Telkom Integrated Annual Report 2020

Telkom has always been committed to providing cost-effective mobile solutions. For this reason, the Competition Commission did not require any commitments from Telkom to lower its prices for mobile data. In striving to ensure that customers can make informed choices when purchasing data services Telkom notifies customers of the in-bundle effective rate per megabyte in its purchase confirmation messages to subscribers.

Telkom is committed to assisting in narrowing the digital divide by extending zero-rated access to essential government services and educational institutions to its mobile subscribers. This includes access to the primary URLs of more than 389 educational sites including universities, further education and training institutions, websites such as Wikipedia, Everything Science, Everything Maths and Department of Basic EducationCloud. Refer Social and relationship capital for the case study on zero-rated services.

In response to customer demands and the evolution of the market, Openserve has been considering changing the way in which it provides wholesale fixed broadband for some time. The introduction of a more competitive fixed broadband end-to-end offering has removed the perceived competition concerns associated with IP Connect. Telkom and the Competition Commission have reached agreement that the new offering addresses the concerns raised during its Data Services Market Inquiry. The new IP Connect has also enabled ISPs to better manage their costs and the general feedback from industry has been positive.

ICASA's IM does not address competition in the mobile market and in Telkom's view, it will further entrench the duopoly. Participating in the auction is necessary to acquire spectrum to compete effectively. Telkom requested ICASA to investigate and conclude on the various commercial HDS arrangements between the duopoly and smaller licensees and ICASA's Mobile Broadband Inquiry, prior to licensing spectrum.

Telkom started deployment of the temporary licensed spectrum to address the increased data traffic demands resulting from the National State of Disaster. The temporary licensing of spectrum provides insight into the upcoming auction pertaining to demand and interest in HDS. Telkom will continue to advocate for the release of spectrum to be done in a manner that reshapes the market structure and enables competition.

It is anticipated that ICASA will publish two Invitations to Apply (ITAs) for the licensing of HDS (auction) and the WOAN in the first quarter of FY2021. The auction is planned for December 2020, while licensing of the WOAN is expected to be completed by December 2021.

Our challenge for the year was the impact of the fixed-voice revenue on group EBITDA as the decline intensified. The growth in new revenue streams, which have lower margins, was not sufficient to offset the decline caused by high-margin fixed-voice on group EBITDA.

Over time, as the revenue mix evolves, we expect the contribution from the fixed-voice revenue to reduce and the contribution from the mobile business, with improved EBITDA, to increase and offset the impact of fixed-voice on group EBITDA. Until this inflection point, management will focus on sustainable cost management which includes the benefits of the restructuring programme and other levers to ensure that we offset the gap caused by the decline in fixed-voice.

In line with this technology shift, the business requires a new skill set to respond to customer needs. Telkom offered VSP and VERP to 2 271 employees as an alternative to retrenchments at a cost of R1 186 million in the current year; 75% of the employees took early retirement packages.

The company expects phase two to commence in FY2021.

The impact of fixed-voice on group EBITDA should be offset in the next 24 months.

The mobile business grew 54.4% in service revenue from a higher base to R12.6 billion to remain the fastest growing mobile business in South Africa, with 12 million customers. This was underpinned by our ongoing network investment and our successful broadband-led proposition, which continue to resonate well with customers.

Despite ongoing competitive threats with changes implemented by our competitors in the mobile space, our broadband-led propositions are market leading being best in class for value and effective pricing. The mobile business remains profitable, with its EBITDA margin, on an IAS 17 basis, improving from 1.4% to 14.9% over the past three years.

Our mobile business strength includes

• Data-led network
• Spectrum, base station with fibre backhaul
• Data-led product proposition and higher data propensity customer base

Our customer base average data usage is approximately four times higher than the dominant players.

We expect the mobile business to continue to grow, and improve EBITDA margin. It should become the number three player in terms of revenue share over the next year or so.

Telkom's network was impacted by load shedding and vandalism during the year, resulting in cutovers to network elements that provide redundancy in case of failure. At an access site level battery theft remains a challenge that Telkom is managing by replacing batteries. Incidents where national impacts were apparent on mobile and fixed call centre platforms highlighted technical specifics that were dealt with technically to avoid a reoccurrence. The root cause analysis for these incidents is taken into consideration for operational configuration, as well as new deployments.

Regardless of the incidents, capacity management has overall assisted with minimising incidents. With the ongoing pandemic (COVID-19), the network has experienced additional high demand for capacity in residential areas as lockdown regulations restrict people to their homes.

This has not only affected the shift in normal traffic patterns, but it has also resulted in higher congestion levels in pockets of the network operating at full capacity.

To this end, government announced that temporary spectrum bands will be made available until November 2020. Subsequent to this, the regulator has issued Telkom temporary spectrum in 700 MHz, 800 MHz, 2 600 MHz and 3 500 MHz. In order to utilise this spectrum, Telkom is embarking on an ad hoc capex programme to fully utilise the bands allocated – these interventions directly address capacity and quality requirements as targeted in the business-as-usual plan. The regulator stipulates that right-of-use of the temporary spectrum will be revoked either at the end of November 2020, or three months after the end of the National State of Disaster is declared.

Openserve, Telkom Consumer and Trudon embarked on a thorough process to redefine their operating and service delivery models which resulted in Telkom SOC Ltd and Trudon issuing notice in terms of section 189 of the Labour Relations Act, informing employees within these businesses of possible retrenchments. The notice further advised that the process would be conducted in two phases, with the Corporate Centre and support functions forming part of the second phase of the process. The impact of the section 189 process, including the offering of VSP/VERP packages, was a critical engagement theme.

Operational requirements, including the evolving needs of our customers, technological advancements, and the evolving world of work, are the drivers of this organisational restructure. Telkom adopts appropriate strategies and frameworks to facilitate retrenchment processes.

As an alternative to retrenchments, VSP/VERP, including a social plan, were offered to employees, and a total of 2 271 employees opted to take the offer. The social plan provides employees with an opportunity to further their studies to broaden their skills base, thereby increasing their employability.

Telkom has further announced that it will begin phase 2 of this process during the second half of FY2021. The organisation will continue to manage this process in a transparent and socially responsible manner in line with labour legislation requirements.