An interview with the Group Chief Executive Officer

Telkom has undergone a significant and transformative journey over the last few years to unlock value and build a solid foundation for recovery and growth. Our financial performance in FY2024 is evidence that this transformation is bearing fruit.

Our ability to improve performance in a tough economy speaks to the proactive measures taken and focus to drive operational growth and improved profitability. We now have a good base to grow as OneTelkom.

In FY2024, the macro-economic environment was characterised by low growth, high inflation and geopolitical tensions. How did Telkom perform in the prevailing climate?

This year was challenging for global and domestic economies, and the consumer was significantly impacted. With the rising cost of living, inflationary pressures, and high interest rates, we had to ensure that our products and services met the customer’s need for value.

Our ability to maintain costs and improve performance in a tough economy speaks to the proactive measures taken to ensure the sustainability of the business. These are reflected in our performance. A stronger operational performance, along with cost-optimisation initiatives, contributed to a normalised EBITDA growth of 5.2% to R10.0 billion. Including non‑recurring restructuring costs in the prior year, reported EBITDA advanced by 18.4%. Improved operating margins were driven by continued growth of our next-generation offerings.

Total HEPS and basic EPS increased to 376.0 cents and 385.5 cents, respectively, driven by an improved operational performance. Profit for the year also increased by 118.9% to R1.9 billion, boosted by the non-recurrence of once-off restructuring costs and lower depreciation. This was despite higher interest rates raising net finance costs compared to the prior year.

We shifted our debt profile from short- to long‑term debt to improve our resilience in the face of interest rate fluctuations. Loadshedding has become our reality, and we have invested in alternative power sources to ensure resilient network availability and performance.

We focused on improving cash generated from operations, which increased by R4.6 billion to R11.3 billion, excluding restructuring costs. This resulted in an overall positive free cash flow of R424 million, driven by improved operational performance and our measured approach towards capex this year.

Performance overview

Openserve

Openserve continued its leadership in the fixed wholesale connectivity market which saw it increase its external channel revenue by 10.7% to R4 526 million, driven by next-generation fibre connectivity that now constitutes more than 93% of Openserve’s external wholesale revenue. Next-generation fibre revenue grew by 7.4% and now represents 76.4% of Openserve’s overall revenue of R12 511 million. The next-generation fibre revenue growth was driven by continued growth of 16.1% in broadband connectivity (fibre to the home), while the enterprise and carrier segments grew by 4.8% and 2.5%, respectively.

Driving its strategic focus of improving its cost base, Openserve continued to optimise its sites and implemented green energy solutions in the form of solar and lithium-ion batteries to support an always-on network, thus reducing its dependency on high-cost energy solutions. These and other cost-reduction initiatives contributed to margin expansion, and EBITDA improved by 6.6% to R3 934 million, yielding an EBITDA margin of 31.4% (+2.8 percentage points (ppts)).

Openserve invested R2 547 million to modernise its network and drive fibre deployment to pass 1 217 110 homes, a 17.0% increase. Its connect-led strategy continues to see positive results, enabling it to increase its homes connected by 19.8% to 590 527, sustaining its leadership in the market with the highest connectivity rate of 48.5% (+1.1 ppts).

Executing on its strategic imperatives to provide a highly reliable and scaled network while offering exceptional customer experience, Openserve continued to show industry-leading network availability uptimes of 99.86%, 99.85% and 100% across its access, transport, and core network layers, respectively. The resilience and high availability of its network could also be seen through the growth in data consumption of 2 307 petabytes, an increase of 21.7%.

Serame Taukobong

Telkom Consumer

Telkom Consumer remained resilient in delivering competitive high-speed broadband solutions across both the mobile and fibre segments, increasing external revenue by 2.2% to R26 140 million. Total external revenue from Mobile operations increased by 4.5% to R22 583 million, driven by 6.8% growth in mobile service revenue. Mobile service revenue growth was primarily due to mobile data revenue, which increased by 10.6%, contributing R14 300 million to total mobile revenue.

As we focused on sustainable growth, we continued to refine our operational efficiencies and optimise cost structures. As a result, EBITDA grew by 24.2% to R4 093 million, and the EBITDA margin expanded to 15.5% (+2.8 ppts). The Mobile business also improved its EBITDA margin to 22.2% (+1.7 ppts), despite the adverse effects of loadshedding and higher expected credit losses due to economic pressure on consumers.

In a highly competitive market, we grew our mobile subscriber base by 11.9% to 20.4 million, with a blended average revenue per user (ARPU) of R84 (FY2023: R86). Our pre-paid base expanded by 14.3% to reach 17.5 million subscribers, whilst growing its ARPU by 1.5% to R65. This was fuelled by the acquisition of higher-quality connections, retentions and improved recharging behaviour within the existing customer base. The post-paid base remained relatively stable at 2.9 million subscribers. Mobile broadband subscribers increased by 9.5% to 12.7 million, representing 62.3% of our total mobile base now using wireless broadband.

We invested R2 598 million in mobile capex, including R972 million for spectrum. This enabled us to expand our network coverage by 2.5%, grow our presence to 7 738 sites, and maintain network resilience by replacing over 5 688 lead-acid batteries with lithium‑ion backup batteries and repairing more than 1 606 sites to date. Our leading 4G device adoption rate exceeded 90.0%, informed by our data-led strategy. We have deployed 465 active 5G sites since launching our 5G services in 2022.

BCX

BCX, operating in a highly competitive market, focused on enhancing the quality and sustainability of its client base. Reported revenue declined by 2.3% to R12 915 million.

IT business revenue increased by 9.9% to R7 262 million, largely due to a strong performance from the hardware and software business. This performance, albeit at lower average margins, was driven by new product deals, existing software contract renewals, the clearing of prior year backlogs in integration services, and record cross-border sales.

BCX complements hardware and software sales with higher-margin IT Services, in the form of managed services. IT Services performed well, increasing revenue by 6.6% to R4 789 million. This was supported by strong cybersecurity growth and steady growth of the data centre and infrastructure solutions business as demand for storage and cloud computing continued to grow in the market.

We made significant progress in modernising our own intellectual property solutions using skills from our acquisition of Dotcom. We also expanded our market offering and launched new products in the last quarter, further supporting the 14.0% revenue growth achieved for cybersecurity products. Demand for security advisory services, managed detection, and threat response services continued to increase in South Africa.

Converged Communications revenue declined by 14.5% to R5 653 million as we continued migrating customers to next-generation technologies. Accordingly, revenue from next-generation services grew by 28.7% while legacy products continued to decline as envisaged.

While BCX reduced some operating costs, this was not sufficient to offset the combined effects of revenue mix at lower margins, decline in higher-margin legacy revenue, and higher expected credit losses on trade receivables. Consequently, EBITDA reduced by 28.4% to R1 294 million at a margin of 10.0% (-3.7 ppts).

Swiftnet

Swiftnet continued to commercialise its masts and towers portfolio as customers continued to invest in improving their network performance and capacity through equipment upgrades and modernisation. Swiftnet’s revenue growth was limited to 1.3% (R1 321 million), impacted by ongoing terminations from two customers. Revenue from other customers increased by 10.7% to R1 018 million on the back of inflationary escalations, new tenancies, 5G rollouts and upgrades.

EBITDA increased by 10.4% to R990 million at an EBITDA margin of 74.9%, attributable to the optimisation of tower operating costs. The masts and towers build programme gained momentum, with 68 towers and eight in‑building solution sites being constructed, resulting in 4 047 total productive towers. The rollout of Power-as-a-Service (PaaS) at scale began in the final quarter of the year, with 18 PaaS solutions for customers being built and connected.

Gyro

Gyro shifted its focus in FY2024 following the Board’s decision to exit property development and focus on managing the Group’s property portfolio for core operational purposes. Gyro focused on optimising the Telkom Group property footprint and improving energy efficiency.

We accelerated the disposal of decommissioned properties no longer required, generating R92 million in cash proceeds from the transfer of 56 sold properties. A further 42 properties with a sale value of R287 million remain in the conveyancing process and are expected to transfer during FY2025.

The implementation of various energy interventions improved the resilience of our mobile and fixed networks, and contributed meaningfully to reducing Telkom Group’s carbon emissions. We prioritised technologies that maximise energy security and decarbonisation while optimising utility and diesel costs. Scope 1 and 2 emissions decreased by 65 699 tCO₂e, a 9% reduction that far exceeded the 4.2% target for the year.

Telkom’s PIVOT Strategy supports the Group’s purpose of seamlessly connecting customers to a better life. How did Telkom deliver on its strategy this year?

Our PIVOT Strategy is anchored by four enablers. Firstly, to monetise our infrastructure assets as OneTelkom. This means operating as an InfraCo, growing sustainably by pooling our assets and capabilities and going to market as OneTelkom. In FY2024, we encouraged business units to collaborate and leverage synergies within the Group.

We have a good base to grow as OneTelkom with our extensive digital infrastructure, including our mobile and fixed networks and our ICT capabilities. We have substantial infrastructure assets anchored by over 170 000 km of fibre, which passes over one million homes. We have over 7 700 mobile sites, an extensive real estate portfolio, 10 data centres (of which three are Tier IV data centres), and over 600 aggregation nodes with potential as edge data centres. Leveraging our infrastructure capabilities will expand our integrated solutions and enhance our competitive advantage.

Our second enabler is people development and empowerment to become a leader in the converged ICT market. In FY2024, we invested R168 million in upskilling our people and creating a future-ready workforce. More than 50% of employees completed online courses, and 533 employees benefited from structured learning programmes. We have prioritised employee engagement and embedding the OneTelkom culture across our business units, including introducing cross-functional teams with top talent from business units to drive collaboration and revenue growth.

Thirdly, our strategy is underpinned by the need to simplify and digitise our processes to improve the customer experience. This year, we revamped the MyTelkom app and our website to create a seamless user experience. Modernising the MyTelkom app has achieved the benefits of increasing downloads and usage while decreasing calls to the call centre.

Our fourth and final enabler is to build a sustainable financial framework through maintaining a healthy balance sheet. In FY2024, this was demonstrated by our improved free cash flow, our fit-for-purpose debt restructuring and progressing the Swiftnet transaction, which will enable us to materially pay down debt.

Read more about our PIVOT Strategy and people development.

Telkom started its ESG strategy execution in FY2023. What are the key milestones achieved and challenges experienced this year?

In the second year of implementation, we matured our approach to ESG and focused on data to inform decision‑making. We are embedding ESG across the Group and expanding the related KPIs to ensure that we align with global and local reporting requirements. For the first time, we included ESG in short- and long‑term incentives for all employees. We invested in carbon accounting platforms to better align our financial and non‑financial KPIs.

Energy efficiency remains a priority for Telkom. In FY2024, we developed an energy strategy to optimise diesel usage and cost, ensure energy security and meet our decarbonisation targets. We continued to drive energy efficiency and decarbonisation while exploring renewable energy alternatives. We reduced diesel consumption by 15% and energy consumption by 4%. Our total emissions (Scope 1 and Scope 2) reduced by 9%. We have installed and replaced more than 5 500 lead-acid batteries with lithium-ion batteries at our mobile and exchange sites to date. We will continue to deploy lithium-ion batteries and solar panels in new sites (1 500 sites planned).

The Group also conducted its first economic impact study to map our ESG strategy to the National Development Plan. In terms of our commitment to social responsibility, we revised our ESG target to impact more than 100 000 lives through SMME development by FY2025, to 250 000 lives by FY2026. So far, we have positively impacted 221 308 lives through the FutureMakers programmes.

Read more on Our ESG strategy.

Prioritising capital allocation is key to ensuring Telkom thrives in a competitive landscape. How will the Group’s capital allocation priorities create value for shareholders in the future?

Our capital allocation priorities are aligned with unlocking value for our shareholders. Our short- to medium-term priorities are to strengthen our balance sheet by paying down debt in a prevailing higher-for-longer interest rate environment and investing capex to drive future growth.

While the proceeds from the Swiftnet disposal will boost the Group’s cash position and reduce debt to within the targeted 1.0x – 1.5x net debt to EBITDA range in the short term, repaying debt from cash generation is also a priority for the medium term. These targeted debt levels will further free up cash flow by reducing finance costs and give the Group balance sheet flexibility to gear up at more favourable rates when the interest rate cycle turns.

After funding capex and strengthening our balance sheet, Telkom aims to return cash to shareholders. We are confident that Telkom will be able to pay dividends again in the near term, with FY2025 targeted as the first year‑end to consider paying a dividend.

A revised dividend policy has been approved by the Board. The new policy will be based on available free cash flow while prioritising a strong balance sheet and future capex requirements. The policy proposes a dividend payout range of 30% to 40% of free cash flow after taking into account capex investments. The dividend will be declared and paid on an annual basis.

In the previous year, you mentioned that Telkom would continue to execute its Value Unlock Strategy by exploring outright disposals and seeking partners to invest in certain business units. What were the key milestones this year?

The Value Unlock Strategy is geared towards value creation for Telkom and its shareholders. We are delivering on this commitment by exploring all options to unlock value. Our Value Unlock Strategy is premised on the Board’s view that Telkom’s market capitalisation does not represent the intrinsic value of its underlying assets.

In March 2024, the Board announced the sale of Swiftnet, our masts and towers business, for R6.75 billion to an Actis LLP infrastructure fund with Royal Bafokeng Holdings as its B-BBEE partner. By disposing of this non-core asset, we deliver on the Value Unlock Strategy while retaining access to the use of masts and towers infrastructure for our mobile and fibre businesses.

The disposal of masts and towers is a Category 1 transaction requiring shareholder approval. This was obtained at the shareholders’ general meeting in May 2024. Regulatory approvals are also required from the Independent Communications Authority of South Africa (ICASA) and the Competition Commission of South Africa. We made submissions to both bodies in April 2024 and await their decisions. From the submission dates, the disposal is expected to take between six and 12 months to close, pending these approvals.

The divestiture of Swiftnet aligns perfectly with our strategy to concentrate on our infrastructure assets, while realising the inherent value in non-core holdings. It is one step closer to positioning Telkom as a leading infrastructure group at the heart of South Africa’s digital future.

The proceeds from the disposal will strengthen the Group’s balance sheet and free cash to invest in our core businesses and pursue future growth opportunities. We also identified opportunities for capex investment in areas that will enable us to reduce our roaming costs for Telkom Consumer. This will help improve our capacity and quality where we have high demand and growth opportunities. For Openserve, we will drive growth by rolling out fibre and increasing the number of homes connected.

Telkom operates in an evolving regulatory environment. What key regulatory developments did the Group consider in the year under review?

We strive for constructive engagements with our regulators where joint problem solving is encouraged. In addition, we support the principle of a level playing field that ultimately benefits the customer. In FY2024, we continued on improving our engagement with regulators on key regulatory matters.

ICASA began its review of call termination rates in May 2021 and commenced a cost modelling exercise in May 2023. The purpose of the exercise was to determine the appropriate call termination rates for calls terminating on fixed and mobile networks. ICASA published the Draft Amendment to the Call Termination Regulations in March 2024. In the draft regulations, ICASA proposed the removal of asymmetrical rates for smaller operators over two years.

In our view, this will not promote competition but rather entrench the currently skewed market structure. The draft regulations also included provisions that purport to regulate termination rates for calls originating outside South Africa. We believe that ICASA’s attempts to prescribe termination rates for international calls will limit the negotiating power of local operators when dealing with international operators.

ICASA held public hearings in June 2024 and engaged stakeholders on alternative glide paths among other matters. We had positive engagements with ICASA regarding our concerns and await further updates on the revised regulations and implementation dates. We welcome ICASA’s commitment to implement a lower cost standard and trust that the new glide path will have pro-competitive outcomes, stimulate economic development through fair competition and reduce communication costs.

The switch-off process for the frequency spectrum above 694 MHz was finally concluded by 30 September 2023. After the final broadcasting interference was cleared, the sub 1 GHz spectrum obtained in the auction concluded in March 2022 was made available nationally for deployment of mobile systems.

For Telkom, this has contributed to an improved customer experience and increased operational efficiency. Telkom paid its final auction fee of R972 million to ICASA in December 2023 for the 2x10 MHz in the 800 MHz band. ICASA indicated that the second spectrum auction will take place in FY2026 and preparations for the auction will continue during FY2025.

The Department of Communications and Digital Technologies published the proposed Electronic Communications Amendment Bill 2022, in June 2023. The Bill deals with critical matters such as spectrum trading and sharing, roaming, mobile virtual network operators, passive infrastructure, competition and facilities access. We have outlined our concerns regarding the Bill in a comprehensive response submitted in August 2023. A key concern includes the insertion of proposed new licence categories applicable to electronic communications facility services and community networks which are already defined and are licensed under the current Electronic Communications Act, 2005.