Group chief executive officer's report
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Sipho N Maseko |
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Group chief executive officer |
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“Despite the current financial position, I see a significant opportunity
to transform Telkom into a profitable and sustainable business able to
support South Africa’s economic development.”
introduction
Before I begin with the review of Telkom’s performance
for the year, I would like to express my condolences on
behalf of the Board and management team to the families
of the two members of staff, Captain Phopolo Phenya
and Mokopa Phillip Swarts, who lost their lives in vehicle
accidents during the year. Fatalities are unacceptable in
the workplace and we need to ensure that our people are
operating in a safe work environment. I will pay particular
attention to issues of workplace safety going forward.
Telkom’s performance trajectory has been disappointing
in recent years. The erosion of traditional revenue streams
in the telecoms industry globally has proven exceptionally
challenging for fixed-line incumbents. The contribution of
strategic errors and poor decisions towards the Group’s
current financial state must also be acknowledged. This
has also resulted in a loss of confidence of our stakeholders.
I am determined that we will not repeat the mistakes of the
past, and while I recognise the challenges that Telkom faces,
the potential of its people, technology and infrastructure
places it in an inherently unique position within the ICT
industry. This opportunity needs to be harnessed to evolve
our business into one that better meets the needs of all
stakeholder groups: our shareholders, customers, employees
and the broader society that Telkom reaches.
As the newly appointed group chief executive officer,
I am committed to the transformation of Telkom’s financial performance, restoring confidence of government and our
shareholders and rejuvenating Telkom as a national asset.
Financial performance
The 2013 financial results re-affirm the need to act with
urgency to turn around the Group’s performance. Headline
earnings from continuing operations for the year was
237.7 cents per share (73.2%) lower than the prior year.
The decline in headline earnings was largely a result of the
cost of voluntary severance packages (VSPs), the provision
for the Competition Tribunal fines and continued pressure
on our fixed voice revenues.
Basic earnings per share was affected by a R12 billion
impairment charge on the carrying value of the Group’s
legacy assets resulting in a basic loss per share of
2,276 cents. The impairment charge is a non-cash item
and did not impact the significant cash flow (EBITDA) that
the Group generates from its operations.
Revenue for the year continued to decline. The Group
reported revenue of R32.5 billion, versus R33.1 billion in the
prior period as a result of sustained pressure on fixed-line
operations. Expenses, excluding the R12 billion impairment
of legacy assets, grew 2.2% to R32.0 billion primarily due
to provisions for voluntary severance and early retirement
packages, as well as a provision for the Competition
Tribunal fines.
Lower revenue and higher operating costs placed strain on
EBITDA, which declined 16.8% to R7,109 million. Notably,
however, free cash flow remained strong at R2,132 million
after capital investment of R5,738 million, which increased
20% year-on-year. This can be largely attributed to the
substantial investment in the upgrade of the Group’s
network. The Group is lowly geared, with year-on-year net
debt decreasing 46.0% to R2.1 billion which places us in a
solid position to fund our capital expenditure programme.
The Board has reviewed its dividend policy and has chosen
to withhold payment of dividends until the Group’s
financials show sufficient signs of recovery.
Operational overview
Telkom Business is the Group’s largest revenue generator.
This year the business achieved a number of strategic
growth deals with key clients across the enterprise and
public sector segments.
Through the upgrade of our networks, we were able to
provide our customers with faster, better quality broadband.
Telkom has an unrivalled network of more than 147,000
cable kilometres of terrestrial fibre which is now widely
available to business customers in metro areas across the
country. This will secure Telkom Business’ leadership in the
data market, thereby preserving existing revenues.
The network upgrade attained full momentum
during the financial year under review. We were
able to put in place 83 fully operational MSANs.
The commercial pilot of this upgrade, consisting of
437 customers, delivered broadband speeds of up to
40 Mbps to 66% of the participants.
While migrating customers onto our IP network, we
experienced a fall out rate of less than 5%. This is
a tremendous achievement when compared with
international benchmarks. We will continue the network
migration during the next financial year and preparation of
sites is already underway.
The Consumer business continues to face significant
challenges of declining fixed-line usage and revenues.
This has necessitated consolidation and innovation to
defend and grow the subscriber base. Rationalisation of
the Consumer voice portfolio has assisted in streamlining
the product offering and allowed us to maintain focus on
profitable products and services.
While it is encouraging that Telkom Mobile exceeded the
targeted 20% reduction in EBITDA losses for the financial year,
it continues to face formidable competition from established
players in the market. We are undertaking a thorough strategic
review of the business to manage the inherent risk around
building a mobile business as the fourth entrant. It is our view
that mobile is vital to our future, especially from a revenue
growth and convergence perspective.
group-wide strategic
review underway
Despite the current financial position, I see a significant
opportunity to transform Telkom into a profitable and sustainable business able to generate appropriate returns
for its shareholders and support South Africa’s economic
development. We are in the process of performing a group-wide
strategic review as part of this transformation, with a
focus on improved operational efficiencies over the short-term
and unlocking value through longer-term strategic
considerations. A summary of initial thinking can be noted
in the table below:
Performance improvement |
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Strategic focus areas |
Focus on operational efficiencies
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Maximising NGN efficiencies and returns |
• |
Effective management of third party spend |
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Customer service effectiveness, integration and innovation |
• |
HR optimisation and capacity building |
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Focus on future operating model
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Defining mid to long-term
strategy and plan |
• |
Wholesale/Retail
structural options |
• |
Participation
in the National
Broadband Plan |
• |
Effective management
of regulatory and
policy framework |
• |
Mobile/Consumer
business options |
• |
Telkom Business
(government and
SMME) value
propositions |
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Greater detail of the revised strategy will be provided during
the course of the year once it has been finalised.
The future will be data-led
It has been widely reported globally that mobile handset
data and fixed and mobile broadband are expected to be
the most important revenue growth areas over the next
three to five years. This is being driven by higher data usage
and increased penetration of smartphones and broadband
services.
In developed markets, we have already seen this change
in revenue mix in line with evolving consumer behaviour.
Many emerging markets are investing heavily in mobile
networks, with mobile data particularly seen as strategic in
terms of future growth.
Telkom, through its superior fixed network, is well-positioned
to provide quality, high-speed broadband services
to customers across market segments. It is therefore
crucial to continue to invest in an IP-compliant network.
In addition, a well-developed mobile infrastructure will
support Telkom’s convergence offering and the rollout of
broadband. The abundant spectrum available to us lends
an additional competitive advantage in capitalising on the
data opportunity.
Profitable market segments and services
A high quality network is meaningless in the absence of
a good business model able to drive profitability. As such,
Telkom is focusing on profitable market segments and
services where there is strong opportunity to grow active users, average revenue per user (ARPU) and stimulate
uptake of value added services.
From a wholesale perspective, we need to employ
strategies that stimulate widespread data growth in line
with government’s broadband strategy, thereby working
towards South Africa’s developmental objectives. By
reducing the incentive to self-provide, we will also be able
to defend and grow our Wholesale business.
Focus on operational efficiency
To improve our performance in the short-term we are
reviewing the business from an operational standpoint.
Measures to achieve cost reduction and greater efficiency
and the identification of growth opportunities, as noted in
the table above, have been initiated. Our focus areas in this
regard are the effective management of third party spend,
HR optimisation and capacity building, rationalising the
property portfolio, consolidating the pay phone business
and exploring IT adjacencies. We also intend to maximise
NGN efficiencies and returns, and improve customer service
effectiveness.
Stakeholder relations
Restoring our relationship with government
One of my top priorities is to rebuild Telkom’s relationship
with government and other key stakeholders. My early
engagements have confirmed that there is substantial
goodwill and commitment regarding Telkom within
government. We are committed to working with government
to discharge our duties as a national incumbent and,
through this, re-invigorate the relationship.
I see Telkom playing a meaningful part in the rollout
of broadband, however we are mindful of the financial
implications involved and we need to guard against any
adverse effects to our long-term financial health. We have
submitted a proposal to government, which is currently
under review. We look forward to further engagements to
arrive at a workable and sustainable solution for all parties
involved. This will also ensure that the expectations of our
minority shareholders are met.
As part of Telkom’s broader role in South Africa’s
development, working with government to provide
broadband connectivity in schools has been a key focus.
In conjunction with the Department of Communication
(DoC), Telkom Business is in the process of connecting
1,500 schools across the country, making e-learning and
e-education accessible. We are committed to continued
collaboration to drive such developments forward.
Mobilising our people
People are Telkom’s greatest asset. The voluntary
retrenchment programme that we started in 2013 was, as
expected, a difficult but necessary exercise. It is therefore
critical that we continue to build upon our relationships
with our people, particularly during these times of change.
We will continue to make efforts to increase our levels of
employee engagement, satisfaction and motivation to
participate in Telkom’s transformation in the years ahead.
Over the course of the year, a reduction in the number
of health and safety incidents of 6% was achieved. It is
unacceptable however, that we suffered two fatalities
during the year and it is my commitment going forward to
ensure that our people operate in a safe environment.
Delivering quality customer service
I cannot emphasise enough the importance of our
customers. The perceptions of both our business and
consumer clients regarding our reputation and the value of
our products and services, is central to our success. Our core
focus has therefore been to drive quality and innovation
to ensure that our customers’ ever-changing needs are
consistently met. To achieve this, we need to instil a culture
of customer centricity among our employees. It is my
hope that, in the years to come, Telkom will report much
improved measures in terms of quality of customer service.
Regulatory environment
Competition law compliance
Settlement discussions with the Competition Commission
were initiated and successfully concluded in April 2013. This
ruling related to the case between Telkom and the South
African Value Added Networks Services Association (SAVA)
and various other complainants pertaining to alleged anti-competitive
behaviour between 1999 and 2002. Telkom
and the Commission agreed to withdraw their respective
appeals against the Tribunal’s initial ruling in August 2012,
resulting in the said ruling remaining unaltered. Accordingly,
Telkom will pay the fine that was awarded by the Tribunal in
the sum of R 449 million.
We have also subsequently negotiated to settle a second
claim relating to a Multiple Complaints Referral by several
complainants including Internet Solutions (Pty) Limited, the
internet division of MultiChoice Subscriber Management
Services (Pty) Limited, Verizon (Pty) Limited and the
Internet Service Providers Association.
As part of this settlement, Telkom is required to pay a
penalty of R200 million which has been fully provided for.
The settlement also requires an undertaking by Telkom
regarding the functional separation between the Group’s
retail and wholesale divisions.
We are committed to understanding the unique
responsibility that we have as the national incumbent. We
acknowledge that past actions of the Group have had a
negative impact on our business and we take accountability
for this. We have been and will continue to uphold
responsible conduct and compliance in all our businesses.
Asymmetric termination rates critical to
sustainable competition
I strongly believe that the current interconnection rate
dispensation hampers competition and new entrants such as Telkom Mobile should be allowed to compete on a level
playing field. The current interconnection rates are set at
an inappropriate level and are discriminatory towards
less established market participants. We have proposed
simplified and converged mobile termination rates (MTR)
and fixed termination rates (FTR) to the regulator. To this
end, Telkom will participate at public hearings to be held
by the Portfolio Committee on Communications on
this topic and will also participate in the Independent
Communications Authority of South Africa’s (ICASAs)
process of reviewing the existing regulations, including
their “Cost to Communicate” programme.
We are also engaging with the regulator on issues relating
to spectrum licensing fees and access, LLU, and relief
of universal service obligations as we believe these to be
unnecessary burdens on Telkom’s already strained financial
position. I intend to deal with all regulatory matters
assertively, decisively and expediently going forward.
Appreciation
I would like to thank the Board and our chairman, Jabulane
Mabuza, for appointing me to lead Telkom through this
period of transition. I would like to congratulate my
predecessor Nombulelo Moholi for making progress in
key areas, despite the complexities of our operating
environment.
I acknowledge the hard work that remains in transforming
the business into a highly profitable one that earns a position
of leadership in its chosen segments. A fundamental
weakness of ours has been our inability to execute and
deliver results. With tenacity and renewed focus on
execution, I am confident that we can turn around Telkom’s
performance. Doing so requires the setting out of clearly
defined objectives and performance measures. Developing
a successful track record of execution will rebuild our
credibility among our stakeholders.
It is up to each and every Telkom employee to rise to this
challenge and take an active role in re-invigorating our
company.
Sipho N Maseko
Group chief executive officer |