Financial capital

Our financial capital makes it possible for us to produce products, provide services and invest in organic and inorganic growth. We obtain our financial capital through financing such as debt, equity or through revenue generated by our operations or investments. Our financial capital increases when we make a profit. Traditionally it was the primary measure of business performance and success (‘the single bottom line’) in terms of reporting performance to shareholders, investors, regulators and government.

Creating value for our stakeholders through sustainable growth

Financial highlights

Revenues have continued to stabilise in a tough operating environment

• EBITDA increased
  15.1%
  
  – margin of 28.3%
• Operating costs decreased
  1.2%
  
  in nominal terms
  • Staff efficiency programme
  • Benefits of PRML settlement
  • Effective marketing spend
  • Lower business transformation cost
• Resolved tax matters, resulting in lower effectivetax rate
• Strong cash flows

ADSL subscribers

*Restated to include internal lines

Managed data network sites revenue

Traffic volumes in TBytes

It is very encouraging that our efforts at stabilising our business, despite the tough economic environment, are bearing fruit and providing us with a solid base to build on for the future.

On a like-for-like basis, that is excluding items that do not form part of the results from normal business operations, we increased our net revenue by 3.1 percent to R26.0 billion, while our operating revenue increased 1.2 percent to R31.7 billion. Our operating costs, excluding depreciation, were down 1.2 percent to R17.7 billion. Normalised EBITDA rose by 15.1 percent to R9.0 billion.

Our Retail Consumer segment performed well with excellent results from our mobile business, which increased its net revenues by 174.1 percent to R954 million. Subscriber revenue growth increased by 46 percent to R717 million, mainly as a result of an approximately 21 percent increase in the number of active mobile subscribers and around 20 percent in the blended average revenue per user (ARPU). We are hopeful that we can continue to maintain this sort of growth in our mobile business and it is encouraging that we are being more successful at monetising our investment in the network.

Fixed-line data revenue increased 1.5 percent to R10.4 billion and mobile data revenue increased 50.6 percent to R988 million. The pressure remains on voice usage, particularly in our Enterprise business. This resulted in an 11.9 percent decrease in fixed-line voice and interconnection revenue to R8.3 billion. A disappointment was the fall-off of 22 percent in leased lines, which accounts for about R400 million.

We also saw a 7.9 percent growth in ADSL subscriptions to just over a million, however, while we are achieving good growth, at the same time we are experiencing significant pressures on pricing.

Derisking the business: growth in mobile data, stabilisation of voice rentals

Contributions to group revenue (%)


• 
  
  Contributions to group revenue
  
• 
  
  33% Fixed-line data
  
  
• 
  
  26% Fixed-line voice usage and interconnection
• 
  
  25% Fixed-line subscriptions
• 
  
  11% Mobile
• 
  
  3% Fixed-line Customer premises equipment
• 
  
  2% Other

 

Fixed-line voice usage continued to decline

Committed to:

Revenue at risk declined (fixed-line voice usage and interconnection revenue)

Contributes 26% (2014: 30%) of group revenue

Our key focus in terms of capital investment will be on LTE, LTE-A and fibre.

Our costs decreased 1.2 percent, largely because of savings on employee expenses and more effective marketing, which saved us around 11 percent, equating to around R85 million less than we spent last year. There was also a decline in transformation costs and vehicle use. On the other hand, we incurred R319 million in bad debts in the current economic climate and we also had some inventory write-offs.

The 3.7 percent reduction in employee expenses was mainly as a result of a 4.5 percent reduction in our headcount and an almost 47 percent reduction in our contractor headcount. We also saw savings from the settlement of the post-retirement medical aid obligation. These decreases were offset by a 6.2 percent average salary increase for bargaining unit members and an average salary increase of around six percent for management.

Our capital expenditure is 21 percent down year-on-year. We will continue with our measured approach going forward to ensure that we focus on revenue generation, efficiency, and at the same time that we build in the right areas. Our rollout of the next generation network was interrupted in the early part of the year because of a lack of availability of certain equipment; however, in the second half of the year we accelerated our capital investment and in the year ahead we expect to increase it further. Our key focus in terms of capital expenditure will be on LTE, LTE-A and fibre. This is a capital intensive industry and we need to balance the need for new technologies with the required return on our investment.

Our good cash flow and our low net debt to EBITDA ratio provides us with excellent financial flexibility when it comes to any opportunities there may be in the market.

Overall, we have achieved what we promised in terms of stabilising the business so we can grow, although we experienced greater pressure on voice usage than we expected and the fall-off in leased lines was also more severe than expected.

Supply and value management

During FY2015 we developed and started implementing a strategic sourcing model as part of our new way of doing business, which allows us to be more agile and flexible with our procurement. This model replaces the tactical approach previously adopted by Telkom.

One of the first applications of this approach was the outsourcing of our contact centre to industry experts who have both the economies of scale and the expertise necessary to reduce our costs and improve our customer experience.

Post year end a further implementation of our strategic sourcing model saw our entire supply chain business being sold to logistics experts, Barloworld, on 1 May 2015. Because of its expertise in this area and the economies of scale it can achieve Barloworld will run our supply chain at a lower per unit cost than Telkom is able to do. This will not only reduce our costs, but will also reduce our environmental impact, and in particular our carbon footprint.

An important element of both these arrangements is the access to expertise they provide that will not only reduce costs but will also help us provide better customer service.

Procurement operating model

Enlarge Procurement operating model graphic

Enterprise development

Enterprise development (ED) is an important part of our social commitment to broad-based black economic empowerment and preferential procurement. Through our FutureMakers programme, launched post year end in May 2015, we are investing R100 million over five years in enterprise and supplier development. Not only will this programme support the national drive to increase access to technology, it will also help us grow the ICT sector and Telkom’s revenue. Details of the FutureMakers programme can be found on page 87 of the Social and Relationship capital section of this report, as can information on Telkom’s achievements in terms of ED and preferential procurement from black-owned businesses. The potential the FutureMakers programme has to grow Telkom’s revenue is also discussed on page 69 of the Productive capital section of this report.

Outlook

We have stabilised the business, but the operating environment is very difficult at present and we recognise we have a challenging year ahead of us. We will be addressing non-profitable areas going forward and we will continue to focus on cost reduction and revenue generation. We had initiatives planned for the year under review that did not materialise, specifically in terms of our headcount reduction programme which we will have to address in the FY2016 financial year. Because of that we are keeping our EBITDA guidance at between 26 and 27 percent for FY2016.

We expect to increase our capital expenditure, with a focus on LTE and fibre rollout and also on the IT side. We have also made additional capex available so we can close any gaps in the network as well as the product areas. This supports one of the important changes in Telkom: we are listening to our customers and doing our best to give them what they want.

We’re operating in a challenging, fast changing environment, but we believe we are ideally placed to execute from the stable base we have built over the past few years.