Group chief executive officer’s strategic review

I am pleased to be able to report to you that after two very difficult years our multi-year turnaround strategy is on track and we are beginning to make good progress towards achieving our objective of building a sustainable, prosperous business.

When we disaggregate the performance of the different businesses the improvement really starts to come through. We have taken out quite a lot of inefficiency, which is reflected in the 5.2 percent reduction in real terms in our operating costs.

A key highlight for us this year has been reinstating the dividend. You’ll find the details of the dividend in the chief financial officer’s review, which follows. In addition to the base dividend we have rewarded our shareholders for their patience with a little extra in the form of a once-off special dividend. We’ve been able to do this because our cash generating capacity is very strong and we have reduced our debt by 92.8 percent. The flexibility that this gives us places us in a very strong position going forward.

Obviously, there is still a lot more we can and will be doing with regard to efficiencies in the years ahead, but we always knew that our transformation and expansion plans for Telkom were never going to happen over a two to three-year period. We’ve given ourselves a quite tough, but we believe a realistic timeline to ensure that year-on-year we can show progress with taking costs out of the business and stabilise revenues. We’re exiting parts of the business that are not core to what we do and we have also exited all of our investments outside South Africa. This has enabled us to build a business that is focused on its core activities and building the right capabilities for the future.

As we forecast, fixed-line voice usage, which is still our largest source of revenue, continues to decline. It is this continuing decline, which is in line with global trends, that makes the turnaround of our business so urgent. We also saw a decline in leased line revenue, which was affected by self-provisioning and the fact that the economy is not doing as well as expected.

At the same time we have been able to derisk our mobile business, which is now much closer to breaking even going forward. You’ll find detail on this in the Financial and Productive capital sections of this report on pages 54 and 62. In our Consumer business, where the team has made a big effort to ensure we begin to do things differently, we have enhanced our fixed-line value proposition and tried to become more relevant and top of mind to our customers. Our smarthome converged offers are driving data usage and we’ve been able to grow our net revenue from our Consumer business by 12 percent with Internet subscriber growth of about nine percent and a 7.4 percent increase in DSL subscriptions. Some of the new products we have brought to the market have had significant success. The majority of our new subscribers are purchasing smartphone solutions, which is most encouraging. It is also an indication that convergence and content services are going to be part of the future that Telkom needs to give serious consideration. We still have an issue around churn and network experience, which we are busy fixing.

We are now well-positioned for changing customer trends, one of which is the demand for increased data bundles. For example, over 21 percent of our prepaid mobile subscribers want an integrated product with both voice and data. Also, the number of customers wanting to combine a mobile and a fixed solution has increased by close on 100 percent year-on-year. This provides us with an opportunity to cross-sell and leverage both the fixed and mobile network.

The year under review has been a difficult year for Telkom Business, with its biggest challenge, of course, being the decline in voice usage and data connectivity revenues. The take-up by businesses of Metro-ethernet, which is a migration from legacy technology to new technology, was 14 percent higher year-on-year off a low base. This technology is more reliable than the legacy technology it replaces and we are able to use it to offer converged solutions, which bodes well for business going forward.

Telkom Business was able to increase its IT revenue by about 82 percent and its convergence solutions by 650 percent, albeit off a low base. This result is an indication of future trends and we need to ensure we position ourselves as a group to take advantage of these trends. While this market has shown significant declines in usage during the year under review, we are beginning to see the convergence offers we have put in place on the enterprise side of our business resulting in a good uptake of total solutions and a pipeline of deals, particularly in the public sector.

The Competition Commission has now recommended our proposed acquisition of Business Connexion for approval by the Competition Tribunal. This acquisition will strengthen Telkom Business’ core business of connectivity with ICT services. If and when the Competition Tribunal’s approval comes through we expect the integration of these businesses to be swift to ensure we begin to maximise the benefits of the transaction as soon as possible.

Wholesale and Networks endured a very tough time over the past 12 months. This includes the relentless pressure from smaller providers of fibre, who are far nimbler than we have been, cherry-picking the suburbs they want to service. As the leading manager of a wide infrastructure network Telkom’s response to this type of competition needs to be carefully thought through. Our approach is to evaluate each market and each exchange to make sure we have the right technological solution for a particular market. Licensed operators continue to self provide resulting in lower data leased line revenue. Another competitive challenge telecoms companies face is from some of the over the top players (OTTs) that deliver content to an end user’s device using an ISP to transport Internet protocol packets. We introduced 20, 40 and 100 Mbps wholesale fibre broadband in selected areas during the year under review and passed 1 030 519 homes with next generation access (fibre to the curb technology). This year we were also the first to market with an LTE-A rollout.

Wholesale has also introduced very substantial price reductions across its product range (see page 72 of Productive capital for more information) as part of its competitive strategy.

Our investment into optimizing our network is intended to increase its speed and capability and to ensure we can obtain the maximum potential performance from a network that is reliable and available all the time. We need to make sure our network is future-proof. We can expect usage to follow global trends where 60 to 70 percent of the usage of networks like ours is for Internet or streaming purpose. Wholesale’s very substantial price reductions across its product range are intended to stimulate demand and increase utilisation. Our wholesale team is offering innovative value propositions on top of their network offering.

We are working very hard to regain customer trust and improve our customer experience. To achieve this we are focusing on listening and responding to our customers. We have also made a substantial investment in a customer experience unit. The process of outsourcing our contact centre this year resulted in a drop-off in service levels, but the new solution is expected to greatly improve the customer experience. The research we did this year to review what progress we had made with our customer experience showed that we are not yet where we want to be, but there has been a big improvement. Customers are beginning to have a warmer feeling towards the group. The awards we won for our broadband and mobile offerings are very encouraging. Our relationship with the regulator is improving, which is pleasing. This does not mean that we do not represent our interests robustly, rather we have been able to demonstrate a logical and rational argument.

With regards to Telkom’s compliance with the settlement agreement entered into with the Competition Commission, I can confirm that Telkom has complied with the terms of the settlement agreement during FY2015. We are extremely fortunate to be experiencing in our lifetime a change that is akin to the industrial revolution. This time the revolution is happening around the Internet and digitalisation and we at Telkom have the opportunity to use the investment we have made and continue to make in our infrastructure to broaden access and democratise broadband. This year for the first time there are over one million broadband users in South Africa. And it’s not only the number of broadband users, but the rate at which they are beginning to use broadband that is quite phenomenal. To further stimulate access to broadband we will be making around 200 of our exchanges available to Internet service providers on an open access basis during 2015. We also have a number of exciting new ventures planned, which will make Telkom a very different business by the time I report to you this time next year. I am encouraged and enthused about the prospects for Telkom. What we have achieved in these past two years is phenomenal even though at times it has felt as though we’re having to run while we are still learning how to walk. We have a long list of things that need to be done and we recognise that time is not on our side. It’s frequently a challenge to prioritise and make sure that the organisation is able to digest what we ask of it. Sometimes we need to take one step back in order to take two steps forward. Slowly but surely our people are getting back their self-belief and self-confidence and this is generating a new energy and determination to make a difference. We are also introducing the right level of talent into the organisation where we need it.

I would like to recognise and thank both our executive team and our board for the very significant role they have played in Telkom’s turnaround. I can look forward to the challenges ahead knowing I have your support and wisdom to guide us in our decision-making.

Sipho Maseko
Group chief executive officer