The global outlook remains uncertain with high inflation, the ongoing effects of the Russia-Ukraine war and enduring economic damage from three years of COVID-19. Risks to the outlook are heavily skewed to the downside.
Global
Outlook
Global
Outlook
We are operating in an unsteady and volatile local and global environment. Government debt levels remain high, limiting its ability to respond to new challenges or provide targeted support to those struggling most with the cost-of-living crisis. While the commodity prices that rose sharply following Russia's invasion of Ukraine have moderated, the war continues and geopolitical tensions remain elevated. Inflation in most economies remains stubbornly high, although there are some signs that it will ease in the coming months. Many central banks have indicated that we are nearing the end of the monetary tightening phase. The reopening of the Chinese borders in March 2023 should also boost global growth.
South
African
Outlook
South
African
Outlook
In South Africa, we have our own unique set of challenges, including weakening growth prospects and crippling unemployment. While the economy rebounded post-COVID-19, our outlook is weighed down by persistent loadshedding, which negatively impacts the local economy, including food prices. Consumers' disposable incomes have been eroded by inflation and recurring interest rate hikes. They consider their costs and discretionary spend carefully, including scrutinising their mobile and data expenses. In addition, the local competitive landscape is fiercely contested, with well-resourced larger competitors investing in their data capabilities and newer, agile players disrupting the data space. Increased competition means that we need to work harder and smarter to win market share.
Fortunately, we have several competitive advantages.
Telkom, through our subsidiary Openserve, has South Africa's largest fibre network with:
More than one million homes passed
Telkom, through our subsidiary Openserve, has South Africa's largest fibre network with more than one million homes passed and 492 812 homes connected. In addition, Telkom's total spectrum portfolio now stands at 184 MHz across all bands, and the latest allocation of sub 1 GHz frequency spectrum will stand us in good stead. We launched our 5G network in October 2022.
Successfully
launched our
5G network and services
in October 2022.
More than
318 active 5G site
deployed.
Customer expectations continue to evolve, with customers increasingly wanting quicker resolution of issues and more channels to communicate with providers. We acknowledge that staying ahead of these expectations and fostering better customer relationships are critical for remaining competitive.
We continually improve our customer experience and retained our second spot in the Ask Africa Orange Index, South Africa’s most widely referenced service excellence benchmark. Our overall customer complaint escalations reduced by 35% year-on-year, due to better service levels at our call centre. We also note improvements in the sales environment, where consultants deal with service issues more effectively. We now offer customers a WhatsApp business number to allow for quicker resolution of service queries.
Our revenue increased marginally by 0.9%, putting additional pressure on profitability and FCF. The Board is not satisfied with the Group’s financial performance for FY2023. We have engaged Executive Management to consider ways to improve performance, despite the macroeconomic challenges.
We believe there needs to be a greater focus on delivering the operational results and closing the revenue gap.
This focus is reflected in our remuneration decisions this year:
Improved financial performance
emphasised in our incentive
arrangements for FY2024
Improving our financial results
requires that Telkom re-evaluate
its cost base, including
reducing its headcount
This is discussed in more detail in the GCEO’s report
In the GCEO and GCFO reports, we also detail the impairment charge relating to Openserve (R6.8 billion) and Telkom Consumer (R5.9 billion). This non-cash item does not impact our debt covenant compliance or ability to fund our Capital Expenditure Programme.
I reflect on, among other things:
The impact the state of our economy and increased loadshedding, has on Telkom’s performance and outlook
How we are focusing on our competitive advantages and continuing to improve our customers’ experience
The progress made in our Value Unlock Programme as well as on our ESG Strategy
Our approach to succession planning and Board renewal
The Board’s focus areas are further unpacked in the Corporate Governance Report.
We are deeply concerned about South Africa’s energy crisis, which dampens growth prospects and threatens to delay the development of a local digital economy. Funds that would have been spent on improving network coverage will now be spent on securing consistent, alternative power. The telecommunications industry provides essential services in a nation where landlines are rare, but nearly 80% of citizens have mobile internet access. As we provide these essential services, we believe we should qualify for similar fuel rebates applicable to the agriculture, mining and manufacturing sectors.
Loadshedding has significant cost impacts for Telkom. In FY2023, Telkom used over 23.1 million litres of diesel and spent more than R650 million to keep our network sites online (including replacing and installing new batteries). Providing a consistent quality of service is challenging during the higher loadshedding stages, when our backup batteries cannot recharge fully. Like other industry players, we have also experienced a spike in theft and vandalism of our infrastructure.
We have ramped up our mitigation measures to keep customers connected. Through reprioritising capex, we are deploying better and more resilient energy solutions to our key sites and implementing measures to protect our infrastructure better. The Group has a power outage preparedness plan that covers all scenarios from Stage 1 to a total blackout. This plan has effectively mitigated the impact of loadshedding on our operations, and is continually reviewed to ensure its adequacy.
Together with Eskom, Transnet and PRASA, Telkom combats economic sabotage through the Economic Sabotage of Critical Infrastructure Forum. The Forum, established in 2020, has made good progress. This includes the creation of a specialised multi-disciplinary unit to address economic sabotage, extortion at construction sites, vandalism of infrastructure, as well as a police task team on cable theft and damage to essential infrastructure.
We remain committed to delivering on Telkom's Value Unlock Programme. Over and above affirming value, we want to commercialise our infrastructure assets to fund our sustainable long-term growth.
FY2023 was a year characterised by an extensive focus on potential corporate activity.
Telkom continues to consider its options to maximise value for shareholders, premised on Telkom's market capitalisation not reflecting its intrinsic value. While interest remains for the masts and towers business and fibre business, we will consider the continued interest in these assets carefully, with the goal of realising the best return for shareholders. In the meantime, we have future growth plans in place for these assets and will continue operating them to the benefit of the Group.
The various initiatives currently underway have progressed as follows:
The process for the disposal of a full or partial stake of Swiftnet, the masts and towers business, is well on track. Telkom has received non-binding offers from shortlisted bidders.
Following the legal separation of Openserve into a standalone entity, various processes have been initiated with the goal of realising value. Telkom has received numerous credible expressions of interest from a range of suitable local and international partners. We are encouraged by the level of interest shown in Openserve by potential strategic partners.
Management has been investigating the possible introduction of a strategic equity partner at BCX to enhance scale, growth and its capabilities in various growth areas including cloud services and cybersecurity. A process is currently underway to assess the market for potential international and/or local partners and to consider available options in this regard. Telkom has formally appointed advisors to drive this process.
Further updates will be made to the market as and when considered necessary.
At the 2022 AGM, the remuneration implementation report resolution did not meet the required 75% threshold as recommended by King IV. In response, the Chairperson of the Board and the Chairperson of the Remuneration Committee engaged with shareholders in March 2023 to better understand their concerns.
These concerns centred around a perceived lack of transparency regarding performance metrics and a desire for concrete external measures to be incorporated into these metrics. Shareholders also wish to see greater incorporation of ESG metrics into performance measures.
The Remuneration Committee is exploring ways to improve the transparency of performance metrics for variable pay. From FY2024, ESG metrics will be included in our long-term incentives (LTI) and short-term incentives (STI) performance targets.
Read more about our remuneration decisions for FY2023 and in the separate remuneration report.
In FY2022, the Board approved Telkom's first ESG Strategy and implementation roadmap. The strategy embodies our approach to purpose, people and planet and will be refined with our evolution on this journey. This year, an ESG Impact Council was established to foster greater collaboration across the Group to reflect on the execution of the ESG Strategy and identify improvement opportunities.
We are participating in the Association of Communications and Technology, the telecommunications industry task forces established in August 2022, to consider alternative energy solutions that would reduce our environmental impact. In FY2023, we substantially reduced our Scope 1 and 2 emissions, supporting our decarbonisation journey. We also concluded our Scope 3 emissions baseline assessment and will report progress in reducing these value chain emissions in FY2024. Improved energy, waste and water management to further reduce emissions will be prioritised in FY2024.
In the South African context, with dire levels of unemployment and inequality, we pay particular attention to the "S" in ESG. We are proud of our track record as a small business champion. In FY2023, we created 39 261 new jobs in small black-owned businesses through our supply chain and investments in enterprise and supplier development. New jobs provide dignity and purpose while opening opportunities for families of new earners. According to Statistics South Africa, every income supports, on average, 3.3 people.
We also foster youth development by investing in education through the Telkom Foundation and providing scholarships, learnerships and internships for young South Africans.
Read more about our ESG Strategy.
In January 2022, Telkom was notified that the Special Investigating Unit (SIU) would launch an investigation into contracting processes concerning telex and advisory services and alleged maladministration in the disposals of iWayAfrica, Africa Online Mauritius and Multi-Links Telecommunications. These matters date back to 2006. In July 2022, the Board decided to lodge a court application to block this investigation and establish whether the SIU has jurisdiction over the Group. The matter is still awaiting a court ruling post a hearing in November 2022.
We do, nevertheless, take a strong stance against corruption. While we believe the allegations are vague and unfounded, we will engage further should new evidence emerge. We have and will continue to support the SIU in its investigation, and avail requested documentation.
Succession planning received appropriate Board attention in FY2023. This included analysing our succession metrics and considering our gaps. We always prioritise developing our internal talent, although we recognise the place for sourcing external skills. While we have programmes to develop female talent, we are still not seeing the required results at Board, Executive or Senior Management levels. In FY2024, we will focus on understanding why we are not achieving our ambitions here and introduce new interventions to cultivate women leaders within the Group.
At Board level, our succession planning is centred around creating a Board balanced in specialist skills, including financial and technical expertise and commercial experience. We also seek to improve our diversity in gender, race and age. As at 01 April 2023, female representation at Board level was at 36%, a percentage we aim to increase over the next three years through our Board diversity policy to a 50% ratio.
We believe that our Board is of the appropriate size and has the requisite skills to guide management to lift the Group's performance and tackle the increased stakeholder demands around ESG.
In FY2023, we bid farewell to four Non-executive Directors: Navin Kapila, Kholeka Mzondeki, Fagmeedah Petersen-Cook and Rex Tomlinson. We thank them for their commitment and insights and wish them well with their new ventures. We benefited from the contributions made by our newer Directors, Naidene Ford-Hoon, Brian Kennedy, Prudence Lebina, Mteto Nyati, Ipeleng Selele, and Sung Yoon, who joined the Board in May, July and November 2022, respectively.
In November 2022, Telkom advised its stakeholders of my intention to step down as an Independent Non-executive Director and Chairperson of the Board by 31 March 2023. On 27 March 2023, Mvuleni Geoffrey Qhena was appointed as the incoming Chairperson, effective 01 April 2023. He will chair the Nominations Committee and be a Member of the Remuneration Committee. Geoffrey is the former CEO of the state-owned Industrial Development Corporation and serves on the Investec Bank and Earo Resources boards as a Non-executive Director and Chairperson, respectively. I wish Geoffrey all the best in his role and believe his skills make him well-suited for the role.
We will continue to evaluate the Board and management leadership to ensure we have the right skills and experience to support the Group's growth and potential value unlock activities amidst the evolving economic demands.
We will
focus on:
Innovation
Technology
to stay ahead of the curve.
Further,
overseeing:
The implementation of the ESG Strategy will remain critical as we forge a path to sustainability.
I joined the Telkom Board in March 2018 and became its Chairperson in June 2019. It has been a privilege to learn more about this dynamic sector and its impact on South Africa's economic development and the daily lives of its citizens.
I am grateful for the support I received from fellow Board Members, who are highly committed and skilled, and from management and other Telkom employees. I am always impressed by the quality and spirit of the people at Telkom, from the Executive to junior levels. They have worked extremely hard in trying times, and their commitment was remarkable during the COVID-19 pandemic.
I leave behind a strong and united Board with the necessary skills and commitment to guide Telkom to improve its financial performance and deliver on the Value Unlock Programme.
Sello Moloko
Chairperson