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Telkom puts shoulders to the wheel

CEO, Sipho Maseko on the group’s results, the first chapter of the turnaround plan,reducing capex and future prospects.

RYK VAN NIEKERK: Telecoms group Telkom today announced results for the year to the end of March. Revenue was up slightly to R26bn, the headline earnings increased by a significant 60% to 533 cents per share. The group has virtually paid off all of its debt and Telkom will pay its first dividend since 2011. The dividend is 245 cents a share.

Sipho Maseko, Telkom’s CEO is on the line. Sipho welcome to the show. You must be pretty relieved with the performance, a year ago you made promises and it seems like you have delivered.

SIPHO MASEKO: Yes Ryk thank you very much and thanks for having me on your show. I am encouraged by the results because what it says to me is that everyone in Telkom has begun to put their shoulders to the wheel, we made commitments that we then followed through on, and it’s been a very difficult year. There were some consequences amongst others that some people had to leave the company on the staff side, but in the main I am actually really pleased by the efforts that the company has put in getting to these results.

RYK VAN NIEKERK: You have formulated a very elaborate turnaround plan. Where do these results leave you in terms of that plan?

SIPHO MASEKO: Where it leaves us is that we are still on track. As we’ve indicated before where we had quite a number of chapters in the turnaround, the first chapter of the turnaround plan comes to an end at the end of the current financial year, so end of 2016, and we are kind of three-quarters away from the first chapter. There are quite a number of things still left to do.

But what is pleasing are the following: that we’ve able to stay the course around a multi-year cost efficiency program, we remain committed around the whole area of customer experience and starting to put the customer first. We have significantly dealt with the balance sheet issues. We have generated jolly good cash and hence we’ve been able to reinstate the dividend. We have practically no debt at the moment. We are now beginning to respond to the market conditions, responding to competition, bringing prices down, looking for efficiency and really looking at the core of the business and how we can get it to be competitive in the market.

RYK VAN NIEKERK: Why did you pay off most of your debt? Wouldn’t somebody look at your balance sheet and say it’s a bit lazy with no debt on it?

SIPHO MASEKO: It is a bit lazy, I fully agree with you but it gives us the flexibility that we want. One of the things that we thought it prudent to have, is that with a clean balance sheet it then makes you potentially very nimble in terms of looking at inorganic options and being able to grow the business into the right adjacencies. For example our acquisition of BCX, we’re funding it ourselves. We had the financial flexibility to do that, we don’t burden the balance sheet when we don’t need to burden the balance sheet and it enables us to deal with the headwinds in front of us. So it is indeed looking like it’s a lazy balance sheet but it is deliberately so in order that we can have the right flexibility in the company to start growing the company beyond stabilising it.

RYK VAN NIEKERK: Telkom has also reduced the capital spending significantly in the financial period. Most telecoms networks actually boast about their capital spend, why did you cut back?

SIPHO MASEKO: Well, a few things. One of the reasons why we slowed down capex especially in the first half of the year was to introduce discipline in how we allocate resources. And then in the second half of the year we had an acceleration. If you recall in the first half of the year we had spent less than 13%, round about 12% and in the second half of the year there was an acceleration. One of the things that has been important to us, is to make sure that we invest capex in the right way in the right places and remain accountable for it. One day they will ask us if we were reckless with how we spend our capex, what are the returns on the capital that we are employing, and it was therefore important for us to get the right commercial discipline and we would therefore be investing largely in three areas.

Growing the fibre footprint, especially the fibre to the home, fibre to the kerb and broadening the media cell base, continuing to invest in LTE and LTA because clearly the future is in broadband and broadband enabled services. So you will see that number edging up a little bit and that is why our future guidance so that means we will be spending somewhere in the order of about 18% of revenue as capex going forward.

RYK VAN NIEKERK: A big focus area is, as you’ve said, fibre to the home, but during the press conference you did state that there seems to be a lot of competition in that market. How do you see it playing out?

SIPHO MASEKO: For me personally what is pleasing is that the competition all the things that we as Telkom have to get right, is that competition is good. We are in a competitive market, we are in an open economy. Competition should make us better – we shouldn’t weep and wail because there’s competition, so therefore we need to embrace competition. What it therefore means is that we need to become more efficient, we need to be able to compete, give customers and consumers a lot more choice, it forces us to get our service levels right. And when we did not have competition, we took things for granted and now that there is a competition we took things for granted. And now that there is competition it actually forces us to know that if we don’t respond, customers have a choice and they’ll go to other providers who would give them better service, better prices and that is why we therefore have to respond.

And hence Ryk, I was saying now the focus is around how do you make sure that the core operations of the business, the core values, the performance management, the products, the services, that’s the area that will differentiate us in the marketplace. It shouldn’t be just about the fact that we own the fibre, if we own it but we can’t use it properly, or we own it but we deliver bad service, it is as good as not having it. So from my perspective actually, much as I’m a bit concerned about it, but also we have to learn to live in a competitive world.

RYK VAN NIEKERK: But if you look at fibre to the home, it’s a relatively new thing in South Africa and it is still expensive. How do you think it could grow, do you think it could grow in the same trend as ADSL did when that was introduced?

SIPHO MASEKO: Well I think it will probably grow a lot faster, I think the prices will come down over time. I think the use case for fibre will increase, I think consumers will start to use fibre for a lot more content consumption than they are currently doing – streaming, local streaming or international steaming, other internet enabled services.

I think as things like e-Government and e-Education come on stream, e-tailing and e-shopping – all of those things will increase the use case of fibre and I think that it will be a lot faster. I personally think that the future will really be in how people consume broadband and one of the things that we have seen is actually the more capacity that consumers have, the more they consume of the products. So I am an actually lot more bullish around fibre, and we made some mistakes around ADSL, I think we held back what we call the democratisation of broadband and will be opening up the market a bit more, and we are fundamentally looking to change Telkom at the core in terms of how we compete in the market place overall.

RYK VAN NIEKERK: A few years ago you invested quite heavily in Telkom Media to provide content services on your broadband platforms. Are you still set on that way or how do you go to populate or provide content via your broadband services?

SIPHO MASEKO: Yeah, one of the things that we will need to do is to find neat alliances where the economics are balanced between ourselves, as network providers and those that aggregate content. I think that the idea for us to buy and build Telkom Media a few years ago was a great idea at the wrong time, but I think now as content over broadband has proliferated to the extent that it has, it means that there’s clearly an alliance that needs to take place between content aggregators and network aggregators. So you see, we’ve just been running a promotion between ourselves and MultiChoice, where they have a broadband enabled set top box which they call an explorer. That has enabled quite a lot more consumption of content but at the same time enabled a lot more consumption of broadband as well, and we think that convergence is inevitable, both as an industry trend worldwide but also in South Africa.

RYK VAN NIEKERK: Telkom Mobile was also one of your problem children a while ago but it seems like you’ve turned the business around and you are even talking about a breakeven scenario in the new financial year. How did you manage to do this?

SIPHO MASEKO: Well, I mean, one of the things I must say about the leadership that has been running Telkom Mobile is that I’m not impressed about what they have done, I’m super impressed about what they have done. I think the management response has been great, they looked at new distribution opportunities, because the previous opportunities were locked down by some of the bigger competitors, they were very innovative around product and product solutions, they managed their costs in the right way, they managed to stagger their deployment of the network in the right way. In the past the metrics were the wrong Ryk, so we countered our success by the number of base stations that we built, not by the number of customers that were on the network. I think now the metrics are beginning to come together in the right way and as I said I think that the management response has been pretty phenomenal and I’m very proud of those guys.

RYK VAN NIEKERK: You have been downsizing the Telkom workforce for a few years now. What is your strategy here, what will happen in the New Year?

SIPHO MASEKO: Well obviously we, you know, we need to continue to work at our costs, like we have indicated before our cost efficiency programme is a multi-year programme. We need to look at all layers of costs, not just staff costs, we need to look at third party spend, we need to look at the sort of costs that tend to hide in cost of sales so that we can take them out. So every bit of bit of inefficiency or what I call bad costs, we need to take them out, so therefore, staff costs as well, we are not immune to it but we don’t necessarily drive a target. One of the things that we’ve said is that currently our staff expense to revenue ratio sits at about 29%. I think when we started on this journey we had it at about 31%, ideally we want to be at about 25% and that’s where we’ll be managing it to, to make sure that we are as close to international benchmarks as we possibly can.

RYK VAN NIEKERK: What is the staff morale currently within Telkom?

SIPHO MASEKO: Well it’s a bit intriguing actually. I’ve received quite a lot of emails today and we have delivered the results firstly to the Telkom staff. I’m sensing quite a lot of optimism about the future. I think that the staff are beginning to see that if we do the right things, the financial delivery will flow through. Naturally there will be a bit of anxiety about personal security but one of the things we have said is the following:

The most important thing is that we need to be profitable. Profitability leads to stability. Stability leads to growth, and growth will definitely make all of us secure about the future and the team understand that now we’re in the stability phase. We need to make sure that things are stable and the more we do better and as I indicated earlier on, if we go through this round by round, making sure that every round we get the maximum points, it holds us in good stead for later on. So everyone in the firm understands that it will be difficult but I’m absolutely bowled over by the commitment, the energy and passion to make it work, despite the possibility of personal consequence for some of the people that are involved.

RYK VAN NIEKERK: Just lastly you did deliver a good set of results for the previous financial year. What will be your key focus areas for the new one?

SIPHO MASEKO: Well the key focus areas for me in the coming year revolves around four things. Firstly, the right customer value propositions, we need to put in place, we’ve begun around this whole area journey around customer experience but now it’s about value propositions, its product, its services, that’s the first thing.

The second thing is following through on our operating model. Three, standalone businesses, our consumer business to enable us to win in the home, our enterprise business so that we can lead in business and our wholesaler network business to enable us to invest in the infrastructure, and as I indicated earlier on, democratise broadband. Thirdly, its following through on our multi-year cost efficiency programme, there’s quite a lot of things that we need to do, we need to make sure that we succeed there, and last but not least, we need to make sure that the performance of the company, the performance of the individual, so performance management, making sure that every person plays a role. I play my role as the CEO of the company. The call centre agent plays his or her role in terms of service experience. The store agent plays their role, the field service operator, everyone needs to play their part and in that way, actually, and we all deliver performance, we all hold each other accountable to the objectives that we have set ourselves, it will make a difference.

RYK VAN NIEKERK: Sipho Maseko is CEO of Telkom.

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