Telkom Sa Soc Ltd. · JSE:TKG
Telkom Sa Soc — H1 FY2020 Earnings Presentation
56 slides from Telkom Sa Soc's earnings presentation, November 2019
Slide 1: Interim Results Presentation 2019
Interim Results Presentation 2019 Telkom SA SOC Limited Interim Results Presentation for the six months ended 30 September 2019 1
Slide 2: Operating environment
Interim Interim Results Results Presentation Presentation 2019 2019 Operating environment 2 1
Slide 3: Tough trading environment
Interim Results Presentation 2019 Tough trading environment Macro-economic Competitive Regulatory environment environment environment • Low GDP growth • Fixed voice revenue • Spectrum policy • Consumers under under pressure directive published pressure • Pricing pressure in • Information • Enterpris
Slide 4: Business performance
Interim Interim Results Results Presentation Presentation 2019 2019 Business performance 4 2
Slide 5: Themes underlying performance
Interim Results Presentation 2019 Themes underlying performance Capital Broadband Technology investment leadership upgrade • Continued investment in • Highest home broadband • Upgrade from copper key growth areas customer base based to new • Investment in 4.5G • Highest FTTH connectivity rate techno
Slide 6: Highlights
Interim InterimResults ResultsPresentation Presentation2019 2019 Highlights 75.7% growth in mobile customers 2.0 million home broadband customers (highest in the history of Telkom) 79% of our sites are on fibre backhaul 6
Slide 7: Mobile growth trajectory continues
Interim Results Presentation 2019 Mobile growth trajectory continues Subscriber growth Mobile service revenue 5 602 ‘000 R’m 11 501 3 578 1 695 2 103 6 545 2 327 909 4 365 1 667 75.7% 56.6% Data 9 398 614 3 907 1 330 Pre-paid Voice 4 878 2 669 3 035 Post-paid 1 713 Other H1 FY2018 H1 FY2019 H1 FY202
Slide 8: Accelerated high-speed broadband growth
Interim Results Presentation 2019 Accelerated high-speed broadband growth Consumer home broadband subscribers Mobile broadband subscribers ‘000 ‘000 7 822 2 047 4 752 64.6% 2 849 6 292 Smartphone users 1 575 3 790 Data only 1 469 2 061 788 962 1 530 H1 FY2018 H1 FY2019 H1 FY2020 1 530 788 962 Mobile
Slide 9: 4.5G network underpins growth
Interim Results Presentation 2019 4.5G network underpins growth Spectrum Mobile sites integrated Site Type Spectrum Telkom MNO 5 476 99% 93% 94% 2300Mhz 60Mhz - 4 383 3 445 61% 70% 2100Mhz 55% 30Mhz 30Mhz 1800Mhz 24Mhz 24Mhz 900Mhz - 22Mhz H1 FY2018 H1 FY2019 H1 FY2020 H1 FY2018 H1 FY2019 H1 FY2020
Slide 10: Capacity & coverage expansion
Interim Results Presentation 2019 Capacity & coverage expansion Network capacity 2100 Refarming 2CC & 3CC Upgrades Mobile sites 2500 4000 integrated 2000 3000 1500 1000 2280 2000 3408 24.9% 2832 500 1280 1000 162 1413 0 0 H1 FY2018 H1 FY2019 H1 FY2020 H1 FY2018 H1 FY2019 H1 FY2020 5 476 sites Massiv
Slide 11: Highlights
Interim Results Presentation 2019 Highlights Strong EBITDA growth up 22.6% with a margin of 16.8% IT revenue up 1% in a weak economy Portfolio review concluded 11
Slide 12: Successful execution
Interim Results Presentation 2019 Successful execution Improved Portfolio review Increased focus profitability concluded on customer experience • Organisation cost-to-serve • Complexity removed, legal entity • Improvement on the NPS score, this reduced resulting in 22.6% reduced from 34 to 5 improve
Slide 13: Performance impacted by weak economy
Interim Results Presentation 2019 Performance impacted by weak economy Revenue by vertical segment (3.3%) 5% growth in public sector • Public sector spend improved but not sustainable • Continued growth in revenue from municipal solutions 165 132 284 79 4% decline in corporate sector • Improved perf
Slide 14: Growth in next generation technologies
Interim Results Presentation 2019 Growth in next generation technologies Voice Data Next generation voice 6% -15% • Revenue increased by 6%, upgrade from legacy to +22% -7% new technology proceeding according to plan • Next generation voice lines have increased by 16% Next Generation Next Generation
Slide 15: Stable IT business in a weak economy
Interim Results Presentation 2019 Stable IT business in a weak economy 4 548 4 594 Revenue • 40.5% increase in hardware sales, R’m taking advantage of the customer 1366 1% 1470 refresh cycle • 7.6% increase in application solutions in line with strategy to grow own IP solutions 2485 2178 • 12.4% dec
Slide 16: Reduce cost to serve
Interim Results Presentation 2019 Reduce cost to serve Total expense 8 627 • Margin expansion due 7% reduction in R’m 428 8 001 360 costs, with 3% reduction in revenue 7.3% 4257 • 15% decrease in employee expenses, due 3949 to headcount reduction of 28% • 7% decrease in selling, general and 2460 209
Slide 17: Highlights
Interim Results Presentation 2019 Highlights 42.6% FTTH connectivity rate 14.2% growth in fixed line broadband data consumption 28.5% growth in Ethernet business 17
Slide 18: Connectivity gateway
Interim Results Presentation 2019 Connectivity gateway Fixed line broadband data consumption1 Ethernet Fibre to the Homes Petabytes business base stations connected 42 417 7 388 195 416 558 services connected connectivity 488 connected rate of 390 14.2% 28.5% 7.4% 42.6% H1 FY2018 H1 FY2019 H1 FY2020
Slide 19: Data eco-system evolution
Interim Results Presentation 2019 Data eco-system evolution Data solutions evolution Broadband connection evolution Legacy technology Copper access1 Services Connections 873 393 124 496 814 595 108 246 98 619 628 454 8.9% 22.9% H1 FY2018 H1 FY2019 H1 FY2020 H1 FY2018 H1 FY2019 H1 FY2020 Next generat
Slide 20: Improved operational efficiencies
Interim Results Presentation 2019 Improved operational efficiencies 39% 17% 40% improvement on next improvement in improvement on average generation access average broadband fault rate time to repair time to install 2.7 32% 29% 39% million reduction in improvement in reduction in fault less kilometr
Slide 21: Highlights
Interim Results Presentation 2019 Highlights 44.1% increase in M&T revenue 11.4% growth in total tenant 18.5% growth in EBITDA margin First 5G small cell site live 21
Slide 22: M&T Portfolio performance
Interim Results Presentation 2019 M&T Portfolio performance Revenue Total tenant growth R’m Number of leases 657 9 551 456 8 577 44.1% 11.4% H1 FY2019 H1 FY2020 H1 FY2019 H1 FY2020 EBITDA EBITDA margin R’m (%) 58.1% 382 38.4% 175 118.3% H1 FY2019 H1 FY2020 H1 FY2019 H1 FY2020 22
Slide 23: M&T portfolio: Independent valuation
Interim Results Presentation 2019 M&T portfolio: Independent valuation FY2020 valuation considerations Portfolio valuation summary Commercially • Independent valuation based on productive a portfolio of 3 648 3 648 portfolio commercially productive towers Productive portfolio towers Future additiona
Slide 24: Unlocking value
Interim Results Presentation 2019 Unlocking value Property development pipeline – 16 Projects Disposal pipeline Sectoral spread Sectoral spread Identified disposal (CAPEX) (GLA) properties (156) Commercial 16% Commercial 21% 34 Mixed- Social Mixed- Use Infra Use Social 58% structure 54% Infra 26% st
Slide 25: Financial Overview
Interim InterimResults ResultsPresentation Presentation2019 2019 Financial Overview 25 3
Slide 26: Key factors impacting results
Interim Results Presentation 2019 Key factors impacting results Weak economic IFRS 16 Margin Capex Financial risk environment adoption pressure acceleration management 26
Slide 27: IFRS 16 impact
Interim Results Presentation 2019 IFRS 16 impact CATEGORY IAS 17 (Previous standard) IFRS 16 (New standard) IMPACT Balance • Lease smoothing • Recognise right of use of asset • R3.9bn Sheet receivable/payable • Recognise lease liability • R4bn • Reduced operating lease (higher EBITDA) • R564m • Depr
Slide 28: Group performance
Interim Results Presentation 2019 Group performance H1 FY2020 H1 FY2020 H1 FY2019 Rm (IFRS 16) (IAS 17) (IAS 17) % Operating Revenue1 21 479 21 479 20 511 4.7 Direct expenses 5 726 5 726 4 200 (36.3) Operating expenses (excl. depreciation) 10 471 11 035 11 236 1.8 EBITDA 5 604 5 040 5 267 (4.3) Head
Slide 29: Investment strategy continue to bear fruit
Interim Results Presentation 2019 Investment strategy continue to bear fruit Revenue by product line (R bn) 56.6% 0.2% (19.1%) (10.7%) 17.0% 5.6 5.9 4.7 3.6 3.4 3.4 3.6 3.2 1.3 1.5 Mobile service revenue Information technology Fixed voice and Traditional data products New data products interconnecti
Slide 30: Higher direct expenses in support of mobile growth
Interim Results Presentation 2019 Higher direct expenses in support of mobile growth Group revenue Direct expenses (R bn) (R bn) 21.5 20.5 0.2 Amount includes: 0.4 0.4 0.3 • Once off roaming 3.4 costs – R132m 3.4 4.7% • Once off migration costs – R78m 4.7 7.1 +1.5 5.7 1.0 4.2 0.6 36.3% 2.9 11.7 Othe
Slide 31: Cost decrease supported by our cost optimisation program
Interim Results Presentation 2019 Cost decrease supported by our cost optimisation program (R201m) Cost growth movement Rm 11 236 1.8% 11 035 401 (110) 137 (219) 109 99 (216) H1 FY2019 Em ployee expenses Maintenance Other operating Marketing Impairment of Service fees Operating leases H1 FY2020 expe
Slide 32: EBITDA impacted by higher acquisition costs
Interim Results Presentation 2019 EBITDA impacted by higher acquisition costs EBITDA movement R227m Rm 4.3% 5 267 (1 238) (64) (92) 130 5 040 2 362 401 (200) (1 526) H1 FY2019 Mobile Fixed Information Other revenue Other Direct expenses Employee Other operating H1 FY2020 1 EBITDA technology income e
Slide 33: Earnings decline due to fair value adjustments
Interim Results Presentation 2019 Earnings decline due to fair value adjustments Profit before tax movement Rm R830m 2 148 38.6% (392) (57) 1 318 (118) (40) (142) (81) H1 FY2019 Operating profit Investment Finance charges Cost of hedging Fair value Interest rate H1 FY2020 Profit before tax income mo
Slide 34: Impact of financial risk management
10 11 12 13 14 15 16 34 4/3 /2017 5/3 /2017 6/3 /2017 (ZAR/USD) 7/3 /2017 8/3 /2017 Cost of hedging 9/3 /2017 Forex movements 10/3/2017 Interest rate swaps 11/3/2017 12/3/2017 1/3 /2018 2/3 /2018 3/3 /2018 4/3 /2018 Forex and fair value movements 5/3 /2018 ZAR/USD historical exchange rates 6/3 /2018
Slide 35: Financial risk management - FY2016 to FY2020
Interim Results Presentation 2019 Financial risk management - FY2016 to FY2020 H1 FY2020 H1 FY2019 H1 FY2018 H1 FY2017 Foreign exchange and fair value movements 138 (125) (6) 78 Cost of hedging 116 76 123 100 Forex & fair value movements (30) (172) (119) (40) Interest rate swaps 52 (29) (10) 18 FY20
Slide 36: Accelerated capex to support mobile expansion
Interim Results Presentation 2019 Accelerated capex to support mobile expansion H1 FY2020 H1 FY2019 % Mobile 2 246 1 352 66.1 Fibre 381 598 (36.3) Core network 459 383 19.8 OSS/BSS programme 81 134 (39.6) Network rehabilitation/sustainment 76 81 (6.2) Service on demand 551 560 (1.6) Other and subsid
Slide 37: Free cash flow impacted by accelerated capex
Interim Results Presentation 2019 Free cash flow impacted by accelerated capex Free cash flow (FCF) movement H1 FY2020 H1 FY2019 % Rm Cash generated from operations 4 446 3 988 11.5 Repayment of lease liability (389) − (100.0) Interest received 116 185 (37.3) Finance charges paid (646) (342) (88.9)
Slide 38: Healthy balance sheet
Interim Results Presentation 2019 Healthy balance sheet H1 FY2020 FY2019 % Debt maturity profile Long-term credit rating Cash balances 1 002 1 428 (29.8) R'm 4000 BB+ Interest bearing debt Baa3 3500 Opening balance 10 241 9 397 (9.0) 3000 Net Funding raised 2 395 702 (241.2) 2500 2000 Other 141 142
Slide 39: Disciplined cash management
Interim Results Presentation 2019 Disciplined cash management Rm 2 652 (1 026) 1 830 1 428 (1 346) 2 120 1 002 2 774 (3 177) 229 1 650 FY2019 Cash Cash generated 1 Maintenance and Dividend paid Net cash before Net financing Remaining capex Other investing H1 FY2020 Cash Short term H1 FY2020 Total ba
Slide 40: Progress against guidance
Interim Results Presentation 2019 Progress against guidance FY2019 – FY2021 H1 FY2020 FY2020 – FY2021 Guidance* Actual Updated Guidance* Operating Mid-single digit 4.7% Mid-single digit revenue EBITDA Mid-single digit (4.3%) Mid-single digit Capex to revenue 16% - 20% 19.7% 16% - 20% Net debt to EBI
Slide 41: Sustainable financial framework
Interim Results Presentation 2019 Sustainable financial framework R Defend and Sustainable cost Disciplined capital Positive grow management allocation framework free cash flow Protect decline in legacy Effectively manage and Framework that supports our • Optimise net working business: contain cost
Slide 42: Sustainable cost management
Interim Results Presentation 2019 Sustainable cost management Targets Measured against H2 quick win initiatives H1 FY2020 actuals Non-exhaustive 3rd party contracts review 75% to 73% Cost to revenue Cost to revenue ratio 78% by FY2022 Reduce cost to acquire/serve Optimize network utilisation Opex IT
Slide 43: Improve operating free cash flow
Interim Results Presentation 2019 Improve operating free cash flow R H2 KEY INITIATIVES R700m - R1bn target Supply chain Handsets Disposal of financing receivables financing non-core assets 43
Slide 44: Capital allocation framework
Interim Results Presentation 2019 Capital allocation framework 1 Inputs Annual Strategic Planning/Investment Strategy 4 Outputs Sources Operational cashflow and cash release initiatives/divestments Debt Alternative 2 of Capital Issuance Funding Solutions Total Optimal Maintain a strong balance sheet
Slide 45: Conclusion
Interim Interim Results Results Presentation Presentation 2019 2019 Conclusion 45 4
Slide 46: Business evolution
Interim Interim Results Results Presentation Presentation 2019 2019 Business evolution 46 5
Slide 47: Benefits of the operating model
Interim Results Presentation 2019 Benefits of the operating model Profit Commercial Cost & capital Regulatory Strategic Value accountability focus efficiency compliance flexibility realisation • Transparency of • Standalone BUs • Focus on BU cost • Trading model • Identify specific • Valuation impro
Slide 48: Evidence of the evolution
Interim Results Presentation 2019 Evidence of the evolution 1% 8% 6% 3% 22% 16% Fixed voice Fixed data FY2013 H1 FY2020 32% 56% Mobile IT 23% Other 33% 48
Slide 49: Market beginning to recognise evolution
Interim Results Presentation 2019 Market beginning to recognise evolution EV/EBITDA 4-6x EV/EBITDA 6-7x I co T l Te EV/EBITDA 4-6x Centre for diversified business portfolio Masts & Towers r Co I nfr we EV/EBITDA as To 9-11x tr u ct re Properties u bu EV/EBITDA si n 6-7x es ty s p er Pr o EV/EBITDA 49
Slide 50: Diversified portfolio – set for growth
Interim Results Presentation 2019 Diversified portfolio – set for growth • Accelerate mobile • Drive new • Modernise the • Optimise and grow • Establish dedicated growth profitable revenue network the Mast & Tower SMB BU • Drive high-speed streams • Commercialise the portfolio • Aggressive on new br
Slide 51: Spectrum assignment
Interim Results Presentation 2019 Spectrum assignment 51 6
Slide 52: Spectrum journey remains complicated and uncertain
Interim Results Presentation 2019 Spectrum journey remains complicated and uncertain • Mobile market not • Hybrid model competitive • Preferential treatment for • All spectrum to be WOAN assigned to WOAN • ICASA to hold off 3.5 & study optimal way to license it for 5G National integrated ICT policy
Slide 53: Spectrum assignment principles and legislative imperatives
Interim Results Presentation 2019 Spectrum assignment principles and legislative imperatives Spectrum assignment to ICASA legislative imperatives and Address key principles considerations for spectrum licensing Promotes competition and ss 2, 3 & 31(3) of the ECA drives economic growth Radio Frequenc
Slide 54: Information Memorandum inconsistent with policy directive
Interim Results Presentation 2019 Information Memorandum inconsistent with policy directive Not informed by Proposed Unrealistic Non economics and spectrum lots are Spectrum Viable competition technically flawed Obligations WOAN • Disregards the • 700 and 800 MHz • Extensive capital • No discernible
Slide 55: Proposed consultation process
Interim Results Presentation 2019 Proposed consultation process Public comments Evaluation of Invitation to on information submissions by apply (ITA) memorandum ICASA 31 January 2020 55
Slide 56: Thank you Q&A
Interim InterimResults ResultsPresentation Presentation2019 2019 Telkom SA SOC Limited Thank you Q&A telkomir@telkom.co.za 56