Telkom SA SOC Ltd (TKG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Telkom Spectrum Segment Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Serame Taukobong. Please go ahead, sir.

Thank you gladly, madam. Good afternoon, everyone, and Good morning to those in the U.S. With me, I have our group CFO, Mr. Reyneke; the Telkom Consumer CEO, Lunga Siyo; and our Head of Regulatory, Dr. Siyabonga Mahlangu. Also with us is the Head of the Investor Relations team, headed by Babalwa and her team. The purpose of today's conference call is to discuss and share some color on the out-of-court settlement with ICASA. The call will flow as follows: I will start by just giving a summary of the settlement reached with ICASA; Siyo will discuss how the settlement satisfies Telkom's complaints that led us to adopting the legal route; and then I will come back and conclude before we hand over to the operator for Q&A. So in essence, Telkom and ICASA have reached an out-of-court settlement, which ends the high court litigation over the licensing of the high-demand spectrum. The parties have agreed that Telkom will withdraw the court application and that each party will pay its own legal costs. ICASA has, in turn, undertaken to do the following. One, commencing with the licensing of the spectrum that remained unassigned in the auction by no later than the 30th of June 2022, and that this licensing process will be concluded within the current financial year. Secondly, in its licensing of the unassigned 800-megahertz spectrum, ICASA will have regard of the outcome of the recently concluded auction, the imbalances in the sub-1 gig and the need to promote competition in the post-auction dispensation. Thirdly, ICASA will also conduct a study on the impact of a possible secondary market of spectrum on competition and, if necessary, provide an adequate and enabling regulatory framework. Telkom has, in good faith, entered into a forward-looking settlement providing ICASA the opportunity to resolve current market challenges identified by competition authorities while allowing operators to focus on the business of providing superior services to all their customers. I will now hand over to Siyo to unpack the benefits of the settlement and how it responds to Telkom's complaints. Siyo, over to you, sir.

Thank you, Serame. Good morning and good afternoon to everyone. The settlement agreement addresses 2 principal complaints that Telkom had. One of those is that the design of the auction unfairly restricted Telkom in its quest to bid for spectrum that it required. That's the first one. And the second issue in summary would also be the view that the regulator took on competition. So in our view, the need for ICASA to consider the competitive effect of spectrum arrangements and also of the licensing of spectrum in general in the market is those 2 things were critical in understanding the approach to Telkom's litigation. So those are the 2 issues, the unfair restriction and the failure to consider the competition impact of licensing spectrum. So what does this settlement do for Telkom or what does it give? So if you've been following on the media and elsewhere, Telkom is on record that all we needed was to bid for an additional 20 or 40 megahertz. So the agreement by ICASA that it will commence the licensing process will give us the opportunity to acquire at least the 20 megahertz of unassigned 800 megahertz. We will have that opportunity and we will then compete with the others for that. So that is the opportunity that you'll recall we were deprived of and now we have it. And we also believe that ICASA's undertaking on looking into the method of competition goes a long way in allowing the industry and particularly ICASA -- I mean, Telkom to then prevent its views on the impact of this auction on the market, competition and the future so that whenever ICASA builds spectrum, spectrum arrangement, the secondary market for spectrum, then it has a clearer understanding of the impact of that on competition and market dynamics in the mobile market. So we are confident that the undertakings by ICASA will at least reach some form of finality and will provide some form of substance onto the premise that we had because there is no longer a debate about how the auction would blend. Lastly, the auction happened as predicted by Telkom and can pass in our submission to ICASA. So the inquiry or study will look at how the outcome of this auction, both on sub-1 gig and also on competition, and see how it reshapes or confirms or entrenches the market structure and whether ICASA should, in any way, intervene. And if ICASA reaches that conclusion, we are confident that we will be part of that solution on finding out what kind of regulatory intervention will be necessary. And what does this give to the settlement? What does it give to the sector and society? In our view that is that for the operator, it gives certainty on how much an operator would pay for spectrum. At least we know that that's now -- that has been settled. And it also gives certainly on the validity of the process. So with ongoing litigation, there would forever be questions or question marks about the validity of the process. Now that there is certainty because the matter has been concluded, then the operator can take a longer-term view or longer-term investment decisions on their network. So they can deploy capital with at least excluding the litigation as a variable that would impact on those decisions. I will now hand it back to Serame to conclude. Thank you.

Thank you, Siyo. Just in closing, ladies and gentlemen. I think as a principle, no company seeks to have regulatory processes supervised by court. It certainly goes against fair market principles and would fit a rather dangerous settlement. However, I think it is important for us for the principle of the matter to be held. I think the development certainly post the auction painted a picture which was different to when we entered the court, I guess, on the 4th of January. Given the changes that we've seen in the market, we thought there was opportunity to agree, a forward-looking agreement with ICASA. I think the context in which we agreed enable us to do this. And we've also agreed with ICASA to a very tight implementation schedule. And I think continuously for us, it's very important that we do have a continuous and positive spirit of engagement with the regulator. I will now hand over to the operator for any Q&As. Thank you.

[Operator Instructions] The first question comes from Zintle Gantsho from Sanlam.

So I just have 2 questions. The first one being you mentioned the source of engagement. So it's quite a tight implementation deadline. So if during these next 2, 3 months, before end of June, you and ICASA still don't see eye to eye in terms of any changes that they would make in terms of looking at the outcome of the spectrum, the mobile broadband services inquiry, et cetera, and you don't see eye to eye, is it back to the court application and the litigation? Or what would be the next step from there? And then in terms of -- I just want to get clarity on the WOAN because that was one of the concerns at some point. Are you happy to just wait it out on the WOAN in terms of how that progresses whenever it happens, it happens? Those are my 2 questions.

Thank you, Zintle. On the first one, I think the time lines are staged to the best commitments, understanding that this process involves engagement not just with Telkom but with other operators as well. But you're absolutely right and I see an extreme correction from [indiscernible] if the process is delayed, I mean, not getting the results that we require. As I said, the court is not always the first point of call but it is an available point of call. So you see I can confirm that as well. On the WOAN, I think what's important for us is that the WOAN, obviously, developments happened literally on the day the auction started. What's key with the settlement was to focus on the matter that obtained the auction, which is the unsold inventory of the sub-1 gig and other inventory, which is also host. The WOAN process itself is going to be quite a lengthy process. And we will wait for that to unfold because that does not only impact Telkom but also all the other operators. So the WOAN is going to be quite a long lengthy process. It has to come from the policymaker, which is a minister, and also how then the regulator administrates the process resulting from the WOAN. I hope, Zintle, I have answered your questions.

The next question comes from Myuran Rajaratnam from MIBFA.

I've got 2 questions. Just hearing what you said about the way the auction may be structured, it sounds like your dominant peers won't get any opportunities to bid for the available new spectrum. Is that correct? But does that mean now you might still compete against some of the previous, what I may call, auction competition like from Cell C and Rain? They might still also bid for that spectrum. So that's the first question. Sorry, there's a train going above me. The second one is -- maybe you can answer my first question and I'll come back to you on the second.

No problem, Myuran. I think that would be -- I'm not going to dictate what process ICASA has to follow. What we have indicated especially in consideration of competition is a similar approach, which was taken in the auction. We had the opt-in law, which then addresses the imbalance of the sub-1 gig. So what is being prudently called the team of the previously different franchise, those who did not have access to sub-1 gig, which would then line up competition in that regard. ICASA also is looking at other spectrum bands, which is another available auction but could be also availed beyond just the sub-1 gig. So these other bands also are available. But in essence, it will be preferred. But obviously, there is a consultation process, which is part of the openness that we and ICASA have to engage with the market with. I hope that answered it, Myuran.

Yes, Serame. The second question is, maybe you could explain it like you'd explain it to a Grade 1 student. What is the secondary market that you're talking about in both the SENS announcement and in your call earlier? You haven't got that in South Africa. So what sort of -- what might -- can you flesh that out a little bit for me?

Remember, when we -- part of our legal issues that when the caps were put on Telkom, it did not take into consideration the fact that there were spectrum-sharing agreements. That's a secondary market. So we know that there are spectrum-sharing agreements between MTN and Cell C and Vodacom and Rain. So when ICASA created those bands, they did not take the full impact of those spectrum-sharing agreements because that is the full access that people are commercially utilizing, that people have commercial value to. So when we talk to the secondary market, we talk to spectrum-sharing agreements in simple layman's language.

[Operator Instructions] The next question comes from Samantha Hartard from Ninety One.

I just want to check on the timing of your access to the spectrum bands. We know that there is long-standing issue of freeing up all the access or all the capacity on the sub-1 gigahertz band and there was a separate court case hearing with e.tv that the government can go ahead and hard turn off all free-to-air television by the 30th of June. When do you think you will really commercially be able to start using that spectrum? And secondly, one of your other issues was, well, anything that 2-gigahertz band range is already available for your peers to use. It's unfair that they could readily access this but not the sub-1 gigahertz that you need more. And so just help us on the timing of when everybody will be able to commercially use the different bands, please?

Thanks, Samantha. I can break that into different -- let me try to be simple. So if we take the spectrum that Telkom got access to in the auction, so the 800, there's actually 3 lots in that: Lot 1, 2 and 3. Currently, we're using Lot 2, which was allocated to us in the temporary spectrum choices. It wasn't the thinnest of the bunch. In the assignment process, which happened, I think, 2 weeks ago, MTN has a choice to, obviously as the highest bidder, choose which lot they wanted. They went for Lot 2, which opened up Lot 3 for us. Lot 3 in the sub-1 gig in the 800 segment is the most relatively thinnest of the lots. It's not 100% thin, but I think a good 65% of that can be used immediately. And obviously, as the e.tv matter unfolds itself, that will also start clearing up. So upon issuing of -- and look, we've now been given assignments as we get the licenses. At least a good 65% of that 800 that we currently got will be available. I think the second batch of the sub-1 gig, which will go through this process that we've discussed, that will become available as the migration from analog goes to digital. So in the auction that we bought, the answer is complete. We believe at least 65% of that is readily available to be used right now. And it's something that from a configuration perspective, it's a simple back office configuration because we're already using the 800, which was given to us as part of the temporary spectrum allocation. I hope that answered it, Samantha.

The next question is a follow-up question from Myuran Rajaratnam.

Can we also -- maybe Dirk can talk a little bit about the balance sheet capacity to buy any potential or to get any more potential spectrum from ICASA?

Yes. I think as the process is starting -- so Dirk is on our hot dial-in. He's actually checking in from -- in the bush but he's trying to do well...

Sorry, I did answer but I was on mute. I think, Myuran, if we look at the reserve prices and then the premiums over reserve prices in the first round, we're comfortable. For the actual auction, we did our calculations. We lifted our capacity. And I've said all along that in the current capacity, we can fund. We still have a view that even with the pricing we got in the first round that we will have sufficient headroom to fund our current facilities. And then as part of our normal CapEx and funding structure, we will look at what do we refinance and what do we have to raise. But at our current facilities, we're comfortable that if the pricing is at all in line with what it was in Round 1, then we should be okay.

Serame, at this time, we have no further questions in the queue. Can I hand back to you for closing remarks, sir?

Thank you very much, madam. Thank you very much all for dialing in. We appreciate the time that you've given us. Please, if you do have any further questions, Babalwa and her team will be more than happy to help you address those. I wish you all a wonderful afternoon and morning. Thank you very much.

Thank you very much. Ladies and gentlemen, that concludes today's conference. Thank you very much for joining us. You may now disconnect your lines.