A word from our executive chairman

MTN experienced an extremely difficult 2015, particularly in the last quarter of the year when the Nigerian Communications Commission (NCC) imposed a US$5,2 billion^† fine relating to subscriber registration requirements. Profound lessons were learned, which precipitated a wide-ranging review of our operations, operating structure and stakeholder management capacity, and substantial progress has been made in taking the necessary corrective action.

A defining time for MTN

As a consequence of the unfortunate events subsequent to the imposition of the fine in October 2015, which included the resignations of the Group CEO and the CEO and head of regulatory for MTN Nigeria, I agreed to assume the role of executive chairman on an interim basis, from December 2015. My primary tasks were to resolve the Nigerian fine and appoint a new Group CEO. The latter process is well under way and we expect to identify and name a new Group CEO by the end of June 2016.

We have sought, systematically, to remedy those areas in which we were found to be lacking, to ensure that the Group emerges as more resilient than before. To this end, we have revised our operating structure and appointed a new management team, and improved our governance, compliance and stakeholder management functions. Furthermore, we are allocating the appropriate resources to ensure that our operational platforms are robust, our networks are competitive and the experience we deliver to our customers is enhanced. An important aspect of achieving all these imperatives has been to elevate the importance of the Group’s people and culture agenda. We are also conducting a holistic strategic review, to ensure that the Group is agile and responsive to the rapid evolution of the sector from voice to higher data and digital services revenue. Central to this effort is to entrench our position at the cutting edge of innovation in the sector.

The Group’s overall financial performance in 2015 reflected its resilience against a confluence of challenging factors. Deteriorating economic conditions, increased competition, heightened regulatory pressure and operational issues in some of our markets, particularly Nigeria and South Africa, had a material negative impact on the Group’s performance. Notwithstanding this difficult operating environment, the Group grew its subscriber base by 4,1%, despite disconnecting 6,7 million customers in Nigeria and 3,7 million in Uganda to comply with subscriber registration requirements.

While overall Group revenue was flat year-on-year, an important feature of the revenue mix was the 33% increase in data revenue, in spite of effective data tariffs being 45% lower, as data traffic grew by more than 100%. This offset the 5% decline in voice revenue, which was primarily due to voice tariffs reducing by as much as a quarter. Headline earnings per share (HEPS) were down 14,3%^** and reported HEPS fell 51,4%, materially impacted by the provision made for the Nigerian fine. The board declared a second half dividend of 830 cents per share (cps), to bring the total dividend for the year to 1 310cps, up 5% from the year before, having taken into consideration all matters pertinent to a cogent and sustainable dividend policy.

Understanding the dynamics in our operating context

The Group’s experiences in 2015 brought into sharp focus our role and responsibilities as a multinational and a major participant – in many instances a pioneer – in the developing countries in which we operate. Our scale and reach as a leading mobile network operator in many of our markets, and our contribution to their socio-economic development as a provider of ICT, imposes on MTN a higher burden of national responsibility. While we are honoured to play this role, it is crucial that we and indeed all our stakeholders understand that it comes with demanding expectations, obligations and challenges. It is incumbent upon us to navigate the complexities, manage the risks and balance the often competing stakeholder expectations these demands bring, especially in uncertain regulatory environments. We must also acknowledge the natural inherent tension that exists between business and regulators if markets are to operate effectively for the good of society, and find the optimal balance necessary both to defend shareholder value and contribute to national and regional development objectives.

Although the regulatory landscape in our markets is being redefined by more formalised frameworks and more assertive regulators, inconsistencies between different bodies of legislation and a lack of clarity around regulatory parameters persist. This has included unpredictable tax regimes, with sudden tax increases being used to shore up fiscal positions as macro-economic pressures have intensified. More specifically, we have had to manage the impact of lower mobile termination rates, more scrutiny of network performance and associated penalties for not meeting agreed performance parameters, the renewal of licences whose terms are coming to an end, and the critical need to secure additional spectrum to ensure sufficient capacity to service customer growth and the increasing migration to data services.

In tandem with the heightened regulatory pressure, changing customer expectations and intensifying competition continue to change the competitive landscape. This has led to sharp declines in mobile communication tariffs, with irrational pricing among some players to defend their market shares. Lower pricing has in turn driven increased penetration and traffic, while the adoption of more 3G and 4G devices has resulted in higher demand for data and improved data quality, putting pressure on available network capacity.

As the convergence of telecommunications, IT and adjacent industries such as banking, insurance, entertainment and publishing has continued, delivering value-added services is providing operators with additional revenue opportunities and an avenue to limit customer churn, even while the threat to traditional revenue streams from Over-the-Top (OTT) providers continue to intensify. These new growth opportunities are being underpinned by mobile being the de facto means of communication and access point for internet-enabled services.

However, the cyclical volatility in macro-economic conditions has continued to dampen growth prospects, with the global economy remaining weak and characterised by a deep commodity and oil price slump. This has affected oil producing economies in particular, although the general weakness in global markets and heightened aversion for higher risk emerging markets has undermined economic growth across the board, and the financial health of consumers and businesses alike. As revenues have retreated, emerging market currencies have also depreciated sharply, making it difficult for MTN to repatriate dividends from countries that have limited foreign exchange liquidity.

Acknowledging and addressing our challenges

The US$5,2 billion^† fine imposed by the Nigerian Communications Commission (NCC) for the late disconnection of 5,1 million improperly registered subscribers, and its subsequent reduction at the NCC’s discretion to US$3,9 billion^†, was the most material and multi-faceted challenge the Group faced in 2015. Months of intense engagement with the NCC led to a good faith payment of US$250 million^† to the Federal Government of Nigeria on 24 February 2016, on the basis that this would be applied towards a settlement. Furthermore, we agreed to retract our legal action against the NCC in support of an environment conducive to reaching an amicable settlement on the matter. Negotiations are ongoing.

The Group is cognisant of the critical importance of ensuring regulatory compliance at all times. However, understanding the complexity of subscriber registration in Nigeria provides some insight into what transpired in this instance.

From the operation’s inception in 2001, given that some 99% of its customer base is prepaid, subscribers were almost entirely anonymous. In 2011, after a period of consultation, the NCC introduced a SIM registration process with the enactment of formal regulations and technical specifications. Its objective was to create a central national database of all users of telecommunication services to counter the abuse of mobile user anonymity. Mobile network operators were tasked with rolling out facilities to register existing customers nationwide, and in doing so encountered significant difficulties. These included having to implement biometric standards akin to US immigration and FBI standards in their complexity, infrastructural constraints such as power supply and access to remote areas, as well as subscriber apathy and social issues particularly in the north of the country. The NCC specifications also required equipment such as fingerprint scanners that were not readily available in the country. That said, our subsequent engagement with the regulator has shown its willingness to work with all operators to address the difficulties encountered in this process.

Irrespective of these extenuating circumstances, the board concluded that MTN Nigeria’s response to the directives from the regulator pertaining to improperly registered subscribers could have been handled differently and with a high sense of urgency.

Turning to some of the challenges that hampered our operational execution in the year, and linked to the subscriber registration issue, MTN Nigeria faced disruptions in the course of stringently enforcing the disconnection of 6,7 million subscribers following the imposition of the fine, which was followed by a further 4,5 million at the end of February 2016. By and large, improper registration is not a case of customers having no proof of identity but rather of incomplete forms. We continue to engage actively with subscribers to rectify this and reconnect them and this process is progressing well.

MTN Nigeria’s competitiveness was also compromised by the suspension of regulatory services in October 2015. This entailed the NCC withdrawing its approval of new tariff plans and promotions until certain tariff plans and promotions, which were deemed to be linked to its determination of MTN as a “dominant operator”, were removed from the market.

In South Africa, management changes – some of which were effected in the prior year – and the decisive action taken to strengthen MTN SA’s competitiveness began to bear fruit in the year. However, the impact of the industrial action from May to July 2015 by the Communications Workers Union (CWU) undermined these improvements. The strike, which continued for seven weeks, related to disagreement on certain key resolutions put forward by the CWU. It caused considerable disruption to MTN SA’s call and service centres as well as its distribution agents and channels, in a period of heightened competition in the South African market. Key outcomes of the agreement between MTN SA and the CWU included a 12% bonus increase in 2016, irrespective of the Company’s performance, the permanent employment of all casual workers and backdated payment for working on Sundays and public holidays. MTN has subsequently taken a decision to recognise the CWU which will enable MTN South Africa to define a process and ensure a constructive relationship.

The CEO of MTN SA, Ahmad Farroukh, resigned and was succeeded by Mteto Nyati.

Decisive responses to reset the springboard for the future

To significantly improve our ability to mitigate, to the extent possible, and manage the implications of our increasingly complex and uncertain operating context, we reviewed our operating structure with a view to strengthening operational oversight, leadership, governance and regulatory compliance across the Group. In the board’s view, a major contributory factor to the problems we faced in the year was that the Group’s reporting structure may have provided insufficient supervisory oversight of the operations.

To address this, we re-introduced the Group’s previous reporting structure, which clustered the operations according to region – West and Central Africa, South and East Africa, and Middle East and North Africa – with a senior executive responsible for each regional cluster. We also re-instated the position of Group COO, aimed at improving and optimising commercial effectiveness, while maintaining appropriate cost efficiency and consolidation, to ensure we have the operational platforms we need to compete and grow in an increasingly revenue constrained environment. The regional executives and the COO report directly to the Group CEO.

Re-introducing this management layer provides narrower and concomitantly deeper executive focus across the Group’s wide geographic and operational scope. The regional executives are tasked with operational supervision and ensuring accountability, functional excellence and integration, specifically in the management of risk and stakeholder relationships; in complement to the strategic, financial, human resources and stakeholder management mandate of the Group CEO. The board believes this structure will support a stronger culture of accountability and places the appropriate emphasis on developing and maintaining constructive stakeholder relationships.

A number of experienced executives with suitable track records and relevant industry and regional expertise were appointed in implementing this structure. The CEOs of MTN South Africa, MTN Nigeria and MTN Irancell, supported by the respective regional executives, will retain a seat on the MTN Group executive committee. Further senior appointments will be made in due course to support this structure, specifically a chief regulatory officer who will also report directly to the Group CEO.

Our remedial actions have included redoubling our efforts to ensure that the effectiveness of our enterprise risk management is commensurate with our evolving risk universe, given the sweeping changes in our sector and in our operating environments. Furthermore, the importance of stakeholder management, and the protection of MTN’s reputation, have been elevated as part of our remedial actions – not only in terms of the new operating structure, which ensures sufficient top management focus on this crucial aspect of our sustainability, but also in including stakeholder management as a key performance indicator for the regional executives. All in all the board is confident that the operating structure and the calibre of the executives that have been appointed will ensure the depth of leadership and oversight required to regain trust and confidence, to manage risk and optimise the allocation of capital, to fulfil the expectations of our stakeholders and to make the improvements to our operational platforms from which we will be well placed to pursue our vision, mission and strategy.

Turning our attention to our longer-term strategy

We stand at the doorway of a tectonic shift in our industry. The opportunities for growth, both for MTN and for the countries in which we operate, are vast as the change in the industry gathers momentum and voice gives way to data connectivity and its revolutionary implications for every aspect of our lives.

In recognition of this opportunity, we refreshed MTN’s vision to lead the delivery of a bold, new Digital World to our customers. We continue to refine our strategic plans to realise this vision, compete effectively and maintain our leadership position in our markets as the shift in the industry gathers pace. With our digital strategy focused on three key areas of opportunity, namely e-commerce, digital entertainment and media, and mobile financial services, our ability to compete in these adjacent markets is underpinned by our entrenched differentiators.

As the largest pan-African mobile network operator, we move from a strong position given our scale, footprint and subscriber base. We are the biggest operator and operate the best quality network in many countries – we serve 232,5 million subscribers across 22 countries, we have some 51,9 million 3G-enabled devices on the network, and over 32,4 million registered data users across the Group. Data services remain the key driver of revenue growth, and we continue to invest in expanding our 3G and LTE networks and stimulating the adoption of data-enabled devices. MTN remains a trusted brand among consumers; we know who our customers are and have well-developed distribution networks in place to reach them, which is key in the contested digital marketplace.

We have made good progress positioning our non-voice businesses, in particular through our investments in the digital services business, Africa Internet Holdings (AIH), our e-commerce venture which has been highly successful creating the largest online mall in Africa, Jumia. In 2015, AIH recorded approximately 2,3 million customers and approximately 4,4 million transactions in the year. The platform’s partner ecosystem has grown substantially with over 10 000 taxi drivers, 1 400 restaurants, 16 000 hotels, 4 000 global brands and 200 000 SMEs currently active on the marketplace and classified properties. Our service delivery platform, which has more than 80 companies providing over 5 000 content services, makes us the largest distributor of digital music in Africa.

MEIH, our Middle East internet venture in Saudi Arabia, Jordan and the UAE, is one year old and is progressing well. The fastest growing parts of the portfolio are Wadi, our e-commerce marketplace, and Easy Taxi. Average basket sizes in this region are three to four times greater in value than those in our African operations, reflecting the higher disposable incomes in the region. E-commerce is projected to grow to a value of US$20 billion by 2018 in the Middle East. In Iran, our presence in e-commerce is nascent but growing rapidly, particularly in the retail and travel sectors. This exciting market is poised for significant growth based on its demographics and improving macro-economic profile.

The use of mobile telephones to deliver basic financial services and support participation in economic systems represents a unique opportunity for MTN to support the growth of cashless societies, and help our customers overcome some of the hurdles that exist in accessing and affordably using traditional banking services. Our MTN Mobile Money product range includes international remittances, savings, lending and insurance, enabling customers to access these services at lower costs. In the year we grew our customer base in this business by 56% to over 34 million customers in 15 markets. The business now contributes 17% to MTN Uganda’s total revenue and 6% each to MTN Ghana and MTN Rwanda’s total revenue. We continue to invest in upgrading our systems to ensure flexibility as services in this area expand, and are engaging closely with regulators as they tighten the relevant regulatory frameworks in some of our markets.

Our Enterprise Business Unit, which is present in 25 countries in Africa, continues to execute its strategy to become the ICT partner of choice to corporate, SME and public sector customers. Notwithstanding the constraints of challenging operating conditions, particularly in Nigeria and against fierce competition in South Africa, the business continues to gain traction. During the year it made good progress with the launch of Internet of Things and our Global Multiple Protocol Label Switching.

As we accelerate our digital strategy, building on the positive progress we have made, we will need to systematically recalibrate the allocation of our capital and human resources. It is essential that we understand the shift will not be peripheral but fundamentally transformative – not only will it involve growing our data offerings to customers, but it will require that we become a fully digitally enabled enterprise. In navigating this transformation, we cannot be bound by traditional telco thinking, but we will need to think like a digital enterprise in capturing new and diversified revenue streams and in leveraging new and profound operational efficiencies, not least in managing risk and compliance more effectively.

Looking forward

We are in the process of evolving the composition of the board as some long serving directors will not be availing themselves for re-election. The succession process will allow us to strike a balance in retaining the institutional memory of existing board members, with the fresh perspectives of new members appointed specifically in view of the strategic transformation of MTN and the skills and experience required for the future. Mr Fani Titi (South African) resigned as a non-executive director with effect from 31 December 2015, and the board thanks him for his service to the Group over the three years of his tenure.

A key priority for management in the coming months will be to embed the new operating structure and changes to the Group executive committee across the organisation. With the additional oversight and supervision made possible by the operating structure, we expect to be able to resolve many of the operational challenges we faced in the last year, while ensuring stringent compliance with regulatory requirements across all our operations, in particular with subscriber registration requirements.

The re-registering of the disconnected subscribers in Nigeria is ongoing. Given the complexity of this process, MTN Nigeria has invested significantly in the infrastructure and resources required – we are employing in excess of 16 000 devices and over 10 000 additional contract staff to complete the exercise, and buses are being used to access remote communities. We have also identified structural issues in the validation process used by the NCC and are engaging with the regulator to address these through regular workshops, which will continue until the process is completed.

Also in Nigeria, we expect to improve our competitiveness and operational performance in the year ahead. We expect the pressure on US dollar liquidity to remain a challenge in the short to medium term, but are putting contingency plans in place to ensure we are able to continue with the planned rollout of our network.

In South Africa, we expect the positive trend in operational performance shown during the second half of 2015 to continue. This will be underpinned by the strength of the leadership team, leveraging an enhanced 3G/LTE device strategy, as well as a concentrated focus on improving customer service.

The easing of sanctions in Iran and its related economic uplift offers significant opportunities to expand our services in the country, particularly in the digital space where we have a strong market position. We are working towards the remittance of R15 billion during the first half of 2016.

Improving network quality and capacity in our key markets remains a priority. Preparing for broadband services, such as video on demand and music streaming, will continue to be an important consideration as we accelerate our digital strategy. This will be done through the rollout of LTE and LTE advanced in Nigeria, South Africa, Ghana and Cameroon. Improving quality and throughput in homes and fixed locations through the rollout of fibre-to-the-home in South Africa, Nigeria, Ghana and Iran, will be a focus in 2016.

The new operating structure, together with our strong platform, positions the Group well to take advantage of the paradigm shift in the mobile telecommunications sector. We are confident that our operations will continue to benefit from the strong growth trend in data, as well as from our investment in AIH and MEIH and related activities in the digital space.

Ensuring that we have the right skills and organisational culture to resource the Group’s strategic direction is paramount to our success in the years ahead. This will require that we recruit people who have experience in digital services, as well as equipping our people with the skill sets needed to become a leading digital player. MTN’s culture, which is defined by innovation and “can do”, will serve us well in the digital era.

While 2015 was a difficult year for the Group we are cautiously optimistic that we will see improvements in operating performance during 2016. The Group will continue to generate strong cash flows, and we will seek to diversify our funding sources and increase the financial headroom available to us to manage the liquidity risk that stems from not being able to repatriate dividends from certain of our operations. Currency risk will continue to be actively managed.

In the year ahead, we will look to declare a minimum dividend of 700cps, taking the uncertainty regarding the Nigerian fine and the US dollar liquidity situation in Nigeria into consideration. This cautious approach to the dividend outlook aims to accommodate the interests of shareholders and lenders, and the imperative of maintaining an investment grade credit rating. This minimum dividend level remains at the discretion of the board and, should operating conditions improve, a higher dividend level will be considered.

Although the Group operates in 22 countries, our earnings remain highly concentrated in a few markets with the associated volatility and risks as has been evident over the last few years and particularly in 2015. We will continue to explore opportunities to address this over the medium term.

A true test of our character

It is important that MTN’s people take on board the lessons of this time, that we do not allow negativity to cloud our judgement or take our eyes off business as usual. My thanks go to all of our people for demonstrating the true character of this organisation in this defining time.

We appreciate the ongoing support of our employees, shareholders, regulators and governments notwithstanding the disappointment you must feel after the last year. The MTN Group remains committed to maintaining solid partnerships with all of our stakeholders to build a sustainable business that delivers competitive long-term value.

Our ability to acknowledge and address the failures of the last year, in a way that ensures our readiness for the strategic journey we envisage in the years ahead, has given us the opportunity to affirm that we are an organisation that is able to face its challenges, address its failures and do what is necessary to remedy these in a way that makes us stronger than we were before.

Phuthuma Nhleko
Group executive chairman
2 March 2016