Safaricom exists to fulfill a purpose. That purpose is to transform lives, and over the past year, we have continued to implement transformative strategies that touch the lives of our shareholders, customers, staff members and other stakeholders.
We believe this is what drove over three million new customers to join our network during the year.
Today, 95% of Kenyans have access to a mobile phone. This small gadget has now become a way of life for many Kenyans, be it for making a phone call, carrying out monetary transactions, accessing healthcare, improving agricultural output or accessing education.
We invested heavily in building the network that will power Kenya’s future growth. We also have nurtured partnerships to provide life-changing solutions in the health, education and energy sectors through products like M-TIBA, Eneza and M-KOPA.
For instance, beyond providing mobile money services, our M-PESA network is delivering drops of hope to over 80,000 customers in Kibera, where we have supported the installation of the world’s first aerial water piping system. This partnership with SHOFCO aims to scale up the provision of clean water to the Kibera community in Nairobi, without disturbing life patterns in the settlement.
In camps in northern Kenya, we are providing refugees with the opportunity to purchase their own food courtesy of a mobile food voucher system known as Bamba Chakula. In addition, through the Safaricom Foundation, we invested in over 120 projects in the last financial year that have impacted the lives of Kenyans beyond our traditional business.
All of these interventions align with our long-term objective of creating a more equitable society. We have linked our growth strategy to the UN’s 17 Sustainable Development Goals (SDGs), out of which we have adopted nine.
This will help us in becoming a more sustainable company, creating meaningful impact on the communities that we have been given the opportunity to serve. These are the “small” actions that we believe will cumulatively transform the lives of our customers.
We recently refreshed our brand, giving it a more forward-looking perspective through the vision of “Twaweza,” which is captured in the brand belief that when we come together, great things happen.
We especially believe in our people, as they are an integral part of our transformative agenda. We empower them to give their best. We show appreciation to them by providing the right working conditions that improve their well-being. We continue to work towards building an environment that is inclusive of all cultures.
Creating social value grounds our strategy, which is founded on three pillars: Putting the Customer First, Delivering Relevant Products, and Optimising Operational Excellence.
During the year, we dedicated more effort to building personalised relationships with our customers. We fine tuned our service delivery, by creating and launching products that leverage a more intimate understanding of our customer needs. This is what informed our strategic decision to launch BLAZE, a youth proposition that attracted over 1.6 million users by the close of the financial year.
None of these achievements would be possible without sustained focus on building a future-proof network. Our core business remains to deliver firstclass connectivity for voice, SMS, data, M-PESA and deepen enterprise use of technology.
The ICT Ministry is currently undertaking a review of the Policy Framework in which we operate and in particular, looking at new and emerging opportunities to accelerate the deepening of new technologies in the country.
We support this initiative as we think convergence, investment and innovation will provide a springboard for future growth of the economy.
At the same time, the Communications Authority of Kenya is currently engaged in a study to determine the levels of competition in the different market segments of the industry. While Safaricom’s market share in some segments remains high, this has been attained through prudent investments and continuous innovation - both of which are central to our strategy.
For equitable growth in the sector, we feel it is important that our competitors are held up to the same standards so that our policy of sustained investment is not punished. We will continue to invest in our business and pursue new business interests.
We are committed to enhancing the position of Kenya as the leading mobile money market in the world by proactively launching interoperability in the country, expanding our offering through products like 1Tap, and exploring potential opportunities for taking M-PESA outside Kenya.
We are excited about the planned launch of an E-Commerce platform and the growth of our Home business, which will evolve to include smart home solutions.
We value partnerships because we realise we cannot achieve success on our own. We also know that we have the right mix of talent and technology to provide transformative innovation, with one goal in mind: Transforming lives.
Despite political and macroeconomic uncertainties during the year, the business remained resilient and delivered solid results.
Of concern was the drought that affected parts of the country last year, creeping inflation, election year disruptions as well as regulatory pressure. I am however happy to report that despite these concerns, we are confident that we are well placed to manage the shifting economic landscape.
The fluctuating regulatory environment remains an area of utmost influence on our operations.
In the second half of the financial year, investors shared increasing concerns on the likely impact of regulatory interventions in the telecommunications sub-sector.
In May 2016, the Communications Authority of Kenya (CA) appointed Analysys Mason to conduct a study on competition within the telecommunication sub-sector.
The draft report suggested that Safaricom was dominant in a number of market segments. It proposed severe regulatory interventions against Safaricom despite the eventual conclusion that the company had not engaged in any anti-competitive actions.
We believe some of the proposals were inconsistent with international best practice. The proposed interventions around the separation of M-PESA from Safaricom, retail price controls, and mandated infrastructure sharing were particularly unfair.
These regrettable developments had an adverse impact on our share price.
However, the Government of Kenya’s position that it does not support the structural separation of Safaricom calmed investors. Our share price has since recovered and continues to be resilient.
Our investors drew comfort from this, and in the spirit of encouraging a more consultative process for these kind of initiatives, we will continue to proactively engage the industry regulator.
We support the development of a regulatory framework that promotes investment and innovation in the telecommunications sector as well as a sustainable business environment in accordance with international best practice.
We continue to witness shifts in the competitive landscape with new forms of competition continuing to emerge from non-telecommunication players. For instance, the integration of Fintech in the banking sector is a signal that competition from non-traditional players is going to be a major challenger to our legacy mobile money products, hence, the urgent need to embrace these threats through innovation.
Competition from other technology industry players also means we must continue differentiating our products, and delivering solutions to our customers that gives us an edge. We remain confident we will continue offering our customers a superior experience as we are a company that is known for its innovation and charting new paths.
During the year, there were some changes to the board. Mr. Vivek Badrinath and Dr. Bitange Ndemo were appointed to the board as non-executive members while Ms. Serpil Timuray resigned from the board. I welcome the new directors and wish to sincerely thank Ms. Timuray for her contribution during her tenure on the board.
Our business ethos is grounded in the desire to deliver improved shareholder value, provide an unrivaled service offering to our customers and remain focused on the company’s purpose of transforming lives.
We remain steadfast in delivering on our strategy and growing shareholders’ wealth. Sustaining the company’s growth is key to the board and that is why we made a considered decision to extend the contract of the CEO, Bob Collymore, for an additional two years. He has successfully navigated our company through some of its most difficult years, whilst also venturing into new areas of business that will shape this company’s future. The board has full confidence in him and pledges its support.
During the year, Vodafone, one of our key shareholders, made a decision to transfer a significant portion of its shareholding to Vodacom, its South African subsidiary. The transaction was approved by the Government of Kenya. We see this as an opportunity for Safaricom to take services such as mobile payments into other African countries.
We recognise that we would not exist without our people: both those who work for us and those who buy and use our products. We are extremely grateful and thankful to our staff, customers, business partners, stakeholders and the government for giving us the platform to move the business to the next level.
We continued to deliver strong financial results this year, with growth posted in all the main business segments.
This was attributed to our targeted investment in our network, our systems and our customer focused and innovative business model. We remained attuned to the needs of our customers and we believe this played a big role in boosting our performance.
Our service revenue grew at 14.8% year-on-year (YoY) in the financial year 2017, compared to the 13.8% posted in the financial year 2016.
In the first half of the year, we had a one-off adjustment resulting in a Shs3.4 billion upside to our profit. Excluding this one-off adjustment, underlying Earnings Before Interest and Taxes (EBIT) was Shs67 billion, a growth of 21.6% from the previous year.
Thanks to the strong trading performance, underlying net income improved by 18.3% YoY while free cash flow recorded a 43.3% YoY growth.
Our voice revenue defied global trends and continued to grow despite the growth achieved in mobile data.
Five years ago, outgoing voice and SMS both constituted 73% of our revenues. Today, these two businesses represent 54% of revenue. Our revenue is now well diversified with our data and M-PESA businesses acting as key drivers of growth.
In line with global trends, the average rate per minute for voice fell by 8% in the financial year, following a 14.6% reduction in the 2016 financial year.
Mobile data contributed to just under one-third of the overall service revenue growth, where an increase in both the number of data subscribers as well as data usage more than offset the reduction in the rate per Mega Byte (MB).
The average rate per MB for data reduced by 22% in the year, following a 33% reduction in the previous financial year. These price drops are supported by a corresponding growth in the amount of data used by the customer.
Mobile money continues to power the economy and drives financial inclusivity with Shs6,869 billion of value transacted on M-PESA, an increase of 29.7% compared to the previous year.
Over the past five years, the values transacted in the M-PESA system have enjoyed a compounded annual growth rate of 27%.
This is part of the reason why M-PESA is our largest revenue growth driver today, contributing just over half of our total service revenue growth.
During the year, we introduced M-PESA “Kadogo”, where transactions under Shs100 do not attract a service fee. This has further strengthened our position as pioneers in entrenching financial inclusion in Kenya. To maintain an edge in our business, we invested Shs38 billion on improving network coverage, capacity and quality of our network.
This included Shs2.5 billion to acquire 10Mhz of LTE spectrum and the record rollout of more than 500 new sites.
A fifth of our capital expenditure was invested in building IT systems and customer analytic tools that we believe enhance our ability to understand and respond better to our customers.
Analytics have enabled us to tailor our products and promotions, providing customers with an opportunity to enjoy a more personalised portfolio of products.
Our business was funded by cash from operations and debt that stood at Shs16.5 billion as of the end of the year.
We paid Shs30.5 billion in normal dividends during the year and the strength of our balance sheet enabled us to also pay a special dividend of Shs27.2 billion.
It’s worth noting that 35% of the dividends are paid to the government of Kenya which holds 35% shareholding. This is in addition to taxes and fees that amounted to Shs84.3 billion in the past financial year.
Like any other business, the country’s macro economic issues may impact on our operations. The impact of the drought, reduced credit growth, the elections and the rising inflation experienced towards the end of the financial year may affect our operations in the short term.
Despite this, we feel we are well placed to continue to deliver sustainable growth this year thanks to our strong operational core, continuous investment in our network, our systems and our people and the expansion of our capabilities through innovation. Data and M-PESA continue to be our main growth drivers, and we see immense opportunities in these areas as Kenya continues to embrace the digital economy.