| Wed 13 Jun 2007, 7:05 | | TKG - Telkom SA Limited - Telkom Group Annual Resu |
|
TKG
TKG
TKG - Telkom SA Limited - Telkom Group Annual Results Provisional Results
For The Year Ended March 31, 2007
Telkom SA Limited
Registration no. 1991/005476/06
JSE and NYSE share code: TKG
ISIN: ZAE000044897
Telkom Group annual results
Provisional results for the year ended March 31, 2007
1. Overview
Johannesburg, South Africa - June 13, 2007, Telkom SA Limited (JSE and
NYSE: TKG), today announced group provisional annual results for the year
ended March 31, 2007.
The Group continued revenue growth across both business segments. The Group
declared an ordinary annual dividend of 600 cents per share and a special
dividend of 500 cents per share on June 13, 2007, both payable on July 9,
2007, for shareholders recorded in the register of the company at close of
business on July 6, 2007.
GROUP FINANCIAL KEY PERFORMANCE AREAS FOR THE YEAR ENDED MARCH 31, 2007
- Operating revenue up 8.4% to R51,619 million;
- 1.4% decline in operating profit to R14,470 million;
- 38.3% group EBITDA margin;
- 45.0% net debt increase to R9,901 million, and net debt to equity ratio
of 30.9%;
- Headline earnings per share decreased by 1.0% to 1,710.7 cents per share;
and
- Basic earnings per share decreased by 3.7% to 1,681.0 cents per share.
Statement by Reuben September, Acting Chief Executive Officer:
"The Telkom Group has delivered continued revenue growth in its mobile
business segment and its fixed-line business segment in the face of
increasing competition in the telecommunication sector.
The fixed-line business grew revenue by 1.7% despite tariff decreases and
competition from mobile operators, VANS and ISPs. In addition, the fixed-
line business delivered an earnings before interest, tax, depreciation and
amortisation (EBITDA) margin of 38.0%, including the effect of raising the
Telcordia provision. The fixed-line segment continued to focus on defending
its revenue through value-adding bundled products and term and volume
discount plans for corporate customers. The Group`s fixed-line segment
showed its ability to deliver data solutions to support the Group`s revenue
growth. Telkom is proud to have delivered on its acquisition strategy with
the acquisition of Africa Online during the year and Nigerian based Multi-
Links subsequent to year end.
Vodacom again delivered an exceptional performance increasing its
subscriber base 28.2% to 30.2 million customers.
Telkom now enters a challenging period with Neotel as its fixed-line
competitor coupled with significant pressure on its product and services
pricing. However, Telkom believes that its commitment to invest and build
the Next Generation Network (NGN) will deliver the required benefits in
terms of products and services at a reduced cost with increasing volumes.
Telkom is also excited about the developing opportunities created by its
Pan African connectivity and convergence strategies through its recent
African acquisitions as well as the incorporation of Telkom Media, a
company created to deliver on Telkom`s triple play strategy."
FINANCIAL PERFORMANCE
Group operating revenue increased 8.4% to R51,619 million, while operating
profit decreased marginally by 1.4% to R14,470 million. The Group EBITDA
margin decreased to 38.3% as at March 31, 2007, compared to 43.2% at March
31, 2006, mainly due to higher fixed-line operating expenditure. The EBITDA
margin for the mobile business decreased marginally from 34.7% to 34.6% for
the year ended March 31, 2007, due to declining ARPUs as a result of
increased lower spending customers connected.
Headline earnings per share decreased by 1.0 % to 1,710.7 cents per share
and basic earnings per share decreased by 3.7% to 1,681.0 cents per share.
The reduced earnings was attributed to a decrease in operating profit due
to an increase in operating expenses, partially offset in part by an 8.4%
increase in operating revenue and an 8.0% reduction in finance charges.
Cash generated from operations increased by 4.0% to R20,520 million and
facilitated capital expenditure of R10,037 million and the repurchase of
12.1 million Telkom shares to the value of R1.6 billion. Our net debt to
equity ratio of 30.9% at March 31, 2007, remains below the announced
targeted range of between 50% and 70%, but is an improvement from the
gearing of 23.2% at March 31, 2006.
Summary group provisional financial results
March 31,
In ZAR millions 2006 2007 %
Operating revenue 47,625 51,619 8.4
Operating profit 14,677 14,470 (1.4)
EBITDA1 20,553 19,785 (3.7)
Capital expenditure2 7,506 10,249 36.5
Operating free cash flow 7,104 3,728 (47.5)
Net debt 6,828 9,901 45.0
Basic EPS (ZAR cents) 1,746.1 1,681.0 (3.7)
Headline EPS (ZAR cents) 1,728.6 1,710.7 (1.0)
Operating profit margin (%) 30.8 28.0
EBITDA margin (%) 43.2 38.3
Net debt to equity (%) 23.2 30.9
After tax operating return on 25.6 22.8
assets (%)
Capex to revenue (%) 15.8 20.0
1. EBITDA and headline earnings
have been reconciled to net
profit - Refer to page 53.
2. Including spend on
intangible assets.
OPERATIONAL DATA
March 31,
2006 2007 %
Fixed-line data
Fixed access lines (`000)1 4,708 4,642 (1.4)
Postpaid - PSTN 2,996 2,971 (0.8)
Postpaid - ISDN channels 693 718 3.6
Prepaid 854 795 (6.9)
Payphones 165 158 (4.2)
Fixed-line penetration rate (%) 10.0 9.8 (2.0)
Revenue per fixed access line 5,304 5,276 (0.5)
(ZAR)
Total fixed-line traffic 31,015 29,344 (5.4)
(millions of minutes)
Local 18,253 16,655 (8.8)
Long distance 4,446 4,250 (4.4)
Fixed-to-mobile 4,064 4,103 1.0
International outgoing 515 558 8.3
International VoIP 83 38 (54.2)
Interconnection 3,654 3,740 2.4
Mobile interconnection 2,299 2,419 5.2
International interconnection 1,355 1,321 (2.5)
Managed data sites 16,887 21,879 29.6
Internet customers3 284,908 305,013 7.1
ADSL2 143,509 255,633 78.1
Fixed-line employees (excluding 25,575 25,864 1.1
subsidiaries)
Fixed-line employees (including 26,156 26,797 2.5
subsidiaries)
Fixed-lines per fixed-line 184 180 (2.2)
employee
Mobile data4
Total customers (`000) 23,520 30,150 28.2
South Africa
Mobile customers (`000) 19,162 23,004 20.1
Contract 2,362 3,013 27.6
Prepaid 16,770 19,896 18.6
Community services telephones 30 95 216.7
Mobile churn (%) 17.7 33.8 91.0
Contract 10.0 9.7 (3.0)
Prepaid 18.8 37.5 99.5
Mobile market share (%) 57.9 57.7 (0.3)
Mobile penetration (%) 70.6 84.2 19.3
Total mobile traffic (millions 17,066 20,383 19.4
of minutes)
Mobile ARPU (ZAR) 140 125 (10.7)
Contract 572 517 (9.6)
Prepaid 69 63 (8.7)
Community services 1,796 902 (49.8)
Mobile employees5, 6 4,305 4,727 9.8
Mobile customers per mobile 4,451 4,867 9.3
employee5, 6
Other African countries
Mobile customers (`000) 4,358 7,146 64.0
Mobile employees6 1,154 1,522 31.9
Mobile customers per mobile 3,776 4,695 24.3
employee6
1. Excludes Telkom internal lines of 107,719 (2006: 103,740).
2. Excludes Telkom internal lines of 523 (2006: 249).
3. Includes Telkom Internet ADSL, satellite and dial-up subscribers.
4. 100% of Vodacom data.
5. Includes Holding company and Mauritius employees.
6. Includes Agency temporary employees.
2. Operational overview
DELIVERING VALUE TO OUR SHAREHOLDERS
The Group is continuing its drive to create value for its shareholders and
is pleased to be able to declare an ordinary annual dividend of 600 cents
per share and a special dividend of 500 cents per share on June 13, 2007,
both payable on July 9, 2007, to shareholders recorded in the register of
the company at close of business on July 6, 2007.
The telecommunication landscape is changing rapidly and requiring Telkom to
invest in the future. Customer demands are increasing and the dynamics of
product, price and service levels needs renewed approaches to create
attractive value propositions. Competitive forces are also constantly
changing as a result of emerging new business models due to the triple and
quad-play convergence opportunities and the ability of Internet Service
Providers and Value Added Network services providers to dis-intermediate
voice from the fixed-line operator. Reputation and image are increasingly
becoming differentiators as the commoditisation of voice continues. In
addition, regulation is moving towards favouring new entrants and South
Africans are demanding a reduction of input costs to stimulate economic
growth.
Telkom is fully aware of the challenges and is responding innovatively to
protect and grow its market while taking telecommunications into the future
through investment into its Next Generation Network, Telkom Media and other
parts of Africa.
The fixed-line revenue increased 1.7% despite tariff reductions in its
regulated basket of products and services and the loss of dial-up minutes
due to our ADSL rollout and cannibalisation by our bundled products. The
tariff reductions were offset in part by volume growth in data services,
increased revenue from mobile outgoing calls and rental and service fees.
The fixed-line EBITDA margin of 38.0% is within management`s guidance of
37% - 40%. Fixed-line operating expenses increased by 7.2% primarily as a
result of the strong product demand, competitive positioning, growth
initiatives, focus on the quality of our network and our services and the
provision of liability in the Telcordia dispute.
Vodacom continues to show impressive growth in its subscriber base which
increased 28.2% to 30.2 million. Vodacom`s revenue increased by 20.9% to
R41.1 billion (50% share: R21 billion). South African mobile customers
increased by 20.1% to 23.0 million (2006: 19.2 million) for the year ended
March 31, 2007, reinforcing Vodacom`s market leadership position in South
Africa. Customers grew 55.3% to 3.2 million (2006: 2.1 million) customers
in Tanzania, 67.5% to 2.6 million (2006: 1.6 million) customers in the
Democratic Republic of Congo, 35.4% to 279 thousand (2006: 206 thousand)
customers in Lesotho, and 101.6% to 988 thousand (2006: 490 thousand)
customers in Mozambique. Exceptional customer growth and improved
efficiencies in the mobile business resulted in a stable EBITDA margin at
34.6% against a declining ARPU due to lower income segment customer
connections.
THE CHANGING REVENUE POSITION
Fixed-line revenue increased by 1.7% to R33,295 million largely as a result
of a 12.6% increase in data revenues to R7,484 million (2006: R6,649
million) and 8.3% growth in subscription and connections to R6,286 million
(2006: R5,803 million). Interconnection revenue was stable at R1,638
million (2006: R1,654 million). Traffic revenue declined by 4.7% to R16,738
million (2006: 17,563 million).
The focus on building a world class Next Generation Network is already
delivering benefits through our ability to provide innovative and value
adding voice and data solutions particularly to the corporate market. The
growth of data products and broadband is a key focus area for the fixed-
line business.
ADSL subscribers increased 78.1% to 255,633 and are targeted to reach
420,000 for the year ending March 31, 2008. Telkom aims to achieve ADSL
penetration of 15% - 20% of fixed access lines by 2010/2011 with the
introduction of new service offerings and aggressive price reductions
through increasing volume and position ourselves in the competitive
environment. The Self install is now operational and growing. The Self
install option has been utilised by 28,779 customers as at March 31, 2007.
In addition, Telkom has upgraded its DSL192 users to 384 Kbit/s and is now
offering 4Mbit/s for DSL 1024 customers. Internet customers including dial-
up subscribers; ADSL customers powered by Telkom Internet and Internet
satellite subscribers; has increased 7.1% to 305,013 customers.
The introduction of ADSL Self install is expected to continue to improve
the Average-Time-To-Install which has improved to an average of 23 days
(2006: 31 days) at March 31, 2007, where infrastructure is available. A
Broadband Demand Register has been set up to capture and identify growth
areas for the future. Port automation should also improve Telkom`s ability
to deliver ADSL services faster. The planned deployment of the automated
metallic test system and the self help/self diagnostic tool of Phase 1 of
the Broadband Service Assurance System later in the year should support
Telkom`s drive to continue to provide high quality service.
The exciting new Do Broadband offering, which bundles ADSL access and a
TelkomInternet account at discounted rates, should stimulate ADSL demand
and provide Telkom customers with the quality, speed and content demand in
South Africa.
The increased demand for broadband during the year ended March 31, 2007,
has resulted in growth in leased line and other data services revenue of
10.2% to R5,820 million (2006: R5,282 million). Revenue from cellular
operator fixed links has increased 21.8% to R1,664 million (2006: R1,367
million) for the year ended March 31, 2007, primarily as a result of the
strong growth of mobile data offerings. Growth in mobile data revenue is
mainly due to data initiatives such as 3G, HSDPA, Vodafone Live!, Vodafone
Simply, Blackberry(R) and the continued popularity of SMS. Revenue from
managed data sites has increased 16.3% to R535 million (2006: R460 million)
during the year ended March 31,2007.
Vodacom`s data revenue increased by 64.0% to R3,342 million (50% share:
R1,671 million) for the year ended March 31, 2007 contributing 8.1% (2006:
6.0%) to mobile operating revenue.
Telkom has successfully trialed WiMAX and 14 sites with base stations which
are currently operational in Pretoria, Cape Town and Durban. A further 57
sites with base stations will be built as WiMAX begins to complement the
ADSL roll-out countrywide.
Telkom has made an offer to Business Connexion`s ("BCX") shareholders to
acquire 100% of BCX for R2.4 billion. The offer price constitutes R9 per
share, plus allowing BCX to pay a special dividend of 25 cents per share.
The BCX acquisition is subject to approval of the Competition Authorities
and the Telkom and BCX Boards have extended the time period for conclusion
of the transaction to July 1, 2007, unless further extended by agreement
between Telkom and BCX. BCX is expected to create shareholder value as it
enables Telkom to enter the data hosting and desktop management market.
These services are complementary to the value adding products and services
being developed within Telkom.
Telkom media
On August 31, 2006 Telkom announced the creation of Telkom Media (Pty)
Limited. Telkom Media has applied to the Independent Communication
Authority of South Africa (ICASA) for a commercial satellite and cable
subscription broadcast license. Telkom Media`s vision is to be Africa`s
"digital media provider of choice" and is developing a set of new digital
media services to address the diverse needs of both the consumer and
business markets. Telkom Media will provide services through a wide range
of digital platforms, positioning itself in new, high growth areas of the
information, communication and entertainment market.
Telkom Media is seeking to develop a digital service portfolio across three
core service areas:
- Content and services over the Internet (online content services and ISP
services);
- Content and services over satellite (Satellite TV and radio); and
- Content and services over a "Quality of Service" network (IPTV including
broadcast and on-demand TV and interactive services).
AFRICA ONLINE
Africa Online is an Internet Services Provider with operations in Kenya,
Tanzania, Cote d`Ivoire, Ghana, Uganda, Namibia, Swaziland and Zimbabwe.
The company was acquired for R150 million during February 2007.
The investment approach focuses on brand development, creation and
development of customer channels, improvement of network systems, human
resources development and an expansion drive targeting other African
countries.
Multi-links
Multi-Links, Private Telecommunication Operator in Nigeria with a Unified
Access License allowing fixed, mobile, fixed-wireless, international and
data service, was acquired in April 2007 for R1,985 million (USD280
million).
Multi-Links will focus on brand awareness and promotional campaigns to
increase the revenue of fixed-wireless and mobile customers and will offer
easy to understand high-value bundles, differentiated on voice quality and
service. Broadband internet with ISP services will target high value
bundles and high quality IP NGN services are planned to be launched for
Government, Corporate and Business customers. Metro Ethernet Services are
planned to be deployed in Lagos to attract high-end Corporate users and
Carrier Class wholesale products and services are planned to be introduced
by establishing an earth station to provide international connectivity.
Offering value to customers
Telkom`s strategy is to become an Information Communication Technology
(ICT) solutions partner for global, corporate, business and residential
customers, moving up the value chain, providing higher level products and
services to our traditional voice and data products. This strategy has been
validated by our success in winning large corporate customer accounts and
delivering to their ICT requirements from voice products and services to
network management.
Telkom`s aim is to enhance the customer experience by introducing
innovative value enhancing bundled products and services. In line with this
strategy, Telkom Closer bundles rental, call answer, peak minutes and off-
peak minutes and ADSL into a package which allows the customer to pay a
flat monthly charge. Telkom Closer now bundles PC`s to improve the PC
penetration rate in South Africa. Demand for the Telkom Closer range of
products has resulted in the sign up of 217,564 customers during the year
ended March 31, 2007.
Telkom`s enhanced business bundles have shown strong growth. Telkom
launched the Supreme Call package during May 2006. As at March 31, 2007
Telkom had 5,771 Supreme Call package subscribers.
Telkom`s strategic intent to retain and grow revenues has led to the
development of flat rate plans to combat the negative minutes of use trend
in the consumer market and term and volume discount packages for the
corporate market. The sales of the term and volume discount plans have
performed exceptionally well. In addition, arbitrage opportunities between
local and long distance and the gap between Standard time and Callmore
rates are being reduced while tariff rebalancing is taking place.
Through bundled products Telkom intends to increase its annuity income,
create a value comparison for customers and improve our competitive
position. Annuity revenue constitutes 9.9% of Telkom`s fixed-line segment`s
revenue as at March 31, 2007 (2006: 8.2%).
COMPETITIVE PRICING AND VOLUME GROWTH
Telkom announced an overall average tariffs decrease on our regulated
basket of products and services of 1.2%, to be filed with ICASA to become
effective on August 1, 2007.
Telkom expects that its future tariff rebalancing will continue to focus on
the relationships between actual costs and tariffs of Subscription and
Connections and Traffic in order to more accurately reflect underlying
costs and to capture volume.
The reduction of telecommunication costs should benefit all South Africans
and contribute positively to the economy.
STRONG MOBILE PERFORMANCE
Vodacom performed exceptionally well in the year ended March 31, 2007,
retaining its market share at approximately 58%, and increasing net profit
by 27.6% to R6,560 million (50% share: R3,280 million) and maintained its
EBITDA margin with a slight decrease from 34.7% to 34.6% in the year ended
March 31, 2007.
Vodacom`s South African customer base increased by a net of 2.8 million
customers to 23.0 million customers as at March 31, 2007.
Vodacom`s focus on customer care and retention saw South African contract
churn at 9.7% (2006:10.0%) and prepaid churn at 37.5% (2006: 18.8%) for the
year ended March 31, 2007. Prepaid churn has increased primarily as a
result of the disconnection of 3 million prepaid sim cards in a once off
clean up of the South African subscriber base during June to August 2006.
The blended South African ARPU over the year was R125 (2006: R139)
supported in part by the clean-up of the subscriber base.
Vodacom`s other African operations contributed 10.1% (2006: 8.7%) to
revenue with 7.1 million (2006: 4.4 million) customers. These operations
constitute 23.7% of the total customer base. All of Vodacom`s other African
operations, with the exception of Vodacom Mozambique, are profitable.
Mozambique remains a tough market but the outlook, and particularly the
competitive landscape, has improved and we remain confident that in the
medium to long-term it will contribute to the overall growth of Vodacom.
As a result of sound cost management, Vodacom has ensured that its revenue
growth has been translated into increased profits from operations, which
increased by 22.4% to R10.9 billion (50% share: R5.4 billion) for the year
ended March 31, 2007 from R8.9 billion (50% share: R4.4 billion) for the
year ended March 31, 2006. Vodacom`s EBITDA increased in the year ended
March 31, 2007 by 20.6% to R14.2 billion (50% share: R7.1 billion) from
R11.8 billion (50% share: R5.9 billion).
CUSTOMER CENTRICITY
Telkom`s customer service has been under pressure as a result of the
reduction in our workforce and increased customer demands. Our continued
key strategic focus is improving customer centricity by placing the
customer at the centre of decision making in Telkom. This includes improved
service delivery and customer communication processes, end-to-end customer
ownership and accountability, actionable customer insight, network capacity
and reliability and market focused products and services.
Telkom acknowledges that sustainable and profitable growth in the customer
base requires creating and strengthening capabilities focused on managing
customer relationships and learning from acquired customer information.
Revenue is protected through managing the customer experience and grown
through anticipating customer needs.
KEY NEXT GENERATION NETWORK AND CAPACITY ACHIEVEMENTS
Increased demand and bandwidth hungry applications have required Telkom to
upgrade its capacity.
The following are the key investment areas:
- Telkom has grown its national and international IP network capacity by
53% to 28.9 Gbit/s and 60% to 2.4 Gbit/s, respectively;
- The bandwidth of the local and national transport networks have increased
12% to 5.7 Tbit/s and 20% to 1.2 Tbit/s respectively;
- Data networks have seen Diginet and Diginet Plus Services increase
bandwidth by 20% to 20.8 Gbit/s;
- The ATM network has grown 30% to 104 Gbit/s to cater for increased ADSL
services; and
- The SAT-3 cable`s capacity has trebled to 120 Gbit/s from 40 Gbit/s.
- Telkom company spent R6,599 million during the year ended March 31, 2007
on its capital expenditure programme in line with its 5 year R30 billion
capital expenditure programme. Projects are prioritised according to
Internal Rate of Return for Telkom. Existing infrastructure is optimised to
decrease capital requirements for service provisioning. It is estimated
that Telkom Company will spend approximately R7.0 billion on capital
expenditure in the financial year ending March 31, 2008.
RECOGNITION OF THE VALUE OF OUR EMPLOYEES
Telkom`s skilled and experienced workforce is our competitive advantage and
is also highly attractive to our competition. Rapidly changing technology,
increasing specialisation and capacity requirements necessitate ongoing
development and training of our employees. Telkom continues to invest
significantly in our employees to ensure that the appropriate business
skills are available to meet customer requirements.
For the year ended March 31, 2007, Telkom spent R425.9 million (2006:
R400.1 million) on training and development and employees participated in
189,645 (2006: 160,274) facilitator led training days.
Telkom continues to identify high potential individuals within the Company
that can be developed for future senior management positions to ensure all
future employee requirements are met. In addition, Telkom`s expansion into
other parts of Africa and competitor poaching of our talent, demands that
our succession plans are robust.
The Company has demonstrated the strength of its succession plans by
appointing 60% of senior management vacancies from within the Company,
utilising the existing skills and potential of the current employee base,
while at the same time increasing the skills pool with outside
appointments.
SIGNIFICANT RETURNS TO SHAREHOLDERS AND EMPLOYEE SHARE OWNERSHIP
In the year ended March 31, 2007, the Company repurchased 12.1 million
shares to the value of R1.6 billion (including costs) which are being
cancelled as issued share capital and restored as authorised but unissued
capital. As at March 31, 2007, 1,035,506 of these shares have not yet been
cancelled from the issued share capital by the Registrar of Companies.
The Telkom Board granted 1,824,984 shares with effect June 2, 2006, to
employees in terms of the Telkom Conditional Share Plan.
As part of the Company`s commitment to the optimal use of capital the
Telkom Board on October 20, 2006 provided authority to buy back shares to a
limit of 20% of shares in issue. This authority expires at the next Annual
General Meeting. The Telkom Board on June 8, 2007 approved a further R2.4
billion in terms of its share buy-back programme.
As previously communicated, Telkom aims to pay a steadily growing ordinary
annual dividend. The level of dividend will be based upon a number of
factors, including the assessment of financial results, available growth
opportunities, the Group`s net debt level, interest coverage and future
expectations, including internal cash flows and share buybacks.
On June 13, 2007, the Telkom Board of Directors declared an ordinary annual
dividend of 600 cents per share, and a special dividend of 500 cents per
share, payable on July 9, 2007, to shareholders recorded in the register of
the company at close of business on July 6, 2007.
A LEADER IN TRANSFORMATION
Telkom has always viewed South Africa`s effective transformation as
imperative for its own sustainable long-term growth. Telkom concurs with
the view that Black Economic Empowerment (BEE) should seek to deliver
meaningful and truly broad-based empowerment to the majority of South
Africa`s people. The draft Information and Communication Technology ICT BEE
Charter is expected to be aligned with the Department of Trade and Industry
(DTI) Codes of Good Practice.
Telkom spent R8.8 billion on empowered or significantly empowered suppliers
for the year ended March 31, 2007.
Telkom`s social investment programme through the Telkom Foundation has
continued to contribute to the positive transformation of disadvantaged
communities through social investments aimed at achieving sustainable
development. The social investment programmes have continued to focus on
the following three main areas:
- Education and Training;
- Empowerment of Women, Children and People with Disabilities; and
- ICT Planning and Infrastructure rollout.
The Telkom Foundation was recognised for its commitment, receiving numerous
awards and recognition, the most notable being the PMR Awards for first
Overall winner on Corporate Care within the Telecommunications Sector, Gold
Status on Social Upliftment, BEE, job creation and training.
The Vodacom Group is in the process of finalising a R7.5 billion BEE equity
deal whereby both BEE partners and employees have the opportunity to share
in the success of Vodacom South Africa going forward. The deal is expected
to be completed by the end of the 2008 financial year and it is anticipated
to make a significant contribution to the well-being of the Vodacom Group
and its employees.
THE REGULATORY ENVIRONMENT
Telkom faces continuous regulatory challenges covering inter alia
competition issues and changes in policies. Through constructive dialogue,
the Company endeavours to achieve a regulatory framework that is realistic,
equitable and beneficial to the industry. The following details the main
regulatory issues affecting the industry and Telkom.
ELECTRONIC COMMUNICATIONS (EC) ACT
The EC Act, No 36 of 2005, came into effect on July 19, 2006. The primary
aim of the Act is to promote convergence in the broadcasting, broadcasting
signal distribution and telecoms sectors and to provide the legal framework
for convergence of these sectors.
The Act, aims to liberalise the market further and will result in a change
in the licensing structure. Essentially, separate licences will be granted
for the provision of infrastructure, communication services and
broadcasting services. All existing licencees will need to be issued with
new licences.
The EC Act creates challenges as well as opportunities that Telkom will
certainly explore. In particular, its expected impact on Telkom include the
following:
- Conversion of licences to network licence and service licence;
- Impact on price controls, terms and conditions of access and
interconnection & facilities leasing.
ICASA AMENDMENT ACT
A bill amending the ICASA Act was enacted on July 19, 2006. The main
provisions of this Act determine in greater detail the functions of the
Authority; amend the procedure for appointment and removal of councillors
and cover the establishment of a Complaints and Compliance Committee.
Interconnection and Facilities Leasing
Current regulations make provision for cost based interconnection and
facility leasing. Telkom submitted its regulatory accounts on a current
cost basis to ICASA in September 2005 and an update in September 2006. The
Company also submitted long run incremental costs (LRIC) statements on
September 29, 2006.
The Electronic Communications Act requires ICASA to analyse the various
markets and should an operator be declared to have Significant Market Power
in any market, cost based prices may be imposed. The recent focus by ICASA
on termination rates may force MTN, Vodacom and Telkom to implement cost
based termination prices.
Telkom continuously engages in negotiations for interconnection, shared
access and facilities leasing agreements. Interconnectivity agreements with
Neotel and the majority of VANS have been concluded.
Number Portability (NP)
In terms of regulations published in September 2005, Telkom is expected to
provide blocks of 10,000 numbers two months after Neotel`s launch of
services, blocks of 1,000 numbers four months after Neotel`s launch of
services and individual number portability 12 months after the request.
Functional specifications for the implementation of NP between fixed-line
operators are being negotiated.
Neotel requested NP in February 2006 and discussions on the implementation
of the required inter-operator systems are under way.
Local Loop Unbundling (LLU)
Telkom is required, in terms of existing legislation, to provide Neotel
with shared access to its local loop.
Although the Telecommunications Act, 103 of 1996, provides that no general
local loop unbundling will be required for the first two years of operation
of Neotel, the EC Act, which repeals the Telecommunications Act, makes
provision for unbundling of the local loop, subject to ICASA making the
necessary regulations. The Minister of Communications (the Minister) has
recently expressed that the unbundling of the local loop (LLU) process
should be implemented urgently and has made a call for the regulator to
make use of the report of the LLU committee and its recommendations. The
Minister has subsequently, on the draft policy decisions, stated that the
unbundling process should be completed by November 1, 2011.
Draft ADSL regulations
ICASA has issued regulations on August 17, 2006 on the provision of ADSL
services. The main provisions of the regulations relate to minimum
standards of service that operators must adhere to.
The Minister of Communications` budget speech 2007
In her budget vote speech delivered to Parliament on May 24, 2007, the
Minister announced policies and policy directions. The Minister addressed
regulatory issues raised in the EC Act and focused on the following areas:
- the unbundling of the local loop, details of which are noted above;
- ICASA to consider whether VANS licensees can be authorised to provide
services as well as provide and operate facilities/networks. ICASA would
have to issue network service licenses for such networks;
- the intention to make representation regarding INFRACO as a "deemed
holder" of an individual electronic communications network services
license;
- regarding the Frequency Spectrum and Radio Frequency Licenses, ICASA must
allocate spectrum for a single national network for mobile broadcasting,
prescribe regulations governing the co-ordination between licenses, and
also prescribe procedures for awarding spectrum licenses for competing
applications;
- directed ICASA to merge the Under Serviced Areas License operators where
there is more than one operator licence per province and issue one
Provincial Under-Serviced Area Network Operators licence where each would
be licensed for individual networks and services;
- as from November 1, 2007 all exclusivity provisions contained in the SAT-
3 agreements shall be declared null and void in South Africa. In addition,
ICASA is to prescribe that all facilities connected to the submarine cable
be declared as essential facilities;
- a Broadcasting Digital Migration Policy to be gazetted on July 1, 2007.
In addition, a body has been set up to oversee the roll-out of digital
migration;
- the intention to bring the Protocol for NEPAD ICT Broadband Network for
ratification by Parliament. In her speech the Minister has stated that all
South African telecom companies have committed to participate in this
project.; and
- the re-iteration of the announcement of the President that Telkom would
provide a special rate for 10 developed call centres in economically-
depressed areas identified by Government.
CONCLUSION
Telkom is confident that it is well placed to deal with all regulatory
issues. Telkom actively engages with the regulator and plans and analyses
multiple regulatory scenarios to ensure that it is prepared for changes in
regulation.
STRATEGY
Telkom`s vision is to be a leading customer and employee centred ICT
solutions service provider. Telkom is focused on balancing the needs of all
stakeholders, often with competing interests, to ensure long term
sustainable and profitable growth of the business for shareholders and
contributing positively to the South African economy.
The accelerated liberalisation of the market, in particular the
implications of the EC Act, the emergence of new technologies and customer
demand is clearly material to Telkom`s strategic intentions. Telkom
believes that it is strongly positioned to compete effectively in a
liberalised market. Customer service excellence through a skilled and
dedicated workforce with greater product and service choice and value for
customers will ensure long term value creation. Telkom will pursue
opportunities to provide the full spectrum of ICT solutions including
voice, data, video and internet services increasingly through broadband
penetration.
Telkom will focus on the following imperatives to sustain long term value
creation for all its stakeholders:
- Continue investment in the development of employees to maintain
competitive advantage;
- Enhancing customer satisfaction through customer centricity;
- Retaining revenue and generating growth;
- Evolving to a Next Generation Network in order to support profitable
growth through prudent cost management; and
- Repositioning Telkom stakeholder management to create healthy external
relationships.
In addition, Telkom continues to urgently investigate opportunities with
mobile partners to consolidate a Service Provider Model across the Fixed
and Mobile Value chain, with integration capabilities into the managed
hosting environment. Swiftnet services will be available to the
Fixed/Mobile Service Provider Model and their proposition will be extended
to target the Small/Medium Enterprise market.
Telkom will continue to expand into Africa and grow the Africa Online
footprint into the continent. This strategy is aligned with the domestic
Fixed/Mobile Service Provider Model. The focus is on further data
acquisitions and fixed/mobile opportunities. A detailed evaluation process
is followed on each opportunity to ensure it is a strategic fit, all risks
and resource requirements are understood and the potential returns exceed
our minimum requirements.
Cost management is central to all our decisions. Particular areas of focus
are on renegotiating service and equipment contracts, automation of
assurance and fulfilment, pursuing turnkey capital projects, improving
maintenance support and licencing models and procurement spend where we are
investigating options to realise savings through the consolidation of
suppliers, extraction of efficiencies and price reductions.
Converged services are evolving rapidly and Telkom is expanding
aggressively into the application layer, centralising the managed voice,
managed data and applications onto a common core to drive end-to-end
solution.
Telkom`s drive towards Gated Communities and Office Parks is gaining
momentum with a specific focus on VPN Lite, VoIP, mobile and Media
integration to differentiate Telkom as a full Quad-play providers within
this market cluster.
The evolution to an IP centric network is a business imperative. It is
vital that we continue our investment in our network and front load it
where possible to enable the cost of operating the network to reduce and to
enable the delivery of fully converged products and services to meet our
customers` needs in the rapidly changing technological environment.
Acceleration of Telkom`s broadband penetration is a critical element of
this strategy.
The first phase is expected to last three years and concentrates on
enabling the network for broadband services. The second phase is the
conversion of existing products and services to NGN. Depending on the
customer demand and profitability, this process is expected to be completed
by 2015.
Given the centrality of ICT to economic growth and social development,
Telkom remains strategically important to the achievement of national
objectives and will continue to invest significantly in the development of
a viable and vibrant marketplace.
Prospects for the year ahead
Fixed-line revenues in the financial year ending March 31, 2008 are
expected to be impacted by tariffs, increased competition and the migration
from dial-up services to ADSL services and the introduction of cost-based
interconnection. Our strategic initiatives to improve service levels are
expected to result in above inflationary increases in operating expenses,
the result being an expected fixed-line EBITDA margin between 37% and 40%.
Employee expenses are expected to increase to cater for the strong demand
for Telkom`s products and services which will increase as prices are
further reduced in competitive response actions. Fixed-line CAPEX is
expected to be between 18% and 22% of revenue.
The mobile business is focused at maintaining its market share and
acquiring operations in Africa. Through improved efficiencies, no material
changes to the EBITDA margin is expected.
The Group net debt to equity target remains at 50% to 70%.
3. Group performance
GROUP OPERATING REVENUE
Group operating revenue increased 8.4% to R51,619 million (2006: R47,625
million) in the year ended March 31, 2007. Fixed-line operating revenue,
after inter-segmental eliminations, increased 1.6% to R32,540 million
primarily due to good growth in data services and increased subscription
revenue. Mobile operating revenue, after inter-segmental eliminations,
increased 22.4% to R19,079 million primarily due to significant customer
growth, offset in part by declining ARPU`s.
GROUP OPERATING EXPENSES
Group operating expenses increased 12.3% to R37,533 million (2006: R33,428
million) in the year ended March 31, 2007, primarily due to a 21.0%
increase in operating expenses in the mobile segment to R14,430 million
(after inter-segmental eliminations) and an increase in Fixed-line
operating expenditure by 7.5% to R23,104 million (after inter-segmental
eliminations) due to increased employee expenses, selling general and
administrative expenses, payments to other operators, services rendered and
operating leases, partially offset by a decrease in depreciation,
amortisation, impairment and write offs. The increase in mobile operating
expenses of 21.0%, after inter segmental eliminations, was primarily due to
increased gross connections resulting in increased cost to connect
customers to the network. Mobile payments to other operators also increased
as a result of the increased outgoing traffic and the higher volume growth
of more expensive outgoing traffic terminating on other mobile networks
when compared to traffic terminating on the lower cost fixed-line network.
INVESTMENT INCOME
Investment income consists of interest received on short-term investments
and bank accounts. Investment income decreased 40.8% to R235 million (2006:
R397 million), largely as a result of lower interest received due to less
cash available for short-term investments and increased taxation payments.
FINANCE CHARGES
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains
and losses on financial instruments and foreign exchange gains and losses.
Finance charges decreased 8.0% to R1,125 million (2006: R1,223 million) in
the year ended March 31, 2007, due to a 1.4% decrease in interest expense
to R1,327 million (2006: R1,346 million) as a result of the redemption of
local and foreign loans. In addition to the decrease in the interest
expense, net fair value and exchange gains on financial instruments of R202
million (2006: R123 million) arose primarily as a result of currency
movements.
TAXATION
Group tax expense increased 4.6% to R4,731 million (2006: R4,523 million)
in the year ended March 31, 2007. The Group effective tax rate for the year
ended March 31, 2007, was 34.8% (2006: 32.7%). Telkom Company`s effective
tax rate was 24.3% (2006: 25.0%). The lower effective tax rate for Telkom
Company in the year ended March 31, 2007, was primarily due to higher
exempt income resulting mainly from dividends received from Group
companies. Vodacom`s effective tax rate decreased marginally to 36.9%
(2006: 37.5%).
PROFIT FOR THE YEAR AND EARNINGS PER SHARE
Profit for the year attributable to the equity holders of the Group
decreased 5.9% to R8,646 million(2006: R9,189 million) for the year ended
March 31, 2007.
Group basic earnings per share decreased 3.7% to 1,681.0 cents (2006:
1,746.1 cents) and Group headline earnings per share decreased 1.0% to
1,710.7 cents (2006: 1,728.6 cents).
4. Group balance sheet
Operating performance across the Group has seen the balance sheet retain
its strength with net debt, after financial assets and liabilities,
increasing 45.0% to R9,901 million (2006: R6,828 million) as at March 31,
2007, resulting in a net debt to equity ratio of 30.9% from 23.2% at March
31,2006. On March 31, 2007, the Group had cash balances of R749 million.
During the year ended March 31, 2007, 12.1 million shares were repurchased
for R1.6 billion, to be cancelled from the issued share capital by the
Registrar of Companies. As at March 31 2007, 1,035,506 of these shares have
not yet been cancelled.
Interest-bearing debt, including credit facilities utilised, decreased 8.6%
to R10,805 million (2006: R11,816 million) in the year ended March 31,
2007. The decrease was mainly due to the redemption of the TL06 bond with a
nominal value of R2,100 million on October 31, 2006 and R3,731 million
nominal value commercial paper bill debt that matured during the year.
These debt repayments were partially offset by the issuance of R4,651
million nominal value commercial paper bills during the year to fund a
portion of the TL06 redemption with the balance being utilized to fund
capital expenditure.
Telkom maintains an active dialogue with the principal credit rating
agencies, who review our ratings periodically. Moody`s Investor Services
and Standard & Poor`s have rated our foreign debt A3 and BBB respectively.
5. Group cash flow
Cash flows from operating activities decreased 1.6% to R9,356 million
(2006: R9,506 million), mainly due to higher taxation and dividend payments
that exceeded the 4.0% increase in cash generated from operations of
R20,520 million (2006: R19,724 million). Cash flows utilised in investing
activities increased 42.9% to R10,412 million (2006:R 7,286 million),
primarily due to increased capital expenditure in both the fixed-line and
mobile segments. Cash utilised in financing activities of R2,920 million
(2006: R258 million) was mostly due to the R1,596 million paid for share
repurchases, the repayment of the TL06 bond with a nominal value of R2,100
million on October 31, 2006 and maturing commercial paper debt of R3,731
million nominal value, during the year offset by the issuance of R4,651
million nominal value commercial paper bills, to fund a portion of the TL06
bond redemption with the balance being utilised to fund capital
expenditures.
Summary
Year ended March 31,
In ZAR millions 2006 2007 %
Cash generated from operations 19,724 20,520 4.0
Cash from operating activities 9,506 9,356 (1.6)
(after tax, interest, dividends)
Investing activities (7,286) (10,412) 42.9
Financing activities (258) (2,920) 1,031.8
Net increase/(decrease) in cash 1,962 (3,976) (302.2)
EBITDA MINUS CAPITAL EXPENDITURE
Year ended March 31,
In ZAR millions 2006 2007 %
Fixed-line 9,711 6,022 (38.0)
Mobile 3,336 3,514 5.3
Group 13,047 9,536 (26.9)
6. Group capital expenditure
Group capital expenditure increased 36.5% to R10,249 million (2006: R7,506
million) and represents 20.0% of Group revenue (2006: 15.8%).
Fixed-line capital expenditure
Year ended March 31,
In ZAR millions 2006 2007 %
Baseline 2,128 3,409 60.2
Portfolio 2,756 3,001 8.9
Revenue generating 374 159 (57.5)
Network evolution 330 784 137.6
Sustainment 596 416 (30.2)
Effectiveness and efficiency 1,080 1,141 5.6
Support 376 501 33.2
Regulatory 15 188 1,153.3
Other 36 43 22.1
4,935 6,641 34.6
Fixed-line capital expenditure, which includes spending on intangibles,
increased 34.6 % to R6,641 million (2006: R4,935 million) and represents
20.0% of fixed-line revenue (2006: 15.1%). Baseline and revenue generating
capital expenditure of R3,568 million (2006: R2,502 million) was largely
for the deployment of technologies to support the growing data services
business (including ADSL footprint), links to the mobile cellular operators
and expenditure for access line deployment in selected high growth
residential areas. The continued focus on rehabilitating the access network
and increasing the efficiencies in the transport network contributed to the
network evolution and sustainment capital expenditure of R1,200 million
(March 31, 2006: R926 million).
Telkom continues to focus on its operations support system investment with
current emphasis on workforce management, provisioning and fulfilment,
assurance and customer care, hardware technology upgrades on the billing
platform and performance and service management. During the year ended
March 31, 2007, R1,141 million (2006: R1,080 million) was spent on the
implementation of systems.
Mobile capital expenditure
Year ended March 31,
In ZAR millions 2006 2007 %
South Africa 2,193 2,730 24.5
Other African countries 378 878 132.3
2,571 3,608 40.3
Mobile capital expenditure (50% of Vodacom`s capital expenditure) increased
40.3% to R3,608 million (2006: R2,571 million) and represents 17.5% of
mobile revenue (March 31, 2006: 15.1%) which was mainly spent on the
cellular network infrastructure as a result of increased investment in
South Africa for increased traffic and investment in 3G technologies. The
increase in capital expenditure in Other African countries is largely as a
result of an increased investment in Tanzania to accommodate the
substantial growth in the subscriber base during the year.
7. Segment performance
Telkom`s operating structure comprises two segments, fixed-line and mobile.
The fixed-line segment provides fixed-line voice and data communications
services through Telkom; directory services through our 64.9% owned
subsidiary, TDS Directory Operations formerly known as, Telkom Directory
Services; wireless data services through our wholly owned subsidiary,
Swiftnet and internet services in Africa through our newly acquired wholly
owned subsidiary Africa Online. The mobile segment consists of a 50% joint
venture interest in Vodacom.
Vodacom`s results are proportionately consolidated into the Telkom Group`s
consolidated financial statements. This means that we include 50% of
Vodacom`s results in each of the line items in the Telkom Group`s
consolidated financial statements. TDS Directory Operations, Swiftnet,
Africa Online and Rossal No 65 and Acajou Investments (subsidiaries for the
repurchase of shares) subsidiaries are fully consolidated in the Telkom
Group`s consolidated financial statements.
Summary
Year ended March 31,
In ZAR millions 2006 2007 %
Operating revenue 47,625 51,619 8.4
Fixed-line 32,749 33,295 1.7
Mobile 17,021 20,573 20.9
Inter-segmental eliminations (2,145) (2,249) 4.8
Operating profit 14,677 14,470 (1.4)
Fixed-line 10,242 9,040 (11.7)
Mobile 4,435 5,430 22.4
Operating profit margin 30.8 28.0 (9.0)
Fixed-line 31.3 27.2 (13.2)
Mobile 26.1 26.4 1.3
EBITDA 20,553 19,785 (3.7)
Fixed-line 14,646 12,663 (13.5)
Mobile 5,907 7,122 20.6
EBITDA margin 43.2 38.3 (11.2)
Fixed-line 44.7 38.0 (15.0)
Mobile 34.7 34.6 (0.2)
Fixed-line segment
The fixed-line segment accounted for 63.0% (2006: 67.3%) of Group operating
revenues (after inter-segmental eliminations) and 67.6% (2006: 74.7%) of
Group operating profit at March 31, 2007.
The financial information presented below for the fixed-line segment is
before inter-segmental eliminations.
Summary
Year ended March
31,
In ZAR millions 2006 2007 %
Revenue 32,749 33,295 1.7
Operating profit 10,242 9,040 (11.7)
EBITDA 14,646 12,663 (13.5)
Capital expenditure 4,935 6,641 34.6
Operating profit margin (%) 31.3 27.2 (13.2)
EBITDA margin (%) 44.7 38.0 (15.0)
Capex to revenue (%) 15.1 20.0 32.4
Fixed-line operating revenue
Year ended March 31,
In ZAR millions 2006 2007 %
Subscriptions and connections 5,803 6,286 8.3
Traffic 17,563 16,738 (4.7)
Local 5,753 5,382 (6.4)
Long distance 3,162 2,722 (13.9)
Fixed-to-mobile 7,647 7,646 -
International outgoing 1,001 988 (1.3)
Interconnection 1,654 1,638 (1.0)
Mobile operators1 760 815 7.2
International operators 894 823 (7.9)
Data 6,649 7,484 12.6
Leased lines and other data 5,282 5,820 10.2
Mobile leased facilities2 1,367 1,664 21.7
Directories and other 1,080 1,149 6.4
32,749 33,295 1.7
1. Interconnection includes revenue from Vodacom of R468 million (2006:
R464 million), 50% is eliminated on consolidation.
2. Data includes revenue from Vodacom of R907 million (2006: R845 million),
50% is eliminated on consolidation.
Revenue from the fixed-line segment, before inter-segmental eliminations,
increased 1.7% to R33,295 million (2006: R32,749 million) primarily due to
the continued growth in data services revenue and increased subscriptions
and connection revenue, partially offset by a decline in traffic revenue.
Subscription and connections revenue grew 8.3% to R6,286 million (2006:
R5,803 million), largely as a result of increased rental tariffs for
digital lines, increased sales of customer premises equipment, including
PABX`s, and higher penetration of value-added services.
Traffic revenue decreased 4.7% to R16,738 million (2006: R17,563 million),
primarily as a result of the increasing substitution of calls placed using
mobile services rather than fixed-line services as well as the acceleration
of broadband adoption and the resultant loss of internet dial-up minutes.
Traffic, including VoIP traffic but excluding interconnection traffic,
decreased 6.4% to 25,565 million minutes (2006: 27,361 million minutes)
primarily as a result of decreased local and long distance traffic offset
in part by increased international outgoing traffic.
Interconnection revenue decreased 1.0% as a result of a 7.9% decrease in
the interconnection revenue from international operators to R823 million
(2006: R894 million) offset in part by a 7.2% increase in mobile to fixed
interconnection revenue to R815 million (2006: R760 million). The decreased
interconnection revenue from international operators is mainly as a result
of a 2.5% decrease in international interconnection traffic minutes of
1,321 million minutes (2006: 1,355 million minutes). Mobile interconnection
revenue increased due to increased interconnection traffic from mobile
operators and tariff increases for call termination offset in part by lower
tariffs on mobile international outgoing calls. Mobile interconnection
traffic minutes increased by 2.4% to 2,419 million minutes (2006: 2,143
million minutes) in the year ended March 31, 2007.
Data revenue increased 12.6% to R7,484 million (2006: R6,649 million)
mainly due to higher demand for data services, including ADSL, in the
medium and small business segment with leased line and other data revenue
growing 10.2% to R5,820 million (2006: R5,282 million) and mobile leased
line revenue by 21.7% to R1,664 million (2006: R1,367 million). The
increase in mobile leased facilities is largely due to the rollout of 3G
networks and universal mobile telecommunication system products by the
mobile operators.
Fixed-line operating expenses
Year ended March
31,
In ZAR millions 2006 2007 %
Employee expenses 6,470 7,268 12.3
Salaries and wages 4,592 5,225 13.8
Benefits 2,410 2,715 12.7
Workforce reduction expenses 88 24 (72.7)
Employee related expenses capitalised (620) (696) 12.3
Payments to other network operators1 6,150 6,463 5.1
Payment to mobile operators 5,231 5,435 3.9
Payment to international operators 919 1,028 11.9
SG&A 3,086 4,244 37.5
Materials and maintenance 1,617 1,908 18.0
Marketing 413 642 55.4
Bad debts 187 141 (24.6)
Other 869 1,553 78.7
Services rendered 2,050 2,212 7.9
Property management 1,107 1,142 3.2
Consultants and security 943 1,070 13.5
Operating leases 777 787 1.3
Depreciation, amortisation, impairment 4,404 3,623 (17.7)
and write-offs
22,937 24,597 7.2
1. Payments to other network operators include payments made to Vodacom of
R2,908 million (2006: R2,818 million), 50% is eliminated on consolidation.
Fixed-line operating expenses, before inter-segmental eliminations,
increased 7.2% in the year ended March 31, 2007 to R24,597 million (2006:
R22,937 million), due to higher employee expenses, selling, general and
administrative expenses, payment to other operators and services rendered
offset by a decrease in depreciation, amortisation, impairment and write-
offs.
Employee expenses increased 12.3% in the year ended March 31, 2007 to
R7,268 (2006: R6,470 million), largely due to a 1.1% increase in the number
of employees to 25,864 employees, increased payments to part-time employees
and contractors employed to meet Telkom`s customer centricity; the
deployment of the NGN objectives and annual salary increases, including
related benefits.
Payments to other network operators increased 5.1% to R6,463 (2006: R6,150
million) as a result of higher payments to mobile operators and
international operators. Payments to mobile operators increased 3.9% to
R5,435 million (2006: R5,231 million), largely as a result of an 1%
increase in fixed-to-mobile traffic. Payments to international operators
increased 11.9% to R1,028 million (2006: R919 million), primarily due to an
8.3% increase in international outgoing traffic.
Selling, general and administrative expenses increased 37.5% to R4,244
million (2006: R3,086 million), primarily as a result of an 55.4% increase
in marketing expenses, an 18.0% increase in material and maintenance
expenses, as well as an increase of 78.7% in other selling, general and
administrative expenses mainly as a result of the provision for the
liability in the Telcordia dispute and increased cost of sales.
Services rendered increased 7.9% to R2,212 million (2006: R2,050 million).
Consultants and security costs increased 13.5% to R1,070 million (2006:
R943 million), primarily as a result of increased payments to consultants
used for the deployment of the NGN objectives and to explore local and
international investment and expansion opportunities as well as higher
security expenses. Property management expenses increased 3.2% to R1,142
million (2006: R1,107 million), mainly as a result of increased maintenance
expenses partly due to copper theft.
Operating leases increased marginally to R787 million (2006: R777 million)
as a result of a slight increase in payments for the vehicle fleet that
remained relatively flat at 9,694 vehicles at March 31, 2007 from 9,708
vehicles at March 31, 2006.
In recognition of changed usage patterns of certain items of property,
plant and equipment and intangible assets, the Group reviewed their
remaining lives of its assets as at March 31, 2006. The assets affected
were certain items included in network equipment, support equipment,
furniture and office equipment and data equipment software and hardware.
The revised estimated useful lives resulted in a decrease of a 17.7% to
R3,623 million (2006: R4,404 million) in depreciation, amortisation,
impairment and write-offs.
Fixed-line operating profit decreased 11.7% to R9,040 million (2006:
R10,242 million) with an operating profit margin of 27.2% (2006: 31.3%).
EBITDA decreased 13.5% to R12,663 million (2006: R14,646 million), with
EBITDA margins decreasing to 38.0%. (2006: 44.7%).
MOBILE SEGMENT
The mobile segment accounted for 37.0% of Group operating revenue (2006:
32.7%) (after inter-segmental eliminations) and 32.4% of Group operating
profits (2006: 25.3%). Vodacom`s operational statistics are presented below
at 100%, but all financial figures represent the 50% that is
proportionately consolidated in the Group and presented before inter-
segmental eliminations.
Summary
Year ended March 31,
In ZAR millions 2006 2007 %
Operating revenue 17,021 20,573 20.9
Operating profit 4,435 5,430 22.4
EBITDA 5,907 7,122 20.6
Capital expenditure 2,571 3,608 40.3
Operating profit margin (%) 26.1 26.4 1.3
EBITDA margin (%) 34.7 34.6 (0.2)
Capex to revenue (%) 15.1 17.5 16.1
MOBILE OPERATING REVENUE
Year ended March 31,
In ZAR millions 2006 2007 %
Airtime and access 10,043 11,854 18.0
Data 1,019 1,671 64.0
Interconnect1 3,348 3,918 17.0
Equipment sales 1,993 2,350 17.9
International airtime 486 653 34.4
Other 132 127 (3.8)
17,021 20,573 20.9
1. Interconnect revenue includes revenue from Telkom, of R1,454 million
(March 2006: R1,409 million), which is eliminated on consolidation.
Operating revenue from the mobile segment increased 20.9%, before inter-
segmental eliminations, to R20,573 million (2006: R17,021 million),
primarily driven by customer growth. Revenue from Vodacom`s operations
outside of South Africa as a percentage of Vodacom`s total mobile operating
revenue increased to 10.1% (2006: 8.7%) for the year ended March 31, 2007.
The growth in revenue can largely be attributed to a 28.2% increase in
Vodacom`s total customers to 30,150 million as of March 31, 2007, (2006:
23,520 million), resulting from strong growth in prepaid and contract
customers in South Africa and 64.0% growth in customers outside of South
Africa. In South Africa, total Average Monthly Revenue Per User (ARPUs)
decreased 10.1% to R125 (2006: R139). Contract ARPUs decreased by 9.6% to
R517 (2006: R572) and prepaid ARPUs decreased by 8.7% to R63 (2006: R69).
Vodacom`s continued implementation of upgrade and retention policies in the
year ended March 31, 2007, ensured an improvement in the South Africa
contract churn to 9.7% (2006: 10.0%) for the year ended March 31, 2007.
South Africa prepaid churn increased from18.8% for the year ended March 31,
2006, to 37.5% for the year ended March 31, 2007.
Data revenue increased 64.0% and represents 8.1% of mobile revenue, before
inter-segmental eliminations. The growth was largely due to the popularity
of SMS and data initiatives such as 3G, HSDPA, Blackberry", Mobile TV,
Vodafone Live! and other initiatives such as bundled pay-as-you-use for
GPRS and 3G/HSPDA. Vodacom South Africa transmitted 4.5 billion (2006: 3,5
billion) messages over its network during the year ended March 31, 2007.
The number of active data users on the South African network as at March
31, 2007, was: 1,2 million MMS users (2006: 867 thousand); 2.8 million GPRS
users (2006: 1,4 million); 139 thousand 3G/HSDPA users (2006: 38 thousand);
733 thousand 3G/HSDPA devices (2006: 180 thousand); 899 thousand Vodafone
Live! users (2006: 351 thousand) and 33 thousand Unique Mobile TV users
(2006: 13 thousand).
Mobile interconnect revenue increased by 17.0%, primarily due to an
increase in the number of fixed-line calls terminating on Vodacom`s network
as a result of the increased number of Vodacom customers and South African
mobile users.
Equipment sales increased 17.9% primarily due to the growth of the customer
base, cheaper Rand prices of new handsets, coupled with added functionality
of new phones.
Vodacom`s international airtime revenue increased 34.4% and consists
largely of international calls by Vodacom`s customers, roaming revenue from
Vodacom customers making and receiving calls while abroad and revenue from
international customers roaming on Vodacom`s network.
Mobile operating expenses
Year ended March
31,
In ZAR millions 2006 2007 %
Employee expenses 1,019 1,186 16.4
Payments to other operators1 2,317 2,818 21.6
SG&A 7,328 8,778 19.8
Services rendered 65 82 26.2
Operating leases2 435 629 44.6
Depreciation, amortisation, impairment 1,472 1,692 14.9
and write offs
12,636 15,185 20.2
1. Payments to other operators include payments to Telkom fixed-line of
R234 million (2006: R232 million), which are eliminated on consolidation.
2. Operating leases include payments to Telkom fixed-line of R420 million
(2006: R376 million), which are eliminated on consolidation.
Mobile operating expenses, before inter-segmental eliminations, increased
by 20.2% in the year ended March 31, 2007, due to increased employee
expenses, selling and distribution costs, payments to other operators,
depreciation, amortisation, impairment and write offs, operating leases and
services rendered.
Mobile employee expenses increased 16.4%, due to an 8.4% increase in the
number of employees to 6,249, including agency temporary employees, to
support the growth in operations as well as annual salary increases
(including related benefits) and an increase in the provision for Vodacom`s
deferred bonus schemes due to increased profits. Vodacom increased the
total number of its employees, including agency temporary employees, by
31.9% in its other African operations to 1,522 employees and by 9.8% in its
operations in South Africa to 4,727 employees, including agency temporary-
holding company and Mauritius employees as at March 31, 2007.
Employee productivity in South Africa and other African countries, as
measured by customers per employee including agency temporary employees,
increased 12.0% to 4,825 customers per employee as at March 31, 2007.
Excluding agency temporary employees, the employee productivity in South
Africa and other African countries as measured by customer per employee
increased 11.9% to 5,093 customers per employee as at March 31, 2007.
Mobile payments to other operators increased 21.6% to R2,818 million (2006:
R2,317 million) in the year ended March 31, 2007, as a result of increased
outgoing traffic terminating on the other mobile networks relative to
traffic terminating on the fixed-line networks. As the cost of terminating
calls on other cellular networks is materially higher than calls
terminating on fixed-line networks and as mobile substitution increases
with the growing number of total mobile users in South Africa,
interconnection charges are expected to continue increasing putting
pressure on margins.
Mobile selling, general and administrative expenses increased 19.8% to
R8,778 million (2006: R7,328 million), in the year ended March 31, 2007,
primarily due to an increase in selling, distribution and marketing
expenses to support the growth in South African and other African
operations.
Mobile depreciation, amortisation, impairment and write-offs increased by
14.9% to R1,692 million (2006: R1,472 million) in the year ended March 31,
2007, and was largely driven by capital expenditure on upgrading the
Group`s networks. Vodacom Mozambique`s asset impairment amounted to R22,9
million (2006: reversal of R52.8 million) for the year ended March 31,
2007.
Telkom`s 50% share of Vodacom`s profit from operations increased 22.4% to
R5,430 million and the mobile operating profit margin increased to 26.4%
(2006: 26.1%). Mobile EBITDA increased 20.6% to R7,122 million (2006:
R5,907 million), with EBITDA margins decreasing to 34.6% (2006: 34.7%).
8. Employees
FIXED-LINE
Year ended March 31,
2006 2007 %
Telkom Company 25,575 25,864 1.1
Lines per employee 184 180 (2.2)
Subsidiaries 581 933 60.6
Fixed-line employees at year 26,156 26,797 2.3
end
MOVEMENT IN FIXED-LINE
EMPLOYEES
(Telkom Company only,
excluding subsidiaries)
Year ended March 31,
2006 2007
Opening balance 28,972 25,575
Appointments 686 1,486
Employee losses (4,083) (1,197)
Workforce reductions (2,990) (20)
Voluntary early retirement (674) (7)
- Voluntary severance (2,295) (13)
- Involuntary reductions (21) -
Natural attrition (1,093) (1,177)
Closing balance 25,575 25,864
MOBILE EMPLOYEES
Year ended March 31, %
2006 2007
South Africa1, 2 4,305 4,427 9.8
Customers per employee1, 2 4,451 4,867 9.3
Other African countries2 1,154 1,522 31.9
Customers per employee2 3,776 4,695 24.3
Vodacom Group1, 2 5,459 6,249 14.5
Customers per employee1, 2 4,308 4,825 12.0
1. Includes Holding Company and Mauritius employees.
2. Includes Agency temporary employees.
9. Condensed consolidated provisional annual financial statements
REVIEW REPORT of the independent auditors
Our auditors, Ernst & Young Inc., have reviewed the condensed consolidated
provisional annual financial statements as set out on pages 24 to 52. Their
unqualified review report is available for inspection at the Company`s
registered office.
Condensed consolidated provisional income statement for the three years
ended March 31, 2007
2005 2006 2007
Notes Rm Rm Rm
Total revenue 3.1 43,696 48,260 52,157
Operating revenue 3.2 43,160 47,625 51,619
Other income 4 280 480 384
Operating expenses 32,179 33,428 37,533
Employee expenses 5.1 8,111 7,489 8,454
Payments to other operators 5.2 6,132 6,826 7,590
Selling, general and 5.3 8,824 10,273 12,902
administrative expenses
Services rendered 5.4 2,021 2,114 2,291
Operating leases 5.5 803 850 981
Depreciation, amortisation,
impairment
and write-offs 5.6 6,288 5,876 5,315
Operating profit 11,261 14,677 14,470
Investment income 350 397 235
Finance charges and fair 1,694 1,223 1,125
value effect
Interest 1,686 1,346 1,327
Foreign exchange and fair 8 (123) (202)
value effect
Profit before taxation 9,917 13,851 13,580
Taxation 6 3,082 4,523 4,731
Profit for the year 6,835 9,328 8,849
Attributable to:
Equity holders of Telkom 6,752 9,189 8,646
Minority interest 83 139 203
6,835 9,328 8,849
Basic earnings per share 8 1,246.9 1,746.1 1,681.0
(cents)
Diluted earnings per share 8 1,244.5 1,736.6 1,676.3
(cents)
Dividend per share (cents) 8 110.0 900.0 900.0
Condensed consolidated provisional balance sheet at March 31, 2007
2005 2006 2007
Notes Rm Rm Rm
Assets
Non-current assets 42,552 44,813 48,770
Property, plant and equipment 10 36,448 37,274 41,254
Intangible assets 11 3,182 3,910 5,111
Investments 12 2,277 2,894 1,384
Deferred expenses 133 254 270
Finance lease receivables - - 158
Deferred taxation 13 512 481 593
Current assets 15,045 12,731 10,376
Short-term investments 69 69 77
Inventories 14 658 814 1,093
Income tax receivable 6 - - 520
Current portion of deferred 214 226 287
expenses
Current portion of finance - - 88
lease receivables
Trade and other receivables 5,820 6,399 7,303
Other financial assets 5,074 275 259
Cash and cash equivalents 15 3,210 4,948 749
Total assets 57,597 57,544 59,146
Equity and liabilities
Equity attributable to equity
holders
of Telkom 26,141 29,165 31,724
Share capital and premium 16 8,293 6,791 5,329
Treasury shares 17 (1,812) (1,809) (1,774)
Share-based compensation 68 151 257
reserve
Non-distributable reserves 360 1,128 1,413
Retained earnings 19,232 22,904 26,499
Minority interest 220 301 284
Total equity 26,361 29,466 32,008
Non-current liabilities 13,870 12,391 8,554
Interest-bearing debt 18 9,504 7,655 4,338
Other financial liabilities - - 36
Provisions 12 2,460 2,677 1,443
Deferred revenue 959 991 1,021
Deferred taxation 13 947 1,068 1,716
Current liabilities 17,366 15,687 18,584
Trade and other payables 6,782 6,103 7,362
Shareholders for dividend 7 7 4 15
Current portion of interest- 18 4,499 3,468 6,026
bearing debt
Current portion of provisions 1,428 1,660 2,095
Current portion of deferred 1,717 1,975 1,983
revenue
Income tax payable 6 1,711 1,549 594
Other financial liabilities 313 235 68
Credit facilities utilised 15 909 693 441
Total liabilities 31,236 28,078 27,138
Total equity and liabilities 57,597 57,544 59,146
Condensed consolidated provisional statement of changes in equity
for the three years ended March 31, 2007
Attributable to equity holders of
Telkom
Share Share Treasury
capital premium shares
Rm Rm Rm
Balance at April 1, 2004 5,570 2,723 (238)
Total recognised income and
expense for the year
Total income and expense
recognised directly in
equity for the year
?Fair value adjustment on
investment
?Realisation of fair value
adjustment on investment
Profit for the year -
restated as per note 2
Dividend declared (refer to
note 7)
Transfer to non-
distributable reserves*
Foreign currency
translation reserve (net of
tax of RNil)
- restated as per note 2
Purchase of treasury shares (1,574)
Business combination
Net increase in Share-based
compensation reserve
Acquisition of subsidiary
Balance at March 31, 2005 5,570 2,723 (1,812)
Total recognised income and
expense
- Profit for the year -
restated as per note 2
Dividend declared (refer to
note 7)
Transfer to non-
distributable reserves*
Foreign currency
translation reserve (net of
tax of RNil)
restated as per note 2
Net increase in Share-based
compensation reserve
Shares vested and re-issued 3
Acquisition of subsidiary
Shares bought back and (121) (1,381)
cancelled (refer to note
16)
Balance at March 31, 2006 5,449 1,342 (1,809)
Total recognised income and
expense - Profit for the
period
Dividend declared (refer to
note 7)
Transfer to non-
distributable reserves*
Foreign currency
translation reserve (net of
tax of R4 million)
Net increase in Share-based
compensation reserve
Shares vested and re-issued 35
Acquisition of subsidiaries
and minorities (refer to
note 19)
Shares bought back and (120) (1,342)
cancelled (refer to note
16)
Balance at March 31, 2007 5,329 - (1,774)
*The earnings from the
Group`s cell captives are
recognised in the income
statement and then
transferred to non-
distributable reserves.
Attributable to equity holders of Telkom
Share- Non-
based
compensat distributable Retained
ion
reserve reserves earnings Total
Rm Rm Rm Rm
Balance at - 91 13,482 21,628
April 1, 2004
Total (22) 6,752 6,730
recognised
income and
expense for the
year
Total income
and expense
recognised
directly in
equity for the (22) (22)
year
?Fair value 9 9
adjustment on
investment
?Realisation of (31) (31)
fair value
adjustment on
investment
Profit for the - 6,752 6,752
year - restated
as per note 2
Dividend (606) (606)
declared (refer
to note 7)
Transfer to non- 279 (279) -
distributable
reserves*
Foreign
currency
translation
reserve (net of
tax of RNil)
- restated as 12 12
per note 2
Purchase of (1,574)
treasury shares
Business (117) (117)
combination
Net increase in 68 68
Share-based
compensation
reserve
Acquisition of -
subsidiary
Balance at 68 360 19,232 26,141
March 31, 2005
Total
recognised
income and
expense
- Profit for 9,189 9,189
the year -
restated as per
note 2
Dividend (4,801) (4,801)
declared (refer
to note 7)
Transfer to non- 716 (716) -
distributable
reserves*
Foreign
currency
translation
reserve (net of
tax of RNil)
restated as per 52 52
note 2
Net increase in 86 86
Share-based
compensation
reserve
Shares vested (3) -
and re-issued
Acquisition of -
subsidiary
Shares bought (1,502)
back and
cancelled
(refer to note
16)
Balance at 151 1,128 22,904 29,165
March 31, 2006
Total 8,646 8,646
recognised
income and
expense -
Profit for the
period
Dividend (4,678) (4,678)
declared (refer
to note 7)
Transfer to non- 239 (239) -
distributable
reserves*
Foreign 46 46
currency
translation
reserve (net of
tax of R4
million)
Net increase in 141 141
Share-based
compensation
reserve
Shares vested (35) -
and re-issued
Acquisition of -
subsidiaries
and minorities
(refer to note
19)
Shares bought (134) (1,596)
back and
cancelled
(refer to note
16)
Balance at 257 1,413 26,499 31,724
March 31, 2007
*The earnings
from the
Group`s cell
captives are
recognised in
the income
statement and
then
transferred to
non-
distributable
reserves.
Minority Total
interest equity
Rm Rm
Balance at April 1, 2004 200 21,828
Total recognised income and 83 6,813
expense for the year
Total income and expense
recognised directly in
equity for the year (22)
Fair value adjustment on 9
investment
?Realisation of fair value (31)
adjustment on investment
Profit for the year - 83 6,835
restated as per note 2
Dividend declared (refer to (67) (673)
note 7)
Transfer to non-distributable -
reserves*
Foreign currency translation
reserve (net of tax of RNil)
- restated as per note 2 (1) 11
Purchase of treasury shares (1,574)
Business combination (117)
Net increase in Share-based 68
compensation reserve
Acquisition of subsidiary 5 5
Balance at March 31, 2005 220 26,361
Total recognised income and
expense
- Profit for the year - 139 9,328
restated as per note 2
Dividend declared (refer to (78) (4,879)
note 7)
Transfer to non-distributable -
reserves*
Foreign currency translation
reserve (net of tax of RNil)
restated as per note 2 (7) 45
Net increase in Share-based 86
compensation reserve
Shares vested and re-issued -
Acquisition of subsidiary 27 27
Shares bought back and (1,502)
cancelled (refer to note 16)
Balance at March 31, 2006 301 29,466
Total recognised income and 203 8,849
expense - Profit for the
period
Dividend declared (refer to (166) (4,844)
note 7)
Transfer to non-distributable -
reserves*
Foreign currency translation 14 60
reserve (net of tax of R4
million)
Net increase in Share-based 141
compensation reserve
Shares vested and re-issued -
Acquisition of subsidiaries (68) (68)
and minorities (refer to note
19)
Shares bought back and (1,596)
cancelled (refer to note 16)
Balance at March 31, 2007 284 32,008
*The earnings from the 75
Group`s cell captives are
recognised in the income
statement and then
transferred to non-
distributable reserves.
Condensed consolidated provisional cash flow statement
for the three years ended March 31, 2007
2005 2006 2007
Notes Rm Rm Rm
Cash flows from operating 15,711 9,506 9,356
activities
Cash receipts from 43,561 46,958 50,979
customers
Cash paid to suppliers and (24,939) (27,234) (30,459)
employees
Cash generated from 18,622 19,724 20,520
operations
Interest received 463 482 422
Dividend received 14 50 3
Finance charges paid (1,272) (1,316) (1,115)
Taxation paid 6 (1,487) (4,550) (5,690)
Cash generated from
operations before
dividend paid 16,340 14,390 14,140
Dividend paid 7 (629) (4,884) (4,784)
Cash flows from investing (6,306) (7,286) (10,412)
activities
Proceeds on disposal of
property, plant and
equipment and intangible 37 92 54
assets
Proceeds on disposal of 267 493 77
investment
Additions to property,
plant and equipment
and intangible assets (5,880) (7,396) (10,037)
Acquisition of (138) - (445)
subsidiaries 19
Additions to other (592) (475) (61)
investments
Cash flows from financing (9,897) (258) (2,920)
activities
Shares bought back and - (1,502) (1,596)
cancelled
Loans raised 1,157 4,123 5,624
Loans repaid (5,027) (7,399) (6,922)
Purchase of treasury (1,710) - -
shares
Finance lease capital (13) (24) (37)
repaid
(Increase)/decrease in net (4,304) 4,544 11
financial assets
Net (decrease)/increase in
cash and
cash equivalents (492) 1,962 (3,976)
Net cash and cash
equivalents at beginning
of year 2,796 2,301 4,255
Effect of foreign exchange (3) (8) 29
rate differences
Net cash and cash 15 2,301 4,255 308
equivalents at end of year
Comparatives
The line items on the detail note disclosure for 2005 and 2006 have been
restated due to the adoption of IAS21 (revised). This has, however, not had
any impact on the face of the cash flow statement (refer to note 2).
Notes to the condensed consolidated provisional annual financial statements
for the three years ended March 31, 2007
1 Corporate Information
Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the
Republic of South Africa (`South Africa`) whose shares are publicly traded.
The Company, its subsidiaries and joint ventures (`the Group`) is the
leading provider of fixed-line voice and data communications services in
South Africa and mobile communications services through the Vodacom Group
(Proprietary) Limited (`Vodacom`) in South Africa and certain other African
countries. The Group`s services and products include:
- fixed-line voice services, including subscriptions and connections
services, local, long distance, fixed-to-mobile and international voice
services, interconnection and hubbing communications services,
international voice-over-internet protocol services, subscription based
value-added voice services and customer premises equipment sales and
rental;
- fixed-line data services, including domestic and international data
transmission services, such as point-to-point leased lines, ADSL services
and packet-based services, managed data networking services and internet
access and related information technology services;
- e-commerce, including internet access service provider, application
service provider, hosting, data storage,e-mail and security services;
- directory and wireless data services through our TDS Directory
Operations Group and Swiftnet subsidiaries, respectively; and
- mobile communications services, including voice services, data
services, value-added services and handset sales through Vodacom.
2 Basis of preparation and accounting policies
Basis of preparation
The condensed consolidated provisional annual financial statements have
been prepared in accordance with IAS34 Interim Financial Reporting and in
compliance with the Companies Act of South Africa, 1973.
The financial statements are prepared on the historical cost basis, with
the exception of certain financial instruments and share-based payments
which are measured at fair value. The Group`s significant accounting
policies are consistent with those applied in the previous financial year
except for the following:
- the Group has adopted the amendments to IAS21 (revised) and IAS39
(revised), IFRIC4 and IFRIC7 with effect from April 1, 2006;
- the Group has also adopted an accounting policy regarding the acquisition
of minority interests in subsidiary companies in terms of IAS8.
The principal effects of these changes are discussed below.
Adoption of amendments to standards and new interpretations
The following changes to the accounting policies have been made in adopting
the revised standards and interpretations for the year under review:
- Amendment to IAS21 The Effects of Changes in Foreign Exchange Rates
(revised)
The amendment, Net Investment in a Foreign Operation, requires that even if
a monetary item (which is part of a net investment) is denominated in a
currency which is neither the functional currency of the reporting entity
nor that of the foreign operation, the resulting exchange difference should
be recognised in equity. This treatment is similar to the treatment where a
monetary item is denominated in the functional currency of the reporting
entity or that of the foreign operation. The impact of this amendment on
previously reported results is a movement from retained earnings to non-
distributable reserves of R8 million in 2006 (2005:R1 million) and an
increase in profit attributable to equity holders of Telkom of R7 million
in 2006 (2005:R1 million).
Amendments to IAS39 Financial Instruments: Recognition and Measurement
(revised)
The revision of IAS39 relates to three amendments to the existing standard.
The first amendment requires that issuers of financial guarantee contracts
recognise a financial liability arising from the issuance of a financial
guarantee. The amendment defines a financial guarantee contract as a
contract that requires the issuer to make specified payments to reimburse
the holder for a loss it incurs because a specified debtor fails to make
payment when due in accordance with the original or modified terms of a
debt instrument. The amendment has not had a material impact on the Group`s
financial statements.
The second amendment deals with cash flow hedge accounting for forecast
intragroup transactions. For hedge accounting purposes, only assets,
liabilities, firm commitments or highly probable forecast transactions that
involve a party external to the entity can be designated as hedged items.
The foreign currency risk of a highly probable forecast intragroup
transaction may qualify as a hedged item provided that the transaction is
denominated in a currency other than the functional currency of the entity
entering into that transaction and the foreign currency risk will affect
profit or loss. This amendment has not had any impact on the Group`s
financial statements since the Group`s derivative transactions do not
qualify for hedge accounting under the specific rules of IAS39.
The third amendment introduces additional requirements to be met before the
entity can choose to designate some of its financial assets or liabilities
as `at fair value through profit or loss`. The amendment has not had any
impact on the Group`s financial statements since the Group has not
designated any financial assets or liabilities into the category `at fair
value through profit or loss`.
IFRIC4 Determining whether an Arrangement contains a Lease
IFRIC4 requires that when an entity enters into a service arrangement as a
supplier or a customer and the supply of the service depends on the use of
a specific asset, or the right to control the specific asset is conveyed to
the customer, the arrangement should be assessed to determine whether it
contains a lease. Once it has been concluded that an arrangement contains a
lease, it should be assessed against criteria in IAS17 to determine if the
arrangement should be recognised as a finance lease or an operating lease.
Where an entity does not apply IFRIC4 retrospectively, the IFRIC requires
the entity to assess existing arrangements at the beginning of the earliest
period for which comparative information under IFRS is presented on the
basis of facts and circumstances existing at the start of that period. The
effect of the application of this interpretation was not considered
material for prior periods and therefore all cumulative adjustments were
made in the current year.
The cumulative impact of this interpretation for the year ended March 31,
2007 was an increase in Profit before taxation of R83 million and an
increase in Taxation of R24 million which resulted in an increase in Profit
for the period of R59 million. A Finance lease receivable of R207 million
was recognised in the Balance sheet at March 31, 2007 in this regard.
IFRIC7 Applying the Restatement Approach under IAS29 Financial Reporting in
Hyperinflationary Economies
The IFRIC provides guidance on the measuring unit at balance sheet date. It
also provides guidance on how to account for the deferred tax opening
balance in restated financial statements. The interpretation does not have
a material impact since the Group does not operate in a hyperinflationary
economy and does not have significant investments in hyperinflationary
economies.
New accounting policy
Acquisition of minorities
The Group has adopted an accounting policy regarding the acquisition of
minority interests in subsidiary companies in terms of IAS8 paragraph 10.
Minority shareholders are treated as equity participants and, therefore,
all acquisitions of minority interests by the Group in subsidiary companies
are accounted for using the parent entity extension method. Under this
method, the assets and liabilities of the subsidiary are not restated to
reflect their fair values at the date of the acquisition. The difference
between the purchase price and the minorities` share of the assets and
liabilities reflected within the consolidated balance sheet at the date of
the acquisition is recorded as goodwill. The adoption of this policy has
not had any impact on previously reported results.
2005 2006 2007
Rm Rm Rm
3 Revenue
3.1 Total revenue 43,696 48,260 52,157
Operating revenue 43,160 47,625 51,619
Other income (excluding profit 186 238 303
on disposal of property, plant
and equipment and investments,
refer to note 4)
Investment income 350 397 235
3.2 Operating revenue 43,160 47,625 51,619
Fixed-line 30,888 32,039 32,540
Mobile 12,272 15,586 19,079
Fixed-line 30,888 32,039 32,540
Subscriptions, connections and 5,385 5,803 6,286
other usage
Traffic 17,723 17,534 16,738
?Domestic (local and long 9,286 8,886 8,104
distance)
?Fixed-to-mobile 7,302 7,647 7,646
?International (outgoing) 1,135 1,001 988
Interconnection 1,320 1,433 1,418
Data 5,484 6,223 6,973
Directories and other 976 1,046 1,125
4 Other income 280 480 384
Other income (included in Total 186 238 303
revenue, refer to note 3)
?Interest received from debtors 129 136 190
?Sundry income 57 102 113
Profit on disposal of property,
plant and equipment
and intangible assets 30 79 29
Profit on disposal of 64 163 52
investment
2005 2006 2007
Rm Rm Rm
5 Operating expenses
Operating expenses comprise:
5.1 Employee expenses 8,111 7,489 8,454
Salaries and wages 5,573 5,566 6,362
Medical aid contributions 406 371 385
Retirement contributions 474 435 496
Post-retirement pension and 12 (58) 33
retirement fund
Post-retirement medical aid 182 361 330
Telephone rebates 15 19 104
Share-based compensation 68 127 141
expense
Other benefits 992 1,200 1,275
Workforce reduction expense 961 88 24
Employee expenses capitalised (572) (620) (696)
5.2 Payments to other operators 6,132 6,826 7,590
Payments to other network
operators consist
of expenses in respect of
interconnection with
other network operators.
5.3 Selling, general and
administrative
expenses 8,824 10,273 12,902
Selling and administrative 5,863 7,240 9,248
expenses
Maintenance 1,993 1,928 2,286
Marketing 740 899 1,215
Bad debts 228 206 153
Included in selling and
administrative expenses is an
amount of R510 million provided
for the supplier dispute as
discussed in note 21.
Change in comparatives
Maintenance has increased by
R334 million and Selling and
administrative expenses has
decreased by R334 million in
2006 due to the
reclassification of maintenance
expenses.
2005 2006 2007
Rm Rm Rm
5.4 Services rendered 2,021 2,114 2,291
Facilities and property management 1,069 1,110 1,142
Consultancy services 159 182 266
Security and other 759 772 821
Auditors` remuneration 34 50 62
?Audit services 31 38 61
??Company auditors 19 28 48
??Other auditors - current year 12 10 13
?Audit related services 3 9 -
?Other services - 3 1
Audit related services in the prior years mainly included the services
performed in preparing for compliance with the requirements of the Sarbanes-
Oxley Act of the United States of America. Fees for audit services
increased in the current year, as it includes the fees incurred for the
Section 404 of the Sarbanes-Oxley Act audit of internal controls over
financial reporting.
2005 2006 2007
Rm Rm Rm
5.5 Operating leases 803 850 981
Buildings 204 221 284
Transmission and data lines 16 42 63
Equipment 81 78 80
Vehicles 502 509 554
5.6 Depreciation, amortisation, impairment
and write-offs 6,288 5,876 5,315
Depreciation of property, plant and 5,442 5,154 4,483
equipment
Amortisation of intangible assets 502 560 536
Impairment/(reversal of impairment) 134 (26) 12
Write-offs of property, plant and
equipment
and intangible assets 210 188 284
In recognition of the changed usage patterns of certain items of property,
plant and equipment and intangible assets, the Group reviewed their
remaining useful lives as at March 31, 2006. The assets affected were
certain items included in Network equipment, Support equipment, Furniture
and office equipment, Data processing equipment and software, Other
equipment and Intangible assets. The revised estimated useful lives of
these assets as set out below, resulted in a decrease of the current year
depreciation and amortisation charges of R983 million.
Previous Revised
life life
Years Years
5.6 Depreciation, amortisation,
impairment
and write-offs (continued)
Property, plant and equipment
?Network equipment
??Cables 15-40 20-40
??Switching equipment 5-15 5-18
??Transmission equipment 5-15 5-18
??Other 2-25 2-20
?Support equipment 8-10 8-13
?Furniture and office equipment 6-10 4-15
?Data processing equipment and 5-7 5-10
software
?Other 2-10 2-15
Intangible assets
?Subscriber bases 3-5 3-8
?Software 5-7 5-10
2005 2006 2007
Rm Rm Rm
6 Taxation 3,082 4,523 4,731
South African normal company 2,492 3,763 3,528
taxation
Deferred taxation 346 173 516
Secondary tax on companies 238 585 670
Foreign taxation 6 2 17
The net increase in deferred
taxation expense results
mainly from the extention of
useful lives of assets, offset
slightly by an increase in the
STC deferred tax asset.
Taxation paid (1,487) (4,550) (5,690)
Tax payable at beginning of year (460) (1,711) (1,549)
Taxation during the year (2,500) (3,795) (3,545)
Secondary tax on companies (238) (585) (670)
Business combination - (8) -
Net tax payable at end of year 1,711 1,549 74
Included in the tax payable at the end of the year is an amount of R520
million due from the South African Revenue Services as a result of Telkom`s
second provisional tax payment for the 2007 tax year. This payment is based
on the basic amount which represents the assessed taxable income of the
2006 tax year. This amount will be offset against the first provisional tax
payment for the 2008 year.
Change in comparatives
Taxation has increased by R3 million in 2006 (2005: RNil) due to the change
in Group policy on net investment in a foreign operation (refer to note 2).
2005 2006 2007
Rm Rm Rm
7 Dividends paid 629 4,884 4,784
Dividends payable at 7 7 4
beginning of year
Declared during the 606 4,801 4,678
year: Dividends on
ordinary shares
Final dividend for 606 - -
2004: 110 cents
Final dividend for - 2,134 -
2005: 400 cents
Special dividend for - 2,667 -
2005: 500 cents
Final dividend for - - 2,599
2006: 500 cents
Special dividend for - - 2,079
2006: 400 cents
Dividends paid to 23 80 117
minority shareholders
Dividends payable at (7) (4) (15)
end of year
8 Earnings and dividend
per share
Basic earnings per 1,246.9 1,746.1 1,681.0
share (cents)
The calculation of
earnings per share is
based on profit
attributable to equity
holders of Telkom for
the year of R8,646
million (2006: R9,189
million; 2005: R6,752
million) and
514,341,282 (2006:
526,271,093; 2005:
541,498,547) weighted
average number of
ordinary shares in
issue.
Reconciliation of
weighted average number
of ordinary shares:
Ordinary shares in 557,031,819 544,944,899 532,855,528
issue (refer to note
16)
Weighted average number
of treasury shares and
shares bought back (15,533,272) (18,673,806) (18,514,246)
Weighted average number 541,498,547 526,271,093 514,341,282
of shares outstanding
Diluted earnings per 1,244.5 1,736.6 1,676.3
share (cents)
The calculation of
diluted earnings per
share is based on
earnings for the year
of R8,646 million
(2006: R9,189 million;
2005: R6,752 million)
and 515,763,579 diluted
weighted average number
of ordinary shares
(2006: 529,152,318;
2005: 542,537,579). The
adjustment in the
weighted average number
of shares is as a
result of the expected
future vesting of
shares already
allocated to employees
under the Telkom
Conditional Share Plan.
Headline earnings per 1,279.2 1,728.6 1,710.7
share (cents)*
The calculation of
headline earnings per
share is based on
headline earnings of
R8,799 million
(2006: R9,097 million;
2005: R6,927 million)
and 514,341,282 (2006:
526,271,093; 2005:
541,498,547) weighted
average number of
ordinary shares in
issue.
Diluted headline 1,276.8 1,719.2 1,706.0
earnings per share
(cents)*
The calculation of diluted headline earnings per share is based on headline
earnings of R8,799 million (2006: R9,097 million; 2005: R6,927 million) and
515,763,579 (2006: 529,152,318; 2005: 542,537,579) diluted weighted average
number of ordinary shares in issue. The adjustment in the weighted average
number of shares is as a result of the expected future vesting of shares
already allocated to employees under the Telkom Conditional Share Plan.
2005 2006 2007
Rm Rm Rm
8 Earnings and dividend
per share (continued)
Reconciliation between
earnings and
headline earnings:
Earnings as reported 6,752 9,189 8,646
Adjustments:
Profit on disposal of (64) (163) (52)
investment
Profit on disposal of
property, plant and
equipment and
intangible assets (30) (79) (29)
Impairment/(reversal of
impairment) of
property, plant,
equipment and 134 (26) 12
intangible assets
Write-offs of property, 210 188 284
plant and equipment
Acquisition of - (35) -
subsidiary
Tax and minority (75) 23 (62)
interest effects
Headline earnings 6,927 9,097 8,799
Reconciliation of
diluted weighted
average
number of ordinary
shares:
Ordinary shares in 557,031,819 544,944,899 532,855,528
issue (refer to note
16)
Expected future vesting 1,039,032 2,881,225 1,422,297
of shares
Weighted average number
of treasury shares
and shares bought back (15,533,272) (18,673,806) (18,514,246)
Weighted average number 542,537,579 529,152,318 515,763,579
of shares outstanding
Dividend per share 110.0 900.0 900.0
(cents)
The calculation of dividend per share is based on dividends of R4,678
million (2006: R4,801 million;2005: R606 million) declared on June 2, 2006
and 519,711,236 (2006: 533,465,571; 2005: 551,509,083) number of ordinary
shares outstanding on the date of dividend declaration. The reduction in
the number of shares represents the number of treasury shares held on date
of payment.
* The disclosure of headline earnings is a requirement of the JSE Limited
and is not a recognised measure under IFRS and US GAAP. It has been
calculated in accordance with the South African Institute of Chartered
Accountants` circular issued in this regard.
Change in comparatives
The amounts for basic, diluted, headline and diluted headline earnings per
share for 2006 and 2005 have changed as a result of the change in
accounting policies as discussed in note 2. The effect of the change on
previously reported numbers is not material.
2005 2006 2007
9. Net asset value per share (cents) 4,900.2 5,593.5 6,223.2
The calculation of net asset value
per share is based on net assets
of R31,724 million (2006: R29,165
million; 2005: R26,141 million)
and 509,769,454 (2006:
521,408,320; 2005: 533,465,571)
number of ordinary shares
outstanding.
2005 2006 2007
Rm Rm Rm
10. Property, plant and equipment
Additions 4,464 6,310 8,648
A major portion of this capital expenditure relates to
the expansion of existing networks and services. An
extensive build program with focus on Next Generation
Network technologies has resulted in an increase in
property, plant and equipment additions which is
expected to continue over the next few years.
Disposals (19) (56) (50)
11. Intangible assets
Additions (including business 1,516 1,324 1,846
combinations)
Disposals - (19) -
Included in the additions is R145 million goodwill and R43 million for a
brand name and licence recognised as a result of the acquisition of Africa
Online by Telkom, as well as R228 million goodwill as a result of the
acquisition of the minorities of Smartphone SP (Proprietary) Limited,
Smartcom (Proprietary) Limited, Cointel V.A.S. (Proprietary) Limited, and
the acquisition of the business of Africell Cellular Services (Proprietary)
Limited by the Vodacom Group (refer to note 19). The remaining additions
and disposals relate to the software intangible asset class.
12. Investments and provisions
The most significant movements in the Investments and Provisions in the
current year related to the increased provision for litigation with
Telcordia (refer to note 21) and the reallocation of the post-retirement
medical aid plan asset as noted below.
Post-retirement medical aid plan asset
Included in Provisions as at March 31, 2006 was R2,607 million for the
Group`s post-retirement medical liability. The liability is funded with an
investment in a cell captive consisting of a sinking fund amounting to
R1,089 million, and an annuity policy amounting to R1,730 million, which
was included in Investments for the year end March 31, 2006 to the value of
R2,819 million.
During the year an addendum to the cell captive annuity policy contract was
signed, which resulted in the annuity policy qualifying as a plan asset.
This has effectively changed the presentation of the liability and the
asset as the annuity policy meets the definition of a plan asset which
requires the liability to be reduced by the fair value of the plan asset.
The effect of this on the condensed consolidated provisional annual
financial statements is a reduction in Investments and Provisions to the
value of R1,961 million.
2005 2006 2007
Rm Rm Rm
The status of the medical aid
liability is as follows:
Present value of funded obligation 3,079 3,904 4,384
Fair value of plan assets - - (1,961)
Funded status 3,079 3,904 2,423
Unrecognised net actuarial loss (649) (1,297) (1,286)
Liability included in Provisions 2,430 2,607 1,137
13. Deferred taxation (435) (587) (1,123)
Deferred tax assets 512 481 593
Deferred tax liabilities (947) (1,068) (1,716)
The deferred tax asset represents STC credits on past dividends received
that are available to be utilised against dividends declared. It is
considered probable, given Telkom`s dividend policy, that these credits
will be utilised prior to October 1, 2007, at which date it is expected
that the proposed change to STC tax treatment as announced by the Minister
of Finance, will be effected. The asset will be released as a tax expense
when the dividends are declared.
The deferred tax liability increased mainly due to the increase in the
difference between the carrying value and tax base of assets, resulting
from the change in the estimate of useful lives.
2005 2006 2007
Rm Rm Rm
14. Inventories 658 814 1,093
Gross inventories 725 916 1,275
Write-down of inventories to net (67) (102) (182)
realisable value
Inventories consist of the 658 814 1,093
following categories:
Installation material,
maintenance material and
network equipment 313 487 811
Merchandise 345 327 282
Inventory levels as at March 31,
2007 have increased
due to the roll-out of the next
generation network and
increased inventory required to
improve customer service.
15. Net cash and cash equivalents 2,301 4,255 308
Cash shown as current assets 3,210 4,948 749
?Cash and bank balances 2,375 1,853 649
?Short-term deposits 835 3,095 100
Credit facilities utilised (909) (693) (441)
Undrawn borrowing facilities 4,750 9,519 8,658
The undrawn borrowing facilities are unsecured, when drawn bear interest at
a rate linked to the prime interest rate, have no specific maturity date
and are subject to annual review. The facilities are in place to ensure
liquidity.
Borrowing powers
To borrow money, the directors may mortgage or encumber Telkom`s property
or any part thereof and issue debentures, whether secured or unsecured,
whether outright as a security or debt, liability or obligation of Telkom
or any third party. For this purpose the borrowing powers of Telkom are
unlimited, but are subject to the restrictive financial covenants of the
TL20 loan.
The decrease in net cash and cash equivalents in the 2007 financial year is
primarily due to the substantially higher taxation paid, the increase in
cash outflows for additions to property, plant and equipment, as well as
the cash outflows for the redemption of the TL06 local bond.
2005 2006 2007
Rm Rm Rm
16. Share capital and
premium
Issued and fully 8,293 6,791 5,329
paid
532,855,526 (2006:
544,944,897;
2005: 557,031,817) 5,570 5,449 5,329
ordinary shares of
R10 each
1 (2006: 1; 2005: - - -
1) Class A ordinary
share of R10
1 (2006: 1; 2005: - - -
1) Class B ordinary
share of R10
Share premium 2,723 1,342 -
The following table
illustrates the
movement within
the number of
shares issued:
Number Number Number
of shares of shares of shares
Shares in issue at 557,031,819 557,031,819 544,944,899
beginning of year
Shares bought back - (12,086,920) (12,089,371)
and cancelled*
Shares in issue at 557,031,819 544,944,899 532,855,528
end of year
The unissued shares are under the control of the Directors of Telkom until
the next Annual General Meeting. The directors have been given authority by
the shareholders to buy back Telkom`s own shares up to a limit of 20% of
the issued share capital as at October 20, 2006. This authority expires at
the next Annual General Meeting.
Share buy-back
During the year Telkom bought back 12,089,371 ordinary shares for a total
consideration of R1,596 million. This reduced Share capital by R120
million, Share premium by R1,342 million and Retained earnings by R134
million.
During the year ended March 31, 2006, Telkom bought back 12,086,920
ordinary shares for a total consideration of R1,502 million. This reduced
the Share capital by R121 million and the Share premium by R1,381 million.
* 1,035,506 shares bought back in the current year have not yet been
cancelled from the issued Share capital by the Registrar of Companies.
2005 2006 2007
Rm Rm Rm
17. Treasury shares (1,812) (1,809) (1,774)
At March 31, 2007, 12,237,016 (2006: 12,687,521; 2005: 12,717,190) and
10,849,058 (2006: 10,849,058; 2005: 10,849,058) ordinary shares in Telkom,
with a fair value of R2,031 million (2006: R2,038 million;2005: R1,366
million) and R1,801 million (2006: R1,743 million; 2005: R1,166 million)
are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary)
Limited and Acajou Investments (Proprietary) Limited, respectively.
The shares held by Rossal No 65 (Proprietary) Limited are reserved for
issue in terms of the Telkom Conditional Share Plan (`TCSP`).
The reduction in the treasury shares is due to 450,505 shares that vested
in terms of the TCSP during the current year.
18. Interest-bearing debt
Long-term portion of interest- 9,504 7,655 4,338
bearing debt
Local debt 7,526 6,296 2,359
Foreign debt 794 127 820
Finance leases 1,184 1,232 1,159
Current portion of interest- 4,499 3,468 6,026
bearing debt
Local debt 264 2,642 5,772
Foreign debt 4,210 786 193
Finance leases 25 40 61
Movements in borrowings for the year are as follows:
Repayments/financing
Commercial Paper Bills with a nominal value of R3,731 million were redeemed
in the current financial year. These redemptions were mainly financed with
cash flows from operations. Commercial Paper Bills with a nominal value of
R4,651 million were issued in the current financial year. Of these, R1,350
million were outstanding as at March 31, 2007. These Commercial Paper Bills
range in maturities from 4 days to 2 months.
The medium-term loan to Vodacom International Limited that amounts to
R1,312 million (Group share: R656 million) was refinanced during the
current period. The loan is now repayable on July 26, 2009 and bears
interest at an effective interest rate of LIBOR plus 0.35%.
Repayments/refinancing of current portion of interest-bearing debt.
The TL06 local bond with a nominal value of R2,100 million at March 31,
2006 was redeemed on October 31, 2006. The facility was repaid/refinanced
with a mixture of operating cash flows and short-term commercial paper
bills. The repayment/refinancing of R5,965 million of the current portion
of interest-bearing debt will depend on the market circumstances at the
time of repayment. Included in the R5,965 million current portion is R4,680
million nominal value of the TK01 bond due on March 31, 2008.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
2007
Rm
19. Acquisition of subsidiaries and minorities
By Telkom
Africa Online Limited
On February 23, 2007 Telkom acquired a 100%
shareholding in Africa Online Limited from African
Lakes Corporation for a total cost of R150 million.
The contribution to revenue and net profit from
Africa Online since the acquisition and for the full
year are not considered material.
The following intangible assets were identified and
fair valued at year end:
Licences 1
Brand 42
43
The goodwill recognised for year end was
provisionally calculated as follows:
Net liabilities acquired (excluding fair value of (26)
intangible assets)
Fair value of intangible assets valued to date 43
Deferred tax raised on intangible assets (12)
Goodwill 145
Purchase consideration 150
The Purchase Price Allocation will be completed in the 2008 financial year.
Goodwill has not been tested for impairment as the accounting is
provisional, and has not been allocated to the various cash-generating
units.
By the Group`s 50% joint venture, Vodacom
Smartphone SP (Proprietary) Limited and subsidiaries
On August 30, 2006, the Vodacom Group acquired a further 19% interest, in
addition to the 51% interest already held, in the equity of Smartphone SP
(Proprietary) Limited, which had a 85,75% shareholding in Smartcom
(Proprietary) Limited at that time.
Minority interest acquired 11
Goodwill 157
Purchase price (Group share) 168
2007
Rm
19 Acquisition of subsidiaries and minorities
(continued)
Smartcom (Proprietary) Limited
On September 13, 2006, the Vodacom Group increased
its interest in Smartcom (Proprietary)
Limited to 88% by acquiring an additional 2.25%
interest through its 70% owned subsidiary,
Smartphone SP (Proprietary) Limited.
Minority interest acquired (
