| Mon 21 Jun 2010, 7:05 | | TKG - Telkom SA Limited - Telkom SA Limited Group annual results for the year |
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TKG
TKG
TKG - Telkom SA Limited - Telkom SA Limited Group annual results for the year
ended 31 March 2010
Telkom SA Limited
(Registration number 1991/005476/06)
JSE share code: TKG
ISIN: ZAE000044897
TELKOM SA LIMITED GROUP ANNUAL RESULTS for the year ended 31 March 2010
GROUP SALIENT FEATURES FOR THE YEAR ENDED 31 MARCH 2010
- Vodacom transaction accounts for profit of R40.5 billion.
- Impairment of Multi-Links goodwill of R2,148 million and assets of R3,012
million.
- Normalised operating revenue up 0.7% to R37.0 billion
- Capital expenditure reduced by 44.2% to R5.4 billion.
- Normalised free cash flow of R5.5 billion
- Normalised net financing costs decreased 44.3% to R1.4 billion.
- Net debt reduced by R10.8 billion decreasing normalised net debt to EBITDA
from 1.3 times to 0.5 times.
- Normalised headline earnings per share from continuing operations decreased
by 11.2% to 473.0 cents.
- Normalised basic earnings per share decreased 12.0% to 425.2 cents per
share.
- Normal dividend declared increased 8.7% to 125 cents per share from 115
cents per share.
- Special dividend declared from Vodacom proceeds of 175 cents per share.
- ADSL subscribers increase 18.1% to 647,462.
1. OVERVIEW
Johannesburg, South Africa - 21 June 2010, Telkom SA Limited (JSE: TKG) today
announced Group annual results for the year ended 31 March 2010.
The reported results for the period are materially impacted by the accounting
for the sale and unbundling of our 50% stake in Vodacom and related
transactions and the impairment of the goodwill and assets of Multi-Links.
Unless otherwise indicated, the discussion below is based on normalised
results, excluding the items above, and is based on continuing operations as
reconciled below.
Segment structure
The Group`s reporting segments are business units that are separately
managed. Our Group consists of three segments. The Telkom South Africa
segment provides fixed-line access and voice services, fixed-mobile and data
communications services through Telkom South Africa. The Multi-Links segment
provides fixed, mobile, data and international communications services in
Nigeria through the Multi-Links subsidiary. The other segment is split
geographically between international and South Africa. The category, other
international provides internet services outside South Africa, through our
Africa Online and MWEB Africa subsidiaries and management services through
our Telkom Management Services Company. The Other South African category
includes the Trudon Group, Swiftnet and the Group`s corporate centre.
Our 50% share of Vodacom`s results in the 2009 financial year and Telkom
Media`s results are disclosed as discontinued operations in terms of IFRS5 in
the Telkom Group`s consolidated financial statements.
Normalised Group operating revenue from continuing operations increased 0.7%
to R37.0 billion, while EBITDA decreased 15.2% to R9.8 billion. The
normalised Group EBITDA margin decreased to 26.5% as at 31 March 2010,
compared to 31.5% at 31 March 2009, mainly due to higher operating
expenditure of Telkom South Africa and Multi-Links.
Normalised headline earnings from continuing operations decreased by 11.2% to
473.0 cents per share as a result of increased operating expenditure in
Telkom South Africa and Multi-Links, partially offset by lower finance
charges. Normalised basic earnings per share decreased 12.0% from 483.1 cents
per share to 425.2 cents per share at 31 March 2010.
Normalised return on assets before taxation decreased from 16.3% to 13.6% due
to the lower operating profit partially set off by a lower asset base and
excludes cash balances.
Statement by Reuben September, Chief Executive Officer:
"The year under review has been tough with muted revenue growth as a result
of low tariff increases, intensifying competition and high operating expense
growth as a result of inventory write-offs in both Telkom SA and Multi-Links
and employee expense growth in excess of inflation as a result of salary
increases of 11.2% following our agreement with the unions. The inventory
write-offs are as a result of technologically obsolete and slow moving
inventory and are unlikely to continue into the future. As a result our
EBITDA margin declined to 26.5% from 31.5% recorded at 31 March 2009. Lower
taxation, lower finance charges and increased investment income resulted in a
more modest normalised headline earnings per share decline of 11.2% to 473.0
cents per share.
The impact of competition and the weaker economic environment are evident in
the Telkom Group`s financial results for the year ended 31 March 2010. The
negative effect of growing competition and fixed-to-mobile substitution is
highlighted in the 9.3% decrease in Telkom South Africa`s traffic revenue.
This continuing trend justifies the imperative for the Group to enter the
mobile market and particularly the mobile data market. Notably our continued
efforts to move traditional traffic revenues into annuity-type subscription
products contributed to the decline in traditional traffic revenue but offers
customers value based alternatives. In addition, data revenue posted more
modest revenue growth of 7.1% as a result of increased competition and
pricing pressure.
Our group operating expenditure grew 8.4% to R32.7 billion. The sharply lower
level of increase in the second half of the financial year is evidence of our
efforts to reduce costs. The cost reduction programme is at an early stage of
implementation and we are confident the pace of reduction will increase and
we remain committed to reducing costs.
The Group exhibited strong management of the capital expenditure programme
spending of R5.4 billion for the year ended 31 March 2010, down 44.2% from
the R9.6 billion spent in the 2009 financial year. As a result, normalised
free cash flow improved significantly to R5.5 billion. Lower finance charges
and acquisitions as well as higher interest received also contributed to the
improvement. We have stated very clearly that every effort will be made to
continuously improve the cash flow position. We still have an extremely
healthy net debt position with annualised net debt to EBITDA of 0.5 times.
Our strategy seeking to re-position the Telkom Group is imperative given the
tough operating environment. Similar to the strategies of other leading
operators in the world, we are focusing on growing other revenue streams -
data centre operation, mobile and Africa - to compensate for the decline in
fixed voice revenues. We are improving our execution in current growth
markets, such as broadband and wholesale, and are taking actions to defend
our consumer and enterprise markets.
Multi-Links remains a major concern. We have impaired goodwill of R2,148
million and assets of R3,012 million in the current year bringing the total
impairment to date to R5,622 million and thereby fully impairing the goodwill
and net asset value. The Board of Directors is considering how best to reduce
exposure to risk in Nigeria.
Despite the difficulties, the commitment of my team to positioning Telkom to
aggressively compete in the South African and African markets is gaining
momentum. Our data centre operations, branded Cybernest, was launched on 19
November 2009. This initiative is further evidence of our drive to diversify
and grow our revenue streams and take costs out of our current operations.
I am confident that the strength inherent in the fixed-line network and the
business leadership and operations skills of our employees will allow us to
offer our markets simple, quality, cost effective services that will be
competitive in our markets."
Declaration of ordinary and special dividend
The ordinary dividend has been calculated with reference to Telkom`s current
and expected future debt and cash flow levels. Our commitment to return to
shareholders any proceeds from the Vodacom transaction not utilised within 24
months enables us to pay a further special dividend of 175 cents per share
(2009: 260 cents). The level of dividend payments going forward will be based
on a number of factors, including the consideration of the financial results,
capital and operating expenditure requirements, the Group`s debt level,
interest coverage, internal cash flows, prospects and available growth
opportunities.
Ordinary dividend number 15 of 125 cents per share (2009: 115 cents) and
special dividend of 175 cents per share (2009: 260 cents) in respect of the
financial year ended 31 March 2010 have been declared payable on Monday, 19
July 2010 to shareholders recorded in the register of the company at close of
business on Friday, 16 July 2010.
Holders of ordinary shares
Salient dates with regard to the ordinary and special dividend 2010
Last date to trade cum dividend Friday, 9 July 2010
Shares trade ex dividend Monday, 12 July 2010
Record date Friday, 16 July 2010
Payment date Monday, 19 July 2010
Share certificates may not be dematerialised or rematerialised between
Monday, 12 July 2010 and Friday, 16 July 2010, both days inclusive.
On Monday 19 July 2010, dividends due to holders of certificated securities
on the South African register will either be transferred electronically to
shareholders` bank accounts or, in the absence of suitable mandates, dividend
cheques will be posted to such shareholders.
Dividends in respect of dematerialised shareholders will be credited to
shareholders` accounts with their relevant CSDP or broker.
2. OPERATIONAL DATA
Year ended 31 March
2009 2010 %
Telkom South Africa
ADSL subscribers1 548,015 647,462 18.1
Calling plan subscribers 590,590 715,221 21.1
Closer subscribers 575,812 694,348 20.6
Supreme call subscribers 14,778 20,873 41.2
W-CDMA subscribers 5,253 16,299 210.3
WiMAX subscribers 2,615 2,979 13.9
Do Broadband subscribers 188,540 236,512 25.4
Fixed access lines (`000)2 4,451 4,273 (4.0)
Postpaid - PSTN 2,769 2,625 (5.2)
Postpaid - ISDN channels 781 784 0.4
Prepaid 766 744 (2.9)
Payphones 135 120 (11.1)
Fixed-line penetration rate (%) 9.1 8.7 (4.4)
Revenue per fixed access line (ZAR) 5,349 5,345 (0.1)
Total fixed-line traffic (millions of 24,869 23,082 (7.2)
minutes)
Local 8,822 6,963 (21.1)
Long distance 3,631 3,238 (10.8)
Fixed-to-mobile 4,113 3,646 (11.4)
Fixed-to-fixed 13 47 261.5
International outgoing 622 595 (4.3)
International VoIP 34 60 76.5
Subscription based calling plans 3,546 3,805 7.3
Interconnection 4,088 4,728 15.7
Domestic mobile interconnection 2,484 2,319 (6.6)
Domestic fixed interconnection 415 736 77.3
International interconnection 1,189 1,673 40.7
Managed data network sites 29,979 33,226 10.8
Internet all access subscribers3 423,196 511,535 20.9
Telkom Company employees 23,520 23,247 (1.2)
Fixed access lines per employee4 189 184 (2.6)
Multi-Links
Active subscribers 1,866,196 2,256,835 20.9
CDMA 1,863,131 2,210,925 18.7
EVDO 2,699 45,340 -
Data leased lines 366 570 55.7
Total traffic (millions of minutes) 1,780 1,125 (36.8)
Estimated CDMA market share (%) 32.8 25.8 (21.3)
Market penetration (%)
GSM (%) 90.0 88.0 (2.2)
CDMA (%) 7.2 10.0 38.9
Fixed (%) 2.4 2.0 (16.7)
Employees 1,124 767 (31.8)
Permanent 775 539 (30.5)
Expatriate 95 60 (36.8)
Temporary 254 168 (33.9)
Customer per employee 1,660 2,942 77.2
Other International
Africa Online subscribers5 18,441 15,607 (15.4)
Africa Online employees5 313 237 (24.3)
MWEB Africa subscribers n/a 19,777 n/a
MWEB Africa employees n/a 325 n/a
Other South African
Trudon employees 531 528 (0.6)
Swiftnet employees 93 135 45.2
1. Excludes Telkom internal lines and includes business, consumer, corporate,
government and wholesale customers.
2. Excludes Telkom internal lines.
3. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers.
4. Based on number of Telkom Company employees, excluding subsidiaries.
5. Excluding UUNet joint venture partner`s subscribers and employees in
Kenya.
3. OPERATIONAL OVERVIEW
Telkom South Africa
The restructuring of Telkom South Africa into leaner, more flexible business
units is complete, allowing for focused attention on revenue growth
opportunities. Accountability throughout the organisation has improved along
with our ability to identify and manage costs more closely.
We are confident that our initiatives will enable Telkom to be the wholesale
provider of choice for operators in the market. Our retail business for both
corporate and residential customers is focused on providing an independent,
quality and value focused service.
Voice revenue
The continued competitive pressure in the voice market has seen declines in
our traffic revenue streams. This is as a result of our drive to offer
significant value through annuity products, managed network services and
virtual private networks which shifts traffic revenue into other revenue
streams. The effect of fixed-to-mobile substitution and least cost routing is
also clear, as is the need for us to develop a mobile service in order to win
back traffic onto the Telkom network. We continue to focus on growing our
annuity revenue streams through subscription based calling plans. Voice
annuity revenue grew 3.7% to R7,664 million and data annuity revenue grew
7.1% to R9,969 million. Telkom Closer subscribers have increased 20.6% to
694,348 and Supreme call subscribers have increased 41.2% to 20,873. The
current line penetration rate for Closer packages is 53.5%, up from 41.7% at
31 March 2009.
We continue to focus on improving customer churn, increasing customer loyalty
and promoting the value offered by fixed-line converged services through many
initiatives such as continued enhancement to the Closer packages, free line
installation to all of Telkom`s ex customers, telemarketing and direct
marketing.
Interconnection revenue
Interconnection revenue increased 25.1% to R2,608 million reflecting the
increased volumes on switched hubbing and higher volumes carried on mobile
networks to international destinations and the growth of Neotel and VANs.
Margins on foreign interconnection revenues have declined as a result of the
strength of the Rand and timing delays in adjusting pricing in line with
developments in foreign markets.
Mobile and fixed-line termination rate developments
On 12 November 2009 the Minister of Communications announced a reduction in
the peak mobile interconnect rate from 125 cents to 89 cents. Off-peak mobile
rates are unchanged at 77 cents. This was brought into into effect by ICASA
from February 2010 with MTN adopting it a month later.
On 16 April 2010 ICASA proposed an additional set of rate cuts that would
take both fixed and mobile operators on a two year glide path down to 10
cents (fixed) and 40 cents (mobile) as applied to "established Significant
Market Players" (SMP) operators which include Telkom, MTN, Vodacom and Cell-C
only. All other operators are requested to use cost based interconnection,
however are not regulated accordingly as only the established Significant
Market Player operators are submitting Chart of Accounts and Cost Allocation
Manual, or COA/CAM accounts. It is uncertain whether the mobile glide paths
applies to Telkom Mobile as well, however a literal reading of the regulation
implies it does. ICASA in addition plans to abolish the difference between
peak and off-peak rates for all the established SMP operators. Also to the
extent that only a single termination rate is proposed for fixed services,
ICASA appears to enforce a distance independent tariff regime on Telkom, as
opposed to the current local/long distance based regime. The final outcome of
current negotiations regarding the glide path for mobile termination rates
between ICASA and operators is difficult to predict. Telkom is in the process
of responding to the regulation and considering our options.
Broadband and data revenue
ADSL subscribers increased 18.1% to 647,462 when compared to the 31 March
2009 reporting period. At 30 September 2009 ADSL subscribers totalled
602,720. Do Broadband subscribers have increased 25.4% to 236,512. At 30
September 2009 Do Broadband subscribers totalled 232,796. Broadband
penetration as a percentage of post paid lines equals 19.0%, up from 15.4% at
31 March 2009.
Total data revenue increased 7.1% to R9,969 million despite significant price
reductions. Data connectivity services revenue increased 3.7% to R5,136
million. Leased line revenue increased 8.1% to R2,008 million and Internet
access and related services revenue increased 12.9% to R1,721 million.
Managed data network services revenue increased 15.9% to R1,033 million,
which included an increase of 16.3% in satellite services revenue and a 15.9%
increase in VPN services revenue. This was mainly driven by a 10.8% increase
in the number of managed data network sites to 33,226.
Telkom is aggressively promoting its broadband packages through focusing our
marketing efforts on particular customer groupings and the up-selling of the
higher end broadband packages which offer substantial value. We have also put
in maximum effort to promote entry-level ADSL packages with competitive
pricing. We continue to make every effort to increase the bandwidth available
to our customers and are currently negotiating a triple play partnership in
order to provide our customers with enhanced content. Speeds of up to 10
mbps, up from 4 mbps available in September 2009, have been installed in
selected exchanges. We have signed agreements with two partners for our gated
community initiative, the benefits of which we expect to start showing in the
2010/11 financial year. These gated communities that fall within these
coverage areas will receive the full benefit of this new enhanced 10Mbps ADSL
service.
Telkom is facing competition on price for traditional data services. We
continue to maximise the benefit of our capacity and ability to provide
quality and security. We are also offering innovative products and services
using the intelligence of our next generation network. The scope and quality
of our data services are unmatched. In addition, the scale of our global
undersea cable system provides additional competitiveness.
We are focusing on differentiating our service through creating attractive,
value propositions. Our differentiators include the reliability of our
comprehensive service level agreements that are flexible and can be designed
to match customer requirements. Other differentiators that we are working
towards include: providing full communication and converged solutions,
including mobility and data centre services that offer value and are clean
and simple to understand.
Cost management
In order to do so we developed an end state vision. The end state
incorporates a sustainable model to serve customers effectively through our
access line strategy, optimising the product portfolio and sales channel
usage. We also investigated ways to extract non-labour efficiencies. We have
examined ways of working more efficiently to improve the quality of the
customer experience through, for example, specific interventions to improve
the effectiveness of our field force and contact centres. We looked at ways
of improving the efficiency of marginal businesses such as payphones and
directory services that we are required to provide as part of our licence
obligations. All elements of our operating model - network and IT, marketing,
channel and customer, corporate services - were reviewed from a revenue,
operating expenditure and capital expenditure perspective to inform the
design of our end state. We also referred to the business model of other
leading telecommunications operators for benchmarking purposes.
The business units within Telkom South Africa have identified the specific
cost saving opportunities which have now been incorporated into the budgets
and five year plan of each specific business unit.
We have continued optimising vacancies created through natural attrition and
have been actively managing overtime and contractors spend in order to manage
costs as far as possible. We have also launched voluntary separation packages
for management.
As we restructured the company and pulled back on the capital expenditure
programme during the twelve months under review, we could not immediately
reduce staffing and contractor levels and therefore expensed certain labour
costs which would otherwise have been capitalised. During the period our
expenditure also increased as a direct result of our restructuring and the
start up of our mobile business.
Telkom SA has actively managed services rendered and operating leases by
introducing efficiencies in all possible areas to ensure that the
inflationary cost impact could be fully offset (specific focus on
consultants, fleet costs, commissions and distribution costs).
Write downs and provisions were required as a result of technologically
obsolete inventory and items classified as slow moving inventory as a result
of the economic slowdown. In addition, a contributing factor was that high
value inventory orders had already been placed in order to service the
previously higher capital expenditure programme. A decision was made to
provide against these inventory items as the capital cost of completing the
projects for which these items were ordered would not render the required
return on investment.
FIFA World Cup 2010
Telkom has been preparing for the FIFA World Cup 2010 for the last three
years and has laid enough fibre optic cable to go around the world three
times. We have provided 40 Gbps bandwidth capacity to each stadium to enable
the broadcast of high definition television to the globe. We have also
installed dual optic fibre routes to ensure redundancy with no single point
of failure from the stadiums to the international broadcast centre. The
network has also been equipped with a self healing capability.
To date, Telkom has delivered 100% on broadcast of all the soccer matches and
has had no single point of failure throughout the network and FIFA`s data
hosting requirements.
Telkom Mobile
Telkom is at an inflection point with growth in traditional fixed-line voice
revenues declining. The majority of global fixed-line incumbents have
discovered that a successful operation requires an integrated mobile
business. We believe that there is a market opportunity in South Africa as
mobile voice and especially mobile data are still experiencing growth. Telkom
has a competitive advantage by virtue of its existing business and customer
base. This is particularly so as wireless growth slows and converged data
becomes more prevalent. A product range spanning both mobile and fixed value
pools will assist Telkom to defend itself more effectively against
competitors and to grow revenues. The mobile business is designed to also
assist Telkom in addressing fixed-line cost challenges and to position Telkom
more competitively in the market. To this end Telkom will undertake best
endeavours to attain the market share required to achieve its required IRR.
Telkom plans to enter the mobile market with Simplicity, Quality and Value as
its three main guiding principles. Telkom believes that these principles will
create differentiated product and service offerings in the South African
mobile market.
As alluded to above, Telkom also plans to use mobile technology to offer
fixed-line services in areas where Telkom is experiencing operational
challenges such as copper theft, breakages, slow copper roll-out to new
greenfield areas, etc. This will assist the company in being more responsive
to its customers` needs.
In order to have a compelling product offering at launch, Telkom has signed a
national roaming agreement with MTN to offer our customers peace of mind in
using the services being provided by Telkom. The agreement covers services
such as Voice, 2G and 3G data, SMS, MMS and USSD on a national basis. In
addition, Telkom will also offer a full international roaming service at
launch through another established and experienced international service
provider.
To take these services to market, Telkom is required to negotiate mobile
interconnect agreements with other mobile and fixed operators. These
negotiations are at an advanced stage.
Telkom will initially offer the following mobile products and services to the
market:
- Prepaid, postpaid and hybrid voice
- Prepaid, postpaid and hybrid data
These products will be provided by a unified 2G voice and data and 3G
(including HSPA) voice and data network. Our turnkey suppliers for
Information Technology and Networks are AMDOCS (for FAB Services) and Huawei
(for Network and Billing support services).
The mobile network deployed is an IP Radio Access Network (RAN). This
technology allows Telkom the flexibility to quickly deploy newer mobile
technologies and dynamically change configurations on the mobile network. The
technology used for the backhaul is IP over Ethernet or IP over TDM. A
differentiating feature is the use of co-transmission of 2G and 3G traffic
onto the same backhaul circuit and prioritisation of traffic. This allows
maximum efficiency of the backhaul while providing the relevant
prioritisation of mobile service flows. A further enhancement is the
deployment of Software Definable Radios allowing significant flexibility in
terms of how 2G, 3G and, in the future, 4G is rolled out within the network.
These systems are useful in improving spectrum utilisation efficiency and are
LTE ready ensuring that Telkom is able to match subscriber expectations well
into the future. The RAN is also more power efficient and environmentally
friendly using almost 30% less power than previous legacy systems.
The core network architecture deployed is also based on a full IP based
network. Class leading assurance, subscriber management and service
management components are being deployed to ensure enhanced quality of
experience (QoE) for the end user to help deliver on our quality
differentiation.
Telkom ordered 2,000 base stations which are in the process of being
constructed in the first year. We plan to have 40% of our own population
coverage at launch which will be grown as required over five years. Full
national coverage will be provided through the roaming agreement with MTN.
We estimate that the capital expenditure required to implement mobility will
be a maximum of R6 billion over five years. We are negotiating innovative
financing structures with our suppliers in order to potentially reduce our
capital investment in favour of operating lease-type payments which include
technology renewal. We are also continuing to negotiate arrangements with
distributors and retailers.
At the end of March 2010 we had 16,299 W-CDMA subscribers, an increase of
210.3% from 5,253 subscribers reported at March 2009, who were provided with
mobile data services and fixed look-alike products in those areas hard hit by
copper theft.
Cybernest - our data centre operations
Telkom`s new data centre operations business unit was launched in November
2009 under the separate brand name of Cybernest. This independent business
unit has been set up to create a vibrant and fresh new identity for Telkom`s
IT arm, as well as give it the autonomy and agility to compete in the open
market. The launch coincided with the opening of the new advanced 1,600m2
data centre facility in Bellville, Cape Town, taking Cybernest`s total data
centre capacity to the largest in Sub-Saharan Africa, being 9,700m2. The
opening of the Bellville Data Centre was well received by the IT industry
including it being nominated by international communications giant Cisco
Systems as being the Most Innovative Data Centre Project of the year for
numerous design considerations, including our "green" approach to power
consumption. The Bellville Data Centre has been recognised as a unique
industry leading facility in South Africa, for its eco friendly design which
assists in reducing carbon emissions in terms of power and cooling.
The transfer of certain IT staff from Telkom has been concluded to add
critical mass and experience to Cybernest, and the formation of a dedicated
focused Sales and Marketing organisation to take it to market has begun. Key
seasoned industry appointments have been made in strategic sales management
positions of the business and this has strengthened our level of experience
and industry competitiveness. We have been able to grow the pipeline
significantly and have notched up some notable wins by leveraging off our
client base that uses us for their data network.
Key partnerships with various industry leaders, such as EMC for storage,
Cisco for data centre technology and VMware for virtualisation have been
established, in order to enhance our ability to deliver solutions that tailor
fit customer requirements in the most effective, efficient and reliable way
possible. A new shared virtual hosting offering has been launched with early
client success, as the trend towards Cloud Computing gains momentum.
Telkom International
Multi-Links
The Nigerian Multi-Links operation remains a major challenge. Interconnection
revenue increased by 315.3% to 14,127 million Naira due to the introduction
of International Carrier Services which introduced traffic hubbing and card
sales during the year. The newly established business contributed 10,548
million Naira to the interconnection revenue increase.
Active voice subscribers increased 18.7% to 2,210,925 from 1,863,131 recorded
at 31 March 2009. Voice ARPU has decreased to USD6 from USD12 at 31 March
2009 (excluding non-revenue generating subscribers).
Multi-Links increased its focus on data services resulting in revenues
increasing 81.8% to 3,135 million Naira due to an increase in equivalent 2
megabit circuits, transmission link services and the expansion of mobile
broadband (EVDO) services.
Data subscribers (EVDO subscribers) increased significantly to 45,340 from
2,699 at 31 March 2010 and are generating USD20 ARPUs. EVDO revenues are now
exceeding narrowband data revenues. Fixed data customers increased 55.7% to
570 for equivalent 2 megabit circuits.
The Nigerian operations reported EBITDA losses of R659 million, a 191.6%
increase from the loss of R226 million reported at 31 March 2009. Trading
conditions in Nigeria remained tough as a result of local economic factors,
pricing pressures and the short term strategy previously in place to reduce
inventories and acquire subscribers by subsidising certain handsets.
Provisions were made against certain handset models with the intention of
liquidating these items. The total charge to the income statement for the
year ended 31 March 2010 amounted to 4.8 billion Naira. The EBITDA margin
decreased to a negative margin of 34.9% from a negative margin of 11.9%
recorded at 31 March 2009. Key issues were identified that hampered Multi-
Links`s customer acquisition drive, the most significant of which was the
management of the dealers. As part of an investment in improving the
distribution system, a new dealer structure was put in place early in the
financial year with the appointment of a single super-dealer.
In addition to the above, the management team is also reviewing existing
contracts to improve margins and achieve strategic flexibility. Various
contracts that were previously entered into, accounting for a significant
component of total operating expenditure are being renegotiated for better
terms and conditions. These range from distribution, network sites, network
maintenance, expatriate costs and IT operations. The renegotiations have to
date yielded some savings and are ongoing.
Mr Jeffery Hedberg commenced his duties as the Chief Executive Officer of
Multi-Links on 1 November 2009. Mr Hedberg is a turnaround specialist and has
contributed significantly to the analysis of the strategic, operational and
financial challenges faced by Multi-Links and has implemented programmes to
improve the performance of the company in all three realms.
During the 2009/10 financial year, the Multi-Links`s build and expansion
programme achieved the following:
- Deployed additional packet based mobile switching centres increasing the
available capacity from 2,800,000 to 4,000,000 subscribers.
- Rolled out additional 373 base transceiver stations to 878, increasing
total radio capacity (Rf) from 1,800,000 to 3,100,000 subscribers on 706
tower sites, 340 of which are Multi-Links owned and the remaining are
collocated.
- Successfully launched its broadband service offering by rolling out an EVDO
3G network to a capacity of 199,000 subscribers.
- Added 2,962 kms of optic fibre (1,822 MLTL owned and 1,140 swop) resulting
in a total to 6,673 kms (4,639 Multi-Links owned and 2,034 swop).
- Successfully completed the rollout of the DWDM transmission network to 39
cities. The implementation of the DWDM network provides additional 4 x STM64
capacity in protected rings.
- Successfully launched four new Customer Service Branches to support the
network growth.
- Increased international capacity by the addition of 2 x 155Mb services on
the SAT-3 submarine cable system; and
- Extended coverage to 22 states.
It has been necessary to continue investing in the Multi-Links network and
operations in order to complete capital projects and ensure that the asset is
properly structured for future viability.
The balance sheet of Multi-Links was over-geared and undercapitalised.
Accordingly, Multi-Links was recapitalised with preference share capital in
order to enable the company to repay existing debt and negotiate third party
financing.
Africa Online and MWEB Africa
The integration of Africa Online and MWEB Africa is expected to be complete
by end September 2010 and is to be rebranded iWay Africa. Taking a
consolidated view on the two companies at 31 March 2010, the new company,
iWay Africa, had 35,384 subscribers and 562 employees (before any
restructuring due to synergies between the two companies). The goal of the
integration is to drive the ISP business in Africa up the ICT value chain by
developing Pan African major city-to-city backbone infrastructure as well as
Sub-Saharan hub-to-international cable access infrastructure.
Telkom Management Services
Telkom Management Services (TMS) was created to provide consultancy services
to telecommunications operators in Africa in order to improve their
performance by providing network, IT, vendor and funding strategies, hands-on
management and technical expertise best suited to meet their challenges.
TMS is currently exploring opportunities in Malawi, Zimbabwe, the Democratic
Republic of Congo, Liberia, Angola, Ghana, Uganda, Botswana, Namibia, Lesotho
and Swaziland. Services offered range from training services to human capital
solutions, networks, systems, data services planning and landing station
management to name a few.
The major obstacle to ramping this business up is securing funding on behalf
of operators in Africa. We are currently working on innovative solutions with
a number of financial institutions.
Guidance
Capital expenditure for the Group is expected to range between 20% and 25% of
revenue over the next financial year including the impact of our mobile
investment.
The targeted ceiling net debt to EBITDA is aimed at a maximum of 1.4 times.
In the short term we will operate at lower levels pending the cash outflows
associated with the mobile related capital expenditure.
New York Stock Exchange delisting
Effective 27 August 2009 Telkom delisted from the New York Stock Exchange as
maintaining a listing in the United States is expensive and takes
considerable management time. The methodology employed and discipline gained
from compliance with the Sarbanes-Oxley reporting requirements are retained,
where appropriate, to ensure strict corporate governance compliance and
transparent financial reporting.
We maintain a level 1 American Depositary Receipt programme to facilitate
over-the-counter trading in the United States of America.
Investor road show
As a result of the FIFA World Cup and competitive sensitivities, Telkom will
be delaying the investor road show until the latter half of September 2010 in
order to be able to provide investors with further detail regarding our
Mobile business plans and Multi-Links developments.
4. FINANCIAL PERFORMANCE
The Telkom Group believes that normalised earnings more accurately reflect
the Group`s operational performance. The statement of comprehensive income is
adjusted to exclude the effects of the sale and unbundling of our 50% share
in Vodacom, the profit on sale of Telkom Media, the impairment of the
goodwill and assets of Multi-Links, and the impact of the FIFA contract
entered into with the Department of Communications. Unless otherwise
indicated, the discussion below is based on normalised results, excluding the
items below, and is based on continuing operations.
The statement of comprehensive income for the year ended 31 March 2009 has
been adjusted to remove the effects of elimination of our 50% share in
Vodacom, the Vodacom transaction expense, impairments and the gain on the
revaluation of the Multi-Links put option to enable year on year comparison.
The impact of the items discussed above on group earnings as reported is as
follows:
Yeor on yeor reconciliation of normalised group statement of comprehensive
income
Reported Effects of Other Normalised
Continuing
operations March Vodacom unusual March
In ZAR millions 2009 transaction items 2009
Operating 36,027 876(1) (119)(5) 36,784
revenue
Other income 351 351
Operating 29,619 1,354 (753) 30,220
expenses
Employee 8,015 - 8,015
expenses
Payments to 6,937 1,493(2) 8,430
other operators
Selling, 5,794 29(2) (119)(5) 5,704
general and
administrative
expenses
Service fees 2,756 (177)(3) 2,579
Operating 824 9(2) 833
leases
Depreciation, 5,293 (634)(6) 4,659
amortisation,
impairment and
write-offs
Results from 6,759 (478) 634 6,915
operating
activities
Investment 183 - 183
income
Gain on - - -
distribution of
asset
Finance charges 2,843 - (409) 2,434
and fair value
movements
Interest 1,732 - 1,732
Foreign exchange 1,111 (409)(7) 702
and fair value
movement loss
Profit before 4,099 (478) 1,043 4,664
taxation
Taxation 1,765 421(4) 33(8) 2,219
Profit from 2,334 (899) 1,010 2,445
continuing
operations
EBITDA 11,574
EBITDA margin 31.5
(%)
Basic earnings 461.0 483.1
per share -
continuing
operations
Headline 610.5 532.7
earnings per
share -
continuing
operations
Rand/Naira
exchange rate
Closing rate at N14.39
beginning of the
year
Closing rate at N15.56
end of the year
Year average N14.39
rate (Source:
Reuters)
Reported Effects of Other Normalised
Continuing
operations March Vodacom unusual March
In ZAR millions 2010 transaction items 2010 Variance
Operating 37,427 - (398)(13) 37,029 0.7
revenue
Other income 19,005 (68)(14) 402 14.5
(18,535)(9)
Operating 39,294 (951) (5,597) 32,746 8.4
expenses
Employee 9,876 (951)(10) 8,925 11.4
expenses
Payments to 8,386 - 8,386 (0.5)
other operators
Selling, 7,000 - (357)(13) 6,643 16.5
general and
administrative
expenses
Service fees 2,702 - 2,702 4.8
Operating 966 - 966 16.0
leases
Depreciation, 10,364 5,124 10.0
amortisation, (5,240)(15)
impairment and
write-offs
Results from 17,138 (17,584) 5,131 4,685 (32.2)
operating
activities
Investment 508 - 508 177.6
income
Gain on 25,688 (25,688) - -
distribution of
asset
Finance charges 1,370 (15) - 1,355 (44.3)
and fair value
movements
Interest 1,313 - 1,313 (24.2)
Foreign exchange 57 (15)(11) 42 (94.0)
and fair value
movement loss
Profit before 41,964 (43,257) 5,131 3,838 (17.7)
taxation
Taxation 4,485 (168)(16) 1,566 (29.4)
(2,751)(12)
Profit from 37,479 (40,506) 5,299 2,272 (7.1)
continuing
operations
EBITDA 9,809 (15.2)
EBITDA margin 26.5 (15.9)
(%)
Basic earnings 7,404.7 425.2 (12.0)
per share -
continuing
operations
Headline 46.8 473.0 (11.2)
earnings per
share -
continuing
operations
Rand/Naira
exchange rate
Closing rate at N15.56 8.1
beginning of the
year
Closing rate at N20.58 32.3
end of the year
Year average N19.34 34.4
rate (Source:
Reuters)
(1) Inter-company elimination of revenue received from Vodacom.
(2) Inter-company elimination of payments made to Vodacom.
(3) Vodacom transaction expenses.
(4) Deferred tax asset raised on disposal of Vodacom.
(5) Revenue and expenses recognised on the FIFA contract.
(6) Includes R462 million impairment of Multi-Links goodwill, R39 million
impairment of the Africa Online investment and R133 million amortisation of
the FIFA intangible asset.
(7) Fair value loss on the revaluation of the Multi-Links put option.
(8) Deferred tax asset raised on the decision to dispose of Swiftnet.
(9) Profit on disposal of our 15% share of Vodacom.
(10) Compensation expense recognised in terms of IFRS2 relating to the
amendment of the Telkom Conditional Share Plan.
(11) Fair value loss on the Vodacom shares held.
(12) Includes R1,353 million capital gains taxation on the sale of Vodacom,
R977 secondary taxation on companies on the R19 special dividend and R421
million reversal of the deferred tax asset raised.
(13) Revenue and expenses recognised on the FIFA contract.
(14) Profit on sale of Telkom Media.
(15) Includes R2,148 million impairment of Multi-Links goodwill, R3,012
million impairment of Multi-Links assets and R80 million impairment of the
FIFA intangible asset.
(16) Includes R135 million secondary taxation on companies on the R2.60
special dividend paid and R33 million reversal of the Swiftnet deferred tax
asset raised.
GROUP OPERATING REVENUE
Year ended 31 March
In ZAR millions 2009 2010 %
Telkom South Africa 33,523 33,487 (0.1)
Multi-Links 1,900 1,887 (0.7)
Other International 194 465 139.7
MWEB Africa - 311 -
Africa Online 194 154 (20.6)
Other South African 1,204 1,316 9.3
Trudon 1,020 1,114 9.2
Swiftnet 99 111 12.1
Corporate centre 85 91 7.1
Eliminations (37) (126) 240.5
Total 36,784 37,029 0.7
Group operating revenue increased by 0.7% to R37,029 million (2009: R36,784
million) in the year ended 31 March 2010. The increase is mainly due to the
inclusion of eleven months` revenue of our newly acquired MWEB Africa
subsidiary and higher revenue from our Trudon subsidiary.
The relative strength of our reporting currency against the Nigerian Naira
has adversely affected the Rand revenue growth of the Nigerian operations at
a Telkom group level.
Telkom South Africa operating revenue
Year ended 31 March
In ZAR millions 2009 2010 %
Subscriptions and connections 6,614 6,814 3.0
Traffic 15,323 13,893 (9.3)
Local 3,634 3,205 (11.8)
Long distance 2,036 1,805 (11.3)
Fixed-to-mobile 7,409 6,452 (12.9)
Fixed-to-fixed 11 37 236.4
International outgoing 933 910 (2.5)
Subscription based calling plans 1,300 1,484 14.2
Interconnection 2,084 2,608 25.1
Mobile 916 1,043 13.9
Fixed 111 228 105.4
International 1,057 1,337 26.5
Data 9,310 9,969 7.1
Leased lines and other 7,452 7,961 6.8
Mobile leased facilities 1,858 2,008 8.1
Other 192 203 5.7
Total 33,523 33,487 (0.1)
Operating revenue from the Telkom South Africa segment decreased by 0.1% to
R33,487 million (2009: R33,523 million) primarily due to lower traffic
revenue as a result of lower volumes, partially offset by growth in data
revenues, higher interconnection revenue and increased revenue from
subscriptions and connections and subscription based calling plans.
Subscription and connections revenue grew by 3.0% to R6,814 million (2009:
R6,614 million) largely as a result of higher equipment sales and rental and
increased line rental tariffs on postpaid lines.
Traffic revenue decreased by 9.3% as a result of lower fixed-to-mobile
volumes due to the increasing substitution of calls placed using mobile
services rather than fixed-line services, and lower local and long distance
volumes. This was partially offset by an increase in revenue from
subscription based calling plans by 14.2% to R1,484 million primarily due to
increased volumes as a result of a 21.1% increase in the number of
subscribers to 715,221 (2009: 590,590).
Interconnection revenue increased by 25.1% to R2,608 million (2009: R2,084
million) largely as a result of an increase of 26.5% in international
interconnection revenue, a 13.9% increase in mobile interconnection revenue
and a significant increase in domestic fixed-line interconnection revenue.
The increased interconnection revenue from international operators is mainly
a result of higher volumes on switched hubbing due to increased volumes as a
result of an agreement signed with an operator in the United States to
transit traffic mostly to African destinations. The increase in mobile
interconnection revenue was driven by price and volume increases on
international traffic. Fixed interconnection revenue increased mainly due to
increased volumes by VANS.
Data revenue increased by 7.1% to R9,969 million (2009: R9,310 million)
mainly due to an increase in internet access and related services, higher
revenue from mobile leased lines and a growing demand for data services,
including ADSL and growth in managed data network services.
Multi-Links operating revenue
Year ended 31 March
In Naira millions 2009 2010 %
Subscriptions and connections 4,508 2,932 (35.0)
Traffic 17,427 16,353 (6.2)
Interconnection 3,402 14,127 315.3
Data 1,724 3,135 81.8
Total 27,061 36,547 35.1
Multi-Links Operating Revenue increased by 35.1% to 36,547 million Naira from
March 2009. Traffic revenue decreased 6.2% mainly due to a decrease in
traffic volumes during the year.
Subscriptions and connections revenue decreased 35.0% due to a decrease in
customer premises equipment sales revenue as a result of the introduction of
calling plans which did not include access fees and the downward pressures on
the selling price of customer premises equipment in the market.
Interconnection revenue increased significantly due to a new line of
business, namely International Carrier Services, which introduced traffic
hubbing and card sales during the year. This new business contributed 10,548
million Naira to the increase.
Multi-Links` increased focus on data services resulted in a significant
increase in data revenue mainly due to an increase in equivalent 2 megabit
circuits services and the expansion of mobile broadband (EVDO) services.
GROUP OTHER INCOME
Year ended 31 March
In ZAR millions 2009 2010 %
Telkom South Africa 278 314 12.9
Multi-Links - 13 -
Other International 3 95 -
MWEB Africa - 11 -
Africa Online 3 7 133.3
Telkom International - 58 -
Telkom Management Services - 19 -
Other South African 332 406 22.3
Trudon 61 55 (9.8)
Swiftnet 8 6 (25.0)
Corporate centre 263 345 31.2
Eliminations (262) (426) 62.6
Total 351 402 14.5
Other income includes profit on the disposal of investments, property, plant
and equipment and intangible assets as well as interest received on loans to
subsidiaries.
GROUP OPERATING EXPENSES
Year ended 31 March
In ZAR millions 2009 2010 %
Employee expenses 8,015 8,925 11.4
Payments to other operators 8,430 8,386 (0.5)
Selling, general and administrative 5,704 6,643 16.5
expenses
Service fees 2,579 2,702 4.8
Operating leases 833 966 16.0
Depreciation, amortisation, 4,659 5,124 10.0
impairments and write-offs
Total 30,220 32,746 8.4
Group operating expenses increased by 8.4% to R32,746 million (2009: R30,220
million) in the year ended 31 March 2010, primarily due to an increase in
employee expenses, selling, general and administrative expenses, and
depreciation. The increase in employee expenses is due to the increase in
salaries and wages in Telkom South Africa. Higher selling, general and
administrative expenses are mainly attributable to Telkom South Africa and
Multi-Links. Operating leases increased mainly as a result of Multi-Links`s
increased utilisation of leased cell sites. Depreciation increased as a
result of higher investment in telecommunications network and data processing
equipment in Telkom South Africa in recent years.
Group operating expenses per segment
Year ended 31 March
In ZAR millions 2009 2010 %
Telkom South Africa 24,434 26,077 6.7
Multi-Links 2,422 2,939 21.3
Other International 324 846 161.1
MWEB Africa - 326 -
Africa Online 208 184 (11.5)
Telkom International 116 322 177.6
Telkom Management Services - 14 -
Other South African 3,278 3,105 (5.3)
Trudon 593 644 8.6
Swiftnet 100 111 11.0
Corporate centre 2,585 2,350 (9.1)
Eliminations (238) (221) (7.1)
Total 30,220 32,746 8.4
The increase in group operating expenses was driven by an increase in the
operating expenses of Telkom South Africa and Multi-Links as well as the
inclusion of eleven months` operating expenses of our newly acquired MWEB
Africa subsidiary.
Telkom South Africa operating expenditure
Year ended 31 March
In ZAR millions 2009 2010 %
Employee expenses 6,482 7,327 13.0
Salaries and wages 5,148 5,804 12.7
Benefits 2,070 2,077 0.3
Employee related expenses (736) (554) (24.7)
capitalised
Payments to other network operators 7,536 7,443 (1.2)
Payment to mobile operators 5,432 4,847 (10.8)
Payment to international operators 1,853 2,323 25.4
Payment to fixed-line operators 251 273 8.8
Selling, general and administrative 3,624 3,996 10.3
expenses
Materials and maintenance 2,186 2,388 9.2
Marketing 257 282 9.7
Bad debts 240 357 48.8
Other 941 969 3.0
Service fees 2,227 2,262 1.6
Property management 1,191 1,313 10.2
Consultants and security 1,036 949 (8.4)
Operating leases 671 645 (3.9)
Depreciation, amortisation, impairment 3,894 4,404 13.1
and write-offs
Depreciation 3,255 3,587 10.2
Amortisation 484 559 15.5
Impairments and write-offs 155 258 66.5
Total 24,434 26,077 6.7
Telkom South Africa`s operating expenses increased by 6.7% in the year ended
31 March 2010, to R26,077 million (2009: R24,434 million), primarily due to
increased employee expenses, selling, general and administrative expenses and
higher depreciation, amortisation, impairment and write-offs.
Employee expenses increased by 13.0% in the year ended 31 March 2010,
primarily due to higher salaries and wages as a result of average annual
salary increases of 7.5% as agreed with the unions as well as the one time
adjustment to accelerate the elimination of disparities translating to an
11.2% average increase for the bargaining unit. During the 2010 financial
year medical aid contributions were reclassified from benefits to salaries
and wages.
Payments to other network operators decreased by 1.2% as a result of lower
payments to mobile operators, partially offset by increased payments to
international and fixed-line operators. Payments to mobile operators
decreased by 10.8%, largely due to an 11.4% decrease in fixed-to-mobile
traffic volumes and a 28.8% reduction in mobile termination rates with effect
from 1 March 2010. Interconnection revenue decreased approximately R71
million for the month of March 2010 and payments to mobile operators
decreased approximately R64 million for the month. Payments to international
operators increased by 25.4% primarily due to higher volumes on switched
hubbing.
Selling, general and administrative expenses increased by 10.3% primarily as
a result of higher maintenance cost on new technologies, higher maintenance
material cost, as well as write downs and increased provisions of
technologically obsolete inventory and items classified as slow moving
inventory as a result of the economic slowdown and higher bad debts. From 1
April 2009, ICASA changed the base of calculation of licence fees from 0.1%
of revenue from PSTS and VANS to 1.5% of gross profit, which resulted in a
R62 million increase in the provision for the year.
Service fees increased marginally due to higher property management fees as a
result of electricity increases and increased maintenance of sites in
preparation of the Soccer World Cup, partially offset by lower insurance cost
as a result of a reduction in the number of incidents.
The 13.1% increase in the depreciation, amortisation, impairment and write-
offs to R4,404 million (2009: R3,894 million) was mainly as a result of
higher depreciation due to the higher levels of investment in
telecommunications network equipment and data processing equipment in recent
years.
MULTI-LINKS OPERATING EXPENSES (excluding impairment)
Year ended 31 March
In Naira millions 2009 2010 %
Employee expenses 1,888 2,298 21.7
Payments to other operators 9,369 16,240 73.3
Selling, general and administrative 15,405 25,582 66.1
expenses
Service fees 459 363 (20.9)
Operating leases 2,757 5,258 90.7
Depreciation, amortisation, impairments 4,233 7,451 76.0
and write-offs
Total 34,111 57,192 67.7
Employee expenses increased by 21.7% in the year ended 31 March 2010,
primarily due to the recruitment of new staff to fill strategic positions in
the period under review and the realignment and restructuring of salaries,
partially offset by a lower number of employees. Multi-Links undertook a
headcount rationalisation including outsourcing of non-core activities. This
has seen the headcount being reduced from 1,124 to 767 at 31 March 2010, a
31.8% reduction. Additional rationalisation activities are still in progress.
Payments to other operators increased 73.3% mainly due to the introduction of
International Carrier Services business which introduced traffic hubbing and
card sales during the year. This contributed 10,363 million Naira to the
increase.
Selling, general and administrative expenses increased 66.1% as a result of
increased inventory write-offs and provisions, higher maintenance costs,
marketing and expatriate fees. Handset subsidies totalled 4,378 million
Naira. Service fees decreased 20.9% mainly due to lower insurance cost and
audit fees.
Operating leases increased significantly as a result of the increased
utilisation of leased infrastructure as opposed to owned infrastructure, as
well as increased maintenance costs as equipment comes out of warranty,
specifically relating to cell sites.
Depreciation, amortisation, impairments and write-offs increased
significantly in line with the expansion programme and network roll out.
EBITDA PER SEGMENT
Year ended 31 March
In ZAR millions 2009 2010 %
Telkom South Africa 13,261 12,128 (8.5)
EBITDA margin (%) 39.6 36.2
Multi-Links (226) (659) (191.6)
EBITDA margin (%) (11.9) (34.9)
Other International (103) (219) (112.6)
EBITDA margin (%) (53.1) (47.1)
Other South African (1,372) (1,137) (17.1)
EBITDA margin (%) (114.0) (86.4)
Eliminations 14 (304) -
Total 11,574 9,809 (15.2)
INVESTMENT INCOME
Investment income consists of interest received on short-term investments and
bank accounts. Investment income increased by 177.6% to R508 million (2009:
R183 million), largely as a result of higher interest income on short-term
deposits.
FINANCE CHARGES AND FAIR VALUE MOVEMENTS
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 on
foreign currency denominated transactions and balances. Finance charges and
fair value movements decreased by 44.3% to R1,355 million (2009: R2,434
million) in the year ended 31 March 2010, primarily due to a 24.2% decrease
in interest expense to R1,313 million (2009: R1,732 million) mainly as a
result of the 69.5% decrease in the Group`s net debt to R4,723 million (2009:
R15,497 million) and lower interest rates. Net fair value and foreign
exchange rate movements resulted in a loss of R42 million for the year ended
31 March 2010 (2009: R702 million). The decrease was mainly attributable to
the recognition of exchange rate differences on the loan from Telkom to Multi-
Links in other comprehensive income in the 2010 financial year, and the fair
value gain on the mark to market valuation of investments held by our cell
captive.
The balance sheet of Multi-Links was such that it was over-geared and unable
to raise debt and creditor financing. Accordingly Multi-Links issued
preference shares which were fully subscribed by Telkom. The proceeds on
issue were used to repay part of the loans owing to Telkom to enable the
company to negotiate third party financing.
From a Group perspective, Telkom`s loans to Multi-Links are accounted for as
part of the Group`s net investment in a foreign operation. Exchange rate
differences are therefore recognised in other comprehensive income and
reclassified from equity to profit and loss in the event of a disposal of the
net investment.
TAXATION
Consolidated tax expense from continuing operations decreased by 29.4% to
R1,566 million (2009: R2,219 million) mainly due to lower profitability. The
consolidated effective tax rate for the year ended 31 March 2010 was 40.0%
(2009: 49.0%). The lower consolidated tax rate is mainly due to lower
secondary tax on companies paid in the 2010 financial year on a lower
ordinary dividend (R1.15 declared in June 2009 vs R6.60 declared in June
2008).
PROFIT FROM DISCONTINUED OPERATIONS
Year ended 31 March
In ZAR millions 2009 2010 %
Vodacom 2,443 - -
Telkom Media (281) 106 137.7
Total 2,162 106 (95.1)
The profit from Telkom Media includes the reversal of an onerous lease
liability recognised on 31 March 2009.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The Group`s financial position remains strong. Net debt, after financial
assets and liabilities, from continuing operations decreased by 69.5% to
R4,723 million (2009: R15,497 million) resulting in a net debt to EBITDA
ratio of 0.5 times from 1.3 times at 31 March 2009. On 31 March 2010, the
Group had cash balances of R3.8 billion (2009: R1.9 billion). The proceeds
retained from the Vodacom transaction contributed to the improvement.
Telkom Company issued commercial paper bills with a nominal value of R2,265
million for the year ended 31 March 2010 and commercial paper bills with a
nominal value of R7,824 million were repaid during the year. The Company also
repaid term loans of R2,000 million and partly repaid the syndicated loan of
R820 million during the year under review.
FREE CASH FLOW
The Group`s cash flow for the year includes R20.6 billion proceeds received
on the sale of our 15% stake in Vodacom, taxation paid relating to the
Vodacom transaction and special dividend of R2.5 billion. Dividends paid
amounted to R11.2 billion which includes the R19.00 per share dividend
relating to the Vodacom transaction and the special dividend of R2.60 per
share. Excluding the effects of the above, the Group`s normalised free cash
flow amounted to R5,507 million.
GROUP CAPITAL EXPENDITURE
Group capital expenditure, which includes spend on intangible assets,
decreased by 44.2% to R5,377 million (2009: R9,629 million) and represents
14.5% of group revenue (2009: 26.2%).
Year ended 31 March
In ZAR millions 2009 2010 %
Telkom South Africa 6,586 4,170 (36.7)
Multi-Links 2,791 1,036 (62.9)
Other International 80 50 (37.5)
Africa Online 63 17 (73.0)
MWEB Africa - 32 -
Telkom International 17 1 (94.1)
Other South African 172 121 (29.7)
Trudon 51 42 (17.6)
Swiftnet 34 22 (35.3)
Corporate centre 87 57 (34.5)
Total 9,629 5,377 (44.2)
The decrease in capital expenditure was driven by a decrease in the capital
expenditure of Telkom South Africa and Multi-Links.
Telkom South Africa capital expenditure
Year ended 31 March
In ZAR millions 2009 2010 %
Baseline 3,327 2,366 (28.9)
Revenue generating 30 203 576.7
Network evolution 1,373 654 (52.4)
Sustainment 115 58 (49.6)
Effectiveness and efficiency 571 432 (24.3)
Support 729 440 (39.6)
Regulatory and other 441 17 (96.1)
Total 6,586 4,170 (36.7)
Telkom South Africa`s capital expenditure, which includes spending on
intangible assets, decreased by 36.7% to R4,170 million (2009: R6,586
million) and represents 12.5% of Telkom South Africa`s revenue (2009: 19.6%).
Baseline capital expenditure of R2,366 million (2009: R3,327 million) was
largely for the deployment of technologies to support the growing data
services business (including the ADSL footprint), links to the mobile
cellular operators and expenditure for access line deployment in selected
high growth commercial and business areas. The lower expenditure for the
period can be attributed to a more measured approach to the rollout of
infrastructure to meet short-term demand and revenue generating services. The
continued focus on rehabilitating the access network and increasing the
efficiencies and reducing redundancies in the transport network contributed
to the network evolution and sustainment capital expenditure.
The increase in revenue generating capital expenditure was as a result of the
mobile business case. The decrease in expenditure on network evolution was
mainly due to the deployment of automated restoration functionality for the
National Transport Network and the provisioning of bandwidth for the FIFA
World Cup and for future network growth requirements that occurred mostly in
the 2009 financial year.
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 enterprise
networks and performance and service management and property optimisation.
During the year ended 31 March 2010, R440 million (2009: R729 million) was
spent on the implementation of several systems. Regulatory and other capital
expenditure in the 2009 financial year includes R260 million intangible asset
for the FIFA brand.
Audit opinion
The consolidated annual financial statements, from which these provisional
condensed consolidated financial statements have been derived, have been
audited by the Company`s auditors, Ernst & Young Inc. Their unqualified audit
opinion is available for inspection at the Company`s registered office.
Condensed consolidated provisional statement of comprehensive income
for the year ended 31 March 2010
Restated*
2009 2010
Notes Rm Rm
Continuing operations
Total revenue 2 36,530 38,303
Operating revenue 36,027 37,427
Other income 15 351 19,005
Operating expenses 29,619 39,294
Employee expenses 8,015 9,876
Payments to other operators 6,937 8,386
Selling, general and administrative 5,794 7,000
expenses
Service fees 2,756 2,702
Operating leases 824 966
Depreciation, amortisation, impairment 3 5,293 10,364
and write-offs
Results from operating activities 6,759 17,138
Investment income 183 508
Gain on distribution of assets 15 - 25,688
Finance charges and fair value 2,843 1,370
movements
Interest 1,732 1,313
Foreign exchange and fair value 1,111 57
movement
Profit before taxation 4,099 41,964
Taxation 4 1,765 4,485
Profit from continuing operations 2,334 37,479
Profit from discontinued operation 2,162 106
Profit for the year 4,496 37,585
Other comprehensive income
Exchange differences on translating 5 30 (1,676)
foreign operations
Realised exchange differences on 5 - (193)
translating foreign operations
Available-for-sale investment 5 (8) -
Defined benefit plan actuarial 5 (1,824) 130
(losses)/gains
Defined benefit plan asset limitations 5 941 (597)
Income tax relating to components of 5 244 463
other comprehensive income
Other comprehensive income for the (617) (1,873)
year, net of taxation
Total comprehensive income 3,879 35,712
Profit attributable to:
Owners of Telkom 4,419 37,458
Non-controlling interest 77 127
Profit for the year 4,496 37,585
Total comprehensive income
attributable to:
Owners of Telkom 3,804 35,585
Non-controlling interest 75 127
Total comprehensive income for the 3,879 35,712
year
Total operations
Basic earnings per share (cents) 6 882.6 7,425.7
Diluted earnings per share (cents) 6 868.5 7,425.7
Dividend per share (cents) 6 660.0 375.0
Continuing operations
Basic earnings per share (cents) 6 461.0 7,404.7
Diluted earnings per share (cents) 6 453.6 7,404.7
* The amounts have been restated for the effect of the discontinued operation
and disposal groups held for sale as well as the change in accounting policy
for the defined benefit plan, refer to note 1.
Condensed consolidated provisional statement of financial position
for the year ended 31 March 2010
Restated Restated
2008 2009 2010
Notes Rm Rm Rm
ASSETS
Non-current assets 57,763 51,002 44,518
Property, plant and equipment 46,815 41,254 37,938
Intangible assets 8,468 7,232 4,338
Investments 1,448 1,383 1,437
Deferred expenses 221 209 156
Other financial assets - 2 341
Finance lease receivables 206 166 250
Deferred taxation 605 756 58
Current assets 12,609 11,287 12,301
Short-term investments 51 - -
Inventories 1,287 1,974 1,274
Income tax receivable 9 91 2
Current portion of deferred 362 48 48
expenses
Current portion of finance 166 109 109
lease receivables
Trade and other receivables 8,986 5,934 5,981
Other financial assets 614 1,200 1,032
Cash and cash equivalents 1,134 1,931 3,855
Assets of disposal groups - 23,482 -
classified as held for sale
Total assets 70,372 85,771 56,819
EQUITY AND LIABILITIES
Equity attributable to owners 31,589 34,642 29,925
of the parent
Share capital 5,208 5,208 5,208
Treasury shares (1,638) (1,517) (1,171)
Share-based compensation 643 1,076 2,060
reserve
Non-distributable reserves 1,292 1,758 620
Retained earnings 26,084 27,241 23,208
Reserves of disposal groups - 876 -
classified as held for sale
Non-controlling interests 522 853 339
Total equity 32,111 35,495 30,264
Non-current liabilities 16,330 16,970 14,204
Interest-bearing debt 9 9,403 10,653 7,925
Other financial liabilities 919 18 19
Provisions 3,382 4,098 4,355
Deferred revenue 1,128 997 1,068
Deferred taxation 1,498 1,204 837
Current liabilities 21,931 17,433 12,351
Trade and other payables 8,771 5,537 5,549
Shareholders for dividend 20 23 23
Current portion of interest- 9 6,330 7,622 1,812
bearing debt
Current portion of provisions 2,181 2,150 2,556
Current portion of deferred 2,593 1,714 2,051
revenue
Income tax payable 323 50 165
Other financial liabilities 371 210 133
Credit facilities utilised 1,342 127 62
Liabilities of disposal groups - 15,873 -
classified as held for sale
Total liabilities 38,261 50,276 26,555
Total equity and liabilities 70,372 85,771 56,819
Condensed consolidated provisional statement of changes in equity
for the year ended 31 March 2010
Restated
2009 2010
Rm Rm
Balance at 1 April 33,337 37,106
Attributable to equity owners of Telkom 32,815 36,253
Non-controlling interest 522 853
Change in accounting policy (1,226) (1,611)
Restated opening balance 32,111 35,495
Total comprehensive income for the year 3,879 35,712
Profit for the year 4,496 37,585
Other comprehensive income (617) (1,873)
Exchange differences on translating foreign 24 (1,345)
operations
Exchange differences realised - (193)
Available-for-sale investment (8) -
Net defined benefit losses (633) (335)
Dividend declared (3,339) (41,737)
Increase in share-based compensation 554 1,330
Non-controlling interest put option 661 -
Disposal of non-controlling interest - (536)
Broad-based black economic empowerment 962 -
transaction in Vodacom
Premium on acquisition of non-controlling 667 -
interest
Balance at 31 March 35,495 30,264
Attributable to equity owners of Telkom 34,642 29,925
Non-controlling interest 853 339
Condensed consolidated provisional statement of cash flow
for the year ended 31 March 2010
Restated
2009 2010
Rm Rm
Cash flows from operating activities 11,432 (3,317)
Cash flows from investing activities (17,005) 15,578
Cash flows from financing activities 7,093 (10,096)
Net increase in cash and cash equivalents 1,520 2,165
Net cash and cash equivalents at beginning of (208) 1,780
year*
Effect of foreign exchange rate differences (30) (152)
Net cash and cash equivalents at end of year 1,282 3,793
*Reconciliation of cash and cash equivalents at
beginning of year
Net cash and cash equivalent as previously 1,282
reported
Cash and cash equivalents in disposal groups 522
Adjusted cash and cash equivalents at the 1,804
beginning of the year
Cash and cash equivalents in disposal groups (24)
Cash and cash equivalents 1,780
Notes to the condensed consolidated provisional annual financial statements
for the year ended 31 March 2010
1. 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 Listings Requirements of the JSE Limited and the South
African Companies Act, 1973.
The condensed consolidated provisional annual financial statements are
prepared on the historical cost basis, with the exception of certain
financial instruments and share-based payments which are measured at grant
date fair value.
Significant accounting policies
Except as described below the accounting policies applied by the group in the
condensed consolidated provisional annual financial statements are consistent
with those applied in the previous year.
The Group has:
- adopted IFRS8 and IAS1 which are applicable for annual periods beginning
on or after 1 January 2009;
- adopted Circular 3/2009 applicable for financial periods ending on or after
31 August 2009;
- early adopted IFRS3, IAS27 and IFRIC17 which are applicable for annual
periods beginning on or after 1 July 2009; and
- early adopted the amendments to IFRS5.
Change in accounting policy
As of 1 April 2009, the Group changed its accounting policy for post employee
benefits by adopting the option available under IAS19 Employee Benefits,
paragraph 93A. The standard allows actuarial gains and losses to be recorded
directly in other comprehensive income in the period in which they occur. The
Group believes that recognising actuarial gains and losses in other
comprehensive income results in better disclosure in the statement of
financial position.
The impact of the change of accounting policy has been retrospectively
applied in accordance with IAS8 Accounting Policies, Changes in Accounting
Estimates and Errors. The financial quantification of this change is
disclosed below.
Balance as
previously Balance as
reported Adjustments restated
Rm Rm Rm
31 March 2008
Statement of Financial Position
Equity
Restated retained earnings 27,310 (1,226) 26,084
Non-current liabilities
Provisions 1,675 1,707 3,382
Deferred tax liability 1,979 (481) 1,498
31 March 2009
Statement of Comprehensive Income
Employee costs 8,373 (358) 8,015
Taxation 1,656 109 1,765
Other comprehensive income
Defined benefit plan acturial - 1,824 1,824
gains and losses
Asset limitation - (941) (941)
Tax effect on defined benefit plan - (513) (513)
actuarial gains losses
Tax effect on asset limitation - 263 263
Statement of Financial Position
Non-current assets
Deferred expenses 216 (7) 209
Equity
Restated retained earnings 28,852 (1,611) 27,241
Non-current liabilities
Provisions 1,875 2,223 4,098
Deferred tax liability 1,823 (619) 1,204
Restated*
2009 2010
Rm Rm
2. Revenue
Total revenue 36,530 38,305
Operating revenue 36,027 37,427
Other income (excluding profit on disposal of 320 370
property, plant and equipment, intangible
assets and investments)
Investment income 183 508
* The 2009 amounts have been restated following a change in plans to sell
Swiftnet.
3. Operating expenses
Depreciation, amortisation, impairment and 5,293 10,364
write-offs
Depreciation of property, plant and equipment 3,746 4,152
Amortisation of intangible assets 724 732
Impairment of property, plant and equipment and 501 5,163
intangible assets
Write-offs of property, plant and equipment and 322 317
intangible assets
The impairment charge for the 2010 financial year relates primarily to Multi-
Links Limited, R5,160 million (2009: R462 million).
4. Taxation 1,765 4,485
South African normal company taxation 1,658 2,772
Deferred taxation (59) 780
Secondary Taxation on Companies ("STC") 164 931
Foreign taxation 2 2
The increase in the deferred taxation expense is mainly due to realisation of
the temporary difference associated with the disposal of the Vodacom
investment as well as the STC on the dividends paid.
The STC expense was provided for at a rate of 10% on the amount by which
dividends declared exceeded dividends received. Deferred tax expense relating
to STC credits is provided for at a rate of 10%. The movement is with regard
to the Vodacom transaction.
2009 2010
Rm Rm
5. Effects of other comprehensive income
including tax effects relating to each
component of other comprehensive income
Exchange differences on translating foreign 30 (1,676)
operations
Tax effect of exchange differences on (6) 331
translating foreign operations
Net foreign currency translation differences 24 (1,345)
for foreign operations
Realised exchange differences on translating - (193)
foreign operations
Tax effect of realised exchange differences on - -
translating foreign operations
Net realised exchange differences on - (193)
translating foreign operations
Available-for-sale investment (8) -
Tax effect of available-for-sale investment - -
Net available-for-sale investment (8) -
Defined benefit plan actuarial (losses)/gains (1,824) 130
Tax effect of defined benefit plan actuarial 513 (35)
(losses)/gains
Net defined benefit plan actuarial (1,311) 95
(losses)/gains
Defined benefit plan asset limitations 941 (597)
Tax effect of defined benefit plan asset (263) 167
limitations
Net defined benefit plan asset limitations 678 (430)
Other comprehensive income for the year before (861) (2,336)
taxation
Tax effect of other comprehensive income for 244 463
the year
Other comprehensive income for the year net of (617) (1,873)
taxation
6. Earnings per share
Total operations
Basic earnings per share (cents) 882.6 7,425.7
Diluted earnings per share (cents) 868.5 7,425.7
Headline earnings per share (cents) 1,044.3 67.8
Diluted headline earnings per share (cents) 1,027.7 67.8
Continuing operations
Basic earnings per share (cents) 461.0 7,404.7
Diluted earnings per share (cents) 453.6 7,404.7
Headline earnings per share (cents) 610.5 46.8
Diluted headline earnings per share (cents) 600.8 46.8
Reconciliation of weighted average number of
ordinary shares:
Ordinary shares in issue 520,784,186 520,783,900
Weighted average number of shares bought (27) -
back
Weighted average number of treasury shares (20,083,621) (16,346,068)
Weighted average number of shares 500,700,538 504,437,832
outstanding
Reconciliation of diluted weighted average
number of ordinary shares
Weighted average number of shares 500,700,538 504,437,832
outstanding
Expected future vesting of shares 8,082,103 -
Diluted weighted average number of shares 508,782,641 504,437,832
outstanding
Rm Rm
Total operations
Reconciliation between earnings and headline
earnings:
Earnings as reported 4,419 37,458
Profit on disposal of investments - (18,603)
Profit on disposal of property, plant and (25) (32)
equipment and intangible assets
Impairment loss on property, plant and 557 5,163
equipment and intangible assets
Write-offs of property, plant and equipment 322 317
and intangible assets
Gain on distribution of non-cash asset - (25,688)
Tax effects (44) 1,727
Headline earnings 5,229 342
Dividend per share (cents) 660.0 375.0
The calculation of dividend per share is
based on dividends of R1,894 million (2009:
R3,306 million) and 505,008,190 (2009:
500,941,029) 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.
Vodacom dividend (cents) 7,750.0
The Vodacom dividend consists of a once-off
cash dividend of 1,900.0 cents per share
totalling R9,740 million and a 35%
unbundling share valued at 5,850.0 cents per
share with a total value of R29,990 million.
7. Net asset value per share (cents) 6,914.6 5,919.9
The calculation of net asset value per share
is based on net assets of R29,925 million
(2009: R34,642 million) and 505,496,644
(2009: 500,993,664) number of ordinary
shares outstanding at year end.
8. Capital expenditure incurred
Property, plant and equipment 8,740 4,964
Intangible assets (including business 2,215 910
combinations)
2009 2010
Rm Rm
9. Interest-bearing debt
Non-current interest-bearing debt 10,653 7,925
Local debt 9,114 6,859
Foreign debt 589 160
Finance leases 950 906
Current portion of interest-bearing debt 7,622 1,812
Local debt 7,546 1,711
Foreign debt 40 55
Finance leases 36 46
Repayments/refinancing of current portion of interest-bearing debt
During the current year Telkom issued Commercial Paper Bills with a nominal
value of R2,265 million and fully repaid Commercial paper debt to the value
of R7,824 million. Telkom also repaid term loans of R2,000 million and partly
repaid the syndicated loan of R820 million during the reporting year.
The R1,841 million nominal value of current portion of interest-bearing debt
as at 31 March 2010 is expected to be repaid/refinanced from available cash,
operational cash flow and the issue of new debt instruments.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
10. Acquisition of subsidiaries, joint ventures and non-controlling interests
Acquisitions
By the Group`s Subsidiaries
Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia
(Proprietary) Limited
Telkom International (Proprietary) Limited, a wholly-owned subsidiary of
Telkom, acquired 100% of MWEB Africa Limited from Multichoice Africa Limited
and 75% of MWEB Namibia (Proprietary) Limited from MIH Holdings Limited
effective 21 April 2009 (collectively referred to as MWEB). Multichoice
Africa Limited and MIH Holdings Limited are members of the Naspers Limited
Group.
The acquisition of MWEB is part of the Group`s strategy of growing its
broadband business and solidifying its market position through acquisitions.
The goodwill on acquisition is partially attributable to the following:
- Certain licences that could not be valued separately from the MWEB group,
but contribute significantly to goodwill as the MWEB business would cease to
exist without the licence rights.
- The skills and technical talent of the acquired business`s workforce, and
the synergies expected to be achieved from integrating the acquiree into the
Group`s existing internet service provision.
The goodwill is also attributable to MWEB`s position as Africa`s largest
satellite-based internet service provider.
Based on an independent valuation, MWEB does not have any significant
contingent liabilities at acquisition date.
The only possible contingent liability,is the AFSAT bonus scheme which is
reasonably quantified and included in the statement of financial position of
MWEB at 31 March 2010.
The purchase price of USD55 million was determined as follows:
- USD1,5 million for the Namibian business
- USD53,5 million for the Mauritian business
The fair value of the assets and liabilities acquired were determined as
follows:
Cash 83
Trade receivables 116
Inventories 18
Property, plant and equipment 40
Intangible assets 469
Less Deferred tax liabilities (14)
Less Liabilities (242)
Net asset value 470
Goodwill on acquisition 28
Purchase price for net asset fair 498
value
Revenue of R311 million and a net loss of R19 million is included in
thecondensed consolidated provisional annual financial statements. The
revenue and profit and loss for the financial year approximates the amount
disclosed from acquisition date.
11. Commitments
Capital commitments authorised 7,928 7,270
Commitments against authorised capital expenditure 1,393 1,680
Authorised capital expenditure not yet contracted 6,535 5,590
Capital commitments comprise commitments for property, plant and equipment
and software included in Intangible assets.
Management expects these commitments to be financed from internally generated
cash and other borrowings.
12. Contingencies
Supplier dispute
Supplier dispute liability included in current portion of provisions 664
565*
A net decrease in the provision is largely due to exchange rate movements
* USD77 million (2009: USD70 million)
There is a dispute between Telkom and Telcordia arising from the development
and installation of an integrated end to end customer assurance and
activation system, which was supposed to have been supplied by Telcordia.
The agreement was terminated in the 2001 financial year and the dispute was
taken to arbitration where Telcordia was seeking approximately USD130 million
plus interest at a rate of 15.5 percent per year for monies outstanding and
damages.
A number of hearings took place during the 2008 and 2009 year without
success.
Telkom requested a referral to the independent third party expert of the
technical issues arising from the systems integration amendment. A hearing
surrounding the technical issues was held during the period 3 - 21 November
2008, where the independent expert released his report and recommended that
some aspects of Telcordia`s claim be reduced.
The parties agreed to argue the issue of systems integration at an experts-
only hearing before the independent expert, which commenced on 2 October
2009. The final evidentiary hearing regarding all outstanding issues and the
recommendation of Mr Burns was held in Johannesburg in January 2010. The
parties further attempted to settle the matter prior to closing arguments
being heard by the arbitrator. Unfortunately the matter could not be settled.
The arbitrator heard closing arguments on 13 and 14 April 2010.
The arbitrator`s award was delivered on 11 June 2010. The arbitrator awarded
an amount of USD30 million excluding interest, to Telcordia. The amount
payable by Telkom in terms of the award, as at 13 June 2010, is USD82
million, which includes interest from March 2001. The question of liability
for costs in the arbitration has not yet been decided by the arbitrator. It
is expected that the question of liability for costs will be determined
before the end of August 2010.
Competition Commission (`CC`)
Telkom is party to a number of legal and arbitration proceedings filed by
several parties with the South African Competition Commission alleging anti-
competitive practices described below.
The South African Value Added Network Services (`SAVA`)
On 7 May 2002, the South African Value Added Network Services Providers`
Association, an association of VANS providers, filed complaints against
Telkom at the CC under the South African Competition Act, alleging, among
other things, that Telkom during 1999 - 2002 was abusing its dominant
position in contravention of the Competition Act and that it was engaged in
price discrimination.
Telkom brought an application for review against the CC and the Competition
Tribunal (`CT`) in the South African High Court, in respect of the decision
by the CC to refer the matters to the CT. Telkom was of the view that the CT
does not have jurisdiction to adjudicate these matters and argued that ICASA
has the requisite jurisdiction.
The application for review was heard in April 2008. The High Court set aside
the decision of the CC to refer the SAVA complaints and the Omnilink
complaint against Telkom to the CT.
On 3 July 2008 the CC filed an application for leave to appeal the decision
of the High Court on the basis that the Judge erred on the issue of bias as
well as his finding that issues surrounding the extension of time to
investigate the issues constitutes a ground for review.
Telkom filed an application for leave to cross-appeal in July 2008.
In November 2009, the Supreme Court of Appeal overturned the High Court`s
decision and held that Telkom`s review application should be dismissed with
costs. The matter proceeded before the CT and Telkom filed its opposing
affidavit in April 2010,together with an application for condonation for the
late filing of the papers. Telkom is awaiting the CC`s replying affidavit.
Should the CT find that Telkom committed a prohibited practice as set out in
the Competition Act, the CT may impose a maximum administrative penalty of 10
percent of Telkom`s annual turnover in the Republic of South Africa (RSA) and
its exports from the RSA during Telkom`s preceding financial year. However,
Telkom has been advised by external legal counsel that the CT has to date not
imposed the maximum penalty on any offender. Telkom has not provided for this
claim as no reliable estimate of liability can be made.
Omnilink
On 22 August 2002 Omnilink filed a complaint against Telkom at the CC
alleging that Telkom was abusing its dominance by discriminating in its price
for Diginet services as against those charged to VANS and the price charged
to customers who apply for a Telkom VPN solution. The CC conducted an enquiry
and subsequently referred the complaint, together with the SAVA complaint, to
the CT for adjudication. This matter is currently being dealt with together
with the SAVA matter discussed above.
Competition Commission referrals
The CC served a notice of motion on Telkom on 26 October 2009, in which it
referred the complaints against Telkom by ISPA, MWEB and IS respectively, to
the CT.
In the notice of motion the CC requests an order against Telkom in the
following terms:
1. Declaring that over the complaint period (2002 - 2005):
- Telkom charged excessive prices to first tier ISPs for high bandwidth
national leased lines (namely leased lines with bandwidth above 2 Mbps);
- Telkom charged excessive prices to first tier ISPs for international
private leased circuits (IPLC`s);
- Telkom set its prices for Diginet lines, high bandwidth leased lines and IP
connect as charged to other first-tier ISPs (or, in the case of diginet
access lines, to end customers using the IP networks of such first tier ISPs)
at levels which, in relation to the prices charged by Telkom for the same
services to its own retail and wholesale customers acquiring bundled Diginet
or ADSL access and IP network services from Telkom, made it impossible for
such other ISPs to compete cost-effectively with Telkom;
2. Interdicting Telkom from continuing with the conduct referred to in
paragraph 1 above;
3. In respect of certain of the contraventions above, an order directing
Telkom to pay a penalty equal to 10 percent of its turnover for the financial
year ended 31 March 2009;
4. In order to discourage the perpetuation by Telkom of the conduct referred
to in paragraph 1 above, by having the CT direct Telkom to provide the CC on
an annual basis with such data and information as is necessary to enable the
CC to assess whether Telkom is charging prices for the services mentioned in
paragraph 1 above such that it prevents other ISPs from competing cost-
effectively with Telkom. The form and nature of such data is to be agreed to
between Telkom and the CC or, in the event that no agreement can be reached
within two months of an order by the CT, in a form directed by the CT.
Telkom opposed the Multiple complaints referral and filed an exception
application on 15 March 2010 in respect thereof. The CC has filed its answer
to the exception application.
Telkom will only be able to complete its response to the merits of the
multiple complaints referral once the exception application is disposed of.
Should the CT find that Telkom committed a prohibited practice as set out in
the Competition Act, the CT may impose a maximum administrative penalty of 10
percent of Telkom`s annual turnover in the RSA and its exports from RSA
during Telkom`s preceding financial year. However Telkom has been advised by
external legal counsel that the CT has to date not imposed the maximum
penalty on any offender.
Maredi
Maredi served an application on Telkom, Ericsson SA and Telsaf Data
(Proprietary) Limited on 8 January 2009. The matter relates to a tender
published by Telkom for the supply of point to point split mount microwave
equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were
shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson.
Maredi has also approached Telkom with a view to settling the litigation.
Telkom sent a settlement proposal to Maredi for consideration subject to
their acceptance thereof by a certain date. Maredi failed to respond to
Telkom by a certain date. Telkom intends proceeding with the recovery of its
legal costs. The review application will proceed in the ordinary course.
Chorus Call (Proprietary) Limited (`Chorus Call`)
Chorus Call filed a complaint at the CC on 26 May 2009, alleging that there
is no difference in the prices Telkom Charges its customers for national or
long distance peak calls, irrespective of the point of termination. For local
peak calls, Telkom`s minimum rate for calls on its network is R0.65
(including VAT) and R0.00653 (including VAT) per second. Rates for Telkom`s
peak local calls to a Neotel number are the same as the national rate. This
pricing method results in Telkom calls to a Neotel number costing 66% more
than a call terminating on Telkom`s network. Telkom has not, as yet been
provided with a full copy of the complaint.
The CC forwarded a questionnaire to Telkom on 16 March 2010 with numerous
questions relating to this complaintand the complaint by ECN
Telecommunications (Proprietary) Limited. Telkom submitted its responses to
the questionnaire on 20 April 2010.
ECN Telecommunications (Proprietary) Limited (`ECN`)
ECN filed a complaint at the CC on 16 October 2009. ECN alleged that Telkom
is marking up calls made by its subscribers to ECN`s network to such an
extent that ECN is being prevented from competing in the fixed line call
termination market. As a direct result of Telkom`s dominant position, nearly
100% of the calls that originate on fixed lines are made by Telkom
subscribers. This means that Telkom has the ability to off-set retail tariffs
at a level that will prevent ECN`s fixed lines from becoming a competitive
alternative to Telkom`s fixed lines. ECN regards Telkom`s excessive pricing
of calls to ECN as an abuse of its dominant position and a clear attempt to
lessen competition in the market and as such being contrary to public
interest.
Telkom has not as yet been provided with a full copy of the complaint.
Phuthuma Networks (Proprietary) Limited (`Phuthuma`)
Phuthuma served a summons on Telkom on 20 August 2009, wherein it is claiming
various amounts as damages. Phutuma`s claim for damages arises from an
allegation that Telkom had failed to adjudicate a tender, in accordance with
a fair, transparent, competitive and cost-effective procurement policy.
The tender was published on 30 November 2007 for the outsourcing of Telkom`s
Telex and Gentex Services and for the provision of a solution to support the
maritime industry requirements. The validity period was 180 days during which
period Telkom was required to make an award. Telkom had cancelled the tender
on 10 June 2009 without making any award, due to the expiry of the validity
period. Phuthuma is claiming damages of R1,44 billion for loss of revenue,
alternatively R3,8 billion for loss of revenue over a 12 year period, and
further alternatively R496 million plus interest at 15.5 percent per annum
from April 2008.
During November 2009, Phuthuma amended its summons by increasing the amount
of damages alleged to have suffered by it as follows - The amount of R1,44
billion being loss of revenue was increased to R2,4 billion. The alternative
claim for damages for loss of revenue over 12 years was increased to R4,2
billion. The further alternate claim for damages was increased to R490
million.
Telkom is defending the matter. The matter has been set down for trial in the
North Gauteng High Court for 17 February 2011.
The Complaints and Compliance Committee at ICASA informed Telkom in February
2010 that Phuthuma also filed a complaint against Telkom at ICASA in respect
of an alleged contravention of the Preferential Procurement Framework Act and
the Broad Based Black Economic Empowerment Act. Phutuma has also filed a
complaint against Telkom at the CC regarding a contravention of the
Competition Act and the Johannesburg Stock Exchange.
Bihati Solutions (Proprietary) Limited (`Bihati`)
The matter arises from a tender which was published on 8 November 2007 for
the provision of network services. Telkom failed to make an award during the
validity period of the tender. An award was made on 14 November 2008 after
the validity period of the tender had expired. Telkom received challenges
from the unsuccessful bidders regarding the validity of the award since it
was made outside the validity period under the tender. Telkom was advised in
March 2010 to apply to the High Court to review and set aside the aforesaid
award.
On 7 May 2010, Bihati Solutions served an application on Telkom for the
review and setting aside of a decision by the Telkom Board in March 2010 to
apply to the high Court for the review and setting aside of its earlier
decision to award a tender to Bihati and 5 other service providers. Telkom is
opposing this application and has in the interim filed its own application to
set aside the purported award of the tender to Bihati and 5 others.
13. Segment information
As at the beginning of the financial year the Group changed the reporting of
its segment information to be in line with IFRS8 Segment Reporting.
Previously the segments were fixed-line, mobile and other. The new reporting
segments are business units that are separately managed.
The Telkom South Africa segment provides fixed-line access, fixed-mobile and
data communications services through Telkom South Africa.
The Multi-Links segment provides fixed, mobile, data and international
communications services in Nigeria.
Other International segment provides internet services outside South Africa
through Africa Online and MWEB Africa subsidiaries and management services
through Telkom Management Services Company.
Other South African includes Trudon Group, Swiftnet and the Group`s corporate
centre.
Consolidated operating revenue 36,027 37,427
Telkom South Africa 33,642 33,885
Multi-Links 1,900 1,887
Other International 194 465
Other South African 1,204 1,316
Elimination (913) (126)
Consolidated operating profit 7,260 4,646
Telkom South Africa 9,234 7,685
Multi-Links (522) (1,039)
Other International (127) (286)
Other South African (1,919) (1,383)
Elimination 594 (331)
Reconciliation
Consolidated operating profit 7,260 4,646
Gain on sale of investment - 18,603
Compensation expense - (951)
Impairment of goodwill (501) (5,160)
Operating profit 6,759 17,138
Investment income 183 508
Gain on distribution of asset - 25,688
Finance charges and fair value movement (2,843) (1,370)
Profit before taxation and discontinued 4,099 41,964
operations
14. Related parties
Details of material transactions and balances with related parties not
disclosed separately in the consolidated annual financial statements were as
follows:
With shareholders:
Government
Trade receivables 386 353
Revenue (2,767) (2,861)
With entities under common control:
Major public entities
Tade receivables 52 39
Trade payables (3) (8)
The outstanding balances are unsecured and will
be settled in cash in the ordinary course of
business.
Revenue (446) (381)
Expenses 212 222
Rent received (20) (29)
Rent paid 19 22
15. Significant events
Change in Chairman
Mrs Shirley Lue Arnold retired as a non-executive director and Chairman of
Telkom on conclusion of her three year contract on 1 November 2009.
Mr Jeff Molobela was appointed as a non-executive director (for a three year
period) and as Chairman (for a one year period) with effect from 1 November
2009.
Change in directors
Mrs Keitumetse Seipelo Thandeka Matthews, a Government representative on the
Telkom board of directors, retired as a non-executive director of Telkom with
effect from 30 October 2009 and was replaced by Ms Julia Ntombikayise Hope as
a Government representative on the Telkom board of directors and appointed as
a non-executive director for a term of three years, commencing 1 November
2009.
Disposal of Vodacom Group (Proprietary) Limited
Telkom disposed of its interest in Vodacom by selling a 15% shareholding to
Vodafone Group Plc ("Vodafone") and unbundling the remaining 35% to existing
shareholders in Telkom.
The carrying amount of the net asset value at disposal date was R6,825
million. This resulted in a gain of R18,535 million being recognised in Other
income.
The remaining 35% was distributed to the existing shareholders of Telkom and
accounted for in terms of IFRIC17, Distribution of Non-Cash Assets to Owners.
The fair value was calculated with reference to the Vodacom listing price at
18 May 2009. A gain on distribution was recognised in profit and loss R25,688
million.
16. Subsequent events
Dividends
The Telkom Board declared an ordinary dividend of 125 cents (2009: 115 cents)
per share and a special dividend of 175 cents (2009: 260 cents) per share on
18 June 2010, payable on 19 July 2010 to shareholders registered on 16 July
2010.
Joint announcement of Telkom Board and GCEO
On 4 June 2010, the Group Chief Executive Mr Reuben September announced his
retirement from his position and resignation of his directorship at the
expiry of his contract in November 2010. Mr Reuben September served Telkom
for more than 33 years and was Group Chief Executive Officer of Telkom from 1
November 2007.
Change in directors
Mr B Molefe has resigned as a non-executive director (Class B Shareholder
representative) of the board of Telkom with effect from 20 April 2010, as a
result of the end of his employment contract with the Public Investment
Corporation Limited.
Mr D Barber resigned as a non-executive director of the board of Telkom with
effect from 20 April 2010.
Mr Younaid Waja has been appointed as a non-executive director (Class B
Shareholder representative) on the board of Telkom with effect from 20 April
2010. In terms of the company`s articles of association, the appointment of
Mr Younaid Waja is made by the Public Investment Corporation Limited,
Telkom`s Class B Shareholder.
Dr Ekwow Spio-Garbrah`s appointment as a non-executive director (Class A
Shareholder representative) of the board of Telkom has been termination with
effect from 1 May 2010.
Bihati Solutions (Proprietary) Limited (`Bihati`)
The matter arises from a tender (RFP 0101/2007) which was published on 8
November 2007 for the provision of network services. Telkom failed to make an
award during the validity period of the tender. An award was made on 14
November 2008 after the validity period of the tender had expired. Telkom
received challenges from the unsuccessful bidders regarding the validity of
the award since it was made outside the validity period under the tender.
Telkom was advised in March 2010 to apply to the High Court to review and set
aside the aforesaid award.
On 7 May 2010, Bihati Solutions served an application on Telkom for the
review and setting aside of a decision by the Telkom Board in March 2010 to
apply to the high Court for the review and setting aside of its earlier
decision to award a tender to Bihati and 5 other service providers. Telkom is
opposing this application and has in the interim filed its own application to
set aside the purported award of the tender to Bihati and 5 others.
Voluntary severance packages
On 31 March 2010, the Board approved the offering of voluntary severance
packages (VSP`s) and voluntary early retirement packages (VERP`s) to all
management employees from 28 April until 2 July 2010. The programme was only
communicated to employees post year-end.
Other matters
The directors are not aware of any other matter or circumstance since the
financial year ended 31 March 2010 and the date of this report, or otherwise
dealt with in the financial statements, which significantly affects the
financial position of the Group and the results of its operations.
www.telkom.co.za
The information contained in this document is also available on Telkom`s
investor relations website www.telkom.co.za/ir.
Telkom SA Limited is listed on the JSE Limited. Information may be accessed
on Reuters under the symbols TKGJ.J and on Bloomberg under the symbol TKG.SJ.
Information contained on Reuters and Bloomberg is provided by a third party
and is not incorporated by reference herein. Telkom has not approved or
verified such information and does not accept any liability for the accuracy
of such information.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Many of the statements included in this document, as well as oral statements
that may be made by us or by officers, directors or employees acting on
behalf of us, constitute or are based on forward looking statements.
All statements, other than statements of historical facts, including, among
others, statements regarding our mobile and other strategies, future
financial position and plans, objectives, capital expenditures, projected
costs and anticipated cost savings and financing plans, as well as projected
levels of growth in the communications market, are forward looking
statements. Forward looking statements can generally be identified by the use
of terminology such as "may", "will", "should", "expect", "envisage",
"intend", "plan", "project", "estimate", "anticipate", "believe", "hope",
"can", "is designed to" or similar phrases, although the absence of such
words does not necessarily mean that a statement is not forward looking.
These forward looking statements involve a number of known and unknown risks,
uncertainties and other factors that could cause our actual results and
outcomes to be materially different from historical results or from any
future results expressed or implied by such forward looking statements. Among
the factors that could cause our actual results or outcomes to differ
materially from our expectations including but not limited to those risks
identified in Telkom`s most recent annual report which are available on
Telkom`s website at www.telkom.co.za/ir.
We caution you not to place undue reliance on these forward looking
statements. All written and oral forward looking statements attributable to
us, or persons acting on our behalf, are qualified in their entirety by these
cautionary statements. Moreover, unless we are required by law to update
these statements, we will not necessarily update any of these statements
after the date of this document, either to conform them to actual results or
to changes in our expectations.
Date: 21/06/2010 07:05:24 Produced by the JSE SENS Department.
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