| Fri 8 Jun 2012, 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 2012
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 2012
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.
GROUP SALIENT FEATURES FOR THE YEAR ENDED 31 MARCH 2012
- ADSL subscribers increased 10.0% to 827,091.
- Calling plan subscribers increased 4.6% to 819,019.
- Managed data network sites increased 13.9% to 38,902.
- Active mobile subscribers increased 213.2% to 1,483,401 with a blended ARPU
of R68.86.
- Operating revenue down 0.7% to R33.1 billion.
- Fixed-line employee expenses decreased 15.0% to R6.6 billion.
- Mobile EBITDA loss of R2.2 billion after elimination.
- Group EBITDA margin decreased to 25.8% from 28.1%.
- Fixed-line EBITDA margin increased from 36.8% to 38.6%.
- Basic earnings per share decreased 97.8% to 10.4 cents.
- Headline earnings per share decreased 33.0% to 324.7 cents.
- Free cash flow generated of R2.1 billion (2011: R2.2 billion).
- Net debt to EBITDA remains 0.5x.
1. OVERVIEW
Johannesburg, South Africa - 8 June 2012, Telkom SA Limited (JSE: TKG) today
announced Group annual results for the year ended 31 March 2012.
Segment structure
The Group`s reporting segments are business units that are separately managed.
The Group consists of two reportable segments. The fixed-line segment provides
fixed-line access and data communications services and the mobile segment
provides mobile voice services, data services and handsets sales through 8ta.
The "other" category is a reconciling item which is split geographically
between International and South Africa. Telkom International category provides
internet services outside South Africa, through the iWayAfrica group. The South
African category includes the Trudon Group, Swiftnet, Data Centre Operations
and the Group`s corporate centre.
Comparative information has been restated to reflect the internal restructuring
between the fixed-line segment and the Group`s corporate centre and to reflect
the entire operations of Multi-Links as discontinued operations.
Statement by Nombulelo Moholi, Group Chief Executive Officer:
Telkom faces many challenges at the moment but we will advance calmly,
determined and focused on delivering on the promise of our business and
strategy going forward. Group financial results for the year under review
reflects our challenges but we took a number of significant steps towards
securing a successful future for Telkom and we began casting the foundation
that will allow the Group to compete well and build value in the future. It was
a year of clean-up and consolidation across the Telkom Group. Our strategy
going forward is clear and focused.
Our results for the year include a R896 million loss relating to the disposal
of Multi-Links and an impairment loss of R569 million relating to the
iWayAfrica goodwill and assets. Headline earnings per share declined 33.0% from
the prior year. This is mainly as a result of the investment made in our mobile
business as well as R605 million additional depreciation as a result of the
review of the useful lives of existing network equipment as we invest to
transform to a commercially led next generation network. This was partially
offset by R739 million voluntary employee severance package costs included in
the prior year.
Much has been accomplished in terms of aligning the broader strategy and
consolidating our operations but there is much that still needs to be done. The
Group faced continued erosion of the traditional fixed-line business with fixed-
line traffic revenue decreasing by 8.0%. Despite the decline in traffic volumes
and pricing pressure we managed to hold the fixed-line revenue decline to 2.8%.
Demand for faster products at lower prices continued to put our data revenue
under pressure.
The sale of Multi-Links was concluded in October. While the process faced more
challenges than we were anticipating, management is satisfied that Telkom is
now better positioned to focus on delivering better results in its core
business without further distraction from non-aligned operations. We believe
that the negative financial and legal impacts associated with retaining Multi-
Links would have had a far more negative impact on the Group than divesting as
quickly and proficiently as we did.
We have agreed with the Board an approach to dividend payments that is in the
best longer term interests of Telkom.
The ordinary dividend has been considered with reference to Telkom`s current
and expected future challenges, performance, debt and cash flow levels.
Telkom`s strategic objectives of network transformation and the building of its
mobile business will see dividends being considered on an annual basis based on
the performance of the group.
Telkom has decided not to declare a dividend in respect of the financial year
ended 31 March 2012. While our current financial position should allow us to
fund network transformation and build our data driven mobile offering, the
Board has decided that it is prudent to allow for more internally generated
funding for the capital expenditures planned over the next three years. This
will better position Telkom to weather uncertainties as we advance our value
building strategy.
2. SHARP AND CLEAR STRATEGIC FOCUS
Our strategy going forward is to:
Lead in data and broadband and in Fixed Mobile Convergence;
Grow Telkom Business revenues by diversifying the service portfolio;
Regain market competitiveness in the consumer market;
Consolidate our position as a wholesaler of choice;
Focus on profitable market segments and services;
Enhance our operational efficiency.
The strategic imperatives above were informed by renewing and refining Telkom`s
tactical initiatives across our key business areas as follows:
- Growing and defending profitable Telkom Business revenues
Telkom Business aims to be the market leader in Converged ICT. We will retain
market leadership in fixed communication services, and additionally become the
industry leader in converged communications and cloud services. In order to
achieve this we will leverage our two biggest assets: our unmatched business
customer base and the unique combination of our fixed network, our mobile
network, and our data centre operations.
- Delivering on our investment in Telkom Mobile
We are committed to the mobile business and, although tactics may change from
time to time, the broader strategy to defend erosion in our fixed-line business
while growing converged delivery channels to our customers remains a key
priority. Meeting the growing data demand in South Africa is a core feature of
our mobile strategy and it is essential that this be done in such a way that it
does not lead to cannibalisation of our other services. Instead, we must offer
services that reward the customer for using Telkom`s products with varying
levels of incentives depending on the customers` level of loyalty.
- Growing and defending profitable revenues in Telkom Consumer Services &
Retail
Using Telkom`s extensive network and integrating this with consumer related
products such as mobile we are uniquely positioned to meet the future demand
for converged communications and increased broadband needs. We intend to work
more closely with partners to offer value-added broadband services. The
products that we would look at investigating are those that are bandwidth
intensive. As an example, Telecoms companies worldwide continue to exploit
video-on-demand services and Telkom would look into this as a potential future
value-added services. The Group recently signed an agreement with electronics
manufacturer Samsung to provide entry-level Smart TV services to consumers and
we expect further innovations in this regard going forward.
- Transforming and upgrading the Telkom network
Telkom announced our network transformation programme as a key enabler of the
Company strategy. We have since achieved major traction against these plans as
we work towards delivering an all-IP (internet protocol) network, designed to
enable efficiency, fixed-mobile convergence and truly differentiated high speed
broadband. The network transformation intent is to take our fibre deeper into
the network and smartly leverage a mix of high speed broadband access
technologies. Our aggregation network is increasingly able to support super-
fast transmission and enable a superior browsing experience. We have also
transformed our national and regional transmission networks which has evolved
from carrying Gbps to Tbps throughput with great resilience and manageability.
Our international connectivity has received a major boost to ensure worldwide
reach with superb capacity and resilience. Telkom`s network transformation is
bound to change the face of broadband capability in South Africa.
3. OPERATIONAL DATA
Year ended 31 March
2011 2012 %
Telkom South Africa
ADSL subscribers1 751,625 827,091 10.0
Calling plan subscribers 783,193 819,019 4.6
Closer subscribers 753,951 787,117 4.4
Supreme call subscribers 29,242 31,902 9.1
WiMAX subscribers 3,199 3,381 5.7
Internet all access subscribers2 543,316 523,057 (3.7)
Fixed access lines (`000)3 4,152 3,995 (3.8)
Postpaid - PSTN 2,552 2,499 (2.1)
Postpaid - ISDN channels 772 767 (0.6)
Prepaid 703 623 (11.4)
Payphones 125 106 (15.2)
Fixed-line penetration rate (%) 8.3 7.9 -
Revenue per fixed access line (ZAR) 4,863 4,865 -
Total fixed-line traffic (millions of 20,545 19,372 (5.7)
minutes)
Local 5,563 4,513 (18.9)
Long distance 2,806 2,683 (4.4)
Fixed-to-mobile 3,563 3,785 6.2
Fixed-to-fixed 104 164 57.7
International outgoing 537 360 (33.0)
Subscription based calling plans 3,988 3,636 (8.8)
Interconnection 3,984 4,231 6.2
Mobile domestic 1,919 1,945 1.4
Mobile international 134 432 222.4
Fixed 951 1,055 10.9
International 980 799 (18.5)
Managed data network sites 34,163 38,902 13.9
Telkom Company employees 22,884 20,939 (8.5)
Fixed access lines per employee4 182 191 4.9
Telkom Mobile
Total subscribers 1,199,596 3,053,393 154.5
Active subscribers5 473,604 1,483,401 213.2
Prepaid 440,775 1,039,448 135.8
Post-paid 32,829 443,953 1,252.3
Base stations constructed 970 1,782 83.7
Employees6 228 355 55.7
ARPU5 (Rand) 22.60 68.86 204.7
Prepaid 15.86 20.89 31.7
Post-paid 238.57 206.83 (13.3)
Churn % - prepaid - 58.9 -
Other International
iWayAfrica
Active subscribers7 25,184 22,386 (11.1)
Employees 517 479 (7.4)
Customer per employee 49 47 (4.1)
Other South African
Trudon employees 520 520 -
Swiftnet employees 107 107 -
1. Excludes Telkom internal lines and includes business, consumer, corporate,
government and wholesale customers.
2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers.
3. Excludes Telkom internal lines.
4. Based on number of Telkom Company employees, excluding subsidiaries.
5. Based on a subscriber who has participated in a revenue generating activity
within the last 90 days.
6. Included in Telkom Company employees.
7. Excluding UUNet joint venture partner`s subscribers and employees in Kenya.
4. OPERATIONAL OVERVIEW
Voice revenue
Voice revenues declined 6.5% to R12,835 million as a result of lower minutes of
use due to mobile substitution and, to a lesser extent, lower tariffs. All
categories of voice revenue, except mobile international and fixed-to-fixed
revenue, declined and we expect traditional voice revenue to continue
declining. Revenue from subscription based calling plans declined 3.6% to
R1,578 million while the total number of subscribers increased 4.6% to 819,019.
The slowdown in calling plan revenue growth reflects the increased penetration
of these products and the shift of customers to the lower priced Telkom Closer
1 and 2 products.
Broadband and data revenue
Total data revenue decreased 1.7% to R10,517 million as a result of income
generated from the Soccer World Cup included in the previous year. Excluding
the revenue relating to the 2010 Soccer World Cup, data revenue increased 1.6%.
The slow growth is mainly as a result of increased self provisioning by mobile
operators, lower internet access revenue and pricing pressures.
ADSL subscribers increased 10.0% to 827,091 when compared to the previous year.
Data, however, continues to be an area of growth and we believe the point at
which the contributions of data and of voice will be one-to-one is not far off.
Telkom is also heavily focused on increasing broadband and data related revenue
to diversify its reliance away from fixed-line voice. To this end, Telkom
launched its uncapped ADSL service over the course of the last year. This was a
successful initiative and at 31 March 2012 we had 35,093 uncapped ADSL
customers. For the first time in the SA market a `free 3-month broadband` trial
was launched by Telkom. Of the total 74,924 customers who applied for the trial
we ended up retaining 68% as customers. While this will not have much of an
impact on the revenues for the year, it has positively contributed to the
growth in subscribers we experienced in the current year with the resultant
revenue benefit expected to follow in the 2013 financial year.
Operating expenses
Operating expenditure increased 6.1% to R31,250 million. This was largely due
to the inclusion of mobile operating expenditure for the full financial year in
2012, the impairment of iWayAfrica goodwill and assets of R569 million and R605
million additional depreciation as a result of the review of the useful lives
of existing network equipment as the Company invests to transform to a
commercially led next generation network, partially offset by R739 million
voluntary employee severance package costs included in the prior year.
8ta - Telkom`s mobile service
Telkom`s commitment to its mobile strategy remains steadfast. While the tactics
for achieving our mobile goals may change from time to time, we are committed
to the strategy as a whole and believe that mobile is an integral part of
ensuring that Telkom grows into the future. We will focus on data to capitalise
on the smartphone revolution, develop a high value customer focus to improve
ARPU, loyalty and retention and drive fixed mobile convergence through
leveraging off a fully IP enabled, next generation fixed-line network.
Telkom Mobile has opened up the network fully for voice as well as data. This
means that instead of pushing subscribers onto shared networks we route them
onto our own network. It is a significant step for us as it emphasises the fact
that we consider our own network to be sufficiently stable to deliver the best
possible quality service to our customers. Since March we have increased our
customers using our voice network to over 40%. A total of 85% of our existing
data customers are utilising the Telkom network rather than the shared network.
We have completed construction of 1,782 base stations of which 1,351 are on
air. There have been challenges in terms of finding adequate power on certain
of the remaining base stations.
8ta achieved revenue of R1,200 million and an EBITDA loss before intersegmental
eliminations of R2,425 million for the year ended 31 March 2012. Total revenue
generating subscribers equalled 1,483,401 with prepaid contributing 1,039,448
and post-paid 443,953. Prepaid ARPU was R20.89 and post-paid ARPU R206.83.
Blended ARPU was R68.86.
We launched our Business Mobile products in October 2011. We have built a
healthy pipeline but conversion is slow due to customers waiting for their post-
paid contracts to expire, the usual corporate sales cycles and very aggressive
competitor response. In the 2013 financial year we will focus on the SME market
and primarily data services to corporate customers.
Data products that were launched over the year include 8ta`s prepaid 2Gig +1Gig
offer for R149pm, 8ta`s prepaid 120Gig Data Bundle, post-paid 10Gig Midnight
Surfer, Internet Saver plans as well as Telkom Business Mobile`s Shared
Internet Bundles.
In the 2013 financial year we aim to reduce our EBITDA losses in mobile by
approximately 20% and plan to invest between R2.0 billion and R2.5 billion in
capital expenditure.
Cybernest
Cybernest has continued to gain traction in the market. While the majority of
the R1,406 million revenue achieved in the year is generated from Telkom, non-
Telkom revenue has increased 12.0% to R84 million, with a win rate on new deals
approaching 50%.
Cybernest will play an important role in the broader Telkom Business integrated
ICT strategy going forward. It is at the heart of our strategy to lead the
cloud services market: initial focus is on Infrastructure as a Service (IaaS)
and basic Software as a Service (SaaS) such as mail and some small business
applications. Subsequent focus will progressively expand to more advanced Iaas
and Saas offers. Together with Telkom Business, Cybernest will also address the
LAN services segment, which is currently a strategic portfolio gap for the
Company, and the IT infrastructure outsourcing market, centred on our "cloud
leveraged outsourcing" proposition.
Trudon
Trudon`s revenue increased by 1.1% to R1,180 million while operating profit
decreased 2.1%.
The core printed directories business has reached maturity in South Africa. To
keep pace with the changes in the marketplace, Trudon is evolving from being a
publisher of traditional print products to being a local online search
solutions provider. Print usage by subscribers has reduced and younger users
access information primarily through internet and mobile channels, rather than
printed white or yellow pages. Trudon has no choice but to follow this
migration and build up its capabilities and capacity to offer these products.
This move required a 35.8% increase in capital investment in the financial year
to R72 million.
iWayAfrica
During the year under review iWayAfrica saw a decline in revenues of 10.9% to
R368 million. Operating loss excluding the impairment improved 11.5% to a loss
of R77 million.
Telkom has taken the decision to rationalise this business. It is acknowledged
that a footprint in Africa is desirable but not at any cost to the core Telkom
business.
Multi-Links
The sale of Multi-Links was concluded in October 2011. Multi-Links had an
operating loss of R269 million for the period up to the sale that is included
in discontinued operations.
The sale of Multi-Links resulted in the recognition of a net loss of R896
million mainly due to the cumulative amount of exchange differences previously
recognised in equity, which was recognised in profit and loss on disposal of
the Multi-Links foreign operation.
Telkom incurred costs of R80 million for the year to exit this business that is
included in continuing operations.
Regulatory
The two most pressing regulatory pressures currently are spectrum fees and
local loop unbundling. Telkom is committed to continually engage with ICASA for
the benefit of both the industry and Telkom.
Spectrum licence fees and access - ICASA introduced Administrative Incentive
Pricing (AIP) of spectrum through Regulations on 27 August 2010. These
Regulations set the various pricing formulae that will be used in future to
determine spectrum fees payable by licensees. The main aim of the regulations
is to create incentives for spectrum users to optimise the effective and
efficient use of the radio frequency spectrum, by incentivising the use of
higher frequencies and in non-urban areas. The objective is to ensure that
spectrum fees calculated through AIP reflect the market value of the radio
frequency spectrum.
Currently there is uncertainty regarding the implementation of the various
formulae and data tables. Telkom and other industry players have had further
engagements with the Authority on the regulations. The implementation of these
regulations have been postponed by ICASA to 1 April 2012. However, Vodacom is
challenging ICASA`s approach to the High Court to obtain confirmation that the
postponement is legally valid.
The new proposed fee structure is expected to increase the total spectrum fees
payable by Telkom. Telkom is working on various options to reduce this amount
using the incentive mechanisms built into the pricing formulae.
Local Loop Unbundling - Local Loop Unbundling (LLU) in its original form is a
regulatory mandated process that allows multiple telecommunications operators
to access and provide services over the last-mile copper infrastructure (i.e.
from the local exchange to the customer premises) that is traditionally owned
by the incumbent operator. The risk that LLU poses to Telkom`s profitability is
dependent upon the form and details of implementation that will be imposed by
ICASA. ICASA has issued a decision document on LLU which stipulates that LLU is
to be introduced in a phased approach to minimise disruptions in the ICT
sector. A Regulatory Impact Assessment on the costs and benefits of the full
loop, sub-loop and shared line forms of LLU will be conducted, commencing in
mid-2012. A Market Review will then follow. As part of the phased approach
IPConnect prices reduced by 30% effective 1 April 2012. ICASA will engage
industry to ensure ways of introducing Bitstream by 1 November 2012. ICASA will
also conduct a public consultation process to establish a mechanism to address
the existing Access Line Deficit as a precursor to the introduction of the
Bitstream product. This decision somewhat reduces the negative impact of LLU on
Telkom.
KT Corporation
On 8th May 2012, Telkom announced that it had reached an in-principle agreement
with KT regarding the terms of a Potential Strategic Venture that would if
implemented result in:
-KT acquiring a strategic equity shareholding of 20% in the post issue ordinary
share capital of Telkom by way of a specific issue of shares for cash at a
price of R25.60 per new Telkom ordinary share;
- Telkom and KT entering into a 5-year co-source management services agreement
to formalise the relationship and identified areas of mutual strategic and
business co-operation.
The in-principle agreement was reached following an extensive investigation
period into the merits of the Potential Strategic Venture spanning 9 months by
the management teams and advisors of KT and Telkom. The Potential Strategic
Venture was subject to the fulfillment of the following preconditions:
Finalising of the transaction agreements comprising a subscription and
relationship agreement and a co-source management services agreement;
Final resolution of the current investigation by the Competition Authorities
into the competition complaints against Telkom to the satisfaction of KT;
Receipt of in-principle support for the Proposed Strategic Venture by the
Government of South Africa; and
Receipt of in-principle support for the Proposed Strategic Venture by Allan
Gray and the Public Investment Corporation.
Given the requirement for support from key shareholders for the Proposed
Strategic Venture and specifically from the Government of South Africa, Telkom
engaged with the Honourable Minister of Communcations and her advisory team
regarding the Proposed Strategic Venture during the course of assessing the
merits of the transaction.
On 30th May 2012, Telkom was informed by the Honourable Minister of
Communications that the proposed transaction between the companies had been
presented to the cabinet of the South African Government and that cabinet had
taken the decision not to support the transaction as proposed.
Having considered all factors, the board of Telkom, remains of the view that
the Potential Strategic Venture would be in the best interest of Telkom, its
employees, customers and shareholders. Telkom will continue to engage the
South African Government further.
Capital expenditure and funding level
Capital expenditure for the group is expected to range between 20% and 25% of
revenue over the 2013 financial year including the impact of our mobile
investment and between R18 billion and R21 billion over the next three years.
The targeted net debt to EBITDA is aimed at 1.4 times. In the short term we
will operate at lower levels pending the cash outflows associated with the
mobile related capital expenditure.
5. FINANCIAL PERFORMANCE
GROUP OPERATING REVENUE
Year ended 31 March
In ZAR millions 2011 2012 %
Fixed-line 31,533 30,638 (2.8)
Mobile 81 1,200 1,381.5
Other International
iWayAfrica 413 368 (10.9)
Other South African
Trudon 1,167 1,180 1.1
Swiftnet 127 128 0.8
Data Centre Operations 1,240 1,406 13.4
Corporate centre 83 78 (6.0)
Eliminations (1,336) (1,919) 43.6
Total 33,308 33,079 (0.7)
Group operating revenue decreased by 0.7% to R33,079 million (2011: R33,308
million) in the year ended 31 March 2012. The decrease is mainly due to lower
fixed-line traffic and data revenue partially offset by the inclusion of mobile
revenue for a full year. Data Centre Operations includes R1,322 million (2011:
R1,165 million) internal revenue received from the fixed-line segment in terms
of the transfer pricing policy. This revenue is eliminated on consolidation.
Fixed-line operating revenue
Year ended 31 March
In ZAR millions 2011 2012 %
Subscriptions and connections 6,763 6,900 2.0
Traffic 12,045 11,078 (8.0)
Local 2,836 2,409 (15.1)
Long distance 1,588 1,365 (14.0)
Fixed-to-mobile 5,181 5,121 (1.2)
Fixed-to-fixed 78 110 41.0
International outgoing 725 495 (31.7)
Subscription based calling plans 1,637 1,578 (3.6)
Interconnection 1,679 1,757 4.6
Mobile domestic 498 375 (24.7)
Mobile international 186 630 238.7
Fixed 328 262 (20.1)
International 667 490 (26.5)
Data 10,699 10,517 (1.7)
Data connectivity 5,325 5,365 0.8
Leased line facilities 2,182 2,310 5.9
Internet access and related 1,814 1,689 (6.9)
services
Managed data network services 1,243 1,101 (11.4)
Multi-media services 135 52 (61.5)
Other 347 386 11.2
Total 31,533 30,638 (2.8)
Operating revenue from the fixed-line segment decreased by 2.8% to R30,638
million (2011: R31,533 million) primarily due to lower traffic revenue and
lower data revenue as a result of the inclusion of the revenue generated during
the 2010 Soccer World Cup in the prior year, partially offset by higher
international interconnection and subscriptions and connections revenue.
Subscription and connections revenue increased by 2.0% to R6,900 million (2011:
R6,763 million) largely as a result of higher line and customer premises
equipment rental tariffs.
Traffic revenue decreased by 8.0% mainly due to lower local and long-distance
revenue as a result of the substitution by mobile ADSL and increased
competition through VANS and Neotel. International outgoing revenue also shows
a decreasing trend in volumes as a result of increased competition.
Interconnection revenue increased by 4.6% to R1,757 million (2011: R1,679
million) largely as a result of a significant increase in mobile international
interconnection revenue as a result of a 222.4% increase in volumes. This was
partially offset by a 26.5% decrease in international interconnection revenue
due to a decrease in switched hubbing and international incoming volumes as
well as the decrease fixed-line termination rates.
Data revenue decreased 1.7% to R10,517 million (2011: R10,699 million) mainly
due to the inclusion of the revenue generated from the Soccer World Cup in the
prior year, the cancellation of mobile links by other mobile operators, lower
SAIX internet access and related revenue and lower growth on VPN supreme. This
was partially offset by the inclusion of R239 million revenue received from 8ta
for mobile links during the year that is eliminated on consolidation.
Other revenue increased 11.2% mainly as a result of R105 million subscriber
acquisition commissions received from the mobile segment, which are eliminated
on consolidation, higher revenue from expired cards and co-location, partially
offset by revenue related to the 2010 Soccer World Cup.
GROUP OTHER INCOME
Year ended 31 March
In ZAR millions 2011 2012 %
Fixed-line 409 232 (43.3)
Mobile - 51 100.0
Other International
iWayAfrica 15 10 (33.3)
Telkom Management Services 8 - (100.0)
Telkom International 19 21 10.5
Other South African
Trudon 41 40 (2.4)
Swiftnet 6 3 (50.0)
Corporate centre 150 177 18.0
Eliminations (108) 45 (141.7)
Total 540 579 7.2
Other income includes profit on the disposal of investments, property, plant
and equipment and intangible assets as well as interest received from debtors
and on loans to subsidiaries. The decrease in fixed-line other income is mainly
attributable to the inclusion of the profit on the sale of a portion of our
right of use in the SAT-3 undersea cable in the prior year. Mobile other income
relates to a donation of two base station controllers received. The corporate
centre`s other income increased due to the R167 million profit on sale of Multi-
Links.
GROUP OPERATING EXPENSES
Year ended 31 March
In ZAR millions 2011 2012 %
Employee expenses 9,716 8,636 11.1
Payments to other operators 5,567 5,484 1.5
Selling, general and administrative 5,545 7,193 (29.7)
expenses
Service fees 2,886 2,974 (3.0)
Operating leases 764 825 (8.0)
Depreciation, amortisation, 4,965 6,138 (23.6)
impairments and write-offs
Total 29,443 31,250 (6.1)
Group operating expenses increased by 6.1% to R31,250 million (2011: R29,443
million) in the year ended 31 March 2012, primarily due to an increase in
selling, general and administrative expenses and depreciation, amortisation,
impairments and write-offs partially offset by a decrease in employee expenses.
The increase in selling, general and administrative expenses is mainly due to
the inclusion of mobile expenses and higher fixed-line marketing and materials
and maintenance expenses, partially offset by a decrease in fixed-line bad
debts. Depreciation, amortisation, impairments and write-offs include R569
million relating to the impairment of iWayAfrica goodwill and assets. The
decrease in employee expenses is due to savings resulting from voluntary
severance packages offered in the prior year.
Operating expenditure contribution per segment
Year ended 31 March
In ZAR millions 2011 2012 %
Fixed-line 24,484 23,638 3.5
Mobile 1,230 3,895 (216.7)
Other International
iWayAfrica 556 1,024 (84.2)
Telkom Management Services 36 - 100.0
Telkom International 70 33 52.9
Other South African
Trudon 695 718 (3.3)
Swiftnet 124 121 2.4
Data Centre Operations 1,054 1,100 (4.4)
Corporate centre 2,584 2,712 (5.0)
Eliminations (1,390) (1,991) (43.2)
Total 29,443 31,250 (6.1)
The 6.1% increase in Group operating expenses was primarily driven by the
inclusion of mobile expenses and the iWayAfrica goodwill and asset impairment
of R569 million. This was partially offset by a decrease in employee expenses
in the fixed-line segment.
Fixed-line operating expenses
Year ended 31 March
In ZAR millions 2011 2012 %
Employee expenses 7,810 6,641 15.0
Salaries and wages 5,761 5,618 2.5
Benefits 1,832 1,520 17.0
Workforce reduction expenses 650 8 98.8
Employee related expenses capitalised (433) (505) 16.6
Payments to other operators 5,193 4,839 6.8
Mobile network operators 3,704 3,218 13.1
International network operators 792 1,029 (29.9)
Fixed-line network operators 404 306 24.3
Data commitments 293 286 2.4
Selling, general and administrative 3,541 3,834 (8.3)
expenses
Materials and maintenance 1,843 1,960 (6.3)
Marketing 377 567 (50.4)
Bad debts 361 245 32.1
Other 960 1,062 (10.6)
Service fees 3,158 3,123 1.1
Property management 1,336 1,292 3.3
Security and other 779 663 14.9
Data centre operations intercompany 1,043 1,168 (12.0)
transactions
Operating leases 647 620 4.2
Buildings 164 162 1.2
Equipment 31 14 54.8
Vehicles 452 444 1.8
Depreciation, amortisation, impairments 4,135 4,581 (10.8)
and write-offs
Depreciation 3,396 3,837 (13.0)
Amortisation 569 538 5.4
Impairments and write-offs 170 206 (21.2)
Total 24,484 23,638 3.5
Fixed-line expenditure decreased 3.5% in the year ended 31 March 2012, to
R23,638 million (2011: R24,484 million), primarily due to lower voluntary
employee severance package expenses and lower payments to mobile operators due
to the reduction in mobile termination rates, partially offset by increased
depreciation due to the review of the useful lives of existing network
equipment as we invest to transform to a commercially led next generation
network.
Employee expenses decreased by 15.0% in the year ended 31 March 2012, primarily
due to voluntary employee severance package expenses of R650 million incurred
in the prior year and lower headcount and bonuses, partially offset by the
average annual salary increases of 5.7%.
Payments to mobile network operators decreased 13.1% largely due to the
reductions in mobile termination rates. The decrease in mobile termination
rates contributed to a R679 million decrease in payments to mobile operators.
Payments to international network operators increased by 29.9% mainly due to
higher settlement rates as a result of a change in the mix of countries dialled
and higher settlement rates as a result of foreign currency movements.
Selling, general and administrative expenses increased by 8.3% primarily as a
result of higher marketing expenses due to the move of fixed-line specific
marketing expenses from the corporate centre to the fixed-line segment, higher
materials and maintenance as a result of a drive to reduce the fault rate on
the core cable network as well as higher expenditure on the repair of copper
theft incidents and direct costs paid to 8ta, partially offset by lower bad
debts.
Service fees decreased by 1.1% primarily due savings on security costs offset
by higher intercompany services charged by Cybernest. Intercompany cost is
eliminated on consolidation.
Equipment leases decreased mainly due to lower rental of security equipment.
Vehicle leases decreased as a result of a 10.2% reduction in the number of
vehicles from 7,606 to 6,833 partially offset by inflation and fuel increases.
Depreciation increased 13.0% due to accelerated depreciation as a result of the
review of the useful lives of existing network equipment as we invest to
transform to a commercially led next generation network.
Mobile operating expenses
Year ended 31 March
In ZAR millions 2011 2012 %
Employee expenses 140 195 (39.3)
Payments to other network operators 161 449 (178.9)
Selling, general and administrative 769 2,536 (229.8)
expenses
Service fees 87 397 (356.3)
Operating leases 27 99 (266.7)
Depreciation, amortisation, 46 219 (376.1)
impairments and write-offs
Total 1,230 3,895 (216.7)
Mobile expenditure increased 216.7% in the year ended 31 March 2012 to R3,895
million (2011: R1,230 million), mainly due to the inclusion of expenditure for
the full year. 8ta was launched in October 2010.
Employee expense increase due to a 39.3% increase in 8ta employees since March
2011 to 355 employees.
Payments to other operators consist mainly of interconnection payments to other
operators and payments to MTN in terms of the roaming agreement. The increase
is due to the significant increase in mobile outgoing traffic from the previous
year.
The increase in selling, general and administrative expenses is mainly due to
an increase in direct network cost, maintenance, cost of handsets sold,
marketing expenses and bad debts.
Service fees relate to the intercompany charge by Cybernest for services
rendered of R246 million (2011: R6 million) that is eliminated on
consolidation.
Operating leases relate mostly to rental of buildings.
Corporate centre operating expenses
Year ended 31 March
In ZAR millions 2011 2012 %
Employee expenses 1,076 1,162 (8.0)
Payments to other network operators - - -
Selling, general and administrative 496 388 21.8
expenses
Service fees 704 893 (26.8)
Operating leases 11 20 (81.8)
Depreciation, amortisation, 297 249 16.2
impairments and write-offs
Total 2,584 2,712 (5.0)
Employee expenses increased 8.0% mainly as a result of an increase in interest
cost on the Telkom Retirement Fund and an increase in the post-retirement
medical aid liability mainly due to an increase in interest and service costs.
This was partially offset by lower bonuses.
Selling, general and administrative expenses decreased 21.8% mainly as a result
of moving fixed-line specific marketing expenses to the fixed-line segment.
Service fees increased 26.8% mainly due to higher consulting fees, electricity,
transport and legal costs.
Operating leases increased 81.8% due to an increase of the percentage office
space allocated to the corporate centre personnel based on an office location
compliance process completed during the year.
Depreciation, amortisation, impairments and write-offs decreased 16.2% mainly
due to lower write offs on support equipment in the current year.
EBITDA PER SEGMENT
Year ended 31 March
In ZAR millions 2011 2012 %
Fixed-line 11,593 11,813 1.9
EBITDA margin (%) 36.8 38.6
Mobile (1,103) (2,425) (119.9)
EBITDA margin (%) (1,361.7) (202.1)
Other International (116) (45) 61.2
EBITDA margin (%) (28.1) (12.2)
Other South African (959) (917) 4.4
EBITDA margin (%) (36.6) (32.8)
Eliminations (45) 120 366.7
Total 9,370 8,546 (8.8)
INVESTMENT INCOME
Investment income consists of interest received on short-term investments and
bank accounts. Investment income increased by 11.7% to R238 million (2011: R213
million), as a result of higher interest and dividends received by the cell
captive.
FINANCE CHARGES AND FAIR VALUE MOVEMENTS
Finance charges and fair value movements 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 increased by 75.3% to R1,872 million
(2011: R1,068 million) in the year ended 31 March 2012. The increase was mainly
as a result of foreign exchange and fair value losses of R1,107 million (2011:
R170 million) due to the cumulative amount of exchange differences of R1,292
million previously recognised in equity, now recognised in profit and loss on
disposal of Multi-Links, partially offset by fair value gains on forward
exchange contracts and interest rate swap agreements. The interest expense
decreased 14.8% to R765 million (2011: R898 million) as a result of a 14.0%
decrease in the Group`s interest-bearing debt to R7,186 million (2011: R8,355
million).
TAXATION
The consolidated tax expense from continuing operations decreased to R595
million (2011: R979 million) mainly due to lower deferred tax as a result of
the foreign exchange losses realised on the disposal of Multi-Links and the
accelerated depreciation on network equipment and lower Secondary Tax on
Companies as a result of lower dividend paid. The consolidated effective tax
rate for the year ended 31 March 2012 was 76.7% (2011: 30.8%). Excluding the
effects of the sale of Multi-Links and the Group impairment of iWayAfrica the
consolidated effective tax rate is 33.4%.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The Group`s financial position remains strong. Net debt, after financial assets
and liabilities, from continuing operations decreased by 19.8% to R3,933
million from R4,907 million as at 31 March 2011 resulting in a net debt to
EBITDA ratio of 0.5 times at 31 March 2012 and 2011. On 31 March 2012, the
Group had cash balances of R1,165 million (2011: R1,773 million).
The decrease in cash is mainly attributable to the repayment of a portion of
the syndicated loan. We repaid R1.3 billion during the year.
The Group`s current assets exceeded current liabilities by R497 million. The
current portion of the interest-bearing debt increased due to the TL12 bond of
R1,060 million that matured in April 2012.
FREE CASH FLOW
Year ended 31 March
In ZAR millions 2011 2012 %
Cash generated from operations before 6,778 6,704 (1.1)
dividends paid
Less: Cash flows from investing (4,545) (4,570) (0.6)
activities
Free cash flow 2,233 2,134 (4.4)
The Group`s free cash flow decreased 4.4% to R2,134 million from R2,233 million
as at 31 March 2011. The decrease in the free cash flow is mainly as a result
of the inclusion of higher mobile operating expenditure in the 2012 financial
year offset by the R608 million settlement paid for the Telcordia dispute and
the additional R500 million invested into the Cell Captive in the prior year.
GROUP CAPITAL EXPENDITURE
Group capital expenditure which includes spend on intangible assets, increased
5.3% to R4,783 million (2011: R4,541 million) and represents 14.5% of Group
revenue (2011: 13.6%).
Year ended 31 March
In ZAR millions 2011 2012 %
Fixed-line 2,835 3,151 11.1
Mobile 1,475 1,372 (7.0)
Other International
iWayAfrica 11 8 (27.3)
Other South African
Trudon 53 72 35.8
Swiftnet 16 42 162.5
Data Centre Operations 107 57 (46.7)
Corporate centre 44 81 84.1
Total 4,541 4,783 5.3
Fixed-line capital expenditure is discussed in detail below. The increase in
corporate centre capital expenditure was mainly on operating system
improvements for supplier management.
Fixed-line capital expenditure
Year ended 31 March
In ZAR millions 2011 2012 %
Baseline 1,736 1,822 5.0
Network evolution 550 733 33.3
Sustainment 101 145 43.6
Effectiveness and efficiency 155 102 (34.2)
Support 265 304 14.7
Regulatory and other 28 45 60.7
Total 2,835 3,151 11.1
Fixed-line capital expenditure, which includes spending on intangible assets,
increased by 11.1% to R3,151 million (2011: R2,835 million) and represents
10.3% of fixed-line revenue (2011: 9.0%).
Baseline capital expenditure of R1,822 million (2011: R1,736 million) was
largely for the deployment of technologies to support the growing data services
business, 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 increased expenditure for the period can be attributed
to the aggressive broadband marketing campaign designed to stimulate growth in
the ADSL footprint.
Expenditure on network evolution of R733 million (2011: 550 million) was mainly
to continue with the submarine cable projects to address international growth
expected during the next decade and to provide next generation voice
infrastructure on the national transport network as well as to relieve
identified capacity requirements. The increase in expenditure is as a result of
the investment on the commercially led next generation network, specifically on
operating support systems as well as the pilot roll-out.
The sustainment category expenditure of R145 million (2011: R101 million) was
largely for the replacement of obsolete batteries and direct-current power
systems as well as the replacement and modernisation of the access and core
network.
Telkom continues to focus on its operations support systems with current
emphasis on provisioning and fulfilment, assurance and customer care and
hardware technology upgrades on the enterprise networks. During the year ended
31 March 2012, R102 million (2011: R155 million) was spent on the
implementation of several systems.
The support capital expenditure of R304 million (2011: R265 million) is mainly
for provision of new buildings and building extensions in support of network
growth and for the compliance upgrading of existing equipment buildings,
including the associated AC power and air-conditioning.
The expenditure on regulatory requirements of R45 million (2011: R28 million)
is primarily to institute regulatory changes to customer-facing functions.
Board approval
The condensed consolidated provisional annual financial statements of Telkom SA
Limited, were approved by the board of directors on 7 June 2012 and signed on
its behalf by Mr PL Zim(Chairman) and Mrs NT Moholi(Group Chief Executive
Officer).
Preparer and supervisor of annual financial statements
These condensed consolidated provisional annual financial statements were
prepared by Mrs Dashni Sinivasan (Executive: Statutory Reporting) and
supervised by Mr Deon Fredericks (Deputy Chief Financial Officer).
Audit opinion
The consolidated annual financial statements, from which these condensed
consolidated provisional 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 2012
Restated*
2011 2012
Notes Rm Rm
Continuing operations
Total revenue 4 33,879 33,668
Operating revenue 33,308 33,079
Other income 540 579
Operating expenses 29,443 31,250
Employee expenses 6.1 9,716 8,636
Payments to other operators 5,567 5,484
Selling, general and administrative 6.2 5,545 7,193
expenses
Service fees 2,886 2,974
Operating leases 764 825
Depreciation, amortisation, impairment 6.3 4,965 6,138
and write-offs
Results from operating activities 4,405 2,408
Investment income 213 238
Finance charges and fair value movements 1,068 1,872
Interest 898 765
Foreign exchange and fair value losses 170 1,107
Profit before taxation 3,550 774
Taxation 7 979 595
Profit from continuing operations 2,571 179
Loss from discontinued operations 8 1,229 269
Profit/(loss) for the year 1,342 (90)
Other comprehensive income
Exchange differences on translating 30 (30)
foreign operations
Available-for-sale investment - (5)
Defined benefit plan actuarial (741) 65
(losses)/gains
Defined benefit plan asset limitations 584 -
Income tax relating to components of 9 44 (18)
other comprehensive income
Other comprehensive (loss)/income for (83) 12
the year, net of taxation
Total comprehensive income/(loss) for 1,259 (78)
the year
Profit/(loss) attributable to:
Owners of Telkom 1,222 (216)
Non-controlling interests 120 126
Profit/(loss) for the year 1,342 (90)
Total comprehensive income/(loss)
attributable to:
Owners of Telkom 1,139 (204)
Non-controlling interests 120 126
Total comprehensive income/(loss) for 1,259 (78)
the year
Total operations
Basic and diluted earnings/(loss) per 10 239.9 (42.3)
share (cents)
Continuing operations
Basic and diluted earnings per share 10 481.2 10.4
(cents)
* The amounts have been restated for the effect of the fixed-line business of
Multi-Links Telecommunications Limited being classified as a discontinued
operation.
Condensed consolidated provisional statement of financial position
at 31 March 2012
Audited
2011 2012
Notes Rm Rm
ASSETS
Non-current assets 43,943 42,362
Property, plant and equipment 37,304 36,155
Intangible assets 3,965 3,555
Investments 2,103 2,260
Deferred expenses 83 47
Finance lease receivables 239 244
Deferred taxation 56 53
Other financial assets 193 48
Current assets 10,315 10,206
Inventories 1,121 993
Income tax receivable 105 26
Current portion of deferred 10 -
expenses
Current portion of finance 118 128
lease receivables
Trade and other receivables 5,503 5,696
Other financial assets 1,674 2,195
Cash and cash equivalents 12 1,784 1,168
Assets of disposal group 8 89 -
classified as held for sale
Total assets 54,347 52,568
EQUITY AND LIABILITIES
Equity attributable to owners 29,635 29,707
of the parent
Share capital 5,208 5,208
Treasury shares (771) (771)
Non-distributable reserves 1,764 1,887
Retained earnings 24,467 23,383
Reserves of disposal groups 8 (1,033) -
classified as held for sale
Non-controlling interests 387 434
Total equity 30,022 30,141
Non-current liabilities 14,974 12,718
Interest-bearing debt 13 8,198 5,897
Other financial liabilities 69 26
Employee related provisions 14 4,711 4,880
Non-employee related provisions 14 29 36
Deferred revenue 1,073 1,132
Deferred taxation 894 747
Current liabilities 8,899 9,709
Trade and other payables 4,782 4,291
Shareholders for dividend 21 23
Current portion of interest- 13 157 1,289
bearing debt
Current portion of employee 14 1,932 1,652
related provisions
Current portion of non-employee 14 86 240
related provisions
Current portion of deferred 1,771 1,995
revenue
Income tax payable 16 87
Other financial liabilities 123 129
Credit facilities utilised 12 11 3
Liabilities of disposal group 8 452 -
classified as held for sale
Total liabilities 24,325 22,427
Total equity and liabilities 54,347 52,568
Condensed consolidated provisional statement of changes in equity
for the year ended 31 March 2012
2011 2012
Rm Rm
Balance at 1 April 30,264 30,022
Attributable to owners of Telkom 29,925 29,635
Non-controlling interests 339 387
Total comprehensive income/(loss) for the year 1,259 (78)
Profit/(loss) for the year 1,342 (90)
Other comprehensive (loss)/income (83) 12
Exchange differences on translating foreign 30 (30)
operations
Available-for-sale investment - (5)
Net defined benefit plan (losses)/gains and asset (113) 47
limitations
Dividend declared (1,587) (814)
Reserves held for sale realised on disposal of - 1,011
Multi-Links Telecommunications Limited
Increase in share-based compensation reserve 86 -
Balance at 31 March 30,022 30,141
Attributable to owners of Telkom 29,635 29,707
Non-controlling interests 387 434
Condensed consolidated provisional statement of cash flows
for the year ended 31 March 2012
2011 2012
Note Rm Rm
Cash flows from operating activities 5,188 5,892
Cash receipts from customers 33,200 32,634
Cash paid to suppliers and employees (25,107) (24,930)
Cash generated from operations 8,093 7,704
Interest received 498 484
Finance charges paid (635) (564)
Taxation paid (1,178) (920)
Cash generated from operations before 6,778 6,704
dividend paid
Dividend paid (1,590) (812)
Cash flows from investing activities (4,545) (4,570)
Proceeds on disposal of property, plant 297 105
and equipment and intangible assets
Additions to property, plant and (4,333) (4,675)
equipment and intangible assets
Acquisition of subsidiaries and joint (9) -
venture
Additions to other investments (500) -
Cash flows from financing activities (2,715) (1,923)
Loans raised 980 1,092
Loans repaid (2,399) (2,345)
Finance lease capital repaid (165) (177)
Increase in net financial assets (1,131) (493)
Net decrease in cash and cash equivalents (2,072) (601)
Net cash and cash equivalents at 3,793 1,773
beginning of year
Effect of foreign exchange rate 52 (7)
differences on cash and cash equivalents
Net cash and cash equivalents at end of 12 1,773 1,165
year*
* For cash flow activities on discontinued operations refer to note 8.
Notes to the condensed consolidated provisional annual financial statements for
the year ended 31 March 2012
1. Corporate information
Telkom SA Limited (Telkom) is a company incorporated and domiciled in the
Republic of South Africa (South Africa) whose shares are publicly traded. The
main objective of Telkom, its subsidiaries and joint ventures (the Group) is to
supply telecommunication, multimedia, technology, information and other related
information technology services to Telkom`s customers, as well as mobile
communication services, in South Africa and certain other African countries.
2. Significant accounting policies
Basis of preparation
The condensed consolidated provisional annual financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting, and in
compliance with the Listings Requirements of the Johannesburg Stock Exchange
Limited (JSE) and the South African Companies Act, 2008.
The condensed consolidated provisional annual financial statements are
presented in South African Rand, which is the Group`s functional currency. All
financial information presented in Rand has been rounded to the nearest
million.
The condensed consolidated provisional annual financial statements are prepared
on the historical cost basis, with the exception of certain financial
instruments initially (and sometimes subsequently) measured at fair value and
share-based payments which are measured at grant date fair value.
Significant accounting judgements, estimates and assumptions
In preparing these condensed consolidated provisional annual financial
statements, the significant judgements made by management in applying the
Group`s accounting policies and the key sources of estimation uncertainty were
consistent with those applied to the consolidated financial statements for the
year ended 31 March 2011.
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 prior year.
Adoption of amendments to standards and new interpretations
IFRS 7 Financial Instruments Disclosures
The amendment emphasises the link between qualitative and quantitative
disclosures to enable users of financial statements to form an overall picture
of the nature and extent of risks arising from financial instruments. Detailed
IFRS 7 disclosures are provided in the annual financial statements.
IAS 1 Presentation of Financial Statements
The amendment requires entities to present for each component of equity, an
analysis of other comprehensive income either in the statement of changes in
equity or in the notes. The Group provides this analysis in note 9.
IAS 34 Interim Financial Reporting
The amendment clarifies that it is unnecessary for interim financial statements
to provide relatively insignificant updates as the users of financial
statements have access to the most recent annual report.
The amendment requires additional disclosures for fair values and changes in
classification of financial assets, as well as changes to contingent assets and
liabilities in interim condensed financial statements.
The following new standards, amendments to standards and interpretations which
are mandatory for financial periods beginning on or after 1 January 2011 have
been adopted and do not have any material impact on the Group:
IFRS 3 (amendment) Business Combinations - Clarification of contingent
consideration arising from business combination prior to adoption of IFRS 3 (as
revised in 2008)
IFRS 3 (amendment) Business Combinations - Accounting for unreplaced and
voluntarily replaced share-based payment awards within a business combination
IFRS 3 (amendment) Business Combinations - Measurement options available for
non-controlling interest (NCI)
IAS 27 (amendment) Consolidated and Separate Financial Statements - Transition
requirements for amendments arising as a result of IAS 21 The Effects of
Changes in Foreign Exchange Rates
IFRIC 14 (amendment) IAS 19 - The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction - Voluntary prepaid contributions
Standards and interpretations in issue not yet adopted and not yet effective
The following new standards, amendments to standards and interpretations in
issue have not yet been adopted and are not yet effective. All standards are
effective for annual periods beginning on or after the effective date.
IFRS 7 Financial Instruments Disclosures - Amendments enhancing disclosures
about transfers of financial assets (effective 1 July 2011)
IFRS 7 Financial Instruments Disclosures - Amendments enhancing disclosures
about offsetting of financial assets and financial liabilities (effective 1
January 2013)
IFRS 7 Financial Instruments Disclosures - Amendments requiring disclosures
about the initial application of IFRS 9 (effective 1 January 2015)
IFRS 9 Financial Instruments - Classification and measurement of financial
assets and financial liabilities (effective 1 January 2015)
IFRS 10 Consolidated Financial Statements (effective 1 January 2013)
IFRS 11 Joint Arrangements (effective 1 January 2013)
IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013)
IFRS 13 Fair Value Measurements (effective 1 January 2013)
IAS 1 Presentation of Financial Statements - Amendments to revise the way other
comprehensive income is presented (effective 1 July 2012)
IAS 1 Presentation of Financial Statements - Amendments to clarify the
requirements for comparative information (effective 1 January 2013)
IAS 12 Income Taxes - Limited scope amendment (recovery of underlying assets)
(effective 1 January 2012)
IAS 16 Property, Plant and Equipment - Classification of service equipment
(effective 1 January 2013)
IAS 19 Employee Benefits - Amended Standard resulting from the Post-Employment
Benefits, Short-Term Employee Benefits and Termination Benefits projects
(effective 1 January 2013)
IAS 27 Consolidated and Separate Financial Statements - Reissued as IAS 27
Separate Financial Statements (as amended in 2011) (effective 1 January 2013)
IAS 28 Investments in Associates - Reissued as IAS 28 Investments in Associates
and Joint Ventures (as amended in 2011) (effective 1 January 2013)
IAS 32 Financial Instruments: Presentation - Amendments to clarify tax effect
of distribution to holders of equity instruments (effective 1 January 2013)
IAS 32 Financial Instruments: Presentation - Amendments to application guidance
on the offsetting of financial assets and financial liabilities (effective 1
January 2014)
IAS 34 Interim Financial Reporting - Interim financial reporting and segment
information for total assets and liabilities (effective 1 January 2013)
3. Segment information
The Group`s reporting segments are business units that are separately managed.
The executive committee assesses the performance of the operating segments
based on a measure of EBITDA. Interest income and expenditure are not allocated
to segments, as this type of activity is driven by the central treasury
function, which manages the cash position of the Group. The results of
discontinued operations are not included in the measure of EBITDA.
The Group consists of two reportable segments, namely Telkom Fixed-line and
Telkom Mobile.
The Telkom Fixed-line segment provides fixed-line access, fixed-mobile and data
communications services through Telkom.
The Telkom Mobile segment provides mobile voice services, data services and
handset sales through 8ta.
The Other category is a reconciling item which is split geographically between
International and South Africa.
The International category provides internet services outside South Africa,
through the iWayAfrica Group.
The South African category includes the Trudon Group, Swiftnet, Data Centre
Operations and the Group`s Corporate Centre.
Comparative information has been restated to reflect the internal restructuring
between the Telkom Fixed-line segment and the Corporate Centre which included
moving the divisional human resource and finance functions from the Telkom
Fixed-line segment to the Corporate Centre to align roles and responsibilities.
Comparatives have been restated to show all of Multi-Links Telecommunications
Limited`s (Multi-Links) operations as discontinued operations. Refer to note 8
for Multi-Links` results.
Restated
2011 2012
Rm Rm
Consolidated operating revenue 33,308 33,079
Telkom Fixed-line 31,533 30,638
Telkom Mobile 81 1,200
Other 3,030 3,160
International 413 368
South African 2,617 2,792
Elimination of intersegmental revenue (1,336) (1,919)
Consolidated operating profit 4,446 2,810
Telkom Fixed-line 7,458 7,232
Telkom Mobile (1,149) (2,644)
Other (1,809) (1,728)
International (166) (89)
South African (1,643) (1,639)
Elimination of intersegmental transactions (54) (50)
Reconciliation
Adjusted EBIT for reportable segments 4,446 2,810
Profit on disposal of subsidiary - 167
Impairment of property, plant and equipment and (41) (569)
intangible assets
Operating profit 4,405 2,408
Investment income 213 238
Finance charges and fair value movement (1,068) (1,872)
Profit before taxation and discontinued 3,550 774
operations
4. Total revenue 33,879 33,668
Operating revenue 33,308 33,079
Other income (excluding profit on disposal of 358 351
property, plant and equipment, intangible assets,
investments and profit on disposal of subsidiary)
Investment income 213 238
Operating revenue decreased mainly due to lower traffic revenue as a result of
mobile substitution and competition from Value-Added Network Services and lower
data revenue as a result of the inclusion of the revenue generated during the
2010 Soccer World Cup in the prior year, offset by an increase in mobile
revenue.
2011 2012
Rm Rm
5. Disposal group
Disposal of Multi-Links Telecommunications
Limited (Multi-Links)
On 26 June 2011 the Telkom Board made a decision
to sell the entire issued share capital of Multi-
Links to Hip Oils Topco Limited. The effective
date of the sale was 3 October 2011.
Amounts included in the statement of
comprehensive income:
Other income (profit on disposal of subsidiary)* - (167)
Foreign exchange and fair value losses** - 1,292
Taxation - (229)
* Multi-Links Telecommunications Limited was sold for USD300. The profit on
disposal of subsidiary is due to the carrying amount of total liabilities
exceeding total assets.
** Relates to the cumulative amount of foreign exchange differences previously
recognised in other comprehensive income, now realised in profit or loss due to
the disposal of the Multi-Links foreign operation.
Restated
2011 2012
Rm Rm
6. Operating expenses
6.1 Employee expenses 9,716 8,636
The decrease in employee expenses is mainly as a
result of the voluntary employee severance
packages expenses which decreased from R739
million in 2011, to only R30 million in the
current year.
6.2 Selling, general and administrative expenses 5,545 7,193
The increase is mainly attributable to an
increase in mobile direct costs incurred with
other network operators as well as the increase
in impairment of receivables.
Maintenance costs increased due to higher
expenditure on repairs resulting from copper
theft incidents and higher maintenance on the
core cable due to a drive to decrease the high
fault rate.
6.3 Depreciation, amortisation, impairment and 4,965 6,138
write-offs
Depreciation of property, plant and equipment 4,005 4,608
Amortisation of intangible assets 733 701
Impairment of property, plant and equipment and 41 569
intangible assets
Write-offs of property, plant and equipment and 186 260
intangible assets
As a result of rolling out of the Next Generation
Network transformation programme, the Group re-
assessed the useful lives of certain individual
legacy equipment. This had the effect of
increasing depreciation expense for the year
ended 31 March 2012 by R605 million (2011: R112
million). Depreciation for each year of the
remaining useful lives of the individually re-
assessed equipment is expected to be similarly
affected by this change in estimate.
Included in impairment of property, plant and
equipment and intangible assets is an impairment
charge relating to iWayAfrica of R442 million
(2011: RNil million) on goodwill and R127 million
(2011: R41 million) on non-current assets.
7. Taxation 979 595
South African normal company taxation 722 1,026
Deferred taxation 97 (494)
Secondary Taxation on Companies (STC) 157 70
Foreign taxation 3 (7)
The decrease in deferred taxation is primarily as a result of the accelerated
depreciation on property, plant and equipment, an increase in provisions and
the realisation of foreign exchange losses on the disposal of Multi-Links
Telecommunications Limited of R332 million (2011: RNil million), offset by the
STC credit reversal.
The decrease in STC is due to the lower dividend paid during the current year.
STC was provided for at a rate of 10% on the amount by which dividends declared
by Telkom exceeded dividends received. The new withholding taxation on
dividends is effective for dividends declared on or after 1 April 2012 at a
rate of 15%. All unutilised STC credits as at 31 March 2012 were reversed.
8. Discontinued operations
Multi-Links Telecommunications Limited (Multi-Links)
On 26 November 2010, Telkom announced that the Board had mandated management to
review options for the exit of the CDMA business of Multi-Links in Nigeria.
On 10 June 2011, the Telkom Board decided to stop funding Multi-Links after the
deal to sell the CDMA business of Multi-Links to Visafone Communications fell
through as a result of certain conditions precedent to the transaction not
being met.
On 26 June 2011, the Telkom Board made a decision to sell the entire issued
share capital of Multi-Links to Hip Oils Topco Limited. The sale was
conditional on, inter alia, regulatory approvals. The entire business was
classified as held for sale at this date.
Multi-Links` assets and liabilities were remeasured to the lower of carrying
amount and fair value less costs to sell at the date of held for sale
classification, 26 June 2011, and the effective date of disposal 3 October
2011.
Analysis of the results of discontinued
operations:
Revenue* 1,180 158
Expenses* (2,188) (427)
Loss before taxation of the discontinued (1,008) (269)
operations
Taxation (6) -
Loss after taxation of the discontinued (1,014) (269)
operations
After-tax loss recognised on the re-measurement (215) -
of assets of disposal group to fair value less
cost to sell
Pre-tax loss recognised on the remeasurement of (215) -
assets of disposal group to fair value less cost
to sell**
Taxation - -
Loss for the year from the discontinued (1,229) (269)
operations
* Revenue comprises operating revenue, other income and investment income.
Expenses comprises operating expenses, finance charges and impairment of R198
million (2011: R238 million).
** For the 2012 financial year, the carrying amount and fair value less costs
to sell were both negative, thus limited to nil.
2011 2012
Rm Rm
The major classes of assets and liabilities of
the business classified as a disposal group:
Assets 89 -
Property, plant and equipment 29 -
Inventories 13 -
Trade and other receivables 23 -
Cash and cash equivalents 14 -
Deferred expenses 10 -
Liabilities 452 -
Interest-bearing debt 7 -
Non-current portion of provisions 5 -
Current portion of provisions 2 -
Trade and other payables 367 -
Current portion of deferred revenue 18 -
Credit facilities utilised 53 -
Reserve of disposal group classified as held for
sale
Exchange differences on translating the disposal (1,033) -
group (included in other comprehensive income)
The net cash flows attributable to the
operating, investing and financing activities of
discontinued operations:
Operating cash flows (607) (75)
Investing cash flows (118) (21)
Financing cash flows 693 143
Total cash (outflow)/inflow* (32) 47
* Cash flows included in 2012 are up to 3 October 2011.
9. Taxation effects of other comprehensive income
Tax effects relating to each component of other comprehensive income
Exchange differences on translating foreign 30 (30)
operations
Tax effect of exchange differences on - -
translating foreign operations
Net foreign currency translation differences for 30 (30)
foreign operations
Available-for-sale investment - (5)
Tax effect of available-for-sale investment - -
Net available-for-sale investment - (5)
Defined benefit plan actuarial (losses)/gains (741) 65
Tax effect of defined benefit plan actuarial 207 (18)
balance
Net defined benefit plan actuarial (534) 47
(losses)/gains
Defined benefit plan asset limitations 584 -
Tax effect of defined benefit plan asset (163) -
limitations
Net defined benefit plan asset limitations 421 -
Other comprehensive (loss)/income for the year (127) 30
before taxation
Tax effect of other comprehensive income for the 44 (18)
year
Other comprehensive (loss)/income for the year, (83) 12
net of taxation
Restated
2011 2012
10. Earnings per share
Total operations
Basic and diluted earnings/(loss) per share 239.9 (42.3)
(cents)*
Headline earnings and diluted headline 332.4 310.8
earnings per share (cents)**
Continuing operations
Basic and diluted earnings per share 481.2 10.4
(cents)*
Headline earnings and diluted headline 484.8 324.7
earnings per share (cents)**
Discontinued operations
Basic and diluted loss per share (cents)* (241.3) (52.7)
Headline loss and diluted headline loss per (152.4) (13.9)
share (cents)**
Reconciliation of weighted average number
of ordinary shares:
Ordinary shares in issue 520,783,900 520,783,900
Weighted average number of treasury shares (11,472,604) (10,190,084)
Weighted average number of shares 509,311,296 510,593,816
outstanding
Reconciliation of diluted weighted average
number of ordinary shares
Weighted average number of shares 509,311,296 510,593,816
outstanding
Expected future vesting of shares - -
Diluted weighted average number of shares 509,311,296 510,593,816
outstanding
* The Telkom Conditional Share Plan was concluded with a final vesting in June
2010, therefore the weighted average number of shares was not adjusted for
expected future vesting of shares allocated to employees under this plan. Due
to the plan being concluded, there is no further dilutive effect on basic
earnings per share.
** The disclosure of headline earnings is a requirement of the JSE Limited and
is not a recognised measure under IFRS. It has been calculated in accordance
with The South African Institute of Chartered Accountants` Circular 3/2009
issued in this regard.
Rm Rm
Total operations
Reconciliation between earnings and headline
earnings:
Profit/(loss) from total operations 1,342 (90)
Non-controlling interests (120) (126)
Earnings/(loss) as reported 1,222 (216)
Profit on disposal of property, plant and (182) (53)
equipment and intangible assets
Profit on disposal of subsidiary - (167)
Foreign exchange differences realised on disposal - 1,292
of subsidiary
Impairment loss on property, plant and equipment 494 767
and intangible assets
Write-offs of property, plant and equipment and 186 254
intangible assets
Tax effects (27) (290)
Headline earnings 1,693 1,587
Restated
2011 2012
Rm Rm
Continuing operations
Reconciliation between earnings and headline
earnings:
Profit from continuing operations 2,571 179
Non-controlling interests (120) (126)
Earnings from continuing operations attributable 2,451 53
to equity holders of Telkom
Profit on disposal of property, plant and (182) (53)
equipment and intangible assets
Profit on disposal of subsidiary - (167)
Foreign exchange differences realised on disposal - 1,292
of subsidiary
Impairment loss on property, plant and equipment 41 569
and intangible assets
Write-offs of property, plant and equipment and 186 254
intangible assets
Tax effects (27) (290)
Headline earnings 2,469 1,658
Discontinued operations
Reconciliation between earnings and headline
earnings:
Loss from discontinued operations (1,229) (269)
Non-controlling interests - -
Loss from discontinued operations attributable to (1,229) (269)
equity holders of Telkom
Impairment loss on property, plant and equipment 453 198
and intangible assets
Headline loss (776) (71)
Dividend per share (cents) 300.0 145.0
The calculation of dividend per share is based on dividends of R740 million
(2011: R1,532 million) and 510,593,816 (2011: 510,638,013) number of ordinary
shares outstanding on the date of dividend declaration.
2011 2012
Rm Rm
11. Capital additions and disposals
Property, plant and equipment
Additions 4,333 4,022
Disposals (169) (130)
Intangible assets
Additions 431 813
Disposals (2) -
A major portion of additions to property, plant and equipment relates to
the expansion of existing networks, services and mobile cellular services. The
balance contributes to the Next Generation Network transformation programme,
submarine cable system, network evolution initiatives and sustainment
programmes.
Intangible assets additions mainly relate to software and the connection
incentive bonus.
12. Net cash and cash equivalents 1,773 1,165
Cash shown as current assets 1,784 1,168
Cash and bank balances 757 713
Short-term deposits 1,027 455
Credit facilities utilised (11) (3)
The decrease in cash and bank balances and short-term deposits is mainly due to
the repayment of a portion of the syndicated loan.
13. Interest-bearing debt
Non-current interest-bearing debt 8,198 5,897
Local debt 6,918 4,649
Foreign debt 429 478
Finance leases 851 770
Current portion of interest-bearing debt 157 1,289
Local debt - 1,060
Foreign debt 98 148
Finance leases 59 81
Repayments
A significant portion of the syndicated loan was paid during the yearand the
remainder classified as current portion of interest-bearing debt as it is due
in the 2013 financial year. This current portion is expected to be repaid from
available, operational cash flows or the issue of new debt instruments.
Management believes that sufficient funding facilities will be available at the
date of repayment.
14. Provisions
Non-current portion of provisions 4,740 4,916
Employee related 4,711 4,880
Non-employee related 29 36
Current portion of provisions 2,018 1,892
Employee related 1,932 1,652
Non-employee related 86 240
The increase in non-current provisions is mainly due to the increase in post-
retirement medical aid provisions as a result of medical inflation.
The increase in current non-employee related provisions is mainly dueto certain
legal matters that have been disclosed in the contingencies (refer to note 16).
15. Commitments
Capital commitments authorised 7,522 7,480
Commitments against authorised capital expenditure 1,072 827
Authorised capital expenditure not yet contracted 6,450 6,653
Capital commitments are largely attributable to purchases of property, plant
and equipment and software (included in intangible assets).
Included in the commitments against authorised capital expenditure and
authorised capital expenditure not yet contracted, is R546 million (2011: R873
million) and R1,160 million (2011: R1,132 million), respectively, which relates
to Telkom Mobile.
Management expects these commitments to be financed from internally generated
cash and borrowings.
16. Contingencies
COMPETITION COMMISSION
Telkom is party to a number of legal proceedings filed by several parties with
the South African Competition Commission (CC) alleging anti-competitive
practices described below. Some of the complaints filed at the CC have been
referred by the CC to the Competition Tribunal (CT) for adjudication.
Should the CT find that Telkom committed a prohibited practice as set out in
the Competition Act for each of the cases, the CT may impose a maximum
administrative penalty of 10% of Telkom`s annual turnover in the Republic of
South Africa and its exports from the Republic of South Africa 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
in respect of the contraventions being accused of.
The South African Value Added Network Services (SAVA) and Omnilink
This matter relates to the complaints filed by SAVA in May 2002 and a complaint
filed by Omnilink (in August 2002) against Telkom at the CC, regarding certain
alleged anti-competitive practices by Telkom. These complaints were referred by
the CC to the CT on 24 February 2004. The matter was heard by the CT from 17 to
28 October 2011 and from 1 to 9 December 2011.
The presentation of evidence by Telkom and the CC was finalised in December
2011. Arguments by both sides were heard by the CT in February 2012. The CC
asked for the maximum penalty of R3.25 billion to be imposed in respect of the
excessive pricing complaint against Telkom, alternatively R1,168 million in
respect of a complaint of alleged refusal by Telkom to provide essential
facilities.
In its original heads of argument, Telkom argued that no penalty, or at worst,
a nominal penalty, should be awarded in the event that the CT finds that Telkom
contravened the Competition Act. However, during argument on the last day of
trial the CT insisted that Telkom make submissions as to an amount of an
appropriate penalty. Telkom then submitted that an appropriate penalty (if any
penalty is awarded by the CT), would be no more than R20,500,677 in respect of
the alleged excessive pricing complaint, or in respect of the refusal to
provide essential facilities complaint, a third of the aforementioned
R20,500,677, which amounts to R6,833,558. It is important to note that the
aforementioned complaints are in the alternative and, accordingly, the CT can
only impose a penalty in respect of one of the aforementioned two complaints,
not both.
Telkom has consistently held that the conduct complained of was fully justified
in terms of the regulatory and legislative environment prevailing at the time.
The CT will now stand down to consider all the evidence and arguments presented
and will then in due course deliver its ruling. It is not clear how long the CT
will take to deliver its ruling.
Internet Solutions (IS)
IS filed a complaint at the CC in December 2007 (which was dealt with by the CC
as part of the Multiple Complaints Referral referred to below), alleging
certain anti-competitive practices by Telkom, such as excessive pricing, margin
squeeze, bundling and price discrimination.
Certain parts of this complaint were referred to the CT by the CC and these are
dealt with in the Multiple Complaints Referral reported on below. The non-
referred parts of the complaint were self-referred by IS. Telkom filed an
exception to this self-referral and the CT ruled that IS must amend its papers.
However, the papers remained excipiable and Telkom again excepted. IS responded
to Telkom`s exception application on 10 April 2012, by filing a notice
withdrawing its initial referral of the entire complaint. On the same day, IS
filed a supplementary affidavit amending and/or withdrawing certain paragraphs
of its self-referral as currently constituted. It appears from this
supplementary affidavit that IS is referring complaints of exclusionary conduct
by Telkom in respect of the retail broadband internet access market, excessive
pricing in respect of Telkom`s pricing of ADSL lines and leased lines under
2Mbps, and price discrimination. IS also referred a price discrimination
complaint and has requested, in the instance of each of the two complaints, an
administrative penalty per complaint.
Telkom filed a notice of an irregular step (namely the supplementary affidavit
filed by IS) and a notice of Telkom`s intention to proceed to have Telkom`s
exception application set down for hearing. Various interlocutory applications
are underway. Telkom also reserved the right to file an application for
consolidation of the IS matter with the Multiple Complaints Referral matter
discussed below, should there still be key areas of overlap between the two
matters after IS` amendment application and Telkom`s exceptions have been
disposed of.
Competition Commission Multiple Complaints Referral
The CC served a notice of motion on Telkom in October 2009, in which it
referred complaints against Telkom filed by MWEB and Internet Solutions (IS) as
well as the Internet Service Providers Association (ISPA), MWEB, IS and
Verizon, 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:
- The prices charged by the Telkom to other first-tier Internet Service
Providers (ISPs) for high bandwidth national leased lines (above 2Mbps) were
excessive in contravention of section 8(a) of the Competition Act (the Act);
- The prices charged by Telkom to other first-tier ISPs for international
private lease circuits were excessive;
- Telkom contravened section 8 of the Act by setting its prices for diginet
access lines, high bandwidth leased lines and for 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 first 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 the contraventions of section 8 of the Act, directing Telkom
to pay a penalty equal to 10% 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
above, directing Telkom on an annual basis to furnish to the CC such data and
information as is necessary to enable the CC to assess whether Telkom is
charging prices for the services, which are the subject matter of the order in
paragraph 1 above. The data and information shall be provided in the manner and
form directed by the CT after hearing further submissions from the CC and
Telkom.
Telkom filed its response in January 2012 (after numerous difficulties
regarding access to confidential documents had been resolved) and the CC filed
its reply in March 2012. Pleadings have now closed and a pre-hearing was held
on 17 May 2012. The matter has been set down for hearing at the CT from 18 June
2013 to 5 July 2013.
Phutuma Networks (Pty) Limited (Phutuma)
Phutuma filed a complaint at the CC early in 2010, wherein Phutuma alleged that
Telkom has contravened section 8(c) of the Competition Act by abusing its
dominant position in engaging in anti-competitive conduct in the telegraphic
and telex maritime services market by unilaterally awarding these services to
Network Telex. The CC in June 2010 decided not to refer the complaint to the
CT.
However, Phutuma self-referred its complaint to the CT on 20 July 2010,
alleging that Telkom engaged in an exclusionary act by appointing Network Telex
in 2007 without any formal procurement process. Telkom filed its answer in
which it raised certain preliminary points, and Phutuma filed its reply.
Telkom`s preliminary points were upheld by the CT in March 2011 and Phutuma`s
self-referral was dismissed with costs. Phutuma appealed this decision to the
Competition Appeal Court (CAC) and filed its notice of appeal on 24 March 2011.
The appeal has been set down for hearing on 28 May 2012 and judgement is
reserved.
Directory Solutions CC v Trudon and Telkom
Directory Solutions lodged a complaint at the CC in March 2009 as well as an
application for interim relief at the CT in November 2009.
In April 2010, the CT made an order in favour of Directory Solutions in respect
of the interim relief application. Telkom and Trudon lodged an appeal at the
CAC. The CAC ruled in favour of Telkom and Trudon in June 2010, setting aside
the order made by the CT. Directory Solutions then brought an application for
special leave to appeal to the Supreme Court of Appeal, which was dismissed
with costs. This thus disposes of the interim relief application. Directory
Solutions` initial complaint at the CC was also non-referred by the CC on 10
February 2012. The time period within which to self-refer has expired and thus
the entire complaint is also disposed of.
Independent Cellular Service Providers` Association of South Africa (ICSPA)
In 2002, ICSPA filed a complaint against Telkom at the CC. The CC issued a
notice of non-referral. The complainant itself then referred the matter to the
CT in September 2003. The complainant had not filed a reply to Telkom`s
answering affidavit. In light of the fact that almost a decade has lapsed since
filing of the last pleading took place, it is unlikely that this matter will be
revived.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal
In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon
at the CC. Orion also filed an application against Telkom, Standard Bank and
Edcon at the CT for an interim order. Telkom did not file its answering
affidavit in the application before the CT since it appeared that Orion was not
actively pursuing this matter. The facts have also long since overtaken the
underlying reasons for the interim application. As regards the complaint, the
CC issued a certificate of non-referral in April 2004. However, Orion self-
referred the complaint to the CT on 30 April 2004. Telkom has not filed an
answer to this referral. Despite this, Orion has not done anything on the self-
referral matter either. In light of the aforementioned, it is highly unlikely
that this matter will be revived.
MATTERS BEFORE ICASA
Phutuma Networks (Pty) Limited (Phutuma)
Phutuma filed a complaint against Telkom at the Complaints and Compliance
Committee of ICASA (CCC) in February 2010. At a hearing before the CCC on 15
July 2010, the CCC expressed the view that they lacked jurisdiction to rule on
certain of the complaints, which relied on legislation over which the CCC does
not have jurisdiction. The CCC requested Phutuma to amend its complaint to
address this and Phutuma consequently filed an amended formal complaint sheet
(replacing the first complaint sheet). However, at a hearing on 28 March 2011
the CCC ruled that the second complaint sheet suffered from the same defects as
the original complaint sheet and requested Phutuma to reformulate the complaint
again. Phutuma then provided the CCC with a fresh complaint in hand-written
format. In terms of the complaint as currently constituted, Phutuma`s complaint
currently consists of 6 (six) complaints, as set out below:
First Complaint: Phutuma alleges that Telkom breached condition 4 of its
Individual Electronic Communication Network Services (IECNS) licence relating
to universal service obligations in that the service which Telkom is giving
does not conform to the "ITU Standards".
Second Complaint: Phutuma alleges that Telkom breached condition 4.2.2 of its
IECNS licence and condition 3.2.2 of its Individual Electronic Communications
Network (IECN) licence in that there is no stipulation in Telkom`s arrangement
with Network Telex to ensure that the exercise by Network Telex of Telkom`s
function under its licence do not contravene any of the conditions of its
licence.
Third Complaint: Phutuma alleges that Telkom has contravened section 16(6) of
the Electronic Communications Act (ECA) in that it has allegedly ceded or
transferred part of both its Individual Electronic Communications Services
(IECS) and Individual Electronic Communications Network Services (IECNS)
licence to Network Telex without the prior written approval of ICASA, being the
function of telegrams, maritime services (ship to shore), customer premises
equipment, and telex machines.
Fourth Complaint: Phutuma alleges that Telkom breached sections 67(1)(a) - (b)
of the ECA read with sections 2(g) - (h) thereof in that Telkom substantially
lessened or prevented competition by giving undue preference to Network Telex
and by causing undue discrimination against the complainant and did not promote
open, fair and non-discriminatory access to electronic communications services
by simply appointing Network Telex and appointing a non-BEE, being Network
Telex.
Fifth Complaint: Phutuma alleges that Telkom breached condition 4.4 of its IECS
licence and condition 3.4 of its IECNS licence and/or contravened section 15(1)
and section 80(1) of the Postal Services Act in that Telkom allegedly entrusted
the delivery of telegrams to Network Telex.
Sixth Complaint: Phutuma alleges that Telkom breached condition 4.2.3 of its
IECS licence and condition 3.2.3 of its IECNS licence in that it failed to act
against Network Telex despite the latter`s known contravention of the Postal
Services Act.
Telkom responded to this amended complaint sheet in December 2011 and Phutuma
filed its reply thereto. Telkom has requested ICASA to allocate a date for
hearing of the matter before the CCC.
End-User and Service Charter Regulations
Allegations have been made at ICASA`s Complaint and Compliance Committee (CCC)
regarding Telkom`s alleged non-compliance with the requirements of the End-User
and Service Charter Regulations relating to the clearance of reported faults. A
hearing has taken place and, should the CCC rule against Telkom, it could
impose a penalty of up to R650,000 on Telkom. Telkom, however, has initiated
administrative review proceedings seeking to set-aside the applicability of the
Regulations.
Neotel (Pty) Limited (Neotel)
On 2 December 2011, the CCC notified Telkom of having received ICASA`s referral
of notification of dispute. A dispute was lodged by Neotel that broadly relates
to Telkom`s alleged refusal to lease its unbundled local loop(LLU)constituting
a portion of Telkom`s electronic communication network.
The CCC heard arguments from both parties in the above matter in May 2012. At
the culmination of proceedings, the CCC ruled that Neotel`s request to access
Telkom`s local loop was a valid request and that Telkom`s response to the same
was inadequate. However, the CCC also ruled that there currently exists no
regulatory framework to give practical effect to LLU. The effect of this is to
render the practical implementation of LLU not possible or legislatively
permissible. In the circumstances the CCC has recommended that Telkom and
Neotel reconsider the issue and revert to ICASA within 3 (three) months and
that ICASA consider the matter within the context of its December 2011 LLU
Determinations.
SUPPLIER DISPUTE
Radio Surveillance Security Services (Pty) Limited (RSSS)
During September 2011 RSSS served two summons on Telkom for the sum of
R215,661,865.88 (including VAT) and R9 913,782.00 (including VAT),
respectively. In the summons for R215,661,865.88 RSSS alleged that Telkom was
indebted to it for the rendering and upgrading of 440 alarm systems previously
purchased by Telkom, to be M3010 compliant and for which services Telkom was
indebted to it.
Telkom neither concluded any written contract with RSSS for the provision of
these alleged services nor did Telkom place any orders or accepted any
quotations in respect of these services. In the summons for R9,913,782.00 RSSS
claimed that Telkom was liable for rentals, monitoring and maintenance of alarm
systems which were rented and/or purchased from RSSS. Both actions are
defended. During November 2011 RSSS withdrew both actions against Telkom in
terms of a settlement agreement. Telkom was of the view that the dispute was
settled on the basis that RSSS withdraw its summons and each party pays its own
legal costs. RSSS differed from Telkom`s view and in December 2011 RSSS
reissued summons for the same amounts. Telkom is defending both claims and
filed a counterclaim for R28,000,000.00 on the first claim. With regard to the
second claim, Telkom has served a notice of exception on RSSS.
HIGH COURT
Phutuma Networks (Pty) Limited (Phutuma)
On 20 August 2009 Phutuma served a summons on Telkom for damages arising from a
tender published on 30 November 2007 for outsourcing of the telex and Gentex
services and for the provision of a solution to support the maritime industry
requirements. The tender was cancelled on 10 June 2009, without any award being
made, due to the expiration of the validity period. Phutuma has alleged that
Telkom had awarded the tender to a third party outside a fair, transparent,
competitive and cost effective procurement process. It has claimed damages of
R3,730,433,545.00, alternatively R5,513,876,290.00, and further alternatively
R1,771,683,580.00 plus interest. The matter was set down for hearing from 24
October 2011 to 18 November 2011 in the High Court. On 24 October 2011, Phutuma
brought an application to compel Telkom to make better discovery of documents
for trial purposes. The court dismissed Phutuma`s application with costs.
Phutuma applied for an adjournment of the trial which applicationwas granted
subject to Phutuma paying Telkom wasted legal costs. The trial has been set
down for hearing on 20 May 2013.
Phutuma also lodged a complaint with the Public Protector during November 2011.
Telkom responded to the complaint in December 2011.
South African National Road Agency (SANRAL)
During October 2009, SANRAL served an application against Telkom issued out of
the KwaZulu-Natal High Court in terms of which it sought a declaratory order
and interdict. The application arose due to Telkom proceeding to install
facilities along the N2 National road reserve within the proximity of Pongola.
On 25 October 2010, the Court granted a declaratory order which prohibited
Telkom from entering upon any SANRAL land without obtaining SANRAL`s prior
permission. Telkom appealed against the court order. In March 2012, the full
bench of the KwaZulu-Natal High Court dismissed the appeal.
Bihati Solutions (Pty) Limited (Bihati) and Merid Trading (Pty) Limited (Merid)
This matter arose from the award of a tender by Telkom in November 2008 for the
construction of network services, after the validity period had expired. In
November 2009 the Telkom Board resolved to apply to the High Court to review
and set aside the award since the award was made outside of the validity
period. Simultaneously with the Telkom application, Bihati applied to the High
Court for the Telkom Board decision to be reviewed and set aside and for an
order compelling Telkom to commence with the negotiations in respect of the
award. Merid and Bihati opposed Telkom`s application. The court granted
Telkom`s application and dismissed Bihati`s application with costs. Bihati and
Merid are appealing the judgment granted in favour of Telkom in the Supreme
Court of Appeals, which is opposed by Telkom. The appeal is set down for
hearing on 16 August 2012. Telkom has, in the interim, received a letter of
demand from Bihati in which it claims damages. The contents of the letter of
demand is under discussion.
ZTE Mzanzi South Africa (Pty) Limited (ZTE)
During 2011, Telkom awarded the MSAN tender to Huawei Technologies Africa and
Alcatel-Lucent. In January 2012, an unsuccessful bidder, ZTE, served an
interdict application on Telkom, in which it sought an order for an interim
interdict, to restrain and interdict Telkom from implementing the tender and
concluding any service level agreements with the successful bidders, pending
the finalisation of the dispute resolution process between Telkom and ZTE. In
March 2012 the High Court granted the interim interdict in favour of ZTE.
Telkom has filed an application for leave to appeal to the Supreme Court of
Appeal, which was granted on 23 May 2012.
African Pre-paid Services Nigeria Limited (APSN) v Multi-Links: Arbitration
matter
Multi-Links, a previously wholly owned subsidiary of Telkom in Nigeria,
concluded a Super Dealer agreementwith African Pre-paid Services(APS), in
December 2008 in terms of which APSN was appointed for an initial period of 10
(ten) years to sell, market and procure customers for Multi-Links range of
products and services in Nigeria (the agreement). On 29 May 2009, APSN ceded
and assigned all of its rights and obligations in terms of the agreement to
APSN. On 26 November 2010 APSN cancelled the agreement on the basis of an
alleged repudiation by Multi-Links of the agreement. On 13 June 2011 APSN
launched arbitration proceedings in South Africa (as per contract) against
Multi-Links claiming damages (9 claims) in the total sum of USD481,199,101.00.
Multi-Links is defending the matter, and has filed a counterclaim in the amount
of USD123 million. Telkom sold its shareholding in Multi-Links to Hip Oils
Topco Limited during September 2011. In addition, in terms of an indemnity
contained in the Sale and Purchase Agreement between Telkom and Hip Oils Topco
Limited concluded in August 2011, Telkom is liable for all amounts in excess of
USD10 million in respect of the claim between APSN and Multi-Links.
The arbitration will be heard from 4 November 2012 to 15 December 2012.
OTHER
Hip Oils Topco Limited (Hip Oils)
With the sale of Telkom`s shares in Multi-Links to Hip Oils, Telkom provided a
taxation indemnity and a "creditors" indemnity to Hip Oils and Multi-Links
where such liability or obligation was incurred prior to 3 October 2011 and to
the extent that such liability exceed the amounts set out in Schedule 4
(creditors list) to the Sale and Purchase Agreement.
Telkom has undertaken to indemnify any actual or contingent liabilities,
obligations or other indebtedness of any nature owed or owing to trade,
financial and other creditors of Multi-Links where such liability, obligation
or other indebtedness was incurred and not disclosed to Hip Oils prior to the
completion date.
Consumer Protection Act (CPA)/National Consumer Commission (NCC)
On 25 August 2011 the NCC served compliance notices on Telkom for both fixed-
line and mobile services to be brought in line with the CPA. The NCC alleges
that Telkom`s terms and conditions for fixed-line and mobile services (8ta)
were, at that stage, not compliant with the CPA. Telkom has filed an objection
to these compliance notices in terms of section 101 of the CPA.
On 28 September 2011, Telkom submitted its revised terms and conditions to the
NCC. Telkom is of the view that the revised terms and conditions are in
compliance with the provisions of the CPA. The NCC is not in agreement with
Telkom`s interpretation of the CPA in respect of certain clauses of our
standard terms and conditions. Telkom has further amended those clauses to give
the NCC more comfort and has implemented its revised/compliant terms and
conditions. Telkom has met with the NCC to ascertain how the matter can be
settled.
Telkom`s objection was set down for hearing in May 2012, but was postponed at
the request of the NCC.
TAX MATTERS
The Group is regularly subject to an evaluation, by tax authorities, of its
direct and indirect tax filings. The consequence of such reviews is that
disputes can arise with tax authorities over the interpretation or application
of certain tax rules applicable to the Group`s business. These disputes may not
necessarily be resolved in a manner that is favourable to the Group.
Additionally, the resolution of the disputes could result in an obligation to
the Group.
2011 2012
Rm Rm
17. Related parties
Details of material transactions and
balances with related parties were as
follows:
With shareholders:
Government of South Africa
Related party balances
Trade receivables 354 371
Trade payables
Department of Communications (371) (71)
Related party transactions
Revenue (2,904) (3,064)
Individually significant revenue* (1,151) (1,105)
City of Cape Town (95) (84)
Department of Correctional Services (66) (73)
Department of Health: Gauteng (65) (63)
Department of Justice (97) (104)
South African National Defence Force (68) (59)
South African Police Services (557) (522)
South African Revenue Services (49) (41)
S.I.T.A. (Pty) Limited (154) (159)
Collectively significant revenue (1,753) (1,959)
* The nature of the individually and
collectively significant revenue
consistsmostly of data revenue.
At 31 March 2012, the Government of South
Africa held 39.8% (2011: 39.8%) of
Telkom`s shares and the Public Investment
Corporation held 10.5% (2011: 10.9%) of
Telkom`s shares.
With entities under common control:
Major public entities
Related party balances
Trade receivables 25 11
Trade payables (1) (1)
Related party transactions
Revenue (332) (381)
Expenses 216 223
Individually significant expenses 203 207
South African Post Office* 107 95
Eskom 84 107
South African Broadcasting Corporation 12 5
Collectively significant expenses 13 16
* Restated
Rent received (28) (26)
Individually significant rent received: (24) (22)
South African Post Office
Collectively significant rent received (4) (4)
Rent paid 24 21
Individually significant rent paid: South 14 13
African Post Office
Collectively significant rent paid 10 8
Key management personnel compensation:
(including directors and prescribed
officers` emoluments)
Related party transactions
Short-term employee benefits 137 188
Post-employment benefits 7 8
Equity compensation benefits 12 3
Terms and conditions of transactions with related parties
Outstanding balances at the year-end are unsecured, interest free and
settlement occurs in cash. There have been no guarantees provided or received
for related party receivables or payables.
18. Subsequent events
Dividends
The Telkom Board declared an ordinary dividend of Nil cents (2011: 145 cents)
per share.
Repayment of TL12 Bond
The TL12 bond of R1,060 million was repaid on maturity at the end of April
2012.
Telkom and KT Corporation
During the 2012 financial year, Telkom and KT Corporation announced that they
had reached, in principle, an agreement on the terms of the potential strategic
venture.
On 1 June 2012 Telkom announced that it has been informed by the Honourable
Minister of Communications that the proposed transaction between the companies
had been presented to cabinet on 30 May 2012 and that cabinet had taken the
decision not to support the transaction as proposed.
Other matters
The directors are not aware of any other matter or circumstance since the
financial year ended 31 March 2012 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.
8 June 2012
Sponsor: UBS South Africa (Pty) Ltd
Date: 08/06/2012 07:05:01 Produced by the JSE SENS Department.
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