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Telkom SA Limited - Group annual results
Telkom SA Limited
(Registration Number 1991/005476/06)
ISIN ZAE000044897
JSE and NYSE Share Code TKG
(`Telkom`)
Group annual results
for the year ended 31 March 2004
* Group operating free cash flow growth of 123% to R9,0 billion
* Headline earnings per share growth of 175% to 864 cents
* Group EBITDA margin reaches 40%
* Dividends of 200 cents for the year
`The Telkom Group delivered strong results for the year. Our continual focus on
driving greater capital and operational efficiencies combined with good growth
from both our fixed-line data business and our mobile segment, has allowed us to
deliver headline earnings per share growth of 175%.`
Sizwe Nxasana, Chief Executive Officer
Johannesburg, South Africa - June 7, 2004, Telkom SA Limited (JSE and NYSE:
TKG), South Africa`s largest communications group announces audited results for
the year ended March 31, 2004.
Commenting on the Group annual results, Sizwe Nxasana, CEO, said: `The
management of the Telkom Group are pleased to report strong results in our first
full year as a listed company.
`In our fixed-line business, we expanded operating margins by aggressively
defending revenues and systematic streamlining of our operations, while our
mobile business continued to deliver robust growth by winning customers in the
local market and in other African countries. These achievements underpinned the
generation of strong cash flows, allowing the Group to repay debt and invest
capital in driving growth and supporting ongoing cost savings.
`This positive momentum, reinforced by a strengthened capital structure and a
relatively buoyant economic environment, enabled the Group to meet and exceed
its performance targets for the year, and deliver on its core strategic
objective of returning value to shareholders.`
Successfully achieved financial targets
The Group has delivered a strong set of financial results demonstrating
management`s commitment to meeting targets. Group operating revenue increased
8.8% to R40,795 million driven by the 23.2% increase in mobile revenue, and
operating profit increased 39.5% to R9,088 million for the year ended March 31,
2004. EBITDA margins during the same period expanded to 40.0% compared to 34.7%
in the prior period primarily as a result of the strict cost discipline in the
fixed-line business as well as the release of the Telcordia provision of R356
million and the strengthening in the Rand.
Headline earnings per share grew 175.0% to 863.6 cents per share and basic
earnings per share grew 177.5% to 812.0 cents. Strong earnings growth was
delivered as a result of a 39.5% increase in operating profit and a 21.4%
reduction in finance charges. Included in finance charges are the net losses of
R776 million arising from measuring derivatives at fair value and the relative
volatility of the currency during the period.
Cash from operating activities increased 42.4% to R13,884 million, which fully
covered cash requirements for group capital expenditure of R5,187 million and
facilitated the repayment of R6,4374 million in net debt. Net debt decreased
33.8% to R13,362 million. The balance sheet was strengthened with net debt to
equity of 60.6% at March 31, 2004, within the announced targeted range of 50% to
70%. A final dividend of 110 cents per share was declared by the board of
directors, in addition to the special dividend of 90 cents per share.
A focused strategy to create shareholder value
Good progress was made across the Group for the year ended March 31, 2004,
instructed by a focused strategy to create value for shareholders comprising
three key imperatives:
- An intense focus on customer growth and retention;
- Driving operational efficiencies and innovation; and
- Sustaining marketplace development.
The fixed-line business posted solid growth in data revenues by driving data
adoption in consumer and small and medium business markets, and increasing the
penetration of value-added data services among residential and business
customers. The competitiveness of this segment was boosted through wide-ranging
programmes to reduce costs, improve employee efficiency and entrench a culture
of innovation across all operations. All these efforts culminated in
considerable improvements in service delivery and an enhanced customer
experience.
Robust growth was sustained in the mobile business through strong customer
growth in South Africa and other African countries. Vodacom continued to
maintain its market leadership and achieved a record level of gross connections.
Continued focus on customer care and retention saw contract churn in South
Africa falling to its lowest level ever.
The first steps were taken to harness potential synergies between the fixed-line
and mobile businesses, both in driving operational efficiencies and in
integrated product and service offerings. The businesses entered into joint
retail distribution and customer payment collections during the year.
Fixed-line
Telkom continued to make great strides in its strategy of becoming the data
service provider of choice, with several new product launches, including VPN
Supreme, a dedicated IP service, CyberTradeMall and TelkomInternet powered by
Satellite. Data products were aggressively promoted to the consumer and small
and medium enterprises markets through targeted campaigns. The strong growth in
ISDN of 16.5% to 655,994 and the increased reach to over 20,000 ADSL customers
was supported by 44.1% growth in Internet subscribers to 142,208. The number of
ADSL-enabled exchanges has almost doubled to 304 during the year covering
approximately 61% of exchanges. Telkom recently launched a 24-month ADSL
contract bundled with a free modem. Telkom also continued to sell value added
data services to corporate and business customers, with 17.3% growth in leased
lines, 17.2% growth in managed network sites and overall data revenue growth of
13.5%.
Telkom focused strongly on stemming the loss of fixed-line customers and
traffic. Both access lines and traffic remained relatively flat on the prior
year through aggressive ISDN marketing, reconnection campaigns and deals with
property developers to ensure early connection of new customers. The stimulation
of traffic remains a priority and further calling packages were launched
supported by extensive fixed-line tariff education. An unwavering focus on
improving customer service resulted in the rebranding of TelkomDirect, the
repositioning of Telkom branches and the closure of non-viable outlets.
Fixed-line controllable costs, excluding depreciation, amortisation, impairments
and write-offs and the release of the Telcordia provision, reduced by R706
million mainly through reductions in materials and maintenance, property
management costs and operating leases. Employee expenses remained relatively
flat, with a 0.7% increase primarily due to retrenchment costs. Fixed-line
employees, excluding subsidiaries, were reduced by 8.5% through a controlled and
socially responsible retrenchment programme, underpinned by re-skilling and
other relevant support services. Increased employee productivity was reflected
in growth from 137 to 149 lines per employee.
Mobile
Vodacom has seen significant growth in South Africa over the past 10 years, with
almost 10 million customers at the end of March 2004. During the year, Vodacom
South Africa reached gross connections of five million, the highest level ever.
Vodacom also maintained its leadership position, with a 54% (2003: 57%) market
share. Vodacom continued to focus on customer care and retention, which saw
contract churn at its lowest level ever at 10.1%.
A number of innovative new products and services were introduced during the
year, including Call Sponsor, which enables a contract customer to sponsor up to
three prepaid customers, SMS-only roaming for international travel and several
MMS and SMS bundled products. Vodacom grew data revenues by 58.9% to over R1.0
billion in revenue (50% share is R0.5 billion).
As part of Vodacom`s strategy to increase margins, they are currently gaining
control of their service provider channels. They have taken the first steps
towards attaining this goal by purchasing 51% of Smartphone SP (Proprietary)
Limited, effective from March 1, 2004. Vodacom South Africa now directly manages
70.6% of its contract customers and 97.8% of its prepaid customers.
Mobile employee productivity in South Africa and other African countries, as
measured by customers per employee, increased by 24.0% to 2,434 customers per
employee as of March 31, 2004.
Vodacom`s customers in other African countries grew by 93.0% to 1,492,000 (2003:
773,000). Vodacom Congo experienced strong customer growth of 170.2% and Vodacom
Tanzania is showing resilience, despite very challenging market conditions. The
recent investment in Mozambique is doing well and 58,000 customers were
connected in three and a half months since startup in December 2003.
Vodacom`s attempts to enter the Nigerian market have been drawn out, and various
equity structures were evaluated to mitigate the risk to shareholders.
Unfortunately shareholders could not find an acceptable solution and Vodacom has
terminated its management agreement and negotiations with VEE Networks (formerly
Econet Wireless Nigeria Limited) effective May 31, 2004. Vodacom will continue
its strategy of managed expansion into Africa, only entering markets where the
conditions and risks are acceptable to shareholders.
Operational efficiency enhancements gained momentum, with the successful rollout
of workforce management by the Operational Support Systems (OSS) organisation.
This enabled 4,817 employees` work to be planned, allocated and monitored
electronically through the use of handheld devices. The field force team, which
delivers service to customers, achieved significant savings through a reduction
of the vehicle fleet of 6.0%, reduced dispatches driven by a reduction in repeat
faults, reduced theft and breakage incidents and a 16% reduction in the cost of
fixed-line materials and maintenance.
Telkom continued to focus on optimising its property portfolio through the
relocation of employees from leased properties to owned properties and
improvements in overall space utilisation.
Group performance
Group operating revenue increased 8.8% (2003: 10.0%) to R40,795 million (2003:
R37,507 million) in the year ended March 31, 2004. Fixed-line operating revenue,
after inter-segmental eliminations, increased 4.6% (2003: 5.9%) primarily due to
solid growth in data services and increased subscription and connection tariffs
and local and fixed-to-mobile traffic tariffs. Mobile operating revenue, after
inter-segmental eliminations, increased 23.2% (2003: 27.5%) primarily due to
customer growth.
Group operating expenses increased 1.9% (2003: 4.0%) to R31,805 million (2003:
R31,226 million) in the year ended March 31, 2004 primarily due to increased
operating expenses in the mobile segment. This was partially offset by a 3.5%
decrease (2003: 0.7%) in the fixed-line operating expenses (before inter-
segmental eliminations) primarily due to reduced payments to operators, selling,
general and administrative expenses, services rendered and operating leases,
partially offset by an increase in depreciation, amortisation and impairment and
write-off of assets. Fixed-line selling, general and administrative costs
(before inter-segmental eliminations) decreased by 15.1% mainly due to the
reversal of the Telcordia provision. The increase in mobile operating expenses
of 17.9% (2003: 23.6%) (before inter-segmental eliminations) was primarily due
to increased competition resulting in increased incentive costs and expenses to
support customer growth. Mobile payments to other operators increased as a
result of the increased outgoing traffic and the higher volume growth of more
expensive outgoing traffic terminating on other mobile networks relative to
traffic terminating on the lower cost fixed-line network.
Investment income consists mainly of interest received on trade receivables,
short-term investments and bank accounts. Investment income increased 13.0%
(2003: 17.2% decrease) to R479 million (2003: R424 million) largely as a result
of higher interest received due to higher average balances held in investment
and bank accounts.
Finance charges include interest paid on local and foreign borrowings, amortised
discounts on bonds and commercial paper bills, fair value gains and losses on
financial instruments and foreign exchange gains and losses. Finance charges
decreased 21.4% (2003: 62.9% increase) to R3,264 million (2003: R4,154 million)
due to a 13.3% decrease (2003: 9.9%) in interest expense to R2,488 million
(2003: R2,869 million) and a 39.6% decrease (2003: 302.4%) in group net fair
value and exchange losses on financial instruments of R776 million (2003: R1,285
million). The decrease in interest expense was primarily due to lower balances
on local loans.
Consolidated tax expenses increased 63.1% (2003: 20.2%) to R1,711 million (2003:
R1,049 million) in the year ended March 31, 2004. The consolidated effective tax
rate for the year ended March 31, 2004 was 27.2% (2003: 37.7%). Telkom Company`s
effective tax rate was 15.6% (2003: 34.7%). The lower effective tax rate for
Telkom Company in the year ended March 31, 2004 was primarily due to dividends
received from Vodacom and the raising of a deferred tax asset on the unutilised
STC credits. Vodacom`s effective tax rate was 36.1% (2003: 34.0%). The higher
effective tax rate for Vodacom is as a result of the Secondary Taxation on
Companies payable on the dividends declared by Vodacom.
Net profit increased 177.5% (2003: 33.5%) to R4,523 million (2003: R1,630
million) in the year ended March 31, 2004.
Group capital expenditure decreased 7.1% (2003: 36.6% decrease) to R5,307
million (2003: R5,712 million) and represents 13.0% of group revenue (2003:
15.2%) in line with the Group`s announced guidance of maintaining capital
expenditure in the range of 12% to 15% of group revenues.
Cash flows from operating activities increased 42.4% (2003: 19.3%) to R13,884
million (2003: R9,748 million) primarily due to increased operational cash flows
and decreased finance charges. Cash flows utilised in investing activities
decreased 5.4% (2003: 38.0%) to R5,423 million (2003: R5,731 million) primarily
due to a reduction in capital expenditure partially offset by Vodacom`s
investment in Mozambique and the repurchase of Telkom`s shares.
Solid operating performance across the Group combined with strict cost
discipline has resulted in a strengthened balance sheet. Net debt, after
financial assets and liabilities, decreased 33.8% to R13,362 million (2003:
R20,171 million). The balance sheet at March 31, 2004 strengthened, resulting in
a net debt to equity ratio of 60.6% from 109.9% at March 31, 2003.
The Group intends to maintain a targeted net debt to equity range of between 50%
- 70% whilst increasing distributions to shareholders in the form of dividends
and share buy-backs while maintaining a strategic level of cash for potential
corporate action.
Interest bearing debt (including credit facilities utilised) decreased 23.6% to
R17,176 million (2003: R22,492 million) in the year ended March 31, 2004. In the
year ended March 31, 2004, loans repaid and the increase in net financial assets
exceeded loans raised by R6,374 million. The Group`s repayments in the year
ended March 31, 2004 included a repayment of R4,311 million of the Telkom TL03
local bond.
Telkom remains committed to maintaining its investment grade credit ratings and
both S&P and Moody`s ratings were unchanged at BBB- and Baa3, respectively. In
May 2004, Moody`s issued a release stating that they had placed Telkom under
review for a possible upgrade in rating.
The macro environment remained relatively stable over the year
GDP growth during 2003 was 1.9%. The outlook for GDP growth is fairly positive
with domestic expenditure remaining buoyant, resulting in more income becoming
available for discretionary telecommunication spend.
The relatively low interest rates of 11.5% at March 31, 2004 have been positive
for telecommunications spend, particularly among small and medium sized
businesses. Telkom expects to benefit from the future refinancing of debt at
lower interest rates from the higher fixed rates currently being paid.
Telkom`s annual tariffs are set in January each year based on annual inflation
increases in September. In 2003, the Statistics South Africa error in the
calculation of inflation and the subsequent downward revision of 1.3% was
unfortunate as Telkom had concluded its three-year agreement with the unions
based on higher future inflation expectations.
The appreciation of the Rand has been positive for Telkom as a significant
portion of capital and operating expenditure is denominated in foreign currency.
The value of the Rand as measured against the Dollar has appreciated 26.4% in
the year ended March 2004 to an average of R7.17 per US$1.00 from R9.74 per
US$1.00 in the prior year. While this appreciation negatively impacted Telkom`s
international interconnection revenues and the translation of Vodacom`s revenues
from international operations, it resulted in savings in foreign denominated
operating and capital expenditure and contributed to the improvement in
operating margins. Although the strong Rand positively contributed to operating
profit, it negatively impacted net reported earnings as a result of the R776
million loss on the net fair value and exchange losses on financial instruments.
The regulatory environment
On July 15, 2003, the Department of Communications announced their plans to
introduce a Convergence Bill that will provide a licensing and regulatory
framework for a converged telecommunications, broadcasting and information
technology industry. This will supplement or replace current sector-specific
legislation. No formal timeline for the tabling in Parliament of the new
legislation has been communicated, but Government will continue to interact with
the industry in its development.
On November 4, 2003, the Minister of Communications announced her intention to
licence the Second National Operator (SNO). However, the process of licencing is
still under way and to date the SNO licence has not been awarded. In June, 2004
the Minister approved four applicants for the under serviced area licencees.
On November 14, 2003, Telkom filed its fixed-line average tariff adjustments of
2.7% effective from January 2004 with the ICASA. On December 10, 2003, a revised
filing was submitted to the Independents Communications authority of South
Africa ICASA with an average tariff adjustment of 2.2% to take account of
Vodacom reducing their fixed-to-mobile tariff.
In terms of the competitive enabling regulations surrounding carrier pre-
selection, a two-phased approach has been adopted. This will initially entail a
call-by-call carrier selection, which has already been built into Telkom`s
exchanges, followed by full carrier pre-selection.
In the year ahead the following key regulatory developments are expected:
- The Group`s regulatory accounts, known as the COA/CAM, the Chart of Account
and Cost Allocation Manual, will be presented on a historic cost basis this year
and on a current cost/Long Run Incremental Cost (LRIC) basis next year;
- The regulator is expected to review price tariffs in terms of the composition
of the basket of services and the application of the price control formula,
which currently caps overall price increases on a basket of services at CPI
minus 1.5%; and
The regulations on interconnection are fairly stable and little new developments
are expected over the next year. However, the refinement of interconnection
guidelines will evolve as Telkom negotiates with new licencees.
Black Economic Empowerment (BEE)
BEE fits logically into the drive for sustainability for all South African
companies. It is crucial for the creation of a sustainable marketplace by
enlarging the domestic market and a broad-based black middle class to support
ongoing revenue and profit growth. BEE is therefore a crucial growth imperative
for Telkom.
Telkom was recently recognised as the most empowered company in South Africa by
the Financial Mail/Empowerdex survey of 200 listed companies. This award
demonstrated the Group`s achievements in advancing broad-based BEE across all
its pillars.
BEE procurement forms the cornerstone of Telkom`s strategy as an area with the
most impact. The Group`s BEE procurement programme is primarily based on
leveraging its buying power and profile to empower small and medium businesses.
Telkom directed R5 billion in the 2004 financial year to BEE suppliers. The
Group has also made strong progress in employment equity, training and
development and social investment.
Telkom and Vodacom have been actively involved in the development of the BEE
Charter for the ICT sector. The third working draft was released in May 2004
with finalisation expected in June 2004.
Both Telkom and Vodacom have created meaningful value for BEE shareholders. Over
100,000 South African retail investors subscribed during Telkom`s Initial Public
Offering (IPO), specifically targeted at historically disadvantaged individuals.
In its first year as a listed company, the estimated value created for retail
shareholders amounted to about R560 million. Vodacom has realised significant
value for its previous BEE shareholder, HCI. In October 1996, a 5% stake was
sold to HCI for R118 million. Six years later, the BEE company sold their stake
for R1.5 billion, making it one of the most successful BEE deals ever done in
South Africa.
Corporate governance
There were a number of developments in corporate governance in both the Group`s
domiciles, with the JSE Securities Exchange, South Africa (JSE) and New York
Stock Exchange, Inc. (NYSE) adopting more stringent listing requirements. In
addition, the Sarbanes-Oxley Act in the USA together with the local King II
Report has set a rigorous corporate governance framework that the Group is
working hard to comply with.
Dividends
The Telkom board of directors approved a final dividend of R613 million or 110
cents per share on June 3, 2004, . A special dividend of R501 million or 90
cents per share was paid on December 29, 2003, making the total dividend for
2004 R1,114 million.
The Board aims to pay a progressively increasing dividend annually. The level of
dividend will be based upon a number of factors, including the assessment of
financial results, the group`s debt level, interest coverage and future growth
expectations, including internal cash flows. For future years the company only
expects to pay an annual dividend.
The year ahead
Over the past year, the Group has demonstrated its ability to maintain its
leadership position, balance its commitments as an active and responsible
corporate citizen, and continues to deliver healthy returns to shareholders.
The Group will seek to continue optimising its capital structure to support the
appropriate allocation of cash to ongoing cost saving initiatives and pursuing
new growth opportunities, while returning dividends to shareholders. The balance
sheet now allows greater financial flexibility to participate in future
corporate action.
Although the Group will continue to look inward to extract further operating
efficiencies, the focus will increasingly shift outward to seek new growth
opportunities in selected new market areas, such as data, and exploiting
synergies between fixed-line and mobile. Additionally, both businesses will seek
to pursue considered African expansion.
NE Mtshotshisa SE Nxasana
Non-executive chairman Chief executive officer
June 7, 2004
Operational data
%
For the year ended March 31, 2003 2004 change
Fixed-line data
Fixed access lines (thousands) 4,844 4,821 (0.5)
Postpaid - PSTN 3,285 3,134 (4.6)
Postpaid - ISDN channels 563 656 16.5
Prepaid 817 856 4.8
Payphones 179 175 (2.2)
Fixed-line penetration rate (%) 10.7 10.4 (2.8)
Revenue per fixed access line 4,987 5,169 3.6
(ZAR)
Total fixed-line traffic 32,868 32,942 0.2
(millions of minutes)
Local 20,396 20,547 0.7
Long distance 4,728 4,616 (2.4)
Fixed-to-mobile 4,135 3,980 (3.7)
International outgoing 439 427 (2.7)
Interconnection 3,170 3,347 5.6
Mobile interconnection 2,099 2,159 2.9
International interconnection 1,071 1,188 10.9
International call centre - 25 -
ADSL (thousands) 3 20 661.5
Managed data network sites 7,729 9,061 17.2
Internet customers 98,690 142,208 44.1
Fixed-line employees (excluding 35,361 32,358 (8.5)
subsidiaries)
Fixed-line employees (including 35,942 32,934 (8.4)
subsidiaries)
Fixed lines per fixed-line 137 149 8.8
employee
Mobile data1
Total customers (thousands) 8,647 11,217 29.7
South Africa
Mobile customers (thousands) 7,874 9,725 23.5
Contract 1,181 1,420 20.2
Prepaid 6,664 8,282 24.3
Community services telephones 29 23 (20.7)
Mobile churn (%) 30.4 36.6 20.4
Contract 11.9 10.1 (15.1)
Prepaid 34.0 41.3 21.5
Mobile market share (%) 57 54 (5.3)
Mobile penetration (%) 30.2 39.2 29.8
Total mobile traffic (millions of 10,486 12,297 17.3
minutes)
Mobile ARPU (ZAR) 183 177 (3.3)
Contract 629 634 0.8
Prepaid 90 90 -
Community services 1,861 2,155 15.8
Mobile employees 3,904 3,848 (1.4)
Mobile customers per mobile 2,017 2,527 25.3
employee
Other African countries
Mobile customers (thousands) 773 1,492 93.0
Mobile employees 502 761 51.6
Mobile customers per mobile 1,540 1,961 27.3
employee
1. 100% of Vodacom. Telkom consolidates 50%.
Summarised consolidated income statements
Audited Audited
2003 2004
for the years ended March 31, Notes Rm Rm
Operating revenue 4 37,507 40,795
Other income 233 98
Operating expenses 31,226 31,805
Employee expenses 7,208 7,408
Payments to other operators 6,092 5,985
Selling, general and 7,682 7,971
administrative expenses
Services rendered 2,622 2,269
Operating leases 1,124 923
Depreciation, amortisation, 6,498 7,249
impairment and write-offs
Operating profit 6,514 9,088
Investment income 424 479
Profit before finance charges 6,938 9,567
Finance charges 5 4,154 3,264
Interest 2,869 2,488
Foreign exchange and fair value 1,285 776
effect
Profit before tax 2,784 6,303
Taxation 1,049 1,711
Profit after tax 1,735 4,592
Minority interests 105 69
Net profit for the year 1,630 4,523
Basic and diluted earnings per 8 292.6 812.0
share (cents)
Headline earnings per share 8 314.0 863.6
(cents)
Dividend per share (cents) 8 - 90.0
Summarised consolidated balance sheets
Audited Audited
2003 2004
at March 31, Notes Rm Rm
Assets
Non-current assets 43,308 41,923
Property, plant and equipment 41,046 39,024
Investment properties - 32
Intangible assets 364 580
Investments 1,161 1,567
Deferred taxation 737 720
Current assets 9,921 11,061
Other financial assets 1,771 1,089
Income tax receivable 276 -
Short term investments 26 168
Inventories 621 520
Trade and other receivables 6,110 6,066
Cash and cash equivalents 10 1,117 3,218
Total assets 53,229 52,984
Equity and liabilities
Capital and reserves 18,348 22,058
Share capital and premium 11 8,293 8,293
Treasury shares 11 - (238)
Non-distributable reserves (11) 104
Retained earnings 10,066 13,899
Minority interests 194 200
Non-current liabilities 20,490 16,283
Interest bearing debt 12 17,453 12,703
Deferred taxation 497 1,142
Provisions 2,540 2,438
Current liabilities 14,197 14,443
Credit facilities utilised 10 280 422
Trade and other payables 5,229 6,007
Shareholders for dividend - 7
Deferred income 1,030 1,345
Current portion of interest 12 4,759 4,051
bearing debt
Current portion of provisions 2,155 1,658
Income tax payable 177 460
Other financial liabilities 567 493
Total equity and liabilities 53,229 52,984
Summarised consolidated cash flow statements
Audited Audited
2003 2004
for the years ended March 31, 2004 Notes Rm Rm
Operating activities 9,748 13,884
Cash receipts from customers 37,494 40,520
Cash paid to suppliers and (25,431) (24,750)
employees
Cash generated from operations 12,063 15,770
Interest received 384 479
Finance charges paid (2,776) (1,255)
Dividend paid (25) (548)
Taxation refunded/(paid) 102 (562)
Investing activities (5,731) (5,423)
Proceeds on disposal of property, 21 52
plant and equipment
Proceeds on disposal of investment 172 29
Proceeds on disposal of 16 -
subsidiaries and joint ventures
Additions to property, plant and (5,671) (5,187)
equipment
Intangible assets acquired - (61)
Additions to other investments (269) (331)
Acquisition of subsidiaries - 75
Financing activities (3,026) (6,481)
Listing costs (154) -
Purchase of treasury shares - (102)
Loans raised 9,117 1,732
Loans repaid (11,526) (7,428)
Finance lease capital repaid - (5)
Finance lease capital raised 5 -
Increase in net financial assets (468) (678)
Net increase in cash and cash 991 1,980
equivalents
Net cash and cash equivalents at (98) 837
beginning of the year
Effect of foreign exchange rate (56) (21)
differences
Net cash and cash equivalents at 10 837 2,796
end of the year
Summarised consolidated statement of changes in equity
Audited Audited
for the years ended March 31, 2003 2004
Balance at April 1 16,832 18,348
Net profit for the year 1,630 4,523
Fair value adjustments on investments (37) 9
Foreign currency reserves net of tax (121) (83)
Share issue expenses reversed 44 -
Treasury shares - (238)
Dividend declared - (501)
Balance at March 31 18,348 22,058
Notes to the summarised consolidated financial statements
for the year ended March 31, 2004
1. Basis of preparation
The Group has prepared summarised consolidated financial statements in
conformity with International Financial Reporting Standards and South African
Statements of Generally Accepted Accounting Practice in compliance with IAS34
and AC127 - Interim Financial Reporting respectively. The accounting policies
applied in the preparation of the preliminary results for the year ended March
31, 2004 are consistent with those applied in the annual financial statements
for the year ended March 31, 2003.
The preparation of summarised consolidated financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Although these estimates are based on management`s best
knowledge of current events and actions that the Group may undertake in the
future, actual results may differ from those estimates.
2. Comparatives
Certain comparative figures have been reclassified in accordance with current
period classifications and presentation. These reclassifications have no effect
on prior year net profit. The current period classifications more closely
resemble the nature of transactions within the Group`s operating structure.
The principle reclassifications were to reflect certain other benefits as part
of salaries and wages, to show certain payments to other operators net of
revenue and to reflect impairments and write-offs as part of the depreciation
charge.
3. Restatement
Vodacom restated its balance sheet disclosure for the 2003 financial year to
reflect its net zero investment in the Vodacom Congo (RDC) s.p.r.l`s preference
shares at its gross value in investments and interest bearing debt as the Group
does not have a legal right of set-off for these amounts. This restatement does
not impact the Group`s results or cash flow information for the 2003 year.
2003 2004
Rm Rm
4. Operating revenue 37,507 40,795
Fixed-line 29,106 30,443
Mobile 8,401 10,352
Fixed-line 29,106 30,443
Subscriptions, connections and other 4,595 5,024
usage
Traffic 18,001 18,313
Domestic (local and long distance) 9,178 9,680
Fixed-to-mobile 7,539 7,321
International (outgoing) 1,284 1,312
Interconnection 1,587 1,441
Data 4,183 4,787
Directories and other 740 878
5. Finance charges 4,154 3,264
Interest 2,869 2,488
Local debt 2,642 2,253
Foreign debt 375 303
Less: Finance costs capitalised (148) (68)
Foreign exchange gains and losses and 1,285 776
fair value adjustments
Foreign exchange losses/(gains) (761) (368)
Fair value adjustments on derivative 2,046 1,144
instruments
6. Restructuring costs 244 302
Telkom has continued to incur
restructuring costs as a result of a
plan to reduce the workforce. 1,633
employees were affected (2003: 2,124)
7. Impairment and write-offs of 189 350
property, plant and equipment
During the period, the Group raised
an impairment provision of R149
million on an earth station. The
asset was developed to route traffic
between the Public
Switch Telecommunications Network
(`PSTN`) and the Satellite Access
Node (`SAN`) of a satellite company.
The satellite company has not met its
current outstanding financial
obligations to Telkom and management
is of the opinion that no future
payments will be received. Management
has assessed the asset and it appears
unlikely that there will be future
economic benefits flowing to the
Group to recover the carrying value.
In addition the Group has written off decommissioned and
obsolete equipment.
8. Earnings per share
Basic and diluted earnings per share
The calculation of earnings per
share is based on net profit for the
year (earnings) of R4,523 million
(2003: R1,630 million) and weighted
number of ordinary shares in issue
of 556,994,962 (2003: 557,031,819).
Headline earnings per share
The calculation of headline earnings
per share is based on headline
earnings of R4,810 million (2003:
R1,749 million) and 556,994,962
(2003: 557,031,819) weighted average
number of ordinary shares issued.
Reconciliation between earnings and
headline earnings:
Earnings as reported 1,630 4,523
Adjustments:
Profit on disposal of investment (89) (25)
Profit on sale of property, plant (15) (19)
and equipment
Property, plant and equipment 189 350
impairment and write-offs
Goodwill amortisation 73 73
Goodwill impairment 16 -
Tax and outside shareholder effects (55) (92)
Headline earnings 1,749 4,810
Basic and diluted earnings per share 292.6 812.0
(cents)
Headline earnings per share (cents) 314.0 863.6
The disclosure of headline earnings is a requirement of the JSE Securities
Exchange of South Africa and is not a recognised measure under US GAAP.
Dividend per share (cents) - 90.0
9. Net asset value per share (cents) 3,293.7 3,982.7
The calculation of net asset value per share is based on net assets of
R22,058 million at March 31, 2004 (2003: R18,348 million) and 553,846,083 (2003:
557,031,819) issued shares.
10. Net cash and cash equivalents 837 2,796
Cash and bank balances 916 1,219
Short-term deposits 201 1,999
Cash shown as current assets 1,117 3,218
Credit facilities utilised (280) (422)
Unutilised banking facilities (Rbn) 3.0 3.0
The borrowing powers of the directors
are unlimited.
11. Share capital 8,293 8,293
Issued and fully paid
557,031,817 (2003: 557,031,817)
ordinary shares of R10 each
1 (2003: 1) Class A ordinary share of
R10
1 (2003: 1) Class B ordinary share of
R10
Treasury shares - (238)
3,185,736 ordinary shares in Telkom
are currently held by its subsidiary
Rossal No 65 (Proprietary) Limited,
at a fair value of R251 million
12. Interest-bearing debt 22,212 16,754
Current portion of interest-bearing 4,759 4,051
debt
Local debt 4,527 3,628
Foreign debt 225 408
Finance leases 7 15
Long-term portion of interest-bearing 17,453 12,703
debt
Local debt 11,473 7,355
Foreign debt 4,873 4,166
Finance leases 1,107 1,182
13. Additions to property, plant and 5,712 5,307
equipment
Land and buildings 60 123
Network equipment 2,479 1,524
Furniture and office equipment 22 10
Support equipment 341 140
Data processing equipment 354 491
Under construction 2,416 2,968
Other 40 51
14. Purchase of subsidiaries
On March 1, 2004 a 51% interest in the equity of
Smartphone SP (Proprietary) Limited was acquired for a
purchase price of R117 million, (Telkom`s 50% share) of
which R116 million was paid on April 7, 2004.
2003 2004
Rm Rm
15. Commitments
Capital commitments authorised 6,974 7,151
Fixed-line 4,977 4,566
Mobile 1,997 2,585
Commitments against authorised 435 439
capital expenditure
Fixed-line 104 88
Mobile 331 351
Authorised capital expenditure not 6,539 6,712
yet contracted
Fixed-line 4,873 4,478
Mobile 1,666 2,234
Management expects these commitments to be financed from internally generated
cash and other borrowings.
Capital commitments of the mobile segment was restated for the years ending
March 31, 2003 to include capital expenditure approved by the Board of Directors
for the next financial year.
16. Contingencies
Third parties
Sundry disputes with third parties that are not individually significant and
that Telkom does not intend to settle amount to R70 million (2003: R161
million).
Guarantee of employee housing loans
Telkom guarantees a certain portion of employees` housing loans. The amount
guaranteed differs depending on facts such as employment period and salary
rates. When an employee leaves the employment of Telkom, any housing debt
guaranteed by Telkom is settled before any pension payout can be made over to
the employee. The maximum amount of the guarantee in the event of the default is
R144 million (2003: R192 million).
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance and
activation system to be supplied by Telcordia. In the 2001 financial year, the
agreement with Telcordia was terminated and in that year, the company wrote off
R119 million of this investment. Following an assessment of the viability of the
project the balance of the Telcordia investment was written off in the 2002
financial year. During March 2001, the dispute was taken to arbitration, where
Telcordia was seeking approximately US$130 million plus interest at a rate of
15.50% per year for money outstanding and damages. In September 2002, a partial
ruling was issued by the arbitrator in favour of Telcordia. On November 5, 2002,
Telkom brought an application to the High Court in South Africa to review and
set aside the partial award. The hearing of the review application commenced on
August 11, 2003. Judgement in Telkom`s favour was handed down on November 27,
2003. Telcordia, however, brought an application for leave to appeal on April
28, 29 and 30, 2004. On May 3, 2004, the High Court dismissed the application by
Telcordia and ordered Telcordia to pay the legal costs of Telkom including the
cost of two council. Telcordia also petitioned the United States District Court
for the district of Columbia to confirm the partial ruling which petition Telkom
has successfully resisted. Telcordia, however, has since filed a notice to
appeal against the decision of the District Court of Columbia, which appeal was
heard on April 1, 2004. The court dismissed the appeal by Telcordia on April 9,
2004. The dispute between Telkom and Telcordia and the amount of Telkom`s
liability are not expected to be finalised until late 2004 or early 2005. As
Telkom no longer believes it has a probable obligation, it has provided US$Nil
(March 31, 2003: US$44 million) for its estimate of liabilities, which include
interest and legal fees.
Competition Commission
The South African Value Added Network Services Association (`SAVA`), an
association of value added network service (`VANS`) providers, filed complaints
against Telkom at the Competition Commission regarding alleged anti-competitive
practices on the part of Telkom. Certain of the complaints have been referred to
the Competition Tribunal by the Competition Commission for adjudication. The
complaints deal with Telkom`s alleged refusal to provide telecommunications
facilities to certain VANS providers to construct their networks, alleged
refusal to lease access facilities to VANS providers, alleged discriminatory
pricing with regard to leased line services and alleged refusal to peer with
certain VANS providers.
A maximum administrative penalty of up to 10% to be calculated with reference to
Telkom`s annual turnover, excluding the turnover of subsidiaries and joint
ventures, for the financial year prior to the complaint date, may be imposed if
it is found that Telkom has committed a prohibited practice as set out in the
Competition Act, 1998 (as amended). The Competition Commission has to date not
imposed the maximum penalty.
Telkom has brought an application in the High Court in respect of the
Competition Tribunal`s jurisdiction to adjudicate this matter, on the basis
that:
the Competition Tribunal should not decide on the nature of Telkom`s rights as
contained in the Telecommunication`s Act, 1996 (as amended) as well as Telkom`s
various licences; and
several of the complaints are already the subject of matters still pending at
the Independent Communications Authority of South Africa (`ICASA`). Telkom
argues that it is for the sectoral regulator, ICASA, to decide on the rights and
obligations given to Telkom in terms of the Telecommunication`s Act and its PSTS
licence.
