| Mon 15 Nov 2004, 12:10 | | Telkom - Vodacom Group (Pty) Limited interim resul |
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Telkom - Vodacom Group (Pty) Limited interim results for the six months ended
September 30, 2004
Telkom SA Limited
(Registration Number 1991/005476/06)
ISIN: ZAE000044897
JSE and NYSE Share Code TKG
(`Telkom`)
Vodacom Group (Pty) Limited interim results for the six months ended September
30, 2004
COMMENTARY
Vodacom Group (Proprietary) Limited (`Vodacom` or `Vodacom Group`) (unlisted),
South Africa`s largest mobile communications group, in which Telkom has a 50.0%
holding, announced interim results for the six months ended September 30, 2004.
Revenue increased by 20.3% to R13,594 million (US$2,102 million), EBITDA
increased 13.4% to R4,192 million (US$648 million) and profit before tax
increased 18.7% to R2,555 million (US$395 million) in the six months ended
September 30, 2004 compared to the six months ended September 30, 2003.
GROUP INTERIM FINANCIAL HIGHLIGHTS
- Group revenue up 20.3% to R13.6 billion
- Group EBITDA up 13.4% to R4.2 billion
- Group cash flow from operations up 28.7% to R3.8 billion
- Interim dividend of R1.6 billion
OPERATING HIGHLIGHTS
- Group total customers up 40.6% to 13.5 million
- Group capex as a percentage of revenue at 10.4%
- Group customers per employee improved by 28.7% to 2,751
- Acquired Smartcom (Pty) Limited and consolidated for the
first time
- Secured access to Vodafone Live! through Vodafone
Affiliate Partner agreement
- 3G rollout well under way
SOUTH AFRICA
Customers
The South African customer base increased by 33.1% to 11.3 million (September
30, 2003: 8.5 million) compared to the six months ended September 30, 2003,
again reinforcing Vodacom`s consistently bullish view of this market. The
majority of the growth came from the prepaid market although remarkable growth
was also achieved in the contract market. The number of prepaid customers
increased by 33.5% to 9.7 million, while the number of contract customers
increased by 32.0% to 1.6 million. The substantial increase in gross contract
connections of 174.5% was fuelled by the new `Top-Up` product and increased
connection incentive levels. These increased incentives and the volume of new
gross connections managed to strengthen Vodacom`s market position but negatively
impacted margins. The strong growth in customers was a direct result of the high
number of gross new connections achieved of 2.7 million, coupled with low churn
in both the contract base and prepaid base of 8.6% and 21.9% respectively.
ARPU
The developing market as reflected in the prepaid base has been a driving force
behind market penetration in South Africa and made up 88.7% (September 30, 2003:
95.0%) of all gross connections. However, a record number of gross contract
connections of 302,000 were achieved because of the migration of higher-end
prepaid customers to contracts coupled with the new `Top-Up` product and higher
incentives. ARPU decreased 7.8% to R165 (September 30, 2003: R179) per month in
the six months ended September 30, 2004 compared to the six months ended
September 30, 2003 due to the continued dilution of ARPU caused by the higher
proportion of new, lower ARPU prepaid connections. Contract customer ARPU has
decreased by 3.9% to R637 (September 30, 2003: increased 8.3% to R663) compared
to the six months ended September 30, 2003 due to the migration of prepaid
customers and the success of the `Top-Up` product at the lower end of the
contract market, while prepaid customer ARPU decreased by 9.2% to R79 (September
30, 2003: 1.1% to R87) per customer per month.
Churn
Due to the high cost of acquisition in the highly developed contract market,
Vodacom`s focus on upgrade and retention policies ensured the further decrease
in contract churn to the lowest level in Vodacom`s history of 8.6% in the six
months ended September 30, 2004 (September 30, 2003: 10.8%). The lower prepaid
churn experienced of 21.9% (September 30, 2003: 44.1%) is due mainly to changes
to the disconnection policy governing prepaid customers.
Traffic
Total traffic on the network, excluding national and international roaming
traffic, has increased 20.4% to 7.0 billion minutes (September 30, 2003: 5.8
billion) in the six months ended September 30, 2004 compared to the six months
ended September 30, 2003. This growth was mainly due to the 33.1% growth in the
total customer base in the same period to 11.3 million as at September 30, 2004.
Also evident was continued fixed for mobile call substitution, with mobile to
mobile traffic increasing by 29.9% compared to the six months ended September
30, 2003 while mobile to fixed and fixed to mobile traffic decreased by 0.8%
compared to the six months ended September 30, 2003.
Operational
The signing of the Vodafone Affiliate Partner agreement announced on November 3,
2004 promises to provide Vodacom with a distinct competitive advantage in the
mobile content arena. In terms of the agreement Vodacom will have access to the
full Vodafone Live! offering. Vodacom intends to launch commercial 3G service on
December 1, 2004 and rollout of the infrastructure is commencing on schedule.
Vodacom`s mobile content portal, Vodacom4me, has experienced its highest growth
ever in August 2004 and the number of registered users now stands at more than
320,000. Several new products and services were introduced during the six months
ended September 30, 2004, with the focus being on prepaid product offerings,
which included fully itemised billing, prepaid passport, a new 4U Super Six
starter pack, enhanced Vodago Super Six starter pack and airtime transfer.
As part of Vodacom`s pledge to provide for the unique requirements of its
specific needs customers, Vodacom now provides blind and visually impaired
customers the ability to interact with Vodacom through a dedicated multi-channel
contact centre, and a speaking phone that, for the first time, enables blind and
visually impaired customers to use the full set of features and functionality of
modern mobile phones. Vodacom aims to be at the forefront of innovation by
enabling wireless application service providers to easily develop applications
on the Vodacom network, and 125 wireless application service provider agreements
have been signed to date.
Regulatory
Vodacom utilises and will continue to utilise 1800 mHz and 3G spectrum in terms
of temporary commercial licences granted by ICASA, pending finalisation of the
1800 mHz and 3G spectrum licence obligations.
During September 2004 the Minister of Communications published a number of
determinations that provided for far-reaching and broad deregulation of the
industry. In terms of these determinations, mobile operators will be allowed to
self-provide and/or obtain facilities from any person or organisation. Value-
added service providers will be allowed to carry voice traffic using any
protocol, obtain facilities from any person as well as sublet, resell and share
spare capacity. Fixed-line operators will also be allowed to share and resell
spare capacity. Vodacom is assessing the impact of these determinations and is
developing strategies to best deal with the changes and to take advantage of any
opportunities. However, Vodacom is awaiting further clarification in the form of
legislation before acting prematurely.
The 4th draft of the ICT BEE Charter released on August 26, 2004 to the ICT
industry called for final comments on the process by September 15, 2004. Vodacom
is actively participating and contributing to this important process and has
submitted extensive comments as well as engaging directly with Government
together with other regulated companies.
Market share
The South African cellular industry has grown by more than 10% in the last six
months. Vodacom has retained its leadership in the highly competitive South
African market with an estimated 56% market share as at September 30, 2004
despite strong competition. Although Vodacom has been highly successful in
defending and extending its market share, the competitiveness in the market and
the sheer volume of gross connections have inevitably resulted in margin
squeeze.
OTHER AFRICAN OPERATIONS
This was an exciting six months for Vodacom`s other African investments. Vodacom
Tanzania entrenched its position as market leader by further extending its
market share to 58% at September 30, 2004. The Tanzanian market remains highly
competitive but with mobile penetration estimated at a mere 4.0% of the
population, it still promises significant further potential. Vodacom Tanzania
increased its customer base by 76.0% to 952,000 (September 30, 2003: 76.9% to
541,000) as at September 30, 2004 compared to September 30, 2003.
Vodacom Congo has grown its market share to 48% at September 30, 2004. The DRC
has the lowest estimated mobile penetration of all Vodacom`s operations at 3.3%
of the population at September 30, 2004. Vodacom consequently expects
substantial further growth from this market. Vodacom Congo increased its
customer base by 97.2% to 903,000 (September 30, 2003: 222.5% to 458,000) at
September 30, 2004 compared to September 30, 2003.
Vodacom Lesotho has positioned itself well to minimise the impact of competitive
activity and has maintained its 80% market share at September 30, 2004. Vodacom
Lesotho had 122,000 customers as at September 30, 2004. Mobile penetration in
Lesotho is now estimated at 7.2% and is not expected to increase significantly
in the near term.
The latest of Vodacom`s African investments, Vodacom Mozambique, is slowly
making inroads into the market against a strong and established competitor.
Vodacom Mozambique had 164,000 customers as at September 30, 2004. Market share
is estimated at 24% and mobile penetration at 3.8%. The financial results of
Vodacom`s operations are analysed in more detail in the segmental commentary of
this report.
GROUP FINANCIAL REVIEW
Two significant accounting changes need to be taken into account when analysing
Vodacom`s results for the six months ended September 30, 2004. Firstly, with
effect from April 1, 2004, Vodacom Congo meets the definition of a subsidiary
because certain clauses granting the outside shareholders participating rights
have been removed from the shareholders` agreement and is consequently fully
consolidated in the Group annual financial statements. Prior to this date, the
Group proportionally consolidated 51% of the results of Vodacom Congo. Any
comparison of consolidated numbers with prior periods will therefore be
distorted since prior periods will reflect only 51% of Vodacom`s revenues,
expenses and balance sheet, whereas the current period reflects 100%. To
facilitate a better comparison of numbers with prior periods, adjusted
consolidated revenue, adjusted profit from operations, EBITDA and adjusted
capital expenditure figures are presented in the segmented analysis below, which
reflect 100% of Vodacom Congo for the prior periods presented.
Secondly, International Accounting Standard 36 - Impairment of Assets (`IAS
36`), has resulted in an impairment charge to the assets of Vodacom Mozambique
of R237 million, which has been included as a separate line item in the income
statement for the six months ended September 30, 2004. IAS 36 requires Vodacom
to recognise an impairment loss to the extent that Vodacom Mozambique`s assets`
carrying values exceeded their recoverable amounts, which is defined as the
higher of the net present value of expected future cash flows and the fair value
less cost of disposal. Vodacom Mozambique has consequently impaired the assets
to their estimated fair value less cost of disposal, which was R237 million less
than the book values at September 30, 2004.
The standard requires expected future pre-tax cash flows to be discounted at a
rate commensurate with the riskiness of the assets producing the cash flows.
Because of the high perceived risk of assets in Mozambique, this discount rate
is relatively high. The high discount rate used and the substantial capital
outlay required at the beginning of the project resulted in the calculated net
present value of expected future cash flows being lower than the expected fair
value less cost of disposal.
The results of the South African operations have been impacted by two main
factors, both of which have had a negative impact on margins. Firstly, the
continuing trend of fixed-mobile substitution has seen Vodacom`s net
interconnect revenue decline further because of increased interconnect cost.
Interconnect costs increased because the cost of terminating calls on other
mobile networks is much higher than the cost of terminating calls on Telkom`s
fixed-line network. Secondly, the higher levels of incentives paid for the
higher volume of gross contract connections has led to higher customer
acquisition costs and further margin pressure. Despite these factors, the
Vodacom Group achieved strong results in an ever more competitive environment.
REVENUE
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
Airtime, connection 5,061 5,974 7,823
and access1
Data revenue2 n/a 512 586
Interconnection 2,555 2,814 2,940
Equipment sales 1,305 1,514 1,681
International 343 310 436
airtime1
Other sales and 177 172 128
services
9,441 11,296 13,594
REVENUE
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
Airtime, connection 18.0 31.0
and access1
Data revenue2 n/a 14.5
Interconnection 10.1 4.5
Equipment sales 16.0 11.0
International (9.6) 40.6
airtime1
Other sales and (2.8) (25.6)
services
19.6 20.3
Notes:
1. An amount of R160 million, previously included under international airtime,
has been reallocated to airtime, connection and access in the six months ended
2003. No reallocation has been done for the six months ended September 30,
2002.
2. Vodacom changed its classification of revenue to enable separate
identification of data during the prior financial period. Data revenue is
included in airtime, connection and access in the six months ended September 30,
2002 and has been reallocated in the six months ended September 30, 2003.During
the six months ended September 30, 2002 and 2003, 51% of Vodacom Congo was
proportionally consolidated in the Group financial statements. Effective April
1, 2004 Vodacom Congo is being fully consolidated as a subsidiary after certain
clauses granting the outside shareholders participating rights have been removed
from the shareholders` agreement. Consequently the table above reflects 100% of
Vodacom Congo for the six months ended September 30, 2004 and only 51% in the
prior periods.
Airtime, connection and access
Vodacom`s airtime, connection and access revenue increased 31.0% to R7,823
million (September 30, 2003: 18.0% to R5,974 million) in the six months ended
September 30, 2004 compared to the six months ended September 30, 2003,
primarily due to the increase in the number of Vodacom`s customers and because
of the consolidation of Vodacom Congo from April 1, 2004. Total customers
increased 40.6% (September 30, 2003: 25.1%) due to strong prepaid and contract
customer growth in South Africa and significant prepaid customer growth in
Vodacom`s other African operations.
Data revenue - geographical split
In ZAR millions
Six months ended September 30,
2003 2004 % of % of %
total total change
(unaudited) (unaudited) 2003 2004 2004/03
South 462 542 90.2 92.5 17.3
Africa
Tanzania 48 35 9.4 6.0 (27.1)
Lesotho 2 4 0.4 0.7 100.0
DRC - 4 - 0.7 -
Mozambique - 1 - 0.1 -
512 586 100.0 100.0 14.5
Vodacom`s data revenue increased 14.5% to R586 million (September 30, 2003: R512
million) in the six months ended September 30, 2004 compared to the six months
ended September 30, 2003 mainly due to SMS traffic growth. Vodacom transmitted
1,123 million SMSs (September 30, 2003: 908 million) over its South African
network during the six months ended September 30, 2004, up 23.7% compared to the
six months ended September 30, 2003. The number of MMS capable handsets on the
network as at September 30, 2004 was materially up at 1,180,238 (September 30,
2003: 236,987) sending on average 621,000 MMS messages per month. Data revenue
contributed 4.3% of total revenue for the six months ended September 30, 2004
(September 30, 2003: 4.5%). The decrease in data revenue in Vodacom Tanzania of
27.1% in the six months is due to aggressive pricing by competitors which
resulted in lower usage by Vodacom`s customers. Vodacom Tanzania has
subsequently matched the competitors` lower tariffs, which has stabilised usage,
but has had a negative effect on revenue.
Data revenue in Vodacom Congo, Vodacom Lesotho and Vodacom Mozambique is very
small but growing.
Interconnection
Vodacom`s interconnection revenue increased 4.5% to R2.9 billion (September 30,
2003: 10.1% to R2.8 billion) in the six months ended September 30, 2004 compared
to the six months ended September 30, 2003 primarily due to an increase in the
number of calls terminating on Vodacom`s network as a result of the increased
number of Vodacom customers and mobile users generally in all operations during
the period. However, significantly offsetting this and thereby inhibiting growth
in interconnection revenue was a 0.4% decrease in traffic originating from
Telkom and terminating on Vodacom`s network compared to the six months ended
September 30, 2003 caused by the changing call patterns of mobile users in South
Africa.
Equipment sales
Vodacom`s revenue from equipment sales, which yields low margins, increased by
11.0% to R1.7 billion (September 30, 2003: 16.0% to R1.5 billion) in the six
months ended September 30, 2004 compared to the six months ended September 30,
2003. The growth in equipment sales was primarily due to growth of Vodacom`s
customer base and the continued uptake of new handsets in South Africa fuelled
by Vodacom`s successful strategic drive to increase access in the South African
market. Sales were further fuelled by cheaper Rand prices of handsets coupled
with the added functionality of the new phones, such as built-in digital cameras
and colour screens.
International airtime
International airtime increased 40.6% to R436 million (September 30, 2003: R310
million) in the six months ended September 30, 2004 compared to the six months
ended September 30, 2003, primarily as a result of a healthy increase in
international airtime revenue in Vodacom South Africa and Vodacom Congo.
International airtime comprises of international calls by Vodacom customers,
roaming revenue from Vodacom`s customers making and receiving calls while abroad
and revenue from international customers roaming on Vodacom`s networks.
Other sales and services
Other sales and services includes revenue from non-core operations such as
income from Vodacom`s cell captive insurance scheme and decreased by 25.6%
(September 30, 2003: decreased by 2.8%) to R128 million primarily because of the
reallocation of value-added services revenue, which was previously included
under other sales and services to airtime connection and access, offset to some
extent by other sales and services revenue received in Smartcom (Pty) Limited.
OPERATING EXPENSES
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
Depreciation and 1,189 1,247 1,655
amortisation
Payments to other 983 1,379 1,804
network operators
Other direct network 4,338 5,013 6,068
operating costs1
Staff expenses 502 632 760
Marketing and 365 345 393
advertising expenses
General 234 300 409
administration
expenses
Other operating (8) (71) (33)
income
7,603 8,845 11,056
OPERATING EXPENSES
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
Depreciation and 4.9 32.7
amortisation
Payments to other 40.3 30.8
network operators
Other direct network 15.6 21.1
operating costs1
Staff expenses 25.9 20.3
Marketing and (5.5) 13.9
advertising expenses
General 28.2 36.3
administration
expenses
Other operating 787.5 (53.5)
income
16.3 25.0
Note:
1. Direct network operating costs less payments to other operators.
During the six months ended September 30, 2002 and 2003, 51% of Vodacom Congo
was proportionally consolidated in the Group financial statements. Effective
April 1, 2004 Vodacom Congo is being fully consolidated as a subsidiary after
certain clauses granting the outside shareholders participating rights have been
removed from the shareholders` agreement. Consequently the table above reflects
100% of Vodacom Congo for the six months ended September 30, 2004 and only 51%
in the prior periods.
Depreciation and amortisation
Vodacom`s depreciation and amortisation increased by 32.7% to R1,655 million
(September 30, 2003: R1,247 million) in the six months ended September 30, 2004
compared to the six months ended September 30, 2003. The biggest contributing
factor to the increase in depreciation and amortisation has been the impairment
of Vodacom Mozambique`s assets amounting to R237 million. The impairment has
been included under depreciation and amortisation for purposes of the above
analysis but has been shown as a separate line item in the income statement in
terms of IAS 36. Excluding this change, the increase in the depreciation and
amortisation would have been 13.7% compared to the six months ended September
30, 2003. Although Vodacom`s biggest capital investments have already been made
in South Africa the more aggressive rollout of infrastructure and the
amortisation of intangible assets in Smartcom and Smartphone have caused an
increase in South African depreciation and amortisation. The strengthening of
the Rand against most other currencies again resulted in depreciation on foreign
denominated capital expenditure in Vodacom`s African operations being translated
at a lower exchange rate than in the past, which translation saving contributed
to only a marginal increase in the depreciation charge in Vodacom`s other
African operations in the six months ended September 30, 2004.
Payments to other network operators
Vodacom`s payments to other network operators increased by 30.8% to R1,804
million (September 30, 2003: R1,379 million) in the six months ended September
30, 2004 compared to the six months ended September 30, 2003 as a result of
increased outgoing traffic and the increased amount of outgoing traffic
terminating on other mobile networks, rather than on Telkom`s fixed-line
network. As the cost of terminating calls on other mobile networks is materially
higher than calls terminating on Telkom`s fixed-line network, and as mobile
substitution increases with the increasing number of total mobile users in South
Africa, interconnection charges should also continue to increase and continue to
put pressure on profit margins.
Other direct network operating expenses
Other direct network expenses increased by 21.1% in the six months ended
September 30, 2004 compared to the six months ended September 30, 2003 to R6.1
billion (September 30, 2003: R5.0 billion) in line with the record number of
customer connections and the growth in revenues. Other direct network expenses
include the cost to connect customers onto the network and are incurred to
support growth in revenues and comprise cost of goods sold, commissions,
customer retention expenses, regulatory and licence fees, distribution expenses
and site and maintenance costs. These costs have increased mainly because of the
increase in the volume of gross contract customer connections.
Staff expenses
Staff expenses increased by 20.3% to R760 million (September 30, 2003: R632
million) in the six months ended September 30, 2004 compared to the six months
ended September 30, 2003 primarily as a result of an increase in headcount to
support the growth in operations of 9.2% compared to the six months ended
September 30, 2003 (September 30, 2003: 1.2%), an increase in the provision for
Vodacom`s deferred bonus incentive scheme as well as an average group-wide
salary increase of 8%. Total headcount in Vodacom`s South African operations
increased by 3.7% compared to the six months ended September 30, 2003 (September
30, 2003: remained constant) primarily because of the acquisition of Smartphone
SP (Pty) Limited and Smartcom (Pty) Limited earlier this year. Total headcount
in Vodacom`s other African operations increased by 41.8% to 915 compared to the
six months ended September 30, 2003 (September 30, 2003: increased 62.5% to 645)
in order to meet the demands of the rapid expansion of these operations.
Employee productivity has shown a marked improvement in all of Vodacom`s
operations, as measured by customers per employee, increasing on an overall
basis by 28.7% to 2,751 customers per employee (September 30, 2003: 2,137).
Marketing and advertising
Marketing and advertising expenses increased by 13.9% to R393 million (September
30, 2003: R345 million) in the six months ended September 30, 2004 compared to
the six months ended September 30, 2003, driven mainly by an intensified
marketing drive in South Africa, marginal increases in Rand terms in Vodacom
Tanzania, Vodacom Congo (excluding the effect of consolidating the full expense)
and Vodacom Lesotho, coupled with the marketing expenses related to establishing
Vodacom Mozambique.
General administration expenses
General administration expenses increased by 36.3% to R409 million (September
30, 2003: R300 million) compared to the six months ended September 30, 2003.
General administration expenses comprise a number of expenses including
accommodation, information technology costs, office administration, consultants`
expenses, social economic investment and insurance. The increase is mainly as a
result of the continued expansion drive into Africa, particularly in the DRC,
which requires expenses relating to assignees on secondments and high overhead
costs such as accommodation, insurance and consulting fees.
Other operating income
Other operating income comprises income of a nature that Vodacom does not view
as part of Vodacom`s core activities, and is therefore shown separately. Other
operating income decreased by 53.5% to R33 million (September 30, 2003: R71
million) compared to the six months ended September 30, 2003.
FUNDING
Summary of net debt and maturity profile
In ZAR millions
September 30, 2004
(unaudited)
2005 2006 2007 2008 2009 2010 Total
South Africa - 38 64 95 134 168 376 875
Finance leases,
ZAR denominated
Tanzania - outside - - - - - 82 82
shareholders, ZAR
denominated
Tanzania - project 82 96 120 28 - - 326
finance, various
denominated
DRC - medium-term
loan,
Euro denominated 609 545 - -- - - 1,154
DRC - preference 238 - - - - - 238
share liability,
US$ denominated
DRC - other short-
term loans,
US$ denominated 7 - - - - - 7
Vodacom Lesotho
minority
shareholders`
loan,
Maluti denominated 4 - - - - - 4
Debt excluding 978 705 215 162 168 458 2,686
bank overdrafts
Less: Net bank and (754)
cash balances
Net debt 1,932
Vodacom`s consolidated net debt position has decreased considerably to R1,932
million as at September 30, 2004 (September 30, 2003: R2,620 million) despite
the full consolidation of Vodacom Congo`s debts in the current period compared
to only 51% in the six months ended September 30, 2003. The Group`s net debt to
EBITDA ratio was 23.0% as at September 30, 2004 (September 30, 2003: 35.1%).
However, this reflects the Group`s net debt position before settlement of the
R1.6 billion dividend paid on October 1, 2004. If dividends payable was included
in net debt, Vodacom`s net debt to EBITDA ratio would increase to 42.1%
(September 30, 2003: 35.1%). Vodacom`s net debt to equity ratio improved to
26.4% as at September 30, 2004 (September 30, 2003: 34.5%). Inclusive of the
R1.6 billion interim dividend payable, Vodacom`s net debt to equity ratio as at
September 30, 2004 was 48.2% (September 30, 2003: 34.7%).
The improvement in net debt was principally the result of strong cash generation
in Vodacom`s South African operations. Changes in interest-bearing debt were
brought about primarily as a result of further drawdowns of South African
guaranteed credit facilities in Vodacom Congo and Vodacom Mozambique as well as
the payment of the final 2004 dividend in Vodacom Group.
Vodacom Tanzania is in the process of restructuring current project finance debt
and although Vodacom Congo is currently dependent on South African support,
management is confident that the more predictable business case and stable
shareholder environment will make project financing for the operation possible.
Vodacom Mozambique and Vodacom Lesotho are expected to remain dependent on South
Africa for the medium term.
The Group had a positive free cash flow before shareholder distributions (before
dividends paid and shareholder interest but after external financing costs paid)
and financing activities (after financing costs) of R826 million for the six
months ended September 30, 2004 (September 30, 2003: R825 million). Free cash
flow growth was negatively impacted by an increase in tax paid of 78.9% to
R1,408 million (September 30, 2003: R787 million), an increase in cash utilised
in investing activities of 30.9% to R1,641 million (September 30, 2003: R1,254
million), offset by an increase in cash generated from operations of 28.7% to
R3.8 billion (September 30, 2003: R3.0 billion). The increase in tax paid is due
to the significant increase in STC paid in the six months ended September 30,
2004 compared to the six months ended September 30, 2003 because of higher
dividend payments as well as higher South African normal tax paid. Management
expects strong cash generation for the remainder of the financial year.
REVENUE
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
South Africa 8,892 10,605 12,420
Tanzania 408 431 472
DRC1 186 402 594
Mozambique - - 43
Lesotho 46 55 65
Adjusted 9,532 11,493 13,594
revenue
Statutory 9,441 11,296 13,594
revenue
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
South Africa 19.3 17.1
Tanzania 5.6 9.5
DRC1 116.1 47.8
Mozambique - -
Lesotho 19.6 18.2
Adjusted revenue 20.6 18.3
Statutory revenue 19.6 20.3
Note:
1. During the six months ended September 30, 2002 and 2003, 51% of Vodacom Congo
was proportionally consolidated in the Group financial statements. Effective
April 1, 2004 Vodacom Congo is being fully consolidated as a subsidiary after
certain clauses granting the outside shareholders participating rights have been
removed from the shareholders` agreement. The figures above have been adjusted
to reflect 100% of Vodacom Congo`s revenue for the prior periods for comparison
purposes. However, the financial statements have not been adjusted since Vodacom
Congo did not meet the requirements of a subsidiary in the prior periods.
Adjusted revenue increased by 18.3% to R13.6 billion (September 30, 2003: 20.6%
to R11.5 billion) in the six months ended September 30, 2004 compared to the six
months ended September 30, 2003, of which Vodacom`s other African operations
contributed 8.6% (September 30, 2003: 7.7%). The increase in revenues was
primarily driven by strong customer growth in all of Vodacom`s operations.
However, the contribution of Vodacom`s other African operations was negatively
impacted by the strong South African Rand.
South Africa
Revenue from Vodacom`s South African operations increased by 17.1% to R12.4
billion (September 30, 2003: 19.3% to R10.6 billion) in the six months ended
September 30, 2004 compared to the six months ended September 30, 2003. South
Africa was again the biggest contributor to the growth in consolidated revenues,
contributing R1,815 million, or 86.4% of the R2,101 million growth in adjusted
revenue compared to the six months ended September 30, 2003. Revenue growth was
fuelled by the rapid growth in customers in South Africa of 33.1% (September 30,
2003: 19.5%) compared to the six months ended September 30, 2003. The number of
contract customers increased by 32.0% to 1.7 million and the number of prepaid
customers increased by 33.5% to 9.7 million as at September 30, 2004. Revenue
growth from contract customers was inhibited by a reduction in the average
monthly minutes of use per customer, offset to some extent by standard tariff
increases and increased value-added services usage. Revenue growth from prepaid
customers was inhibited by reduced average monthly minutes of use per customer
brought about by connecting increasingly more marginal customers as the South
African market grows. These factors caused the South African ARPU to decrease by
7.8% to R165 per month (September 30, 2003: R179).
Other African countries
Vodacom`s adjusted revenue from its other African operations increased 32.2% to
R1,174 million (September 30, 2003: 38.8% to R888 million) in the six months
ended September 30, 2004 compared to the six months ended September 30, 2003.
The increase in revenue was driven by very strong customer growth, and was
partially offset by lower Rand-based revenues in Vodacom Congo due to the
weakness of the US Dollar against the Rand. The relatively low growth in revenue
of 9.5% in Vodacom Tanzania compared to the growth in customers of 76.0% was
primarily as a result lower tariffs, which were necessitated by a highly
competitive environment and aggressive price cuts by competitors coupled with a
stronger South African Rand. This resulted in a decrease in Vodacom Tanzania`s
ARPU of 33.1% to R91 (September 30, 2003: R136) in the six months ended
September 30, 2004 compared to the six months ended September 30, 2003.
EBITDA
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
South Africa 2,949 3,540 3,943
Tanzania 130 122 152
DRC1 (109) 64 110
Mozambique - - (69)
Lesotho 14 12 21
Holding companies (10) (9) 35
Adjusted EBITDA 2,974 3,729 4,192
Statutory EBITDA 3,027 3,698 4,192
Adjusted EBITDA 31.2 32.4 30.8
margin (%)
EBITDA margin (%) 32.1 32.7 30.8
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
South Africa 20.0 11.4
Tanzania (6.2) 24.6
DRC1 158.7 71.9
Mozambique - -
Lesotho (14.3) 75.0
Holding companies 10.0 -
Adjusted EBITDA 25.4 12.4
Statutory EBITDA 22.2 13.4
Adjusted EBITDA
margin (%)
EBITDA margin (%)
Note:
1. During the six months ended September 30, 2002 and 2003, 51% of Vodacom
Congo was proportionally consolidated in the Group financial statements.
Effective April 1, 2004 Vodacom Congo is being fully consolidated as a
subsidiary after certain clauses granting the outside shareholders participating
rights have been removed from the shareholders` agreement. The figures above
have been adjusted to reflect 100% of Vodacom Congo`s EBITDA for the prior
periods for comparison purposes. However, the financial statements have not been
adjusted since Vodacom Congo did not meet the requirements of a subsidiary in
the prior periods.
Group adjusted EBITDA increased by 12.4% to R4,192 million in the six months
ended September 30, 2004 (September 30, 2003: R3,729 million) compared to the
six months ended September 30, 2003, of which Vodacom`s other African operations
contributed 5.9% (September 30, 2003: 5.1%). Vodacom`s adjusted EBITDA margin
decreased to 30.8% in the six months ended September 30, 2004 (September 30,
2003: 32.4%). The lower EBITDA margin achieved was mainly due to the high volume
of gross contract connections, fixed-mobile substitution and margin pressure in
Tanzania but also due to the start-up losses incurred in Vodacom Mozambique.
EBITDA margin decreased to 31.7% in South Africa (September 30, 2003: 33.4%),
increased to 32.2% in Vodacom Tanzania (September 30, 2003: 28.3%) and increased
to 32.3% in Vodacom Lesotho (September 30, 2003: 21.8%). Vodacom Congo reported
EBITDA of R110 million (September 30, 2003: R64 million adjusted EBITDA) and an
18.5% EBITDA margin (September 30, 2003: 15.9%). Excluding the impact of low
margin cellular phone and equipment sales and profits thereon, Vodacom Group`s
EBITDA margin in the six months was 34.4%, down from 36.6% adjusted EBITDA
margin in the six months ended September 30, 2003.
PROFIT FROM OPERATIONS
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
South Africa 1,965 2,502 2,758
Tanzania 60 54 72
DRC1 (165) (12) 7
Mozambique - - (341)
Lesotho 1 - 9
Holding companies (104) (99) 33
Adjusted profit from 1,757 2,445 2,538
operations
Statutory profit from 1,838 2,451 2,538
operations
Adjusted operating 18.4 21.3 18.7
profit margin (%)
Operating profit 19.5 21.7 18.7
margin (%)
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
South Africa 27.3 10.2
Tanzania (10.0) 33.3
DRC1 92.7 -
Mozambique - -
Lesotho - -
Holding companies 4.8 -
Adjusted profit from 39.2 3.8
operations
Statutory profit from 33.4 3.5
operations
Adjusted operating
profit margin (%)
Operating profit
margin (%)
Vodacom`s adjusted profit from operations increased by 3.8% to R2,538 million in
the six months ended September 30, 2004 (September 30, 2003: R2,445 million)
compared to the six months ended September 30, 2003. Vodacom`s operating profit
margin decreased to 18.7% in the six months ended September 30, 2004, down from
an adjusted 21.3% in the six months ended September 30, 2003. The reduction in
operating profit margin is the result of start-up losses in Vodacom Mozambique
of R104 million compounded by a R237 million impairment charge to its assets and
margin pressure in Vodacom South Africa.
Excluding Vodacom Mozambique`s revenues and losses yields an operating profit
margin of 21.2%, which is in line with margins of prior periods. Operating
expenses in South Africa grew by 19.2% versus revenue growth of 17.1%, thereby
diluting South African margins to 22.2% (September 30, 2003: 23.6%) compared to
the six months ended September 30, 2003. Operating profit margins in all other
operations increased. Vodacom Tanzania`s operating profit margin increased to
15.3% in the six months ended September 30, 2004, up from 12.5% in the prior
period despite margin pressure resulting from lower tariffs. Both Vodacom Congo
and Vodacom Lesotho turned operating profit positive in the six months ended
September 30, 2004.
Vodacom`s results have historically been seasonal, with the second six months of
Vodacom`s financial year delivering stronger results and margins primarily
because of the higher call activity during the summer months.
CAPITAL EXPENDITURE
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
2002 2003 2004
(unaudited) (unaudited) (unaudited)
South Africa 1,119 830 1,109
Tanzania 160 145 83
DRC1 790 286 187
Mozambique - - 27
Lesotho 35 4 2
Holding companies 1 4 5
Adjusted capex 2,105 1,269 1,413
Statutory capex 1,718 1,129 1,413
Adjusted capex as a 22.1 11.0 10.4
percentage of
adjusted revenue
Capex as a percentage 18.2 10.0 10.4
of revenue
Geographical split (adjusted)
In ZAR millions
Six months ended September 30,
% change % change
2003/02 2004/03
South Africa (25.8) 33.6
Tanzania (9.4) (42.8)
DRC1 (63.8) (34.6)
Mozambique - -
Lesotho (88.6) (50.0)
Holding companies 300.0 25.0
Adjusted capex (39.7) 11.3
Statutory capex (34.3) 25.2
Adjusted capex as a
percentage of
adjusted revenue
Capex as a percentage
of revenue
Note:
1. During the six months ended September 30, 2002 and 2003, 51% of Vodacom
Congo was proportionally consolidated in the Group financial statements.
Effective April 1, 2004 Vodacom Congo is being fully consolidated as a
subsidiary after certain clauses granting the outside shareholders participating
rights have been removed from the shareholders` agreement. The figures above
have been adjusted to reflect 100% of Vodacom Congo`s capital expenditure for
the prior periods for comparison purposes. However, the financial statements
have not been adjusted since Vodacom Congo did not meet the requirements of a
subsidiary in the prior periods.
Vodacom`s adjusted capital expenditure increased by 11.3% to R1,413 million in
the six months ended September 30, 2004 (September 30, 2003: R1,269 million)
compared to the six months ended September 30, 2003. Vodacom`s capital
expenditure was 10.4% of revenue in the six months ended September 30, 2004,
down from an adjusted 11.0% in the prior period. The stronger Rand and weak US
Dollar again aided the Group because most capital expenditure is foreign
currency denominated. In terms of IAS 39 - Financial Instruments: Recognition
and Measurement, all capital expenditure in South Africa is recorded at the
exchange rate ruling at the date of acceptance of the equipment. Capital
expenditure of Vodacom`s other African operations is translated at the average
exchange rate of the Rand against the operation`s reporting currency for the
period, while closing capital expenditure is translated at the closing exchange
rate of the Rand against the reporting currency.
EFFECTIVE TAX RATE
Vodacom`s effective tax rate increased to 43.4% in the six months ended
September 30, 2004 (September 30, 2003: 35.9%) primarily because of significant
amounts of Secondary Tax on Companies (`STC`) payable on dividends paid to
Vodacom`s shareholders. STC payable increased Vodacom`s effective tax rate by
7.9% (September 30, 2003: 3.6%) relative to the statutory South African tax rate
of 30%. Vodacom`s higher effective tax rate was further due to the impairment of
Vodacom Mozambique`s assets, for which no deferred taxation asset was recognised
and to a lesser extent due to differences in effective tax rates in Vodacom`s
other African operations.
SHAREHOLDER DISTRIBUTIONS
Dividends declared in the six months ended September 30, 2004 totalled R1,600
million and was paid to shareholders on October 1, 2004.
OUTLOOK
The Vodacom Group has performed well in a competitive African market. The
performance of the South African market continues to be strong and management
believes that Vodacom`s alliance with Vodafone gives it a competitive advantage.
The strong cash generation from Vodacom`s South African operations ensured that
the consolidated balance sheet remains as strong as ever, even after paying out
substantial amounts to its shareholders and funding the investments in
Mozambique and the DRC. Vodacom continues to be confident of success in all of
their operations despite a challenging environment. In South Africa, Vodacom
intends to position itself strategically to minimise any negative impact from
the pending deregulation of the South African market and to seize any
opportunities that may emerge.
WYN Luhabe ADC Knott-Craig
Non-executive Chairman Chief Executive Officer
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained herein, as well as oral statements that may be made by
us or by officers, directors or employees acting on behalf of the Telkom Group,
that are not statements of historical fact constitute `forward-looking
statements` within the meaning of the US Private Securities Litigation Reform
Act of 1995, specifically Section 21E of the U.S. Securities Exchange Act of
1934, as amended. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that could cause our actual results to be
materially different from historical results or from any future results
expressed or implied by such forward-looking statements
