Wrap Text
Group Annual Results for the year ended 31 March 2016
Telkom SA SOC Ltd
(Registration number 1991/005476/30)
JSE share code: TKG
ISIN: ZAE000044897
Group Annual Results
For the year ended 31 March 2016
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Many of the statements included in this document, as well as verbal statements that may be made by us or
by officers, directors or employees acting on our behalf, constitute or are based on forward-looking
statements
All statements, other than statements of historical facts, including, among others, statements regarding
our convergence 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. Factors that could cause our actual results or outcomes to differ materially from
our expectations include but are not limited to those risks identified in Telkom’s most recent annual
report, which is 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 verbal
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, so
that they conform either to the actual results or to changes in our expectations.
The information contained in this document is also available on Telkom’s investor relations website
www.telkom.co.za/ir.
Telkom SA SOC Limited is listed on the JSE Limited. Information may be accessed on Reuters under the
symbol 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.
All commentary, messaging and indicators in this report for the current year exclude voluntary early
retirement and severance package costs of R2 193 million and the related tax impact of R517 million. The
comparative numbers exclude voluntary early retirement and severance package cost of R591 million and
the related tax impact of R165 million, as well as the tax benefit on the post-retirement medical aid
payment of R546 million.
Auditors’ report
This summarised report is extracted from audited information, but is not itself audited. The annual
financial statements were audited by Ernst & Young Inc. who expressed an unmodified opinion thereon. The
audited annual financial statements and the auditors’ report thereon are available for inspection at the
Company’s registered office. The directors take full responsibility for the preparation of the
preliminary, provisional or abridged report and the financial information has been correctly extracted
from the underlying annual financial statements.
Board approval
The condensed consolidated provisional annual financial statements were authorised for issue by the
Board of Directors of Telkom (Board) on 3 June 2016.
Preparer and supervisor of condensed consolidated provisional annual financial statements
These condensed consolidated provisional annual financial statements were prepared by
Mrs Gladys Machinjike (Executive Financial Accounting and Reporting) and supervised by
Mr Robin Coode (Group Executive Accounting).
Group salient features - for the year ended 31 March 2016.
Key highlights
+ Operating revenue up 13.9% to R37.3 billion
+ EBITDA up 16.1%* with EBITDA margin of 29.3%*
+ BEPS up 32.4%* to 767.2 cents
+ HEPS up 15.5%* to 657.9 cents
+ Capex up 16.8% with capex to revenue of 16.3%
+ Dividend declared up 10.2% to 270 cents per share
Achievements
+ Group net revenue up 3.7%
+ Group data revenue up 29.2%
+ Mobile service revenue up 39.3%
+ 93.7% reduction in Mobile EBITDA loss to R43 million
+ Telkom company employee expense down 9.6%*
+ Profit after tax up 32.2%*
Improvements
+ Active customer growth of 23.8% with improved blended ARPU of R89
+ 81 503 homes passed with fibre
+ LTE integrated sites up 9.9% to 1 448
Challenges
+ Voice and subscription revenue down 1.9%
+ Leased line revenue down 18.5% offset by higher capacity from Megalines and Metro-Ethernet
+ Increased competition
*Excluding voluntary early retirement and severance package cost of R2 193 million and the related tax
impact of R517 million. The comparative number also excludes voluntary early retirement and severance
package cost of R591 million and the related tax impact of R165 million, as well as the tax benefit on
the post-retirement medical aid payment of R546 million.
Key indicators
2016 2015
R million R million
Operating revenue 37 325 (up 13.9%) 32 760
EBITDA 10 954 (up 16.1%) 9 432
2016 2015
Cents/share Cents/share
BEPS 767.2 (up 32.4%) 579.5
HEPS 657.9 (up 15.5%) 569.7
2016 2015
Percentage Percentage
Return on invested capital 16.0% (up 4.6 pts) 11.4%
2016 2015
R million R million
Free cash flow 3 900 3 898
2016 2015
R million R million
Telkom operating expenditure 21 880 (down 5.2%) 23 071
2016 2015
R million R million
Mobile services and 2 528 (up 39.3%) 1 815
subscriptions revenue
2016 2015
R million R million
Mobile EBITDA loss 43 (down 93.7%) 684
2016 2015
Thousands Thousands
Revenue generating mobile 2 707 (up 23.8%) 2 187
subscribers
01 OVERVIEW
Johannesburg, South Africa - 6 June 2016, Telkom SA SOC Limited (JSE: TKG) today announced group annual
results for the year ended 31 March 2016.
MESSAGE FROM GROUP CEO: SIPHO MASEKO
Successful execution of our turnaround strategy; the business is now ready for growth.
This financial year marks the end of the turnaround phase of our business. I am very pleased with what
we have achieved despite the challenges we encountered over the period. Our solid performance
demonstrates the strong execution capability we have developed over our turnaround journey.
We have executed well on the targets we set for ourselves three years ago which included: de-risking the
mobile business, managing traditional revenue decline, focusing on operational and capital efficiencies
and improving customer experience.
The mobile business has been a star performer over this phase reducing its EBITDA loss from R2.2 billion
three years ago to R43 million this year. Since the fourth quarter, the mobile business has been showing
sequential break-even on a monthly basis.
During the turnaround phase, as part of our Customer First programme, we introduced the Net Promoter
Score (NPS) which measures customer experience.
We progressed well with the upgrading of our complex legacy IT systems which were a bottleneck in
serving our customers, and outsourced our call centres to specialists with the aim of improving customer
support services. We remain committed to putting our customers first and will continue to implement
initiatives that will enhance their experience.
To prepare our business for the future and to meet the evolving needs of our customers, we have made a
substantial investment in modernising our network infrastructure to the latest technologies. During the
year under review, to strengthen our core business we successfully acquired Business Connexion (BCX).
Our Enterprise and BCX teams are working closely together to offer an end-to-end service to our
customers. The integration of BCX and Enterprise provides us with an ability to offer solutions beyond
connectivity and strengthen our leadership in Enterprise.
We also announced our intention of implementing a more flexible and agile operating model and began the
process with the launch of Openserve, our network and wholesale business, in October 2015.
The objective of our new operating model, which will be supported by a lean corporate centre, is to
improve accountability as well as the competitive effectiveness of each business unit relative to its
peers. I am confident that we have laid a good foundation on which we can build and grow our business.
FINANCIAL CAPITAL
Strong revenue growth boosted by the acquisition of BCX and a solid performance in data
Operating revenue grew 13.9 percent to R37.3 billion with net revenue up 3.7 percent boosted by
consolidation of BCX and solid performance in data. This performance was partially offset by a
1.9 percent decline in voice and subscriptions revenue as a result of the ongoing reduction in voice
usage. The fixed to mobile substitution continues and we are managing the decline in voice through
offering bundled products and migrating customers from traditional voice to data based products, which
has seen a reduction in the accelerating negative growth experienced in recent years.
BCX generated revenue for seven months of R4.8 billion and EBIT of R213 million before eliminations
since the acquisition date.
The integration of BCX which was acquired during the first half of the financial year is on track.
Cybernest, previously the IT business division of Telkom, has been sold to BCX effective from 1 November
2015 to realise further synergies.
Group data revenue grew 29.2 percent mainly driven by IT services as a result of consolidating BCX.
Data connectivity revenue from Metro-Ethernet and Megalines delivered good growth of 24 percent and
46 percent respectively, which was offset by a decline in leased line revenue of 18.5 percent. We have
managed to stabilise the decline in leased line revenue in the second half of the year, indicating that
our migration of customers to next generation products and services and pricing strategies are proving
to be successful. Excluding leased line revenue, fixed-line data connectivity revenue grew 3.4 percent.
2016 2015 2014 2013
R million R million R million R million
Leased line, Megaline and 2 028 2 050 2 362 2 523
Metro-Ethernet
2016 2015 2014 2013
Percentage Percentage Percentage Percentage
Percentage Deterioration -1.1 -13.2 -6.4 -3.5
Demand for our mobile data services surged in the period with data revenue increasing by 59.4 percent
due to a 72 percent growth in mobile data traffic. The fixed-line lookalike LTE service, which offers
high download and upload speeds, has performed remarkably well constituting approximately 39 percent of
our data traffic. This is encouraging given that we have significantly invested in LTE and it remains
one of our capital investment priorities for future growth. In addition to the outstanding operational
and financial performance, Telkom was the winner of the My Broadband mobile broadband provider of the
year for the second consecutive year. Telkom was also named the mobile Internet provider South African
consumers are most satisfied with, according to a survey conducted by the SA Consumer Satisfaction
Index.
Group achieved flat operating expenses including BCX, a commendable performance in a 6 percent inflation
environment.
During the year, 3 878 employees accepted voluntary severance packages (VSPs) and voluntary early
retirement packages (VERPs) which amounted to R2.2 billion and a further 437 employees were affected by
outsourcing. Excluding this impact, employee expenses decreased by 9.6 percent in Telkom Company
(excluding BCX, Trudon and Swiftnet) due to lower headcount. This was partially offset by a 4.7 percent
growth in selling, general and administration expenses (SG&A) as a result of cost relating to the
outsourcing of our call centres.
2016 2015 2014
R million R million R million
Telkom company employee expenses 7 914 8 752 9 031
2016 2015 2014
People People People
Headcount 13 766 18 333 19 197
We further managed to reduce and variabilise what once was a rigid cost base as seen in our decline in
property management and vehicle leases cost. With all the cost initiatives implemented through our
multi-year cost efficiency programme, we have now reset the cost base and we will continue with
sustained discipline over our overall costs going forward.
2016 2015 2014
R million R million R million
Property Management 1 518 1 934 1 741
2016 2015 2014
R million R million R million
Vehicle leases 425 484 514
EBITDA increased 16.1 percent with an EBITDA margin of 29.3 percent benefiting from net revenue
generated and contained costs. However, on a reported basis, EBITDA growth was lower with an
EBITDA margin of 23.5 percent as a result of the inclusion of BCX in the consolidated group results.
We are pleased to report BEPS increasing by 32.4 percent to 767 cents and HEPS growing by 15.5 percent
to 658 cents. The main difference between BEPS and HEPS is the gains from property, plant and equipment
of R704 million.
Capex aligned to our strategic priorities in preparation of future growth.
Capex increased 16.8 percent to R6.1 billion with capex to revenue of 16.3 percent in line with our
guidance. We invested in our key priority areas which include Fibre, LTE and Mobile, IT systems,
maintenance and rehabilitation as well as service on demand.
In the year ahead we plan on an aggressive fibre roll-out as our number one priority while
simultaneously deploying our other capital resources with a focus on revenue generation and cost
efficiency as we seek to grow earnings.
Adequate balance sheet capacity to support inorganic growth and investment into the business.
Our current net debt to EBITDA ratio remains low at 0.1x, significantly below our target of 1x,
providing us with sufficient capacity to fund our capex programme, invest into the core business and
take advantage of any earnings accretive inorganic growth opportunities.
Group cash balances and other money market instruments reduced from R4.7 billion to R4.2 billion
affected by the following significant cash outflows during the year under review:
+ Purchase of BCX for R2.7 billion
+ Payment of voluntary early retirement and severance packages of R1.7 billion
+ Repayment of a maturing bond of R1.16 billion
+ Payment of the dividend of R1.4 billion.
The board declared a dividend of 270 cents, a 10.2 percent increase on the previous year’s total
dividend.
PRODUCTIVE CAPITAL
Our strategy, designed to support the introduction of a more flexible and agile operating model,
includes strengthening our customer focus, improving business unit accountability and allowing for
clearer decision-making and faster solution delivery. Openserve’s revitalisation of the broadband
ecosystem and its provision of affordable broadband for all South Africans is part of this strategy. To
achieve this, we have decreased the cost of IPC and SAIX to stimulate growth and provide a true
broadband experience to the end users. It also allows smaller operators to enter this space which was
predominately dominated by the larger operators.
We also introduced a 1Mbps DSL service at a low price point to reduce the barriers to broadband access.
We intensified our fibre deployment plan by signing up more contractors to speed up our deployment to
key identified areas. Our sales specialists are engaging with homeowner associations, body corporates as
well as other service providers to assist us in gaining access so we can deploy fibre services to these
areas. We conducted a fibre training programme for our reseller community to ensure they have a clear
understanding of the product.
With the increasing demand for high speed broadband in mind, we aim to grow our broadband penetration
through our fixed-line lookalike LTE services and will continue to invest in this service by re-farming
our 1800 MHz spectrum to offer a fully mobile LTE service to our smartphone customers.
Our efforts to migrate customers off legacy services to bundled, converged and next generation services
are showing early signs of success, which are reflected in the growth in subscriptions, Metro Ethernet
and Megaline services. Indications are that this growth will offset the decline in our traditional
revenue streams. While these services are priced lower, with smaller margins required to remain
competitive, it presents an attractive opportunity for us to acquire new customers.
Our investment into BCX is also proving to be rewarding, with the demand by Telkom customers for BCX
services growing as we combine our sales efforts to offer end-to-end solutions to our enterprise
customers. We will also harness the success of our mobile business to offer fixed mobile convergence and
unified communications to our Enterprise customers. Telkom Enterprise and BCX are moving closer together
as we implement our integration plan. This integration allows us to offer purpose-built digital
solutions, together with integrated IT solutions, through joint vertical industry offerings to both
Telkom and BCX customers.
HUMAN CAPITAL
During the period under review we have approved voluntary severance and retirement packages to
3 878 employees at a cost of R2.2 billion with a further 437 employees being affected by
outsourcing.
We have been mindful to retain talent and attract new talent, especially scarce and business critical
skills. While we have achieved a substantial reduction in our workforce we retained key skills with the
main reductions being in the semi-skilled category, where we reduced our workforce by 46.6 percent
year-on-year, and the junior management or supervisory category, where our workforce decreased by
25.3 percent. In the middle management category our workforce decreased by 14.8 percent year-on-year and
there was a 4.1 percent decrease in senior management.
It is now necessary that we focus on becoming a company whose employees would like to recommend Telkom
as a good place to work, as well as recommend our products and services to their friends and colleagues.
Our culture shaping programme, which began with leadership, is well underway. We believe our efforts
in this regard will have a positive impact on all our employees and increase productivity and internal
brand commitment.
Telkom is taking a new view on recruitment in order to attract the best talent to the transforming
business. It has recently hired eight interns through an online guerrilla marketing campaign that seeks
to reward new ways of approaching business challenges. The campaign used social media posts, Google ads,
and email marketing. The ad copy read: “We’re looking for bright young minds. If you think you’re the
smartest person in the room, answer this question.” The campaign generated over 38 000 hits in a two-
month period. This is one way that Telkom sought a new perspective on hiring and to reward
unconventional thinking, so the company took a chance with a new approach to talent acquisition
Our investment in training and development is key to our efforts to transform our culture and ensure
that we achieve our strategic objective of equipping our employees with the appropriate skills and
experience to put our customers first in a very competitive ICT environment. A major training effort
currently underway is the multi-skilling of frontline store employees in the use of our new frontline
systems, which provide an integrated view of our customer’s mobile and fixed-line products.
INTELLECTUAL CAPITAL
Our continued commitment to the transformation of our technology platforms and systems that will empower
our employees to provide much improved customer experience in replacing complex consumer and enterprise
legacy systems. By the end of the third quarter of 2017 we will have completed the installation of our
new operations support system (OSS) and business support system (BSS) stacks for our consumer and
enterprise fixed-line and mobile products. This will provide us with an integrated view of our
customers’ fixed-line and mobile products, and will have a major impact on the speed and accuracy of the
service we can provide our customers, as well as our customers’ ability to view their information
online.
We will continue on our journey to replace our legacy systems with best of suite packages that will take
us from standalone bespoke systems to pre-wired, pre-integrated and pre-configured systems. The next
focus will be addressing the Openserve systems. This process has the added complexity of having to
manage the overhaul of technology systems that are integrated with South Africa’s biggest and most
complex network, as well as the management of stock and workforce scheduling.
We are also integrating BCX, which will become the IT arm of Telkom, not only providing IT services
support and development to our customers, but also to Telkom. During FY2016 the first step we took in
the integration of Telkom group IT (TGIT) and BCX was to integrate our Cybernest, Telkom’s data centre
operations, made up of six data centres, to BCX. These operations are now managed by BCX. We are busy
with the design of how the various parts of TGIT and BCX will integrate so as to best serve our business
units, and plan to complete this exercise over the next 12 months.
SOCIAL AND RELATIONSHIP CAPITAL
The primary focus of the Telkom Foundation, which is responsible for our corporate investment programme,
is on education. It also invests in social development projects and runs a successful employee
volunteering programme. We supported three education programmes, the Cancer Foundation’s fundraising and
a xenophobia campaign.
Over 200 Telkom employees volunteered in four projects which involved 1 600 youths and 114 schools
through the Rally to Read programme. Over 500 Telkom volunteers also took part in the Connected Youth
projects which focused on using ICT to support youth development. Some 1 600 youth were shown how to
create electronic CVs, create email addresses and explore job and other youth development websites.
In response to the drought we supported Operation Hydrate efforts to provide water to communities in the
Free State province and the establishment of boreholes in the same communities.
Our enterprise and supplier development programme FutureMakers, launched in May 2015, has already
approved investments in eleven black-owned small businesses. The primary objective of the fund is to
enable the growth of qualifying enterprises and to promote technology innovation in the Telkom value
chain and the broader technology sector through financial support and appropriate business development
support.
FutureMakers Hubs provided virtual and physical business incubation and development support to over
300 innovative technology businesses during FY2016 through its key partner, the Bandwidth Barn.
FutureMakers Proof builds strategic relationships with key industry players to promote innovation, drive
broadband uptake and improve technology usage in small business. These relationships have resulted in
the training of over 300 black-owned businesses in the potential of technology to increase their
business efficiencies, and improve their marketing and customer services.
FutureMakers Sourcing supports 49 Internet cafe owners with capacity building, business tools,
technology, connectivity, selected infrastructure, as well as the establishment of new revenue streams.
It has also partnered with ABI to support their Bizniz in a Box youth economic inclusion and empowerment
programme, which through providing training, mentorship, business and technical support helps unemployed
youth to own and run Internet cafe-cum-spaza shops in refurbished shipping containers.
FutureMakers, recognising that every individual and business that acquires new technology and tools will
need technical support, has set up the independent field technicians (IFTs) pilot project, which will
offer structured funding for IFTs that allows them to lease technician vehicles. There are already 12
people working for three new technical support businesses supported by the FutureMakers IFT project. The
number of technicians benefitting employment is currently being increased to 65 working in 13 new
companies that are being inducted to the IFT. We have equipped them to work on our network and are
providing them with work and also encourage them to offer their services to other network operators. We
believe they will grow into sustainable businesses providing a wide range of services to
telecommunications, video entertainment and Internet companies throughout South Africa. The majority of
the people working in these companies are ex-Telkom employees and these businesses offer them a more
independent remuneration option.
NATURAL CAPITAL
Telkom is committed to minimising any possible negative impact it may have on the environment in which
it operates, and to reducing our water and energy intensity. While Telkom is categorised as a medium to
low risk organisation in terms of the impact of our activities on the environment we are committed to
addressing the causes and adapting to the impacts of climate change.
We are constructing a large solar farm on our new campus in Centurion. The first phase of this project
will produce 1MW of electricity and will go live in July 2016. Another megawatt will go live every month
until the project is completed, at which time it will generate 3MW of electricity.
When completed, its panels will cover 1 800 carports specially positioned to absorb as much sunlight as
possible.
The project will also make electrical points available for charging electrically operated vehicles. The
next phase of our head office energy project will include a 3MW tri-generation plant which would allow
us to be self-sufficient in terms of our electricity requirements for our head office.
Once completed these initiatives will reduce our carbon emissions by an estimated 15 377 tonnes a year,
which is the equivalent of the annual GHG emissions of over 1 742 households.
OUTLOOK
Having completed the turnaround phase of our strategy, we are embarking on the next phase, the
transformation to growth of our business. This entails moving from an efficiency to a growth bias as we
focus on implementing our new operating model, while maintaining a cost efficiency focus.
Investing in high speed broadband, content and IP services, IT and value added services is a key part of
our strategy to transform and exploit the potential of our business going forward. These, we believe,
will serve towards strengthening our core business.
A relentless focus on customer service will also always be part of our strategy, as will implementing
the right processes and systems to enable and empower our employees to contribute towards improved
customer centricity. Our culture shaping programme will play an important part in creating an
environment where our people can flourish and give of their best.
Group chief executive officer
Sipho Maseko
DECLARATION OF DIVIDEND
Ordinary final dividend number 18 of 270 cents per share (March 2015: 215 cents and a special dividend
of 30 cents) in respect of the year ended 31 March 2016 has been declared payable on Monday, 4 July 2016
to shareholders recorded in the register of the company at close of business on Friday, 1 July 2016. The
dividend will be subject to a local dividend withholding tax rate of 15 percent which will result in a
net final dividend of 229.5 cents per ordinary share to those shareholders not exempt from paying dividend
withholding tax. The ordinary dividend will be paid out of cash balances.
DIVIDEND POLICY
The ordinary dividend has been calculated with reference to Telkom’s current financial performance,
current and future debt and cash flow levels. Telkom’s turnaround and transformation over the last three
years has been a success and as such the business has been stabilised and positioned for growth. Our
intention is to grow our dividend on an annual basis taking into account financial performance, capital
and operating expenditure requirements, the group’s debt levels and available growth opportunities.
The number of ordinary shares in issue at date of this declaration is 526 948 698.
Telkom SA SOC Limited’s tax reference number is 9/414/001/710.
Salient dates with regard to the ordinary dividend 2016
Declaration date Monday, 6 June 2016
Last date to trade cum dividend Friday, 24 June 2016
Shares trade ex dividend Monday, 27 June 2016
Record date Friday, 1 July 2016
Payment date Monday, 4 July 2016
Share certificates may not be dematerialised or rematerialised between Monday, 27 June 2016 and Friday,
1 July 2016, both days inclusive.
On Monday, 4 July 2016, dividends due to holders of certificated securities on the South African
register will either be transferred electronically to shareholders’ bank accounts or, in the absence of
suitable mandates, dividend cheques will be posted to such shareholders.
Dividends in respect of dematerialised shareholders will be credited to shareholders’ accounts with
their relevant CSDP or broker.
With reference to special resolution number 8 passed by shareholders at the annual general meeting on
7 August 2014 we will only be paying dividends via electronic funds transfer (EFT) and therefore request
all shareholders to provide Computershare with their banking details immediately. Computershare may be
contacted on 011 370 5000.
REPORT STRUCTURE
Telkom acquired the entire issued share capital of Business Connexion (BCX) and accordingly included
their results from 1 September 2015 in the group results. Cybernest, previously the IT business division
of Telkom, has been sold to BCX effective 1 November 2015 to realise synergies. Through the acquisition
of BCX and the sale of Cybernest to BCX we are expanding our IT services offering, integrated and end-
to-end solutions and delivering capability.
The results of BCX for the seven months ended 31 March 2016 before inter-group eliminations are
disclosed in annexure A.
Since the acquisition of BCX, the group consists of two reportable segments, namely Telkom and BCX.
The Telkom segment provides fixed-line access and data communication services through Telkom South
Africa, and offers mobile voice services, data services and handset sales through Telkom Mobile.
The BCX segment provides information and communication services including cloud services, infrastructure
services, workspace services, global service integration management and hardware and network equipment
sales locally, in seven African countries, the UK and Dubai.
RESULTS FROM CONTINUING OPERATIONS
Shareholders are referred to the announcement of our annual results released on 8 June 2015 wherein we
provided financial guidance for the year ending 31 March 2016 and informed shareholders that the board
approved the disposal of Telkom’s 64.9 percent shareholding in Trudon.
The material conditions precedent of the proposed sale of our stake in Trudon were not met and therefore
Trudon will no longer be classified as a discontinued operation and has been consolidated into the
results from continuing operations for the year.
The comparative information for March 2015 has been restated as a result of a prior year adjustment
relating to the reassessment of the accounting treatment of the Telkom Retirement Fund (TRF). This
reassessment relates to the classification of the TRF as either a defined contribution or a defined
benefit plan. Although Telkom is not exposed to asset returns during the working lives of employees, the
rules of the TRF provide that employees who were appointed prior to 1 September 2009 can retire from the
defined contribution plan of the TRF with an option to receive a pension from the defined benefit plan
of the TRF. Should a retiree elect to retire into the pensioner pool of the TRF and receive a pension
from the defined benefit fund, the employer is thereafter exposed to longevity and the other actuarial
risk from the date of retirement onwards.
The reassessment arose from the voluntary early retirement process concluded in August 2015 which
highlighted the impact of the option available to employees. The pension is calculated based on the
defined contribution member share at retirement. This change in classification and measurement impacted
on the statement of financial position, and the statement of profit and loss and other comprehensive
income as we recognised an IAS 19 non-current employee related provision which will incur interest
costs, included in employee expenses. Further the SAICA exposure draft on the application of IAS 19
provided additional guidance on the actuarial assumptions that were required to be used in the
measurement of this liability.
At 31 March 2016 the accounting obligation balance is R1 274 million. This provision is not expected to
represent an outflow of cash.
The actuarially determined statutory valuation of the liability and funding position of the pensioner
account in terms of the requirements of the Financial Services Board and the Pension Funds Act differs
materially from the liability recognised in terms of IFRS. Actuaries have confirmed that the TRF is in a
sound financial position as at the statutory valuation date in terms of section 16 of the Pension Funds
Act, as amended. As at the latest statutory valuation date there was a surplus of R536 million in the
pensioners fund (after taking into account the solvency reserve of R2.3 billion).
The group recorded a reported profit after tax of R2.4 billion (March 2015: R3.2 billion). This is
25.4 percent lower than the previous period and was mainly as a result of voluntary early retirement and
severance package costs of R2 193 million for 3 878 employees (a further 437 affected by outsourcing) in
the current period and R591 million in the comparative period for 1 205 employees.
The one-off items discussed on page 5 are not part of the results from normal operations for the
period under review and have therefore been excluded from the discussion below.
The group recorded a normalised profit after tax of R4 052 million (March 2015: R3 064 million) and
EBITDA of R10 954 million (March 2015: R9 432 million), resulting in a 15.5 percent increase in headline
earnings per share.
The increase was driven by higher mobile data revenue, gains on sale of assets and the benefit from
lower employee expenses due to a lower headcount. This was offset by lower gains on foreign
exchange and fair value movements as a result of the lower gains recognised on the underlying assets
held by the cell captive and a higher income tax charge.
FINANCIAL GUIDANCE
F2017 F2018
Net revenue Modest growth Modest growth
EBITDA margin 23%-25%* 23%-25%*
Capex to revenue 15%-18% 14%-17%
Net debt to EBITDA smaller than or equal to 1 smaller than or equal to 1
Mobile EBITDA breakeven Achieved
* Excluding BCX the EBITDA margin for FY2016 was 27.6 percent and we expect 25-27 percent and
26-28 percent for FY2017 and FY2018 respectively.
The financial guidance above has not been reviewed or reported on by our auditors.
02 OPERATIONAL DATA
Operational data March March %
2016 2015
Broadband subscribers1 1 027 507 1 005 286 2.2
Closer subscribers 838 258 833 363 0.6
Internet all access subscribers2 574 460 574 761 (0.1)
Fixed access lines (’000)3 3 217 3 439 (6.5)
Post-paid 2 237 2 325 (3.8)
Post-paid - ISDN channels 665 697 (4.6)
Pre-paid 288 372 (22.6)
Payphones 27 45 (40.0)
Ports activated via MSAN access 1 077 939 964 196 11.8
Fixed-line penetration rate (%)4 5.8 6.6 (0.8)
Revenue per fixed access line (ZAR) 4 728 4 639 1.9
Total fixed-line traffic (millions of minutes) 14 918 16 315 (8.6)
Managed data network sites 47 492 47 599 (0.2)
Telkom Company employees5 13 766 18 333 (24.9)
Trudon employees 540 533 1.3
Swiftnet employees 131 108 21.3
BCX employees 5 904 - -
Fixed access lines per employee5 234 188 24.5
Active mobile subscribers6 2 706 687 2 186 774 23.8
Pre-paid 1 912 415 1 607 649 19.0
Post-paid 794 272 579 125 37.2
Mobile sites integrated 2 663 2 510 6.1
LTE sites integrated 1 448 1 317 9.9
ARPU (Rand) 89.44 75.05 19.2
Pre-paid 51.46 39.68 29.7
Post-paid 181.69 196.89 (7.7)
Churn %-pre-paid 55.1 51.0 (4.1)
1. Includes 8 258 (March 2015: 8 341) internal lines, 8 129 fibre subscribers and ADSL subscribers which
includes business, consumer, corporate, government and wholesale customers.
2. Includes Telkom Internet ADSL, ISDN and WiMAX subscribers.
3. Excludes Telkom internal lines.
4. Penetration rate is based on the 2015 Stats SA mid-term population statistics.
5. Based on number of Telkom Company employees, excluding subsidiaries.
6. Based on a subscriber who has participated in a revenue-generating activity within the last 90 days.
03 FINANCIAL PERFORMANCE
Group operating revenue March March %
In ZAR millions 2016 2015
Voice and subscriptions 15 299 15 589 (1.9)
Fixed-line usage 6 029 6 867 (12.2)
Fixed-line subscriptions 8 421 8 005 5.2
Mobile voice and subscriptions 849 717 18.4
Interconnection 1 267 1 493 (15.1)
Fixed-line domestic 428 452 (5.3)
Fixed-line international 735 931 (21.1)
Mobile interconnection 104 110 (5.5)
Data 14 712 11 383 29.2
Data connectivity 6 763 6 836 (1.1)
Internet access and related services 1 971 1 832 7.6
Managed data network services 1 116 1 046 6.7
Multi-media services 52 48 8.3
Mobile data 1 575 988 59.4
IT Business Services revenue1 314 633 (50.4)
Business Connexion 2 921 - -
Customer premises equipment sales and rentals 4 370 2 704 61.6
Sales 280 247 13.4
Rentals 902 865 4.3
Mobile handset and equipment sales 1 993 1 592 25.2
Business Connexion 1 195 - -
Other 535 415 28.9
Other subsidiaries
Trudon 1 040 1 085 (4.2)
Swiftnet 102 91 12.1
Total 37 325 32 760 13.9
1. To be considered in conjunction with Business Connexion IT service revenue
Group operating revenue increased 13.9 percent to R37 325 million (March 2015: R32 760 million), driven
by the acquisition of Business Connexion, higher mobile data revenue, fixed-line subscription revenue
and higher equipment sales. This was offset by the continuous decline in fixed-line voice revenue
and lower data connectivity which includes leased line revenue driven by our intention to migrate
traditional revenue to bundled and next generation products and services.
Fixed-line voice usage revenue decreased by 12.2 percent to R6 029 million (March 2015: R6 867 million)
driven by competition, our migration of voice customers to bundled and annuity products and a
6.5 percent decline in the number of lines.
Fixed-line subscriptions revenue grew 5.2 percent to R8 421 million (March 2015: R8 005 million) as a
result of customers migrating to bundled offerings and average line rental tariff increases for business
and residential customers.
Mobile voice and subscriber revenue increased 18.4 percent to R849 million (March 2015: R717 million).
This can be attributed to a 23.8 percent increase in the number of active mobile subscribers and a
19.2 percent increase in blended ARPU.
Interconnection revenue decreased 15.1 percent to R1 267 million (March 2015: R1 493 million) due to
competitive pricing.
Group data revenue including BCX increased 29.2 percent to R14.7 billion which constitutes 39.4 percent
of the total revenue.
Revenue from data connectivity services decreased 1.1 percent to R6 763 million (March 2015:
R6 836 million), caused by a decline in revenue from leased lines. The decrease is partly offset by
growth in Metro-Ethernet and Megaline services as a result of migration and an increase in ADSL revenue
driven by a 2.2 percent increase in Broadband subscribers to 1 027 507 (March 2015: 1 005 286).
Higher growth of 7.6 percent in Internet access and related services revenue to R1 971 million
(March 2015: R1 832 million) was as a result of higher uptake on uncapped services.
Managed data network services revenue increased 6.7 percent to R1 116 million (March 2015:
R1 046 million) due to higher VPN supreme and satellite revenue.
Mobile data revenue increased 59.4 percent to R1 575 million (March 2015: R988 million) driven by our
strategy to focus on data which led to a 72 percent increase in mobile data traffic.
IT Business Services of the group increased 411.1 percent to R3 235 million (March 2015: R633 million)
due to the inclusion of BCX.
Group customer premises equipment sales increased 61.6 percent to R4 370 million (March 2015:
R2 704 million) mainly due to increased mobile handset and equipment sales and the inclusion of BCX.
Group other income March March %
In ZAR millions 2016 2015
Telkom 1 229 697 76.3
Business Connexion 16 - -
Other
Trudon 34 32 6.3
Swiftnet 2 2 -
Total 1 281 731 75.2
Other income includes profit on the disposal of investments, property, plant and equipment, interest
received from debtors and sundry income.
Other income increased 75.2 percent to R1 281 million (March 2015: R731 million) mainly as a result of
higher profit on sale of properties.
Group direct expenses March March %
In ZAR millions 2016 2015
Payments to other operators 2 793 2 930 4.7
Direct cost 863 615 (40.3)
Cost of sales 6 106 2 634 (131.8)
Total 9 762 6 179 (58.0)
Group direct expenses increased 58 percent to R9.8 billion as a result of the consolidation of Business
Connexion from 1 September 2015.
Group direct expenses per segment March March %
In ZAR millions 2016 2015
Telkom 5 767 5 689 (1.4)
Business Connexion 3 508 - -
Other
Trudon 460 462 0.4
Swiftnet 27 28 3.6
Total 9 762 6 179 (58.0)
Telkom direct expenses March March %
In ZAR millions 2016 2015
Payments to other operators 2 766 2 902 4.7
Mobile network operators 1 444 1 450 0.4
International network operators 756 887 14.8
Fixed-line network operators 248 254 2.4
Data commitments 318 311 (2.3)
Direct cost 863 615 (40.3)
Cost of sales 2 138 2 172 1.6
Total 5 767 5 689 (1.4)
Payments to international operators decreased 14.8 percent as a result of interconnect traffic lost due
to competitive pricing. We regained lost traffic in the latter part of the year under review.
Higher direct cost is driven by an increase in subscriber acquisition costs
Group operating expenses March March %
In ZAR millions 2016 2015
Employee expenses 8 708 8 871 1.8
Selling, general and administrative expenses 4 978 4 755 (4.7)
Service fees 3 106 3 219 3.5
Operating leases 1 098 1 035 (6.1)
Operating expenses excluding depreciation,
amortisation, impairments and write-offs 17 890 17 880 (0.1)
Depreciation, amortisation, impairments and write-offs 5 442 5 505 1.1
Total 23 332 23 385 0.2
Group operating expenses including depreciation, amortisation, impairments and write-offs were flat at
R23.3 billion (March 2015: R23.4 billion) for the year ended 31 March 2016. Telkom’s operating expenses
decreased 5.2 percent due to lower employee expenses and effective property management cost.
Telkom operating expenditure March March %
In ZAR millions 2016 2015
Employee expenses 7 914 8 752 9.6
Salaries and wages 6 130 7 167 14.5
Benefits 2 244 2 071 (8.4)
Employee related expenses capitalised (460) (486) 5.4
Selling, general and administrative expenses 4 819 4 664 (3.3)
Materials and maintenance 2 969 2 908 (2.1)
Marketing 756 714 (5.9)
Bad debts 319 319 -
Other 775 723 (7.2)
Service fees 2 893 3 209 9.9
Property management 1 518 1 934 21.5
Consultants, security and other 1 375 1 275 (7.8)
Operating leases 980 987 0.7
Buildings 508 455 (11.7)
Equipment 47 48 2.1
Vehicles 425 484 12.2
Depreciation, amortisation, impairments and write-offs 5 274 5 459 3.4
Depreciation 4 303 4 481 4.0
Amortisation 801 757 (5.8)
Impairment and write-offs 170 221 23.1
Total 21 880 23 071 5.2
Employee expenses were 9.6 percent lower due a lower headcount emanating from voluntary severance and
retirement packages and the outsourcing of the call centres in the previous period. The headcount
decreased 24.9 percent to 13 766 full-time employees. This was offset by a 6.6 percent average
salary increase for bargaining unit employees and a 6.1 percent average salary increase for management
employees.
Selling, general and administrative expenses increased 3.3 percent to R4 819 million
(March 2015: R4 664 million) mainly due to cost relating to the outsourcing of our call centres.
Service fees decreased 9.9 percent to R2 893 million (March 2015: R3 209 million) largely due to
effective property management partly offset by an increase in costs incurred relating to the company’s
transformation programme.
The 12.2 percent decrease in vehicle leases was mainly attributed to the transition of our vehicle
supply contract despite initial disruption during the execution of this initiative.
Building leases increased 11.7 percent to R508 million (March 2015: R455 million) as a result of an
increase in the site lease cost on mobile masts.
Depreciation decreased 3.4 percent to R5 274 million (March 2015: R5 459 million) due to lower asset
write-offs and acceleration.
Mobile operating expenditure March March %
In ZAR millions 2016 2015
Payments to other operators 707 505 (40.0)
Direct cost 649 512 (26.8)
Cost of sales 1 772 1 436 (23.4)
Employee expenses 266 368 27.7
Selling, general and administrative expenses 780 920 15.2
Service fees 83 100 17.0
Operating leases 311 260 (19.6)
Depreciation, amortisation, impairments and write-offs 786 720 (9.2)
Total 5 354 4 821 (11.1)
Business Connexion operating expenditure March March %
In ZAR millions 2016 2015
Direct cost 3 508 - -
Employee expenses 664 - -
Selling, general and administrative expenses 82 - -
Service fees 203 - -
Operating leases 77 - -
Depreciation, amortisation, impairments and write-offs 100 - -
Total 4 634 - -
Investment income
Investment income consists of interest received on short-term investments and bank accounts. Investment
income decreased by 30.7 percent to R203 million (March 2015: R293 million) as a result of lower cash
balances held by the group.
Finance charges and fair value movements
Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and
commercial paper bills, fair value gains and losses on financial instruments and the cell captive as
well as foreign exchange gains and losses on foreign currency denominated transactions and balances.
Foreign exchange and fair value movements decreased 213.5 percent to a loss of R101 million (March 2015:
R89 million gain). This decrease was mainly attributable to a fair value loss (prior year was a gain)
on revaluation of the underlying assets held by the cell captive. The interest expense decreased
7.3 percent to R521 million (March 2015: R562 million) as a result of lower debt levels.
Taxation
The reported tax expense increased by 1 971.4 percent to R524 million (March 2015: R28 million credit).
The lower 2015 expense was mainly as a result of the settlement of the post-retirement medical aid
liability related to the post-1994 pensioners and the reversal of provisions relating to the 2010 tax
year.
The normalised tax expense increased by 52.4 percent to R1 041 million (March 2015: R683 million) and
excludes the R517 million (March 2015: R711 million) tax benefit on the voluntary severance and
retrenchment expenses and other one-off items.
Consolidated statement of financial position
The group’s capital structure remains strong. Net debt, including financial assets and liabilities,
increased to R1 373 million from R123 million as at 31 March 2015, resulting in a net debt to EBITDA
ratio of 0.1 times. On 31 March 2016, the group had cash balances and other money market investments of
R4.2 billion (31 March 2015: R4.7 billion). The lower cash balances emanate from significant cash
outflows including the cash payment for BCX, dividend payment and voluntary early retirement and
severance package costs. Despite the significant cash outflows we remain lowly geared with a comfortable
debt maturity profile.
Free cash flow March March %
In ZAR millions 2016 2015
Cash generated from operations before dividends paid as
reported 8 153 6 402 27.4
Add back: Payment to Competition Commission - 291 -
Add back: Payment to insurer for post-retirement medical aid - 1 950 -
Add back: Package cost paid 1 688 325 419.4
Adjusted cash generated from operations 9 841 8 968 9.7
Cash paid for capital expenditure (5 941) (5 070) (17.2)
Free cash flow 3 900 3 898 -
Group capital expenditure
Our capital expenditure programme has been aligned to focus on the growth areas of our business which
include fibre to the home and LTE as well as cost and operational efficiencies emanating from network
rehabilitation and our Operating Support System (OSS) and Business Support System (BSS) programme.
Group capital expenditure, which includes spend on intangible assets, increased 16.8 percent to
R6 090 million (March 2015: R5 214 million) and represents 16.3 percent of group operating revenue
(March 2015: 15.9 percent).
Group capital expenditure March March %
In ZAR millions 2016 2015
Fibre to home 757 252 200.4
Mobile 660 481 37.2
OSS/BSS programme 544 404 34.7
Network rehabilitation/sustainment 674 429 57.1
Service on demand 1 540 1 492 3.2
Next generation network 553 857 (35.5)
Other 1 033 1 036 (0.3)
Telkom 5 761 4 951 16.4
BCX 139 - -
Other
Trudon 63 50 26.0
Swiftnet 26 20 30.0
Capital expenditure included in PPE 5 989 5 021 19.3
Capital inventory 101 193 (47.7)
Total 6 090 5 214 16.8
The Fibre to the Home expenditure of R757 million (March 2015: R252 million) has been aligned to the
company strategy and there is an enhanced focus on fibre deployment, with a stated plan to pass one
million homes by 2018.
Mobile capital expenditure increased 37 percent to R660 million (March 2015: R481 million), due to the
focus on continued LTE deployment, for the provision of fixed wireless access via LTE and Mobile LTE
products and is intended to project and grow our customer base.
OSS/BSS programme expenditure increased 34.7 percent to R544 million (March 2015: R404 million) and is
focused on operational and business support systems to ensure fulfilment assurance and billing
requirements relating to our product portfolio. The programme will continue to focus on the
improvement of operational efficiencies and will support the launch of next generation products.
Network rehabilitation and sustainment category expenditure of R674 million (March 2015: R429 million)
was largely linked to the replacement of obsolete power systems as well as the replacement and
modernisation of the access and core network. The increase is due to a focus on access network
rehabilitation to improve the customer experience for voice and ADSL services.
Service on Demand expenditure increased 3.2 percent to R1 540 million (March 2015: R1 492 million).
Service on Demand provides network “last-mile” connectivity and the related customer premises
equipment to fulfil customer orders.
The expenditure on the next generation network decreased from R857 million in March 2015 to R553 million
in March 2016 due to the prioritisation of the Fibre to the Home/Business and the OSS/BSS programmes.
Other capital expenditure of R1 033 million (March 2015: R1 036 million) is due to enhanced operating
and capital expenditure efficiencies, incremental revenue growth, buildings and our Centurion campus
optimisation.
Annexure A
Below are the results of BCX for the seven months ended 31 March 2016 that have been consolidated before
inter-group eliminations:
March
2016
Operating revenue 4 810
Cost of sales* 3 526
Net revenue 1 284
Other income 16
Operating expenses 1 026
EBITDA 274
Depreciation, ammortisation, impairments and write-offs 61
EBIT 213
Profit for the year 132
*Cost of sales
When inventories are sold, the carrying amount is recognised as part of cost of sales. Any write-down
of inventories to net realisable value and any loss of inventory or reversals of previous write-downs
or losses are recognised in cost of sales in the period the write-down, losses or reversal occurs.
Manpower costs, depreciation charges and any other expenses incurred in delivering a service are also
recognised as part of cost of sales.
CONDENSED CONSOLIDATED PROVISIONAL FINANCIAL STATEMENTS
Condensed consolidated provisional statement of profit or loss and other comprehensive income
for the year ended 31 March 2016
Restated*
2016 2015
Notes Rm Rm
Continuing operations
Operating revenue 4 37 325 32 760
Payments to other operators 5.1 2 793 2 930
Cost of sales 5.2 6 969 3 249
Net operating revenue 27 563 26 581
Other income 4 1 281 731
Operating expenses 20 083 18 471
Employee expenses 5.3 10 901 9 462
Selling, general and administrative expenses 5.4 4 978 4 755
Service fees 5.5 3 106 3 219
Operating leases 1 098 1 035
EBITDA 8 761 8 841
Depreciation of property, plant and equipment 5.6 4 370 4 506
Amortisation of
intangible assets 5.6 902 779
Write-offs, impairment and losses
of property, plant and equipment and
intangible assets 5.6 170 220
Operating profit 3 319 3 336
Investment income 4 203 293
Finance charges and fair value movements 622 473
Finance charges 521 562
Foreign exchange and fair value movements 101 (89)
Profit before taxation 2 900 3 156
Taxation expense/(income) 6 524 (28)
Profit for the year 2 376 3 184
Items that may be reclassified
subsequently to profit and loss
Exchange losses on translating foreign
operations (9) -
Items that will not be reclassified to
profit and loss
Defined benefit plan actuarial gains/
(losses) 191 (1 953)
Income tax relating to actuarial
gains/losses - 282
Defined benefit plan asset ceiling
limitation 86 699
Income tax relating to asset ceiling
limitation - (125)
Other comprehensive income/(loss) for the
year, net of taxation 268 (1 097)
Total comprehensive income for the year 2 644 2 087
Profit attributable to:
Owners of Telkom 2 246 3 079
Non-controlling interest 130 105
Profit for the year 2 376 3 184
Total comprehensive income attributable to:
Owners of Telkom 2 514 1 982
Non-controlling interest 130 105
Total comprehensive income for the year 2 644 2 087
Total operations
Basic earnings per share (cents) 7 439.4 603.0
Diluted earnings per share (cents) 7 432.8 590.7
*Refer to note 2.3 and note 8.
Condensed consolidated provisional statement of financial position
at 31 March 2016
Restated*
2016 2015
Notes Rm Rm
Assets
Non-current assets 33 875 30 855
Property, plant and equipment 9 25 357 24 479
Intangible assets 9 4 584 2 982
Other investments 2 318 2 231
Employee benefits 10 846 452
Other financial assets 55 28
Finance lease receivables 281 413
Deferred taxation 14 434 270
Current assets 12 912 11 127
Inventories 12 971 638
Income tax receivable 57 11
Current portion of finance lease receivables 207 200
Trade and other receivables 7 375 5 388
Current portion of other financial assets 11 1 754 1 247
Cash and cash equivalents 13 2 548 3 643
Total assets 46 787 41 982
Equity and liabilities
Equity attributable to owners of the parent 26 134 24 864
Share capital 5 208 5 208
Share-based compensation reserve 241 126
Non-distributable reserves 1 507 1 507
Retained earnings 19 178 18 023
Non-controlling interest 473 363
Total equity 26 607 25 227
Non-current liabilities 7 104 5 272
Interest-bearing debt 17 4 566 3 244
Employee-related provisions 18 1 665 1 264
Non-employee related provisions 18 66 61
Deferred revenue 656 687
Deferred taxation 14 151 16
Current liabilities 13 076 11 483
Trade and other payables 19 7 134 5 635
Shareholders for dividend 22 19
Current portion of interest-bearing debt 17 703 1 612
Current portion of employee-related
provisions 18 2 231 1 882
Current portion of non-employee related
provisions 18 142 303
Current portion of deferred revenue 1 708 1 502
Income tax payable 675 344
Current portion of other financial liabilities 11 455 185
Credit facilities utilised 13 6 1
Total equity and liabilities 46 787 41 982
*Refer to note 2.4.
Condensed consolidated provisional statement of changes in equity
for the year ended 31 March 2016
Restated*
2016 2015
Rm Rm
Balance at 1 April 25 227 23 148
Attributable to owners of Telkom 24 864 22 771
Non-controlling interests 363 377
Total comprehensive income for the year 2 644 2 087
Profit for the year 2 376 3 184
Other comprehensive income/ (loss) 268 (1 097)
Exchange losses on translating foreign
operations (9) -
Net defined benefit plan remeasurements 277 (1 097)
Dividend declared** (1 405) (119)
Acquisition of subsidiaries with
non-controlling interest (refer to note 16) 126 -
Acquisition of non-controlling
interest (refer to note 16) (100) -
Adjustment to shares held in escrow - (4)
Increase in share-compensation reserve 115 115
Balance at 31 March 26 607 25 227
Attributable to owners of Telkom 26 134 24 864
Non-controlling interests 473 363
*Refer to note 2.3
**Dividend declared in the prior year relates to the non-controlling interests of the Trudon Group.
Condensed consolidated provisional statement of cash flows
for the year ended 31 March 2016
Restated**
2016 2015
Notes Rm Rm
Cash flows from operating activities 6 751 6 281
Cash receipts from customers 37 690 32 952
Cash paid to suppliers and employees (28 946) (26 153)
Cash generated from operations 8 744 6 799
Interest received 465 502
Finance charges paid (768) (493)
Taxation paid (288) (406)
Cash generated from operations before
dividend paid 8 153 6 402
Dividend paid (1 402) (121)
Cash flows from investing activities (8 265) (5 168)
Proceeds on disposal of property, plant
and equipment and intangible assets 567 253
Acquisition of subsidiary (BCX), net
of cash acquired 16.1 (2 255) -
Proceeds on disposal of investment - 750
Investments made by FutureMakers (13) -
Acquisition of non-controlling interest
by BCX 16.3 (89) -
Additions to assets for capital expansion* 9 (5 941) (5 070)
Increase in repurchase agreements (534) (1 101)
Cash flows from financing activities 412 685
Loans raised 4 020 1 000
Loans repaid (3 746) (310)
Finance lease repaid (430) (170)
Proceeds from net derivatives 568 165
Net (decrease)/increase in cash and cash
equivalents (1 102) 1 798
Net cash and cash equivalents at
beginning of year 3 642 1 841
Effect of foreign exchange rate gains
on cash and cash equivalents 2 3
Net cash and cash equivalents at end of year 13 2 542 3 642
* Includes R83 million (2015: R137 million) inventory purchases in the current financial year.
**Refer to note 2.5
NOTES TO THE CONDENSED CONSOLIDATED PROVISIONAL ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2016
1. Corporate information
Telkom SA SOC 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 group is to supply
telecommunication, multimedia, technology, information and other related information technology services
to the group customers, as well as mobile communication services, in Africa.
2. Basis of preparation and accounting policies
2.1 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 JSE Limited,
the South African Companies Act, 2008, as amended, the SAICA Financial Reporting Guide as issued by the
Accounting Practices Committee and the Financial Reporting Standards Council.
The condensed consolidated provisional annual financial statements are disclosed in South African Rand,
which is also the group’s presentation currency. All financial information presented in Rand has been
rounded off 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. Details of the group’s significant accounting policies are consistent with those
applied in the previous financial year except for those listed below.
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 2015.
Significant accounting policies
The condensed consolidated provisional annual financial statements have been prepared in accordance with
the accounting policies adopted in the group's last annual financial statements for the year ended
31 March 2015, except for the adoption of the amendments, new standards and remeasurements described
below and note 2.2.
The following new standards and amendments to standards have been adopted.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Amendment to the accounting treatment of changes to a plan of sale or to a plan of distribution to
owners. The amendment clarifies that changing between disposal methods would not be considered a new
plan of disposal but rather a continuation of the original plan. This amendment has been adopted and has
no impact on the group.
Effective date: 1 January 2016
IFRS 7 Financial Instruments Disclosures
Servicing contracts disclosures: Application guidance to clarify whether a servicing contract gives rise
to continuing involvement in a transferred asset for the purposes of determining the transfer disclosure
requirements. This amendment has been adopted and has no impact on the group.
Effective date: 1 January 2016
IFRS 7 Financial Instruments Disclosures
Offsetting disclosures to the condensed interim financial statements: Amendment clarifying the
applicability of previous amendments to IFRS 7 issued in December 2011 with regard to offsetting
financial assets and financial liabilities in relation to interim financial statements prepared under
IAS 34. As per this amendment the IFRS 7 amendment is only applicable to the condensed interim financial
statement to the extent that it is required by IAS 34 and provides an update to information provided in
the most recent annual report.
Effective date: 1 January 2016
IFRS 14 Regulatory Deferral Accounts
This new standard describes the financial reporting requirements for ‘regulatory deferral account
balances’ that arise when an entity provides goods or services to customers at a price or rate that is
subject to rate regulation. This standard is applicable to first time adopters of IFRS.
This amendment is not applicable to Telkom.
Effective date: 1 January 2016
IAS 1 Presentation of Financial Statements
Amendment aiming to ensure that an entity does not reduce the understandability of its financial
statements by obscuring material information with immaterial information or by aggregating material
items that have different natures or functions. This amendment has been adopted and has no material
impact on the group.
Effective date: 1 January 2016
IAS 19 Employee Benefits
Discount rate: requirement to use the market yields on government bonds denominated in the currency of
high quality corporate bonds in cases where there is no deep market for such bonds for the purpose of
discounting post-employment benefit obligations. This amendment has been adopted and has no impact on
the group.
Effective date: 1 January 2016
IAS 34 Interim Financial Reporting
Certain disclosures are to be given either in the interim financial statements or incorporated by a
cross-reference from the interim financial statements to some other statement. These disclosures must
also be available to users on the same terms and at the same time as the interim financial statements
for the interim financial report to be complete. This amendment has been adopted and has no impact on
the group.
Effective date: 1 January 2016
IFRS 10, IFRS 12 and IAS 28, Investment Entities: Applying the Consolidation Exception
Amendment granting exemption from preparation of consolidated financial statements for an intermediate
parent entity that is a subsidiary of an investment entity even if that parent entity measures all of
its subsidiaries at fair value. Consequential amendments have also been made to IAS 28 exemption from
applying the equity method for entities that are subsidiaries and hold interest in associate and joint
venture. This amendment has been adopted and has no impact on the group.
Effective date: 1 January 2016
The group has not early adopted any other standard, interpretation or amendment that has been issued but
is not yet effective.
2.2 Reassessment of the Telkom Retirement Fund Defined Benefit (DB) members
During the current reporting period, the group reassessed the accounting treatment of the Telkom
Retirement Fund (TRF). The rules of the fund provide employees who were appointed prior to 1 September
2009 retiring from the defined contribution plan with an option to receive a pension from the fund.
Should a retiree elect to receive the pension, the employer is thereafter exposed to longevity and other
actuarial risk. Such a pension is based on the plan assets allocated to the employee at the point of
retirement based on the defined contribution portion of the plan. Those employees that do not elect to
receive a pension from the fund would use their allocated plan assets to invest in annuities with
unrelated parties. The classification rules within IAS 19 require that, where the employer is exposed to
any actuarial risk, the entire fund be classified as a defined benefit plan (DB). This change in
classification impacted the statement of financial position, the statement of profit and loss and other
comprehensive income. At 31 March 2016 the obligation balance is R1.274 billion (Rnil 2014; R812 million
2015).
It should, however be noted that there is a difference between the IAS 19 project credit unit
methodology valuations and the Fund actuaries’ valuation, which reflects that the assets of the TRF are
sufficient to cover the TRF’s liabilities towards active members and pensioners. The TRF is in a sound
financial condition as at the valuation date in terms of section 16 of the Pension Funds Act, as
amended. As at the latest statutory valuation date there was a surplus of R536 million in the pensioners
account per the statutory valuation (after taking into account the solvency reserve of R2.3 billion).
Refer to note 2.3 and 2.4.
2.3 Adjustments to the consolidated statement of profit or loss and other comprehensive income
For the year ended 31 March 2015
As previously Reclassification Reassessment Restated
reported of Trudon group of Telkom
as not held for Retirement
sale* Fund**
Rm Rm Rm Rm
Continuing operations
Operating revenue 31 675 1 085 32 760
Payments to other operators 2 930 2 930
Cost of sales 2 787 462 3 249
Net operating revenue 25 958 623 - 26 581
Other income 699 32 731
Operating expenses 18 270 147 54 18 471
Employee expenses 9 354 54 54 9 462
Selling, general and
administrative expenses 4 712 43 4 755
Service fees 3 212 7 3 219
Operating leases 992 43 1 035
EBITDA 8 387 508 (54) 8 841
Depreciation of property, plant and
equipment 4 500 6 4 506
Amortisation of intangible asset 758 21 779
Write-offs,impairment and losses of
property, plant and equipment and
intangible assets 220 220
Operating profit 2 909 481 (54) 3 336
Investment income 283 10 293
Finance charges and fair value movements 471 2 - 473
Interest 560 2 - 562
Foreign exchange gains and fair
value movements (89) - - (89)
Profit before taxation 2 721 489 (54) 3 156
Taxation (income)/expense (168) 122 18 (28)
Profit from continuing operations 2 889 367 (72) 3 184
Profit from discontinued operations 367 (367) - -
Profit for the year 3 256 - (72) 3 184
Other comprehensive income
Items that will not be reclassified
to profit or loss
Defined benefit plan actuarial losses (944) - (1 009) (1 953)
Defined benefit plan asset ceiling limitation 448 - 251 699
Income tax relating to components of other
comprehensive income 139 - 18 157
Other comprehensive loss for the period,
net of taxation (357) - (740) (1 097)
Total comprehensive income for the year 2 899 - (812) 2 087
Total operations
Basic earnings per share (cents) 617.1 603.0
Diluted earnings per share (cents) 604.5 590.7
*Refer to note 8.
** Refer to note 2.2.
2.4 Adjustments to the consolidated statement of financial position
At 31 March 2015
As previously Reclassification Reassessment Restated
reported of Trudon group of Telkom
as not held for Retirement
sale* Fund**
Rm Rm Rm Rm
Assets
Non-current assets 30 554 301 - 30 855
Property, plant and equipment 24 387 92 - 24 479
Intangible assets 2 793 189 - 2 982
Other investments 2 231 - - 2 231
Employee benefits 452 - - 452
Other financial assets 28 - - 28
Finance lease receivables 413 - - 413
Deferred taxation 250 20 - 270
Current assets 10 511 616 - 11 127
Inventories 552 86 - 638
Income tax receivable 1 10 - 11
Current portion of finance lease receivables 200 - - 200
Trade and other receivables 4 895 493 - 5 388
Current portion of other financial assets 1 247 - - 1 247
Cash and cash equivalents 3 616 27 - 3 643
Assets of disposal group classified as
held for sale 917 (917) - -
Total assets 41 982 - - 41 982
Equity and liabilities
Equity attributable to owners of the parent 25 676 - (812) 24 864
Share capital 5 208 - - 5 208
Share-based compensation reserve 126 - - 126
Non-distributable reserves 1 507 - - 1 507
Retained earnings 18 835 - (812) 18 023
Non-controlling interest 363 - - 363
Total equity 26 039 - (812) 25 227
Non-current liabilities 4 421 39 812 5 272
Interest-bearing debt 3 244 - - 3 244
Employee-related provisions 437 15 812 1 264
Non-employee related provisions 39 22 - 61
Deferred revenue 687 - - 687
Deferred taxation 14 2 - 16
Current liabilities 11 403 80 - 11 483
Trade and other payables 5 571 64 - 5 635
Shareholders for dividend 19 - - 19
Current portion of interest-bearing debt 1 612 - - 1 612
Current portion of employee-related
provisions 1 867 15 - 1 882
Current portion of non-employee related
provisions 302 1 - 303
Current portion of deferred revenue 1 502 - - 1 502
Income tax payable 344 - - 344
Current portion of other financial liabilities 185 - - 185
Credit facilities utilised 1 - - 1
Liabilities of disposal group classified
as held for sale 119 (119) - -
Total liabilities 15 943 - 812 16 755
Total equity and liabilities 41 982 - - 41 982
*Refer to note 8.
**Refer to note 2.2.
2.5 Adjustments to the statement of cash flows
At 31 March 2015
As previously Reclassification Restated
reported of Trudon group
as not held for
sale*
Rm Rm Rm
Cash flows from operating activities 6 226 55 6 281
Cash receipts from customers 31 852 1 100 32 952
Cash paid to suppliers and employees (25 210) (943) (26 153)
Cash generated from operations 6 642 157 6 799
Interest received 470 32 502
Finance charges paid (491) (2) (493)
Taxation paid (274) (132) (406)
Cash generated from operations before
dividend paid 6 347 55 6 402
Dividend paid (121) - (121)
Cash flows from investing activities (5 113) (55) (5 168)
Proceeds on disposal of property, plant
and equipment and intangible assets 253 - 253
Proceeds on disposal of investment 750 - 750
Additions for capital expansion (5 015) (55) (5 070)
Increase in repurchase agreements (1 101) - (1 101)
Cash flows from financing activities 685 - 685
Loans raised 1 000 - 1 000
Loans repaid (310) - (310)
Finance lease capital repaid (170) - (170)
Settlement of derivatives 165 - 165
Net increase in cash and cash equivalents 1 798 - 1 798
Net cash and cash equivalents at
beginning of year 1 841 - 1 841
Trudon cash and cash equivalents
classified as held for sale (27) 27 -
Effect of foreign exchange rate differences
on cash and cash equivalents 3 - 3
Net cash and cash equivalents at end of year 3 615 27 3 642
*Refer to note 8.
3. Segment information
The Telkom group is organised into business units based on products and services and has two reportable
segments, namely:
i) Telkom which provides fixed-line access, fixed-line usage, data communications services, mobile
voice services and handset sales; and
ii) BCX which provides business solutions based on information and communications technology and runs
ICT systems and manages products, services and solutions.
The Other segment represents Trudon, Swiftnet and other non-trading entities.
The group did not report segment information in the prior year as the chief operating decision-maker (CODM)
managed the group business on a combined basis. During the current year the group acquired BCX and the CODM
manages Telkom and BCX as two segments.
The executive committee assesses the performance of the operating segments based on a measure of operating profit.
The group announced its aspiration to implement a more flexible and agile operating model and launched Openserve on
13 October 2015 which will require a reassessment of segment reporting as progress is made in implementing the new
operating and reporting model to manage performance.
Telkom BCX Other Eliminations Consolidated
Rm Rm Rm Rm Rm
2016
Operating revenue 32 106 4 810 1 255 (846) 37 325
External customers 32 064 4 116 1 145 - 37 325
Inter-segment 42 694 110 (846) -
Reconciliation of operating profit to profit before tax
EBITDA for reportable segments excluding voluntary packages 10 217 274 499 (36) 10 954
Voluntary packages (2 193) - - - (2 193)
Depreciation, amortisation, impairment, write-offs
and losses (5 274) (61) (58) (49) (5 442)
Operating profit 2 750 213 441 (85) 3 319
Investment income 812 7 22 (638) 203
Finance charges and fair value movement (618) (18) - 14 (622)
Profit before taxation 2 944 202 463 (709) 2 900
2015
Operating revenue 31 611 - 1 298 (149) 32 760
External customers 31 576 - 1 184 - 32 760
Inter-segment 35 - 114 (149) -
Reconciliation of operating profit to profit before tax
EBITDA for reportable segments excluding voluntary packages 8 972 - 524 (64) 9 432
Voluntary packages (591) - - - (591)
Depreciation, amortisation, impairment, write-offs
and losses (5 457) - (59) 11 (5 505)
Operating profit 2 924 - 465 (53) 3 336
Investment income 506 - 14 (227) 293
Finance charges and fair value movement (471) - (2) - (473)
Profit before taxation 2 959 - 477 (280) 3 156
4. Total income Restated
2016 2015
Rm Rm
Operating revenue 37 325 32 760
Other income 1 281 731
Investment income 203 293
Operating revenue increased due to higher mobile data revenue, higher fixed-line subscription revenue,
higher equipment sales and the consolidation of BCX. This is partially offset by the decline in fixed-
line voice revenue and lower connectivity revenue.
Other income increased mainly as a result of higher profit on sale of Telkom properties.
Investment income decreased as a result of lower cash balances held by the group during the financial
year.
5. Operating expenses Restated
2016 2015
Rm Rm
5.1 Payments to other operators 2 793 2 930
Payments to other operators decreased mainly due to
the lower mobile termination rates.
5.2 Cost of sales 6 969 3 249
The increase in cost of sales is largely attributable to the
inclusion of BCX, amounting to R3.5 billion, and the
increase in the sale of mobile devices.
5.3 Employee expenses 10 901 9 462
The increase in employee expenses is mainly due to the
voluntary severance packages (VSP) and voluntary early
retirement packages (VERP), offered to employees, an
average salary increase of 6% and the inclusion of BCX.
This is offset by lower headcount from prior year VSP and
VERP process.
5.4 Selling, general and administrative expenses 4 978 4 755
The increase in selling, general and administrative expenses
is mainly due to an increase in bad debts and outsourcing
costs.
5.5 Service fees 3 106 3 219
The effective management of property led to the decrease in
service fees. This is partially offset by the company
transformation cost and the inclusion of BCX.
5.6 Depreciation, amortisation, impairment and write-offs 5 442 5 505
Depreciation of property, plant and equipment 4 370 4 506
Amortisation of intangible assets 902 779
Write-offs, impairment and losses of property, plant and 170 220
equipment and intangible assets
The decrease is due to lower asset write-offs and lower accelerated depreciation.
6. Taxation expense/(income) Restated
2016 2015
Rm Rm
Taxation expense/(income) 524 (28)
South African normal company taxation 560 73
Deferred taxation (15) (101)
Withholding tax 1 -
Common control transaction (22) -
The higher group taxation is mainly due to the prior year being lower as a result of reduced assessments
issued to the company and the reversal of provisions. In the prior year the company recognised a
deferred tax asset of R250 million and in the current year no further deferred tax assets were
recognised. The acquisition of BCX further contributed to the increase in the tax charge.
7. Earnings per share Restated
2016 2015
Total operations
Basic earnings per share (cents) 439.4 603.0
Diluted earnings per share(cents) 432.8 590.7
Headline earnings per share(cents) 330.0 593.2
Diluted headline earnings per share(cents) 325.1 581.1
Continuing operations
Reconciliation of weighted average number of ordinary shares: Number of Number of
shares shares
Ordinary shares in issue 526 948 700 520 783 900
Weighted average number of shares held by subsidiaries
and in escrow (15 791 240) (10 190 084)
Weighted average number of shares outstanding 511 157 460 510 593 816
Reconciliation of diluted weighted average number of
ordinary shares:
Weighted average number of shares outstanding 511 157 460 510 593 816
Expected future vesting of shares 7 808 223 10 654 715
Diluted weighted average number of shares outstanding 518 965 683 521 248 531
Total operations Rm Rm
Reconciliation between earnings and headline earnings:
Profit for the year 2 376 3 184
Non-controlling interests (130) (105)
Profit attributable to owners of Telkom 2 246 3 079
Profit on disposal of property, plant and equipment and
intangible assets (704) (257)
Write-offs of property, plant and equipment and
intangible assets 170 220
Taxation effects (25) (13)
Headline earnings 1 687 3 029
Dividend per share (cents)
The calculation of dividend per share is based on dividends of R1 291 million declared on 5 June 2015
and 526 948 700 number of ordinary shares outstanding on the date of dividend declaration. The dividend
declared is made up of an ordinary dividend of 215 cents per share and a special dividend of 30 cents
per share.
8. Reclassification of discontinued operation
The Trudon group
On 27 November 2014, the Telkom board approved the disposal of Telkom's 64.9% shareholding in Trudon to
Trumancon. This was part of Telkom's strategic imperative to focus on its fixed-line, mobile and
Internet-based business.
In September 2015, the material conditions precedent of the proposed sale of Trudon were not met and
therefore Trudon is no longer held for sale and will be consolidated into the results from continuing
operations.
The consolidated statement of profit or loss and other comprehensive income and the statement of
financial position and statement of cash flows for 31 March 2015 have been restated to re-integrate the
numbers for the Trudon group. Refer to notes 2.3, 2.4. and 2.5.
9. Capital additions and disposals Restated
2016 2015
Rm Rm
Property, plant and equipment
Additions 5 263 4 039
Disposals (231) (16)
5 032 4 023
Intangible assets
Additions 726 987
Disposals - -
726 987
The capital expenditure relates to the deployment of the next generation network, mobile cellular
services and converged service offerings. The higher expenditure is largely due to the deployment of
fibre and other technologies to support the growing data services business, internet capacity growth,
links to the mobile cellular operators and access line deployment in selected high-growth commercial and
business areas.
An estimated amount of R101 million (31 March 2015: R193 million) included in inventories will be used
for Telkom's network expansion of which R83 million (31 March 2015: R137 million) was purchased in the
current financial year.
Finance charges of R103 million (31 March 2015: R93 million) were capitalised to property, plant and
equipment and intangible assets in the current financial year.
10. Employee benefits 2016 2015
Rm Rm
846 452
Telkom Pension Fund asset 114 28
Post-retirement medical aid net plan asset 732 424
The assets recognised are determined in accordance with IAS 19.
11. Other financial assets and other financial liabilities 2016 2015
Rm Rm
Current other financial assets consist of: 1 754 1 247
Repurchase agreements 1 634 1 101
Derivative instruments 101 146
Forward exchange contracts 20 70
Firm commitments 43 5
Cross-currency swaps 38 71
Asset finance receivables 19 -
Repurchase agreements
The increase in other financial assets is as a result of a
higher repurchase agreement balance at year end.
Current other financial liabilities consist of: 455 185
Forward exchange contracts 155 14
Firm commitments 293 170
Interest rate swaps 7 1
The increase in other financial liabilities is due to the volatility of the foreign exchange markets
towards the end of the financial year and the weaker rand mainly against the US dollar year on year.
12. Inventories Restated
2016 2015
Rm Rm
Inventories 971 638
Gross inventories 1 062 730
Write-down of inventories to net realisable value (91) (92)
The increase in inventory is mainly due to an increase in merchandise stock and the consolidation of
BCX.
13. Net cash and cash equivalents Restated
2016 2015
Rm Rm
Net cash and cash equivalents 2 542 3 642
Cash shown as current assets 2 548 3 643
Cash and bank balances 418 162
Short-term deposits 2 130 3 481
Credit facilities utilised (6) (1)
The lower cash balance is as a result of the acquisition of BCX, dividend payment and voluntary
severance and retirement packages in the first six months of the year. This was partially offset by the
increased cash generated from operations and loan raised.
14. Deferred taxation Restated
2016 2015
Rm Rm
Deferred taxation is made up as follows 283 254
Deferred taxation asset 434 270
Deferred taxation liability (151) (16)
Deferred tax assets and liabilities increased in the current year due to the consolidation of the BCX
group.
15. Financial risk management
Exposure to continuously changing market conditions has made management of financial risk critical for
the group. Treasury policies, risk limits and control procedures are continually monitored by the board
of directors through its audit committee and risk committee.
The condensed consolidated provisional annual financial statements do not include all financial risk
management information and disclosures required in the annual financial statements and should be read in
conjunction with the group’s annual financial statements as at 31 March 2016. The group uses derivatives
as hedging instruments.
15.1 Liquidity risk
Liquidity risk is the risk that the group will not be able to meet its financial obligations as they
fall due. The group is exposed to liquidity risk as a result of uncertain cash flows as well as the
capital commitments of the group.
Liquidity risk is managed by the group’s treasury department in accordance with policies and guidelines
formulated by the group’s executive committee. In terms of its borrowing requirements the group ensures
that sufficient facilities exist to meet its immediate obligations.
Compared to the 2015 financial year end there was no material change in the contractual undiscounted
cash outflows for financial liabilities.
15.2 Fair value of financial instruments
The carrying amount of financial instruments approximate fair value, with the exception of interest-
bearing debt (at amortised cost) which has a fair value of R5 569 million (2015: R5 312 million) and a
carrying amount of R 5 269 million (2015: R4 856 million) (refer to note 17).
Valuation techniques and assumptions applied for the purposes of measuring fair value
Type of financial instrument Fair value at Valuation Significant
31 March 2016 technique inputs
Rm
Receivables, bank balances, repurchase agreements, 6 767 Undiscounted future Probability of default
and other liquid funds, payables and accruals, estimated cash flows
credit facilities utilised and shareholders due to short-term maturities
for dividends of these instruments
Derivatives (316) Discounted cash flows Yield curves, Market
interest rate, Market
foreign currency rate
Borrowings (5 569) Discounted cash flows and Market interest rate,
quoted bond prices Market foreign currency rate
The estimated net fair values as at the reporting date have been determined using available market
information and appropriate valuation methodologies as outlined below. This value is not necessarily
indicative of the amounts that the group could realise in the normal course of business. The fair values
of the financial assets and financial liabilities are sensitive to exchange rate and interest rate
movements.
Derivatives are recognised at fair value. The fair values of derivatives are determined using quoted
prices or, where such prices are not available, a discounted cash flow analysis is used. These amounts
reflect the approximate values of the net derivative position at the reporting date. The fair values of
listed investments are based on quoted market prices.
The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are
not available, the expected future payments discounted at market interest rates. As a result they differ
from carrying values.
The fair values of receivables, bank balances, repurchase agreements and other liquid funds, payables
and accruals, approximate their carrying amount due to the short-term maturities of these instruments.
15.3 Fair value hierarchy
The table that follows analyses financial instruments carried at fair value, by valuation method.
The different levels have been defined as follows:
a) Quoted prices in active markets for identical assets or liabilities (level 1).
b) Inputs other than quoted prices, that are observable for the asset or liability (level 2).
c) Inputs for the asset or liability that are not based on observable market data (level 3).
Hierarchy levels 2016 2015
Rm Rm
Assets measured at fair value
Investment in cell captive
preference shares Level 2 2 235 2 227
Investment by FutureMakers Level 3 13 -
Forward exchange contracts Level 2 21 70
Asset finance receivable Level 2 39 -
Loans Level 2 35 -
Firm commitments Level 2 43 5
Cross-currency swaps Level 2 38 99
Liabilities measured at fair value
Interest rate swaps Level 2 (7) (1)
Firm commitments Level 2 (293) (170)
Forward exchange contracts Level 2 (155) (14)
Liabilities measured at amortised cost
Interest-bearing debt consisting of:
(5 569) (5 312)
Quoted debt securities Level 1 (2 162) (3 355)
Unquoted debt securities Level 2 (3 407) (1 957)
16. Acquisition of subsidiaries 2016
Rm
16.1 Business Connexion group Limited (BCX)
On 25 August 2015, Telkom acquired the entire issued
ordinary share capital and the entire issued
“A” ordinary shares of Business Connexion group (BCX).
The total purchase consideration of R2.7 billion was
funded through Telkom’s own cash resources.
BCX provides innovative business solutions based on
information and communication technology, runs
ICT systems and manages products, services and solutions
for a wide range of customers.
The merger will enable Telkom to expand its existing
offerings while, at the same time, providing
scale in IT services, which will help reinforce
Telkom’s core connectivity business and enhance
Telkom’s convergence strategy.
The acquisition has been accounted for using the
acquisition method.
The date of acquisition is 31 August 2015 and the
annual financial statements include the BCX
results for the seven months ended 31 March 2016.
The fair values of the identifiable assets and liabilities
at acquisition date were determined as follows:
Assets
Property, plant and equipment 461
Intangible assets 652
Investment in joint venture and associates and long-term
loan receivable 74
Deferred tax 117
Trade and other receivables 1 822
Inventories 227
Income tax receivable 14
Cash and cash equivalents 399
Total assets 3 766
Liabilities
Long-term debt 300
Non-current finance leases 38
Deferred taxation 129
Non-current provisions 5
Trade and other payables 1 192
Current portion of long-term debt 169
Current portion of finance leases 23
Income tax payable 23
Current portion of provision 158
Contingent liability 68
Total liabilities 2 105
Total identifiable net assets at fair value 1 661
Non-controlling interest at proportional share of net assets 126
Goodwill arising on acquisition 1 119
Purchase consideration transferred 2 654
Analysis of cash flows at acquisition:
Net cash acquired with the subsidiary (included in cash flows
from investing activities)
Cash paid 2 654
BCX cash at acquisition (399)
Net cash flow on acquisition 2 255
At the date of the acquisition, the fair value of the trade receivables at R1 424 million approximated
its carrying value.
From the date of acquisition, BCX has contributed R4 116 million of revenue and R499 million loss to the
net profit before tax from the continuing operations of the group. This is after eliminating inter-
company revenue of R694 million. If the acquisition had taken place at the beginning of the year,
Telkom group revenue from continuing operations would have been R40 768 million and the Telkom group
profit from continuing operations for the period would have been R2 524 million.
The goodwill recognised is primarily attributed to the expected synergies and other benefits from
combining the assets and activities of BCX with those of the group. The goodwill is not deductible for
income tax purposes.
Transaction costs of R103 million, which include issue costs, have been expensed since the inception of
the acquisition. These expenses were recognised in service fees.
As at 31 March 2016, the BCX and Telkom initial business combination was complete.
A contingent liability of R68 million was recognised at acquisition of BCX. The amount is an estimate in
relation to BCX tax matters in Africa. The timing and the actual amount of this obligation is uncertain.
16.2 Anco IT (Pty) Ltd (Anco)
On 1 November 2015 BCX acquired the entire issued ordinary share capital of Anco.
The total purchase consideration of R41 million was in the form of cash, earn out payments, a loan to
BCX and deferred consideration.
Anco provides innovative business solutions based on information and communication technology and runs
ICT systems and manages products, services and solutions for a wide range of customers.
The merger will enable BCX to expand its existing offerings while, at the same time, providing scale in
IT services, which will help reinforce Telkom’s core connectivity business and enhance BCX’s strategy.
The acquisition has been accounted for using the acquisition method. The date of acquisition is
1 November 2015 and the financial statements include the Anco results for the five months ended
31 March 2016.
The fair value of the identifiable assets and liabilities at acquisition date were
determined as follows:
2016
Rm
Assets
Investment in joint venture and associates and long-term loan
receivable 2
Deferred tax 2
Trade and other receivables 7
Cash and cash equivalents 3
Total assets 14
Liabilities
Trade and other payables 3
Income tax payable 2
Total liabilities 5
Total identifiable net assets at fair value 9
Goodwill arising on acquisition (provisional) 32
Purchase consideration transferred 41
Analysis of cash flows at acquisition:
Net cash acquired with the subsidiary (included in cash flows from
investing activities) 3
Cash paid 9
Net cash flow on acquisition 6
Deferred purchase consideration 33
The earn out payments are based on the period as defined in the contract.
The amount recognised is based on the likelihood of the company reaching the targets and is calculated
as the present value of the earn out payments. The deferred purchase consideration was also calculated
in accordance with the purchase agreement.
At the date of the acquisition, the fair value of the trade receivables approximated its carrying value.
The gross amount of trade receivables is R7 million.
From the date of acquisition, Anco has contributed R15 million of revenue and R1 million to the net
profit from the continuing operations of the group. If the acquisition had taken place at the beginning
of the year, BCX revenue from continuing operations would have been R4,8 billion and the BCX group
profit from continuing operations for the period would have been R133 million.
16.2 The goodwill recognised is primarily attributed to the expected synergies and other benefits from
combining the assets and activities of Anco with those of the group. The goodwill is not
deductible for income tax purposes.
Transaction costs of R0,7 million, which includes issue costs, have been expensed since the
inception of the acquisition. These expenses were recognised in service fees.
The business combination was provisional and incomplete at the time the financial statements were
authorised for issue.
16.3 UCS Solutions (Pty) Ltd (UCS) minority interest
On 31 December 2015 the Telkom Group, through the BCX group, acquired the remaining 15% of the UCS
Solution (Pty) Ltd (and its holding in Integr8 IT (Pty) Ltd), based on the vested put option
agreement with shareholders. UCS and Integr8 are now a wholly owned subsidiary of BCX group. This
transaction was accounted for as an equity transaction.
16.4 Common control transactions
On 1 November 2015 cybernest (DCO), previously the IT business division of Telkom, was sold to BCX
to realise synergies. The transaction was financed through a loan from Telkom to BCX and accounted
for as a common control transaction. BCX recognised the acquired DCO assets at their carrying
amount on date of sale and the difference between the proceeds and the carrying amount of the DCO
business was recognised as common control equity reserves. In Telkom Company the difference
between the carrying amount of the DCO business and proceeds was recognised in profit or loss.
16. 5 Goodwill reconciliation
Rm
The group’s 2016 goodwill balance is reconciled as follows:
Opening balance (restated) 63
Acquisition of BCX* 1 119
Acquisition of Anco IT (Pty) Ltd (provisional) 32
Impairment -
Closing balance 1 214
* R719 million is allocated to the Telkom CGU and R400 million is allocated to the BCX CGU.
17. Interest-bearing debt 2016 2015
Rm Rm
Non-current interest-bearing debt 4 566 3 244
Local debt 4 340 2 605
Foreign debt 154 101
Finance leases 72 538
Current portion of interest-bearing debt 703 1 612
Local debt 654 1 260
Foreign debt 18 239
Finance leases 31 113
The current portion of interest-bearing debt of R703 million (nominal) as at 31 March 2016 is expected
to be repaid from available cash or operational cash flow.
18. Provisions Restated
2016 2015
Rm Rm
Non-current portion of provisions 1 731 1 325
Employee related 1 665 1 264
Non-employee related 66 61
Current portion of provisions 2 373 2 185
Employee related 2 231 1 882
Non-employee related 142 303
The increase in the non-current employee related provision is due to the change in the current financial
year post employee benefit actuarial assumptions as well as the curtailments due to the VSP and VERP
process.
The increase in the current employee provision is due to the inclusion of BCX and the voluntary packages
approved at year end. This is partially offset by a lower annual leave provision.
The decrease in the current-non employee related provisions is due to the settlement of the Pretoria
campus site restoration provision and other related provisions. The final Competition Commission payment
was also made during the current financial year.
19. Trade and other payables Restated
2016 2015
Rm Rm
Trade and other payables 7 134 5 635
Trade payables 3 872 2 797
Finance cost accrued 54 108
Accruals and other payables 3 208 2 730
The increase in trade and other payables balances is mainly due to the payables consolidated as a result
of the acquisition of BCX. Accruals and other payables mainly represent amounts payable for goods
received net of value added tax, obligations and licence fees.
Included in the current and prior year balance is the refund from SARS of R854 million.
Refer to note 21.
20. Commitments Restated
2016 2015
Rm Rm
Capital commitments authorised 6 574 5 556
Commitments against authorised capital expenditure 3 388 1 057
Authorised capital expenditure not yet contracted 3 186 4 499
Capital commitments are largely attributable to purchases of property, plant and equipment and software.
Management expects these commitments to be financed from internally generated cash and other borrowings.
21. Contingencies
Contingent liabilities
Matters before Icasa
End-User and Service Charter Regulations
In 2011, allegations were made at ICASA Complaints and Compliance Committee (the 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. The CCC heard the matter and ruled that Telkom is not in breach of the
Regulations and recommends that ICASA review the Regulations. Telkom has initiated administrative review
proceedings seeking to set aside the applicability of the Regulations since the CCC ruling is not
binding on ICASA and the risk remains of similar referrals. The review application is in process and no
hearing date has been allocated as yet. ICASA promulgated the Amended End-User and Subscriber Charter
Regulations 2016 on 1 April 2016 and we are currently assessing the impact that the new regulations will
have on the review proceedings and Telkom going forward.
High Court
Neotel/Telkom: CCC
Neotel requested Telkom to provide access to Telkom's local loop in November 2010. Telkom declined the
request and Neotel submitted a formal complaint to the CCC which made an order directing Telkom to
provide Neotel access to Telkom's local loop. Telkom launched an interim relief application in the High
Court for an order that the CCC order should not be implemented pending the outcome of a review
application in the High Court to review and set aside the CCC order. The parties have since reached an
agreement in terms of which Telkom withdrew its application for interim relief and ICASA in turn
undertook not to implement the CCC order pending the outcome of Telkom's application for review. No date
has been set down as yet for the hearing of the review application.
Radio Surveillance Security Services (Pty) Ltd (RSSS)
In December 2011, RSSS served a summons on Telkom for the sum of R216 million. Telkom is defending the
matter and has filed a plea and counterclaim for R22 million. RSSS is relying on a quotation which it
gave to a former Telkom employee. There was no written contract. No purchase orders were issued by
Telkom to RSSS. There is also no acceptance of the quotation by Telkom. The matter is set down for trial
from 30 May 2016 until 10 June 2016 in the North Gauteng High Court.
Phutuma Networks (Pty) Ltd (Phutuma)
In August 2009 Phutuma served a summons on Telkom, claiming for damages arising from a tender published
by Telkom in November 2007, claiming damages in the amount of R5.5 billion. The High Court granted
absolution from the instance, in Telkom's favour. The Supreme Court of Appeal (SCA) had initially
dismissed Phutuma's application for leave to appeal in October 2014. On 4 November 2014, the SCA
rescinded its order granted in October 2014. In early 2015, the SCA referred the appeal back to the full
bench of the North Gauteng High Court. The appeal has been set down for hearing in September 2016.
Other
Section 197: Labour Relations Act
Telkom invoked a process in terms of Section 197 of the Labour Relations Act in a bid to outsource
certain services as going concerns. Section 197 (7) states that Telkom and the new employers are jointly
and severally liable to any employee who becomes entitled to receive a payment as a result of the
employee's dismissal for a reason relating to the new employer's operational requirements or liquidation
or sequestration. Telkom will be held liable for a period of 12 months after the date of transfer, which
may result in an onerous obligation.
Contingent Assets
Tax Matters
As noted in the 2014 consolidated annual financial statements the tax treatment of the loss that arose
in the 2012 and 2014 financial years on the sale of foreign subsidiaries is based on a specific set of
circumstances and a complex legislative environment. A tax refund received during the prior financial
year, relating to the 2012 sale, is contingent and will only be recognised once the matter has been
resolved with SARS. Refer to note 19.
22. Related parties Restated
2016 2015
Rm Rm
Details of material transactions and balances with
related parties were as follows:
With shareholders:
Government of South Africa
Related party balances
Finance lease receivable 272 366
Trade receivables 562 464
Provision for doubtful debt (67) (16)
Related party transactions
Revenue (3 700) (3 770)
Individually significant revenue (1 494) (1 870)
City of Cape Town (41) (41)
Department of Correctional Services (78) (82)
Department of Health: Gauteng (95) (389)
Department of Justice (104) (109)
South African National Defence Force (66) (69)
South African Police Services (577) (628)
South African Revenue Services (28) (34)
S.I.T.A. (Pty) Ltd (201) (205)
South African Post Office (37) (55)
Ekurhuleni Metropolitan Council (57) (52)
KZN Ethekwini Municipality (44) (46)
Department of Internal Affairs (53) (61)
Eastern Cape Department of Health** (49) (38)
Province of KZN Health Service** (64) (61)
Collectively significant revenue* (2 206) (1 900)
* The nature of the individually and collectively
significant revenue consists mostly of data revenue.
**Individually significant from the current year.
At 31 March 2016, the Government of South Africa
held 39.3% (2015: 39.8%) of Telkom's shares, and has
the ability to exercise significant influence, and the
Public Investment Corporation held 11.4%
(2015: 12%) of Telkom's shares.
With entities under common control:
Major public entities
Related party balances
Trade receivables 130 75
Trade payables (5) (1)
Related party transactions
Revenue (394) (243)
Expenses 226 238
Individually significant expenses 207 226
South African Post Office 52 77
Eskom 155 144
South African Broadcasting Corporation - 5
Collectively significant expenses 19 12
Rent received (28) (53)
Individually significant rent received:
South African Post Office (25) (46)
Collectively significant rent received (3) (7)
Rent paid 10 29
Individually significant rent paid:
South African Post Office 5 19
Collectively significant rent paid 5 10
Key management personnel compensation:
(Including directors' and prescribed officers' emoluments)
Related party transactions
Short-term employee benefits* 236 214
Post-employment benefits 17 12
Termination benefits 14 5
Equity compensation benefits 1 4
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.
*Short term incentives has not yet been allocated but is included in employee expenses.
23. Significant events
Issuing of ordinary shares
On 30 June 2015 Telkom issued 3 979 348 ordinary shares for no consideration. The shares were allotted
and issued in terms of the Telkom Employee Share Plan.
Company secretary
Ms Xoliswa Mpongoshe Makasi resigned from her position as company secretary of Telkom with effect from
30 June 2015. Ms Ephenia Motlhamme was appointed as company secretary to the group with effect from
1 August 2015.
Results of the Telkom Annual General Meeting regarding directors’ reappointments
On 26 August 2015 all board members were re-elected as per the annual general meeting ordinary
resolutions.
MTN and Telkom Radio Access Network (RAN) assets transaction
On 7 March 2014 Telkom signed a heads of agreement in terms of which MTN South Africa would take over
the financial and operational responsibility for the roll-out and operation of Telkom’s RAN. The parties
wanted reciprocal roaming agreements to enable customers of either party to roam on each other’s
network.
On 17 August 2015 Telkom was informed by the Competition Commission that it had recommended to the
Competition Tribunal that the transaction be prohibited. The parties have agreed not to proceed with the
transaction in its current form.
Acquisition of Business Connexion (BCX)
On 22 May 2014 Telkom announced its firm intention to make an offer to acquire the entire issued share
capital of BCX in a bid to improve performance and restore profitability.
Shareholders of BCX approved the acquisition by Telkom at an ordinary shareholders meeting held on
11 August 2014. On 4 August 2015 the Competition Tribunal approved the transaction between the companies
with conditions. All suspensive conditions were met and the purchase consideration was paid on 25 August
2015.
Voluntary severance packages and voluntary early retirement packages
Telkom announced on 13 July 2015 the offer of VSPs and VERPs to non-unionised employees across the
company. On 24 July 2015 Telkom announced the decision to extend the invitation to all employees,
including union members.
The application process was concluded on 17 August 2015.
On 18 March 2016 Telkom announced the offer of VSP and VERP to all employees, including union members
across the company. The application process was concluded on 4 April 2016.
Approximately 3 878 employee applications were accepted during the financial year.
Dividends
The Telkom board declared an ordinary dividend of 215 cents per share and a special dividend of 30 cents
per share on 5 June 2015 payable on 20 July 2015 to shareholders registered on 17 July 2015.
Pretoria Head Office
In September 2015, Telkom settled its lease obligation for the buildings with the Telkom Retirement Fund
(TRF). Telkom also purchased a previously leased property from the TRF.
FutureMakers
Telkom has implemented an Enterprise and Supplier Development (ESD) programme. As part of the programme,
Telkom in partnership with Identity FutureFund (Pty) Ltd (IDF), established FutureMakers, in terms of
the Department of Trade and Industry’s Codes of Good Practice on Black Economic Empowerment 2007, as
amended (the Codes) and specifically, in terms of the Information and Technology Charter (the ICT
Charter). The Partnership and its initiatives is established in line with Telkom’s sustainable strategy
of implementing meaningful black economic empowerment (BEE) initiatives.
The inception year of the programme focused on the setup and development of key commercial programmes
namely, Internet Cafes, 3rd party dealerships, Independent Field Technicians and a Cisco partnership.
Launch of redesigned wholesale division
On 13 October 2015 Telkom launched Openserve, the group’s redesigned wholesale and networks division.
Openserve will be a distinct business unit within the Telkom group, which is formed as part of the
group’s ongoing efforts to strengthen customer focus through a more flexible and agile operating model.
The separation heralds a new era in the Telkom group as it prepares to welcome a more open access
environment and all the opportunities it offers. This move is also in line with Telkom’s turnaround
strategy to separate its wholesale and retail divisions to facilitate greater focus, accountability and
most importantly, customer-centricity.
As a key driver of socio-economic development, Openserve will enable more choice, increased innovation
and greater service-provider competition. The result will be increased broadband access. Telkom intends
to play a substantial role in lowering the barrier to entry for new players and to increase the
competitiveness of smaller players.
24. Subsequent events
Dividends
The Telkom board declared an ordinary dividend of 270 cents per share on 6 June 2016 payable on 4 July
2016 to shareholders registered on 1 July 2016.
Employee share plan
During April 2016, Telkom purchased 3 710 126 shares from the market through Rossal for the purposes of
the Telkom Employee Share Plan.
BCX’s acquisition of Relational Database Consulting (RDC)
Effective 1 April 2016 Business Connexion acquired Relational Database Consulting group (Pty) Ltd (RDC).
RDC is a market leader in database and system administration with a strong focus on Oracle, SQL Server,
MySQL and PostgreSQL on a variety of operating systems. Their expanded range of services includes Oracle
E-Business Suite, Oracle Fusion Middleware, Oracle Solaris Support and Oracle Sales.
The total purchase consideration of R32 million was in the form of cash and earn out payments. The
provisional fair value of the assets and liabilities were R23 million and R17 million respectively.
A provisional goodwill of R26 million was recognised. The business combination was provisional and
incomplete at the time the financial statements were authorised for issue.
Other matters
The directors are not aware of any other matter or circumstance since the financial year ended 31 March
2016 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.
The information contained in this document is also available on Telkom’s investor relations website
www.telkom.co.za/ir
Telkom SA SOC Ltd
(Registration number 1991/005476/30)
JSE share code: TKG
ISIN: ZAE000044897
Group secretary
E Motlhamme
Transfer secretaries
Computershare Investor Services Proprietary Limited
PO Box 61051 Marshalltown, 2107
Sponsor
The Standard Bank of South Africa Limited
Standard Bank Centre
30 Baker Street, Rosebank, 2196
Directors
JA Mabuza (Chairman),
SN Maseko (Group chief executive officer),
DJ Fredericks (Chief financial officer),
S Botha, G Dempster, T Dingaan, N Kapila,
I Kgaboesele, K Kweyama, K Mzondeki,
N Ntshingila, F Petersen-Lurie, R Tomlinson,
LL Von Zeuner
6 June 2016
Date: 06/06/2016 07:35:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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