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Telkom SA Limited - Group annual results for the year ended March 31, 2005
Telkom SA Limited
(Registration number 1991/005476/06)
JSE and NYSE share symbol: TKG
ISIN: ZAE000044897
Group highlights
6.5% growth in operating revenue to R43,117 million
21.4% growth in operating profit to R11,222 million
40.6% group EBITDA margin
48.1% net debt decrease to R6,941 million, and debt to equity of 25.9%
Basic earnings per share increased by 52.9% to 1,241.8 cents per share
Total dividend of 900 cents per share
Johannesburg, South Africa - June 6, 2005, Telkom SA Limited (JSE and NYSE: TKG)
announced group annual results, with strong performance across both business
segments increasing both operating revenue and profit for the year ended March
31, 2005.
The company declared an annual dividend of 400 cents per share and a special
dividend of 500 cents per share payable on July 8, 2005.
Statement by Sizwe Nxasana, Chief Executive Officer:
"The Telkom Group has delivered strong performances in all spheres of its
business, again displaying the ability to compete aggressively, defend and grow
its market leadership and extract further efficiencies. Telkom has also invested
significantly in its people and the sustainable development of its marketplace
and despite a number of complex challenges has succeeded in creating significant
value for all its stakeholders."
"Telkom continued to build strength and flexibility into its financial base.
Strong operating cash flows adequately covered capital expenditure requirements
and allowed further debt repayment, resulting in a considerably strengthened
balance sheet. This enabled the Group to repurchase shares and distribute a
large proportion of controllable cash to shareholders."
"Telkom"s net profit growth was derived from the acceleration in the uptake of
data services, robust growth in Vodacom"s South African customers, efficiency
gains and reduced finance charges. Increases in fixed-line prices contributed an
estimated R224 million or 10% of the R2.2 billion growth in net profit."
"Telkom is steadily becoming a world-class operator and continues to deliver on
its commitments as a leading driver of transformation and progress in South
Africa. This all-round achievement reflects a business that I believe has found
its balance."
Operational Overview
Creating value
During the year ended March 31, 2005, the Group made good progress on its
strategy to create value. This strategy is based on three key imperatives -
customer growth and retention, operational excellence and sustaining marketplace
development.
The fixed-line business posted modest growth in revenue of 1.6% as a result of
low effective tariff increases and declining voice volumes. This was offset by
the increasing adoption of data services in consumer and small and medium
business markets. Significant progress was made in improving the competitiveness
of the fixed-line segment through ongoing rationalisation, improving employee
productivity and building a culture of innovation.
Driven by continued customer growth in South Africa and other African countries,
the mobile business maintained its strong performance. Vodacom firmly remained
the market leader in South Africa and achieved in South Africa and other African
countries a substantial increase of 38.0% in customers and a high level of gross
connections of 7.8 million. During the year Vodacom successfully launched its 3G
Vodafone Live! services and the GPRS Blackberry product.
Driving greater adoption of data services across all markets
Telkom grew fixed-line data revenue by 15.6% during the year ended March 31,
2005. In the consumer and small business market, ADSL adoption accelerated as a
result of extensive marketing campaigns, new lower speed ADSL products and
reduced tariffs. These include the expansion of the TelkomInternet powered by
ADSL-service with two reduced-cost, lower speed services, and the launch of a 4
Port Ethernet interface router and a 24-month ADSL contract bundled with a free
modem. ADSL customers increased 188.2% to 58,532 and Telkom Internet subscribers
grew 49.4% to 225,280, of which 10.2% are broadband customers. As a result of
the substantial increase in ADSL customers, local fixed-line traffic decreased
6.0%. Excluding the loss of minutes to ADSL, local fixed-line traffic minutes
increased by an estimated 4.5%. Telkom has partnered with Intel in trialing
WiMAX to enable future broadband demand to be captured, especially in areas
where ADSL deployment is not feasible.
Successful line retention
Telkom focused strongly on connecting and reconnecting fixed-line customers
through discounted offers, targeted marketing campaigns and the prudent relaxing
of selected credit management policies. These actions led to a net line growth
of 1.0% (excluding Telkom internal lines). The 9.8% growth in ISDN channels was
a major contributor to this result. Telkom is focused on offering value-for-
money and is increasingly launching bundled minute packages and calling plans
such as XtraTime and Surf Anytime.
Preparing for increased competition
In line with Telkom"s strategy of delivering excellent service to customers at
competitive prices, Telkom limited its overall tariff increases for its
regulated basket to 0.2% in 2005, well below Government"s target inflation range
of between 3% and 6%. From January 1 2005, international calls decreased on
average by 28% with rates of R1.70 per minute (VAT inclusive) for major
destinations like the United States, United Kingdom and Australia. Prices for
local peak calls increased by 5.5% to 40 cents per minute (VAT inclusive) and
monthly subscriptions increased by 6.3%. From August 1, 2005, Telkom"s ADSL
prices will have reduced by 40.4% for BusinessDSL 512, 29.9% for Home512 DSL and
20% for Home384 DSL since January 2005. Its recently introduced HomeDSL 192 will
also reduce by 17.9% to R270 per month. Telkom has lowered its international
private leased circuits (IPLC) prices by 23% in the financial year. From August
1, 2005 IPLC prices will be lowered by a further 28%. There is still a need to
rebalance certain tariffs to eliminate any cross subsidisation and allow for
effective competition in all areas going forward.
Future fit technology
Investment in the evolution of Telkom"s network is a key imperative to transform
Telkom from its Time Division Multiplex network to an Internet Protocol (IP)-
based Next Generation Network. Telkom is trialing a converged, softswitching
capability to support VoIP solutions which provide advanced call control, hosted
IP telephony and IP PBX solutions. In the PBX arena, Telkom already has a
comprehensive IP offering aligned to customer requirements. In addition, Telkom
has established new VoIP presence in various international centres in an effort
to attract global telecommunication traffic.
Operational excellence
Telkom remains focused on improving customer service and customer satisfaction
levels. During the year the company embarked on a country-wide drive to
reposition and transform the company"s customer service branches and
TelkomDirect, into world-class retail outlets. At the same time, Telkom
continued with the process of closing down non-viable outlets.
Despite some short-term service-related challenges in the fixed-line business in
the last quarter of the financial year, Telkom managed to reduce the overall
fault rate and improve repair times and installation rates. Bad weather
conditions, with an extraordinary high level of lightening incidence, resulted
in increased fault rates in the last 15 weeks of the financial year, which
temporarily impacted on Telkom"s service levels.
However, subsequent to year end, the Company has taken corrective action to
ensure improved service levels.
The field force team, which delivers service to customers, achieved significant
savings through an 11.7% reduction in the vehicle fleet, reduced dispatches
driven by a reduction in overall repeat faults, theft and breakage incidents.
Telkom achieved further optimisation of its property portfolio through the
relocation of employees from leased properties to owned properties, improvements
in overall space utilisation and energy management programmes and the sale of
several non-core properties.
Meaningful investment in our workforce
Telkom has continued to invest substantially in building its skills base. During
the period under review, R402 million (2004: R390m) was spent on training and
development of fixed-line employees, totalling 224,662 training days. There has
been a dedicated effort on furthering technical skills training (100,658 days)
and a continued focus on advanced leadership development programmes as well as
specific programmes aimed at developing technical skills among female employees.
After conducting a comprehensive health profile in 2003 among its employees,
Telkom has launched an integrated wellness programme, "Thuso" (Sotho for
"Help"). The programme includes voluntary counselling, testing and treatment to
combat HIV/Aids and to provide care to employees and their families in all these
health-related needs.
Maintaining leadership in the mobile market in South Africa
Vodacom"s exceptional performance and customer growth once again exceeded
expectations, further demonstrating the robust growth of the cellular industry
in South Africa and Vodacom"s ability to maintain its leadership position in
this market. Vodacom South Africa added gross connections of 6.2 million
customers, the highest level ever and increased market share to an estimated
56%. Vodacom continued to focus on customer care and retention, which saw
contract customer churn at 9.1%.
Vodacom grew data revenues by 28.8% to R1,340 million (Telkom"s 50% share is
R670m), largely as a result of the strong growth in SMSs transmitted. The
signing of the Vodafone Affiliate Partner agreement announced in November 2004
allowed Vodacom to launch the Vodafone Live! offering, giving a distinct
competitive advantage in the mobile phone arena.
Over 2.5 million customers outside of South Africa
Vodacom grew its customer base in other African countries by 77.3% to 2.6
million (2004: 1.5m). Despite a fiercely competitive environment, Vodacom
Tanzania grew its customer base by 75.6% to 1.2 million and extended its market
share to 59%, further entrenching its leadership position. Vodacom Congo
maintained its market share at an estimated 47% and grew its customer base to 1
million. The investment in Mozambique is slowly making inroads with 265,000
customers.
The regulatory environment
In September 2004 the Minister of Communications, Dr Matsepe-Casaburri, made new
policy announcements in terms of further deregulating the market. The Minister
stated that the rationale for the acceleration of competition in certain
segments is to stimulate growth in the ICT sector and reduce the cost of
telecommunications.
In summary the new policy announcements address 5 key areas:
- The self provision of facilities by the mobile operators;
- The expansion of licensing for the provision of payphone services;
- The carrying of voice by value added network service providers (VANS);
- Telkom no longer being the sole provider of facilities to VANS; and
- The resale of Private Telecommunication Network facilities.
On January 31, 2005, the Minister clarified her intentions to state that VANS
operators are not permitted to self provide telecommunications facilities. On
May 20, 2005 ICASA published regulations for VANS detailing the licence fees,
empowerment requirements, application process and fees. There are currently
different views as to whether VANS operators will be allowed to provide Voice
Over Internet Protocol, or VOIP, to the general public or only to their own
customers to whom they provided value added data services. Regulations on
interconnection and facilities leasing are still awaiting approval. While there
are several network access issues to be resolved, we believe the
Telecommunications Act does not allow for unbundling of the local loop for at
least 2 years from the date the SNO is licensed.
In September 2004, the Minister of Communications granted a licence to a second
national operator that will be 30% owned by Transtel and Esitel which are
beneficially owned by the South African Government, 19% owned by Nexus
connection, a black economic empowerment consortium, 12.5% to each of Communitel
and Two Telecom and the remaining 25% by VSNL, a member of the TATA Group. ICASA
is in the process of issuing this license.
In terms of the Telecommunications Act, Telkom was required to present the
results of its retail and wholesale activities to ICASA, using a specific cost
allocation methodology set out in a Chart of Accounts and Cost Allocation Manual
(COA/CAM). Telkom delivered its audited regulatory financial statements to ICASA
by the due date of September 30, 2004.
On November 8, 2004 a Government Gazette was issued with the proposed changes to
the Telkom"s price control regulation and inviting comments on the proposal. A
final regulation was submitted to the Minister by ICASA in May 2005. If the
Minister approves the regulation by June 20, 2005, Telkom expects to file its
tariffs in accordance with the new regulation to be effective from August 1,
2005.
The Convergence Bill was tabled in Parliament in February 2005. The Portfolio
Committee on Communications invited written comments in April and will conduct
public hearings from May 24 to June 24, 2005. Telkom is scheduled to make an
oral presentation to the Committee on June 14, 2005.
The main stated objective of the legislation is to promote convergence in the
broadcasting, broadcasting signal distribution and telecommunications sectors,
and to provide the legal framework for convergence of these sectors. The primary
provision of the Bill is the introduction of a new "horizontal" licensing
regime, where a number of separate licenses will be issued for network
infrastructure, communications services and application/content services.
Individual licenses will be granted for network infrastructure, broadcasting
services and frequency spectrum. Class Licences will be granted for
communications and applications service using the communications infrastructure.
Telkom has several concerns with the proposed leglislation. Many of the
stakeholders that have made written submission also expressed similar concerns
in their submissions to the Portfolio Committee.
Broadbased Black Economic Empowerment (BEE)
As a South African company, BEE is an important growth imperative for Telkom.
The Group recognises the need for the creation of a sustainable marketplace by
enlarging the domestic market to support ongoing revenue and profit growth.
During the year ended March 31, 2005, Telkom directed R5.2 billion (2004: R4.6b)
to BEE suppliers, representing 61.9% of the Company"s total procurement spend.
The amount spent on black small, medium and micro enterprises (SMMEs) to provide
core and non-core services totalled R901 million (2004: R719m).
For 2005, the second consecutive year, Telkom was ranked by Financial Mail and
Empowerdex as the most empowered company amongst the top 185 companies on the
JSE.
Telkom and Vodacom were actively involved in the development of the BEE Charter
(Charter) for the ICT sector. A final draft was sent to the Minister of
Communications in May 2005 and it is in the process for Cabinet approval. The
Charter sets the equity ownership target at 30% which excludes Government
shareholding in the calculation and a 20% free float exclusion for listed
companies. The Charter further states that if R7.5 billion of the equity is BEE
owned, the company will be fully compliant in the equity category. Based on
these criteria, Telkom estimates that approximately 12% of the company should be
BEE owned for it to be fully compliant.
Financial overview
Group operating revenue
Group operating revenue increased 6.5% to R43,117 million (2004: R40,484m) for
the year ended March 31, 2005. Fixed-line operating revenue, after inter-
segmental eliminations, increased 1.3% to R30,844 million primarily due to solid
growth in data services revenue and increased subscription and connection
revenue. Mobile operating revenue, after inter-segmental eliminations, increased
22.2% to R12,273 million primarily due to customer growth.
Group operating expenses
Group operating expenses increased 2.2% to R32,175 million (2004: R31,494m) for
the year ended March 31, 2005 due to a 17.9% increase in operating expenses in
the mobile segment to R9,870 million (after inter-segmental eliminations). This
was partially offset by a 3.5% decrease in the fixed-line operating expenses to
R22,305 million (after inter-segmental eliminations) primarily due to reduced
depreciation, amortisation, impairment and write-offs, services rendered,
payments to other operators and operating leases, partially offset by an
increase in employee expenses, as a result of the R961 million (2004: R302m)
workforce reduction expense.
Investment income
Investment income consists of interest received on short-term investments and
bank accounts. Investment income increased 8.7% to R350 million (2004: R322m)
largely as a result of higher interest received due to higher average balances
held in investment and bank accounts. Investment income has been reclassified to
exclude interest on trade and other receivables, which is now included in "other
income".
Finance charges
Finance charges include interest paid on local and foreign borrowings, amortised
discounts on bonds and commercial paper bills, fair value gains and losses on
financial instruments and foreign exchange gains and losses. Finance charges
decreased 48.1% to R1,695 million (2004: R3,264m) due to a 32.2% decrease in
interest expense to R1,686 million (2004: R2,488m) resulting from lower balances
on local loans and a significant decrease in group net fair value and exchange
losses on financial instruments of R9 million (2004: R776m) as a result of a
relatively stable currency.
Taxation
Consolidated tax expenses increased 79.4% to R3,070 million (2004: R1,711m) for
the year ended March 31, 2005. The consolidated effective tax rate for the year
ended March 31, 2005 was 31.1% (2004: 27.2%).
Profit for the year
Profit for the year increased 48.2% to R6,807 million (2004: R4,592m) in the
year ended March 31, 2005.
Group basic earnings per share increased 52.9% to 1,241.8 cents (2004: 812.0)
and group headline earnings per share increased 47.5% to 1,274.1 cents (2004:
863.6 cents).
Group balance sheet
Solid operating performance across the Group combined with strict cost
discipline and debt repayment has resulted in a strengthened balance sheet. Net
debt, after financial assets and liabilities, decreased 48.0% to R6,941 million
(2004: R13,362m).
The strenghtened balance sheet at March 31, 2005, resulted in a net debt to
equity ratio of 25.9% from 59.8% at March 31, 2004. The Group intends to
maintain a net debt to equity targeted range of between 50% and 70% by
increasing distributions to shareholders in the form of dividends and share buy-
backs while maintaining financial flexibility for potential growth
opportunities. During the year ended March 2005, 20.4 million shares were
repurchased for R1,574 million and the annual and special dividend totalling
R5,013 million will be paid on July 8, 2005.
Interest bearing debt, including credit facilities utilised, decreased 13.2% to
R14,912 million (2004: R17,176m) for the year ended March 31, 2005. The Group"s
repayments for the year ended March 31, 2005 included a repayment of R2,299
million of the Telkom TL08 local bond. In April 2005, the Euro 512 million loan
was settled and refinanced in the local debt markets.
Telkom remains committed to maintaining its investment grade credit ratings. In
July 2004, Moody"s upgraded Telkom"s rating from Baa3 to Baa1, with a stable
outlook. S&P"s rating was also upgraded to BBB from BBB-.
Group cash flow
Cash flows from operating activities increased 13.2% to R15,711 million (2004:
R13,884m) primarily due to increased operational results and decreased finance
charges paid, offset in part by the increased taxation paid. Cash flows utilised
in investing activities increased 16.3% to R6,306 million (2004: R5,423m)
primarily due to increased capital expenditure in both the mobile and fixed-line
segments and an increased contribution to the investment vehicle for purposes of
funding the post retirement medical aid liability. Cash utilised in financing
activities increased significantly as a result of the R1,710 million utilised
for the repurchase of shares and the investment of R3,768 million in short-term
repurchase agreements in the South African money and capital markets.
Group capital expenditure
Group capital expenditure increased 10.2% to R5,850 million (2004: R5,307m) and
represents 13.6% of group revenue (2004: 13.1%) in line with the Group"s
announced guidance of maintaining capital expenditure in the range of 12% to 15%
of group revenue.
Fixed-line capital expenditure increased 6.2% to R4,103 million (March 31, 2004:
R3,862m) and represents 13.1% of fixed-line revenue (2004: 12.5%).
Mobile capital expenditure (50% of Vodacom"s capital expenditure) increased
20.9% to R1,747 million (2004: R1,445m) and represents 12.8% of mobile revenue
(2004: 12.6%) as a result of increased investment in South Africa for increased
traffic and investment in 3G technologies.
Consolidated capital expenditures in property, plant and equipment for the 2006
financial year is budgeted to be R7,204 million, of which R5,037 million is
budgeted to be spent in the fixed-line segment and R2,167 million in the mobile
segment (50% of Vodacoms, which is the group"s 50% share of Vodacom"s total
budgeted capital expenditure of R4,333m).
Share repurchase, employee share ownership and dividends
In the year ended March 31, 2005, the Company had repurchased 20.4 million
shares amounting to R1.6 billion (including costs) which are currently being
held as treasury shares and for purposes of the Telkom Conditional Share Plan
(TCSP). In August 2004, 3.0 million shares were granted to employees through the
TCSP.
The Telkom board of directors declared an annual dividend of 400 cents per share
and a special dividend of 500 cents per share on June 2, 2005, payable on July
8, 2005 for shareholders registered on July 1, 2005.
The Board aims to pay an increasing dividend annually. The level of dividend
will be based upon a number of factors, including the assessment of financial
results, available growth opportunities and capital requirements, the group"s
debt level, interest coverage and future expectations, including internal cash
flows.
Audit report
The comprehensive annual financial statements, from which the summarised results
have been derived, have been audited by the company"s auditors Ernst & Young.
Their unqualified audit opinion on the comprehensive annual financial statements
is available for inspection at the Company"s registered office.
Strategic direction
Telkom"s turnaround is largely complete, and its operations and financial base
have been stabilised. It has rewarded its shareholders for backing an ambitious
vision to be a world-class operator, and management"s ability to realise this
vision. And to support long-term profitable growth, Telkom has continued to play
a central role in the socio-economic transformation of South Africa.
The accelerated liberalisation of the market, in particular the implications of
the Convergence Bill, in draft stage at the time of writing, is clearly material
to Telkom"s strategic intentions. Telkom believes that it is strongly positioned
to compete in a liberalised market. Greater choice for consumers will also
supply a relevant and credible basis for comparison, and Telkom believes that it
will prove to be competitive on this basis.
To ensure that Telkom can sustain the creation of value relative to developments
in its dynamic market environment, management have determined certain shifts in
strategic emphasis.
Telkom will focus on the following imperatives to support growth:
- By moving to a predominantly IP based network, Telkom will have the ability to
offer converged services such as voice, data and video services, thereby meeting
the advancing needs of existing customers and attracting new customers.
- Expanding our VAN/IT/ISP services to win a larger market share and become the
leading ISP and VAN provider in South Africa.
- Becoming a wholesale provider of choice by providing access to our high
quality network at competitive prices.
- Continuing to benefit from our investment in Vodacom to provide robust mobile
customer growth. Management believes that the mobile market in South Africa will
remain vibrant with good growth prospects.
- Although it is clear that significant potential for growth exists in Africa,
Telkom will evaluate any acquisitive opportunities as they arise, using
stringent criteria particularly in terms of their value accretive prospects.
The realisation of Telkom"s strategic intentions ultimately lies in the hands of
Telkom"s people. Product, service and operational innovation vests mostly in
people. As such, Telkom has committed to invest significantly in its people as
the drivers of innovation, excellence and growth.
Telkom has a strong, capable and diverse management team with a clear sense of
direction, and it stands ready for a new and exciting phase of development.
NE Mtshotshisa SE Nxasana
Non-executive Chairman Chief Executive Officer
June 2, 2005
Company registered office
Telkom SA Limited 1991/005476/06,
Telkom Towers North, 152 Proes Street
Pretoria, 0002, South Africa
Private Bag X881, Pretoria, 0001
Sponsor
UBS South Africa (Proprietary) Limited
Board of directors
Nomazizi Mtshotshisa (Chairman)
Sizwe Nxasana (CEO)
Thenjiwe Chikane
Brahm du Plessis
Tshepo Mahloele
Thabo Mosololi
Marius Mostert
Albertinah Ngwezi
Dumisani Tabata
Yekani Tenza
Lazarus Zim
This information is also available on Telkom"s investor relations website
http://www.telkom.co.za/ir
Summarised group financial statements
Audited consolidated income statement
Year ended March, 31
Restated
2003 2004 2005
Rm Rm Rm
Operating revenue 37,322 40,484 43,117
Other income 401 255 280
Operating expenses 31,043 31,494 32,175
Employee expenses 7,208 7,408 8,111
Payments to other operators 6,092 5,985 6,132
Selling, general and 7,498 7,660 8,820
administrative expenses
Services rendered 2,622 2,269 2,021
Operating leases 1,124 924 803
Depreciation,amortisation, 6,499 7,248 6,288
impairment and write-offs
Operating profit 6,680 9,245 11,222
Investment income 256 322 350
Finance charges 4,201 3,264 1,695
Interest 2,869 2,488 1,686
Foreign exchange and fair value 1,332 776 9
effect
Profit before tax 2,735 6,303 9,877
Taxation 1,035 1,711 3,070
Profit for the year 1,700 4,592 6,807
Attributable to:
Equity holders of Telkom SA Ltd 1,628 4,523 6,724
Minority interest 72 69 83
1,700
Basic earnings per share (cents) 292.3 812.0 1,241.8
Diluted earnings per share 812.0 1,239.4
(cents)
Dividend per share (cents) - 90.0 110.0
Audited consolidated balance sheet
Years ended March, 31
Restated
2003 2004 2005
Rm Rm Rm
Assets 2003 2004 2005
Non-current assets 44,739 42,841 42,672
Property, plant and equipment 41,046 39,024 39,073
Investment properties - 32 25
Intangible assets 356 564 533
Investments 1,161 1,567 2,277
Other financial assets 1,571 1,101 134
Deferred expenses 143 202 118
Deferred taxation 462 351 512
Current assets 8,647 10,322 14,910
Current portion of other 342 140 4,940
financial assets
Income tax receivable 276 - -
Short term investments 26 168 69
Current portion of deferred 272 430 214
expenses
Inventories 621 520 657
Trade and other receivables 5,993 5,846 5,820
Cash and cash equivalents 1,117 3,218 3,210
Total assets 53,386 53,163 57,582
Equity and liabilities
Equity attributable to equity 18,670 22,372 26,853
holders of Telkom SA Ltd
Share capital and premium 8,293 8,293 8,293
Treasury shares - (238) (1,812)
Share-based compensation reserve - - 68
Non-distributable reserves (15) 91 362
Retained earnings 10,392 14,226 19,942
Minority interest 194 200 220
Total equity 18,864 22,572 27,073
Non-current liabilities 20,663 16,420 13,546
Interest bearing debt 17,453 12,703 9,504
Other financial liabilities 143 153 83
Deferred taxation 222 773 1,239
Deferred revenue 305 353 260
Provisions 2,540 2,438 2,460
Current liabilities 13,859 14,171 16,963
Credit facilities utilised 280 422 909
Trade and other payables 5,229 6,007 6,785
Shareholders for dividend - 7 7
Current portion of interest 4,759 4,051 4,499
bearing debt
Current portion of deferred 1,023 1,404 1,394
revenue
Current portion of provisions 1,825 1,329 1,429
Income tax payable 177 459 1,710
Current portion of other 492 230
financial liabilities
Total liabilities 34,522 30,591 30,509
Total equity and liabilities 53,386 53,163 57,582
Audited consolidated cash flow statement
Years ended March, 31
2003 2004 2005
Rm Rm Rm
Operating activities 9,748 13,884 15,711
Cash receipts from customers 37,494 40,520 43,561
Cash paid to suppliers and (25,431) (24,750) (25,402)
employees
Cash generated from operations 12,063 15,770 18,159
Interest received 384 479 477
Finance charges paid (2,776) (1,255) (809)
Taxation refunded/(paid) 102 (562) (1,487)
Cash generated from operations 9,773 14,432 16,340
before dividend paid
Dividend paid (25) (548) (629)
Investing activities (5,731) (5,423) (6,306)
Proceeds on disposal of 21 52 37
property, plant and equipment
Proceeds on disposal of 172 29 267
investment
Proceeds on disposal of 16 - -
subsidiaries and joint ventures
Additions to property, plant (5,671) (5,187) (5,880)
and equipment
Intangible assets acquired - (61) -
Additions to other investments (269) (331) (592)
Acquisition of subsidiaries - 75 (138)
Financing activities (3,026) (6,481) (9,897)
Listing costs (154) - -
Purchase of treasury shares - (102) (1,710)
Loans raised 9,117 1,732 1,157
Loans repaid (11,526) (7,428) (5,026)
Finance lease capital raised 5 - -
Finance lease capital repaid - (5) (14)
Increase in net financial (468) (678) (4,304)
assets
Net increase/(decrease) in cash 991 1,980 (492)
and cash equivalents
Net cash and cash equivalents (98) 837 2,796
at beginning of the year
Effect of foreign exchange rate (21) (3)
differences
Net cash and cash equivalents 837 2,796
Audited consolidated statement of changes in equity
Year ended March, 31
2003 2004 2005
Rm Rm Rm
Balance at April 1 16,965 18,864 22,572
- Attributable to equity 16,832 18,670 22,372
holders
- Minority interests 133 194 200
Restatement of employee 330 - -
liabilities
Change in accounting policies 14 - -
Restated balance at April 1 17,309 18,864 22,572
- Attributable to equity 17,176 18,670 22,372
holders
- Minority interests 133 194 200
Net profit for the year 1,700 4,592 6,807
Dividend declared (25) (555) (673)
Foreign currency translation (160) (100) 12
reserve
Fair value adjustment on (37) 9 (22)
investments
Capital contribution 33 - -
Preliminary listing cost 44 -
expensed
Purchase of treasury shares - (238) (1,574)
Purchase of subsidiary - - 5
Increase in share based - - 68
compensation reserve
Business combinations - - (122)
Balance at March 31 18,864 22,572 27,073
- Attributable to equity 18,670 22,372 26,853
holders
- Minority interests 194 200 220
Notes to the summarised consolidated financial statements for the year ended
March 31, 2005
Significant accounting policies
Basis of preparation
The Group has prepared summarised consolidated financial statements in
conformity with International Financial Reporting Standards and in compliance
with IAS34 Interim Financial Reporting.
The summarised financial statements are prepared on the historical cost basis,
with the exception of certain financial instruments and share-based compensation
which are measured at fair value. The Group"s significant accounting policies
are consistent with those applied in the previous financial year except for the
following:
Adoption of certain International Financial Reporting Standards
The following revised and new standards have been early adopted for the year
under review:
The Group early adopted IFRS2 in the current year. The effect of the adoption of
the standard in the current year is an increase of R68 million in employee
expenses and R68 million in the share-based compensation reserve. There was no
impact on the prior years as no grants were made prior to April 1, 2004.
The Group has also early adopted the following revised and new standards during
the year under review. This has not impacted the Group"s cash flow information,
but impacted on the results and disclosure for the years ended March 31, 2005
and 2004.
IAS1 Presentation of Financial Statements
IAS2 Inventories
IAS8 Accounting Policies, Changes in Accounting Estimates and
Errors
IAS10 Events after the Balance Sheet Date
IAS21 The Effects of Changes in Foreign Exchange Rates
IAS27 Consolidated and Separate Financial Statements
IAS28 Investments in Associates
IAS31 Interests in Joint Ventures
IAS32 Financial Instruments: Disclosure and Presentation
IAS33 Earnings per Share
IAS39 Financial Instruments: Recognition and Measurement
IFRS5 Non-current Assets Held for Sale and Discontinued Operations
Reclassifications
Certain comparative figures have been reclassified in accordance with current
period classification and presentation. These reclassifications have no effect
on the prior years" profit. The current period classification more closely
resembles the nature of the transactions within the Group"s operating structure.
The principal reclassifications were as follows:
- Interest received from debtors from investment income to other income;
- Apportion Deferred revenue and Deferred expenses between current and long-
term portions;
- Deferred expenses from Trade and other receivables to Deferred expenses;
and
- Apportion Other financial assets and Other financial liabilities between
current and long-term portions.
Change in accounting policies
The Group changed its accounting policies with respect to revenue recognition of
mobile activation revenue and costs; minority interest (IAS27); goodwill
translation (IAS21); and goodwill amortisation (IFRS3).
Restatements
The Group has restated revenue relating to mobile equipment sales, deferred
taxation and the sick leave liability as a result of incorrect application of
GAAP in the past.
2003 2004 2005
Rm Rm Rm
Operating revenue 37,322 40,484 43,117
Fixed-line 29,106 30,443 30,844
Mobile 8,216 10,041 12,273
Fixed-line 29,106 30,443 30,844
Subscriptions, connections and other usage 4,595 5,024 5,316
Traffic 18,001 18,313 17,723
Domestic (local and long distance) 9,178 9,680 9,286
Fixed-to-mobile 7,539 7,321 7,302
International (outgoing) 1,284 1,312 1,135
Interconnection 1,587 1,441 1,319
Data 4,183 4,787 5,510
Directories and other 740 878 976
Change in comparatives
The Group restated its revenue relating to mobile equipment sales for the years
ended March 31, 2004 with R311 million and 2003 with R185 million.
2003 2004 2005
Rm Rm Rm
Workforce reduction expenses 244 302 961
Telkom has continued to incur costs as a result of a plan to reduce the size of
its workforce to a comparable level for international telecommunication
companies. The total number of employees who left the company is 5,041 (2004:
1,633). These employees include management and operating staff. For 2,745 of the
employees, March 31, 2005 was their last working day.
2003 2004 2005
Rm Rm Rm
Depreciation, amortisation, impairment and 6,499 7,248 6,288
write-offs
Depreciation of property, plant and 6,146 6,763 5,826
equipment
Depreciation of investment properties - 2 2
Amortisation of intangible assets 148 133 116
Impairment of goodwill 16 - -
Impairment of intangible assets - - 49
Impairment of property, plant and - 149 85
equipment
Write-offs of property, plant and 189 201 210
equipment
In recognition of the changed usage patterns of certain items of property, plant
and equipment, the Group reviewed their remaining useful lives in the current
year. The assets affected were network equipment and data processing equipment
and software. Accordingly, the Group revised the estimated useful lives of these
assets from 5 to 7 years and 8 years respectively. As the prior period effects
are not determinable, the estimated remaining useful lives of these assets were
adjusted prospectively, which resulted in a decrease of the current year
depreciation charge of R542 million.
2003 2004 2005
Earnings per share
Basic earnings per share (cents) 292.3 812.0 1,241.8
The calculation of earnings per share is based on profit attributable to equity
holders of Telkom SA Ltd for the year of R6,724 million (2004: R4,523m, 2003:
R1,628m) and 541,498,547 (2004: 556,994,962, 2003: 557,031,819) weighted average
number of ordinary shares in issue.
2003 2004 2005
Diluted earnings per share (cents) 292.3 812.0 1,239.40
The calculation of diluted earnings per share is based on earnings for the year
of R6,724 million (2004: R4,523m, 2003: R1,628m) and 542,537,579 diluted
weighted average number of ordinary shares (2004: 556,994,962, 2003:
557,031,819). The adjustment in the weighted average number of shares is as a
result of the expected future vesting of shares already allocated to employees
under the Telkom Conditional Share Plan.
2003 2004 2005
Headline earnings per share (cents) 313.8 863.6 1,274.1
The calculation of headline earnings per share is based on headline earnings of
R6,899 million (2004: R4,809m, 2003: R1,748m) and 541,498,547 (2004:
556,994,962, 2003: 557,031,819) weighted average number of ordinary shares in
issue.
2003 2004 2005
Rm Rm Rm
Reconciliation between earnings and
headline earnings:
Earnings as reported 1,628 4,523 6,724
Adjustments:
Profit on disposal of investment (89) (25) (64)
Profit on disposal of property, plant and (15) (19) (30)
equipment
Impairment of assets - 149 134
Write-offs of property, plant and 189 201 210
equipment
Amortisation of goodwill 74 72 -
Impairment of goodwill 16 - -
Tax and minority interest effects (55) (92) (75)
Headline earnings 1,748 4,809 6,899
Diluted headline earnings per share 313.8 863.6 1,271.6
(cents)
The calculation of diluted headline earnings per share is based on headline
earnings of R6,899 million (2004: R4,809m, 2003: R1,748m) and 542,537,579 (2004:
556,994,962, 2003: 557,031,819) diluted weighted average number of ordinary
shares in issue. The adjustment in the weighted average number of shares is as a
result of the expected future vesting of shares already allocated to employees
under the Telkom Conditional Share Plan.
2003 2004 2005
Dividend per share (cents) - 90 110
The calculation of dividend per share is based on dividends of R606 million
(2004: R501m, 2003: RNil) declared on June 3, 2004 and 551,509,083 (2004:
557,031,819, 2003: 557,031,819) number of ordinary shares issued. The reduction
in the number of shares represents the number of treasury shares held on date of
payment.
2003 2004 2005
Net asset value per share (cents) 3,351,7 4,039,4 5,033,7
The calculation of net asset value per share is based on net assets of R26,853
(2004: R22,372m, 2003: R18,670m) and 533,465,571 issued shares (2004:
553,846,083) (2003: 557,031,819).
2003 2004 2005
Rm Rm Rm
Finance charges 4,201 3,264 1,695
Interest 2,869 2,488 1,686
Local debt 2,642 2,253 1,515
Foreign debt 375 303 281
Less: Finance costs capitalised (148) (68) (110)
Foreign exchange gains and losses and 1,332 776 9
fair value adjustments
Foreign exchange (gains)/losses (761) (368) 112
Fair value adjustments on derivative 2,093 1,144 (103)
instruments
Change in comparatives
The Group changed its comparatives for fair value adjustments due to a change in
accounting policy regarding minority interests for the year ended March 31, 2003
with R47 million.
2003 2004 2005
Rm Rm Rm
Additions to property, plant and equipment
Freehold land and buildings 19 64 43
Leasehold buildings 41 59 -
Network equipment 2,479 1,524 1,787
Support equipment 341 140 121
Furniture and office equipment 22 10 10
Data and processing equipment and software 354 491 410
Under construction 2,416 2,968 3,407
Other 40 51 73
5,712 5,307 5,851
Net cash and cash equivalents 837 2,796 2,301
Cash and bank balances 916 1,219 2,375
Short-term deposits 201 1,999 835
Cash shown as current assets 1,117 3,218 3,210
Credit facilities utilised (280) (422) (909)
Undrawn borrowing facilities 3,018 2,995 4,750
Share capital
Authorised and issued share capital and share premium are made up as follows:
Issued and fully paid 8,293 8,293 8,293
557,031,817 ordinary shares of R10 each 5,570 5,570 5,570
1 Class A ordinary share of R10 - - -
1 Class B ordinary share of R10 - - -
Share premium 2,723 2,723 2,723
Treasury shares - (238) (1,812)
12,717,190 (2004: 3,185,736) and 10,849,058 (2004: Nil) ordinary shares in
Telkom, with a fair value of R1,366 million (2004: R251m) and R1,166 million
(2004: RNil) are currently held as treasury shares by its subsidiaries Rossal No
65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited,
respectively.
2003 2004 2005
Rm Rm Rm
Interest bearing debt
Long term interest bearing debt 17,453 12,703 9,504
Total interest bearing debt 22,212 16,754 14,003
Gross interest bearing debt 26,181 20,151 16,914
Discount on debt instruments issued (3,969) (3,397) (2,911)
Less: - Current portion of interest bearing (4,759) (4,051) (4,499)
debt
Local debt (4,527) (3,628) (264)
Locally registered Telkom debt instruments (4,306) (2,286) -
Repurchase agreements (167) (27) 0
Commercial paper bills (54) (1,313) (262)
Short-term interest free loans - (2) (2)
Foreign debt (225) (408) (4,210)
Finance lease (7) (15) (25)
Commitments
Capital commitments authorised 6,974 7,151 7,970
Fixed-line 4,977 4,566 5,029
Mobile 1,997 2,585 2,941
Commitments against authorised capital 435 439 825
expenditure
Fixed-line 104 88 91
Mobile 331 351 734
Authorised capital expenditure not yet 6,539 6,712 7,145
contracted
Fixed-line 4,873 4,478 4,938
Mobile 1,666 2,234 2,207
Management expects these commitments to be financed from internally generated
cash and other borrowings.
Contingencies
Supplier dispute - Telcordia
No material changes since prior year.
Competition commission
No material changes since prior year.
Interception of Communications and Provisions of Communication-related
Information Act ("the Act")
The Act was assented and published on January 22, 2003, but will only become
effective at a future date which is currently uncertain. Due to the fact that
certain provisions of the Act are still being finalised, a reliable estimate of
capital and operating costs that will potentially be incurred in order to comply
with the provisions of the Act cannot be estimated at this stage.
The Group exposure is 50% of the following items:
Service providers
The Vodacom Group has committed as part of its strategy to acquire its customer
bases from certain independent service providers. Should all conditions be met,
the Group"s commitments in this regard are estimated at R1.2 billion.
Other
An offer to purchase a 51% stake in Cointel VAS (Proprietary) Limited for R112
million was made by the Vodacom Group during the year. The Group is currently
awaiting Competion Commisssion approval.
2003 2004 2005
Rm Rm Rm
Segment information
The inter-company transactions are
reflected as net and are thus eliminated
against segment results:
Business Segment
Consolidated operating revenue 37,322 40,484 43,117
Fixed line 29,542 30,906 31,414
To external customers 29,106 30,443 30,844
Intercompany 436 463 570
Mobile 9,705 11,428 13,657
To external customers 8,216 10,041 12,273
Intercompany 1,489 1,387 1,384
Elimination (1,925) (1,850) (1,954)
Consolidated operating profit 6,680 9,245 11,222
Fixed line 4,516 6,626 7,979
Elimination 1,053 924 807
Mobile 2,164 2,619 3,243
Elimination (1,053) (924) (807)
Consolidated finance charges 4,201 3,264 1,695
Fixed line 3,758 2,991 1,647
Mobile 485 284 48
Elimination (42) (11) -
Profit for the year 1,628 4,523 6,724
Fixed line 823 4,054 6,493
Elimination 711 (137) (893)
Mobile 1,105 1,519 1,931
Elimination (1,011) (913) (807)
Related parties
Related party relationships exist within the Group. During the year all
transactions were concluded at arm"s length.
2003 2004 2005
Rm Rm Rm
With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances
Trade receivables 35 42 42
Trade payables (253) (250) (250)
Related party transactions
Income (435) (463) (569)
Expenses 1,489 1,387 1,387
Audit fees 14 3 3
IPO costs 25 - -
Interest received (42) (11) -
With shareholder:
Thintana Communications LLC
Management fees 273 154 57
Government
Revenue (1,606) (1,866) (1,987)
Trade receivables 193 189 185
Employees
Other receivables 126 114 102
Further related party disclosures are contained in the comprehensive financial
statements.
Business combinations
On April 16, 2004, Vodacom acquired a 85.75% interest in the equity of Smartcom
(Proprietary) Limited through its 51% owned subsidiary, Smartphone SP
(Proprietary) Limited for R78 million (Telkom"s 50% share: R40m).
On February 1, 2005, Vodacom acquired cellular business of Tiscali (Proprietary)
Limited for R40 million (Telkom"s 50% share: R20m).
The Vodacom Group has a 51% equity interest in Vodacom Congo (RDC) s.p.r.l.
("Vodacom Congo"), which commenced business on December 11, 2001. This
investment is governed by a shareholders" agreement, which previously provided
the minority shareholder with certain protective and participative rights and
therefore, in terms of IAS31: Interests in Joint Ventures, Vodacom Congo was
considered to be a joint venture resulting in it being proportionately
consolidated in the financial statements for the year ended March 31, 2004.
During the current financial year a new shareholders" agreement was negotiated
which removed these participative rights, resulting in Vodacom Congo now being
controlled and considered to be a 51% owned subsidiary of Vodacom from April 1,
2004. Vodacom"s interest in the company is consolidated from this date in
accordance with IAS27: Consolidated and Separate Financial Statements.
Negative working capital
For the financial years ended March 31, 2005, 2004 and 2003 the Group"s current
liabilities are greater than current assets. Current liabilities will be
financed from operating cash flows, new borrowings and existing credit
facilities.
Subsequent events
Other than as disclosed elsewhere in this report the directors are not aware of
any other matter or circumstance since the financial year end and the date of
this report, not otherwise dealt with in the financial statements, which
significantly affects the financial position of the Group and the results of its
operations.
Special note regarding forward-looking statements
All statements contained herein, as well as oral statements that may be made by
us or by officers, directors or employees acting on behalf of the Telkom Group,
that are not statements of historical fact constitute "forward-looking
statements" within the meaning of the US Private Securities Litigation Reform
Act of 1995, specifically Section 27A of the US Securities Act of 1933, as
amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause our actual results to be
materially different from historical results or from any future results
expressed or implied by such forward-looking statements. Among the factors that
could cause our actual results or outcomes to differ materially from our
expectations are those risks identified under the caption "Risk Factors"
contained in item 3 of Telkom"s most recent annual report on Form 20-F filed
with the U.S. Securities Exchange Commission (SEC) and our other filings with
the SEC, available on Telkom"s website at www.telkom.co.za/ir. You should not
place undue reliance on these forward-looking statements. All written and oral
forward-looking statements, attributable to us, or persons acting on our behalf,
are qualified in their entirety by these cautionary statements. Moreover, unless
we are required by law to update these statements, we will not necessarily
update any of these statements after the date hereof either to conform them to
actual results or to changes in our expectations.
www.telkom.co.za
Date: 06/06/2005 07:18:49 AM Supplied by www.sharenet.co.za
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