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Telkom - Annual Results For The Year Ended 31 March 2006
Telkom SA Limited
(Registration Number 1991/005476/06)
ISIN ZAE000044897
JSE and NYSE Share Code TKG
("Telkom")
Index
1. Highlights
2. Operational Overview
3. Group Performance
4. Group Balance Sheet
5. Group Cash Flow
6. Group Capital Expenditure
7. Segment Performance
8. Employees
9. Summarised Group Financial Statements
10. Supplementary Information
11. Special Note Regarding Forward-looking Statements
1 Highlights
Johannesburg, South Africa - June 5, 2006, Telkom SA Limited (JSE and NYSE:
TKG), South Africa"s largest communications Group today announced group
results for the year ended March 31, 2006. The Group delivered a strong
performance across both business segments primarily as a result of
continued growth in the fixed-line and mobile business and cost reductions
in the fixed-line business.
The Group declared an ordinary annual dividend of 500 cents per share on
June 2, 2006, and a special dividend of 400 cents per share, payable on
July 14, 2006, for shareholders registered on July 7, 2006.
Group financial highlights for the year ended March 31, 2006
Operating revenue up 10.3% to R47,625 million
30.3% growth in operating profit to R14,677 million
43.2% group EBITDA margin
1.6% net debt decrease to R6,828 million, and debt to equity of 23.2%
Headline earnings increased by 36.1% to 1,740.5 cents per share
Basic earnings per share increased by 39.9% to 1,744.7 cents
Statement by Papi Molotsane, Chief Executive Officer:
"The Telkom Group has delivered another strong set of results with headline
earnings per share growth of 36.1% to 1,740.5 cents per share. The fixed-
line business performance was driven mainly from revenue growth of 4.1% and
a decrease in operating expenses of 3.2% and the mobile business by
customer growth achieving gross connections for the year of 11.8 million.
Telkom stands at an important point in its development in an industry
undergoing fundamental changes.
Our customers require increasingly sophisticated products and services as
technologies converge and the industry worldwide moves to an IP-based
operating standard. In view of this, and with greater certainty in the
local regulatory dispensation following accelerated liberalisation of the
market, management has redefined its strategy to compete across the ICT
value chain.
In view of the opportunities in our dynamic environment, and fully
appraised of where we need to improve to compete effectively, Telkom has
set its sights on being a leading ICT solutions provider. Our strategy aims
to create long-term value for all stakeholders through customer centricity,
investing in our employees and our network, defending and growing revenues,
playing a central role in South Africa"s competitiveness and growth, and
thereby, making healthy financial returns for our shareholders
sustainable."
Strong Financial Performance
The Group has delivered a strong performance for the financial year ended
March 31, 2006. Group operating revenue increased 10.3% to R47,625 million
and operating profit increased 30.3% to R14,677 million. The Group earnings
before interest, tax, depreciation and amortisation ("EBITDA") margin
increased to 43.2% compared to 40.7%, at March 31, 2005, mainly due to
fixed-line data revenue growth, lower fixed-line employee costs as a result
of a workforce reduction and a consistent mobile business EBITDA margin of
34.7% from strong customer growth.
Headline earnings per share grew by 36.1% to 1,740.5 cents per share and
basic earnings per share grew 39.9% to 1,744.7 cents per share. The strong
growth in earnings was attributed to the increase in operating profit and a
27.3% reduction in finance charges.
Cash generated from operations increased 5.9% to R19,724 million and
facilitated capital expenditure of R7,396 million and the repurchase of
12,086,920 Telkom shares to the value of R1,502 million. Our net debt to
equity ratio of 23.2% at March 31, 2006, is below the announced targeted
range of between 50% and 70%.
Summary group financial results
March 31,
Restated
In ZAR millions 2005 2006 %
Operating revenue 43,160 47,625 10.3
Operating profit 11,261 14,677 30.3
EBITDA 17,549 20,553 17.1
Capital expenditure 5,850 7,508 28.3
Operating free cash flow 10,034 7,104 (29.2)
Net debt 6,941 6,828 (1.6)
Basic EPS (ZAR cents) 1,246.7 1,744.7 39.9
Headline EPS (ZAR cents) 1,279.0 1,740.5 36.1
Operating profit margin (%) 26.1 30.8
EBITDA margin (%) 40.7 43.2
Net debt to equity (%) 26.3 23.2
After tax operating return on 19.8 25.6
assets (%)
Capex to revenue (%) 13.6 15.8
Operational data
March 31,
2005 2006 %
Fixed-line data
Fixed access lines ("000)1 4,725 4,708 (0.4)
Postpaid - PSTN 3,006 2,996 (0.3)
Postpaid - ISDN channels 663 693 4.5
Prepaid 887 854 (3.7)
Payphones 169 165 (2.4)
Fixed-line penetration rate (%) 10.1 10.0 (1.0)
Revenue per fixed access line 5,245 5,304 1.1
(ZAR)
Total fixed-line traffic 31,706 31,015 (2.2)
(millions of minutes)
Local 19,314 18,253 (5.5)
Long distance 4,453 4,446 (0.2)
Fixed-to-mobile 3,911 4,064 3.9
International outgoing 415 515 24.1
International VoIP 89 83 (6.7)
Interconnection 3,524 3,654 3.7
Mobile interconnection 2,206 2,299 4.2
International interconnection 1,318 1,355 2.8
Managed data networks 11,961 16,887 41.2
Internet customers3 226,707 284,908 25.7
ADSL2 58,278 143,509 146.2
Fixed-line employees (excluding 28,972 25,575 (11.7)
subsidiaries)
Fixed-line employees (including 29,544 26,156 (11.5)
subsidiaries)
Fixed-lines per fixed-line 163 184 12.9
employee
Mobile data4
Total customers ("000) 15,483 23,520 51.9
South Africa
Mobile customers ("000) 12,838 19,162 49.3
Contract 1,872 2,362 26.2
Prepaid 10,941 16,770 53.3
Community services telephones 25 30 20.0
Mobile churn (%) 27.1 17.7 (34.7)
Contract 9.1 10.0 9.9
Prepaid 30.3 18.8 (38.0)
Mobile market share (%) 55.7 57.9 3.9
Mobile penetration (%) 49.5 70.6 26.8
Total mobile traffic (millions 14,218 17,066 20.0
of minutes)
Mobile ARPU (ZAR) 163 139 (14.7)
Contract 624 572 (8.3)
Prepaid 78 69 (11.5)
Community services 2,321 1,796 (22.6)
Mobile employees 3,954 4,148 4.9
Mobile customers per mobile 3,247 4,620 42.3
employee
Other African countries
Mobile customers (thousands) 2,645 4,358 64.8
Mobile employees 1,039 1,154 11.1
Mobile customers per mobile 2,546 3,776 48.3
employee
1. Excludes Telkom internal lines of 103,740 (2005: 108,521)
2. Excludes Telkom internal lines of 249 (2005: 254)
3. Includes Telkom Internet ADSL, satellite and dial-up subscribers
4. 100% of Vodacom data
2 Operational Overview
Delivered to all stakeholders
The Group delivered on its strategic intent during the financial year to
March 31, 2006, by striving to fulfil customer needs, introducing
innovative products and delivering impressive financial returns to
shareholders.
The fixed-line revenue continues to exceed expectations, improving 4.1%
despite tariff reductions across our product range and the loss of dial-up
minutes due to our ADSL rollout. The tariff reductions were offset by
strong volume growth in data services, increased revenue from mobile
outgoing calls and rental and service fees. Operating margins improved
mainly due to a reduction in employee expenses and lower depreciation due
to the extension of useful lives of certain assets.
Mobile South African customers increased 49.3% during the year, reinforcing
Vodacom"s market leadership position in South Africa. Exceptional customer
growth and improved efficiencies in the mobile business resulted in a
stable EBITDA margin at 34.7% against a declining ARPU due to lower income
segment customer connections.
Increasing importance of fixed-line data revenue
The fixed-line business achieved a 14.4% increase in data revenue for the
year ended March 31, 2006, with good growth in all data revenue categories.
ADSL adoption in the consumer and small and medium size business segment
increased in the year ended March 31, 2006, 146% from 58,278 to 143,509
services as at March 31, 2006, due to our focused roll-out strategy to
achieve ADSL penetration of 15% - 20% of fixed access lines by 2010 and the
introduction of new service offerings and price reductions.
The explosion of broadband demand during the year has resulted in strong
growth in leased line and other data service revenue of 11.1%. Revenue from
cellular operator fixed links have increased from R1,056 million to R1,367
million for the year ended March 31, 2006, as a result of the roll out of
cellular operators"
3G networks.
Telkom has successfully trialled WIMAX (IEEE 802 16e) and has been
allocated frequency Spectrum by ICASA. Telkom will now begin deploying a
wireless broadband network to complement the ADSL rollout.
Telkom"s vision is to become an ICT solutions partner for corporate and
business customers, moving up the value chain, providing higher level
products and services to our traditional voice and data products. This
strategy has been validated by our success in winning large corporate
customer accounts and delivering to their ICT requirements from voice
products and services to network management. Our VPN Supreme and Customer
Network Care products aimed mainly at the medium to large sized business
have enjoyed success through alignment with customers" requirements.
Vodacom"s data revenue increased by 52.1% to R1,019 million (50% share) for
the year ended March 31, 2006 from R670 million (50% share) for the year
ended March 31, 2005, contributing 6.0% (2005: 4.9%) to mobile operating
revenue.
Growth in mobile data revenue is mainly due to the launch of new data
initiatives such as 3G, HSDPA, Vodafone Live!, Blackberry (R)and the
continued popularity of SMS.
Within this context Telkom has made an offer to Business Connexion"s
("BCX") shareholders to acquire 100% of BCX for R2,5 billion. The offer
price constitutes R9 per share, plus allowing BCX to pay a special dividend
of 25 cents per share. The BCX acquisition provides a good opportunity to
create shareholder value as it enables Telkom to enter the data hosting and
desktop management market. These services are complementary to the value
adding products and services being developed within Telkom.
Positive customer response to new innovative products and services
Telkom"s aims to enhance the customer experience by introducing innovative
value enhancing bundled products and services. In line with this strategy,
Telkom successfully launched Telkom Closer in January 2006.
Telkom Closer bundles rental, call answer, peak minutes and off-peak
minutes into a package which allows the customer to pay a flat monthly
charge. Demand for the product has been strong, resulting in the sign up of
71,317 customers in the three months to March 31, 2006.
Other value added products that have received a positive response include:
- The provision of free medical emergency response for fixed-line
customers by Netcare 911;
- SpaceStream providing satellite access; and
- Office Suite providing office functionality to the small and medium
enterprise market.
Through bundled products Telkom intends to increase its annuity income,
create a value comparison for the customer and improve our competitive
position.
Total mobile customers up by 51.9% to 23.5 million
Vodacom performed exceptionally well in the year ended March 31, 2006,
improving market share to 58%, and increasing net profit by 32.0%.
Operating effectiveness was maintained with EBITDA margins decreasing
marginally to 34.7% from 35.1% in the previous financial year.
Vodacom"s South Africa customer base increased a net of 6.3 million
customers to 19.2 million customers.
Vodacom"s focus on customer care and retention saw South African contract
churn at 10.0% (2005: 9.1%) and prepaid churn at 18.8% (2005: 30.3%) for
the year ended March 31, 2006. The blended South African ARPU over the year
was R139 (2005: R163).
Outside South Africa, Vodacom grew its customer base by 64.8% to 4.4
million customers (2005: 2.6 million). Vodacom Tanzania achieved a
substantial 74.1% increase in customers to 2.1 million (2005: 1.2 million).
Vodacom Congo saw a 52.2% increase in customers to 1.6 million customers
(2005: 1.0 million). Vodacom Lesotho increased its customer base by 40.1%
to 206,000 customers (2005: 147,000) as at March 31, 2006. Vodacom
Mozambique increased its customer base substantially by 84.9% to 490,000
customers (2005: 265,000) for the year ended March 31, 2006.
Focused on achieving improved service levels
The increased demand for our products and services coupled with a reduced
workforce, has seen our services levels come under pressure.
Telkom"s key strategic focus is improving customer centricity. This
includes network reliability, market focused products and services and
improved customer communications.
Telkom has launched new bundled packages, repositioned customer facing
outlets and launched projects to improve customer communication and improve
the internal processes for the installation of new services.
Competitive pricing and volume growth
Telkom today announced price reductions on our regulated basket of products
and services of 2.1%.
From August 1, 2006, the following price changes will be effective:
ADSL rental 24% average decrease
Long distance 10% decrease
International 10% average decrease
Data 9% average decrease
Rental (analogue lines) 8% increase
Rebalancing of tariffs will allow effective competition in all areas going
forward. Revenue is unlikely to be affected to the same degree the price
reductions are expected to result in increased volume which is expected to
have an offsetting effect. The reduction of telecommunication costs should
benefit all South Africans contributing positively to the economy. In
addition Telkom is combining the DSL192 and DSL384 products, and the DSL192
users will be upgraded to up to 384 kbit/s in due course, depending on
network infrastructure.
Continuous advancement of our network
Increased investment in the network has been directed at:
- Improving network service levels and customer service levels - R1,488
million;
- Maintaining the customer base of R1,424 million; and
- Initial investments on the conversion to a Next Generation Network -
R1,956 million.
In line with customer demand and sound financial criteria, we will continue
to invest in improving our network and the orderly migration to an IP base
network to supply next generation products and services.
Recognition of the value of our employees
Telkom"s skilled and experienced workforce is our competitive advantage.
Rapidly changing technology, increasing specialisation requirements and
capacity gaps necessitate an ongoing development and training requirements.
Telkom continues to invest significantly in our employees to ensure that
the appropriate business skills are available to meet customer
requirements.
For the year ended March 31, 2006, Telkom spent R400.1 million (2005:
R401.5) on training and development and employees participated in 160,274
(2005: 192,799) facilitator led training days.
Telkom has detailed plans to identify and ascertain high potential
individuals within the Company that can be developed for future senior
management positions to ensure all future employee requirements are met.
The Company has demonstrated the strength of its succession and relation
plans by appointing 80% of senior management vacancies from within the
Company, utilising the existing skills and potential of the current
employees.
Significant Returns to Shareholders and employee share ownership
In the year ended March 31, 2006, the Company repurchased 12.1 million
shares to the value of
R1.5 billion (including costs) which have been cancelled as issued share
capital and restored as authorised but unissued capital.
The Telkom Board of Directors declared an annual dividend of 500 cents per
share and a special dividend of 400 cents per share on June 2, 2006, to be
paid on July 14, 2006, for shareholders registered on July 7, 2006.
As part of the Company"s commitment to the optimal use of capital the
Telkom Board approved a R2 billion share buyback programme on June 2, 2006.
The Telkom Board granted 2,024,555 shares on June 23, 2005, to employees in
terms of the Telkom Conditional Share Plan.
As previously communicated, Telkom aims to pay a steadily growing annual
ordinary dividend. The level of dividend will be based upon a number of
factors, including the assessment of financial results, available growth
opportunities, the Group"s net debt level, interest coverage and future
expectations, including internal cash flows and share buybacks.
The Regulatory environment
Telkom faces regulatory challenges and through constructive dialogue
endeavours to achieve a regulatory framework that is realistic, equitable
and beneficial to the industry. The following details the main regulatory
issues affecting the industry and Telkom.
Electronic Communications (EC) Act
The EC Act, No 36 of 2005, has been assented to by the President but not
yet promulgated. The primary aim of the Act is to promote convergence in
the broadcasting, broadcasting signal distribution and telecoms sectors and
to provide the legal framework for convergence of these sectors.
The Act, once promulgated, will liberalise the market further and will
result in a change in the licensing structure. Essentially, separate
licences will be granted for the provision of infrastructure, communication
services and broadcasting services. All existing licensees will need to be
issued with new licences.
The EC Act creates challenges as well as opportunities that Telkom will
certainly explore.
ICASA Amendment Bill
A bill amending the ICASA Act was passed by Parliament but was referred
back to Parliament by the President on concerns of possible constitutional
challenges to some provisions. The amended Bill was discussed by the
Parliament Portfolio Committee on telecommunications on May 12, 2005, the
concerns have been addressed and the amended Bill has again been submitted
to the Assembly for debate.
The delay in enacting the bill is the reason for holding back promulgation
of the EC Act, because of the linkages between the two.
The Bill was passed by Parliament on May 30, 2006.
Interconnection and Facility Leasing
Current regulations make provision for cost based interconnection and
facility leasing. Telkom submitted its regulatory accounts on a fully
allocated costs basis to ICASA in September 2005, and is expected to submit
long run incremental costs (CLRIC) statements in September 2006.
Operators classified as "major" operators have to supply interconnection
and facility leasing services to "public" operators at cost based tariffs
as entitled to by the provisions of their licences. Telkom has been
declared a "major" operator by ICASA.
Public hearings were held by ICASA on new interconnection and facility
leasing regulations in late March 2006. It is expected that the final
regulations will be published shortly. The draft regulations propose that
LRIC based interconnection be extended to all licensees.
Telkom and the SNO are in talks on interconnection and facility leasing
agreements.
Number Portability (NP)
In terms of regulations published in September 2005, Telkom is expected to
provide blocks of 10,000 numbers two months after the SNO"s launch of
services, blocks of 1,000 numbers four months after the SNO"s launch of
services and individual number portability 12 months after the request.
Functional specifications for the implementation of NP between fixed-line
operators have not yet been finalised.
The SNO has requested NP in February 2006 and discussions on the
implementation of the required inter-operator systems are under way.
Local loop unbundling
Telkom is required, in terms of existing legislation, to provide the SNO
with shared access to its local loop.
Although the Telecommunications Act, 103 of 1996, provides that no general
local loop unbundling will be required for the first two years of operation
of the SNO, the EC Act, which repeals the Telecommunications Act, makes
provision for unbundling of the local loop, subject to ICASA making the
necessary regulations.
Draft ADSL regulations
ICASA issued draft ADSL regulations in 2005. Although there is uncertainty
on some of their provisions, they appear to propose that Telkom is not
allowed to charge a rental for ADSL services, but only recover a small
portion of once-off costs. ICASA conducted public hearings on the draft
regulations at the end of
May 2006.
Interception of Communication and Communication-related Information Act
The effective date of the Act is September 30, 2005 with the exception of
the provisions dealing with customer registration which is effective June
30, 2006.
Subscriber registration
The Act requires customers to produce an identification document and a
physical address which the operator must verify.
The mobile operators have succeeded in obtaining, in principle, support for
an electronic registration process. The legislative amendments to effect
the changes have not yet been effected.
Telkom and Vodacom are in a position to intercept communications and
register subscribers. However, the Act does place onerous conditions on
operators who therefore, continue to engage the authorities on the
practical implications of the Act.
We are confident that we are well placed to deal with all regulatory issues
confronting us. We actively plan and analyse multiple regulatory scenarios
to ensure we are prepared for changes in regulation.
Budget speech by the Minister of Communications
In her budget speech delivered to Parliament at the end of May 2006, the
Minister announced her intention to shortly issue policy directions to
ICASA setting out the priorities for implementing the provisions of the EC
Act. Among these will be the regulation of access to submarine cables and
the unbundling of the local loop. The Minister also announced the
establishment of a Broadband Advisory Council to advise her on the
development of a broadband policy for South Africa and that Sentech will
form the core of the country"s wireless broadband infrastructure network.
Conclusion
Telkom is confident that it is well placed to deal with all regulatory
issues confronting Telkom. Telkom actively plans and analyses multiple
regulatory scenarios to ensure that it is prepared for changes in
regulation.
Telkom is a leader in transformation
Telkom has always viewed South Africa"s effective transformation as
imperative for its own sustainable
long-term growth. Telkom concurs with the view that BEE should seek to
deliver meaningful and truly broad-based empowerment to the majority of
South Africa"s people. The draft Information and Communication Technology
ICT BEE Charter is expected to be aligned with the Department of Trade and
Industry (DTI) Codes of Good Practice during July 2006.
Telkom spent R6.4 billion on empowered or significantly empowered suppliers
for the year ended March 31, 2006.
Telkom"s transformation progress has been consistently recognised. Telkom
was placed fifth out of 200 companies in the annual 2006 FM/Empowerdex Most
Empowered Company in SA Survey.
Telkom"s social investment programme through the Telkom Foundation has
continued to contribute to the positive transformation of disadvantaged
communities through social investments aimed at achieving sustainable
development. The social investment programmes have continued to focus on
the following four main focus areas:
Education and Training;
Empowerment of Women, Children and People with Disabilities; and
ICT Planning and Infrastructure rollout.
The Telkom Foundation was recognised for its commitment, receiving numerous
awards and recognition. The most notable being the PMR Awards for first
Overall winner on Corporate Care within the Telecommunications Sector, Gold
Status on Social Upliftment, BEE, Job Creation and Training.
Strategy
Telkom"s vision is to be a leading customer and employee centred
Information and Communications Technologies (ICT) solutions service
provider. Telkom is focused on balancing the needs of all stakeholders to
ensure long term sustainable and profitable growth of the business for
shareholders.
The accelerated liberalisation of the market, in particular the
implications of the Electronic Communications Act, the emergence of new
technologies and customer demand is clearly material to Telkom"s strategic
intentions. Telkom believes that it is strongly positioned to compete
effectively in a liberalised market. Customer service excellence through a
skilled and dedicated workforce with greater product and service choice and
value for customers will ensure long term value creation. Telkom will
pursue opportunities to provide the full spectrum of ICT solutions
including voice, data, video and internet services increasingly through
broadband penetration.
To ensure that Telkom can sustain the creation of value relative to
developments in its dynamic and changing market environment, management
have determined certain shifts in strategic emphasis.
Telkom will focus on the following imperatives to sustain long term value
creation for all its stakeholders:
Investing in the development of employees to maintain competitive
advantage;
Enhancing customer satisfaction through customer centricity;
Retaining revenue and generating growth;
Evolving to a Next Generation Network in order to support profitable growth
through prudent cost management;
Repositioning Telkom stakeholder management to create healthy external
relationships.
The realisation of Telkom"s strategic intentions ultimately lies in the
hands of Telkom"s people.
The evolution to an IP centric network is a business imperative. Telkom
cannot delay the investment to a fully enabled IP network. It is vital that
we increase our investment in our network to enable the cost of operating
the network to reduce and to enable the delivery of fully converged
products and services to meet our customers" needs in the rapidly changing
technological environment. Acceleration of Telkom"s broadband penetration
is a critical element of this strategy. The technology has reached critical
mass and is set to become the technology of choice, as demonstrated
globally.
The evolution to a Next Generation Network in a phased approach which is
based on sound commercial criteria and will enable Telkom to exploit new
opportunities in the ICT solutions market. The first phase is expected to
last three years and concentrates on enabling the network for broadband
services.
The second phase is the conversion of existing products and services to
NGN. Depending on the customer demand and profitability, this process is
expected to be completed by 2015. Telkom should have a predominant IP-based
network with most products and services on the new platform.
Delaying the investment will result in lost opportunities and erode our
ability to retain existing customers through new services, features and
functionality. Cost management is central to all our decisions with
processes and procedures in place to ensure costs are managed to minimise
expenditure. A particular area of focus is on our procurement spend, where
we are investigating options to realise savings through the consolidation
of suppliers, extract efficiencies and obtain price reductions. In the
short-term, we expect to incur a marginal increase in costs due to the
maintenance required to improve the viability to our network and the impact
of the annual wage increase.
Given the centrality of ICT to economic growth and social development,
Telkom remains strategically important to the achievement of national
objectives and will continue to invest significantly in the development of
a viable and vibrant marketplace.
Telkom is exploring opportunities outside its borders where there is
potential for growth, healthy returns and long-term value creation for its
stakeholders. The focus is on data acquisitions and fixed/mobile
opportunities. A detailed evaluation process is followed on each
opportunity to ensure it is a strategic fit, all risks and resource
requirements are understood and the potential returns exceed our minimum
requirements.
Prospects for the year ahead
Fixed-line revenues in the financial year ending March 31, 2007 are
expected to be impacted by tariffs, increased competition and the migration
from dial-up to ADSL and the introduction of cost-based interconnection.
Our strategic initiatives to improve service levels are expected to result
in above inflationary increases in operating expenses, the result being an
expected fixed-line EBITDA margin between 37% and 40%.
Fixed-line CAPEX is expected to be between 18% and 22% of revenue. The
increase from the financial year ended March 31,2006 is due to capacity
increases and the accelerated evolution to an IP centric network for the
introduction of a Next Generation Network.
The mobile business is focused at maintaining its market share. Through
improved efficiencies, the EBITDA margin is expected to remain constant.
The Group net debt to equity target remains the same at 50% to 70%.
3 Group Performance
Group operating revenue
Group operating revenue increased 10.3% to R47,625 million (2005: R43,160
million) in the year ended March 31, 2006. Fixed-line operating revenue,
after inter-segmental eliminations, increased 3.7% to R32,039 million
primarily due to solid growth in data services and increased subscription
revenue. Mobile operating revenue, after inter-segmental eliminations,
increased 27.0% to R15,586 million primarily due to customer growth.
Group operating expenses
Group operating expenses increased 3.9% to R33,428 million (2005: R32,179
million) in the year ended March 31, 2006, due to a 20.8% increase in
operating expenses in the mobile segment to R11,926 million (after inter-
segmental eliminations). This was partially offset by a 3.6% decrease in
the fixed-line operating expenses to R21,502 (after inter-segmental
eliminations) primarily due to reduced employee expenses and depreciation,
amortisation, impairment and write-offs, partially offset by an increase in
payments to other operators, services rendered, operating leases and
selling, general and administrative expenses. The increase in mobile
operating expenses of 20.8%, after inter segmental eliminations, was
primarily due to increased gross connections resulting in increased
incentive costs and expenses to support customer satisfaction and growth.
Mobile payments to other operators also increased as a result of the
increased outgoing traffic and the higher volume growth of more expensive
outgoing traffic terminating on other mobile networks relative to traffic
terminating on the lower cost fixed-line network.
Investment income
Investment income consists of interest received on short-term investments
and bank accounts. Investment income increased 13.4% to R397 million (2005:
R350 million), largely as a result of higher interest received due to
higher cash flow generated from operations.
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 27.3% to R1,233 million (2005: R1,695 million) in
the year ended March 31, 2006, due to a 20.2% decrease in interest expense
to R1,346 million (2005: R1,686 million) as a result of the redemption of
local and foreign loans. In addition to the decrease in the interest
expense, net fair value and exchange gains on financial instruments of R113
million (2005: Loss of R9 million) arose primarily as a result of currency
movements and unrealised gains relating to the Cell Captive investment.
Taxation
Consolidated tax expense increased 46.7% to R4,520 million (2005: R3,082
million) in the year ended March 31, 2006. The consolidated effective tax
rate for the year ended March 31, 2006, was 32.7% (2005: 31.1%). Telkom
Company"s effective tax rate was 25.0% (2005: 20.6%). The higher effective
tax rate for Telkom Company in the year ended March 31, 2006, was primarily
due to the secondary tax on companies payable in respect of dividends paid.
Vodacom"s effective tax rate decreased to 37.5% (2005: 40.2%). The lower
effective tax rate for Vodacom was largely as a result of the non-
deductible expenses of the previous year not recurring.
Profit for the year and earnings per share
Profit for the year attributable to the equity holders of Telkom increased
36.0% to R9,182 million (2005: R6,751 million) in the year ended March 31,
2006.
Group basic earnings per share increased 39.9% to 1,744.7 cents (2005:
1,246.7 cents) and Group headline earnings per share increased 36.1% to
1,740.5 cents (2005: 1,279.0 cents).
4 Group Balance Sheet
Solid operating performance across the Group combined with strict cost
discipline and debt payment has resulted in a strengthened balance sheet.
Net debt, after financial assets and liabilities, decreased 1.6% to R6,828
million (2005: R6,941 million). The balance sheet at March 31, 2006,
strengthened, resulting in a net debt to equity ratio of 23.2% from 26.3%
at March 31,2005. On March 31, 2006, the Group had cash balances of R4,948
million.
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 buybacks while maintaining financial flexibility for
potential growth opportunities. During the year ended March 31, 2006, 12.1
million shares were repurchased for R1,502 million. These shares have been
cancelled from the issued share capital by the Registrar of Companies.
Interest-bearing debt, including credit facilities utilised, decreased
20.8% to R11,816 million (2005: R14,912 million) in the year ended March
31, 2006. In April 2005, the Euro 500 million Eurobond matured and was
refinanced with R600 million nominal value of the existing TL06 bond, with
the balance being refinanced with short-term commercial paper borrowings
and hedging instruments. The Group repaid R2,720 million of the commercial
paper debt by March 31, 2006. Included in interest-bearing debt at March
31, 2006, was R429 million in commercial paper bills that matured in April
2006.
Telkom maintains an active dialogue with the principal credit rating
agencies, who review our ratings periodically. Moody"s Investor Services
and Standard & Poor"s have rated our foreign debt A3 and
BBB respectively.
5 Group Cash Flow
Cash flows from operating activities decreased 39.5% to R9,506 million
(2005: R15,711 million), primarily due to higher taxation and dividend
payments offset by increased operational cash flows. Cash flows utilised
in investing activities increased 15.5% to R7,286 million (2005: 6,306
million), primarily due to increased
capital expenditure in both the mobile and fixed-line segments. Cash
utilised in financing activities of
a R1,502 million for a share buyback and the R2,720 million repayment of
commercial paper bills, was partially offset by the loans raised to
refinance the Eurobond, as well as cash inflows from maturing financial
assets.
Summary
Year ended
March 31,
Restated
In ZAR millions 2005 2006 %
Cash generated from operations 18,622 19,724 5.9
Cash from operating activities
(after tax, interest, 15,711 9,506 (39.5)
dividends)
Investing activities (6,306) (7,286) 15.5
Financing activities (9,897) (258) (97.4)
Net (decrease)/increase in cash (492) 1,962 (498.8)
EBITDA minus capital
expenditure
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Fixed-line 8,650 9,709 12.2
Mobile 3,049 3,336 9.4
Group 11,699 13,045 11.5
6 Group Capital Expenditure
Group capital expenditure
increased 28.3% to R7,508
million (2005: R5,850 million)
and represents 15.8% of Group
revenue (2005: 13.6%).
Fixed-line capital expenditure
Year ended March 31,
In ZAR millions 2005 2006 %
Base expansion and core support 1,902 2,534 33.2
Network evolution 729 926 27.0
Efficiencies and improvements 1,177 1,080 (8.2)
Company support and other 295 397 34.6
4,103 4,937 20.3
Fixed-line capital expenditure increased 20.3% to R4,937 million (2005:
R4,103 million) and represents 15.1% of fixed-line revenue (2005: 13.0%).
Baseline expansion and core support capital expenditure of R2,534 million
(2005: R1,902 million) was largely for the deployment of technologies to
support the growing data services business and expenditure for access line
deployment in selected high growth residential areas. The continued focus
on rehabilitating the access network and increasing the efficiencies and
redundancies in the transport network contributed to the network evolution
capital expenditure of
R926 million (March 31, 2005: R729 million).
Telkom continues to focus on its operations support system investment with
current emphasis on workforce management, provisioning and fulfilment,
assurance and customer care. During the year ended March 31, 2006, R1,080
million (2005: R1,177 million) was spent on the implementation of several
systems.
Mobile capital expenditure
Year ended March 31,
In ZAR millions 2005 2006 %
South Africa 1,389 2,193 57.9
Other African countries 358 378 5.6
1,747 2,571 47.2
Mobile capital expenditure (50% of Vodacom"s capital expenditure) increased
47.2% to R2,571 million (2005: R1,747 million) and represents 15.1% of
mobile revenue (March 31, 2005: 12.8%) which was mainly spent on the
cellular network infrastructure as a result of increased investment in
South Africa for increased traffic and investment in 3G technologies. The
increase in capital expenditure in other African countries is largely as a
result of an increased investment in Tanzania to accommodate the
substantial growth in the subscriber base during the year.
7 Segment Performance
Telkom"s operating structure comprises two segments, fixed-line and mobile.
The fixed-line segment provides fixed-line voice and data communications
services through Telkom; directory services through our 64.9% owned
subsidiary, Telkom Directory Services and wireless data services through
our wholly owned subsidiary, Swiftnet. The mobile segment consists of a 50%
joint venture interest in Vodacom.
Vodacom"s results are proportionately consolidated into the Telkom Group"s
consolidated financial statements. This means that we include 50% of
Vodacom"s results in each of the line items in the Telkom Group"s
consolidated financial statements. Telkom Directory Services, Swiftnet and
Rossal No 65 and Acajou (subsidiaries for the repurchase of shares)
subsidiaries are fully consolidated in the
Telkom Group"s consolidated financial statements.
Summary
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Operating revenue 43,160 47,625 10.3
Fixed-line 31,457 32,749 4.1
Mobile 13,657 17,021 24.6
Inter-segmental eliminations (1,954) (2,145) 9.8
Operating profit 11,261 14,677 30.3
Fixed-line 8,021 10,242 27.7
Mobile 3,240 4,435 36.9
Inter-segmental eliminations - - -
Operating profit margin 26.1 30.8 18.1
Fixed-line 25.5 31.3 22.7
Mobile 23.7 26.1 9.8
EBITDA 17,549 20,553 17.1
Fixed-line 12,753 14,646 14.8
Mobile 4,796 5,907 23.2
Inter-segmental eliminations - - -
EBITDA margin 40.7 43.2 6.1
Fixed-line 40.5 44.7 10.3
Mobile 35.1 34.7 (1.2)
Finance charges 1,695 1,233 (27.3)
Fixed-line 1,647 839 (49.1)
Mobile 48 394 720.8
Inter-segmental eliminations - - -
FIXED-LINE SEGMENT
The fixed-line segment provides fixed-line voice and data communications
services through Telkom, directory services through the 64.9% owned
subsidiary, Telkom Directory Services, and wireless data services through
the wholly owned subsidiary, Swiftnet. The fixed-line segment accounted for
67.3% (2005: 71.6%) of Group operating revenues (after inter-segmental
eliminations) and 74.7% (2005: 78.4%) of Group operating profit at March
31, 2006.
The financial information presented below for the fixed-line segment is
before inter-segmental eliminations.
Summary
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Revenue 31,457 32,749 4.1
Operating profit 8,021 10,242 27.7
EBITDA 12,753 14,646 14.8
Capital expenditure 4,103 4,937 20.3
Operating profit margin (%) 25.5 31.3 22.7
EBITDA margin (%) 40.5 44.7 10.3
Capex to revenue (%) 13.0 15.1 15.6
Fixed-line operating revenue
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Subscriptions and connections 5,359 5,803 8.3
Traffic 17,760 17,563 (1.1)
Local 5,746 5,753 0.1
Long distance 3,577 3,162 (11.6)
Fixed-to-mobile 7,302 7,647 4.7
International outgoing 1,135 1,001 (11.8)
Interconnection 1,546 1,654 7.0
Mobile operators1 748 760 1.6
International operators 798 894 12.0
Data 5,810 6,649 14.4
Leased lines and other data 4,754 5,282 11.1
Mobile leased facilities2 1,056 1,367 29.5
Directories and other 982 1,080 10.0
31,457 32,749 4.1
1. Interconnection includes revenue from Vodacom of R464 million (2005:
R465 million), 50% is eliminated on consolidation
2. Data includes revenue from Vodacom of R845 million (2005: R562 million),
50% is eliminated on consolidation
Operating revenue from the fixed-line segment, before inter-segmental
eliminations, increased 4.1% to R32,749 million (2005: R31,457 million)
primarily due to strong growth in data services revenue and increased
subscription revenue, offset by a decline in traffic revenue.
Subscription and connections revenue grew 8.3% largely as a result of
increased tariffs, increased sales of customer premises equipment,
including PABX"s, and penetration of higher value-added services.
Traffic revenue decreased 1.1% as a result of the acceleration of broadband
adoption and the resultant loss of internet dial-up minutes as well as the
increasing substitution of calls placed using mobile services rather than
fixed-line services. Traffic, including VoIP traffic but excluding
interconnection traffic, decreased 2.9% to 27,361 million minutes (2005:
28,182 million minutes).
Interconnection revenue increased 7.0% largely as a result of an increase
of 12.0% in international interconnection revenue. The increased
interconnection revenue from international operators is mainly as a result
of a 2.8% increase in international interconnection traffic minutes of
1,355 million minutes (2005: 1,318 million minutes). Mobile interconnection
revenue increased 1.6% to R760 million (2005: R748 million) due to
increased interconnection traffic from mobile operators and tariff
decreases. Mobile interconnection traffic minutes increased by 4.2% to
2,299 million minutes (2005: 2,206 million minutes) in the year ended March
31, 2006.
Data revenue increased 14.4% mainly due to higher demand for data services,
including ADSL, in the medium and small business segment with leased line
and other data revenue growing 11.1% and mobile leased line revenue by
29.5%. The increase in mobile leased facilities is largely due to the
rollout of 3G networks by the mobile operators.
Fixed-line operating expenses
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Employee expenses 7,285 6,470 (11.2)
Salaries and wages 4,785 4,592 (4.0)
Benefits 2,110 2,410 14.2
Workforce reduction expenses 961 88 (90.8)
Employee related expenses (571) (620) 8.6
capitalised
Payments to other network operators1 5,896 6,150 4.3
Payment to mobile operators 5,059 5,231 3.4
Payment to international operators 837 919 9.8
SG&A 3,046 3,086 1.3
Materials and maintenance 1,726 1,617 (6.3)
Marketing 360 413 14.7
Bad debts 196 187 (4.6)
Other 764 869 13.7
Services rendered 1,976 2,050 3.7
Property management 1,068 1,107 3.7
Consultants and security 908 943 3.9
Operating leases 756 777 2.8
Depreciation, amortisation, 4,732 4,404
impairment and write-offs
23,691 22,937 (3.2)
1. Payments to other network operators include payments made to Vodacom of
R2,818 million (2005: R2,728 million), 50% is eliminated on consolidation
Fixed-line operating expenses, before inter-segmental eliminations,
decreased 3.2% in the year ended March 31, 2006, to R22,937 million (2005:
R23,691 million), primarily due to lower employee expenses and
depreciation, amortisation, impairment and write-offs. The decrease was
partially offset by increased expenses for services rendered, operating
leases, selling, general and administrative expenses and payments to other
operators.
Employee expenses decreased 11.2%, largely due to decreased workforce
reduction expenses of
R88 million (2005: R961 million) and an 11.7% reduction in headcount.
Payments to other network operators increased 4.3% as a result of higher
payments to mobile operators and international operators. Payments to
mobile operators increased 3.4%, largely as a result of tariff increases
and a 3.9% increase in fixed-to-mobile traffic. Payments to international
operators increased 9.8% primarily due to an 24.1% increase in
international outgoing traffic.
Selling, general and administrative expenses increased 1.3% as a result of
increased marketing expenses offset by a decrease in material and
maintenance expenses and bad debts.
Services rendered increased 3.7% with property management expenses
increasing 3.7% as a result of increased maintenance. Consultants and
security costs increased 3.9% primarily as a result of increased cost of
regulatory accounting and Sarbanes-Oxley project and the transport costs of
equipment from warehouses to final drop-off points due to an increased
number of reported faults resulting from adverse weather conditions, offset
by lower fees paid to Thintana due to the termination of the contract in
November 2004 and lower insurance expenses.
Operating leases increased 2.8% as a result of increased vehicle lease
rates, increased vehicle maintenance and increased ad-hoc vehicle rentals
offset by a 7.2% reduction in the vehicle fleet from 10,458 vehicles at
March 31, 2005 to 9,708 vehicles at March 31, 2006.
Depreciation, amortisation, impairment and write-offs decreased 6.9% to
R4,404 million (2005: R4,732 million), largely as a result of extending the
useful lives of certain network and support equipment.
Fixed-line operating profit increased 27.7% to R10,242 million (2005:
R8,021 million) with an operating profit margin of 31.3% (2005: 25.5%).
EBITDA increased 14.8% to R14,646 million (2005: R12,753 million), with
EBITDA margins increasing to 44.7%. (2005: 40.5%).
MOBILE SEGMENT
The mobile segment accounted for 32.7% of Group operating revenue (2005:
28.4%) (after inter-segmental eliminations) and 25.3% of Group operating
profits (2005: 21.6%). Vodacom"s operational statistics are presented below
at 100%, but all financial figures represent the 50% that is
proportionately consolidated in the Group and presented before inter-
segmental eliminations.
Summary
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Operating revenue 13,657 17,021 24.6
Operating profit 3,240 4,435 36.9
EBITDA 4,796 5,907 23.2
Capital expenditure 1,747 2,571 47.2
Operating profit margin (%) 23.7 26.1 9.8
EBITDA margin (%) 35.1 34.7 (1.2)
Capex to revenue (%) 12.8 15.1 18.1
Mobile operating revenue
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Airtime and access 8,096 10,043 24.0
Data 670 1,019 52.1
Interconnect1 2,962 3,348 13.0
Equipment sales 1,344 1,993 48.3
International airtime 444 486 9.5
Other 141 132 (6.4)
13,657 17,021 24.6
1. Interconnect revenue includes revenue from Telkom fixed-lines, of R1,409
million (March 2005: R1,364 million), which is eliminated on consolidation
Operating revenue from the mobile segment increased 24.6%, before inter-
segmental eliminations, to R17,021 million (2005: R13,657 million),
primarily driven by customer growth. Revenue from Vodacom"s operations
outside of South Africa as a percentage of Vodacom"s total mobile operating
revenue increased to 8.7% to R2,974 million (2005: R2,274 million).
The growth in revenue can largely be attributed to a 51.9% increase in
Vodacom"s total customers to
23,520 million as of March 31, 2006, (2005: 15,483 million), resulting from
strong growth in prepaid and contract customers in South Africa and 64.8%
growth in customers outside of South Africa. In South Africa, total Average
Monthly Revenue Per User (ARPUs) decreased 14.7% to R139 (2005: R163).
Contract ARPUs decreased 8.3% to R572 (2005: R624) and prepaid ARPUs
decreased 11.5% to R69 (2005: R78).
Vodacom"s continued implementation of upgrade and retention policies in the
year ended March 31, 2006, ensured contract churn of 10.0%. Prepaid churn
of 18.8% for the year ended March 31, 2006, was lower than the 30.3%
prepaid churn for the year ended March 31, 2005.
Data revenue increased 52.1% and represents 6.0% of mobile revenue. The
growth was largely due to customer growth and the introduction of new
technologies and products in South Africa.
Mobile interconnect revenue increased by 13.0%, primarily due to an
increase in the number of fixed-line calls terminating on Vodacom"s network
as a result of the increased number of Vodacom customers and South African
mobile users.
Equipment sales increased 48.3% primarily due to the growth of the customer
base coupled with added functionality of new phones based on new
technologies.
Vodacom"s international airtime revenue is largely international calls by
Vodacom"s customers, roaming revenue from Vodacom customers making and
receiving calls while abroad and revenue from international customers
roaming on Vodacom"s network. International airtime revenue increased 9.5%,
primarily as a result of an increase in the number of roaming partners.
Mobile operating expenses
Year ended March 31,
Restated
In ZAR millions 2005 2006 %
Employee expenses 826 1,019 23.4
Payments to other operators1 1,826 2,317 26.9
SG&A 5,888 7,328 24.5
Services rendered 45 65 44.4
Operating leases2 310 435 40.3
Depreciation, amortisation, 1,556 1,472 (5.4)
impairment and write offs
10,451 12,636 20.9
1. Payments to other operators include payments to Telkom fixed-line of
R232 million (2005: R233 million), which are eliminated on consolidation
2. Operating leases include payments to Telkom fixed-line of R376 million
(2005: R256 million), which are eliminated on consolidation
Mobile operating expenses, before inter-segmental eliminations, increased
by 20.9% in the year ended March 31, 2006, primarily due to increased
employee expenses, selling and distribution costs, services rendered,
operating leases and payments to other operators.
Mobile employee expenses increased 23.4%, primarily due to a 9.3% increase
in the number of employees to 5,302 and a higher employee deferred bonus
incentive accrual resulting from Vodacom"s higher net profit. Vodacom
increased the total number of its employees by 11.1% in its other African
operations to 1,154 employees and by 4.9% in its operations in South Africa
to 4,148 employees as of March 31, 2006.
Employee productivity in South Africa and other African countries, as
measured by customers per employee, increased 43.1% to 4,436 customers per
employee as of March 31, 2006.
Mobile payments to other operators increased 26.9% to R2,317 million (2005:
R1,826 million) in the year ended March 31, 2006, as a result of increased
outgoing traffic terminating on the other mobile networks relative to
traffic terminating on the fixed-line network and partially due to an
increase in interconnection tariffs on January 1, 2005, in South Africa.
The cost of terminating calls on other mobile networks is higher than calls
terminating on Telkom"s fixed-line network.
Mobile selling, general and administrative expenses increased 24.5% in the
year ended March 31, 2006, primarily due to an increase in selling,
distribution and marketing expenses to support the growth in South African
and other African operations.
Mobile depreciation, amortisation, impairment and write-offs decreased by
5.4% to R1,472 million in the year ended March 31, 2006 primarily as a
result of a partial impairment reversal of Vodacom Mozambican asset
impairment of the prior year. The implementation of IAS 16 (revised):
"Property, Plant and Equipment" further contributed to the lower
depreciation for the year ended March 31, 2006.
Telkom"s 50% share of Vodacom"s profit from operations increased 36.9% to
R4,435 million and the mobile operation profit margin increased to 26.1%.
Mobile EBITDA increased 23.2% to R5,907 million with EBITDA margins
increasing to 34.7%.
8 Employees
Fixed-line
Year ended March 31,
2005 2006 %
Telkom Company 28,972 25,575 (11.7)
Lines per employee 163 184 12.9
Subsidiaries 572 581 1.6
Fixed-line employees at year end 29,544 26,156 (11.5)
Movement in fixed-line employees
(Telkom Company only, excluding
subsidiaries)
Year ended March 31,
2005 2006
Opening balance 32,358 28,972
Appointments 159 686
Employee losses (3,545) (4,083)
Workforce reductions (2,296) (2,990)
Voluntary early retirement (513) (674)
Voluntary severance (1,741) (2,295)
Involuntary reductions (42) (21)
Natural attrition (1,249) (1,093)
Closing balance 28,972 25,575
Mobile Employees
Year ended March 31,
2005 2006 %
South Africa 3,954 4,148 4.9
Customers per employee 3,247 4,620 42.3
Other African countries 1,039 1,154 11.1
Customers per employee 2,546 3,776 48.3
Vodacom Group 4,993 5,302 6.2
Customers per employee 3,101 4,436 43.1
9. Summarised Group Financial Statements
Auditors" report
The comprehensive annual financial statements, from which these summarised
results have been derived, have been audited by the Company"s auditors,
Ernst & Young. Their unqualified audit report is available for inspection
at the Company"s registered office.
Summarised consolidated income statement
for the three years ended March 31, 2006
Restated Restated
2004 2005 2006
Notes Rm Rm Rm
Total revenue 41,115 43,696 48,260
Operating revenue 2 40,582 43,160 47,625
Other income 255 280 480
Operating expenses 31,499 32,179 33,428
Employee expenses 7,408 8,111 7,489
Payments to other operators 5,985 6,132 6,826
Selling, general and 7,665 8,824 10,273
administrative expenses
Services rendered 2,269 2,021 2,114
Operating leases 924 803 850
Depreciation, amortisation, 3 7,248 6,288 5,876
impairment and write-offs
Operating profit 9,338 11,261 14,677
Investment income 322 350 397
Finance charges 4 3,264 1,695 1,233
Interest 2,488 1,686 1,346
Foreign exchange and fair 776 9 (113)
value effect
Profit before tax 6,396 9,916 13,841
Taxation 1,738 3,082 4,520
Profit for the year 4,658 6,834 9,321
Attributable to:
Equity holders of Telkom 4,589 6,751 9,182
Minority interest 69 83 139
6,834 4,658
Basic earnings per share 5 823.9 1,246.7 1,744.7
(cents)
Diluted earnings per share 5 823.9 1,244.3 1,735.2
(cents)
Dividend per share (cents) 5 90.0 110.0 900.0
Summarised consolidated balance sheet
at March 31, 2006
Restated Restated
2004 2005 2006
Notes Rm Rm Rm
ASSETS
Non-current assets 41,751 42,552 44,813
Property, plant and equipment 7 37,756 36,448 37,274
Intangible assets 8 1,864 3,182 3,910
Investments 1,567 2,277 2,894
Deferred expenses 213 133 254
Deferred taxation 351 512 481
Current assets 11,423 15,045 12,731
Other financial assets 1,241 5,074 275
Short-term investments 168 69 69
Current portion of deferred 430 214 226
expenses
Inventories 520 658 814
Trade and other receivables 5,846 5,820 6,399
Cash and cash equivalents 9 3,218 3,210 4,948
Total assets 53,174 57,597 57,544
EQUITY AND LIABILITIES
Equity attributable to equity 21,628 26,141 29,165
holders of Telkom
Share capital and premium 10 8,293 8,293 6,791
Treasury shares 10 (238) (1,812) (1,809)
Share-based compensation reserve - 68 151
Non-distributable reserves 91 361 1,136
Retained earnings 13,482 19,231 22,896
Minority interest 200 220 301
Total equity 21,828 26,361 29,466
Non-current liabilities 16,707 13,870 12,391
Interest-bearing debt 11 12,703 9,504 7,655
Deferred taxation 469 947 1,068
Deferred revenue 1,097 959 991
Provisions 2,438 2,460 2,677
Current liabilities 14,639 17,366 15,687
Credit facilities utilised 9 422 909 693
Trade and other payables 6,007 6,782 6,103
Shareholders for dividend 7 7 4
Current portion of interest-bearing 11 4,051 4,499 3,468
debt
Current portion of deferred revenue 1,718 1,717 1,975
Current portion of provisions 1,329 1,428 1,660
Income tax payable 460 1,711 1,549
Other financial liabilities 645 313 235
Total liabilities 31,346 31,236 28,078
Total equity and liabilities 53,174 57,597 57,544
Summarised consolidated statement of changes in equity
For the three years ended March 31, 2006
Restated Restated
2004 2005 2006
Rm Rm
Balance at April 1 18,864 21,828 26,361
- Attributable to equity 18,670 21,628 26,141
holders
- Minority interests 194 200 220
Change in accounting policies (809) - -
Restated balance at April 1 18,055 21,828 26,361
- Attributable to equity 17,861 21,628 26,141
holders
- Minority interests 194 200 220
Net profit for the year 4,658 6,834 9,321
Dividend declared (555) (673) (4,879)
Foreign currency translation (101) 12 52
reserve
Fair value adjustment on 9 (22) -
investments
Business combination - (117) -
Purchase of treasury shares (238) (1,574) -
Purchase of subsidiary - 5 27
Increase in share-based - 68 86
compensation reserve
Shares bought back and - - (1,502)
cancelled
Balance at March 31 21,828 26,361 29,466
- Attributable to equity 21,628 26,141 29,165
holders
- Minority interests 200 220 301
Summarised consolidated cash flow statement
for the three years ended March 31, 2006
Restated Restated
2004 2005 2006
Notes Rm Rm Rm
Cash flows from operating 13,884 15,711 9,506
activities
Cash receipts from 40,520 43,561 46,958
customers
Cash paid to suppliers (24,218) (24,939) (27,234)
and employees
Cash generated from 16,302 18,622 19,724
operations
Interest received 469 463 482
Dividends received 10 14 50
Finance charges paid (1,787) (1,272) (1,316)
Taxation paid (562) (1,487) (4,550)
Cash generated from 14,432 16,340 14,390
operations before
dividend paid
Dividend paid (548) (629) (4,884)
Cash flows from investing (5,423) (6,306) (7,286)
activities
Proceeds on disposal of
property, plant and
equipment and intangible 52 37 92
assets
Proceeds on disposal of 29 267 493
investments
Additions to property,
plant and equipment
and intangible assets 7,8 (5,248) (5,880) (7,396)
Additions to other (331) (592) (475)
investments
Acquisition of 16 75 (138) -
subsidiaries
Cash flows from financing (6,481) (9,897) (258)
activities
Purchase of treasury (102) (1,710) -
shares
Shares bought back and - - (1,502)
cancelled
Loans raised 1,732 1,157 4,123
Loans repaid (7,428) (5,027) (7,399)
Finance lease capital (5) (13) (24)
repaid
(Increase)/decrease in (678) (4,304) 4,544
net financial assets
Net increase/(decrease)
in cash and
cash equivalents 1,980 (492) 1,962
Net cash and cash 837 2,796 2,301
equivalents at beginning
of the year
Effect of foreign (21) (3) (8)
exchange rate differences
Net cash and cash
equivalents at
end of the year 9 2,796 2,301 4,255
Change in comparatives
The Group reclassified R463 million of Finance costs accrued from Cash paid
to suppliers and employees to Finance charges paid for the year ended March
31, 2005 (2004: R532 million).
Notes to the summarised consolidated annual financial statements
for the year ended March 31, 2006
1 Significant accounting policies
Basis of preparation
The comprehensive consolidated annual financial statements from which these
summarised results have been derived comply with International Financial
Reporting Standards ("IFRS") of the International Accounting Standards
Board ("IASB") and the Companies Act in South Africa, 1973.
The financial statements are prepared on the historical cost basis, with
the exception of certain financial instruments and share-based payments
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:
* the Group has adopted IAS16 (revised), IAS17 (revised), IAS24 (revised),
IAS40 (revised), IFRS4 and IFRIC1 which are applicable for financial years
beginning on or after January 1, 2005;
* the Group has early adopted the amendment to IAS19 which is applicable
for financial years beginning on or after January 1, 2006;
* the Group has made certain voluntary changes in accounting policies
related to fixed-line connection revenues; and
* the Group made certain retrospective changes to its application of
certain accounting standards. The changes were:
- Lease payments and receipts under operating leases have been restated in
order to recognise the expenses and income on a straight-line basis over
the lease terms. This ensures that the income statement charge/income is
more representative of the time pattern of the operating lease benefit/cost
to the Group. The Group previously recognised the expenses and the income
based on the amount paid or payable and received or receivable for each
period. The restatement decreases the Group"s results for the years ended
March 31, 2005, by R3 million and 2004, by R3 million.
- IT Software items have been reclassified from Property, plant and
equipment to Intangible assets to the value of R2,650 million (2004: R1,300
million) and the related depreciation from Depreciation to Amortisation.
The Group has identified and recorded software that was previously included
as part of Property, plant and equipment as a separate intangible asset
because it was not considered an integral part of the related hardware.
- Investment properties have been restated to Property, plant and
equipment to the value of R25 million (2004: R32 million). The Vodacom
Group previously classified its Vodaworld property as an investment
property. However, the property"s primary purpose is to service and connect
Vodacom customers. The property, therefore, does not meet the criteria of
IAS40: Investment Property, ie to earn rentals or for capital appreciation.
- Other financial assets of R134 million (2004: R1,101 million) and
liabilities of R83 million (2004: R153 million) previously classified as
non-current have been reclassified to current assets and liabilities, as
they represent derivatives classified as held for trading.
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
2004 2005 2006
Rm Rm
2 Operating revenue 40,582 43,160 47,625
Fixed-line 30,541 30,888 32,039
Mobile 10,041 12,272 15,586
Fixed-line 30,541 30,888 32,039
Subscriptions, connections and other 5,117 5,385 5,803
usage
Traffic 18,313 17,723 17,534
Domestic (local and long distance) 9,680 9,286 8,886
Fixed-to-mobile 7,321 7,302 7,647
International (outgoing) 1,312 1,135 1,001
Interconnection 1,441 1,320 1,433
Data 4,792 5,484 6,223
Directories and other 878 976 1,046
Change in comparatives
Operating revenue has increased by R43
million in 2005 (2004: R98 million)
due to the change in fixed-line policy
for recognising connection revenues
(refer to note 1).
3 Depreciation, amortisation,
impairment
and write-offs 7,248 6,288 5,876
Depreciation of property, plant and 6,092 5,442 5,154
equipment
Amortisation of intangible assets 806 502 560
Impairment of property, plant and 149 85 -
equipment
Reversal of impairment of property, - (26)
plant and equipment
Impairment of intangible assets - 49 -
Write-offs of property, plant and 201 210 188
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 certain items included
in Network and Support equipment.
4 Finance charges 3,264 1,695 1,233
Interest 2,488 1,686 1,346
Local debt 2,253 1,515 1,506
Foreign debt 303 281 9
Less: Finance costs capitalised (68) (110) (169)
Foreign exchange gains and losses and 776 9 (113)
fair value adjustments
Foreign exchange (gains)/losses (368) 112 57
Fair value adjustments on derivative 1,144 (103) (170)
instruments
Capitalisation rate 15.14% 15.23% 13.91%
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
2004 2005 2006
5 Earnings and dividend per share
Basic earnings per share (cents) 823.9 1,246.7 1,744.7
The calculation of earnings per
share is based on profit
attributable to equity holders of
Telkom for the year of R9,182
million (2005: R6,751 million;
2004: R4,589 million) and
526,271,093 (2005: 541,498,547;
2004: 556,994,962) weighted
average number of ordinary shares
in issue.
Diluted earnings per share 823.9 1,244.3 1,735.2
(cents)
The calculation of diluted
earnings per share is based on
earnings for the year of R9,182
million (2005: R6,751 million;
2004: R4,589 million) and
529,152,318 diluted weighted
average number of ordinary shares
(2005: 542,537,579; 2004:
556,994,962). 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.
Headline earnings per share 875.2 1,279.0 1,740.5
(cents)
The calculation of headline
earnings per share is based on
headline earnings of R9,160
million (2005: R6,926 million;
2004: R4,875 million) and
526,271,093 (2005: 541,498,547;
2004: 556,994,962) weighted
average number of ordinary shares
in issue.
Diluted headline earnings per 875.2 1,276.6 1,731.1
share (cents)
The calculation of diluted
headline earnings per share is
based on headline earnings of
R9,160 million (2005: R6,926
million; 2004: R4,875 million)
and 529,152,318 (2005:
542,537,579; 2004: 556,994,962)
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.
Reconciliation between earnings
and headline earnings:
Earnings as reported 4,589 6,751 9,182
Adjustments:
Profit on disposal of investment (25) (64) (163)
Profit on disposal of property, (19) (30) (79)
plant and equipment and
intangibles
Impairment of property, plant, 134 (26)
equipment and intangibles
Write-offs of property, plant and 201 210 188
equipment
Acquisition of subsidiary - - 35
Amortisation of goodwill 72 - -
Tax and minority interest effects (92) (75) 23
Headline earnings 4,875 6,926 9,160
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
2004 2005 2006
5 Earnings and dividend per
share (continued)
Reconciliation of weighted
average number of ordinary
shares
Ordinary shares in issue 557,031,819 557,031,819 544,944,899
Weighted average number of (36,857) (15,533,272) (18,673,806)
treasury shares
Weighted average number of 556,994,962 541,498,547 526,271,093
shares outstanding
Reconciliation of diluted
weighted average number of
ordinary shares
Weighted average number of 556,994,962 541,498,547 526,271,093
shares outstanding
Expected future vesting of - 1,039,032 2,881,225
shares
Weighted average number of 556,994,962 542,537,579 529,152,318
shares outstanding
Dividend per share (cents) 90.0 110.0 900.0
The calculation of dividend
per share is based on
dividends of R4,801 million
(2005: R606 million; 2004:
R501 million) declared on
June 2, 2005, and 533,465,571
(2005: 551,509,083; 2004:
557,031,819) number of
ordinary shares outstanding.
The reduction in the number
of shares represents the
number of treasury shares
held on date of payment.
6 Net asset value per share
Net asset value per share 3,905.1 4,900.2 5,593.5
(cents)
The calculation of net asset
value per share is based on
net assets of R29,165 million
(2005: R26,141 million; 2004:
R21,628 million) and
521,408,320 (2005:
533,465,571; 2004:
553,846,083) number of
ordinary shares outstanding.
Notes to the summarised
consolidated annual financial
statements (continued)
for the year ended March 31,
2006
7 Additions to property,
plant and equipment
Freehold land and buildings 64 42 105
Leasehold buildings 59 - 75
Network equipment 1,524 1,742 2,622
Support equipment 140 95 130
Furniture and office 9 10 19
equipment
Data processing equipment and 491 379 381
software
Under construction 2,598 2,123 2,933
Other 51 73 45
4,936
Fully depreciated assets with
a cost of R3,724 million were
derecognised in the 2006
financial year. This has
reduced both the cost price
and accumulated depreciation
of property, plant and
equipment accordingly.
8 Additions to intangible
assets
Trademarks, copyrights and 4 - 2
other
Licences 57 - 1
Software - 103 219
Assets under construction 371 1,284 974
432
Notes to the summarised
consolidated annual financial
statements (continued)
for the year ended March 31,
2006
9 Net cash and cash 2,796 2,301 4,255
equivalents
Cash and bank balances 1,219 2,375 1,853
Short-term deposits 1,999 835 3,095
Cash shown as current assets 3,218 3,210 4,948
Credit facilities utilised (422) (909) (693)
Undrawn borrowing facilities 2,995 4,750 9,519
10 Share capital
Authorised and issued share
capital and share premium are
made up as follows:
Authorised 10,000 10,000 10,000
999,999,998 ordinary shares 10,000 10,000 10,000
of R10 each
1 (2005: 1; 2004: 1) Class A - - -
ordinary share of R10
1 (2005: 1; 2004: 1) Class B - - -
ordinary share of R10
Issued and fully paid 8,293 8,293 6,791
544,944,897 (2005: 5,570 5,570 5,449
557,031,817; 2004:
557,031,817)ordinary shares
of R10 each
1 (2005: 1; 2004: 1) Class A - - -
ordinary share of R10
1 (2005: 1; 2004: 1) Class B - - -
ordinary share of R10
Share premium 2,723 2,723 1,342
Share buyback
During the year, Telkom
bought back 12,086,920
ordinary shares at a total
consideration of R1,502
million. This reduced the
share capital by R121 million
and the share premium by
R1,381 million.
Treasury shares
12,687,521 (2005: 12,717,190;
2004: 3,185,736) and
10,849,058 (2005: 10,849,058;
2004: Nil) ordinary shares in
Telkom, with a fair value of
R2,038 million (2005: R1,366
million; 2004: R251 million)
and R1,743 million (2005:
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.
Notes to the summarised
consolidated annual financial
statements (continued)
for the year ended March 31,
2006
11 Interest-bearing debt
Long-term interest-bearing 12,703 9,504 7,655
debt
Total interest-bearing debt 16,754 14,003 11,123
Gross interest-bearing debt 20,151 16,914 13,686
Discount on debt instruments (3,397) (2,911) (2,563)
issued
Less: Current portion of (4,051) (4,499) (3,468)
interest-bearing debt
Local debt (3,628) (264) (2,642)
Locally registered Telkom (2,286) - (2,211)
debt instruments
Repurchase agreements (27) - -
Commercial paper bills (1,313) (262) (429)
Short-term interest-free (2) (2) (2)
loans
Foreign debt (408) (4,210) (786)
Finance leases (15) (25) (40)
12 Commitments
Capital commitments 7,151 7,970 10,265
authorised
Fixed-line 4,566 5,029 6,519
Mobile 2,585 2,941 3,746
Commitments against 439 825 842
authorised capital
expenditure
Fixed-line 88 91 200
Mobile 351 734 642
Authorised capital 6,712 7,145 9,423
expenditure not yet
contracted
Fixed-line 4,478 4,938 6,319
Mobile 2,234 2,207 3,104
Management expects these commitments to be financed from internally
generated cash and other borrowings.
The Group exposure is 50% of the following items:
Interception of Communications and Provisions of Communication-related
Information Act ("the Act")
The Act was proclaimed in the Government Gazette and has been made
effective September 30, 2005, with the exception of the provisions dealing
with customer registration which comes into effect on June 30, 2006. The
cellular operators have succeeded in obtaining, in principle, support by
the Department of Justice for an electronic registration process. The
legislative amendments necessary to allow for such an electronic
registration process have not yet been effected, but are anticipated prior
to the effective date of June 30, 2006. The sections of the interception
and monitoring legislation ("RICA") prescribing a paper-based customer
registration process came into effect on May 28, 2006. 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 made at this stage.
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
12 Commitments (continued)
Global Alliance fees
The Vodacom Group pays annual fees from February 18, 2005, for the services
provided. The fee is calculated as a percentage of revenue.
Retention incentives
The Vodacom Group has committed a maximum of R456 million (March 31, 2005:
R373 million) in respect of customers already beyond their normal 24-month
contract period, but who have not yet upgraded to new contracts, and
therefore have not utilised the incentive available for such upgrades. The
Group has not provided for this liability, as no legal obligation exists,
since the customers have not yet entered into new contracts.
Africell Cellular Services (Proprietary) Limited
An offer to acquire the cellular business of Africell Cellular Services
(Proprietary) Limited was made and accepted. The suspensive conditions as
well as Competition Commission approval, are currently being attended to.
13 Contingencies
Supplier dispute
No material change since prior year.
Competition commission
South African Value Added Network Services ("SAVA").
No material change since prior year.
Internet Service Providers Association ("ISPA")
The Internet Service Providers Association ("ISPA"), an association of
internet service providers (ISPs), filed complaints against Telkom at the
Competition Commission regarding alleged anti-competitive practices on the
part of Telkom. A maximum administrative penalty of up to 10%, calculated
with reference to Telkom"s annual turnover, excluding the turnover of
subsidiaries and joint ventures, for the financial year prior to the
compliant date, may be imposed if it is found that Telkom has committed a
prohibited practice as set out in the Competition Act, 1998 (as amended).
The Competition Commission has formally requested Telkom to provide it with
certain records of orders placed for certain services, in an attempt to
first investigate the latter aspects of the complaint.
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
2004 2005 2006
14 Segment information
Eliminations represent the inter-segmental
transactions that have been eliminated
against segment results. The mobile segment
represents the Group"s joint venture
Vodacom.
Business segment
Consolidated revenue 40,582 43,160 47,625
Fixed-line 31,004 31,457 32,749
To external customers 30,541 30,888 32,039
Inter-company 463 569 710
Mobile 11,428 13,657 17,021
To external customers 10,041 12,272 15,586
Inter-company 1,387 1,385 1,435
Elimination (1,850) (1,954) (2,145)
Other income 255 280 480
Fixed-line 230 255 430
Elimination - (9) -
Mobile 25 34 50
Operating expenses 31,499 32,179 33,428
Fixed-line 24,510 23,691 22,937
Elimination (1,387) (1,385) (1,435)
Mobile 8,839 10,451 12,636
Elimination (463) (578) (710)
Consolidated operating profit 9,338 11,261 14,677
Fixed-line 6,724 8,021 10,242
Elimination 924 807 725
Mobile 2,614 3,240 4,435
Elimination (924) (807) (725)
Consolidated investment income 322 350 397
Fixed-line 1,324 1,992 2,583
Elimination (1,061) (1,700) (2,250)
Mobile 59 58 64
Consolidated finance charges 3,264 1,695 1,233
Fixed-line 2,991 1,647 839
Mobile 284 48 394
Elimination (11) - -
Notes to the summarised consolidated annual
financial statements (continued)
for the year ended March 31, 2006
14 Segment information (continued)
Consolidated taxation 1,738 3,082 4,520
Fixed-line 876 1,775 2,981
Mobile 862 1,307 1,539
Minority interests 69 83 139
Fixed-line 56 68 81
Mobile 13 15 58
Profit attributable to equity holders of 4,589 6,751 9,182
Telkom
Fixed-line 4,125 6,523 8,924
Elimination (137) (893) (1,525)
Mobile 1,514 1,928 2,508
Elimination (913) (807) (725)
Consolidated assets 50,198 50,177 54,306
Fixed-line 41,441 40,206 43,748
Mobile 9,799 11,157 12,262
Elimination (1,042) (1,186) (1,704)
Investments 1,735 2,346 2,963
Fixed-line 1,466 2,240 2,861
Mobile 269 106 102
Other financial assets 1,241 5,074 275
Fixed-line 1,222 5,039 256
Mobile 19 35 19
Total assets 53,174 57,597 57,544
Consolidated liabilities 13,487 15,209 15,171
Fixed-line 9,733 10,658 10,409
Mobile 4,796 5,737 6,466
Elimination (1,042) (1,186) (1,704)
Interest-bearing debt 16,754 14,003 11,123
Fixed-line 15,724 12,703 9,889
Mobile 1,030 1,300 1,234
Other financial liabilities 645 313 235
Fixed-line 613 313 205
Mobile 32 - 30
Tax liabilities 460 1,711 1,549
Fixed-line 34 1,395 1,234
Mobile 426 316 315
Total liabilities 31,346 31,236 28,078
Notes to the summarised consolidated annual
financial statements (continued)
for the year ended March 31, 2006
14 Segment information (continued)
Other segment information
Capital expenditure for property, plant and 4,936 4,464 6,310
equipment
Fixed-line 3,491 2,820 3,960
Mobile 1,445 1,644 2,350
Capital expenditure for intangible assets 432 1,387 1,196
Fixed-line 371 1,284 975
Mobile 61 103 221
Depreciation and amortisation 6,898 5,944 5,714
Fixed-line 5,633 4,522 4,216
Mobile 1,265 1,422 1,498
Impairment and asset write-offs 350 295 162
Fixed-line 350 210 188
Mobile - 85 (26)
Intangible assets impairment - Mobile - 49 -
Workforce reduction expenses - Fixed-line 302 961 88
Notes to the summarised consolidated annual
financial statements (continued)
for the year ended March 31, 2006
15 Related parties
Details of material transactions and
balances with related parties not disclosed
elsewhere in the summarised consolidated
annual financial statements were as follows:
With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances
Trade receivables 42 42 48
Trade payables (250) (250) (256)
Related party transactions
Income (463) (569) (710)
Expenses 1,387 1,385 1,443
Audit fees 3 3 3
Interest received (11) - -
With shareholders:
Thintana Communications LLC
Management fees 154 57 -
On November 22, 2004, Thintana
Communications LLC sold their total interest
in Telkom.
Government
Related party balances
Trade receivables 189 185 194
Related party transactions
Revenue (1,866) (1,987) (2,106)
With entities under common control:
Major public entities
Related party balances
Trade receivables 25 37 31
Trade payables (3) (7) (2)
Related party transactions
Income (368) (445) (343)
Expenses 169 199 170
Rent received (9) (15) (17)
Rent paid 54 52 56
Remuneration and benefits 103 93 146
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
16 Purchase of subsidiarY
On August 1, 2005, the Vodacom Group acquired a 51% interest in the equity
of Cointel VAS (Proprietary) Limited. The fair value of the assets and
liabilities acquired were determined by the Group and are as follows:
Fair value of net assets acquired (47)
Property, plant and equipment (1)
Intangible assets (90)
Trade and other receivables (4)
Cash and cash equivalents (42)
Deferred taxation liability 18
Trade and other payables 57
Taxation payable 8
Provision 1
Dividends payable 6
Minority interest 23
Goodwill (18)
Purchase price (including capitalised costs) (42)
Cash and cash equivalents 42
Cash consideration -
The purchase price of R84 million (Group share: R42 million), excluding
capitalised costs was paid on August 23, 2005. Capitalised costs were paid
throughout the period.
Revenue amounting to R45 million and net profit of R9 million is included
in the current period results. Revenue would have amounted to R47,630
million and net profit to R9,146 million if the entity had been
consolidated for the full year ended March 31, 2006.
The goodwill related to the acquisition represents future synergies and is
allocated to the mobile South African cash- generating unit.
Notes to the summarised consolidated annual financial statements
(continued)
for the year ended March 31, 2006
17 Negative working capital
For the financial years ended March 31, 2006, 2005 and 2004, 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.
18 Subsequent events
Business Connexion Group Limited (BCX)
On April 4, 2006, Telkom announced its firm intention to make an offer to
acquire the entire issued share capital of BCX, other than the BCX shares
held as treasury shares and, if the trustees of the BCX share incentive
trust so agree, the BCX shares held by the BCX share incentive trust.
Telkom will acquire the outstanding options in BCX on the same terms and
conditions as the offer for the shares. The offer will be implemented by
way of a scheme of arrangement in terms of section 311 of the Companies
Act, to be proposed by Telkom between BCX and its shareholders.
The transaction will advance Telkom"s ongoing data strategy. In particular,
Telkom believes that the transaction will enhance Telkom"s ability to offer
its customers end-to-end solutions across the ICT value chain. Telkom"s
strength has to date been on ICT services relevant to its core connectivity
proposition, managed network and internet access and BCX offers a
complementary service offering. The transaction will enable Telkom to have
a meaningful presence in the IT services market extending its value chain
with BCX"s proven capabilities in business application and support
management, business process outsourcing and other IT related complementary
lines of business.
BCX has defined a strategy to expand into the communications arena and has
been considering a relationship with a communications company to that
effect. If the offer is successful, BCX will continue to operate as a
standalone or separate business unit within Telkom. BCX will retain and
expand its service offering and always service its clients with ongoing
commitment.
Cell captive annuity policy
Subsequent to year end, an addendum to the annuity policy contract was
signed, which transferred a part of the post-retirement medical liability
to an annuity fund. This will effectively change the presentation of the
liability and the asset as the annuity policy will meet the definition of a
plan asset in terms of IAS19 which requires the liability to be reduced by
the fair value of the plan asset. The effect of this on the annual
financial statements will be a reduction in investments as well as
liabilities to the value of R1,371 million.
Share buy-back
As part of the Group"s commitment to the optimal use of capital, the Telkom
Board approved on June 2, 2006 a share buy-back programme to the value of
R2 billion.
Other matters
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.
10 Supplementary Information
In connection with the US Securities Exchange Commission Rules relating to
"Conditions for use of Non-GAAP Financial Measures", EBITDA and headline
earnings have been reconciled to net profit.
Year ended March 31,
Restated
In ZAR millions 2005 2006
EBITDA
Earnings before interest, taxation,
depreciation and amortisation (EBITDA) can
be reconciled as follows:
EBITDA 17,549 20,553
Depreciation, amortisation, impairment and (6,288) (5,876)
write-offs
Investment income 350 397
Finance charges (1,695) (1,233)
Taxation (3,082) (4,520)
Minority interests (83) (139)
Net profit 6,751 9,182
Headline earnings
The disclosure of headline earnings is a
requirement of the JSE Securities Exchange,
South Africa and is not a recognised measure
under US GAAP.
Headline earnings can be reconciled as
follows:
Headline earnings 6,751 9,182
Profit on disposal of investment (64) (163)
Profit on disposal of property, plant and (30) (79)
equipment
Impairment of property, plant and equipment (26)
and intangible assets
Write-offs of property, plant and equipment 210 188
Acquisition of subsidiary - 35
Tax and minority interest effects (75) 23
Net profit 6,926 9,160
Definitions
Operating free cash flow
Operating free cash flow is defined as cash flow from operating activities,
after interest and taxation, before dividends, less cash flow from
investing activities.
Total interest-bearing debt
Total interest-bearing debt is defined as short and long-term interest-
bearing debt, including credit facilities and finance leases.
Net debt
Net debt is defined as total interest-bearing debt, net of bank and cash
and financial assets and liabilities.
Asymmetrical Digital Subscriber Line (ADSL)
ADSL is a broadband access standard which uses existing copper lines to
offer high-speed digital connections over the local loop. ADSL transmits
data asymmetrically, meaning that the bandwidth usage is much higher in one
direction than the other. ADSL provides greater bandwidth from the exchange
to the customer (ie downloading) than from the customer to the exchange (ie
sending).
Average Revenue per User (ARPU)
ARPU is usually quoted on a monthly or annual basis by cellular networks.
US DOLLAR CONVENIENCE
Year ended March 31,
Restated
2005 2006 %
Revenue 6,939 7,744 11.6
Operating profits 1,810 2,385 31.8
Net profit 1,099 1,516 37.9
EBITDA 2,822 3,339 18.3
EPS (cents) 200.5 283.7 41.9
Net debt 1,116 1,110 (0.5)
Total assets 9,260 9,357 1.0
Cash flow from operating 2,526 1,546 (38.8)
activities
Cash flow used in investing (1,014) (1,185) 16.9
activities
Cash flow used in financing (1,591) (42) 97.4
activities
Exchange rate
Period end1
US$1 = ZAR 6.22 6.15 (1.1)
1. Noon buying rate
11 Special Note Regarding Forward-looking Statements
All of the statements included in this document, as well as oral statements
that may be made by us or by officers, directors or employees acting on
behalf of us, that are not statements of historical facts constitute or are
based on 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 US Securities
Exchange Act of 1934, as amended. These forward-looking statements involve
a number of known and unknown risks, uncertainties and other factors that
could cause our actual results and outcomes to be materially different from
historical results or from any future results expressed or implied by such
forward-looking statements. Among the factors that could cause our actual
results or outcomes to differ materially from our expectations are those
risks identified in Item 3. "Key Information-Risk Factors," of Telkom"s
most recent Annual Report on Form 20-F filed with the US Securities and
Exchange Commission (SEC) and its other filings and submissions with the
SEC which is available on Telkom"s website at www.telkom.co.za/ir,
including, but not limited to, increased competition in the South African
fixed-line and mobile communications markets; developments in the
regulatory environment; continued mobile growth and reductions in Vodacom"s
and Telkom"s net interconnect margins; Vodacom"s and Telkom"s ability to
expand their operations and make investments in other African countries and
the general economic, political, social and legal conditions in South
Africa and in other countries where Vodacom and Telkom invest; our ability
to attract and retain key personnel; our inability to appoint a majority of
Vodacom"s directors and the consensus approval rights at Vodacom may limit
our flexibility and ability to implement our preferred strategies;
Vodacom"s continued payment of dividends or distributions to us; our
ability to improve and maintain our management information and other
systems; our negative working capital; changes and delays in the
implementation of new technologies; our ability to reduce theft, vandalism,
network and payphone fraud and lost revenue to non-licensed operators; our
ability to improve our internal control over financial reporting; health
risks to related mobile handsets, base stations and associated equipment;
our control by the Government of the Republic of South Africa; the outcome
of regulatory, legal and arbitration proceedings, including tariff
approvals, and the outcome of Telkom"s hearing before the Competition
Commission related to the VANs litigation, its proceedings with Telcordia
Technologies Incorporated and others; our ability to negotiate favourable
terms, rates and conditions for the provision of interconnection services;
our ability to implement and recover the substantial capital and
operational costs associated with carrier pre-selection, Number Portability
and monitoring and interception; Telkom"s ability to comply with the South
African Public Finance Management Act and South African Public Audit Act
and the impact of the Municipal Property Rates Act; fluctuations in the
value of the Rand; the impact of unemployment, poverty, crime and HIV
infection, labour laws and exchange control restrictions in South Africa;
and other matters not yet known to us or not currently considered material
by us.
We caution you not to place undue reliance on these forward-looking
statements. All written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are qualified in their entirety by
these cautionary statements. Moreover, unless we are required by law to
update these statements, we will not necessarily update any of these
statements after the date hereof, either to confirm them to actual results
or to changes in our expectations.
5 June 2006
Sponsor: UBS
Date: 05/06/2006 07:01:58 AM Supplied by www.sharenet.co.za
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