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TKG - Telkom SA Limited -Telkom Group annual provisional results - March 2008
Telkom SA Limited
Telkom SA Limited Registration no. 1991/005476/06
JSE and NYSE share code: TKG
ISIN: ZAE000044897
Telkom Group annual provisional results - March 2008
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, including but not limited
to financial targets and prospects, 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 are available on Telkom`s
website at www.telkom.co.za/ir, including, but not limited to, any changes to
our mobile strategy and Vodacom holdings and our ability to impact such
strategy and organizational changes thereto, increased competition in the
South African fixed-line, mobile and data communications markets; our ability
to impact our strategy of transforming from basic voice and data connectivity
to fully converged solutions, developments in the regulatory environment;
continued mobile growth and reductions in Vodacom`s and Telkom`s net
interconnect margins; Telkom`s and Vodacom`s ability to expand their
operations and make investments and acquisitions in other African countries
and the general economic, political, social and legal conditions in South
Africa and in other countries where Telkom and Vodacom invest; our ability to
improve and maintain our management information and other systems; our ability
to attract and retain key personnel and partners; 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 negative
working capital; changes in technology 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; the amount of damages Telkom
is ultimately required to pay to Telcordia Technologies Incorporated; the
outcome of regulatory, legal and arbitration proceedings, including tariff
approvals, and the outcome of Telkom`s hearings before the Competition
Commission and others; any requirements that we unbundle the local loop, our
ability to negotiate favorable terms, rates and conditions for the provision
of interconnection services and facilities leasing services or if ICASA finds
that we or Vodacom have significant market power or otherwise imposes
unfavorable terms and conditions on us; our ability to implement and recover
the substantial capital and operational costs associated with carrier pre-
selection, number portability and the monitoring, interception and customer
registration requirements contained in the South African Regulation of
Interception of Communications and Provisions of Communication-Related
Information Act and the impact of these requirements on our business; 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 and inflation rates; the impact of
unemployment, poverty, crime, HIV infection, labor laws and labor relations,
exchange control restrictions, and power outages 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
expectation.
Index
1. Overview
2. Operational overview
3. Group performance
4. Group balance sheet
5. Group cash flow
6. Group capital expenditure
7. Segment performance
8. Employees
9. Condensed consolidated annual financial statements
10. Supplementary information
1 Overview
Johannesburg, South Africa - June 9, 2008, Telkom SA Limited (JSE and NYSE:
TKG), today announced group annual results for the year ended March 31, 2008.
GROUP KEY FINANCIAL PERFORMANCE AREAS FOR THE YEAR ENDED MARCH 31, 2008
Operating revenue up 9.0% to R56.3 billion
Group EBITDA increased by 4.2% to R20.6 billion
Group EBITDA margin decreased from 38.3% to 36.6%
Operating profit increased by 0.1% to R14.5 billion
Net debt to equity increased to 49.9% from 31.3% at March 31, 2007
Cash generated from operations increased by 3.6% to R21.3 billion
Headline earnings per share decreased by 4.4% to 1634.8 cents per share
Ordinary dividend increased by 10.0% to 660 cents per share payable on July 7,
2008.
Statement by Reuben September, Chief Executive Officer:
"As such competition is intensifying, price pressures are a business and
regulatory reality and inflation is rising. Growth was impacted with the Group
delivering 9.0% growth in revenue, the fixed-line business delivering 0.7%
growth in revenue to R32.6 billion and the mobile business impressing with
17.1% revenue growth to R48.2 billion of which 50% is consolidated. The drop
in Group EBITDA margin from 38.3% to 36.6% is mainly attributable to flat
revenue in the fixed-line business. Attributable net profit declined by 7.7%
to R8.0 billion largely as a result of the fixed-line`s decreasing operating
profit margin and increased finance charges. The Group reported a 4.4%
decrease in headline earnings per share to 1,634.8 cents and declared an
ordinary dividend of 660 cents per share, an increase of 10.0% from the
ordinary dividend of 600 cents per share in the 2007 financial year, a
continuation of our commitment to progressively grow the ordinary dividend.
Unlike in the past no special dividend was declared due to an increased
investment in our expansion programme and pressure on the fixed-line`s EBITDA
margin. In the next few years, in line with our strategy, Telkom will be
aggressively funding the expansion of our African subsidiaries and our network
in South Africa.
Both the fixed-line and mobile segments are operating in changing and
challenging business environments. As mobile voice growth slows, the mobile
segment is aggressively expanding into data and particularly corporate data.
The fixed-line is challenged with increased competition and pricing pressures
in its traditional high margin, predominantly retail markets. The above
business developments, amongst others, are evident in the drop in fixed-line
domestic local and long distance voice revenue from R7.6 billion at March 31,
2007 to R6.3 billion at March 31, 2008. The growth in demand is in the lower
margin, wholesale and data markets. This necessitates increased investments in
the provisioning of backbone networks and support systems.
The fixed-line segment is gearing up to deliver the full suite of converged
services to a far greater extent in South Africa and Africa. Given its
ubiquity and network management capabilities, we believe the fixed-line
segment is well positioned to deliver data and value-added data managed
services at speeds and quality levels superior to its competitors. As we
continue to deploy the Next Generation Network, this competitive advantage
will be enhanced.
The execution of our strategic initiatives is gaining momentum. We have
completed the preparation for building out the fixed wireless and mobile data
networks. As announced, we intend to roll-out networks in selected areas and
to seek a suitable partner for roaming of our mobile services. Telkom has well
entrenched relationships with corporate customers and as the provider of
mobile backbone network in South Africa, is ideally positioned to offer a full
bouquet of solutions to its customers. The shareholders agreement with
Vodafone has prevented Telkom from entering into the mobile voice market. The
discussion with Vodafone Plc regarding the sale of our 50% stake in Vodacom,
as announced, is intended to remove this impediment. We are determined to put
ourselves in a position where we can forcefully drive the creation of value
for our shareholders.
We are also moving into gaining data hosting abilities to bolster our ability
to deliver the full bundle of data services to our customers.
We have taken the decision to aggressively work on our cost profile and are
now beginning the process of consolidating our service provider profile in
order to reap the benefits of scale and are working towards outsourcing non-
core services with the intent of reducing operational expenditure. The
building of the fixed wireless network and mobile data network in selected
areas should reduce our access costs and improve customer service on ADSL in
particular. Losses due to cable theft are increasing and it is no longer
economical to replace copper with copper. We are implementing wireless. A
wireless data network will allow us to provide 3G services while ADSL is being
installed. This should be hugely beneficial to our customer service.
Telkom has a challenging but exciting few years ahead of us. A compelling
differentiation strategy is in place that we believe will deliver substantial
value to all stakeholders as it is progressively executed, setting the scene
for both organic and acquisitive growth. We are committed to build the Telkom
Group in the years to come towards being an African based, globally
competitive, formidable force within the ICT industry and are looking forward
to reaping the benefits in the future."
FINANCIAL PERFORMANCE
Group operating revenue increased 9.0% to R56,285 million, while operating
profit increased marginally by 0.1% to R14,482 million. The Group EBITDA
margin decreased to 36.6% as at March 31, 2008, compared to 38.3% at March 31,
2007, mainly due to higher fixed-line operating expenditure which decreased
the fixed-line EBITDA margin by 1.4% to 36.3% as at March 31, 2008 (March 31,
2007: 37.7%). The EBITDA margin for the mobile segment decreased from 34.6% to
34.0% for the year ended March 31, 2008, primarily due to declining ARPUs as a
result of increased lower spending customers connected.
Headline earnings per share decreased by 4.4% to 1,634.8 cents per share and
basic earnings per share decreased by 6.9% to 1,565.0 cents per share. The
reduced earnings is attributable to a decrease in operating profit due to an
increase in operating expenses, and 60.3% increase in finance charges
partially offset by a 9% increase in operating revenue.
Cash generated from Group operations increased by 3.6% to R21,256 million and
facilitated Group capital expenditure of R11,657 million, the acquisition of
Multi-Links for R1,985 million and the repurchase of 12.1 million Telkom
shares to the value of R1.6 billion.
SUMMARY GROUP PROVISIONAL FINANCIAL RESULTS
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Operating revenue 47,625 51,619 56,285 8.4 9.0
Operating profit 14,677 14,470 14,482 (1.4) 0.1
EBITDA 1 20,553 19,786 20,612 (3.7) 4.2
Capital 7,506 10,246 11,900 36.5 16.1
expenditure 2
Operating free 7,104 3,728 2,150 (47.5) (42.3)
cash flow
Net debt 6,828 10,026 16,617 46.8 65.7
Basic EPS (ZAR
cents) 1,746.1 1,681.0 1,565.0 (3.7) (6.9)
Headline EPS (ZAR 1,728.6 1,710.7 1,634.8 (1.0) (4.4)
cents)
Operating profit 30.8 28.0 25.7
margin (%)
EBITDA margin (%) 43.2 38.3 36.6
Net debt to equity
(%) 23.2 31.3 49.9
After tax
operating return
on assets (%) 25.6 22.7 18.3
Capex to revenue 15.8 19.8 21.1
(%)
1. EBITDA and headline earnings have been reconciled to net profit
2. Including spend on intangible assets.
OPERATIONAL DATA
Year ended March 31, % variance
2006 2007 2008 06/07 07/08
Fixed-line data
Fixed access 4,708 4,642 4,532 (1.4) (2.4)
lines (`000) 1
Postpaid - PSTN 2,996 2,971 2,893 (0.8) (2.6)
'Postpaid - ISDN 693 718 754 3.6 5.0
channels
'Prepaid 854 795 743 (6.9) (6.5)
'Payphones 165 158 143 (4.2) (9.5)
Fixed-line
penetration rate 10.0 9.8 9.5 (2.0) (3.1)
(%)
Revenue per fixed
access line (ZAR) 5,304 5,275 5,250 (0.5) (0.5)
Total fixed-line
traffic (millions 31,015 29,344 26,499 (5.4) (9.7)
of minutes)
'Local 18,253 16,153 13,145 (11.5) (18.6)
'Long distance 4,446 4,641 4,614 (4.4) (0.6)
'Fixed-to-mobile 4,064 4,103 4,168 1.0 1.6
'International 515 558 634 8.3 13.6
outgoing
'International 83 38 43 (54.2) 13.2
VoIP
Interconnection 3,654 3,740 3,895 2.4 4.1
'Mobile 2,299 2,419 2,502 5.2 3.4
interconnection
'International 1,355 1,321 1,280 (2.5) (3.1)
interconnection
Fixed domestic - - 113 - -
Managed data 16,887 21,879 25,112 29.6 14.8
network sites
Internet 284,908 305,013 358,066 7.1 17.4
subscribers 2
ADSL subscribers 143,509 255,633 412,190 78.1 61.2
3
Calling plan 62,803 288,881 471,742 360.0 63.3
subscribers
Fixed-line
employees 25,575 25,864 24,879 1.1 (3.8)
(excluding
subsidiaries)
Fixed access
lines per fixed- 184 180 182 (2.2) 1.1
line employee 4
Mobile data 5
Total customers 23,520 30,150 33,994 28.2 12.8
(`000)
South Africa
Mobile customers 19,162 23,004 24,821 20.1 7.9
(`000)
'Contract 2,362 3,013 3,541 27.6 17.5
customers
'Prepaid 16,770 19,896 21,177 18.6 6.4
customers
'Community 30 95 103 216.7 8.4
services
telephones
Mobile churn (%) 17.7 33.8 42.3 91.0 25.2
'Contract churn 10.0 9.7 8.3 (3.0) (14.4)
'Prepaid churn 18.8 37.5 47.9 99.5 27.7
Estimated mobile 57.9 57.7 55.0 (0.3) (4.7)
market share (%)6
Mobile 70.6 84.2 94.3 19.3 12.0
penetration (%)
Total mobile
traffic (millions 17,066 20,383 22,769 19.4 11.7
of minutes) 7
Mobile ARPU (ZAR) 139 125 125 (10.1) 0.0
'Contract ARPU 572 517 486 (9.6) (6.0)
'Prepaid ARPU 69 63 62 (8.7) (1.6)
'Community 1,796 902 689 (49.8) (23.6)
services
Number of mobile
employees 8 4,305 4,727 4,849 9.8 2.6
Mobile customers
per mobile 4,451 4,867 5,119 9.4 5.2
employee
Other African
countries
Mobile customers 4,358 7,146 9,173 64.0 28.4
(`000)
Number of mobile 1,154 1,522 1,992 31.9 30.9
employees
Number of mobile
customers per 3,776 4,695 4,605 24.3 (1.9)
mobile employee 6
Other data
Africa Online -
Number of - 14,452 14,393 - (1.0)
subscribers
Multi-Links -
Number of - 185,619 813,392 - 338.2
subscribers
1. Excludes Telkom internal lines of 109,501 (2007:107,719 and 2006: 103,740).
2. Includes Telkom Internet ADSL, satellite and dial-up subscribers.
3. Excludes Telkom internal lines of 751 (2007:523 and 2006: 249).
4. Based on number of fixed-line employees, excluding subsidiaries.
5. 100% of Vodacom data.
6. Based on Vodacom estimates.
7. Traffic for the year ended March 31, 2008.
8. Includes Holding company and Mauritius employees.
2 Operational overview - Defend and grow
Telkom`s strategy continuous to focus on defending and growing our traditional
voice base. Our growth strategies focus on adding revenue through developing a
fixed-mobile capability giving us a larger share of the voice revenue pie,
aggressively building our data, broadband and converged services offering and
expanding geographically into high growth markets.
Traffic revenue has decreased 4.7% to R15.9 billion with local traffic revenue
decreasing 15.6% to R4.1 billion while local minutes decreased by 18.6% to
13.1 billion minutes. This is primarily due to continuing fixed to mobile
substitution. Telkom has reclassified subscription revenue from calling plans
into a separate revenue line item - subscription based calling plans - to
easily identify revenue from calling plans. Total traffic minutes decreased by
9.4% to 26.5 billion minutes. Revenue from subscription based calling plans
has increased by 98.7% to R1.1 billion.
Long distance revenue decreased by 17.6% to R2.3 billion with a decrease in
volumes of 0.6% to 4.6 billion minutes and a 10% decrease in call charges
effective August 1, 2007. The effect of the 17.1% decrease in long distance
calls` effective tariff for the year is clearly evident. Fixed to mobile
revenue decreased by 1.2% to R7.6 billion with an increase in volumes of 1.6%
to 4.2 billion minutes offset the 2.7% effective tariff reduction for the
year. International traffic revenue decreased by 0.2% to R986 million. The
12.2% effective tariff decrease for the year in international tariffs was
largely offset by the 13.7% increase in international traffic volumes to 677
million minutes. Interconnection revenue increased by 7.2% assisted by volume
increases of 4.2% to 3.9 billion minutes and an effective tariff increase of
2.7%.
The Closer packages have performed exceptionally well, increasing by 69.4% to
451,122 plans. Supreme call packages, targeted at the SMME segment, have
increased by 149.2% to 12,916 packages. Telkom continues to be successful in
tying in large corporate customers to term and volume discount plans. During
the 2008 financial year, term and volume discount plans to the value of R3.4
billion was sold. Annuity revenue streams, which exclude line installations,
reconnection fees and CPE sales have increased by 14.1% to R6.9 billion from
R6.0 billion in the 2007 financial year. Telkom will seek to continue
converting revenue streams to annuity revenues. This will be done largely
through bundling call minutes with access line rental in attractive
subscription based value propositions. This is an important strategy for
delivering greater value to our customers.
Pricing is a key element of the value proposition and our pricing strategy is
aimed at improving our competitiveness in areas where competition is expected
to intensify and where arbitrage opportunities exist. Telkom`s strategy to
counter pricing pressures is as follows:
Actively offering value based calling plans and bundles to extend value and
savings to our customers.
Rebalancing standard/Callmore local rates for better alignment with
international norms and to improve our competitive position.
Reducing and rebalancing national and international data prices to improve our
competitive position.
Essentially, we are implementing a differentiation strategy that aligns our
core competencies to the drivers of customer value in order to achieve
competitive advantages. Customers will be kept constantly informed about
Telkom and its products.
Data
As a result of Telkom`s strategy to grow our data business, data revenues
increased a very pleasing 10.9% to R8.3 billion. This is also indicative of
the growth in bandwidth demand from corporates and mobile operators as a
result of 3G and HSDPA. Data connectivity revenue increased 4.5% to R4.5
billion. Mobile leased line revenue increased 11.1% to R1.8 billion. Internet
access revenues increased 29.1% to R1.2 billion and we are proud of the fact
that managed network services revenue increased 36.2% to R728.5 million. VPN
services revenue increased 46.6% to R500 million.
Telkom`s focus on bringing new innovative products to the market that cater
for increased data usage and converged services has seen our new VPN products
gain increasing traction in the market. We have increased VPN sites by 58.0%
to 12,741. Our VPN Lite products which is delivered over the ADSL network
include advanced self-help and online charging solutions. This product was
launched during November 2007. Telkom is in the process of building on a
culture of research and innovation and fast time to market in order to cater
for customers who are increasingly looking for innovative, easy to use
products.
Telkom has previously stated that moving further into the converged service
offering environment with a specific focus on value added data services is
vital to growing our revenue. It is difficult to make data centre acquisitions
in South Africa. Telkom is pursuing the acquisition of a data centre business
outside of South Africa as we move up the converged ICT value chain. The
ability to increase the support we provide to our corporate customers is
expected to further entrench relationships.
The data centre business is used effectively by telecommunication companies to
stimulate the use of bandwidth over their networks. In addition, the
convergence of IT and telecommunications are driving customer demand for one-
stop solutions for their telecommunication and IT infrastructure requirements.
Data centres are believed to be, the next logical step in the value chain for
a telecommunication company that is already well positioned with basic data
services as well as managed WAN/VPN services and LAN services.
The data centre business is one of the fastest growing areas in the IT space
as a result of:
Customers realising that it is very expensive to host IT infrastructure on
site - prime office space is used in many cases;
Regulators insisting that data is protected properly and assisting with carbon
footprint reduction;
Improvement of efficiencies by moving from basic machine hosting to shared
resources in the data centre;
Being in a position to up sell into value added IT services such as Software
as a Service (SaaS); and
Leveraging the fit that exists between communication infrastructure and data
centre services
Broadband and converged services
Telkom is aggressively expanding its ADSL footprint, increasing the bandwidth
in order to host applications such as video services and using the next
generation network to facilitate innovative solutions. The ADSL footprint now
covers 92% of Telkom`s total network and our coverage in underserviced areas
is 76%. ADSL subscribers grew 61.2% to 412,190, excluding Telkom internal
lines. We fell short of our aggressive target of 420,000. Nevertheless, this
strong growth was achieved through the commoditisation of ADSL, Do Broadband,
the Self Install Option, DSL port automation and wholesale services. Do
Broadband packages increased by 245.6% to 119,288. Wholesale ADSL services
grew to 18,722. Telkom remains committed to achieving our targeted ADSL
penetration of 15%-20% of fixed access lines by 2010/11. This will continue to
offset the decrease in access lines which have decreased by 2.4% to 4,531,752
access lines.
ADSL Average Time To Install (ATTI) has improved to 19 days from the 23 days
achieved at March 31, 2007. The ADSL Self Install option is expected to
continue to improve the ATTI. As of March 31, 2008, 57% of all ADSL
installations were being done through the Self Install Option.
In extending and complimenting our ADSL footprint, Telkom has increased its
WIMAX base stations from 27 sites at September 30, 2007 to the current 56
sites. Telkom remains committed to its target of 71 WIMAX base stations.
Geographic expansion
The aim is to establish Telkom as a regional voice and data player through the
provisioning of a range of hosting services, managed solutions, mobile voice
and wireless broadband services. Telkom is also entering the field of
professional consulting to operators. In addition, we are positioning Telkom
as a wholesale facilities and infrastructure enabler for regional incumbents.
Our expansion to date has been through Multi-Links, a private
telecommunications operator operating in Nigeria, and Africa Online, an
internet services provider with its head-office in Kenya and operating in 8
other African countries.
Multi-Links
Telkom owns 75% of Multi-Links, a private telecommunications operator with a
Universal Access License in Nigeria. Multi-Links performed well in growing its
subscriber base from 262,431 at September 30, 2007. We placed an aggressive
subscriber target of 812,000 for the year ending March 31, 2008 on the
company. Multi-Links exceeded this target and delivered 813,392 subscribers to
March 31, 2008. By May 31, 2008, Multi-Links had a subscriber base of
1,000,251 customers.
Multi-Links reported revenue of R845.4 million, a loss before tax of R63.5
million and a profit after tax of R49 million. Multi-Links` pioneer tax
status, that ended on December 31, 2007 resulted in deferred tax credits due
to capital expenditures incurred prior to this date, now being eligible for
deduction from taxable income. The company is now liable to pay tax of 30% and
an educational levy of 2% going forward, subject to the utilization of tax
credits. Voice and data revenue contributed 81% to total revenue, handset
sales 12%, interconnect revenue 6.8% and SMS 0.2%. Operating expenses were
R941.8 million with payment to other operators contributing 66%, selling
general and administrative expenses contributing 15%, employee expenses 4%,
operating leases 4%, services rendered 2% and depreciation 9%. Multi-Links
subsidises handsets which was the largest contributor to SG&A expenses.
The majority of new subscribers were added in late February 2008 and March
2008 as a result of equipment being delayed by the logistic constraints. The
ARPU achieved for the 11 months ended 31 March 2008, was $32. It is however
expected that ARPU will drop to below $30 during the 2009 financial year.
Multi-Links has now installed 269 base stations, 223 towers and grown its
fibre deployment to 2500kms. In addition, Multi-Links has commissioned a
Huawei packet exchange in Abuja with capacity of 300,000 subscribers, extended
the Lagos switch capacity by 250,000 subscribers and established a new main
network site in Gbagada, Lagos. The Lagos Metro Ethernet ring has now been
completed and Abuja is near to completion. Plans are underway for the
deployment of Metro Ethernet rings in Kanu, Kaduna and the Delta region. Six
NGN nodes are planned to be built in the 2009 financial year greatly extending
Multi-Links` ability to provide data products to corporate customers. In May
2008, an IPLC services was commissioned for a corporate customer connecting
South Africa and Nigeria. Multi-Links expects more corporate customers to come
on board in the near future.
The prospects for Multi-Links are strong and the company intends to capitalise
on Telkom`s brand and access to international data connectivity. The
resilience and quality of international connectivity provides great
opportunities in servicing the corporate, wholesale and retail markets.
Africa Online
Africa Online increased its revenue from R46 million in the six months ended
September 30, 2007 to R110 million at March 31, 2008. The major contributors
to revenue were dial up, consumer wireless and dedicated corporate links.
EBITDA margin declined from 2.2% in the six months ended September 30, 2007 to
x% in the year ended March 31, 2008. The decline in EBITDA margin was largely
as a result of the Telkom management fee, payments to other operators and
selling, general and administrative expenses. The company reported an
operating loss of R63.2 million largely as a result of the interest paid on
Telkom funding.
Africa Online`s infrastructure roll out has not progressed as speedily as
hoped due to the long equipment lead times and unrest in Kenya during December
2007 and January 2008. However, Africa Online has capitalised on its
relationship with Telkom in the pursuit of multi-national clients and now has
124 Pan-African multi-national customers.
Telkom has migrated 115 corporate VSAT sites to African Online. The target
remains 171. This has allowed for the joint tendering of business to large
multinational customers and opened up the Southern African region to Africa
Online. The company is also now in a position to compete with the likes of
Mweb and AFSAT.
In addition to the current affiliates that Africa Online works with in
Senegal, Benin, Nigeria, Angola, Botswana and Mozambique, new affiliates have
been signed up in Malawi, Mauritius and Sudan including additional affiliates
in Nambia, Angola and Mozambique. The company is extending its coverage in
Africa in order to aggressively target the Pan-African corporate market.
Telkom management services company (TMSC)
The board of directors has given their approval for the establishing of the
Telkom management services company. Opportunities exist in subSaharan Africa
for a reputable and acknowledged telecommunications operator to provide
telecommunications management services. The target markets for such services
are the:
State-owned incumbent operators in subSaharan Africa; and
numerous new entrants in the ICT industry, i.e. green field entrants that need
operational expertise to scale up and be effective operators. There are few
consultants in the ICT industry with relevant expertise and support from
reputable telecommunications operators that understand the African operational
environment and are able to provide such services.
It is envisaged that TMSC will be a wholly owned subsidiary providing the full
range of strategic and operational services. The relationship with Telkom
brings advantages in terms of expertise in technology innovation and
integration, independence from equipment manufacturers, experience of a large
number of supplier platforms as well as first hand experience in transforming
from a state owned monopoly, through commercialisation to privatisation and
listing.
The management contracts of Multi-Links and Africa Online will be handled by
TMSC.
Other developments
Mobile strategy developments
Telkom announced on June 2, 2008 that it is in negotiations with Vodafone
regarding the potential sale and unbundling of its stake in Vodacom.
Telkom is facing active competition from mobile operators in the voice market
and increasingly so in the data market. We believe that an integrated fixed-
mobile operator is better positioned to react to and take advantage of the
challenges that lie ahead. Having an integrated fixed-mobile offering will
allow Telkom to leverage our customer base, marketing, distribution and
logistics channels to increase our share of voice revenue. In addition,
Internet access demands are increasingly requiring mobility. An integrated
bundled offering would offer superior speeds and quality through the fixed-
line, including the advantages of mobility when required by the customer. In
the future we also anticipate that content demands will require an element of
mobility although not in the short term. And, very importantly, we believe
that having a coherent, integrated and synergistic fixed-mobile capability
will greatly enhance Telkom`s ability to successfully compete for
international acquisitions.
Fixed wireless and mobile data network
Telkom has decided to use W-CDMA technology and has appointed Huawei as our
vendor to build out our fixed wireless and mobile data network.
W-CDMA technology will provide Telkom with the following benefits:
Provide Telkom with a mobile data as well as fixed and a nomadic voice
capability;
As W-CDMA does have the capability of supporting full mobility, the above
services can be further augmented with mobile voice should Telkom be
successful in concluding its mobile strategy and no longer be bound to the
current Shareholders Agreement with Vodafone; and
Alleviate the negative impact of Thefts, Breakages and Incidences (TBIs) on
service delivery. In order to satisfy demand for services in high theft and
high maintenance areas, Telkom has acquired W-CDMA to decrease exposure to the
losses being incurred.
In addition, the cost per customer should be attractive when compared to the
cost of using current point to multi-point radio based systems.
Key next generation network (NGN), capacity and product developments
Telkom is in the third year of its NGN build out programme. Customer demands
and global standards necessitate the provision of services and particularly
bandwidth that is only possible utilising the intelligence of an NGN system.
Our NGN build out achievements are as follows:
An increase of the ADSL footprint to 2,660 DSLAMs, covering 92% of Telkom`s
existing customer footprint.
84 Metro Ethernet nodes have been deployed in major cities using 10Gbit and
1Gbit line systems.
The first system of Dense Wave Division Multiplexing (DWDM) system capable of
forty 10Gbit/s signals over a single pair of fibre has been deployed between
Gauteng and Durban. This has significantly increased transport bandwidth
capability. A significant rollout of this system between all major cities in
SA is currently in the build phase, and planned for completion during the 2009
financial year.
Automatic self-healing re-routing of bandwidth on the national layer has
commenced.
The national and local transport network increased by 377 nodes, growing the
network bandwidth by 1.2 Tbit/s, which is a growth of 21%.
Total international bandwidth has increased to 4.5Gbit/s, which is a growth of
88%.
ATM network available bandwidth on the core and metro layers has increased to
a combined 147 Gbits/s, which is a growth of 41%.
National IP Network bandwidth has increased to 32.2 Gbit/s, which is a growth
of 11%.
A Network Interactive Voice Response Systems have been deployed which offers
advanced speech services. Automated speech recognition and text-to-speech
application enable corporate customers and Telkom to enhance their voice
systems.
Diginet and Diginet Plus network bandwidth has increased to 27Gbit/s, which is
a growth of 20%.
237 WiFi hotspots have been deployed at strategic partner locations.
Fibre deployment has increased by 8.7%.
IMAX has been introduced into the system and is ready to carry traffic. IMAX
has the ability to carry narrowband and broadband services for wire line
legacy and converged services.
Cost, efficiency and productivity management
Faced with competition eroding our revenue base, cost management is a key
element in creating shareholder value. Telkom is proud of its achievements in
this regard. The Telkom fixed-line business managed to contain its operating
expense growth to a 3.6% increase, despite the high inflationary environment
with CPIX recorded at 10.1% in March 2008. Employee expenses increased by 4.2%
to R7.4 billion, selling general and administrative expenses decreased by 7.4%
to R3.7 billion, service fees increased by 9.4% to R2.4 billion and operating
leases decreased by 18.8% to R619 million. Depreciation, amortisation,
impairment and write-offs increased by 10.2% to R3.9 billion. Telkom did not
achieve its fixed-line EBITDA margin target of 37% - 40% with the EBITDA
margin at 36.3% decreasing from 37.7% at March 31, 2007.
Our continued focus on cost management, efficiency and productivity management
has resulted in Telkom developing a Capability Management programme.
Professional services have grown in maturity throughout the world,
particularly in the information technology and telecoms environments. This
allows Telkom to focus on services that differentiate us from competitors such
as:
an increased focus on customer service;
the faster delivery of improved services to the market;
improving cost management and capital productivity; and
increasing shareholder returns.
Telkom is currently using approximately 100 service providers to deliver
network services. These contracts are expiring at the end of June 2008. A
critical factor in the new contract process is to ensure that Telkom moves
towards a more consolidated interface to the service provider market and
obtains maximum efficiencies through creating scale and volume.
In addition to service provider consolidation, a capability management process
is under way to identify partners for network operations, information
technology management and Telkom Direct Shops which entails that certain
elements will be outsourced to professional service providers. Telkom has
commenced with issuing a closed Request For Proposals for professional
services in this regard.
To ensure that capability management, which includes elements of outsourcing,
is legitimate, we are engaging with organised labour in line with transparency
and labour regulations. Many interactions have taken place with union
leadership over the past few months to achieve the appropriate levels of
awareness, education and strategic insight on the aspects of capability
management and outsourcing. This included international benchmarking visits to
other operators and professional services providers in Germany, Australia, New
Zealand and Brazil.
Sustained employability and well being of Telkom staff is of paramount
importance.
Customer service
Improved customer service is vital to the success of Telkom into the future.
Sustainable and profitable growth in the customer base requires creating and
strengthening capabilities focused on managing customer relationships and
learning from acquired customer information. This will allow Telkom to better
manage the customer experience and anticipate customer needs.
Customer segmentation based on value should enable Telkom to understand
customer equity better in order to give additional value and services to
customers. Understanding an individual customer`s breakeven point and
anticipating their future requirements will allow Telkom to intelligently
determine value enhancers and cross selling opportunities.
A call centre masterplan has been designed to compliment customer segmentation
through dedicated agents for high value customers, upfront identification and
routing of complex calls to the specialised agents and upfront resolution of
high volume simple calls by universal agents. This is a vital element in
making it easier for our customers to do business with us.
We have consolidated all call centre operations under one structure creating a
single point of accountability. In addition, we have ensured redundancy
through the interconnection of call centres allowing a reduction of
bottlenecks and rerouting of overflow traffic.
In areas of high cost, high maintenance and high theft occurrence,
particularly copper and fibre cable theft, Telkom is deploying a wireless
network using W-CMDA to restore and improve service quality.
The table below illustrates some key customer service metrics and targets for
the year ending March 31, 2009. We anticipate that our customer centricity
project will be complete by March 31, 2011 by which time we will be able to
deliver on our customer expectations as set out in the Customer Satisfaction
Surveys.
Year ended March 31, Target
2006 2007 2008 2009
Residential
% cleared in 24 hours 47 50 38 40
Faults per 1,000 lines 470 785 476 423
% installed in 5 days 49 81 54 61
Business voice
% cleared in 24 hours 61 66 50 51
Faults per 1,000 lines 300 328 264 250
% installed in 5 days 63 83 63 72
Data subrate
% cleared in 24 hours 92 84 93 95
Faults per 1,000 lines 801 870 875 830
% installed in 10 days 40 41 19 25
ADSL Business
% cleared in 24 hours 54 33 42 46
Faults per 1,000 lines 480 575 575 540
% installed in 20 days 56 76 56 67
Telkom media and content services
Telkom announced on March 31, 2008 that it will reduce its shareholding in
Telkom Media substantially. A potential anchor investor has been identified to
take over a substantial portion of Telkom`s investment in Telkom Media. Telkom
is awaiting a proposal from the investor which the investor has indicated will
be received towards the end of June 2008.
Telkom acknowledges that the expansion of the content rich services is crucial
as it will drive future revenue and act as a major product differentiator in a
crowded broadband market space. Content can however be sourced from other
operators and Telkom is in the process of investigating options with respect
to acquiring content from a number of content providers.
Vodacom results
Vodacom again demonstrated strong performance in the twelve months to March
31, 2008 delivering 17.1% growth in revenue to R48.2 billion with an estimated
South African market share of approximately 55%. Vodacom increased its profit
from operations by 15.0% to R12.5 billion and increased net profit after tax
by 22% to R8.0 billion and, in the face of declining ARPUs as a result of
lower income segment customer connections and aggressive drives to attract and
retain customers, admirably delivered a 34.0% EBITDA margin down 1.7% from the
34.6% EBITDA margin achieved for the year ended March 31, 2007.
Vodacom`s total customer base increased by 12.7% to 34.0 million customers as
at March 31, 2008. South African mobile customers increased by 7.9% to 24.8
million. Customers grew by 29.6% to 4.2 million in Tanzania, by 25.0% to 3.3
million in the Democratic Republic of Congo, by 41.6% to 395,000 in Lesotho,
and by 29.8% to 1.3 million in Mozambique. Vodacom`s other African operations
reported customers of 9.2 million and contributed 6.6% to data revenue, down
from 6.9% contribution in the 2007 financial year.
South African prepaid churn increased to 47.9% for the year ended March 31,
2008 from 37.5% for the year ended March 31, 2007. The increase in the churn
ratio was due in part to disconnection rules being amended to classify SIM
cards whose only activity was call forwarding to voice mail for an
uninterrupted period of 13 months as inactive. Vodacom believes this rule
change provides a better reflection of active prepaid SIM cards on the network
and results in higher Average Revenue Per User (ARPU). Vodacom`s focus on
customer care and retention saw South African contract churn improve to 8.3%
from the 9.7% recorded in the year ended March 31, 2007. The blended South
African ARPU remained stable over the year at R125 with contract ARPU
decreasing 6.0% to R486 and pre-paid ARPU decreasing to R62 from R63 in at
March 31, 2007.
Vodacom`s data revenue increased by 49.7% to R5,002 million for the twelve
months ended March 31, 2008 contributing 10.4% to mobile operating revenue.
The data contribution has increased from 8.1% recorded at March 31, 2007. The
superb performance of Vodacom`s data products is as a result of higher
penetration levels and more affordable product offerings.
Telkom refers shareholders to the SENS announcements published on March 10,
2008 and April 25, 2008 concerning Vodacom`s proposed Broad Based Black
Economic Empowerment transaction. Telkom remains fully supportive of this R7.5
billion transaction.
The regulatory environment
Telkom faces continuous regulatory challenges covering inter alia competition
issues and changes in policies. Through constructive dialogue, the Company
endeavours to achieve a regulatory framework that is realistic, equitable and
beneficial to the industry. The following details the main changes to the
regulatory environment affecting the industry and Telkom during the year.
Electronic communications (EC) act
ICASA had to address the task of developing the market regulation framework.
ICASA has issued since December 2007 some 10 draft regulations, dealing with
the identification and definition of the various relevant markets, the
methodologies for analysing these markets to determine the level of
competition, or lack thereof, proposed rules on the leasing of communication
facilities, on interconnection, on the special treatment of facilities that
are deemed to be "essential" and on the owners thereof. Telkom will, of
course, be affected for the most part by all these developments.
Regarding the pro competition regulations, in March 2008 ICASA published draft
regulations on the processes and methodologies that ICASA will use for the
definition of the relevant markets, for determining the effectiveness of
competition in markets, for the identification of licensees having significant
market power, and for ensuring that pro-competitive remedies imposed are
reasonable and proportionate in addressing market failure.
Licence conversion
ICASA has started a process of converting our licenses to the new licensing
framework. Regulations providing the framework to convert our PSTS and VANS
licenses have been published by ICASA, including the standard terms and
conditions that will apply to all electronic communications services and all
electronic communications network services licenses, including ours. ICASA has
proposed draft additional conditions applicable to the electronic
communications service and electronic communications network service licences
that will be issued to existing licensees, including Telkom. ICASA, after
taking into account the comments received, is expected to publish final
proposed terms and conditions for public comment. It is, however not likely
that ICASA will complete the licence conversion process before the end of
July. We presume that the technology neutrality of the Electronic
Communications Act will result in us being able to explore new horizons; how
far we will be allowed to go, however, and at what cost, is not yet clear.
Telkom continuously engages in negotiations for interconnection, shared access
and facilities leasing agreements. Interconnectivity agreements with Neotel
and the majority of VANS have been concluded.
Number portability (NP)
Mobile number portability has been in operation since 2006. Anecdotal evidence
is that mobile porting in South Africa was slower than it was expected to be,
although the high cost of implementation has duly materialised. Fixed-line
porting, essentially between Telkom and Neotel, has not yet happened.
Negotiations are advancing and some form of portability is expected to soon be
in place. The existence of very active VoIP service providers has led to
further competition for our fixed-line network. Carrier pre-selection between
Telkom and Neotel has also not yet been established, for essentially the same
reasons.
Local loop unbundling (LLU)
Telkom is required, in terms of existing legislation, to provide Neotel with
shared access to its local loop. Although the Telecommunications Act, 103 of
1996, provided that no general local loop unbundling would be required after
the first two years of operation of Neotel, the EC Act, which repeals the
Telecommunications Act, makes provision for unbundling of the local loop,
subject to ICASA making the necessary regulations. The Minister of
Communications published policy decisions that the process of unbundling the
local loop in South Africa should be urgently implemented and completed by
2011. On May 23, 2007, the Local Loop Unbundling Committee set up by the
Minister of Communications to develop appropriate policies for the unbundling
of the local loop in South Africa recommended, amongst other things:
three forms of local loop unbundling to be considered, full unbundling of the
metallic loop, line sharing and wholesale bit stream access; and
the regulatory process, with full industry participation should commence as
soon as possible and be completed in 2011.
Defining end-to-end leased lines and other wholesale markets
The market review process undertaken by ICASA is aimed at determining the
scope and boundaries of various fixed-line wholesale and retail markets (e.g.
local access, national long distance, international, etc.). In terms of the
process, ICASA is expected to:
define the relevant markets;
assess Telkom`s market power and dominance in each market; and
propose pro-competition regulations on Telkom.
Conclusion
Telkom is confident that it is well placed to deal with all regulatory issues.
Telkom actively engages with both policymakers (Parliamentary Committees) and
the regulator (ICASA) and plans and analyses multiple regulatory scenarios to
ensure that it is prepared for changes in regulation.
Prospects
Telkom`s strategy is designed to deliver sustainable, profitable growth going
forward and is benchmarked against global best practice. The creation of
shareholder value is the underlying driver of every decision made. Telkom`s
board of directors and management team are well aware that the price of the
share has not been reflecting the underlying value of the fixed-line business
and are committed to addressing this.
The next couple of years will focus on transforming the business to deal with
competition, concentrating on delivering innovative products and services to
our customers, expanding our network and bedding down our growth drivers. We
expect that competition will continue to constrain revenue growth over the
next three years. Targets in a transforming industry such as ours are
inherently risky, particularly in later years and investors should not place
undue reliance on such targets. We are targeting a compound average growth
rate (CAGR) of revenue over the following three years in the 5% to 10% range
as increased revenues from our data, broadband and converged business and our
newly acquired subsidiaries are projected to mitigate the impacts of increased
competition.
The EBITDA margin relating to fixed-line and other segments is targeted to
range between 32% and 36% over the next three years. This margin range
reflects the increased operational expenditure that goes hand in hand with an
aggressive customer service improvement and expansion programme, an increased
contribution from lower margin business and the decline in local and national
voice traffic revenue. The early stages of development in Multi-Links and
Africa Online add to the expected decrease in the EBITDA margin. We expect to
see improvements in the EBITDA margin within the range towards the end of our
three year planning period.
Capital expenditure for the fixed line and other segments will range between
23% and 27% of revenue over the next two years. In year three capex is
targeted to range between 18% and 22%. Capital expenditure is expected to be
R11.3 billion in the 2009 financial year.
The net debt to EBITDA for the fixed-line and other segments is targeted to be
1.3 times.
Targets in a transforming industry such as ours are inherently risky,
particularly in later years and investors should not place undue reliance on
such targets.
Our dividend policy remains that we progressively grow the ordinary dividend
each year. Given the investment in our network, expansion in current
businesses, the potential acquisitions and pressure on the fixed-line and
other segments` EBIDTA margin, no special dividend will be paid in respect of
the 2008 financial year. The level of dividend going forward will be based on
a number of factors including the consideration of the financial results,
available growth opportunities, the group`s debt level, interest coverage,
internal cash flows and resources, the repurchase of Telkom shares and other
future expectations.
Declaration of ordinary dividend No 13
Notice is hereby given that ordinary dividend number 13 of 660 cents per share
(2007:600 cents) in respect of the financial year ended 31 March 2008 has been
declared payable on Monday 7 July 2008 to shareholders recorded in the
register of the company at close of business on Friday 4 July 2008.
Holders of ordinary shares
Salient dates 2008
Last date to trade cum dividend Friday 27 June
Shares trade ex dividend Monday 30 June
Record date Friday 4 July
Payment date Monday 7 July
Share certificates may not be dematerialised or rematerialised between Monday
30 June 2008 and Friday 4 July 2008 both days inclusive.
On Monday 7 July 2008, dividends due to holders of certificated securities on
the South African register will either be transferred electronically to
shareholders` bank accounts or, in the absence of suitable mandates, dividend
cheques will be posted to such shareholders.
Dividends in respect of dematerialised shareholders will be credited to
shareholders` accounts with their relevant CSDP or broker.
Holders of American Depositary Shares
2008
Ex dividend on New York Stock Exchange Friday 27 June
Record date Friday 4 July
Approximate date for currency conversion into Monday 7 July
US dollars
Approximate date for payment of dividend Monday 21 July
3 Group performance
GROUP OPERATING REVENUE
Group operating revenue increased by 9.0% to R56,285 million (March 31, 2007:
R51,619 million) in the year ended March 31, 2008. Fixed-line operating
revenue, before inter-segmental eliminations, increased by 0.7% to R32,572
million primarily due to increased data services, interconnection and
subscriptions and connections revenue partially offset by a decline in traffic
revenue. Mobile operating revenue, before inter-segmental eliminations,
increased by 17.1% to R24,089 million primarily due to significant customer
growth, offset in part by declining ARPU`s.
GROUP OPERATING EXPENSES
Group operating expenses increased by 12.8% to R42,337 million (March 31,
2007: R37,533 million) in the year ended March 31, 2008, primarily due to a
17.9% increase in operating expenses in the mobile segment to R17,898 million
(before inter-segmental eliminations). Fixed-line operating expenditure
increased by 3.7% to R24,962 million (before inter-segmental eliminations) due
to increased employee expenses, payments to other operators, depreciation,
amortisation, impairment and write-offs and services rendered, partially
offset by a decrease in operating leases and selling, general and
administrative expenses. The increase in mobile operating expenses of 17.9%,
before inter segmental eliminations, was primarily due to increase in employee
expenses and gross connections resulting in increased cost to connect
customers to the network. 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 when
compared 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 decreased by 16.2% to R197 million (March 31,
2007: R235 million), largely as a result of lower interest received from fixed
deposits primarily due to lower cash balances.
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 on
foreign currency denominated transactions and balances. Finance charges
increased by 60.3% to R1,803 million (March 31, 2007: R1,125 million) in the
year ended March 31, 2008, due to a 42.0% increase in interest expense to
R1,885 million (March 31, 2007: R1,327 million) as a result of the 65.7%
increase in net debt to R16,617 million (March 31, 2007: R10,026 million).
Net debt increased mainly as a result of the issuance of commercial debt paper
debt with a nominal value R18,806 million during the year, as well as an
increase in Vodacom`s net debt for the year. This was partly offset by the
repayment of R15,773 million nominal value of commercial paper bills. In
addition to the increase in the interest expense, net fair value and exchange
movements on financial instruments resulted in a loss of R82 million for the
year ended March 31, 2008 (March 31, 2007: Gain of R202 million)
TAXATION
Consolidated tax expense reduced to R4,704 million (March 31, 2007: R4,731
million) in the year ended March 31, 2008. The consolidated effective tax rate
for the year ended March 31, 2008, was 36.5% (March 31, 2007: 34.8%). Telkom
Company`s effective tax rate was 24.6% for the year ended March 31, 2008
(March 31, 2007: 24.3%). Vodacom`s effective tax rate decreased to 34.1%
(March 31, 2007: 36.9%) mainly as a result of a decrease in the secondary
taxation on companies(STC) liability due to the decrease in the STC rate from
12.5% to 10.0% effective October 1, 2007.
PROFIT FOR THE YEAR AND EARNINGS PER SHARE
Profit for the year attributable to the equity holders of the Group decreased
by 7.8% to R7,975 million (March 31, 2007: R8,646 million) for the year ended
March 31, 2008.
Group basic earnings per share decreased by 6.9% to 1,565.0 cents (March 31,
2007: 1,681.0 cents) and Group headline earnings per share decreased by 4.4%
to 1,634.8 cents (March 31, 2007: 1,710.7 cents).
4. Group balance sheet
Net debt, after financial assets and liabilities, increased by 65.7% to
R16,617 million (March 31, 2007: R10,026 million) as at March 31, 2008,
resulting in a net debt to equity of 49.9% from 31.3% at March 31,2007. On
March 31, 2008, the Group had cash balances of R1,134 million (March 31, 2007:
R749 million).
During the year ended March 31, 2008, 12.1 million shares were repurchased for
R1.65 billion, to be cancelled from the issued share capital by the Registrar
of Companies. As at March 31, 2008, 4,444,138 of these shares have not yet
been cancelled.
Interest-bearing debt, including credit facilities utilised, increased by
58.0% to R17,075 million (March 31, 2007: R10,805 million) in the year ended
March 31, 2008. The Group raised commercial paper bills with a nominal value
of R18,806 million for the year ended March 31, 2008 of which R15,773 million
was redeemed by March 31, 2008. Credit facilities from our subsidiaries
increased by R901 million, and Telkom`s portion of Vodacom`s interest bearing
debt increased by R490 million.
5. Group cash flow
Cash flows from operating activities increased by 13.3% to R10,603 million
(March 31, 2007: R9,356 million), mainly due to lower taxation as well as an
increase in cash generated from operations of R21,256 million (March 31, 2007:
R20,520 million), partly offset by higher dividends paid. Cash flows utilised
in investing activities increased by 35.5% to R14,106 million (March 31, 2007:
R10,412 million), primarily due to increased capital expenditure in both the
fixed-line and mobile segments, as well as cash utilised for the purchase of
Multi-Links Telecommunications (Proprietary) Limited. Cash flows from
financing activities of R2,943 million (March 31, 2007: (R2,920) million) was
mostly due to the R1,647 million paid for share repurchases, the repayment of
the TK01 bond with a nominal value of R4,680 million on March 31, 2008 and
maturing commercial paper debt of R15,773 million nominal value during the
year. This was offset by the issuance of R18,806 million nominal value
commercial paper bills, as well as entering into call and term loans of R5,600
million to fund the redemption of the TK01 bond and other cash flows from
investing activities.
SUMMARY
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Cash generated from 19,724 20,520 21,256 4.0 3.6
operations
Cash from operating
activities
(after tax, interest, 9,506 9,356 10,603 (1.6) 13.3
dividends)
Investing activities (7,286) (10,412) (14,106) (42.9) (35.5)
Financing activities (258) (2,920) 2,943 (1,031.8) 200.8
Net 1,962 (3,976) (560) (302.7) 85.9
increase/(decrease) in
cash
6 Group capital expenditure
Group capital expenditure increased by 16.1% to R11,900 million (March 31,
2007: R10,246 million) and represents 21.1% of Group revenue (March 31, 2007:
19.8%).
GROUP CAPITAL EXPENDITURE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Fixed-line 4,900 6,594 6,794 34.6 3.0
Mobile 2,571 3,608 3,460 40.3 (4.1)
Other 35 44 1,646 25.7 -
7,506 10,246 11,900 36.5 16.1
FIXED-LINE CAPITAL EXPENDITURE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Baseline 2,128 3,409 4,039 60.2 18.5
Portfolio 2,756 2,997 2,718 8.7 (9.3)
'Revenue generating 374 159 57 (57.5) (64.2)
'Network evolution 330 784 1,092 137.6 39.3
'Sustainment 596 416 277 (30.2) (33.4)
'Effectiveness and 1,080 1,141 841 5.6 (26.3)
efficiency
'Support 376 497 451 32.2 (9.3)
Regulatory 17 188 37 1,005.9 (80.3)
Other 0 0 0 0.0 0.0
4,901 6,594 6,794 34.5 3.0
Fixed-line capital expenditure, which includes spending on intangibles,
increased by 3.0 % to R6,794 million (March 31, 2007: R6,594 million) and
represents 20.9% of fixed-line revenue (March 31,2007: 20.4%). Baseline and
revenue generating capital expenditure of R4,096 million (March 31, 2007:
R3,568 million) was largely for the deployment of technologies to support the
growing data services business (including ADSL footprint), links to the mobile
cellular operators and expenditure for access line deployment in selected high
growth residential areas. The continued focus on rehabilitating the access
network and increasing the efficiencies in the transport network contributed
to the network evolution and sustainment capital expenditure of R1,369 million
(March 31, 2007: R1,200 million).
Telkom continues to focus on its operations support system investment with
current emphasis on workforce management, provisioning and fulfilment,
assurance and customer care, hardware technology upgrades on the billing
platform and performance and service management. During the year ended March
31, 2008, R841 million (March 31, 2007: R1,141 million) was spent on the
implementation of systems.
MOBILE CAPITAL EXPENDITURE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
South Africa 2,192 2,730 2,135 24.5 (21.8)
Other African 379 878 1,326 131.7 51.0
countries
2,571 3,608 3,461 40.3 (4.1)
Mobile capital expenditure (50% of Vodacom`s capital expenditure) decreased by
4.1% to R3,461 million (March 31, 2007: R3,608 million) and represents 14.4%
of mobile revenue (March 31, 2007: 17.5%) which was mainly spent on the
cellular network infrastructure consisting of radio, switching and
transmission network infrastructure and computer software. The decrease in
capital expenditure in other African countries was largely as a result of
decreased investment in Tanzania, Democratic Republic of the Congo and
Mozambique offset by an increase in investment in Lesotho.
OTHER CAPITAL EXPENDITURE
In ZAR millions 2006 2007 2008 06/07 07/08
Other 35 44 1,646 25.7 3,640.9
Other capital expenditure consists of additions to property, plant and
equipment for our subsidiaries TDS Directory Operations (Proprietary) Limited,
Swiftnet (Proprietary) Limited, Telkom Media (Proprietary) Limited, Africa
Online Limited and Multi-Links Telecommunications Limited. Other capital
expenditure, which includes spending on intangible assets, increased to R1,646
million (March 31, 2007: R44 million) and represents 84.9% of other revenue
(March 31, 2007: 4.5%).
7 Segment performance
Telkom`s operating structure comprises three segments, fixed-line, mobile and
other. The fixed-line segment provides fixed-line voice and data
communications services through Telkom. The mobile segment provides mobile
services through our 50% joint venture interest in Vodacom. The other segment
provides directory services through our 64.9% owned subsidiary, TDS Directory
Operations, wireless data services through our wholly owned subsidiary,
Swiftnet, internet services in Cote d`Ivoire, Ghana, Kenya, Namibia,
Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, through our wholly owned
subsidiary, Africa Online Limited and fixed, mobile, data, long distance and
international telecommunications services throughout Nigeria, through our 75%
owned subsidiary, Multi-Links, as well as Telkom Media.
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 consolidated financial
statements.
SUMMARY
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Operating revenue 47,625 51,619 56,285 8.4 9.0
Fixed-line 31,832 32,346 32,572 1.6 0.7
Mobile 17,021 20,573 24,089 20.9 17.1
Other 952 979 1,939 2.8 98.1
Inter-segmental (2,180) (2,279) (2,315) 4.5 1.6
eliminations
Operating profit 14,677 14,470 14,482 (1.4) 0.1
Fixed-line 9,843 8,597 8,107 (12.7) (5.7)
Mobile 4,436 5,430 6,211 22.4 14.4
Other 398 444 164 11.6 (63.1)
Inter-segmental 0 (1) 0 0 0
eliminations
Operating profit 30.8 28.0 25.7 (9.1) (8.2)
margin
Fixed-line 30.9 26.6 24.9 (13.9) (6.4)
Mobile 26.1 26.4 25.8 1.1 (2.3)
Other 41.8 45.4 8.5 8.6 (81.3)
EBITDA 20,553 19,786 20,612 (3.7) 4.2
Fixed-line 14,207 12,180 11,839 (14.3) (2.8)
Mobile 5,908 7,122 8,181 20.6 14.9
Other 438 484 307 10.3 (36.6)
EBITDA margin 43.2 38.3 36.6 (11.3) (4.4)
Fixed-line 44.6 37.7 36.3 (15.5) (3.7)
Mobile 34.7 34.6 34.0 (0.3) (1.7)
Other 46.0 49.4 15.8 7.4 (68.0)
FIXED-LINE SEGMENT
The fixed-line segment accounted for 57.9% (March 31, 2007: 62.7%) of Group
operating revenues (before inter-segmental eliminations) and 56.0% (March 31,
2007: 59.4%) of Group operating profit at March 31, 2008.
The financial information presented below for the fixed-line segment is before
inter-segmental eliminations.
SUMMARY
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Revenue 31,832 32,346 32,572 1.6 0.7
Operating profit 9,843 8,597 8,107 (12.7) (5.7)
EBITDA 14,207 12,180 11,839 (14.3) (2.8)
Capital expenditure 1 4,901 6,594 6,794 34.6 3.0
Operating profit 30.9 26.6 24.9 (13.9) (6.4)
margin (%)
EBITDA margin (%) 44.6 37.7 36.3 (15.5) (3.7)
Capex to revenue (%)
15.4 20.4 20.9 32.5 2.5
1. Including spend on intangible assets
FIXED-LINE OPERATING REVENUE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Subscriptions and 5,803 6,286 6,330 8.3 0.7
connections
Traffic 17,563 16,740 15,949 (4.7) (4.7)
'Local 5,753 4,832 4,076 (16.0) (15.6)
'Long distance 3,162 2,731 2,251 (13.6) (17.6)
'Fixed-to-mobile 7,647 7,646 7,557 (0.0) (1.2)
'International 1,001 988 986 (1.3) (0.2)
outgoing
'Subscription based - 543 1,079 - 98.7
calling plans
Interconnection 1,654 1,639 1,757 (0.9) 7.2
'Mobile operators 760 816 838 7.4 2.7
'Fixed operators - - 28 - -
'International 894 823 891 (7.9) 8.3
operators
Data 6,674 7,489 8,308 12.2 10.9
'Leased lines and 5,304 5,828 6,460 9.9 10.8
other data
'Mobile leased 1,371 1,664 1,848 21.4 11.1
facilities
Directories and
other 138 191 228 38.4 18.9
31,832 32,345 32,572 1.6 0.7
Operating revenue from the fixed-line segment, before inter-segmental
eliminations, increased by 0.7% to R32,572 million (March 31, 2007: R32,345
million) primarily due to the increase in data services, interconnection,
subscriptions and connection revenue, partially offset by a decline in traffic
revenue.
Subscription and connections revenue grew by 0.7% to R6,330 million (March 31,
2007: R6,286 million), largely as a result of increased rental tariffs,
increased subscribers on Telkom Closer and SupremeCall, increase in the number
of PABX`s and higher penetration of value-added services.
Traffic revenue decreased by 4.7% to R15,949 million (March 31, 2007: R16,740
million), 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 by 11.4% to 22,561 million minutes (March 31, 2007: 25,455
million minutes).
Interconnection revenue increased by 7.2% to R1,757 million (March 31, 2007:
R1,639 million) largely as a result of an increase of 8.3% in international
interconnection revenue. The increased interconnection revenue from
international operators is mainly as a result of higher exchange rates
partially offset by a 3.1% decrease in international interconnection traffic
minutes to 1,280 million minutes (March 31, 2007: 1,321 million minutes).
Mobile interconnection revenue increased by 2.7% to R838 million (March 31,
2007: R816 million) primarily due to increased interconnection traffic from
domestic mobile operators and increased average tariff increases for call
termination partially offset by lower average tariffs on mobile international
outgoing calls. Mobile interconnection traffic minutes increased by 3.4% to
2,502 million minutes (March 31, 2007: 2,419 million minutes) in the year
ended March 31, 2008.
Data revenue increased by 10.9% to R8,308 million (March 31, 2007: R7,492
million) mainly due to higher demand for data services, including ADSL,
connectivity and SAIX, internet access, and managed data networks, including
VPN Supreme and increased revenue from leased line facilities from mobile
operators. These increases were partially offset by decreased tariffs for
leased line facilities to mobile operators and data connectivity services.
FIXED-LINE OPERATING EXPENSES
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Employee expenses 6,314 7,096 7,397 12.4 4.2
Salaries and wages 4,466 5,095 5,509 14.1 8.1
Benefits 2,383 2,673 2,671 12.2 (0.1)
Workforce
reduction expenses 85 24 3 (71.8) (87.5)
Employee related (620) (696) (786) 12.3 12.9
expenses
capitalised
Payments to other
network operators 6,140 6,461 6,902 5.2 6.8
Payment to mobile
operators 5,220 5,425 5,697 3.9 5.0
Payment to
international 920 1,036 1,205 12.6 16.3
operators
SG&A 2,836 3,975 3,899 40.2 (1.9)
Materials and
maintenance 1,608 1,900 1,996 18.2 5.1
Marketing 378 604 583 59.8 (3.5)
Bad debts 154 137 217 (11.0) 58.4
Other 696 1,334 1,103 91.7 (17.3)
Services rendered 2,045 2,206 2,413 7.9 9.4
Property management
1,109 1,141 1,222 2.9 7.1
Consultants and
security 936 1,065 1,191 13.8 11.8
Operating leases 755 762 619 0.9 (18.8)
Depreciation,
amortisation,
impairment and 4,364 3,583 3,732 (17.9) 4.2
write-offs
22,454 24,083 24,962 7.3 3.6
Fixed-line operating expenses, before inter-segmental eliminations, increased
by 3.6% in the year ended March 31, 2008 to R24,962 million (March 31, 2007:
R24,083 million), primarily due to increased employee expenses, payment to
other operators, services rendered and depreciation, amortisation, impairment
and write-offs in part offset by a decrease in operating leases and selling,
general and administrative expenses.
Employee expenses increased by 4.2% in the year ended March 31, 2008 to R7,397
million (March 31, 2007: R7,096 million), largely due to increased payments to
part-time employees and contractors employed to meet Telkom`s customer
centricity focus; the deployment of the NGN objectives and annual salary
increases, including related benefits due to an average annual salary
increases of 7.0%.
Benefits decreased in the 2008 financial year primarily as a result of the
annuity policy qualifying as a plan asset in June 2006, a lower provision for
leave as a result of the decrease in the number of employees and lower
training expenses, partially offset by higher share compensation expenses as a
result of the higher number of shares allocated during the year.
Payments to other network operators increased by 6.8% to R6,902 million (March
31, 2007: R6,461 million) as a result of increased payments to mobile and
international operators. Payments to mobile operators increased by 5.0% to
R5,697 million (March 31, 2007: R5,425 million), largely as a result of a 1.6%
increase in fixed-to-mobile traffic. Payments to international operators
increased by 16.3% to R1,205 million (March 31, 2007: R1,036 million),
primarily due to an increase in volumes in switched hubbing and a 13.6%
increase in international outgoing traffic volumes, arising from our reduced
average international tariffs and a weaker exchange rate.
Selling, general and administrative expenses decreased by 1.9% to R3,899
million (March 31, 2007: R3,975 million), primarily as a result of a decrease
in marketing expenses and other selling, general and administration expenses
offset in part by an increase in material and maintenance expenses due to new
technology roll-out and higher fuel cost and higher bad debts.
Services rendered increased by 9.4% to R2,413 million (March 31, 2007: R2,206
million), with property management expenses increasing by 7.1% primarily as a
result of increased electricity, rates and taxes. Consultants and security
costs increased by 11.8% primarily as a result of increased cost to explore
local and international investment and expansion opportunities as well as
higher security and legal costs.
Operating leases decreased by 18.8% to R619 million (March 31, 2007: R762
million) primarily due to a discount received on our renegotiated Debis
contract effective August 1, 2007 as well as 9.3% reduction in vehicle fleet
from 9,694 vehicles at March 31, 2007 to 8,792 vehicles at March 31, 2008.
The 4.2% increase in depreciation, amortisation, impairment and write-offs to
R3,732 million (March 31, 2007: R3,583 million) was mainly as a result of
higher amortisation of intangibles and increased depreciation due to ongoing
investment in telecommunications network equipment and data processing
equipment, partially offset by lower asset write-offs.
Fixed-line operating profit decreased by 5.7% to R8,107 million (March 31,
2007: R8,597 million) with an operating profit margin of 24.9% (March 31,
2007: 26.6%). EBITDA decreased by 2.8% to R11,839 million (March 31, 2007:
R12,180 million), with EBITDA margins decreasing to 36.3%. (March 31, 2007:
37.7%).
MOBILE SEGMENT
The mobile segment accounted for 42.8% of Group operating revenue (March 31,
2007: 39.8%) (before inter-segmental eliminations) and 42.9% of Group
operating profits (March 31, 2007: 37.5%). 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, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Operating revenue 17,021 20,573 24,089 20.9 17.1
Operating profit 4,436 5,430 6,211 22.4 14.4
EBITDA 5,908 7,122 8,181 20.5 14.9
Capital expenditure 2,571 3,608 3,460 40.3 (4.1)
Operating profit
margin (%) 26.1 26.4 25.8 1.1 (2.3)
EBITDA margin (%) 34.7 34.6 34.0 (0.3) (1.7)
Capex to revenue (%) 15.1 17.5 14.4 15.9 (17.7)
MOBILE OPERATING REVENUE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Airtime and access 10,043 11,854 13,548 18.0 14.3
Data 1,019 1,671 2,501 64.0 49.7
Interconnect 3,348 3,918 4,443 17.0 13.4
Equipment sales 1,993 2,350 2,526 17.9 7.5
International
airtime 486 653 918 34.4 40.6
Other 132 127 153 (3.8) 20.5
17,021 20,573 24,089 20.9 17.1
Operating revenue from the mobile segment increased by 17.1%, before inter-
segmental eliminations, to R24,089 million (March 31, 2007: R20,573 million),
primarily driven by customer growth and partially offset by declining Average
Monthly Revenue Per User (ARPUs) in all operations. Revenue from Vodacom`s
operations outside of South Africa increased by 30.3% to R2,697 million (March
31, 2007: R2,070 million) for the year ended March 31, 2008.
The growth in revenue can largely be attributed to a 12.7% increase in
Vodacom`s total customers to 33,994 million as of March 31, 2008, (March 31,
2007: 30,150 million), resulting from strong growth in prepaid and contract
customers in South Africa and 28.4% growth in customers outside of South
Africa. In South Africa, total Average Monthly Revenue Per User (ARPUs)
remained stable at R125. Contract ARPUs decreased by 6.0% to R486 (March 31,
2007: R517) and prepaid ARPUs decreased by 1.6% to R62 (March 31, 2007: R63)
but had a positive impact on ARPU.
Vodacom`s continued focus on implementation of upgrade and retention policies
in the year ended March 31, 2008, ensured an improvement in the South Africa
contract churn to 8.3% (March 31, 2007: 9.7%) for the year ended March 31,
2008. South Africa`s prepaid churn of 47.9% for the year ended March 31, 2008,
(March 31, 2007: 37.5%) was largely as a result of a once-off rule change that
will disconnect inactive prepaid SIM cards after 13 months of being kept in an
active state by call forwarding to voicemail and having not had any other
revenue generating activity on the Vodacom network. This rule has led to the
disconnection of an additional 2.9 million prepaid SIM cards in September
2007. The blended South African ARPU over the year ended March 31, 2008 was Rx
(March 31, 2007: Rx) supported in part by the clean-up of the subscriber base.
Data revenue increased by 49.7% and represents 10.4% of mobile revenue for the
year ended March 31, 2008 (March 31, 2007: 8.1%). The growth was largely due
to the popularity of SMS and data initiatives such as 3G, HSDPA, Blackberry",
Vodafone Live! as well as other data products. Vodacom South Africa
transmitted 4.7 billion (March 31, 2007: 4.5 billion) messages over its
network during the year ended March 31, 2008. The number of active data users
on the South African network as at March 31, 2008, was: 1.4 million MMS users
(March 31, 2007: 1.2 million); 4.7 million GPRS users (March 31, 2007: 2.8
million); 1.3 million 3G/HSDPA devices (March 31, 2007: 584 thousand); 1,421
thousand Vodafone Live! users (March 31, 2007: 899 thousand) and 31 thousand
Unique Mobile TV users (March 31, 2007: 33 thousand).
Mobile interconnect revenue increased by 13.4% to R4,443 million for the year
ended March 31, 2008 (March 31, 2007: R3,918 million), 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.
Equipment sales increased by 7.5% to R2,526 million for the year ended March
31, 2008 (March 31, 2007: R2,350 million) primarily due to the growth of the
customer base and cheaper handsets combined with added functionality of new
phones based on new technologies. South African handset sales volume increased
by 10.9% to 5,1 million units (March 31, 2007: 4.6 million units) during the
year ended March 31, 2008.
Vodacom`s international airtime revenue consists largely of 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.
MOBILE OPERATING EXPENSES
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Employee expenses 1,019 1,186 1,483 16.4 25.0
Payments to other 2,317 2,818 3,279 21.6 16.4
operators1
SG&A 7,328 8,778 10,436 19.8 18.9
Services rendered 65 82 115 26.2 40.2
Operating leases2 435 629 615 44.6 (2.2)
Depreciation, 1,472 1,692 1,970 14.9 16.4
amortisation,
impairment and write
offs
12,636 15,185 17,898 20.2 17.9
Mobile operating expenses, before inter-segmental eliminations, increased by
17.9% to R17,898 million for the year ended March 31, 2008 (March 31, 2007:
R15,185 million), primarily due to increased selling and distribution costs,
payments to other operators, employee expenses, depreciation, amortisation,
impairment and write offs and services rendered partially offsets by lower
operating leases.
Mobile employee expenses increased by 25.0% to R1,483 million for the year
ended March 31, 2008 (March 31, 2007: R1,186 million), primarily due to a 5.5%
increase in the number of employees to 6,247, to support the growth in
operations as well as annual salary increases (including related benefits) and
an increase in the provision for Vodacom`s deferred bonus schemes due to
increased profits. Vodacom increased the total number of its employees,
including agency temporary employees, by 14.3% in its other African operations
to 1,540 employees and by 2.9% in its operations in South Africa to 4,707
employees, including agency temporary-holding company and Mauritius employees
as at March 31, 2008.
Employee productivity in South Africa and other African countries, as measured
by customers per employee including agency temporary employees, increased by
6.9% to 5,442 customers per employee as at March 31, 2008.
Mobile payments to other operators increased by 16.4% to R3,279 million (March
31, 2007: R2,818 million) for the year ended March 31, 2008, primarily as a
result of increased outgoing traffic terminating on the other mobile networks
due to the increased number of South African mobile users relative to traffic
terminating on the fixed-line networks.
Mobile selling, general and administrative expenses increased by 18.9% to
R10,436 million (March 31, 2007: R8,778 million), in the year ended March 31,
2008, primarily due to an increase in selling, distribution and marketing
expenses mainly driven by new technologies and enhancing brand presence in all
operations to support the growth in South African and other African
operations.
Mobile depreciation, amortisation, impairment and write-offs increased by
16.4% to R1,970 million (March 31, 2007: R1,692 million) in the year ended
March 31, 2008, primarily as a result of increased capital expenditure on
network equipment with the roll-out of 3G/HSPDA networks.
Telkom`s 50% share of Vodacom`s profit from operations increased by 14.4% to
R6,211 million for the year ended March 31, 2008 (March 31, 2007: R5,430) and
the mobile operating profit margin decreased to 25.8% (March 31, 2007: 26.4%).
Mobile EBITDA increased by 14.9% to R8,181 million (March 31, 2007: R7,122
million), with EBITDA margins decreasing to 34.0% (March 31, 2007: 34.6%).
OTHER SEGMENT
The other segment accounted for 3.4% of Group operating revenue (March 31,
2007: 1.9%) (before inter-segmental eliminations) and 1.1% of Group operating
profits (March 31, 2007: 3.1%).
SUMMARY
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Operating revenue 952 979 1,939 2.8 98.1
Operating profit 398 444 164 11.6 (63.1)
EBITDA 438 484 307 10.5 (36.6)
Capital Expenditure 35 44 1,646 25.7 -
Operating profit
margin (%) 41.8 45.4 8.5 8.6 (81.3)
EBITDA margin (%) 46.0 49.4 15.8 7.4 (68.0)
Capex to revenue -
(%) 3.7 4.5 84.9 21.6
OTHER OPERATING REVENUE
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Other 952 979 1,939 2.8 98.1
Other operating revenue before inter segmental eliminations increased by 98.1%
for the year ended March 31, 2008 to R1,939 million (March 31, 2007: R979
million) primarily driven by the inclusion in the current period of revenue
generated by our newly acquired subsidiaries, Multi-links and Africa Online.
OTHER OPERATING EXPENSES
Year ended March 31, % variance
In ZAR millions 2006 2007 2008 06/07 07/08
Employee expenses 156 173 340 10.9 96.5
Payments to other 9 10 698 11.1 6,880.0
operators
SG&A 326 336 544 3.1 61.9
Services rendered 5 5 45 - 800.0
Operating leases 28 25 72 (10.7) 188.0
Depreciation,
amortisation,
impairment and 40 40 143 - 257.5
write offs
564 589 1,842 4.4 212.7
Other operating expenses, before inter-segmental eliminations, increased by
212.7% to R1,842 million (March 31, 2007: R589 million) for the year ended
March 31, 2008 primarily due to the inclusion of operating expenses relating
to our newly acquired subsidiaries, Multi-Links and Africa Online and the
creation of Telkom Media resulting in significant increases across all
expenditure categories. Multi-links was the main contributor to the increases
in payments to other operators and Multi-Links and TDS Operations were the
main contributors to selling, general and administrative expenditure.
8 Employees
FIXED-LINE
Year ended March 31, % variance
2006 2007 2008 06/07 07/08
Fixed-line
employees 25,575 25,864 24,879 1.1 (3.8)
Lines per employee 184 180 182 (2.2) 1.1
MOVEMENT IN FIXED-LINE EMPLOYEES
Telkom Company only, excluding subsidiaries
Year ended March 31,
2006 2007 2008
Opening balance 28,972 25,575 25,864
Appointments 686 1,486 891
Employee losses (4,083) (1,197) (1,876)
Workforce (2,990) (20) (4)
reductions
Voluntary early (674) (7) (2)
retirement
Voluntary (2,295) (13) (2)
severance
Involuntary (21) - -
reductions
Natural attrition (1,093) (1,177) (1,872)
Closing balance 25,575 25,864 24,879
MOBILE EMPLOYEES
Year ended March 31, % variance
2006 2007 2008 06/07 07/08
South Africa1, 2 4,305 4,727 4,849 9.8 2.6
Customers per 4,451 4,867 5,119 9.3 5.2
employee1, 2
Other African 1,154 1,522 1,992 31.9 30.9
countries2
Customers per 3,776 4,695 4,605 24.3 (1.9)
employee2
Vodacom Group1, 2 5,459 6,249 6,841 14.5 9.5
Customers per 4,308 4,825 4,969 12.0 3.0
employee1, 2
1 Includes Holding Company and Mauritius employees
2 Includes Agency temporary employees
OTHER
Year ended March 31, % variance
2006 2007 2008 06/07 07/08
Multi-Links 3 680
Africa Online 317 379 19.6
Telkom Media 142
Swiftnet 67 76 85 13.4 11.8
TDS Directory 514 549 610 6.8 11.1
Services
9 Condensed consolidated annual financial statements
Separately presented
REPORT ON REVIEW OF CONDENSED CONSOLIDATED PROVISIONAL ANNUAL FINANCIAL
STATEMENTS TO THE SHAREHOLDERS OF TELKOM SA LIMITED
Introduction
We have reviewed the accompanying condensed consolidated provisional balance
sheet of Telkom SA Limited as at 31 March 2008 and the related condensed
consolidated provisional statements of income, changes in equity and cash
flows for the year then ended, and a summary of significant accounting
policies and other explanatory notes.
Management is responsible for the preparation and fair presentation of these
condensed consolidated provisional annual financial statements in accordance
with International Financial Reporting Standard IAS 34 Interim Financial
Reporting ("IAS 34"). Our responsibility is to express a conclusion on these
condensed consolidated provisional annual financial statements based on our
review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements 2410, "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity". A review of interim financial information
consists of making inquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying condensed consolidated provisional annual
financial information does not present fairly, in all material respects, the
financial position of the entity as at 31 March 2008, and of its financial
performance and its cash flows for the year then ended in accordance with IAS
34.
Registered Auditor
6 June 2008
Pretoria
Condensed consolidated provisional income statement
for the three years ended March 31, 2008
2006 2007 2008
Notes Rm Rm Rm
Total revenue 3.1 48,260 52,157 56,865
Operating revenue 3.2 47,625 51,619 56,285
Other income 4 480 384 534
Operating expenses 33,428 37,533 42,337
Employee expenses 5.1 7,489 8,454 9,220
Payments to other operators 5.2 6,826 7,590 9,169
Selling, general and 5.3 10,273 12,902 14,409
administrative expenses
Service fees 5.4 2,114 2,291 2,571
Operating leases 5.5 850 981 838
Depreciation, amortisation, 5.6 5,876 5,315 6,130
impairment and write-offs
Operating profit 14,677 14,470 14,482
Investment income 397 235 197
Finance charges and fair 1,223 1,125 1,803
value movements
Interest 1,346 1,327 1,885
Foreign exchange and fair (123) (202) (82)
value movement
Profit before taxation 13,851 13,580 12,876
Taxation 6 4,523 4,731 4,704
Profit for the year 9,328 8,849 8,172
Attributable to:
Equity holders of Telkom 9,189 8,646 7,975
Minority interest 139 203 197
9,328 8,849 8,172
Basic earnings per share
(cents) 8 1,746.1 1,681.0 1,565.0
Diluted earnings per share
(cents) 8 1,736.6 1,676.3 1,546.9
Dividend per share (cents) 8 900.0 900.0 1,100.0
Condensed consolidated provisional balance sheet
at March 31, 2008
2006 2007 2008
Notes Rm Rm Rm
Assets
Non-current assets 44,813 48,770 57,763
Property, plant and 10 37,274 41,254 46,815
equipment
Intangible assets 11 3,910 5,111 8,468
Investments 2,894 1,384 1,448
Deferred expenses 254 270 221
Finance lease receivables - 158 206
Deferred taxation 12 481 593 605
Current assets 12,731 10,376 12,609
Short-term investments 69 77 51
Inventories 13 814 1,093 1,287
Income tax receivable 6 - 520 9
Current portion of deferred 226 287 362
expenses
Current portion of finance - 88 166
lease receivables
Trade and other receivables 6,399 7,303 8,986
Other financial assets 275 259 614
Cash and cash equivalents 14 4,948 749 1,134
Total assets 57,544 59,146 70,372
Equity and liabilities
Equity attributable to 29,165 31,724 32,815
equity holders of Telkom
Share capital and premium 15 6,791 5,329 5,208
Treasury shares 16 (1,809) (1,774) (1,638)
Share-based compensation 17 151 257 643
reserve
Non-distributable reserves 1,128 1,413 1,292
Retained earnings 22,904 26,499 27,310
Minority interest 301 284 522
Total equity 29,466 32,008 33,337
Non-current liabilities 12,391 8,554 15,104
Interest-bearing debt 18 7,655 4,338 9,403
Other financial liabilities - 36 919
Provisions 2,677 1,443 1,675
Deferred revenue 991 1,021 1,128
Deferred taxation 12 1,068 1,716 1,979
Current liabilities 15,687 18,584 21,931
Trade and other payables 6,103 7,237 8,771
Shareholders for dividend 7 4 15 20
Current portion of interest- 18 3,468 6,026 6,330
bearing debt
Current portion of 1,660 2,095 2,181
provisions
Current portion of deferred 1,975 1,983 2,593
revenue
Income tax payable 6 1,549 594 323
Other financial liabilities 235 193 371
Credit facilities utilised 14 693 441 1,342
Total liabilities 28,078 27,138 37,035
Total equity and liabilities 57,544 59,146 70,372
Condensed consolidated provisional statement of changes in equity
for the three years ended March 31, 2008
Attributable to equity Attributable to
holders of Telkom equity holders of
Telkom
Share- Non-
based
Share Share Trea- compensa distribu
sury tion table
capital premium shares reserve reserves
Rm Rm Rm Rm Rm
Balance at April 1, 5,570 2,723 (1,812) 68 360
2005
Total income and 52
expense for the
year
Profit for the year
Foreign currency 52
translation reserve
(net of tax of
RNil)
Dividend declared
(refer to note 7)
Transfer to non- 716
distributable
reserves*
Shares vested and 3 (3)
re-issued (refer to
note 16 and 17)
Net increase in
Share-based
compensation
reserve
(refer to note 17) 86
Acquisition of
subsidiary
Shares bought back (121) (1,381)
and cancelled
(refer to note 15)
Balance at March 5,449 1,342 (1,809) 151 1,128
31, 2006
Total income and 46
expense for the
year
Profit for the year
Foreign currency
translation reserve
(net of tax of R4
million) 46
Dividend declared
(refer to note 7)
Transfer to non-
distributable
reserves* 239
Net increase in
Share-based
compensation
reserve
(refer to note 17) 141
Shares vested and
re-issued (refer to
note 16 and 17) 35 (35)
Acquisition of
subsidiaries and
minorities
Shares bought back
and cancelled
(refer to note 15) (120) (1,342)
Balance at March
31, 2007 5,329 - (1,774) 257 1,413
Total income and
expense for the
year 529
Profit for the year
Revaluation of
available-for-sale
investment
(net of tax of R1
million) 8
Foreign currency
translation reserve
(net of tax of R6
million) 521
Dividend declared
(refer to note 7)
Transfer to non-
distributable
reserves* 11
Net increase in
Share-based
compensation
reserve
(refer to note 17) 522
Shares vested and
re-issued (refer to
note 16 and 17) 136 (136)
Acquisition of
subsidiaries and
minorities (refer
to note 19)
Shares bought back
and cancelled
(refer to note 15) (121)
Minority put option
(refer to note 19) (661)
Balance at March
31, 2008 5,208 - (1,638) 643 1,292
Condensed consolidated provisional statement of changes in equity (continued)
for the three years ended March 31, 2008
Attributable to equity holders of
Telkom
Retained Minority Total
earnings Total interest equity
Rm Rm Rm Rm
Balance at April 1, 2005 19,232 26,141 220 26,361
Total income and expense 9,189 9,241 132 9,373
for the year
Profit for the year 9,189 9,189 139 9,328
Foreign currency 52 (7) 45
translation reserve (net of
tax of RNil)
Dividend declared (refer to
note 7) (4,801) (4,801) (78) (4,879)
Transfer to non-
distributable reserves* (716) - -
Shares vested and re-issued
(refer to note 16 and 17) - -
Net increase in Share-based
compensation reserve
(refer to note 17) 86 86
Acquisition of subsidiary - 27 27
Shares bought back and
cancelled (refer to note
15) (1,502) (1,502)
Balance at March 31, 2006 22,904 29,165 301 29,466
Total income and expense 8,646 8,692 217 8,909
for the year
Profit for the year 8,646 8,646 203 8,849
Foreign currency 46 14 60
translation reserve (net of
tax of R4 million)
Dividend declared (refer to
note 7) (4,678) (4,678) (166) (4,844)
Transfer to non- (239) - -
distributable reserves*
Net increase in Share-based
compensation reserve
(refer to note 17) 141 141
Shares vested and re-issued
(refer to note 16 and 17) - -
Acquisition of subsidiaries
and minorities - (68) (68)
Shares bought back and
cancelled (refer to note (134) (1,596) (1,596)
15)
Balance at March 31, 2007 26,499 31,724 284 32,008
Total income and expense
for the year 7,975 8,504 226 8,730
Profit for the year 7,975 7,975 197 8,172
Revaluation of available-
for-sale investment
(net of tax of R1 million) 8 8
Foreign currency
translation reserve (net of
tax of R6 million) 521 29 550
Dividend declared (refer to
note 7) (5,627) (5,627) (65) (5,692)
Transfer to non-
distributable reserves* (11) - -
Net increase in Share-based
compensation reserve
(refer to note 17) 522 522
Shares vested and re-issued
(refer to note 16 and 17) - -
Acquisition of subsidiaries
and minorities (refer to
note 19) - 77 77
Shares bought back and
cancelled (refer to note
15) (1,526) (1,647) (1,647)
Minority put option (refer
to note 19) (661) (661)
Balance at March 31, 2008 27,310 32,815 522 33,337
*The earnings from the Group`s cell captives are recognised in the income
statement and then transferred to non-distributable reserves.
Condensed consolidated provisional cash flow statement
for the three years ended March 31, 2008
2006 2007 2008
Notes Rm Rm Rm
Cash flows from operating
activities 9,506 9,356 10,603
Cash receipts from
customers 46,958 50,979 55,627
Cash paid to suppliers and
employees (27,234) (30,459) (34,371)
Cash generated from
operations 19,724 20,520 21,256
Interest received 482 422 433
Dividends received 50 3 -
Finance charges paid (1,316) (1,115) (1,077)
Taxation paid 6 (4,550) (5,690) (4,277)
Cash generated from
operations before
dividend paid 14,390 14,140 16,335
Dividend paid 7 (4,884) (4,784) (5,732)
Cash flows from investing
activities (7,286) (10,412) (14,106)
Proceeds on disposal of
property, plant and
equipment and intangible
assets 92 54 169
Proceeds on disposal of
investments 493 77 8
Additions to property,
plant and equipment
and intangible assets (7,396) (10,037) (11,657)
Acquisition of subsidiaries 19 - (445) (2,462)
and minorities
Additions to other (475) (61) (164)
investments
Cash flows from financing (258) (2,920) 2,943
activities
Loans raised 4,123 5,624 23,877
Loans repaid (7,399) (6,922) (19,315)
Shares bought back and (1,502) (1,596) (1,647)
cancelled
Finance lease capital
repaid (24) (37) (61)
Decrease in net financial
assets 4,544 11 89
Net increase/(decrease) in
cash and cash equivalents 1,962 (3,976) (560)
Net cash and cash
equivalents at beginning
of year 2,301 4,255 308
Effect of foreign exchange
rate differences (8) 29 44
Net cash and cash
equivalents at
end of year 14 4,255 308 (208)
Notes to the condensed consolidated provisional annual financial statements
for the three years ended March 31, 2008
1. Corporate Information
Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the
Republic of South Africa (`South Africa`) whose shares are publicly traded.
The main objective of Telkom, its subsidiaries and joint ventures (`the
Group`) is to supply telecommunication, broadcasting, multimedia, technology,
information and other related information technology services to the general
public, as well as mobile communication services through the Vodacom Group
(Proprietary) Limited (`Vodacom`) in South Africa and certain other African
countries. The Group`s services and products include:
* fixed-line subscription and connection services to post-paid, prepaid and
private payphone customers using PSTN lines, including ISDN lines, and
the sale of subscription based value-added voice services and customer
premises equipment rental and sales;
* fixed-line traffic services to post-paid, prepaid and payphones
customers, including local, long distance, fixed-to-mobile, international
outgoing and international voice-over-internet protocol traffic services;
* interconnection services, including terminating and transiting traffic
from South African mobile operators, as well as from international
operators and transiting traffic from mobile to international
destinations;
* fixed-line data services, including domestic and international data
transmission services, such as point-to-point leased lines, ADSL
services, packet-based services, managed data networking services and
internet access and related information technology services;
* e-commerce, including internet access service provider, application
service provider, hosting, data storage, e-mail and security services;
* mobile communications services, including voice services, data services,
value-added services and handset sales through Vodacom and;
* other services include directory services, through our TDS Directory
Operations Group, wireless data services, through our Swiftnet
(Proprietary) Limited subsidiary, internet services outside South Africa,
through our Africa Online Limited subsidiary and information,
communication and telecommunication operating services in Nigeria,
through our newly acquired Multi-Links Telecommunications (Proprietary)
Limited subsidiary.
2. Basis of preparation and accounting policies
Basis of preparation
The condensed consolidated provisional annual financial statements have been
prepared in accordance with IAS34 Interim Financial Reporting and in
compliance with the South African Companies Act, 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.
Significant accounting policies
The Group`s significant accounting polices and methods of computation are
consistent with those applied in the previous financial year except for the
following:
* adoption of amendment to IAS1;
* adoption of IFRS7, IFRIC8, IFRIC9, IFRIC10, IFRIC11 and Circular 8/2007;
and
* identification of an additional segment.
The principal effects of these changes are discussed below.
Amendment to IAS1 Presentation of Financial Statements
This amendment is effective for annual periods beginning on or after January
1, 2007. As a result of the pronouncement of IFRS7 Financial Instruments:
Disclosures, IAS1 has been amended to require the disclosure of the entity`s
objective, policies and processes for managing capital, quantitative data
about what the entity regards as capital, whether the entity has complied with
any capital requirements and if it has not complied, the consequences of such
non-compliance. The impact of this standard is to expand on certain
disclosures relating to financial instruments and requires additional
disclosures not previously disclosed. The effect of this amendment will be
included in the consolidated annual financial statements for the year ended
March 31, 2008 and has no effect on the disclosure in the condensed
consolidated provisional annual financial statements.
IFRS7 Financial Instruments: Disclosures
The standard is effective for annual periods beginning on or after January 1,
2007. IFRS7 supersedes disclosure in IAS32. All financial instruments
disclosures will now be provided in terms of IFRS7. One of the main disclosure
requirements added by IFRS7 is that an entity must group its financial
instruments into classes of similar instruments, and when disclosures are
required, make disclosures by class. IFRS7 also requires information about the
significance of financial instruments and information about the nature and
extent of risks arising from financial instruments. The impact of this
standard is to expand on certain disclosures relating to financial instruments
and requires additional disclosures not previously disclosed. The effect of
this standard will be included in the consolidated annual financial statements
for the year ended March 31, 2008.
IFRIC8 Scope of IFRS2
The interpretation is effective for annual periods beginning on or after May
1, 2006. The interpretation clarifies that IFRS2 applies to transactions in
which an entity receives goods or services as consideration for equity
instruments of the entity. This includes transactions in which the entity
cannot identify specifically some or all of the goods or services received.
The impact of this interpretation on the condensed consolidated provisional
annual financial statements is not material since the Group has not transacted
with third parties using equity as a purchase consideration for the
transaction, other than those paid to employees in share-based payment
transactions.
IFRIC9 Reassessment of Embedded Derivatives
The interpretation is effective for annual periods beginning on or after June
1, 2006. The interpretation clarifies that an entity is required to separate
an embedded derivative from the host contract and account for it as a
derivative when the entity first becomes a party to the contract. It further
clarifies that reassessment is only allowed when there is a change in the
terms of the contract which significantly modifies the cash flows that would
otherwise be required under the contract. The interpretation does not have an
impact on the condensed consolidated provisional annual financial statements.
IFRIC10 Interim Financial Reporting and Impairment
The interpretation is effective for annual periods beginning on or after
November 1, 2006. The interpretation clarifies that an entity should not
reverse an impairment loss recognised in a previous interim period in respect
of goodwill or an investment in either an equity instrument classified as
available-for-sale or financial asset carried at cost. The impact of this
interpretation on the condensed consolidated provisional annual financial
statements is not material.
IFRIC11 IFRS2 - Group and Treasury Share Transactions
The interpretation is effective for annual periods beginning on or after March
1, 2007. The interpretation clarifies that regardless of whether the entity
chooses or is required to buy equity instruments from another party to satisfy
its obligations to its employees under the share-based payment arrangement by
delivery of its own shares, the transaction should be accounted for as equity
settled. This interpretation also applies regardless of whether the employee`s
rights to the equity instruments were granted by the entity itself or by its
shareholders or was settled by the entity itself or its shareholders. Share-
based payments involving the Group`s own equity instruments in which the Group
chooses or is required to buy its own equity instruments to settle the share-
based payment obligation are currently accounted for as equity-settled share-
based payment transactions under IFRS2. The interpretation has no further
impact on the condensed consolidated provisional annual financial statements.
Circular 8/2007 Headline earnings
The circular was issued by the South African Institute of Chartered
Accountants (`SAICA`) and is applicable for financial periods ending on or
after August 31, 2007. Circular 8/2007 supersedes Circular 7/2002 and it
defines rules for calculating headline earnings per share, which is an
additional per share measure permitted by IAS33 Earnings per Share. It further
requires a disclosure of a detailed reconciliation of headline earnings to the
earnings numbers used in the calculation of basic earnings per share in
accordance with the requirements of IAS33. The Group adopted the provisions of
Circular 8/2007 in the reporting period beginning on April 1, 2007 and the
adoption has had no impact other than additional disclosure as required by the
Circular, which will be included in the consolidated annual financial
statements for the year ended March 31, 2008.
Segmental reporting
As of the beginning of the year the Group has identified a new segment called
`Other` and is now managed in three business segments, which form the primary
segment reporting basis: Fixed-line, Mobile and Other. The Other business
segment includes newly acquired Multi-Links Telecommunications (Proprietary)
Limited and Africa Online Limited, as well as recently formed Telkom Media
Group. It also includes TDS Directory Operations Group and Swiftnet
(Proprietary) Limited, which were previously included in the Fixed-line
segment.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
3. Revenue
3.1 Total revenue 48,260 52,157 56,865
Operating revenue 47,625 51,619 56,285
Other income
(excluding profit on
disposal of property,
plant and equipment
and investments, refer
to note 4) 238 303 383
Investment income 397 235 197
3.2 Operating revenue 47,625 51,619 56,285
Fixed-line 31,832 32,345 32,572
Mobile 17,021 20,573 24,089
Other 952 979 1,939
Eliminations (2,180) (2,278) (2,315)
Fixed-line 31,832 32,345 32,572
Subscriptions,
connections and other
usage 5,803 6,286 6,330
Traffic 17,563 16,740 15,950
Domestic (local and
long distance) 8,915 7,563 6,328
Fixed-to-mobile 7,647 7,646 7,557
International
(outgoing) 1,001 988 986
Subscription based
calling plans* - 543 1,079
Interconnection 1,654 1,639 1,757
Data 6,674 7,489 8,308
Sundry revenue 138 191 227
*The Group has reclassified calling plans from domestic traffic into a
separate revenue line item to disclose revenue earned from subscription based
calling plans. Amounts for the year ended March 31, 2006 were not restated as
they were considered to be immaterial.
Fixed-line revenue has been restated as a result of changes in the segment
structure.
4. Other income 480 384 534
Other income (included in
Total revenue, refer to note
3) 238 303 383
Interest received from trade
receivables 136 190 257
Sundry income 102 113 126
Profit on disposal of
property, plant and equipment
and intangible assets 79 29 147
Profit on disposal of
investment 163 52 4
Sundry income includes rental received for the
partial sub-letting of commercial properties.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
5. Operating expenses
Operating expenses comprise:
5.1 Employee expenses 7,489 8,454 9,220
Salaries and wages 5,566 6,362 7,144
Medical aid contributions 371 385 417
Retirement contributions 435 496 598
Post-retirement and pension
benefits (58) 33 5
Post-retirement medical aid 361 330 277
Telephone rebates 19 104 27
Share-based compensation expense
(refer to note 17) 127 141 522
Other benefits* 1,288 1,299 1,016
Employee expenses capitalised (620) (696) (786)
*Other benefits include skills
development, annual leave,
performance incentive and
service bonuses.
5.2 Payments to other operators 6,826 7,590 9,169
Payments to other network
operators consist of expenses in
respect of interconnection with
other network operators.
5.3 Selling, general and 10,273 12,902 14,409
administrative expenses
Selling and administrative 7,240 9,248 10,352
expenses
Maintenance 1,928 2,286 2,508
Marketing 899 1,215 1,249
Bad debts 206 153 300
5.4 Service fees 2,114 2,291 2,571
Facilities and property 1,110 1,142 1,228
management
Consultancy services 182 266 291
Security and other 772 821 982
Auditors` remuneration 50 62 70
Audit services 38 61 69
Company auditors 28 48 46
Current year 26 47 43
Prior year underprovision 2 1 3
Other auditors - current year 10 13 23
Audit related services 9 - 1
Other services 3 1 -
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
5. Operating expenses (continued)
5.5 Operating leases 850 981 838
Land and buildings 221 284 170
Transmission and data lines 42 63 187
Equipment 78 80 50
Vehicles 509 554 431
5.6 Depreciation, amortisation,
impairment and write-offs 5,876 5,315 6,130
Depreciation of property,
plant and equipment 5,154 4,483 4,855
Amortisation of intangible
assets 560 536 746
Impairment of property,
plant and equipment and
intangible assets - 12 244
Reversal of impairment of
property, plant and
equipment and intangible
assets (26) - -
Write-offs of property,
plant and equipment and
intangible assets 188 284 285
In recognition of the changed usage patterns of certain items of property,
plant and equipment and intangible assets, the Group reviewed their remaining
useful lives as at March 31. The assets affected were certain items included
in, Support equipment and Intangible assets.
Previous Revised
life life
Years Years
Property, plant and equipment
'Support equipment 8-13 5-13
Intangible assets
'Subscriber bases 3- 8 4-10
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
6. Taxation 4,523 4,731 4,704
South African normal company
taxation 3,763 3,528 3,756
Deferred taxation 173 516 219
Secondary tax on companies
(`STC`) 585 670 678
Foreign taxation 2 17 51
The net deferred taxation
expense results mainly from the
extension of useful lives which
is offset slightly by STC tax
credits.
STC is provided for at a rate
of 10% (12.5% before October 1,
2007) on the amount by which
dividends declared by Telkom
exceeds dividends received.
Taxation paid (4,550) (5,690) (4,277)
Net liability at beginning of
year (1,711) (1,549) (74)
Taxation expense (3,795) (3,545) (3,807)
Foreign currency translation
reserve - - (32)
Secondary tax on companies (585) (670) (678)
Business combination (8) - -
Net taxation liability at end
of year 1,549 74 314
7. Dividends paid (4,884) (4,784) (5,732)
Dividends payable at beginning
of year (7) (4) (15)
Declared during the year - (4,801) (4,678) (5,627)
Dividends on ordinary shares
Final dividend for 2005: 400
cents (2,134) - -
Special dividend for 2005: 500
cents (2,667) - -
Final dividend for 2006: 500
cents - (2,599) -
Special dividend for 2006: 400
cents - (2,079) -
Final dividend for 2007: 600
cents - - (3,069)
Special dividend for 2007: 500
cents - - (2,558)
Dividends paid to minority
shareholders (80) (117) (110)
Dividends payable at end of
year 4 15 20
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
8. Earnings and dividend
per share
Basic earnings per
share (cents) 1,746.1 1,681.0 1,565.0
The calculation of
earnings per share is
based on profit
attributable to
equity holders of
Telkom for the year
of R7,975 million
(2007: R8,646
million; 2006: R9,189
million) and
509,595,090 (2007:
514,341,282; 2006:
526,271,093) weighted
average number of
ordinary shares in
issue.
Diluted earnings per
share (cents) 1,736.6 1,676.3 1,546.9
The calculation of
diluted earnings per
share is based on
earnings for the year
of R7,975 million
(2007: R8,646
million; 2006: R9,189
million) and
515,541,966 diluted
weighted average
number of ordinary
shares (2007:
515,763,579; 2006:
529,152,318). 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 (cents)* 1,728.6 1,710.7 1,634.8
The calculation of
headline earnings per
share is based on
headline earnings of
R8,331 million (2007:
R8,799 million; 2006:
R9,097 million) and
509,595,090 (2007:
514,341,282; 2006:
526,271,093) weighted
average number of
ordinary shares in
issue.
Diluted headline
earnings per share
(cents)* 1,719.2 1,706.0 1,616.0
The calculation of
diluted headline
earnings per share is
based on headline
earnings of R8,331
million (2007: R8,799
million; 2006: R9,097
million) and
515,541,966 (2007:
515,763,579; 2006:
529,152,318) 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 of
weighted average
number of ordinary
shares:
Ordinary shares in
issue (refer to note
15) 557,031,819 544,944,899 532,855,528
Weighted average
number of shares
bought back (7,211,710) (7,442,253) (1,594,241)
Weighted average
number of treasury
shares (23,549,016) (23,161,364) (21,666,197)
Weighted average
number of shares
outstanding 526,271,093 514,341,282 509,595,090
*The disclosure of headline earnings is a requirement of the JSE Limited and
is not a recognised measure under IFRS. It has been calculated in accordance
with the South African Institute of Chartered Accountants` circular issued in
this regard.
The effect of the increase in the interest expense as a result of the increase
in borrowings is a reduction in the basic earnings per share of 63.4 cents and
a reduction in the headline earnings per share of 62.7 cents.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
8. Earnings and dividend
per share (continued)
Reconciliation between
earnings and headline
earnings:
Earnings as reported 9,189 8,646 7,975
Adjustments:
Profit on disposal of
investments (Available- (163) (52) (4)
for-sale)
Profit on disposal of
property, plant and
equipment and
intangible assets (79) (29) (147)
Impairment of
property, plant,
equipment and
intangible assets - 12 244
Reversal of impairment
of property, plant,
equipment and
intangible assets (26) - -
Write-offs of
property, plant and
equipment 188 284 285
Acquisition of
subsidiary (35) - -
Tax effects 23 (62) (26)
Minority interest - - 4
Headline earnings 9,097 8,799 8,331
Reconciliation of
diluted weighted
average number of
ordinary shares:
Weighted average
number of shares
outstanding 526,271,093 514,341,282 509,595,090
Expected future
vesting of shares 2,881,225 1,422,297 5,946,876
Diluted weighted
average number of
shares outstanding 529,152,318 515,763,579 515,541,966
Dividend per share
(cents) 900.0 900.0 1,100.0
The calculation of
dividend per share is
based on dividends of
R5,627 million (2007:
R4,678 million; 2006:
R4,801 million)
declared on June 8,
2007 and 511,513,237
(2007: 519,711,236;
2006: 533,465,571)
number of ordinary
shares outstanding on
the date of dividend
declaration. The
reduction in the
number of shares
represents the number
of treasury shares
held on date of
payment.
9. Net asset value per
share (cents) 5,593.5 6,223.2 6,570.3
The calculation of net asset value per share at March 31, is based on net
assets of R32,815 million (2007: R31,724 million; 2006: R29,165 million) and
499,441,985 (2007: 509,769,454; 2006: 521,408,320) number of ordinary shares
outstanding.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
10. Property, plant and equipment
Additions 6,310 8,648 10,108
Disposals (56) (290) (122)
A major portion of this capital
expenditure relates to the
expansion of existing networks and
services across the Telkom Group.
An extensive build program with
focus on Next Generation Network
technologies at Telkom has resulted
in an increase in property, plant
and equipment additions which is
expected to continue over the next
few years.
11. Intangible assets
Additions (including business
combinations) 1,324 1,841 3,720
Disposals (19) - -
Included in the additions is R1,731
million goodwill and R202 million
for other intangible assets
recognised as a result of the
acquisition of Multi-Links
Telecommunications (Proprietary)
Limited by Telkom International
(Proprietary) Limited, as well as
R475 million goodwill as a result
of the acquisition of the
minorities of Smartphone SP
(Proprietary) Limited and Smartcom
(Proprietary) Limited by the
Vodacom Group (refer to note 19).
The remaining additions and
disposals relate to the software
intangible asset class.
12. Deferred taxation (587) (1,123) (1,374)
Deferred tax assets 481 593 605
Deferred tax liabilities (1,068) (1,716) (1,979)
The major part of the deferred tax asset relates to taxation losses,
provisions and deferred income recognised in the Vodacom Group. The deferred
tax asset also includes STC credits on past dividends received that are
available to be utilised against dividends declared. It is considered
probable, given Telkom`s dividend policy, that these credits will be utilised.
The asset will be released as a tax expense when the dividends are declared.
The deferred tax liability increased mainly due to the increase in the
temporary differences between the carrying value and tax base of assets,
resulting from the change in the estimate of useful lives, as well as from the
acquisition of Multi-Links Telecommunications (Proprietary) Limited.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
13. Inventories 814 1,093 1,287
Gross inventories 916 1,275 1,535
Write-down of inventories to net
realisable value (102) (182) (248)
Inventories consist of the
following categories: 814 1,093 1,287
Installation material, maintenance
material and network equipment 487 811 895
Merchandise 327 282 392
14. Net cash and cash equivalents 4,255 308 (208)
Cash shown as current assets 4,948 749 1,134
'Cash and bank balances 1,853 649 664
'Short-term deposits 3,095 100 470
Credit facilities utilised (693) (441) (1,342)
Undrawn borrowing facilities 9,519 8,658 7,565
The undrawn borrowing facilities are unsecured, when drawn bear interest at a
rate linked to the prime interest rate, have no specific maturity date and are
subject to annual review. The facilities are in place to ensure liquidity.
Borrowing powers
To borrow money, Telkom`s directors may mortgage or encumber Telkom`s property
or any part thereof and issue debentures, whether secured or unsecured,
whether outright as a security or debt, liability or obligation of Telkom or
any third party. For this purpose the borrowing powers of Telkom are
unlimited, but are subject to the restrictive financial covenants of the TL20
loan as well as the conditions and covenants of the Bridge Loan facility.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
15. Share capital and
premium
Issued and fully 6,791 5,329 5,208
paid
520,784,182 (2007:
532,855,526;
2006: 544,944,897) 5,449 5,329 5,208
ordinary shares of
R10 each
1 (2007: 1; 2006: 1) - - -
Class A ordinary
share of R10
1 (2007: 1; 2006: 1) - - -
Class B ordinary
share of R10
Share premium 1,342 - -
The following table
illustrates the
movement within the
number of shares
issued:
Number of Number of Number of
shares shares shares
Shares in issue at 557,031,819 544,944,899 532,855,528
beginning of year
Shares bought back* (12,086,920) (12,089,371) (12,071,344)
Shares in issue at 544,944,899 532,855,528 520,784,184
end of year
The rights of class A and class B shares rank equally with the ordinary shares
in respect of rights to dividends but differ in respect of the right to
appoint directors. Full details of the voting rights of ordinary class A and
class B shares are documented in the Articles of Association of Telkom.
The directors have been given authority by the shareholders to buy back
Telkom`s own shares up to a limit of 20% of the issued share capital as at
October 26, 2007. This authority expires at the next Annual General Meeting.
Share buy-back
During the year, Telkom bought back 12,071,344 ordinary shares for a total
consideration of R1,647 million. This reduced Share capital by R121 million
and Retained earnings by R1,526 million.
During the year ended March 31, 2007, Telkom bought back 12,089,371 ordinary
shares at a total consideration of R1,596 million. This reduced the Share
capital by R120 million, Share premium by R1,342 million and Retained earnings
by R134 million.
During the year ended March 31, 2006, 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.
*4,444,138 ordinary shares bought back are in the process of being cancelled
from the issued share capital by the Registrar of Companies.
2006 2007 2008
Rm Rm Rm
16. Treasury shares (1,809) (1,774) (1,638)
At March 31, 2008, 10,493,141 (2007: 12,237,016; 2006: 12,687,521) and
10,849,058 (2007: 10,849,058; 2006: 10,849,058) ordinary shares in Telkom,
with a fair value of R1,377 million (2007: R2,031 million; 2006: R2,038
million) and R1,423 million (2007: R1,801 million; 2006: R1,743 million) are
held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited
and Acajou Investments (Proprietary) Limited, respectively.
The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue
in terms of the Telkom Conditional Share Plan (`TCSP`). In addition, the Board
of directors agreed that, subject to the JSE Listing requirements, the
treasury shares held by Acajou Investments (Proprietary) Limited be made
available to the TCSP to make up for the current shortfall in the share scheme
after the additonal grants during the current financial year (refer to note
17).
The reduction in the treasury shares is due to 1,743,875 (2007: 450,505; 2006:
29,669) shares that vested in terms of the TCSP during the current year.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
17. Share-based compensation reserve
This reserve represents the cumulative fair value of the equity-settled share-
based payment transactions recognised in employee expenses during the vesting
period of the equity instruments granted to employees in terms of the Telkom
Conditional Share Plan.
The Telkom Board approved the fourth enhanced allocation of shares to
employees on September 4, 2007, with a grant date of September 27, 2007, the
day that the employees and Telkom shared a common understanding of the terms
and conditions of this grant. A total of 6,089,810 shares were granted. No
consideration is payable on the shares issued to employees, but performance
criteria will need to be met in order for the granted shares to vest. The
ultimate number of shares that will vest may differ based on certain
individual and Telkom performance conditions being met. The related
compensation expense is recognised over the vesting period of shares granted,
commencing on the grant date.
The Board also approved an enhanced allocation for the November 2006 grant on
September 4, 2007, with a grant date of September 27, 2007. The number of
additional shares granted with respect to the 2006 allocation is 4,966,860.
2006 2007 2008
Rm Rm Rm
The following table illustrates
the movement within the Share-
based compensation reserve:
Balance at beginning of year 68 151 257
Net increase in equity 83 106 386
'Employee cost* 120 141 522
'Accelerated vesting of shares (37) - -
'Vesting and transfer of shares - (35) (136)
Balance at end of year 151 257 643
*The increase in the employee
cost for the current financial
year is mainly as a result of
the additional share
allocations.
The principal assumptions used
in calculating the expected
number of shares that will vest
are as follows:
Employee turnover (%) 5 5 5
Meeting specified performance
criteria (%) 100 100 100
At March 31, 2008 the estimated total compensation expense to be recognised
over the vesting period was R2,151 million (2007: R580 million; 2006: R381
million), of which R522 million (2007: R141 million; 2006: R120 million) was
recognised in employee expenses.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
18. Interest-bearing debt
Long-term portion of interest- 7,655 4,338 9,403
bearing debt
Local debt 6,296 2,359 6,875
Foreign debt 127 820 1,441
Finance leases 1,232 1,159 1,087
Current portion of interest- 3,468 6,026 6,330
bearing debt
Local debt 2,642 5,772 6,001
Foreign debt 786 193 202
Finance leases 40 61 127
Movements in borrowings for the year are as follows:
Local debt
The increase in local debt is mainly attributable to the increase in
Commercial Paper Bills and Money Market Fixed Term Borrowings which were
acquired in order to finance capital expenditure.
Repayments/refinancing
Commercial Paper Bills with a nominal value of R15,773 million were redeemed
in the current financial year including the R1,350 million nominal value that
was outstanding at March 31, 2007. These redemptions were mainly financed with
cash flows from operations. Commercial Paper Bills with a nominal value of
R18,806 million were issued during the current financial year. The R6,109
million nominal value of debt as at March 31, 2008 is expected to be
repaid/refinanced from cash flows from operations and the issue of new debt
instruments upon maturity. The TK01 bond which had a nominal value of R4,680
million was redeemed at March 31, 2008.
Repayments/refinancing of current portion of interest-bearing debt
The repayment/refinancing of R6,203 million of the current portion of interest-
bearing debt will depend on the market circumstances at the time of repayment.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
Loans raised and loans repaid on the cash flow statement increased due to
raising and redemption of the Commercial Paper Bills in Telkom, as well as
newly acquired Asset Backing finance in Vodacom.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2007 2008
Rm Rm
19. Acquisitions and disposals of
subsidiaries and minorities
19.1 Acquisitions
By Telkom
Africa Online Limited (`Africa
Online`)
On February 23, 2007 Telkom
acquired a 100% shareholding of
Africa Online Limited from African
Lakes Corporation for a total cost
of R150 million, with a resulting
goodwill of R145 million.
Africa Online is an internet
service provider active in Cote
d`Ivoire, Ghana, Kenya, Namibia,
Swaziland, Tanzania, Uganda, Zambia
and Zimbabwe. Africa Online is
incorporated in Mauritius.
The process of calculating a fair
value of the identified assets,
liabilities and contingent
liabilities continued after the
preceding year end and has now been
finalised.
The fair value of the assets and
liabilities acquired were
determined as follows:
Fair value of intangible assets 43
Less: Deferred taxation raised on
intangible assets (12)
Less: Net liabilities acquired
(excluding fair value of intangible
assets)
(26)
Fair value of assets 5
Goodwill 145
Purchase price 150
The goodwill has been allocated to
the various cash-generating units
representative of the countries in
which Africa Online Limited
operates. An impairment loss of R12
million was recognised in order to
write down goodwill to the
recoverable amount.
By the Group`s 50% joint venture,
Vodacom
Smartphone SP (Proprietary) Limited
and subsidiaries (`Smartphone SP`)
On August 31, 2007, the Vodacom
Group increased its interest in the
equity of Smartphone SP from 70% to
100%. The acquisition was accounted
for using the parent entity
extension method.
Minority interest acquired 3
Goodwill 466
Purchase price (including 469
capitalised cost)
Capitalised cost payable (1)
Purchase price 468
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2007 2008
Rm Rm
19. Acquisitions and disposals of subsidiaries and
minorities (continued)
19.1 Acquisitions (continued)
Smartcom (Proprietary)
Limited (`Smartcom`)
On September 1, 2007, the
Vodacom Group increased
its interest in the equity
of Smartcom from 88% to
100%. The acquisition was
accounted for using the
parent entity extension
method.
Minority interest acquired -
(19. Acquisitions and disposals of subsidiaries and minorities
(continued)
19.1 Acquisitions (continued)
Multi-Links Telecommunications
(Proprietary) Limited (continued)
The following intangible assets were
identified and fair valued at year
end:
Customer relationships 61
Licences 36
Brand 105
202
The fair value of the assets and
liabilities acquired were determined
as follows:
Net asset value acquired (excluding 236
fair value of intangible assets)
Fair value of intangible assets 202
Less: Deferred taxation raised on (65)
intangible assets
Less: Contingencies recognised (35)
Fair value of net assets acquired 338
Less: Minority interests (84)
Goodwill 1,731
Purchase price 1,985
Revenue amounting to R845 million and
a profit of R23 million are included
in the condensed consolidated
provisional annual financial
statements.
The factors that lead to goodwill
recognised is a combination of a
premium paid and intangible assets not
separately identifiable at
acquisition.
19.2 Disposals of Subsidiaries
By the Group`s 50% joint venture,
Vodacom
Ithuba Smartcall (Proprietary) Limited
(`Ithuba Smartcall`)
On September 3, 2007, the Group
disposed of its 52% interest in Ithuba
Smartcall. The fair value of the
assets and liabilities disposed of was
less than R1 million.
Stand 13 Eastwood Road Dunkeld
(Proprietary) Limited
On September 3, 2007, the Group
disposed of its 100% interest in Stand
13 Eastwood Road Dunkeld (Proprietary)
Limited. The fair value of the assets
and liabilities disposed was as
follows:
Carrying amount of net assets disposed 4
of:
Gain on disposal 4
Selling price 8
The consideration was received on September 6, 2007.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
19. Acquisitions and disposals of subsidiaries
and minorities (continued)
19.3 Minority put options
Congolese Wireless Network s.p.r.l. put option
In terms of a shareholder agreement, the minority shareholder in Vodacom Congo
(RDC) s.p.r.l., Congolese Wireless Network s.p.r.l., has a put option which
came into effect three years after the commencement date, December 1, 2001,
and for a maximum of five years thereafter. The option price will be the fair
market value of the related shares at the date the put option is exercised.
The option was reclassified from trade and other payables to other financial
liabilities. The option liability`s value increased to R396 million (Group
share: R198 million) (March 31, 2007: R249 million (Group share: R125
million)). The liability is reflected as a short-term financial liability.
Multi-Links put option
In terms of the sale agreement signed on May 1, 2007 between Telkom and the
previous shareholders of Multi-Links, the minorities have been granted a put
option that requires Telkom to purchase all of the minorities` shares in Multi-
Links, if the minorities put their shares to Telkom. The put option is
exercisable within 90 days of the second anniversary of signing the sales
agreement. A liability of R918 million has been recognised in this regard and
is included in other non-current financial liabilities. R661 million was
initially recognised directly in equity, R257 million subsequent measurement
through finance charges and fair value movements.
2006 2007 2008
Rm Rm Rm
20. Commitments
Capital commitments
Capital commitments authorised 10,265 11,167 15,698
'Fixed-line 6,500 7,000 7,500
'Mobile 3,746 4,159 5,211
'Other 19 8 2,987
Commitments against authorised 842 1,099 3,504
capital expenditure
Fixed-line 197 506 652
Mobile 642 591 800
Other 3 2 2,052
Authorised capital expenditure 9,423 10,068 12,194
not yet contracted
Fixed-line 6,302 6,494 6,848
Mobile 3,104 3,568 4,411
Other 17 6 935
Capital commitments comprise of commitments for property, plant and equipment
and intangible assets.
Management expects these commitments to be financed from internally generated
cash and other borrowings.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
20. Commitments (continued)
2010 FIFA World Cup Commitment
The FIFA World Cup commitment is an executory contract which requires the
Group to develop the fixed-line components of the necessary telecommunications
infrastructure needed to broadcast this event to the world. This encompasses
the provisioning of the fixed-line telecommunications related products and
services and, where applicable, the services of qualified personnel necessary
for the planning, management, delivery, installation and de-installation,
operation, maintenance and satisfactory functioning of these products and
services. Furthermore as a National Supporter, Telkom owns a tier 3
sponsorship that grants Telkom a package of advertising, promotional and
marketing rights that are exercisable within the borders of South Africa. The
total value of the commitment amounted to USD35 million.
2006 2007 2008
Rm Rm Rm
21. Contingencies
Third parties 35 28 27
'Fixed-line 27 19 18
'Mobile 3 4 4
'Other 5 5 5
Third parties
These amounts represent sundry disputes with third parties that are not
individually significant and that the Group does not intend to settle.
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance
and activation system to be supplied by Telcordia. In the 2001 financial year,
the agreement with Telcordia was terminated and in that year, Telkom wrote off
R119 million of this investment. Following an assessment of the viability of
the project, the balance of the Telcordia investment was written off in the
2002 financial year. During March 2001, the dispute was taken to arbitration
where Telcordia was seeking approximately USD130 million plus interest at a
rate of 15.5% per year which was subsequently increased to USD172 million plus
interest at a rate of 15.5% per year for money outstanding and damages.
The parties have since reached an advanced stage in their preparation to
determine the quantum payable by Telkom to Telcordia. Following the ruling by
the Constitutional Court, two hearings were held at the International Dispute
Resolutions Centre (`IDRC`). The first hearing was held in London on May 21,
2007 and was a `directions hearing` in terms of which the parties consented to
a ruling by the arbitrator setting out a consolidated list of proposals and
issues to form part of the quantum hearing.
In the second hearing in London at the IDRC on June 25 and 26 2007 the
arbitrator set out a list of issues for determination at the quantum hearing.
At a subsequent hearing during July 2007 in London the arbitrator ruled that
the rate in terms of the Prescribed Rate of Interest will apply on both
damages and debt claims, permitted Telcordia to a further amount to
Telcordia`s existing claims, permitted VAT to be claimed on Telcordia`s claim,
where applicable, and set out an agreed timetable for the future conduct of
proceedings. A full hearing is expected to take place during the second
quarter of 2008 in South Africa and a further argument is expected to take
place thereafter in London.
A mediation was concluded, without success, on February 26, 2008. Since then
the focus has been on dealing with various interlocutory/procedural issues
that required resolution prior to the main substantive arbitration hearings
due to take place.
The Arbitrator has in the interim directed that the main hearings scheduled
for April 28 to May 23, 2008 and June 9 to June 20, 2008 would not take place.
An interlocutory hearing was directed by the Arbitrator to resolve the various
interlocutory/procedural issues in London from April 28, 2008 to May 2, 2008.
Only once the interlocutory issues have been finalised will dates for the main
hearings be scheduled.
A provision has been raised based on management`s best estimate of the
probable payments in this regard.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
21. Contingencies (continued)
2006 2007 2008
Rm Rm Rm
Supplier dispute liability - 527 569
included in current portion
of provisions
The provision has increased from March 31, 2007 due to finance costs and
exchange rate movements.
Competition Commission
The following are updates of cases that have been brought to the Competition
Commission. A maximum administrative penalty of up to 10%, for any of the
following cases, calculated with reference to Telkom`s annual turnover,
excluding the turnover of subsidiaries and joint ventures, for the financial
year prior to the complaint date, may be imposed if it is found that Telkom
has committed a prohibited practice as set out in the Competition Act, 1998
(as amended). The Competition Commission has to date not imposed the maximum
penalty on any offender.
The South African Value Added Network Services (`SAVA`)
SAVA filed a complaint against Telkom regarding alleged anti- competitive
practices on the part of Telkom.
Telkom filed its replying affidavit on August 1, 2007. The application review
of the matter has been set down for hearing in the second quarter of 2008. The
matter is being held over pending decision by the High Court regarding the
jurisdiction of the Competition Tribunal to hear the matter.
Omnilink
Omnilink alleged that Telkom was abusing its dominance by discriminating in
its price for Diginet services as against those charged to VANS and the price
charged to customers who apply for a Telkom IVPN solution. The Competition
Commission conducted an enquiry and subsequently referred the complaint,
together with the SAVA complaint, to the Competition Tribunal for
adjudication.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal
Orion filed a complaint against Telkom concerning offering discounts on Public
Switch Telecommunication Services to Corporate Customers.
Telkom has not yet filed its answering affidavit in the main complaint before
the Tribunal and it appears as if Orion is not actively pursuing this matter
any further.
The Internet Service Providers Association (`ISPA`)
ISPA filed complaint against Telkom regarding alleged anti- competitive
practices in relation to the cost of access to SA internet exchange.
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. Telkom has provided the
records requested and no further activity has occurred since.
M-Web and Internet Solutions (`IS`)
`IS` filed a complaint against Telkom regarding pricing including ADSL retail
products and IP connect products.
To date there has been no further movement on this matter, either in the
filing of a replying affidavit by IS/M-Web in the interim relief application
or in the investigation of the matter by the Competition Commission.
M-Web
On June 5, 2007 M-Web brought an application against Telkom for interim relief
at the Competition Tribunal in regard to the manner in which Telkom provides
wholesale ADSL internet connections. M-Web requested the Competition Tribunal
to grant an order of interim relief against Telkom to charge M-Web a wholesale
price for the provision of ADSL internet connections which is not higher than
the lowest retail price. M-Web further applied for an order that Telkom
implement the migration of end customers from Telkom PSTS (ADSL access) to M-
Web without interruption of the service. Although Telkom raised the objection
that the Competition Tribunal does not have jurisdiction to hear the matter in
its answering affidavit filed at the Competition Tribunal, Telkom has also
filed an application in the Transvaal Provincial Division of the High Court on
July 3, 2007 for an order declaring that the Competition Tribunal does not
have jurisdiction to hear the application made to it by M-Web.
The application has been set down for hearing during the second quarter of
2008. The main matter is being held over pending the outcome of the
application in the High Court. As is the case with the SAVA matter, only if
the High Court decides that the Competition Tribunal does have jurisdiction to
hear the matter, will the matter again be set down for hearing.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
21. Contingencies (continued)
Salary negotiations
The Group has a long term suspensive agreement with bargaining unit
(employees) which fixes the salary increase for a period of 3 years. The
agreement comes to an end March 31, 2009, as a result the group and the unions
are currently in negotiation over whether the current increases in CPIX index
should lead to an amendment of the agreement.
The Group`s exposure is 50% of the following items:
Retention incentives
The Vodacom Group has committed a maximum R1,317 million (2007: R652 million;
2006: R456 million) in respect of customers already beyond their normal 24
month contract period, but who have not yet upgraded into 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.
Put and call options
In terms of various shareholders` agreements, put and call options exist for
the acquisition of shares in various companies. Except as disclosed in note
19.3, none of the put and call options have any value at any of the periods
presented as the conditions set out in the agreements have not been met.
Customer registration
The telecommunications industry in the Democratic Republic of the Congo is
subject to a recently promulgated ministerial decree requiring the
registration of the entire customer base of all network operators. This decree
requires prescribed particulars of all customers to be obtained and maintained
by June 30, 2008. The sanction for non-compliance by any operator who has not
identified its customers in accordance with the requirements of this decree
within three months from March 28, 2008 could result in:
a fine equivalent to between USD5 thousand and USD10 thousand per customer;
suspension of the licence for a period not exceeding three months in the
event of repetition; and
suspension of the licence in the event of a likely disturbance of law and
order/safety.
The Group is making every effort to obtain the required information but
management believes it is unlikely that the Group will meet all the
requirements as prescribed in this decree by June 30, 2008. Management is
engaging with the relevant ministries on this matter and are presently unable
to reliably assess the potential impact on the Group in the event of non-
compliance with this decree.
Contingent asset
Litigation is being instituted for the recovery of certain fees paid by the
Vodacom Group. The information usually required by IAS 37: Provisions,
Contingent Liabilities and Contingent Assets, is not disclosed on the grounds
that it can be expected to prejudice seriously the outcome of the litigation.
The directors are of the opinion that a claim may be successful and that the
amount recovered could be significant.
Negative working capital ratio
At each of the financial years ended March 31, 2008, 2007 and 2006 Telkom had
a negative working capital ratio. A negative working capital ratio arises when
current liabilities are greater than current assets. Current liabilities are
intended to be financed from operating cash flows, new borrowings and
borrowings available under existing credit facilities.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
22. Segment information
Eliminations represent the
inter-segmental transactions
that have been eliminated
against segment results.
Business Segment
Consolidated operating revenue 47,625 51,619 56,285
Fixed-line 31,832 32,345 32,572
Elimination (737) (772) (774)
Mobile 17,021 20,573 24,089
Elimination (1,435) (1,494) (1,519)
Other 952 979 1,939
Elimination (8) (12) (22)
Consolidated other income 480 384 534
Fixed-line 465 334 497
Elimination (45) (46) (50)
Mobile 50 42 20
Elimination - - -
Other 10 54 67
Elimination - - -
Consolidated operating 33,428 37,533 42,337
expenses
Fixed-line 22,454 24,083 24,962
Elimination (1,443) (1,495) (1,538)
Mobile 12,635 15,185 17,898
Elimination (710) (755) (805)
Other 564 589 1,842
Elimination (72) (74) (22)
Consolidated operating profit 14,677 14,470 14,482
Fixed-line 9,843 8,596 8,107
Elimination 661 677 714
Mobile 4,436 5,430 6,211
Elimination (725) (739) (714)
Other 398 444 164
Elimination 64 62 -
Consolidated investment income 397 235 197
Fixed-line 2,720 3,041 3,975
Elimination (2,398) (2,850) (3,832)
Mobile 64 36 27
Other 11 8 27
Consolidated finance charges 1,223 1,125 1,803
Fixed-line 839 856 1,277
Mobile 384 269 240
Other - - 286
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
22. Segment information (continued)
Consolidated taxation 4,523 4,731 4,704
Fixed-line 2,836 2,652 2,630
Mobile 1,542 1,918 2,055
Other 145 161 19
Minority interests 139 203 197
Fixed-line - - -
Mobile 58 109 73
Other 81 94 124
Profit attributable to equity 9,189 8,646 7,975
holders of Telkom
Fixed-line 8,888 8,129 8,175
Elimination (1,737) (2,173) (3,118)
Mobile 2,516 3,170 3,870
Elimination (725) (739) (714)
Other 183 197 (238)
Elimination 64 62 -
Consolidated assets 54,306 57,426 68,259
Fixed-line 43,121 44,224 47,829
Elimination (1,598) (1,547) (1,604)
Mobile 12,263 14,026 16,743
Elimination (258) (353) (278)
Other 905 1,188 5,734
Elimination (127) (112) (165)
Investments 2,963 1,461 1,499
Fixed-line 3,093 1,621 4,917
Elimination (232) (341) (3,607)
Mobile 102 181 176
Other - - 13
Other financial assets 275 259 614
Fixed-line 256 230 445
Mobile 19 28 169
Other - 1 -
Total assets 57,544 59,146 70,372
Consolidated liabilities 15,171 15,951 19,689
Fixed-line 10,285 10,154 11,892
Elimination (351) (458) (495)
Mobile 6,466 7,416 8,871
Elimination (1,441) (1,468) (1,542)
Other 319 374 971
Elimination (107) (67) (8)
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
22. Segment information (continued)
Interest-bearing debt 11,123 10,364 15,733
Fixed-line 9,888 9,082 13,362
Mobile 1,234 1,278 1,815
Other 1 4 556
Other financial liabilities 235 229 1,290
Fixed-line 205 58 167
Mobile 30 158 204
Other - 13 919
Tax liabilities 1,549 594 323
Fixed-line 1,186 - 7
Mobile 315 556 290
Other 48 38 26
Total liabilities 28,078 27,138 37,035
Other segment information
Capital expenditure for property, 6,310 8,648 10,108
plant and equipment
Fixed-line 3,926 5,545 6,044
Mobile 2,350 3,069 2,475
Other 34 34 1,589
Capital expenditure for 1,196 1,598 1,792
intangible assets
Fixed-line 974 1,049 750
Mobile 221 539 985
Other 1 10 57
Depreciation and amortisation 5,714 5,019 5,601
Fixed-line 4,176 3,298 3,470
Mobile 1,498 1,681 1,955
Other 40 40 176
Impairment and asset write-offs 162 296 529
Fixed-line 187 284 263
Mobile (26) 12 15
Other 1 - 251
Workforce reduction expense - 88 24 3
Fixed-line
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
23. Related parties
Details of material transactions
and balances with related parties
not disclosed separately in the
condensed consolidated
provisional annual financial
statements were as follows:
With joint venture:
Vodacom Group (Proprietary)
Limited
Related party balances
Trade receivables 48 61 51
Trade payables (256) (353) (346)
Related party transactions
Revenue (710) (755) (816)
Expenses 1,435 1,494 1,525
Audit fees 3 3 3
Revenue includes interconnect
fees and lease and installation
of transmission lines
Expenses mostly represent
interconnect expenses
With shareholders:
Government
Related party balances
Trade receivables 247 271 326
Related party transactions
Revenue (2,304) (2,458) (2,623)
With entities under common
control:
Major public entities
Related party balances
Trade receivables 39 59 28
Trade payables (2) (6) (25)
The outstanding balances are
unsecured and will be settled in
cash in the ordinary course of
business
Related party transactions
Revenue (370) (435) (486)
Expenses 172 238 243
Rent received (17) (29) (21)
Rent paid 56 27 22
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
2006 2007 2008
Rm Rm Rm
23. Related parties (continued)
Key management personnel
compensation:
(Including directors` emoluments)
Related party transactions
Short-term employee benefits* 157 176 232
Post employment benefits 7 14 8
Termination benefits 12 - 28
Equity compensation benefits 6 8 42
Other long term benefits 16 27 9
*The comparatives for March 31, 2006 were restated to include directors`
emoluments of Vodacom which were previously excluded, as well as to reclassify
certain amounts to other long-term benefits.
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services
are made at arms length prices. Except as indicated above, outstanding
balances at the year-end are unsecured, interest free and settlement occurs in
cash. There have been no guarantees provided or received for related party
receivables or payables. Except as indicated above for the year ended March
31, 2008, the Group has not made any impairment of amounts owed by related
parties (2007: R Nil; 2006: R Nil ). This assessment is undertaken each
financial year through examining the financial position of the related party
and the market in which the related party operates.
24. Significant events
Swiftnet (Proprietary) Limited
Telkom is in the process of selling a 30% shareholding in its subsidiary
Swiftnet (Proprietary) Limited (`Swiftnet`) in order to comply with existing
licence requirements from the Independent Communications Authority of South
Africa (`ICASA`). The 30% shareholding has in principle been sold to
empowerment investors, the Radio Surveillance Consortium (`RSC`), for R55
million. The transaction however is still subject to an ICASA approval
process.
Telkom Media (Proprietary) Limited
On August 31, 2006 Telkom created of a new subsidiary, Telkom Media
(Proprietary) Limited, with a Black Economic Empowerment (`BEE`) shareholding.
ICASA awarded Telkom Media a commercial satellite and cable subscription
broadcast licence on September 12, 2007.
Telkom has decided to significantly reduce its investment in Telkom Media
(Proprietary) Limited in the future and will be investigating all
opportunities to do this in the best interest of Telkom shareholders and all
other stakeholders.
Mobile Strategy
Telkom is supportive of the BBBEE (Broad-Based Black Economic Empowerment)
transaction proposed by Vodacom but is not in a position to comment on the
impact of the proposed transaction on Telkom as the details relating to the
transaction have not been finalised.
Notes to the condensed consolidated provisional annual financial statements
(continued)
for the three years ended March 31, 2008
25. Subsequent events
Dividends
The Telkom Board declared an annual dividend of R3,437 million or 660 cents
per share on June 6, 2008 payable on July 7, 2008 for shareholders registered
on July 4, 2008 which will fully utilise the deferred tax asset on STC credits
and result in an additional STC charge of R161 million.
Mobile strategy and unlocking shareholder value
Telkom shareholders are informed that on Friday, May 30, 2008, Telkom received
a non-binding proposal from a wholly-owned subsidiary of Vodafone Group Plc
(`Vodafone`) to acquire a portion of Telkom`s stake in Vodacom Group
(Proprietary) Limited (`Vodacom`) subject to, inter alia, the Company
unbundling its remaining stake in Vodacom to Telkom shareholders.
Separately, on Friday, May 30, 2008, Telkom received a letter from a
consortium comprising Mvelaphanda Holdings (Proprietary) Limited, affiliated
funds of Och-Ziff Capital Management Group and other strategic funders (`the
Consortium`), which states that the Consortium is considering making an offer
for the entire issued share capital of Telkom. The letter makes it clear that
the offer will only be made if a number of pre-conditions are met including,
inter alia, confirmation by the Telkom Board that it will unbundle Telkom`s
entire 50% stake in Vodacom as part of the offer.
The discussions with Vodafone commenced on Wednesday, May 14, 2008 and are
independent from the approach from the Consortium.
The Board of Telkom, in accordance with its fiduciary duties, will evaluate
all bona fide offers with a view to maximising shareholder value. No
transaction will be entered into without requisite shareholder approvals.
Telkom will advise shareholders of further developments in this regard in due
course.
Other matters
The directors are not aware of any other matter or circumstance since the
financial year ended March 31, 2008 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 below:
Year ended March 31,
2006 2007 2008
EBITDA
Earnings before interest, taxation,
depreciation and amortisation
(EBITDA) can be reconciled as
follows:
EBITDA 20,553 19,785 20,612
Depreciation, amortisation, (5,876) (5,315) (6,130)
impairment and write-offs
Investment income 397 235 197
Finance charges (1,223) (1,125) (1,803)
Taxation (4,523) (4,731) (4,704)
Minority interests (139) (203) (197)
Net profit 9,189 8,646 7,975
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:
Earnings as reported 9,189 8,646 7,975
Profit on disposal of investment (163) (52) (4)
Profit on disposal of property, plant (79) (29) (147)
and equipment and intangible assets
Impairment/(reversal of impairment) (26) 12 244
of property, plant and equipment and
intangible assets
Write-offs of property, plant and 188 284 285
equipment
Acquisition of subsidiary (35) - -
Tax and minority interest effects 23 (62) (22)
Headline earnings 9,097 8,799 8,331
We believe that EBITDA provides meaningful additional information to investors
since it is widely acceptable by analysts and investors as a basis for
comparing a company`s underlying operating profitability with that of other
companies as it is not influenced by past capital expenditures or business
acquisitions, a company`s capital structure or the relevant tax regime.
EBITDA is not a US GAAP or IFRS measure. You should not construe EBITDA as an
alternative to operating profit or cash flows from operating activities
determined in accordance with US GAAP or IFRS or as a measure of liquidity.
US DOLLAR CONVENIENCE
March 31,
2008
Operating revenue 6,915
Operating profits 1,779
Net profit 980
EBITDA 2,532
EPS (cents) 192.3
Net debt 2,041
Total assets 8,645
Cash flow from operating activities 1,303
Cash flow used in investing (1,733)
activities
Cash flow used in financing 362
activities
Exchange rate
Period end 1
US$1 = ZAR 8.14
1. Noon buying rate.
Date: 09/06/2008 07:29:02 Supplied by www.sharenet.co.za
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