To view the PDF file, sign up for a MySharenet subscription.

TKG - Telkom SA Limited - Telkom SA Limited Group Annual Results for the year

Release Date: 13/06/2011 07:05
Code(s): TKG
Wrap Text

TKG - Telkom SA Limited - Telkom SA Limited Group Annual Results for the year ended 31 March 2011 Telkom SA Limited (Registration number 1991/005476/06) JSE share code: TKG ISIN: ZAE000044897 Telkom SA Limited Group Annual Results for the year ended 31 March 2011 Connecting human potential every second of the day Telkom is one of Africa`s largest integrated communications companies, providing integrated communications solutions to both enterprise and consumer customers. The information contained in this document is also available on Telkom`s investor relations website www.telkom.co.za/ir. Telkom SA Limited is listed on the JSE Limited. Information may be accessed on Reuters under the symbol TKGJ.J and on Bloomberg under the symbol TKG.SJ. Information contained on Reuters and Bloomberg is provided by a third party and is not incorporated by reference herein. Telkom has not approved or verified such information and does not accept any liability for the accuracy of such information. Special note regarding forward looking statements Many 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, constitute or are based on forward looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our mobile and other strategies, future financial position and plans, objectives, capital expenditures, projected costs and anticipated cost savings and financing plans, as well as projected levels of growth in the communications market, are forward looking statements. Forward looking statements can generally be identified by the use of terminology such as "may", "will", "should", "expect", "envisage", "intend", "plan", "project", "estimate", "anticipate", "believe", "hope", "can", "is designed to" or similar phrases, although the absence of such words does not necessarily mean that a statement is not forward looking. These forward looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward looking statements. Among the factors that could cause our actual results or outcomes to differ materially from our expectations including but not limited to those risks identified in Telkom`s most recent annual report which are available on Telkom`s website at www.telkom.co.za/ir. We caution you not to place undue reliance on these forward looking statements. All written and 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 of this document, either to conform them to actual results or to changes in our expectations. Group salient features for the year ended 31 March 2011 - Normalised operating revenue down 5.2% to R33.4 billion. - Voice revenue decreased 16.8% to R13.7 billion. - Data revenue increased 7.7% to R10.7 billion. - ADSL subscribers increased 16.1% to 751,625. - Calling plan subscribers increased 9.5% to 783,193. - Managed data network sites increased 2.8% to 34,163. - Normalised operating expenses decreased 1.5% to R29.7 billion. - Normalised free cash flow decreased 36.8% to R3.5 billion. - Normalised EBITDA margin decreased to 27.4% from 29.3%. - Normalised headline earnings per share from continuing operations decreased by 35.2% to 444.9 cents. - Normalised basic earnings per share decreased 29.9% to 448.1 cents per share. Normalised Group operating revenue from continuing operations decreased 5.2% to R33.4 billion, while EBITDA decreased 11.4% to R9.2 billion. The normalised Group EBITDA margin decreased to 27.4% as at 31 March 2011, compared to 29.3% at 31 March 2010, mainly due to mobile start-up costs and voluntary severance package expenses incurred. Normalised headline earnings from continuing operations decreased 35.2% to 444.9 cents per share mainly as a result of the effect of the reduction in mobile termination rates, mobile business start-up costs and the voluntary severance package expenses incurred. Normalised basic earnings per share decreased 29.9% from 639.5 cents per share to 448.1 cents per share at 31 March 2011. 1. OVERVIEW Johannesburg, South Africa - 13 June 2011, Telkom SA Limited (JSE: TKG) today announced Group annual results for the year ended 31 March 2011. Segment structure The Group`s reporting segments are business units that are separately managed. The Group consist of three reportable segments. The Telkom South Africa segment provides fixed-line access and data communications services through Telkom South Africa. The Mobile segment provides mobile voice services, data services and handsets sales through 8ta. These services were launched on 14 October 2010. The Multi-Links continuing operations segment provides fixed-line and data communications services in Nigeria through our Multi-Links subsidiary. Following the decision to exit the CDMA business in Nigeria, this portion of the Multi-Links results are presented as discontinued operations. The "other" category is a reconciling item which is split geographically between International and South Africa. Telkom International category provides internet services outside South Africa, through the iWayAfrica subsidiary. The South African category includes Trudon Group, Swiftnet, Data Centre Operations and the Group`s corporate centre. The Data Centre Operations was shown as part of the Telkom South Africa segment in the March 2010 results as the information was still in the process of being split out. Although information is now available, the results of the Data Centre Operations were moved to the other category as it does not meet the quantitative thresholds for disclosure as a separate segment. Statement by Nombulelo Moholi, Group Chief Executive Officer: "The year under review has been tough with revenue declining 5.2% to R33.4 billion. Competition, pricing pressures and regulatory intervention have all had an impact on our revenue. The declines seen in our traditional fixed-line voice revenue are set to continue. Operating expenditure decreased 1.5% to R29.7 billion despite the 10.3% growth in employee expenditure to R9.7 billion and mobile start-up expenditure of R1.2 billion. This decrease is largely as a result of the drop in termination rates payable to the other mobile operators. The years of investment in our network has allowed our data revenue to grow 7.7% to R10.7 billion. This is a good achievement given the muted economic conditions and intensifying competition. These basic dynamics demand that we focus our efforts on those areas where we are growing and can differentiate from our competitors. The decision to exit the Multi-Links CDMA business in Nigeria is but one of the key decisions taken in the past financial year. We have conducted an extensive review of our network to ensure that any capital allocation is prefaced on customer requirements, commercial returns and the ability to differentiate. The restraint in our capital expenditure is visible in the 27.2% decline in Telkom SA`s capital expenditure to R2.8 billion. Capital expenditure going into the future will be aimed at growing our ability to service enterprise customers and other value clusters and providing far superior broadband speeds. It is about increased capacity and connectivity. We have to capitalise on Telkom`s strength - the network and relationships with business - to provide higher speeds and end to end reliability that cannot be matched by our competitors. Our focus areas continue to be as follows: - Leadership and organisation - stable, quality management, the right structures and enforcing accountability - EBITDA and cash flow focus - challenge the status quo and demand innovation; drive revenue through our exclusive differentiators; continued commitment to cost efficiency; efficient capital allocation to drive revenue growth - 8ta - provide innovative packages that allow people to talk more and take advantage of the full range of telecommunication service that only an integrated fixed and mobile operator can offer - Drive broadband - through convergence and bundling - Africa - consolidate existing subsidiaries, exit the Multi-Links business We were extremely pleased to have launched 8ta during the past financial year. It is an exciting venture for Telkom and provides an essential tool for providing customers with a differentiated service through our ability to provide the full suite of communication tools. It has not been easy. The growth of our network and distribution channels has encountered delays. It is coming together though and we look forward to turning our network on and launching services into the enterprise market during the coming year." Declaration of ordinary dividend The ordinary dividend has been calculated with reference to Telkom`s current and expected future debt and cash flow levels. The level of dividend payments going forward will continue to be based on a number of factors, including the consideration of the financial results, capital and operating expenditure requirements, the Group`s debt level, interest coverage, internal cash flows, prospects and available growth opportunities. Ordinary dividend number 16 of 145 cents per share (2010: 125 cents) in respect of the financial year ended 31 March 2011 have been declared payable on Monday, 11 July 2011 to shareholders recorded in the register of the company at close of business on Friday, 8 July 2011. Holders of ordinary shares Salient dates with regard to the ordinary dividend 2011 Last date to trade cum dividend Friday, 1 July 2011 Shares trade ex dividend Monday, 4 July 2011 Record date Friday, 8 July 2011 Payment date Monday, 11 July 2011 Share certificates may not be dematerialised or rematerialised between Monday, 4 July 2011 and Friday, 8 July 2011, both days inclusive. On Monday, 11 July 2011, dividends due to holders of certificated securities on the South African register will either be transferred electronically to shareholders` bank accounts or, in 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. 2. OPERATIONAL DATA Year ended 31 March 2010 2011 % Telkom South Africa ADSL subscribers1 647,462 751,625 16.1 Calling plan subscribers 715,221 783,193 9.5 Closer subscribers 694,348 753,951 8.6 Supreme call subscribers 20,873 29,242 40.1 WiMAX subscribers 2,979 3,199 7.4 Internet all access subscribers2 511,535 543,316 6.2 Fixed access lines (`000)3 4,273 4,152 (2.8) Postpaid - PSTN 2,625 2,552 (2.8) Postpaid - ISDN channels 784 772 (1.5) Prepaid 744 703 (5.5) Payphones 120 125 4.2 Fixed-line penetration rate (%) 8.7 8.3 (4.6) Revenue per fixed access line (ZAR) 5,345 4,863 (9.0) Total fixed-line traffic (millions of 23,082 20,545 (11.0) minutes) Local 6,963 5,563 (20.1) Long distance 3,238 2,806 (13.3) Fixed-to-mobile 3,646 3,563 (2.3) Fixed-to-fixed 47 104 121.3 International outgoing 595 468 (21.3) International VoIP 60 69 15.0 Subscription based calling plans 3,805 3,988 4.8 Interconnection 4,728 3,984 (15.7) Domestic mobile interconnection 2,319 2,053 (11.5) Domestic fixed interconnection 736 951 29.2 International interconnection 1,673 980 (41.4) Managed data network sites 33,226 34,163 2.8 Telkom Company employees 23,247 22,884 (1.6) Fixed access lines per employee4 184 182 (1.1) Telkom Mobile Total subscribers - 1,199,596 Active subscribers5 - 473,604 - Prepaid - 440,775 - Contract - 32,829 - Base stations constructed - 970 - Employees6 - 228 - ARPU5 (Rand) - 22.60 - Prepaid - 15.86 - Contract - 238.57 - Multi-Links Active fixed-line subscribers 570 2,181 282.6 Employees (including CDMA) 767 617 (19.6) Permanent 539 419 (22.3) Expatriate 60 33 (45.0) Temporary 168 165 (1.8) Other International iWayAfrica Active subscribers7 35,384 25,184 (28.8) Employees7 562 517 (8.0) Customer per employee7 63 49 (22.2) Other South African Trudon employees 528 520 (1.5) Swiftnet employees 135 107 (20.7) 1. Excludes Telkom internal lines and includes business, consumer, corporate, government and wholesale customers. 2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers. 3. Excludes Telkom internal lines. 4. Based on number of Telkom Company employees, excluding subsidiaries. 5. Based on a subscriber who has participated in a revenue generating activity within the last 90 days. 6. Included in Telkom Company employees. 7. Excluding UUNet joint venture partner`s subscribers and employees in Kenya. 3. OPERATIONAL OVERVIEW The telecommunication market dynamics remain extremely challenging, particularly for a fixed-line incumbent. Traditional voice revenue has been our mainstay allowing us to invest in extensive network and systems upgrades in order to facilitate the explosive demand for bandwidth and data services. Call termination rate reductions and aggressive pass through by competitors places Telkom at risk and demands aggressive price reduction. Current market experience confirms this. Data growth however does not offset voice revenue reduction. In addition, there is a continued migration toward VoIP architectures. Customers are also increasingly adopting Unified Communication as a service which requires IP connectivity. In order to manage these conditions Telkom remains focused on ensuring its competitiveness in terms of pricing and product and service mix. We also continue to migrate our customers towards annuity-based packages and provide innovative bundled packages to our enterprise customers. Bundling voice and data services is key to retaining our customers which is vital. However, the voice migration strategy has to be carefully paced in order not to decimate revenue. Following the launch of 8ta our focus into the future will be on offering fully converged products that marry mobile voice and data services with the quality and resilience of the fixed-line services to both the enterprise and residential markets. Voice revenue Voice revenues declined 16.8% to R13,724 million as a result of lower minutes of use and, to a lesser extent, lower tariffs. Telkom elected to pass 100% of the benefit of the drop in mobile termination rates from 125 cents per minute to 89 cents per minute to its customers. Local voice revenue declined 11.5% to R2,836 million, long distance voice revenue was down by 12.0% to R1,588 million, fixed to mobile revenue was down 19.7% to R5,181 million and international outgoing revenue declined 20.3% to R725 million. Our continued drive to convert customers to annuity revenue streams saw revenue from subscription based calling plans grow 10.3% to R1,637 million. Voice annuity revenue, which includes line rental, calling plans, customer premises equipment rental and value added services grew 3.1% to R7.9 billion. Telkom Closer subscribers grew 8.6% to 753,951 and Supreme Call subscribers grew 40.1% to 29,242. We continue to focus on improving customer churn, increasing customer loyalty and promoting the value offered by fixed-line converged services through many initiatives and new product launches such as Telkom Simple. Products of this nature have begun to slow down the rate of decline in the number of lines. We continue to offer volume based discounts, offering better value in exchange for extended contracts and migration to shared services. Interconnection revenue Interconnection revenue decreased 35.6% to R1,679 million reflecting the 34.4% decrease in mobile domestic interconnection revenue to R684 million, which includes fixed-to-mobile revenue (down 5.5% to R501 million) and international mobile outgoing revenue (down 64.3% to R183 million). The decline in fixed-to- mobile revenue has been mitigated with some traffic won back as a result of Telkom`s full pass through of the mobile terminate rate reduction on 1 March 2010. The decline in mobile interconnection revenue is as a result of continuing mobile substitution and the sharp decline in international mobile outgoing revenue is as a result of lower volumes and switching to alternate international gateway providers. Fixed domestic interconnection revenue grew 43.9% to R328 million as Neotel and VANS gained further traction. International interconnection revenue declined 50.1% to R667 million as switched hubbing revenue, which is very irregular and driven by exchange rates, decreased 71.4% to R236 million and international incoming revenue dropped 15.5% to R431 million. Telkom has been successful in winning back some revenue lost to least cost routers and has also optimised interconnection routes resulting in lower settlement rates and higher retention on international outgoing calls. Telkom is pleased to have secured asymmetric mobile termination rates. Asymmetry is positive for 8ta and may or may not be positive for Telkom`s fixed-line service depending on the level of pass through and traffic patterns. The mobile termination rate cut from 125 cents per minute to 89 cents per minute effective from March 2010 impacted Telkom`s fixed-to-mobile voice revenue by R1,199 million. Telkom elected to pass through 100% of the benefit of the reduction to its customers. Payments to other operators decreased R1,025 million resulting in a net loss for Telkom of R174 million. Telkom will continue to share some of the benefits of further mobile termination rate cuts with our customers. Broadband and data revenue Total data revenue increased 7.7%% to R10,699 million despite significant price reductions. Data connectivity services revenue increased 4.5% to R5,324 million which includes the 18.1% increase in ADSL revenue to R1,631 million. Leased line revenue increased 8.7% to R2,182 million. The growth in this line item is slowing down, which reflects the self-provisioning by mobile operators. Internet access and related services revenue increased 5.5% to R1,816 million and managed data network services revenue increased 20.2% to R1,242 million. Managed network sites grew 2.8% to 34,163. Telkom is facing competition on price for traditional data services. We continue to maximise the benefit of our capacity and ability to provide quality and security and continue to invest in our network to provide customers with differentiated, innovative IP based converged services. We are working towards providing full communication and converged solutions, including mobility and data centre services that offer significant value. We anticipate launching mobile business services in the second half of the 2011 calendar year. ADSL subscribers increased 16.1% to 751,625 when compared to the 31 March 2010 reporting period. Telkom`s share of net additions within the entire broadband market is declining as a result of the rapid growth in mobile broadband. Broadband does however remain a growth driver for Telkom. In order to capitalise on this growth it is necessary for Telkom to invest significantly in shortening the local loop, additional fibre and Metro Ethernet. Fixed-line broadband needs to differentiate itself from mobile offerings through far higher speeds and quality. Research indicates that customers are prepared to pay more for higher value services. The next few years will see Telkom begin to offer its customers in selected areas all of the above. Telkom will continue to up-sell and cross-sell higher bandwidth converged products to both consumer and enterprise segments. Operating expenses Operating expenditure decreased 1.5% to R29,671 million. This was largely as a result of the reduction in payment to other operators of 26.2% to R5,584 million. Employee expenses increased 10.3% to R9,745 million as a result of R739 million voluntary employee severance package expenses incurred and the 8.3% average annual salary increase. Selling, general and administrative expenses increased 5.2% to R5,706 million, service fees increased 7.2% to R2,891 million mainly due to electricity increases and operating leases grew 11.7% to R848 million. Telkom`s start-up mobile business, 8ta, incurred operating expenses of R1,230 million. Telkom is firmly committed to reducing its cost base. This must be done in a manner that ensures sustainable, long term benefits. We have continued optimising staff vacancies through natural attrition and have been actively managing overtime and contractors spend in order to manage costs as far as possible. We launched voluntary severance packages for management employees with 186 employees electing to take advantage of the packages. In March 2011 we launched similar packages for bargaining unit employees. 1,830 employees took advantage of these packages. The total cost of voluntary severance packages was R739 million. Other initiatives focus on increasing revenue per customer, product and channel rationalisation, contact centre consolidation, better management of capitalised cost and capital work in progress and process optimisation throughout the business. Management is aware that cost reduction, no matter how difficult, is essential. 8ta - Telkom`s mobile service Telkom is at an inflection point with growth in traditional fixed-line voice revenues declining. We believe that there is a market opportunity in South Africa as mobile voice and especially mobile data are still experiencing growth. Telkom has a competitive advantage by virtue of its existing business and customer base. A product range spanning both mobile and fixed value pools will assist Telkom to defend itself more effectively against competitors and to grow revenues. The mobile business is designed to also assist Telkom in addressing fixed-line cost challenges and to position Telkom more competitively in the market. To this end Telkom will undertake best endeavours to attain the market share required to achieve its required IRR. 8ta was launched on 14 October 2010. At 31 March 2011 we had 1,199,596 subscribers that have completed the RICA process. At 31 March 2011 8ta branding had been completed at 20 Telkom Direct Stores and six new stand-alone 8ta flagship stores have been completed. We had 51,800 airtime point of sales, 22,300 sim card point of sales and 398 contract point of sales. 970 base stations had been constructed. As previously announced, we are working through an order to build a further 2,000 base stations. 8ta`s approach is one of simplicity, quality, value and authenticity. Marketing has been aimed at creating brand awareness and affinity. Focus has now shifted on to communicating product benefits in key targeted segments within prepaid and postpaid markets. These include consumer and enterprise. We have experienced start-up challenges particularly in the case of our distribution channel and network build out. Completing complex integrated IT projects is taking longer than expected, delaying the launch of new products. It is vital that these systems are flawless in order to provide our customers with high quality of service and truly innovative products. We are overcoming these issues and ironing out operational processes. To date, products and customer service have been well received. 8ta achieved revenue of R81 million and an EBITDA loss of R1,103 million. As a result of our delayed launch and network and systems build out our guidance with regard to break-even EBITDA is pushed out to the financial year ending 31 March 2014. Cybernest Cybernest has been in operation for a year and a half and has gained considerable traction in the market. While the majority of the R1,240 million revenue achieved in the twelve months to 31 March 2011 is generated from Telkom, non-Telkom revenue has increased 92.3% to R75 million. We are focusing our efforts on large customers with customised solutions and addressing smaller customers with packaged offers. Cybernest continues to optimise its network design to provide flexible solutions to high bandwidth client requirements. We continue with capacity increases, improving the network management and connectivity and increasing automation to improve productivity. We also continue to build our sales team and build credibility with customers through our strategic partnerships with industry leaders. Our product portfolio is growing as we moved up the IT value chain and we are working closely with Telkom SA`s enterprise team to offer customers expanded products and services. We remain optimistic about the prospects for this business. Trudon Trudon`s revenue increased by 4.8% to R1,167 million while EBITDA declined 1.3% to R551 million. Operating profit decreased 2.3% to R513 million. The core printed directories business has reached maturity in South Africa. To keep pace with the changes in the marketplace, Trudon is evolving from being a publisher of traditional print products to being a local search solutions provider. Print usage by subscribers has reduced and younger users access information primarily through internet and mobile channels, rather than printed white or yellow pages. Trudon has no choice but to follow this migration and build up its capabilities and capacity to offer these products. This move will require capital investment of R145 million over the following two financial years. iWayAfrica During the year under review iWay Africa saw a decline in revenues of 11.2% to R413 million. The consumer business suffered from the effects of new and cheaper entrants into the market, specifically mobile operators and undersea cable operators. We expect to stop the declining margins and revenue trends in the next year by: - Completing the consolidation of Africa Online and MWEB Africa and rebranding it as a single operating unit named iWayAfrica. - Focusing on enterprise market and reducing consumer orientation. - Re-orienting sales staff focus and training to target enterprise market. - Completing the consolidation of distributors, technical and sales force. - Restructuring of sales staff remuneration. - Support of the SSA multinational enterprises expanding into Africa. The Group`s operating loss deteriorated significantly from the prior year to a loss of R87 million. This has primarily been driven by lower access revenues coupled with contracted bandwidth cost (specifically satellite) which could not be cancelled. To address customer churn, we are migrating some Satellite customers to our wireless platforms where available. iWayAfrica has been awarded the best VSAT operator of the year in Africa by the recent SatCom conference. We are leveraging on this reputation to strengthen our market position in the enterprise market and to support position in the enterprise market and to support the South African multinational companies that are expanding into the rest of Africa. Multi-Links On 31 March 2011, Telkom and Visafone Communications Limited ("Visafone") entered into a legally binding agreement to sell Multi-Links` CDMA business to Visafone, subject to conditions precedent. Certain conditions precedent have not been met and the transaction will not proceed. The Telkom board resolved on 10 June 2011 to stop all funding to Multi-Links Telecommunications Ltd. Regulatory The two most pressing regulatory pressures currently are spectrum fees and local loop unbundling. Telkom is committed to continually engage with ICASA for the benefit of both the industry and Telkom. Spectrum licence fees and access - ICASA introduced Administrative Incentive Pricing (AIP) of spectrum through Regulations on 27 August 2010. These Regulations set the various pricing formulae that will be used in future to determine spectrum fees payable by licensees. The main aim of the regulations is to create incentives for spectrum users to optimise the effective and efficient use of the radio frequency spectrum, by incentivising the use of higher frequencies and in non-urban areas. The objective is to ensure that spectrum fees calculated through AIP reflect the market value of the radio frequency spectrum. Currently there is uncertainty regarding the implementation of the various formulae and data tables. Telkom and other industry players have formally requested further engagements with the Authority on the regulations. The indication from the Authority is that the implementation date of these regulations will be postponed. The implementation of these regulations has been postponed by ICASA to 1 April 2012 to allow ICASA to get the necessary systems in place to implement the new pricing formulae. Telkom is awaiting a formal communication by ICASA in this regard. The new proposed fee structure is expected to substantially increase the total spectrum fees payable by Telkom. Telkom is working on various options to reduce this amount using the incentive mechanisms built into the pricing formulae; however even after such optimisations, Telkom`s spectrum fees are still expected to increase by a significant amount. Local Loop Unbundling - Local Loop Unbundling (LLU) in its original form is a regulatory mandated process that allows multiple telecommunications operators to access and provide services over the last-mile copper infrastructure (i.e. from the local exchange to the customer premises) that is traditionally owned by the incumbent operator. The risk that LLU poses to Telkom`s profitability is dependent upon the form and details of implementation that will be imposed by ICASA, neither of which are known at this point in time. In addition, Telkom is not the same company it was when LLU was first considered and the market has changed significantly, particularly access technology. Telkom is of the view that any process which ICASA may follow to introduce LLU is likely to be undertaken on a legal basis which is not clearly defined in the EC Act. The process will thus be open to interpretation and possibly result in disputes. Telkom has analysed various LLU options, and will continue to engage with key stakeholders. Strategic direction Telkom currently has neither the agility to seize market opportunities nor the ability to absorb competitive pressures ad infinitum. Therefore, a step change in the way we invest and operate this business is vital. Firstly, we have to aggressively tackle the cost conundrum. Labour support is vital in this area. Secondly we need to grow our agility in order to increase our resilience. Operational agility means designing the right business structures and processes to spot and execute quickly on revenue and cost opportunities. Both are equally important. Then we need to identify the most important elements of our business in terms of profitability and growth and equip these areas with financial resources and our best skills. This will take time and careful capital investment in our differentiators. Guidance Capital expenditure for the group is expected to range between 20% and 25% of revenue over the current financial year including the impact of our mobile investment. The targeted net debt to EBITDA is aimed at 1.4 times. In the short term we will operate at lower levels pending the cash outflows associated with the mobile related capital expenditure. 4. FINANCIAL PERFORMANCE The Telkom Group believes that normalised earnings more accurately reflect the Group`s operational performance. Unless otherwise indicated, the discussion below is based on normalised results, excluding the items below, and is based on continuing operations. The statement of comprehensive income for the year ended 31 March 2011 has been adjusted to remove the effects of the impact of the Soccer World Cup contract entered into with the Department of Communications, the amortisation of the FIFA brand intangible asset, the impairment of the net asset value of Multi-Links, fair value gain on the Vodacom shares held, STC on the special dividend declared in June 2010 and a tax credit relating to the 2010 capital gains tax liability. The statement of comprehensive income for the year ended 31 March 2010 has been adjusted to remove the effects of the sale and unbundling of our 50% share in Vodacom, the profit on sale of Telkom Media, the impairment of the goodwill and net asset value of Multi-Links, the impact of the Soccer World Cup contract entered into with the Department of Communications and the amortisation of the FIFA brand intangible asset to enable year on year comparison. The reported results for March 2010 have been restated for the effect of the CDMA business relating to Multi-Links being classified as a disposal Group held for sale. The impact of the items discussed above on Group earnings as reported is as follows: Reconciliation of normalised group statement of comprehensive income Effects of Other Continuing operations Reported Vodacom unusual In ZAR millions March 2010 transaction items Operating revenue 35,611 - (398)(6) Other income 18,995 (18,535)(1) (68)(7) Operating expenses 34,790 (951) (3,703) Employee expenses 9,785 (951)(2) - Payments to other operators 7,563 - - Selling, general and 5,780 - (357)(6) administrative expenses Service fees 2,696 - - Operating leases 759 - - Depreciation, amortisation, 8,207 - (3,346)(8) impairment and write-offs Results from operating activities 19,816 (17,584) 3,237 Investment income 503 - - Gain on distribution of asset 25,688 (25,688)(3) - Finance charges and fair value 1,068 (15) - movements Interest 1,143 - - Foreign exchange and fair value (75) (15)(4) - movement Profit before taxation 44,939 (43,257) 3,237 Taxation 4,485 (2,751)(5) (168)(9) Profit from continuing operations 40,454 (40,506) 3,405 EBITDA EBITDA margin (%) Basic earnings per share - 7,994.4 continuing operations Headline earnings per share - 260.5 continuing operations Rand/Naira exchange rate Closing rate at beginning of the year Closing rate at end of the year Year average rate (Source: Reuters) Other Continuing operations Normalised Reported unusual In ZAR millions March 2010 March 2011 items Operating revenue 35,213 33,454 (66)(6) Other income 392 541 - Operating expenses 30,136 29,924 (253) Employee expenses 8,834 9,745 - Payments to other operators 7,563 5,584 - Selling, general and 5,423 5,772 (66)(6) administrative expenses Service fees 2,696 2,891 - Operating leases 759 848 - Depreciation, amortisation, 4,861 5,084 (187)(10) impairment and write-offs Results from operating activities 5,469 4,071 187 Investment income 503 213 - Gain on distribution of asset - - - Finance charges and fair value 1,053 1,084 25 movements Interest 1,143 907 - Foreign exchange and fair value (90) 177 25(4) movement Profit before taxation 4,919 3,200 162 Taxation 1,566 985 (35)(11) Profit from continuing operations 3,353 2,215 197 EBITDA 10,330 EBITDA margin (%) 29.3 Basic earnings per share - 639.5 411.2 continuing operations Headline earnings per share - 686.7 434.2 continuing operations Rand/Naira exchange rate Closing rate at beginning of the N15.56 year Closing rate at end of the year N20.58 Year average rate (Source: N19.34 Reuters)
Continuing operations Normalised Variance In ZAR millions March 2011 % Operating revenue 33,388 (5.2) Other income 541 38.0 Operating expenses 29,671 1.5 Employee expenses 9,745 (10.3) Payments to other operators 5,584 26.2 Selling, general and 5,706 (5.2) administrative expenses Service fees 2,891 (7.2) Operating leases 848 (11.7) Depreciation, amortisation, 4,897 (0.7) impairment and write-offs Results from operating activities 4,258 (22.1) Investment income 213 (57.7) Gain on distribution of asset - - Finance charges and fair value 1,109 (5.3) movements Interest 907 20.6 Foreign exchange and fair value 202 (324.4) movement Profit before taxation 3,362 (31.7) Taxation 950 39.3 Profit from continuing operations 2,412 (28.1) EBITDA 9,155 (11.4) EBITDA margin (%) 27.4 (6.5) Basic earnings per share - 448.1 (29.9) continuing operations Headline earnings per share - 444.9 (35.2) continuing operations Rand/Naira exchange rate Closing rate at beginning of the N20.58 32.3 year Closing rate at end of the year N22.90 11.3 Year average rate (Source: N21.16 9.4 Reuters) (1) Profit on disposal of our 15% share in Vodacom. (2) Compensation expense recognised in terms of IFRS2 relating to the amendment of the Telkom Conditional Share Plan. (3) Gain on distribution of our 35% share in Vodacom. (4) Fair value (loss)/gain on the Vodacom shares held. (5) Includes R1,353 million capital gains taxation on the sale of Vodacom, R977 million secondary taxation on companies on the R19 special dividend and R421 million reversal of the deferred taxation asset raised. (6) Revenue and expenses recognised on the contract entered into with the Department of Communications. (7) Profit on sale of Telkom Media. (8) Includes R3,266 million impairment of Multi-Links goodwill and R80 million amortisation of the FIFA brand intangible asset. (9) Includes R135 million secondary taxation on companies on the R2.60 special dividend paid and R33 million reversal of the Swiftnet deferred taxation asset raised. (10) Includes R99 million impairment of Multi-Links assets, R47 million amortisation of the FIFA brand intangible asset and R41 million impairment of the iWay brand intangible asset. (11) Includes R90 million secondary taxation on companies on the R1.75 special dividend paid, R65 million taxation credit relating to the 2010 capital gains taxation liability and R10 million derecognition of the deferred taxation liability as a result of the impairment of the iWay brand. NORMALISED GROUP OPERATING REVENUE Year ended 31 March In ZAR millions 2010 2011 % Telkom South Africa 33,448 31,467 (5.9) Telkom Mobile - 81 - Multi-Links 70 151 115.7 Other International iWayAfrica 465 413 (11.2) Other South African Trudon 1,114 1,167 4.8 Swiftnet 111 127 14.4 Data Centre Operations 39 1,240 3,079.5 Corporate centre 91 83 (8.8) Eliminations (125) (1,341) 972.8 Total 35,213 33,388 (5.2) Group operating revenue decreased by 5.2% to R33,388 million (2010: R35,213 million) in the year ended 31 March 2011. The decrease is mainly due to the 100% pass through to customers of the reduction in mobile termination rates effective from 1 March 2010, lower switched hubbing activities and lower traffic volumes. Data Centre Operations includes R1,165 million of revenue from Telkom SA in terms of the transfer pricing policy effective from 1 April 2010. This revenue is eliminated on consolidation. Normalised Telkom South Africa operating revenue Year ended 31 March In ZAR millions 2010 2011 % Subscriptions and connections 6,814 6,763 (0.7) Traffic 13,893 12,045 (13.3) Local 3,205 2,836 (11.5) Long distance 1,805 1,588 (12.0) Fixed-to-mobile 6,452 5,181 (19.7) Fixed-to-fixed 37 78 110.8 International outgoing 910 725 (20.3) Subscription based calling plans 1,484 1,637 10.3 Interconnection 2,608 1,679 (35.6) Mobile 1,043 684 (34.4) Fixed 228 328 43.9 International 1,337 667 (50.1) Data 9,930 10,699 7.7 Leased lines and other 7,922 8,517 7.5 Mobile leased facilities 2,008 2,182 8.7 Other 203 281 38.4 Total 33,448 31,467 (5.9) Operating revenue from the Telkom South Africa segment decreased by 5.9% to R31,467 million (2010: R33,448 million) primarily due to lower fixed-to-mobile traffic revenue and lower international and mobile interconnection revenue, partially offset by growth in data revenue. Subscription and connections revenue decreased slightly by 0.7% to R6,763 million (2010: R6,814 million) largely as a result of a decrease in the number of postpaid and prepaid access lines. Traffic revenue decreased by 13.3% mainly due to a reduction in mobile termination rates and lower fixed-to-mobile volumes due to the increasing substitution of calls placed using mobile services rather than fixed-line services. This was partially offset by an increase in revenue from subscription based calling plans by 10.3% to R1,637 million primarily due to increased volumes as a result of a 9.5% increase in the number of subscribers to 783,193 (2010: 715,221). Interconnection revenue decreased by 35.6% to R1,679 million (2010: R2,608 million) largely as a result of a decrease of 50.1% in international interconnection revenue and a 34.4% decrease in mobile interconnection revenue. International interconnection revenue decreased primarily due to lower volumes on switched hubbing. The decrease in mobile interconnection revenue is mainly as a result of the decrease in mobile termination rates. Fixed interconnection revenue increased mainly due to increased volumes from Neotel, Sentech and VANS. Data revenue increased 7.7% to R10,699 million (2010: R9,930 million) mainly due to revenue generated by the 2010 Soccer World Cup, a growing demand for services, including ADSL, a 7.5% increase in revenue from leased line facilities to mobile operators, growth in managed data network services and an increase in internet access and related services. NORMALISED GROUP OTHER INCOME Year ended 31 March In ZAR millions 2010 2011 % Telkom South Africa 263 409 55.5 Telkom Mobile - - Multi-Links 3 1 (66.7) Other International iWay Africa 18 15 (16.7) Telkom Management Services - 8 - Telkom International 77 19 (75.3) Other South African Trudon 55 41 (25.5) Swiftnet 6 6 - Corporate centre 395 150 (62.0) Eliminations (425) (108) (74.6) Total 392 541 38.0 Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets as well as interest received from debtors and on loans to subsidiaries. The increase is mainly due to profit on the sale of a portion of our right of use in the SAT-3 undersea cable, partially offset by lower interest received from debtors due to the lowering of the interest rate charged. Interest received from subsidiaries by the corporate centre was significantly lower for the year ended 31 March 2011 due to the impairment of the Multi-Links loans as well as part of the Multi-Links loan being interest free from 30 September 2009 onwards. Interest received from subsidiaries is eliminated on consolidation. NORMALISED GROUP OPERATING EXPENSES Year ended 31 March In ZAR millions 2010 2011 % Employee expenses 8,834 9,745 (10.3) Payments to other operators 7,563 5,584 26.2 Selling, general and administrative 5,423 5,706 (5.2) expenses Service fees 2,696 2,891 (7.2) Operating leases 759 848 (11.7) Depreciation, amortisation, impairments 4,861 4,897 (0.7) and write-offs Total 30,136 29,671 1.5 Group operating expenses decreased by 1.5% to R29,671 million (2010: R30,136 million) in the year ended 31 March 2011, primarily due to a decrease in payments to other operators partially offset by the expenditure incurred by the mobile business and an increase in employee expenses. The decrease in payments to other operators is mainly due to the reduction in mobile termination rates and lower international switched hubbing volumes in Telkom South Africa. The increase in employee expenses is primarily due to voluntary employee severance package expenses incurred of R739 million. Higher selling, general and administrative expenses are mainly attributable to the start-up of the Mobile business, offset by a decrease in maintenance and material expenses and lower licence fees in Telkom South Africa and a decrease in marketing fees in Corporate Centre. Service fees increased as a result of higher consulting fees paid mainly for the start-up of the mobile business and the exit of the CDMA business in Nigeria. Operating leases increased mainly as a result of an increase in vehicle leases. Normalised operating expenditure contribution per segment Year ended 31 March In ZAR millions 2010 2011 % Telkom South Africa 25,103 24,682 1.7 Telkom Mobile 45 1,230 - Multi-Links 326 385 (18.1) Other International iWay Africa 510 515 (1.0) Telkom International 314 70 77.7 Telkom Management Services 14 36 (157.1) Other South African Trudon 644 695 (7.9) Swiftnet 111 124 (11.7) Data Centre Operations 957 1,054 (10.1) Corporate centre 2,330 2,271 2.5 Eliminations (218) (1,391) (538.1) Total 30,136 29,671 1.5 The 1.5% decrease in group operating expenses was primarily driven by a decrease in Telkom SA and Telkom International`s operating expenses partially offset by the inclusion of mobile operating expenditure in the current year. Telkom SA`s operating expenses decreased mainly as a result of the reduction in mobile termination rates partially offset by voluntary employee severance package expenses incurred. Also included in Telkom SA expenditure in the 2011 financial year is service fees paid to data centre operations in terms of the transfer pricing policy of R1,165 million that is eliminated on consolidation. Telkom international`s operating expenditure is lower mainly as a result of lower expat fees incurred for Multi-Links. Normalised Telkom South Africa operating expenditure (excluding mobile) Year ended 31 March In ZAR millions 2010 2011 % Employee expenses 7,109 7,977 (12.2) Salaries and wages 5,604 5,909 (5.4) Benefits 2,059 1,851 10.1 Voluntary employee severance packages - 650 - Employee related expenses capitalised (554) (433) 21.8 Payments to other network operators 7,443 5,193 30.2 Mobile network operators 4,847 3,704 23.6 International network operators 2,323 1,085 53.3 Fixed-line network operators 273 404 (48.0) Selling, general and administrative 3,610 3,443 4.6 expenses Materials and maintenance 2,035 1,843 9.4 Marketing 273 377 (38.1) Bad debts 357 361 (1.1) Other 945 862 8.8 Service fees 2,214 3,333 (50.5) Property management 1,278 1,336 (4.5) Security and other 936 954 (1.9) Data Centre Operations transfer - 1,043 - pricing Operating leases 623 647 (3.9) Buildings 158 164 (3.8) Equipment 55 31 43.6 Vehicles 410 452 (10.2) Depreciation, amortisation, impairments 4,104 4,089 0.4 and write-offs Depreciation 3,367 3,394 (0.8) Amortisation 480 525 (9.4) Impairments and write-offs 257 170 33.9 Total 25,103 24,682 1.7 Telkom South Africa`s operating expenses, excluding mobile expenditure, decreased by 1.7% in the year ended 31 March 2011, to R24,682 million (2010: R25,103 million), primarily due to lower payments to international operators as a result of lower volumes on switched hubbing and lower payments to mobile operators due to the reduction in mobile termination rates, partially offset by the introduction of a transfer pricing policy from 1 April 2010 for services rendered by Cybernest of R1,165 million and voluntary employee severance package expenses. Employee expenses increased by 12.2% in the year ended 31 March 2011, primarily due to voluntary employee severance package expenses incurred of R650 million incurred and higher salaries and wages as a result of average annual salary increases of 8.3% partially offset by lower headcount and Telkom Conditional Share Plan expenses included in the prior year. Payments to international network operators decreased 53.3% due to lower volumes on switched hubbing and mobile international traffic. Payments to mobile operators decreased 23.6%, largely due to the reduction in mobile termination rates with effect from 1 March 2010. The decrease in mobile termination rates contributed to a R1,199 million decrease in fixed-to-mobile revenue and R1,025 million to the decrease in payments to mobile operators. Selling, general and administrative expenses decreased by 4.6% primarily as a result of lower materials and maintenance resulting from cost saving initiatives and lower provision for licence fees due to lower gross profit generated from Electronic Communications Services and Electronic Communication Network Services, partially offset by higher marketing expenses mainly relating to the 2010 Soccer World Cup. Service fees increased by 50.5% primarily due to a R1,043 million intercompany charge by Cybernest for services performed as the transfer pricing policy was introduced on 1 April 2010. This cost is eliminated on consolidation. Vehicle leases increased as a result of inflation increases, partially offset by a 4.1% reduction in the number of vehicles from 7,928 to 7,606. Mobile operating expenses (part of Telkom South Africa operating expenses but excluded from above) Year ended 31 March In ZAR millions 2010 2011 % Employee expenses 19 140 - Payments to other network operators - 161 - Selling, general and administrative 21 769 - expenses Service fees 3 87 - Operating leases 2 27 - Depreciation, amortisation, - 46 - impairments and write-offs Total 45 1,230 - 8ta employed 228 employees at 31 March 2011. Payments to other operators consist mainly of payments to MTN in terms of the roaming agreement. Selling, general and administrative expenses relate mostly to network maintenance, cost of handsets sold and marketing expenses. Service fees relate to consultants assisting with the implementation of the business plan. Operating leases relate mostly to rental of buildings. NORMALISED EBITDA PER SEGMENT Year ended 31 March In ZAR millions 2010 2011 % Telkom South Africa 12,712 11,283 (11.2) EBITDA margin (%) 38.0 35.9 Telkom Mobile (45.0) (1,103.0) - EBITDA margin (%) - (1,361.7) Multi-Links (139) (213) (53.2) EBITDA margin (%) (198.6) (141.1) Other International (211) (116) 45.0 EBITDA margin (%) (45.4) (28.1) Other South African (1,685) (646) 61.7 EBITDA margin (%) (124.4) (24.7) Eliminations (302) (50) 83.4 Total 10,330 9,155 (11.4) INVESTMENT INCOME Investment income consists of interest received on short-term investments and bank accounts. Investment income decreased by 57.7% to R213 million (2010: R503 million), largely as a result of lower cash balances and short term deposits. NORMALISED FINANCE CHARGES AND FAIR VALUE MOVEMENTS Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements increased by 5.3% to R1,109 million (2010: R1,053 million) in the year ended 31 March 2011. The increase was mainly as a result of foreign exchange and fair value losses of R202 million (2010: R90 million gain) due to lower investment growth in assets held by the cell captive compared to 2010 and the revaluation of the Telcordia provision on settlement of this liability. This was partly offset by a 20.6% decrease in interest expense to R907 million (2010: R1,143 million) as a result of 14.2% decrease in the Group`s interest bearing debt to R8,355 million (2010: R9,737 million) and lower prevailing interest rates. NORMALISED TAXATION The consolidated taxation expense from continuing operations decreased to R950 million (2010: R1,566 million) due to lower profit levels and taxation concessions. The consolidated effective taxation rate for the year ended 31 March 2011 was 28.3% (2010: 31.8%). CONSOLIDATED STATEMENT OF FINANCIAL POSITION The Group`s financial position remains strong. Net debt, after financial assets and liabilities, from continuing operations decreased by 3.9% to R4,907 million from R4,723 million as at 31 March 2010 resulting in a net debt to EBITDA ratio of 0.5 times at 31 March 2011. On 31 March 2011, the Group had cash balances of R1,773 million (2010: R3,793 million). The proceeds retained from the Vodacom transaction contributed to the higher balances as at 31 March 2010. The decrease in cash is mainly attributable to the mobile expansion capital and operational expenditure, the settlement of the Telcordia dispute (approximately R608 million) and the repayment of private placing debt instruments with a nominal value of R1,780 million on maturity and the dividend payment of R3 per share. NORMALISED FREE CASH FLOW Year ended 31 March In ZAR millions 2010 2011 % Cash generated from operations 8,063 6,778 (15.9) Add back: Capital gains taxation on 1,353 - - Vodacom transaction Add back: STC on R19 dividend 977 - - Add back: STC on special dividend 135 90 (33.3) Add back: Payment to Telcordia - 608 - Add back: Voluntary severance package - 147 - expenditure Less: Saving from voluntary severance - (97) - packages Less: Cash flows from investing (5,021) (4,045) (19.4) activities excluding Vodacom proceeds and investment in cell captive. Normalised free cash flow 5,507 3,481 (36.8) Excluding the effects of the R608 million payment to Telcordia regarding the supplier dispute, STC on the special dividend and voluntary severance packages the Group`s free cash flow decreased 36.8% to R3,481 million from R5,507 million as at 31 March 2010. GROUP CAPITAL EXPENDITURE Group capital expenditure which includes spend on intangible assets, decreased by 11.4% to R4,763 million (2010: R5,377 million) and represents 14.3% of group revenue. Year ended 31 March In ZAR millions 2010 2011 % Telkom South Africa 3,892 2,835 (27.2) Telkom Mobile 181 1,475 714.9 Multi-Links 1,036 223 (78.5) Other International iWay Africa 49 11 (77.6) Telkom International 1 - - Other South African Trudon 42 53 26.2 Swiftnet 22 16 (27.3) Data Centre Operations 97 107 10.3 Corporate centre 57 44 (22.8) Total 5,377 4,764 (11.4) The decrease in capital expenditure was mainly driven by a decrease in the capital expenditure of Multi-Links as a result of the decision to exit the CDMA business, partially offset by an increase in mobile capital expenditure. Telkom South Africa capital expenditure Year ended 31 March In ZAR millions 2010 2011 % Baseline 2,380 1,736 (27.1) Network evolution 654 550 (15.9) Sustainment 58 101 74.1 Effectiveness and efficiency 402 155 (61.4) Support 381 265 (30.4) Regulatory and other 17 28 64.7 Total 3,892 2,835 (27.2) Telkom South Africa`s capital expenditure, which includes spending on intangible assets, decreased by 27.2% to R2,835 million (2010: R3,892 million) and represents 9.0% of Telkom South Africa`s revenue (2010: 11.6%). Baseline capital expenditure of R1,736 million (2010: R2,380 million) was largely for the deployment of technologies to support the growing data services business (including the ADSL footprint), links to the mobile cellular operators and expenditure for access line deployment in selected high growth commercial and business areas. The lower expenditure for the period can be attributed to a more measured approach to the rollout of infrastructure to meet short-term demand and revenue generating services. Expenditure on network evolution of R550 million (2010: R654 million) was mainly to continue with the submarine cable projects to address international growth expected during the next decade and to provide next generation voice infrastructure on the national switching layer to relieve identified legacy capacity requirements. The sustainment category expenditure of R101 million (2010: R58 million) was largely for the replacement of obsolete batteries and direct-current power systems. Telkom continues to focus on its operations support systems with current emphasis on provisioning and fulfilment, assurance and customer care and hardware technology upgrades on the enterprise networks. During the year ended 31 March 2011, R155 million (2010: R402 million) was spent on the implementation of several systems. The support capital expenditure of R265 million (2010: R381 million) is mainly for provision of new buildings and building extensions in support of network growth and for the development and upgrading of existing equipment buildings, including the associated AC power and air conditioning. The expenditure on regulatory requirements of R28 million (2010: R17 million) is primarily for a system to store and manage customer identification documentation and for the initial phase of the Number Portability project. Audit opinion The consolidated annual financial statements, from which these provisional condensed consolidated financial statements have been derived, have been audited by the Company`s auditors, Ernst & Young Inc. Their unqualified audit opinion is available for inspection at the Company`s registered office. Condensed consolidated provisional statement of comprehensive income for the year ended 31 March 2011 Restated* 2010 2011 Notes Rm Rm Continuing operations Total revenue 4 36,474 34,026 Operating revenue 35,611 33,454 Other income 5 18,995 541 Operating expenses 34,790 29,924 Employee expenses 6.1 9,785 9,745 Payments to other operators 6.2 7,563 5,584 Selling, general and administrative 5,780 5,772 expenses Service fees 2,696 2,891 Operating leases 759 848 Depreciation, amortisation, impairment 6.3 8,207 5,084 and write-offs Results from operating activities 19,816 4,071 Investment income 503 213 Gain on distribution of assets 5 25,688 - Finance charges and fair value 7 1,068 1,084 movements Interest 1,143 907 Foreign exchange and fair value (75) 177 (gains)/losses Profit before taxation 44,939 3,200 Taxation 8 4,485 985 Profit from continuing operations 40,454 2,215 Loss from discontinued operations 9 2,869 873 Profit for the year 37,585 1,342 Other comprehensive income Exchange differences on translating (1,676) 30 foreign operations Realised exchange differences on (193) - translating foreign operations Defined benefit plan actuarial 130 (741) gains/(losses) Defined benefit plan asset limitations (597) 584 Income tax relating to components of 10 463 44 other comprehensive income Other comprehensive income for the (1,873) (83) year, net of taxation Total comprehensive income 35,712 1,259 Profit attributable to: Owners of Telkom 37,458 1,222 Non-controlling interests 127 120 Profit for the year 37,585 1,342 Total comprehensive income attributable to: Owners of Telkom 35,585 1,139 Non-controlling interests 127 120 Total comprehensive income for the year 35,712 1,259 Total operations Basic and diluted earnings per share 11 7,425.7 239.9 (cents) Continuing operations Basic and diluted earnings per share 11 7,994.4 411.3 (cents) * The amounts have been restated for the effect of the CDMA business relating to Multi-Links Telecommunications Limited being classified as a disposal group held for sale. Condensed consolidated provisional statement of financial position at 31 March 2011 Audited 2010 2011
Notes Rm Rm Assets Non-current assets 44,518 43,943 Property, plant and equipment 37,938 37,304 Intangible assets 4,338 3,965 Investments 1,437 2,103 Deferred expenses 156 83 Finance lease receivables 250 239 Deferred taxation 58 56 Other financial assets 341 193 Current assets 12,301 10,315 Inventories 14 1,274 1,121 Income tax receivable 2 105 Current portion of deferred expenses 48 10 Current portion of finance lease 109 118 receivables Trade and other receivables 5,981 5,503 Other financial assets 1,032 1,674 Cash and cash equivalents 15 3,855 1,784 Assets of disposal group classified as 9 - 89 held for sale Total assets 56,819 54,347 Equity and liabilities Equity attributable to owners of the 29,925 29,635 parent Share capital 5,208 5,208 Treasury shares 16 (1,171) (771) Share-based compensation reserve* 2,060 - Non-distributable reserves 620 1,764 Retained earnings 23,208 24,467 Reserves of disposal groups classified 9 - (1,033) as held for sale Non-controlling interests 339 387 Total equity 30,264 30,022 Non-current liabilities 14,204 14 974 Interest-bearing debt 17 7,925 8,198 Other financial liabilities 19 69 Employee related provisions 18 4,315 4,711 Non-employee related provisions 18 40 29 Deferred revenue 1,068 1,073 Deferred taxation 837 894 Current liabilities 12,351 8,899 Trade and other payables 19 5,549 4,782 Shareholders for dividend 23 21 Current portion of interest-bearing 17 1,812 157 debt Current portion of employee related 18 1,963 1,932 provisions Current portion of non-employee related 18 593 86 provisions Current portion of deferred revenue 2,051 1,771 Income tax payable 165 16 Other financial liabilities 133 123 Credit facilities utilised 15 62 11 Liabilities of disposal group 9 - 452 classified as held for sale Total liabilities 26,555 24,325 Total equity and liabilities 56,819 54,347 * Share-based compensation reserve has been transferred to retained earnings as a result of the final vesting and closure of the Telkom Conditional Share Scheme in June 2010. Condensed consolidated provisional statement of changes in equity for the year ended 31 March 2011 2010 2011
Rm Rm Balance at 1 April 35,495 30,264 Attributable to owners of Telkom 34,642 29,925 Non-controlling interests 853 339 Total comprehensive income for the year 35,712 1,259 Profit for the year 37,585 1,342 Other comprehensive income (1,873) (83) Exchange differences on translating foreign (1,345) 30 operations Exchange differences realised (193) - Net defined benefit plan losses and asset (335) (113) limitations Dividend declared (41,737) (1,587) Increase in share-based compensation reserve 1,330 86 Disposal of non-controlling interests (536) - Balance at 31 March 30,264 30,022 Attributable to owners of Telkom 29,925 29,635 Non-controlling interests 339 387 Condensed consolidated provisional statement of cash flows for the year ended 31 March 2011 2010 2011 Note Rm Rm Cash flows from operating activities (3,317) 5,188 Cash receipts from customers 36,925 33,200 Cash paid to suppliers and employees (24,198) (25,107) Cash generated from operations 12,727 8,093 Interest received 802 498 Finance charges paid (578) (635) Taxation paid (4,888) (1,178) Cash generated from operations before 8,063 6,778 dividend paid Dividend paid (11,380) (1,590) Cash flows from investing activities 15,580 (4,545) Proceeds on disposal of property, plant 21 297 and equipment and intangible assets Proceeds on disposal of investment 20,599 - Additions to property, plant and (4,545) (4,333) equipment and intangible assets Acquisition of subsidiaries and joint (495) (9) venture Additions to other investments - (500) Cash flows from financing activities (10,098) (2,715) Loans raised 2,727 980 Loans repaid (11,315) (2,399) Acquisition of non-controlling interests (2) - Finance lease capital repaid (399) (165) Increase in net financial assets (1,109) (1,131) Net increase/(decrease) in cash and cash 2,165 (2,072) equivalents Net cash and cash equivalents at 1,780 3,793 beginning of year Effect of foreign exchange rate (152) 52 differences of cash and cash equivalents Net cash and cash equivalents at end of 15 3,793 1,773 year* * For 2011 cash flow activities on discontinued operation refer to note 9. Notes to the condensed consolidated provisional annual financial statements for the year ended 31 March 2011 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, multimedia, technology, information and other related information technology services to the general public, as well as mobile communication services in South Africa and certain other African countries. 2. Basis of preparation and significant accounting policies Basis of preparation The condensed consolidated provisional annual financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and in compliance with the Listing Requirements of the JSE Limited and the Companies Act of South Africa, 1973. These condensed consolidated provisional annual financial statements are presented in Rand, which is the Group`s functional currency. All financial information presented in Rand has been rounded to the nearest million. The condensed consolidated provisional annual financial statements are prepared on the historical cost basis with the exception of certain financial instruments that are measured at fair value and share-based payments which are measured at grant date fair value. Significant accounting policies Except as described below the accounting policies applied by the Group in the condensed consolidated provisional annual financial statements are consistent with those applied in the previous year. Adoption of amendments to standards and new interpretations IAS 24 (revised) Related Party Disclosures The Group has early adopted the revised IAS 24 in full. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for Government-related entities to disclose details of all transactions with Government and other Government-related entities, refer to note 22. The change in the definition of a related party has no material impact on the Group. The disclosures relating to the relief for Government-related entities to disclose details of all transactions with Government and Government-related entities have been applied retrospectively. Telkom discloses only those transactions that are individually or collectively significant when transacting with Government and major public entities. IFRIC 13 (amendment) Customer Loyalty Programmes The Group has early adopted the amendment to IFRIC 13. The interpretation addresses the accounting by an entity that grants award credits to its customers. The amendment clarifies that the fair value of the award credits takes into account the amount of discounts or incentives that would otherwise be offered to customers who have not earned award credits from the initial sale. These principles were already incorporated in determining the fair values of award credits subject to customer loyalty programmes on the Group accounting policies, therefore, there was no material retrospective impact on the Group financial statements. IFRIC 18 Transfers of Assets from Customers As of 1 April 2010, the Group adopted IFRIC 18. The interpretation clarifies the requirements of IFRS for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. This interpretation does not have a material impact on contracts that Telkom has with external customers. Change in accounting policy IAS 31 Interests in Joint Ventures As of 1 April 2010, the Group changed its accounting policy for interests in joint ventures from proportionate consolidation to equity accounting. The Group believes that equity accounting aligns it with the expected changes that will be introduced with IFRS 11 Joint Arrangements. The Number Portability Company which was acquired in April 2010 and the Group`s share in UUNET, through iWayAfrica Group, will be accounted for in terms of the new policy. This change in accounting policy had no retrospective impact on the Group financial statements. The impact of UUNET is not material. 2. Basis of preparation and significant accounting policies (continued) Significant accounting policies (continued) The following new standards, amendments to standards and interpretations which are mandatory for financial periods beginning on or after 1 January 2010 have been adopted and do not have a material impact on the Group: IFRS 8 (amendment) Operating Segments - Disclosure of information about segment assets IAS 1 (amendment) Presentation of Financial Statements - Current/Non-current classification of convertible instruments IAS 7 (amendment) Statement of Cash Flows - Classification of expenditures on unrecognised assets IAS 17 (amendment) Leases - Classification of leases of land and buildings IAS 32 (amendment) Financial Instruments - Classification of rights issue IAS 36 (amendment) Impairment of Assets - Unit of accounting for goodwill impairment test IAS 38 (amendment) Intangible Assets - Additional consequential amendments arising from revised IFRS 3 IAS 38 (amendment) Intangible Assets - Measuring the fair value of an item of an intangible asset acquired in a business combination IAS 39 (amendment) Financial Instruments - Scope exemption for business combination contracts IAS 39 (amendment) Financial Instruments - Cash flow hedge accounting IAS 39 (amendment) Financial Instruments - Assessment of loan prepayments penalties as embedded derivatives IAS 39 (amendment) Financial Instruments - Eligible hedged items IFRIC 9 (amendment) Reassessment of Embedded Derivatives - Scope of IFRIC 9 and revised IFRS 3 IFRIC 16 (amendment) Hedges of a Net Investment in a Foreign Operation - Amendment to the restriction on the entity that can hold hedging instruments IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments Standards and interpretations in issue not yet adopted and not yet effective The new standards, amendments to standards and interpretations in issue have not yet been adopted and are not yet effective. All standards are effective for annual periods beginning on or after the stated effective date. IFRS 3 Business Combinations - Amendments resulting from May 2010 Annual improvements to IFRSs (effective 1 July 2010) IFRS 7 Financial Instruments Disclosures - Amendments resulting from May 2010 Annual improvements to IFRSs (effective 1 January 2011) IFRS 7 Financial Instruments Disclosures - Amendments enhancing disclosures about transfers of financial assets (effective 1 July 2011) IFRS 9 Financial Instruments - Classification and Measurement (effective 1 January 2013) IFRS 10 Consolidated Financial Statements (effective 1 January 2013) IFRS 11 Joint Arrangements (effective 1 January 2013) IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013) IFRS 13 Fair Value Measurements (effective 1 January 2013) IAS 1 Presentation of Financial Statements - Amendments resulting from May 2010 Annual improvements to IFRSs (effective 1 January 2011) IAS 12 Income Taxes - Limited scope amendment (recovery of underlying assets) (effective 1 January 2012) IAS 27 Consolidated and Separate Financial Statements - Amendments resulting from May 2010 Annual Improvements to IFRSs (effective 1 July 2010) IAS 34 Interim Financial Reporting - Amendments resulting from May 2010 Annual Improvements to IFRSs (effective 1 January 2011) IFRIC 14 Prepayments of a minimum funding requirement (effective 1 January 2011) The condensed consolidated provisional annual financial statements were authorised for issue by the Board of Directors on 10 June 2011. 3. Segment information The Group`s reporting segments are business units that are separately managed. The Group consists of three reportable segments, namely Telkom South Africa, Telkom Mobile and Multi-Links. The Telkom South Africa segment provides fixed-line access, fixed-mobile and data communications services through Telkom South Africa. The Telkom Mobile segment provides mobile voice services, data services and handset sales through 8ta. The Multi-Links segment provides fixed-line, data and international communications services in Nigeria through the Multi-Links subsidiary. The Other category is a reconciling item which is split geographically between International and South Africa. The International category provides internet services outside South Africa, through the iWayAfrica Group (formerly Africa Online Limited and MWEB Africa Limited) and management services through the Telkom Management Services Company. The South African category includes Trudon Group, Swiftnet, Data Centre Operations and the Group`s Corporate Centre. The Data Centre Operations was shown as part of the Telkom South Africa segment in the March 2010 results as the financial information was still in the process of being split out. As the information is now available the results of the Data Centre Operations were moved to the Other category as it does not meet the quantitative thresholds for disclosure as a separate segment. In addition a transfer pricing policy was implemented with effect from 1 April 2010 for internal transactions between the Data Centre Operations and other business units. Included in the Data Centre Operations under the Other category is internal revenue of R1,165 million for the year ended 31 March 2011 that is eliminated on consolidation. Telkom Mobile is a new segment following the launch of 8ta on 14 October 2010. The Multi-Links comparatives have been restated to show the effect of the discontinued operations of the CDMA business. Restated 2010 2011 Rm Rm
Business segments Consolidated operating revenue 35,611 33,454 Telkom South Africa 33,846 31,533 Telkom Mobile - 81 Multi-Links 70 151 Other 1,820 3,030 International 465 413 South African 1,355 2,617 Elimination of intersegmental revenue (125) (1,341) Consolidated operating profit 5,429 4,211 Telkom South Africa 8,568 7,147 Telkom Mobile (45) (1,149) Multi-Links (253) (233) Other (2,509) (1,496) International (278) (166) South African (2,231) (1,330) Elimination of intersegmental transactions (332) (58) Reconciliation Adjusted EBIT for reportable segments 5,429 4,211 Gain on sale of investment 18,603 - Compensation expense (951) - Impairment of property, plant and equipment and (3,265) (140) intangible assets Operating profit 19,816 4,071 Investment income 503 213 Gain on distribution of asset 25,688 - Finance charges and fair value movement (1,068) (1,084) Profit before taxation and discontinued 44,939 3,200 operations 4. Total revenue 36,474 34,026 Operating revenue 35,611 33,454 Other income (excluding profit on disposal of 360 359 property, plant and equipment, intangible assets and investments, refer to note 5) Investment income 503 213 Operating revenue decreased mainly due to a reduction in interconnection revenue as a result of the mobile termination rate cut and lower volumes on switched hubbing. 5. Other income 18,995 541 Other income (included in Total revenue, refer 360 359 to note 4) Interest received from trade receivables 294 285 Sundry income 66 74 Profit on disposal of property, plant and 32 182 equipment and intangible assets Profit on disposal of subsidiary and joint 18,603 - venture The increase in the profit on disposal of assets is mainly due to a finance lease arrangement relating to indefeasible rights of use (IRU`s) in respect of the S3SW and EIG cable system. The R18,603 million profit on disposal in the 2010 financial year relates to R18,535 million for Vodacom (15% holding) and R68 million for Telkom Media. In the 2010 financial year, Telkom also unbundled the remaining 35% share in Vodacom to existing shareholders in Telkom. A gain on distribution of assets of R25,688 million was recognised in the profit for the year. Restated
2010 2011 Rm Rm 6. Operating expenses 6.1 Employee expenses 9,785 9,745 Salaries and wages 6,718 7,085 Medical aid contributions 17 19 Retirement contributions 528 581 Post-retirement pension and retirement fund (129) (160) Post-retirement medical aid 388 425 Telephone rebates 49 67 Share-based compensation expense 1,330 86 Other benefits* 394 1,166 Bonuses 1,048 911 Employee expenses capitalised (558) (435) *Other benefits Other benefits include skills development, annual leave, performance incentive and voluntary employee severance packages costs. Voluntary employee severance packages cost amounted to R739 million (2010: RNil million). The increase in salaries and wages is mainly due to an average salary increase of 8.3% and a percentile adjustment for bargaining unit as agreed upon with unions in September 2010. The share-based compensation expense has decreased by R1,244 million due to the final vesting in June 2010. 6.2 Payments to other operators 7,563 5,584 Payments to other network operators consist of expenses in respect of interconnection with other network operators. The decrease in payment to mobile operators is mainly due to mobile termination rates reduction and volume decrease that can be attributed to the growth in the mobile market. 6.3 Depreciation, amortisation, impairment and 8,207 5,084 write-offs Depreciation of property, plant and equipment 3,896 4,025 Amortisation of intangible assets 728 733 Impairment of property, plant and equipment and 3,266 140 intangible assets Write-offs of property, plant and equipment and 317 186 intangible assets
The impairment charge for the 2011 financial year relates to iWayAfrica Group brand impairment of R41 million (2010: RNil million) and to Multi-Links` fixed-line business, R99 million (2010: R3,263 million). Restated 2010 2011 Rm Rm
7. Finance charges and fair value movements 1,068 1,084 Finance charges on interest-bearing debt 1,143 907 Local debt 1,365 1,021 Foreign debt 11 3 Less: Finance charges capitalised (233) (117) Foreign exchange gains and losses and fair value (75) 177 movement Foreign exchange (gains)/losses (133) 50 Fair value adjustments on derivative 58 127 instruments Capitalisation rate for borrowing costs (%) 11.7 11.4 Fair value adjustments on derivative instruments were due to currency fluctuations and lower interest rates impacting negatively on forward exchange contracts and interest rate swap agreements, partially reduced by growth in the assets held by the Cell Captive. 8. Taxation 4,485 985 South African normal company taxation 2,772 722 Deferred taxation 780 103 Secondary Taxation on Companies (`STC`) 931 157 Foreign taxation 2 3 Included in the current year`s normal company taxation and deferred taxation expense is capital gains tax of RNil million (2010: R1,345 million) and a reversal of RNil million (2010: R454 million) relating to deferred taxation assets on the investments which were held for sale. The STC expense was provided for at a rate of 10% on the amount by which dividends declared by Telkom exceeded dividends received. Included in the 2010 financial year is the impact of the Vodacom transaction dividend.

Restated 2010 2011
Rm Rm 9. Discontinued operations and disposal groups held for sale 9.1 Discontinued operations Telkom Media (Proprietary) Limited On 4 May 2009 Telkom sold its 75% shareholding in Telkom Media to Shenzhen Media South Africa (Proprietary) Limited for a nominal amount. The results and cash flows of the subsidiary are disclosed as a discontinued operation in accordance with IFRS. Analysis of the results of discontinued operations: Revenue* 2 - Expenses* 104 - Profit before taxation of discontinued 106 - operations Taxation - - Profit after taxation of discontinued operations 106 - * Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges and reversal of onerous lease in Telkom Media in 2010. Operating results for 2010 were all non-cash items, thus there were no cash flows for the one month in 2010. 9. Discontinued operations and disposal groups held for sale (continued) 9.2 Disposal groups held for sale CDMA business of Multi-Links Telecommunications Limited On 26 November 2010 the Telkom Board announced its decision to exit the CDMA business of Multi- Links Telecommunications Limited (`Multi- Links`). On 31 March 2011, Telkom and Visafone Communications Limited (`Visafone`) entered into a legally binding agreement regarding the sale of the Multi-Links` CDMA business through a number of transaction steps. The sale is conditional on inter-alia regulatory approvals and renegotiation of the Helios contract. Upon the successful closing of the transaction, Telkom will retain Multi-Links` fibre network and fixed line operations in Nigeria. Analysis of the results of discontinued operations: Revenue* 1,832 1,033 Expenses* (4,807) (1,691) Loss before taxation of discontinued operations (2,975) (658) Taxation - - Loss after taxation of discontinued operations (2,975) (658) Pre-tax loss recognised on the re-measurement of - (215) assets of disposal group to fair value less cost to sell Taxation - - After-tax loss recognised on the re-measurement (2,975) (873) of assets of disposal group to fair value less cost to sell Loss for the year from discontinued operations (2,975) (873) * Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses, finance charges and impairment of R139 million (2010: R1,897 million). The major classes of assets and liabilities of the business classified as a disposal group: Assets 89 Property, plant and equipment 29 Inventories 13 Trade and other receivables 23 Cash and cash equivalents 14 Deferred expenses 10 Liabilities 452 Interest-bearing debt 7 Non-current portion of provisions 5 Current portion of provisions 2 Trade and other payables 367 Current portion of deferred revenue 18 Credit facilities utilised 53 Reserve of disposal group held for sale Exchange difference on translating the disposal (1,033) group (included in other comprehensive income) The net cash flows attributable to the operating, investing and financing activities of discontinued operations: Operating cash flows (607) Investing cash flows (118) Financing cash flows 693 Total cash outflow (32) 2010 2011
Rm Rm 10. Taxation effects of other comprehensive income Tax effects relating to each component of other comprehensive income Exchange differences on translating foreign (1,676) 30 operations Tax effect of exchange differences on 331 - translating foreign operations Net foreign currency translation differences for (1,345) 30 foreign operations Realised exchange differences on translating (193) - foreign operations Tax effect of realised exchange differences on - - translating foreign operations Net realised exchange differences on translating (193) - foreign operations Defined benefit plan actuarial gains/(losses) 130 (741) Tax effect of defined benefit plan actuarial (35) 207 balance Net defined benefit plan actuarial 95 (534) gains/(losses) Defined benefit plan asset limitations (597) 584 Tax effect of defined benefit plan asset 167 (163) limitations Net defined benefit plan asset limitations (430) 421 Other comprehensive income for the year before (2,336) (127) taxation Tax effect of other comprehensive income for the 463 44 year Other comprehensive income for the year net of (1,873) (83) taxation Restated 2010 2011 11. Earnings per share Total operations Basic and diluted earnings per share 7,425.7 239.9 (cents)** Headline earnings and diluted headline 67.8 332.3 earnings per share (cents)* Continuing operations Basic and diluted earnings per share 7,994.4 411.3 (cents)** Headline earnings and diluted headline 260.5 434.2 earnings per share (cents)* Discontinuing operations Basic and diluted earnings per share (568.8) (171.3) (cents)** Headline earnings and diluted headline (192.7) (101.8) earnings per share (cents)* Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue 520,783,900 520,783,900 Weighted average number of treasury shares (16,346,068) (11,472,604) Weighted average number of shares 504,437,832 509,311,296 outstanding Reconciliation of diluted weighted average number of ordinary shares Weighted average number of shares 504,437,832 509,311,296 outstanding Expected future vesting of shares - - Diluted weighted average number of shares 504,437,832 509,311,296 outstanding * 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 3/2009 issued in this regard. ** The Telkom Conditional Share Plan was concluded with a final vesting in June 2010, therefore no adjustment in the weighted average number of shares as a result of the expected future vesting of shares allocated to employees under this plan. Due to the plan being concluded, there is no further dilutive effect on basic earnings per share. Restated
2010 2011 Rm Rm Total operations Reconciliation between earnings and headline earnings: Profit from total operations 37,585 1,342 Non-controlling interests (127) (120) Earnings as reported 37,458 1,222 Profit on disposal of investments (18,603) - Profit on disposal of property, plant and (32) (182) equipment and intangible assets Impairment loss on property, plant and 5,163 494 equipment and intangible assets Write-offs of property, plant and equipment 317 186 and intangible assets Gain on distribution of assets (25,688) - Tax effects 1,727 (27) Headline earnings 342 1,693 Continuing operations Reconciliation between earnings and headline earnings: Profit from continuing operations 40,454 2,215 Non-controlling interests (127) (120) Earnings from continuing operations 40,327 2,095 attributable to equity holders of Telkom Profit on disposal of investments (18,603) - Profit on disposal of property, plant and (32) (182) equipment and intangible assets Impairment loss on property, plant and 3,266 140 equipment and intangible assets Write-offs of property, plant and equipment 317 186 and intangible assets Gain on distribution of assets (25,688) - Tax effects 1,727 (27) Headline earnings 1,314 2,212 Discontinuing operations Reconciliation between earnings and headline earnings: Loss from discontinued operations (2,869) (873) Non-controlling interests - - Earnings from discontinued operations (2,869) (873) attributable to equity holders of Telkom Impairment loss on property, plant and 1,897 354 equipment and intangible assets Headline earnings (972) (519) Dividend per share Dividend per share (cents) 375.0 300.0 The calculation of dividend per share is based on dividends of R1,532 million (2010: R1,894 million) and 510,638,013 (2010: 505,008,190) number of ordinary shares outstanding on the date of dividend declaration.
Vodacom dividend (cents) 7,750.0 - The Vodacom dividend consists of a once-off cash dividend of Nil cents (2010: 1,900.0 cents) per share totalling RNil million (2010: R9,740 million) and a 35% unbundling share valued at Nil cents (2010: 5,850.0 cents) per share with a total value of RNil million (2010: R29,990 million). 2010 2011 Rm Rm 12. Net asset value per share (cents) 5,919.9 5,803.5 The calculation of net asset value per share is based on net assets of R29,635 million (2010: R29,925 million) and 510,638,289 (2010: 505,496,644) number of ordinary shares outstanding. 13. Capital expenditure incurred Property, plant and equipment 4,964 4,333 Intangible assets 910 431 Capital expenditure was for the deployment of technologies to support the growing data services business, links to the mobile cellular operators, expenditure for access line deployment and construction of mobile base stations.
Included in intangible assets for 2010 was the acquisition of MWEB Africa Group for R497 million. 14. Inventories 1,274 1,121 Gross inventories 1,861 1,392 Write-down of inventories to net realisable (587) (271) value
The decrease in gross inventory is mainly due to the reduction of cable holding and outside plant material within the installation and maintenance category. This was then offset by an increase in Telkom mobile handsets and microwave equipment for backbone rollout.
The decrease in write-down of inventory is due to a lower provision for technology obsolescence as stock holding levels have decreased from prior year. 2010 2011 Rm Rm 15. Net cash and cash equivalents 3,793 1,773 Net cash and cash equivalents 3,793 1,773 Cash shown as current assets 3,855 1,784 Cash and bank balances 828 757 Short-term deposits 3,027 1,027 Credit facilities utilised (62) (11) The significant decrease in cash and bank balances and short-term deposits is due to the payment of mobile expansion capital expenditure and operating expenses, the advancement of USD132 million (R956 million) to Multi-Links for operational expenses, the settlement of the Telcordia dispute of R608 million as well as the repayment of the Private Placing debt instruments (PP02 and PP03) of R1,780 million. 16. Treasury shares (1,171) (771) The reserve represents amounts paid by Telkom to Rossal No 65 (Proprietary)Limited and Acajou Investments (Proprietary) Limited, subsidiaries for the acquisition of Telkom`s shares to be utilised in terms of the Telkom Conditional Share Plan (`TCSP`). The TCSP was closed in June 2010. The future use of the remaining shares is subject to management review. At 31 March 2011, 2,002,055 (2010: 7,143,700) and 8,143,556 (2010: 8,143,556) ordinary shares in Telkom, with a fair value of R74 million (2010: R244 million) and R301 million (2010: R278 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively. The decrease in the number of treasury shares is due to 5,141,645 (2010: 4,457,699) shares that vested in terms of the TCSP during the current financial year. The fair value of these shares at the date of vesting was R194 million (2010: R169 million). 2010 2011 Rm Rm 17. Interest-bearing debt Non-current interest-bearing debt 7,925 8,198 Local debt 6,863 6,918 Foreign debt 156 429 Finance leases 906 851 Current portion of interest-bearing debt 1,812 157 Local debt 1,711 - Foreign debt 55 98 Finance leases 46 59 Repayments/refinancing The Group repaid Private Placings debt instruments (PP02 and PP03) with a nominal value of R1,780 million on maturity. The R157 million nominal value of the current portion of interest-bearing debt as at 31 March 2011 is expected to be repaid/refinanced from available cash, operational cash flows and issue of new debt instruments. Management believes that sufficient funding will be available at the date of repayment/refinancing. The Group entered into a USD127 million Export Credit Agency (ECA) facility agreement during the year. This facility is being utilised to finance equipment for the 8ta network roll out. The facility is expected to be fully utilised during the next financial year and is repayable over five years. 18. Provisions Non-current portion of provisions 4,355 4,740 Employee related 4,315 4,711 Non-employee related 40 29 Current portion of provisions 2,556 2,018 Employee related 1,963 1,932 Non-employee related 593 86 The increase in non-current provisions is due to the increase in post-retirement medical aid. This is due to the interest cost, service fee and the change in actuarial assumptions. The reduction of the current portion of provisions is attributable to the settlement of the Telcordia dispute of R608 million. In the current year the provisions have been split between employee related and non- employee related. 19. Trade and other payables 5,549 4,782
The decrease in vendors` balances is due to reduced purchases requirements for projects made in the current financial year and also due to the strengthening of the Rand against major currencies in the financial year. Included in the current financial year is Voluntary Early Retirement Packages (`VERP`) and Voluntary Severance Packages (`VSP`) of R592 million, partially offset by the reclassification of certain Multi-Links Telecommunications Limited trade and other payables as liabilities held for sale. 2010 2011 Rm Rm 20. Commitments Capital commitments authorised 7,270 7,522 Commitments against authorised capital 1,680 1,072 expenditure Authorised capital expenditure not yet 5,590 6,450 contracted Capital commitments comprise commitments for property, plant and equipment and software included in intangible assets. Included in the commitments against authorised capital expenditure and authorised capital expenditure not yet contracted, is R873 million (2010: RNil million) and R1,132 million (2010: RNil million) respectively which relates to Telkom Mobile. Management expects these commitments to be financed from internally generated cash and other borrowings. 21. Contingencies Supplier dispute Telcordia settlement The arbitrator`s award was delivered on 11 June 2010. The arbitrator awarded an amount of USD30.5 million, excluding interest from March 2001, to Telcordia. Telkom paid an amount of USD8.7 million during 2007, which was in respect of conceded claims. The amount of the claim, plus interest thereon, as at 30 June 2010 was approximately USD82.7 million. The parties settled the matter on the basis that Telkom pay an amount of USD80 million, plus applicable VAT, which was paid. Radio Surveillance Security Services (Proprietary) Limited (`RSSS`) RSSS has invoiced Telkom for an amount of R97 million for apparent system upgrades in terms of M3010 standards and/or replacement of alarm systems, dating back to 2008. According to Telkom`s investigations, there are no records of any contracts concluded with RSSS for the upgrade and/or replacements of alarm systems, nor is there any acceptance of quotations previously provided by RSSS. Telkom also has no record of any written instructions to RSSS in this regard or purchase orders being placed for the provision of M3010 upgrades and/or system alarm replacements. Telkom`s internal legal counsel has advised that this invoice should not be paid. Helios Towers Nigeria Multi-Links has on 20 December 2010, initiated a civil action against Helios regarding the validity of the Master Lease Agreement. The matter has been heard and judgement was passed on 7 June 2011 in favour of Helios. Helios brought a counter application against Multi-Links on 23 December 2010 in which they, amongst other things, requested an interim status quo order (to keep the status of the parties` positions in terms of the contract intact for an interim period); an interdict against the sale of Multi-Links` assets and a claim for damages in the amount of USD252 million relating to so called "anticipatory breach of contract". The interim status quo order was granted to Helios in December 2010 but, in terms of Nigerian Court rules, expired seven days after it was granted. The Court refused the interdict preventing the sale. The damages claim of Helios has not yet been heard. Certain cost orders have been awarded against Helios. The parties are still continuing to perform in terms of the Master Lease Agreement. Telkom remains committed to exiting Multi-Links` CDMA business. African Prepaid Services Nigeria (`APSN`) Multi-Links has terminated the Super Dealer Agreement with APSN on 25 November 2010, as a result of their breach of contract. APSN has in turn terminated the agreement based on alleged breaches by Multi-Links. In terms of the agreement, the parties agreed that any dispute will be referred to arbitration in South Africa. APSN has indicated that they will refer their claim to arbitration. Multi-Links has not yet received APSN`s particulars of claim. Multi-Links is preparing its counter claim. Competition Commission Telkom is party to a number of legal proceedings filed by several parties with the South African Competition Commission (`CC`), alleging certain anti- competitive practices described below. Some of the complaints filed at the CC have been referred by the CC to the Competition Tribunal (`CT`) for adjudication. Should the CT find that Telkom committed a prohibited practice as set out in the Competition Act, the CT may impose a maximum administrative penalty of 10% of Telkom`s annual turnover in the RSA during Telkom`s preceding financial year, in respect of the SAVA and Omnilink, Internet Solutions and Multiple Complaints Referral matter respectively. In the IS matter, IS has requested that the CC imposes two administrative penalties. However, Telkom has been advised by external legal counsel that the CT has to date not imposed the maximum penalty on any offender in respect of the contraventions Telkom is being accused of. The South African Value Added Network Services (`SAVA`) and Omnilink This matter relates to the complaints filed by SAVA on 7 May 2002 and a complaint filed by Omnilink in August 2002 against Telkom at the CC, regarding certain alleged anti-competitive practices by Telkom such as refusal to give a competitor access to an essential facility, engaging in exclusionary acts, inducing a supplier not to deal with a competitor and price discrimination. The matter is proceeding before the CT. Telkom filed its opposing affidavit and the CC filed its replying affidavit. The CC also filed an amendment application to include an allegation of an alleged contravention of sections 8(a) and 8(c) of the Competition Act. It is Telkom`s view that this was an attempt by the CC to include excessive price and margin squeeze cases respectively. The application was heard on 21 April 2011. The CT issued its ruling on 4 May 2011, granting the CC leave to amend its papers in certain nominal respects, but dismissed the CC`s application to include the allegation of an alleged contravention of section 8(a) and 8(c) of the Competition Act. The CC delivered its amended complaint referral on 12 May 2011. The main matter has been set down for hearing at the CT from 17 to 28 October 2011 and from 1 to 9 December 2011. Internet Solutions (`IS`) IS filed a complaint at the CC in December 2007, alleging certain anti- competitive practices by Telkom such as excessive pricing, margin squeeze, bundling, price discrimination and exclusionary acts. Certain parts of this complaint were referred to the CT by the CC. The non-referred parts of the complaint were self-referred by IS. IS self-referred allegations such as exclusionary conduct in respect of the retail broadband (including ADSL) market, excessive pricing in respect of ADSL and leased lines below 2Mbps and price discrimination with regard to Telkom`s VPN Supreme product. Telkom filed an exception to IS` referral papers. The CT ruled that IS must amend its papers, and IS filed its amended papers. However, the papers remain excipiable and Telkom has thus filed a second exception application on 4 April 2011. IS did not deliver answering papers to Telkom`s application within the requisite time period. Should Telkom`s exception application be upheld, IS` amended referral may be set aside, alternatively the CT may order IS to amend its papers, in which case Telkom will have to plead to IS` amended papers. Telkom has not set the matter down for hearing as yet. Competition Commission Multiple Complaints Referral The CC served a notice of motion on Telkom on 26 October 2009, in which it referred complaints against Telkom by MWEB and Internet Solutions (`IS`) as well as the Internet Service Providers Association (`ISPA`), MWEB, IS and Verizon SA respectively, to the CT. The CC alleged certain anti-competitive practices by Telkom, such as excessive pricing, refusal of access to an essential facility, exclusionary acts, refusal to supply scarce goods to a competitor and bundling. Telkom opposed the Multiple Complaints Referral and filed an exception application on 15 March 2010 in respect thereof, and the CC filed its answer to the exception application. The exception application was heard on 11 October 2010 and dismissed on 4 February 2011. Telkom is preparing its responding affidavit to the main referral. Phuthuma Networks (Proprietary) Limited (`Phuthuma`) Telkom was informed by the CC that a complaint was filed by Phuthuma at the CC, wherein Phuthuma alleges that "Telkom has contravened section 8(c) of the Competition Act no 89 of 1998, as amended, by abusing its dominant position in engaging in anti-competitive conduct in the telegraphic and telex maritime services market by unilaterally awarding these services to Network Telex". The CC non-referred the complaint on 28 June 2010. However, Phuthuma self-referred its complaint to the CT on 20 July 2010, alleging that Telkom engaged in an exclusionary act by appointing Network Telex in 2007 "without any formal procurement process". Telkom filed its opposing affidavit in which it raised certain preliminary points, and Phuthuma filed its replying affidavit. Telkom`s preliminary points were upheld by the CT on 2 March 2011 and Phuthuma`s complaint was dismissed with costs. Phuthuma is appealing this decision and has filed a notice of appeal to the Competition Appeal Court on 24 March 2011. High Court Phuthuma Networks (Proprietary) Limited (`Phuthuma`) On 20 August 2009 Phuthuma served a summons on Telkom for damages arising from a tender published on 30 November 2007 for outsourcing of the Telex and Gentex services and for the provision of a solution to support the maritime industry requirements. The tender was cancelled on 10 June 2009, without any award being made, due to the expiration of the validity period. Phuthuma has alleged that Telkom had awarded the tender to a third party outside a fair, transparent, competitive and cost effective procurement process. It has claimed damages of R3,730,433,545.00, alternatively R5,513,876,290.00, and further alternatively R1,771,683,580.00 plus interest at 15.5% per annum to date of payment from April 2008, alternatively from 30 April 2009 being the date of notice in terms of Act 40 of 2002, further alternatively from date of service of this summons plus costs of suit and further and/or alternative relief. Telkom is defending the matter, which is set down for hearing from 24 October 2011 to 18 November 2011 in the North Gauteng High Court. Bihati Solutions (Proprietary) Limited (`Bihati`) The matter arises from a tender award which was made on 8 November 2007 outside the validity period of 120 days, relating to construction of network services. In November 2009 the Board resolved to apply to the North Gauteng High Court to set aside the aforementioned award. Concurrently with the Telkom application to set aside the award, Bihati also applied to the North Gauteng High Court for the review and setting aside of the Board`s decision. On 7 January 2011 the North Gauteng High Court granted Telkom`s application and dismissed Bihati`s application. Bihati`s application for leave to appeal was dismissed on 25 March 2011. Bihati has petitioned for leave to appeal against the North Gauteng High Court decision. South African National Road Agency (`SANRAL`) During October 2009, SANRAL applied to the KwaZulu Natal High Court for an interdict and declaratory order against Telkom. SANRAL requested the Court to grant an order preventing Telkom from installing facilities without compliance to the SANRAL Act and to remove facilities installed by Telkom in the N2 National road reserve in KwaZulu Natal as part of Telkom`s FIFA project. On 25 October 2010, the Court granted a declaratory which prohibits Telkom from entering SANRAL`s land without compliance to the SANRAL Act. On 18 January 2011 Telkom was granted leave to appeal against the full judgement and is awaiting a date for appeal. Restated 2010 2011 Rm Rm
22. Related parties Details of material transactions and balances with related parties were as follows: With shareholders: Government of South Africa Related party balances Trade receivables 353 354 Related party transactions Revenue (2,861) (2,904) Individually significant revenue* (1,070) (1,151) City of Cape Town (75) (95) Department of Correctional Services (73) (66) Department of Health: Gauteng (36) (65) Department of Justice (78) (97) South African National Defence Force (CSF) (72) (68) South African Police Services (523) (557) South African Revenue Services (68) (49) S.I.T.A. (Pty) Limited (145) (154) Collectively significant revenue* (1,791) (1,753)
* The nature of the individually and collectively significant revenue consists mostly of data revenue. The prior year revenue stream consisted mostly of voice revenue. At 31 March 2011, the Government of South Africa held 39,76% (2010: 39,76%) of Telkom`s shares and the Public Investment Corporation held 3,92% (2010: 3,92%) of Telkom`s shares and a further 8,95% (2010: 8,95%) through Black Ginger 33 (Proprietary) Limited.
Restated 2010 2011 Rm Rm With entities under common control: Major public entities Related party balances Trade receivables 39 25 Trade payables (8) (1) The outstanding balances are unsecured and will be settled in cash in the ordinary course of business. Related party transactions Revenue (381) (332) Expenses 222 163 Individually significant expenses 190 151 South African Post Office 110 55 Eskom 72 84 South African Broadcast Services 8 12 Collectively significant expenses 32 12 Rent received (29) (28) Individually significant rent received: South (25) (24) African Post Office Collectively significant rent received (4) (4) Rent paid 22 24 Individually significant rent paid: South African 13 14 Post Office Collectively significant rent paid 9 10 Key management personnel compensation: (Including directors` emoluments) Related party transactions Short-term employee benefits 137 137 Post-employment benefits 7 7 Equity compensation benefits 21 12 Terms and conditions of transactions with related parties 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. 23. Significant events Resignation of Telkom Group Chief Executive Officer Telkom announced on 4 June 2010 that Mr Reuben September will retire as Group Chief Executive Officer (`GCEO`) and also relinquish his directorship at the expiry of his contract. Mr Reuben September agreed with the Telkom Board to step down as GCEO and resigned as a director from 7 July 2010. Appointment and resignation of Acting Group Chief Executive Officer Mr Jeffrey Hedberg served as Acting GCEO. His contract expired at the end of March 2011. The Board of Directors have requested Mr Hedberg to remain at Telkom in an advisory capacity until the release of the Group`s annual results in June 2011. Appointment of Group Chief Executive Officer On 17 March 2011, the Telkom Board announced the appointment of Nombulelo Moholi as Group Chief Executive Officer (`GCEO`) with effect from 1 April 2011. The Telkom Board believes that this appointment provides leadership, continuity and stability at an important time given the number of key strategic and operational deliverables. Resignation of Telkom Group Chief Financial Officer Telkom announced on 13 July 2010 that Mr Peter Nelson resigned as Group Chief Financial Officer (`GCFO`) and also relinquished his directorship. Appointment of Acting Group Chief Financial Officer While under the leadership of the Acting Group CEO, Jeffrey Hedberg, the Group has initiated the process of appointing a new GCFO. Mr Deon Fredericks, Group Executive: Accounting Services is acting as GCFO until the process is finalised. Change in chairman and directors of Telkom Mr Jeff Molobela retired as Chairman of Telkom and he was re-appointed as a non- executive director of the Telkom Board for a period of three years with effect from 16 February 2011. Telkom is grateful to Mr Molobela for his leadership, dedication, contribution and service during his tenure as chairman of the Board. Mr Polelo Lazarus Zim was appointed as a non-executive director for a three year period and as Chairman for a one year period with effect from 16 February 2011. Mr Brian Molefe resigned as a non-executive director of the Board of Telkom with effect from 20 April 2010 as a result of the end of his employment contract with the Public Investment Corporation Limited. Mr Younaid Waja was appointed as a non-executive director on the Board of Telkom with effect from 20 April 2010. Mr David Barber resigned as a non-executive director of the Board of Telkom with effect from 20 April 2010. Dr Ekwow Spio-Garbrah`s appointment as a non-executive director of the Board of Telkom was terminated with effect from 1 May 2010. Dr Victor Lawrence`s appointment as a non-executive director was terminated with effect from 15 February 2011. Mr Navin Kapila was appointed as a non-executive director for a three year period with effect from 16 February 2011. Ms Reitumetse Jackie Huntley and Ms Julia Ntombikayise Hope were re-appointed as non-executive directors for a period of three years, with effect from 16 February 2011. Telkom concluded a roaming agreement with MTN South Africa On 14 April 2010, Telkom announced that in line with its mobile strategy it concluded a five year national roaming agreement with MTN South Africa in terms of which Telkom and its customers will have national access to MTN`s 2G and 3G network throughout South Africa. Telkom placed orders to build 2,000 new base stations in selected high density areas over the next two years. The capital outlay for mobile related investments over the next five years is expected to be approximately R6 billion. The conclusion of the roaming agreement with MTN South Africa enhances Telkom`s ability to offer Telkom customers extensive national mobile coverage from day one of launch and accordingly, is key to the delivery of a successful mobile strategy. Voluntary severance packages The Telkom Board approved the offering of voluntary severance packages (`VSPs`) and voluntary early retirement packages (`VERPs`) to all management and bargaining unit employees. The key exit dates were 28 April 2010 until 2 July 2010 for the management employees and 31 March 2011 and 30 April 2011 for the bargaining unit employees. 186 management employees accepted packages resulting in a cost of R147 million. 1,632 bargaining unit employees accepted packages at 31 March 2011 resulting in a cost of R536 million. 189 bargaining unit employees accepted packages at 30 April 2011 resulting in a cost of R53 million. It is expected that 9 bargaining unit employees will accept packages at the end of July 2011 at a cost of R3 million. Employees exiting on 31 March 2011 qualified for six months` notice pay and those exiting on 30 April 2011 qualified for four months` notice pay. The offer is aimed at enabling the Group to achieve its business objectives by specifically focusing on implementing a strategic workforce plan linked to the long-term business strategy and optimising staff levels. Integration of MWEB Africa Limited and Africa Online Limited During the year management initiated the integration of MWEB Africa Limited and Africa Online Limited subsidiaries under the brand of iWayAfrica Group. Management believes the integration will achieve financial synergies by improving economies of scale and eliminating duplication of functions. The integration process is ongoing. Telkom launches its mobile brand under a new name called 8ta On 18 October 2010 Telkom launched it`s new mobile brand called "8ta". The launch of Telkom`s mobile brand under the new name 8ta is undoubtedly the most significant achievement to date, one that will allow Telkom to not only counter the threat posed by competition such as fixed-to-mobile substitution (and the resulting decline in fixed-line voice revenue) but also grow Telkom revenue by providing mobile services and products to consumer and business markets. Launching a retail brand is a massive undertaking that consists of a myriad of components - among other things the network and technology aspects, billing, products and services, distribution channels and the marketing drive to create awareness and generate sales. Key brand attributes: 8ta is built on a number of core pillars. These give the brand a unique personality that tells the customer what 8ta stands for and why it is different to other brands in the mobile market: - Value: "more bang for your buck", in other words more value for your money. - Simplicity: products that are easy to understand, buy and use. - Quality: network clarity and reliability, as well as the quality of the customer experience we offer. - Innovation: deploying new mobile technologies and rapidly bringing new services to the market. - Authenticity: a South African brand for South Africa. Public Finance Management Act (PFMA) Telkom`s three year exemption from certain sections of the PFMA ended on 25 October 2010. On 17 November 2010 the Minister of Finance approved a further three year exemption expiring on 26 October 2013. Disposal of Multi-Links CDMA business On 26 November 2010, Telkom announced that the Board had mandated management to review options for the exit of the CDMA business of Multi-Links Telecommunications Limited in Nigeria. On 31 March 2011, Telkom and Visafone Communications Limited (`Visafone`) entered into a legally binding agreement regarding the sale of the Multi-Links` CDMA business to Visafone. The sale is conditional on inter-alia regulatory approvals and renegotiation of the Helios contract. Upon the successful closing of the transaction, Telkom will retain Multi-Links` fibre network and fixed-line operations in Nigeria. Expiry of the Class A and B shares in terms of Telkom`s Articles of Association In terms of Telkom`s Memorandum and Articles of Association, the holders of the Class A and B shares in the ordinary share capital of Telkom, were defined as a "significant shareholder", which were afforded certain extraordinary rights. The Government of the Republic of South Africa was the A shareholder and Thintana Communications (the previous strategic equity partner) was the B shareholder. Thintana Communications ceased to be a significant shareholder in November 2005. The Government of the Republic of South Africa is the largest shareholder in Telkom SA Limited, holding 39,8% of Telkom`s issued share capital. The Government`s extraordinary rights as contained in Telkom`s Memorandum and Articles of Association persisted until 4 March 2011 - eight years from the listing date of Telkom on the JSE, the date also, upon which the Government ceased to be a significant shareholder. The Class A share has ipso facto been converted into ordinary shares. The Memorandum and Articles of Association of Telkom will be harmonised into a Memorandum of Incorporation (`MOI`) to bring it in line with the JSE Listings Requirements, King III and the new Companies Act 71 of 2008. 24. Subsequent events Multi-Links On 31 March 2011, Telkom and Visafone Communications Limited ("Visafone") entered into a legally binding agreement to sell Multi-Links` CDMA business to Visafone, subject to conditions precedent. Certain conditions precedent have not been met and the transaction will not proceed. The Telkom board resolved on 10 June 2011 to stop all funding to Multi-Links Telecommunications Ltd. Dividends The Telkom Board declared an ordinary dividend of 145 cents (2010: 125 cents) per share and a special dividend of Nil cents (2010: 175 cents) per share on 10 June 2011, payable on 11 July 2011 to shareholders registered on 8 July 2011. The Secondary Taxation on Companies impact is R47 million. Other matters The directors are not aware of any other matter or circumstance since the financial year ended 31 March 2011 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of its operations. www.telkom.co.za 13 June 2011 Sponsor: UBS South Africa (Pty) Ltd Date: 13/06/2011 07:05:03 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

Share This Story