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24 Telkom Annual Report 2009 Chief Financial Officer’s review The roll-out of our mobile network is expected to enable us to provide connectivity cost-effectively Peter Nelson Chief Financial Officer It is my pleasure to present Telkom’s financial review for the year ended March 31, 2009. It has been a challenging year and despite difficult economic conditions, Telkom managed to deliver value to shareholders by declaring a special dividend of R19 per share upon conclusion of the Vodacom transaction after year end and declaring an ordinary dividend of R1.15 per share and special dividend of R2.60 per share in June 2009. Faced with competition eroding our revenue base, cost management continues to be a key element in creating shareholder value. Combined with the inflationary environment affecting our operating expenses, a number of once-off items impacted Group earnings including: • R691 million cost relating to the Vodacom BEE deal; • R462 million impairment of Multi-Links; • R409 million fair value loss on the acquisition of the additional 25% in Multi-Links; • R204 million foreign exchange loss on the acquisition of Gateway by Vodacom; • R177 million expenses relating to the Vodacom transaction; • R39 million impairment of Africa Online; and • R454 million deferred tax credit on the Vodacom transaction. In addition, Multi-Links reported a R1.76 billion loss before eliminations during the 2009 financial year. Turning around Multi-Links’s performance is vital to Telkom given the extent of the Group’s investment and the enormous opportunity the Nigerian market provides. The roll-out of our mobile network is expected to enable us to provide connectivity in a more cost effective manner in rural and high cable theft areas. Next Generation Network and mobile technology also allows us to replace expensive to maintain legacy equipment. We continue with the renegotiation of all supplier contracts and constructive engagement with labour unions. We are reviewing our IT investment strategy in order to ensure optimum levels of spend in line with our strategy and network investment. Inventories and capital work-inprogress are receiving considerable attention as we seek to lower just-in-time levels of investment and to monetise any excessive levels of assets. Telkom is targeting an operating cost reduction of 10% over the following three financial years. The Telkom Board is focusing on improving the cost efficiency and free cash flow profile of the Company. It has reduced the initial five year capital expenditure budget by 40% to R34 billion and is targeting lower levels of inventory. The Telkom Group added Multi-Links as a new segment to its financial reporting for the 2009 financial year. As a result, the Telkom Group’s four reporting segments for the 2009 financial year are fixed-line, Multi-Links, mobile and other. The other segment includes Telkom’s Trudon, formerly known as TDS Directory Operations, and Africa Online, subsidiaries. The information
in this annual report has been updated to reflect the above changes to Telkom’s reporting segments. Telkom currently expects its Telkom SA, Telkom International and Telkom Data Centre businesses will constitute distinct reporting segments in the 2010 financial year due to the implementation of its new organisational structure, which became effective as of April 1, 2009. Telkom concluded the disposal and sale of Vodacom, its mobile segment that provided mobile services through its 50% joint venture interest in Vodacom, effective as of April 20, 2009. In addition, Telkom’s Board of directors has decided to dispose of Swiftnet, a wholly owned subsidiary that provides wireless data services, and determined to abandon its Telkom Media subsidiary. The Telkom Group’s consolidated financial statements and information included herein reflects the restatement to Telkom’s consolidated financial statements in prior years as a result of these events to disclose the effect of discontinued operations and the disposal of the subsidiaries held for sale as follows: • Income statement data for all the periods have been restated to reflect our 50% share of Vodacom’s results, our 100% share of Swiftnet’s results and our 75% share of Telkom Media’s results as discontinued operations in accordance with IFRS5; and • Balance sheet data for only the year ended March 31, 2009 reflects our 50% share of Vodacom’s results and our 100% share of Swiftnet’s results as discontinued operations in accordance with IFRS5. The discussion of the business below has been revised from previous years to reflect the changes to Telkom’s segments and its discontinued operations. Group operating revenue Group operating revenue increased by 6.9% to R35,940 million (March 31, 2008: R33,611 million) in the year ended March 31, 2009. Fixed-line operating revenue, before inter-segmental eliminations, increased by 3.3% to R33,659 million due to growth in data revenues, higher revenue from interconnection and subscriptionbased calling plans, partially offset by lower traffic revenue. Multi-Links’s operating revenue increased 124.9% due to a 209.3% growth in its subscriber base. Telkom’s defend and growth strategies are on track. We have achieved good growth in our bundled calling plan products, Telkom Closer and Supreme Call, and strong growth in our broadband products. Data revenue continues to achieve double digit growth, delivering a 12.1% revenue growth to R9,310 million for the year ended March 31, 2009. Group operating expenses Group operating expenses increased by 19.5% to R29,895 million (March 31, 2008: R25,014 million) in the year ended March 31, 2009, due to a 19.6% increase in operating expenses in the fixedline segment to R29,849 million (before inter-segmental eliminations) and a 157.1% increase in operating expenses in Multi-Links to R2,422 million (before intersegmental eliminations). Fixed-line operating expenses increased due to increased selling, general and administrative expenses, payments to other network operators, depreciation, amortisation, impairment and write-offs, employee expenses and service fees. The increase in Multi-Links’s operating expenses was primarily due to increased cost of sales and associated subsidies as a result of increased sales volumes, increased advertising and promotional expenditure and an increase in expatriate fees as a result of an increase in staff seconded from Telkom during the year. Investment income Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 7.7% to R181 million (March 31, 2008: R168 million), largely as a result of increased short-term deposits and interest rates. Telkom Annual Report 2009 25 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 82.7% to R2,843 million (March 31, 2008: R1,556 million) in the year ended March 31, 2009, primarily due to a 12.2% increase in interest expense to R1,732 million (March 31, 2008: R1,543 million) mainly as a result of the 38.7% increase in the Group’s net debt to R23,047 million (March 31, 2008: R16,617 million). In addition to the increase in the interest expense, net fair value and foreign exchange rate movements resulted in a loss of R1,111 million for the year ended March 31, 2009 (March 31, 2008: R13 million). The increase in the loss was mainly attributable to foreign exchange losses incurred by Multi-Links on foreign denominated loans and creditors’ balances as a result of the devaluation of the Naira as well as the mark to market valuation of the Multi-Links put option. Taxation Consolidated taxation expense from continuing operations decreased by 37.3% to R1,660 million (March 31, 2008: R2,647 million) in the year ended March 31, 2009. The consolidated effective taxation rate for the year ended March 31, 2009 was 44.6% (March 31, 2008: 34.5%). Telkom company’s effective taxation rate was 8.9% (March 31, 2008: 24.6%). The lower effective taxation rate for Telkom Company in the year ended March 31, 2009 was mainly due to the deferred taxation asset that was raised on the capital gains tax base cost of the 15% investment in Vodacom which is held for sale that will be utilised in the future capital gains tax liability of the sale transaction, partially offset by the R1,843 million Group overview Management review Sustainability review Performance review Financial statements Company Financial Information
Page 1 and 2: We are... one of Africa’s largest
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These will be augmented by another
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Some of the key deliverables are:
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Fittingly, the initiative was launc
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Sponsorships Sponsorships continue
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Item Comment and reference Governan
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espond to competitive challenges Pe
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Operational review History and deve
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service. All costs including instal
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Traffic was adversely affected in b
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Telkom’s focus on bringing new in
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esponse of the CDMA operators to ou
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MWEB Africa On April 21, 2009, we a
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VPN model that allows other service
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services and also to support Telkom
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Telkom’s fixed-line voice busines
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Results of operations The Telkom Gr
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EBITDA can be reconciled to operati
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Fixed-line operating revenue increa
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Interconnection revenue Year ended
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Fixed-line payments to other networ
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Service fees increased in the year
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Vodacom’s operating revenue from
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our fixed-line business, which were
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Vodacom’s selling, general and ad
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The increase in other operating rev
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commercial paper bills, as well as
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The following table sets forth our
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challeng Consolidated financial sta
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Notes Telkom Annual Report 2009 1.
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