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Annual Financial Results
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Annual Results 2012

Operational Overview

Voice revenue

Voice revenues declined 6.5% to R12,835 million as a result of lower minutes of use due to mobile substitution and, to a lesser extent, lower tariffs. All categories of voice revenue, except mobile international and fixed-to-fixed revenue declined and we expect traditional voice revenue to continue declining. Revenue from subscription based calling plans declined 3.6% to R1,578 million while the total number of subscribers increased 4.6% to 819,019. The slowdown in calling plan revenue growth reflects the increased penetration of these products and the shift of customers to the lower priced Telkom Closer 1 and 2 products.

Broadband and data revenue

Total data revenue decreased 1.7% to R10,517 million as a result of income generated from the Soccer World Cup included in the previous year. Excluding the revenue relating to the Soccer World Cup, data revenue increased 1.6%. The slow growth is mainly as a result of increased self provisioning by mobile operators, lower internet access revenue and pricing pressures.

ADSL subscribers increased 10.0% to 827,091 when compared to the previous year. Data, however, continues to be an area of growth and we believe the point at which the contributions of data and of voice will be one-to-one is not far off.

Telkom is also heavily focused on increasing broadband and data-related revenue to diversify its reliance away from fixed-line voice. To this end, Telkom launched its uncapped ADSL service over the course of the last year. This was a successful initiative and at 31 March 2012 we had 35,093 uncapped ADSL customers. For the first time in the SA market a 'free 3-month broadband' trial was launched by Telkom. Of the total 74,924 customers who applied for the trial we ended up retaining 68% as customers. While this will not have much of an impact on the revenues for the year, it has positively contributed to the growth in subscribers we experienced in the current year with the resultant revenue benefit expected to follow in the 2013 financial year.

Operating expenses

Operating expenditure increased 6.1% to R31,250 million. This was largely due to the inclusion of mobile operating expenditure for the full financial year in 2012, the impairment of iWayAfrica goodwill and assets of R569 million and R605 million additional depreciation as a result of the review of the useful lives of existing network equipment as the Company invests to transform to a commercially led next generation network, partially offset by R739 million voluntary employee severance package costs included in the prior year.

8•ta – Telkom's mobile service

8•ta Telkom's commitment to its mobile strategy remains steadfast. While the tactics for achieving our mobile goals may change from time to time, we are committed to the strategy as a whole and believe that mobile is an integral part of ensuring that Telkom grows into the future. We will focus on data to capitalise on the smartphone revolution, develop a high value customer focus to improve ARPU, loyalty and retention and drive fixed mobile convergence trough leveraging off a fully IP enabled, next generation fixed-line network.

Telkom Mobile has opened up the network fully for voice as well as data. This means that instead of pushing subscribers onto shared networks we route them onto our own network. It is a significant step for us as it emphasises the fact that we consider our own network to be sufficiently stable to deliver the best possible quality service to our customers. Since March we have increased our customers using our voice network to over 40%. A total of 85% of our existing data customers are utilising the Telkom network rather than the shared network. We have completed construction of 1,782 base stations of which 1,351 are on air. There have been challenges in terms of finding adequate power on certain of the remaining base stations.

8•ta achieved revenue of R1,200 million and an EBITDA loss before inter-segmental eliminations of R2,425 million for the year ended 31 March 2012. Total revenue generating subscribers equalled 1,483,401 with pre-paid contributing 1,039,448 and post-paid 443,953. Prepaid ARPU was R20.89 and post-paid ARPU R206.83. Blended ARPU was R68.86.

We launched our Business Mobile products in October 2011. We have built a healthy pipeline but conversion is slow due to customers waiting for their post-paid contracts to expire, the usual corporate sales cycles and very aggressive competitor response. In the 2013 financial year we will focus on the SME market and primarily data services to corporate customers. Back to Top

Data products that were launched over the year include 8•ta's prepaid 2Gig +1Gig offer for R149pm, 8•ta's prepaid 120Gig Data Bundle, postpaid 10Gig Midnight Surfer, Internet Saver plans as well as Telkom Business Mobile's Shared Internet Bundles.

In the 2013 financial year we aim to reduce our EBITDA losses in mobile by approximately 20% and plan to invest between R2.0 billion and R2.5 billion in capital expenditure.

CybernestCybernest

Cybernest has continued to gain traction in the market. While the majority of the R1,406 million revenue achieved in the year is generated from Telkom, non-Telkom revenue has increased 12.0% to R84 million, with a win rate on new deals approaching 50%.

Cybernest will play an important role in the broader Telkom Business integrated ICT strategy going forward. It is at the heart of our strategy to lead the cloud services market: initial focus is on Infrastructure as a Service (IaaS) and basic Software as a Service (SaaS) such as mail and some small business applications. Subsequent focus will progressively expand to more advanced Iaas and Saas offers. Together with Telkom Business Cybernest will also address the LAN services segment, which is currently a strategic portfolio gap for the company, and the IT infrastructure outsourcing market, centred on our "cloud leveraged outsourcing" proposition.

TrudonTrudon

Trudon's revenue increased by 1.1% to R1,180 million while operating profit decreased 2.1%.

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 online 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 required a 35.8% increase in capital investment in the financial year to R72 million.

iWayAfricaiWay Africa

During the year under review iWayAfrica saw a decline in revenues of 10.9% to R368 million. Operating loss excluding the impairment improved 11.5% to a loss of R77 million.

Telkom has taken the decision to rationalise this business. It is acknowledged that a footprint in Africa is desirable but not at any cost to the core Telkom business.

Multi-LinksMulti-Links

The sale of Multi-Links was concluded in October 2011. Multi-Links had an operating loss of R269 million for the period up to the sale that is included in discontinued operations.

The sale of Multi-Links resulted in the recognition of a net loss of R896 million mainly due to the cumulative amount of exchange differences previously recognised in equity, which was recognised in profit and loss on disposal of the Multi-Links foreign operation.

Telkom incurred costs of R80 million for the year to exit this business that is included in continuing operations.

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 had further engagements with the Authority on the regulations. The implementation of these regulations have been postponed by ICASA to 1 April 2012. However, Vodacom is challenging ICASA's approach to the High Court to obtain confirmation that the postponement is legally valid.

The new proposed fee structure is expected to 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.

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. ICASA has issued a decision document on LLU which stipulates that LLU is to be introduced in a phased approach to minimise disruptions in the ICT sector. A Regulatory Impact Assessment on the costs and benefits of the full loop, sub loop and shared line forms of LLU will be conducted, commencing in mid-2012. A Market Review will then follow. As part of the phased approach IPConnect prices reduced by 30% effective 1 April 2012. ICASA will engage industry to ensure ways of introducing Bitstream by 1 November 2012. ICASA will also conduct a public consultation process to establish a mechanism to address the existing Access Line Deficit as a precursor to the introduction of the Bitstream product. This decision somewhat reduces the negative impact of LLU on Telkom.

KT Corporation

On 8th May 2012, Telkom announced that it had reached an in-principle agreement with KT regarding the terms of a Potential Strategic Venture that would if implemented result in:

  • KT acquiring a strategic equity shareholding of 20% in the post issue ordinary share capital of Telkom by way of a specific issue of shares for cash at a price of R25.60 per new Telkom ordinary share;
  • Telkom and KT entering into a 5-year co-source management services agreement to formalise the relationship and identified areas of mutual strategic and business co-operation.

The in-principle agreement was reached following an extensive investigation period into the merits of the Potential Strategic Venture spanning 9 months by the management teams and advisors of KT and Telkom. The Potential Strategic Venture was subject to the fulfillment of the following preconditions:

  • Finalising of the transaction agreements comprising a subscription and relationship agreement and a co-source management services agreement;
  • Final resolution of the current investigation by the Competition Authorities into the competition complaints against Telkom to the satisfaction of KT;
  • Receipt of in-principle support for the Proposed Strategic Venture by the Government of South Africa; and
  • Receipt of in-principle support for the Proposed Strategic Venture by Allan Gray and the Public Investment Corporation.

Given the requirement for support from key shareholders for the Proposed Strategic Venture and specifically from the Government of South Africa, Telkom engaged with the Honourable Minister of Communcations and her advisory team regarding the Proposed Strategic Venture during the course of assessing the merits of the transaction.

On 30th May 2012, Telkom was informed by the Honourable Minister of Communications that the proposed transaction between the companies had been presented to the cabinet of the South African Government and that cabinet had taken the decision not to support the transaction as proposed.

Having considered all factors, the board of Telkom, remains of the view that the Potential Strategic Venture would be in the best interest of Telkom, its employees, customers and shareholders. Telkom will continue to engage the South African Government further.

Capital expenditure and funding level

Capital expenditure for the group is expected to range between 20% and 25% of revenue over the 2013 financial year including the impact of our mobile investment and between R18 billion and R21 billion over the next three years.

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.

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