2010 Group Annual Report for the year ended 31 March 2010 Vodacom Group Limited is an African mobile communications company providing voice, messaging, data and converged services to around 40 million customers. From its roots in South Africa, Vodacom has grown its operations to include networks in Tanzania, the Democratic Republic of Congo, Mozambique and Lesotho, and provides carrier and business services to customers in over 40 African countries. Vodacom is majority owned by Vodafone, one of the world’s largest mobile communications companies by revenue, and is listed on the JSE Limited under the symbol VOD. Shareholders’ diary Financial year end 31 March Annual general meeting Friday 30 July 2010 Dividends Interim dividend – Cents per share 110 – Paid 7 December 2009 Final dividend – Cents per share 175 – Date declared 14 May 2010 – Payable 5 July 2010 Contents ➾ 2 Chairman’s statement Executive summary 6 Performance at a glance 8 Chief Executive Officer’s review 12 Operating environment and strategy 14 Group at a glance ➾ 16 Business overview Business overview 18 Technology and resources 23 People 27 Customers 28 Brand and distribution 29 Services and devices 32 Operating indicators ➾ 34 Key performance indicators Performance 35 Operating results 42 Financial position and resources 46 Five-year review 48 Sustainability review 56 Consolidated value-added statement ➾ 58 Board of directors Governance 60 Executive Committee 62 Corporate governance statement 68 Remuneration report ➾ 79 Contents Financials 80 Directors’ statement of responsibility 80 Certificate by the Company Secretary 81 Independent auditors’ report on the consolidated annual financial statements 82 Directors’ report 86 Consolidated annual financial statements 150 Independent auditors’ report on the condensed Company annual financial statements 151 Condensed Company annual financial statements 159 Addendum A: Interest in material subsidiaries 160 Addendum B: Shareholder analysis ➾ 162 Corporate information Additional information 163 Definitions 167 Disclaimer 168 Notice of annual general meeting 171 Form of proxy For more information please visit our website at www.vodacom.com. Vodacom Group Annual Report 2010 1 Chairman’s statement Peter Moyo – Chairman Vodacom ended the year as a listed company, leaner, healthier, both financially and commercially, and possessing a strong base to capitalise on the new opportunities coming in 2011 and beyond. 2010 – a challenging year also learned much about our performance from extensive benchmarking exercises that compare Vodacom to all Vodacom began the year as a private company facing a raft of Vodafone’s operating units across the globe. The expertise that external and internal challenges, any one of which would be Vodafone brings at the Board level has also been illuminating difficult enough to deal with alone, but taken together were – their experience with markets at all stages of the growth little short of formidable. Vodacom ended the year as a listed company, leaner, healthier, both financially and commercially, lifecycle brings a welcome new perspective to the discussion and possessing a strong base to capitalise on the new of many of the challenges facing Vodacom. opportunities coming in 2011 and beyond. In this difficult environment, the Group managed to maintain It is a testament to Vodacom’s management team and or grow market shares and overall revenue increased 5.6% to employees that while dealing with some of the most pervasive R58.5 billion. This success reflects Vodacom’s approach of changes that the Group has seen since its inception 16 years placing the customer at the heart of the business and ensuring ago, their collective focus on the fundamentals of the business a consistent focus on improving the value delivered to did not waiver. Headline earnings per share (‘HEPS’) for the year customers. There is a subtle but important difference between grew 22.3% to 510 cents and operating free cash flow grew increasing value and simply cutting prices, a distinction that 55.2% to R13.5 billion. This strong cash flow supported a underpins Vodacom’s focus on customer value management. reduction in the Group’s gearing, with net debt to EBITDA In addition to taking steps to grow revenue, the management reduced from 1.0 times at the end of last year to 0.6 as at team also put in place cost-efficiency programmes. While these 31 March 2010. This in turn underpinned the declaration actions gained traction towards the end of the year, we believe of a final dividend of 175 cents per share. the main benefit will be evident in the 2011 financial year. In conjunction with the listing of Vodacom on the JSE Limited Regulation and the consumer (‘JSE’), Vodafone Group plc (‘Vodafone’), one of the world’s largest mobile communications companies by revenue, We place great emphasis on maintaining a constructive working increased its stake in Vodacom from 50% to 65%. The benefits relationship with the Department of Communications (‘DoC’) of this new relationship with Vodafone as a majority and with the Minister, General (Ret.) Siphiwe Nyanda. We were shareholder have already proven to be wide-ranging and pleased to support the Minister’s initiative to reduce mobile significant. Particularly notable has been the impact of termination rates (‘MTRs’) and to lead the industry in announcing cooperation on technical and procurement matters. We have the implementation of these cuts in March 2010. Ongoing 2 Vodacom Group Annual Report 2010 Executive summary engagement with the regulator, the Independent Communications Authority of South Africa (‘ICASA’), is also a key priority. On 15 April 2010, ICASA released for public comment a proposal to make further cuts in MTRs with a view to implementation starting in July 2010. We agree that reducing MTRs will stimulate competition and therefore ultimately lead to lower call charges. Meanwhile, we have been working hard to reduce our operating costs – this gives us the scope to offer greater value to customers. Indeed, our average effective price per minute has fallen by 7.7% in South Africa over the year. The next challenge that our regulator faces is the efficient allocation of radio frequency spectrum in South Africa. Vodacom is one of only a few companies in the country that has the existing network and customer base to be able to maximise the value of this national asset for the benefit of all South Africans. We will do this through our ability to rapidly roll out higher speed access as widely as possible and at the same time aim to provide sustainable returns for all stakeholders. The regulatory conundrum is to balance the need to provide 55.2% a competitive market against the efficient usage that comes with the reasonable allocation Increase in operating free cash flow of spectrum amongst a limited number of companies. With respect to other legislative actions that affect Vodacom’s business, we have made good R13.5 billion (2009: R8.7 billion) headway in implementing the Regulation of Interception of Communication and Provision of Communication – Related Information Act (‘RICA’) and have now registered almost This strong cash flow supported a half of our South African customer base. The implementation of RICA has been at a cost to reduction in the Group’s gearing, with net debt to EBITDA reduced from Vodacom and it has had a dramatic, albeit temporary, negative impact on our customer 1.0 times at the end of last year to numbers. However, rather than dwell on the negative, I would like to say clearly that we 0.6 times as at 31 March 2010. support RICA and the benefits that it can bring to South Africa. Furthermore, we have found that there is a silver lining to the implementation progress – we are now getting to know our customer base better and we are seeing increased foot traffic in the stores. Empowerment – a practical approach I have had the privilege of working in a number of very different industries, and since I started in this role at Vodacom I have been repeatedly surprised by the number of ways that our Group has the power to change lives. The initial vision of bringing communications Vodacom Group Annual Report 2010 3 Chairman’s statement continued to those who have none, to drastically simplify everyday tasks and to drive the development of crucial small and medium enterprises, is really only the beginning. Vodacom has led in the drive to deliver low-cost handsets. The Group has also placed great emphasis on bringing in more affordable smartphones, which often will offer people their first taste of the internet and the benefits that being truly connected can bring. This year will see another example of the deeply practical empowerment that mobile communications can bring. The launch of the Vodacom M-PESA money transfer system in South Africa means that millions of previously unbanked people can take another step closer to the formal economy and enjoy services that are considered basic rights elsewhere in the world. While Vodacom SA continues to change the lives of so many people in the communities in which it operates, there is still work to be done to support broad-based black economic empowerment (‘BBBEE’) and drive transformation within the company. There is a danger when focusing too heavily on scorecards and ratings that true empowerment can be 1.8 million overlooked. We are pleased that we have retained our focus on the bigger empowerment Low-cost (<US$30) handsets sold in 2010 in South Africa picture, with more than R1.3 billion spent in excess of the scorecard target this year in support of enterprise development. By providing essentials such as training, advertising and even office space, we have given entrepreneurs the chance to flourish with community Vodacom has led in the drive to deliver low-cost handsets into all service telephones, Vodashops, and as wireless application service providers (‘WASPs’).