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Administration Telkom SA Limited Annual Report 2009
COMPANY REGISTRATION NUMBER REGULATORY AND PUBLIC POLICY 1991/005476/06 Adv. Ouma Rasethaba Tel: +27 12 311 4785 HEAD OFFICE [email protected] Telkom Towers North 152 Proes Street AUDITORS Pretoria 0002 Ernst & Young Inc. Wanderers Office Park 52 Corlett Drive POSTAL ADDRESS Illovo 2196 Telkom SA Limited We Private Bag X14 Private Bag X881 Northlands 2116 Pretoria 0001 Creating synergy Tel: +27 11 772 3000 TELKOM SHARE REGISTER HELPLINE Fax: +27 11 772 4000 2009 Annual Report Telkom SA 0861 100 948 TRANSFER AGENTS to give business the CUSTOMER CALL CENTRE Computershare Investor Services 2004 (Pty) Ltd 10219 70 Marshall Street COMPANY SECRETARY Johannesburg, 2001 Mmathoto Lephadi PO Box 61051 Tel: +27 12 311 7743 Marshalltown 2107 [email protected] BUSINESS CALL CENTRE MEDIA RELATIONS 10217 Ajith Bridgraj INVESTOR RELATIONS Tel: +27 12 311 7720 Nicola White [email protected] Tel: +27 12 311 5720 UNITED STATES ADR DEPOSITARY [email protected] The Bank of New York [email protected] Shareholder Relations Department SPONSORS PO Box 11258 UBS Securities South Africa (Pty) Limited New York edge 64 Wierda Road East Wierda valley Sandton 2196 NY 10286-1258 Tel: +1 888 643 4269 e-mail: [email protected]
CORPORATE COMMUNICATIONS Brenda Kali Tel: +27 12 311 4301 [email protected]
Telkom SA www.telkom.co.za Annual Report 2009 Telkom cover final 8/12/09 6:46 PM Page 2
Contents 1 Group overview Telkom SA Limited Telkom Group structure and revenue contribution 2 Telkom shareholding 3 Group strategy 4 Annual Report 2009 Financial review summary 6 Operational review summary 7 Equity markets 8 The Telecommuniations Industry 9 The independent benchmarking of Telkom’s pricing 13
2 Management review Chairman’s review 16 Chief Executive Officer’s review 20 Chief Financial Officer’s review 24 Board of directors 28 Chief officers 30 Management team 31 We have the 3 Sustainability review Sustainability review 36 Corporate governance 42 Enterprise risk management 50 Black economic empowerment 58 Human capital management 62 Safety, health and environment 72 Corporate social investment 78 GRI content index 82
4 Performance review Five year operational review 86 Operational review 87 Three year financial review 104 Financial review 105
5 Annual financial statements Directors’ responsibility statement 137 Certificate from Group Company Secretary 137 Report of the independent auditors 138 Directors’ report 140 Consolidated income statement 142 Consolidated balance sheet 143 Consolidated statement of changes in equity 144 Consolidated cash flow statement 145 Notes to the consolidated annual financial statements 146 Company income statement 250 Company balance sheet 251 Company statement of changes in equity 252 Company cash flow statement 253 Notes to the Company annual financial statements 254
6 Shareholder information Shareholder analysis 337 Definitions 339 Special note regarding forward-looking statements 343 Administration ibc Telkom AR front.qxp 8/12/09 6:18 PM Page 1
Telkom Annual Report 2009 1
We are... one of Africa’s largest integrated communication service providers. We aim... to be Africa’s preferred ICT solutions provider.
and resources to Group create a powerful overview
Management communications platform review
Sustainability review
Performance review
Financial statements
Company Financial Information
for more information please visit our website at www.telkom.co.za Telkom AR front.qxp 8/12/09 6:18 PM Page 2
2 Telkom Annual Report 2009
Telkom Group structure and revenue contribution as at March 31, 2009
Telkom SA Our fixed-line segment is our largest business. Telkom South Africa provides fixed-line subscription and connection, traffic, interconnection, data and internet service Trudon – 64.9% Trudon (Pty) Ltd, formerly known as TDS Directory Operations, provides Yellow and White page directory services, an electronic directory service, 10118 “The Talking Yellow Pages”, and an online web directory service. Multi-Links – 100% Multi-Links Telecommunications Limited is one of Nigeria’s pioneer private telephone operators. As one of the leading providers of telecommunications solutions in Nigeria, Multi-Links was one of the first to locally introduce the CDMA technology. Telkom acquired the remaining 25% interest in Multi-Links on January 21, 2009, thereby increasing its ownership of Multi-Links to 100%. Africa Online – 100% Africa Online is an internet service provider (ISP) in Africa. As one of the largest Pan-African ISP in sub-Saharan Africa, Africa Online offers a wide range of services to suit a variety of customer needs. With operations in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, Africa Online is positioned to provide individuals and organisations with scalable solutions based on each client’s specific needs.
Joint venture – Vodacom Group – 50% Vodacom Group (Pty) Ltd is a leading mobile communications company in South Africa, providing mobile communications services as of March 31, 2009 to 39.6 million customers in South Africa, Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique. Vodacom has an estimated market share of 53% in South Africa. Telkom concluded the sale and unbundling of its interest in Vodacom after year end. Swiftnet – 100% Swiftnet (Pty) Ltd trades under the name FastNet Wireless Services. FastNet provides synchronous wireless access on Telkom’s X.25 network, Saponet-P, to its customer base. Services include retail credit card and check point of sale terminal verification, telemetry, security and fleet management. Telkom’s Board of directors has decided to dispose of Swiftnet. Telkom Media – 75% Telkom Media is the holder of a commercial satellite and cable subscription broadcasting licence, which allows it to operate both a satellite pay-TV service and an IPTV service in South Africa. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Pty) Ltd. Telkom AR front.qxp 8/12/09 6:18 PM Page 3
Telkom Annual Report 2009 3
Telkom shareholding as at March 31, 2009
Government Black Ginger 33 Public Investment The government of the (Pty) Ltd Corporation Republic of South Africa is Black Ginger 33 (Pty) Ltd is The Public Investment the largest shareholder in a wholly owned (100%) Corporation (PIC) is an Telkom, holding 39.8% of subsidiary of the Public investment management the Company’s issued share Investment Corporation company wholly owned by capital. The government is holding 8.9% of the the government. It invests the Class A shareholder. Company’s issued share funds on behalf of public capital. Black Ginger 33 is sector entities. The PIC holds the Class B shareholder. 6.7% of the Company’s issued share capital.
Group overview Elephant Telkom Treasury Free float The free float of 33.6% Consortium Stock Management review The Elephant Consortium is Rossal No 65 (Pty) Ltd holds makes up the remainder of a Black Economic 11,646,680 shares, 2.2% the Company’s issued share Empowerment group, which of the Company’s issued capital. Included in the free Sustainability review through Newshelf 772 (Pty) share capital which were float are 11,570,245 Ltd holds 7.2% of Telkom’s purchased for the Telkom shares held by 91,625 retail shareholders Performance issued share capital. Conditional Share Plan. review Acajou Investments (Pty) Ltd representing 2.2% of the holds 8,143,556 shares, Company’s issued share Financial 1.6% of the Company’s capital. statements issued share capital.
Company Financial Information Telkom AR front.qxp 8/12/09 6:18 PM Page 4
4 Telkom Annual Report 2009
Group Strategy – The evolution of Telkom
Defend profitable revenue
• Maintain fixed-line net revenue. • Improve competitiveness through tariff rebalancing. • Retain leading fixed-line market • Build customer retention initiatives that entice share. customers to stay with Telkom. • Increase annuity • Build customer loyalty by providing superior revenue as a value propositions that position Telkom as the percentage of total service provider of choice. fixed-line operating • Convert revenue streams to annuity revenue. revenue.
Grow profitable revenue through broadband and converged services
• Expand our broadband footprint. • Increase bandwidth to offer higher bandwidth • Increase broadband applications. penetration. • Deliver superior data • Provide converged information, speed and quality communications and technology solutions to through fixed-line the enterprise market and enable the digital network. home in the consumer market. • Increase converged • Bundle content to provide added value in services revenue. subscription and pay-as-you go models. • Partnerships with content • Target the medium to large business segment providers. to meet their demand for end-to-end solutions. • Improve market share in • Satisfy customer demand for converged one- information technology stop solutions for communications and services sector. information technology infrastructure • Expand domestic data requirements. centre operations. • Develop improved value propositions through • Improve innovation customer understanding enabled by the capability. customer centricity programme. • Grow organically and through acquisitions. • Enhance availability to successfully partner with others where synergistic opportunities exist. Telkom AR front.qxp 8/12/09 6:18 PM Page 5
Telkom Annual Report 2009 5
Grow profitable revenue through wireless voice and mobile data services
Transform fixed-line business to incorporate key value-added services, including mobile converged voice services. • Provide integrated bundled offerings. Build a cost-effective wireless voice and mobile data network in selected areas to offer: • Combine with mobility to enhance fixed-line • Wireless access in campus environments, offering. gated communities, security complexes and other developments. • Mobile data services. • Fixed and nomadic wireless voice services.
Grow profitable revenue internationally
Become a Pan-African integrated service provider, offering: • International communications and internet • Increase revenue connectivity. and long-term profitability from • Hosting and managed data services. acquired African • Wireless voice and mobile broadband Group subsidiaries and solutions. overview international services. Leverage synergies across the Telkom Group to grow revenue from subsidiaries – organically Management review and through acquisitions. Introduce converged fixed and mobile service Sustainability in the Nigerian market through Multi-Links. review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:18 PM Page 6
6 Telkom Annual Report 2009
Financial review summary Continuing operations
Solid revenue growth EPS & HEPS The 3.3% growth in fixed-line revenue to The decrease in both headline and basic earnings per R33.7 billion contributed to the Group’s overall share reflects increasing operating expenses, once-off 6.9% revenue growth to R35.9 billion. impairments of Multi-Links and Africa Online and increased finance charges and fair value movements.
Operating revenue Annuity revenue Rm R35,940m Rm 40 8 (R33,611m) 35 7 Strong growth in data 30 6 revenues, higher revenue R7,387m 25 5 from interconnection and (R6,917m) 20 calling plans, partially off- 4 Telkom continues to be 15 set by lower traffic. Multi- 3 successful in tying in large 10 Links delivered strong 2 corporate customers to 5 revenue growth as a result 1 term and volume discount
0 of subscriber growth. 0 plans. 07 08 09 07 08 09
Data revenue Operating expenditure Rm Rm 10 30 000 9 25 000 R9,310m 8 7 R29,895m (R8,308m) 20 000 Higher demand for data 6 (R25,014m) services, including ADSL, an 5 15 000 Operating expenses 4 increase in internet access 10 000 increased across all 3 and related services and segments and were affected 2 5 000 managed data network 1 by a number of once-off services. 0 0 items. 07 08 09 07 08 09
Operating profit Headline earnings per share Rm cents 10 1 400 9 1 200 8
7 R6,388m 1 000 6 (R9,069m) 557.0 cents 800 5 Excluding the Multi-Links 4 (1,028.9 cents) 600 impairment of R1.8 billion 3 Decrease in headline the South African business 400 2 earnings reflects decrease performed well in the current 1 in operating profit and 200 0 high inflationary environment. increased finance charges. 0 07 08 09 07 08 09 Telkom AR front.qxp 8/12/09 6:18 PM Page 7
Telkom Annual Report 2009 7
Operational review summary
Quality, value for money products delivering strong growth
93% ADSL coverage 27.3% increase 93% of our exchanges are ADSL in calling plan enabled. They consist of 4,000 subscribers digital subscriber line access The Telkom Closer packages have multiplexers, serving approximately performed well, increasing by 27.6% 548,015 customers, which to 575,812 plans. Supreme call represents a growth of 33.0%. packages, targeted at the business segment, have increased by 14.4% to 14,778 packages and PC bundles have increased 48.3% to 11,336.
58% increase in Do 7.4% increase in Broadband packages wholesale internet Do Broadband subscribers leased lines increased 58.1% to 188,540. The growth in broadband Our current Broadband line has stimulated the demand for penetration rate is 15%. leased lines. Wholesale internet leased lines increased 7.4% to 24,204 lines.
57% self-install ADSL 141 W-CDMA base Group packages stations selectively overview Our self-install option is very deployed popular and had a positive Telkom has commenced the Management impact on ADSL installation deployment of a W-CDMA review times. wireless local loop network in the 2100MHz band. Sustainability review
ADSL subscribers (000) Managed data network sites Supreme Call subscribers Do Broadband subscribers (000) (000) (000) Performance 600 30 16 200 review
14 180 500 25 160 12 140 Financial 400 20 statements 10 120 300 15 8 100
6 80 200 10 Company 60 Financial 4 Information 40 100 5 2 20 0 0 0 0 07 08 09 07 08 09 07 08 09 07 08 09 Telkom AR front.qxp 8/12/09 6:18 PM Page 8
8 Telkom Annual Report 2009
Equity markets
The financial year ended March 31, 2009 was characterised by extreme volatility in global stock markets and currencies as a result of the sub-prime crisis. Despite these difficulties we managed to conclude: • The sale of our 15% share in Vodacom to Vodafone Plc for the excellent price of R22.5 billion. In addition, the remaining 35% share in Vodacom was unbundled directly to shareholders. Details of the transaction can be found in the performance review. • As a result of this transaction Telkom was able to pay a special dividend of R19.00 per share to its shareholders. • In addition, Telkom declared an ordinary dividend of R1.15 and a special dividend of R2.60 in respect of the 2009 financial year. Telkom remains committed to returning cash to shareholders and growing shareholder value.
Market performance JSE Limited NYSE (ZAR per ordinary share) (USD per ADS) year ended March 31 year ended March 31, 2008 2009 2008 2009
Closing price 131.20 105.49 65.43 44.93 Highest price 195.02 107.37 113.00 45.03 Market capitalisation (millions) 68,327 54,937 8,519 5,850
JSE share price vs volume traded NYSE share price vs volume traded
160 20 000 000 85 250 80 150 17 500 000 75 200 140 15 000 000 70 65 130 12 500 000 60 150 55 120 10 000 000 50 Volume 110 7 500 000 45 100 Volume 40 Share price (R)
100 5 000 000 Share price (USD) 35 50 30 90 2 500 000 25 80 0 20 0
Mar 08 Jun 08 Aug 08 Nov 08 Jan 09 Mar 09 Mar 08 Jun 08 Aug 08 Nov 08 Jan 09 Mar 09
Share price (R) Volume Share price (US$) Volume
JSE share price relative to SA indices NYSE share price relative to major international stock market indices
FTSE 250 Telcos -25.2
Telco index -15.5 Telkom US$ -31.3 Nasdaq -32.9 Telkom -19.6 FTSE Global Telcos -34.6
All share -31.2 S&P Telecoms -36.8 DJI -38.0 S&P 500 -39.7 Industrials -32.4 FTSE 350 Telcos (in USD) -46.1 0 0 -50 -60 -40 -20 -10 -30 -10 -40 -30 -20 % % Telkom AR front.qxp 8/12/09 6:18 PM Page 9
Telkom Annual Report 2009 9
The telecommunications industry
Conclusion of Vodacom transaction gives Telkom
freedom to compete
Overview Telkom is an integrated communications service provider offering bundled voice, data, broadband and internet services with its service offerings expanded to business and residential customers.
Competition in the South African fixed-line communications market is intense and is increasing as a result of the Electronic Communications Act and determinations issued by the Minister of Communications.
The new licensing framework included in the Act has resulted in the market becoming more horizontally layered with a large number of separate licences being issued for electronic communications network services, electronic communications services, broadcasting services and radio frequency spectrum and, as a result, this will substantially increase competition in Telkom’s fixed-line business.
In the areas where we currently face competition, and expect to compete for public switched telecommunications services, Telkom competes primarily on the basis of customer service, quality, dependability and price. In addition, we intend to introduce new Group overview products, services and tariff structures to enable us to maintain and grow revenue.
Management Fixed-line voice competition review In September 2004, South Africa’s Minister of Communications granted an additional licence to provide switched tele- communications services to Neotel, a company that was 30% Sustainability review owned by Transtel Telecoms, a division of Transnet Limited, and Esitel, which is beneficially owned by the South African
government and other strategic equity investors, including a 26% Performance shareholding owned by TATA Africa Holdings (Pty) Ltd, a member review of the TATA Group, a large Indian conglomerate with information and communications operations. On March 19, 2008, Neotel Financial announced that the Competition Tribunal of South Africa had statements approved its acquisition of Transtel without any conditions. Subsequently, TATA Africa Holdings (Pty) Ltd acquired the Company government’s 30% equity, extending its equity in Neotel to 56%. Financial Information Neotel started providing services to large corporations and other licensees at the start of the 2007 calendar year and on April 25, 2008, announced that the first of its consumer products were Telkom AR front.qxp 8/12/09 6:18 PM Page 10
10 Telkom Annual Report 2009
The telecommunications industry (continued)
All existing licences have been converted
available to limited parts of Johannesburg individual ECNS and individual ECS including licence fees to be paid, minimum and Pretoria. licences for a public entity’, inviting services to be provided to customers and Broadband Infraco to submit applications other service obligations, will be contained As a result of an amendment to the for these licences. in regulations, some of which have been Electronic Communications Act to enable promulgated and some of which are in the state investment and licensing in the sector, The process to issue additional licences to process of being promulgated. the government created an infrastructure small business operators for the purpose of company, Broadband Infraco (Pty) Ltd, in providing telecommunications services in Telkom’s licence fee under the public 2007, to provide inter-city bandwidth at underserviced areas with a teledensity of less switched telecommunications service cost based prices to Neotel and, later, to than 5% started in 2005. To date, the licence amounted to 0.1% of its annual the rest of the industry, which added further Minister of Communications has identified revenue generated from the provision of the competition to Telkom’s communications 27 underserviced areas and ICASA has licensed public switched telecommuni- network. Broadband Infraco will also be issued licences to seven successful bidders cations services. This provision was involved in some of the undersea cable with the Minister issuing invitations to apply retained following the conversion to the projects. for licences in an additional 14 areas. ECS and ECNS licences. However, in terms of a regulation published on April 1, Licences All existing USAL licences, including 2009, Telkom’s annual licence fees for On October 29, 2008, the Minister of Telkom’s, have been converted into ECS ECS and ECNS were set at 1.5% of gross Communications published for public and ECNS licences, and all future licences profit from licensed activities, defined as comment, a draft policy direction for this category will be issued as ECS and total revenue obtained from the provision of which would direct ICASA to grant ECNS licences. licensed services, less total costs directly Broadband Infraco individual Electronic incurred in the provision of such services. These licences provide the authorisation to Communications Services (ECS) and As a result, there may be a material construct, maintain and operate an Electronic Communications Network increase in Telkom’s annual licence fee. electronic communications network and Services (ECNS) licences. provide ECNS and ECS. All the obligations On March 25, 2009, the telecommuni- On March 13, 2009, ICASA published contained in Telkom’s public switched cations industry put forward proposals to an ‘invitation for a public entity to apply for telecommunications service licence, ICASA regarding a Service Charter
Telkom is in the process of challenging the proposed new licence fee regulation Telkom AR front.qxp 8/12/09 6:18 PM Page 11
Telkom Annual Report 2009 11
regulation that stipulated standard levels of service. The standards stipulated in the regulation are extremely demanding and, the The 2010 Telkom ‘hotseat’ communications industry has made representation to ICASA. On This is the control room – the ‘hotseat’ – for our 2010 World July 24, 2009, ICASA has repeated the previous Service Charter Cup soccer national transport network. From here, our highly regulation and published a new regulation that implements many skilled team will direct all incoming and outgoing of the recommendations made by the industry. transmissions for the duration of the tournament.
Other licences In August 1995, Telkom’s subsidiary, Swiftnet, was granted a tele- communications licence and a radio frequency spectrum licence for the provision of:
• The construction, maintenance and operation of a national wireless data network and the provision of wireless data telecommunications services; and
• Interconnection with Telkom’s network.
In terms of the licence agreement, Swiftnet was required to have at least a 30% black economic empowerment (BEE) shareholding. In spite of Telkom entering into an agreement in 2007 to sell 30% of Swiftnet to the Radio Surveillance Consortium, a group of empowerment investors, an agreement that received Competition Commission approval, ICASA did not approve the transaction. As a result, Swiftnet was in breach of its licence.
Swiftnet, assisted by Telkom, has subsequently had two meetings with ICASA on this matter and ICASA has indicated that currently there is no agreement within the industry as to acceptable BEE shareholding percentages for all licensees. ICASA also indicated that the shareholding issue for the Swiftnet licence would have to be in line with the BEE values applicable to other similar licensees.
Swiftnet received a new licence from ICASA on January 16, 2009 Group which stipulated that the company still needed to secure a 30% overview BEE shareholding. However, ICASA has said that in the 2010 financial year it will be reviewing the equity shareholdings of all licensees, after which it is anticipated that all licensees will be Management review given sufficient time to meet their equity shareholding requirements. Telkom’s Board of directors has decided to dispose of Swiftnet,
and Telkom is currently seeking potential purchasers that would Sustainability review comply with Swiftnet’s BEE requirements.
Carrier pre-selection The now repealed Telecommunications Act mandated that fixed-line Performance review operators were required to implement carrier pre-selection to enable customers to choose and vary their fixed-line telecommunications
carrier for long distance and international calls. These provisions Financial statements were retained in the Electronic Communications Act and on June 24, 2005, regulations were published for the implementation of
carrier pre-selection in two phases (the implementation of call-by-call Company Financial pre-selection and fully automatic pre-selection, to be implemented Information and provided within two months and 10 months, respectively, of them being requested by another operator). Telkom had already conditioned its exchanges to handle call-by-call carrier pre-selection Telkom AR front.qxp 8/12/09 6:18 PM Page 12
12 Telkom Annual Report 2009
The telecommunications industry (continued)
Telkom has made significant progress in rebalancing its fixed-line tariffs...
by December 31, 2003. Telkom has met includes multi-line porting, secure file including lines of 2 Mbps of capacity and with Neotel to discuss its request for transfer protocol access to third parties and the rental and installation of business implementing carrier pre-selection. operational software upgrades on the exchange lines. central reference data base. Until Neotel’s interconnection systems and Approximately 57% of Telkom’s operating its inter-operator process and systems to The set-up and per-operator costs are revenue in the year ended March 31, support carrier pre-selection become typically the largest cost components of 2008 was included in this basket, available, Telkom cannot fully implement implementing number portability. Similar to compared to approximately 54% in the carrier pre-selection. However, Telkom carrier pre-selection, there is a risk of not fully year ended March 31, 2009. does not believe it can meet the 10 months recovering system set-up costs. The deadline for automatic carrier pre- implementation of these requirements in a selection. timely manner, could result in Telkom’s business being disrupted and cause its net Number portability profit to decline and the implementation of The Telecommunications Act mandated that these requirements will likely further increase number portability, to enable customers to competition and cause churn rates to retain their fixed-line and mobile telephone increase. numbers if they switch between fixed-line operators or between mobile operators, be Fees and tariffs introduced. These provisions were retained Telkom has made significant progress in in the Electronic Communications Act. rebalancing its fixed-line tariffs with a view A framework number portability regulation to focusing more on the relationship was published at the end of 2004 that between the actual costs and tariffs of generically provides for the introduction of subscriptions and connections and traffic in fixed-to-fixed and mobile-to-mobile number order to more accurately reflect underlying portability. Telkom is required to implement costs and to be more competitive. number portability in blocks of 10,000 Regulations made under the repealed numbers within two months after Neotel Telecommunications Act, but which are still launches such retail services and individual in effect, imposed a price cap (3.5% number portability within 12 months of below inflation, effectively implying a receiving a request from Neotel. Telkom continuous real decrease in prices) on a has received a request from Neotel to basket of Telkom’s specified services. These implement both block and individual include installations; pre-paid and post- number portability and Telkom and Neotel paid line rentals; local, long distance and implemented number portability in blocks international calls; fixed-to-mobile calls; of 10,000 and 1,000 numbers in May public payphone calls; ISDN services; its 2009. After several delays mobile number Diginet product and its Megaline product. portability phase one was launched on A similar cap applies to a sub-basket of November 11, 2006. Phase 2, which those services provided to residential was implemented during April 2007, customers, including leased lines up to and Telkom AR front.qxp 8/12/09 6:18 PM Page 13
Telkom Annual Report 2009 13
Independent benchmarking of Telkom’s pricing – Tarifica review, 4th quarter 2008 Telkom continues to manage its pricing actively in order to continually offer enhanced value to our customers. We intend to educate all our customers as to the global attractiveness of our pricing and the value offered by the fixed-line service. Telkom’s mobile offering will follow the lead of the fixed-line in terms of competitive pricing. Below find a selection of Tarifica’s findings.
Local peak (3 minute) Source: Tarifica 4th quarter 2008 0.25
0.20
0.15
a - Euros 0.10
0.05
0.00 Slovak Republic Cyprus Malta Slovenia Germany Iceland Telkom Bulgaria Luxembourg Estonia Hungary Turkey Croatia Italy Latvia Denmark Average Netherlands Sweden Spain Lithuania Finland Norway Ireland UK (BT) France Poland Switzerland Portugal Greece Czech Republic Austria Belgium Romania
Local off peak (3 minute) Source: Tarifica 4th quarter 2008
0.20
0.15
0.10 a - Euros
0.05 Ireland UK (BT) 0.00 Slovak Republic Malta Telkom Cyprus Luxembourg Turkey Croatia Bulgaria Lithuania Slovenia Romania Austria Denmark Netherlands Poland Switzerland Estonia Germany Czech Republic Latvia Average Iceland Italy Hungary Spain France Norway Portugal Sweden Belgium Finland Greece Group overview
Management review To adjacent country Peak (3 minutes) Source: Tarifica 4th quarter 2008
1.0 Sustainability review
0.8
Performance 0.6 review a - Euros 0.4 Financial statements
0.2
Company
0.0 Turkey Cyprus Sweden Norway Switzerland Netherlands Iceland Romania Slovenia Telkom Denmark France Luxembourg Bulgaria Austria Poland Czech Republic Latvia Slovak Republic Finland Average Malta Spain Estonia Hungary Ireland Greece Belgium Italy Portugal Croatia Germany UK (BT) Lithuania Financial Information Telkom AR front.qxp 8/12/09 6:18 PM Page 14
14 Telkom Annual Report 2009
Independent benchmarking of Telkom’s pricing – Tarifica review, 4th quarter 2008
Residential: Installation Source: Tarifica 4th quarter 2008
1.5
1.2
0.9
a - Euros 0.6
0.3
0.0 Germany Turkey Cyprus Telkom Switzerland Norway Sweden Netherlands Iceland Romania France Slovenia Luxembourg Austria Poland Slovak Republic Czech Republic Ireland Spain Bulgaria Average Malta Denmark Estonia Belgium Latvia Italy Greece Hungary Finland Portugal UK (BT) Lithuania Croatia
150 Business: Installation Source: Tarifica 4th quarter 2008
120
90
a - Euros 60
30 Turkey Iceland Czech Republic Romania Switzerland Telkom Greece Slovak Re Bulgaria Netherlands Latvia S Cyprus Norway Malta Denmark Ireland UK (BT) Austria Estonia France Luxembourg Germany Belgium Lithuania Average Hungary Sweden Croatia Portugal Slovenia Poland Italy Finland (Elisa)
0 pain public
64 kbits / 50kms Source: Tarifica 4th quarter 2008 600
500
400
300 a - Euros
200
100 France 0 Croatia Iceland Latvia Telkom Malta Norway Finland Hungary Bulgaria Turkey Denmark Cyprus Greece Sweden Luxembourg Average Romania Germany Ireland Spain UK (BT) Italy Austria Netherlands Belgium Poland Portugal Czech republic Switzerland Telkom AR front.qxp 8/12/09 6:18 PM Page 15
management team with experience to guide the Group
Management review Chairman’s review 16 Chief Executive Officer’s review 20 Chief Financial Officer’s review 24 Board of directors 28 Chief officers 30 Management team 31
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:19 PM Page 16
16 Telkom Annual Report 2009
Chairman’s review
We have strengthened the Board, our structures and processes to ensure Telkom’s transformation
The year under review was characterised The socio-economic environment by the sale of Vodacom, a fast and This period is marked by the shrinking local substantively changing competitive local economy, growing activism of our landscape, and our efforts to grow in other shareholders and stakeholders, the socio- parts of the African continent. To ensure economic challenges and new political consistent growth in value for our leadership. shareholders, among our strategic priorities, Bold and creative leadership is required to my first year in Telkom was to bring stability create employment, and intervene in the to the organisation; the second a education, health, housing and security strengthening of the Board; and the third sectors. These socio-economic factors will must embed the ongoing transformation of strain corporations and increase the focus the new Telkom to defend, grow, and on companies as good corporate citizens. deliver, competitively. While it has been a Pressure on the government to further reduce demanding period for the Telkom Board, communication costs and widen services to we have been preparing for our most boost the economy and public services will Shirley Lue Arnold challenging year, which lies ahead. increase. Reporting on sustainability and Chairman Restructuring Telkom SA Limited environment impacts is also being more This demands Telkom’s organisational strongly demanded. Telkom is addressing It is with great regret that we structures and operational systems become these issues and our efforts are detailed said a final farewell to the more responsive, adaptive and much elsewhere in this report. quicker in delivering innovative and quality former Minister of The South African Gross Domestic Product services. More detail on the strategic Communications Dr Ivy (GDP) dropped 1.5% in the six months to priorities and restructuring of the company is Matsepe-Casaburri, who March 2009, with the mining, manufac- provided by Reuben September in his turing and automotive industries being passed away on April 6, CEO review. particularly hard hit. In addition, in the first 2009. She was a great source The change is fundamental to our strategy quarter of 2009, formal employment fell by of strength to us and we will to grow our market share in South Africa 90,000. The rand remained under miss her wise counsel. and build a strong footprint across the pressure with the resultant impact on the African continent. It is vital to Telkom’s economy and we believe that until world survival to continually retire obsolete legacy markets revive, the overall macro-economic systems and bureaucracies as we review scenario remains parlous. our performance and restructure to meet our challenges. Telkom AR front.qxp 8/12/09 6:19 PM Page 17
Telkom Annual Report 2009 17
Group overview The regulatory environment 99.9% of our telephone access lines were using three satellite operators – Intelsat, The regulatory environment remains connected to digital exchanges. SES-Newskies and Hellas Sat. Management challenging as the telecommunications Our national network operations centre Progress continues with the roll-out of the review regulator, ICASA, continues to implement provides our corporate and global Next Generation Network (NGN). The the Electronic Communications Act. Until all customers with managed data networking NGN will give us significant advantages the new regulations are promulgated, an over mobile operators through increased Sustainability services and our investment in a third review element of uncertainty will bedevil all upgrade of the South Atlantic Tele- ability to carry traffic, provide superior operators. Telkom remains committed to communications Cable – 3 West African quality services and compete on price. working with ICASA for the greater good submarine cable/South Africa Far East – Changing market dynamics Performance review of the South African telecommunications has increased fibre optic transmission To counter the continued decrease in voice industry. capability between South Africa and revenues through the shift to mobile
international destinations. Our supply units, we are aggressively expanding our Financial The technological environment statements contract for the development of the EASSy broadband footprint to offer and host Our fully digital fixed-line network provides submarine cable system will link eight higher bandwidth applications such as service to every major urban area in South video services. Our enhanced ADSL countries from Sudan to South Africa. Company Africa, giving Telkom a competitive edge offering enables our customers to access a Financial Information over other communications service The acquisition of satellite bandwidth from host of broadband value-added services. providers selling value-added voice and Intelsat in the Atlantic and Indian Ocean ADSL subscribers increased by a pleasing data services. At the end of March 2009, regions provides services on eight satellites 33% over the previous financial year. Telkom AR front.qxp 8/12/09 6:19 PM Page 18
18 Telkom Annual Report 2009
Chairman’s review (continued)
We continue to explore all avenues that will provide us with growth
Our strategic direction, the implementation Chief Financial Officer of AngloCoal, on Africa during the year under review. An of Telkom’s new structure and the increasing September 1, 2008. additional R832 million is expected to be challenges of the competitive and spent in the 2010 and 2011 financial The change in our articles of association regulatory environment are explained more years. FIFA’s president, Sepp Blatter has allowed our new Chief Financial Officer, fully in the Chief Executive Officer’s review. been most complimentary about Telkom’s Peter Nelson, to join the Board on services (see box alongside). A major spin- Management continues to identify December 8, 2008. off of the project is that all the equipment opportunities for growth, particularly in sub- Detailed curriculum vitae can be viewed on used will benefit local and other Saharan Africa. pages 28 and 29. communities. The Vodacom transaction Empowerment Appreciation The conclusion of the sale of 15% of our While we remain a champion of Broad A special note of appreciation must go the shares in Vodacom to Vodafone and the Based Black Economic Empowerment Telkom Board members for their tireless unbundling of the remaining 35% to (BBBEE) with excellent performances in commitment to Telkom under demanding shareholders after year end allows us to some areas (10 out of 10 for management conditions, our employees, and all our enter the South African mobile market and control and 19.1 out of 20 for preferential customers. provide fully converged services. Telkom is procurement), our overall BBBEE status is now a smaller company which allows us to relatively low – a level 6 contributor at the Telkom has remained, through even more put more focus on our key growth areas. last verification. A new BBBEE strategy will difficult times in our history as one of South be implemented to rectify this situation. See Africa’s leading ICT companies, and the The Board page 58. Board and Executive will continue to In the year under review, Mark Lamberti provide value to our shareholders and resigned on June 3, 2008 and the PIC Confederations Cup and the 2010 service to the country as a strategic representative, Athol Rhoda, resigned Soccer World Cup national asset. on July 3, 2008. I would like to thank them A significant accolade for the year under both for their commitment and support. review was being appointed FIFA’s main Brian Molefe replaced Athol Rhoda as the partner for the development of fixed-line PIC’s representative. network infrastructures for these major sports events. Some R118 million was We were pleased to welcome Peter invested in the necessary equipment and Shirley Lue Arnold Joubert, director of companies, on August cabling for the soccer stadia around South Chairman 12, 2008, and David Barber, former Telkom AR front.qxp 8/12/09 6:19 PM Page 19
Telkom Annual Report 2009 19
On target for 2010
‘For the first time ever, the FIFA World Cup will kick off on African soil. This is an exciting, historic moment for Africa, and YOU are the people making it happen. For me, it will be the realisation of a dream. I have seen what football means to Africa. With so many talented and outstanding African players, coaches, clubs and national teams it is fitting that the 2010 FIFA World Cup should find a home on this continent.
I have felt South Africa’s enormous enthusiasm – from the blue-collar worker to the top executive. This country has a phenomenal spirit, and I am privileged to share in the hope and inspiration that the 2010 FIFA World Cup is bringing to your people. You have shown the world that South Africa can achieve wonders, and there is no doubt in my mind that you will be ready.
Telkom is ideally placed to make this a FIFA World Cup to be remembered. You are making history. Not only is this the first time the tournament is being hosted in Africa, but it is also the first time the event will be broadcast in high definition. With the huge volume of voice and data traffic that will be moving through the FIFA event network, your work is critical in facilitating the successful broadcast of the event.
Group overview
Management review
Telkom is on target for meeting the FIFA Confederations Cup 2009 requirements. And the completion of the Sustainability review network will allow Telkom to meet its requirements for 2010. This is how I know Telkom can deliver.
Your efforts not only guarantee the smooth running of the games, but also build an infrastructure that will benefit Performance your country long after we are gone. This is the kind of legacy we hope the 2010 FIFA World Cup will leave review in Africa, and you are delivering an enormous gift, not just to us, but also to your own people.
I have seen what this nation can do – the spirit of Ubuntu that pulls you together. With teamwork you can Financial achieve anything and Telkom is no different. I have every confidence in you, the Telkom staff, to make this the statements greatest FIFA World Cup we have ever seen’ – Sepp Blatter.
Company Financial Information Telkom AR front.qxp 8/12/09 6:19 PM Page 20
20 Telkom Annual Report 2009
Chief Executive Officer’s review evolve with the changing trends, meet the demand
The ICT market is never static, unknown and competitive markets, highly characterised as it is by fluidity, change volatile currency fluctuations, infrastructure and on-going innovation and those factors and technology challenges. But, expensive aptly summed up the year under review. as they were, we have learned our lessons and we are ready to capitalise on the Following the sale of Vodacom at what I opportunities going forward. believe was an exceptional price given the market conditions, and returning substantial In South Africa, our on-going drive to capital to our shareholders, and the sale of enhance the Next Generation Network our 75% stake in Telkom Media to (NGN) continues to deliver significant Schenzen Media, we are now poised to benefits and gives us a substantial compete more aggressively in the competitive edge in providing our telecommunications market. Our defend customers with a full suite of converged ICT and grow strategies are on track and, services. In particular, given the fact that following our restructuring, we are better we can now enter the mobile market, the NGN’s leading edge technologies will Reuben September placed to manage our resources more enable us to carry increased traffic, Chief Executive Officer effectively and efficiently. provide superior service and compete on Our South African operations remain our price in a market where quality and In South Africa, our on-going core business and cash flow generator and efficiency is key. I am pleased to report that we achieved drive to enhance the Next Financial overview good growth in our bundled calling plan Generation Network (NGN) Our operating revenue from continuing products – Telkom Closer and Supreme operations grew by 6.9% to R35.9 billion continues to deliver benefits Call – and significant growth in our in the year under review. Operating profit and gives us a competitive broadband products. We once again from continuing operations declined by edge in providing our achieved double digit growth from our 29.6% to R6.4 billion and cash generated customers with a full suite data revenue, up 12.1% to R9.3 billion for from operations before dividends paid fell the year. of converged Information, by 9.6% to R14.8 billion. Communication and In Africa, our footprint now covers almost The Group EBITDA margin decreased from Technology (ICT) services. the entire continent, with the exception of 39.3% to 32.5% in the year under review, North Africa, which gives us the mainly because of an EBITDA loss of opportunity to extend our services to a very R226 million recorded by Multi-Links and fast-growing market. We took our holding higher fixed-line operating expenditure in Multi-Links Nigeria up to 100% and, which reduced the fixed-line EBITDA post the year end, we acquired MWEB margin to 25.8% as at March 31, 2009 Africa, including AFSAT, from Naspers. compared to 36.3% as at March 31, However, on the debit side, our initiatives 2008. The South African business, however, in Africa to date have been most performed relatively well, and excluding challenging, with high start-up costs, the Multi-Links, Telkom Media and Africa Telkom AR front.qxp 8/12/09 6:19 PM Page 21
Telkom Annual Report 2009 21
Online impairments, the fixed-line EBITDA R9.3 billion. Data connectivity revenue Defend profitable revenue margin would have been 32.3%. increased to R5.0 billion, up 10.9% and Our key objectives are to improve our internet access revenues increased by 29.6% competitiveness in areas where competition We experienced a 45.9% decrease in to R1.5 billion. Our managed network is expected to intensify by use of tariff headline earnings per share to 557 cents a services and VPN revenues were up by rebalancing, building customer retention, share and declared an ordinary dividend of 22.3% to R891 million. We intend to continue building customer loyalty and converting 115 cents per share and a special dividend to exploit the competitive edge our high-quality revenue streams to annuity revenue. of 260 cents per share, a decrease of s, network gives us in the corporate data market. 43.2% from the ordinary dividend of Pricing is a key element and our tariff 660 cents per share declared in the 2008 Cost management is a key element in rebalancing will focus mainly on the financial year. The dividend was paid to creating shareholder value, particularly as relationship between the actual costs and shareholders on July 20, 2009. competition continues to erode our revenue tariffs of line rentals and traffic so we can base. As a result of the vicious inflationary compete in a liberalised communications Total traffic revenue decreased by 3.9% to environment; expenses incurred by the market. We aim to protect our margins and R15.3 billion, with local traffic revenue Vodacom transaction; an R85 million increase the per second billing benefits as decreasing 10.8% to R3.6 billion and long impairment of Africa Online; the R254 million part of our bundled packages. distance revenue decreasing by 9.6% to impairment of Telkom Media and the • Differentiating retail list prices from R2.0 billion, primarily because of the R1.8 billion impairment of Multi-Links, our value-based offerings. continuing fixed to mobile substitution. fixed-line operating expenses rose by Our quest is to convert customers from The Telkom Closer packages performed 19.6% to R29.8 billion. usage-based products to adopting well, growing by 27.6% to 575,812 plans Employee expenses rose to R8 billion, an calling plans and bundles. and Supreme call packages, targeted at increase of 8.1%; selling, general and • Value-based calling packages and the business segment, grew by 14.4% to administrative expenses were up 68.8% to bundles. 14,778 packages. Our PC bundles showed R6.6 billion; service fees rose 14.4% to Our intention is to deliver value to our a 48.3% growth to 11,336 packages and R2.8 billion and payments to other customers and thus improve retention we continued successfully to tie in large operators increased 9.2% to R7.5 billion, and loyalty. We will bundle call minutes corporate customers to term and volume with operating leases decreasing by 1% to with access line rental in an attractive discount plans. R613 million. Depreciation, amortisation, subscription-based value proposition to impairment and write-offs increased by Annuity revenue streams, excluding line deliver greater value to our customers. 16.8% to R4.4 billion. Headline earnings installations, reconnection fees and customer from continuing operations decreased premises equipment sales, grew by 6.8% • Converting revenue to annuity-based Group overview 45.9% to 557 cents per share for the year to R7.4 billion and we will seek to continue revenue. ended March 31, 2009. The reduced to convert revenue streams to annuity This will help us offset declining usage- earnings can be attributed to the significant based revenue and boost annuity revenues, largely through bundling call Management impairments contained in operating revenue. review minutes with access line rental in attractive expenses and negative foreign exchange subscription-based value propositions. Our • Rebalancing prices of data services. and fair value movements of R1.1 billion current line penetration of bundled products We will pass on the benefits of Sustainability resulting from the depreciation of the rand review is 41.7%. By 2013/14, we are targeting increased network efficiencies to and the naira against the US dollar. a penetration of 56%. customers so we can defend our market Strategic overview share and revenue. Broadband and converged services Performance Our core strategy is to defend and grow review performed very well with a 33% growth in • Differentiated attributes of our offerings. profitable revenue, while managing costs. ADSL subscribers to 548,015. There was We will emphasise the offerings that We will aim to differentiate ourselves from a 58.1% increase in Do Broadband customers value so that we can Financial competitors by moving from a provider of statements subscribers to 188,540. Internet all-access compete on more than just price. basic voice and data connectivity to subscribers grew to 423,196, an increase become Africa’s preferred information, Build customer retention of 18.2%. Company communications and technology service We will continue to launch initiatives to Financial Information In line with our strategy of growing our data provider offering fully converged voice, attract customers to stay with us and focus on business, data revenues (including broad- data, video and information technology customer centricity through implementing band) increased a very pleasing 12.1% to services. value and needs-based customer Telkom AR front.qxp 8/12/09 6:19 PM Page 22
22 Telkom Annual Report 2009
Chief Executive Officer’s review (continued)
segmentation. Additionally, we will concen- as mobile converged voice services and been initiated with the objective of trate on fostering long-term relationships with by building a wireless voice and mobile transforming us into a leading Pan-African enterprise and wholesale customers through data network in areas that use less communications company. Delivering on volume and term agreements. vulnerable access technologies, which will this requires a compelling and focused reduce the theft of copper cables and transformation programme. This programme Build customer loyalty improve service levels. We will also enter consists of various initiatives including We will continue to position Telkom as the into, among other things, a roaming defending our market share, seeking new service provider of choice through superior agreement in the areas where we choose revenue and businesses, implementing a value propositions and constant product and not to build our own network. structure that enables clear profit and loss service innovations. We will also upgrade accountability, as well as ensuring that our our customer communication programme. To implement this strategy we have business processes and work practices obtained access to the 1800MHz and Grow profitable revenue through deliver upon our strategic intent. 2100MHz spectrum bands to utilise 2G broadband and converged services and 3G technologies in pursuit of our voice This is aimed at achieving certain key Profitable revenue growth in our broadband and mobile data services. By focusing on financial targets, such as improving our and converged services area will be driven higher value customer segments and EBITDA by increasing the return on our by continuing to increase converged services technologies that enable roaming across assets, making effective capital revenue; pursuing partnerships with content networks that use different mobile expenditure investments, as well as providers to enhance our products; technologies, we can offer wireless access improving our cash flow. We intend to do aggressively seeking to improve our market to, amongst others, campuses, gated this by significantly improving revenue share in the information technology services communities and security complexes and through our strategic initiatives, capturing sector and improving our innovation provide mobile data services and operating expenditure efficiencies, capabilities. fixed/nomadic voice services. focusing on expenditure in areas where we We are in no doubt that the next can increase our return on assets and Our move to offering a fully fledged mobile battleground of the convergence between critically challenging capital expenditure service depends on the outcome of a telecommunications and IT will be in the planned for the next few years. market research programme and a roaming data management environment. We have agreement we are currently negotiating with We embarked on the initiative towards the one of the finest National Network the South African mobile operators. At this end of the year under review and our Operating Centres in the world and we stage, we will not commit to any capital inspirational objective is creating a new will use it to provide our customers with expenditure before completion of the Telkom. It is a bold, new journey for the cost-effective solutions that support their comprehensive market study. Group and its scope and importance is total ICT needs. We expect to stimulate the such that it will roll out over two years. It is use of bandwidth over our network through Grow profitable revenue internationally a phased and planned programme that our data centre business. Telkom aims to increase revenue and long- will transform our Group’s culture and the term profitability from our African Several products, including Metro LAN, way we do business. It will ensure full profit subsidiaries we have acquired and from have been introduced to strengthen our and loss accountability throughout the the international services we provide. We data communications service capabilities organisation and will enable us to focus on will become a Pan-African integrated and improve our integrated communications efficient resource management and cost service provider that offers international service offerings in response to increased containment. Our financial objective is a communications and internet connectivity, 10% reduction in operating expenses by demand for higher bandwidth in the hosting and managed data services and the financial year ending 2011/2012. corporate and global segment. wireless voice and mobile broadband Currently we are conducting a Group-wide Grow profitable revenue through solutions. We have the opportunity to survey to analyse our current culture and wireless voice and mobile data services leverage synergies from Telkom South give employees the opportunity to provide By providing customers with an integrated Africa into our Africa subsidiaries, their views on what our culture should look bundled offering with superior speeds and capitalise on strategic partnerships, for like. I believe that this is essential if we are quality through our fixed-line network, example, with AT&T, and advance data to have a firm foundation on which to build combined with mobility when required, we services into a growing market in Africa. the remainder of the process. can grow profitable revenue. Executing our strategy Underpinning the programme is the four This we can do by transforming our fixed- We will execute our strategy through the ‘Rs” strategy: line business to incorporate services such Telkom Renaissance initiative which has Telkom AR front.qxp 8/12/09 6:19 PM Page 23
Telkom Annual Report 2009 23
• Remodelling – reaching for new revenue MWEB Africa The ordinary dividend of 115 cents per streams in current and new markets. Our geographic expansion strategy is share declared for the 2009 financial year geared to establishing us as a regional provides the new targeted base established • Reorganising – fashioning a structure voice and data player via a range of by the Board for the determination of future that enables clear profit and loss hosting services, managed solutions, and dividends for Telkom as a stand-alone entity. accountability and focus in a mobile voice and wireless broadband The level of dividend payments going performance-oriented environment. services. To this end, in addition to Multi- forward will be based on a number of • Revitalisation – renewing the entire Links, we purchased MWEB Africa and factors, including the consideration of the Group and reinforcing a positive ‘make 75% of MWEB Namibia for approximately financial results, capital and operating it happen’ attitude among all our R498 million. As of March 31, 2009, expenditure requirements, the Group's people. MWEB Africa had a customer base of debt level, interest coverage, internal cash 20,175 with operations in Nigeria, Kenya, flows, prospects and available growth • Re-engineering – ensuring that our Tanzania, Uganda, Namibia and opportunities. business processes, allocation of Zimbabwe and an agency arrangement in Appreciation resources and work practices deliver on Botswana. This acquisition, together with our As ever, on behalf of the Executive our strategic intent. investment in Africa Online, gives us the Committee, I extend my sincere gratitude to ideal opportunity to service multi-national We are re-building the organisation into a the Telkom Board of directors for the and corporate customers across Africa, world class team. guidance and insights its members have particularly in the data products field, which provided. I must also thank the executive Multi-Links we believe will deliver enormous future team and all our employees for their As mentioned earlier in my report, we growth. The memorandum of understanding dedication and commitment in executing acquired the remaining 25% of Multi-Links signed with AT&T will further enhance our our defend and grow strategies. Thanks ability to service multi-national and corporate in January 2009 for US$130 million. The also to our customers for their continued customers throughout the continent. company did not perform well in the last and valued support. financial year with a net loss for the period Prospects Conclusion ending March 31, 2009 of R1.76 billion. Telkom’s strategy is designed to deliver In summing up the year I am reminded of sustainable, profitable growth going We acknowledge that we under-estimated something one of our call centre operators in forward and is benchmarked against the competitiveness of the Nigerian market Cape Town said about her job: ”You have global best practice. The creation of and failed to execute on the building and to take the good with the bad and, overall, shareholder value is the underlying driver of management of our distribution channels. the good outweighs the bad.” And that was every decision made. Telkom’s Board of Turning Multi-Links’ performance around is the year under review. Tremendous pressures directors and management team believes our number one priority, given the extent of on all fronts; a lot of angst around the that the share price has not been reflecting Group our investment and the enormous Vodacom deal – externally and internally – overview the underlying value of the fixed-line opportunity the Nigerian market provides. the on-going fight against the cable thieves, business and they are committed to US$100 million has been budgeted for the etc. But then we had the restructuring of the rectifying this. 2009/10 financial year for the completion business, a force for good, and the Management review of an additional 1,645 km build and Over the next few years, we will be opportunity, via our appointment by FIFA, to 584 km swop of optic fibre cable for the focusing on transforming the business to design and provision the infrastructure for the deal with competition; concentrating on Confederations Cup and 2010 Soccer DWDM/SDH network. It is anticipated that Sustainability delivering innovative products and services the network will connect 80 DWDM/SDH World Cup stadia, to show the world just review to our customers; expanding our network sites, covering all major cities in Nigeria, how good we are. The fact that our diverse and bedding down our growth drivers. providing us with additional bandwidth customer base includes the majority of the country’s large corporates also contributed to Performance connectivity for voice and data customers. We expect that over the next three years, review the ‘good’ part of the year. In addition, 227 cell towers are to be competition will continue to constrain erected and another 300 commissioned on revenue growth and, in a transforming Telkom is now poised to maximise value for third party leased tower infrastructure during industry like ours, targets are inherently all our shareholders. Financial statements the year. Seven new customer service risky, particularly in the later years, and centres are planned to facilitate and support investors should not place undue reliance on such targets. Increased revenues from the network growth. Company our data, broadband and converged Financial Information We expect Multi-Links to be EBITDA business and our recently acquired positive in 2010/11 and to be cash flow subsidiaries are projected to mitigate the Reuben September positive by 2011/12. impact of increased competition. Chief Executive Officer Telkom AR front.qxp 8/12/09 6:19 PM Page 24
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
It is my pleasure to present Telkom’s around Multi-Links’s performance is vital to financial review for the year ended Telkom given the extent of the Group’s March 31, 2009. It has been a challenging investment and the enormous opportunity year and despite difficult economic the Nigerian market provides. conditions, Telkom managed to deliver The roll-out of our mobile network is value to shareholders by declaring a expected to enable us to provide special dividend of R19 per share upon connectivity in a more cost effective conclusion of the Vodacom transaction manner in rural and high cable theft areas. after year end and declaring an ordinary Next Generation Network and mobile dividend of R1.15 per share and special technology also allows us to replace dividend of R2.60 per share in June 2009. expensive to maintain legacy equipment. Faced with competition eroding our We continue with the renegotiation of all revenue base, cost management continues supplier contracts and constructive to be a key element in creating shareholder engagement with labour unions. We are reviewing our IT investment strategy in Peter Nelson value. Combined with the inflationary order to ensure optimum levels of spend in Chief Financial Officer environment affecting our operating expenses, a number of once-off items line with our strategy and network impacted Group earnings including: investment. Inventories and capital work-in- progress are receiving considerable • R691 million cost relating to the attention as we seek to lower just-in-time Vodacom BEE deal; levels of investment and to monetise any • R462 million impairment of Multi-Links; excessive levels of assets.
• R409 million fair value loss on the Telkom is targeting an operating cost acquisition of the additional 25% in reduction of 10% over the following three Multi-Links; financial years. The Telkom Board is focusing on improving the cost efficiency • R204 million foreign exchange loss on and free cash flow profile of the Company. the acquisition of Gateway by It has reduced the initial five year capital Vodacom; expenditure budget by 40% to R34 billion • R177 million expenses relating to the and is targeting lower levels of inventory. Vodacom transaction; The Telkom Group added Multi-Links as a • R39 million impairment of Africa new segment to its financial reporting for Online; and the 2009 financial year. As a result, the Telkom Group’s four reporting segments for • R454 million deferred tax credit on the the 2009 financial year are fixed-line, Vodacom transaction. Multi-Links, mobile and other. The other In addition, Multi-Links reported a segment includes Telkom’s Trudon, formerly R1.76 billion loss before eliminations known as TDS Directory Operations, and during the 2009 financial year. Turning Africa Online, subsidiaries. The information Telkom AR front.qxp 8/12/09 6:19 PM Page 25
Telkom Annual Report 2009 25
in this annual report has been updated to increased by 3.3% to R33,659 million due Finance charges and fair value reflect the above changes to Telkom’s to growth in data revenues, higher revenue movements reporting segments. Telkom currently from interconnection and subscription- Finance charges include interest paid on expects its Telkom SA, Telkom International based calling plans, partially offset by local and foreign borrowings, amortised and Telkom Data Centre businesses will lower traffic revenue. Multi-Links’s operating discounts on bonds and commercial paper constitute distinct reporting segments in the revenue increased 124.9% due to a bills, fair value gains and losses on 2010 financial year due to the 209.3% growth in its subscriber base. financial instruments and foreign exchange implementation of its new organisational gains and losses on foreign currency Telkom’s defend and growth strategies are structure, which became effective as of denominated transactions and balances. on track. We have achieved good growth April 1, 2009. Finance charges and fair value movements in our bundled calling plan products, increased by 82.7% to R2,843 million Telkom concluded the disposal and sale of Telkom Closer and Supreme Call, and (March 31, 2008: R1,556 million) in the Vodacom, its mobile segment that provided strong growth in our broadband products. year ended March 31, 2009, primarily mobile services through its 50% joint venture Data revenue continues to achieve double interest in Vodacom, effective as of April due to a 12.2% increase in interest digit growth, delivering a 12.1% revenue 20, 2009. In addition, Telkom’s Board of expense to R1,732 million (March 31, growth to R9,310 million for the year directors has decided to dispose of 2008: R1,543 million) mainly as a result ended March 31, 2009. Swiftnet, a wholly owned subsidiary that of the 38.7% increase in the Group’s net provides wireless data services, and Group operating expenses debt to R23,047 million (March 31, determined to abandon its Telkom Media Group operating expenses increased by 2008: R16,617 million). In addition to the subsidiary. The Telkom Group’s 19.5% to R29,895 million (March 31, increase in the interest expense, net fair consolidated financial statements and 2008: R25,014 million) in the year ended value and foreign exchange rate information included herein reflects the March 31, 2009, due to a 19.6% movements resulted in a loss of restatement to Telkom’s consolidated increase in operating expenses in the fixed- R1,111 million for the year ended financial statements in prior years as a result line segment to R29,849 million (before March 31, 2009 (March 31, 2008: of these events to disclose the effect of inter-segmental eliminations) and a R13 million). The increase in the loss was discontinued operations and the disposal of mainly attributable to foreign exchange the subsidiaries held for sale as follows: 157.1% increase in operating expenses in losses incurred by Multi-Links on foreign Multi-Links to R2,422 million (before inter- • Income statement data for all the denominated loans and creditors’ balances segmental eliminations). Fixed-line operating periods have been restated to reflect our as a result of the devaluation of the Naira expenses increased due to increased selling, 50% share of Vodacom’s results, our as well as the mark to market valuation of general and administrative expenses, 100% share of Swiftnet’s results and our the Multi-Links put option. Group payments to other network operators, 75% share of Telkom Media’s results as overview discontinued operations in accordance depreciation, amortisation, impairment and Taxation with IFRS5; and write-offs, employee expenses and service Consolidated taxation expense from fees. The increase in Multi-Links’s operating continuing operations decreased by Management • Balance sheet data for only the year review expenses was primarily due to increased 37.3% to R1,660 million (March 31, ended March 31, 2009 reflects our cost of sales and associated subsidies as a 2008: R2,647 million) in the year ended 50% share of Vodacom’s results and our result of increased sales volumes, March 31, 2009. The consolidated Sustainability 100% share of Swiftnet’s results as review effective taxation rate for the year ended discontinued operations in accordance increased advertising and promotional March 31, 2009 was 44.6% (March 31, with IFRS5. expenditure and an increase in expatriate 2008: 34.5%). Telkom company’s effective fees as a result of an increase in staff Performance The discussion of the business below has taxation rate was 8.9% (March 31, 2008: review seconded from Telkom during the year. been revised from previous years to reflect 24.6%). The lower effective taxation rate the changes to Telkom’s segments and its Investment income for Telkom Company in the year ended discontinued operations. Financial Investment income consists of interest March 31, 2009 was mainly due to the statements Group operating revenue received on short-term investments and deferred taxation asset that was raised on Group operating revenue increased by bank accounts. Investment income the capital gains tax base cost of the 15% Company 6.9% to R35,940 million (March 31, increased by 7.7% to R181 million investment in Vodacom which is held for Financial Information 2008: R33,611 million) in the year ended (March 31, 2008: R168 million), largely sale that will be utilised in the future capital March 31, 2009. Fixed-line operating as a result of increased short-term deposits gains tax liability of the sale transaction, revenue, before inter-segmental eliminations, and interest rates. partially offset by the R1,843 million Telkom AR front.qxp 8/12/09 6:19 PM Page 26
26 Telkom Annual Report 2009
Chief Financial Officer’s review (continued)
impairment of the Multi-Links investment, a Group cash flow provisioning and fulfilment, assurance and R254 million impairment of the Telkom Cash flows from operating activities customer care, hardware technology Media loan and R85 million impairment of increased by 7.8% to R11,432 million upgrades on the billing platform and the Africa Online investment at company (March 31, 2008: R10,603 million), performance and service management and level. primarily due to a lower dividend paid in property optimisation. During the year respect of the 2008 financial year and ended March 31, 2009, R603 million Profit for the year and earnings per lower taxation payments partially offset by (March 31, 2008: R841 million) was spent share higher finance charges. Cash flows utilised on the implementation of several systems. Profit attributable to the equity holders of in investing activities increased by 20.6% Multi-Links’s capital expenditure, which Telkom decreased by 47.7% to to R17,005 million (March 31, 2008: includes spending on intangible assets, R4,170 million (March 31, 2008: R14,106 million), primarily due to higher increased by 112.7% to R2,791 million R7,975 million) in the year ended capital expenditure in the Multi-Links and (March 31, 2008: R1,312 million) and March 31, 2009. A major contributor to mobile segments and the acquisition of represents 146.9% of Multi-Links’s revenue the decrease was the net loss of Gateway by Vodacom. Cash flows from (March 31, 2008: 155.3%) and was due R1.76 billion reported by Multi-Links. financing activities includes loans raised of to the continued investment to improve Group basic earnings per share from R18,168 million, partially offset by loans geographic coverage and increase repaid of R10,212 million. continuing operations decreased 57.7% to capacity for both the voice and data 407.4 cents per share (March 31, 2008: Group capital expenditure networks. 963.7 cents) and Group headline Group capital expenditure, which includes Mobile capital expenditure, which includes earnings per share from continuing spend on intangible assets, increased by spending on intangible assets, increased operations decreased by 45.9% to 11.2% to R13,234 million (March 31, by 3.2% to R3,569 million (March 31, 557.0 cents per share (March 31, 2008: 2008: R11,900 million) and represents 2008: R3,460 million) and represents 1,028.9 cents). 36.8% of Group revenue (March 31, 12.9% of mobile revenue (March 31, 2008: 35.4%). 2008: 14.4%) and was due to the Group balance sheet continued investment to improve geographic Net debt, after financial assets and Fixed-line capital expenditure, which coverage and increase capacity for both the liabilities, including discontinued includes spending on intangible assets, voice and data networks. operations, increased by 38.7% to decreased by 1.5% to R6,690 million R23,047 million (March 31, 2008: (March 31, 2008: R6,794 million) and Other capital expenditure consists of R16,617 million) resulting in a net debt to represents 19.9% of fixed-line revenue additions to property, plant and equipment EBITDA ratio of 1.2 times from 0.8 times at (March 31, 2008: 20.9%). Baseline and intangible assets for our subsidiaries capital expenditure of R3,343 million March 31, 2008. On March 31, 2009, Trudon (Pty) Ltd, formerly known as TDS (March 31, 2008: R4,039 million) was Directory Operations, Swiftnet (Pty) Ltd, the Group had cash balances of largely for the deployment of technologies Africa Online Ltd and Telkom Media (Pty) R1,931 million (March 31, 2008: to support the growing data services Ltd. Other capital expenditure decreased to R1,134 million). Net debt, after financial business (including the ADSL footprint), links R184 million (March 31, 2008: assets and liabilities of continuing to the mobile cellular operators and R334 million) and represents 13.8% of operations, was R15,497 million with a expenditure for access line deployment in other revenue (March 31, 2008: 29.1%). net debt to EBITDA ratio of 1.3 times. selected high growth commercial and Prospects Telkom Company issued new local bonds, residential areas. The continued focus on Telkom’s strategy is designed to deliver the TL12 and TL15 with a nominal value of rehabilitating the access network and sustainable, profitable growth going R1,060 million and R1,160 million, increasing the efficiencies and reducing forward and is benchmarked against redundancies in the transport network as respectively as well as syndicated loans global best practice. The creation of well as the initiation of the fixed-wireless with a nominal value of R4,100 million sustainable shareholder value is the roll-out contributed to the network evolution during the year ended March 31, 2009. underlying driver of every decision made. and sustainment capital expenditure of The Company issued commercial paper bills Telkom’s Board of directors and R1,488 million (March 31, 2008: with a nominal value of R11,025 million for management team believe in the cost R1,369 million). the year ended March 31, 2009 of which efficiencies and cash flows of the fixed-line commercial paper bills with a nominal value Telkom continues to focus on its operations business and are committed to addressing of R9,849 million were repaid by support system investment with current this while we invest for growth in new March 31, 2009. emphasis on workforce management, areas of business. Telkom AR front.qxp 8/12/09 6:19 PM Page 27
Telkom Annual Report 2009 27
Capital expenditure for the Group is operational requirements, the Group’s debt African and global investors. Telkom expected to range between 20% and 23% level, interest coverage, internal cash intends to maintain a level 1 American of revenue over the next financial year. flows, prospects and available growth Depositary Receipt programme to facilitate opportunities. over-the-counter trading in the United States In the long term the targeted net debt to of America. EBITDA ratio is expected to be below New York Stock Exchange Listing 1.4 times. However, in the shorter term, Given the current global economic climate Conclusion debt levels will be considerably lower and the business imperative for Telkom to With a year of unprecedented global given the retention in part of the proceeds reduce its cost base, the Board has financial conditions behind us, I certainly look forward to the challenges of the year from the sale of 15% of Vodacom. decided to delist from the New York Stock ahead. The management team is committed Targets in a transforming industry such as Exchange. Maintaining a listing in the to turning the performance of Multi-Links United States is expensive and takes ours are inherently risky, particularly in later around, reducing operating and capital considerable management time. The years and investors should not place undue expenditures and continuing to deliver value methodology employed and discipline reliance on such targets. Our ability to meet to our shareholders. I remain confident in such targets is subject to a number of risks gained from compliance with the our ability to meet these challenges. and uncertainties and there could be no Sarbanes-Oxley reporting requirements will assurance that we could meet such targets. be retained, where appropriate, to ensure strict corporate governance compliance The level of dividend going forward will be and transparent financial reporting. based on a number of factors including the consideration of the financial results, Telkom is comfortable that the JSE provides Peter Nelson available growth opportunities, capital and sufficient access to capital from both South Chief Financial Officer
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:20 PM Page 28
28 Telkom Annual Report 2009
Board of directors
SHIRLEY LUE ARNOLD Chairman Shirley Lue Arnold was appointed Chairman and non-executive director on November 1, 2006. Holder of a BA degree and a Certificate in Education, Ms Arnold is a former non-executive director of Peermont Global Limited and Ernst & Young South Africa. Currently she is a member of the Chairpersons Forum, Gordon Institute of Business, the Independent Directors’ Initiative and the Institute of Directors in South Africa. She is a trustee of the Thutuka Bursary Fund (SAICA) and the Maths Centre and is a patron of the Student Sponsorship Programme.
REUBEN SEPTEMBER Chief Executive Officer With 32 years’ experience in the IT and telecommunications industry, Reuben September was appointed acting Chief Executive Officer in April 2007; appointed to the Board in May 2007 and appointed CEO of Telkom in November 2007. He has worked in various engineering and commercial positions at Telkom since 1977, including Managing Executive of Technology and Network Services; Chief Technical Officer and Chief Operating Officer and also served as a director of Vodacom. Mr September has a BSc in electrical and electronic engineering from the University of Cape Town and is a member of the Professional Institute of Engineers of South Africa (ECSA).
PETER NELSON Chief Financial Officer Peter Nelson, BComm, BAcc (Honours), CA, was appointed to the Board on December 8, 2008. Previously he was the Chief Financial Officer of Netcare. Mr Nelson has also served at board level for a number of major corporations for the past 20 years, including BMW, Mondi Paper and Pretoria Portland Cement. Government, independent and PIC representatives
KEITUMETSE MATTHEWS Government representative Appointed to the Board in June 2006, Ms Matthews is a businesswoman and former Chief Legal Advisor for the South African Broadcasting Corporation (SABC) and a former special advisor to the Minister of Communications. She has a BA (Hons) degree and is a Barrister-at-Law.
SIBUSISO LUTHULI Independent Mr Luthuli, managing director of Ithala BRAHM DU PLESSIS Limited since 2004, was appointed to the Telkom Board in July 2005. Independent A qualified chartered accountant (CA), Brahm du Plessis was appointed to the Board in Mr Luthuli holds a BComm degree and December 2004. A practising advocate at the a post graduate diploma in Johannesburg Bar since 1987, Advocate Du Plessis, accountancy. He is non-executive who holds BA and LLB degrees from the University of Chairman of Cipla Medro SA and a Stellenbosch and an LLM degree from the University member of the KwaZulu-Natal of London, is a member of Advocates For Provincial Government audit Transformation and has served as a member of the committee. Johannesburg Bar Council. Telkom AR front.qxp 8/12/09 6:20 PM Page 29
Telkom Annual Report 2009 29
DR EKWOW More than100 years SPIO-GARBRAH Government representative of combined Appointed to the Board in September 2007. Dr Spio-Garbrah is the Chief Executive Officer of the London-based Commonwealth Telecom Organisation and Ghana’s former telecommunications Minister of Communication and Education. He holds a BA (Hons), English from the University of Ghana, a Graduate Certificate experience in International Banking from the New York University; a Graduate Diploma in Journalism and Communication and an MA in International Affairs from Ohio University and an LLD (Honorary Doctorate in Laws) from Middlebury University in the USA.
JACKIE HUNTLEY Government representative Ms Huntley who was appointed to the Board in September 2007, is an attorney and senior partner at Mkhabela Huntley Adekeye Inc, one of the major black law firms in South Africa. She has extensive experience in commercial and corporate law, including telecommunications law. She holds BProc and LLB degrees from the University of the Witwatersrand along with a Management Advanced Programme certificate.
DR VICTOR LAWRENCE PETER JOUBERT Government representative Independent Dr Lawrence was appointed to the Mr Joubert was appointed to the Board in August Board in September 2007, holds BSc, 2008. Previously he was the Chief Executive MSc and PhD degrees in Electrical Officer and chairman of Afrox. He has served as and Computer Engineering from the the chairman of numerous companies. He is the University of London, is the Charles W current Chairman of BDFM Publishers and Bachelor Chair Professor of Electrical Sandvik and is a director of SAA and Transnet and Computer Engineering and and external advisor to General Motors SA. He Associate Dean for Special Programs holds a BA degree from Rhodes University, a at Stevens Institute of Technology. DPWM from Rhodes and has completed Harvard Business School’s Advanced Management Programme. Group overview
DAVID BARBER Management Independent review Appointed to the Board in September 2008, Mr Barber is the former global Chief Financial Officer of AngloCoal and former Chief Financial Officer for the Anglo American Corporation of South Africa. Sustainability Mr Barber is a chartered accountant (South Africa) review and FCA (England and Wales) and serves as an independent non-executive director and member of the audit committee for Murray & Roberts. Performance review
Financial BRIAN MOLEFE statements Public Investment Corporation representative Appointed to the Board in July 2008, Mr Molefe is the Chief Executive Officer of the PIC. A former deputy Director Company General at the National Treasury and Chief Director: Financial strategic planning in the office of the Premier of Limpopo, Information Mr Molefe holds a Masters of Business Leadership and BCom degrees from the University of South Africa. He also has a post-graduate Diploma in Economics from London University, School of Oriental and African Studies. Telkom AR front.qxp 8/12/09 6:20 PM Page 30
30 Telkom Annual Report 2009
Chief officers
THAMI MSIMANGO NAAS FOURIE Chief of Global Operations and Subsidiaries Chief of Strategy Mr Msimango was appointed Managing Director of Telkom Mr Fourie was appointed Chief of Strategy in April 2008 having International on April 15, 2009. Previously he served as Chief of acted in the position from November 2007. He joined Telkom in Global Operations and Subsidiaries since November 1, 2007 and 1994. He is a former Managing Executive of Commercial Services Chief Technical Officer from September 2005. He joined Telkom in and Executive of Marketing Services. He holds a BA, BDivinity and 1984 and held a number of senior positions, including Managing BAcc Science (Honours) degrees and has completed the advanced Executive of Technology and Network Services and Executive executive programme of the Kellogg School of Business. Technology, Direction and Integration.
CHARLOTTE MOKOENA OUMA RASETHABA Chief of Human Resources Chief of Corporate Governance Ms Mokoena, former Group Executive of Human Resources from Appointed Chief Corporate Governance Officer in November December 2002 to October 2007, was appointed Chief of Human 2007, Advocate Rasethaba joined Telkom in 2006 as Group Resources in November 2007. She holds a BA (Hons) degree in Executive of Regulatory and Public Policy. She is a former special human resources development from the University of Johannesburg; director of Public Prosecutions at the National Prosecuting Authority. a BSoc Sciences from the University of the North West and a post- She holds a BProc degree from the University of the North, an LLB graduate diploma in training and performance management from (Hons) and Higher Diploma in Company Law from the University of Leicester University in the UK. the Witwatersrand and an LLM from the University of Pretoria. Telkom AR front.qxp 8/12/09 6:20 PM Page 31
Telkom Annual Report 2009 31
Management team
Age at Telkom Position Name 30 June Portfolio Responsibilities appointment appointment
Marius Mostert 54 Network Infrastructure Responsible for network technology, 1973 2007 Provisioning strategy, planning, technical product development and all associated network infrastructure deployment.
Casper Kondo 48 Network Responsible for customer service 1993 2007 Chihaka Field Operations fulfilment and assurance network restoration.
Pierre Marais 50 Network Core Responsible for the technical and 1976 2007 Operations operational management associated with Telkom’s core network.
Zethembe Khoza 51 Contact Centre Responsible for managing all contact 1980 2007 Operations points in which customers contact Telkom, such as call centres, TelkomDirect shops, commercial services and credit management.
Godfrey Ntoele 48 National Sales and Responsible for the national sales and 1997 2007 Marketing Operations marketing operations for Telkom’s retail consumers and business enterprises and direct sales to business customers and government entities.
Bashier Sallie 41 Information Responsible for enterprise wide IT 1986 2007 Operations activities including infrastructure, architecture, applications, support and internet service providers.
Theo Hess 51 Capability Responsible for ensuring that Telkom has 1996 2007 Management the right groups of processes, relationships,
assets and resources that enable it to Group deliver on its strategic objectives. overview
Amith Maharaj 34 Fixed Mobile Responsible for the development and 2008 2008
Convergence Services implementation of the mobile and Management fixed-mobile converged business and review technical strategy.
Thami Magazi 51 Multi-National Responsible for national and 2001 2007 Sustainability Customers international sales revenue for multi- review national customers and also service and project management to support both Performance national and multi-national sales review teams. The portfolio directs Telkom’s service delivery obligations for 2010 FIFA Soccer World Cup. Financial statements Alphonzo Samuels 43 Wholesale and Responsible for national and international 1984 2007 Marketing Operations wholesale revenue and customer Company relationship management. Financial Information Telkom AR front.qxp 8/12/09 6:20 PM Page 32
32 Telkom Annual Report 2009
Management team (continued)
Age at Telkom Position Name 30 June Portfolio Responsibilities appointment appointment
Brenda Kali 55 Corporate Guided by the company’s business 2008 2008 Communications plan, vision and brand strategy, the role of Corporate Communication is to influence stakeholder behaviour through effective, timely and measureable communication making use of world-class reputation management solutions.
Mike Mlengana 49 Corporate Development Responsible for implementing Telkom’s 1995 2005 international expansion strategy through business development and merger and acquisition activities across Africa and other emerging markets.
Nicola White 37 Investor Relations Responsible for liaising with the investor 2006 2006 community which includes retail shareholders, analysts and institutional investors.
Nicolene Rossouw 40 Performance Centre Responsible for the Performance 1997 2007 (Acting) Centre in support of the company’s customer centricity strategy, marketing intelligence and to management the business improvement function.
David Lupafya 36 Strategy (Acting) Responsible for Telkom Group strategy 2008 2008
Deon Fredericks 48 Accounting Services Responsible for financial accounting, 1993 2008 reporting and analysis, financial services, external and regulatory reporting, capital work in progress and asset management
Robin Coode 43 Corporate Finance, Overall responsible for taxation, treasury 1992 2008 Specialised Services and corporate investment with specific focus areas that include share buy-back evaluations, trustee responsibilities on retirement funds and a merger and acquisition role through strategy.
Stafford Augustine 40 Procurement Services Responsible for overall management 2007 2007 of procurement services encompassing strategic sourcing management of outsourced entities, corporate support and BEE. Telkom AR front.qxp 8/12/09 6:20 PM Page 33
Telkom Annual Report 2009 33
Age at Telkom Position Name 30 June Portfolio Responsibilities appointment appointment
Mohammed Dukandar 37 Internal Audit Accountable for developing and 2009 2009 implementing internal audit strategies for Telkom Group and its subsidiaries and to ensure proper management of the internal audit function. Ensure that significant risks are understood and managed by management and ensure that significant risks are independently and objectively reviewed periodically.
Anton Klopper 47 Legal Services Responsible for managing the provision 1991 2005 of legal advice and assistance to various business units within Telkom.
Andrew Barendse 42 Regulatory Affairs Responsible for regulatory affairs which 2006 2007 include regulatory strategy and analysis, regulatory compliance, regulatory pricing and costing and protecting Telkom’s regulatory rights.
Charmaine Houvet 36 Governance Responsible for improved governance 1991 2008 in the organisation through the design and implementation of the Enterprise Programme office and key company governance process and policies.
Prelene Schmidt 38 CEO Telkom Responsible for all facets of the 1996 2008 Foundation (Acting) Telkom Foundation.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:20 PM Page 34
34 Telkom Annual Report 2009 Telkom AR front.qxp 8/12/09 6:20 PM Page 35
a partnership with communities, creating synergies that benefit
Sustainability review Sustainability review 36 Corporate governance 42 Enterprise risk management 50 Black economic empowerment 58 Human capital management 62 Safety, health and environment 72 Corporate social investment 78 GRI content index 82
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:20 PM Page 36
36 Telkom Annual Report 2009
Sustainability review
The modern corporation must meet the expectations of a diverse range of stakeholders
As one of South Africa’s largest Company will completely renew itself in Throughout the year we refined our corporations, Telkom’s public visibility is terms of markets, processes, skills, stakeholder management policy to ensure enormous. Our activities impact on the lives capabilities and a new behaviour. Our goal systematic engagements with: of every South African in one way or is to create a high performance company • Employees another and so our sustainability must be that is capable of executing our ‘defend and • Customers beyond reproach. grow’ strategy; a company that is • Investors characterised by profitability, sustainability As the draft King Report III notes: “Although • Government and an ability to realise its vision; a a company is an economic institution, it company that is customer-focused with • Regulators remains a corporate citizen and therefore leading edge value solutions, and where the • Media has to balance economic, social and creation of value through excellence is the • Suppliers environmental value. The triple bottom line norm and not the exception. • Unions approach enhances the potential of a • Civil society company to create economic value…” To date, we have distinguished ourselves as an entity that subscribes to the values of As a result, we achieved: Telkom has long subscribed to this good corporate governance but, we can philosophy and sustainability is a key driver Employees: A significant improvement in of our business strategy. It is a business do better. We can, like the Renaissance levels of employee engagement over the opportunity for us, an opportunity we Period of the 14th to 16th centuries that our last three years via briefing sessions, pursue with relentless vigour in all our initiative is named after, expand our vision training initiatives and electronic and print operations. beyond the conventional and traditional, communication. In the year under review and sustainability is a key focus area in this there was an on-going refinement in Last year we reported that we continue to regard. focus on the transformation of our business promoting a culture of engagement and and, to this end, in the latter part of the Stakeholder engagement internal communication channels. Greater year under review we embarked on a The modern corporation must meet the prominence was given to face-to-face focused internal transformation programme, expectations of a diverse range of communication, especially between top Telkom Renaissance, a programme geared stakeholders and, as such, the leaders and the next management level, as to ensuring that we become Africa’s management of stakeholder relationships is well as electronic communication from the leading ICT service provider. It is, at least, not a nice to have but a critical must. CEO across the company. a two year initiative during which time the
As one of South Africa’s largest corporations, Telkom’s public visibility is enormous Telkom AR front.qxp 8/12/09 6:20 PM Page 37
Telkom Annual Report 2009 37
Group overview
Customers: Through our Customer Action, especially in the areas of economic proactive engagement and relationship
Centricity project we have seen growth, infrastructure development and the building. Management improvements in customer call centre provision of telecommunications for public review Suppliers: The top company award in the operations; our ability to keep our promises schools, was well received. Our success in 2008 Empowerdex Preferential Procure- and the reaction time in identifying and engaging with government is evident in the ment on overall spend survey. Sustainability dealing with complaints. irrevocable support provided by review government which resulted in the successful Unions: We continued to engage with the Investors: An improvement in sharing with conclusion of the Vodacom transaction. unions through the Restructuring Forum, a them our strategic plans, operational purely consultative body where we share Performance review performance and financial results through Regulators: Regular submissions on new information with union leaders; the one-on-one briefings; daily consultations; regulations and responses to enquiries to, Company Forum, the only decision-making roadshows and the Investor Relations in particular, the Independent Com- structure on issues that require negotiations; Financial website. munications Authority of South Africa the National Employment Equity and Skills statements (ICASA) and total compliance, where Development Forum and Task Teams which Government: A substantial improvement in technically possible, with all the regulatory consist of both management and union our relations with national government as a Company requirements in our operational areas. representatives and which deal with Financial result of extensive consultations in which Information specific issues. emerging issues were pre-empted and Media: Media management was promptly dealt with. In addition, our conducted in a structured manner guided Civil society: Traditionally, telecommuni- support for the government’s Programme of by three focus areas: reactive engagement, cations companies and utilities are at the Telkom AR front.qxp 8/12/09 6:20 PM Page 38
38 Telkom Annual Report 2009
Sustainability review (continued)
Group communication and brand was infused with a renewed sense of purpose bottom of global reputation studies as they face an uphill battle to communicate with the public. As a result of this, we embarked on a reputation study in May 2008 to measure and analyse attitudes and perceptions about us amongst various stakeholder groups. In the year under review approximately 3,700 interviews were conducted. It was gratifying to note that our reputation improved significantly, albeit from a low base. There was increased recognition in our key areas of products/service; leadership and governance and a significant improvement in the perceptions of our corporate social investment programme.
Going forward In the 2009/10 financial year we will focus on developing unambiguous stakeholder value statements that detail our promises to our stakeholders and, equally importantly, internal scorecards for us to check how we live up to those promises.
Group communication and brand Group communication and brand was infused with a renewed sense of purpose following the appointment of one of South Africa’s leading communications experts, Brenda Kali, as Group Executive responsible for this function.
Guided by the decision to integrate and align communication processes and practices with Telkom’s brand position and values system to ensure greater credibility amongst our stakeholders, we focused on two specifics – the management of stakeholder relationships and reputation, and brand and image management. Telkom AR front.qxp 8/12/09 6:20 PM Page 39
Telkom Annual Report 2009 39
• Interfacing with the media While the media is an influential stakeholder in its own right, it is also a vehicle through which we can communicate to our broader stakeholder base. To this end, a dedicated media unit was established to ensure we sent out a consistent message to enhance our reputation and create greater brand awareness.
On the reactive front, the vast scope of our activities ensured a d very high level of media interest in the year under review. Media enquiries ranged from our growth and expansion plans to cable theft, the provision of broadband, regulatory issues, the evolution of the network, our financial results, service delivery, customer complaints and corporate governance.
As a result of our commitment to providing accurate and strategic information to the media, our reputation took a turn for the better.
During the year under review, the value of proactive media engagement was underscored in three areas – the 2010 Soccer World Cup; the sale of our shares in Vodacom and the strategic agreement with AT&T.
2010 World Cup As FIFA’s main partner in the development of fixed-line network infrastructure, we are responsible for providing infrastructure and communication services. Our capabilities in this regard were highlighted through media site visits and face-to-face interviews with the key people in our 2010 project office.
The Vodacom transaction Throughout the transaction process from November 2008 to June 2009, journalists were given as much access as they requested to our key top management team. Group The AT&T agreement overview At the announcement of the strategic memorandum of understanding, journalists had the opportunity to spend time with Management the role players from both companies. review We pride ourselves not only on building strong relationships between the media and our management team, but also on Sustainability enhancing the media’s knowledge of the IT industry as a whole. review In the year under review we hosted a number of well attended functions, including inviting key media to the Southern African Telecommunication and Applications conference. Performance review • Connecting with our employees In addition to refining our internal communication channels, we Financial provided effective and timeous communication to all employees statements on the progress of our transformation programme, Telkom Renais- sance. The programme’s specific communication was given a Company highlighted visual appearance to distinguish it from other Financial Information electronic communications and to emphasise the status of each message. Weekly messages containing detailed information on the project’s progress were issued and a tailor-made web site Telkom AR front.qxp 8/12/09 6:21 PM Page 40
40 Telkom Annual Report 2009
Sustainability review continued
To reinforce the visibility of our involvement with the World Cup two giant footballs are being erected on two prominent Johannesburg and Pretoria landmarks
was set up to enable employees to ask services and ‘from the desk of the CEO’ weekly E-news channel and an e-mail questions, make suggestions and receive e-mails. based desktop broadcast system. feedback. On a more generic level, a number of We also put together a number of face-to- As the torch bearer of the programme, the initiatives were launched during the face sessions at top and senior CEO was highly active in all internal reporting period, for example a cross- management level where the Group’s communications via our Skytrain interactive functional editorial committee for our strategy and business approach was satellite-based network; our digital media Online print channel; the opening of a debated.
To ensure greater credibility amongst our stakeholders we focused on two specifics – the management of stakeholder relationships and reputation, and brand and image management. Telkom AR front.qxp 8/12/09 6:21 PM Page 41
Telkom Annual Report 2009 41
Partnering with Human Resources Group communication and brand played a pivotal role in communicating Human Resource initiatives to employees. These ranged from changes in employee benefits to the Renaissance programme. Where necessary, the communications function was supplemented by event management.
Brand and image management In our view, the brand concept is much more than just logos and products. It also promises an experience and a relationship. As a result, in the year under review, the full spectrum of brand activities was incorporated into the communication function.
Our brand has matured since Telkom was formed in 1991 and, as a result, a process was initiated during the year to rebuild it and create a fresh, innovative look and feel to give us a more modern, vibrant and customer-focused brand.
To support this, a new Vision, Mission and Value (VMV) statement, together with a VMV-wired concept, was developed to ensure that our employees wholeheartedly embrace and accept the brand and, in the process, deliver the brand promise to our customers.
2010 Soccer World Cup sponsorship To reinforce the visibility of our involvement with the World Cup, two giant footballs are being erected on two prominent Johannesburg and Pretoria landmarks – the Hillbrow and Lukasrand towers. As a further reminder of our commitment and expertise, a number of TV commercials were produced and broadcast.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
Artist’s impression of the Lukasrand tower Telkom AR front.qxp 8/12/09 6:21 PM Page 42
42 Telkom Annual Report 2009
Corporate governance
appointed by the government of South Africa (the Class A shareholder) and one non-executive appointed by Black Ginger 33 (the Class B shareholder).
There are four other non-executive directors who are appointed at the company’s annual general meeting and are considered to be independent, as set out in King II and the JSE Listings Requirements. The executive directors on the Board are the Chief Executive Officer and the Chief Financial Officer. In line with best practice, the roles of the Chairman and Chief Executive Officer have been separated. The Board is led by Ms ST Arnold, the Chairman, while operational management of the Group is the responsibility of Mr RJ September, Chief Executive Officer.
In terms of the articles of association, the non-executive directors appointed by the Class A shareholder have a fixed term of three years and may be re-elected to the Board by those shareholders. The Chairman has a term of one year and is re- elected as Chairman for the ensuing year by the Class A shareholder. The four independent non-executive directors are The Board takes overall responsibility for the Group and its role is to exercise leadership subject to retirement by rotation and re- and judgement in directing it to achieve continued prosperity and to act in the best interests of stakeholders. election by shareholders at least every three years in accordance with the articles of association and JSE Listings Compliance association. Most of the areas of non- Requirements. The Telkom Board subscribes to and is fully compliance will be resolved by no later The holders of the Class A and B ordinary committed to sound business principles and than March 2011, when the provisions of shares are the government of South Africa practices of integrity and accountability, Telkom’s articles of association resulting in and Black Ginger respectively. The only and values of good corporate governance non-compliance with the Code fall away or significant shareholder is the Class A as espoused in the Code of Corporate earlier if the shareholding of a significant shareholder who currently holds 39.8% of Practices and Conduct of King II (the shareholder falls below certain stipulated the issued ordinary shares in the company. Code). In so doing, the directors recognise levels. The significant shareholder has certain the need to conduct the enterprise in Chairman and Board of directors Board-reserved matters which are detailed accordance with best corporate practices. The Board takes overall responsibility for in the company’s articles of association. The Board is of the view that Telkom the company and its role is to exercise Pursuant to the articles of association, whilst complies in all material respects to the leadership and sound judgement in the government is a significant shareholder, principles of the Code. While it directing it to achieve continued prosperity neither Telkom nor any of its subsidiaries acknowledges the importance of good and to act in the best interests of may take action with respect to certain governance, the Board is aware that stakeholders. reserved matters unless authorised by the Telkom does not strictly comply with certain Telkom has a unitary Board comprising 12 Board. In addition, the authorising principles set out in the Code. These areas directors. In accordance with Telkom’s resolution of the Board must have received of non-compliance stem mainly from certain articles of association, five non-executives the affirmative vote of at least one of the provisions in Telkom’s articles of including the Chairman have been directors appointed by the government. Telkom AR front.qxp 8/12/09 6:21 PM Page 43
Telkom Annual Report 2009 43
The members’ resignations and appointments Board meetings to the Telkom Board of directors during the Board meetings are held at least once a quarter. In addition to these meetings, whenever year under review are as follows: circumstances dictate the necessity, special Board meetings are convened. During the year under review, four scheduled Board meetings were held and 11 additional special Board Resignations meetings were convened. Details of attendance by each director including attendance at MJ Lamberti 3 June 2008 committee meetings of the Board are set out in the table below. Certain members of senior AG Rhoda 3 July 2008 management attend Board meetings when invited to make presentations on particular Appointments company issues of interest to the Board. A majority of directors, one of whom must be a B Molefe 3 July 2008 representative of the Class A shareholder, is required for a quorum for Board meetings. PG Joubert 12 August 2008 DD Barber 1 September 2008 The following table presents the attendance of meetings held during the 2009 financial PG Nelson 8 December 2008 year by directors: Scheduled Special Company Secretary Number of Number of All directors have access to the advice and meetings1 Attendance meetings1 Attendance services of the Group Company Secretary, Non-executive who is responsible for ensuring the proper ST Arnold (Chairman) 4 4 11 11 administration of the board and corporate DD Barber 3344 governance procedures. The Group B du Plessis 4 4 11 11 Company Secretary provides guidance to RJ Huntley 4 4 11 10 PG Joubert 3254 the directors on their responsibilities within MJ Lamberti 0043 the prevailing regulatory and statutory VB Lawrence 4 4 11 11 environment and the manner in which such PCS Luthuli 4 4 11 9 responsibilities should be discharged. KST Matthews 4 3 11 10 B Molefe 4163 Details of the secretary’s business address AG Rhoda 0054 and the company’s registered office are set E Spio-Garbrah 4 4 11 10 out on inside back cover. Executive Delegation of authority RJ September 4 4 11 11 PG Nelson 1111 The ultimate responsibility for the Group’s operations rests with the Board. The Board 1 The table represents the possible meetings based on the appointment and resignation dates of retains effective control through a well- Group members. overview developed governance structure of Board Executive committee Audit and risk committee (ARC) committees which specialise in certain This committee consists of the two executive The ARC is chaired by Mr PCS Luthuli, a areas of the business. Certain authorities Management directors that serve on the Board of non-executive director; it held four review have been delegated to the Chief directors and chief executives of the Telkom scheduled meetings and six special Executive Officer to manage the day-to-day Group. The Chief Executive Officer is the meetings during the financial year. business affairs of the company. The Group Chairman of this committee and has the Mr Luthuli is considered an audit committee Sustainability executives assist the Chief Executive Officer review power of authority to, among other things: financial expert within the meaning of the in discharging his duties and the duties of • Implement approved business plans, requirements of the US Securities and the Board when it is not in session. annual budgets and all other matters Exchange Commission (SEC). He is a Performance However, in terms of statute and the review and issues relating to the achievement chartered accountant. company’s constitution, together with the of Telkom’s obligations under its In terms of its charter, the ARC evaluates the revised delegation of authority, certain licences, including without limitations Group’s systems of internal and financial Financial matters are still reserved for Board and/or statements network expansion, equipment control; reviews accounting policies and shareholder approval. procurement, tariff setting and financial information issued to the public; packaging, customer service and Committees reviews the performance of the internal and Company marketing; and Financial The Board is assisted in discharging its external auditors and determines the fees Information duties through its committees. During the • Prepare, review and recommend to the payable to the external auditors. It also year under review, the Board merged the Board the annual budgets and any determines and monitors the use of the Investment and Strategy Committees. amendments thereto. external auditors for non-audit related Telkom AR front.qxp 8/12/09 6:21 PM Page 44
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Corporate governance (continued)
Board committees specialise in distinctive business areas
services. The committee examines, reviews Ms ST Arnold and Mr B du Plessis. A quorum Mr B du Plessis (Chairman) financial results and recommends same to for a meeting is two members. Mr PG Joubert (independent) the Board for approval. A quorum for a Ms KST Matthews The committee makes recommendations to meeting is two members. Mr E Spio-Garbrah the Board on the composition of the Board, As at March 31, 2009, the committee and the balance between executive, non- The HRRRC held four scheduled meetings comprised four non-executive directors of executive and independent non-executive and one special meeting during the which three are considered independent: directors with regard to all aspects of financial year. This committee, in Mr PCS Luthuli (independent) diversity and experience. consultation with management, ensures that Mr RJ Huntley the Group’s directors and senior executives The committee is responsible for identifying Mr DD Barber (independent) are fairly rewarded for their individual and nominating candidates and formulating Mr PG Joubert (independent) contribution to the Group’s performance. In succession plans for the approval of the fulfilling its duties, the HRRRC gives The new terms of reference of the Board. consideration to industry and local committee were approved during the year. In addition, the committee recommends to benchmarks to ensure that remuneration At the time of the Chief Financial Officer’s the Board continuation (or not) of services packages remain competitive. Senior appointment on December 8, 2008 the of any director who has reached the executives receive a salary, short-term audit and risk committee satisfied itself of retirement age as well as directors who are incentive and an allocation in terms of the the appropriateness of his credentials, retiring by rotation, for re-election. rules of the Conditional Share Plan. professionalism, technical competency and Medical and retirement benefits are also experience. Investment and strategy committee offered. Remuneration packages are The investment and strategy committee, The audit and risk committee will conduct a reviewed annually and performance consists of Mr DD Barber (Chairman), similar review on an annual basis as bonuses are linked both to individual Dr E Spio-Garbrah, Mr RJ Huntley, required by the JSE Listings Requirements. performance and to the performance of the Mr RJ September, Mr PG Nelson and The internal and external auditors have Group. Non-executive directors are paid Dr VB Lawrence. unlimited access to the Chairman of the fees for their services as directors of the audit and risk committee. The function of the committee is to assist the Company and for their participation as Board in evaluating investments, corporate members of the Board committees. The audit and risk committee is satisfied actions and key funding and financial that Ernst & Young is independent in Board effectiveness proposals. accordance with section 270A of the An appraisal of the effectiveness of the Corporate Laws Amendment Act, and Human resources review and Board was conducted externally during the nominated the re-appointment of Ernst & remuneration committee (HRRRC) year. The appraisal was benchmarked Young as registered auditors for the The committee consists entirely of non- against the strategic requirements of Telkom 2009/2010 financial year. executive directors. Mr B du Plessis, an SA to ensure the capacity to deliver these Nominations committee independent non-executive director, was requirements and strengthen the diversity The nomination committee, which must have appointed as Chairman of the HRRRC as and sector expertise of directors. The a minimum of three members and is chaired of June 2008. The HRRRC comprises the appraisal was positive and its by an independent non-executive director, following non-executive directors, of which recommendation will be followed through consists of Mr PCS Luthuli (Chairman), two must be independent: implementation. Telkom AR front.qxp 8/12/09 6:21 PM Page 45
Telkom Annual Report 2009 45
Share dealings the requirements of Section 302 have been • Accept directly or indirectly any In line with JSE Listings Requirements and met for the year ended March 31, 2009. consulting, advisory or other the Group’s insider trading policy, compensation from the listed entity; and In addition to the Sarbanes-Oxley Act, the executives who wish to trade in Telkom NYSE corporate governance rules, • Be an affiliated person of the listed securities are required to obtain prior approved by the SEC, permit NYSE-listed entity. written approval from the Chairman of the companies that are foreign private issuers, Board and the Group Company Secretary An affiliated person of an issuer is a person such as Telkom, to follow home-country before dealing in Telkom securities. The who directly, or indirectly, through one or practices in lieu of the requirements Group operates closed periods as defined more intermediaries, controls, or is applicable to listed US companies, subject in the JSE Listings Requirements. Additional controlled by or is under common control to certain exceptions. closed periods are enforced, when with the issuer.
required, in terms of corporate activities as In particular, foreign private issuers must Rule 10A-3(b)(1)(iv)(E) of the US Securities and when these occur. have an audit committee that satisfies the Exchange Act provides an exemption from Compliance with Sarbanes-Oxley requirements of Rule 10A-3 under the the prohibition on being an affiliated The Sarbanes-Oxley Act of 2002 was Securities Exchange Act of 1934, as person of the issuer for an audit committee passed in the United States of America to amended and must disclose the significant member of a foreign private issuer, who is protect investors by improving the accuracy ways in which their corporate governance a representative or designee of a foreign and reliability of corporate disclosures, practices differ from those followed by US governmental entity that is an affiliate of the accounting practices and corporate companies under the NYSE listing foreign private issuer if the member is not governance. Telkom, as a listed company standards. In addition, the CEO of a an executive officer of the foreign private on the New York Stock Exchange (NYSE), foreign private issuer must promptly notify issuer. registered in terms of the US Securities the NYSE in writing after any executive Exchange Act of 1934, is required to officer of the listed company becomes comply with the Sarbanes-Oxley Act. aware of any material non-compliance with Telkom is committed to good corporate any applicable provisions of the NYSE governance practices and compliance with corporate governance standards and the Act as directed by the US Securities foreign private issuers must submit an and Exchange Commission (SEC). annual and interim written affirmation to the NYSE with regard to compliance with the Telkom’s Sarbanes-Oxley steering committee foregoing requirements and certain represents divisions directly impacted by changes to their audit committees. the requirements of the Act. Working Group overview closely with line management, a Sarbanes- As a foreign private issuer the definition of Oxley compliance team is responsible for independence of directors for Telkom is ensuring that risks and controls that may only relevant to the audit committee and is Management review impact on the integrity of financial included in Rule 10A-3 of the US Security reporting are properly documented, Exchange Act. This states that each reviewed and reported on. The member of the audit committee must be a Sustainability independent external auditor attested to member of the Board and should be review and reported on management’s assessment independent as defined in Rule 10A-3 of the effectiveness of internal control over (b)(1)(ii) of the US Securities Exchange Act. financial reporting for the year ended Performance A member of an audit committee of a listed review March 31, 2009. issuer may not, other than in his capacity The Chief Executive Officer and the Chief as a member of the audit committee, the Financial Financial Officer (CFO) have certified that Board, or any other Board committee: statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:21 PM Page 46
46 Telkom Annual Report 2009
Corporate governance (continued)
Key differences between NYSE corporate governance listing rules and Telkom practice are:
NYSE rules Telkom practice
Board of directors Composition The Board of directors should have a majority The majority of Telkom’s directors are non-executive of independent directors. Four of the 12 directors are considered independent, based on the King II definition of ‘independent’. Based on their ordinary shareholding at March 31, 2009 and their holding of the Class A and Class B shares respectively, the government is entitled to appoint five directors to the Board, while Black Ginger is entitled to appoint one director to the Board. King II defines an independent director as a non-executive director who:
• Is not a representative of a share owner who has the ability to control or significantly influence management;
• Has not been employed by the company or the Group, of which it currently forms part, in any executive capacity for the preceding three financial years;
• Is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the Group in an executive capacity;
• Is not a professional advisor to the company or the Group other than in a director capacity;
• Is not a significant supplier to, or customer of the company or Group;
• Has not been a significant supplier to, or customer of the company or Group;
• Has no significant contractual relationship with the company or Group; and
• Is free from any business or other relationship that could be seen to materially interfere with the individual’s capacity to act in an independent manner.
Board committees Committees Companies are required to establish an audit Telkom has an ARC, investment, and strategy committee, required committee, a nominating or corporate nominations committee and HRRRC. For the description and governance committee and a compensation composition of these committees and the members refer to committee. Each of these committees must have pages 43 and 44. Board members who are not appointed a written charter that addresses certain matters by the Class A and B shareholders are appointed by specified in the NYSE listing standards, shareholders at the annual general meeting as stipulated in including the committee’s purpose and Telkom’s articles of association. Telkom does not perform an responsibilities and an annual performance annual performance evaluation of each committee. evaluation of each committee. Telkom AR front.qxp 8/12/09 6:21 PM Page 47
Telkom Annual Report 2009 47
NYSE rules Telkom practice
Board committees Composition All of the required committees should be All the committees have non-executive directors as members. composed entirely of independent non-executive However, not all non-executives are independent. directors.
Audit committee Written charter The audit committee must have a written charter The ARC has a written charter. The responsibilities of the that addresses certain matters specified in the ARC are described in further details, on pages 43 and 44. NYSE listing standards, including the In addition, Telkom’s audit and risk committee charter, as a committee’s purpose, an annual performance listed issuer, complies with the Sarbanes-Oxley evaluation and the duties and responsibilities of requirements. the audit committee.
Composition The audit committee must include a minimum The ARC consists of four non-executive members of Telkom’s of three members that satisfy the independence Board of directors, three of which are independent. requirements of both the NYSE listing standards Pursuant to the Sarbanes-Oxley Act, each member of and the Sarbanes-Oxley Act. Telkom’s ARC, as a non-US listed company, is a member of the Board of directors. In addition, although one of the members is appointed by the government, who may be deemed to be affiliated persons of Telkom, such appointments fall within the exception for the SEC independence requirements.
Each of the members of the audit committee For members’ work experience refer to pages 28 to 29 under must be financially literate. In addition, at Board of directors. The Chairman of Telkom’s ARC, least one member of the audit committee Mr PCS Luthuli, who is a Chartered Accountant, is must have accounting or related financial considered an audit committee financial expert within the management skills. An audit committee financial meaning of item 16A of the requirements of Form 20-F in expert within the meaning of the SEC rules terms of the definition in the Sarbanes-Oxley Act. The SEC adopted pursuant to the Sarbanes Oxley Act has determined that the audit committee financial expert satisfies this requirement. designation does not impose on the person with that Group designation any duties, obligations or liabilities that are overview greater than the duties, obligations or liabilities imposed on such person as a member of the audit committee in the Management absence of such designation. review
Disclosure and Communication Sustainability Corporate Listed companies are required to adopt, and The corporate governance statement is available on the review governance post on their websites, a set of corporate company’s website, www.telkom.co.za/ir. guidelines governance guidelines and the charters of their most important committees, including at least the Performance review audit, and, if applicable, compensation and nominating committees. The guidelines must address, among other things: director qualification Financial statements standards, director responsibilities, director access to management and independent advisers, director compensation, director orientation and Company Financial continuing education, management succession, Information and an annual performance evaluation of the Board of directors. Telkom AR front.qxp 8/12/09 6:21 PM Page 48
48 Telkom Annual Report 2009
Corporate governance (continued)
Telkom Audit Services (TAS) is an independent and objective assurance and consulting function that focuses on a balance between value protection and value enhancement
Internal controls weaknesses, including processes that • Significant financial, managerial and Our internal control environment is ascertain the level at which deficiencies operating information is accurate, monitored by the ARC, which: are reported. Significant deficiencies and reliable and timely; material weaknesses in internal controls are • Ensures that risks are identified and • Employees’ actions are in compliance reported to top management, the Board or assessed. with policies, standards, procedures, the ARC, and the external auditors. applicable laws and regulations; • Ascertains that all systems and Telkom Audit Services (TAS) processes to prevent and/or mitigate • Significant legislative or regulatory TAS, in accordance with global best these risks are monitored; and issues impacting on us are recognised practices, is a value-adding, independent and addressed appropriately; and • Reviews the quality of reporting and and objective assurance and consulting adherence to internal policies and other function, designed to add value to, and • An assessment is provided regularly of governance best practices. improve our operations. Its mandate is to the adequacy and effectiveness of our provide an independent assessment on the corporate governance, risk and control Our organisational structure facilitates and reliability of financial reporting, validate processes for controlling our activities allows the flow of information upstream, control systems and provide an oversight of and managing our risks. downstream and across all business management and overall business activities. This is supported by formal To ensure the independence of TAS, the activities, bringing a systematic, disciplined Group Executive: Telkom Audit Services mechanisms in place to communicate the approach to the evaluation and reports functionally to the ARC Chairman responsibilities and expectations of improvement of the effectiveness of risk and administratively to the Chief Financial business activities at executive level. management, internal controls and Officer and has direct access to the Chief Section 404 of the Sarbanes-Oxley Act corporate governance processes. In Executive Officer. In this context, the ARC requires that companies listed on the NYSE carrying out its mandate, TAS co-ordinates oversees processes related to financial risks annually evaluate and report on the with other control and monitoring functions and internal controls, financial reporting effectiveness of their controls over financial (enterprise risk management, compliance, and the monitoring of internal and external reporting. We submit progress reports at security, legal, ethics, environment and external audit). auditing processes. In carrying out its least quarterly to the ARC which then duties, the team has unrestricted access to reports to the Board. TAS is required to provide reasonable all Telkom functions, records, property and assurance and to determine whether or not Our internal audit function plays a key role personnel. our control processes and systems are in providing an objective view and adequate and functioning to ensure that: The TAS team conducts audit work, or any continuous assessment of the effectiveness other task, in accordance with the internal of the internal control systems throughout • Resources and assets are effective and auditing standards set by the globally the Group to both management and the efficiently used and adequately recognised Institute of Internal Auditing ARC. protected; (IIA). This requires compliance with the Mechanisms are in place that capture and • Risks are appropriately identified and Standards or Professional Practice of report on identified internal control managed; Internal Auditing (SPPIA) and, in particular, Telkom AR front.qxp 8/12/09 6:21 PM Page 49
Telkom Annual Report 2009 49
the codes of conduct and ethics that are promulgated from time to time by relevant professional bodies and any other corporate The Network Operations Centre (NOC) governance initiatives. Internal audit practices and activities are Our world-class campus in Centurion, outside Pretoria, also benchmarked independently by an authoritative external party enables us to offer our customers an integrated solution to as recommended by the SPPIA and required by the ARC. their network requirements. At its heart is the Network Operations Centre (NOC). Developed from the best in world-class practices and centres, it employs the latest technologies and houses high level technical skills and support teams. It offers full network monitoring, fault management, configuration management, accounting n management, performance management and security management 24 hours a day, seven days a week.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:21 PM Page 50
50 Telkom Annual Report 2009
Enterprise risk management
We manage a variety of risks including financial, political, regulatory and technology across the African continent
SAT-3
Mauritainia Mali Niger Senegal EASSy
Gambia Sudan Burkina Guinea Benin Nigeria Somalia Sierra Leone Togo Ivory Ethiopia Coast Ghana Central African Republic Liberia Cameroon
Equa.Guinea Congo Uganda Kenya SAT-3 Gabon DRC Rawanda Burundi
Tanzania EASSy Overlap of Primary Operators of Africa Online and MWEB
Angola Overlap of Multi-Links and MWEB Zambia Only Africa Online Operators Mozambique Madagascar Overlap of Distributors of Zimbabwe Namibia Africa Online and MWEB Botswana SAT-3 Only Africa Online Affiliates (Partneship with A-link) Swaziland EASSy Telkom SA Limited Lesotho South Africa
SAT-3
Our Enterprise Risk Management (ERM) management framework, risk policy and Our various subsidiaries and service strategy was comprehensively reviewed procedure deliverables were updated and organisations completed risk management during the year, in particular the capturing approved by the Board. compliance plans and all Telkom SA policies and reviewing of the high risks for were endorsed. In addition, all Telkom A proposed risk reporting format for the the business for the Telkom enterprise Group subsidiaries are now covered. various risk committees was developed to risk management committee (TERMC), help the audit and risk committee (ARC) Enterprise risk management governance together with the compilation of an monitor ERM’s effectiveness across the We manage a variety of risks including improved TERMC report. Group and the Risk Portfolio was monitored financial; political; regulatory; technology; As a result of certain gaps identified by on an on-going basis. human capital; operational; safety, health KPMG’s risk maturity assessment, the risk and environment; security; strategic and Telkom AR front.qxp 8/12/09 6:21 PM Page 51
Telkom Annual Report 2009 51
Enterprise risk management governance Enterprise risk management at Telkom is guided and monitored by various committees that have adopted certain principles to assist them in executing their respective enterprise risk management functions. The model below outlines the key enterprise risk management structures, the key role-players and their roles and responsibilities. t
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:21 PM Page 52
52 Telkom Annual Report 2009
Enterprise risk management (continued)
We practice a risk management approach that triggers an informed and dynamic approach
legal, across the African continent. These On a daily basis, risks are managed by a management performance and providing are identified, measured and monitored number of committees (see chart), mainly an on-going high level risk assessment through various control mechanisms. through the ARC, which reports to the to the Board. To ensure it fulfils its Board. responsibilities, the ARC can access any Our Board which sets the risk management information it needs. standard and risk appetite* for the group is *Risk appetite is a framework which we use to measure the ‘amount of risk’ – on a broad level – which we are supported by various committees whose prepared to accept in our pursuit of our strategic and • Telkom enterprise risk management responsibilities include: financial objectives. As part of our business strategy, it committee (TERMC) helps management allocate resources across the various This is a dedicated risk management • Reviewing and recommending to the service organisations to ensure that objectives are met. committee appointed by the ARC to Board risk management standards, Responsibility and accountability implement an effective risk management including risk control principles and • The Board process that will optimise our risk taking. overall risk measure. The Board, through the ARC, is responsible • Group management • Reviewing the overall risk appetite and for the total risk management process and The senior and line management teams of profile of the Group. the formation of its own opinion on the our service organisations are responsible effectiveness of the process. The Board • Reviewing significant changes in the risk for effective risk management. approves the risk strategy in liaison with, framework, risk policy and the various and through recommendations of, the Enterprise risk management framework procedures that support the risk strategy. ARC. Risk is an unavoidable consequence of • Reviewing the dashboard of strategic doing business but, managed correctly, it • Audit and risk committee (ARC) risks that impact on us; and can be an opportunity for us to operate The ARC, which is empowered by the competitively. • Reviewing reports on specific material Board, operates within written guidelines aspects of our risk governance and risk established by it. The ARC is responsible In our quest to be the leading customer and management processes. for reviewing and monitoring our risk employee-centred ICT solutions service
Loss statistics for 2008/2009 2006/07 2007/08 2008/09 In the year under review our copper cable losses amounted to R284.9 million excluding outbound revenue losses which 8% 13% 15% is estimated at R907 million. 8% 11% 10% 14% 7% 69% 68% 74% 3%
Copper cable Dect (CPE) Optic Damages (unknown third parties) Telkom AR front.qxp 8/12/09 6:21 PM Page 53
Telkom Annual Report 2009 53
provider, we practice a risk management Statistics approach that triggers an informed and 2006/07 2007/08 2008/09 dynamic response through the evaluation Total incidents reported 9,279 7,954 7,216 and management of the many Total cases investigated 8,863 7,838 7,116 opportunities and threats that permeate our Total cases resolved 8,443 6,427 5,960 business environment. Case types investigated Protecting our assets TARPS investigations To minimise, and preferably prevent, fraud, Asset theft 1,794 2,026 2,573 corruption and theft, we have a Telkom Burglary 117 141 196 Asset and Revenue Protection Services Business Code of Ethics 294 293 265 (TARPS) section in place. Its scope includes Fraud 192 124 130 forensic services, a fraud committee and Line management requests 72 27 15 an anti-fraud policy statement. Payphones 224 157 112 Forensic services investigates all fraud- Reputational risk (Refund scam) 594 469 657 related activities; the committee, which Robbery 111 159 244 meets continuously, monitors all fraud- Security breaches 57 16 16 related activities and the policy statement Vehicle 96 39 19 implements fraud risk management. Forensic projects 3 – –
Although no major fraud incidents were Total TARPS investigations 3,554 3,451 4,227 reported in the year under review, asset Network Protection Services (NPS) investigations theft losses increased by 27%, mainly as a Cable 3,399 3,198 2,018 result of information technology equipment Network fraud 786 716 690 compliance which highlighted past Solar panel theft 1,124 473 181 lost/stolen equipment at ‘unknown times’. Total NPS investigations 5,309 4,387 2,889 The Telkom Crime Hotline 0800 124 000 Successes The Hotline 0800 124 000, which takes Number of arrests 1,250 1,079 568 calls from employees and the public Number of convictions 156 165 128 regarding any Telkom-related alleged unethical or criminal activities, was Group overview contracted out to an independent administrator on January 1, 2009 in
compliance with the Sarbanes-Oxley Act Management requirements. The administrator does, review however, forward all information to TARPS for investigation. Sustainability review As a result, employee trust in the line has been rejuvenated in terms of anonymity. In Cable theft has addition, our Whistleblower policy was Performance updated to ensure more effective support review for the whistleblowing process.
Security services Financial statements We continue to use physical and technical security services for physical access control to affect our operations to all our sites and the protection of our Company Financial assets, and the provision of electronic Information solutions for all our security needs and requirements. Telkom AR front.qxp 8/12/09 6:21 PM Page 54
54 Telkom Annual Report 2009
Enterprise risk management (continued)
The Second Hand Goods Act provides pfor stiffenalties including imprisonment
Cable statistics Cable theft Total cable losses Cable theft has been a problem for the last R millions 2006/07 2007/08 2008/09 10 years and increased at an alarming rate. In the year under review our copper Copper cable 227.1 194.6 190.6 cable losses amounted to R284.9 million Dect (CPE) 31.8 20.0 9.2 excluding outbound revenue losses which Optic fibre 25.7 31.6 40.0 is estimated at R907 million. Damages 26.1 37.7 40.8 Payphone vandalism 15.0 5.8 4.3 Our main cable network and open wire routes have been targeted by highly Total 325.7 289.7 284.9 organised syndicates and, on our smaller Cable theft repair costs cable routes, we have seen an increase in R millions 2006/07 2007/08 2008/09 petty crime. The key drivers, we believe, are the rising price of copper which, on Copper 179.5 151.2 141.2 average, increased by 600% over the last Fibre 5.5 7.9 10.2 five years, and the strong demand for the Total 185.0 159.1 151.4 metal from international markets, in particular China. Estimated outbound revenue loss due to cable theft R millions 2006/07 2007/08 2008/09 While the problem is not unique to us or, indeed, South Africa, as evidenced by Outbound revenue1 368.1 626.3 906.8 reports from, amongst other countries, 1 Estimates based on certain assumptions Zambia, Tanzania, Kenya, Great Britain and the United States, it is impacting on our performance as the resources used to replace the stolen cable should actually be used to roll out new infrastructure and provide new services.
We have instituted a number our own contingency measures – the investment of millions of rands in security personnel; cable alarms; placing cables underground; replacing manhole covers with lockable lids, closer working relationships with the South African Police Services, Non-Ferrous Theft Combating Committee and Business Against Crime, amongst others – to combat the problem.
In addition, we believe the amended Second Hand Goods Act, whose aim is to Telkom AR front.qxp 8/12/09 6:21 PM Page 55
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regulate the business of dealers in second hand goods in order to combat the trade in stolen goods, will be a valuable tool in the Menlyn Park – the flagship of the new generation fight against this problem. TelkomDirect stores The Act provides for stiff penalties, including imprisonment, for Since its opening in December 2008, the TelkomDirect store convicted metal thieves and scrap metal dealers. in Pretoria’s up-market Menlyn Park shopping centre has proved to be a huge hit with customers, justifying our faith in We are also lobbying to have copper declared in the same category as diamonds and for charging cable thieves with launching this ‘third generation’ store offering to South ‘sabotage’ instead of ‘theft’. African consumers.
Telkom Business Continuity Management (BCM) Open seven days a week from 09:00 to 19:00, the store ent In 2002 we established the Telkom Business Continuity/Disaster is one of the 136 we have in major shopping centres across Recovery unit (Telkom BC/DR) which mainly focused on the the country. readiness of our critical sites in case of a disaster or major incident. It provides not only a range of goods from fixed mobile In February 2008, we reviewed BC/DRs network-driven focus conversions (the phones of the future) to laptops, ADSL units, and re-established the function as an enterprise-wide Business mobile phones, play stations and satellite navigation units, Continuity Management organisation. Its focus areas are to but also free technical support. improve all disaster-related activities across the Group, ranging from management to operations and systems. “Basically,” says store manager Thobeng Choeu, “we can fix or help with anything that is software-related. No other A key deliverable in the year under review was the operator offers this service, making it a unique plus for re-establishment of our BCM Institutional Capacity which resulted in an improved BCM Governance, Additionally, we reviewed our Telkom.” BCM company policy and charter, the implementation of a BCM With its ‘touch and feel’ ambience, the store is a superb training programme – which 32.1% of Telkom managers and marketing tool for us as it showcases our new technologies senior managers completed – the review of the BCM website and technical expertise. A key customer ‘pull’ factor is the and generic BCM awareness on all managerial levels. The free doBroadband gaming facilities at the rear of the store. establishment and implementation of operational business Here youngsters – and adults – can play a range of games continuity plans was also a key deliverable. to their heart’s content. Going forward Our key focus areas for the year ahead are: Says Thobeng: “Because of the tactile experience, many customers end up buying the games and play stations”. • Implement, through a phased approach, the revised ERM strategy and align it to an enterprise-wide view of all risks. Group overview • Upgrade our risk management training programme.
• Align corporate governance and ERM to the draft King III code. Management • Conduct compliance risk assessments in terms of the agreed review framework.
• Present the first critical element in the determination of our risk Sustainability appetite – the draft Risk Bearing Capacity (RBC) – to TERMC. review
• Create an independent division by separating ERM from the ARC, but ensuring that audit is still an integral part of our overall Performance risk management; and review • A significant enhancement of the quality of ERM reporting to the Board, business units and subsidiaries. Financial We will also continue to improve our communication to internal statements and external stakeholders through a review and further development of our risk management processes. Our risk Company management database will also be re-examined to ensure we Financial Information provide timeous, current, accurate and accessible information to our stakeholders. Telkom AR front.qxp 8/12/09 6:21 PM Page 56
56 Telkom Annual Report 2009
Enterprise risk management (continued)
Risk factors investments outside of South Africa, not be able to pay dividends and our You should carefully consider the risks which could adversely affect our operations and financial condition described below in conjunction with the businesses and cause our financial could be adversely affected. other information and the consolidated condition and net income to decline. • Continuing rapid changes in financial statements of the Telkom Group • The number of commercially attractive technologies could increase competition and the related notes included elsewhere in acquisition and investment opportunities or require us to make substantial this annual report before making an for our fixed-line and mobile businesses additional investments in technologies investment decision with regard to Telkom’s on the African continent is limited. and equipment, which could reduce our ordinary shares or ADSs. Moreover, the consummation of return on investment and net profit. Risks related to our business acquisitions and investments may be • If we continue to experience high rates • We may be affected by global unsuccessful, which could have a material of theft, vandalism, network fraud, economic and financial conditions adverse effect on our future growth. payphone fraud and lost revenue due to which could cause our growth rates, • The growth in the mobile market in non-licensed operators in our fixed-line operating revenue, net profit and South Africa has resulted in an increase business, our fixed-line fault rates could dividends to decline. in the number of Telkom calls terminating increase and our operating revenue • Any changes to our mobile strategy or on mobile networks as opposed to and net profit could decline. our inability to successfully implement our fixed-line network. Telkom’s net • Delays in the development and supply of such strategy and organisational interconnect margins and net profit communications equipment may hinder changes, could cause our growth rates, could decline if this trend continues. the deployment of new technologies and operating revenue, net profit and • If we are not able to continue to services and cause our growth rates and dividends to decline. improve and maintain our management net profit to decline. • If we are not able to turn around information and other systems, we could • Actual or perceived health risks relating the financial performance of our Multi- be subject to losses and inaccuracies in to mobile handsets, base stations and Links subsidiary, our Group’s financial our financial reporting, our ability to associated equipment and any related condition could decline. provide accurate and comprehensive publicity or litigation could make it • Increased competition in the South operating information and to compete difficult to find attractive sites for base African communications market may may be harmed and our share price stations and impact our ability to grow result in a reduction in overall average could decline. our 3G mobile network business, and tariffs and market share and an increase • If we lose key personnel or if we are reduce our customer base, average in costs in our fixed-line business, which unable to hire and retain highly usage per customer and net profit. could cause our growth rates, operating qualified employees and partners, our Risks related to Telkom’s ownership by revenue and net profit to decline and business operations could be disrupted the government of South Africa and our churn rates to increase. and could impact on our ability to major shareholders • Increased competition in the South compete successfully. • Telkom’s major shareholders are entitled African data communications market to appoint the majority of Telkom’s • If Telkom is not able to successfully grow may adversely impact our growth rates, directors and exercise control over revenues, profits and cash flows from its operating revenue and net profit. Telkom’s strategic direction and major existing and new businesses to replace corporate actions. • We may not be successful in revenues, profits and cash flows implementing our strategy of transforming previously received from Vodacom, • The government of the Republic of South from basic voice and data connectivity Telkom may not be able to pay Africa may use its position as to fully converged solutions offering dividends and service its debt and shareholder of Telkom and policymaker integrated voice, data, video and internet could be required to lower or defer for, and customer of, the telecommuni- services and managing costs through our capital expenditures, dividends and cations industry in a manner that may restructuring programme, which could debt reduction, which could cause the be favourable to our competitors and adversely impact our ability to maintain trading prices of Telkom’s ordinary unfavourable to us. profitability by growing and protecting shares and ADSs to decline. Risks related to regulatory and legal revenue, while managing costs. • We have negative working capital, matters • There are significant political, which may impair our operating and • The regulatory environment for the economic, regulatory, taxation and financial flexibility and require us to telecommunications industry in South legal risks associated with our African defer capital expenditures and we may Africa is evolving and regulations Telkom AR front.qxp 8/12/09 6:21 PM Page 57
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addressing a number of significant portability or are unable to implement trading prices of Telkom’s ordinary matters have not yet been made. The these requirements in a timely manner, shares and ADSs, to decline. interpretation of existing regulations, the our business operations could be • Should the country continue to adoption of new policies or regulations disrupted and our net profit could experience high occurrences of power that are unfavourable to us, or the decline. The implementation of carrier outages, Telkom’s operational capacity, imposition of additional licence pre-selection and number portability will expenses and revenues will be affected obligations and fees on us, could also likely further increase competition and its operating revenue and net profit disrupt our business operations and and cause our churn rates to increase. could decline. could cause our net profit and the • The implementation of the Regulation of trading prices of Telkom’s ordinary • The high rates of HIV infection in South Interception of Communications and shares and ADSs to decline. Africa could cause the size of the South Provisions of Communication-Related African communications market and our • Our tariffs are subject to approval by Information Act, or RICA, could be growth rates, operating revenue and net the regulatory authorities, which may costly and may negatively impact the profit to decline. limit our flexibility in pricing and could ability of Telkom to register customers reduce our revenues and net profit. and may require us to disconnect • Significant labour disputes, work stoppages, increased employee expenses • Any payments to Telcordia Technologies existing customers, causing our as a result of collective bargaining and Incorporated, or Telcordia, in the penetration rates, growth rates, revenue the cost of compliance with South damages phase of its arbitration and net profit to decline. African labour laws could limit our proceedings against Telkom, will be • If Telkom is required to comply with the operating flexibility and disrupt our required to be funded by Telkom from provisions of the South African Public cash flows or the incurrence of debt, fixed-line business operations and Finance Management Act, 1 of 1999, which could have a material adverse reduce our net profit. or PFMA, and the provisions of the effect on its financial condition and South African Public Audit Act of 2004, • South African exchange control results of operations. or PAA, Telkom could incur increased restrictions could hinder our ability to • We are parties to a number of legal expenses and its net profit could decline make foreign investments and procure and arbitration proceedings, including and compliance with the PFMA and foreign denominated financing. complaints before the South African PAA could result in the delisting of Risks related to ownership of Telkom’s Competition Commission. If we lose Telkom’s ordinary shares from the JSE. ordinary shares and ADSs these legal and arbitration proceedings, • Our total property taxation expense • The future sale of a substantial number we could be prohibited from engaging could increase significantly and our net of Telkom’s ordinary shares or ADSs in certain business activities and could could cause the trading prices of profit could decline as a result of the Group be required to pay substantial penalties overview enactment of the South African Local Telkom’s ordinary shares and ADSs to and damages, which could cause our Government: Municipal Property Rates decline. revenue and net profit to decline and Act, 6 of 2004. have a material adverse impact on our • Your rights as a shareholder are Management governed by South African law, which review business and financial condition. Risks related to the Republic of South differs in material respects from the • If we are required to unbundle the local Africa rights of shareholders under the laws of loop, or are unable to negotiate • Fluctuations in the value of the rand and Sustainability other jurisdictions. review favourable terms and conditions for the inflation rates in South Africa could have provision of interconnection services a significant impact on the amount of • It may not be possible for you to effect and facilities leasing services or ICASA Telkom’s dividends, the trading prices of service of legal process, enforce Performance finds that we have significant market Telkom’s ordinary shares and ADSs, our judgments of courts outside of South review power or otherwise imposes operating revenue, operating expenses, Africa or bring actions based on unfavourable terms and conditions on net profit, capital expenditures and on securities laws of jurisdictions other than us, our business operations could be the comparability of our results between South Africa against Telkom or against Financial statements disrupted and our net profit could financial periods. members of its Board. decline. • The levels of unemployment, poverty • Your ability to sell a substantial number Company • If we are unable to recover the and crime in South Africa may cause the of ordinary shares and ADSs may be Financial Information substantial capital and operational costs size of the South African communications restricted by the limited liquidity of associated with the implementation of market and our growth rates, operating ordinary shares. carrier pre-selection and number revenue and net profit, as well as the Telkom AR front.qxp 8/12/09 6:21 PM Page 58
58 Telkom Annual Report 2009
Black economic empowerment
We constantly strive to maintain our momentum in terms of implementing our BBBEE transformation pillars
In the year under review, we continued to • In management control, we were recognised procurement spend from all make a significant contribution towards the ranked the second most empowered suppliers was R8.8 billion, equivalent to achievement of the objectives of our company on the JSE Securities 70.4% of total measured procurement government’s Broad-Based Black Economic Exchange by the Financial Mail Top spend. Again, this figure significantly Empowerment (BBBEE) policies and the Companies Survey. This ranking exceeds the 50% target in the BEE transformation of the Information and reflected the total transformation of our Codes. BEE recognised procurement Communications Technology (ICT) sector. Board and top management structures spend from Qualifying Small Enterprises to significantly exceed government’s (QSEs) and Exempted Micro-Enterprises One of our strategic goals is to become targets for this element of BBBEE. (EMEs) declined slightly as many of our one of South Africa’s leading empowered small suppliers graduated to become companies. Our BBBEE Strategy and • In preferential procurement, we were large enterprises measured under the Implementation Roadmap, which are the again ranked one of the best performers Generic Scorecard of the BEE Codes of enablers to achieve the objectives of our on the JSE Securities Exchange by the Good Practice. 2010 Strategic Plan, have both been Financial Mail Top Empowerment approved by the Board. Companies Survey. Our Preferential In this regard, we have a dual BEE Procurement is recognised as a champion evaluation policy that considers both the Our BBBEE self-assessment has revealed a in driving economic transformation DTI scorecard (broad-based BEE number of highlights. among JSE Listed companies, state- evaluation criteria) and levels of black • In ownership, a series of landmark owned enterprises and within the ICT ownership (narrow-based BEE criteria) transactions – the sale of 15% of our sector. During the past financial year, when making procurement decisions. shares in Vodacom, the declaration of a we procured goods and services This policy is in line with best practices in special dividend and the listing and worth R4.1 billion from black-owned the South African economy. Our unbundling of Vodacom shares – companies, equivalent to 33.2% of total preferential procurement policy also unlocked value for our shareholders, the measured procurement spend. This seeks to move beyond BBBEE majority of whom are public entities and figure exceeds the 15% target in the compliance and achieve other qualitative black shareholders. BEE Codes by a significant margin. BEE and industrial policy objectives such as reducing our dependence on international resources, the development of domestic technology production capabilities and the creation of sustainable black-owned ICT companies. 2007/ 2008/ BBBEE element Target 08 09 Although our preferential procurement policy is perceived to be stringent, the BBBEE procurement spend from all suppliers 50% 55% 70.4% majority of our large suppliers, many of BBBEE procurement spend from qualifying small them multi-national companies, have set enterprises or exempted micro-enterprises 10% 6.7% 5.1% up local operations, sold equity to black BBBEE procurement from black-owned suppliers 9% 23.4% 33.2% shareholders and developed BBBEE BBBEE procurement from black women-owned Commitment Plans that are in line with suppliers 6% 6.3% 4.8% our policy. Telkom AR front.qxp 8/12/09 6:21 PM Page 59
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There was a major improvement in our BBBEE suppliers spend
Over the past decade, we have made a major contribution towards the economic transformation of our sector by awarding large contracts worth tens of billions of rands that facilitated the creation of sustainable black-owned ICT companies.
Through Procurement’s intervention, we have managed to persuade multi-nationals to partner with local BEE companies. These partnerships will provide black-owned companies with the opportunity to upgrade their skills and other capabilities. During the next phase, they will be in a position to develop their own independent brands, products and services that can be marketed in South Africa and the rest of the world.
Thank you Telkom for having faith in me, says Maletsati Tracking the health of its employees is Group overview critical for Telkom as, not only is it a legal requirement but it’s the right thing to do in a
company whose employees are subjected Management review to various levels of stress in their daily lives.
In line with our commitment to sourcing We have various programmes in place BBBEE suppliers, we regularly put out Sustainability to attract and retain black employees, review tenders for the outsourcing of various particularly women. A total of 87% of new appointments in 2009 were black, activities and, in 2002, a tender for bringing overall representation in the occupational health testing was awarded workforce to 62%. Performance to a small company, Maletsati review Occupational Health.
Initially the company, owned and run by Financial statements Maletsati Mosweu, worked in the Gauteng region, providing an in-house clinic service from the Telkom Centre For Learning in Company Financial Johannesburg. We were so impressed with Information the service and attention to detail that in 2004 we offered Maletsati a national Telkom AR front.qxp 8/12/09 6:21 PM Page 60
60 Telkom Annual Report 2009
Black economic empowerment continued We havep developedrogressive employment equity targets
How BBBEE works On February 9, 2007, the Department of Trade and Industry (DTI) released its Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice (the Codes), a framework to guide government departments in the implementation of BBBEE.
The Codes have a generic scorecard (the Scorecard) with seven elements:
• Ownership (20 points) • Preferential procurement (20 points) • Management control (10 points) • Enterprise development (15 points) • Employment equity (15 points) • Socio-economic development (5 points). • Skills development (15 points)
The elements in turn have indicators, each of which has its own weightings, measurement principles and compliance targets.
Based on its scorecard performance, a business/enterprise is awarded a BEE Status and Recognition Level. The highest BEE Status is Level 1. This is awarded to an enterprise which scores more than 100 points and gives it a BEE recognition level of 135%. Effectively an enterprise purchasing goods and services from a Level 1 supplier can recognise 135% of the procurement on its own scorecard.
The lowest BEE Status is Level 8, which is awarded to an enterprise with a score of between 30 and 40 points. This equates to a BEE recognition level of 10%.
An enterprise that scores less than 30 is a non-compliant BEE contributor with a BEE recognition level of 0%.
contract for our five regions, creating through school. Telkom has taught me that to attract and retain black employees, additional jobs in the process as she had supporting the smaller people pays especially black women. A total of 87% to set up satellite offices. dividends all round,” says Maletsati. of new appointments in 2009 were black, bringing overall black repre- Maletsati, who says she is eternally grateful • We have developed aggressive sentation in the workforce to 62%. The employment equity targets to address to Telkom for the faith shown in her and her proportion of disabled employees has the challenges we face in terms of colleagues, tests up to 2,000 employees a risen from 0.93% in 2007 to 1.13% in increasing the diversity of our year, screening them for ailments such as 2009. We continue to drive various workforce, especially the representation diabetes, blood pressure, impaired vision initiatives across the organisation to of black women and black disabled and hearing. ensure that our policies and guidelines people in the middle and senior attract and support the recruitment of “Telkom has been my springboard. It has management levels of the organisation. people with disabilities and to allowed me to pace myself to the point We have put a Human Capital and encourage the disclosure of current where I am now ready to take on other Diversity Strategy in place to ensure that employees with disabilities. jobs and, at the same time, intensify my our workforce reflects South African commitment to the community through the demographics in terms of race, gender • As part of our commitment towards company’s support for, amongst others, the and disability. We also have various Enterprise Development, more than Society For the Blind, mentoring newly programmes in place, including a 100 black-owned companies are now qualified nurses and helping some children dedicated talent management division, beneficiaries of a new short-term Telkom AR front.qxp 8/12/09 6:21 PM Page 61
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payment policy that facilitates the settlement of invoices in less than Guma – smart by name and nature 15 days. Other initiatives include Success stories include Guma Smart Card. This black-owned company has grown training provided by senior staff from small beginnings to become a world-class manufacturer of smart cards that has members within procurement to enable replaced imports with local production and employment and developed lucrative suppliers to comply with quality export markets. Guma recently produced its 100 millionth smart card. standards and the training provided to “Today Guma is a role model black company with ownership of Gijima AST, Tourvest, suppliers at the Telkom Centre for etc. employing over 10,000 value-adding employees including those in our overseas Learning. Khayelihle Projects, which offices like Australia, Canada, America, etc. Thanks to Telkom for having put faith in was assisted to develop and implement us as a small company with big dreams. This year we achieved 100 million Telkom PCR, an abridged ISO 9000 of 2000 quality system, is one of many phonecards manufactured locally and delivered by Guma Smart Card. Through beneficiaries of Telkom’s Enterprise Telkom’s vigorous support and commitment to quality, Guma Smart Card attained Development. Management has been ISO 9001 certification over six years ago. Without Telkom’s commitment to BEE, the working hard at identifying various success we have achieved thus far would not have been possible. Thanks to Telkom sustainable initiatives in this area to management for staying true to the spirit of empowerment,” says Robert Matana improve on current enterprise Gumede, Chairman: Guma Group and Gijima AST. development contributions. Many of the identified initiatives have been approved by the Company’s top management and are in the process of being implemented.
• We recognise that we have a critical role to play in transforming communities and in ensuring that they are sustainable.
Our Telkom Foundation is a key driver in this regard and its activities are detailed on pages 78 to 80.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:22 PM Page 62
62 Telkom Annual Report 2009
Human capital management
The past year’s performance has given us a platform to critically identify and
prioritise interventions
Introduction The labour dynamics in the global and local integrated communications technology (ICT) industry have been impacted by the rapid pace of change in the industry, and by the changes in the sector-specific and broader economies. These events have led to a marked change in the labour supply and skills retention patterns in recent years.
This complex and evolving environment has tested our ability to provide a continuous supply of skills to ensure we achieve our strategy of growing our business and delivering shareholder value.
The year under review’s performance has given us a platform to critically identify and prioritise interventions and test our progress in this regard.
Our workforce We currently have 23,520 full-time employees, 5.5% less than the previous year, with the majority (68%) in operational and support roles; a further 21% in supervisory roles and 11% in managerial positions.
The proportional distribution of our people largely corresponds with our existing and potential customer base.
Staffing and staff exits In line with the changing labour dynamics of the industry, our natural attrition (employees
We have developed progressive who resigned and were not replaced) rate employment equity targets to address rose to 9% (7% in the previous year) and the challenges we face in terms of the diversity of our work force. resignations rose to 8% (6% in 2007/08). This , however, is still in line with the South African industry norm. Telkom AR front.qxp 8/12/09 6:22 PM Page 63
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Headcount movement In the top management scheme, the financial driver accounts for 45% of the 2006 2007 2008 2009(**) total award, and this is measured by the Opening balance 28,972 25,575 25,864 24,879 basic earning per share, return on assets (ROA) and the defend and grow revenues Employee gains 706 1,512 918 1,047 strategy. Performance drivers (customer Appointments 686 1,486 891 1,034 satisfaction and organisational renewal Re-instatement 20 26 27 13 components) account for 35% and 20% is allocated for individual performance. Employee losses 4,103 1,223 1,903 2,406 • Long-term incentive plan Employee retrenchments 2,990 20 4 10 All employees receive conditional shares, Voluntary early retirement 674 7 2 5 subject to their individual performance for each year preceding the allocation. The Voluntary severance 2,295 13 2 5 allocation is based on the average share Involuntary reductions 21 0 0 0 price 10 days before the award date of June 1 each year, using a percentage of Natural attrition 1,113 1,203 1,899 2,396 the employees’ total package. Our Closing balance 25,575 25,864 24,879 23,520 employees have no right or title to the
Other employees* 4,227 5,807 3,801 4,307 shares and cannot receive dividends until the shares have vested. The shares will only * Other employees refer to contract and temporary employees but exclude Board members, learnerships and bursary students. vest if we meet our annual financial targets ** Employee retrenchments for 2009 were employee initiated. which are set out in the relevant team award plan, and employees must remain in Compensation and benefits continuous employment. The Company will • Remuneration introduce a new share scheme subject to While the fixed, or guaranteed, remune- each year as part of our overall shareholders’ approval. ration packages are reviewed each year, remuneration review process and they are • The Telkom Pension Fund and in certain critical skills areas, depending on assessed against individual performance. Retirement Fund the supply and demand of those skills in the The difference between the upper quartile The old Pension Fund, only had 123 market, there are ad hoc reviews to ensure and the market median for guaranteed members and the Telkom Retirement Fund we remain competitive. Group packages is used when calculating had 23,389 members at March 31, 2009 overview • Non-executive directors incentives for top management. and both are financially sound. The directors, on recommendation of the • Other employees Performance management Management human resources review and remuneration review Salary increases for all employees – The performance management system has committee, determine the fees of non- management and bargaining unit – are been enhanced to ensure that our executive directors who do not participate approved by the Board. Non-management leadership is measured on the right criteria in the incentive scheme for top Sustainability employees are paid in terms of the to drive behaviours that will ensure we review management. These fees are set out on negotiated agreements with the relevant continuously improve on the value we Page • and in Note • in the consolidated unions. obtain from our employees. A five point annual financial statements. Performance assessment scale has been introduced that • Short-term incentive plan review • Executive remuneration ranges from ‘consistently exceeds job There is an incentive scheme for our Fixed remuneration is currently set at requirements’ to ‘consistently does not meet management based on a balanced set of the market median and independent job requirements’ to distinguish those who Financial measures determined by the Board. The statements remuneration consultants advise the Board’s do from those who do not. measures consist of financial and key remuneration committee on executive performance driven targets, based on the management packages. Company approved business plan. All other Financial Information Guaranteed packages are influenced by the employees participate in an incentive scope of each individual’s role, knowledge, scheme with different measures applied at skills and experience. These are reviewed the lower levels. Telkom AR front.qxp 8/12/09 6:22 PM Page 64
64 Telkom Annual Report 2009
Human capital management (continued)
In the past year we focused on building the necessary current and future competencies
Reward and recognition Training and development (CFL) with the balance conducted via the Our ‘Name In Lights’ programme that In the past year we focused on building the virtual (PC-based) campus interactive recognises outstanding achievement by necessary current and future competencies satellite-based facility, Skytrain. employees or teams who go the extra mile through training programmes in: Telkom invested R300 million in employee is one of the yardsticks that distinguishes • Customer Service Academy (marketing, training and development in the year under our business from others. sales, call/contact centre and customer review (2008: R283 million). At CFL, Our Gold Award team award for service competencies). 12,271 employees (7,796 black 2007/2008 went to Daniel Fourie, Alan • Leadership and management develop- candidates and 3,641 women) were Gould, Kevin Burns, Deon Minnie and ment (enterprise leadership, general trained. Willie Engelbrecht, for developing a management, frontline leadership and software application that created a service The CFL, which conducts most of its training business development competencies), view for the DSLAM. This application has in-house, spent R35.0 million with external and enabled us to determine within minutes vendors in the key areas of technical and whether a DSLAM has been affected by a • Technical training (product knowledge, IT, management, marketing and Safety, major failure. It also provides us with technical service, ICT infrastructure, IT Health and Environment (SHE). valuable information for special investigation solutions and technology and sections as it identifies problematic networks innovation management competencies). for future investigations. The bulk of the training (64%) was through Daniel also won the CEO Award. the classroom-based Centre For Learning
EE training 2008–2009 AA and EE as a % of total trained EE/AA 2008–2009
African female AA African female Male African Coloured female EE Female coloured Male coloured Foreign female White male Foreign female Male Indian
Indian female Female Indian Male white
White female Female white Male foreigner Telkom AR front.qxp 8/12/09 6:22 PM Page 65
Telkom Annual Report 2009 65
• Accelerated development of women, blacks and young talent Tyron – a fine example of our development programme In the year under review, 257 employees (50% female and 70% black) were trained in value management and technology management.
Some 18 graduates from the ICT GMP obtained their MSc degrees in technology and innovation management. Of these, seven were women and 11 were black.
• Technical training Approximately 2,883 field technicians were trained in IP telephony and the installation and maintenance of ADSL and, to date, more than 3,300 students have been trained on IP-related offerings, including LAN technologies, router installation and
maintenance programmes. Tyron Truter, manager of the Cape Town Electronic Business • Network and IT training Support Centre (ESBC), is a 20 year Telkom veteran who has Some 350 ICT diploma and degree graduates and 400 diploma worked his way up from being an ‘appie’ in the Mitchell’s students were exposed to the industry via theoretical and field Plan branch of the old Posts and Telecommunications training. This resulted in the creation of various talent pools department in 1989, to where he is today.
including specific functional skills needed by line management; IP He has worked all over the Western Cape, run call centres skills and field operations. on the West Rand of Gauteng and Pretoria and returned to • Other training Cape Town in January 2009 to take over the ESBC.
The CFL trained 200 candidates in 22 events relating to IO driven “This job is what you make of it and I’m having a lot of fun. Telkom OSS/BSS projects and an additional 240 people were I’m not a military style manager, I like to get down and dirty trained in infrastructure and product/service training on emerging with my team to ensure we deliver on our key performance technologies. Some 111 employees received IT certification with indicators (KPIs). Our customers make us responsible for 1,823 attending IT short courses and 154 attending IBM Tivoli everything so we have to keep them happy. South Africans, Netcool training. in the main, are not techno savvy so it’s up to us to help them Jobs Initiative on Priority Skills Acquisition (JIPSA) set up their systems. Also, a lot of people don’t realise that we This is a government initiative aimed at addressing the skills support all users from MNet to ourselves and we provide a Group overview shortage in certain areas in South Africa and, to date, 1,138 value-added service to them all.” unemployed ICT graduates have participated in internship
programmes. Of these, we appointed 644 (75% of total industry Management review appointments). In addition, 40 unemployed female ICT graduates were trained and completed advanced Internet Protocol Networking/Solutions development and we offered 22 (55%) of Sustainability them full-time employment. review
Leadership and management development programmes
During the year under review: Performance review • 22 employees completed the Implementing Strategy and Managing Performance programme. Financial • 33 employees from the top leadership team enrolled for the statements Telkom Global Leadership Development programme.
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66 Telkom Annual Report 2009
Human capital management (continued)
We remain committed to continuous engagement with the unions
• 40 employees were nominated for the • There has been a marked improvement albeit one that is within our control if we NGN Professional programme. in our relationship with the unions, and are prepared to change the way we relate to these employees. • 100 employees have graduated to • There is the emerging phenomenon of date from the Advanced Operations managerial employees joining trade Two factors are involved here – a feeling of Management Development programme unions. abandonment of junior and middle (AOMDP). management by top management, and the The former is, we believe, because of our annual general salary increase approach • 81 employees attended the Gordon deliberate action in 2007 to invest in which tends to treat management Institute of Business Science (GIBS) rebuilding the relationship between employees as immune to the economic programme in managing the customer ourselves and the unions following 2006’s hardships that we are all facing. As a result relationship (PMCR), and industrial action. While the suspicions are of the increases gained by union members, • 453 employees have been trained in still there, the propensity to engage in the unions are seen as viable vehicles for the Next Generation Network (NGN) confrontational conduct has diminished. channelling frustrations with some of our Essentials programme. There is also some semblance of shared practices. vision and a willingness to co-operate. Employee engagement Industrial action Two developments stand out in the year Although the latter increase is not material Following an impasse in wage under review: it is, nevertheless, a worrying development, negotiations in 2008, some 2,500 out of
Union memberships – bargaining unit
Non- recognised Non- Grand Union name CWU SACU Solidarity unions Total unionised total
Number of members 8,205 4,682 2,836 52 15,775 5,259 21,034
% membership: 2008/09 39.0 22.3 13.5 0.2 75.0 25.0 100
% membership: 2007/08 37.6 23.8 13.2 0.2 74.8 25.2 100
Union memberships – managerial staff
Non- recognised Non- Grand Union name CWU SACU Solidarity unions Total unionised total
Number of members 149 319 125 225 818 1,668 2,486
% membership: 2008/09 6.0 12.8 5.0 9.1 32.9 67.1 100
% membership: 2007/08 5.7 12.0 4.3 8.7 30.7 69.3 100 Telkom AR front.qxp 8/12/09 6:22 PM Page 67
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14,500 union members participated in a short-lived strike in August 2008 and 1,680 bargaining unit employees participated in industrial action in August 2009. Telkom continues to engage with unions in order to find equitable solutions. Hartebeeshoek keeps track of South Africa The multi-billion rand Hartebeeshoek satellite station lies deep • Heartbeat in a valley between Krugersdorp and Hartbeespoort Dam. The company measures the level of employee Since its opening in 1975 it has relayed literally billions of engagement, through the annual Heartbeat Survey. signals from two satellites deep in space to South Africa’s data, In the year under review our employees were more television and voice units, 24 hours a day, seven days a week. committed to Telkom and indicated that their intention was Donovan Horn is one of the 28 people that man the station. to stay with the Company and take up the challenges that As a technical specialist, Donovan heads a team of eight come their way. For the first time in a long period technicians who ensure that the station runs smoothly and employees are proud to say that they are part of the Telkom efficiently. “We have to be fully operational at all times and our family. They are willing to continue to focus on the positive equipment is in what we call full redundancy mode so that if in spite of negative economic conditions; internal anything goes down it kicks in automatically,” he says. performance pressures; and changing market forces. For some people, working at the station could be a lonely The great news is that even in the light of the above experience, but not for Donovan. “We are surrounded by challenges the Company’s engagement increased by a prime bushveld with its myriad species of flora and fauna, so pleasing 10%. Some 62% of the Company’s employees there’s always something to see, whether it’s a Piet-my-Vrou were engaged compared to 52% in 2008. It is expected whose call echoes from the satellite dishes, or our lone that this will be reflected in increased individual, team and Blesbok. The only thing I do miss about ‘civilisation’ is that Company performance, as well as in the retention of the there is no canteen on site so, if you forget your lunch, the Group right people in the Company. overview nearest hamburger is 23km away!” Engaged employees focus on what’s good for the customer
and what’s good for shareholders. There is positive growth Management review in customer satisfaction in most of the customer segments, which is indirectly the result of the positive engagement of our employees. Sustainability review Telkom intends to continue its effort to improve employee engagement through a particular focus on improving the
accessibility and availability of top management and Performance improving Telkom’s ability to attract and retain a quality review workforce.
Talent management Financial statements Managing our talent pool is a critical aspect of our business, from retaining key skills to unearthing the leaders of tomorrow. We have a number of initiatives in place to Company Financial ensure we are well placed to face current and future Information challenges. Telkom AR front.qxp 8/12/09 6:22 PM Page 68
68 Telkom Annual Report 2009
Human capital management (continued)
Our Graduate Development Schemes division is dedicated to growing and developing young talent
• Succession planning During the year under review our talent pool bench strength rose to 1,474. Effectively this means that there is at least one candidate in the talent pool for each group executive and executive position who can replace the current incumbent.
• Retention programme The four focus areas of our retention strategy are:
• Create knowledge (attract and seek talent)
• Store and protect knowledge (retain talent)
• Share and distribute knowledge (develop potential talent); and
• Use knowledge (deploy talent).
The success rate of our retention programme to date is 95%, with 253 employees on retention.
• Global talent To ensure we have a sustainable talent pool to staff our international businesses we established a Global Talent Pool and, currently, 48 employees are on short- or long-term assignments with Multi-Links/ Africa Online.
• Managed career development for high potential employees
In the year under review our employees The six employees who obtained their were more committed to Telkom and Masters degrees in engineering and indicated their intention to stay. computer science at Cornell University in New York in 2007/08, rejoined us in September 2008 with two being promoted. An additional three employees Telkom AR front.qxp 8/12/09 6:22 PM Page 69
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were admitted to the university in May 2009. The voices of Telkom Six employees, identified by the CEO Telkom has 34 call centres in South Africa, each geared to providing technical Rising Stars programme, are attending the support and service to business and domestic customers. For the men and women IMD’s Building On Talent programme in who staff the centres, life can, at times, be challenging and stressful for these Switzerland. people are the ‘voice’ of Telkom, the ones who take the brunt of customer complaints. 51 female employees attended a Chat and Learn programme which focused on Hilary Peacock, an agent in the Cape Town Service Activation Unit, says a key Women Leaders Under Construction – attribute to surviving in the job is the ability to not take any of the abuse received Blazing Your Own Path. In addition, as personal. The other key attributes are learning what tone of voice to adopt 10 female employees attended a two day when handling calls, good or bad, and having a passion for customers workshop on Women In Management and “I try to put myself in the customer’s place and take the good with the bad when Leadership. handling calls. Overall, the good definitely outweighs the bad and I would go as Graduate and skills pipelines (future far as to say that about 90% of the calls I receive are good,” she says. talent) Colleague Marlon Ernstzen agrees, particularly when it comes to adopting the Our Graduate Development Schemes right tone of voice. Division is dedicated to growing and developing young talent, not only for “There’s nothing better than talking to an irate customer who’s upset because ourselves, but for South Africa as a whole. something he was promised didn’t happen, and then, at the end of the call, hearing him, or her, calm down and apologising and then saying thank you for Some R29.7 million was invested in the help. That experience energises you for the next day.” student bursaries in the fields of information technology, electrical engineering and Blanche Machelm is an agent in the Electronic Business Support Centre (EBSC) in marketing management during the year Cape Town, a unit which handles between 6,000 and 8,000 calls a day, mainly and an additional R3.7 million was spent in the areas of ADSL support (90% of the calls) and fault and connectivity issues – on our Centres Of Excellence programme. e-mail, for example.
We also funded 833 full-time bursaries; Blanche, who estimates that she handles approximately 50 calls a day, says all 667 part-time bursaries and 1,121 study EBSC agents have to have an IT background as they have to have an intimate loans for employees or their dependants in technical knowledge in areas such as routing, configurations, outages, modems
the 2008 academic year. and cable passwords. Group overview
Management review
Sustainability review
Performance review
Financial statements
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70 Telkom Annual Report 2009
Human capital management (continued)
Overall, the year under review was our As part of Telkom’s contribution to the The various CoEs have been encouraged most successful to date in terms of bursar upliftment of advanced research skills in to build relationships with African placements (80%) and a pass rate of more South Africa, several of the previously universities to expand the ICT blueprint in than 95%. under-resourced universities were partnered Africa as a catalyst for job creation and with historically white universities. After a economic development. Africa Online and Multi-Links number of years these previously Africa Online is our internet service Major progress has already been made in disadvantaged institutions have established provider (ISP) in Nairobi, Kenya and Multi- this regard and formal agreements exist, themselves as research centres that can Links is Nigeria’s first private telecommuni- inter alia, with institutions in Egypt, operate independently. Examples of these cations operator. Two of our top Ethiopia, Uganda, Namibia, Kenya, Libya joint research centres are Rhodes University management employees are on three year and Tunisia. contracts in Nairobi and 39 are based in and the University of Fort Hare as well as The CoE programme enables the various Lagos. the University of KwaZulu-Natal together with the University of Zululand. Currently, institutions to establish research facilities Telkom Centres of Excellence there are 16 CoEs across the country, each that would not otherwise have been Telkom's Centres of Excellence (CoE) is a with a unique research focus. possible without the necessary Telkom, collaboration programme between Telkom, industry and government sponsorship. the telecommunications industry and The CoEs are jointly funded by Telkom, ICT government to promote research in industry players and the Department of Skills retention in South Africa is a major communication technology and allied Trade and Industry - through its Technology challenge as many talented post-graduate sciences and to provide facilities to and Human Resource for Industry students are attracted to opportunities encourage young scientists and engineers Programme (THRIP). overseas. An important feature of the CoE to pursue their research interests in South programme is that the extensive research Sound governance ensures that allocated Africa opportunities offered to students effectively funds are well managed. Various levels of contribute to minimising the “brain drain”, The CoE programme was launched in governance have been formally thus keeping our talent here to provide a February 1997 when the then Minister of established. valuable human resource to the industry. Communications, Mr Jay Naidoo • Formal CoE Agreement between all participated in the signing ceremony of the Approximately 250 students are currently stakeholders. first research agreement between Telkom, pursuing post graduate degrees through Siemens and the University of Cape Town. • Each CoE is managed by a Steering the programme and since its inception, During 1997 a total of seven CoEs were Committee represented by the research more than 1,800 post graduate degrees launched and subsequently, during the staff, Telkom, the respective industry have been awarded. following year another five were sponsor and a representative from the The profile of the current CoE students is: established, including several at THRIP management team. technikons. From the launch of the • 84 Doctoral students • Research project selection mechanisms programme, the current Chief Executive are aligned with; industry partner/s and • 166 Masters students Officer of Telkom, Mr Reuben September, THRIP funding criteria. became the patron of the programme and • 20 women has guided and supported the initiative. At • High level governance of the CoE • 150 BEE candidates each of the launches during 1997/98, programme is provided by an Executive top ranking government officials, including Management Council with representivity • 38% non-South African students Mr Andile Ngcaba, Mr Tokyo Sexwale from Telkom, industry, academia and Currently 27 industry partners are involved and Minister Sibusiso Bhengu participated THRIP. in the CoE programme. Industry in the signing ceremonies of the stakeholders are more than financiers of the collaborative research agreements. CoE programme as they also play a vital Telkom AR front.qxp 8/12/09 6:22 PM Page 71
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role in exposing students to the real world Industry Partner: Telkom and Dimension University of KwaZulu-Natal of communication. Data Radio access involving CDMA receivers; traffic modelling; adaptive antenna arrays Telkom’s CoE programme has been Optical Fibre Measurements and resource management. recognised as a catalyst for ICT research in Industry Partners: Telkom, Hezeki and MCT Africa. Rural telecommunications with a variety of Communications projects in the wireless networking arena. Intuitions, research areas and industry Solar Energy Research partners Industry Partners: Telkom and Alcatel-Lucent Tshwane University of Technology Industry Partners: Telkom and TFMC University of Zululand Radio planning: projects involve Rhodes University Mobile e-Services comparing the calculated or predicted Distributed Multimedia: projects deal with Industry Partners: Telkom and Huawei value of radio signals with the measured virtual reality; Internet Protocol telephony, signals. protocols and intelligent agents Universities of Cape Town and Stellenbosch Industry Partners: Telkom, Alcatel-Lucent Industry Partners: Telkom, Comverse, ATM/Broadband Networks and their and Molapo Technology Tellabs and StorTech applications with research on MPLS and IP North West University (Potchefstroom University of Fort Hare networks; congestion control and network Campus) Electronic Commerce performance. Telecommunications Application Modelling Industry Partners: Telkom, Saab Grintek includes projects on the Super Parallel Industry Partners: Telkom, Nokia Siemens and Tellabs Networks and Telesciences Computing facility; data mining; decision support systems and mathematical University of Stellenbosch University of Western Cape programming applications. Satellite communication, speech and Internet Protocol Networks and their image processing applications Industry Partners: Telkom and Saab Grintek Industry Partners: Telkom, Motorola and Industry Partners: Telkom and Cisco University of Johannesburg Spescom Modelling Optical communication: involving University of the Free State Dense Wave Division Multiplexing (DWDM) University of Witwatersrand The identification of usability and human projects; optical filters and transport Telecommunications Access and Services factors that will ensure higher accessibility networks based on the TINA Architecture to Information Technology
Industry Partners: Telkom, CBi Electric and Industry Partners: Telkom, Vodacom and Industry Partner: Telkom Group overview Ericsson Nokia Siemens Networks Vaal University of Technology Operational Support Systems (OSS) University of Limpopo Power (fuel cells etc) and optic fibre Management Automatic Speech technology research Industry Partners: Telkom and SAP review Industry Partners: Telkom and Maredi Industry partners: Telkom, M-Tec and Nelson Mandela Metropolitan University TFMC Multimedia software: includes usability University of Pretoria Sustainability review laboratory projects, virtual classroom; Next Generation Networks programming tools and 3D system design Industry Partners: Telkom, Unisys, Alvarion, EMC and Tellumat Performance review
Financial statements
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72 Telkom Annual Report 2009
Safety, health and environment
We successfully piloted sa tress resilience and emotional intelligence workshop
Safety, health and environment Our entrenched and integrated Employee Wellness and Safety, Health and Environment (SHE) portfolio continues to be one of the most admired in South African industry, as evidenced by the following achievements in the year under review.
• We received the coveted international Global Business Coalition (GBC) Award for Excellence as the best HIV/AIDS workplace programme for our integrated Voluntary Counselling, Testing and Treatment programme for 2008. The award was made by the United Nations Secretary General in New York.
• Our annual national HIV/AIDS celebrations campaign, ‘Don’t hesitate, donate’, was successfully launched on World AIDS Day 2008 with our employees donating thousands of kilograms of food, clothes and toys to 26 adopted HIV/AIDS havens, orphanages and hospices.
• Our Direct Retail shops initiated the Thuso Bus concept (Thuso is our employee wellness programme). Outlets in the Eastern Cape, including the former Transkei, were given a working day off to attend Thuso programmes.
• We successfully piloted a stress An industrial theatre show was a key driver in the roll-out of our Thuso Wellness days resilience and emotional intelligence which highlighted a step-by-step approach to improve employee wellbeing through lifestyle changes. (EQ) workshop in areas with high degrees of trauma as a result of hijackings, robberies and other criminal activities. This will be rolled out nationally in the new financial year. Telkom AR front.qxp 8/12/09 6:22 PM Page 73
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Sick leave indices
Sick leave measure 2006/2007 2007/2008 2008/2009 % variance
SAR (%) 2.24 2.51 2.52 (0.4) Defined as a total number of sick days as % of total available man-days
ASR (days) 2.45 2.48 2.53 2.0 Defined as the average number of days used per sick leave incident
AFT (incidents) 3.38 3.59 3.30 (8.1) The average number of sick leave incidents per sick leave user
SUR (%) Monthly average 15.7 17.3 17.3 0 Number of sick leave users per month as % of total number of employee population
SUR (%) Year-to-date 67.2 70.1 71.7 2.3 Number of sick leave users progressively utilising sick leave as % of total number of employee population (all sick leave users are only calculated once)
Total number of man-days/shifts lost due to sick leave 176,795 194,364 183,679 (5.5) implying the progressive and accumulative total of sick leave days over 12-month period
• We saved R2 million on our Operational Absenteeism through illness out of our Thuso Wellness days which Hygiene surveys thanks to the application There were no significant variations in the highlighted a step-by-step approach to of specific criteria in key areas. absenteeism through illness and year-to- improve employee wellbeing through date sick leave use figures, although there lifestyle changes. Our challenge remains to • Our ISO 14001:2007 and OHSAS was a 5.5% improvement in overall sick reconstruct the “Terrible Triangle” of high 18001:2007 Safety, Occupational leave days used. stress levels, poor chronic disease profile Health and Environmental Management Group and bad lifestyle habits. overview systems were recertified by Dekra We remain concerned about the high level Norisko Industrial South Africa. of sick leave taken (71.7% compared to • Eye screening 70.1% in the previous year) and we will be 2,113 employees were screened for vision Management • The Compensation Commissioner review making planned changes in sick leave impairment and 194 were identified for granted us a dedicated resource to deal policy stipulations and management further treatment intervention. specifically with Telkom-related cases. effectiveness to decrease this business risk This resulted in a ‘quicker return to work’ • Individual health risk assessments Sustainability and impact. In terms of productivity and review by employees who were injured on duty. (chronic profile) direct/indirect cost factors, the data 2,903 employees at selected sites in the • As a result of effective risk management indicates that 791 employees are off sick Free State, KwaZulu-Natal, Western Cape Performance controls, there were significant each working day. While this is an and Gauteng were screened for review reductions in three reportable incident improvement of 2.6% on the previous year, hypertension, cholesterol, diabetes and categories – working in elevated it is still unacceptable and a significant body mass. Financial positions (17%); lifting and pushing improvement is necessary. Our new target statements # Hypertension profile: While there was a (30%); and vehicle accidents (16%). is to reduce the sick leave per day to decrease in the normal range from 63% to 600 employees in 2010/2011. • We established the Telkom Green 46%, this remains a major risk area as Company Initiative (TGI) project team to enable us Financial Physical wellness more than 50% of those tested had some Information to better manage our environmental An industrial theatre show, ‘How Do I Eat abnormality in their blood pressure. The impact. This Elephant’ was a key driver in the roll- high systolic range (heart subtraction) Telkom AR front.qxp 8/12/09 6:22 PM Page 74
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Safety, health and environment (continued) Of particular concern is the 17.6% increase in stress-related cases due to work related relations, poor performance, incapacity and job security.
The following table shows the diagnostic causal factors for the EAP referrals
Diagnosis 2006/2007 2007/2008 2008/2009 % variance
Crisis and trauma 41.7% 41.3% 40.5% (1.9%)
Family relationships and divorce 15.4% 17.6% 16.1% (8.5%)
Stress related 7.6% 6.8% 8.0% 17.6%
percentage was similar to the previous Psychological wellness • The stress category (which includes year but the diastolic (heart pumping) rate In the year under review we transformed work-related poor performance, increased from 15% to 25% as a result this section of the Wellness programme into incapacity, job security etc) constitutes of increased cardio-vascular illnesses; a more proactive, competency-based almost 14% of all diagnoses and the increased stress levels and poor lifestyles. approach, highlighted by the following: 293 cases recorded during the year is an increase of 17.6% on the previous # Cholesterol profile: There was a 7% • Some 1,216 employees and their year. This is a major challenge for us in increase in the at-risk category, again due dependants were referred to our the next financial year, particularly to lifestyle factors such as lack of exercise psychological counselling interventions, in view of the roll-out of Project and incorrect eating habits. This profile will a 10% decrease on the previous year. Renaissance and the resultant be a priority going forward in our wellness This decrease is, we believe, largely uncertainty of job security and fears of campaigns. due to the fact that employees did, from job losses. time to time, use their own private # Diabetes profile: There was an 11% psychologists. From the referrals, Preventative interventions improvement in the diabetes chronic 4,132 sessions were conducted at an Five key workshops were held during the profile, thanks to regular testing and the average of 3.4 sessions per referred year: fact that diabetes remains a high focus area. However, we are concerned that low patient at a cost to us of R1.8 million. • Stress and resilience; blood sugar levels rose from 28% to 37% • Of particular concern is the 3.8% • Team and value development; and this will be another key focus area in increase in cases in the ‘other our awareness campaigns. psychological illnesses’, such as • Trauma and resilience;
# Obesity profile: This is a high risk area psycho-sexual, personality disorders • Bereavement therapy; and for us as 65% of the employees tested were and related psychosis. This could be the • Conflict management. overweight or obese. As a result, the tip of the iceberg as some of importance of lifestyle modification is a the problems experienced by our priority for us in the new financial year. employees are of such a sensitive nature that they are discussed with their own # Opportunistic diseases: We are psychologists. pleased to note that only six cases of TB were reported in the year under review and all cases were successfully treated. Telkom AR front.qxp 8/12/09 6:22 PM Page 75
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These will be augmented by another six workshops in the next financial year: Our carbon footprint It now takes the earth 16 months to regenerate the resources it • Psychological and emotional resilience; uses in a year and so businesses that look ahead and actively manage their ecological risks and opportunities can not only • Financial wellness; make a major contribution to saving the world’s resources but, • Prevention of emotional burnout; at the same time, gain a strong competitive advantage over those that don’t. • Emotional intelligence; At Telkom, via our Green Initiative, we are consolidating all our • Dealing with challenging circumstances; and environmental initiatives to ensure we meet our, and legislation’s, • The psychology of customer care. targets and, additionally, educate our people and encourage them to lead a greener lifestyle. Socio-economic wellness We provided guidance in the areas of lifestyle, finance and debt We have 10 key focus management areas – energy, water, waste, greenhouse gas emissions, green procurement, counselling during the year, three key areas that impact on the biodiversity, renewable energy, company initiatives, our wellbeing of our employees with the specific focus to reduce stress corporate image and our people. Some of our key objectives in and poor lifestyle habits. these areas are to offset emissions, participate in carbon # Lifestyle: We contracted a lifestyle service provider to run our trading, provide the greater ICT sector and stakeholders with Telkom Touch Lifestyle Programme which connects employees to a products and services that will help them to reduce their range of lifestyle services such as recreational, vocational, footprints and provide our shareholders with ‘green’ returns. household, educational and general lifestyle value offerings at Some of the areas where we can improve are: great prices. • Employee business travel (currently 26.7 million km a year). # Financial resilience: There was an increase in counselling Our aim is to reduce this by 5.3 million km. referrals (three to four a month) for employees with financial • Our 2008/09 electricity consumption was 537,300MWh. problems, which was underscored by the increase in garnishee Our aim is a reduction of 107,460MWh. orders against employees. As a result, a bid for the outsourcing of • EPS generators use 2.3 million litres of diesel. Our aim is to a financial resilience intervention and a financial advice service reduce this by 456,000 litres. has been approved and is in process, • Employee business air travel sits at 31.8 million km. Our aim # Debt counselling: We have set up a debt counselling service is to reduce this by 6.4 million km. which registers employees who have huge debt under the National Credit Act of 2005. This protects them against parties Overall, we believe we can reduce our carbon emissions by Group between 15% and 30% over the next three to five years. overview demanding payment. A debt counselling company will act for such employees, negotiating new payback terms for bonds, vehicle
leases and other creditors and preventing repossession of these Management assets. review
Safety management Sustainability The Occupational Health and Safety (OHS) of Telkom’s employees review is a fundamental right and therefore Telkom acknowledges that a healthy and safe working environment enhances performance in the workplace and also contributes to employee wellbeing. Performance review
Financial statements
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Safety, health and environment (continued)
To ensure Telkom complies with the In analysing this data, 32% of HIV positive educators. It is gratifying to note that the minimum safety requirements as per employees are either in the process of involvement of peer educators has national legislation and to support Telkom’s being registered or are unaccounted for. extended beyond the boundaries of the OHS policy, a: This remains a challenge for the Company into the communities they serve programme to improve on this conversion via the adoption of various havens, • Well structured SHE Governance policy rate to get identified HIV positive orphanages, hospices and presentations to is developed and revised annually. employees on to the programme. In the community youth groups. As a result, a • Incident on Duty (IOD) system is 2008/2009 performance cycle, there Champions Programme will be launched developed to provide intelligent were 74 new registrations on the later in 2009 to formalise community information to assist management in programme (40 via onsite VCT; 32 self- involvement. identifying trends and to implement identified and two prophylaxis patients). • Thuso Toll-free Call Centre corrective actions to mitigate future The gender distribution on the chronic Some 4,234 calls were routed via the incidents. programme is 203 (52%) male and 186 Thuso Call Centre for the year under • Contractor management audit pro- (48%) female. The median age is 36 years review. Outbound calls comprised 65.5% gramme is implemented to ensure with ranges between four and 56 years. of these, mainly providing clinical support contractors are audited monthly to meet to patients. Inbound personal advice calls We have adopted a conservative the requirements of the Construction made up 29.7% of all calls. approach in providing anti-retrovirals for Regulations; and employees registered on the programme • KABP Study • Telkom Subsidiary audit initiative is with a CD4 count of 350 versus a The regular KABP (Knowledge, Attitude, implemented to provide support to the governmental and NGO norm of 200. Behaviour and Perception) studies which subsidiaries to meet minimum statutory Using this as measurement category, only test the general level of information, SHE requirements. 14 (4.9%) of the 284 employees on anti- understanding and influencing behaviour of employees about education and HIV/AIDS workplace programme retrovirals are categorised in the AIDS or awareness interventions have been In addition to our international award, our fully blown AIDS category. extended to the HIV positive employees to Thuso programme is recognised for its best • Preventative strategy test their understanding and also determine practices by researchers and academics Since 1996, we have dispensed free the level of stigmatisation experienced by who visit us for benchmarking purposes. condoms at all sites. In the year under them in the workplace. review more than 703,000 condoms Since the inception of our voluntary Environmental management were dispensed and more than 120,000 counselling and testing programme (VCT) in While our environmental impact is not big, expired condoms of previous governmental 2004, 23,391 employees have been our contribution is not totally insignificant issues were withdrawn. tested. In the year under review, and, as a result, during the year under review 2,353 employees, from a target population • Peer education we launched our Telkom Green Initiative, a of 3,178 at 52 sites, were tested. Currently 594 employees have been concerted effort to place green issues firmly in the mainstream of our operations. We have 280 employees receiving anti- trained and registered as fully fledged peer retroviral therapy of which the majority • Treatment protocols have a normal sick absence profile, being In terms of treatment protocols, the following table reflects the current treatment status: healthy and productive at work. Treatment aspect Number of employees
HIV positive employees 708
HIV positive status via VCT 512 (72%)
HIV positive status via self-identification 196 (28%)
HIV employees registered on the Chronic Disease Programme 389 (55%)
HIV employees registered on Medical Aid, NGO or Government Programmes 92 (13%)
HIV positive employees on treatment (Expert Treatment Programme (ETP)) 284 (40%) Telkom AR front.qxp 8/12/09 6:22 PM Page 77
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Some of the key deliverables are: • Participation in national and • Improved functional efficiency of international climate change awareness underfloor cooling requirements in • Measuring our carbon footprint through programmes. equipment rooms. the monitoring of electricity and fuel use; minimising travel and reducing waste • Employee behavioural change aware- • The implementation of the Green and carbon emissions (there is no ness programmes. building concept in partnership with our carbon trading legislation in South facility management company; and • Computerised destination control Africa as yet). Reducing our electricity elevator system in our high rise • Installation of motion sensor light bill through the installation of meters at buildings. switches and upgrade of existing key sites, a possible return to using more lighting technology with more efficient solar power and the installation of wind technology. chargers.
Bats We are currently managing a bat encroachment concern in a remote exchange building in Mpumalanga. A colony of free tailed bats is roosting and raising its young in the ceiling, which creates an unhealthy environment for our technicians performing routine maintenance work. We are allowing the young to mature and will then install a one-way excluder exit. This will allow the mature adults and young to leave but not return. The final phase of the project will be the erection of a bat house on the site to provide an artificial roosting site for the colony.
Blue cranes We are delighted to announce that since the installation of ‘flappers’ on our lines in the central region, no blue crane mortalities have been recorded.
Raptors As part of our commitment to active environmental stakeholder Group engagement with both governmental and non-governmental overview organisations we attended various meetings around the country. One of these is the annual meeting of the Northern Cape Raptor Forum (NCRF). At the last meeting issues relating to the nesting Management review habits of sociable weavers on our towers were raised, specifically the environmental impact the removal of these nests would have on the survival of the Pygmy Falcons which prey on the weavers. Sustainability review
Performance review
Financial statements
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Corporate social investment
The Foundation was voted the
Top Empowerment Company in CSI
All our corporate social investment (CSI) programmes are run and managed by the Telkom Foundation which we established 10 years ago.
As a result of the Foundation’s work, we are recognised as one of the largest CSI investors in South Africa and in the year under review we invested more than R47 million, mainly in the areas of education and the roll-out of information and technology in disadvantaged communities.
As a result of this commitment, the Foundation was voted the Top Empowerment Company in CSI at the 2009 Oliver Empowerment Awards, hosted by Topco.
The Foundation’s focus on education and technology is governed by our belief that these areas are key contributors to an equal opportunity society in South Africa. One of the most powerful learning resources is the internet and by bringing this medium into classrooms around the country, educational standards will be enhanced.
It is our hope that our continued investment in these fields will help redress skills shortages, particularly in the engineering, science and IT fields.
We focused on four main projects in the year under review:
• 2,010 for 2010 Schools Connectivity Initiative This is the Foundation’s biggest and most ambitious project ever. Our goal is to provide 2,010 schools across the country with internet access by 2010. Telkom AR front.qxp 8/12/09 6:22 PM Page 79
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Group overview
Management review
Fittingly, the initiative was launched in Sustainability review February 2009 by our CEO, Reuben We have been a proud supporter of the South African Paralympic team since September, at his former school, Grassy 1992. Our team achieved 6th place in Park High School in Cape Town. the overall medal table in the 2008 Performance Beijing Olympics. review Each participating school will receive an internet connection; discounted broadband subscription rates and interactive electronic Financial statements whiteboards and laptops.
Grassy Park also received an Internet Café Company for use by not only the learners, but the Financial Information community. If this pilot programme is successful, it will be rolled out to the other schools as part of the overall initiative. Telkom AR front.qxp 8/12/09 6:23 PM Page 80
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Corporate social investment (continued)
• Beacon of Hope This programme, which was launched in 2006, is designed to develop promising young learners into future leaders by placing top students from under-resourced schools in some of the country’s leading high schools.
The Foundation pays for the tuition and boarding fees; uniforms; books and stationery for the 186 learners enrolled in the programme.
• Giving from the Heart Initiated by our Human Resources department to encourage employees to give something back to the community, the project was taken over by the Foundation in 2006.
Employees can either donate a portion of their salary to Giving from the Heart projects; donate their time and skills to projects, or identify their own charities to which they contribute either money or time. The Telkom Foundation matches every rand an employee donates with the same amount.
In the year under review, the Foundation launched an Employee Volunteer Week which resulted in our people working and assisting at the Tumelo Hospice in Mabopane; the Centre of Hope in Mahwelereng; the Nokuthula School for the Intellectually Disabled in Marlboro; the Uthando Orphanage House in Hazyview; St Patrick’s College in Kokstad and the Hospice Association of Transkei in Southernworld.
• Sponsorships In the year under review various grants were made to organisations ranging from Childline to Nurturing Orphans of AIDS for Humanity (Noah) in line with our commitment to improving the lot of previously disadvantaged communities.
Going forward
In the next financial year, the Telkom Our Telkom Business golf sponsorships enable us to position our brand in the business Foundation will launch the Telkom Teacher environment. They also help us to introduce new products and reinforce our relationship of the Year awards to honour South Africa’s marketing programme. top maths, science and technology educators at the Further Education and Training and the General Education and Training level. The awards will be made in August 2009. Telkom AR front.qxp 8/12/09 6:23 PM Page 81
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Sponsorships ICT capabilities. In June 2009, the The programme is sub-divided into the Sponsorships continue to be an important Confederations Cup was utilised as a dress ‘Pool Splash’ project which focuses on safe part of our brand building and reputation rehearsal for the World Cup finals in swimming in pools; the ‘Ocean Splash’ management strategies. In the year under 2010. Telkom exceeded all FIFA’s project which concentrates on sea review we focused on soccer, swimming requirements in ensuring that broadcasting swimming and the ‘Rural Splash’ project and golf. and media requirements were met. Telkom which concentrates on swimming in rivers has approximately 128,000 cable and dams. Soccer kilometres of optical fibre in the ground – For the third consecutive year we Golf enough to circle the world three times. This sponsored the Telkom Knockout, a Premier Our Telkom Business golf sponsorships – is more than enough fibre to support the Soccer League (‘PSL’) event played by all the Telkom PGA Championships, the massive amounts of bandwidth that FIFA 16 PSL teams between October and Telkom PGA Pro-Am on the Sunshine Tour will need in 2010. December. It is a knockout event that plays and two Telkom Business Pro-Ams – enable a major role in honing South Africa’s soccer Swimming us to position our brand in the business skills. Since 2000, we have sponsored environment. They also enable us to Swimming South Africa, a public benefit introduce new products and reinforce our For the ninth consecutive year we also organisation which promotes all aquatic relationship marketing programme. sponsored the Telkom Charity Cup, a one sports in the country. In addition to many day PSL event where the fans choose the We also have a presence on Sunshine Tour South African swimming stars such as four competing teams. The teams who tournaments such as the SA Open and the Ryk Neethling, Natalie du Toit and receive the most telephone and SMS votes Nedbank Golf Challenge. In addition we Roland Schoeman, Swimming South Africa play in a round robin series of games. are a broadcast sponsor of international has played a key role in boosting public A significant portion of the money awareness of swimming as a life and events like the European Tour and World generated by ticket sales and telephone survival skill. Swimming contributes towards Gold championships. voting is given to charities working with the Company’s objectives of being a Paralympics children, the elderly and people with caring organisation, as the sport offers Telkom has been a proud supporter of the disabilities. Some 695,000 fans voted in opportunities for both able and disabled South African Paralympics team since the 2008 event and R4.6 million was people. 1992. Our team achieved 6th place on raised for the charitable organisations. Drowning remains a major cause of death the overall medal table in the 2008 Beijing 2010 FIFA Soccer World Cup among children under the age of 14 and, Olympics. The Paralympics are not only Telkom is a tier three National Supporter as a result of our support for Swimming about sport; they are about hope, pride, within the fixed-line environment. The South Africa’s ‘Learn to Swim’ programme, inspiration and courage. Telkom is Group overview biggest sporting event in the world is the many children and adults in the country honoured to align our brand with this perfect platform for Telkom to showcase its have the opportunity to learn to swim. message of upliftment.
Management review
Sustainability review
Performance review
Financial statements
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Global reporting initiative (GRI) content index
Telkom has opted for an incremental adoption of the guidelines to the GRI index, the full adoption will include a quality assurance and compliance audit report. In many cases, Telkom’s internal reporting frameworks pre-date external frameworks, hence this is presented as a navigation aid as opposed to a “tick-box” compliance exercise.
Item Comment and reference
Vision and strategy 1.1 Statement of the organisation’s vision and strategy regarding its See Telkom’s website: www.telkom.co.za/ir contribution to sustainable development.
1.2 Statement from CEO (or equivalent senior manager) describing Chief Executive Officer’s review key elements of the report.
Profile Organisational profile 2.1 Name of reporting organisation. Telkom SA Limited
2.2 Major products and/or services including brands if appropriate. Operational review Further details of products and service can be accessed on the website www.telkom.co.za
2.3 Operational structure of the organisation. Group structure
2.4 Description of major divisions, operating Group structure companies, subsidiaries.
2.5 Countries in which the organisation’s operations are located. Enterprise risk management
2.6 Nature of ownership; legal form. Telkom Group structure
2.7 Nature of markets served. The telecommunications industry
Report scope 2.10 Contact person(s) for the report, including e-mail and Administration page and www.telkom.co.za/ir web addresses.
2.11 Reporting period for information provided. Year ended March 31, 2009
2.12 Date of most recent previous report. Year ended March 31, 2008
Report profile 2.17 Decisions not to apply GRI principles or protocols. Sustainability review
2.18 Criteria/definitions used in any accounting for Notes to the consolidated annual financial statements economic environment.
2.19 Significant changes from previous years in the Notes to the consolidated annual financial statements measurement methods.
2.22 Means by which report users can obtain additional information See Telkom’s website: www.telkom.co.za/ir and reports about economic, environmental and social aspects of the organisation’s activities, including facility-specific information. Telkom AR front.qxp 8/12/09 6:23 PM Page 83
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Item Comment and reference
Governance structure and management systems Structure and governance 3.1 Governance structure, including major Board committees. Corporate governance report
3.2 Percentage of the Board of directors that are independent, Corporate governance report non-executive directors.
3.3 Board-level processes for overseeing economic, environmental Corporate governance report and social risks and opportunities.
3.4 Linkage between executive compensation and achievement Human capital management report of goals.
3.5 Organisational structure and key responsibilities. Chief officers and management team
3.6 Mission and values statements and codes of conduct. See Telkom’s website: www.telkom.co.za/ir
3.7 Mechanisms for shareholders to provide recommendations to the Company Secretary (see contact details on ibc;) IR road- Board of directors. shows; AGM and the IR website www.telkom.co.za/ir
Stakeholder engagement 3.8 Major stakeholders. Sustainability review
3.9 Approaches to stakeholder consultation. Sustainability review
3.10 Type of information generated by stakeholder consultations. Sustainability review
3.11 Use of information resulting from stakeholder engagements. Sustainability review
Economic performance indicators EC1 Net sales. Consolidated income statement
EC2 Geographic breakdown of markets. Notes to the consolidated annual financial statements
EC3 Cost of all goods, material and services purchased. Consolidated income statement
EC5 Total payroll benefits. Consolidated income statement Group EC6 Distributions to providers of capital. Consolidated statement of changes in equity overview
EC7 Increase/decrease in retained earnings at end of period. Consolidated statement of changes in equity
Management EC8 Total sum of taxes of all types paid broken down by country. Notes to the consolidated annual financial statements review
EC10 Donations to community, civil society and other groups. Corporate social investment report
Sustainability review
Performance review
Financial statements
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Global reporting initiative (GRI) content index (continued)
Item Comment and reference
Environmental performance indicators Materials EN1 Total material use other than water, by type (report in tonnes, Safety, health and environment report kilograms or volume). Provide definitions used for types of materials.
EN2 Percentage of materials used that are waste (processed Safety, health and environment report or unprocessed) from sources external to the reporting organisation.
EN5 Total water use. Safety, health and environment report
EN6 Land owned, leased, or managed in biodiversity-rich habitats. Safety, health and environment report
EN7 Description of major impacts on biodiversity, associated with Safety, health and environment report the organisation’s activities and/or products and services in terrestrial, freshwater and marine environments.
Social performance indicators Labour practices and decent work LA1 Breakdown of workforce. Human capital management report
LA2 Percentage of employees represented by independent Human capital management report trade unions.
LA3 Occupational accidents and diseases. Safety, health and environment report
LA4 Standard injury, lost day and absentee rates and number of Safety, health and environment report work-related fatalities.
LA5 Description of policies or programmes on HIV/AIDS. Safety, health and environment report
LA6 Average hours of training per year per employee by category Human capital management report of employee.
LA7 Equal opportunity policies or programmes. Human capital management report
LA8 Composition of senior management and corporate Chief officers and management team governance bodies. Corporate governance report Telkom AR front.qxp 8/12/09 6:23 PM Page 85
to competitive challenges
Performance review Five year operational review 86 Operational review 87 Three year financial review 104 Financial review 105
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 86
86 Telkom Annual Report 2009
Five year operational review
for the years ended March 31 2005 2006 2007 2008 2009 CAGR (%)
Fixed-line operational data ADSL subscribers1 58,278 143,509 255,633 412,190 548,015 75.1 Calling plan subscribers – 62,803 272,071 464,038 590,590 111.1 Closer subscribers – 62,803 266,300 451,122 575,812 109.3 Supreme call subscribers – – 5,771 12,916 14,778 60.0 W-CDMA subscribers ––––5,253 n/a Fixed access lines (’000)1 4,726 4,708 4,642 4,533 4,451 (1.5) Post-paid – PSTN 3,006 2,996 2,971 2,893 2,769 (2.0) Post-paid – ISDN channels 664 693 718 754 781 4.1 Prepaid 887 854 795 743 766 (3.6) Payphones 169 165 158 143 135 (5.5) Fixed-line penetration rate (%) 10.1 10.0 9.8 9.5 9.1 (2.6) Revenue per fixed access line (ZAR) 5,250 5,304 5,275 5,250 5,349 0.5 Total fixed-line traffic (millions of minutes) 31,706 31,015 29,323 26,926 24,869 (5.9) Local 19,314 18,253 14,764 11,317 8,822 (17.8) Long distance 4,453 4,446 4,224 3,870 3,631 (5.0) Fixed-to-mobile 3,911 4,064 4,103 4,169 4,126 1.3 International outgoing 415 515 558 635 622 10.6 International VoIP 89 83 38 43 34 (21.4) Subscription based calling plans – – 1,896 2,997 3,546 36.8 Interconnection 3,524 3,654 3,740 3,895 4,088 3.8 Domestic mobile interconnection 2,206 2,299 2,419 2,502 2,484 3.0 Domestic fixed interconnection – – – 113 415 n/a International interconnection 1,318 1,355 1,321 1,280 1,189 (2.5) Managed data network sites 11,961 16,887 21,879 25,112 29,979 25.8 Internet all access subscribers2 225,280 282,927 302,593 358,066 423,196 17.1 Fixed-line employees 28,972 25,575 25,864 24,879 23,520 (5.1) Fixed access lines per fixed-line employee3 163 184 180 182 189 3.8
(1) Excludes Telkom internal lines. (2) Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers. (3) Based on number of fixed-line employees, excluding subsidiaries.
Mobile operational data4 Total mobile customers (’000) 15,483 23,520 30,150 33,994 39,614 26.5 South Africa Mobile customers (’000) 12,838 19,162 23,004 24,821 27,625 21.1 Contract 1,872 2,362 3,013 3,541 3,946 20.5 Prepaid 10,941 16,770 19,896 21,177 23,561 21.1 Community services telephones 25 30 95 103 118 47.4 Mobile churn (%) 27.1 17.7 33.8 42.3 40.1 10.3 Contract 9.1 10.0 9.7 8.3 9.9 2.1 Prepaid 30.3 18.8 37.5 47.9 45.4 10.6 Estimated mobile market share (%)5 56 58 58 55 53 (1.4) Mobile penetration (%) 49.5 70.6 84.2 94.3 108.0 21.5 Total mobile traffic (millions of minutes) 14,218 17,066 20,383 22,769 24,383 14.4 Mobile ARPU (ZAR)6 163 139 128 128 133 (5.0) Contract 624 572 517 486 474 (6.6) Prepaid 78 69 63 62 68 (3.4) Community services 2,321 1,796 902 689 534 (30.7) Mobile employees7 3,919 4,305 4,727 4,849 5,451 8.6 Mobile customers per mobile employee7 3,276 4,451 4,867 5,119 5,068 11.5 Other African countries Mobile customers (’000) 2,645 4,358 7,146 9,173 11,989 45.9 Mobile employees8 1,074 1,154 1,522 1,992 2,336 21.4 Mobile customers per mobile employee8 2,463 3,776 4,695 4,605 5,132 20.1 Gateway employees ––––389 n/a
(4) 100% of Vodacom data. (5) Based on Vodacom estimates. (6) With effect from April 1, 2008, ARPU calculations include revenues from national roamers and international visitors roaming on Vodacom’s network. Historical ARPU numbers have been restated in line with this new methodology. (7) Includes Holding company and Mauritian employees and temporary employees. (8) Includes temporary employees. Multi-Links Subscribers – – 185,619 813,392 2,516,109 268.2 Employees – – – 782 1,124 n/a Permanent – – – 680 775 n/a Expatriate – – – 71 95 n/a Temporary – – – 31 254 n/a Africa Online Subscribers9,10 – – n/a 17,252 18,441 n/a Employees – – 317 379 313 (0.6)
(9) From April 1, 2008, Africa Online changed the method of counting subscribers to include all the individual corporate sites as individual customers. The comparative information for 2008 has been restated. (10) Excluding UUNet joint venture partner’s subscribers in Kenya. UU-Net had 300 and 320 subscribers as at March 31, 2008 and 2009, respectively. Telkom AR front.qxp 8/12/09 6:23 PM Page 87
Telkom Annual Report 2009 87
Operational review
History and development of the Sale and unbundling of Vodacom ineligible foreign shareholders in Company shareholding proportion to their entitlement to Vodacom Telkom was incorporated on September Effective as of April 20, 2009, Telkom shares. JP Morgan Securities Limited acted 30, 1991 as a public limited liability concluded the sale and unbundling of its as the Sole Bookrunner for the placement. company registered under the South interest in Vodacom, pursuant to which the For further information on this transaction African Companies Act No. 61 of 1973, following inter-conditional transactions please refer to the detailed announcements as amended. occurred: posted on the Investor Relations website at www.telkom.co.za. Registration number: 1991/005476/06 • Telkom sold a 15% stake in Vodacom for R22.5 billion of cash less the Delisting on the New York Stock The Company’s principal executive offices attributable net debt of Vodacom as at Exchange are located at: September 30, 2008 and 15% of any Given the current global economic climate Telkom Towers North dividends, and any secondary taxation and the business imperative for Telkom to 152 Proes Street on companies (STC) levied thereon, reduce its cost base, the Board has Pretoria which amounted to R20,583 million. decided to delist from the New York Stock 0002 Exchange. Maintaining a listing in the • Telkom distributed to its shareholders a Gauteng Province United States is expensive and takes sum equal to 50% of the after-tax South Africa considerable management time. The proceeds from the sale to Vodacom, net methodology employed and discipline Telephone number: +27 (0)12 311 3566 of any STC levied thereon (R19 per gained from compliance with the Website address: http://www.telkom.co.za share) by way of a special dividend. Sarbanes-Oxley reporting requirements Historical background • Vodacom converted to a public will be retained, where appropriate, to Prior to 1991, the former Department of company and was listed on the main ensure strict corporate governance Posts and Telecommunications of South board of the JSE Limited on May 18, compliance and transparent financial Africa exclusively provided telecommuni- 2009; and reporting. cations and postal services in South Africa. • Telkom distributed its remaining 35% Telkom is comfortable that the JSE provides In 1991, the government of South Africa stake in Vodacom to eligible Telkom sufficient access to capital from both South transferred the entire telecommunications shareholders in proportion to their African and global investors. Telkom enterprise of the Department of Posts and shareholdings in Telkom, by way of an intends to maintain a level 1 American Telecommunications of South Africa to a unbundling in terms of Section 90 of the Depositary Receipt programme to facilitate new entity, Telkom, as part of a Companies Act 61 of 1973, as over-the-counter trading in the United States commercialisation process intended to Group amended, and Section 46 of the of America. overview liberalise certain sectors of South Africa’s Income Tax Act 58 of 1962, as economy. Telkom remained a wholly state- Senior management amended. owned enterprise until May 14, 1997, On November 14, 2008, the Board Management when the government of South Africa sold On June 2, 2009, Telkom completed a announced that our business would be split review a 30% equity interest in Telkom to Thintana placement of 28,993,233 shares of into three operational units – Telkom SA, Communications LLC, a strategic equity Vodacom, on behalf of ineligible foreign Telkom International and Telkom Data Sustainability investor beneficially owned by SBC shareholders, with institutional investors Centre Operations, effective from April 1, review Communications Inc. and Telekom Malaysia through an accelerated bookbuild offering, 2009. On April 15, 2009 Thami S.D.N. Berhard. On March 7, 2003, we pursuant to Regulation S under the US Msimango was appointed Managing completed our initial public offering and Securities Act of 1933. The Vodacom Director of the Telkom International business Performance review listing on the JSE and NYSE, pursuant to shares were placed at a price of R53.00 unit. On May 1, 2009 Nombulelo Moholi which the government of South Africa sold per share, raising gross proceeds of was appointed Managing Director of
a total of 154,199,467 ordinary shares, R1.54 billion for such ineligible foreign Telkom SA and on July 30, 2009 Financial statements including 14,941,513 ordinary shares shareholders. The proceeds from the Pierre Marais was appointed as acting through the exercise of an over-allotment offering, net of applicable fees, expenses, Managing Director of Telkom Data Centre option. taxes and charges, were distributed to the Operations. Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 88
88 Telkom Annual Report 2009
Operational review (continued)
Peter Nelson was appointed Chief Business summary • Interconnection services, including Financial Officer on December 8, 2008. We are one of the largest companies terminating and transiting traffic from registered in South Africa and one of the South African mobile operators and On July 7, 2009 Telkom announced the largest communications service providers in international operators, as well as appointment of Jeffrey Hedberg as Chief Africa based on operating revenue and transiting traffic from mobile to Executive Officer of Multi-Links. assets. As of March 31, 2009, we had international destinations, and Segmental reporting and discontinued total assets of R85.8 billion; operating • Data and internet services, including operations revenue from continuing operations of domestic and international data At the beginning of 2009, Multi-Links was R35.9 billion; approximately 4.5 million transmission services, such as point-to- added as a separate financial reporting telephone access lines with 99.9% of these point leased lines, ADSL services, segment. Our four reporting segments are connected to digital exchanges. W-CDMA packet based services, now fixed-line, Multi-Links, mobile and We offer our customers fixed-line voice managed data networking services, as other. The other segment includes Trudon, services, fixed-line and wireless data well as internet access and related formerly TDS Directory Operations; Africa services and mobile communications information technology services. Online; Swiftnet and Telkom Media. services. Other services include the Trudon Discontinued operations include Vodacom, Group, our directory services, Multi-Links Products and services Swiftnet and Telkom Media. and MWEB Africa subsidiaries. Subscriptions and connections Telkom provides post-paid, prepaid and Overview Acquisitions and investments private payphone customers with digital Our fixed-line segment is our largest During the year under review we purchased and analogue fixed-line access services business segment and includes our fixed- an additional 25% of Multi-Links in Nigeria, including PSTN lines, ISDN lines, and line voice, data and internet businesses. giving us 100% control of the company. In wireless access between a customer’s Telkom’s fixed-line services comprise: addition, after year end we acquired premises and our fixed-line network. Each MWEB Africa and 75% of MWEB • Fixed-line subscription and connection analogue PSTN line includes one access Namibia from Naspers and we sold our services to postpaid, prepaid and channel, each basic rate ISDN line 75% shareholding in Telkom Media to private payphone customers using PSTN includes two access channels and each Shenzhen Media South Africa. lines including ISDN lines, and the sale primary rate ISDN line includes 30 access of subscription based value-added voice channels. Each ISDN line transmits signals Strategic agreement with AT&T services and customer premises at speeds of 64 Kbps per channel. On April 16, 2009 we entered into a equipment (CPE) rental and sales. Subscriptions to ADSL are included in our strategic memorandum of understanding data services revenue. with global communications leader AT&T to • Fixed-line traffic services to postpaid, enable the Company to extend its reach prepaid and payphone customers We were the first fixed-line operator into sub-Saharan Africa to service corporate including local, long distance, fixed-to- globally to provide a prepaid service on a customers and boost our strategy to grow a mobile, international outgoing and fixed-line network. Our prepaid service strong local footprint in Africa. international Voice over Internet Protocol offers customers an alternative to the (VoIP) traffic services. conventional post-paid fixed-line telephone
Year ended March 31, 2008/2007 2009/2008 (in thousands, except percentages) 2007 2008 2009 % change % change
Post-paid PSTN(1) 2,971 2,893 2,769 (2.6) (4.3) Business 1,426 1,429 1,396 0.2 (2.3) Residential 1,545 1,464 1,373 (5.2) (6.2) Prepaid PSTN 795 743 766 (6.5) 3.1 ISDN channels 718 754 781 5.0 3.6 Payphones(2) 158 142 135 (10.1) (4.9)
Total fixed access lines(3) 4,642 4,532 4,451 (2.4) (1.8)
(1) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre. (2) Includes public and private payphones. (3) Total fixed access lines are comprised of PSTN lines, including ISDN channels, prepaid lines, ADSL lines and public and private payphones, but excluding internal lines in service. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels. Telkom AR front.qxp 8/12/09 6:23 PM Page 89
Telkom Annual Report 2009 89
Year ended March 31, 2008/2007 2009/2008 (in thousands, except percentages) 2007 2008 2009 % change % change
Opening balance 4,708 4,642 4,532 (1.4) (2.4) Net line growth (66) (110) (81) (66.7) (26.4) Connections 572 497 482 (13.1) (3.0) Disconnections (638) (607) (563) (4.9) (7.2) Closing balance 4,642 4,532 4,451 (2.4) (1.8) Chum (%) 13.6 13.3 12.5 (2.2) (6.0)
service. All costs including installation, and combination payphones, and the time up to one hour, a discounted per telephone equipment, line rental and call remainder card-operated payphones. record rate for local and long distance charges are paid in advance, eliminating calls subject to a minimum charge, as well The table opposite presents information the need for monthly telephone bills. We as 30 free local minutes during standard regarding our post-paid and prepaid lines target our prepaid service mainly at first- time introduced since August 2007. In as well as payphones as at the dates time residential customers who do not have addition, with effect from August 2008, indicated, excluding our internal lines. sufficient credit history, and are located in this package includes 60 free local internet areas where we can provide access to our The table above shows information related minutes during off-peak time. to the number of our fixed access lines in network without significant additional Telkom Closer 2 service, net line growth and churn for the investment. Customers who have previously Includes line rental, CallAnswer, unlimited periods. Churn is calculated by dividing had their telephone service disconnected free calls during off-peak time up to one the number of disconnections by the due to non-payment are also encouraged hour, a discounted per record rate for local average number of fixed access lines in to migrate to our prepaid service option in and long distance calls subject to a service during the year. order to reduce future non-payments while minimum charge, as well as 30 free local satisfying demand for our services. Connections include new line orders resulting minutes during standard time introduced in primarily from changes in service and, to a We also offer a broad range of value- August 2007. In addition, with effect from lesser extent, new line roll-out. Disconnections added voice services on a subscription or August 2008, this package includes include both customer-initiated disconnections usage basis including call forwarding, call 60 free local internet minutes during off- and Telkom-initiated disconnections. Included waiting, conference calling, voicemail, toll- peak time. in disconnections and churn are those free calling, ShareCall which permits Telkom Closer 3 customers who have terminated their service Group callers and recipients to share call costs, overview with Telkom and subsequently subscribed to a Includes line rental, CallAnswer, 1,300 speed dialling, enhanced fax services and new service with Telkom as a result of inclusive free peak-time minutes, unlimited calling card services for payphones. These free calls during off-peak time up to one relocation or change of subscription to a Management services complement our basic voice different type of service. hour, a discounted per second rate for review services and provide us with additional local and long distance calls subject to a revenue while satisfying customer demand, Value-enhancing bundles minimum charge, as well as reduced rates enhancing our brand and increasing During the year under review, Telkom Sustainability to selected international destinations and review continued to focus on customer retention customer loyalty. Value-added voice pure per second billing for fixed-to-mobile and offering value for money by services such as our CallAnswer voicemail calls since August 2007. continuously enhancing packages such as service are also bundled with value-added Performance Telkom Closer 4 review calling plans such as Telkom Closer, to PC bundles and Telkom Closer, including All the benefits of Telkom Closer 3 bundled further enhance the value of these services the following: with Fast DSL up to 384 Kbps. to our customers. From August 1, 2009, Closer customers Financial will have the option to choose between Telkom Closer 5 statements We provide payphone services throughout CallAnswer and Identicall. Currently the All the benefits of Telkom Closer 3 bundled South Africa. As at March 31, 2009, package includes only CallAnswer. with Fastest DSL up to 4096 Kbps. Telkom operated approximately 132,208 Company Financial public payphones and approximately Telkom Closer 1 Telkom Closer plans 1 to 3 have an option Information 3,146 private payphones, of which Includes line rental, CallAnswer, a minimum to purchase 150 or 75 local internet hours approximately 39% were coin-operated flat-rate charge for calls during off-peak during call more time. Telkom AR front.qxp 8/12/09 6:23 PM Page 90
90 Telkom Annual Report 2009
Operational review (continued)
The Telkom Closer packages have international norms and improve our effects of theft, as well as grow market performed well, increasing by 27.6% to competitive position; and share in anticipation of Telkom moving into 575,812 plans. Supreme call packages, the mobile market. Connections to our • Reduce and rebalance national and targeted at the business segment, have wireless W-CDMA service are included in international data prices to improve our increased by 14.4% to 14,778 packages our numbers of subscribers, but not lines. competitive position. and PC bundles have increased 48.3% to We also offer telecommunications equip- 11,336. Telkom continues to be successful The decrease in the number of subscriber ment rentals and sales such as telephones in tying in large corporate customers to lines was largely in the residential post- and private branch exchange (PABX) term and volume discount plans. Annuity paid PSTN line and, to a lesser extent, systems, as well as related post-sales revenue streams, which exclude line business post-paid PSTN lines, partially maintenance and service for residential installations, reconnection fees and offset by an increase in ISDN channels. and business customers in South Africa. CPE sales, have increased by 6.8% to The decrease in the number of residential The market in South Africa for such R7.4 billion. Telkom will seek to continue post-paid PSTN lines was mainly due to the equipment and systems, commonly known converting revenue streams to annuity introduction of competition in the fixed-line as customer premises equipment (CPE), is revenues. This will be done largely through arena from Neotel, including due to characterised by high competition and low bundling call minutes and ADSL services customers relocating and changing profit margins. We believe, however, that with access line rental in attractive providers, customer migration to mobile the supply and servicing of CPE is an subscription based value propositions. This and higher bandwidth products and, to a essential part of providing a full service is an important strategy for delivering lesser extent, cable theft incidents. The to our customers and in the process greater value to our customers. Our current increase in prepaid services in the 2009 stimulating usage on our network. line penetration of bundled products is financial year was due primarily to our 41.7% and we are targeting a penetration lower priced “Waya-Waya” offering, Traffic minutes of 56% by 2013/14. which accounted for approximately 60.2% We offer local, long distance, fixed-to- of prepaid services as of March 31, mobile, international outgoing and Pricing is a key element of the value 2009. The increase in ISDN channels and international voice over internet protocol proposition and our pricing strategy is ADSL services was mainly driven by services to business, residential and aimed at improving our competitiveness in increased demand for higher bandwidth payphone customers throughout South areas where competition is expected to and functionality. This is evident in the 6% Africa at tariffs that vary depending on the intensify and where arbitrage opportunities growth in ISDN Primary rates and the 33% destination, length, day and time of call. exist. Telkom’s strategy to counter pricing growth in ADSL services. The upgrading of pressures is as follows: The following table presents information DSL 1024 to DSL 4096 increased the regarding our fixed-line traffic minutes, • Actively offer value based calling plans attractiveness of this DSL band, with excluding interconnection traffic, for the and bundles to extend value and customers migrating from DSL 512 to the periods indicated. We calculate fixed-line savings to our customers. high speed offering despite the added traffic by dividing fixed-line traffic revenues cost. Telkom’s aggressive marketing • Reduce international and long distance for the particular category by the weighted campaigns for Do Broadband products, rates to reduce arbitrage opportunities; average tariff for that category during the also contributed to the ADSL growth. In the relevant period. • Rebalance standard/off-peak local 2009 fiscal year, Telkom introduced a rates, to better align these with wireless W-CDMA service to combat the
Year ended March 31, 2008/2007 2009/2008 (in millions of minutes, except percentages) 2007 2008 2009 % change % change
Local(1) 14,764 11,317 8,822 (23.3) (22.0) Long distance(1) 4,224 3,870 3,631 (8.4) (6.2) Fixed-to-mobile 4,103 4,169 4,126 1.6 (1.0) International outgoing 558 635 622 13.8 (2.0) International voice over internet protocol 38 43 34 13.2 (20.9) Subscription based calling plans 1,896 2,997 3,546 58.1 18.3
Total 25,583 23,031 20,781 (10.0) (9.8)
(1) Local and long distance traffic includes dial-up Internet traffic. Telkom AR front.qxp 8/12/09 6:23 PM Page 91
Telkom Annual Report 2009 91
Year ended March 31, 2008/2007 2009/2008 (in millions of minutes, except percentages) 2007 2008 2009 % change % change
Domestic mobile interconnection traffic 2,419 2,502 2,484 3.4 (0.7) Domestic fixed interconnection traffic – 113 415 n/a 267.3 International interconnection traffic 1,321 1,280 1,189 (3.1) (7.1)
Total 3,740 3,895 4,088 4.1 5.0
Traffic was adversely affected in both the network. lines up to and including lines of 2 Mbps 2009 and 2008 financial years by the of capacity and the rental and installation Domestic fixed interconnection traffic increasing substitution of calls placed using of business exchange lines. Approximately includes traffic from Neotel, USALs and mobile services rather than our fixed-line 57% of our operating revenue for the year VANS. The increase in domestic fixed service and dial-up internet traffic being ended March 31,2008 was included in interconnection traffic in the year under substituted by our ADSL service, as well as this basket, compared to approximately review was mainly due to increased the decrease in the number of residential 54% in the year ended March 31, 2009. competition. post-paid PSTN lines and increased Our tariffs for these services are filed with competition in our payphone business. In International interconnection traffic ICASA for approval. The price cap addition, the 2009 financial year traffic decreased in the 2009 and 2008 operates by restricting the annual was adversely affected by customer financial years due to a decrease in percentage increase in revenues from all migration to broadband services offered volumes as a result of loss of volumes to services included in the basket that are by mobile operators. Neotel, Sentech, the USALs and illegal attributable solely to changes in annual operators terminating traffic in the country. inflation, measured by changes in the The table above sets forth information The decrease was partially offset by consumer price index, less a specified regarding interconnection traffic terminating increased international hubbing traffic in percentage. on or transiting through our network for the year under review. the periods indicated. We calculate Historically, the annual permitted Tariff rebalancing interconnection traffic, other than percentage increase in revenues from both We made significant progress in international outgoing mobile traffic and the whole basket and the residential sub- rebalancing our fixed-line tariffs. Our tariff international interconnection traffic, by basket was 1.5% below inflation. Effective rebalancing programme was historically dividing interconnection revenue for the from August 1, 2005 through July 31, aimed at better aligning our fixed-line traffic particular category by the weighted 2008, the annual permitted increase in Group charges with underlying costs and overview average tariff for such category during the revenues from both the whole basket and international norms. We expect that our relevant period. Fixed-line international the residential sub-basket was lowered to tariff rebalancing in future will focus more 3.5% below inflation, and ADSL products outgoing mobile traffic and international Management on the relationship between the actual review interconnection traffic are based on the and services have been added to the costs and tariffs of subscriptions, traffic registered through the respective basket. In addition, the price of no connections and traffic in order to more individual service within the residential sub- exchanges and reflected in international Sustainability accurately reflect underlying costs, and in basket can be increased by more than 5% interconnection invoices. review response to increased competition. above inflation except where specific The increase in domestic mobile approval has been received from ICASA, Regulations under the Telecommunications interconnection traffic in the years ended and pursuant to the Electronic Communi- Performance Act, which remain in effect, impose a price review March 31, 2009 and 2008 was primarily cations Act, revenue generated from cap on a basket of Telkom’s specified due to an overall increase in mobile calls services where we have significant market services including installations, prepaid as a result of growth in the mobile market, power may not be used to subsidise and post-paid line rental, local, long Financial statements partially offset by increased mobile-to- competitive services. Early in 2008, distance and international calls, fixed-to- mobile calls bypassing our network. The ICASA commissioned a review of the mobile calls, public payphone calls, ISDN decrease in domestic mobile inter- existing price control regulations Company services, our Diginet product and our Financial connection traffic in the 2009 financial applicable to Telkom; however, ICASA has Megaline product. A similar cap applies to Information year was primarily due to increased not initiated the statutory public process of a sub-basket of those services provided to mobile-to-mobile calls bypassing our reviewing the existing regulations. Telkom is residential customers, including leased Telkom AR front.qxp 8/12/09 6:23 PM Page 92
92 Telkom Annual Report 2009
Operational review (continued)
awaiting communications from ICASA in links at speeds of 45 Mbps, 155 Mbps Managed data networking services respect of proposed timelines for the and 622 Mbps, and anticipate that we Our managed data networking services review. will soon be providing links at speeds of combine our data transmission services 2.5 Gbps. Formalised service level discussed above with active network ICASA approved a 2.1% reduction in the agreements as well as term and volume management provided through our state-of- overall tariffs for services in the basket based discount structures, as a counter to the-art national network operations centre. effective August 1, 2006, a 1.2% the competitive challenges that are reduction in the overall tariffs for services in We offer a wide range of integrated and occurring in this area of the business, have the basket effective August 1, 2007 and a customised networking management been implemented. 2.4% increase on its regulated basket of services, including design, planning, products and services effective August 1, Recognising the increasing threat of installation, management and maintenance 2008. On June 22, 2009, Telkom filed competition in the provision of leased lines of corporate-wide data, voice and video with ICASA proposed average price to the mobile operators, Telkom introduced communications networks, as well as other increases on its regulated basket of further discounting structures in the 2007 value-added services such as capacity, products and services of 1.7% as a result and 2008 financial years to enhance the configuration and software version of inflation increases, effective August 1, attractiveness of Telkom’s product offerings management on customers’ networks. To 2009. The price control formula would to this rapidly growing market. Fixed-link support our service commitment, we offer have permitted Telkom to apply for a leasing agreements were also entered into guaranteed service level agreements on a 19.7% price increase due to the high with some of the smaller operators, wide range of our products, which include including VANS and USALs, as well as with consumer price index in South Africa and guaranteed availability, or uptime, of the Neotel. Vodacom and MTN have both excess carryover of lower price increases network through the use of our national indicated that they intend to self-provide for prior periods. Our tariffs are subject to network operations centre. some of the leased lines, which they require approval by the regulatory authorities. All for the build-out of their networks, as an Our managed data networking services tariffs include value-added tax (VAT) at a alternative to leasing from Telkom. We are include our customer network care service rate of 14%. currently negotiating improved leased line which facilitates the network management Data prices with the mobile operators in order to of all our data transmission services using Leased lines retain revenue from leased lines. the leased lines or packet based services A large number of leased lines are The table below indicates the bandwidth discussed above, and our Spacestream provided to the mobile operators at capacity of our Diginet, Diginet Plus, ATM and IVSat products, which are satellite negotiated wholesale rates for the build-out Express and broadcasting data based products. Spacestream is a high of their networks. With the growth in traffic transmission services: quality, flexible satellite networking service carried on the mobile networks, a need that supports data, voice, fax, video and was identified for the deployment within Leased line Bandwidth multimedia applications, both domestically these networks of transmission links with Diginet 64 Kbps and in the rest of Africa. Diginet Plus 128 Kbps to 2 Mbps speeds higher than the 2 Mbps provided ATM Express 2 Mbps to 155 Mbps by existing agreements. We have Managed data networking services are broadband fixed-link leasing agreements Broadcasting billed on a monthly basis and vary by with Vodacom, MTN and Cell C. These Analogue audio 7.5 or 15 KHz customer depending on the particular agreements have been enhanced over Analogue video 70 MHz services provided and the number of time, and we currently provide broadband Digital 2 Mbps to 155 Mbps network sites under management.
As of March 31, 2008/2007 2009/2008 2007 2008 2009 % change % change
Terrestrial based 12,905 17,237 19,042 33.6 10.5 Satellite based 8,974 7,875(1) 10,937(2) (12.2) 38.9
Total managed network sites 21,879 25,112 29,979 14.8 19.4
(1) Satellite based managed network sites declined during the 2008 financial year as a result of Uthingo, the South African lottery operator, losing its licence to operate. (2) The increase in the 2009 financial year was mainly due to new global and corporate customers and expansion of the networks of existing customers. Telkom AR front.qxp 8/12/09 6:23 PM Page 93
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Telkom’s focus on bringing new innovative The following table indicates our product offerings as at March 31, 2009: products to the market that cater for increased data usage and converged DSL DSL DSL services has resulted in our new VPN 384 512 4096 products gaining increased traction in the market. We have increased VPN sites by Downstream speed Up to 384 Kbps 512 Kbps 4096 Kbps 20.7% to 14,659. Our VPN Lite products, Upstream speed Up to 128 Kbps 256 Kbps 512 Kbps which are delivered over the ADSL Internet access services and other related internet service targeted at African operators network, include advanced self-help and information technology services and ISPs to enhance additional growth of online charging solutions. This product was Telkom is one of the leading internet access internet access services north of the equator. launched during November 2007. Telkom providers in South Africa in the retail and Currently, the customers in this region buy is in the process of building on a culture of wholesale internet access provision markets. their internet services from Europe. By research and innovation and fast time-to- We also package our TelkomInternet establishing a central SAIX hub in London market, in order to cater for customers who product with personal computers, ADSL and we believe we can capture this market and are increasingly looking for innovative, ISDN services, as well as our satellite access increase our revenue. easy to use products. products, SpaceStream Express and The table below presents information Broadband and converged services continue SpaceStream Office. regarding our wholesale and retail internet to perform well with ADSL subscribers up Our South African Internet exchange (SAIX) services and customers as at the dates 33% to 548,015. Do Broadband is South Africa’s largest internet access indicated. subscribers increased 58.1% to 188,540. provider, offering dedicated and dial-up, Internet all access subscribers increased aDSL and satellite internet connectivity to Voice over Internet Protocol network 18.2% to 423,196. Our current broadband internet service providers and value-added Softswitch capability has been deployed line penetration rate is 15% and our targeted network providers. SAIX has offered fixed- as an overlay network to enable the penetration rate is 25 by 2013/14. line network internet access through dial-up communication of VoIP services. Our current VoIP network terminates calls for We have increased DSLAMs throughout service since 1995. SAIX derives revenue numerous international voice carriers into the country by 50.4% to 4,000 sites. We for its access services primarily from subscription fees paid by internet service our fixed-line network as well as local have installed 91% of ADSL lines within providers and value-added network VANS providers. Call centres from around 21 working days where no network build providers for access services. In order to the world that have relocated to South is required, compared to 79% in the year grow the portfolio, an opportunity has been Africa due to favourable economic ended March 31, 2008 and 74% within identified to develop a service targeted conditions and lower resource costs are 21 working days where network build is mainly at night-time users of the SAIX ADSL also hosted on our VoIP network. Telkom required compared to 66% in the year service. These customers can be regarded has points of presence for connectivity to Group ended March 31, 2008. The ADSL Self overview as heavy users as they use the service mainly the VoIP network in Amsterdam, London, Install option is expected to continue to for games, music and movie downloading. New York, Ashburn (Washington DC), improve the installation times. As of March The SAIX customer base has expanded Hong Kong, Zambia, Zanzibar, Tanzania, Management 31, 2009, 57% of all ADSL installations beyond service providers and value-added Senegal and Madagascar. The network review were being done through the Self Install network providers, and now includes has 69 media gateways and can terminate option. Vodacom and other operators in Africa. some 32,700 voice circuits. The media These include incumbents in Mozambique, Sustainability ADSL allows provisioning of high speed gateways compress the traditional voice review Namibia, Angola, Zimbabwe and Lesotho. connections over existing copper wires channels of 64 Kbps to 8 Kbps channels, using digital compression. We have Broadband and converged services thus enabling us to reduce the cost of different ADSL services available, aimed at We have identified an opportunity to international calls, while maintaining the Performance review the distinct needs of our customers. develop a SAIX northern hemisphere perceived voice quality of a 64 Kbps call. Year ended March 31,
2008/2007 2009/2008 Financial statements 2007 2008 2009 % change % change
Wholesale Company Internet leased lines-equivalent 64 kbps 19,247 22,541 24,204 17.1 7.4 Financial Dial-up ports 11,462 7,010 4,541 (38.8) (35.2) Information Retail Internet all access subscribers 302,593 358,066 423,196 18.3 18.2 Telkom AR front.qxp 8/12/09 6:23 PM Page 94
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WiFi its head office in Kenya and operating in Trudon’s primary competitors for print In February 2005 Telkom launched a hot eight other African countries. materials include Caxton, Easy Info and spot service that provides wireless data Brabys. Trudon’s primary internet The Telkom Group added Multi-Links as a access through 802.11b/g WiFi competitors include Yahoo, Google, new segment to its financial reporting for the technology. Any user with a wireless-enabled Ananzi, as well as vertical search 2009 financial year. As a result, the Telkom notebook computer or personal digital capabilities such as Auto Trader and Group’s four reporting segments for the assistant can connect to the service while in Supersport. Trudon’s estimated market 2009 financial year are fixed-line, Multi- the coverage area. WiFi is mainly targeted share as of March 31, 2009 was Links, mobile and other. The other segment at restaurants, hotel groups, major shopping approximately 11% in respect of print includes Telkom’s Trudon, formerly known as malls and some sites on national routes. At media and approximately 22% in respect TDS Directory Operations, and Africa March 31, 2009 Telkom had 335 hotspots, of internet directory services. Online subsidiaries. The information in this up from 237 at March 31, 2008. annual report has been updated to reflect Trudon had 531 employees as of March WiMAX the above changes to Telkom’s reporting 31, 2009. Telkom has launched services based on fixed segments. Multi-Links (IEEE 802. 16-2004) WiMAX technology. Trudon With effect from May 1, 2007, Telkom This technology is a standards based Telkom owns 64.9% of Trudon, formerly acquired 75% of Multi-Links Telecom- broadband wireless access technology that known as TDS Directory Operations, the munications Limited, or Multi-Links, through provides throughput connectivity in a point-to- largest directory publisher in South Africa Telkom International, a wholly owned South multipoint configuration. The technology is providing white and yellow pages African subsidiary, in Nigeria, for designed to enable Telkom to complement its US$280 million, or R1,985 million. The directory services and electronic white ADSL service offering and voice services to remaining 25% of Multi-Links was owned pages. In the year ended March 31, customers in areas affected by fixed-line by Kenston Investment Limited, an 2009, Trudon published approximately copper cable problems. Currently there are investment company based in the Isle of 5.437 million white, 1.995 million yellow 57 WiMAX base stations across all major Man in the United Kingdom. With effect and 7.433 million combined directories. cities and towns with 2,615 customers, from January 21, 2009, Telkom acquired Trudon also provides electronic yellow including voice and internet customers as of the remaining 25% interest in Multi-Links for pages and value-added content through full March 31, 2009. US$130 million, thereby increasing its colour advertisements. Trudon has ownership of Multi-Links to 100%. The W-CDMA improved the accessibility and distribution purchase price was subject to a contractual We have started rolling out a W-CDMA of directories through door-to-door delivery put option in favour of the minority Wireless Local Loop (WLL) network in the and electronic media. Trudon also provides shareholder. 2100MHz band. Initially planned to deliver national telephone inquiries and directory service in areas plagued by theft, breakages services. The remaining 35.1% of Trudon is Multi-Links is a private telecommunications and incidents, the network is now expected owned by Truvo Services South Africa (Pty) operator with a Unified Access Licence to evolve into a full mobile network to Ltd, formerly known as Maister Directories. allowing fixed, mobile, data, long distance compete with other mobile operators. As of On January 23, 2007, Trudon acquired a and international telecommunications March 31, 2009, we had 141 base 100% shareholding in a shell company services to corporate clients, wholesale station sites in major metropolitan areas. and subsequently renamed it TDS Directory and mass markets in Nigeria. Geographic expansion and other Operations (Namibia) (Pty) Ltd, which Multi-Links’ Unified Access Licence was operations provides directory services in Namibia. granted on November 1, 2006 and has a Telkom aims to establish itself as a regional On October 31, 2008, Trudon sold a term of 10 years, with seven years voice and data player through providing a 25% interest in TDS Directory Operations remaining. There are currently range of hosting services, managed (Namibia) (Pty) Ltd to Ripanga Investment 13 operators licensed with Unified Access solutions, mobile voice and wireless Holdings (Pty) Ltd, a black economic Services Licences in Nigeria, making the broadband services. We are also entering empowerment partner in Namibia, for two Nigerian telecommunications market the field of management consulting to million Namibian dollars. extremely competitive as operators may use operators. In addition, we are positioning Trudon’s capital expenditure was any technology to deliver voice, data and Telkom as a wholesale facilities and R12 million in the 2009 financial year as video services to their customers. infrastructure enabler for regional incumbents. the company sought to continue to expand We were disappointed with the Our expansion to date has been through access and distribution into new markets. performance of Multi-Links. The poor Multi-Links, a private telecommunications Trudon has invested in a new online performance is solely attributable to our operator operating in Nigeria and Africa platform in order to combat declining under-estimation of the competitiveness of Online, an internet services provider with revenue from printed products. the Nigerian market and the aggressive Telkom AR front.qxp 8/12/09 6:23 PM Page 95
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response of the CDMA operators to our internet protocol/next generation network • Extended coverage to 22 states and subsidisation of handsets. We also failed services to the government, corporate and Abuja. to adequately manage our distribution SMME customers whilst extending its metro- Turning around Multi-Links’s performance is channels and opened ourselves up to ethernet services. The reach of its fibre vital to Telkom given the extent of the exploitation by the dealers. We have learnt network also allows Multi-Links to concentrate Group’s investment and the enormous our lessons the hard way. Turning around on carrier class corporate and wholesale opportunity the Nigerian market provides. Multi-Links is our number one priority. product and services offerings. US$100 million has been budgeted for the Multi-Links reported a 124.9% increase in Multi-Links has contracted the service of 2009/10 financial year for the completion revenue to R1.9 billion with subscribers Blue Label Telecoms Limited to assist with growing 209.3% to 2,516,109 in the the development and management of of an additional 1,645 km build and year ended March 31, 2009. Voice and our distribution channels, dealerships, 584 km swop of optic fibre cable for the data revenue contributed 75.0% to total promotional campaigns and inventory DWDM/SDH network. It is anticipated that revenue, handset sales 11.9%, inter- management. the network will connect 80 DWDM/SDH connect revenue 12.6% and SMS 0.5%. sites, covering all major cities in Nigeria, Operating expenses have been driven by providing us with additional bandwidth Multi-Links’s slow start in developing an network growth, rehabilitation of connectivity for voice and data customers. efficient and well controlled distribution distribution channels, marketing costs and In addition, 227 cell towers are to be channel, together with a departure from its customer acquisition and maintenance. initial strategy of focusing on high ARPU Multi-Links is focusing on containing costs erected and another 300 commissioned on subscribers, the delayed launch of EVDO through reducing handset subsidies third party leased tower infrastructure during and destructive competition in the CDMA drastically, continuing to migrate to an all IP the year. Seven new customer service market caused ARPU to decline from network in order to reap the benefits of its centres are planned to facilitate and support US$32 at March 31, 2008 to US$9 at cost effective network management the network growth. March 31, 2009. Telkom is currently capabilities and securing cost effective addressing these challenges as indicated We expect Multi-links to be EBITDA international connectivity through the SAT-3 below. positive in 2010/11 and to be cash flow and other submarine cables. positive by 2011/12. Operating expenses increased 157.1% to Capital expenditure increased 112.7% to R2.4 billion primarily as a result of upfront Africa Online R2.8 billion in the year ended March 31, handset subsidies. The average cost per unit On February 23, 2007, Telkom acquired 2009. In the 2009 financial year, Multi- equalled approximately R400 and subsidies 100% of the issued share capital of Africa Links’s build and expansion programme totalled R281 million. Payment to other Online from African Lakes Corporation for achieved the following: operators contributed 26.9%, selling general a total cost of R150 million. Africa Online and administrative expenses 46.0%, • Deployed additional packet based is an internet service provider active in Group employee expenses 5.2%, operating leases mobile switching centres increasing the Cote d’Ivoire, Ghana, Kenya, Namibia, overview 8.0%, service fees 1.6% and depreciation available capacity from 1,000,000 to Swaziland, Tanzania, Uganda, Zambia 12.3%. 2,800,000 subscribers. and Zimbabwe. Africa Online’s strategy focuses on brand development, creation Management Multi-Links reported a negative EBITDA • Extended home location register and development of customer channels, review margin of 11.9%, an EBITDA loss of capacities from 800,000 to improvement of network systems, human R226 million for the year ended March 31, 5,100,000 subscribers. 2009 and a net loss of R1.76 billion after resources development and an expansion Sustainability accounting for an impairment of the • Rolled out additional base transmission drive targeting other African countries. review deferred tax asset of R301 million. Bad stations increasing its total capacity from Africa Online offers wireless and fixed debts increased 208.2% to R7.9 million. 800,000 to 1,800,000 subscribers. technologies, hosting and domain registration to both consumer and Performance Multi-Links has begun focusing its attention on • Successfully launched its broadband review corporate customers. the SMME, corporate and wholesale service offering by rolling out an EVDO markets and mainly on high ARPU users. Its 3G network to a capacity of 100,000 In the 2009 financial year, Africa Online revenue retention and growth strategy will subscribers. had R194 million of revenue and Financial statements concentrate on increasing revenue of fixed R216 million of total assets. The major • Added 1,300 kms of optic fibre resulting wireless and mobile customers through brand contributors to revenue were corporate and in a total to 3,711 kms. awareness and promotion; expanding consumer wireless and broadband VSAT Company broadband internet to offer high value • Increased international capacity by the services. Consumer wireless revenue Financial Information bundles and services. Through its extensive addition of 2 x 155Mb services on the growth was predominantly in East Africa, fibre network it will provide high quality SAT-3 submarine cable system; and while corporate revenue growth was Telkom AR front.qxp 8/12/09 6:23 PM Page 96
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Year ended March 31, Restated(1) 2008/2007 2009/2008 2007 2008 2009 % change % change
Dial-up ports n/a 12,051 11,437 3.9 (5.1) Consumer wireless n/a 4,075 5,754 110.2 41.2 Unbundled local loop n/a 99 99 (1.0) – ADSL n/a 325 308 8.3 (5.2) VSAT n/a 96 210 269.2 118.8 Dedicated corporate n/a 606 633 4.8 4.5
Total(1) n/a 17,252 18,441 18.6 6.9
UUNet subscribers(2) n/a 300 320 – 6.7
(1) In the 2009 financial year, Africa Online changed the method of counting subscribers to include all the individual corporate sites as individual customers. The comparative information for the 2008 financial year has been restated. (2) Includes 100% of UUNet’s subscribers. UUNet is Africa Online’s joint venture partner that provides internet services in Kenya. We own a 40% interest in UUNet and MTN owns the remaining 60% of UUNet.
mainly in Ghana and Uganda. The growth to increase customers on its own wireless in Pan African business, Ghana and network infrastructure as opposed to dial- Tanzania accounted for the increase in up and ADSL networks. Broadband VSAT. In the 2008 financial Africa Online’s distribution is conducted year, Africa Online had R110 million of through various channels, including direct revenue, and R122 million of total assets. sales and different types of resellers In the 2008 financial year, dedicated depending on the customer segment. corporate links and consumer wireless Customers are serviced through customer were the highest revenue streams followed closely by dial-up business. Dial-up relationship managers and a 24 hour call packages are the most popular and centre. Africa Online’s primary competitors accounted for approximately 62% of Africa include former telecommunication Online’s total customers as of March 31, companies that have entered the internet 2009. Wireless customers are expected to service provider market, mobile providers continue to grow with Africa Online’s and other private data companies. continued investment in infrastructure. Africa Online’s network had 29 points of The reason for the decrease in the number presence, 46 mobile broadband transceiver of dial-up and ADSL customers is that Africa stations, 31 fixed broadband wireless Online has shifted its marketing approach access transceiver stations, eight network Shiletsi Makhofane was appointed as operation and 17 support centres and eight acting chief executive officer in October data centres across nine countries as of 2008. March 31, 2009. Africa Online’s capital Africa Online’s footprint covers East Africa, expenditure was US$7 million in the 2009 southern Africa and West Africa. The financial year, US$5.7 million in the 2008 regulatory environments are fairly different financial year and US$0.8 million in the in each of Africa Online’s different regions. 2007 financial year. The increase in Africa East Africa is liberalised and Africa Online Online’s capital expenditure was primarily for provides services across the information, the improvement of service quality and to communications and technology spectrum, increase the range of information, including voice over internet protocol communications and technology services services, in East Africa. Markets in southern offered in the market. Africa are still regulated, limiting the services Africa Online is able to provide to Africa Online had 313 employees as of its customers. West Africa is a fairly March 31, 2009. UUNet, Africa Online’s liberalised market and Africa Online is 40% joint venture partner had presently seeking to take advantage of this 70 employees as of March 31, 2009. opportunity. Telkom AR front.qxp 8/12/09 6:23 PM Page 97
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MWEB Africa efficiencies and the opportunity to standards necessitate the provision of On April 21, 2009, we acquired a 100% consolidate traffic onto Telkom’s network. services and particularly bandwidth that is interest in MWEB Africa Limited, which only possible utilising the intelligence of an Currently mobile customers are owns approximately 88% of ASFAT NGN system. experiencing the effects of highly Communications Limited, and a 75% congested networks. Telkom intends to use Our NGN build-out achievements are as interest in MWEB Namibia (Pty) Ltd, for the strengths of its fixed-line network to follows: R498 million. MWEB Africa is a group of differentiate its mobile service on quality companies offering internet services and its • In the national layer of the transport with a fully converged array of products own VSAT access services in sub-Saharan network, bandwidth capability has and services. Our Next Generation Africa (excluding South Africa). MWEB increased by more than 500% in Network and access to the latest Africa is obliged to acquire the additional bandwidth and automatic self-healing technologies will provide further value to 12% of AFSAT Communications Limited re-routing of bandwidth has been our customers. and we are currently in negotiations to introduced based on customer service purchase such shares. Telkom has rolled out 141 W-CDMA sites levels. in major metropolitan areas throughout MWEB Africa’s VSAT service is mostly • Optical fibre deployment has been South Africa. Our initial focus has been on focused on the corporate and enterprise accelerated and Telkom now has theft, breakages and incident-prone areas, markets and is branded iWay. Its VSAT around 128,000 cable kilometres of customers waiting for service and services are using satellite teleport facilities optical fibre in the ground, enough to greenfield areas where Telkom has no in SA, the USA and Europe. The company circle the world three times. copper infrastructure. In essence, the had almost 20,175 customers at W-CDMA technology allows Telkom to • Dense Wave Division Multiplexing March 31, 2009. deploy fixed-line lookalike services with (DWDM) systems have been introduced The group is headquartered in Mauritius regional fixed numbering plans instead of between major metropolitan centres with operations in Nigeria, Kenya, deploying copper, especially in high such as Gauteng and Durban. These Tanzania, Uganda, Namibia and copper theft areas or areas where copper systems can carry 40 10GB signals Zimbabwe and an agency arrangement in deployment is not feasible or too slow to over a single fibre pair. Botswana. There are distributors in 26 sub- roll out. This roll-out will be extended to • Metro Ethernet has been deployed in Saharan African countries. rural areas and to replace expensive to the major metros, including Cape Town, maintain legacy equipment. Other developments Durban, Johannesburg, Pretoria and Mobile strategy Our move into offering a fully fledged Port Elizabeth. Mobile Strategy – South Africa mobile service is dependent on the • Integrated Multi-Service Access The recent liberalisation in the licensing finalisation of market research and the Multiplexer (IMAX) has been deployed regime, advancements in convergence outcome of pilot and customer trials to carry narrowband and broadband Group technology and termination of the planned for the end of 2009. overview services for Wireline legacy and Vodafone shareholders’ agreement provide We are however aware of the power of converged systems. Telkom with the opportunity to enter the the entrenched mobile companies. With mobile market. We believe that an • A Network Interactive Voice Response Management this in mind, Telkom will not commit to review integrated fixed-mobile operator is well system has been introduced, giving further capital expenditure other than that positioned to react to, and take advantage Telkom and its corporate customers the focused on reducing costs before the of the future requirements of our customers. ability to use advanced speech services Company has completed its market Sustainability By developing an integrated fixed-mobile such as automated speech recognition review research. Future build will be based on offering Telkom will seek to leverage its and text-to-speech applications. maximising our current infrastructure and customer base, marketing, logistics and subscriber numbers in order to reduce • The SAT-3/WASC/SAFE undersea distribution channels to increase its share of Performance operational and build costs and improve cable system, which connects South review voice revenue. In addition, internet access value add as far as possible. Africa to Europe and the Far East, has demands are increasingly requiring been upgraded to treble the amount of mobility. An integrated bundled offering Key Next Generation Network, capacity international bandwidth available. Financial would offer superior speeds and quality and product developments statements through the fixed-line, including the Telkom is in the fourth year of its Next advantages of mobility when required by Generation Network (NGN) build out Company the customer. Mobility provides cost programme. Customer demand and global Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 98
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Next Generation Network (NGN) in the longer term, in view of the longer term customer services will migrate Telkom has strategic objectives that are expectation that bandwidth will grow to an NGN infrastructure where only a few followed as part of network planning to exponentially. Softswitch nodes with multiple Softswitches ensure that we drive the implementation of are required to fulfil the functionalities of the The NGN network elements the NGN. Telkom’s NGN is based on an Class 4 core and Class 5 edge Time The Metro Ethernet Network evolutionary approach where the NGN is Division Multiplex switches. An extensive Metro Ethernet Network is deployed in parallel with the legacy being deployed for the provisioning of IP Network network and migration to the NGN is high-speed broadband services for Telkom’s IP Network is an extensive phased in over time. corporate customers and to serve as an network, providing points of presence Key to Telkom’s NGN deployment are access network backhaul to provide cost country wide. 34 Edge nodes, each with Softswitches that function in association effective transport of high bandwidth multiple routers, have been deployed. At with Application Servers, next generation services, typically as a backhaul for access these nodes, edge routers act as transport networks, and IP and Metro nodes. Metro Ethernet also serves as an distribution and aggregation points to Ethernet networks. In order to leverage on access network to services provisioned on IPNet via the Network Access Servers (dial- Telkom’s ubiquitous network deployment, the IP Network. up customers), Access Routers (leased the transport network will be transformed to line Internet customers), customer edges The Transport Network support the expected exponential growth in (Customer Edges for VPN termination) and To achieve the growth and manageability bandwidth. The IP Network has been also terminate ADSL sessions – 145 Edge in the transport network, Telkom is positioned to differentiate Telkom from routers are deployed at the 34 edge deploying Next Generation Synchronous its competitors and to leverage on nodes. Digital Hierarchy (NG-SDH) and Dense the bandwidth capacity increase of the Wavelength Division Multiplexing The IPNet routing platforms support transport network. (DWDM). In order to provide automated business customer requirements (VPN) as To achieve success with the NGN, two provisioning, routing and restoration well as providing Internet capacity for objectives are actively pursued; the capability, Automatic Switching Transport leased line and broadband internet consolidation of service offerings and the Network (ASTN) technology is being services. development and marketing of new and deployed on Telkom’s long haul network. Separate and dedicated edge routers for innovative services which are enabled by The ASTN network will also improve business traffic and internet traffic provide the NGN technology. resilience, reliability and reduce cost of the physical separation of corporate customer transport network. NGN is cheaper to maintain and Virtual Private Network (VPN) traffic from operate Softswitches and application servers that of Internet traffic to ensure secure NGN will provide network convergence Softswitches have been deployed to implementation of services to the business and simplification over the longer term as control media gateways, access gateways segment. Separate routing platforms, separate networks for voice and data and provide basic voice services while it dedicated for ADSL termination, are also deployed at the IPNet edge nodes. converge to one IP based network with functions in association with application associated intelligent devices such as servers to provide advanced next An extensive access network that could softswitches and application servers. NGN generation voice services. Telkom’s IP potentially provide connectivity to almost requires less diverse technology elements network provides the transport capability any customer provides access to IP to maintain that will increase network between the network elements while media services. These access networks include reliability and manageability and result in gateways mediate between the circuit legacy networks such as Constant Bit Rate operational savings. switched network and the Voice Over (CBR), and new point to cloud infrastructure Internet Protocol (VoIP) network. The need e.g. Synchronous High-bit rate Digital NGN is a revenue generator for such media gateways will diminish as Subscriber Line and Metro Ethernet. There is a critical mass of NGN equipment more traffic moves to VoIP. that is required before proper converged To further improve the secure provisioning services with a viable footprint are The NGN network will continue to be of services and create new business possible. Some NGN services are already developed towards an IP Multimedia opportunities, IPNet is evolving to a functioning, but in small numbers. Pre- Subsystem (IMS) controlled network where Carrier-supporting-Carrier (CsC) Multi- provisioning in the core of the network is call control will be combined into a single Protocol Label Switching (MPLS) currently taking place that will be beneficial control layer with IMS architecture. In the architecture. In short, CsC is a hierarchical Telkom AR front.qxp 8/12/09 6:23 PM Page 99
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VPN model that allows other service the edge other than physical protection Data networks providers or corporate customers to at the SDH layer where end-to-end path At the core layer and between the core interconnect their own IP/MPLS networks protection, utilising 1+1 protection and the edge nodes, full resilience exists. over Telkom’s MPLS backbone. This architecture, i.e. a working path and a hot Edge devices are connected to two core eliminates the need for customer carriers standby protection path, has been devices, located in physically diverse and service carriers to build and maintain deployed. buildings. The connectivity between the their own MPLS backbone. In the edge and each core router as well as the The traffic leaving or entering edges to or backbone, the CsC concept provides core infrastructure is dimensioned to carry from the network is protected in the core. complete separation of the different service the full traffic load in the event of a link Core redundancy provides protection in carriers’ traffic. failure or core node failure. Edge to core, edge to edge and edge to international inter-core and edge to International A Service Carrier is a collection of destination set-ups. The degree of destinations are therefore fully redundant. Service (or customer-specific) Provider redundancy varies across the different Edge routers (S-PEs), essentially forming a technologies and networks. Connectivity to international destinations is layer around the Backbone Carrier provided from two physically diverse Voice network network. Service Carriers also include their nodes, through different cable landing Dual connectivity exists between edge to respective Customer Edge (CE) routers. stations and different submarine cable core nodes and core to international S-PE and CE routers can only belong to a networks to multiple international nodes on gateway nodes. The transmission links single Service Carrier at any one time. different continents that are all between the edge and the core pair nodes interconnected using protected or In essence, IPNet will consist of a are geographically separated. These links restorable transmission systems. In the event Backbone Carrier, supporting various are protected to eliminate any single point of the loss of one of the local nodes, Service or Customer Carriers each of failure in the transport network. All links potentially 38% of the IP throughput traffic retaining a level of autonomy (e.g. security, are designed to cater for the busy hour could be lost. Mechanisms will schedule management, Quality of Service loads and have been implemented in a traffic and prioritisation of traffic will implementation) from the core. At a basic 50:50 load sharing fashion with each take place. technical level, it means that any number of route limited to 80% utilisation. Service level agreements are offered to customer VPNs are embedded and treated In the event of a failure of an international clients to provide improved resilience from as a single VPN within the backbone gateway during the peak hour, about 38% the customer site to the edge. carrier infrastructure by means of multiple of the international traffic will be lost. In the stacked MPLS labels, while preserving the event of a failure of a core switch during Power customer’s unique parameters, such as Group the peak hour, about 38% of national and Only 12V and 48V direct current (DC) overview Quality of Service models. international traffic will be lost from the equipment is utilised. Some alternating secondary layer of a particular region. current (AC) equipment is used, mainly in Network resilience Activation of disaster recovery procedures the server environments, eg data centres Management Telkom’s networks are generally viewed as review and plans to re-route traffic will further limit and at sites where DC is not available, eg three layers, ie access, edge and core. the loss of traffic. The Intelligent Network at customer service branches. The different network elements are platforms, providing advance services, interconnected utilising Synchronous Digital Operations centres, Core nodes, Edge Sustainability cater for protection of traffic under failure review Hierarchy (SDH), with the primary physical nodes, International gateway nodes and conditions. interconnecting medium being fibre. any station carrying core or edge traffic Signalling have been defined as critical sites where a Performance The transport network equipment is review No risk exists from a national perspective disruption of service cannot be tolerated. connected in a mesh or ring topology, as full redundancy has been implemented. Power availability is ensured, using a providing for redundancy. To further Due to the fact that the international combination of battery back up and AC improve resilience, intelligent ASTN Financial Signalling Transit Points are not connected standby plants. statements switches are deployed in the long haul as a mated pair to all international network to provide automatic provisioning, destinations, failure of an international routing, and restoration capability. Company gateway Signalling Transit Point may Financial Information Generally, at the access, no resilience is result in the loss of some international present in the network architecture towards connections. Telkom AR front.qxp 8/12/09 6:23 PM Page 100
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Operational review (continued)
Cost, efficiency and productivity Network in order to reduce maintenance customer needs more rapidly, and to management spend. We continue with the renegotiation provide appropriate solutions and services. Faced with competition eroding our of all supplier contracts and constructive In order to take advantage of economies of revenue base, cost management continues engagement with labour unions. We are scale, we have consolidated our six voice to be a key element in creating shareholder reviewing our IT investment strategy in installation and fault management centres value. Combined with the inflationary order to ensure optimum levels of spend in into two centres to address faults, environment affecting our operating line with our strategy and network installation and service appointment sites, expenses, a number of once-off items investment. Inventories and capital work-in- and have consolidated our six data impacted fixed-line expenditure including: progress are receiving considerable installation and fault management centres
• R177 million expenses relating to the attention as we seek to lower just-in-time into two centres. levels of investment and to monetise any Vodacom transaction; Faults reported on residential, business and excessive levels of assets. • R85 million impairment of Africa ADSL business services increased in the Online; Telkom is targeting an operating cost 2009 financial year mainly due to the 33% reduction of 10% over the following three increase in the ADSL installed base during • R254 million impairment of Telkom financial years. the 2009 financial year resulting in an Media; and increase in the number of reported faults, The Telkom Board is focusing on improving • R1.8 billion impairment of Multi-Links. adverse weather conditions causing many the cost efficiency and free cash flow areas to be flooded, mainly in the coastal Fixed-line operating expenses increased profile of the company. It has reduced the areas of KwaZulu-Natal, Western Cape 19.6% to R29.8 billion. Employee initial five year capital expenditure budget and Eastern Cape, and third party expenses increased by 8.1% to by 40% to R34 billion and intends to damage to Telkom cable infrastructure, roll- R8.0 billion, payments to other operators reduce it further where possible. out of other providers’ services, road increased 9.2% to R7.5 billion, selling Maintaining the quality of services to our extensions and other 2010 Soccer World general and administrative expenses customers Cup projects. In addition, many customers increased by 68.8% to R6.6 billion, Improved customer service is vital to the were affected by access equipment that service fees increased by 14.4% to success of Telkom into the future. failed following prolonged power outages. R2.8 billion and operating leases Sustainable and profitable growth in the Data and ADSL Business services fulfilment decreased by 1.0% to R613 million. customer base requires creating and performances improved following the Depreciation, amortisation, impairment strengthening capabilities focused on introduction of more efficient workflow and write-offs increased by 16.8% to managing customer relationships and processes. R4.4 billion resulting in an EBITDA margin learning from acquired customer of 25.8%. Excluding the Multi-Links, Telkom Faults cleared in 24 hours declined in the information. This will allow Telkom to better Media and Africa Online impairment the 2009 financial year due to the increased manage the customer experience and fixed-line adjusted EBITDA margin was number of ADSL services. The ADSL anticipate customer needs. 32.3%. installed base grew by 61% during the Customer segmentation based on value is 2008 financial year. This growth resulted The Telkom reorganisation programme – enabling Telkom to understand customers in an increase in the number of reported Telkom Renaissance – improves profit and better in order to give additional value and faults and impacted on the time taken to loss accountability throughout the services to customers. Surveys with our key clear faults. This growth also impacted on organisation and will allow us to focus on customer segments have shown that service data subrate services as they share ADSL efficient resource management and cost quality perception has improved in the resources. Network failures consist of cable containment. In addition, the roll-out of our small business, medium and large business breaks, cable theft and failures on other mobile network is expected to enable us to and corporate and government sectors. core network elements. We implemented a provide connectivity in a more cost The residential market perception survey self install option for ADSL, which had a effective manner in rural and high cable indicates a stable rating. positive impact on ADSL installation. theft areas. Next Generation Network and mobile technology also allows us to Network service quality We expect to continue to change the replace expensive to maintain legacy We have made significant investments in method in which we measure performance equipment. We intend to expedite the our national network operations centre and to align with changes in the information retirement of costly legacy systems as a our data centre, designed to increase our communication technology industry that result of our growing Next Generation ability to identify and anticipate future focus more on broadband and data Telkom AR front.qxp 8/12/09 6:23 PM Page 101
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The following table presents information regarding Telkom’s service delivery measurements during the periods indicated. Year ended March 31, 2007 2008 2009
Residential voice % cleared in 24 hours 50 38 32 Faults per 1,000 lines 485 476 650 % installed within 28 working days initial timeframe – No build 84 91 91 % installed within 80 working days initial timeframe – Build 73 82 80 Business voice % cleared in 24 hours 66 50 45 Faults per 1,000 lines 328 264 369 % installed within 21 working days initial timeframe – No build 77 85 87 % installed within 70 working days initial timeframe – Build 81 84 82 Data subrate % cleared in 24 hours 84 93 94 Faults per 1,000 lines 870 875 816 % installed within 30 working days initial timeframe – No build 49 48 64 % installed within 90 working days initial timeframe – Build 54 79 80 ADSL business % cleared in 24 hours 33 42 37 Faults per 1,000 lines 575 575 649 % installed within 28 working days initial timeframe – No build 56 79 91 % installed within 60 working days initial timeframe – Build 68 66 74
services and also to support Telkom’s We intend to introduce new products and our fixed-line service. ICASA has initiated a customer centricity drive. services as well as tariff structures with the review process of mobile termination rates aim of maintaining and gaining revenue. aimed at reducing high mobile Competition interconnect charges which, once Competition in the South African fixed-line Mobile competition completed, is also likely to impact Telkom’s communications market is intense and is Telkom competes for voice customers with own termination rates and interconnection increasing as a result of the Electronic the three existing mobile operators, Group revenues. overview Communications Act and determinations Vodacom, MTN and Cell C. Vodacom, issued by the Minister of Communications. our previously 50% owned joint venture, Data competition was listed on the JSE on May 18, 2009. Neotel, the former VANS providers such as The new licensing framework included in the Management The sale and unbundling of our stake in Internet Solutions and the three existing review Electronic Communications Act is resulting in Vodacom will further increase competition. mobile operators are our main competitors the market becoming more horizontally MTN is a public company listed on the JSE in the data market. Each of Vodacom, layered, with a large number of separate Sustainability Limited, and Cell C entered into a joint MTN and Cell C currently offer 3G, HSPA review licences being issued for electronic venture with Virgin Mobile which has and EDGE mobile broadband data communications network services, electronic further increased competition. Telkom also services that directly compete with our communications services, broadcasting competes with service providers who use services. Neotel is entering the market Performance services and the radio frequency spectrum. review least cost routing technology that enables through competitive pricing and niche This will substantially increase competition in fixed-to-mobile calls from corporate private products such as fibre connections and our fixed-line business. branch exchanges to bypass our fixed-line rings. The mobile operators have also Financial statements We compete primarily on the basis network by being transferred directly to stated their intention to start competing in of customer service, quality, reliability mobile networks. In recent periods, our the fixed-line market through building their and price in those areas where we fixed-line business has experienced own infrastructure. The former VANS Company Financial currently face competition and where we significant customer migration to mobile provide competitive internet protocol virtual Information expect to compete for public-switched services, as well as substitution of calls private networks and internet service telecommunications services in the future. placed using mobile services rather than provider services to the business segment. Telkom AR front.qxp 8/12/09 6:23 PM Page 102
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Operational review (continued)
Consumer orientated internet service alliances between the VANS and fixed and and Pretoria. Government has created an providers such as MWEB are our main mobile operators. Technological advances infrastructure company, Broadband Infraco, competitors in the consumer internet will also enable more and more which stated that it will provide inter-city market. convergence and integration which in turn bandwidth at cost based prices to Neotel, will enable more effective competition and and later to the rest of the industry. This will In addition, our data services have faced usage of bandwidth. further compete with our existing increased competition from iBurst, a communications network. As an alternative wireless competitor that offers competing As competition increases in the South provider of communications infrastructure, broadband services and, to a lesser extent, African market, South African tele- Broadband Infraco will also be involved in Sentech, which owns and operates satellite communication service providers, including some of the undersea cable projects. transmission systems, a packaged, always- Telkom, are expected to increasingly look Broadband Infraco was established by an on bidirectional broadband service via to other developing markets for new Act of Parliament: the Broadband Infraco satellite and a wireless high-speed internet revenue streams, particularly in sub- Act, No 33 of 2007. The Electronic service offering. The mobile data providers Saharan Africa. Internationally, Telkom’s Communications Act, No 36 of 2005, has have reduced prices significantly, leading to new Africa Online business already been amended by the Electronic price competition in our data markets. We competes with Internet Solutions and MTN Communications Amendment Act, No 37 believe the former VANS operators and Network Solutions. In addition, Verizon is of 2007, to permit electronic internet service providers will increasingly already present in a number of other communications licences to be issued to move into the corporate and voice services African markets. Broadband Infraco. market, while telecommunications service Fixed-line voice competition providers aim to expand into the managed A process to issue additional licences to In September 2004, the Minister of data network and international traffic small business operators to provide Communications granted an additional markets. We anticipate that alliances will telecommunications services in licence to provide public-switched be forged between the former VANS underserviced areas with a teledensity of telecommunications services to Neotel. operators, telecommunications service less than 5% commenced in 2005 and is Neotel was 30% owned by Transtel and providers and content providers to continuing. The Minister of Communi- Esitel, which are beneficially owned by the concentrate on the delivery of converged cations has identified 27 of these South African government and other services within the next few years. underserviced areas. ICASA has issued strategic equity investors including 26% licences to successful bidders in seven of Domestically, expansion into new markets beneficially owned by TATA Africa these areas and the Minister has issued by the former VANS and mobile Holdings (Pty) Ltd, a member of the large invitations to apply for licences in companies will occur, while the Indian conglomerate with information and 14 additional areas. In August 2006 development of new products and services communications operations. On March ICASA recommended to the Minister that will intensify competition. We expect 19, 2008 Neotel announced that the licences be granted to successful competition to further increase as a result of Competition Tribunal of South Africa had applicants in 13 of these areas. While it consolidation in the market, with approved its acquisition of Transtel without was expected that further licences would competitors growing through mergers, any conditions. TATA Africa Holdings (Pty) be issued in the 2007 calendar year, none acquisitions and alliance-forming activity. Ltd has subsequently acquired the 30% were issued. The Minister of The entry of multi-national corporations into equity stake beneficially owned by the Communications has issued a policy South Africa is expected to be a further South African government, increasing its directive to ICASA directing it to, where incentive for global communications shareholding in Neotel to 56%. Neotel there is more than one licence in a operators, which already service these was licensed on December 9, 2005 and province, merge the licences and issue one corporations abroad, to establish or commercially launched on August 31, Provincial Under-Serviced Area Network enhance their presence in South Africa. 2006. Neotel commenced providing Operator (PUSANO) licence. None of services to large corporations and other Competition in the data market is expected these consolidated licences have yet been licensees at the beginning of the 2007 to increase as a result of the VANS issued by ICASA. In his budget speech of calendar year. providers’ ability to deliver complex June 26, 2009, the Minister of managed data solutions and integrated On April 25, 2008, Neotel announced Communications indicated the intention to information communications technology that the first of its consumer products were review the policy in relation to USALs. solutions, as well as expected future available in limited parts of Johannesburg Telkom AR front.qxp 8/12/09 6:23 PM Page 103
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Telkom’s fixed-line voice business is expected to be further impacted by continuing developments of Voice over Internet Protocol (VoIP) and by the roll-out of limited mobility services. Wireless operator iBurst has started to offer portable voice services over its wireless network. Additionally, VoIP and other operators with international gateway licences are expected to create increased competition for Telkom’s fixed-line voice business in carrying international traffic in and out of South Africa.
We expect that the introduction of number portability and carrier pre-selection could further enhance competition in our fixed-line voice business and increase our churn rates. As competition intensifies, the main challenges our fixed-line voice business faces are continuing to improve customer loyalty through improved services and products, and maintaining our leadership in the South African communications market. As a result of increasing competition, we anticipate pressure on our overall average tariffs and a reduction in our market share.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 104
104 Telkom Annual Report 2009
Three year financial review
for the years ended March 31 Amounts in accordance with IFRS (in ZAR millions, except percentages) 2007 2008 2009 CAGR (%) Fixed-line segment financial data Revenue 32,345 32,572 33,659 2.0 Operating profit 8,596 8,107 4,334 (29.0) Operating profit margin (%) 26.6 24.9 12.9 (30.4) EBITDA 12,178 11,839 8,692 (15.5) EBITDA margin (%) 37.7 36.3 25.8 (17.3) Capital expenditure to revenue (%) 20.4 20.9 19.9 (1.2) Multi-Links segment financial data Revenue – 845 1,900 124.9 Operating profit – (97) (522) 438.1 Operating profit margin (%) – (11.5) (27.5) 139.3 EBITDA – (11) (226) 1,954.5 EBITDA margin (%) – (1.3) (11.9) 813.7 Capital expenditure to revenue (%) – 155.3 146.9 (5.4) Other segment financial data Revenue 873 1,040 1,214 17.9 Operating profit 411 453 477 7.7 Operating profit margin (%) 47.1 43.6 39.3 (8.6) EBITDA 430 486 527 10.7 EBITDA margin (%) 49.3 46.7 43.4 (6.1) Capital expenditure to revenue (%) 5.0 32.1 13.8 66.1 Financial review (Group) Income statement data Continuing operations Operating revenue 32,441 33,611 35,940 5.3 Operating expenses (including depreciation) 23,028 25,014 29,895 13.9 EBITDA 13,352 13,203 11,668 (6.5) Operating profit 9,751 9,069 6,388 (19.1) Profit before tax 9,093 7,681 3,726 (36.0) Profit from continuing operations 6,290 5,034 2,066 (42.7) Basic earnings per share (cents) 1,204.7 963.7 407.4 (41.8) Headline earnings per share (cents) 1,235.5 1,028.9 557.0 (32.9) Dividend per share (cents) 900.0 1,100.0 660.0 (14.4) Total operations Basic earnings per share (cents) 1,681.0 1,565.0 832.8 (29.6) Headline earnings per share (cents) 1,710.7 1,634.8 994.6 (23.8) Balance sheet data Total assets 59,146 70,372 85,779 20.4 Current assets 10,376 12,609 11,287 4.3 Non-current assets 48,770 57,763 51,009 2.3 Assets of disposal groups held for sale n/a n/a 23,482 Total liabilities 27,138 37,035 48,673 33.9 Current liabilities 18,584 21,931 17,452 (3.1) Non-current liabilities 8,554 15,104 15,348 33.9 Liabilities of disposal groups held for sale n/a n/a 15,873 Shareholders’ equity 32,008 33,337 37,106 7.7 Continuing operations Capital expenditure 6,623 8,428 9,631 20.6 Total debt 11,034 18,365 18,630 29.9 Net debt 10,026 16,617 15,497 24.3 Total operations Capital expenditure 10,246 11,900 13,234 13.6 Net debt 10,026 16,617 23,047 51.6 Cash flow data Cash flow from operating activities 9,356 10,603 11,432 10.5 Cash flow from investing activities (10,412) (14,106) (17,005) 27.8 Cash flow from financing activities (2,920) 2,943 7,093 – Capital expenditure excluding intangibles 8,648 10,108 8,725 0.4 Operating free cash flow 3,728 2,229 (2,237) – Financial ratios Continuing operations Operating profit margin (%) 30.1 27.0 17.8 (23.1) EBITDA margin (%) 41.2 39.3 32.5 (11.2) Net profit margin (%) 19.4 15.0 5.7 (45.5) Net debt to EBITDA n/a n/a 1.3 – After tax operating return on assets (%) n/a n/a 5.0 – Capital expenditure to revenue (%) 20.4 25.1 26.8 14.6 Total operations Net debt to EBITDA 0.5 0.8 1.2 54.9 After tax operating return on assets (%) 22.7 18.3 9.7 (34.6) Telkom AR front.qxp 8/12/09 6:23 PM Page 105
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Financial review
Results of operations 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 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 determined to dispose of Swiftnet, a wholly owned subsidiary that provides wireless data services, and determined to wind up 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 reflect 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 The Board has decided to delist from the New York Stock Group previous years to reflect the changes to Telkom’s segments and its Exchange. Maintaining a listing in the United States is overview discontinued operations. expensive and takes considerable management time. The methodology employed and discipline gained from Year ended March 31, 2009 compared to year ended March compliance with the Sarbanes-Oxley reporting Management 31, 2008 and year ended March 31, 2007 review requirements will be retained, where appropriate, to Consolidated results ensure strict corporate governance compliance and The following table shows information related to our operating transparent financial reporting. Sustainability review revenue, other income, operating expenses, operating profit, Telkom is comfortable that the JSE provides sufficient access operating profit margin, profit for the year, profit margin, EBITDA to capital from both South African and global investors. and EBITDA margin for the periods indicated. Performance review
Financial statements
Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 106
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Financial review (continued)
Telkom Group’s segmental results Year ended March 31, 2008/ 2009/ 2007 2008 2009 2007 2008 (in millions, except percentages) ZAR % ZAR % ZAR % % change % change
Operating revenue 32,441 100.0 33,611 100.0 35,940 100.0 3.6 6.9 Fixed-line 32,345 99.7 32,572 96.9 33,659 93.7 0.7 3.3 Multi-Links – – 845 2.5 1,900 5.3 – 124.9 Other 873 2.7 1,040 3.1 1,214 3.4 19.1 16.7 Intercompany eliminations (777) (2.4) (846) (2.5) (833) (2.4) 8.9 (1.5) Other income(1) 338 100.0 472 100.0 343 100.0 39.6 (27.3) Fixed-line 334 98.8 497 105.3 524 152.8 48.8 5.4 Multi-Links ––––––– – Other 50 14.8 61 12.9 64 18.6 22.0 4.9 Intercompany eliminations (46) (13.6) (86) (18.2) (245) (71.4) 87.0 184.9 Operating expenses 23,028 100.0 25,014 100.0 29,895 100.0 8.6 19.5 Fixed-line 24,083 104.6 24,962 99.7 29,849 99.8 3.6 19.6 Multi-Links – – 942 3.8 2,422 8.1 – 157.1 Other 512 2.2 648 2.6 801 2.7 26.6 23.6 Intercompany eliminations (1,567) (6.8) (1,538) (6.1) (3,177) (10.6) (1.9) 106.6 Operating profit 9,751 100.0 9,069 100.0 6,388 100.0 (7.0) (29.6) Fixed-line 8,596 88.2 8,107 89.4 4,334 67.8 (5.7) (46.5) Multi-Links – – (97) (1.1) (522) (8.2) – (438.1) Other 411 4.2 453 5.0 477 7.5 10.2 5.3 Intercompany eliminations 744 7.6 606 6.7 2,099 32.9 (18.5) 246.4 Operating profit margin (%) 30.1 27.0 17.8 (10.3) (34.1) Fixed-line 26.6 24.9 12.9 (6.4) (48.2) Multi-Links – (11.5) (27.5) – 139.1 Other 47.1 43.6 39.3 (7.4) (9.9) Profit for the year attributable to equity holders of Telkom Profit margin (%) EBITDA(2) 13,352 100.0 13,203 100.0 11,668 100.0 (1.1) (11.6) Fixed-line 12,178 91.2 11,839 89.7 8,692 74.5 (2.8) (26.6) Multi-Links – – (11) (0.1) (226) (1.9) – (1,954.5) Other 430 3.2 486 3.7 527 4.5 13.0 8.4 Intercompany eliminations 744 5.6 889 6.7 2,675 22.9 19.5 200.9 EBITDA margin (%) 41.2 39.3 32.5
Notes: (1) Other income includes profit and losses on disposal of investments, property, plant and equipment and intangible assets. (2) EBITDA represents profit for the year, which includes profit on sale of investments, before taxation, finance charges, investment income and depreciation, amortisation, impairments and write-offs. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with IFRS or as a measure of liquidity. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. In addition, the calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond is based on accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a result, EBITDA for purposes of those covenants is not calculated in the same manner as it is calculated in the above table. Telkom AR front.qxp 8/12/09 6:23 PM Page 107
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EBITDA can be reconciled to operating profit as follows: Year ended March 31, 2007 2008 2009 (in millions) ZAR ZAR ZAR
Fixed-line EBITDA 12,178 11,839 8,692 Depreciation, amortisation, impairments and write-offs (3,582) (3,732) (4,358)
Operating profit 8,596 8,107 4,334
Multi-Links EBITDA – (11) (226) Depreciation, amortisation, impairments and write-offs – (86) (296)
Operating profit – (97) (522)
Other EBITDA 430 486 527 Depreciation, amortisation, impairments and write-offs (19) (33) (50)
Operating profit 411 453 477
Operating revenue more properties at a higher value during expenses, depreciation, amortisation Operating revenue increased in the years the 2008 fiscal year. impairments and write-offs, operating ended March 31, 2009 and 2008 due to leases and service fees. Operating expenses increased operating revenue in our fixed- Operating expenses increased in the years The increase in fixed-line operating line, Multi-Links and other segment. The ended March 31, 2009 and 2008 as a expenses in the 2009 financial year was increase in fixed-line operating revenue of result of increased operating expenses in primarily due to increased selling, general 3.3% and 0.7% in the 2009 and 2008 Multi-Links and fixed-line segments. and administrative expenses, payment to financial years, respectively, was primarily other network operators, depreciation, due to continued growth in data services, The increase in the Multi-Links segment’s amortisation impairments and write-offs, higher revenue from interconnection and operating expenses in the 2009 financial employee expenses and service fees. subscription based calling plans, partially year was primarily due to increased cost of Selling, general and administrative offset by lower traffic revenue. The increase sales and associated subsidies as a result expenses increased primarily due to the in revenue in our Multi-Links segment in the of increased sales volumes, increased impairment of the Multi-Links investment in Group 2009 financial year was primarily due to advertising and promotional expenditure overview the 2009 financial year, increased subscriber growth, an increase in and an increase in expatriate fees as a materials and maintenance expenses and domestic traffic volumes as well as result of an increase in staff seconded from higher bad debts. Depreciation, increased data revenue. The increase in Telkom during the year. The increase in the Management amortisation, impairments and write-offs review revenue in our Multi-Links and other Multi-Links segment’s operating expenses in increased in the year ended March 31, segment in the 2008 financial year was the 2008 financial year was primarily due 2009 primarily as a result of higher primarily due to the inclusion in the 2008 to the inclusion of operating expenses Sustainability amortisation of intangible assets and review fiscal year of revenue generated by our relating to our newly acquired subsidiary, increased depreciation due to the on-going newly acquired subsidiaries, Multi-Links Multi-Links, which impacted all expense investment in telecommunications network and Africa Online. categories. equipment and data processing Performance review Other income The increase in the other segment’s equipment. Payments to other operators Other income includes profit on the operating expenses in the 2009 financial increased primarily due to increased
disposal of investments, property, plant and year was mainly contributed by the payments to international operators due to Financial statements equipment and intangible assets. The operating expenditure of UUNET, Africa increased switch hubbing volumes and decrease in fixed-line other income in the Online’s 40% joint venture. Increases in the higher exchange rates and settlement rates.
2009 financial year was primarily due to other segment’s operating expenses in the Employee expenses increased in the year Company Financial the gain on disposal of properties in the 2008 financial year were primarily driven ended March 31, 2009 primarily due to a Information 2008 financial year. The increase in fixed- by significant increases in payments to higher provision for medical aid for line other income in the 2008 financial other operators, employee expenses, pensioners as a result of increased interest year was primarily due to the disposal of selling, general and administrative costs, higher salaries and wages as a result Telkom AR front.qxp 8/12/09 6:23 PM Page 108
108 Telkom Annual Report 2009
Financial review (continued)
of average annual salary increases of due to a discount received on the extension year to a negative operating margin of 10.86% as well as higher leave benefits. of our vehicle lease and a reduction in the 25.7% in the 2009 financial year. The Service fees increased in the year ended number of vehicles from 9,694 at operating profit margin for our other March 31, 2009 primarily due to March 31, 2007 to 8,792 at March 31, segment decreased from 47.1% in the consultancy fees relating to the Vodacom 2008. Selling, general and administrative 2007 financial year to 43.6% in the 2008 sale and unbundling transaction and higher expenses decreased primarily due to the financial year and decreased to 39.3% in security costs to secure the copper network. provision for probable liabilities in the the 2009 financial year. Telcordia dispute in the 2007 financial The increase in fixed-line operating Investment income year, which were not increased significantly expenses in the 2008 financial year was Investment income consists of interest in the 2008 financial year, and lower primarily due to increased payments to received on short-term investments and marketing expense, partially offset by the other operators, higher employee expenses bank accounts and income received from R217 million impairment of the Telkom and service fees, partially offset by lower our investments. Group investment income Media loan in the 2008 financial year – leases and selling, general and increased 7.7% to R181 million in the increased materials and maintenance administrative expenses. Payments to other 2009 financial year and decreased expenses and higher bad debts. operators increased primarily due to 15.6% to R168 million in the 2008 Depreciation, amortisation, impairments increased calls from our fixed-line network financial year from R199 million in the and write-offs increased in the year ended to mobile and international operators as 2007 financial year. The increase in the March 31, 2008 primarily as a result of result of higher call volumes from our fixed- 2009 financial year was primarily due to higher amortisation of intangible assets and line network to the mobile and international increased short-term investments and increased depreciation due to the on-going networks. Employee expenses increased interest rates. The decrease in the 2008 investment in telecommunications network due to higher salaries and wages as a financial year was primarily due to lower equipment and data processing equipment, result of average annual salary increases interest received from fixed deposits and partially offset by lower asset write-offs. and higher share compensation expenses, repurchase agreements mainly due to partially offset by a reduced provision for Operating profit lower cash balances. team award and a reduction in the number Operating profit decreased in the 2009 Finance charges and fair value of employees. Service fees increased and 2008 financial years due to movements primarily due to increased property decreased operating profit in the fixed-line Finance charges and fair value movements management costs mainly related to and Multi-Links segments as a result of include interest paid on local and foreign increased electricity usage, electricity rates increased operating expenditure. As a borrowings, amortised discounts on bonds and taxes, payments to consultants to result, the fixed-line operating profit margin and commercial paper bills, fair value explore local and international investment decreased from 26.6% in the 2007 gains and losses on financial instruments opportunities, higher security costs due to financial year to 24.9% in the 2008 and foreign exchange gains and losses. increases in contract prices and financial year and decreased to 12.9% in maintenance and monitoring of the cable the 2009 financial year. The operating The following table sets forth information alarm system and legal fees related to margin for our Multi-Links segment related to our finance charges and fair Telcordia. Operating leases decreased in decreased significantly from a negative value movements for the periods indicated. the year ended March 31, 2008 primarily margin of 11.5% in the 2008 financial Telkom AR front.qxp 8/12/09 6:23 PM Page 109
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Finance charges and fair value movements Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Interest expense 1,142 1,543 1,732 35.1 12.2
Local loans 1,303 1,700 1,895 30.5 11.5 Foreign loans – 18 – – – Finance charges capitalised (161) (175) (163) 8.7 (6.9)
Foreign exchange losses and fair value movements (285) 13 1,111 (104.6) –
Fair value (adjustments) on derivative instruments (344) (80) 268 (76.7) (435.0) Foreign exchange losses 59 93 843 57.6 806.5
Total finance charges 857 1,556 2,843 81.6 82.7
During the year ended March 31, 2009, option we have in place relating to Multi- was raised on the capital gains tax base finance charges increased primarily due to Links. This was partially offset by fair value cost of the 15% investment in Vodacom, higher foreign exchange losses and fair adjustments as a result of the significant that are held for sale and will be utilised for value movements incurred by Multi-Links on weakness of the rand against international the future capital gains tax liability of the foreign denominated loans and creditor’s currencies. sale transaction. This was partially offset by balances as a result of the devaluation of higher non-deductible expenditure relating Taxation the naira and the mark to market valuation to the impairment of Multi-Links and Africa Our consolidated taxation expense from of the Multi-Links put option as well as Online. The decrease in the 2008 continuing operations decreased 37.3% to financial year was primarily due to higher increased interest paid as a result of higher R1,660 million in the year ended March non-deductible expenses relating mostly to debt levels and interest rates. During the 31, 2009 and decreased 5.6% to the impairment of Telkom Media and Africa year ended March 31, 2008, finance R2,647 million in the year ended March Online assets, the increase in STC taxation charges increased primarily due to a 31, 2008 from R2,803 million in the year credits utilised in respect of the repurchase higher interest expense resulting from ended March 31, 2007. The decrease in of Telkom shares, the utilisation of the Multi- higher debt levels in the fixed-line, Multi- the 2009 financial year was primarily due Links assessed losses and the impact of the Links and other segments, and foreign to the decrease in the STC charge as a taxation rate change on deferred taxation Group exchange losses and fair value movements result of lower dividends declared as overview from 29% to 28% with effect from April 1, decreased primarily due to currency compared to the previous year and the 2008. movements and fair value losses on the put R454 million deferred taxation asset that Management The following table sets forth information related to our effective taxation rate for the Telkom Group, Telkom Company and Vodacom for review the periods indicated:
Year ended March 31, Sustainability review 2007 2008 2009 2008/2007 2009/2008 (in percentages) % % % % change % change
Effective tax rate Performance review Telkom Group – continuing operations 30.8 34.5 44.5 12.0 29.3 Telkom Company 24.2 24.6 8.9 1.7 (63.8)
Vodacom 36.9 34.1 39.5 (7.6) 15.8 Financial statements
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Financial review (continued)
The increase in the Telkom Group effective in the rate of secondary taxation on Fixed-line operating revenue taxation rate in the 2009 financial year companies from 12.5% to 10%. Our fixed-line operating revenue is derived was mainly due to higher non-deductible principally from fixed-line subscriptions and Minority interests expenditure relating to the impairment of connections; traffic, which comprises local Minority interests in the income of subsidiaries Multi-Links and Africa Online and Vodacom and long distance traffic, fixed-to-mobile decreased significantly to R77 million in the transaction costs. The increase in the traffic, international outgoing traffic and year ended March 31, 2009 primarily due Telkom Group effective taxation rate in the international voice over internet protocol to an increase in the Multi-Links minorities’ 2008 financial year was mainly due to services; and interconnection, which share in net losses. Minority interests in the higher non-deductible expenses relating comprise terminating and hubbing traffic. income of subsidiaries decreased 3.0% to mostly to the impairment of Telkom Media We also derive fixed-line operating R197 million in the year ended March 31, and Africa Online assets, the increase in revenue from our data business, which 2008 primarily due to the purchase of the STC taxation credits utilised in respect of includes data transmission services, remaining equity interest of 30% in the repurchases of Telkom shares and the managed data networking services and Smartphone on August 31, 2007, partially impact of the taxation rate change on internet access and related information offset by an increase in profits generated by deferred taxation from 29% to 28% with technology services. our Telkom Directory Services subsidiary and effect from April 1, 2008. Vodacom Tanzania. Telkom has in recent years introduced The decrease in the Telkom Company calling plans as a customer retention Profit for the year attributable to equity effective taxation rate in the 2009 financial strategy in order to defend revenues. These holders of Telkom year was mainly due to the R1,280 million calling plan arrangements comprise Profit for the year attributable to equity deferred taxation asset that was raised on monthly subscriptions for access line rental, holders of Telkom decreased to the capital gains tax base cost of the 15% value-added services and free or R4,170 million in the 2009 financial year investment in Vodacom, that are held for discounted rates on calls. The access line primarily due to decreased operating profit sale and will be utilised for the future rentals and value-added services revenue in our Multi-Links, fixed-line and mobile capital gains tax liability of the sale components of calling plan arrangements segments, partially offset by increased transaction, partially offset by the are included in subscriptions and operating profit in our other segment. R1,843 million impairment of the Multi- connections revenue. In response to the Higher finance charges were partially Links investment, R254 million impairment significant growth in calling plan offset by lower taxation and higher of the Telkom Media loan and R85 million arrangements, the need arose to separate investment income. Profit for the year impairment of the Africa Online investment traffic revenue resulting from subscription attributable to equity holders of Telkom as well as Vodacom transaction costs. The based calling plans into annuity revenue decreased to R7,975 million in the 2008 higher effective taxation rate for Telkom and the respective traffic revenue streams. financial year primarily due to decreased Company in the year ended March 31, Subscription based on calling plans operating profit in our fixed-line and other 2008 was primarily due to higher non- revenue includes traffic annuity revenue segments, partially offset by increased deductible expenses relating to the related to calling plans. Discounted and operating profit in our mobile segment. R217 million impairment of the Telkom out of plan traffic relating to these calling Higher finance charges and lower Media loan and an increase of plans is disclosed under the applicable investment income were partially offset by R198 million in secondary taxation on traffic revenue streams. lower taxation. companies, partially offset by higher The following table shows operating exempt income resulting from dividends Fixed-line segment revenue for our fixed-line segment broken received from Vodacom and other The following is a discussion of the results down by major revenue streams and as a subsidiaries. Vodacom’s effective taxation of operations from our fixed-line segment percentage of total revenue for our fixed- rate increased in the 2008 financial year before eliminations of intercompany line segment and the percentage change primarily due to the disallowable expenses transactions with the mobile and other by major revenue stream for the periods relating to the BEE deal and non-deductible segments. Our fixed-line segment is our indicated. interest expenses. Vodacom’s effective largest segment based on revenue and taxation rate decreased in the 2008 profit contribution. financial year primarily due to the decrease Telkom AR front.qxp 8/12/09 6:23 PM Page 111
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Fixed-line operating revenue Year ended March 31, 2008/ 2009/ 2007 2008 2009 2007 2008 (in millions, except percentages) ZAR % ZAR % ZAR % % change % change
Subscriptions and connections 6,286 19.4 6,330 19.4 6,614 19.7 0.7 4.5 Traffic 16,740 51.8 15,950 49.0 15,323 45.5 (4.7) (3.9)
Local 4,832 14.9 4,076 12.6 3,634 10.8 (15.6) (10.8) Long distance 2,731 8.5 2,252 6.9 2,036 6.0 (17.5) (9.6) Fixed-to-mobile 7,646 23.6 7,557 23.2 7,420 22.0 (1.2) (1.8) International outgoing 988 3.1 986 3.0 933 2.8 (0.2) (5.4) Subscription based calling plans 543 1.7 1,079 3.3 1,300 3.9 98.7 20.5
Interconnection 1,639 5.1 1,757 5.4 2,084 6.2 7.2 18.6 Data 7,489 23.1 8,308 25.5 9,310 27.6 10.9 12.1 Sundry revenue 191 0.6 227 0.7 328 1.0 18.8 44.5
Fixed-line operating revenue 32,345 100.0 32,572 100.0 33,659 100.0 0.7 3.3
Fixed-line operating revenue increased in lines as a result of customer migration to 0.5% to R5,250 in the 2008 financial the 2009 financial year primarily due to mobile services and our residential post- year from R5,275 in the 2007 financial continued growth in data services, higher paid PSTN services to enable access to year primarily due to the decline in traffic revenue from interconnection services and subscription based calling plans and was tariffs and local traffic volumes, partially subscriptions and connections partially positively impacted by our increase in offset by increased subscription based offset by a decrease in traffic revenue, ISDN channels, ADSL services and, to a calling plans, interconnection and particularly local and long distance traffic lesser extent, business post-paid PSTN subscriptions and connections tariffs. lines. In addition, traffic was adversely revenue partially offset by an increase in Subscriptions and connections. Revenue affected in both years by the increasing traffic revenue from subscription based from subscriptions and connections consists substitution of calls placed using mobile calling plans. Fixed-line operating revenue of revenue from connection fees, monthly services rather than our fixed-line service increased in the 2008 financial year rental charges, value-added voice services and dial-up traffic being substituted by our primarily due to continued growth in data and the sale and rental of customer ADSL service, as well as the decrease in Group services and higher revenue from premises equipment for post-paid and overview the number of prepaid and residential post- subscription based calling plans, prepaid PSTN lines, including ISDN paid PSTN lines and increased competition interconnection and subscriptions and channels and private payphones. in our payphones business. As a result, connections, partially offset by a decrease Subscriptions and connections revenue is Management traffic declined 7.6% in the 2009 financial review in traffic revenue, particularly local and principally a function of the number and year and 8.2% in the 2008 financial year. long distance traffic revenue. mix of residential and business lines in Revenue per fixed access line increased service, the number of private payphones Sustainability Fixed-line operating revenue was adversely 2.1% to R5,349 in the 2009 financial review in service and the corresponding charges. impacted in both the 2009 and 2008 year from R5,250 in the 2008 financial The following table sets forth information financial years due to a decrease in the year primarily due to a 1.4% decrease in related to our fixed-line subscription and Performance number of residential post-paid PSTN lines the average number of access lines connection revenue during the periods review primarily as a result of customer migration and increased interconnection and indicated. to mobile and higher bandwidth products subscriptions and connection revenue such as ADSL and lower connections, and partially offset by lower traffic revenue. Financial statements a decrease in the number of prepaid PSTN Revenue per fixed access line decreased
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Fixed-line subscription and connection revenue Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 % change % change
Total subscriptions and connections revenue (ZAR millions, except percentages) 6,286 6,330 6,614 0.7 4.5 Total subscription access lines (thousands, except percentages)(1) 4,490 4,395 4,319 (2.1) (1.7) Postpaid PSTN(2) 2,971 2,893 2,769 (2.6) (4.3) ISDN channels 718 754 781 5.0 3.6 Prepaid PSTN 795 743 766 (6.5) 3.1 Private payphones 6 5 3 (16.7) (40.0)
Notes: (1) Total subscription access lines comprise PSTN lines, including ISDN lines and private payphones, but excluding internal lines in service and public payphones. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels. (2) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre.
Revenue from subscriptions and increase in the number of post-paid ISDN Telkom has in recent years introduced connections increased in the year ended channels was driven by increased demand calling plans as a customer retention March 31, 2009 mainly due to increased for higher bandwidth and functionality. The strategy in order to defend revenues. These tariffs as well as an increase in the number increase in prepaid PSTN lines in the calling plan arrangements comprise of ISDN lines and, to a lesser extent, 2009 financial year was primarily due to monthly subscriptions for access line rental, residential prepaid PSTN lines, partially our affordable Waya Waya offering. The value-added services and free or offset by lower business and residential decrease in prepaid PSTN lines in the discounted rates on calls. The access line post-paid PSTN lines. The average monthly 2008 financial year was primarily due to rentals and value-added services revenue prices for subscriptions increased by continued migration to mobile services and components of calling plan arrangements 11.0% on August 1, 2008. Revenue from our residential post-paid PSTN services to are included in subscriptions and subscriptions and connections increased in enable access to subscription based connections revenue. In response to the the year ended March 31, 2008 mainly calling plans. In addition, we relaxed our significant growth in calling plan due to increased tariffs as well as an credit policies which led to fewer arrangements, the need arose to separate increase in the number of ISDN lines and, migrations of our postpaid customers to traffic revenue resulting from subscription to a lesser extent, business post-paid PSTN prepaid service in the 2008 financial year. based calling plans into annuity revenue lines, partially offset by lower residential and the respective traffic revenue streams. Traffic. Traffic revenue consists of revenue post-paid PSTN lines and prepaid PSTN Subscription based on calling plans from local, long distance, fixed-to-mobile lines. The average monthly prices for revenue includes traffic annuity revenue and international outgoing calls, subscriptions increased by 8.3% on August related to calling plans. Discounted and international voice over internet protocol 1, 2006 and 12.0% on August 1, 2007. out of plan traffic relating to these calling services and subscription based calling plans is disclosed under the applicable The decrease in the number of residential plans. Traffic revenue is principally a traffic revenue streams. post-paid PSTN lines in service in both the function of tariffs and the volume, duration 2009 and 2008 financial years was and mix between relatively more expensive Traffic includes dial-up internet traffic. primarily as a result of customer migration domestic long distance, international and to mobile and higher bandwidth products fixed-to-mobile calls and relatively less such as ADSL and lower connections. The expensive local calls. Telkom AR front.qxp 8/12/09 6:23 PM Page 113
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The following table sets forth information related to our fixed-line traffic revenue for the periods indicated.
Fixed-line traffic revenue Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 % change % change
Local traffic revenue (ZAR millions, except percentages) 4,832 4,076 3,634 (15.6) (10.8) Local traffic (millions of minutes, except percentages)(1) 14,764 11,317 8,822 (23.3) (22.0) Long distance traffic revenue (ZAR millions, except percentages) 2,731 2,252 2,036 (17.5) (9.6) Long distance traffic (millions of minutes, except percentages)(1) 4,224 3,870 3,631 (8.4) (6.2) Fixed-to-mobile traffic revenue (ZAR millions, except percentages) 7,646 7,557 7,420 (1.2) (1.8) Fixed-to-mobile traffic (millions of minutes, except percentages)(1) 4,103 4,169 4,126 1.6 (1.0) International outgoing traffic revenue (ZAR millions, except percentages) 988 986 933 (0.2) (5.4) International outgoing traffic (millions of minutes, except percentages)(1) 558 635 622 13.8 (2.0) International voice over internet protocol (millions of minutes, except percentages)(2) 38 43 34 13.2 (20.9) Subscription based calling plans revenue (ZAR millions, except percentages) 543 1,079 1,300 98.7 20.5 Subscription based calling plans (millions of minutes, except percentages) 1,896 2,997 3,546 58.1 18.3 Total traffic revenue (ZAR millions, except percentages) 16,740 15,950 15,323 (4.7) (3.9) Total traffic (millions of minutes, except percentages)(1) 29,323 26,926 24,869 (8.2) (7.6) Average total monthly traffic minutes per average monthly access line (minutes)(3) 456 417 385 (8.6) (7.7) Group overview Notes: (1) Traffic, other than international voice over internet protocol traffic, is calculated by dividing total traffic revenue by the weighted average tariff during the relevant period. Traffic includes dial-up internet traffic. Management (2) International voice over internet protocol traffic is based on the traffic reflected in invoices. review (3) Average monthly traffic minutes per average monthly access line are calculated by dividing the total traffic by the cumulative number of monthly access lines in the period.
Sustainability review
Performance review
Financial statements
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Financial review (continued)
Traffic revenue declined in the 2009 on August 1, 2006 and August 1, 2007. and mix of calls to destinations outside financial year primarily due to lower traffic On August 1, 2008, we increased the South Africa. In the 2009 financial year, volumes partially offset by increased price of local peak calls after the first unit international outgoing traffic revenue subscription based calling plans and by 3.2% to 39.2 SA cents per minute (VAT declined primarily as a result of a decrease revenue and higher average traffic tariffs. inclusive). On August 1, 2007, the price of in volumes mainly as a result of the Traffic revenue declined in the 2008 local off-peak calls increased 4.1% on increase in the number of Telkom Closer financial year primarily due to lower average. On August 1, 2008, the price of subscribers, thereby decreasing the out of average traffic tariffs and lower local traffic local off-peak calls increased 9.2% on bundle volumes. In the 2008 financial volumes partially offset by increased average. year, international outgoing traffic revenue subscription based calling plans and declined primarily as a result of a decrease Long distance traffic revenue decreased in revenue, international outgoing and fixed- in the average international outgoing the 2009 and 2008 financial years mainly to-mobile traffic. tariffs, partially offset by an increase in due to a decrease in average long international outgoing traffic primarily as a ICASA approved a 2.1% reduction in the distance tariffs and, to a lesser extent, result of the reduced tariffs. The average overall tariffs for services in the basket decreased long distance traffic, partially tariffs to all international destinations effective August 1, 2006, 1.2% reduction offset by increased traffic related to Telkom decreased by 11.1% on August 1, 2006 in the overall tariffs for services in the Closer packages and Worldcall. We and by 9.0% on August 1, 2007. On basket effective August 1, 2007 and a decreased our fixed-line long distance August 1, 2008 the overall international 2.4% increase in the overall tariffs for traffic tariffs by 10% on September 1, tariffs remained unchanged, but tariffs to services in the basket effective August 1, 2005, a further 10% on August 1, 2006 certain destinations were increased whilst 2008. Traffic was adversely affected in and a further 10% on August 1, 2007. The others were decreased. both the 2009 and 2008 financial years tariff remained unchanged on August 1, by the increasing substitution of calls 2008. Revenue from subscription based calling placed using mobile services rather than Revenue from fixed-to-mobile traffic consists plans includes revenue from Telkom’s our fixed-line service and dial-up traffic of revenue from calls made by our fixed-line subscription based plans, Telkom Closer being substituted by our ADSL service, as customers to the three mobile networks in and Supreme Call, which are bundled well as the decrease in the number of South Africa and is primarily a function of products on post-paid PSTN lines that prepaid and residential post-paid PSTN fixed-to-mobile tariffs and the number, the include discounted rates and free minutes lines and increased competition in our duration and the time of calls. Fixed-to- for a fixed monthly subscription fee. In the payphone business. mobile traffic revenue decreased in the 2009 financial year, revenue from 2009 and 2008 financial years due to subscription based calling plans increased Local traffic revenue decreased in the higher discount offered to customers in by 20.5% primarily due to a 27.6% 2009 and 2008 financial years primarily order to retain traffic, partially offset by increase in customers subscribing to these due to significantly lower traffic resulting higher traffic related to the Telkom Closer packages. In the 2008 financial year, primarily from internet call usage being packages. The decrease in fixed-to-mobile revenue from subscription based calling substituted by our ADSL service, the traffic in the 2009 financial year was plans increased by 98.7% primarily due to substitution of calls placed using mobile primarily due to an increase in the number a 69.4% increase in customers subscribing services and discounts to business of Telkom Closer customers, thereby to these packages. customers, partially offset by increased decreasing the out of bundle volumes. The local off-peak tariffs and traffic volumes Interconnection. We generate revenue from increase in fixed-to-mobile traffic in the related to Telkom Closer packages. We interconnection services for traffic from calls 2008 financial year was primarily due to increased penetration of subscription made by other operators’ customers that discounts offered to larger customers on based calling plans to stimulate usage in terminate on or transit through our network. fixed-to-mobile calls. the 2009 and 2008 financial years and to Revenue from interconnection services counteract mobile substitution, which Revenue from international outgoing traffic includes payments from domestic mobile, effectively lowers the cost to the customer. consists of revenue from calls made by our domestic fixed and international operators On September 1, 2005, we decreased fixed-line customers to international regardless of where the traffic originates or the price of local peak calls after the first destinations and from international voice terminates. The following table sets forth unit by 5.0% to 38 SA cents per minute over internet protocol services and is a information related to interconnection (VAT inclusive). This price was unchanged function of tariffs and the number, duration revenue for the years indicated. Telkom AR front.qxp 8/12/09 6:23 PM Page 115
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Interconnection revenue Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 % change % change
Interconnection revenue (ZAR millions, except percentages) 1,639 1,757 2,084 7.2 18.6 Interconnection revenue from domestic mobile operators (ZAR millions, except percentages) 816 838 916 2.7 9.3 Domestic mobile interconnection traffic (millions of minutes, except percentages)(1) 2,419 2,502 2,484 3.4 (0.7) Interconnection revenue from domestic fixed-line operators (ZAR millions, except percentages) – 28 111 – 296.4 Domestic fixed-line interconnection traffic (millions of minutes, except percentages)(2) – 113 415 – 267.3 Interconnection revenue from international operators (ZAR millions, except percentages) 823 891 1,057 8.3 18.6 International interconnection traffic (millions of minutes, except percentages)(2) 1,321 1,280 1,189 (3.1) (7.1)
Notes: (1) Domestic mobile interconnection traffic, other than international outgoing mobile traffic, is calculated by dividing total domestic mobile and domestic fixed- line interconnection traffic revenue, respectively, by the weighted average domestic mobile and domestic fixed-line interconnection traffic tariffs during the relevant period. International outgoing mobile traffic is based on the traffic registered through the respective exchanges and reflected in interconnection invoices. (2) International interconnection and domestic fixed-line interconnection traffic is based on the traffic registered through the respective exchanges and reflected on interconnection invoices.
Interconnection revenue from domestic interconnection traffic increased in the year services, such as emergency services and mobile operators includes revenue for call ended March 31, 2008 primarily due to directory inquiry services. With effect from termination and international outgoing calls an overall increase in mobile calls as a May 23, 2007, ICASA approved from domestic mobile networks, as well as result of a growing mobile market, partially interconnection rates with Neotel, underserviced area licence holders and Group access to other services, such as offset by increased mobile-to-mobile calls overview value-added network service providers for emergency services and directory enquiry bypassing our network. Interconnection interconnection on our fixed-line network. In services. Interconnection revenue from revenue from domestic mobile operators October 2007, Neotel commenced domestic mobile operators increased in the includes fees paid to our fixed-line business Management interconnection with Telkom. In July 2007, review 2009 and financial year mainly due to by Vodacom of R462 million in the year Telkom began interconnection with the higher average tariffs, partially offset by ended March 31, 2009, R468 million in underserviced area licence holders and in lower volumes. Interconnection revenue the year ended March 31, 2008 and November 2007, value added network Sustainability review from domestic mobile operators increased R468 million in the year ended March 31, service providers. We expect inter- in the 2008 financial year mainly due to 2007. Fifty percent of these amounts were connection revenue to increase as a result
increased traffic from domestic mobile attributable to our interest in Vodacom and of the entrance of Neotel and the further Performance operators, partially offset by lower average were eliminated from the Telkom Group’s liberalisation of the South African review tariffs on mobile international outgoing revenue on consolidation. telecommunications industry, which may calls. Domestic mobile interconnection partially mitigate declines in revenue in Interconnection revenue from domestic other areas. Financial traffic decreased in the year ended March fixed-line operators includes fees paid by statements 31, 2009 primarily due to increased Neotel, underserviced area licence holders Interconnection revenue from international mobile-to-mobile calls bypassing our operators includes amounts paid by foreign and value-added network service providers Company network and volumes lost to other for call termination and international operators for the use of our network to Financial Information international carriers. Domestic mobile outgoing calls, as well as access to other terminate calls made by customers of such Telkom AR front.qxp 8/12/09 6:23 PM Page 116
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Financial review (continued)
Data services revenue Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 % change % change
Data services revenue (ZAR millions, except percentages) 7,489 8,308 9,310 10.9 12.1 Leased lines and other data revenue(1) 5,828 6,460 7,452 10.8 15.4 Leased line facilities revenues from mobile operators 1,661 1,848 1,858 11.3 0.5 Number of managed network sites (at period end) 21,879 25,112 29,979 14.8 19.4 Internet all access subscribers (at period end) 302,593 358,066 423,196 18.3 18.2 Total ADSL subscribers (at period end)(2) 255,633 412,190 548,015 61.2 33.0
Notes: (1) Leased lines and other data revenue includes all data services revenue other than leased line facilities revenue from mobile operators. (2) Excludes Telkom internal ADSL services of 1,029, 751 and 523 as of March 31, 2009, 2008 and 2007, respectively.
operators and payments from foreign distance. The table above sets forth amounts were attributable to our interest in operators for interconnection hubbing information related to revenue from data Vodacom and were eliminated from the traffic through our network to other foreign services for the periods indicated. Telkom Group’s revenue on consolidation. networks. Interconnection revenue from Our data services revenue increased in Sundry revenue. Sundry revenue includes international operators increased in the both the 2009 and 2008 financial years revenue relating to collocation of other year ended March 31, 2009 primarily primarily due to increased revenue from licensed operators on Telkom owned due to the weakening of the Rand against data connectivity service, including ADSL properties, the sale of materials and the SDR, the notional currency in which connectivity and SAIX, internet access, and revenue related to the recovery of costs for international rates are determined, and managed data networks, including VPN work performed on behalf of other licensed increased switched hubbing traffic volumes Supreme and increased revenue from operators. Sundry revenue increased by due to a reduction in tariffs to stimulate leased line facilities from mobile operators. 44.5% to R328 million in the 2009 competitiveness. Interconnection revenue These increases were partially offset by financial year and 18.8% to R227 million from international operators increased in decreased tariffs for leased line facilities to in the 2008 financial year from the year ended March 31, 2008 primarily mobile operators and data connectivity R191 million in the 2007 financial year. due to the weakening of the rand against services. Revenue from leased line facilities The increase in the 2009 financial year the SDR, the notional currency in which from mobile operators was relatively flat in was primarily due to revenue from the FIFA international rates are determined, and the year ended March 31, 2009. Revenue World Cup project. The increase in the increased switched hubbing traffic volumes from leased line facilities from mobile 2008 financial year was primarily due to due to a reduction in tariffs to stimulate operators increased in the year ended an increase in prices for collocation and competitiveness, partially offset by lower March 31, 2008 primarily due to the roll- recoveries. volumes and settlement rates. out of third generation and universal mobile Fixed-line operating expenses Data. Data services comprise data telecommunications system products by the The following table shows the operating transmission services, including leased mobile operators. expenses of our fixed-line segment broken lines and packet based services, managed Operating revenue from our data services down by expense category as a data networking services and internet included R1,059 million, R1,028 million percentage of total revenue and the access and related information technology and R907 million in revenue received by percentage change by operating expense services. In addition, data services include our fixed-line business from Vodacom in the category for the years indicated. revenue from ADSL. Revenue from data years ended March 31, 2009, 2008 and services is mainly a function of the number 2007, respectively. Fifty percent of these of subscriptions, tariffs, bandwidth and Telkom AR front.qxp 8/12/09 6:23 PM Page 117
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Fixed-line operating expenses Year ended March 31, 2007 2008 2009 2008/ 2009/ % of % of % of 2007 2008 (in millions, except percentages) ZAR revenue ZAR revenue ZAR revenue % change % change
Employee expenses(1) 7,096 21.9 7,397 22.7 7,999 23.8 4.2 8.1 Payments to other network operators 6,461 20.0 6,902 21.2 7,536 22.3 6.8 9.2 Selling, general and administrative expenses(2)(3) 3,976 12.3 3,899 11.9 6,582 19.5 (1.9) 68.8 Service fees 2,206 6.8 2,413 7.4 2,761 8.2 9.4 14.4 Operating leases 762 2.4 619 1.9 613 1.8 (18.8) (1.0) Depreciation, amortisation, impairments and write-offs 3,582 11.1 3,732 11.5 4,358 13.0 4.2 16.8
Fixed-line operating expenses 24,083 74.5 24,962 76.6 29,849 88.7 3.6 19.6
Notes: (1) Employee expenses include workforce reduction expenses of R8 million, R3 million and R24 million in the years ended March 31, 2009, 2008 and 2007, respectively. (2) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we recorded a provision of R569 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. In the year ended March 31, 2009 we recorded a provision of R664 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange rate effect of R94 million, which are included in finance charges, partially offset by a R10 million reversal of the provision which is included in selling, general and administrative expenses. (3) Includes a R254 million and R217 million impairment relating to Telkom Media in the 2009 and 2008 financial years, respectively and R1,843 million relating to the impairment of Multi-Links, R85 million impairment relating to Africa Online in the 2009 financial year.
Fixed-line operating expenses increased in operating expenses increased in the 2008 Employee expenses. Employee expenses the 2009 financial year primarily due to financial year primarily due to increased consist mainly of salaries and wages for Group increased selling, general and administrative payments to other network operators, employees, including bonuses and other overview expenses, payments to other network employee expenses, service fees and incentives, benefits and workforce operators, depreciation, amortisation, depreciation, amortisation, impairment and reduction expenses. impairment and write-offs, employee write-offs, partially offset by lower leases and Management The following table sets forth information review expenses and service fees. Fixed-line selling, general and administrative expenses. related to our employee expenses for the years indicated. Sustainability review
Performance review
Financial statements
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Fixed-line employee expenses Year ended March 31, (in millions, except percentages and 2007 2008 2009 2008/2007 2009/2008 number of employees) ZAR ZAR ZAR % change % change
Salaries and wages 5,095 5,509 5,746 8.1 4.3 Benefits 2,673 2,671 2,981 (0.1) 11.6 Workforce reduction expenses 24 3 8 (87.5) 166.7 Employee related expenses capitalised (696) (786) (736) 12.9 (6.4)
Employee expenses 7,096 7,397 7,999 4.2 8.1
Number of full-time, fixed-line employees (at period end) 25,864 24,879 23,520 (3.8) (5.5)
Employee expenses increased in the year provisions, workmen’s compensation and employees in the 2008 financial year and ended March 31, 2009 primarily due to a levies payable for skills development. 13 employees in the 2007 financial year higher provision for medical aid for Benefits increased in the 2009 financial left Telkom as part of the conclusion of pensioners as a result of increased interest year primarily due to a higher provision for Telkom’s workforce reduction initiatives for costs, higher salaries and wages as a result medical aid for pensioners as a result of the 2005 financial year. of average annual salary increases of increased interest costs and a higher Employee related expenses capitalised 10.85% as well as a higher leave provision for leave as a result of annual include employee related expenses provision, partially offset by a lower salary increases and a decrease in leave associated with construction and number of employees. Employee expenses days taken. Benefits decreased in the infrastructure development projects. increased in the year ended March 31, 2008 financial year primarily due to lower Employee related expenses capitalised 2008 primarily due to higher salaries and team awards, a lower provision for decreased in the year ended March 31, wages as a result of average annual salary medical aid for pensioners as a result of the 2009 primarily due to an increase in the increases of 7.0%, and increased share annuity policy qualifying as a plan asset in use of subcontractors. Employee related option grant expenses as a result of the June 2006, a lower provision for leave as expenses capitalised increased in the year higher number of shares granted in the a result of the decrease in the number of ended March 31, 2008 primarily due to year, partially offset by lower team employees and lower training expenses, annual salary increases and increased awards. partially offset by increased share option capital expenditures on projects during the grant expenses as a result of the higher Salaries and wages increased in the year year. number of shares allocated during the year. ended March 31, 2009 primarily due to Payments to other network operators. average annual salary increases of Workforce reduction expenses include the Payments to other network operators 10.85%, partially offset by lower cost of voluntary early retirement, include settlement payments paid to the headcount. Salaries and wages increased termination severance packages offered to three South African mobile communications in the year ended March 31, 2008 employees and the cost of social plan network operators and commencing in the primarily due to average annual salary expense to prepare affected employees for 2008 financial year, Neotel, for increases of 7.0% and were further new careers outside Telkom. Workforce terminating calls on their networks and to impacted by increased payments to reduction expenses decreased substantially international network operators for contractors from original equipment in the years ended March 31, 2009 and terminating outgoing international calls and manufacturers. 2008 due to the moratorium on voluntary traffic transiting through their networks. Benefits include allowances, such as severance packages taken in the 2007 The following table sets forth information bonuses, company contributions to medical financial year. An additional seven related to our payments to other network aid, pension and retirement funds, leave employees in the 2009 financial year, four operators for the periods indicated. Telkom AR front.qxp 8/12/09 6:23 PM Page 119
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Fixed-line payments to other network operators Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Payments to mobile communications network operators 5,425 5,460 5,432 0.6 (0.5) Payments to international and other network operators 1,036 1,208 1,853 16.6 53.4 Payments to fixed-line operators – 234 251 n/a 7.3
Payments to other network operators 6,461 6,902 7,536 6.8 9.2
Payments to fixed-line operators increased in the 2009 financial year due to higher call volumes from interconnection with Neotel and VANS. Payments to fixed-line operators in the 2008 financial year were derived from interconnection commencing with Neotel, USALS and VANS during the 2008 financial year. Payments to mobile network operators decreased in the 2009 financial year primarily due to lower call volumes from our fixed-line network to the mobile networks due to an increase in mobile-to-mobile calls. Payments to international operators increased during the 2009 financial year due to increased switch hubbing volumes and higher exchange rates. Payments to mobile and international network operators increased in the 2008 financial year primarily due to higher call volumes from our fixed-line network to the mobile networks, resulting from discounts offered on our CellSaver and Telkom Closer products, increased fixed-to-mobile calls by business customers due to growth in the mobile market, increased international outgoing traffic arising from our reduced average international tariffs, a weaker exchange rate in the 2008 financial year and payments to fixed-line operators commencing in the 2008 financial year. Payments to other network operators include payments made by our fixed-line business to Vodacom, which were R3,020 million, R3,017 million and R2,954 million in the years ended March 31, 2009, 2008 and 2007, respectively. Fifty percent of these amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group’s expenses on consolidation.
Selling, general and administrative expenses. Selling, general and administrative expenses include materials and maintenance costs, marketing expenditures, bad debts, theft, losses and other expenses, including obsolete stock and cost of sales.
The following table sets forth information related to our fixed-line selling, general and administrative expenses for the periods indicated.
Fixed-line selling, general and administrative expenses Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change Group Materials and maintenance 1,900 1,996 2,295 5.1 15.0 overview Marketing 604 583 574 (3.5) (1.5) Bad debts 137 217 285 58.4 31.3 Management Other(1)(2) 1,335 1,103 3,428 (17.4) 210.8 review
Selling, general and administrative expenses(1)(2) 3,976 3,899 6,582 (1.9) 68.8
Notes: Sustainability review (1) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we increased the provision to R569 million for probable Performance liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and review foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. In the year ended March 31, 2009 we increased the provision to R664 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange Financial rate effect of R94 million, which are included in finance charges, partially offset by a R10 million reversal of the provision which is included in selling, statements general and administrative expenses. (2) Includes a R254 million and R217 million impairment relating to Telkom Media in the 2009 and 2008 financial years, respectively and a R1,843 million impairment of the Multi-Links investment and an R85 million impairment of the Africa Online investment in the 2009 financial year. Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 120
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Selling, general and administrative fuel. In the 2009 financial year increased R1,843 million impairment of the Multi- expenses increased primarily due to the maintenance on the submarine cables as a Links investment, R254 million impairment impairment of the Multi-Links investment in result of higher exchange rates also of the Telkom Media loan and R85 million the 2009 financial year, increased contributed. impairment of the Africa Online investment materials and maintenance expenses and in the 2009 financial year. Other expenses Marketing expenses were relatively flat in higher bad debts. Selling, general and decreased in the year ended March 31, the 2009 financial year. Marketing administrative expenses decreased 2008 primarily due to the provision for expenses decreased in the year ended primarily due to the provision for probable probable liabilities in the Telcordia dispute March 31, 2008 primarily due to lower liabilities in the Telcordia dispute in the in the 2007 financial year, which were not sponsorships and decreased calling plan 2007 financial year, which were not increased significantly in the 2008 financial advertising during the year. increased significantly in the 2008 year, partially offset by the R217 million financial year, and lower marketing Bad debt increased in the year ended impairment of the Telkom Media loan in the expense, partially offset by the R217 million March 31, 2009 as more debtors 2008 financial year. impairment of the Telkom Media loan in the defaulted on payments as a result of poor Service fees. Service fees include payments 2008 financial year – increased materials economic conditions in South Africa driven in respect of the management of our and maintenance expenses and higher by higher inflation. Bad debt increased in properties, to TFMC, a facilities and bad debts. the year ended March 31, 2008 due to property management company, consultants provisions for higher international bad Materials and maintenance expenses and security. Consultants comprise fees debts in certain countries, including include stock write-offs, subcontractor paid to collection agents and to providers Nigeria, Gabon and the United Kingdom. payments and consumables required to Bad debt as a percentage of revenue was of other professional services and external maintain our network. Materials and 1.0%, 0.7% and 0.4% in the 2009, 2008 auditors. Security refers to services to maintenance expenses increased in the and 2007 financial years, respectively. safeguard the network and contracts to years ended March 31, 2009 and 2008 ensure a safe work environment, such as primarily due to increased operating Other expenses include obsolete stock, guard services. maintenance projects as result of an cost of sales, subsistence and travel and an increase in the number of technologies offset for bad debts recovered. Other The following table sets forth information employed in the network and higher fuel expenses increased in the year ended relating to service fee expenses for the costs as a result of the increased price of March 31, 2009 primarily due to the periods indicated.
Fixed-line service fees Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Property management 1,141 1,222 1,262 7.1 3.2 Consultants, security and other 1,065 1,191 1,499 11.8 25.9
Service fees 2,206 2,413 2,761 9.4 14.4 Telkom AR front.qxp 8/12/09 6:23 PM Page 121
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The following table sets forth information relating to depreciation, amortisation, impairments and write-offs for the periods indicate.
Fixed-line depreciation, amortisation, impairments and write-offs Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Depreciation of property, plant and equipment 2,993 3,061 3,399 2.3 11.0 Amortisation of intangibles 305 409 638 34.1 56.0 Write-offs of property, plant and equipment and intangible assets 284 262 321 (7.7) 22.5
Depreciation, amortisation, impairments and write-offs 3,582 3,732 4,358 4.2 16.8
Service fees increased in the year ended of vehicles from 9,694 at March 31, 2007 customers in South Africa. In addition to its March 31, 2009 primarily due to to 8,792 at March 31, 2008. South African operations, Vodacom has consultancy fees relating to the Vodacom investments in mobile communications Depreciation, amortisation, impairments sale and unbundling transaction and higher network operators in Lesotho, Tanzania, the and write-offs. Depreciation, amortisation, security costs to secure the copper network. Democratic Republic of the Congo and impairments and write-offs increased in the Mozambique. On December 30, 2008 Service fees increased in the year ended year ended March 31, 2009 primarily as Vodacom acquired 100% shareholding in March 31, 2008 primarily as a result of a result of higher amortisation of intangible Gateway Telecommunications Plc, increased property payment costs, mainly assets and increased depreciation due to Gateway Communications (Proprietary) related to increased electricity usage, the ongoing investment in Limited, Gateway Communications electricity rates and taxes, payments to telecommunications network equipment Mozambique LDA, Gateway consultants to explore local and and data processing equipment. Communications (Tanzania) Limited, GS international investment opportunities, Depreciation, amortisation, impairments Telecom (Proprietary) Limited and their higher security costs due to increases in and write-offs increased in the year ended respective subsidiaries, or Gateway which contract prices and maintenance and March 31, 2008 primarily as a result of has customers in 40 countries in Africa. monitoring of the cable alarm system and higher amortisation of intangible assets legal fees related to Telcordia. and increased depreciation due to the The following table shows information ongoing investment in telecommunications related to our 50% share of Vodacom’s Group Operating leases. Operating leases overview network equipment and data processing operating revenue and operating profit include payments in respect of equipment, equipment, partially offset by lower asset buildings and vehicles. Operating leases broken down by Vodacom’s South African write-offs. operations and operations in other African Management decreased by 1.0% primarily due to a review Mobile segment 6.0% reduction in the vehicle fleet from countries and Gateway for the periods Mobile encompasses all the operating 8,792 vehicles at March 31, 2008 to indicated. All amounts in this table and the activities of our 50% joint venture 8,266 vehicles at March 31, 2009. discussion of our mobile segment that Sustainability investment in Vodacom, the largest mobile review Operating leases decreased in the year follows represent 50% of Vodacom’s results operator in South Africa with an ended March 31, 2008 primarily due to a of operations unless otherwise stated and approximate 53% market share as of discount received on the extension of our are before the elimination of intercompany Performance March 31, 2009 based on total estimated vehicle lease and a reduction in the number transactions with us. review
Financial statements
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Mobile operating revenue and profits Year ended March 31, 2008/ 2009/ 2007 2008 2009 2007 2008 (in millions, except percentages) ZAR % ZAR % ZAR % % change % change
Operating revenue 20,573 100.0 24,089 100.0 27,594 100.0 17.1 14.6
South Africa 18,504 89.9 21,392 88.8 23,688 85.8 15.6 10.7 Other African countries 2,069 10.1 2,697 11.2 3,502 12.7 30.4 29.8 Gateway ––––404 1.5 – n/a
Operating profit(1) 5,430 100.0 6,247 100.0 6,009 100.0 15.0 (3.8)
South Africa 5,170 95.2 5,852 93.7 5,690 94.7 13.2 (2.8) Other African countries 260 4.8 395 6.3 303 5.0 51.9 (23.3) Gateway ––––16 0.3 n/a
EBITDA(1)(2) 7,123 100.0 8,217 100.0 8,407 100.0 15.4 2.3
Notes: (1) Mobile operating profit and mobile EBITDA include our 50% share of an impairment loss of R23 million, R30 million and R112 million, in the 2007, 2008 and 2009 financial years, respectively, in respect of the assets in Mozambique due to a decrease in the fair value of the assets. R5.8 million of the impairment loss related to available-for-sale investments. (2) Mobile EBITDA comprises our 50% share of Vodacom’s EBITDA, which represents mobile net profit, before taxation, finance charges, investment income and depreciation, amortisation and impairments, but includes the profit on sale of investments and broad-based black economic empowerment expenses. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not an IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with IFRS or as a measure of liquidity. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same.
Mobile operating revenue interconnection revenue from other customers from other international networks Vodacom derives revenue from mobile operators for the termination of calls on and Vodacom customers who roam abroad. services as well as other related or value- Vodacom’s network and national roaming The following table shows our 50% share added goods and services. Vodacom’s revenue, revenue from equipment sales, of Vodacom’s revenue broken down by revenue is mainly in the form of airtime including sales of handsets and accessories; major revenue type and as a percentage of charges, primarily airtime payments from and revenue from international services, total operating revenue for our mobile customers registered on Vodacom’s including airtime charges for the use of segment and the percentage change by network; data products and services; Vodacom’s network through roaming of revenue type for the periods indicated.
Mobile operating revenue Year ended March 31, 2008/ 2009/ 2007 2008 2009 2007 2008 (in millions, except percentages) ZAR % ZAR % ZAR % % change % change
Airtime and access 11,854 57.6 13,548 56.3 15,166 55.0 14.3 11.9 Data 1,671 8.1 2,501 10.4 3,221 11.7 49.7 28.8 Interconnection 3,918 19.0 4,443 18.4 4,899 17.7 13.4 10.3 Equipment sales 2,350 11.4 2,526 10.5 2,650 9.6 7.5 4.9 International airtime 653 3.2 918 3.8 1,043 3.8 40.6 13.6 Other sales and services 127 0.7 153 0.6 615 2.2 20.5 302.0
Mobile operating revenue 20,573 100.0 24,089 100.0 27,594 100.0 17.1 14.6 Telkom AR front.qxp 8/12/09 6:23 PM Page 123
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Vodacom’s operating revenue from South year and R517 per month in the 2007 94.4% of all gross connections were African operations increased in the 2009 financial year. South African prepaid ARPU prepaid customers in the 2009 financial financial year mainly due to an increase in increased to R68 per month in the 2009 year. Vodacom expects the number of customers driven by retention campaigns financial year from R62 per month in the prepaid mobile users to continue to grow and loyalty programmes, the introduction 2008 financial year, a decrease from to a greater extent than contract mobile of more affordable products and lower R63 per month in the 2007 financial year. users. The increasing number of prepaid denomination vouchers. Revenue growth in In the 2008 and 2007 financial years, users, who tend to have lower average the other African operations was mainly contract and prepaid customer ARPU were usage, and the lower overall usage as the due to strong customer growth driven by also negatively impacted by the high lower end of the market is penetrated have the launch of new products and services, growth in Vodacom’s hybrid contract historically resulted in decreasing overall aggressive sales and marketing campaigns product, Family Top Up, which contributed average revenue per customer. Total South as well as enhanced network coverage. to the migration of higher spending African ARPU increased to R133 per month Vodacom’s operating revenue increased in prepaid customers, who tend to spend less in the 2009 financial year and remained the 2008 financial year primarily due to than existing contract customers, to stable at R128 per month in the 2008 and increased airtime, data, interconnection contracts. In the 2007 financial year, 2007 financial years. Total South African and equipment sales revenue as a result of Vodacom changed its definition of active ARPU remained stable in the 2008 continued customer growth. Vodacom’s customers to exclude calls forwarded to financial year, despite declining South equipment sales further increased in the voicemail from the definition of revenue African contract and prepaid ARPU, due to 2008 financial year due to the added generating activity for a six-month period, a shift in the customer mix to higher functionality of new phones based on new resulting in the deletion of approximately spending contract customers, which technologies. three million customers. Prepaid ARPU was represented 14.3% of total South African positively impacted by this temporary rule customers as of March 31, 2009 and Our 50% share of Vodacom’s revenue from change in the 2007 financial year. 2008, respectively. operations outside of South Africa increased Vodacom subsequently changed its to R3,502 million for the year ended Service providers in South Africa generally definition of revenue generating activity March 31, 2009 from R2,697 million subsidise handsets when a contract back to include calls forwarded to for the year ended March 31, 2008 and customer enters into a new contract or voicemail effective September 1, 2006. R2,069 million in the year ended renews an existing contract depending on Such SIM cards were disconnected from March 31, 2007. The increase in the airtime and tariff plan and type of the network after being inactive for a Vodacom’s operating revenue from other handset purchased. Subsidised handset 215 consecutive day period. Since African countries in the 2009 and 2008 sales give customers an incentive to switch implementing this change, prepaid SIM financial years was primarily due to operators to obtain new handsets and Group cards remaining in an active state on the overview substantial increases in the number of have contributed to churn. Handsets for network, with only call forwarding to customers in Vodacom’s operations, prepaid customers are not subsidised by voicemail and no other revenue generating particularly in Tanzania, the Democratic Vodacom as these users have the freedom Management activities, increased significantly. Vodacom review Republic of the Congo and Mozambique, of switching operators and contribute to therefore implemented a supplementary and the weakening of the rand in the 2009 churn. Vodacom is more vulnerable to disconnection rule in September 2007 to and 2008 financial years, which resulted in churn than other mobile communications disconnect inactive prepaid SIM cards Sustainability higher rand converted revenue, partially providers in South Africa since it has the review after 13 months of being kept in an active offset by lower ARPU resulting from the largest number of customers in South state, by call forwarding to voicemail only, higher volume of lower spending prepaid Africa. To date, mobile number portability and not having had any other revenue Performance customers. Revenue from Vodacom’s other has had no significant impact on churn. review generating activity on Vodacom’s network. African countries as a percentage of The implementation of the supplementary The cost to acquire contract customers in a Vodacom’s total mobile operating revenue disconnection rule led to the disconnection highly developed market is high. Vodacom increased to 12.7% in the year ended Financial of an additional 2.9 million prepaid SIM has therefore implemented upgrade and statements March 31, 2009 from 11.2% in the year cards in September 2007, which resulted retention policies over the last few years ended March 31, 2008 and 10.1% in the in higher prepaid ARPU than would have and has striven to maintain a high level of year ended March 31, 2007. Company otherwise occurred. Approximately 85.3% incentives to service providers in order to Financial Information South African contract ARPU decreased to of Vodacom’s South African mobile reduce churn. Vodacom’s churn rate for R474 per month in the 2009 financial year customers were prepaid customers at contract customers in South Africa from R486 per month in the 2008 financial March 31, 2009 and approximately increased to 9.9% in the 2009 financial Telkom AR front.qxp 8/12/09 6:23 PM Page 124
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year from 8.3% in the 2008 financial year Vodacom’s primary market in South Africa GPRS, 3G and HSDPA, the volume of data mainly due to an increase in involuntary continues to mature and Vodacom transferred increased to 3,175 Terabytes, churn driven by the economic conditions. continues to connect more marginal a 97.8% increase from the 2008 financial Vodacom’s churn rate for contract customers in its South African operations, year. customers decreased in the 2008 financial Vodacom expects that growth in airtime in Interconnection. Vodacom generates year to 8.3% from 9.7% in the 2007 South Africa will continue to slow. Total interconnection revenue when a call financial year mainly due to an customers increased 16.5% and 12.7% in originating from our fixed-line network and improvement in service and products to the years ended March 31, 2009 and more recently, Neotel, or one of the other customers and the continued high level of 2008, respectively, primarily due to strong mobile operators’ networks terminates on handset support to retain customers. prepaid customer growth in South Africa Vodacom’s network. Interconnection Prepaid churn is adversely impeded by an and significant customer growth in revenue also includes revenue from Cell C increasingly competitive market, lower Vodacom’s operations outside of South for national roaming services. Vodacom barriers to entry for prepaid customers in Africa, particularly in Tanzania, the does not have a roaming agreement with South Africa and the volatile nature of the Democratic Republic of Congo and MTN. Vodacom generates national prepaid customer base. Vodacom’s churn Mozambique in the 2009 and 2008 roaming revenue when its mobile network rate for prepaid customers in South Africa financial years. carries a call made from a Cell C customer. decreased to 45.4% in the 2009 financial Data revenue. Vodacom derives data Interconnection revenue depends on the year from 47.9% in the 2008 financial revenue from mobile data, including short volume of traffic terminating on Vodacom’s year mainly due to focused campaigns to messaging services, or SMSs, and network, the interconnection termination offer greater value to customers to reduce multimedia messaging services, or MMSs, rates payable by ourselves and the other churn coupled with the marketing of SIM general packet radio services, or GPRS, mobile operators to Vodacom and national swaps and various loyalty programmes. and third generation services, or 3G. Data roaming rates. Vodacom’s churn rate for prepaid revenue contributed 11.7% of Vodacom’s customers in South Africa increased to Vodacom’s interconnection revenue total revenue in the year ended March 31, 47.9% in the 2008 financial year from increased in the years ended March 31, 2009, up from 10.4% in the year ended 37.5% in the 2007 financial year. The 2009 and March 31, 2008 primarily due March 31, 2008 and 8.1% in the year increase in prepaid churn in the 2008 to an increase in the number of calls ended March 31, 2007. Vodacom’s financial year was mainly due to the terminating on Vodacom’s network as a mobile data revenue increased in the year supplementary disconnection rule result of the increased number of ended March 31, 2009 primarily due to implemented, which led to the Vodacom’s customers and South African growth in the number of messages sent as disconnection of an additional 2.9 million mobile users generally. The increase in the well as an increase in the number of prepaid SIM cards in September 2007. 2009 financial year was mainly driven by broadband customers. Vodacom’s mobile an increase in incoming traffic as well as Airtime. Vodacom derives airtime revenue data revenue increased in the year ended an increase in national roaming revenue from connection and monthly rental fees March 31, 2008 primarily due to higher from Cell C as a result of their increased and airtime usage fees paid by Vodacom’s penetration levels influenced by more market share and increased calls contract customers for use of its mobile affordable product offerings. terminating on Vodacom’s network. The networks. Airtime revenue also includes In South Africa, Vodacom transmitted growth in the 2008 financial year was fees paid by Vodacom’s prepaid phone 5.4 billion SMSs and MMSs over its also attributable to the growth in the customers for prepaid starter phone network in the 2009 financial year, substitution of fixed-line calls by mobile packages and airtime recharge vouchers compared to 5.0 billion in the 2008 calls and incoming traffic resulting from an utilised, which entitle customers to receive financial year. The number of broadband overall increase in the customer base of unlimited incoming calls up to 365 days. connectivity customers increased by 79.8% other mobile operators. The increases were Airtime revenue depends on the total to approximately 720,000 customers from partially offset by a reduced number of number of customers, traffic volume, mix of approximately 400,000 customers as of fixed-line calls from Telkom’s network prepaid and contract customers and tariffs. March 31, 2008. The number of terminating on Vodacom’s network. Vodacom’s airtime revenue increased in the 3G/HSDPA handsets on the network as of Interconnection revenue in our mobile years ended March 31, 2009 and March March 31, 2009 was 2.8 million, as segment included R1,483 million, 31, 2008 primarily due to continued compared to 1.3 million as of March 31, R1,482 million and R1,454 million in the customer growth and an increase in 2008. During the 2009 financial year years ended March 31, 2009, 2008 and outgoing voice traffic minutes. As there was an increase in the usage of 2007, respectively, for calls received from Telkom AR front.qxp 8/12/09 6:23 PM Page 125
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our fixed-line business, which were enabled phones, camera phones and the acquisition of Gateway. Vodacom’s eliminated from the Telkom Group’s colour screens. other sales and services revenue increased revenue on consolidation. 20.5% to R153 million in the 2008 International airtime. International airtime financial year primarily due to an increase Equipment sales. Vodacom generates revenues are predominantly from in inactivated starter packs which do not revenue from equipment sales primarily international calls by Vodacom customers, contain an expiration date, but which are from the sale of mobile phones and roaming revenue from Vodacom’s recognised as income after a period of accessories. Vodacom purchases handsets customers making and receiving calls while 36 months. for itself and for external service providers abroad and revenue from international in bulk at purchase discounts in order to customers roaming on Vodacom’s Mobile operating expenses lower the cost of handset subsidisation for networks. International airtime increased The following is a discussion of our mobile contract customers. Equipment sales 13.6% to R1,043 million in the year ended segment’s operating expenses which revenue fluctuates based on whether March 31, 2009 and 40.6% to comprise our 50% share in Vodacom’s external providers and Vodacom’s other R918 million in the year ended March 31, operating expenses. Vodacom’s operating African operators source equipment from 2008 primarily as a result of growth in the expense line items are presented in Vodacom in South Africa or purchase customer base. accordance with the line items reflected in equipment from third party suppliers. the Telkom Group’s consolidated operating Other. Revenue from other sales and expenses which are different from the Vodacom’s equipment sales increased in services includes revenue from Vodacom’s operating expense line items contained in the 2009 and 2008 financial years cell captive insurance vehicle, wireless Vodacom’s consolidated financial statements. primarily due to the growth of Vodacom’s application services provider, or WASP, customer base and the continued uptake of revenue, site sharing rental income as well The following table shows our 50% share new handsets in South Africa as a result of as other revenue from non-core operations. of Vodacom’s operating expenses and the cheaper rand prices of new handsets and Vodacom’s other sales and services percentage change for the periods the added functionality of new phones revenue increased 302.0% to R615 million indicated. based on new technologies such as 3G in the 2009 financial year primarily due to
Mobile operating expenses Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Employee expenses 1,186 1,488 1,804 25.5 21.2 Group overview Payments to other network operators 2,818 3,279 3,822 16.4 16.6 Selling, general and administrative expenses 8,777 10,271 12,553 17.0 22.2
Service fees 82 115 169 40.2 47.0 Management review Operating leases 629 775 958 23.2 23.6 Depreciation, amortisation and impairments 1,693 1,970 2,398 16.4 21.7
Mobile operating expenses 15,185 17,898 21,704 17.9 21.3 Sustainability review
Performance review
Financial statements
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Financial review (continued)
The increase in mobile operating expenses Vodacom’s employee expenses increased payments to other network operators in the 2009 financial year was mainly due in the year ended March 31, 2008 increased significantly in the years ended to the increased cost of connecting prepaid primarily as a result of a 9.5% increase in March 31, 2009 and 2008 as a result of customers and retaining contract customers, headcount to support the expansion of increased outgoing traffic in line with as well as increased network operational customer care operations, the strengthening increased customer growth and the expenditure due to the roll-out of additional of senior management structures to support increasing percentage of outgoing traffic sites, coupled with increased inter- the growth in ongoing operations and the terminating on the other mobile networks connection rates in the DRC. The increase in launch of Vodacom Business. Annual salary rather than Telkom’s fixed-line network as mobile operating expenses in the 2008 increases and increased provisions for the cost of terminating calls on other mobile financial year was primarily due to other employee incentive schemes also networks is higher than calls terminating on inflationary factors and growth in the contributed to the increase in staff Telkom’s fixed-line network. As the mobile business, which led to increased selling, expenses. communications market continues to grow general and administrative expenses to in South Africa, Vodacom expects that Total headcount in Vodacom’s South support the expansion of 3G, growth in interconnection charges will continue to African operations increased 12.4% to Vodacom’s South African and African increase and adversely impact Vodacom’s 5,451 employees as of March 31, 2009 operations and increased competition, profit margins. and 2.6% to 4,849 employees as of increased payments to other network March 31, 2008 from 4,727 employees Payments to other network operators in our operators due to higher outgoing traffic and as of March 31, 2007. Total headcount in mobile segment included R231 million, the increased percentage of outgoing traffic Vodacom’s other African countries R234 million and R234 million in the years terminating on other mobile networks, increased 17.3% to 2,336 employees as ended March 31, 2009, 2008 and higher employee costs as a result of of March 31, 2009 and 30.9% to 1,992 2007, respectively, for interconnection fees increased headcount as well as increased employees as of March 31, 2008 from paid to our fixed-line segment, which were depreciation, amortisation and impairment. 1,522 employees as of March 31, 2007. eliminated from the Telkom Group’s Employee expenses. Employee expenses Total headcount includes temporary operating expenses on consolidation. consist mainly of salaries and wages of agency employees. Employees seconded Selling, general and administrative employees as well as contributions to to other African countries are included in expenses. Selling, general and employee pension, medical aid funds and the number of employees of other African administrative expenses include customer benefits and the deferred bonus incentive countries and excluded from Vodacom acquisition and retention costs, packaging, scheme. South Africa’s number of employees. distribution, marketing, regulatory licence Vodacom’s employee expenses increased Payments to other network operators. fees, bad debts and various other general in the year ended March 31, 2009 Payments to other network operators consist administrative expenses, including primarily as a result of the increase in the mainly of interconnection payments made accommodation, information technology average number of employees and annual by Vodacom’s South African and other costs, office administration, consultant salary increases, partially offset by lower African operations for terminating calls on expenses, social economic investment and performance based remuneration. other operators’ networks. Vodacom’s insurance.
The following table sets forth information related to our 50% share of Vodacom’s selling, general and administrative expenses for the periods indicated.
Mobile selling, general and administrative expenses Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Selling, distribution and other 7,703 9,063 11,105 17.7 22.5 Marketing 573 632 762 10.3 20.6 Regulatory and licence fees 490 527 607 7.6 15.2 Bad debts 11 49 79 345.5 61.2
Selling, general and administrative expenses 8,777 10,271 12,553 17.0 22.2 Telkom AR front.qxp 8/12/09 6:23 PM Page 127
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Vodacom’s selling, general and increased customer connections, accommodation, office equipment and administrative expenses increased in the competition, revenue, cost of equipment as motor vehicles. Operating leases in our year ended March 31, 2009 primarily a result of increased handset sales and mobile segment included R529 million, due to an increase in selling, distribution maintenance of the GSM infrastructure and R514 million and R453 million in the years and other expenses and marketing billing systems as well as due to the ended March 31, 2009, 2008 and expenses to support the launch and Vodafone global alliance fee. 2007, respectively, for operating lease expansion of 3G, growth in Vodacom’s payments to our fixed-line segment, which The increase in marketing expenses in the South African and African operations and were eliminated from the Telkom Group’s 2009 financial year was mainly as a result competition. Vodacom’s selling, general operating expenses on consolidation. of promotion campaigns to counter and administrative expenses increased in competition. The increase in marketing Depreciation, amortisation and the year ended March 31, 2008 primarily expenses in the 2008 financial year was impairments. Depreciation, amortisation due to an increase in selling, distribution mainly due to promoting new technologies, and impairments increased in the years and other expenses, incentive costs, including 3G and Vodafone live! and ended March 31, 2009 and 2008 regulatory and licence fees and marketing further promoting the Vodacom brand in all primarily due to higher capital expenditure expenses to support the launch and operations. The increases in regulatory and as a result of the implementation and expansion of 3G, growth in Vodacom’s licence fees during the reporting periods expansion of 3G/HSDPA networks, the South African and African operations and were directly related to the increase in weakening of the rand against the other increased competition. operating revenues and corresponding functional currencies of Vodacom and the payments under Vodacom’s existing Selling, distribution and other expenses impairment of assets in Vodacom licences. The increase in bad debts in the include cost of goods sold, commissions, Mozambique. 2008 financial year resulted from a clean- customer acquisition and retention up of Smartphone debtors following the Multi-Links segment expenses, distribution expenses and increase in shareholding to 100%. Multi-Links operating revenue insurance. The increase in selling, Multi-Links operating revenue is derived distribution and other expenses in the Service fees. Service fees include principally from fixed, mobile, data, long 2009 financial year was primarily due to consultancy services for technical, administrative and managerial services, distance and international communications increased fuel and electricity costs, audit fees, legal fees and communication services throughout Nigeria, through our competition and network operational and information technology costs. wholly owned subsidiary, Multi-Links. expenditure as a result of the roll-out of additional sites. The increase in selling, Operating leases. Operating leases The following table shows the operating distribution and other expenses in the include payments in respect of rentals of revenue for our Multi-Links segment for the Group overview 2008 financial year was primarily due to GSM transmission lines as well as office periods indicated.
Multi-Links operating revenue Management Year ended March 31, review 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change Sustainability review Multi-Links operating revenue – 845 1,900 – 124.9
Performance Multi-Links operating expenses review The increase in Multi-Links revenue is which was acquired with effect from May The following table shows operating mainly as a result of subscriber growth and 1, 2007, contributed R845 million in the expenses for our Multi-Links segment broken
an increase in domestic traffic volumes as 2008 financial year from its customers in down by major expense categories and the Financial well as increased data revenue. Multi-Links, the Nigerian market since its acquisition. percentage change for the periods indicated. statements
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128 Telkom Annual Report 2009
Financial review (continued)
Multi-Links operating expenses Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Employee expenses – 39 126 – 223.1 Payments to other operators – 624 652 – 4.5 Selling, general and administrative expenses – 142 1,117 – 686.6 Service fees – 14 38 – 171.4 Operating leases – 37 193 – 421.6 Depreciation, amortisation and impairments – 86 296 – 244.2
Other operating expenses – 942 2,422 – 157.1
Employee expenses increased by 223.1% in The increases in service fees were mainly Other segment the 2009 financial year primarily due to an as a result of increased security cost and Other operating revenue increase in the number of employees as well payments to consultants as a result of an Our other operating revenue is derived as salary increases and bonus payments. increase in operations during the year. principally from directory services, through our Trudon Group, internet services outside The 686.6% increase in selling, general Operating leases increased 421.6% as a South Africa, through our Africa Online and administrative expenditure in the result of an increase in the number of subsidiary. 2009 financial year primarily related to leased base stations, warehouses and increased cost of sales and associated The following table shows the operating office buildings as a result of the handset subsidies of R281 million as a revenue for our other segment broken expanding operations. result of increased sales volumes, down by major revenue streams and the increased advertising and promotional Depreciation, amortisation and impairments percentage change by major revenue expenditure and an increase in expatriates increased 244.2% as a result of higher stream for the periods indicated. fees as a result of an increase in staff capital expenditure incurred during the seconded from Telkom during the year. year.
Other operating revenue Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Trudon 865 930 1,020 7.5 9.7 Africa Online 8 110 194 n/a 76.4
Other operating revenue 873 1,040 1,214 19.1 16.7 Telkom AR front.qxp 8/12/09 6:23 PM Page 129
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The increase in other operating revenue These additional revenue streams were Other operating expenses was mainly attributable to UUNET, Africa further supported by the continued growth The following table shows operating Online’s 40% joint venture. Our other in advertising revenue from our subsidiary, expenses for our other segment broken operating revenue increased in the 2008 Trudon. Revenue from directory services down by major expense categories and financial year primarily due the inclusion in increased in the years ended March 31, the percentage change for the periods the current year of revenue generated by 2009 and 2008 primarily due to annual indicated. our newly acquired subsidiary, Africa tariff increases and increased marketing Online. Africa Online, which was acquired and online efforts, resulting in increased with effect from February 23, 2007, spending on advertising by existing increased the revenue contribution to the customers and additional advertising group from R8 million during the 2007 revenue from new customers. financial year to R110 million during the 2008 financial year.
Other operating expenses Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Employee expense 158 193 220 22.2 14.0 Payments to other operators – 53 89 – 67.9 Selling, general and administrative expenses 310 335 404 8.1 20.6 Service fees 5 12 12 140.0 – Operating leases 20 23 26 15.0 13.0 Depreciation, amortisation and impairments 19 32 50 68.4 56.3
Other operating expenses 512 648 801 26.6 23.6
Increases in other operating expenses in driven by increases in payments to other Online, which impacted all expense the 2009 financial year were primarily operators, employee expenses, depre- categories. driven by increases in selling, general and ciation, amortisation and impairments, The following table shows the contributions administrative expenses, payments to other operating leases and service fees. The Group to other operating expenses by each of the overview operators, employee expenses and increase in these operating expenses in the two subsidiaries contained in our other depreciation, amortisation and impairments. 2008 financial year was primarily due to segment and the percentage change for Increases in other operating expenses in the inclusion of operating expenses relating the periods indicated. Management the 2008 financial year were primarily to our newly acquired subsidiary, Africa review
Other operating expenses Sustainability review Year ended March 31, 2007 2008 2009 2008/2007 2009/2008
(in millions, except percentages) ZAR ZAR ZAR % change % change Performance review Trudon 504 530 593 5.2 11.9 Africa Online 8 118 208 1,375.0 76.3
Financial Other operating expenses 512 648 801 210.7 23.6 statements
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130 Telkom Annual Report 2009
Financial review (continued)
Liquidity and capital resources Group liquidity and capital resources Cash flows
The following table shows information regarding our consolidated cash flows for the periods indicated.
Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change
Cash flows from operating activities 9,356 10,603 11,432 13.3 7.8 Cash flows from investing activities (10,412) (14,106) (17,005) 35.5 20.6 Cash flows from financing activities (2,920) 2,943 7,093 200.8 141.0
Net (decrease)/increase in cash and cash equivalents (3,976) (560) 1,520 85.9 371.4 Effect of foreign exchange rate differences 29 44 (30) 51.7 (168.2) Net cash and cash equivalents at the beginning of the year 4,255 308 (208) (92.8) (167.5)
Net cash and cash equivalents at the end of the year 308 (208) 1,282 (167.5) 716.3
Cash flows from operating activities our 50% share of Vodacom’s investments in In the 2009 financial year, loans raised Our primary sources of liquidity are cash its mobile networks in South Africa and exceeded loans repaid and the increase in flows from operating activities and other African countries. The increase in net financial assets. In the 2009 financial borrowings. We intend to fund our cash flows used in investing activities in the year, cash flows from financing activities expenses, indebtedness and working 2009 financial year was as a result of the were primarily due to the issuance of R11,025 million nominal value of capital requirements from cash generated increased capital expenditure of Multi-Links commercial paper bills, the issue of the from our operations and from capital raised as well as the acquisition of Gateway by new local bonds, the TL12 and TL15 with in the markets. The increase in cash flows Vodacom and the acquisition of the a nominal value of R1,060 million and from operating activities in the 2009 remaining 25% share in Multi-Links. The R1,160 million, respectively, as well as financial year is mainly due to a lower increase in cash flows used in investing entering into a syndicated loan agreement dividend payment in respect of the 2008 activities in the 2008 financial year was with a nominal value of R4,100 million. financial year and lower taxation paid, mainly the result of R1,985 million cash This was partially offset by the repayment of partially offset by higher finance charges utilised for the purchase of Multi-Links and a term loan of R1,000 million, a bank and a decrease in cash generated from increased equity investments in Smartphone, facility of R1,000 million, bridging finance operations. The increase in cash flows from increased capital expenditures in our fixed- of R1,600 million and maturing commercial operating activities in the 2008 financial line, mobile and other segments and lower paper bills of R9,849 million nominal value. year is mainly due to lower taxation proceeds on the disposal of investments, In the 2008 financial year, loans raised payments as well as an increase in cash partially offset by higher proceeds on the and the decrease in net financial assets generated from operations, partially offset disposal of property, plant and equipment exceeded loans repaid, shares bought by higher dividends paid. and intangibles. back and cancelled and finance lease Cash flows from investing activities Cash flows from financing activities obligation repaid. In the 2008 financial Cash flows from investing activities relate Cash flows from financing activities are year, cash flows from financing activities primarily to investments in our fixed-line primarily a function of borrowing and share were primarily due to the issuance of network, our other segment’s networks and buy-back activities. R18,806 million nominal value of Telkom AR front.qxp 8/12/09 6:23 PM Page 131
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commercial paper bills, as well as entering R3,731 million in nominal value of by the TL12 and TL15 bonds after the year into call and term loans of R5,600 million commercial paper bill debt. Commercial end, a reduction in cash available due to to fund the redemption of the TK01 bond paper bills having a nominal value of acquisition activities, increased capital and other cash flows from investing R4,651 million were issued in the 2007 expenditure, increased dividends paid, activities, including R1.6 billion of financial year. shares repurchased and an increase in trade additional bank borrowings and interest and other payables. Telkom is of the opinion Working capital bearing debt by Vodacom. This was that the Telkom Group’s cash flows from We had negative consolidated working partially offset by the maturing commercial operations, together with proceeds from the capital from continuing operations of paper debt of R15,773 million nominal Vodacom transaction and the proceeds from approximately R6.2 billion as of March 31, value, the repayment of the TK01 bond liquidity available under credit facilities and 2009, we had negative consolidated with a nominal value of R4,680 million in the capital markets, will be sufficient to working capital from total operations of and R1,647 million paid for the meet the Telkom Group’s present working approximately R9.3 billion as of March 31, repurchase of shares during the year. capital requirements for the 12 months 2008 and approximately R8.2 billion as of following the date of this annual report. We In the 2007 financial year, loans and finance March 31, 2007. Negative working intend to fund current liabilities through a leases repaid and shares repurchased and capital arises when current liabilities are combination of operating cash flows and cancelled exceeded loans raised and the greater than current assets. The increase in with new borrowings and borrowings decrease in net financial assets, by the Company’s negative working capital in available under existing credit facilities. We R2,920 million. In the 2007 financial year the 2009 financial year was mainly as a had R6.2 billion available under existing cash flows used in financing activities result of an increase in interest bearing debt credit facilities as of March 31, 2009. increased primarily due to the lower sale of payable, partially offset by higher financial repurchase agreements and derivative assets in the form of repurchase agreements. Capital expenditures and investments instruments that were sold in the 2006 The increase in negative working capital in The following table shows the Telkom financial year to fund dividends and tax the 2008 financial year was primarily due Group’s investments in property, plant and payments. On October 31, 2006, we to an increase in the current portion of equipment including intangible assets, repaid the TL06 local bond having a nominal interest bearing debt due to the repayment including our 50% share of Vodacom’s value of R2,100 million and during the of the TK01 local bond with short-term debt investments, for the periods indicated. 2007 financial year, we repaid that was subsequently partially refinanced
Year ended March 31, 2007 2008 2009 2008/2007 2009/2008 (in millions, except percentages) ZAR ZAR ZAR % change % change Group overview Group capital expenditure Fixed-line 6,594 6,794 6,690 3.0 (1.5) Management Baseline 3,409 4,039 3,343 18.5 (17.2) review Revenue generating 159 57 30 (64.2) (47.4) Network evolution 784 1,092 1,373 39.3 25.7 Sustainment 416 277 115 (33.4) (58.5) Sustainability review Effectiveness and efficiencies 1,141 841 603 (26.3) (28.3) Company support 497 451 790 (9.3) 75.2
Regulatory 188 37 436 (80.3) 1,078.4 Performance review Mobile 3,608 3,460 3,569 (4.1) 3.2
Multi-Links – 1,312 2,791 – 112.7 Financial Other 44 334 184 659.1 (44.9) statements
Total investment in property, plant and equipment and intangible assets 10,246 11,900 13,234 16.1 11.2 Company Financial Information Telkom AR front.qxp 8/12/09 6:23 PM Page 132
132 Telkom Annual Report 2009
Financial review (continued)
Fixed-line capital expenditure, which in the 2007 financial year and represented geographic coverage and increase includes spending on intangible assets, 20.9% of fixed-line revenue compared to capacity for both the voice and data decreased by 1.5% to R6,690 million and 20.4% in the 2007 financial year. The networks. Mobile capital expenditure (50% represents 19.9% of fixed-line revenue. increase in baseline and revenue of Vodacom’s capital expenditure) Baseline capital expenditure of generating capital expenditure to decreased by 4.1% to R3,460 million R3,343 million in the 2009 financial year R4,095 million in the 2008 financial year in the 2008 financial year from was largely for the deployment of from R3,568 million in the 2007 financial R3,608 million in the 2007 financial year technologies to support the growing data year was largely for the deployment of and represents 14.4% of mobile revenue services business (including ADSL footprint), technologies to support the growing data compared to 17.5% in the 2007 financial links to the mobile cellular operators and services business (including ADSL footprint), year which was mainly spent on the expenditure for access line deployment in links to the mobile cellular operators and cellular network infrastructure consisting of selected high growth commercial and expenditure for access line deployment in radio, switching and transmission network residential areas. The continued focus on selected high growth residential areas. infrastructure and computer software. The rehabilitating the access network and decrease in capital expenditure in other During the year ended March 31, 2008, increasing the efficiencies and African countries was largely as a result of R841 million was spent on the redundancies in the transport network as decreased investment in Tanzania, implementation of systems compared to well as the initiation of the fixed-wireless Democratic Republic of the Congo and R1,141 million in the 2007 financial year. roll-out contributed to the network evolution Mozambique offset by an increase in Mobile capital expenditure (50% of and sustainment capital expenditure of investment in Lesotho. Vodacom’s capital expenditure) increased R1,488 million. by 3.2% to R3,569 million in the 2009 Our consolidated capital expenditure in Telkom continues to focus on its operations financial year from R3,460 million in the property, plant and equipment for the support system investment with current 2008 financial year and represents 12.9% 2010 financial year budgeted to be emphasis on workforce management, of mobile revenue compared to 14.4% in approximately R7.9 billion, of which provisioning and fulfilment, assurance and the 2008 financial year which was mainly approximately R7.0 billion is budgeted to customer care, hardware technology spent on the continued investment to be spent in our fixed-line segment, upgrades on the billing platform and improve geographic coverage and approximately R847 million is budgeted to performance and service management and increase capacity for both the voice and be spent in our Multi-Links segment, and property optimisation. During the year data networks in South Africa and to approximately R90 million is budgeted to ended March 31, 2009, R603 million expand coverage in Tanzania and be spent in our other segment. Our capital was spent on the implementation of several Mozambique. expenditures are continuously examined systems. and evaluated against the perceived Mobile capital expenditure, which includes economic benefit and may be revised in Fixed-line capital expenditure, which spending on intangible assets, increased light of changing business conditions, includes spending on intangible assets, by 3.2% to R3,569 million and represents regulatory requirements, investment increased 3.0% to R6,794 million in the 12.9% of mobile revenue and was due to opportunities and other business factors. 2008 financial year from R6,594 million the continued investment to improve Telkom AR front.qxp 8/12/09 6:23 PM Page 133
Telkom Annual Report 2009 133
The following table sets forth our consolidated indebtedness including finance leases as of March 31, 2009
Nominal amount Out- out standing standing Maturing Interest Interest as of as of Year ended March 31, payment rate/ March 31, March 31, After dates coupon 2009 20092010 2011 2012 2013 2014 2014 (in millions) (%) ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR
Telkom Bonds 12.45% unsecured local bond due 29 Apr & April 29, 2012 (TL12)(1, 2) 29 Oct 12.45 1,059 1,060 – – – 1,060 – – 11.90% unsecured local bond due 29 Apr & April 29, 2015 (TL15)(1, 3) 29 Oct 11.9 1,159 1,160 –––––1,160 6% unsecured local bond due February 24, 2020 (TL20)(1, 4) 22 Feb 6 1,325 2,500 –––––2,500 Zero coupon unsecured loan stock due September 30, 2010 (PP02)(5) ––349 430 – 430 –––– Zero coupon unsecured loan stock due June 15, 2010 (PP03)(6) ––1,131 1,350 – 1,350 - – – – Commercial paper – 11.44 5,476 5,559 5,559 ––––– Syndicated loans due December 17, 2011 and 2013(7) 11.46 4,083 4,100 – – 820 – 3,280 – Term loans Various 9.67 2,000 2,000 2,000 ––––– Bank facilities R394 million uncommitted overdraft facility with ABSA Bank Limited, repayable on demand, and a R1 billion unsecured committed facility, repayable on 364 days Mutually Not Not notice – agreed utilised utilised –––––– R1 billion unsecured committed facility with The Standard Bank of South Africa Limited, repayable within 365 days of Mutually Not Not Group drawdown – agreed utilised utilised ––––––overview R1 billion unsecured committed facility with FirstRand Bank Limited, repayable Mutually Not Not on 364 days notice – agreed utilised utilised –––––– Management $35 million unsecured short-term loan review facility with Calyon Corporate and Mutually Not Not Investment Bank, repayable on demand – agreed utilised utilised –––––– R1 billion uncommitted short term facility with Sustainability Sumitomo Mitsui Banking Corporation, Mutually Not Not review repayable on demand – agreed utilised utilised –––––– R500 million call loan facility with iNkotha Investments Limited, repayable Mutually Not Not Performance on demand – agreed utilised utilised ––––––review R1 billion loan agreement with Old Mutual Specialised Finance Mutually Not Not (Proprietary) Limited, repayable on demand agreed utilised utilised ––––––Financial statements Various bank loans8 – Various 138 138 – 20 13 9 0 96 Bank overdraft and other short-term debt – 106 106 106 – – – – 13.43% –
(9) Company Finance leases n/a 37.78% 984 984 35 231 – – – 718 Financial Information Total Telkom 17,810 19,387 7,700 2,031 833 1,069 3,280 4,474 Telkom AR front.qxp 8/12/09 6:23 PM Page 134
134 Telkom Annual Report 2009
Financial review (continued)
Nominal amount Out- out standing standing Maturing Interest Interest as of as of Year ended March 31, payment rate/ March 31, March 31, After dates coupon 2009 20092010 2011 2012 2013 2014 2014 (in millions) (%) ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR
Other Trudon (Pty) Ltd Various finance leases – Various 2 2 1 1 ––––
Telkom Media (Pty) Ltd Various loans – 13% 9 9 – 5 2 2 – –
Multi-Links Telecommunications Limited Naira 1,100 million Commercial paper – 18.5% 70 70 70 – – – $18 million Export Development Bank LIBOR of Canada funding – + 1.25% 157 157 35 – – 122 – – $41.6 million Huawei Vendor Financing LIBOR Facility funding – + 2% 323 323 – – 323 – – –
Africa Online Limited Various loans – Various 11 11 4 7 ––––
Bank overdrafts and other short-term debt – 20 20 20 –––––
Total other 592 592 130 13 325 124 – –
Grand total 18,402 19,979 7,830 2,044 1,158 1,193 3,280 4,474
1. Listed on the Bond Exchange of South Africa. 2. The TL12 was issued on April 29, 2009 at a yield to maturity of 12.47% and listed on the Bond Exchange of South Africa. 3. The TL15 was issued on April 29, 2009 at a yield to maturity of 11.91% and listed on the Bond Exchange of South Africa. 4. 2,500 of these bonds were issued on February 22, 2000 at a yield to maturity of 15.00%. The TL20 bond wasd Exchange listed on theof South Bon Africa with effect of April 1, 2005. 5. Issued on February 25, 2000. Original amount issued was R430 million. The yield to maturity of this instrument issued by Telkom is 14.37%. 6. Issued on June 15, 2000. Original amount issued was R1,350 million. The yield to maturity of this instrument is 15.175%. 7. Agreement effective from December 17, 2008 for three and five years. 8. R138 million of Telkom's indebtedness outstanding as of March 31, 2009 was guaranteed by the government of South Africa. Euro loans converted at the spot rate. 9. Secured by land and buildings. Telkom fins (group) NEW 8/12/09 6:28 PM Page 135
Consolidated financial statements Directors’ responsibility statement 137 Certificate from Group Company Secretary 137 Report of independent auditors 138 Directors’ report 140 Consolidated income statement 142 Consolidated balance sheet 143 Consolidated statement of changes in equity 144 Consolidated cash flow statement 145 Notes to the consolidated annual financial statements 146
economic conditions contributed to a
difficult year Group overview 1
Management review 2
Sustainability review 3
Performance review 4
Financial statements 5
Company Financial 6 Information Telkom fins (group) NEW 8/12/09 6:28 PM Page 136 Telkom fins (group) NEW 8/12/09 6:28 PM Page 137
Telkom Annual Report 2009 137
Directors’ responsibility statement
The directors are responsible for the preparation of the annual financial accountability for assets and liabilities. The directors are satisfied that statements of the Company and the Group. The directors are also the Company and the Group have adequate resources to continue in responsible for maintaining a sound system of internal controls to operational existence for the foreseeable future. Accordingly, Telkom safeguard shareholders’ investments and the Group’s assets. SA Limited continues to adopt the going concern basis in preparing the annual financial statements. In presenting the accompanying financial statements, International Financial Reporting Standards as issued by the International Against this background, the directors of the Company accept Accounting Standards Board have been followed and applicable responsibility for the annual financial statements, which were approved accounting policies have been used incorporating prudent judgements by the Board of directors on 10 July 2009 and are signed on their and estimates. behalf by:
The external auditors are responsible for independently auditing and reporting on the annual financial statements.
In order for the directors to discharge their responsibilities, management continues to develop and maintain a system of internal Shirley Lue Arnold controls aimed at reducing the risk of error or loss in a cost-effective Chairman manner. The internal controls include a risk-based system of internal auditing and administrative controls designed to provide reasonable but not absolute assurance that assets are safeguarded and that transactions are executed and recorded in accordance with generally accepted business practices and the Group’s policies and procedures. Reuben September The directors, primarily through the audit and risk committee, which Chief Executive Officer consists of non-executive directors, meet periodically with the external and internal auditors, as well as executive management to evaluate matters concerning accounting policies, internal controls, auditing and financial reporting.
The directors are of the opinion, based on the information and Peter Nelson explanations given by management and internal audit, that the internal Chief Financial Officer accounting controls are adequate, so that the financial records may be relied on for preparing the financial statements and maintaining Pretoria
Certificate from Group Company Secretary
I hereby certify that in accordance with section 268G(d) of the Companies Act, 1973, as amended, the Company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act and that all such returns are, to the best of my knowledge and belief, true, correct and up to date.
Mmathoto Lephadi Group Company Secretary Pretoria
10 July 2009 Telkom fins (group) NEW 8/12/09 6:29 PM Page 138
138 Telkom Annual Report 2009 Telkom fins (group) NEW 8/12/09 6:29 PM Page 139
Telkom Annual Report 2009 139 Telkom fins (group) NEW 8/12/09 6:29 PM Page 140
140 Telkom Annual Report 2009
Directors’ report
To the members of Telkom SA Limited SHARE REPURCHASE The directors have pleasure in submitting the annual financial Shareholders approved a special resolution granting a general statements of the Company and the Group for the year ended authority for the repurchase of shares by the Company at its annual March 31, 2009. general meeting of September 15, 2008. The Company repurchased 286 ordinary shares at a value of R30,425 (including costs) during the NATURE OF BUSINESS year under review. These shares have been cancelled as issued share Telkom is a leading integrated communications service provider in capital and restored as authorised but unissued share capital. South Africa and on the African continent. BORROWING POWERS FINANCIAL RESULTS In terms of the Company’s articles of association, Telkom has unlimited Earnings attributable to equity holders of Telkom for the year ended borrowing powers subject to the restrictive financial covenants of the March 31, 2009 were R4,170 million (2008: R7,975 million) TL20 bond and Syndicated loans. representing basic earnings per share from continuing operations of 407.4 cents (2008: 963.7 cents). Full details of the financial position CAPITAL EXPENDITURE AND COMMITMENTS and results of the Group are set out in the accompanying Company Details of the Company’s capital expenditure on property, plant and and Group financial statements. equipment as well as intangibles are set out in notes 9 and 10 of the accompanying financial statements, while details of the Company’s DIVIDENDS capital commitments are set out in note 34. The following dividend was declared in respect of the year ended March 31, 2009: Details of the Group’s capital expenditure on property, plant and equipment as well as intangibles are set out in notes 11 and 12 of the • Ordinary dividend number 14 of 115 cents per share (2008: accompanying financial statements, while details of the Group’s 660 cents); capital commitments are set out in note 38. • Special dividend of 260 cents per share (2008: nil cents). EVENTS SUBSEQUENT TO BALANCE SHEET DATE The level of dividend payments will be based upon a number of Events subsequent to the balance sheet date are set out in note 45 of factors, including the consideration of financial results, capital and the accompanying Group financial statements and note 39 of the operating expenditure requirements, the Group’s debt level, interest Company financial statements. coverage, internal cash flows, prospects and available growth DIRECTORATE opportunities. The following changes occurred in the composition of the Board from SUBSIDIARIES April 1, 2008 to date of this report. Particulars of the significant subsidiaries of the Group are set out in Appointments notes 42 and 43 of the accompanying Group financial statements. B Molefe July 3, 2008 The attributable interest of the Group in the after taxation earnings from PG Joubert August 12, 2008 continuing operations of its subsidiaries for the year ended March 31, DD Barber September 1, 2008 2009 were: PG Nelson December 8, 2008
2008 2009 Resignations Rm Rm MJ Lamberti June 3, 2008
Aggregate amount of loss after taxation (102) (2,142) AG Rhoda July 3, 2008
SHARE CAPITAL Details of the authorised, issued and unissued share capital of the Company as at March 31, 2009 are contained in note 22 and note 20 of the accompanying Group and Company financial statements respectively. Telkom fins (group) NEW 8/12/09 6:29 PM Page 141
Telkom Annual Report 2009 141
Directors’ report (continued)
The Board of Directors at date of this report are as follows:
ST Arnold (Chairman) RJ September (Chief Executive Officer) PG Nelson (Chief Financial Officer) DD Barber B du Plessis RJ Huntley PG Joubert VB Lawrence PCS Luthuli KST Matthews B Molefe E Spio-Garbrah
Details of each director may be found on pages 28 and 29 in the Management review section.
DIRECTORS’ INTERESTS At the date of this report, none of Telkom’s directors other than Mr RJ September, Mr PG Nelson, Mr PG Joubert and Mr DD Barber, held any direct and indirect, beneficial and non-beneficial interests in the share capital of the Company. Mr RJ September directly held 90,815 and indirectly held 1,820 ordinary shares, Mr. PG Nelson directly held 19,182 ordinary shares, Mr PG Joubert indirectly held 15,000 ordinary shares and Mr DD Barber indirectly held 1,200 ordinary shares in the capital of Telkom.
Details of the Company Secretary’s business address and the Company’s registered office are set out on the inside back cover. Telkom fins (group) NEW 8/12/09 6:29 PM Page 142
142 Telkom Annual Report 2009
Consolidated income statement for the three years ended March 31, 2009
Restated* Restated* Audited 2007 2008 2009 Notes Rm Rm Rm
Total revenue 3.1 32,919 34,084 36,433
Operating revenue 3.2 32,441 33,611 35,940 Other income 4 338 472 343 Operating expenses 23,028 25,014 29,895
Employee expenses 5.1 7,254 7,629 8,345 Payments to other operators 5.2 5,005 6,098 6,919 Selling, general and administrative expenses 5.3 4,184 4,045 5,772 Service fees 5.4 2,209 2,437 2,756 Operating leases 5.5 775 671 823 Depreciation, amortisation, impairment and write-offs 5.6 3,601 4,134 5,280
Operating profit 9,751 9,069 6,388 Investment income 6 199 168 181 Finance charges and fair value movements 7 857 1,556 2,843
Interest 1,142 1,543 1,732 Foreign exchange and fair value movement (gain)/loss (285) 13 1,111
Profit before taxation 9,093 7,681 3,726 Taxation 8 2,803 2,647 1,660
Profit from continuing operations 6,290 5,034 2,066 Profit for the year from discontinued operations 9 2,559 3,138 2,181
Profit for the year 8,849 8,172 4,247
Attributable to: Equity holders of Telkom 8,646 7,975 4,170 Minority interest 203 197 77
8,849 8,172 4,247
Total operations Basic earnings per share (cents) 10 1,681.0 1,565.0 832.8 Diluted earnings per share (cents) 10 1,676.3 1,546.9 819.6 Dividend per share (cents) 10 900.0 1,100.0 660.0
Continuing operations Basic earnings per share (cents) 10 1,204.7 963.7 407.4 Diluted earnings per share (cents) 10 1,201.3 952.6 401.0
* The amounts have been restated for the effect of the discontinued operation and disposal groups held for sale as disclosed in note 9. Telkom fins (group) NEW 8/12/09 6:29 PM Page 143
Telkom Annual Report 2009 143
Consolidated balance sheet at March 31, 2009
2007 2008 2009 Notes Rm Rm Rm ASSETS Non-current assets 48,770 57,763 51,010
Property, plant and equipment 11 41,254 46,815 41,418 Intangible assets 12 5,111 8,468 7,232 Investments 14 1,384 1,448 1,383 Deferred expenses 15 270 221 55 Finance lease receivables 16 158 206 166 Deferred taxation 17 593 605 756
Current assets 10,376 12,609 11,287
Short-term investments 14 77 51 – Inventories 18 1,093 1,287 1,974 Income taxation receivable 34 520 9 91 Current portion of deferred expenses 15 287 362 – Current portion of finance lease receivables 16 88 166 109 Trade and other receivables 19 7,303 8,986 5,980 Other financial assets 20 259 614 1,202 Cash and cash equivalents 21 749 1,134 1,931
Assets of disposal groups classified as held for sale 9 – – 23,482
Total assets 59,146 70,372 85,779
EQUITY AND LIABILITIES Equity attributable to equity holders of Telkom 31,724 32,815 36,253
Share capital 22 5,329 5,208 5,208 Treasury share reserve 23 (1,774) (1,638) (1,517) Share-based compensation reserve 24 257 643 1,076 Non-distributable reserves 25 1,413 1,292 1,758 Retained earnings 26 26,499 27,310 28,852 Reserves of disposal groups classified as held for sale 9 – – 876
Minority interest 27 284 522 853
Total equity 32,008 33,337 37,106
Non-current liabilities 8,554 15,104 15,348
Interest-bearing debt 28 4,338 9,403 10,653 Other financial liabilities 20 36 919 – Provisions 29 1,443 1,675 1,875 Deferred revenue 15 1,021 1,128 997 Deferred taxation 17 1,716 1,979 1,823
Current liabilities 18,584 21,931 17,452
Trade and other payables 31 7,237 8,771 5,538 Shareholders for dividend 35 15 20 23 Current portion of interest-bearing debt 28 6,026 6,330 7,622 Current portion of provisions 29 2,095 2,181 2,150 Current portion of deferred revenue 15 1,983 2,593 1,714 Income taxation payable 34 594 323 50 Other financial liabilities 20 193 371 228 Credit facilities utilised 21 441 1,342 127
Liabilities of disposal groups classified as held for sale 9 – – 15,873
Total liabilities 27,138 37,035 48,673
Total equity and liabilities 59,146 70,372 85,779 Telkom fins (group) NEW 8/12/09 6:29 PM Page 144
144 Telkom Annual Report 2009
Consolidated statement of changes in equity for the three years ended March 31, 2009
Attributable to equity holders of Telkom Share- based Discon- Treasury compen- Non-distri- tinued Share Share share sation butable Retained opera- Minority Total capital premium reserve reserve reserves earnings tions Total interest equity Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm
Balance at April 1, 2006 5,449 1,342 (1,809) 151 1,128 22,904 – 29,165 301 29,466 Total income and expense for the year 46 8,646 – 8,692 217 8,909 Profit for the year – 8,646 – 8,646 203 8,849 Foreign currency translation reserve (net of taxation of R4 million) (refer to note 25) 46 – – 46 14 60 Dividend declared (refer to note 35) – (4,678) – (4,678) (166) (4,844) Transfer to non-distributable reserves (refer to note 25) 239 (239) –––– Shares vested and re-issued (refer to note 24) 35 (35) –––––– Increase in share-based compensation reserve (refer to note 24) – 141 – – – 141 – 141 Acquisition of subsidiaries and minorities (refer to note 36) ––––––(68) (68) Shares bought back and cancelled (refer to note 22) (120) (1,342) – – – (134) – (1,596) (1,596) Balance at March 31, 2007 5,329 – (1,774) 257 1,413 26,499 – 31,724 284 32,008 Total income and expense for the year 529 7,975 – 8,504 226 8,730 Profit for the year – 7,975 – 7,975 197 8,172 Revaluation of available-for-sale investment (net of taxation of R1 million) 8 – – 8 – 8 Foreign currency translation reserve (net of taxation of R6 million) (refer to note 25) 521 – – 521 29 550 Dividend declared (refer to note 35) – (5,627) – (5,627) (65) (5,692) Transfer to non-distributable reserves (refer to note 25) 11 (11) –––– Increase in share-based compensation reserve (refer to note 24) 522 – – – 522 – 522 Shares vested and re-issued (refer to note 24) 136 (136) –––––– Acquisition of subsidiaries and minorities (refer to note 36) ––––––77 77 Shares bought back and cancelled (refer to note 22) (121) – – – (1,526) – (1,647) – (1,647) Minority put option ––––(661) – – (661) – (661) Balance at March 31, 2008 5,208 – (1,638) 643 1,292 27,310 – 32,815 522 33,337 Discontinued operations (4) – 4 – – – Total income and expense for the year (181) 4,171 181 4,171 93 4,264 Profit for the year – 4,171 – 4,171 77 4,248 Revaluation of available-for-sale investment (net of taxation of R1 million) – – (8) (8) – (8) Foreign currency translation reserve (net of taxation of R6 million) (refer to note 25) (181) – 189 8 16 24 Dividend declared (refer to note 35) – (3,306) – (3,306) (33) (3,339) Transfer to non-distributable reserves (refer to note 25) (10) 10 –––– Increase in share-based compensation reserve (refer to note 24) 554 – – – 554 – 554 Shares vested and re-issued (refer to note 24) 121 (121) –––– –– Acquisition of subsidiaries and minorities – – – 667 – 667 – 667 Shares bought back and cancelled (refer to note 22) –––––––– Minority put option – – 661 – – 661 – 661 Broad-based black economic empowerment transaction in Vodacom ––––691 691 271 962 Balance at March 31, 2009 5,208 – (1,517) 1,076 1,758 28,852 876 36,253 853 37,106 Telkom fins (group) NEW 8/12/09 6:29 PM Page 145
Telkom Annual Report 2009 145
Consolidated cash flow statement for the three years ended March 31, 2009
2007 2008 2009 Notes Rm Rm Rm Cash flows from operating activities 9,356 10,603 11,432
Cash receipts from customers 50,979 55,627 61,302 Cash paid to suppliers and employees (30,459) (34,371) (40,908)
Cash generated from operations 32 20,520 21,256 20,394 Interest received 422 433 485 Dividends received 6 3 – – Finance charges paid 33 (1,115) (1,077) (2,164) Taxation paid 34 (5,690) (4,277) (3,947)
Cash generated from operations before dividend paid 14,140 16,335 14,768 Dividend paid 35 (4,784) (5,732) (3,336)
Cash flows from investing activities (10,412) (14,106) (17,005)
Proceeds on disposal of property, plant and equipment and intangible assets 54 169 43 Proceeds on disposal of investments 77 8 – Additions to property, plant and equipment and intangible assets (10,037) (11,657) (13,191) Acquisition of subsidiaries and minority interest (445) (2,462) (3,778) Additions to other investments (61) (164) (79)
Cash flows from financing activities (2,920) 2,943 7,093
Loans raised 5,624 23,877 18,168 Loans repaid (6,922) (19,315) (10,212) Shares bought back and cancelled (1,596) (1,647) – Finance lease obligation repaid (37) (61) (136) Decrease/(increase) in net financial assets 11 89 (727)
Net (decrease)/increase in cash and cash equivalents (3,976) (560) 1,520 Net cash and cash equivalents at beginning of the year 4,255 308 (208) Effect of foreign exchange rate differences 29 44 (30)
Net cash and cash equivalents at end of the year 21 308 (208) 1,282 Telkom fins (group) NEW 8/12/09 6:29 PM Page 146
146 Telkom Annual Report 2009
Notes to the consolidated annual financial statements for the three years ended March 31, 2009
1. CORPORATE INFORMATION Mobile communications services, wireless data services and Telkom SA Limited (Telkom) is a company incorporated and television media services through Vodacom, Swiftnet and Telkom domiciled in the Republic of South Africa (South Africa) Media Group respectively have been classified as disposal whose shares are publicly traded. The main objective of Telkom, groups held for sale and discontinued operations. its subsidiaries and joint ventures (the Group) is to supply 2. SIGNIFICANT ACCOUNTING POLICIES telecommunication, broadcasting, multimedia, technology, Basis of preparation information and other related information technology services to The consolidated annual financial statements comply with the general public, as well as mobile communication services the International Financial Reporting Standards (IFRS) of the through the Vodacom Group (Proprietary) Limited (Vodacom) in International Accounting Standards Board (IASB) and the South Africa and certain other African countries. The principal Companies Act of South Africa, 1973. activities of the Group include: The financial statements are prepared on the historical cost • fixed-line subscription and connection services to post-paid, basis, with the exception of certain financial instruments which prepaid and private payphone customers using PSTN are measured at fair value and share-based payments which are (‘Public Switched Telephone Network’) lines, including ISDN measured at grant date fair value. (‘Integrated Services Digital Network’) lines, and the sale of subscription based value-added voice services and customer Details of the Group’s significant accounting policies are set out premises equipment rental and sales; below, and are consistent with those applied in the previous financial year except for the following: • fixed-line traffic services to post-paid, prepaid and payphone customers, including local, long distance, fixed-to-mobile, The Group has adopted certain amendments to IAS39 and international outgoing and international voice-over-internet IFRS7, and adopted IFRIC12 and IFRIC14 which are protocol traffic services; applicable for annual periods on or after January 1, 2008.
• interconnection services, including terminating and transiting The principal effects of these changes are discussed below. traffic from South African mobile operators, as well as from Adoption of amendments to standards and new international operators and transiting traffic from mobile to interpretation international destinations; IAS39 Financial Instruments: Recognition and Measurement • fixed-line data and internet services, including domestic and and IFRS7 Financial Instruments: Disclosures – international data transmission services, such as point-to-point Reclassification of Financial Assets (amended) leased lines, ADSL (Asymmetrical Digital Subscriber Line) The amendments, which are effective on or after July 1, 2008, services, packet-based services, managed data networking permit an entity to reclassify non-derivative financial assets (other services and internet access and related information than those designated at fair value through profit or loss by the technology services; entity upon initial recognition) out of the fair value through profit or loss category in particular circumstances. The amendments • e-commerce, including internet access service provider, also permit an entity to transfer from the available-for-sale application provider, hosting, data storage, e-mail and category to the loans and receivables category a financial asset security services; that would have met the definition of loans and receivables • W-CDMA (Wideband Code Division Multiple Access), a (if the financial asset had not been designated as available-for- 3G next generation network, including fixed voice services, sale), if the entity has the intention and ability to hold that data services and nomadic voice services; and financial asset for the foreseeable future. The amendments do not have an impact on the consolidated annual financial • other services including directory services, through Trudon statements. (Proprietary) Limited (formerly trading as TDS Directory Operations (Proprietary) Limited), wireless data services, IFRIC12 Service Concession Arrangements through Swiftnet (Proprietary) Limited, television media The interpretation, which is effective for annual periods services, through Telkom Media Group, internet services beginning on or after January 1, 2008, sets out general outside South Africa, through Africa Online Limited and principles on recognising and measuring the obligations and information, communication and telecommunication related rights in service concession arrangements from an operating services in Nigeria, through Multi-Links operator’s perspective. The interpretation does not have an Telecommunications Limited. impact on the consolidated annual financial statements. Telkom fins (group) NEW 8/12/09 6:29 PM Page 147
Telkom Annual Report 2009 147
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) the relative fair values could affect the allocation of arrangement Adoption of amendments to standards and new consideration between the various revenue streams. interpretation (continued) Judgement is also required to determine the expected customer IFRIC14 The Limit on a Defined Benefit Asset, Minimum relationship period. Any changes in these assessments may Funding Requirements and their Interaction have a significant impact on revenue and deferred revenue. The interpretation, which is effective for annual periods beginning on or after January 1, 2008, provides guidance on Property, plant and equipment and intangible assets assessing the limit in IAS19 on the amount of the surplus that can The useful lives of assets are based on management’s be recognised as an asset. It also explains how the pension estimation. Management considers the impact of changes in asset or liability may be affected by a statutory or contractual technology, customer service requirements, availability of minimum funding requirement. The interpretation does not have capital funding and required return on assets and equity to any impact on the consolidated annual financial statements, as determine the optimum useful life expectation for each of the the Group is not subject to minimum funding requirements. individual categories of property, plant and equipment and intangible assets. Due to the rapid technological advancement Significant accounting judgements, estimates and in the telecommunications industry as well as Telkom’s plan to assumptions migrate to a next generation network over the next few years, The preparation of financial statements requires the use of the estimation of useful lives could differ significantly on an estimates and assumptions that affect the reported amounts annual basis due to unexpected changes in the roll-out strategy. of assets and liabilities and disclosure of contingent assets and The impact of the change in the expected useful life of property, liabilities at the date of the financial statements and the reported plant and equipment is described more fully in note 5.6. amounts of revenue and expenses during the reporting periods. The estimation of residual values of assets is also based on Although these estimates and assumptions are based on management’s judgement whether the assets will be sold management’s best knowledge of current events and actions that or used to the end of their useful lives and what their condition the Group may undertake in the future, actual results may ultimately differ from those estimates and assumptions. will be like at that time.
The presentation of the results of operations, financial position For intangible assets that incorporate both a tangible and an and cash flows in the financial statements of the Group is intangible portion, management uses judgement to assess which dependent upon and sensitive to the accounting policies, element is more significant to determine whether it should be assumptions and estimates that are used as a basis for the treated as property, plant and equipment or intangible assets. preparation of these financial statements. Management has Asset retirement obligations made certain judgements in the process of applying the Group’s Management judgement is exercised when determining whether accounting policies. These, together with the key estimates and an asset retirement obligation exists, and in determining the assumptions concerning the future, and other key sources of present value of expected future cash flows and discount rate estimation uncertainty at the balance sheet date, are as follows: when the obligation to dismantle or restore the site arises, as Revenue recognition well as the estimated useful life of the related asset. To reflect the substance of each transaction, revenue recognition Impairments of property, plant and equipment and criteria are applied to each separately identifiable component intangible assets of a transaction as disclosed in note 3. In order to account for Management is required to make judgements concerning multiple-element revenue arrangements in developing its the cause, timing and amount of impairment as indicated on accounting policies, the Group considered the guidance notes 11 and 12. In the identification of impairment indicators, contained in the United States Financial Accounting Standards management considers the impact of changes in current Board (’FASB’) Emerging Issues Task Force No 00-21 Revenue competitive conditions, cost of capital, availability of funding, Arrangements with Multiple Deliverables. Judgement is required to separate those revenue arrangements that contain the delivery technological obsolescence, discontinuance of services and of bundled products or services into individual units of other circumstances that could indicate that an impairment accounting, each with its own earnings process, when the exists. The Group applies the impairment assessment to its delivered item has stand-alone value and the undelivered item separate cash-generating units. This requires management to has fair value. Further judgement is required to determine the make significant judgements concerning the existence of relative fair values of each separate unit of accounting to be impairment indicators, identification of separate cash-generating allocated to the total arrangement consideration. Changes in units, remaining useful lives of assets and estimates of projected Telkom fins (group) NEW 8/12/09 6:29 PM Page 148
148 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Leases in which a significant portion of the risks and rewards of Significant accounting judgements, estimates and ownership are retained by the lessor are classified as operating assumptions (continued) leases. Payments made under operating leases (net of any Impairments of property, plant and equipment and incentives received from the lessor) are charged to the income intangible assets (continued) statement on a straight-line basis over the period of the lease. cash flows and fair value less costs to sell. Management A lease is classified as a finance lease if it transfers substantially judgement is also required when assessing whether a previously all the risks and rewards incidental to ownership. recognised impairment loss should be reversed. Deferred taxation asset Where impairment indicators exist, the determination of Management judgement is exercised when determining the the recoverable amount of a cash-generating unit requires probability of future taxable profits which will determine whether management to make assumptions to determine the fair value deferred taxation assets should be recognised or derecognised. less costs to sell and value in use. Key assumptions on which The realisation of deferred taxation assets will depend on management has based its determination of fair value less costs whether it is possible to generate sufficient taxable income, to sell include the existence of binding sale agreements, and for taking into account any legal restrictions on the length and the determination of value in use include the weighted average nature of the taxation asset. When deciding whether to cost of capital, projected revenues, gross margins, average recognise unutilised taxation credits, management needs to revenue per customer, capital expenditure, expected customer determine the extent that the future obligation is likely to be bases and market share. The judgements, assumptions and available for set-off. In the event that the assessment of the future methodologies used can have a material impact on the fair obligation and future utilisation changes, the change in the value and ultimately the amount of any impairment. recognised deferred taxation asset must be recognised in profit Impairment of other financial assets or loss. At each balance sheet date management assesses whether Taxation there are indicators of impairment of financial assets, including The taxation rules and regulations in South Africa as well as the equity investments. If such evidence exists, the estimated present other African countries within which the Group operates are value of the future cash flows of that asset is determined. highly complex and subject to interpretation. Additionally, for Management judgement is required when determining the the foreseeable future, management expects South African expected future cash flows. To determine whether any decline in taxation laws to further develop through changes in South fair value in available-for-sale investments is significant or Africa’s existing taxation structure as well as clarification of the prolonged, reliance is placed on an assessment by existing taxation laws through published interpretations and the management. In measuring impairments, quoted market prices resolution of actual taxation cases. Refer to notes 8 and 17. are used, if available, or projected business plan information from the investee is used for those financial assets not carried at Management has made a judgement that all outstanding fair value. taxation credits relating to secondary taxation on companies (STC) will be available for utilisation before the taxation regime Impairment of receivables from STC to withholding taxation change is effective. An impairment is recognised on trade receivables that are assessed to be impaired (refer to notes 13 and 19). The The growth of the Group, following its geographical expansion impairment is based on an assessment of the extent to which into other African countries over the past few years, has made customers have defaulted on payments already due and an the estimation and judgement required in recognising and assessment on their ability to make payments based on their measuring deferred taxation balances more challenging. The credit worthiness and historical write-offs experience. Should the resolution of taxation issues is not always within the control of assumptions regarding the financial condition of the customer the Group and it is often dependent on the efficiency of the change, actual write-offs could differ significantly from the legal processes in the relevant taxation jurisdictions in which impaired amount. the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of taxation liabilities for an Leases accounting period result from payments on account and on the The determination of whether an arrangement is, or contains a final resolution of open items. As a result there can be substantial lease is based on whether, at the date of inception, the fulfilment differences between the taxation charge in the consolidated of the arrangement is dependent on the use of a specific asset income statement and the current taxation payments. or assets or the arrangement conveys a right to use the asset as set out in notes 16 and 38. Telkom fins (group) NEW 8/12/09 6:29 PM Page 149
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Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Telkom provides equity compensation in the form of the Telkom Significant accounting judgements, estimates and Conditional Share Plan to its employees. The related expense assumptions (continued) and reserve are determined through an actuarial valuation Taxation (continued) which relies heavily on assumptions. The assumptions include Group entities are regularly subject to evaluation, by the relevant employee turnover percentages and whether specified taxation authorities, of their historical taxation filings and in performance criteria will be met. Changes to these assumptions connection with such reviews, disputes can arise with the taxation could affect the amount of expense ultimately recognised in the authorities over the interpretation or application of certain taxation financial statements. An actuarial valuation relies heavily on the rules to the business of the relevant Group entities. These disputes actual plan experience assumptions as disclosed in note 30. may not necessarily be resolved in a manner that is favourable for Provisions and contingent liabilities the Group. Additionally the resolution of the disputes could result in Management judgement is required when recognising and an obligation for the Group that exceeds management’s estimate. measuring provisions and when measuring contingent liabilities as The Group has historically filed, and continues to file, all required set out in notes 29 and 39 respectively. The probability that an income taxation returns. Management believes that the principles outflow of economic resources will be required to settle the applied in determining the Group’s taxation obligations are obligation must be assessed and a reliable estimate must be made consistent with the principles and interpretations of the relevant of the amount of the obligation. Provisions are discounted where countries’ taxation laws. the effect of discounting is material based on management’s judgement. The discount rate used is the rate that reflects current Deferred taxation rate market assessments of the time value of money and, where Management makes judgements on the taxation rate applicable appropriate, the risks specific to the liability, all of which requires based on the Group’s expectations at balance sheet date on management judgement. The Group is required to recognise how the asset is expected to be recovered or the liability is provisions for claims arising from litigation when the occurrence of expected to be settled. the claim is probable and the amount of the loss can be reasonably Employee benefits estimated. Liabilities provided for legal matters require judgements The Group provides defined benefit plans for certain post- regarding projected outcomes and ranges of losses based on employment benefits. The Group’s net obligation in respect of historical experience and recommendations of legal counsel. defined benefits is calculated separately for each plan by Litigation is however unpredictable and actual costs incurred could estimating the amount of future benefits earned in return for differ materially from those estimated at the balance sheet date. services rendered. The obligation and assets related to each of Held-to-maturity financial assets the post-retirement benefits are determined through an actuarial Management has reviewed the Group’s held-to-maturity valuation. The actuarial valuation relies heavily on assumptions financial assets in the light of its capital management and as disclosed in note 30. The assumptions determined by liquidity requirements and has confirmed the Group’s positive management make use of information obtained from the intention and ability to hold those assets to maturity. Group’s employment agreements with staff and pensioners, market related returns on similar investments, market related Summary of significant accounting policies discount rates and other available information. The assumptions Basis of consolidation concerning the expected return on assets and expected change The consolidated financial statements incorporate the financial in liabilities are determined on a uniform basis, considering statements of Telkom and entities (including special purpose long-term historical returns and future estimates of returns and entities) controlled by Telkom, its subsidiaries, as well as its joint medical inflation expectations. In the event that further changes ventures and associates. Control is achieved where Telkom has in assumptions are required, the future amounts of post- the power to govern the financial and operating policies of an employment benefits may be affected materially. investee entity so as to obtain benefits from its activities. Joint ventures are those enterprises over which the Group exercises The discount rate reflects the average timing of the estimated joint control in terms of a contractual agreement. Joint ventures defined benefit payments. The discount rate is based on long- are proportionately consolidated. Associates are those entities term South African government bonds with the longest maturity over which the Group has significant influence and that are period as reported by the Bond Exchange of South Africa. neither subsidiaries nor joint ventures. Associates are equity The discount rate is expected to follow the trend of inflation. accounted. Significant influence exists when the Group has the The overall expected rate of return on assets is determined power to participate in the financial and operating policy based on the market prices prevailing at that date, applicable decisions of these entities, but does not have control or joint to the period over which the obligation is to be settled. control over those policies. Telkom fins (group) NEW 8/12/09 6:29 PM Page 150
150 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue is recognised when there is evidence of an Summary of significant accounting policies (continued) arrangement, collectability is reasonably assured, and the Basis of consolidation (continued) delivery of the product or service has occurred. In certain The results of subsidiaries acquired or disposed of during the circumstances revenue is split into separately identifiable year are included in the income statement from the effective date components and recognised when the related components are of acquisition and up to the effective date of disposal, as delivered in order to reflect the substance of the transaction.
appropriate. The value of components is determined using verifiable Where necessary, adjustments are made to the financial objective evidence. The Group does not provide customers with statements of subsidiaries, joint ventures and associates to bring the right to a refund.
the accounting policies used in line with those used by the Fixed-line and other Group. Subscriptions, connections and other usage Inter-company transactions, balances and unrealised gains on The Group provides telephone and data communication transactions between Group companies are eliminated. services under post-paid and prepaid payment arrangements. Unrealised profit or losses are also eliminated. Revenue includes fees for installation and activation, which are deferred over the expected customer relationship period. Costs The Group applies a policy of treating transactions with minority incurred on first time installations that form an integral part of interests as transactions with parties external to the Group. the network are capitalised and depreciated over the expected Disposals to minority interests result in gains and losses for the average customer relationship period. All other installation and Group and are recorded in the income statement. Acquisition of activation costs are expensed as incurred. minority interests results in goodwill, being the difference between any consideration paid and the relevant share Post-paid and prepaid service arrangements include acquired of the carrying value of net assets of the subsidiary. subscription fees, typically monthly fees, which are recognised over the subscription period. Business combinations Revenue related to sale of communication equipment, products The purchase method of accounting is used to account for the and value-added services is recognised upon delivery and acquisition of subsidiaries by the Group. The cost of an acceptance of the product or service by the customer. acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at Traffic (domestic, fixed-to-mobile and international) the date of exchange, plus costs directly attributable to the Prepaid acquisition. Identifiable assets acquired and liabilities and Prepaid traffic service revenue collected in advance is deferred contingent liabilities assumed in a business combination are and recognised based on actual usage or upon expiration of measured initially at their fair values at the acquisition date, the usage period, whichever comes first. The terms and irrespective of the extent of any minority interest. The excess conditions of certain prepaid products allow the carry over of of the cost of acquisition over the fair value of the Group’s share unused minutes. Revenue related to the carry over of unused of the identifiable net assets acquired is recorded as goodwill. minutes is deferred until usage or expiration. If the cost of acquisition is less than the fair value of the net Payphones assets of the subsidiary acquired, the difference is recognised Payphone service coin revenue is recognised when the service directly in the income statement. is provided.
Operating revenue Payphone service card revenue collected in advance is deferred The Group provides fixed-line communication services, mobile and recognised based on actual usage or upon expiration of communication services and other services. Other includes the usage period, whichever comes first.
data services, directory services and communication related Post-paid products. The Group provides such services to business, Revenue related to local, long distance, network-to-network, residential, payphone and mobile customers. Revenue roaming and international call connection services is recognised represents the fair value of fixed or determinable consideration when the call is placed or the connection provided. that has been received or is receivable. Interconnection Revenue for services is measured at amounts invoiced to Interconnection revenue for call termination, call transit, and customers and excludes Value Added Taxation. network usage is recognised as the traffic flow occurs. Telkom fins (group) NEW 8/12/09 6:29 PM Page 151
Telkom Annual Report 2009 151
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Vodacom revenue from the handset is recognised when the Summary of significant accounting policies (continued) product is delivered limited to the amount of cash received. Fixed-line and other (continued) Monthly service revenue received from the customer is recognised Data in the period in which the service is delivered. Airtime revenue is The Group provides data communication services under post- recognised on the usage basis. The terms and conditions of the paid and prepaid payment arrangements. Revenue includes fees bundled airtime products, where applicable, allow the carry over for installation and activation, which are deferred over the of unused airtime. The unused airtime is deferred in full. Deferred expected average customer relationship period. Costs incurred revenue related to unused airtime is recognised when utilised by on first time installations that form an integral part of the network the customer. Upon termination of the customer contract, all are capitalised and depreciated over the life of the expected deferred revenue for unused airtime is recognised in revenue. average customer relationship period. All other installation and Prepaid products activation costs are expensed as incurred. Post-paid and prepaid Prepaid products that may include deliverables such as a SIM- service arrangements include subscription fees, typically monthly card and airtime are defined as arrangements with multiple fees, which are recognised over the subscription period. deliverables. The arrangement consideration is allocated to Directory services each deliverable, based on the fair value of each deliverable Included in other are directory services. Revenue is recognised on a stand-alone basis as a percentage of the aggregated fair when printed directories are released for distribution, as the value of the individual deliverables. Revenue allocated to the significant risks and rewards of ownership have been transferred identified deliverables in each revenue arrangement and the to the buyer. Electronic directories’ revenue is recognised on a cost applicable to these identified deliverables are recognised monthly basis, as earned. based on the same recognition criteria of the individual deliverable at the time the product or service is delivered. Sundry revenue Sundry revenue is recognised when the economic benefit flows • Revenue from the SIM-card representing activation fees is to the Group and the earnings process is complete. recognised over the average useful life of a prepaid customer.
Dealer incentives • Airtime revenue is recognised on the usage basis. Unused Telkom provides incentives to its retail payphone card distributors airtime is deferred in full. as trade discounts. Incentives are based on sales volume and • Deferred revenue related to unused airtime is recognised value. Revenue for retail payphone cards is recorded as traffic when utilised by the customer. Upon termination of the revenue, net of these discounts as the cards are used. customer relationship, all deferred revenue for unused airtime Mobile is recognised in revenue. The Vodacom Group invoices its independent service providers Upon purchase of an airtime voucher the customer receives the for the revenue billed by them on behalf of the Group. The right to make outgoing voice and data calls to the value of the Group, within its contractual arrangements with its agents, pays airtime voucher. Revenue is recognised as the customer utilises them administrative fees. The Group receives in cash, the net the voucher. amount equal to the gross revenue earned less the administrative fees payable to the agents. Deferred revenue and costs related to unactivated starter packs which do not contain any expiry date, are recognised in the Contract products period when the probability of these starter packs being Contract products that may include deliverables such as a activated by a customer becomes remote. In this regard the handset and 24-month service are defined as arrangements Group applies a period of 36 months before these revenue and with multiple deliverables. The arrangement consideration is costs are released to the consolidated income statement. allocated to each deliverable, based on the fair value of each deliverable on a stand-alone basis as a percentage of the Data aggregated fair value of the individual deliverables. Revenue Revenue, net of discounts, from data services is recognised allocated to the identified deliverables in each revenue when the Group has performed the related service and arrangement and the cost applicable to these identified depending on the nature of the service, is recognised either at deliverables are recognised based on the same recognition the gross amounts billed to the customer or the amount criteria of the individual deliverable at the time the product or receivable by the Group as commission for facilitating the service is delivered. service. Telkom fins (group) NEW 8/12/09 6:29 PM Page 152
152 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) A deferred taxation asset is recognised to the extent that it is Summary of significant accounting policies (continued) probable that future taxable profits will be available against Mobile (continued) which the associated unused taxation losses, unused taxation Equipment sales credits and deductible temporary differences can be utilised. All equipment sales are recognised only when delivery and The carrying amount of deferred taxation assets is reviewed at acceptance has taken place. Equipment sales to third party each balance sheet date and is reduced to the extent that it is service providers are recognised when delivery is accepted. no longer probable that the related taxation benefit will be No rights of return exist on sales to third party service providers. realised. In respect of deductible temporary differences Mobile number portability associated with investments in subsidiaries, associates and Revenue transactions from mobile number portability are interest in joint ventures, deferred income taxation assets are accounted for in terms of current business rules and revenue recognised only to the extent that it is probable that temporary recognition policies above. differences will reverse in the foreseeable future and taxable profit will be available against which temporary differences can Interest on debtors’ accounts be utilised. Interest is raised on overdue accounts on an effective interest rate method and recognised in the income statement. Deferred taxation relating to items recognised directly in equity
Marketing is recognised in equity and not in the income statement. Marketing costs are recognised as an expense when incurred. Deferred taxation assets and liabilities are measured at the Incentives taxation rates that are expected to apply to the period when the Incentives paid to service providers and dealers for products asset is realised or the liability is settled, based on taxation rates delivered to the customer are expensed as incurred. Incentives (and taxation laws) that have been enacted or substantively paid to service providers and dealers for services delivered are enacted by the balance sheet date. Deferred taxation assets and expensed in the period that the related revenue is recognised. liabilities are not discounted.
Distribution incentives paid to service providers and dealers for Deferred taxation assets and deferred taxation liabilities are exclusivity are deferred and expensed over the contractual offset, if a legally enforceable right exists to set off current relationship period. taxation assets against current taxation liabilities and the Investment income deferred taxes relate to the same taxable entity and the same Dividends from investments are recognised on the date that the taxation authority.
Group is entitled to the dividend. Interest is recognised on a time Exchange differences arising from the translation of foreign proportionate basis taking into account the principal amount deferred taxation assets and liabilities of foreign entities where outstanding and the effective interest rate. the functional currency is different to the local currency, are Taxation classified as a deferred taxation expense or income. Current taxation Secondary taxation on companies The charge for current taxation is based on the results for the year Secondary taxation on companies (STC) is provided for at a and is adjusted for non-taxable income and non-deductible rate of 10% (12.5% before October 1, 2007) on the amount expenditure. Current taxation is measured at the amount expected by which dividends declared by the Group exceeds dividends to be paid to the taxation authorities, using taxation rates and laws that have been enacted or substantively enacted by the received. Deferred taxation on unutilised STC credits is balance sheet date. recognised to the extent that STC payable on future dividend payments is likely to be available for set-off. Deferred taxation Deferred taxation is accounted for using the balance sheet liability method on all temporary differences at the balance sheet date between the taxation bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred taxation is not provided on the initial recognition of assets or liabilities which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. Telkom fins (group) NEW 8/12/09 6:29 PM Page 153
Telkom Annual Report 2009 153
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) The estimated useful lives assigned to groups of property, plant Summary of significant accounting policies (continued) and equipment are: Property, plant and equipment Years At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties Freehold buildings 15 to 50 and non-refundable purchase taxes, after deducting trade Leasehold buildings 7 to 50 discounts and rebates. The recognised cost includes any directly Network equipment attributable costs for preparing the asset for its intended use. Cables 20 to 40 Switching equipment 2 to 25 The cost of an item of property, plant and equipment is Transmission equipment 3 to 18 recognised as an asset if it is probable that the future economic Other 1 to 20 benefits associated with the item will flow to the Group and the Support equipment 3 to 13 cost of the item can be measured reliably. Furniture and office equipment 2 to 25 Property, plant and equipment is stated at historical cost less Data processing equipment and software 3 to 10 accumulated depreciation and any accumulated impairment Other 2 to 20 losses. Each component of an item of property, plant and An item of property, plant and equipment is derecognised upon equipment with a cost that is significant in relation to the total disposal or when no future economic benefits are expected from cost of the item is depreciated separately. Depreciation is its use or disposal. Any gain or loss arising on derecognition of charged from the date the asset is available for use on a the asset (calculated as the difference between the net disposal straight-line basis over the estimated useful life and ceases at the proceeds and the carrying amount of the asset) is included in earlier of the date that the asset is classified as held for sale and the income statement in the year the asset is derecognised. the date the asset is derecognised. Idle assets continue to attract depreciation. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, The estimated useful life of individual assets and the where shorter, the term of the relevant lease if there is no depreciation method thereof are reviewed on an annual basis reasonable certainty that the Group will obtain ownership by the at balance sheet date. The depreciable amount is determined end of the lease term. after taking into account the residual value of the asset. The residual value is the estimated amount that the Group would Intangible assets currently obtain from the disposal of the asset, after deducting Goodwill the estimated cost of disposal, if the asset were already of the Goodwill arising on the acquisition of a subsidiary is age and in the condition expected at the end of its useful life. recognised as an asset at the date that control is acquired (the The residual values of assets are reviewed on an annual basis acquisition date). Goodwill is measured as the excess of the at balance sheet date. sum of the consideration transferred, the amount of any minority interest in the acquiree and the fair value of the acquirer’s Assets under construction represents freehold buildings, integral previously-held equity interest (if any) in the entity over the net fair operating software, network and support equipment and value of the identifiable net assets recognised. includes all direct expenditure as well as related borrowing If, after reassessment, the Group’s interest in the net fair value of costs capitalised, but excludes the costs of abnormal amounts of the acquiree’s identifiable net assets exceeds the sum of the waste material, labour or other resources incurred in the consideration transferred, the amount of any minority interest in production of self-constructed assets. the acquiree and the fair value of the acquirer’s previously-held Freehold land is stated at cost and is not depreciated. Amounts equity interest (if any), the excess is recognised immediately in paid by the Group on improvements to assets which are held in profit or loss as a bargain purchase gain. terms of operating lease agreements are depreciated on a Goodwill is not amortised, but is reviewed for impairment at straight-line basis over the shorter of the remaining useful life of least annually. Any impairment loss is recognised immediately in the applicable asset or the remainder of the lease period. profit or loss and is not subsequently reversed. Where it is reasonably certain that the lease agreement will be renewed, the lease period equals the period of the initial On disposal of a subsidiary, the attributable amount of goodwill agreement plus the renewal periods. is included in the determination of the profit or loss on disposal. Telkom fins (group) NEW 8/12/09 6:29 PM Page 154
154 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) use and no future economic benefit is expected from its Intangible assets (continued) disposal. Any gains or losses on the retirement or disposal of Licences, software, trademarks, copyrights and other assets are recognised in the income statement in the year in At initial recognition acquired intangible assets are recognised which they arise. at their purchase price, including import duties and non- The expected useful lives assigned to intangible assets are: refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable Years costs for preparing the asset for its intended use. Internally Licences 5 to 30 generated intangible assets are recognised at cost comprising Software 2 to 10 all directly attributable costs necessary to create and prepare Trademarks, copyrights and other 1 to 15 the asset to be capable of operating in the manner intended by Asset retirement obligations management. Licences, software, trademarks, copyrights and Asset retirement obligations related to property, plant and other intangible assets are carried at cost less accumulated equipment and intangible assets are recognised at the present amortisation and any accumulated impairment losses. value of expected future cash flows when the obligation to Amortisation commences when the intangible assets are dismantle or restore the site arises. The increase in the related available for their intended use and is recognised on a straight- asset’s carrying value is depreciated over its estimated useful line basis over the assets’ expected useful lives. Amortisation life. The unwinding of the discount is included in finance ceases at the earlier of the date that the asset is classified as charges and fair value movements. Changes in the held for sale and the date that the asset is derecognised. measurement of an existing liability that result from changes in the estimated timing or amount of the outflow of resources The residual value of intangible assets is the estimated amount that required to settle the liability, or a change in the discount rate the Group would currently obtain from the disposal of the asset, are accounted for as increases or decreases to the original cost after deducting the estimated cost of disposal, if the asset were of the recognised assets. If the amount deducted exceeds the already of the age and in the condition expected at the end of its carrying amount of the asset, the excess is recognised useful life. Due to the nature of the asset the residual value is immediately in profit or loss. assumed to be zero unless there is a commitment by a third party to purchase the asset at the end of its useful life or when there is an Non-current assets held for sale active market that is likely to exist at the end of the asset’s useful life, Non-current assets and disposal groups are classified as held which can be used to estimate the residual values. The residual for sale if their carrying amount will be recovered through a sale values of intangible assets, amortisation methods and their useful transaction rather than through continuing use. This condition is lives are reviewed on an annual basis at balance sheet date. regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its Intangible assets with indefinite useful lives and intangible assets present condition. Management must be committed to the sale, not yet available for use are tested for impairment annually which should be expected to qualify for recognition as a either individually or at the cash-generating unit level. Such complete sale within one year from the date of classification and intangible assets are not amortised. The useful life of an marketed at a reasonable value. Assets are no longer intangible asset with an indefinite life is reviewed annually to depreciated when they are classified into the category. determine whether indefinite life assessment continues to be If a non-current asset or disposal group is classified as held for supportable. If not, the change in the useful life assessment from sale, but the criteria for classification as held for sale are no indefinite to finite is made on a prospective basis. longer met, the disclosure of such non-current asset or disposal Assets under construction represents application and other non- group as held for sale is ceased. Where the disposal group integral software and includes all direct expenditure as well as was also classified as a discontinued operation, the subsequent related borrowing costs capitalised, but excludes the costs of classification as held for use also requires that the discontinued abnormal amounts of waste material, labour or other resources operation be included in continuing operations. incurred in the production of self-constructed assets. Non-current assets (and disposal groups) classified as held for Intangible assets are derecognised when they have been sale are measured at the lower of the assets’ previous carrying disposed of or when the asset is permanently withdrawn from amount and fair value less cost to sell. Telkom fins (group) NEW 8/12/09 6:29 PM Page 155
Telkom Annual Report 2009 155
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) being deferred and recognised systematically over the expected Summary of significant accounting policies (continued) duration of the customer relationship because it is considered to Impairment of property, plant and equipment and be part of the customers’ ongoing rights to telecommunication intangible assets services and the operator’s continuing involvement. Any excess The Group regularly reviews its non-financial assets and cash- of the costs over revenues is expensed immediately. generating units for any indication of impairment. When Inventories indicators, including changes in technology, market, economic, Installation material, maintenance and network equipment legal and operating environments occur and could result in inventories are stated at the lower of cost, determined on a changes of the asset’s or cash-generating unit’s estimated weighted average basis, or estimated net realisable value. recoverable amount, an impairment test is performed. Merchandise inventories are stated at the lower of cost, The recoverable amount of assets or cash-generating units is determined on a first-in first-out (FIFO) basis, or estimated net measured using the higher of the fair value less costs to sell and realisable value. Write-down of inventories arises when, for its value in use, which is the present value of projected cash example, goods are damaged or when net realisable value is flows covering the remaining useful lives of the assets. lower than carrying value. Impairment losses are recognised when the asset’s carrying Financial instruments value exceeds its estimated recoverable amount. Where Recognition and initial measurement applicable, the recoverable amount is determined for the cash- All financial instruments are initially recognised at fair value, plus, generating unit to which the asset belongs. in the case of financial assets and liabilities not at fair value through Previously recognised impairment losses, other than goodwill, are profit or loss, transaction costs that are directly attributable to the reviewed annually for any indication that it may no longer exist or acquisition or issue. Financial instruments are recognised when the may have decreased. If any such indication exists, the recoverable Group becomes a party to their contractual arrangements. All amount of the asset is estimated. Such impairment losses are regular way transactions are accounted for on settlement date. reversed through the income statement if the recoverable amount Regular way purchases or sales are purchases or sales of financial has increased as a result of a change in the estimates used to assets that require delivery of assets within the period generally determine the recoverable amount, but not to an amount higher established by regulation or convention in the marketplace. than the carrying amount that would have been determined (net of Subsequent measurement depreciation or amortisation) had no impairment loss been Subsequent to initial recognition, the Group classifies financial recognised in prior years. Impairment on goodwill is not reversed. assets as ’at fair value through profit or loss’, ’held-to-maturity Repairs and maintenance investments’, ’loans and receivables’, or ’available-for-sale’. The Group expenses all costs associated with repairs and Financial liabilities are classified ’at fair value through profit or maintenance, unless it is probable that such costs would result in loss’ or ’other financial liabilities’. The measurement of each is increased future economic benefits flowing to the Group, and set out below and presented in a table in note 13. the costs can be reliably measured. The fair value of financial assets and liabilities that are actively Borrowing costs traded in financial markets is determined by reference to quoted Financing costs directly associated with the acquisition or market prices at the close of business on the balance sheet date. construction of assets that require more than three months to Where there is no active market, fair value is determined using complete and place in service are capitalised at interest rates valuation techniques such as discounted cash flow analysis. relating to loans specifically raised for that purpose, or at the Financial assets at fair value through profit or loss weighted average borrowing rate where the general pool of The Group classifies financial assets that are held for trading in the Group borrowings was utilised. Other borrowing costs are category ’financial assets at fair value through profit or loss’. expensed as incurred. Financial assets are classified as held for trading if they are Deferred revenue and expenses acquired for the purpose of selling in the future. Derivatives not Activation revenue and costs are recognised in accordance with designated as hedges are also classified as held for trading. On the principles contained in Emerging Issues Task Force Issue remeasurement to fair value the gains or losses on held for trading No 00-21, Revenue Arrangements with Multiple Deliverables financial assets are recognised in net finance charges and fair (EITF 00-21), issued in the United States. This results in activation value movements for the year. revenue and costs up to the amount of the deferred revenue Telkom fins (group) NEW 8/12/09 6:29 PM Page 156
156 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial liabilities at fair value through profit or loss Financial instruments (continued) Financial liabilities are classified as ‘at fair value through profit Financial assets at fair value through profit or loss or loss’ (FVTPL) where the financial liability is held for trading. (continued) A financial liability is classified as held for trading: Gains and losses arising from changes in the fair value of the ’financial assets at fair value through profit or loss’ category are • if it is acquired for the purpose of settling in the near term; or presented in the income statement within ’finance charges and • if it is a derivative that is not designated and effective as a fair value movements’ in the period which they arise. hedging instrument. Held-to-maturity financial assets The Group classifies non-derivative financial assets with fixed or Financial liabilities at a FVTPL are stated at fair value, with any determinable payments and fixed maturity dates as held-to- resultant gains or losses recognised in profit or loss. The net maturity when the Group has the positive intention and ability to gain or loss recognised in profit or loss incorporates any interest hold to maturity. These assets are subsequently measured at paid on the financial liability. amortised cost. Amortised cost is computed as the amount Other financial liabilities initially recognised minus principal repayments, plus or minus Other financial liabilities are subsequently measured at the cumulative amortisation using the effective interest rate amortised cost using the effective interest rate method, with method. This calculation includes all fees paid or received interest expense recognised in finance charges and fair value between parties to the contract. For investments carried at movements, on an effective interest rate basis. amortised cost, gains and losses are recognised in net profit or loss when the investments are sold or impaired. The effective interest rate is the rate that accurately discounts
Loans and receivables estimated future cash payments through the expected life of the Loans and receivables are non-derivative financial assets with financial liability or, where appropriate, a shorter period.
fixed or determinable payments that are not quoted in an active Financial guarantee contracts market. Such assets are carried at amortised cost using the Financial guarantee contracts are subsequently measured at the effective interest rate method. Trade receivables are higher of the amount determined in accordance with IAS37 subsequently measured at the original invoice amount where the Provisions, Contingent Liabilities and Contingent Assets or the effect of discounting is not material. amount initially recognised less, when appropriate, cumulative Available-for-sale financial assets amortisation, recognised in accordance with IAS18 Revenue. Available-for-sale financial assets are those non-derivative assets Cash and cash equivalents that are designated as available-for-sale, or are not classified in any of the three preceding categories. Equity instruments are all Cash and cash equivalents are measured at amortised cost. This treated as available-for-sale financial instruments. After initial comprises cash on hand, deposits held on call and term recognition, available-for-sale financial assets are measured at deposits with an initial maturity of less than three months when fair value, with gains and losses being recognised as a entered into. separate component of equity, net of taxation. Dividend income For the purpose of the cash flow statement, cash and cash is recognised in the income statement as part of other income equivalents consist of cash and cash equivalents defined above, when the Group’s right to receive payment is established. net of credit facilities utilised. Changes in the fair value of monetary items denominated in a Capital and money market transactions foreign currency and classified as available-for-sale are New bonds and commercial paper bills issued are subsequently analysed between translation differences resulting from changes in amortised cost of the security and other changes in carrying measured at amortised cost using the effective interest rate amount of the item. The translation differences on monetary method. items are recognised in profit or loss, while translation Bonds issued where Telkom is a buyer and seller of last resort differences on non-monetary securities are recognised in equity. are carried at fair value. The Group does not actively trade in Changes in the fair value of monetary and non-monetary items bonds. classified as available-for-sale are recognised directly in equity. When an investment is derecognised or determined to be impaired, the cumulative gain or loss previously recorded in equity is recognised in profit or loss. Telkom fins (group) NEW 8/12/09 6:29 PM Page 157
Telkom Annual Report 2009 157
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) If, in a subsequent period, the amount of the impairment loss for Financial instruments (continued) financial assets decreases and the decrease can be related Derecognition objectively to an event occurring after the impairment was A financial instrument or a portion of a financial instrument will recognised, the previously recognised impairment loss is be derecognised and a gain or loss recognised when the reversed except for those financial assets classified as available- Group’s contractual rights expire, financial assets are transferred for-sale and carried at cost that are not reversed. Any or financial liabilities are extinguished. On derecognition of a subsequent reversal of an impairment loss is recognised in the financial asset or liability, the difference between the income statement, to the extent that the carrying value of the consideration and the carrying amount on the settlement date is asset does not exceed its amortised cost at the reversal date. included in finance charges and fair value movements for the Reversals in respect of equity instruments classified as available- year. For available-for-sale assets, the fair value adjustment for-sale are not recognised in profit or loss. Reversals of relating to prior revaluations of assets is transferred from equity impairment losses on debt instruments classified as available-for- and recognised in finance charges and fair value movements for sale are reversed through the income statement, if the increase the year. in fair value of the instrument is objectively related to an event
Bonds and commercial paper bills are derecognised when the occurring after the impairment loss was recognised through the obligation specified in the contract is discharged. The difference income statement. between the carrying value of the bond and the amount paid to Remeasurement of embedded derivatives extinguish the obligation is included in finance charges and fair The Group assesses whether an embedded derivative is value movements for the year. required to be separated from the host contract and accounted Impairment of financial assets for as a derivative when it first becomes party to the contract. At each balance sheet date an assessment is made of whether The Group reassesses the contract when there is a change in the there are any indicators of impairment of a financial asset or terms of the contract which significantly modifies the cash flows a group of financial assets based on observable data about that would otherwise be required under the contract.
one or more loss events that occurred after the initial recognition Financial instruments: Disclosures of the asset or the group of assets. For loans and receivables The Group groups its financial instruments into classes of similar carried at amortised costs, if there is objective evidence that an instruments and where disclosure is required, it discloses them impairment loss has been incurred, the amount of the loss is by class. It also discloses information about the nature and measured at the difference between the asset’s carrying amount extent of risks arising from its financial instruments as indicated and the present value of estimated future cashflows. The in note 13. carrying amount of the assets is reduced through the use of an allowance account and the amount of the loss is recognised in Foreign currencies the income statement. In the case of equity securities classified Each entity within the Group determines its functional currency. as available-for-sale, a significant or prolonged decline in the The Group’s presentation currency is the South African rand fair value of the security below its cost is considered as an (ZAR). indicator that the securities are impaired. Transactions denominated in foreign currencies are measured at If any such evidence exists for available-for-sale assets, the the rate of exchange at transaction date. Monetary items cumulative loss – measured as the difference between the denominated in foreign currencies are remeasured at the rate of acquisition cost and the current fair value, less any impairment exchange at settlement date or balance sheet date, whichever loss on that financial asset previously recognised in profit or loss occurs first. Exchange differences on the settlement or translation – is removed from equity and recognised in the income of monetary assets and liabilities are included in finance statement. Impairment losses recognised in the income statement charges and fair value movements in the period in which they on equity instruments are not reversed through the income arise. Non-monetary items that are measured in terms of statement. The recoverable amount of financial assets carried at historical cost in a foreign country are translated using the amortised cost is calculated as the present value of expected exchange rates as at the dates of the initial transactions. Non- future cash flows discounted at the original effective interest rate monetary items measured at fair value in a foreign currency are of the asset. translated using the exchange rates at the date when the fair value is determined. Telkom fins (group) NEW 8/12/09 6:29 PM Page 158
158 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) The land and buildings elements of a lease of land and Foreign currencies (continued) buildings are considered separately for the purposes of lease The annual financial statements of foreign operations are classification unless it is impracticable to do so. translated into South African rand, the Group’s presentation Lessee currency, for incorporation into the consolidated annual Operating lease payments are recognised in the income financial statements. Assets and liabilities are translated at the statement on a straight-line basis over the lease term. foreign exchange rates ruling at the balance sheet date. Income, expenditure and cash flow items are measured at the Assets acquired in terms of finance leases are capitalised at the actual foreign exchange rate or average foreign exchange rates lower of fair value or the present value of the minimum lease for the period. All resulting unrealised exchange differences are payments at inception of the lease and depreciated over the classified as equity. On disposal, the cumulative amounts of lesser of the useful life of the asset or the lease term. The capital unrealised exchange differences that have been deferred are element of future obligations under the leases is included as a recognised in the consolidated income statement as part of the liability in the balance sheet. Lease finance costs are amortised gain or loss on disposal. in the income statement over the lease term using the interest rate implicit in the lease. Where a sale and leaseback transaction All gains and losses on the translation of equity loans to foreign operations that are intended to be permanent, whether they are results in a finance lease, any excess of sale proceeds over the denominated in one of the entities’ functional currencies or in a carrying amount is deferred and recognised in the income third currency, are recognised in equity. statement over the term of the lease.
Goodwill and intangible assets arising on the acquisition of a Lessor foreign operation are treated as assets of the foreign operation Operating lease revenue is recognised in the income statement and translated at the foreign exchange rates ruling at balance on a straight-line basis over the lease term.
sheet date. Assets held under a finance lease are recognised in the balance Treasury shares sheet and presented as a receivable at an amount equal to the Where the Group acquires, or in substance acquires, Telkom net investment in the lease. The recognition of finance income is shares, such shares are measured at cost and disclosed as a based on a pattern reflecting a constant periodic rate of return reduction of equity. No gain or loss is recognised in profit or loss on the net investment in the finance lease. on the purchase, sale, issue or cancellation of the Group’s own Employee benefits equity instruments. Such shares are not remeasured for changes Post-employment benefits in fair value. The Group provides defined benefit and defined contribution Where the Group chooses or is required to buy equity instruments plans for the benefit of employees. These plans are funded by from another party to satisfy its obligations to its employees under the employees and the Group, taking into account the share-based payment arrangement by delivery of its own recommendations of the independent actuaries. The post- shares, the transaction is accounted for as equity-settled. This retirement telephone rebate liability is unfunded. applies regardless of whether the employees’ rights to the equity Defined contribution plans instruments were granted by the Group itself or by its shareholders The Group’s funding of the defined contribution plans is charged or was settled by the Group itself or its shareholders. to employee expenses in the same year as the related service is Leases provided. A lease is classified as a finance lease if it transfers substantially Defined benefit plans all the risks and rewards incidental to ownership. All other leases are classified as operating leases. The Group provides defined benefit plans for pension, retirement, post-retirement medical aid benefits and telephone Where the Group enters into a service agreement as a supplier or rebates to qualifying employees. The Group’s net obligation in a customer that depends on the use of a specific asset, and conveys respect of defined benefits is calculated separately for each the right to control the use of the specific asset, the arrangement is plan by estimating the amount of future benefits earned in return assessed to determine whether it contains a lease. Once it has been for services rendered. concluded that an arrangement contains a lease, it is assessed against the criteria in IAS17 to determine if the arrangement should be recognised as a finance lease or operating lease. Telkom fins (group) NEW 8/12/09 6:29 PM Page 159
Telkom Annual Report 2009 159
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred bonus incentives Employee benefits (continued) Employees of the wholly owned subsidiaries of Vodacom, Defined benefit plans (continued) including executive directors, are eligible for compensation The amount recognised in the balance sheet represents the present benefits in the form of a Deferred Bonus Incentive Scheme. The value of the defined benefit obligations, calculated by using the benefit is recorded at the present value of the expected future projected unit credit method, as adjusted for unrecognised cash outflows. actuarial gains and losses, unrecognised past service costs and Share-based compensation reduced by the fair value of the related plan assets. The amount The grants of equity instruments, made to employees in terms of of any surplus recognised and reflected as deferred expenses is the Telkom Conditional Share Plan, are classified as equity- limited to unrecognised actuarial losses and past service costs plus settled share-based payment transactions. The expense relating the present value of available refunds and reductions in future to the services rendered by the employees, and the contributions to the plan. To the extent that there is uncertainty as corresponding increase in equity, is measured at the fair value to the entitlement to the surplus, no asset is recognised. No gain of the equity instruments at their date of grant based on the is recognised solely as a result of an actuarial loss or past service market price at grant date, adjusted for the lack of entitlement to cost in the current period and no loss is recognised solely as a dividends during the vesting period. This compensation cost is result of an actuarial gain or past service cost in the current period. recognised over the vesting period, based on the best available Actuarial gains and losses are recognised as employee estimate at each balance sheet date of the number of equity expenses when the cumulative unrecognised gains and losses instruments that are expected to vest. for each individual plan exceed 10% of the greater of the Short-term employee benefits present value of the Group’s obligation and the fair value of The cost of all short-term employee benefits is recognised during plan assets at the beginning of the year. These gains or losses the year the employees render services, unless the Group uses are amortised on a straight-line basis over 10 years for all the the services of employees in the construction of an asset and the defined benefit plans, except gains or losses related to the benefits received meet the recognition criteria of an asset, at pensioners in the Telkom Retirement Fund or unless the standard which stage it is included as part of the related property, plant requires faster recognition. For the Telkom Retirement Fund and equipment or intangible asset item. pensioners, the cumulative unrecognised actuarial gains and losses in excess of the 10% corridor at the beginning of the year Long-term incentive provision are recognised immediately. The Vodacom Group provides long-term incentives to eligible employees payable on termination or retirement. The Group’s Past service costs are recognised immediately to the extent that liability is based on an actuarial valuation. Actuarial gains and the benefits are vested, otherwise they are recognised on a losses are recognised as employee expenses. straight-line basis over the average period the benefits become vested. Provisions Provisions are recognised when the Group has a present Leave benefits obligation (legal or constructive) as a result of a past event, it is Annual leave entitlement is provided for over the period that the probable that an outflow of resources will be required to settle leave accrues and is subject to a cap of 22 days. the obligation, and a reliable estimate can be made of the Workforce reduction amount of the obligation. Provisions are reviewed at each Workforce reduction expenses are payable when employment balance sheet date and adjusted to reflect the current best is terminated before the normal retirement age or when an estimate. Where the effect of the time value of money is employee accepts voluntary redundancy in exchange for material, the amount of the provision is the present value of the benefits. Workforce reduction benefits are recognised when the expenditures expected to be required to settle the obligation. entity is demonstrably committed and it is probable that the expenses will be incurred. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits is based on the number of employees expected to accept the offer. Telkom fins (group) NEW 8/12/09 6:29 PM Page 160
160 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
3. REVENUE 3.1 Total revenue 32,919 34,084 36,433
Operating revenue 32,441 33,611 35,940 Other income (excluding profit on disposal of property, plant and equipment, intangible assets and investments, refer to note 4) 279 305 312 Investment income (refer to note 6) 199 168 181
3.2 Operating revenue 32,441 33,611 35,940
Fixed-line 32,345 32,572 33,659 Multi-Links – 845 1,900 Other 873 1,040 1,214 Eliminations (777) (846) (833)
Fixed-line 32,345 32,572 33,659
Subscriptions, connections and other usage 6,286 6,330 6,614 Traffic 16,740 15,950 15,323
Domestic (local and long distance) 7,563 6,328 5,670 Fixed-to-mobile 7,646 7,557 7,420 International (outgoing) 988 986 933 Subscription based calling plans 543 1,079 1,300
Interconnection 1,639 1,757 2,084 Data 7,489 8,308 9,310 Sundry revenue 191 227 328
4. OTHER INCOME 338 472 343
Other income (included in Total revenue, refer to note 3) 279 305 312
Interest received from trade receivables 188 254 270 Sundry income 91 51 42
Profit on disposal of property, plant and equipment and intangible assets 16 167 31 Profit on disposal of investment 43 – – Telkom fins (group) NEW 8/12/09 6:29 PM Page 161
Telkom Annual Report 2009 161
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
5. OPERATING EXPENSES Operating expenses comprise: 5.1 Employee expenses 7,254 7,629 8,345
Salaries and wages 5,215 5,710 6,050 Medical aid contributions 384 415 410 Retirement contributions 446 470 472 Post-retirement pension and retirement fund (refer to note 30) 33 5 29
Current service cost 5 5 4 Interest cost 329 509 633 Expected return on plan assets (508) (713) (825) Actuarial gain (136) (16) – Settlement loss/(gain) 21 (2) (3) Asset limitation 322 222 220
Post-retirement medical aid (refer to notes 29 and 30) 330 278 457
Current service cost 83 84 95 Interest cost 286 322 428 Expected return on plan asset (188) (257) (223) Actuarial loss 149 129 157
Telephone rebates (refer to notes 29 and 30) 104 27 61
Current service cost 4 3 6 Interest cost 19 22 39 Past service cost 76 2 2 Actuarial loss 5 – 14
Share-based compensation expense (refer to note 24) 141 522 554 Other benefits* 1,297 988 1,048 Employee expenses capitalised (696) (786) (736)
* Other benefits include annual leave, performance incentive, service bonuses, skills development and workforce reduction expenses.
5.2 Payments to other operators 5,005 6,098 6,919
Payments to other network operators consist of expenses in respect of interconnection with other network operators. Telkom fins (group) NEW 8/12/09 6:29 PM Page 162
162 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
5. OPERATING EXPENSES (continued) 5.3 Selling, general and administrative expenses 4,184 4,045 5,772
Selling and administrative expenses 1,533 1,220 2,374 Maintenance 1,870 1,966 2,319 Marketing 640 614 711 Bad debts 141 245 368
The increase in the current year’s selling and administrative expenses is attributable to the focus on expanding the customer base in Nigeria.
5.4 Service fees 2,209 2,437 2,756
Facilities and property management 1,142 1,228 1,275 Consultancy services 192 169 295 Security and other 821 982 1,121 Auditors’ remuneration 54 58 65
Audit services 53 57 58
Company auditors 48 46 47
Current year 47 43 47 Prior year underprovision 1 3 –
Other auditors – current year 5 11 11
Audit related services – 1 –
Other auditors – 1 –
Other services 1 – 7
Included in the current year’s consultancy services is an amount of R177 million relating to services rendered in respect of the transaction to dispose of Telkom’s shareholding in Vodacom Group (Proprietary) Limited.
The increase in the current year’s security and other costs is mainly attributable to the new contract negotiated to secure the copper network in Telkom’s drive to cut down on cable thefts.
5.5 Operating leases 775 671 823
Land and buildings 135 160 244 Transmission and data lines 8 35 118 Equipment 80 48 72 Vehicles 552 428 389
5.6 Depreciation, amortisation, impairment and write-offs 3,601 4,134 5,280
Depreciation of property, plant and equipment 3,011 3,151 3,733 Amortisation of intangible assets 306 469 724 Impairment of property, plant and equipment and intangible assets – 229 501 Write-offs of property, plant and equipment and intangible assets 284 285 322
Included in the current year’s amortisation of intangible assets is an amount of R134 million relating to the FIFA brand intangible asset. The impairment charge for the 2009 financial year consists of R462 million and R39 million relating to Multi-Links and Africa Online respectively. Telkom fins (group) NEW 8/12/09 6:29 PM Page 163
Telkom Annual Report 2009 163
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
6. INVESTMENT INCOME 199 168 181
Interest income 196 168 181 Dividend income from investments 3 – –
Included in investment income is an amount of R160 million (2008: R142 million; 2007: R196 million) which relates to interest earned from financial assets not measured at fair value through profit or loss.
7. FINANCE CHARGES AND FAIR VALUE MOVEMENTS 857 1,556 2,843
Finance charges on interest-bearing debt 1,142 1,543 1,732
Local debt 1,303 1,700 1,895 Foreign debt – 18 – Finance charges capitalised (161) (175) (163)
Foreign exchange gains and losses and fair value movement (285) 13 1,111
Foreign exchange losses 59 93 843 Fair value adjustments on derivative instruments (344) (80) 268
Capitalisation rate 14.77% 12.60% 12.40%
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss.
Included in foreign exchange losses and fair value adjustments are forex losses of R961 million in respect of the loan that Multi-Links received from Telkom and R409 million loss in respect of the Multi-Links put option, offset by the R318 million gain in Telkom. Telkom fins (group) NEW 8/12/09 6:29 PM Page 164
164 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
8. TAXATION 2,803 2,647 1,660
South African normal company taxation 1,989 2,018 1,658
Current taxation 2,023 2,018 1,686 Overprovision for prior year (34) – (28)
Deferred taxation 490 254 (164)
Temporary differences – normal company taxation 534 121 241 Temporary difference – secondary taxation on companies (STC) taxation credits (raised)/utilised (45) 190 (89) Change in taxation rate – (54) – Capital gains taxation (CGT) asset – – (454) Underprovision/(overprovision) for prior year 1 (3) 138
Secondary taxation on companies 324 381 164 Foreign taxation – (6) 2
Included in the current year’s deferred taxation expense is a credit of R454 million relating to the deferred taxation on temporary differences associated with the disposal groups which are classified as held for sale.
The decrease in the deferred taxation expense is mainly due to the temporary difference associated with the disposal groups which are classified as held for sale.
The STC expense was provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared exceeded dividends received. Deferred taxation expense relating to STC credits is provided for at a rate of 10% (2008: 10%; 2007: 12.5%).
Reconciliation of taxation rate %%% Effective rate 30.8 34.5 44.5 South African normal rate of taxation 29.0 29.0 28.0 Adjusted for: 1.8 5.5 16.5
Change in taxation rate – (0.5) – Exempt income (2.2) (2.5) (26.8) Disallowable expenditure 0.7 2.9 47.7 Taxation losses not utilised – (0.7) 1.6 STC credits (raised)/utilised (0.3) 1.5 (2.4) STC charge 3.1 5.3 4.4 CGT asset 1.1 – (11.0) Net (overprovision)/underprovision for prior year (0.5) (0.5) 3.0 Utilisation of assessed loss (0.1) – – Telkom fins (group) NEW 8/12/09 6:29 PM Page 165
Telkom Annual Report 2009 165
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE 9.1 Discontinued operations Telkom Media (Proprietary) Limited Telkom Media was classified as held for sale in the September 2008 interim financials. At year end March 31, 2009, the subsidiary did not meet the held for sale criteria as management were unable to sell the disposal group for its expected price and therefore decided to abandon it. 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* 14 26 Expenses* 157 305
Loss before taxation of discontinued operations 143 279 Taxation (1) 2
Loss after taxation of discontinued operations 142 281
The net cash flows attributable to the operating, investing and financing activities of discontinued operations: Operating cash flows (95) (140) Investing cash flows (218) (39) Financing cash flows 319 149
Total cash inflow/(outflow) 6 (30)
9.2 Disposal groups held for sale 9.2.1 Vodacom Group (Proprietary) Limited In the current year, the Group announced a decision to dispose of its entire interest in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group Plc (Vodafones) and unbundling its remaining 35% shareholding to its shareholders pursuant to a listing of Vodacom on the main board of the JSE Limited. This decision was taken in line with the Group’s strategy to unlock shareholder value; consequently, all assets and liabilities of Vodacom and its subsidiaries were classified as a discontinued operation.
Analysis of the results of discontinued operations: Revenue* 19,157 22,653 26,215 Expenses* 14,709 17,334 21,749
Profit before taxation of discontinued operations 4,448 5,319 4,466 Taxation 1,918 2,055 2,023
Profit after taxation of discontinued operations 2,530 3,264 2,443
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges. Telkom fins (group) NEW 8/12/09 6:29 PM Page 166
166 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm 9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE (continued) 9.2 Disposal groups held for sale (continued) 9.2.1 Vodacom Group (Proprietary) Limited (continued) The major classes of assets and liabilities of the business classified as a disposal group: Assets 23,410
Property, plant and equipment 10,922 Intangible assets 5,897 Trade and other receivables 4,283 Other non-current and current assets 2,308
Liabilities 15,858
Interest-bearing debt 4,170 Trade and other payables 4,679 Current portion of interest-bearing debt 2,882 Current portion of deferred revenue 1,260 Credit facilities utilised 1,102 Other non-current and current liabilities 1,765
Reserve of disposal group held for sale 876
Reconciliation of carrying value transferred to disposal groups at year end: Property, plant and equipment
Carrying value at beginning of year 9,585 Additions 2,979 Disposals (28) Foreign currency translation reserve 340 Business combinations 143 Impairments and write-offs (53) Depreciation (1,974) Transfers (33) Other transfers (37)
Carrying value at end of year 10,922
Intangible assets
Carrying value at beginning of year 2,111 Additions 590 Foreign currency translation reserve 26 Business combinations 3,503 Amortisation (366) Transfers (33)
Carrying value at end of year 5,897
The net cash flows attributable to the operating, investing and financing activities of the disposal group:
Operating cash flows 2,429 2,563 2,092 Investing cash flows (3,292) (3,751) (6,375) Financing cash flows (100) 1,617 4,436
Total cash (outflow)/inflow (963) 429 153 Telkom fins (group) NEW 8/12/09 6:29 PM Page 167
Telkom Annual Report 2009 167
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE (continued) 9.2 Disposal groups held for sale (continued) 9.2.2 Swiftnet (Proprietary) Limited In February 2009, Telkom’s Board of directors took a decision to dispose of its 100% investment in Swiftnet (Proprietary) Limited. The investment is classified as held for sale.
Analysis of the results of discontinued operations: Revenue* 103 98 97 Expenses* 64 79 82
Profit before taxation of discontinued operations 39 19 15 Taxation 10 3 (4)
Profit after taxation of discontinued operations 29 16 19
The major classes of assets and liabilities of the business classified as a disposal group: Assets 72
Property, plant and equipment and intangible assets 24 Income taxation receivable 2 Trade and other receivables 18 Cash and cash equivalents 28
Liabilities 15
Provisions 1 Trade and other payables 10 Current portion of provisions 4
The net cash flows attributable to the operating, investing and financing activities of the disposal group:
Operating cash flows 43 22 31 Investing cash flows (15) (11) (33) Financing cash flows (23) – 10
Total cash inflow 5 11 8
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges. Telkom fins (group) NEW 8/12/09 6:29 PM Page 168
168 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
10. EARNINGS PER SHARE Total operations Basic earnings per share (cents) 1,681.0 1,565.0 832.8 The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R4,170 million (2008: R7,975 million; 2007: R8,646 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted earnings per share (cents) 1,676.3 1,546.9 819.6 The calculation of diluted earnings per share is based on earnings for the year of R4,170 million (2008: R7,975 million; 2007: R8,646 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
Headline earnings per share (cents)* 1,710.7 1,634.8 994.6 The calculation of headline earnings per share is based on headline earnings of R4,980 million (2008: R8,331 million; 2007: R8,799 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted headline earnings per share (cents)* 1,706.0 1,616.0 978.8 The calculation of diluted headline earnings per share is based on headline earnings of R4,980 million (2008: R8,331 million; 2007: R8,799 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
Continuing operations Basic earnings per share (cents) 1,204.7 963.7 407.4 The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R2,040 million (2008: R4,911 million; 2007: R6,196 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted earnings per share (cents) 1,201.3 952.6 401.0 The calculation of diluted earnings per share is based on earnings for the year of R2,040 million (2008: R4,911 million; 2007: R6,196 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Telkom fins (group) NEW 8/12/09 6:29 PM Page 169
Telkom Annual Report 2009 169
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
10. EARNINGS PER SHARE (continued) Continuing operations (continued) Headline earnings per share (cents)* 1,235.5 1,028.9 557.0 The calculation of headline earnings per share is based on headline earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted headline earnings per share (cents)* 1,232.2 1,017.0 548.2 The calculation of diluted headline earnings per share is based on headline earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
Discontinuing operations Basic earnings per share (cents) 476.3 601.3 425.4 The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R2,130 million (2008: R3,064 million; 2007: R2,450 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted earnings per share (cents) 475.0 594.3 418.6 The calculation of diluted earnings per share is based on earnings for the year of R2,130 million (2008: R3,064 million; 2007: R2,450 million) and 508,782,641 diluted weighted average number of ordinary shares (2008: 515,541,968; 2007: 515,763,581). The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
Headline earnings per share (cents)* 475.2 606.0 437.6 The calculation of headline earnings per share is based on headline earnings of R2,191 million (2008: R3,088 million; 2007: R2,444 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue.
Diluted headline earnings per share (cents)* 473.9 599.0 430.6 The calculation of diluted headline earnings per share is based on headline earnings of R2,191 million (2008: R3,088 million; 2007: R2,444 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Telkom fins (group) NEW 8/12/09 6:29 PM Page 170
170 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
10. EARNINGS PER SHARE (continued) Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue (refer to note 22) 544,944,901 532,855,530 520,784,186 Weighted average number of shares bought back (7,442,253) (1,594,241) (27) Weighted average number of treasury shares (23,161,364) (21,666,197) (20,083,621)
Weighted average number of shares outstanding 514,341,284 509,595,092 500,700,538
Reconciliation of diluted weighted average number of ordinary shares Weighted average number of shares outstanding 514,341,284 509,595,092 500,700,538 Expected future vesting of shares 1,422,297 5,946,876 8,082,103
Diluted weighted average number of shares outstanding 515,763,581 515,541,968 508,782,641
Gross** Net Total operations Rm Rm
2009 Reconciliation between earnings and headline earnings: Earnings as reported 4,170 Profit on disposal of property, plant and equipment and intangible assets (25) (21) Impairment loss on property, plant and equipment and intangible assets 557 557 Write-offs of property, plant and equipment and intangible assets 322 274
Headline earnings 4,980
2008 Reconciliation between earnings and headline earnings: Earnings as reported 7,975 Profit on disposal of investments (available-for-sale) (4) (3) Profit on disposal of property, plant and equipment and intangible assets (147) (104) Impairment loss on property, plant and equipment and intangible assets 248 244 Write-offs of property, plant and equipment and intangible assets 285 219
Headline earnings 8,331
2007 Reconciliation between earnings and headline earnings: Earnings as reported 8,646 Profit on disposal of investments (available-for-sale) (52) (37) Profit on disposal of property, plant and equipment and intangible assets (29) (21) Reversal of impairment loss on property, plant and equipment and intangible assets 12 9 Write-offs of property, plant and equipment and intangible assets 284 202
Headline earnings 8,799
* The disclosure of headline earnings is a requirement of the JSE Limited and is not a recognised measure under IFRS. It has been calculated in accordance with the South African Institute of Chartered Accountants’ circular issued in this regard. ** These are the gross amounts, before deducting taxation and minority interests. Telkom fins (group) NEW 8/12/09 6:29 PM Page 171
Telkom Annual Report 2009 171
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
10. EARNINGS PER SHARE (continued) Gross* Net Continuing operations Rm Rm
2009 Reconciliation between earnings and headline earnings: Profit from continuing operations 2,066 Minority interest 26
Earnings from continuing operations attributable to equity holders of Telkom 2,040 Profit on disposal of property, plant and equipment and intangible assets (32) (26) Impairment loss on property, plant and equipment and intangible assets 501 499 Write-offs of property, plant and equipment and intangible assets 322 276
Headline earnings 2,789
2008 Reconciliation between earnings and headline earnings: Profit from continuing operations 5,034 Minority interest 123
Earnings from continuing operations attributable to equity holders of Telkom 4,911 Profit on disposal of property, plant and equipment and intangible assets (166) (118) Impairment loss on property, plant and equipment and intangible assets 233 233 Write-offs of property, plant and equipment and intangible assets 285 217
Headline earnings 5,244
2007 Reconciliation between earnings and headline earnings: Profit from continuing operations 6,290 Minority interest 94
Earnings from continuing operations attributable to equity holders of Telkom 6,196 Profit on disposal of investments (available-for-sale) (43) (31) Profit on disposal of property, plant and equipment and intangible assets (16) (11) Write-offs of property, plant and equipment and intangible assets 284 201
Headline earnings 6,355
* These are the gross amounts, before deducting taxation and minority interests. Telkom fins (group) NEW 8/12/09 6:29 PM Page 172
172 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
10. EARNINGS PER SHARE (continued) Gross* Net Discontinuing operations Rm Rm
2009 Reconciliation between earnings and headline earnings: Profit from discontinued operations 2,181 Minority interest 51
Earnings from discontinued operations attributable to equity holders of Telkom 2,130 Profit on disposal of property, plant and equipment and intangible assets 7 5 Impairment loss on property, plant and equipment and intangible assets 56 56
Headline earnings 2,191
2008 Reconciliation between earnings and headline earnings: Profit from discontinued operations 3,138 Minority interest 74
Earnings as reported 3,064 Profit on disposal of investments (available-for-sale) (4) (4) Profit on disposal of property, plant and equipment and intangible assets 19 13 Impairment loss on property, plant and equipment and intangible assets 15 15
Headline earnings 3,088
2007 Reconciliation between earnings and headline earnings: Profit from discontinued operations 2,559 Minority interest 109
Earnings as reported 2,450 Profit on disposal of investments (available-for-sale) (9) (6) Profit on disposal of property, plant and equipment and intangible assets (13) (9) Reversal of impairment loss on property, plant and equipment and intangible assets 12 9
Headline earnings 2,444
2007 2008 2009
Dividend per share (cents) 900.0 1,100.0 660.0
The calculation of dividend per share is based on dividends of R3,306 million (2008: R5,627 million; 2007: R4,678 million) declared on June 6, 2008 and 500,941,027 (2008: 511,513,237; 2007: 519,711,236) number of ordinary shares outstanding on the date of dividend declaration. The reduction in the number of shares represents the number of treasury shares held on date of payment.
* These are the gross amounts, before deducting taxation and minority interests. Telkom fins (group) NEW 8/12/09 6:29 PM Page 173
Telkom Annual Report 2009 173
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009* Accumu- Accumu- Accumu- lated lated lated depre- depre- depre- ciation and ciation and ciation and impair- Carrying impair- Carrying impair- Carrying Cost ment value Cost ment value Cost ment value Rm Rm Rm Rm Rm Rm Rm Rm Rm
11. PROPERTY, PLANT AND EQUIPMENT Freehold land and buildings 4,594 (1,837) 2,757 4,931 (2,010) 2,921 4,950 (2,136) 2,814 Leasehold buildings 926 (362) 564 1,052 (418) 634 805 (477) 328 Network equipment 63,003 (31,820) 31,183 69,572 (35,214) 34,358 59,765 (29,982) 29,783 Support equipment 4,045 (2,436) 1,609 4,355 (2,635) 1,720 3,921 (2,482) 1,439 Furniture and office equipment 536 (366) 170 568 (377) 191 453 (328) 125 Data processing equipment and software 5,836 (3,707) 2,129 6,279 (3,904) 2,375 5,543 (3,518) 2,025 Under construction 2,536 – 2,536 4,200 – 4,200 4,612 – 4,612 Other 860 (554) 306 1,046 (630) 416 721 (429) 292
82,336 (41,082) 41,254 92,003 (45,188) 46,815 80,770 (39,352) 41,418
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial year. This has reduced both the cost price and accumulated depreciation of property, plant and equipment.
Property, plant and equipment with a carrying value of R158 million (2008: R681 million; 2007: R574 million) are pledged as security. Details of the loans are disclosed in note 28.
* Net of assets of disposal groups classified as held for sale. Telkom fins (group) NEW 8/12/09 6:29 PM Page 174
174 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
11. PROPERTY, PLANT AND EQUIPMENT (continued) The carrying amounts of property, plant and equipment can be reconciled as follows:** Carrying Transfers Impairment, Carrying value at to Business Foreign write-offs value at beginning disposal combi- currency and Depre- end of of year groups Additions nations Transfers*translation reversals Disposals ciation year Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm
2009 Freehold land and buildings 2,921 (293) 283 – 82 (4) (5) (2) (168) 2,814 Leasehold buildings 634 (360) 119 – 24 (64) – – (25) 328 Network equipment 34,358 (7,951) 2,913 – 3,378 30 (141) (71) (2,733) 29,783 Support equipment 1,720 (235) 137 – 112 1 (12) – (284) 1,439 Furniture and office equipment 191 (72) 19 – 13 1 – – (27) 125 Data processing equipment and software 2,375 (370) 154 – 310 (1) (5) (1) (437) 2,025 Under construction 4,200 – 4,872 – (4,120) (238) (102) – – 4,612 Other 416 (304) 228 – 13 (1) (1) – (59) 292
46,815 (9,585) 8,725 – (188) (276) (266) (74) (3,733) 41,418
2008 Freehold land and buildings 2,757 – 300 22 27 2 (3) (8) (176) 2,921 Leasehold buildings 564 – 136 26 32 1 (67) (1) (57) 634 Network equipment 31,183 – 5,167 404 1,301 272 (136) (107) (3,726) 34,358 Support equipment 1,609 – 316 1 116 3 (8) – (317) 1,720 Furniture and office equipment 170 – 78 3 1 1 (8) (1) (53) 191 Data processing equipment and software 2,129 – 525 31 150 6 (19) (2) (445) 2,375 Under construction 2,536 – 3,416 135 (1,737) 2 (152) – – 4,200
Other 306 – 170 8 11 7 (2) (3) (81) 416
41,254 – 10,108 630 (99) 294 (395) (122) (4,855) 46,815
2007 Freehold land and buildings 2,699 – 209 – – 2 17 (1) (169) 2,757 Leasehold buildings 618 – – – 1 – – (14) (41) 564 Network equipment 28,941 – 5,154 1 849 240 (199) (270) (3,533) 31,183 Support equipment 1,321 – 442 – 109 2 (15) – (250) 1,609 Furniture and office equipment 134 – 51 3 8 1 – – (27) 170 Data processing equipment and software 2,082 – 466 12 (36) 8 (10) (2) (391) 2,129 Under construction 1,320 – 2,165 – (912) – (37) – – 2,536
Other 159 – 161 – 58 4 (1) (3) (72) 306
37,274 – 8,648 16 77 257 (245) (290) (4,483) 41,254
Full details of land and buildings are available for inspection at the registered offices of the Group. The Group does not have temporarily idle property, plant and equipment. A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that provides capacity for growth in services, with focus on Next Generation Network technologies, roll-out of the W-CDMA network and Multi-Links’s expansion of network equipment, has resulted in an increase in property, plant and equipment additions. During the 2008 financial year, the Group recognised an impairment loss relating to Telkom Media assets. The recoverable amount for certain items of property, plant and equipment was estimated, and an impairment loss of R217 million was recognised in order to reduce the carrying amount of those assets to their recoverable amount. The impairment has been included in impairment, write-offs and reversals. Included in the current year’s additions in the other category, is an amount of R179 million (2008: R31 million; 2007: RNil) that relates to finance leases. An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the reclassification of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Group entering into aangement. leasing arr
* An amount of R21 million was transferred from network equipment to cash and cash equivalents for Telkom Media. ** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9. Telkom fins (group) NEW 8/12/09 6:29 PM Page 175
Telkom Annual Report 2009 175
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009* Accumulated Accumulated Accumulated amortisation amortisation amortisation and impair- Carrying and impair- Carrying and impair- Carrying Cost ment value Cost ment value Cost ment value Rm Rm Rm Rm Rm Rm Rm Rm Rm
12. INTANGIBLE ASSETS Goodwill 673 – 673 3,267 (12) 3,2553,461 (501) 2,960 Trademarks, copyrights and other 761 (521) 240 1,127 (633) 494 677 (332) 345 Licences 222 (116) 106 311 (140) 171 228 (35) 193 Software 6,720 (3,737) 2,983 8,106 (4,298) 3,8087,045 (3,799) 3,246 Under construction 1,109 – 1,109 740 – 740488 – 488
9,485 (4,374) 5,111 13,551 (5,083) 8,46811,899 (4,667) 7,232
* Net of assets of disposal groups classified as held for sale.
The carrying amounts of intangible assets can be reconciled as follows:** Carrying Transfers Impair- Carrying value at to Business Foreign ment value at beginning disposal combi- currency and Amor- end of of year groups Additions nations Transfers translation write-offs tisation year Rm Rm Rm Rm Rm Rm Rm Rm Rm
2009 Goodwill 3,255 (947) – 1,309 – (156) (501) – 2,960 Trademarks, copyrights and other 494 (178) 300 – (28) (22) – (221) 345 Licences 171 (104) 41 – 137 (42) – (10) 193 Software 3,808 (882) 209 – 613 (8) (1) (493) 3,246 Under construction 740 – 356 – (555) 2 (55) – 488
8,468 (2,111) 906 1,309 167 (226) (557) (724) 7,232
2008 Goodwill 673 – 492 1,727 – 375 (12) – 3,255 Trademarks, copyrights and other 240 – 174 165 – 20 – (105) 494 Licences 106 – 32 36 – 15 (3) (15) 171 Software 2,983 – 739 – 713 9 (10) (626) 3,808 Under construction 1,109 – 354 – (614) – (109) – 740
5,111 – 1,791 1,928 99 419 (134) (746) 8,468
2007 Goodwill 305 – 186 173 – 9 – – 673 Trademarks, copyrights and other 213 – 8 69 – – – (50) 240 Licences 60 – 47 1 – 8 – (10) 106 Software 2,269 – 628 – 559 7 (4) (476) 2,983 Under construction 1,063 – 729 – (636) – (47) – 1,109
3,910 – 1,598 243 (77) 24 (51) (536) 5,111
Intangible assets that are material to the Group consist of Software and Goodwill. The average remaining amortisation period for Software is between 2 and 10 years.
** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9. Telkom fins (group) NEW 8/12/09 6:29 PM Page 176
176 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
12. INTANGIBLE ASSETS(continued) Impairment testing of goodwill For the purposes of impairment testing, goodwill is allocated to the smallest cash-generating unit. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Group reviews goodwill for impairment annually by comparing the recoverable amounts of cash-generating units to the carrying amounts.
Goodwill acquired through business combinations has been allocated to two cash-generating units for impairment testing as follows:
Africa Online Limited (Kenya) Multi-Links Telecommunications Limited (Nigeria)
Kenya The carrying amount of goodwill is R144 million.
For the period ending March 31, 2009, Africa Online was treated as one cash-generating unit for impairment testing purposes. This represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.
Goodwill relating to Africa Online was tested for impairment on March 31, 2009. The recoverable amount of goodwill relating to Africa Online was determined on the basis of value in use calculations.
Key assumptions used to determine the value in use include the discount rate and cash flows. Cash flows are based on a five year forecast of future cash flows, extrapolated in perpetuity to reflect the long-term plans for the entity, using a weighted average cost of capital of 15.4% (2008: 11.59%) and a terminal growth rate of 3%.
An impairment loss of R39 million (2008: R12 million) was recognised.
Nigeria The carrying amount of goodwill is R2,749 million.
Multi-Links has been identified as a single cash-generating unit within the Group. The recoverable amount of goodwill relating to Multi-Links was determined using the discounted cash flow method.
The key assumptions in determining cash flows are a five year forecast of future cash flows, extrapolated in perpetuity to reflect the long- term plans for the entity, using a weighted average cost of capital of 18.8%. The calculated perpetuity value for Multi-Links assumes that the company will continue to grow at 3% p.a. (nominal).
Key assumptions used in the testing of goodwill for impairment: Applicable to all cash-generating units Expected customer base: The basis for determining value(s) assigned to key assumptions is based on the closing customer base in the period immediately preceding the budget period and increased for expected growth. The value assigned to key assumptions reflects past experience, and has an element of potential growth. The growth is based on market assumptions.
Gross margin: The basis for determining value(s) assigned to key assumptions is based on the average gross margin achieved in the period immediately before the budget period and increased for expected efficiences. The value assigned reflects past experience and efficiency improvements.
Capital expenditure: The basis for determining value(s) assigned to key assumptions is based on the total capital expenditure achieved in the period immediately before the budget period and adjusted for expected network coverage roll-out. The value assigned is based on management’s expected network coverage roll-out.
Applicable to all cash-generating units except for the Africa Online cash-generating units ARPU: The basis for determining value(s) assigned to key assumptions is based on past experience and expected growth which is based on market forces and external sources of information.
Applicable to all non-South African cash-generating units Exchange rates: The basis for determining value(s) assigned to key assumptions is based on the average market forward exchange rate over the budget period in respect of the ZAR/US$. The value assigned to the key assumption is consistent with external sources of information. Telkom fins (group) NEW 8/12/09 6:29 PM Page 177
Telkom Annual Report 2009 177
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Group. As a result of the financial instruments held, the Group is exposed to market risk (comprising interest rate risk and currency risk), credit risk and liquidity risk. Treasury policies, risk limits and control procedures are continuously monitored by the Board of directors through its audit and risk management committee.
The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments, for example trade receivables and payables, arise directly from the Group’s operations.
The Group finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Group uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Group does not speculate in derivative instruments.
The table below sets out the Group’s classification of financial assets and liabilities:
At fair value through profit or Financial loss liabilities at Total held for amortised Held-to- Available- Loans and carrying trading cost maturity for-sale receivables value Fair value Note Rm Rm Rm Rm Rm Rm Rm
2009 Classes of financial instruments per balance sheet Assets 1,442 – 1,046 – 7,976 10,464 10,464
Investments 14 1,286–––97 1,383 1,383 Trade and other receivables* 19 ––––5,673 5,673 5,673 Other financial assets 20 156 – 1,046 – – 1,202 1,202
Interest rate swaps 4––––44 Forward exchange contracts 152––––152 152 Repurchase agreements – – 1,046 – – 1,046 1,046
Finance lease receivables 16 ––––275275 275 Cash and cash equivalents 21 ––––1,931 1,931 1,931
Liabilities (228) (23,963) – – – (24,191) (25,265)
Interest-bearing debt 28 – (18,275) – – – (18,275) (19,349) Trade and other payables 31 – (5,538) – – – (5,538) (5,538) Other financial liabilities 20 (228) ––––(228) (228)
Interest rate swaps (72) ––––(72) (72) Forward exchange contracts (156) ––––(156) (156)
Credit facilities utilised 21 – (127) – – – (127) (127) Shareholders for dividends 35 – (23) – – – (23) (23)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million). Telkom fins (group) NEW 8/12/09 6:29 PM Page 178
178 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Risk management (continued) At fair value through profit or Financial loss liabilities at Total held for amortised Held-to- Available- Loans and carrying trading cost maturity for-sale receivables value Fair value Note Rm Rm Rm Rm Rm Rm Rm
2008 Classes of financial instruments per balance sheet Assets 1,991 – – 55 10,155 12,201 12,201
Investments 14 1,377 – – 55 67 1,499 1,499 Trade and other receivables* 19 ––––8,582 8,582 8,582 Other financial assets 20 614––––614 614
Interest rate swaps 9 ––––99 Forward exchange contracts 589––––589 589 Other financial assets 16––––1616
Finance lease receivables 16 ––––372372 372 Cash and cash equivalents 21 ––––1,134 1,134 1,134
Liabilities (1,290) (25,866) – – – (27,156)(27,692)
Interest-bearing debt 28 – (15,733) – – – (15,733) (16,269) Trade and other payables 31 – (8,771) – – – (8,771) (8,771) Other financial liabilities 20 (1,290) ––––(1,290) (1,290)
Put option (Multi-Links) (919) ––––(919) (919) Put option (Vodacom DRC) (198) ––––(198) (198) Forward exchange contracts (173) ––––(173) (173)
Credit facilities utilised 21 – (1,342) – – – (1,342) (1,342) Shareholders for dividend 35 – (20) – – – (20) (20)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million). Telkom fins (group) NEW 8/12/09 6:29 PM Page 179
Telkom Annual Report 2009 179
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Risk management (continued) At fair value through profit or Financial loss liabilities at Total held for amortised Held-to- Available- Loans and carrying trading cost maturity for-sale receivables value Fair value Note Rm Rm Rm Rm Rm Rm Rm
2007 Classes of financial instruments per balance sheet Assets 1,608 – 246 47 7,861 9,762 9,762
Investments 14 1,349 – – 47 65 1,461 1,461 Trade and other receivables* 19––––7,047 7,047 7,047 Other financial assets 20 259––––259 259
Bills of exchange 98––––9898 Interest rate swaps 16––––1616 Forward exchange contracts 145––––145 145
Finance lease receivables 16 – – 246 – – 246 246 Cash and cash equivalents 21––––749749 749
Liabilities (327) (17,959) – – – (18,286)(19,676)
Interest-bearing debt 28 (98) (10,266) – – – (10,364) (11,754) Trade and other payables 31 – (7,237) – – – (7,237) (7,237) Other financial liabilities 20 (229) ––––(229) (229)
Put option (Vodacom DRC) (125) ––––(125) (125) Interest rate swaps (26) ––––(26) (26) Forward exchange contracts (42) ––––(42) (42) Other financial liabilities (36) ––––(36) (36)
Credit facilities utilised 21 – (441) – – – (441) (441) Shareholders for dividend 35 – (15) – – – (15) (15)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million). Telkom fins (group) NEW 8/12/09 6:29 PM Page 180
180 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.1 Fair value of financial instruments Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below.
The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation methodologies as outlined below.
Derivatives are recognised at fair value.
The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date.
The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their fair amount due to the short-term maturities of these instruments.
The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates, as a result they differ from carrying values.
The fair values of listed investments are based on quoted market prices.
13.2 Interest rate risk management Interest rate risk arises from the repricing of the Group’s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings.
The Group’s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Group makes use of interest rate derivatives as approved in terms of the Group policy limits. Fixed rate debt represents approximately 64.86% (2008: 51.88%; 2007: 90.37%) of the total debt, after taking the instruments listed below into consideration. There were no changes in the policies and processes for managing and measuring the risk from the previous period.
The table below summarises the interest rate swaps outstanding as at March 31:
Notional Weighted Average amount average maturity Currency Rm coupon rate
2009 Interest rate swaps outstanding Pay fixed 2-5 years ZAR 2,000 10.84%
2008 Interest rate swaps outstanding Pay fixed < 1 year ZAR 27 13.62% Receive fixed 1-5 years ZAR 58 13.30%
2007 Interest rate swaps outstanding Pay fixed < 1 year ZAR 1,000 14.67% Receive fixed 1-5 years ZAR 38 11.45% >5 years ZAR 61 11.44% Pay fixed The floating rate is based on the three month JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments. Telkom fins (group) NEW 8/12/09 6:29 PM Page 181
Telkom Annual Report 2009 181
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.3 Credit risk management Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due.
Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Group is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Group from counterparties is a net favourable position of R29 million (2008: R438 million; 2007: R144 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits the exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations.
With regard to credit risk arising from other financial assets of the Group, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets, the Group’s exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments.
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles.
Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate.
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. Refer to note 19.
The Group has provided a financial guarantee to Africa Online Limited for bank loans to the value of R26 million as at March 31, 2009 (2008: R23 million; 2007: RNil).
Telkom guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts such as employment period and salary rates. When an employee leaves the employment of Telkom, any housing debt guaranteed by Telkom is settled before any pension payout can be made to the employee. There is no provision outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of a default is R12 million. The fair value of the guarantee at March 31, 2009 was RNil (2008: RNil; 2007: RNil).
Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than in the previous period. Telkom fins (group) NEW 8/12/09 6:29 PM Page 182
182 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.3 Credit risk management (continued) The maximum exposure to credit risk for financial assets at the reporting date by type of customer was:
Carrying amount 2007 2008 2009 Rm Rm Rm
Trade receivables
Fixed-line 3,926 4,401 4,231
Business and residential 1,924 1,824 1,870 Global, corporate and wholesale 1,643 1,875 1,708 Government 318 368 444 Other customers 41 334 209
Mobile 2,299 2,880 – Multi-Links – 38 72 Other 567 666 720 Impairment of trade receivables (235) (290) (324)
Subtotal for trade receivables 6,557 7,695 4,699 Other receivables* 490 887 974 Other financial assets 259 614 1,202
7,306 9,196 6,875
* Excluding prepayments.
The ageing of trade receivables at the reporting date was: Not past due/current 5,829 6,840 3,582
Ageing of past due but not impaired 21 to 60 days 331 384 441 61 to 90 days 80 110 135 91 to 120 days 59 71 84 120+ days 258 290 457
6,557 7,695 4,699
The ageing in the allowance for the impairment of trade receivables at reporting date was: Fixed-line and other Current defaulted trade 24 53 70 21 to 60 days 21 25 30 61 to 90 days 19 31 19 91 to 120 days 15 19 74 120+ days 118 121 131
197 249 324 Mobile 38 41 –
235 290 324 Telkom fins (group) NEW 8/12/09 6:29 PM Page 183
Telkom Annual Report 2009 183
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.3 Credit risk management (continued) The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 19.
Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007: R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances.
During the 2009 year end the Group renegotiated the terms of trade receivables amounting to R1,9 million from a long outstanding customer. No impairment losses were recognised.
13.4 Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments. Liquidity risk is managed by the Group’s various Corporate Finance divisions in accordance with policies and guidelines formulated by the Group’s executive committees. In terms of its borrowing requirements the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Group maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills.
There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk from the previous period.
The table below summarises the maturity profile of the Group’s financial liabilities based on undiscounted contractual cash flow at the balance sheet date:
Carrying Contractual 0 – 12 1 – 2 2 – 5 > 5 amount cash flows months years years years Note Rm Rm Rm Rm Rm Rm
2009 Non-derivative financial liabilities Finance lease liabilities 38 986 1,848 165 172 516 995 Interest-bearing debt (excluding finance leases) 28 17,291 18,866 7,670 1,817 5,621 3,758 Trade and other payables 31 5,538 5,778 5,778––– Credit facilities utilised 21 127 127 127––– Derivative financial liabilities Other financial liabilities 20 228 228 156 72 – –
Interest rate swaps 72 72 – 72 – – Forward exchange contracts 156 156 156 – – –
24,170 26,847 13,896 2,061 6,137 4,753 Telkom fins (group) NEW 8/12/09 6:29 PM Page 184
184 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.4 Liquidity risk management (continued) Carrying Contractual 0 – 12 1 – 2 2 – 5 > 5 amount cash flows months years years years Note Rm Rm Rm Rm Rm Rm
2008 Non-derivative financial liabilities Finance lease liabilities 38 1,167 2,198 257 202 589 1,150 Interest-bearing debt (excluding finance leases) 28 14,566 16,672 6,350 4,835 2,733 2,754 Trade and other payables 31 8,771 8,771 8,771 – – – Credit facilities utilised 21 1,342 1,342 1,342 – – – Derivative financial liabilities Other financial liabilities 20 1,290 1,290 371 919 – –
Put option (Multi-Links) 919 919 – 919 – – Put option (Vodacom DRC) 198 198 198 – – – Forward exchange contracts 173 173 173 – – –
27,136 30,273 17,091 5,956 3,322 3,904
2007 Non-derivative financial liabilities Finance lease liabilities 38 1,220 2,424 231 276 585 1,332 Interest-bearing debt (excluding finance leases) 28 9,144 11,329 6,133 1 2,551 2,644 Trade and other payables 31 7,237 7,237 7,237 – – – Credit facilities utilised 21 441 441 441 – – – Derivative financial liabilities Other financial liabilities 20 229 229 229–––
Put option (Vodacom DRC) 125 125 125 – – – Interest rate swaps 26 26 26 – – – Forward exchange contracts 42 42 42 – – – Other financial liability 36 36 36 – – –
18,271 21,660 14,271 277 3,136 3,976 Telkom fins (group) NEW 8/12/09 6:29 PM Page 185
Telkom Annual Report 2009 185
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.5 Foreign currency exchange rate risk management The Group manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Group’s risk exposure.
Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Group’s operations and liabilities. The Group also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Group’s foreign currency hedging activities is to protect the Group from the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk from the previous period.
The following table details the foreign forward exchange contracts outstanding at year end:
Foreign contract Forward amount amount Fair value To buy m Rm Rm
2009 Currency US$ 155 1,477 14 Euro 92 1,205 (24) Other 36 69 (3)
2,751
2008 Currency US$ 139 1,042 109 Euro 252 2,826 444 Pound Sterling 19 281 30 Other 31 32 6
4,181
2007 Currency US$ 181 1,329 (1) Euro 196 1,899 23 Pound Sterling 19 261 6 Other 66 49 (1)
3,538 Telkom fins (group) NEW 8/12/09 6:29 PM Page 186
186 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.5 Foreign currency exchange rate risk management (continued) Foreign contract Forward amount amount Fair value To sell m Rm Rm
2009 Currency US$ 99 947 (22) Euro 35 485 28 Other 21 43 4
1,475
2008 Currency US$ 78 596 (68) Euro 73 848 (103) Pound Sterling 5 89 (1) Other 17 22 (1)
1,555
2007 Currency US$ 122 994 88 Euro 52 505 (5) Pound Sterling 4 51 1 Other 29 17 –
1,567
The Group has various monetary assets and liabilities in currencies other than the Group’s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Group according to the different foreign currencies.
South United African Pound States Rand Euro Sterling Dollar Other Rm Rm Rm Rm Rm
2009 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand – 204 – 650 19 Naira – – – (1,611) –
2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African Rand – 481 (133) 224 (13) United States Dollar – 8 – – (17) Naira – – – (446) – Telkom fins (group) NEW 8/12/09 6:29 PM Page 187
Telkom Annual Report 2009 187
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.5 Foreign currency exchange rate risk management (continued) South United African Pound States Rand Euro Sterling Dollar Other Rm Rm Rm Rm Rm
2007 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand – 475 (166) 159 32 United States dollar 26 (25) – – (17)
Currency swaps There were no currency swaps in place at March 31, 2009, 2008 and 2007.
13.6 Sensitivity analysis Interest rate risk The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant:
+1% movement –1% movement Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2009 Classes of financial instruments per balance sheet Assets Trade and other receivables 5 – (5) – Other financial assets 28 – (28) –
Interest rate swaps 18 – (18) – Repurchase agreements 10 – (10) –
Liabilities Interest-bearing debt (67) – 67 – Other financial liabilities 15 – (15) –
Interest rate swaps 15 – (15) –
(19) – 19 – Telkom fins (group) NEW 8/12/09 6:29 PM Page 188
188 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.6 Sensitivity analysis (continued) Interest rate risk (continued) +1% movement –1% movement Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2008 Classes of financial instruments per balance sheet Assets Trade and other receivables 5 – (5) – Liabilities Interest-bearing debt (62) – 62 –
(57) – 57 –
2007 Classes of financial instruments per balance sheet Assets Trade and other receivables 4 – (4) – Liabilities Interest-bearing debt (1) – 1 – Other financial liabilities 2 – (2) –
Forward exchange contract 2 – (2)
5 – (5) –
Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant.
+10% movement –10% movement (depreciation) (appreciation) Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2009 Classes of financial instruments per balance sheet Assets Trade and other receivables 40 – (40) Other financial assets 1 – (1) –
Forward exchange contract 1 – (1) –
Liabilities Interest-bearing debt (70) – 70 – Trade and other payables (173) – 173 – Other financial liabilities 128 – (128) –
Forward exchange contract 128 – (128) –
(74) – 74 – Telkom fins (group) NEW 8/12/09 6:29 PM Page 189
Telkom Annual Report 2009 189
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.6 Sensitivity analysis (continued) Foreign exchange currency sensitivity (continued) +10% movement –10% movement (depreciation) (appreciation) Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2008 Classes of financial instruments per balance sheet Assets Trade and other receivables 10 – (10) – Other financial assets 331 – (331) –
Forward exchange contract 331 – (331) –
Liabilities Interest-bearing debt 68 – (68) – Trade and other payables (95) – 95 – Other financial liabilities (153) – 153 –
Forward exchange contract (153) – 153 –
161 – (161) –
2007 Classes of financial instruments per balance sheet Assets Trade and other receivables 10 – (10) – Other financial assets 74 – (74) –
Forward exchange contract 74 – (74) –
Liabilities Interest-bearing debt 10 – (10) – Trade and other payables (40) – 40 – Other financial liabilities 11 – (11) –
Forward exchange contract 11 – (11) –
45 – (45) – Telkom fins (group) NEW 8/12/09 6:29 PM Page 190
190 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 13.7 Exchange rate table (closing rate) 2007 2008 2009 RRR
United States Dollar 7.248 8.132 9.484 Euro 9.649 12.854 12.617 Pound Sterling 14.189 16.166 13.555 Swedish Krona 1.033 1.370 1.153 Japanese Yen 0.061 0.082 0.097
13.8 Capital management The Group’s policy is to maintain a strong capital base so as to sustain investor, creditor and market confidence and to sustain future development of the business. Capital comprises equity attributable to equity holders of Telkom. The Group monitors capital using net debt to EBITDA ratio. Telkom’s policy is to keep the net debt to EBITDA ratio between 1 and 2 times. Included in net debt are interest-bearing loans and borrowings, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets.
Telkom plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other investment opportunities and needs.
All of Telkom’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom’s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable the Group to achieve its strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends and the amount of the dividends, will depend upon, among other things, the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans.
The Group has access to financing facilities; the total unused amount is R6,237 million (2008: R7,565 million; 2007: R8,658 million) at the balance sheet date.
There were no changes in the Group’s approach to capital management during the year.
Neither the Group nor any of its subsidiaries are subject to externally imposed capital requirements.
The net debt to EBITDA ratio is as follows: 2007 2008 2009 Rm Rm Rm
Non-current portion of interest-bearing debt 4,338 9,403 10,653 Current portion of interest -bearing debt 6,026 6,330 7,622 Credit facilities utilised 441 1,342 127 Non-current portion of other financial liabilities 36 919 – Current portion of other financial liabilities 193 371 228 Less: Cash and cash equivalents (749) (1,134) (1,931) Less: Other financial assets (259) (614) (1,202)
Net debt 10,026 16,617 15,497
EBITDA 13,352 13,203 11,668
Net debt to EBITDA ratio 0.75 1.26 1.33 Telkom fins (group) NEW 8/12/09 6:29 PM Page 191
Telkom Annual Report 2009 191
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
14. INVESTMENTS 1,384 1,444 1,383
Available-for-sale 47 55 –
Unlisted investments Rascom ––– WBS Holdings (Proprietary) Limited 40 23 – 2 500 ordinary shares at R0.01 each Other investments 7 32 –
Loans and receivables 65 63 97
Mirambo Limited – 60 – Planetel Communications Limited 25 – – Caspian Limited 29 – – Number Portability Company (Proprietary) Limited 3 3 – Sekha-Metsi Investment Consortium Limited 8 – – Empresa Mocambicana de Telecommunicacoes S.A.R.L. (’Emotel’) – 4 – Other unlisted investments – – 97
At fair value through profit or loss 1,349 1,377 1,286
Linked insurance policies – Coronation 1,280 1,291 1,286 Other money market investments 69 51 – Other unlisted investments – 35 –
Less: Short-term investments (77) (51) –
Sekha-Metsi Investment Consortium Limited (8) – – WBS Holdings (Proprietary) Limited (included in other unlisted investments) – (13) – Other money market investments (69) (38) –
Included in held-for-trading investments is R1,286 million (2008: R1,290 million, 2007: R1,279 million) that will be used to fund the post- retirement medical aid liability. These investments are made through a cell captive, in which Telkom holds 100% of the preference shares of the cell captive, and represent the fair value of the underlying investments of the cell captive. The initial cost of the investment amounts to R535 million (2008: R535 million; 2007: R535 million). Telkom bears all the risks and rewards of the investment, as the returns/losses on the preference shares are dependent on the performance of the underlying investments made by the cell captive. On this basis Telkom as the preference shareholder receives any residual gains or losses made by the cell captive. The ordinary shareholders of the cell captive do not bear any of the risks and rewards. The cell captive has been consolidated in full. Telkom fins (group) NEW 8/12/09 6:29 PM Page 192
192 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
15. DEFERRED REVENUE AND DEFERRED EXPENSES Deferred revenue 3,004 3,721 2,711
Non-current deferred revenue 1,021 1,128 997 Current portion of deferred revenue 1,983 2,593 1,714
Deferred expenses 557 583 55
Non-current deferred expenses 270 221 55 Current portion of deferred expenses 287 362 –
Included in non-current deferred expenses and revenue for the financial year end March 31, 2008 and 2007 is Vodacom unactivated starter packs.
16. FINANCE LEASE RECEIVABLES The Group provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to those arrangements which were assessed to be finance leases in terms of IAS17.
Total < 1 year 1 – 5 years > 5 years Rm Rm Rm Rm
2009 Minimum lease payments Lease payments receivable 360 142 219 – Unearned finance income (85) (33) (53) –
Present value of minimum lease payments 275 109 166 –
Lease receivables 275 109 166 –
2008 Minimum lease payments Lease payments receivable 452 196 256 – Unearned finance income (80) (30) (50) –
Present value of minimum lease payments 372 166 206 –
Lease receivables 372 166 206 –
2007 Minimum lease payments Lease payments receivable 312 110 202 – Unearned finance income (66) (22) (44) –
Present value of minimum lease payments 246 88 158 –
Lease receivables 246 88 158 – Telkom fins (group) NEW 8/12/09 6:29 PM Page 193
Telkom Annual Report 2009 193
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
17. DEFERRED TAXATION (1,123) (1,374) (1,068)
Opening balance (587) (1,123) (1,374) Transferred to disposal group – – 281 Income statement movements (516) (219) 164
Temporary differences (515) (331) (152) (Underprovision)/overprovision prior year (1) 53 (138) Capital gains taxation asset – – 454 Change in taxation rate – 59 –
Business combinations (16) (65) (137) Foreign currency translation reserve and foreign equity revaluation (4) 33 (2)
The balance comprises: (1,123) (1,374) (1,067)
Capital allowances (3,325) (3,841) 3,210) Provisions and other allowances 1,719 2,008 1,416 Taxation losses 113 276 – Capital gains taxation asset – – 454 STC taxation credits 370 183 273
Deferred taxation balance is made up as follows: (1,123) (1,374) (1,067)
Deferred taxation assets 593 605 756 Deferred taxation liabilities (1,716) (1,979) (1,823)
Unutilised STC credits 2,958 1,830 2,730
Secondary taxation on companies (STC) is provided for a rate of 10% on the amount by which dividends declared by Telkom exceeds dividends received. The deferred taxation asset is raised as it is probable that it will be utilised in future. The asset will be released as a taxation expense when dividends are declared.
The deferred taxation asset represents STC credits on past dividends received that are available to be utilised against dividends declared. The deferred taxation asset also includes deferred taxation on temporary differences arising on investments that were classified as held for sale in the period as well as STC credits on past dividends received.
18. INVENTORIES 1,093 1,287 1,974
Gross inventories 1,275 1,535 2,165 Write-down of inventories to net realisable value (182) (248) (191)
Inventories consist of the following categories: 1,093 1,287 1,974
Installation material, maintenance material and network equipment 811 895 1,051 Merchandise 282 392 923
Write-down of inventories to net realisable value 182 248 191
Opening balance 102 182 248 Transferred to disposal group – – (50) Charged to selling, general and administrative expenses 154 164 167 Inventories written-off (74) (98) (174)
Inventory levels as at March 31, 2009, 2008 and 2007 have increased due to the accelerated roll-out of the Next Generation Network required to improve customer service, and the acquisition of merchandise for the W-CDMA roll-out. Telkom fins (group) NEW 8/12/09 6:29 PM Page 194
194 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
19. TRADE AND OTHER RECEIVABLES 7,303 8,986 5,980
Trade receivables 6,557 7,695 4,698
Gross trade receivables 6,792 7,985 5,022 Impairment of receivables (235) (290) (324)
Prepayments and other receivables 746 1,291 1,282
Impairment allowance account for receivables 235 290 324
Opening balance 290 235 290 Charged to selling, general and administrative expenses 153 300 368 Receivables written-off (208) (245) (334)
Refer to note 13 for detailed credit risk analysis.
20. OTHER FINANCIAL ASSETS AND LIABILITIES Other financial assets consist of: 259 614 1,202
Held-to-maturity Repurchase agreements – – 1,046 At fair value through profit or loss 259 614 156
Bills of exchange 98 – – Interest rate swaps 16 9 4 Forward exchange contracts 145 589 152 Other financial assets – 16 –
Repurchase agreements Telkom manages a portfolio of repurchase agreements in the South African capital and money markets, with a view to generating additional investment income on the favourable interest rates provided on these transactions. Interest received from the borrower is based on the current market related yield. There were no repurchase agreements held at March 31, 2008 and 2007.
Bills of exchange The fair value of bills of exchange has been calculated at with reference to the Bond Exchange of South Africa quoted prices.
Other financial liabilities consist of: (229) (1,290) (228)
Non-current portion of other financial liabilities Other (36) – – Put option at fair value through profit or loss – (919) – Current portion of other financial liabilities At fair value through profit or loss (193) (371) (228)
Put option at fair value through profit or loss (125) (198) – Interest rate swaps (26) – (72) Forward exchange contracts (42) (173) (156) Telkom fins (group) NEW 8/12/09 6:29 PM Page 195
Telkom Annual Report 2009 195
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
21. NET CASH AND CASH EQUIVALENTS 308 (208) 1,282
Net cash and cash equivalents attributable to continuing operations 308 (208) 1,804
Cash shown as current assets 749 1,134 1,931
Cash and bank balances 649 664 1,361 Short-term deposits 100 470 570
Credit facilities utilised (441) (1,342) (127)
Net cash and cash equivalents attributable to disposal groups – – (522)
Cash at banks and short-term deposits attributable to disposal groups – – 580 Credit facilities utilised – – (1,102)
Undrawn borrowing facilities 8,658 7,565 6,237
The undrawn borrowing facilities are unsecured, when drawn bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date and are subject to annual review. The facilities are in place to ensure liquidity. At March 31, 2009, R3,000 million of these undrawn facilities were committed by Telkom.
Borrowing powers To borrow money, Telkom’s directors may mortgage or encumber Telkom’s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to the restrictive financial covenants of the loan facilities indicated on note 28. Telkom fins (group) NEW 8/12/09 6:29 PM Page 196
196 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
22. SHARE CAPITAL Authorised and issued share capital is made up as follows:
Authorised 10,000 10,000 10,000
999,999,998 ordinary shares of R10 each 10,000 10,000 10,000 1 class A ordinary share of R10 – – – 1 class B ordinary share of R10 – – –
Issued and fully paid 5,329 5,208 5,208
520,783,898 (2008: 520,784,184; 2007: 532,855,528) ordinary shares of R10 each 5,329 5,208 5,208 1 (2008: 1; 2007: 1) class A ordinary share of R10 – – – 1 (2008: 1; 2007: 1) class B ordinary share of R10 – – –
The following table illustrates the movement within the number of shares issued: Number of Number of Number of shares shares shares
Shares in issue at beginning of year 544,944,901 532,855,530 520,784,186 Shares bought back and cancelled (12,089,371) (12,071,344) (286)
Shares in issue at end of year 532,855,530 520,784,186 520,783,900
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of Telkom.
Share buy-back During the financial year Telkom bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and cancelled in order to allow Telkom shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This reduced share capital by R2,860 and retained earnings by R27,565.
During the financial year ended March 31, 2008, Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced share capital by R121 million and retained earnings by R1,526 million.
During the financial year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million.
Capital management Refer to note 13 for detailed capital management disclosure. Telkom fins (group) NEW 8/12/09 6:29 PM Page 197
Telkom Annual Report 2009 197
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
23. TREASURY SHARE RESERVE (1,774) (1,638) (1,517)
This 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’).
At March 31, 2009, 11,646,680 (2008: 10,493,141; 2007: 12,237,016) and 8,143,556 (2008: 10,849,058; 2007: 10,849,058) ordinary shares in Telkom, with a fair value of R1,229 million (2008: R1,377 million; 2007: R2,031 million) and R859 million (2008: R1,423 million; 2007: R1,801 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively.
The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited are reserved for issue in terms of the Telkom Conditional Share Plan (’TCSP’).
The reduction in the number of treasury shares is due to 1,552,029 (2008: 1,743,785; 2007: 450,505) shares that vested in terms of the TCSP during the year.
The fair value of these shares at the date of vesting was R228 million (2008: R301 million; 2007: R63 million).
24. SHARE-BASED COMPENSATION RESERVE This reserve represents the cumulative grant date fair value of the equity- settled share-based payment transactions recognised in employee expenses during the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 30).
No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of shares granted, commencing on the grant date.
The following table illustrates the movement within the share-based compensation reserve: Balance at beginning of year 151 257 643 Net increase in equity 106 386 433
Employee cost 141 522 554 Vesting and transfer of shares (35) (136) (121)
Balance at end of year 257 643 1,076
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008: R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee expenses for the year. Telkom fins (group) NEW 8/12/09 6:29 PM Page 198
198 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. NON-DISTRIBUTABLE RESERVES 1,413 1,292 1,758
Opening balance 1,128 1,413 1,292 Transferred to disposal groups (4) Movement during the year 285 (121) 470
Foreign currency translation reserve (net of taxation of R6 million (2008: R6 million; 2007: R4 million) 46 521 (181) Minority put option – (661) 661 Revaluation of an available-for-sale investment (net of taxation of R1 million) – 8 – Available-for-sale financial asset Life fund reserve (cell captive) 239 11 (10)
The balance comprises: 1,413 1,292 1,758
Foreign currency translation reserve (58) 463 286 Cell captive reserve 1,471 1,482 1,472 Available-for-sale investment – 8 – Minority put option – (661) –
The Group has a consolidated cell captive, used as an investment to fund Telkom’s post-retirement medical aid liability.
The earnings from the cell captive are recognised in the income statement and then transferred to non-distributable reserves.
Gains and losses from changes in the fair value of available-for-sale investments are recognised directly in equity until the financial asset is disposed of.
26. RETAINED EARNINGS 26,499 27,310 28,852
Opening balance 22,904 26,499 27,310 Movement during year 3,729 2,337 1,542
Net profit for the year 8,646 7,975 4,171 Transfer to non-distributable reserves (refer to note 25) (239) (11) 10 Premium on acquisition of minority interest in Multi-Links – – 667 Dividend declared (refer to note 35) (4,678) (5,627) (3,306)
Shares bought back (refer to note 22) (134) (1,526) –
The balance comprises: 26,499 27,310 28,852
Company 21,906 22,484 24,323 Joint venture 4,762 5,697 6,132 Subsidiaries 786 428 223 Eliminations (955) (1,299) (1,826) Telkom fins (group) NEW 8/12/09 6:29 PM Page 199
Telkom Annual Report 2009 199
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
27. MINORITY INTEREST 284 522 853
Opening balance 301 284 522 Movement during the year (17) 238 331
Reconciliation: 284 522 853
Balance at beginning of year 301 284 522 Share of earnings 203 197 77 Acquisition of subsidiaries and minority interests (68) 77 – Foreign currency translation reserves 14 29 16 Dividend declared (166) (65) (33) Broad-based black economic empowerment transaction in Vodacom – – 271
28. INTEREST-BEARING DEBT Non-current interest-bearing debt 4,338 9,403 10,653
Total interest-bearing debt (refer to note 13) 10,364 15,733 18,275
Gross interest-bearing debt 12,549 17,839 19,851 Discount on debt instruments issued (2,185) (2,106) (1,576)
Less: Current portion of interest-bearing debt (6,026) (6,330) (7,622)
Local debt (5,772) (6,001) (7,546)
Locally registered Telkom debt instruments (4,432) – (2,000) Commercial paper bills (1,339) (3,401) (5,546) Short-term interest-free loans (1) – – Call borrowings – (2,600) –
Foreign debt (193) (202) (40) Finance leases (61) (124) (36) Licence obligation – (3) – Telkom fins (group) NEW 8/12/09 6:29 PM Page 200
200 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
28. INTEREST-BEARING DEBT (continued) Total interest-bearing debt is made up as follows: 10,364 15,733 18,275
(a) Local debt 8,131 12,923 16,660
Locally registered Telkom debt instruments 6,786 8,164 11,106
Name, maturity, rate p.a., nominal value TK01, 2009, 10%, RNil (2008: RNil; 2007: R4,680 million) 4,432 – – TL12, 2012, 12.45%, R1,060 million (2008: RNil; 2007: RNil) – – 1,059 TL15, 2015, 11.9%, R1,160 million (2008: RNil; 2007: RNil) – – 1,159 TL20, 2020, 6%, R2,500 million (2008: R2,500 million; 2007: R2,500 million) 1,246 1,283 1,325 PP02, 2010, 0%, R430 million (2008: R430 million; 2007: R430 million) 264 304 349 PP03, 2010, 0%, R1,350 million (2008: R1,350 million; 2007: R1,350 million) 844 977 1,131 Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million; 2007: RNil) – 2,600 – Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million; 2007: RNil) – 3,000 2,000 Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil; 2007: RNil) – – 4,083
Total interest-bearing debt is made up of R18,275 million debt at amortised cost (2008: R15,733 million debt at amortised cost; 2007: R10,266 million debt at amortised cost and R98 million debt at fair value through profit and loss).
Local bonds The local Telkom bonds are unsecured, but a Side letter to the Subscription Agreement (as amended) of the TL20 bond contains a number of restrictive covenants, which, if not met, could result in the early redemption of the loan. The local bonds limit Telkom’s ability to create encumbrances on revenue or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. The Term loan agreements limit Telkom’s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without prior written consent of the Lenders, which will not be unreasonably withheld. The syndicated loan agreement contains restrictive covenants as well as restrictions on encumbrances, disposals, Group guarantees and Group loans.
Commercial paper bills 1,339 4,202 5,546 Rate p.a., nominal value 2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million (2008: R4,383 million; 2007: R1,350 million)
Asset Backed Arbitraged Securities (Proprietary) Limited – 500 – Licence obligation – 47 – Other debt 6 10 8 Telkom fins (group) NEW 8/12/09 6:29 PM Page 201
Telkom Annual Report 2009 201
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
28. INTEREST-BEARING DEBT (continued) (b) Foreign debt 1,013 1,643 629
Maturity, rate p.a., nominal value 106 141 138 Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%; 2007: 0.10% – 0.14%), e11 million (2008: e11 million; 2007: e11 million)
Interest-bearing debt held in Vodacom disposal group 907 957 – The local and foreign debt, for both the non-current and current portion, is disclosed in note 9.2 in the disposal group.
Zenith Bank –45 – Multi-Links Telecommunications Limited took out a loan with Zenith Bank. The original loan amounted to US$14 million against which full repayments were made in 2009. The loan bore interest at LIBOR plus 3.5%.
FCMB loan –87 – Multi-Links Telecommunications Limited took out a FCMB loan.The original loan amounted to naira 1,500 million against which full repayments were made in 2009. The loan bore interest at 13%.
Export Development Bank of Canada –82 157 Multi-Links Telecommunications Limited has a long-term funding facility in place with Export Development Bank of Canada (EDC), through First Bank of Nigeria plc. The original funding amounted to US$18 million against which US$1,6 million repayments were made.The loan bears interest at LIBOR plus 1.25%, and will be fully repaid during 2013.
Huawei Vendor Financing Facility (‘VFF’) – 319 323 Multi-Links Telecommunications Limited entered into a Bridge Financing Agreement with Huawei Tech Investment Co. Limited for the supply of telecommunications equipment and services. The original funding amounted to US$41.6 million against which repayments of US$5 million have already been made. The loan bears interest at LIBOR plus 2% and will be repaid by 2012. The above arrangement is temporary until financing facilities are obtained from China Development Bank.
PTA Bank and Barclays Bank – 12 11 Africa Online Group has taken out a loan with PTA Bank and Barclays Bank to the value of US$1.5 million in total. Of this amount US$0.8 million bears interest at LIBOR plus 6% and the remaining US$0.4 million bears interest at 11.5%.
(c) Finance leases 1,220 1,167 986 The finance leases are secured by buildings with a carrying value of R152 million (2008: R174 million; 2007: R197 million) and office equipment with a book value of R6 million (2008: R14 million; 2007: R6 million) (refer to note 11). These amounts are repayable within periods ranging from 1 to 12 years. Interest rates vary between 13.43% and 37.78%. Telkom fins (group) NEW 8/12/09 6:29 PM Page 202
202 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
28. INTEREST-BEARING DEBT (continued) Included in non-current and current debt is: Debt guaranteed by the South African Government 4,537 141 138 Telkom may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of 1991. The borrowing powers of Telkom are set out as per note 21.
Repayments/refinancing of current portion of interest-bearing debt Telkom issued new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million respectively and entered into Syndicated loan agreements with a nominal value of R4,100 million during the current year. Commercial Paper Bills with a nominal value of R11,025 million were issued and Commercial Paper debt with a nominal value of R9,849 million was repaid during the current year.
The repayment/refinancing of R7,622 million of the current portion of interest-bearing debt will depend on the market circumstances at the time of repayment.
Management believes that sufficient funding facilities will be available at the date of repayment/refinancing.
29. PROVISIONS 1,443 1,675 1,875
Employee related 3,005 3,186 3,169
Annual leave 413 438 428
Balance at beginning of year 356 413 438 Transferred to disposal groups – – (67) Charged to employee expenses 66 44 72 Leave paid (9) (19) (15)
Post-retirement medical aid (refer to note 30) 1,139 1,356 1,745
Balance at beginning of year 2,607 1,139 1,356 Interest cost 286 322 428 Current service cost 83 84 95 Expected return on plan asset (188) (257) (223) Actuarial loss 149 129 157 Termination settlement – – (5) Plan asset – initial recognition (1,720) – – Contributions paid (78) (61) (63)
Telephone rebates (refer to note 30) 282 287 325
Balance at beginning of year 198 282 287 Interest cost 19 22 39 Current service cost 4 3 6 Past service cost 76 2 2 Actuarial loss 5 – 14 Benefits paid (20) (22) (23)
Bonus 1,090 992 671
Balance at beginning of year 1,071 1,090 992 Transferred to disposal groups – – (397) Charged to employee expenses 965 797 577 Payment (946) (895) (501) Telkom fins (group) NEW 8/12/09 6:29 PM Page 203
Telkom Annual Report 2009 203
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm 29. PROVISIONS (continued) Long-term incentive provision 81 113 –
Balance at beginning of year 61 81 113 Transferred to disposal groups – – (113) Charged to employee expenses 21 41 – Payment (1) (9) –
Non-employee related 533 670 856
Supplier dispute (refer to note 39) 527 569 664
Balance at beginning of year – 527 569 Charged to expenses 527 42 95
Warranty provision –––
Balance at beginning of year 16 – – Provision utilised (16) – –
Other 6 101 192
Less: Current portion of provisions (2,095) (2,181) (2,150)
Annual leave (402) (417) (425) Post-retirement medical aid (186) (186) (227) Telephone rebates (26) (26) (29) Bonus (911) (921) (654) Supplier dispute (527) (569) (664) Other (43) (62) (151)
Annual leave In terms of Telkom’s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.
Bonus The Telkom bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is to all qualifying employees payable bi-annually after Telkom’s results have been made public.
Supplier dispute Telkom provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in note 39.
The net movement in the provision of R95 million consists of finance charges and fair value movements.
Other Included in other provisions is an amount provided for asset retirement obligations and the onerous lease obligation recognised in Telkom Media. Telkom fins (group) NEW 8/12/09 6:29 PM Page 204
204 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
30. EMPLOYEE BENEFITS The Group provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund. Membership of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years.
At March 31, 2009, the Group employed 25,445 employees (2008: 33,616; 2007: 33,047).
Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented.
The Telkom Pension Fund The Telkom Pension Fund is a defined benefit fund that was created in terms of the Post Office Amendment Act 85 of 1991.
The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after unrecognised losses. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised).
With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the year ended March 31, 2007, a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund.
The funded status of the Telkom Pension Fund is disclosed below:
2007 2008 2009 Rm Rm Rm
The Telkom Pension Fund The net periodic pension costs includes the following components: Interest and service cost on projected benefit obligations 22 21 21 Expected return on plan assets (19) (27) (28) Recognised actuarial loss/(gain) 9 (16) – Settlement loss/(gain) 21 (2) (3) Asset limitation – 29 39
Net periodic pension expense recognised 33 5 29
Pension fund contributions (refer to note 5.1) 8 5 (1)
The status of the pension plan obligation is as follows: At beginning of year 281 205 204 Interest and service cost 22 21 21 Employee contributions 2 2 2 Benefits paid (2) (3) (5) Settlements (70) (15) (22) Actuarial gain (28) (6) (1)
Benefit obligation at end of year 205 204 199
Plan assets at fair value: At beginning of year 243 284 311 Expected return on plan assets 19 27 28 Benefits paid (2) (3) (5) Contributions 10 8 2 Settlements (61) (15) (22) Actuarial gain/(loss) 75 10 (67)
Plan assets at end of year 284 311 247 Telkom fins (group) NEW 8/12/09 6:29 PM Page 205
Telkom Annual Report 2009 205
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
30. EMPLOYEE BENEFITS (continued) The Telkom Pension Fund (continued) Present value of funded obligation 205 204 199 Fair value of plan assets (284) (311) (247)
Fund surplus (79) (107) (48) Unrecognised net actuarial gain/(loss) 25 23 (46)
Fund surplus (54) (84) (94) Asset limitation – 29 39
Recognised net asset (54) (55) (55)
Expected return on plan assets 19 27 28 Actuarial return/(loss) on plan assets 75 10 (67)
Actual return/(loss) on plan assets 94 37 (39)
Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Yield on government bonds (%) 7.5 9.0 8.7 Long-term return on equities (%) 10.5 11.0 12.0 Long-term return on cash (%) 5.5 7.0 7.5 Expected return on plan assets (%) 9.7 9.8 10.5 Salary inflation rate (%) 6.0 7.5 7.2 Pension increase allowance (%) 2.9 4.3 4.0
The overall long-term expected rate of return on assets is 10.5%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Pension Fund and expected long-term return of these assets, of which South African equities and bonds are the largest contributors.
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%) 100.0 100.0 100.0 The number of employees registered under the Telkom Pension Fund 153 146 123 The fund portfolio consists of the following: Equities (%) 74 54 57 Bonds (%) 5 5 25 Cash (%) 3 23 3 Foreign investments (%) 16 18 15 Insurance policies (%) 2 – –
The total expected contributions payable to the pension fund for the next financial year are R1 million. Telkom fins (group) NEW 8/12/09 6:29 PM Page 206
206 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
30. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred.
The Telkom Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the fund, including any potential excess, belong to the participants of the scheme. Telkom is unable to benefit from the excess in the form of future reduced contributions or refunds.
Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position of R1,549 million after unrecognised losses.
The Telkom Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets. Telkom would be required to fund the statutory deficit.
The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that Telkom has a potential asset with regard to this fund.
The funded status of the Telkom Retirement Fund is disclosed below:
2007 2008 2009 Rm Rm Rm
The Telkom Retirement Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations 312 493 616 Expected return on plan assets (489) (686) (796) Recognised actuarial gain (145) – –
Net periodic pension expense not recognised (asset limitation) (322) (193) (180)
Retirement fund contributions (refer to note 5.1) 439 460 460 Benefit obligation: At beginning of year 4,377 6,581 7,101 Interest 312 493 616 Benefits paid (486) (488) (520) Liability for new pensioners 44 14 143 Actuarial loss/(gain) 2,334 501 (636)
Benefit obligation at end of year 6,581 7,101 6,704
Plan assets at fair value: At beginning of year 5,973 7,661 7,991 Expected return on plan assets 489 686 796 Benefits paid (486) (488) (520) Asset backing new pensioners’ liabilities 44 14 143 Actuarial gain/(loss) 1,641 118 (1,735)
Plan assets at end of year 7,661 7,991 6,675 Telkom fins (group) NEW 8/12/09 6:29 PM Page 207
Telkom Annual Report 2009 207
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
30. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) Present value of funded obligation 6,581 7,101 6,704 Fair value of plan assets (7,661) (7,991) (6,675)
Fund (surplus)/deficit (1,080) (890) 29 Unrecognised net actuarial loss (96) (478) (1,578)
Unrecognised net asset (1,176) (1,368) (1,549)
Expected return on plan assets 489 686 796 Actuarial gain/(loss) on plan assets 1,641 118 (1,735)
Actual gain/(loss) on plan assets 2,130 804 (939)
Included in the fair value of plan assets is: Office buildings occupied by Telkom 371 596 619 Telkom bonds 21 10 – Telkom shares 284 141 132
The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds.
2007 2008 2009 Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Yield on government bonds (%) 7.5 9.0 8.7 Long-term return on equities (%) 10.5 11.0 12.0 Long-term return on cash (%) 5.5 7.0 7.5 Expected return on plan assets (%) 9.3 10.3 10.7 Pension increase allowance (%) 4.5 6.0 4.0
The overall long-term expected rate of return on assets is 10.7%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Retirement Fund and expected long-term return on these assets, of which South African equities, foreign investments and South African index-linked bonds are the largest contributors. Telkom fins (group) NEW 8/12/09 6:29 PM Page 208
208 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
30. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%) 100 100 100 The number of pensioners registered under the Telkom Retirement Fund 14,451 14,255 13,617 The number of in-service employees registered under the Telkom Retirement Fund 25,766 24,939 23,389
The fund portfolio consists of the following: Equities (%) 59 70 55 Property (%) 2 2 – Bonds (%) 19 11 5 Cash (%) 7 1 5 Foreign investments (%) 13 16 20 Index linked (%) – – 15
The total expected pension benefit payments for the year ending March 31, 2010 are R541,000.
Medical benefits Telkom makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 29. Telkom has terminated future post-retirement medical benefits in respect of employees joining after July 1, 2000.
There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those who retired after 1994 (Post-94); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap, which increases annually with the average salary increase.
Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, 2009.
Telkom has allocated certain investments to fund this liability as set out in note 14. Telkom fins (group) NEW 8/12/09 6:29 PM Page 209
Telkom Annual Report 2009 209
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
30. EMPLOYEE BENEFITS (continued) Medical benefits (continued) Medical aid Benefit obligation: At beginning of year 3,904 4,384 4,850 Interest cost 286 322 428 Current service cost 83 84 95 Actuarial loss 283 246 246 Termination settlement – – (5) Benefits paid from plan assets (94) (125) (141) Contributions paid by Telkom (78) (61) (63)
Benefit obligation at end of year 4,384 4,850 5,410
Plan assets at fair value: At beginning of year – 1,961 1,929 Plan asset – initial recognition 1,720 – – Expected return on plan assets 188 257 223 Benefits paid from plan assets (94) (125) (141) Actuarial gain/(loss) 147 (164) (393)
Plan assets at end of year 1,961 1,929 1,618
Present value of funded obligation 4,384 4,850 5,410 Fair value of plan assets (1,961) (1,929) (1,618)
Funded status 2,423 2,921 3,792 Unrecognised net actuarial loss (1,284) (1,565) (2,047)
Liability as disclosed in the balance sheet (refer to note 29) 1,139 1,356 1,745
Expected return on plan assets 188 257 223 Actuarial return on plan assets 147 (164) (393)
Actual return on plan assets 335 93 (170)
2007 2008 2009 Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Expected return on plan assets (%) 13.5 12.0 11.0 Salary inflation rate (%) 6.0 7.5 7.2 Medical inflation rate (%) 6.5 8.0 7.7
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Contractual retirement age 65 65 65 Average retirement age 60 60 60 Number of members 17,119 15,526 13,883 Number of pensioners 8,494 8,430 8,397 Telkom fins (group) NEW 8/12/09 6:29 PM Page 210
210 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
30. EMPLOYEE BENEFITS (continued) Medical benefits (continued) The valuation results are extremely sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions above:
The Trudon benefit obligation of R21 million has been excluded from the sensitivity analysis below.
Current assumption Decrease Increase Rm Rm Rm
Medical cost inflation rate 7.7% -1.0% +1.0%
Benefit obligation 5,389 (736) 921 Percentage change (13.7)% 17.1%
Service cost and interest cost 2009/2010 555 (84) 108 Percentage change (15.1)% 19.5 %
Discount rate 8.7% -1.0% +1.0%
Benefit obligation 5,389 933 (734) Percentage change 17.3% (13.6)%
Service cost and interest cost 2009/2010 555 46 (37) Percentage change 8.3% (6.7)%
Post-retirement mortality rate PA(90) Ultimate-1 -10.0% +10.0%
Benefit obligation 5,389 221 (197) Percentage change 4.1% (3.7)%
Service cost and interest cost 2009/2010 555 23 (20) Percentage change 4.1% (3.6)%
2007 2008 2009
The fund portfolio consists of the following: Equities (%) 59 56 30 Bonds (%) 322 Cash and money market investments (%) 21 33 10 Foreign investments (%) 9 9 9 Insurance policies (%) 8 – 49
Telephone rebates Telkom provides telephone rebates to its pensioners. The most recent actuarial valuation was performed as at March 31, 2009. Eligible employees must be employed by Telkom until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan.
2007 2008 2009 Rm Rm Rm
The status of the telephone rebate liability is disclosed below: Benefit obligation opening balance 251 307 443 Service cost 4 3 6 Interest cost 19 22 39 Actuarial (gain)/loss (39) 133 19 Amendments 93 – – Benefits paid (21) (22) (23)
Present value of unfunded obligation 307 443 484 Unrecognised net actuarial loss and service cost* (25) (156) (159)
Liability as disclosed in the balance sheet (refer to note 29) 282 287 325
* The major increase in 2008 is attributable to the change in the rebate inflation rate. Telkom fins (group) NEW 8/12/09 6:29 PM Page 211
Telkom Annual Report 2009 211
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
30. EMPLOYEE BENEFITS (continued) Telephone rebates (continued) Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Rebate inflation rate (%) 0.0 4.0 4.0 Contractual retirement age 65 65 65 Average retirement age 60 60 60
The assumed rates of mortality are determined by reference to the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland.
Number of members 19,515 18,766 17,034 Number of pensioners 10,918 10,680 10,499
Telkom Conditional Share Plan Telkom’s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees shares awarded in 2004 and 2005 is 0% in year one, 33% in each of the three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met (refer to note 24).
The Telkom Board approved the fourth enhanced allocation of shares to employees as at September 24, 2007, with a grant date of September 27, 2007, the day that the employees and Telkom shared a common understanding of the terms and conditions of the grant. A total number of 6,089,810 shares were granted.
The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares.
The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years; 2007: 1.75 years).
2007 2008 2009
The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year 2,414,207 1,883,991 420,590 Granted during the year 1,212 252 – Forfeited during the year (80,923) (43,790) (3,985) Vested during the year (450,505) (1,419,863) (416,605)
Outstanding at end of the year 1,883,991 420,590 –
The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant: Outstanding at beginning of the year 1,930,687 1,864,041 1,435,387 Granted during the year 1,005 3,469 52,954 Forfeited during the year (67,651) (108,177) (45,188) Vested during the year – (323,946) (1,135,424)
Outstanding at end of the year 1,864,041 1,435,387 307,729 Telkom fins (group) NEW 8/12/09 6:29 PM Page 212
212 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009
30. EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant: Outstanding at beginning of the year – 1,773,361 1,640,980 Granted during the year 1,825,488 833 – Forfeited during the year (52,127) (133,214) (132,614)
Outstanding at end of the year 1,773,361 1,640,980 1,508,366
The following table illustrates the movement of the maximum number of shares that will vest to employees relating to the additional November 2006 grant:
Outstanding at beginning of the year – – 4,812,305 Granted during the year – 4,984,693 25,775 Forfeited during the year – (172,388) (389,357)
Outstanding at end of the year – 4,812,305 4,448,723
The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant:
Outstanding at beginning of the year – – 5,846,636 Granted during the year – 6,117,163 23,650 Forfeited during the year – (270,527) (509,185)
Outstanding at end of the year – 5,846,636 5,361,101
The fair value of the shares granted have been calculated by an actuary using Black-Scholes-Merton model and the following values at grant date: August 8, June 23, November 2, September 4, 2004 2005 2006 2007 Grant Grant Grant Grant
Market share price (R) 77.50 111.00 141.25 173.00 Dividend yield (%) 2.60 3.60 3.50 3.50
2007 2008 2009
The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) 5 5 9 Meeting specified performance criteria (%) 100 100 75 Telkom fins (group) NEW 8/12/09 6:29 PM Page 213
Telkom Annual Report 2009 213
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
30. EMPLOYEE BENEFITS (continued) The amounts for the current and previous four years are as follows:
2005 2006 2007 2008 2009 Rm Rm Rm Rm Rm
Telkom Pension Fund Defined benefit obligation (186) (281) (205) (204) (199) Plan assets 231 243 284 311 247
Surplus/(deficit) 45 (38) 79 107 48 Asset limitation – – – (29) (39) Unrecognised actuarial loss/(gain) 89 118 (25) (23) 46
Unrecognised/recognised net asset 134 80 54 55 55
Experience adjustment on assets – – 75 10 (67) Experience adjustment on liabilities – – 25 (6) 1
Telkom Retirement Fund Defined benefit obligation (4,020) (4,377) (6,581) (7,101) (6,704) Plan assets 4,477 5,973 7,661 7,991 6,675
Surplus/(deficit) 457 1,596 1,080 890 (29) Unrecognised actuarial gain/(loss) 312 (742) 96 478 1,578
Unrecognised net asset 769 854 1,176 1,368 1,549
Experience adjustment on assets* – – 1,641 118 (1,735) Experience adjustment on liabilities* – – 1,234 485 (645)
Medical benefits Defined benefit obligation (3,079) (3,904) (4,384) (4,850) (5,410) Plan assets – – 1,961 1,929 1,618
Deficit (3,079) (3,904) (2,423) (2,921) (3,792) Unrecognised actuarial loss 649 1,297 1,284 1,565 2,047
Liability recognised (2,430) (2,607) (1,139) (1,356) (1,745)
Experience adjustment on assets – – 147 (164) (393) Experience adjustment on liabilities – – 28 193 246
Telephone rebates Defined benefit obligation (177) (251) (307) (443) (484) Unrecognised actuarial (gain)/loss (2) 53 25 156 159
Liability recognised (179) (198) (282) (287) (325)
Experience adjustment on liabilities – – (25) 2 2
The experience adjustments on asset and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been disclosed due to the fact that it was impractical to determine the information.
* During the March 31, 2007 year end Telkom actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of the plan assets.
This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end. Telkom fins (group) NEW 8/12/09 6:29 PM Page 214
214 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
31. TRADE AND OTHER PAYABLES 7,237 8,771 5,538
Trade payables 5,511 6,768 2,955 Finance cost accrued 22 39 156 Accruals and other payables 1,704 1,964 2,427
Accruals and other payables mainly represent amounts payable for goods received, net of Value Added Taxation obligations.
32. RECONCILIATION OF PROFIT FOR THE YEAR TO CASH GENERATED FROM OPERATIONS* Cash generated from operations 20,520 21,256 20,394
Profit for the year 8,849 8,172 4,247 Finance charges and fair value movements 1,125 1,803 3,765 Taxation 4,731 4,704 3,681 Investment income (235) (197) (216) Interest received from debtors (190) (257) (273) Non-cash items 6,582 6,930 10,292
Depreciation, amortisation, impairment and write-offs 5,315 6,130 8,155 Cost of equipment disposed when recognising finance leases 240 88 71 Increase in provisions 1,107 857 1,387 Profit on disposal of property, plant and equipment and intangible assets (29) (147) (29) Vodacom broad-based black economic empowerment charge – – 691 Profit on disposal of investment and subsidiaries (52) – – Loss on disposal of property, plant and equipment and intangible assets 1 2 17
(Increase)/decrease in working capital (342) 101 (1,102)
Inventories (393) (354) (1,130) Accounts receivable (758) (784) (812) Accounts payable 809 1,239 840
33. FINANCE CHARGES PAID* (1,115) (1,077) (2,164)
Finance charges per income statement (1,125) (1,803) (3,765) Non-cash items 10 726 1,601
Movements in interest accruals (119) 101 105 Net discount amortised 409 568 698 Capitalised finance leases – – 178 Capitalised foreign exchange – – 38 Fair value adjustment (338) (243) 183 Unrealised gain 58 300 399
* Cash flows includes the cash flows related to assets held for sale and disposal groups. Telkom fins (group) NEW 8/12/09 6:29 PM Page 215
Telkom Annual Report 2009 215
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
34. TAXATION PAID* (5,690) (4,277) (3,947)
Taxation payable at beginning of year (1,549) (74) (314) Current taxation (excluding deferred taxation) (3,545) (3,807) (3,412) Foreign currency translation reserve – (32) 2 Business combinations – – 2 Secondary taxation on companies (670) (678) (425) Taxation payable at end of year 74 314 200
Reconciliation of net taxation liability at end of year** (74) (314) (200)
Income taxation receivable 520 9 125
Continuing operations 520 9 91 Disposal groups – – 34
Income taxation payable (594) (323) (325)
Continuing operations (594) (323) (50) Disposal groups – – (275)
* Cash flows includes the cash flows related to assets held for sale and disposal groups.
** The split income taxation receivable and income taxation payable was split in 2009 to disclose the effect of the discontinued operations.
35. DIVIDEND PAID (4,784) (5,732) (3,336)
Dividend payable at beginning of year (4) (15) (20) Declared during the year – Dividend on ordinary shares: (4,678) (5,627) (3,306)
Final dividend for 2006: 500 cents (2,599) – – Special dividend for 2006: 400 cents (2,079) – – Final dividend for 2007: 600 cents – (3,069) – Special dividend for 2007: 500 cents – (2,558) – Final dividend for 2008: 660 cents – – (3,306)
Dividends paid to minority interest (117) (110) (33) Dividend payable at end of year 15 20 23 Telkom fins (group) NEW 8/12/09 6:29 PM Page 216
216 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
36. ACQUISITION AND DISPOSALS OF SUBSIDIARIES, JOINT VENTURES AND MINORITY INTERESTS 36.1 Acquisitions By Telkom 2007 2008 2009 Rm Rm Rm Multi-Links Telecommunications Limited (Multi-Links Telecommunications) (25%) Telkom International (Proprietary) Limited acquired 75% of the issued share capital of Multi-Links Telecommunications Limited from Kenston Investment Limited on May 1, 2007. Telkom also granted Kenston the irrevocable right and option (put option) to require Telkom to acquire all of the shares held by Kenston (25% shareholding) in Multi-Links, at any time during the 90 day period following the second anniversary of the effective date. On initial recognition, a liability of R661 million, representing the higher of the transaction share price and the fair value, was recognised under non-current other financial liabilities. A corresponding debit was recognised in non-distributable reserves.
The put option was exercised on January 21, 2009 for R1,328 million (US$130 million at US$1 = R10.2188). The liability was derecognised and a corresponding credit consisting of R661 million reversal of equity and R667 million relating to changes in the fair value of the put option subsequent to initial recognition, was recognised directly in equity.
Put option ––1,328
Africa Online Limited (Africa Online) On February 23, 2007 Telkom acquired a 100% shareholding of Africa Online from African Lakes Corporation for a total cost of R150 million, with a resulting goodwill of R145 million.
Africa Online is an internet service provider active in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online is incorporated in the Republic of Mauritius.
At acquisition date the company was not IFRS compliant and thus no fair value information based on IFRS was available.
The process of calculating a fair value of the identified assets, liabilities and contingent liabilities has been finalised.
The fair value of the assets and liabilities acquired were determined as follows: Fair value of intangible assets (licences R1 million, brand R42 million) 43 – – Less: Deferred taxation raised on intangible assets (12) – – Less: Net liabilities acquired (excluding fair value of intangible assets) (26) – –
Fair value of net assets acquired 5 – – Goodwill 145 – –
Purchase price 150 – –
The goodwill has been allocated to the various cash-generating units (’CGU’) representative of the countries in which Africa Online Limited operates. Telkom fins (group) NEW 8/12/09 6:29 PM Page 217
Telkom Annual Report 2009 217
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
36. ACQUISITION AND DISPOSALS OF SUBSIDIARIES, JOINT VENTURES AND MINORITY INTERESTS (continued) 36.1 Acquisitions (continued) By the Group’s subsidiaries Multi-Links Telecommunications Limited (’Multi-Links Telecommunications’) (75%) On May 1, 2007 Telkom acquired a 75% shareholding in Multi-Links Telecommunications through Telkom International, a wholly owned South African subsidiary, for a total cost of R1,985 million.
Multi-Links Telecommunications is a Nigerian Private Telecommunications Operator with a Unified Access Licence providing fixed, mobile, data, long distance and international telecommunications services throughout Nigeria. Multi-Links is domiciled and incorporated in Nigeria.
The purchase price allocation was completed during the 2008 financial year, and has resulted in goodwill being adjusted.
The following intangible assets were identified and valued at the end of the year:
Customer relationship – 61 – Licence – 36 – Brand – 105 –
Fair value of intangible assets – 202 –
The fair value of the assets and liabilities acquired were determined as follows: Net assets acquired (excluding fair value of intangible assets) – 236 – Fair value of intangible assets – 202 – Less: Contingencies recognised – (35) – Less: Deferred taxation raised on intangible assets – (65) –
Fair value of net assets acquired – 338 – Less: Minority interest – (80) – Goodwill – 1,727 –
Purchase price* – 1,985 –
* The purchase price was settled in cash.
Disposal group By the Group’s 50% joint venture, Vodacom Storage Technology Services (Proprietary) Limited – – 69 Gateway ––2,846 Smartphone SP (Proprietary) Limited and subsidiaries 168 468 – Smartcom (Proprietary) Limited 4 9 – Africell Cellular Services (Proprietary) Limited 40 – – InterConnect s.p.r.l 10 – – Cointel VAS (Proprietary) Limited 73 – –
Disposals By the Group’s 50% joint venture, Vodacom Ithuba Smartcall (Proprietary) Limited – – – Stand 13 Eastwood Road Dunkeld (Proprietary) Limited – 8 – Telkom fins (group) NEW 8/12/09 6:29 PM Page 218
218 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
37. UNDRAWN BORROWING FACILITIES AND GUARANTEES 37.1 Rand denominated facilities and guarantees Telkom has general banking facilities of R6,226 million. The facilities are unsecured, when drawn bear interest at a rate linked to prime, have no specific maturity date and are subject to annual review. R3,000 million of these undrawn facilities were committed.
37.2 Foreign denominated facilities and guarantees 2007 2008 2009 Guarantor Details Beneficiary Rm Rm Rm
Telkom SA Limited Punctual payment and performance by Various US$3 million – 23 26 Africa Online under the Trade Finance (2008: Facility Agreement to various banks US$3 million)
First Bank of Nigeria plc Guarantee on lending facility from Export Nortel Networks US$18 million – 147 171 (on behalf of Multi-links Bank of Canada to Nortel Networks for Canada (2008: Telecommunications the purchase of Telecommunications US$18 million) Limited) equipment phases – 9a, 9b, 9c and 9d
Zenith Bank plc (on Guarantee payment to Gilat Satcom Gilat Satcom US$0.1 million – 1 1 behalf of Multi-links Limited in respect of interconnect Limited (2008: Telecommunications service (standby letter of credit) US$0.1 million) Limited)
Zenith Bank plc (on Support the bid award of the contract NCC US$0.1 million – 1 1 behalf of Multi-links for the submission of the proposal to (2008: Telecommunications provide wire to Nigerian Telecommuni- US$0.1 million) Limited) cations Services
Zenith Bank plc (on Issued in favour of Huawei Technology Huawei US$31 million – 250 294 behalf of Multi-links Investment Company Limited for the Technology (2008: Telecommunications supply of core telecommunications Investment US$31 million) Limited) services Company Limited
Zenith Bank plc (on Issued in favour of Huawei Technology Huawei US$11 million – 88 104 behalf of Multi-links Investment Company Limited for the Technology (2008: Telecommunications supply of core telecommunications Investment US$11 million) Limited) services Company Limited
– 510 597
Disposal group Rand denominated facilities and guarantees The Group exposure is 50% of the following items: Vodacom has Rand denominated credit facilities totalling R15,675 million with R12,335 million utilised as at March 31, 2009. The facilities that are uncommitted can also be utilised for loans to foreign entities and are subject to review at various dates (usually on an annual basis). Certain of the facilities are still subject to the Group’s final acceptance. Telkom fins (group) NEW 8/12/09 6:29 PM Page 219
Telkom Annual Report 2009 219
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
37. UNDRAWN BORROWING FACILITIES AND GUARANTEES (continued) 37.2 Foreign denominated facilities and guarantees Rand denominated facilities and guarantees (continued) 2007 2008 2009 Guarantor Details Beneficiary Rm Rm Rm
Vodacom (Proprietary) All guarantees individually less than Various 3 2 2 Limited R2 million
Vodacom Service All guarantees individually less than Various 3 3 2 Provider Company R2 million (Proprietary) Limited
Vodacom Service Guarantee in respect of receipt of SA Insurance 27 32 35 Provider Company independent intermediaries of premiums Association (Proprietary) Limited on behalf of short-term insurers and for benefit Lloyd’s underwriters, and relating to of insurers short-term insurance business carried on in RSA. Renewable annually
Smartcom (Proprietary) Guarantees for salary bank account Various 3 – – Limited and debit orders
Cointel VAS (Proprietary) Guarantees for operating lease Various 1 – – Limited and debit orders
Vodacom (Proprietary) Letter of undertaking in respect of land Attorneys 7 17 33 Limited
Vodacom Properties Lease guarantees Various ––3 No.2 (Proprietary) Limited
44 54 75
The Group exposure is 50% of the following items: Vodacom Congo (RDC) s.p.r.l. has various facilities of US$31 million which was fully utilised as at March 31, 2009. Vodacom International Limited has a revolving term loan of US$180 million which was fully utilised at March 31, 2009. Vodacom Lesotho (Proprietary) Limited has overdraft facilities with various banks of M25 million of which M13 million was utilised at March 31, 2009. Vodacom Tanzania Limited has medium-term loans for US$47 million and TZS54,000 million of which US$40 million and TZSNil was utilised at March 31, 2009. Foreign currency term facilities are predominantly US Dollar based, at various maturities and are utilised for bridging and short-term working capital needs.
2007 2008 2009 Guarantor Details Beneficiary Rm Rm Rm
Vodacom Group Guarantees issued for the obligation of Standard Bank US$180 million 1,312 1,463 1,735 (Proprietary) Limited Vodacom International Limited’s term plc and RMB (2008: loan facility*# International US$180 million; (Dublin) Limited 2007: US$180 million)
1,312 1,463 1,735
* Foreign denominated guarantees amounting to R1,735 million (2008: R1,463 million; 2007: R1,312 million) issued in support of Vodacom Congo (RDC) s.p.r.l. are included as liabilities in the disposal group held for sale. # The Group is in compliance with the covenants attached to the term loan facility.
Companies within the Group have provided the following guarantees: Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary) Limited. Telkom fins (group) NEW 8/12/09 6:29 PM Page 220
220 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
38. COMMITMENTS Capital commitments
Capital commitments authorised 11,167 15,198 7,928
Fixed-line 7,000 7,000 6,991 Mobile 4,159 5,211 – Multi-Links – 355 847 Other 8 2,632 90
Commitments against authorised capital expenditure 1,099 3,504 1,393
Fixed-line 506 652 539 Mobile 591 800 – Multi-Links – 355 847 Other 2 1,697 7
Authorised capital expenditure not yet contracted 10,068 11,694 6,535
Fixed-line 6,494 6,348 6,452 Mobile 3,568 4,411 – Multi-Links ––– Other 6 935 83
Capital commitments comprise commitments for property, plant and equipment and software included in Intangible assets.
Management expects these commitments to be financed from proceeds of the Vodacom sale.
2010 FIFA World Cup commitments The FIFA World Cup commitment is an executory contract which requires Telkom to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixed-line telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter. Telkom owns a tier 3 sponsorship that grants Telkom a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. Telkom entered into a barter transaction in return for which it has an outstanding commitment to FIFA of R243 million (2008: R260 million) as at March 31, 2009. This has been recognised in intangible assets (note 12) and has been included in the disclosure note.
Total <1 year 1 – 5 years >5 years Rm Rm Rm Rm
Operating lease commitments and receivables 2009 Land and buildings 583 290 281 12 Rental receivable on buildings (271) (99) (170) (2) Vehicles 1,137 261 876 – Equipment 15 6 9 – Customer premises equipment receivables (87) (48) (39) –
Total 1,377 410 957 10 Telkom fins (group) NEW 8/12/09 6:29 PM Page 221
Telkom Annual Report 2009 221
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
38. COMMITMENTS (continued) Total <1 year 1 - 5 years >5 years Rm Rm Rm Rm
Operating lease commitments and receivables (continued) 2008 Land and buildings 2,061 341 913 807 Rental receivable on buildings (266) (94) (169) (3) Transmission and data lines 709 134 490 85 Vehicles 1,444 233 1,211 – Equipment 13 10 3 – Sport and marketing contracts 680 282 395 3 Customer premises equipment receivables (84) (45) (39) –
Total 4,557 861 2,804 892
2007 Land and buildings 1,465 289 771 405 Rental receivable on buildings (269) (91) (174) (4) Transmission and data lines 262 68 159 35 Vehicles 573 568 5 – Equipment 23 6 17 – Sport and marketing contracts 441 164 275 2 Customer premises equipment receivables (57) (30) (27) –
Total 2,438 974 1,026 438
Customer premises equipment receivable The disclosed information relates to those arrangements which were assessed to be operating leases in terms of IAS17.
Operating leases The Group leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are 10 years with other leases signed for five and three years. The majority of the leases contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term.
The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%.
Penalties in terms of the lease agreements are only payable should Telkom vacate a premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of which Telkom has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions (refer to note 29).
The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, 2013.
In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airport which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement.
The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually.
The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, 2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24, 2009. In terms of these agreements the leases of individual equipment shall be valid for 36 months at a fixed fee for the entire period. Telkom fins (group) NEW 8/12/09 6:29 PM Page 222
222 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
38. COMMITMENTS (continued) Total <1 year 1 – 5 years >5 years Rm Rm Rm Rm
Finance lease commitments 2009 Building Minimum lease payments 1,654 113 546 995 Finance charges (822) (112) (426) (284)
Finance lease obligation 832 1 120 711
Equipment Minimum lease payments 7 5 2 – Finance charges (2) (1) (1) –
Finance lease obligation 5 4 1 –
Vehicles Minimum lease payments 187 47 140 – Finance charges (38) (15) (23) –
Finance lease obligation 149 32 117 –
2008 Building Minimum lease payments 2,198 257 791 1,150 Finance charges (1,031) (152) (496) (383)
Finance lease obligation 1,167 105 295 767
Equipment Minimum lease payments 16 4 12 – Finance charges (2) – (2) –
Finance lease obligation 14 4 10 –
Vehicles Minimum lease payments 242 48 194 – Finance charges (59) (20) (39) –
Finance lease obligation 183 28 155 –
2007 Building Minimum lease payments 2,412 227 853 1,332 Finance charges (1,198) (166) (540) (492)
Finance lease obligation 1,214 61 313 840
Equipment Minimum lease payments 6 – 6 – Finance charges ––––
Finance lease obligation 6 – 6 –
Finance leases Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013.
A major portion of the finance leases relates to the sale and lease-back of the Group’s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages.
Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for a period of three years ending in 2011. Telkom fins (group) NEW 8/12/09 6:29 PM Page 223
Telkom Annual Report 2009 223
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
39. CONTINGENCIES Third parties 28 27 18
Fixed-line 19 18 18 Mobile 4 4 – Multi-Links ––– Other 5 5 –
Third parties These amounts represent sundry disputes with suppliers that are not individually significant and that the Group does not intend to settle.
Supplier dispute Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator of the International Court of Arbitration, operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration proceeding relates to the cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-to-end customer assurance and activation system by Telcordia.
In September 2002, the arbitrator found that Telkom had wrongfully repudiated the contract and a partial award was issued by the arbitrator in favour of Telcordia. Telkom subsequently filed an application in the South African High Court to review and set aside the partial award. On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of Telkom. On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom.
On November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey.
The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following the successful upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving around the Supreme Court of Appeals’ failure to recognise Telkom’s rights of access to the courts under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom’s appeal with costs. The Constitutional Court judgment brought finality to the dispute over the merits of Telcordia’s claim against Telkom and the parties reconvened the arbitration in May 2007 to deal with the amount of damages to which Telcordia is entitled.
Two hearings were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in London on May 21, 2007 and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the damages hearing.
The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the application by Telcordia for the striking out of part of Telkom’s defence on the basis that Telkom had raised issues in its defence that had already been heard by the arbitrator prior to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for determination of the damages. Telkom fins (group) NEW 8/12/09 6:29 PM Page 224
224 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
39. CONTINGENCIES (continued) Supplier dispute (continued) The mediation took place in London in February and April of 2008 without success. In the interim the parties agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was held before the arbitrator in October 2008 during which the arbitrator permitted Telkom to amend its statement of defence. Further hearings were held before the software expert in November 2008 and he has made his report available.
The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers) before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact on the quantum of the other claims. The arbitrator has confirmed that the final hearing will be from January 25 to February 10, 2010, in Johannesburg.
Although Telkom is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. Telkom will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above Telkom’s provision would increase Telkom’s liabilities and decrease its net profit, which could have a material adverse effect on its financial condition, cash flows and results of operations.
A provision has been raised based on management’s best estimate of the probable payments in this regard.
2007 2008 2009 Rm Rm Rm Supplier dispute liability included in current portion of provisions 527 569 664*
The provision has not increased from March 31, 2007, except for foreign exchange movements. * US$70 million (2008: US$70 million; 2007: US$70 million).
Competition Commission Telkom is party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging anti-competitive practices described below. If Telkom were found to have committed prohibited practices as contained in the Competition Act, 1998, as amended. Telkom could be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender.
On July 31, 2008, Telkom received a summons issued by the Competition Commission requesting information in connection with investigations being conducted by the Competition Commission into five complaints against Telkom described in greater detail below by the Internet Service Association, MWEB, Internet Solutions and Verizon SA Limited. The summons was subsequently withdrawn by the Competition Commission following an agreement with Telkom in a co-operative process with the Competition Commission as part of the Competition Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar year.
As competition continues to increase, Telkom expects that we will become involved in an increasing number of disputes regarding the legality of services and products provided by Telkom and third parties. These disputes may range from court lawsuits to complaints lodged by or against Telkom with various regulatory bodies. Telkom is currently unable to predict the amount that it may eventually be required to pay in these proceedings. However, Telkom has not included provisions for any of these claims in our financial statements. In addition, Telkom might need to spend substantial amounts defending or prosecuting these claims even if it is ultimately successful. If Telkom is required to cease these practices, divest from the relevant businesses or pay significant fines, Telkom’s business and financial condition could be materially and adversely affected and its revenue and net profit could decline. Telkom may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause its indebtedness to increase.
Independent Cellular Services Provider Association of South Africa (ICSPA) In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the ’premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by Telkom. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to its High Court application in respect of utilisation of the ’premicell’ device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. Telkom filed its answering affidavit on November 28, 2003. ICSPA has taken no further action since then. Telkom fins (group) NEW 8/12/09 6:29 PM Page 225
Telkom Annual Report 2009 225
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
39. CONTINGENCIES (continued) Competition Commission (continued) The South African Value Added Network Services (SAVA) On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed complaints against Telkom at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom’s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers.
Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the South African High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the review application, Telkom also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application and filed an answering affidavit.
The main complaint at the Competition Commission was held over pending the outcome of the review application.
The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the Competition Commission to refer the SAVA complaints and the Omnilink complaint against Telkom discussed below to the Competition Tribunal. The decision was made based on three grounds, namely that:
• the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA;
• the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission was allowed to investigate the complaints were invalid; and
• the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in the SAVA complaints.
The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to deal with competition matters in the electronic communications industry).
On July 3, 2008 the Competition Commission filed an application for leave to appeal the decision of the High Court on the basis that the judge erred on the issue of bias as well as his finding that issues surrounding the extension of time to investigate the issues constitutes a ground for review. Telkom then filed an application for leave to cross-appeal on July 11, 2008. The main basis of Telkom’s cross-appeal is that Telkom believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending the outcome of the appeal and cross-appeal.
This matter is not expected to be finalised within the 2010 financial year. Telkom fins (group) NEW 8/12/09 6:29 PM Page 226
226 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
39. CONTINGENCIES (continued) Competition Commission (continued) Omnilink On August 22, 2002 Omnilink filed a complaint against Telkom at the Competition Commission alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed previously.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom’s discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion, simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s Cellsaver discount plan.
The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there have been no further developments on this matter.
The Internet Service Providers Association (ISPA) In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information.
MWEB and Internet Solutions (IS) On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the architecture of Telkom’s ADSL access route and the manner in which internet service providers can only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth on Telkom’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS and MWEB’s replying affidavit.
Since then, Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application. Telkom fins (group) NEW 8/12/09 6:29 PM Page 227
Telkom Annual Report 2009 227
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
39. CONTINGENCIES (continued) Competition Commission (continued) MWEB On June 5, 2007, MWEB brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim relief against Telkom to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. MWEB further applied for an order that Telkom implement the migration of end customers from Telkom PSTS ADSL access to MWEB without interruption of the service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over” as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB.
The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by Telkom. The parties are in further negotiations.
Verizon SA Limited (Verizon) Verizon filed a complaint against Telkom on March 22, 2007 alleging that Telkom charges an excessive price on services rendered to Verizon thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in offering prices to end-users which are lower than the prices at which it sells rights of access to its infrastructure on a wholesale basis to Verizon, and that Telkom engages in price discrimination against Verizon.
Internet Solutions (IS) IS filed a complaint against Telkom at the Competition Commission during December 2007. The complaint alleges abusive conduct by Telkom. IS specifically alleges that Telkom is charging excessive prices that bear no reasonable relation to the economic value of the goods or services, that Telkom has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients; engaging in margin squeeze, that Telkom has introduced a series of bundled products (namely Telkom Closer Products) that limit the ability of rivals in particular markets to compete effectively, and Telkom is offering discriminatory prices in relation to a number of infrastructural and service items that IS is compelled to purchase from Telkom.
While that complaint was being investigated by the Competition Commission IS brought an application to the Competition Commission for interim relief requesting: that Telkom be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private network services to its customers no higher than the lowest retail price for such connection charged to Telkom’s VPN Supreme customers and ordering that the costs of the application be paid by Telkom.
Telkom opposed the application of by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the interim relief application to date. Telkom fins (group) NEW 8/12/09 6:29 PM Page 228
228 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
39. CONTINGENCIES (continued) Competition Commission (continued) Telecom and Broadcasting (Proprietary) Limited (Maredi) Maredi Maredi served a notice of motion on Telkom, Ericsson SA and Telsaf Data (Pty) Ltd on January 8, 2009. The matter relates to a tender published by Telkom for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson.
Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent Telkom from entering into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender. Maredi also requested an order that the court review and set aside the award of the tender to Telsaf and Ericsson or either of the aforementioned parties, and refer the tender back to Telkom in order for Telkom to reconsider its award. Maredi alleged that there were certain irregularities in the tender process in that Telkom did not follow fair procedures by failing to comply with its own mandatory procedural requirements, that Telkom acted arbitrarily and in bad faith, that Telkom was biased in favour of Ericsson and that Ericsson should have been disqualified as it failed to meet Telkom’s critical criteria as set out in the tender.
Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations by Maredi of compliance by them to the technical critical criteria, were refuted by Telkom. Telkom and Ericsson opposed the application and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the ordinary course and Telkom is opposing the application.
Telkom is not currently able to predict when these disputes may be resolved or the amount that Telkom may eventually be required to pay, however, Telkom has not included provisions for all of these claims in our consolidated financial statements. In addition, Telkom may need to spend substantial amounts defending or prosecuting these claims even if Telkom is ultimately successful. If Telkom were to lose these or future legal and arbitration proceedings, Telkom could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause Telkom’s revenue and net profit to decline and have a material adverse impact on the business and financial condition. Telkom may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause Telkom’s indebtedness to increase.
Telkom is party to various additional proceedings and lawsuits in the ordinary course of our business, which management does not believe will have a material adverse impact.
Negative working capital ratio At each of the financial years ended March 31, 2009, 2008 and 2007 the Group had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities. Telkom fins (group) NEW 8/12/09 6:29 PM Page 229
Telkom Annual Report 2009 229
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
40. DIRECTORS’ INTERESTS ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom’s Board members, are the South African Government’s representatives on Telkom’s Board of directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%; 2007: 38.83%) of Telkom’s shares.
B Molefe is a Public Investment Corporation (PIC) representative on Telkom’s Board of directors. As at March 31, 2009 the PIC held 15.63% (2008: 15.23%, 2007: 15.27%) of Telkom’s shares.
Beneficial Non-beneficial Direct Indirect Direct Indirect
Directors’ shareholding (Number of shares) 2009 Executive RJ September 90,815 1,820 – – PG Nelson 19,182 –
Total 109,997 1,820 – –
Non-executive PG Joubert – 15,000 – – D Barber – 1,200 – –
– 16,200 – –
2008 Executive RJ September 7,155 – – –
Total 7,155 – – –
Non-executive At March 31, 2008 there were no non-executive directors’ shareholdings.
2007 Non-executive TF Mosololi 455 – – –
Total 455 – – –
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been reflected in the above information.
2007 2008 2009 Rm Rm Rm
Directors’ emoluments 7 36 20
Executive For services as directors 4 31 15 Non-executive For services as directors 3 5 5 Telkom fins (group) NEW 8/12/09 6:29 PM Page 230
230 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
40. DIRECTORS’ INTEREST (continued) Directors’ emoluments (continued) Performance Fringe and Fees Remuneration bonus other benefits Total RRRRR
2009 Emoluments per director: Non-executive 5,028,084 – – – 5,028,084
ST Arnold 1,030,000 – – – 1,030,000 B du Plessis 498,000 – – – 498,000 PSC Luthuli 642,000 – – – 642,000 KST Matthews 441,000 – – – 441,000 B Molefe 159,551––– 159,551 AG Rhoda 124,001 – – – 124,001 RJ Huntley 533,000 – – – 533,000 Dr E Spio-Garbrah** 622,750 – – – 622,750 Dr VB Lawrence** 359,000 – – – 359,000 DD Barber 293,667 – – – 293,667 PG Joubert 302,778 – – – 302,778
Executive – 4,530,912 2,289,947 7,848,357 14,669,216
RJ September CEO* – 3,555,800 1,841,396 7,430,452 12,827,648 PG Nelson CFO* – 975,112 448,551 417,905 1,841,568
Total emoluments – paid by Telkom 5,005,747 4,530,912 2,289,947 7,848,357 19,674,963
2008 Emoluments per director: Non-executive 4,633,933 – – – 4,633,933
ST Arnold 1,124,373 – – – 1,124,373 B du Plessis 393,967 – – – 393,967 MJ Lamberti – – – – – PSC Luthuli 502,117 – – – 502,117 TD Mahloele 357,684 – – – 357,684 KST Matthews 501,217 – – – 501,217 TF Mosololi 174,960 – – – 174,960 M Mostert*** 229,433 – – – 229,433 DD Tabata 250,583 – – – 250,583 YR Tenza 305,633 – – – 305,633 PL Zim 5,333 – – – 5,333 B Molefe 20,497 – – – 20,497 A Rhoda 14,286 – – – 14,286 RJ Huntley 193,833 – – – 193,833 Dr E Spio-Garbrah** 273,841 – – – 273,841 Dr VB Lawrence** 286,176 – – – 286,176
Executive – 14,489,833 3,436,308 13,244,896 31,171,037
R September* – 2,453,757 3,436,308 13,218,772 19,108,837
CEO – 1,016,524 3,436,308 10,438,538 14,891,370 Acting CEO – 1,437,233 – 2,780,234 4,217,467
LRR Molotsane* – 12,036,076 – 26,124 12,062,200
Total emoluments – paid by Telkom 4,633,933 14,489,833 3,436,308 13,244,896 35,804,970 Telkom fins (group) NEW 8/12/09 6:29 PM Page 231
Telkom Annual Report 2009 231
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
40. DIRECTORS’ INTEREST (continued) Directors’ emoluments (continued) Performance Fringe and Fees Remuneration bonus other benefits Total RRRRR
2007 Emoluments per director: Non-executive 2,641,168 – – – 2,641,168
NE Mtshotshisa 463,050 – – – 463,050 ST Arnold 353,719 – – – 353,719 TCP Chikane 32,670 – – – 32,670 B du Plessis 213,367 – – – 213,367 PSC Luthuli 205,417 – – – 205,417 TD Mahloele 166,667 – – – 166,667 KST Matthews 109,643 – – – 109,643 TF Mosololi 214,417 – – – 214,417 M Mostert 232,417 – – – 232,417 DD Tabata 175,367 – – – 175,367 YR Tenza 321,767 – – – 321,767 PL Zim 152,667 – – – 152,667
Executive – 2,272,785 – 1,653,202 3,925,987
LRR Molotsane* – 2,272,785 – 1,653,202 3,925,987
Total emoluments – paid by Telkom 2,641,168 2,272,785 – 1,653,202 6,567,155
*Included in fringe and other benefits is a pension contribution for LRR Molotsane of RNil (2008: R4,690; 2007: R295,462), RJ September of R462,254 (2008: R280,261; 2007: RNil) and PG Nelson of R125,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the Telkom Retirement Fund.
** Foreign directors.
*** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the Company and shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During 2008, Dr Mostert led all efforts in this regard and was remunerated accordingly. Moreover, in compliance with the principles of good governance, the Board took legal advice and established that there was no conflict of interest arising out of this involvement in the transaction evaluated. Telkom fins (group) NEW 8/12/09 6:29 PM Page 232
232 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION Eliminations represent the inter-segmental transactions that have been eliminated against segment results. The mobile segment represents the Group’s joint venture Vodacom.
Business segment Consolidated operating revenue 32,441 33,611 35,940
Fixed-line 32,345 32,572 33,659 Elimination (772) (830) (817) Multi-Links – 845 1,900 Other 873 1,040 1,214 Elimination (5) (16) (16)
Discontinued operations 19,178 22,674 26,174
Mobile 20,573 24,089 27,594 Elimination (1,494) (1,519) (1,531) Other 106 108 123 Elimination (7) (4) (12)
Consolidated other income 338 472 343
Fixed-line 334 497 524 Elimination (46) (86) (245) Other 50 61 64
Discontinued operations 46 62 129
Mobile 42 56 119 Other 4 6 10
Consolidated operating expenses 23,028 25,014 29,895
Fixed-line 24,083 24,962 29,849 Elimination (1,505) (1,709) (3,624) Multi-Links – 942 2,422 Elimination – 56 469 Other 512 928 801 Elimination (62) (165) (22)
Discontinued operations 14,505 17,323 21,214
Mobile 15,185 17,898 21,704 Elimination (745) (805) (876) Other 77 245 607 Elimination (12) (15) (221) Telkom fins (group) NEW 8/12/09 6:29 PM Page 233
Telkom Annual Report 2009 233
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Consolidated operating profit 9,751 9,069 6,388
Fixed-line 8,596 8,107 4,334 Elimination 687 793 2,562 Multi-Links – (97) (522) Elimination – (56) (469) Other 411 173 477 Elimination 57 149 6
Discontinued operations 4,719 5,413 5,089
Mobile 5,430 6,247 6,009 Elimination (749) (714) (655) Other 33 (131) (474) Elimination 5 11 209
Consolidated investment income 199 168 181
Fixed-line 3,041 3,975 2,807 Elimination (2,850) (3,832) (2,646) Multi-Links –7 5 Other 8 18 15
Discontinued operations 37 29 35
Mobile 37 27 33 Other –2 2
Consolidated finance charges 857 1,556 2,843
Fixed-line 857 1,277 1,464 Multi-Links – (4) 1,201 Elimination – (33) (164) Other – 318 353 Elimination – (2) (11)
Discontinued operations 269 247 922
Mobile 269 240 921 Other –7 1
Consolidated taxation 2,803 2,647 1,660
Fixed-line 2,652 2,630 560 Elimination ––825 Multi-Links – (131) 141 Elimination ––(24) Other 151 148 158 Telkom fins (group) NEW 8/12/09 6:29 PM Page 234
234 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Discontinued operations 1,928 2,057 2,021
Mobile 1,918 2,055 2,023 Other 10 2 (2)
Minority interests 94 123 26
Multi-Links – 12 (96) Other 94 111 122
Discontinued operations 109 74 51
Mobile 109 73 51 Other –1 –
Profit attributable to equity holders of Telkom 6,196 4,911 2,040
Fixed-line 8,128 8,175 5,117 Elimination (2,163) (3,039) (909) Multi-Links – 33 (1,763) Elimination – (23) (281) Other 174 (386) (141) Elimination 57 151 17
Discontinued operations 2,450 3,064 2,130
Mobile 3,171 3,906 3,047 Elimination (749) (714) (655) Other 23 (139) (471) Elimination 5 11 209
Consolidated assets 57,426 68,259 59,712
Fixed-line 44,224 47,829 54,593 Elimination (1,547) (1,604) (1,167) Mobile 14,026 16,743 – Elimination (353) (278) – Multi-Links – 2,451 5,834 Elimination ––(860) Other 1,188 3,283 1,285 Elimination (112) (165) 27
Disposal group – – 23,215
Mobile 23,412 Elimination (269) Other 94 Elimination (22) Telkom fins (group) NEW 8/12/09 6:29 PM Page 235
Telkom Annual Report 2009 235
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Investments 1,461 1,499 1,383
Fixed-line 1,621 4,917 10,910 Elimination (341) (3,607) (9,540) Mobile 181 176 – Other – 13 13
Disposal group – – Mobile 194
Other financial assets 259 614 1,202
Fixed-line 230 445 1,200 Mobile 28 169 – Other 1 – 2
Disposal group Mobile ––73
Total assets 59,146 70,372 85,779
Consolidated liabilities 15,951 19,689 14,247
Fixed-line 10,154 11,892 13,002 Elimination (458) (495) (514) Multi-Links – 639 1,564 Elimination ––(265) Mobile 7,416 8,871 – Elimination (1,468) (1,542) – Other 374 332 165 Elimination (67) (8) 295
Disposal group – – 8,498
Mobile 9,611 Elimination (1,128) Other 15
Interest-bearing debt 10,364 15,733 18,275
Fixed-line 9,082 13,362 17,704 Mobile 1,278 1,815 – Multi-Links – 532 550 Other 4 24 21
Disposal group – – 7,052
Mobile 7,052 Other – Telkom fins (group) NEW 8/12/09 6:29 PM Page 236
236 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Other financial liabilities 229 1,290 228
Fixed-line 58 167 226 Mobile 158 204 – Other 13 919 2
Disposal group Mobile ––48
Taxation liabilities 594 323 50
Fixed-line –7 12 Mobile 556 290 – Other 38 26 38
Disposal group – – 275
Mobile 275 Other –
Total liabilities 27,138 37,035 48,673
Other segment information Capital expenditure for property, plant and equipment 8,648 10,108 8,725
Fixed-line 5,545 6,044 5,866 Mobile 3,069 2,475 – Multi-Links – 1,312 2,754 Other 34 277 105
Disposal group – – 3,013
Mobile 2,979 Other 34
Capital expenditure for intangible assets 1,598 1,791 906
Fixed-line 1,049 749 824 Mobile 539 985 – Multi-Links ––37 Other 10 57 45
Disposal group – – 590
Mobile 590 Other –
Depreciation and amortisation 3,316 3,621 4,458
Fixed-line 3,298 3,470 4,037 Multi-Links – 119 296 Elimination ––69 Other 18 32 50 Elimination ––6 Telkom fins (group) NEW 8/12/09 6:29 PM Page 237
Telkom Annual Report 2009 237
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Discontinued operations 1,703 1,980 2,373
Mobile 1,681 1,955 2,341 Other 22 25 32
Impairment and asset write-offs 284 514 822
Fixed-line 284 262 321 Multi-Links – 23 462 Other – 229 39
Discontinued operations 12 15 57
Mobile 12 15 57 Other –––
Workforce reduction expense – Fixed-line 24 3 8
Geographical segment Consolidated operating revenue 32,441 33,611 35,940
South Africa 32,428 32,671 33,847 Other African countries 29 956 2,093 Elimination (16) (16) –
Disposal group 19,178 22,674 26,174
South Africa 17,130 19,997 22,298 Other African countries 2,070 2,697 3,932 Elimination (22) (20) (56)
Consolidated operating profit 9,751 9,069 6,388
South Africa 9,744 9,254 7,435 Other African countries 18 (169) (533) Elimination (11) (16) (514)
Disposal group 4,719 5,413 5,089
South Africa 4,622 5,089 4,726 Other African countries 276 414 400 Elimination (179) (90) (37)
Consolidated assets 59,146 70,372 62,297
South Africa 56,797 63,772 57,056 Other African countries 3,489 8,785 6,101 Eliminations (1,140) (2,185) (860) Telkom fins (group) NEW 8/12/09 6:29 PM Page 238
238 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
41. SEGMENT INFORMATION (continued) Disposal group – – 23,482
South Africa 20,693 Other African countries 9,597 Elimination (6,808)
Capital expenditure for property, plant and equipment and intangible assets 10,246 11,899 9,631
South Africa 9,459 9,780 6,735 Other African countries 787 2,119 2,896
Disposal group – – 3,603
South Africa 2,443 Other African countries 1,213 Elimination (53)
’South Africa’, which is also the country of domicile for Telkom, comprises the segment information relating to Telkom and its South African subsidiaries as well as Vodacom’s South African-based mobile communications network, the segment information of its service providers is included in the disposal group.
‘Other African countries’ comprises Telkom’s subsidiaries Africa Online Limited and Multi-Links Telecommunications Limited as well as Vodacom’s mobile communications network in Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique. Telkom fins (group) NEW 8/12/09 6:29 PM Page 239
Telkom Annual Report 2009 239
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
42. RELATED PARTIES Details of material transactions and balances with related parties not disclosed separately in the consolidated annual financial statements were as follows: 2007 2008 2009 Rm Rm Rm
With joint venture: Vodacom Group (Proprietary) Limited Related party balances Trade receivables 61 51 61 Trade payables (353) (346) (325)
Related party transactions Revenue (755) (816) (891) Expenses 1,494 1,525 1,533 Audit fees 3 3 2 Revenue includes interconnect fees and lease and installation of transmission lines. Expenses mostly represent interconnect expenses.
With shareholders: Public Investment Corporation There were no material transactions between Telkom and the Public Investment Corporation.
Government Related party balances Trade receivables 271 326 386
Related party transactions Revenue (2,458) (2,623) (2,767)
With entities under common control: Major public entities Related party balances Trade receivables 59 28 52 Trade payables (6) (25) (3)
The outstanding balances are unsecured and will be settled in cash in the ordinary course of business.
Related party transactions Revenue (435) (486) (446) Expenses 238 243 212 Rent received (29) (21) (20) Rent paid 27 22 19
Key management personnel compensation: (Including directors’ emoluments) Related party transactions Short-term employee benefits 116 155 62 Post-employment benefits 4 4 6 Termination benefits – 27 – Equity compensation benefits 8 29 39 Other long-term benefits 17 – –
The fair value of the shares that vested in the current year is R11 million (2008: R12 million; 2007: RNil).
Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above, outstanding balances at the year end are unsecured, interest-free and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million provided to Africa Online Limited, there have been no guarantees provided or received for related party receivables or payables. Telkom fins (group) NEW 8/12/09 6:29 PM Page 240
240 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
43. INTEREST IN MATERIAL SUBSIDIARIES Country of incorporation: RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho; MZ – Mozambique; DRC – Democratic Republic of Congo; MAU – Mauritius; NIG – Nigeria; GUE – Guernsey.
Nature of business: C – Cellular; S – Satellite; MSC – Management services company; PROP – Property company; OTH – Other.
* Dormant at March 31, 2008.
Interest in issued Issued share capital ordinary share capital Country of 2007 2008 2009 2007 2008 2009 incorporation %%%
Directory advertising Trudon (Proprietary) Limited (formerly trading as TDS Directory Operations (Proprietary) Limited) RSA R100,000 R100,000 R100,000 64.9 64.9 64.9 Other group entities Rossal No 65 (Proprietary) Limited RSA R100 R100 R100 100 100 100 Acajou Investments (Proprietary) Limited RSA R100 R100 R100 100 100 100 Africa Online Limited MAU US$1,000 US$1,000 US$1,000 100 100 100
Multi-Links Telecommunications Limited NIG – NGN300,000,000 NGN300,000,000 – 75 100 Telkom Management Services (Proprietary) Limited RSA – – R100 – – 100 Intekom (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001,000 100 100 100 Q-Trunk (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001,000 100 100 100 Telkom International (Proprietary) Limited RSA R100 R100 R100 100 100 100
The aggregate net loss of the nine subsidiaries is R2,168 million (2008: R186 million) and profit of (2007: R564 million)
Disposal group Telkom Media (Proprietary) Limited RSA R100 R100 R100 100 100 100 Swiftnet (Proprietary) Limited RSA R25,000,000 R5,000,000 R5,000,000 100 100 100
Vodacom has an interest in the following companies (Group share: 50% of the interest in ordinary share capital as indicated):
Cellular network operators Vodacom (Proprietary) Limited (C) RSA R100 R100 R100 100 100 100 Vodacom Lesotho (Proprietary) Limited (C) LES M4,180 M4,180 M4,180 88.3 88.3 88.3 Vodacom Tanzania Limited (C) TZN TZS10,000 TZS10,000 TZS10,000 65 65 65 VM, S.A.R.L. (C) MZ US$60,000,000 US$60,000,000US$60,000,000 98 90 90 Vodacom Congo (RDC) s.p.r.l. (C) DRC US$1,000,000 US$1,000,000US$1,000,000 51 51 51
Service providers Vodacom Service Provider Company (Proprietary) Limited (C) RSA R20 R20 R20 100 100 100 Smartphone SP (Proprietary) Limited (C)* RSA R20,000 R20,000 R20,000 70 100 100 Smartcom (Proprietary) Limited (C)* RSA R1,000 R1,000 R1,000 61.7 100 100 Cointel VAS (Proprietary) Limited (C)* RSA R10,204 R10,204 R10,204 70 100 100
Other significant subsidiaries of the Group’s Joint Venture Vodacom Service Provider Holdings Company (Proprietary) Limited (MSC)* RSA R1,020 R1,023 R1,023 100 100 100 Vodacom Satellite Services (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100 GSM Cellular (Proprietary) Limited (OTH)* RSA R1,200 R1,200 R1,200 100 100 100 Vodacom Venture No.1 (Proprietary) Limited (OTH)* RSA R810 R810 R810 100 100 100 Vodacom Equipment Company (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100 Vodacare (Proprietary) Limited* (OTH) RSA R100 R100 R100 100 100 100 Telkom fins (group) NEW 8/12/09 6:29 PM Page 241
Telkom Annual Report 2009 241
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
43. INTEREST IN MATERIAL SUBSIDIARIES (continued) Interest in issued Issued share capital ordinary share capital Country of 2007 2008 2009 2007 2008 2009 incorporation % % %
Vodacom International Holdings (Proprietary) Limited (MSC) RSA R100 R100 R100 100 100 100 Vodacom International Limited (MSC) MAU US$100 US$100 US$100 100 100 100 Vodacom Properties No.1 (Proprietary) Limited (PROP) RSA R100 R100 R100 100 100 100 Vodacom Properties No.2 (Proprietary) Limited (PROP) RSA R1,000 R1,000 R1,000 100 100 100 Stand 13 Eastwood Road Dunkeld West (Proprietary) Limited (PROP) RSA R100 – – 70 – – Ithuba Smartcall (Proprietary) Limited (OTH) RSA R100 – – 36.4 – – Smartcall Smartlife (Proprietary) Limited (OTH) RSA R100 – – 63 – – Vodacom Tanzania Limited (Zanzibar) (OTH)* TZN TZS10,000 TZS10,000 TZS10,000 99 99 99 Joycell Shops (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100 Marble Gold Investments (Proprietary) Limited (OTH) * RSA R100 R100 R100 100 100 100 Vodacom Ventures (Proprietary) Limited (OTH) RSA R120 R120 R120 100 100 100 Skyprops 134 (Proprietary) Limited (PROP) RSA R100 R100 R100 100 100 100 Storage Technology Services (Proprietary) Limited RSA – – R136 – – 51 Gateway Telecommunications Plc UK – – £49,567,569 – – 100 Gateway Communications Africa (UK) Limited UK – – £1 – – 100 Gateway Communications SA BLG – – e62,000 – – 100 Gateway Telecoms Integrated Services Limited NIG – – NGN1,250,000 – – 100
GS Telecom Limited GUE – – US$193 – – 100
Indebtedness of Telkom subsidiary companies Rm Rm Rm
Intekom (Proprietary) Limited RSA – – – – – (23) Q-Trunk (Proprietary) Limited RSA – – – 30 26 22 Rossal No 65 (Proprietary) Limited RSA – – – – 30 (342) Acajou Investments (Proprietary) Limited RSA – – – – – 285 Africa Online Limited MAU – – – – 74 236 Multi-Links Telecommunications Limited NIG – – – – 841 5,225 Telkom International (Proprietary) Limited RSA – – – – 1,985 1,985 Disposal group Swiftnet (Proprietary) Limited RSA – – – – – 10 Telkom Media (Proprietary) Limited RSA – – – – 326 470 Telkom fins (group) NEW 8/12/09 6:29 PM Page 242
242 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
44. SIGNIFICANT EVENTS Telkom Renaissance On November 14, 2008, Telkom’s Board of directors approved the new organisation structure which is designed to fit Telkom’s defend and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called Telkom Renaissance.
The Group has been restructured into three operating Business Units namely Telkom South Africa, Telkom International and Telkom Data Centre Operations. The Telkom Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling, reorganising, revitalising and re-engineering happens in order to make the new structure function optimally.
This initiative is a complete transformation of the way Telkom focuses on servicing its customers and creating value for its stakeholders. It is a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of Telkom’s strategy to maintain and grow market share in South Africa whilst building a strong footprint on the African continent.
Capability Management Telkom will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its transforming information, communications and technology business.
The transformation of the communications industry and increasing market and competitive pressure has put communication companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result Capability Management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. Capability Management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service provider relationships improving performance in other functional areas.
Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service delivery across the Telkom Group.
Given the challenges Telkom faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial, operational and transformational targets, customer expectations and shareholder expectations are met.
The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will focus on the following:
• Identify and assess existing capabilities;
• Establish a Telkom Group Capability Inventory;
• Determine future capability requirements;
• Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and
• Enable Telkom South Africa, Telkom International and Telkom Data Centre Operations to: – Improve resource efficiency; – Improve capital productivity; and – Improve service delivery.
A memorandum of understanding was entered into between Telkom and organised labour which included issues such as the deferment of the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a Restructuring Forum where all restructuring initiatives will be debated between the parties concerned.
Telkom Management Services (Proprietary) Limited (TMS) TMS was registered as a company during August 2008. Telkom’s Board approved the establishment of TMS as a part of Telkom’s strategic plan to grow revenue and expand geographic reach.
Appointment of director On November 10, 2008 Telkom announced the appointment of Mr Peter Nelson as Chief Financial Officer and director in Telkom with effect from December 8, 2008. Telkom fins (group) NEW 8/12/09 6:29 PM Page 243
Telkom Annual Report 2009 243
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
45. SUBSEQUENT EVENTS Dividends The Telkom Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on July 17, 2009.
Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited On November 10, 2008, Telkom International (Proprietary) Limited, a wholly owned subsidiary of Telkom, announced it has entered into agreements to acquire 100% of MWEB Africa Limited ("MWEB Africa") and 75% of MWEB Namibia (Proprietary) Limited (“MWEB Namibia”). The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million (approximately R498 million) with a deferred payment of US$14.18 million due when the profits of MWEB Group for the year ended March 31, 2009 are finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited respectively, which are members of the Naspers Limited Group.
MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in Botswana and distributors in 26 sub-Saharan African countries.
The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions.
Based on an independent valuation, the MWEB Africa Group does not have any significant contingent liabilities at acquisition date.
The only possible contingent liability, the AFSAT bonus scheme, is reasonably quantified and included in the balance sheet of MWEB Africa Group at March 31, 2009.
The purchase price of US$69.168 million was determined as follows:
• Namibian cash-generating unit for US$1.5 million;
• Mauritian cash-generating unit for US$53.5 million; and
• US$14.18 million deferred until the profits of the MWEB Group for the year ended March 31, 2009 are finalised.
The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being obtained in certain African jurisdictions.
Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled.
The acquisition will have the following effect on the Group’s assets and liabilities on acquisition: Carrying amounts Fair values Rm Rm
Fixed assets 43 43 Intangible assets 138 209 Deferred taxation asset 22 Cash and cash equivalents 75 75 Trade and other receivables 26 26 Inventory 16 16 Deferred taxation liability (18) (19) Taxation (4) (4) Trade and other payables (69) (69)
Fair value of net assets acquired 209 279 Minority interests (2) (2)
Net asset value 207 277 Goodwill on acquisition – 352
Purchase price* – 629 Capitalised transaction costs –3
Total cash consideration – 632
* Of the R629 million purchase price, R498 million has been settled. The outstanding amount of US$14.18 million (approximately R105 million) is deferred payment. Telkom fins (group) NEW 8/12/09 6:29 PM Page 244
244 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
45. SUBSEQUENT EVENTS (continued) The goodwill from the acquisition is partially attributable to the following:
• Certain licences that could not be valued separately from the MWEB Group as no secondary licensing market exists, but contribute significantly to goodwill as the MWEB business’s would cease to exist without the licence rights.
• The skills and technical talent of the acquired business’s workforce, and the synergies expected to be achieved from integrating the acquiree into the Group’s existing internet service provision.
• The goodwill is also attributable to the MWEB Group’s position as Africa’s largest satellite-based internet service provider in Sub-Saharan Africa.
There was RNil revenue in the consolidated annual financial statements.
AT&T strategic agreement On April 16, 2009, Telkom and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s global networking reach to sub-Saharan Africa and boost Telkom’s strategy to grow a strong ICT footprint on the African continent. The agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services to multinational customers, either based in or seeking to extend their operations in sub-Saharan Africa.
Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would:
• directly connect the Telkom regional network and the AT&T global network;
• deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points;
• enhance mobile service capabilities for corporate customers in sub-Saharan Africa;
• extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered in or seeking to expand sites in sub-Saharan Africa;
• explore other potential opportunities in areas such as Telepresence, hosting and professional services; and
• expand the existing global wholesale voice services relationship between Telkom Group and AT&T.
Telkom Media (Proprietary) Limited (Telkom Media) On August 31, 2006 Telkom created a new subsidiary, Telkom Media (Proprietary) Limited, with a black economic empowerment (’BEE’) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.
On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum. Telkom Media did not meet the held for sale criteria at year end as management were unable to sell the disposal group for its expected price and therefore decided to abandon it.
Subsequent to year end Telkom was approached by potential buyers of Telkom’s interest in Telkom Media and negotiations with the potential buyer were concluded. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Proprietary) Limited for a nominal amount.
Disposal and unbundling of stake in Vodacom In 2008 Telkom announced a decision to dispose of its entire shareholding in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group plc, and unbundling its remaining 35% shareholding to its shareholders pursuant to a listing of Vodacom on the main board of JSE Limited.
On May 18, 2009 Vodacom was successfully listed on the main board of JSE Limited and a special divided of R19 was distributed to all Telkom shareholders. Telkom successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009. Telkom fins (group) NEW 8/12/09 6:29 PM Page 245
Telkom Annual Report 2009 245
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
45. SUBSEQUENT EVENTS (continued) Bookbuilding of Vodacom Group (Proprietary) Limited shares On June 2, 2009 Telkom announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million for "ineligible shareholders". The directors of Telkom, in consultation with Vodafone, determined that Telkom shareholders in the United States of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of Telkom, which was completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions.
The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in proportion to their entitlement to Vodacom shares.
New York Stock Exchange listing Given the current global economic climate and the absolute necessity for Telkom to reduce its cost profile, the Board has decided to delist from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict governance compliance and transparent financial reporting.
Telkom is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global investors. Telkom intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United States of America.
Telkom Communications International (Proprietary) Limited The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that Telkom Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009.
Other matters The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 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.
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Group has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective:
IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS financial statements) as one of the following amounts:
• Cost determined in accordance with IAS27
• At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments: Recognition and Measurement
• The previous GAAP carrying amount of the investment at the date of transition to IFRS
This determination is made for each investment, rather than being a policy decision.
The amendment does not have an impact on the annual financial statements. Telkom fins (group) NEW 8/12/09 6:29 PM Page 246
246 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRS2 Share-Based Payment: Vesting Conditions and Cancellations (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-Based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. The amendment will not have a material impact on the consolidated financial statements.
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended) This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not have a material impact on the Company’s/Group’s financial statements.
IFRS3 Business Combinations (revised) The revisions are effective for annual periods beginning on or after 1 July 2009 .The revised standard still applies the acquisition method of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The impact of the revised standard is being evaluated.
IFRS7 Financial Instruments: Disclosures (amended) The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.
IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.
IFRIC9 Reassessment of Embedded Derivatives (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the consolidated financial statements as the Group does not have material embedded derivatives.
IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale. The interpretation is not relevant to the Group’s operations because none of the Group entities operate any loyalty programmes.
Where the cost of fulfilling the awards is expected to exceed the consideration received, the Group will have to recognise an onerous contract liability. The impact of this interpretation is being evaluated.
IFRIC15 Agreements for the Construction of Real Estate The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue.
This interpretation is not relevant to the Group’s operations as the Group does not construct real estates. Telkom fins (group) NEW 8/12/09 6:29 PM Page 247
Telkom Annual Report 2009 247
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRIC16 Hedges of a Net Investment in a Foreign Operation The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group. The interpretation will not have an impact on the consolidated annual financial statements.
IFRIC17 Distributions of Non-Cash Assets to Owners The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or a cash alternative. The impact of this interpretation is being evaluated.
IFRIC18 Transfer of Assets from Customers The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment (’PPE’) 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. The interpretation also provides guidance where an entity receives cash from a customer that must be used only to acquire or construct an item of PPE in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services. The impact of this interpretation is currently being evaluated.
IAS1 Presentation of Financial Statements (revised) The revised standard is effective for annual periods beginning on or after January 1, 2009.
IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement by different names: the ’statement of financial position’ and ’statement of cash flows’, respectively. The revision to the standard will result in changes in the way the consolidated annual financial statements are presented.
IAS7 Cash Flow Statement: Consequential Amendments Arising from Amendments to IAS16 The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating activities. The impact of this amendment is being evaluated.
IAS23 Borrowing Costs (revised) The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets to be capitalised. The Group does not expect the adoption of the standard to have a material impact.
IAS27 Consolidated and Separate Financial Statements (revised) The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated.
IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Assoc iate (amended) The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following changes in respect of the holding company’s separate financial statements:
• The deletion of the ’cost method’. Making the distinction between pre- and post- acquisition profits is no longer required. All dividends will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment; and
• In cases of reorganisations where a new parent is inserted above an existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. The impact of this amended standard is currently being evaluated. Telkom fins (group) NEW 8/12/09 6:29 PM Page 248
248 Telkom Annual Report 2009
Notes to the consolidated annual financial statements (continued) for the three years ended March 31, 2009
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity only on liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amendment is being evaluated.
IAS39 Financial Instruments: Recognition and Measurement (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives.
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended) The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The amendment will not have an impact on the financial statements as Telkom does not apply hedge accounting.
Changes as a result of the annual improvements project A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1, 2009. These standards were as follows:
IFRS5 Non-Current Assets Held for Sale and Discontinued Operations IAS1 Presentation of Financial Statements – Non-Current/Current Classification of Derivatives IAS16 Property, Plant and Equipment IAS19 Employee Benefits IAS20 Government Grants IAS23 Borrowing Costs – Components of Borrowing Costs IAS27 Consolidated and Separate Financial Statements IAS28 Investments in Associates IAS29 Financial Reporting in Hyperinflationary Economies IAS31 Interests in Joint Ventures IAS36 Impairment of Assets IAS38 Intangible Assets IAS39 Financial Instruments: Recognition and Measurement IAS40 Investment Property IAS41 Agriculture
The Group will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted during the 2011 financial year. The Group is currently evaluating the effects of the improvements. Telkom fins (group) NEW 8/12/09 6:29 PM Page 249
Company financial statements Company income statement 250 Company balance sheet 251 Company statement of changes in equity 252 Company cash flow statement 253 Notes to the Company annual financial statements 254
business shows resilience
Company Financial 6 Information Telkom fins (company) NEW 8/12/09 6:58 PM Page 250
250 Telkom Annual Report 2009
Company income statement for the three years ended March 31, 2009
2007 2008 2009 Notes Rm Rm Rm
Total revenue 3.1 35,818 36,641 37,058
Operating revenue 3.2 32,340 32,571 33,659 Other income 4 655 498 524 Operating expenses 24,089 24,953 29,837
Employee expenses 5.1 7,077 7,386 7,990 Payments to other operators 5.2 6,461 6,902 7,536 Selling, general and administrative expenses 5.3 3,970 3,904 6,580 Service fees 5.4 2,236 2,410 2,760 Operating leases 5.5 762 619 613 Depreciation, amortisation, impairment and write-offs 5.6 3,583 3,732 4,358
Operating profit 8,906 8,116 4,346 Investment income 6 3,202 3,739 2,907 Finance charges and fair value movements 7 1,027 1,289 1,460
Interest 1,142 1,499 1,655 Foreign exchange and fair value movement gain (115) (210) (195)
Profit before taxation 11,081 10,566 5,793 Taxation 8 2,690 2,599 516
Profit for the year 8,391 7,967 5,277 Telkom fins (company) NEW 8/12/09 6:58 PM Page 251
Telkom Annual Report 2009 251
Company balance sheet at March 31, 2009
2007 2008 2009 Notes Rm Rm Rm
ASSETS Non-current assets 37,533 43,360 50,796
Property, plant and equipment 9 32,614 35,273 37,345 Intangible assets 10 3,502 3,806 3,988 Investments 11 887 3,883 7,693 Finance lease receivables 13 136 160 166 Deferred taxation 14 340 183 1,549 Deferred expenses 25 54 55 55
Current assets 7,754 8,763 10,090
Inventories 15 839 873 1,331 Income tax receivable 31 519 – 91 Current portion of finance lease receivables 13 71 105 109 Trade and other receivables 17 5,920 6,859 6,420 Other financial assets 18 229 443 1,198 Cash and cash equivalents 19 176 483 941
Assets held for sale and discontinued operations 16 – – 34
Total assets 45,287 52,123 60,920
EQUITY AND LIABILITIES Capital and reserves 25,714 26,693 29,086
Share capital 20 5,329 5,208 5,208 Treasury share reserve 21 (1,778) (1,642) (1,521) Share-based compensation reserve 22 257 643 1,076 Retained earnings 21,906 22,484 24,323
Non-current liabilities 6,580 11,181 14,766
Interest-bearing debt 23 3,308 7,336 10,193 Provisions 24 1,203 1,445 1,830 Deferred revenue 26 739 870 996 Deferred taxation 14 1,330 1,530 1,747
Current liabilities 12,993 14,249 17,068
Trade and other payables 27 4,333 4,923 5,424 Shareholders for dividend 32 15 20 23 Current portion of interest-bearing debt 23 5,775 6,026 7,511 Current portion of provisions 24 1,706 1,640 1,953 Current portion of deferred revenue 26 1,107 1,424 1,826 Income tax payable 31 – 7 – Other financial liabilities 18 57 168 225 Credit facilities utilised 19 – 41 106
Total liabilities 19,573 25,430 31,834
Total equity and liabilities 45,287 52,123 60,920 Telkom fins (company) NEW 8/12/09 6:58 PM Page 252
252 Telkom Annual Report 2009
Company statement of changes in equity for the three years ended March 31, 2009
Treasury Share-based Share Share share compensation Retained capital premium reserve reserve earnings Total Rm Rm Rm Rm Rm Rm
Balance at April 1, 2006 5,449 1,342 (1,786) 151 18,534 23,690 Total income and expense for the year ––––8,391 8,391 Dividend declared (refer to note 32) ––––(4,885) (4,885) Payment made for treasury shares – – (27) – – (27) Increase in share-based compensation reserve (refer to note 22) – – – 141 – 141 Shares vested and re-issued (refer to note 22) – – 35 (35) – – Shares bought back and cancelled (refer to note 20) (120) (1,342) – – (134) (1,596)
Balance at March 31, 2007 5,329 – (1,778) 257 21,906 25,714 Total income and expense for the year ––––7,967 7,967 Dividend declared (refer to note 32) ––––(5,863) (5,863) Increase in share-based compensation reserve (refer to note 22) – – – 522 – 522 Shares vested and re-issued (refer to note 22) – – 136 (136) – – Shares bought back and cancelled (refer to note 20) (121) – – – (1,526) (1,647)
Balance at March 31, 2008 5,208 – (1,642) 643 22,484 26,693 Total income and expense for the year ––––5,277 5,277 Dividend declared (refer to note 32) ––––(3,438) (3,438) Increase in share-based compensation reserve (refer to note 22) – – – 554 – 554 Shares vested and re-issued (refer to note 22) – – 121 (121) – –
Balance at March 31, 2009 5,208 – (1,521) 1,076 24,323 29,086 Telkom fins (company) NEW 8/12/09 6:58 PM Page 253
Telkom Annual Report 2009 253
Company cash flow statement for the three years ended March 31, 2009
Restated Restated 2007 2008 2009 Notes Rm Rm Rm
Cash flows from operating activities 6,383 8,172 9,948
Cash receipts from customers 32,109 32,375 34,239 Cash paid to suppliers and employees (19,449) (19,713) (22,212)
Cash generated from operations 28 12,660 12,662 12,027 Interest received 385 390 343 Dividends received 29 2,950 3,536 3,242 Finance charges paid 30 (886) (842) (466) Taxation paid 31 (3,852) (1,716) (1,764)
Cash generated from operations before dividend paid 11,257 14,030 13,382 Dividend paid 32 (4,874) (5,858) (3,434)
Cash flows from investing activities (6,662) (9,994) (12,129)
Proceeds on disposal of property, plant and equipment and intangible assets 4 164 21 Additions to property, plant and equipment and intangible assets (6,598) (6,763) (6,428)
Expansions to property, plant and equipment and intangible assets (2,409) (4,142) (3,344) Maintenance to property, plant and equipment and intangible assets (3,189) (2,621) (3,084)
Acquisition of subsidiary and minority interest in subsidiary 11 (150) – (1,339) Loans to subsidiaries – (3,395) (4,383) Loans repaid by subsidiaries 82 – –
Cash flows from financing activities (2,777) 2,088 2,574
Loans raised 5,624 23,878 18,168 Loans repaid (6,843) (20,204) (14,649) Shares bought back and cancelled (1,596) (1,647) – Decrease/(increase) in net financial assets 38 61 (945)
Net (decrease)/increase in cash and cash equivalents (3,056) 266 393 Net cash and cash equivalents at beginning of the year 3,232 176 442
Net cash and cash equivalents at end of the year 19 176 442 835 Telkom fins (company) NEW 8/12/09 6:58 PM Page 254
254 Telkom Annual Report 2009
Notes to the annual financial statements for the three years ended March 31, 2009
1. CORPORATE INFORMATION are measured at fair value and share-based payments which are Telkom SA Limited (the Company) is a company incorporated measured at grant date fair value. Details of the Company’s and domiciled in the Republic of South Africa (’South Africa’) significant accounting policies are set out below, and are whose shares are publicly traded. The Company’s main consistent with those applied in the previous financial year objective and main business is to supply telecommunication, except for the following: broadcasting, multimedia, technology, information and other • The Company has adopted certain amendments to IAS39 related information technology services to the general public. and IFRS7, and adopted IFRIC12 and IFRIC14, which The principal activities of the Company’s services and products are applicable for annual periods beginning on or after include: January 1, 2008. • fixed-line subscription and connection services to post-paid, The principal effects of these changes are discussed below. prepaid and private payphone customers using PSTN (Public Switched Telephone Network) lines, including ISDN Adoption of amendments to standards and new (Integrated Service Digital Network) lines, and the sale of interpretations subscription based value-added voice services and customer IAS39 Financial Instruments: Recognition and Measurement premises equipment rental and sales; and IFRS7 Financial Instruments: Disclosures – Reclassification of Financial Assets (amended) • fixed-line traffic services to post-paid, prepaid and payphone The amendments which are effective on or after July 1, 2008, customers, including local, long distance, fixed-to-mobile, permit an entity to reclassify non-derivative financial assets (other international outgoing and international voice-over-internet than those designated at fair value through profit or loss by the protocol traffic services; entity upon initial recognition) out of the fair value through profit • interconnection services, including terminating and transiting or loss category in particular circumstances. The amendments traffic from South African mobile operators, as well as from also permit an entity to transfer from the available-for-sale international operators and transiting traffic from mobile to category to the loans and receivables category a financial asset international destinations; that would have met the definition of loans and receivables (if the financial asset had not been designated as available-for- • fixed-line data and internet services, including domestic and sale), if the entity has the intention and ability to hold that international data transmission services, such as point-to-point financial asset for the foreseeable future. The amendments do leased lines, ADSL (Asymmetrical Digital Subscriber Line) not have an impact on the annual financial statements. services, packet-based services, managed data networking services and internet access and related information IFRIC12 Service Concession Arrangements technology services; and The interpretation which is effective for annual periods beginning on or after January 1, 2008, sets out general • W-CDMA (Wideband Code Division Multiple Access), a principles on recognising and measuring the obligations and 3G next generation network, including fixed voice services, related rights in service concession arrangements from an data services and nomadic voice services. operator’s perspective. This interpretation does not have an These separate annual financial statements are prepared in impact on the annual financial statements. compliance with the South African Companies Act, 1973. In IFRIC14 The Limit on a Defined Benefit Asset, Minimum addition, the Group presents consolidated financial statements Funding Requirements and their Interaction which include all subsidiaries, special purpose entities and joint The interpretation which is effective for annual periods ventures, which are included in these financial statements as beginning on or after January 1, 2008, provides guidance on investments. assessing the limit in IAS19 on the amount of the surplus that can 2. SIGNIFICANT ACCOUNTING POLICIES be recognised as an asset. It also explains how the pension Basis of preparation asset or liability may be affected by a statutory or contractual The financial statements comply with the International Financial minimum funding requirement. This interpretation does not have Reporting Standards (IFRS) of the International Accounting any impact on the annual financial statements, as the Company Standards Board (IASB) and the Companies Act of South Africa, is not subject to minimum funding requirements. 1973.
The financial statements are prepared on the historical cost basis, with the exception of certain financial instruments which Telkom fins (company) NEW 8/12/09 6:58 PM Page 255
Telkom Annual Report 2009 255
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) capital funding and required return on assets and equity to Significant accounting judgements, estimates and determine the optimum useful life expectation for each of the assumptions individual categories of property, plant, equipment and The preparation of financial statements requires the use of intangible assets. Due to the rapid technological advancement estimates and assumptions that affect the reported amounts of in the telecommunications industry as well as the Company’s assets and liabilities and disclosure of contingent assets and plan to migrate to a next generation network over the next few liabilities at the date of the financial statements and the reported years, the estimation of useful lives could differ significantly on amounts of revenue and expenses during the reporting periods. an annual basis due to unexpected changes in the roll-out Although these estimates and assumptions are based on strategy. The impact of the change in the expected useful life of management’s best knowledge of current events and actions that property, plant and equipment is described more fully in note the Company may undertake in the future, actual results may 5.6. The estimation of residual values of assets is also based on ultimately differ from those estimates and assumptions. management’s judgement whether the assets will be sold or used to the end of their useful lives and what their condition will The presentation of the results of operations, financial position be like at that time. and cash flows in the financial statements of the Company is dependent upon and sensitive to the accounting policies, For intangible assets that incorporate both a tangible and assumptions and estimates that are used as a basis for the intangible portion, management uses judgement to assess which preparation of these financial statements. Management has element is more significant to determine whether it should be made certain judgements in the process of applying the treated as property, plant and equipment or intangible assets. Company’s accounting policies. These, together with the key Asset retirement obligations estimates and assumptions concerning the future, and other key Management judgement is exercised when determining whether sources of estimation uncertainty at the balance sheet date, are an asset retirement obligation exists, and in determining the as follows: present value of expected future cash flows and discount rate Revenue recognition when the obligation to dismantle or restore the site arises, as To reflect the substance of each transaction, revenue recognition well as the estimated useful life of the related asset. criteria are applied to each separately identifiable component Impairments of property, plant and equipment and of a transaction. In order to account for multiple-element revenue intangible assets arrangements in developing its accounting policies, the Management is required to make judgements concerning the Company considered the guidance contained in the United cause, timing and amount of impairment as indicated on notes States Financial Accounting Standards Board (FASB) Emerging 9 and 10. In the identification of impairment indicators, Issues Task Force No 00-21 Revenue Arrangements with management considers the impact of changes in current Multiple Deliverables. Judgement is required to separate those competitive conditions, cost of capital, availability of funding, revenue arrangements that contain the delivery of bundled technological obsolescence, discontinuance of services and products or services into individual units of accounting, each other circumstances that could indicate that an impairment with its own earnings process, when the delivered item has exists. The Company applies the impairment assessment to its stand-alone value and the undelivered item has fair value. separate cash-generating units. This requires management to Further judgement is required to determine the relative fair values make significant judgements concerning the existence of of each separate unit of accounting to be allocated to the total impairment indicators, identification of separate cash-generating arrangement consideration. Changes in the relative fair values units, remaining useful lives of assets and estimates of projected could affect the allocation of arrangement consideration cash flows and fair value less costs to sell. Management between the various revenue streams. judgement is also required when assessing whether a previously Judgement is also required to determine the expected customer recognised impairment loss should be reversed. relationship period. Any changes in these assessments may have a significant impact on revenue and deferred revenue.
Property, plant and equipment and intangible assets The useful lives of assets are based on management’s estimation. Management considers the impact of changes in technology, customer service requirements, availability of Telkom fins (company) NEW 8/12/09 6:58 PM Page 256
256 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) incentives received from the lessor) are charged to the income Significant accounting judgements, estimates and statement on a straight-line basis over the period of the lease. assumptions (continued) A lease is classified as a finance lease if it transfers substantially Impairments of property, plant and equipment and all the risks and rewards incidental to ownership. intangible assets (continued) Deferred taxation asset Where impairment indicators exist, the determination of the Management judgement is exercised when determining the recoverable amount of a cash-generating unit requires probability of future taxable profits which will determine whether management to make assumptions to determine the fair value deferred tax assets should be recognised or derecognised. The less costs to sell and value in use. Key assumptions on which realisation of deferred tax assets will depend on whether it is management has based its determination of fair value less costs possible to generate sufficient taxable income, taking into to sell include the existence of binding sale agreements, and for account any legal restrictions on the length and nature of the the determination of value in use include the weighted average taxation asset. When deciding whether to recognise unutilised cost of capital, projected revenues, gross margins, average taxation credits, management needs to determine the extent that revenue per customer, capital expenditure, expected customer the future obligation is likely to be available for set-off. In the bases and market share. The judgements, assumptions and event that the assessment of future payments and future utilisation methodologies used can have a material impact on the fair changes, the change in the recognised deferred tax asset must value and ultimately the amount of any impairment. be recognised in profit or loss.
Impairment of other financial assets Taxation At each balance sheet date management assesses whether The taxation rules and regulations in South Africa within which there are indicators of impairment of financial assets, including the Company operates are highly complex and subject to equity investments. If such evidence exists, the estimated present interpretation. Additionally, for the foreseeable future, management expects South African taxation laws to further value of the future cash flows of that asset is determined. develop through changes in South Africa’s existing taxation Management judgement is required when determining the structure as well as clarification of the existing taxation laws expected future cash flows. To determine whether any decline in through published interpretations and the resolution of actual tax fair value of available-for-sale investments is prolonged, reliance cases (refer to notes 8 and 14). is placed on an assessment by management regarding the future prospects of the investee. In measuring impairments, Management has made a judgement that all outstanding quoted market prices are used, if available, or projected taxation credits relating to secondary taxation on companies business plan information from the investee is used for those (STC) will be available for utilisation before the taxation regime financial assets not carried at fair value. change, from STC to withholding taxation, is effective.
Impairment of receivables The Company is regularly subject to evaluation by the South An impairment is recognised on trade receivables that are African taxation authorities of its historical income taxation filings and in connection with such reviews disputes can arise with the assessed to be impaired (refer to notes 12 and 17). The taxing authorities over the interpretation or application of certain impairment is based on an assessment of the extent to which taxation rules to the business of the Company. These disputes customers have defaulted on payments already due and an may not necessarily be resolved in a manner that is favourable assessment on their ability to make payments based on their for the Company. Additionally the resolution of the disputes credit worthiness and historical write-offs experience. Should the could result in an obligation for the Company that exceeds assumptions regarding the financial condition of the customer management’s estimate. The Company has historically filed, change, actual write-offs could differ significantly from the and continues to file, all required income taxation returns. impaired amount. Management believes that the principles applied in determining Leases the Company’s taxation obligations are consistent with the The determination of whether an arrangement is, or contains a principles and interpretations of the South African taxation laws.
lease is based on whether, at the date of inception, the fulfilment Deferred taxation rate of the arrangement is dependent on the use of a specific asset Management makes judgements on the taxation rate applicable or assets or the arrangement conveys a right to use the asset. based on the Company’s expectations at balance sheet date on Leases in which a significant portion of the risks and rewards of how the asset is expected to be recovered or the liability is ownership are retained by the lessor are classified as operating expected to be settled. leases. Payments made under operating leases (net of any Telkom fins (company) NEW 8/12/09 6:58 PM Page 257
Telkom Annual Report 2009 257
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) and, where appropriate, the risks specific to the liability, all of Significant accounting judgements, estimates and which requires management judgement. The Company is assumptions (continued) required to recognise provisions for claims arising from litigation Employee benefits when the occurrence of the claim is probable and the amount The Company provides defined benefit plans for certain post- of the loss can be reasonably estimated. Liabilities provided for employment benefits. The Company’s net obligation in respect legal matters require judgements regarding projected outcomes of defined benefits is calculated separately for each plan by and ranges of losses based on historical experience and estimating the amount of future benefits earned in return for recommendations of legal counsel. Litigation is however services rendered. The obligation and assets related to each of unpredictable and actual costs incurred could differ materially the post-retirement benefits are determined through an actuarial from those estimated at the balance sheet date.
valuation. The actuarial valuation relies heavily on assumptions Held-to-maturity financial assets as disclosed in note 25. The assumptions determined by Management has reviewed the Company’s held-to-maturity management make use of information obtained from the financial assets in the light of its capital management and Company’s employment agreements with staff and pensioners, liquidity requirements and has confirmed the Company’s positive market related returns on similar investments, market related intention and ability to hold those assets to maturity. discount rates and other available information. The assumptions concerning the expected return on assets and expected change Summary of significant accounting policies in liabilities are determined on a uniform basis, considering Operating revenue long-term historical returns and future estimates of returns and The Company provides fixed-line and data communication medical inflation expectations. In the event that further changes services and communication-related products. The Company in assumptions are required, the future amounts of post- provides such services to business, residential and payphone employment benefits may be affected materially. customers. Revenue represents the fair value of fixed or determinable consideration that has been received or is receivable. The discount rate reflects the average timing of the estimated defined benefit payments. The discount rate is based on long- Revenue for services is measured at amounts invoiced to term South African government bonds with the longest maturity customers and excludes Value Added Tax. period as reported by the Bond Exchange of South Africa. The Revenue is recognised when there is evidence of an arrangement, discount rate is expected to follow the trend of inflation. collectability is probable, and the delivery of the product or The overall expected rate of return on assets is determined service has occurred. In certain circumstances, revenue is split into based on the market prices prevailing at that date, applicable separately identifiable components and recognised when the to the period over which the obligation is to be settled. related components are delivered in order to reflect the substance of the transaction. The value of components is determined using Telkom provides equity compensation to its employees in the verifiable objective evidence. The Company does not provide form of the Telkom Conditional Share Plan. The related expense customers with the right to a refund. and reserve are determined through an actuarial valuation which relies heavily on assumptions. The assumptions include Dealer incentives employee turnover percentages and whether specified The Company provides incentives to its retail payphone card performance criteria will be met. Changes to these assumptions distributors as trade discounts. Incentives are based on sales could affect the amount of expense ultimately recognised in the volume and value. Revenue for retail payphone cards is recorded financial statements. An actuarial valuation relies heavily on the as traffic revenue, net of these discounts as the cards are used. actual plan experience assumptions as disclosed in note 25. Subscriptions, connections and other usage Provisions and contingent liabilities The Company provides telephone and data communication Management judgement is required when recognising and services under post-paid and prepaid payment arrangements. measuring provisions and when measuring contingent liabilities Revenue includes fees for installation and activation, which are as set out in notes 24 and 35 respectively. The probability that deferred and recognised over the expected customer an outflow of economic resources will be required to settle the relationship period. Costs incurred on first time installations that obligation must be assessed and a reliable estimate must be form an integral part of the network are capitalised and made of the amount of the obligation. Provisions are discounted depreciated over the expected average customer relationship where the effect of discounting is material based on period. All other installation and activation costs are expensed management’s judgement. The discount rate used is the rate that as incurred. reflects current market assessments of the time value of money Telkom fins (company) NEW 8/12/09 6:58 PM Page 258
258 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Directory services Summary of significant accounting policies (continued) Included in other revenue are directory services. Revenue is Operating revenue (continued) recognised when printed directories are released for Subscriptions, connections and other usage (continued) distribution, as the significant risks and rewards of ownership Post-paid and prepaid service arrangements include have been transferred to the buyer. Electronic directories’ subscription fees, typically monthly fees, which are recognised revenue is recognised on a monthly basis, as earned. over the subscription period. Sundry revenue Revenue related to sale of communication equipment, products Sundry revenue is recognised when the economic benefit flows and value-added services is recognised upon delivery and to the Company and the earnings process is complete. acceptance of the product or service by the customer. Interest on debtors’ accounts Traffic (domestic, fixed-to-mobile and international) Interest is raised on overdue accounts by using the effective Prepaid interest rate method and recognised in the income statement. Prepaid traffic service revenue collected in advance is deferred and recognised based on actual usage or upon expiration of Marketing the usage period, whichever comes first. The terms and Marketing costs are recognised as an expense as incurred. conditions of certain prepaid products allow the carry over of unused minutes. Revenue related to the carry over of unused Incentives minutes is deferred until usage or expiration. Incentives paid to service providers and dealers for products delivered to the customer are expensed as incurred. Incentives Payphones paid to service providers and dealers for services delivered are Payphone service coin revenue is recognised when the service expensed in the period that the related revenue is recognised. is provided. Distribution incentives paid to service providers and dealers for Payphone service card revenue collected in advance is deferred exclusivity are deferred and expensed over the contractual and recognised based on actual usage or upon expiration of the usage period, whichever comes first. relationship period.
Post-paid Investment income Revenue related to local, long distance, network-to-network, Dividends from investments are recognised on the date that the roaming and international call connection services is recognised Company is entitled to the dividend. Interest is recognised on a when the call is placed or the connection provided. time proportionate basis taking into account the principal amount outstanding and the effective interest rate. Interconnection Interconnection revenue for call termination, call transit and Taxation network usage is recognised as the traffic flow occurs. Current taxation Data The charge for current taxation is based on the results for the The Company provides data communication services under year and is adjusted for non-taxable income and non-deductible post-paid and prepaid payment arrangements. Revenue expenditure. Current taxation is measured at the amount includes fees for installation and activation, which are deferred expected to be paid to the taxation authorities, using taxation over the expected average customer relationship period. Costs rates and laws that have been enacted or substantively enacted incurred on first time installations that form an integral part of the by the balance sheet date. network are capitalised and depreciated over the life of the Deferred taxation expected average customer relationship period. All other installation and activation costs are expensed as incurred. Post- Deferred taxation is accounted for using the balance sheet paid and prepaid service arrangements include subscription liability method on all temporary differences at the balance fees, typically monthly fees, which are recognised over the sheet date between taxation bases of assets and liabilities and subscription period. their carrying amounts for financial reporting purposes. Telkom fins (company) NEW 8/12/09 6:58 PM Page 259
Telkom Annual Report 2009 259
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) and non-refundable purchase taxes, after deducting trade Summary of significant accounting policies (continued) discounts and rebates. The recognised cost includes any directly Taxation (continued) attributable costs for preparing the asset for its intended use. Deferred taxation (continued) The cost of an item of property, plant and equipment is Deferred taxation is not provided on the initial recognition of recognised as an asset if it is probable that the future economic goodwill or initial recognition of assets or liabilities which is not benefits associated with the item will flow to the Company and a business combination and at the time of the transaction affects the cost of the item can be measured reliably. neither accounting nor taxable profit or loss. Property, plant and equipment is stated at historical cost less A deferred taxation asset is recognised to the extent that it is accumulated depreciation and any accumulated impairment probable that future taxable profits will be available against losses. Each component of an item of property, plant and which the associated unused taxation losses, unused taxation equipment with a cost that is significant in relation to the total credits and deductible temporary differences can be utilised. cost of the item is depreciated separately. Depreciation is The carrying amount of deferred taxation assets is reviewed at charged from the date the asset is available for use on a each balance sheet date and is reduced to the extent that it is straight-line basis over the estimated useful life and ceases at the no longer probable that the related taxation benefit will be earlier of the date that the asset is classified as held for sale or realised. In respect of deductible temporary differences the date the asset is derecognised. Idle assets continue to attract associated with investments in subsidiaries, associates and depreciation. interest in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that temporary The estimated useful life of individual assets and the differences will reverse in the foreseeable future and taxable depreciation method thereof are reviewed on an annual basis profit will be available against which temporary differences can at balance sheet date. The depreciable amount is determined be utilised. after taking into account the residual value of the asset. The residual value is the estimated amount that the Company would Deferred taxation relating to items recognised directly in equity currently obtain from the disposal of the asset, after deducting is recognised in equity and not in the income statement. the estimated cost of disposal, if the asset were already of the Deferred taxation assets and liabilities are measured at the age and in the condition expected at the end of its useful life. taxation rates that are expected to apply to the period when the The residual values of assets are reviewed on an annual basis asset is realised or the liability is settled, based on taxation rates at balance sheet date. (and taxation laws) that have been enacted or substantively Assets under construction represents freehold buildings, enacted by the balance sheet date. operating software, network and support equipment and Deferred taxation assets and deferred taxation liabilities are includes all direct expenditure as well as related borrowing offset, if a legally enforceable right exists to set off current costs capitalised, but excludes the costs of abnormal amounts of taxation assets against current taxation liabilities and the waste material, labour or other resources incurred in the deferred taxes relate to the same taxable entity and the same production of self-constructed assets. taxation authority. Freehold land is stated at cost and is not depreciated. Amounts Secondary taxation on companies paid by the Company on improvements to assets which are held Secondary taxation on companies (’STC’) is provided for at a in terms of operating lease agreements are depreciated on a rate of 10% (12.5% before October 1, 2007) on the amount straight-line basis over the shorter of the remaining useful life of by which dividends declared by the Company exceed the applicable asset or the remainder of the lease period. dividends received. Deferred taxation on unutilised STC credits Where it is reasonably certain that the lease agreement will be is recognised to the extent that STC payable on future dividend renewed, the lease period equals the period of the initial payments is likely to be available for set-off. agreement plus the renewal periods.
Property, plant and equipment At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties Telkom fins (company) NEW 8/12/09 6:58 PM Page 260
260 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) the end of its useful life. Due to the nature of the asset the Summary of significant accounting policies (continued) residual value is assumed to be zero unless there is a Property, plant and equipment (continued) commitment by a third party to purchase the asset at the end of The estimated useful lives assigned to groups of property, plant its useful life or when there is an active market that is likely to and equipment are: exist at the end of the asset’s useful life, which can be used to estimate the residual values. The residual values of intangible Years assets and their useful lives are reviewed on an annual basis at Freehold buildings 15 to 40 balance sheet date. Leasehold buildings 7 to 25 Intangible assets with indefinite useful lives and intangible assets Network equipment: not yet available for use are tested for impairment annually Cables 20 to 40 either individually or at the cash-generating unit level. Such Switching equipment 2 to 18 intangibles are not amortised. The useful life of an intangible Transmission equipment 5 to 18 asset with an indefinite life is reviewed annually to determine Other 1 to 20 whether indefinite life assessment continues to be supportable. If Support equipment 5 to 13 not, the change in the useful life assessment from indefinite to Furniture and office equipment 2 to 15 finite is made on a prospective basis. Data processing equipment and software 3 to 10 Other 2 to 20 Assets under construction represent application and other non- integral software and includes all direct expenditure as well as An item of property, plant and equipment is derecognised upon related borrowing costs capitalised, but excludes the costs of disposal or when no future economic benefits are expected from abnormal amounts of waste material, labour or other resources its use or disposal. Any gain or loss arising on derecognition of incurred in the production of self-constructed assets. the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in Intangible assets are derecognised when they have been the income statement in the year the asset is derecognised. disposed of or when the asset is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any Assets held under finance leases are depreciated over their gains or losses on the retirement or disposal of assets are expected useful lives on the same basis as owned assets or, recognised in the income statement in the year in which they arise. where shorter, the term of the relevant lease if there is no reasonable certainty that the Company will obtain ownership by The expected useful lives assigned to intangible assets are: the end of the lease term. Years Intangible assets Licences 5 to 30 At initial recognition acquired intangible assets are recognised at Software 2 to 10 their purchase price, including import duties and non-refundable Trademarks, copyrights and other including purchase taxes, after deducting trade discounts and rebates. The FIFA brand 1 to 15 recognised cost includes any directly attributable costs for preparing the asset for its intended use. Internally generated intangible assets Asset retirement obligations are recognised at cost comprising all directly attributable costs Asset retirement obligations related to property, plant and necessary to create and prepare the asset to be capable of equipment and intangible assets are recognised at the present operating in the manner intended by management. Licences, value of expected future cash flows when the obligation to software, trademarks, copyrights and other intangible assets are dismantle or restore the site arises. The increase in the related carried at cost less accumulated amortisation and any accumulated asset’s carrying value is depreciated over its estimated useful impairment losses. Amortisation commences when the intangible life. The unwinding of the discount is included in finance assets are available for their intended use and is recognised on a charges and fair value movements. Changes in the straight-line basis over the assets’ expected useful lives. Amortisation measurement of an existing liability that result from changes in ceases at the earlier of the date that the asset is classified as held the estimated timing or amount of the outflow of resources for sale and the date that the asset is derecognised. required to settle the liability, or a change in the discount rate, are accounted for as increases or decreases to the original cost The residual value of intangible assets is the estimated amount of the recognised assets. If the amount deducted exceeds the that the Company would currently obtain from the disposal of carrying amount of the asset, the excess is recognised the asset, after deducting the estimated cost of disposal, if the immediately in profit and loss. asset were already of the age and in the condition expected at Telkom fins (company) NEW 8/12/09 6:58 PM Page 261
Telkom Annual Report 2009 261
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs Summary of significant accounting policies (continued) Financing costs directly associated with the acquisition or Non-current assets held for sale construction of assets that require more than three months to Non-current assets and disposal groups are classified as held complete and place in service are capitalised at interest rates for sale if their carrying amount will be recovered through a sale relating to loans specifically raised for that purpose, or at the transaction rather than through continuing use. This condition is weighted average borrowing rate where the general pool of regarded as met only when the sale is highly probable and the Company borrowings was utilised. Other borrowing costs are asset (or disposal group) is available for immediate sale in its expensed as incurred. present condition. Management must be committed to the sale, Deferred revenue and expenses which should be expected to qualify for recognition as a Activation revenue and costs are recognised in accordance with complete sale within one year from the date of classification. the principles contained in Emerging Issues Task Force Issue Assets are no longer depreciated when they are classified into No 00-21, Revenue Arrangements with Multiple Deliverables this category. (’EITF 00-21’), issued in the United States. This results in Non-current assets (and disposal groups) classified as held for activation revenue and costs up to the amount of the deferred sale are measured at the lower of the assets’ previous carrying revenue being deferred and recognised systematically over the amount and fair value less costs to sell. expected duration of the customer relationship because it is considered to be part of the customers’ ongoing rights to Impairment of property, plant and equipment and telecommunication services and the operator’s continuing intangible assets involvement. Any excess of the costs over revenues is expensed The Company regularly reviews its non-financial assets and immediately. cash-generating units for any indication of impairment. When indicators, including changes in technology, market, economic, Subsidiaries and joint venture legal and operating environments occur and could result in Investments in subsidiaries, special purpose entities and joint changes of the asset’s or cash-generating unit’s estimated ventures are carried at cost and adjusted for any impairment recoverable amount, an impairment test is performed. losses.
The recoverable amount of assets or cash-generating units is Inventories measured using the higher of the fair value less costs to sell and Installation material, maintenance and network equipment its value in use, which is the present value of projected cash inventories are stated at the lower of cost, determined on a flows covering the remaining useful lives of the assets. weighted average basis and estimated net realisable value. Impairment losses are recognised when the asset’s carrying Merchandise inventories are stated at the lower of cost, value exceeds its estimated recoverable amount. Where determined on a first-in first-out (’FIFO’) basis and estimated net applicable, the recoverable amount is determined for the cash- realisable value. Write-down of inventories arises when, for generating unit to which the asset belongs. example, goods are damaged or when net realisable value is lower than carrying value. Previously recognised impairment losses are reviewed annually for any indication that it may no longer exist or may have Financial instruments decreased. If any such indication exists, the recoverable amount Recognition and initial measurement of the asset is estimated. Such impairment losses are reversed All financial instruments are initially recognised at fair value, through the income statement if the recoverable amount has plus, in the case of financial assets and liabilities not at fair increased as a result of a change in the estimates used to value through profit or loss, transaction costs that are directly determine the recoverable amount, but not to an amount higher attributable to the acquisition or issue. Financial instruments are than the carrying amount that would have been determined (net recognised when the Company becomes a party to their of depreciation or amortisation) had no impairment loss been contractual arrangements. All regular way transactions are recognised in prior years. accounted for on settlement date. Regular way purchases or sales are purchases or sales of financial assets that require Repairs and maintenance delivery of assets within the period generally established by The Company expenses all costs associated with repairs and regulation or convention in the marketplace. maintenance, unless it is probable that such costs would result in increased future economic benefits flowing to the Company, and the costs can be reliably measured. Telkom fins (company) NEW 8/12/09 6:58 PM Page 262
262 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Available-for-sale financial assets Summary of significant accounting policies (continued) Available-for-sale financial assets are those non-derivative assets Financial instruments (continued) that are designated as available-for-sale, or are not classified in Subsequent measurement any of the three preceding categories. Equity instruments are all Subsequent to initial recognition, the Company classifies treated as available-for-sale financial instruments. After initial financial assets as ’at fair value through profit or loss’, ’held-to- recognition, available-for-sale financial assets are measured at maturity investments’, ’loans and receivables’, or ’available-for- fair value, with gains and losses being recognised as a sale'. Financial liabilities are classified ’at fair value through separate component of equity, net of taxation. Dividend income profit or loss’ or ’other financial liabilities’. The measurement of is recognised in the income statement as part of other income each is set out below and presented in a table in note 12. when the Company’s right to receive payment is established.
The fair value of financial assets and liabilities that are actively Changes in the fair value of monetary items denominated in a traded in financial markets is determined by reference to quoted foreign currency and classified as available-for-sale are market prices at the close of business on the balance sheet date. analysed between translation differences resulting from changes Where there is no active market, fair value is determined using in amortised cost of the security and other changes in carrying valuation techniques such as discounted cash flow analysis. amount of the item. The translation differences on monetary items are recognised in profit or loss, while translation Financial assets at fair value through profit or loss differences on non-monetary securities are recognised in equity. The Company classifies financial assets that are held for trading Changes in the fair value of monetary and non-monetary items in the category ’financial assets at fair value through profit or classified as available-for-sale are recognised directly in equity. loss’. Financial assets are classified as held for trading if they When an investment is derecognised or determined to be are acquired for the purpose of selling in the future. Derivatives impaired, the cumulative gain or loss previously recorded in not designated as hedges are also classified as held for trading. equity is recognised in profit or loss. On remeasurement to fair value the gains or losses on held for trading financial assets are recognised in net finance charges Financial liabilities at fair value through profit or loss and fair value movements for the year. Financial liabilities are classified as ‘at fair value through profit or loss’ (’FVTPL’) where the financial liability is held for trading. Gains and losses arising from changes in the fair value of the ’financial assets at fair value through profit or loss’ category are A financial liability is classified as held for trading: presented in the income statement within ’finance charges and • if it is acquired for the purpose of settling in the near term; or fair value movements’ in the period which they arise. • if it is a derivative that is not designated and effective as a Held-to-maturity financial assets hedging instrument. The Company classifies non-derivative financial assets with fixed or determinable payments and fixed maturity dates as held-to- Financial liabilities at a FVTPL are stated at fair value, with any maturity when the Company has the positive intention and resultant gains or losses recognised in profit or loss. The net gain ability to hold to maturity. These assets are subsequently or loss recognised in profit or loss incorporates any interest paid measured at amortised cost. Amortised cost is computed as the on the financial liability.
amount initially recognised minus principal repayments, plus or Other financial liabilities minus the cumulative amortisation using the effective interest Other financial liabilities are subsequently measured at method. This calculation includes all fees paid or received amortised cost using the effective interest rate method, with between parties to the contract. For investments carried at interest expense recognised in finance charges and fair value amortised cost, gains and losses are recognised in net profit or movements, on an effective interest rate basis. loss when the investments are sold or impaired. The effective interest rate is the rate that accurately discounts Loans and receivables estimated future cash payments through the expected life of the Loans and receivables are non-derivative financial assets with financial liability or, where appropriate, a shorter period. fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Trade receivables are subsequently measured at the original invoice amount where the effect of discounting is not material. Telkom fins (company) NEW 8/12/09 6:58 PM Page 263
Telkom Annual Report 2009 263
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) the asset or the group of assets. In the case of equity securities Summary of significant accounting policies (continued) classified as available-for-sale, a significant or prolonged Financial instruments (continued) decline in the fair value of the security below its cost is Financial guarantee contracts considered as an indicator that the securities are impaired. For Financial guarantee contracts are subsequently measured at the loans and receivables carried at amortised cost, if there is higher of the amount determined in accordance with IAS37 objective evidence that an impairment loss has been incurred, Provisions, Contingent Liabilities and Contingent Assets or the the amount of the loss is measured at the difference between the amount initially recognised less, when appropriate, cumulative asset’s carrying amount and the present value of estimated future amortisation, recognised in accordance with IAS18 Revenue. cashflows. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is Cash and cash equivalents recognised in the income statement. Cash and cash equivalents are measured at amortised cost. This comprises cash on hand, deposits held on call and term If any such evidence exists for available-for-sale assets, the deposits with an initial maturity of less than three months when cumulative loss – measured as the difference between the entered into. acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss For the purpose of the cash flow statement, cash and cash – is removed from equity and recognised in the income equivalents consist of cash and cash equivalents defined above, statement. Impairment losses recognised in the income statement net of credit facilities utilised. on equity instruments are not reversed through the income Capital and money market transactions statement. The recoverable amount of financial assets carried at New bonds and commercial paper bills issued are subsequently amortised cost is calculated as the present value of expected measured at amortised cost using the effective interest rate future cash flows discounted at the original effective interest rate method. of the asset.
Bonds issued where the Company is a buyer and seller of last If, in a subsequent period, the amount of the impairment loss for resort are carried at fair value. The Company does not actively financial assets decreases and the decrease can be related trade in bonds. objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is Derecognition reversed except for those financial assets classified as available- A financial instrument or a portion of a financial instrument will for-sale and carried at cost that are not reversed. Any be derecognised and a gain or loss recognised when the subsequent reversal of an impairment loss is recognised in the Company’s contractual rights expire, financial assets are income statement, to the extent that the carrying value of the transferred or financial liabilities are extinguished. On asset does not exceed its amortised cost at the reversal date. derecognition of a financial asset or liability, the difference Reversals in respect of equity instruments classified as available- between the consideration and the carrying amount on the for-sale are not recognised in profit and loss. Reversals of settlement date is included in finance charges and fair value impairment losses on debt instruments classified as available-for- movements for the year. For available-for-sale assets, the fair sale are reversed through the income statement, if the increase value adjustment relating to prior revaluations of assets is in fair value of the instrument can be objectively related to an transferred from equity and recognised in finance charges and event occurring after the impairment loss was recognised fair value movements for the year. through the income statement. Bonds and commercial paper bills are derecognised when the Embedded derivatives obligation specified in the contract is discharged. The difference The Company assesses whether an embedded derivative is between the carrying value of the bond and the amount paid to required to be separated from the host contract and accounted extinguish the obligation is included in finance charges and fair for as a derivative when it first becomes party to the contract. value movements for the year. The Company reassesses the contract when there is a change Impairment of financial assets in the terms of the contract which significantly modifies the cash At each balance sheet date an assessment is made of whether flows that would otherwise be required under the contract. there are any indicators of impairment of a financial asset or a group of financial assets based on observable data about one or more loss events that occurred after the initial recognition of Telkom fins (company) NEW 8/12/09 6:58 PM Page 264
264 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Where the Company enters into a service agreement as a Summary of significant accounting policies (continued) supplier or a customer that depends on the use of a specific Financial instruments (continued) asset, and conveys the right to control the use of the specific Financial instruments: Disclosures asset, the arrangement is assessed to determine whether it The Company groups its financial instruments into classes of contains a lease. Once it has been concluded that an similar instruments and where disclosure is required, it discloses arrangement contains a lease, it is assessed against the criteria them by class. It also discloses information about the nature and in IAS17 to determine if the arrangement should be recognised extent of risks arising from its financial instruments (refer to as a finance lease or operating lease. note 12). The land and buildings elements of a lease of land and Foreign currencies buildings are considered separately for the purposes of lease The functional and presentation currency of the Company is the classification unless it is impractical to do so. South African Rand (ZAR). Lessee
Transactions denominated in foreign currencies are measured at Operating lease payments are recognised in the income statement on a straight-line basis over the lease term. the rate of exchange at transaction date. Monetary items denominated in foreign currencies are remeasured at the rate of Assets acquired in terms of finance leases are capitalised at the exchange at settlement date or balance sheet date, whichever lower of fair value and the present value of the minimum lease occurs first. Exchange differences on the settlement or translation payments at inception of the lease and depreciated over the of monetary assets and liabilities are included in finance lesser of the useful life of the asset and the lease term. The charges and fair value movements in the period in which they capital element of future obligations under the leases is included arise. Non-monetary items that are measured in terms of as a liability in the balance sheet. Lease finance costs are historical cost in a foreign currency are translated using the amortised in the income statement over the lease term using the exchange rates as at the dates of the initial transactions. Non- interest rate implicit in the lease. Where a sale and leaseback monetary items measured at fair value in a foreign currency are transaction results in a finance lease, any excess of sale translated using the exchange rates at the date when the fair proceeds over the carrying amount is deferred and recognised value is determined. in the income statement over the term of the lease.
Treasury shares Lessor Where the Company acquires, or in substance acquires, its Operating lease revenue is recognised in the income statement own shares, such shares are measured at cost and disclosed as on a straight-line basis over the lease term.
a reduction of equity. No gain or loss is recognised in profit or Assets held under a finance lease are recognised in the balance loss on the purchase, sale, issue or cancellation of the sheet and presented as a receivable at an amount equal to the Company’s own equity instruments. Such shares are not net investment in the lease. The recognition of finance income remeasured for changes in fair value. is based on a pattern reflecting a constant periodic rate of return
Where the Company chooses or is required to buy equity on the net investment in the finance lease. instruments from another party to satisfy its obligations to its Employee benefits employees under the share-based payment arrangement by Post-employment benefits delivery of its own shares, the transaction is accounted for as The Company provides defined benefit and defined contribution equity-settled. This applies regardless of whether the employee’s plans for the benefit of employees. These plans are funded by rights to the equity instruments were granted by the Company the employees and the Company, taking into account itself or by its shareholders or was settled by the Company itself recommendations of the independent actuaries. The post- or its shareholders. retirement telephone rebate liability is unfunded.
Leases Defined contribution plans A lease is classified as a finance lease if it transfers substantially The Company’s funding of the defined contribution plans is all the risks and rewards incidental to ownership. All other charged to employee expenses in the same year as the related leases are classified as operating leases. service is provided. Telkom fins (company) NEW 8/12/09 6:58 PM Page 265
Telkom Annual Report 2009 265
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2. SIGNIFICANT ACCOUNTING POLICIES (continued) Workforce reduction Summary of significant accounting policies (continued) Workforce reduction expenses are payable when employment Employee benefits (continued) is terminated before the normal retirement age or when an Defined benefit plans employee accepts voluntary redundancy in exchange for The Company provides defined benefit plans for pension, benefits. Workforce reduction benefits are recognised when the retirement, post-retirement medical aid benefits and telephone entity is demonstrably committed and it is probable that the rebates to qualifying employees. The Company’s net obligation expenses will be incurred. In the case of an offer made to in respect of defined benefits is calculated separately for each encourage voluntary redundancy, the measurement of plan by estimating the amount of future benefits earned in return termination benefits is based on the number of employees for services rendered. expected to accept the offer.
The amount recognised in the balance sheet represents the Share-based compensation present value of the defined benefit obligations, calculated by The grants of equity instruments, made to employees in terms of using the projected unit credit method, as adjusted for the Telkom Conditional Share Plan, are classified as equity- unrecognised actuarial gains and losses, unrecognised past settled share-based payment transactions. The expense relating service costs and reduced by the fair value of the related plan to the services rendered by the employees, and the assets. The amount of any surplus recognised and reflected as corresponding increase in equity, is measured at the fair value a defined benefit asset is limited to unrecognised actuarial of the equity instruments at their date of grant based on the losses and past service costs plus the present value of available market price at grant date, adjusted for the lack of entitlement to refunds and reductions in future contributions to the plan. To the dividends during the vesting period. This compensation cost is extent that there is uncertainty as to the entitlement to the surplus, recognised over the vesting period, based on the best available no asset is recognised. No gain is recognised solely as a result estimate at each balance sheet date of the number of equity of an actuarial loss or past service cost in the current period and instruments that are expected to vest. no loss is recognised solely as a result of an actuarial gain or Short-term employee benefits past service cost in the current period. The cost of all short-term employee benefits is recognised during Actuarial gains and losses are recognised as employee the year the employees render services, unless the Company expenses when the cumulative unrecognised gains and losses uses the services of employees in the construction of an asset for each individual plan exceed 10% of the greater of the and the benefits received meet the recognition criteria of an present value of the Company’s obligation and the fair value of asset, at which stage it is included as part of the related plan assets at the beginning of the year. These gains or losses property, plant and equipment or intangible asset item. are amortised on a straight-line basis over 10 years for all the Provisions defined benefit plans, except gains or losses related to the Provisions are recognised when the Company has a present pensioners in the Telkom Retirement Fund or unless the standard obligation (legal or constructive) as a result of a past event, it is requires faster recognition. For the Telkom Retirement Fund probable that an outflow of resources will be required to settle pensioners, the cumulative unrecognised actuarial gains and the obligation, and a reliable estimate can be made of the losses in excess of the 10% corridor at the beginning of the year amount of the obligation. Provisions are reviewed at each are recognised immediately. balance sheet date and adjusted to reflect the current best Past service costs are recognised immediately to the extent that estimate. Where the effect of the time value of money is the benefits are vested, otherwise they are recognised on a material, the amount of the provision is the present value of the straight-line basis over the average period the benefits become expenditures expected to be required to settle the obligation. vested.
Leave benefits Annual leave entitlement is provided for over the period that the leave accrues and is subject to a cap of 22 days. Telkom fins (company) NEW 8/12/09 6:58 PM Page 266
266 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
3. REVENUE 3.1 Total revenue 35,818 36,641 37,058
Operating revenue 32,340 32,571 33,659 Other income (excluding profit on disposal of property, plant and equipment, intangible assets and investments, refer to note 4) 276 331 492 Investment income (refer to note 6) 3,202 3,739 2,907
3.2 Operating revenue 32,340 32,571 33,659
Subscriptions, connections and other usage 6,286 6,330 6,614 Traffic 16,740 15,949 15,323
Domestic (local and long distance) 7,563 6,327 5,670 Fixed-to-mobile 7,646 7,557 7,420 International (outgoing) 988 986 933 Subscription based calling plans 543 1,079 1,300
Interconnection 1,639 1,757 2,084 Data 7,489 8,308 9,310 Sundry revenue 186 227 328
4. OTHER INCOME 655 498 524
Other income (included in Total revenue, refer to note 3) 276 331 492
Interest received from trade receivables 181 211 214 Other interest 8 37 189 Sundry income 87 83 89
Profit on disposal of property, plant and equipment and intangible assets 15 167 32 Profit on disposal of investment 364 – –
The increase in the current year’s other interest is a result of the increase in loans to subsidiaries (refer to note 11). Telkom fins (company) NEW 8/12/09 6:58 PM Page 267
Telkom Annual Report 2009 267
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
5. OPERATING EXPENSES Operating expenses comprise: 5.1 Employee expenses 7,077 7,386 7,990
Salaries and wages 5,076 5,519 5,742 Medical aid contributions 377 407 404 Retirement contributions 439 460 460 Post-retirement pension and retirement fund (refer to note 25) 33 5 29
Current service cost 5 5 4 Interest cost 329 509 633 Expected return on plan assets (508) (713) (825) Actuarial gain (136) (16) – Settlement loss/(gain) 21 (2) (3) Asset limitation 322 222 220
Post-retirement medical aid (refer to note 25) 329 277 455
Current service cost 83 84 95 Interest cost 285 321 426 Expected return on plan asset (188) (257) (223) Actuarial loss 149 129 157
Telephone rebates (refer to note 25) 104 27 61
Current service cost 4 3 6 Interest cost 19 22 39 Past service cost 76 2 2 Actuarial loss 5 – 14
Share-based compensation expense (refer to note 22 and 25) 141 522 554 Other benefits* 1,274 969 1,021 Employee expenses capitalised (696) (800) (736)
* Other benefits include annual leave, performance incentive, service bonuses, skills development and workforce reduction expenses.
5.2 Payments to other operators 6,461 6,902 7,536 Payments to other network operators consist of expenses in respect of interconnection with other network operators.
5.3 Selling, general and administrative expenses 3,970 3,904 6,580
Selling and administrative expenses 1,329 1,108 3,428 Maintenance 1,900 1,996 2,293 Marketing 604 583 574 Bad debts (refer to note 17) 137 217 285
Included in the current year’s selling and administrative expenses, a total impairment loss of R2,178 million (2008: R229 million; 2007: RNil) has been recognised on investments. Telkom fins (company) NEW 8/12/09 6:58 PM Page 268
268 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
5. OPERATING EXPENSES (continued) 5.4 Service fees 2,236 2,410 2,760
Facilities and property management 1,140 1,221 1,261 Consultancy services 209 160 324 Security and other 833 978 1,122 Auditors’ remuneration 54 51 53
Audit services 53 51 50
Company auditors 47 46 46
Current year 47 43 46 Prior year underprovision – 3 –
Other auditors – current year 6 5 4
Other services 1 – 3
Included in the current year’s consultancy services is an amount of R177 million relating to services rendered in respect of the transaction to dispose of the Company’s stake in Vodacom Group (Proprietary) Limited.
The increase in the current year’s security and other costs is mainly attributable to the new contract negotiated to secure the copper network in the Company’s drive to cutting down on cable thefts.
5.5 Operating leases 762 619 613
Land and buildings 131 142 166 Equipment 79 49 58 Vehicles 552 428 389
5.6 Depreciation, amortisation and write-offs 3,583 3,732 4,358
Depreciation of property, plant and equipment (refer to note 9) 2,994 3,062 3,398 Amortisation of intangible assets (refer to note 10) 305 408 638 Write-offs of property, plant and equipment and intangible assets 284 262 322
Included in the current year’s amortisation of intangible assets is an amount of R134 million relating to the FIFA brand intangible asset.
In recognition of the changed usage patterns of certain items of property, plant and equipment and intangible assets, the Company revised their remaining useful lives as at March 31. The assets affected were individual items of Network equipment, Data processing equipment, Support equipment, Freehold land and buildings and Intangible assets. The revised estimated useful lives of these assets as set out below, resulted in a decrease of the current year depreciation and amortisation charges of R11,4 million (2008: R196 million; 2007: R942 million).
Previous life Revised life Years Years
Property, plant and equipment Other 2 – 15 2 – 20 Telkom fins (company) NEW 8/12/09 6:58 PM Page 269
Telkom Annual Report 2009 269
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
6. INVESTMENT INCOME 3,202 3,739 2,907
Interest income 196 142 160 Dividend income from joint venture 2,700 2,970 2,600 Dividend income from subsidiaries 306 627 147
Included in investment income is an amount of R160 million (2008: R142 million; 2007: R196 million) which relates to interest earned from financial assets not measured at fair value through profit or loss.
7. FINANCE CHARGES AND FAIR VALUE MOVEMENTS 1,027 1,289 1,460
Finance charges on interest-bearing debt 1,142 1,499 1,655
Local debt 1,303 1,675 1,818 Finance charges capitalised (161) (176) (163)
Foreign exchange gains and losses and fair value movements (115) (210) (195)
Foreign exchange losses/(gains) 58 116 (318) Fair value adjustments on derivative instruments (173) (326) 123
Capitalisation rate 14.8% 12.6% 12.4%
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss. Telkom fins (company) NEW 8/12/09 6:58 PM Page 270
270 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
8. TAXATION 2,690 2,599 516
South African normal company taxation 1,874 1,879 1,510
Current taxation 1,907 1,879 1,540 Overprovision for prior year (33) – (30)
Deferred taxation 521 357 (1,150)
Temporary differences – normal company taxation 561 255 111 Temporary difference – secondary taxation on companies (’STC’) taxation credits (raised)/utilised (41) 157 (87) Capital gains taxation (’CGT’) – – (1,280) Change in taxation rate – (55) – Underprovision in prior year 1 – 106
Secondary taxation on companies 295 363 156
Reconciliation of taxation rate %%% Effective rate 24.2 24.6 8.9 South African normal rate of taxation 29.0 29.0 28.0 Adjusted for: (4.8) (4.4) (19.1)
Change in taxation rate – (0.5) – Exempt income (8.3) (10.6) (13.9) Disallowable expenditure 1.5 1.8 13.8 STC taxation credits (raised)/utilised (0.4) 1.5 (1.5) STC taxation charge 2.7 3.4 2.7 CGT asset ––(22.1) Other ––0.6 Net (overprovision)/underprovision for prior year (0.3) – 1.3
The Company has historically filed, and continues to file, all required income taxation returns. Management believes that the principles applied in determining the Company’s taxation obligations are consistent with the principles and interpretations of South African taxation laws.
Included in the current year’s deferred taxation expense is an amount of R1,280 million relating to the deferred taxation on the CGT base cost of the investments which are held for sale.
The decrease in the deferred taxation expense is mainly due to the temporary difference on CGT as well as the decrease in STC taxation credits.
South African normal rate of taxation has decreased from 29% to 28% effective from the March 31, 2009 financial year. Telkom fins (company) NEW 8/12/09 6:58 PM Page 271
Telkom Annual Report 2009 271
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value Cost depreciation value Rm Rm Rm Rm Rm Rm Rm Rm Rm
9. PROPERTY, PLANT AND EQUIPMENT Freehold land and buildings 4,381 (1,829) 2,552 4,581 (1,988) 2,593 4,886 (2,128) 2,758 Leasehold buildings 496 (299) 197 534 (348) 186 519 (355) 164 Network equipment 49,780 (25,774) 24,006 52,952 (27,366) 25,586 57,438 (29,470) 27,968 Support equipment 3,584 (2,209) 1,375 3,863 (2,377) 1,486 3,916 (2,479) 1,437 Furniture and office equipment 345 (236) 109 372 (265) 107 387 (286) 101 Data processing equipment and software 4,758 (3,022) 1,736 4,951 (3,103) 1,848 5,041 (3,309) 1,732 Under construction 2,530 – 2,530 3,362 – 3,362 2,907 – 2,907 Other 456 (347) 109 476 (371) 105 694 (416) 278
66,330 (33,716) 32,614 71,091 (35,818) 35,273 75,788 (38,443) 37,345
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial year. This has reduced both the cost and accumulated depreciation of property, plant and equipment.
Property, plant and equipment with a carrying value of R158 million (2008: R188 million; 2007: R203 million) are pledged as security. Details of the loans are disclosed in note 23. Telkom fins (company) NEW 8/12/09 6:58 PM Page 272
272 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
9. PROPERTY, PLANT AND EQUIPMENT (continued) The carrying amounts of property, plant and equipment can be reconciled as follows:
Carrying Carrying value at Write-offs value at beginning and end of year Additions Transfers reversals Disposals Depreciation of year Rm Rm Rm Rm Rm Rm Rm
2009 Freehold land and buildings 2,593 258 81 (5) (2) (167) 2,758 Leasehold buildings 186 2 – – – (24) 164 Network equipment 25,586 2,830 2,292 (141) (71) (2,528) 27,968 Support equipment 1,486 127 118 (12) – (282) 1,437 Furniture and office equipment 107 7 8 – – (21) 101 Data processing equipment and software 1,848 145 63 (4) – (320) 1,732 Under construction 3,362 2,281 (2,627) (109) – – 2,907 Other 105 216 14 (1) – (56) 278
35,273 5,866 (51) (272) (73) (3,398) 37,345
2008 Freehold land and buildings 2,552 198 22 (3) (8) (168) 2,593 Leasehold buildings 197 7 30 – – (48) 186 Network equipment 24,006 2,693 1,308 (96) (88) (2,237) 25,586 Support equipment 1,375 257 117 (7) – (256) 1,486 Furniture and office equipment 109 26 1 – – (29) 107 Data processing equipment and software 1,736 268 161 (14) – (303) 1,848 Under construction 2,530 2,588 (1,725) (31) – – 3,362 Other 109 7 10 – – (21) 105
32,614 6,044 (76) (151) (96) (3,062) 35,273
2007 Freehold land and buildings 2,610 102 (8) 17 – (169) 2,552 Leasehold buildings 240 – – – (14) (29) 197 Network equipment 23,253 2,599 847 (190) (240) (2,263) 24,006 Support equipment 1,134 352 105 (13) – (203) 1,375 Furniture and office equipment 104 11 5 – – (11) 109 Data processing equipment and software 1,779 303 (48) (9) – (289) 1,736 Under construction 1,316 2,163 (912) (37) – – 2,530 Other 52 16 72 (1) – (30) 109
30,488 5,546 61 (233) (254) (2,994) 32,614
Full details of land and buildings are available for inspection at the registered offices of the Company.
The Company does not have temporarily idle property, plant and equipment.
A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that provides capacity for growth in services, with focus on the Next Generation Network technologies, has resulted in an increase in property, plant and equipment additions which is expected to continue over the next few years.
Included in the current year’s additions in the other category is an amount of R179 million (2008: R31 million; 2007: RNil) that relates to finance leases.
An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the reclassification of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Company entering into a leasing arrangement. Telkom fins (company) NEW 8/12/09 6:58 PM Page 273
Telkom Annual Report 2009 273
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Accumulated Carrying Accumulated Carrying Accumulated Carrying Cost amortisation value Cost amortisation value Cost amortisation value Rm Rm Rm Rm Rm Rm Rm Rm Rm 10. INTANGIBLE ASSETS Trademarks, copyrights and FIFA brand 52 (52) – 197 (59) 138 457 (203) 254 Software 5,306 (2,913) 2,393 6,239 (3,312) 2,927 7,031 (3,785) 3,246 Under construction 1,109 – 1,109 741 – 741 488 – 488
6,467 (2,965) 3,502 7,177 (3,371) 3,806 7,976 (3,988) 3,988
The carrying amounts of intangible assets can be reconciled as follows: Carrying Carrying value at value at beginning end of year Additions Transfers Write-offs Disposals Amortisation of year Rm Rm Rm Rm Rm Rm Rm
2009 Trademarks, copyrights and FIFA brand 138 260 – – – (144) 254 Software 2,927 207 607 (1) – (494) 3,246 Under construction 741 357 (555) (55) – – 488
3,806 824 52 (56) – (638) 3,988
2008 Trademarks and copyrights – 144 – – – (6) 138 Software 2,393 250 688 (2) – (402) 2,927 Under construction 1,109 353 (612) (109) – – 741
3,502 747 76 (111) – (408) 3,806
2007 Software 1,804 323 575 (4) – (305) 2,393 Under construction 1,063 729 (636) (47) – – 1,109
2,867 1,052 (61) (51) – (305) 3,502
There are no intangible assets whose title is restricted, or that have been pledged as security for liabilities at March 31, 2009.
Intangible assets that are material to the Company consist of Software, Copyrights and Trademarks whose average remaining amortisation period is 5.6 years (2008: 5.9 years; 2007: 6.58 years).
No intangible asset has been assessed as having an indefinite useful life. Telkom fins (company) NEW 8/12/09 6:58 PM Page 274
274 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
11. INVESTMENTS 887 3,883 7,693 Special purpose entity – cell captive Cost 535 535 535 Subsidiaries 352 3,348 7,158
Trudon (formerly TDS Directory Operations) (Proprietary) Limited 64.90% shareholding at cost 167 167 167 Swiftnet (Proprietary) Limited** 100% shareholding at cost 25 25 – Rossal No 65 (Proprietary) Limited – – – 100% shareholding at cost (R100) – – – Acajou Investments (Proprietary) Limited 100% shareholding at cost (R100) – – – Intekom (Proprietary) Limited 100% shareholding at cost 10 10 10 Q-Trunk (Proprietary) Limited – – –
100% shareholding at cost 10 10 10 Loan 30 26 22 Impairment (40) (36) (32)
Telkom Media (Proprietary) Limited** – 109 –
75% shareholding at cost (R2,868) – – – Loan – 326 – Impairment of loan – (217) –
Africa Online Limited 150 212 275
100% shareholding at cost 150 150 150 Impairment of investment – (12) (97) Loan – 74 222
Multi-Links Telecommunications Limited* – 840 5,595
25% shareholding at cost – – 1,339 Impairment of investment – – (969) Loan – 840 5,225
Telkom Communications International (Proprietary) Limited 100% shareholding at cost (R12) – – – Telkom International (Proprietary) Limited* – 1,985 1,111
100% shareholding at cost (R100) – – – Loan – 1,985 1,985 Impairment of loan – – (874) Available-for-sale Unlisted investment Rascom 0.69% (2008: 0.69%; 2007: 0.69%) interest in Regional African Satellite Communications Organisation, headquartered in Abidjan, Ivory Coast, at cost – – –
Cost 1 1 1 Impairment (1) (1) (1) Incorporation The subsidiaries and joint venture are all incorporated in the Republic of South Africa, with the exception of Telkom Communications International (Proprietary) Limited and Africa Online Limited that are incorporated in the Republic of Mauritius, and Multi-Links Telecommunications (Proprietary) Limited, which is incorporated in Nigeria. * The 75% shareholding in Multi-Links Telecommunications Limited is an indirect investment through Telkom International (Proprietary) Limited. ** The investments Swiftnet (Proprietary) Limited and Telkom Media (Proprietary) Limited are both classified as assets held for sale in the 2009 financial year in terms of IFRS5. (Refer to note 16.) The aggregate directors’ valuation of the above investments is R321 million (2008: R7,658 million; 2007: R6,690 million) based on net asset values. Telkom fins (company) NEW 8/12/09 6:58 PM Page 275
Telkom Annual Report 2009 275
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Company. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors through its audit and risk committee.
The Company holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments such as trade receivables and payables arise directly from the Company’s operations.
The Company finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Company uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Company does not speculate in derivative instruments.
The table below sets out the classification of financial assets and liabilities: At fair value through Financial profit liabilities or loss at Loans Available Total held for amortised Held-to- and for carrying Fair trading cost maturity receivables sale value value Notes Rm Rm Rm Rm Rm Rm Rm
Classes of financial instruments per balance sheet 2009 Assets 154 – 1,044 15,062 34 16,294 16,460
Trade and other receivables* 17 – – – 6,153 – 6,153 6,153 Investments 11 – – – 7,693 – 7,693 7,693 Finance lease receivable 13 – – – 275 – 275 275 Assets held for sale and discontinued operations 16 – – – – 34 34 200 Other financial assets 154 – 1,044 – – 1,198 1,198
Repurchase agreements 18 – – 1,044 – – 1,044 1,044 Interest rate swaps 18 4 – – – – 4 4 Forward exchange contracts 18 150 – – – – 150 150
Cash and cash equivalents 19 – – – 941 – 941 941
Liabilities (225) (23,257) – – – (23,482) (24,555)
Interest-bearing debt 23 – (17,704) – – – (17,704) (18,777) Trade and other payables 27 – (5,424) – – – (5,424) (5,424) Shareholders for dividend 32 – (23) – – – (23) (23) Credit facilities utilised 19 – (106) – – – (106) (106) Other financial liabilities (225) ––––(225) (225)
Interest rate swaps 18 (72) ––––(72) (72) Forward exchange contracts 18 (153) ––––(153) (153)
(71) (23,257) 1,044 15,062 34 (7,188) (8,095) Telkom fins (company) NEW 8/12/09 6:58 PM Page 276
276 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) At fair value through Financial profit or liabilities at Total loss held amortised Held-to- Loans and Available carrying Fair for trading cost maturity receivables for sale value value Notes Rm Rm Rm Rm Rm Rm Rm
Classes of financial instruments per balance sheet 2008 Assets 443 – – 11,224 – 11,667 11,667
Trade and other receivables* 17 – – – 6,593 – 6,593 6,593 Investments 11 – – – 3,883 – 3,883 3,883 Finance lease receivable 13 – – – 265 – 265 265 Other financial assets 443 – – – – 443 443
Forward exchange contracts 18 443 – – – – 443 443
Cash and cash equivalents 19 – – – 483 – 483 483
Liabilities (168) (18,346) – – – (18,514) (19,029)
Interest bearing debt 23 – (13,362) – – – (13,362) (13,877) Trade and other payables 27 – (4,923) – – – (4,923) (4,923) Shareholders for dividend 32 – (20) – – – (20) (20) Credit facilities utilised 19 – (41) – – – (41) (41) Other financial liabilities (168) – – – – (168) (168)
Forward exchange contracts 18 (168) – – – – (168) (168)
275 (18,346) – 11,224 – (6,847) (7,362)
Classes of financial instruments per balance sheet 2007 Assets 229 – – 7,025 – 7,254 7,254
Trade and other receivables* 17 – – – 5,755 – 5,755 5,755 Investments 11 – – – 887 – 887 887 Finance lease receivable 13 – – – 207 – 207 207 Other financial assets 229 – – – – 229 229
Bills of exchange 18 98 – – – – 98 98 Forward exchange contracts 18 131 – – – – 131 131
Cash and cash equivalents 19 – – – 176 – 176 176
Liabilities (155) (13,333) – – – (13,488) (14,849)
Interest bearing debt 23 (98) (8,985) – – – (9,083) (10,444) Trade and other payables 27 – (4,333) – – – (4,333) (4,333) Shareholders for dividend 32 – (15) – – – (15) (15) Credit facilities utilised 19 ––––––– Other financial liabilities (57) – – – – (57) (57)
Interest rate swaps 18 (26) – – – – (26) (26) Forward exchange contracts 18 (31) – – – – (31) (31)
74 (13,333) – 7,025 – (6,234) (7,595)
* Trade and other receivables are disclosed net of prepayments of R267 million (2008: R266 million; 2007: R165 million). Telkom fins (company) NEW 8/12/09 6:58 PM Page 277
Telkom Annual Report 2009 277
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.1. Fair value of financial instruments Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below.
The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation methodologies as outlined below. This value is not necessarily indicative of the amounts that the Company could realise in the normal course of business.
Derivatives are recognised at fair value.
The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date.
The carrying value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their fair value due to the short-term maturities of these instruments.
The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates, as a result they differ from carrying values.
The fair values of listed investments are based on quoted market prices.
12.2 Interest rate risk management Interest rate risk arises from the repricing of the Company’s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings.
The Company’s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Company makes use of interest rate derivatives as approved in terms of the Company policy limits. Fixed rate debt represents approximately 64.86% (2008: 57.03%; 2007: 98.83%) of the total debt. The debt profile of mainly fixed rate debt has been maintained to limit the Company’s exposure to interest rate increases given the size of the Company’s debt portfolio. There were no changes in the policies and processes for managing and measuring the risk from the previous period.
The table below summarises the interest rate swaps outstanding as at March 31:
Weighted average Notional coupon Average amount rate maturity Currency Rm % 2009 Interest rate swaps outstanding Pay fixed 2-5 years ZAR 2,000 10.84
2008 Interest rate swaps outstanding Pay fixed ––––
2007 Interest rate swaps outstanding Pay fixed < 1 year ZAR 1,000 14.67
Pay fixed The floating rate is based on the three months JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments. Telkom fins (company) NEW 8/12/09 6:58 PM Page 278
278 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.3. Credit risk management Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due.
Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Company is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Company from counterparties in respect of derivative contracts is a net favourable position of R29 million (2008: R289 million; 2007: R103 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Company limits the exposure to any counterparty and exposures are monitored daily. The Company expects that all counterparties will meet their obligations.
With regard to credit risk arising from other financial assets of the Company, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets (other than equity investments), the Company’s exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles.
Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate.
The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. Refer to note 17.
The Company has provided a financial guarantee to Africa Online Limited for bank loans. At March 31, 2009 there was R26 million (2008: R23 million; 2007: RNil) outstanding.
Telkom guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts such as employment period and salary rates. When an employee leaves the employment of Telkom, any housing debt guaranteed by Telkom is settled before any pension payout can be made to the employee. The Company recognises a provision when it becomes probable that a guarantee will be called. There is no provision outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of the default is R12 million. The fair value of the guarantee at March 31, 2009 was RNil (2008: RNil; 2007: RNil).
Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than in the previous period. Telkom fins (company) NEW 8/12/09 6:58 PM Page 279
Telkom Annual Report 2009 279
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.3 Credit risk management (continued) The maximum exposure to credit risk for financial assets at the reporting date by type of customer was:
Carrying amount 2007 2008 2009 Rm Rm Rm
Trade receivables 3,831 4,316 4,239
Business and residential 1,924 1,824 1,870 Global, corporate and wholesale 1,701 1,950 1,921 Government 318 368 444 Other 41 334 209 Impairment of trade receivables (153) (160) (205)
Derivatives 229 443 154 Loans receivable – 3,008 6,558 Other receivables* 1,924 2,277 1,914
5,984 10,044 12,865
* Excluding prepayments.
The ageing of trade receivables at the reporting date was: 2007 2008 2009 Rm Rm Rm
Not past due/current 3,250 3,654 3,361 Ageing of past due but not impaired 21 to 60 days 290 320 379 61 to 90 days 70 83 92 91 to 120 days 41 55 62 120+ days 180 204 345
3,831 4,316 4,239
The ageing in the allowance for the impairment of trade receivables at reporting date was:
Ageing of impaired trade receivables: Current defaulted 24 26 23 21 to 60 days 21 25 29 61 to 90 days 14 23 18 91 to 120 days 13 16 28 120+ days 81 70 107
153 160 205
The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 17.
Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007: R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Company does not hold any collateral over these balances.
During the 2009 year end the Company renegotiated the terms of trade receivables amounting to R1.9 million from a long outstanding customer. No impairment losses were recognised. Telkom fins (company) NEW 8/12/09 6:58 PM Page 280
280 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.4. Liquidity risk management Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments of the Company. Liquidity risk is managed by Telkom’s Corporate Finance division in accordance with policies and guidelines formulated by Telkom’s executive committee. In terms of its borrowing requirements the Company ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Company maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills.
There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk during the 2009 financial year.
The table below summarises the maturity profile of the Company’s financial liabilities based on undiscounted contractual cash flow at the balance sheet date: Contractual Carrying cash < 6 6 – 12 1 – 2 2 – 5 amount flows months months years years > 5 years Notes Rm Rm Rm Rm Rm Rm Rm
2009 Non-derivative financial liabilities Interest-bearing debt (excluding finance leases) 23 16,720 18,297 5,059 2,500 1,815 5,167 3,756 Credit facilities utilised 19 106 106 106 – – – – Trade and other payables 27 5,424 5,528 5,399 129 – – – Finance lease liabilities 34 984 1,846 82 82 171 516 995
Derivative financial liabilities Other financial liabilities 18 225 235 147 6 82 – –
Interest rate swaps 72 82 – – 82 – – Forward exchange contracts 153 153 147 6 – – –
23,459 26,012 10,793 2,717 2,068 5,683 4,751
2008 Non-derivative financial liabilities Interest-bearing debt (excluding finance leases) 23 12,505 14,403 4,882 1,200 3,900 1,823 2,598 Credit facilities utilised 19 41 41 41 – – – – Trade and other payables 27 4,923 4,923 4,609 314 – – – Finance lease liabilities 34 857 1,794 64 62 123 395 1,150
Derivative financial liabilities Other financial liabilities Forward exchange contracts 18 168 168 83 85 – – –
18,494 21,329 9,679 1,661 4,023 2,218 3,748 Telkom fins (company) NEW 8/12/09 6:58 PM Page 281
Telkom Annual Report 2009 281
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.4. Liquidity risk management (continued) Contractual Carrying cash < 6 6 – 12 1 – 2 2 – 5 amount flows months months years years > 5 years Notes Rm Rm Rm Rm Rm Rm Rm
2007 Non-derivative financial liabilities Interest-bearing debt (excluding finance leases) 23 8,231 10,416 1,350 4,680 – 1,806 2,580 Trade and other payables 27 4,333 4,333 3,887 446 – – – Finance lease liabilities 34 852 1,903 59 61 137 356 1,290
Derivative financial liabilities Other financial liabilities 18 57 57 51 6 – – –
Interest rate swaps 26 26 26 – – – – Forward exchange contracts 31 31 25 6 – – –
13,473 16,709 5,347 5,193 137 2,162 3,870
12.5. Foreign currency exchange rate risk management The Company manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Company’s risk exposure.
Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Company’s operations and liabilities. The Company also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk from the previous period. Telkom fins (company) NEW 8/12/09 6:58 PM Page 282
282 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.5. Foreign currency exchange rate risk management (continued) The following table details the foreign forward exchange contracts outstanding at year end:
Foreign contract Forward amount amount Fair value To buy m Rm Rm
2009 Currency US$ 155 1,477 14 Euro 92 1,205 (24) Other 36 69 (3)
2,751
2008 Currency US$ 123 915 107 Euro 173 1,923 319 Other 40 166 17
3,004
2007 Currency US$ 165 1,209 2 Euro 102 991 12 Other 68 80 2
2,280
To sell 2009 Currency US$ 99 947 (22) Euro 35 485 28 Other 21 43 4
1,475
2008 Currency US$ 78 593 (67) Euro 69 803 (98) Other 22 105 (2)
1,501
2007 Currency US$ 122 994 88 Euro 50 483 (5) Other 31 40 1
1,517 Telkom fins (company) NEW 8/12/09 6:58 PM Page 283
Telkom Annual Report 2009 283
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.5. Foreign currency exchange rate risk management (continued) The Company has various monetary assets and liabilities in currencies other than the Company’s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Company according to the different foreign currencies.
United States Euro Dollar Other Rm Rm Rm
2009 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand 203 6,097 19
2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand 219 1,117 51
2007 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand 282 90 70
Currency swaps There were no currency swaps in place at March 31, 2009, 2008 and 2007. Telkom fins (company) NEW 8/12/09 6:58 PM Page 284
284 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.6 Sensitivity analysis Interest rate risk The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant:
+1% movement –1% movement Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
Classes of financial instruments per balance sheet 2009 Assets Trade and other receivables 5 – (5) – Investments 56 – (56) Other financial assets 28 – (28) –
Repurchase agreements 10 – (10) – Interest rate swaps 18 – (18) –
Liabilities Interest-bearing debt (62) 62 Other financial liabilities 15 – (15) –
Interest rate swaps 15 – (15) –
42 – (42) –
2008 Assets Trade and other receivables 5 – (5) – Investments 9 – (9) –
Liabilities Interest-bearing debt (57) – 57 –
(43) – 43 – Telkom fins (company) NEW 8/12/09 6:58 PM Page 285
Telkom Annual Report 2009 285
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.6 Sensitivity analysis (continued) Interest rate risk (continued) +1% movement –1% movement Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2007 Assets Trade and other receivables 4 – (4) –
Liabilities Interest-bearing debt 1 – – – Other financial liabilities 2 – (2) –
Interest rate swaps 2 – (2) –
7 – (6) –
Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant. +10% movement –10% movement (depreciation) (appreciation) Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
Classes of financial instruments per balance sheet 2009 Assets Trade and other receivables 40 – (40) – Investments 545 – (545) – Other financial assets 1 – (1) –
Forward exchange contract 1 – (1)
Liabilities Interest-bearing debt (14) – 14 – Trade and other payables (60) – 60 – Other financial liabilities 128 – (128) –
Forward exchange contract 128 – (128) –
640 – (640) – Telkom fins (company) NEW 8/12/09 6:58 PM Page 286
286 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.6 Sensitivity analysis (continued) Foreign exchange currency risk (continued) +10% movement –10% movement (depreciation) (appreciation) Other Other movements movements Profit in equity Profit in equity Rm Rm Rm Rm
2008 Assets Trade and other receivables 10 – (10) – Investments 91 – (91) – Other financial assets 331 – (331) –
Forward exchange contract 331 – (331) –
Liabilities Interest-bearing debt (10) – 10 – Trade and other payables (95) – 95 – Other financial liabilities Forward exchange contract (153) – 153 –
174 – (174) –
2007 Assets Trade and other receivables 10 – (10) – Other financial assets 74 – (74) –
Forward exchange contract 74 – (74) –
Liabilities Interest-bearing debt (10) – 10 – Trade and other payables (40) – 40 – Other financial liabilities 11 – (11) –
Forward exchange contract 11 – (11) –
45 – (45) –
2007 2008 2009 RRR 12.7. Exchange rate table (closing rate) United States dollar 7.248 8.132 9.484 Euro 9.649 12.854 12.617 Pound Sterling 14.189 16.166 13.555 Swedish krona 1.033 1.370 1.153 Japanese yen 0.061 0.082 0.097 Telkom fins (company) NEW 8/12/09 6:58 PM Page 287
Telkom Annual Report 2009 287
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 12.8. Capital management The Board’s policy is to maintain a strong capital base so as to sustain investor, creditor, market confidence and future development of the business. Capital comprises equity attributable to equity holders of the Company. The Company monitors capital using net debt to EBITDA ratio. The Company’s policy is to keep the net debt to EBITDA ratio of between 1 and 2 times. Included in net debt are interest-bearing debts, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets.
Telkom plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other investment opportunities and needs.
All of Telkom’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom’s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends, and the amount of the dividends, will depend upon, among other things, the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans.
The Company has access to financing facilities, the total unused amount of which is R6,226 million at the balance sheet date.
There were no changes in the Company’s approach to capital management during the year.
The Company is not subject to externally imposed capital requirements.
The net debt to EBITDA ratio is as follows: 2007 2008 2009 Rm Rm Rm
Non-current portion of interest-bearing debt 3,308 7,336 10,193 Current portion of interest -bearing debt 5,775 6,026 7,511 Other financial liabilities 57 168 225 Less: Cash and cash equivalents (176) (483) (941) Plus: Credit facilities utilised – 41 106 Less: Other financial assets (229) (443) (1,198)
Net debt 8,735 12,645 15,896
EBITDA 12,489 11,848 8,704
Net debt to EBITDA ratio 0.70 1.07 1.83 Telkom fins (company) NEW 8/12/09 6:58 PM Page 288
288 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
13. FINANCE LEASE RECEIVABLES The Company provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to certain customer arrangements which were assessed to be finance leases in terms of IAS17.
Total < 1 year 1 – 5 years > 5 years Rm Rm Rm Rm
2009 Minimum lease payments Lease payments receivable 360 142 219 – Unearned finance income (85) (33) (53) –
Present value of minimum lease payments 275 109 166 –
Lease receivables 275 109 166 –
2008 Minimum lease payments Lease payments receivable 345 135 210 – Unearned finance income (80) (30) (50) –
Present value of minimum lease payments 265 105 160 –
Lease receivables 265 105 160 –
2007 Minimum lease payments Lease payments receivable 273 92 181 – Unearned finance income (66) (21) (45) –
Present value of minimum lease payments 207 71 136 –
Lease receivables 207 71 136 – Telkom fins (company) NEW 8/12/09 6:58 PM Page 289
Telkom Annual Report 2009 289
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
14. DEFERRED TAXATION (990) (1,347) (198)
Opening balance (469) (990) (1,347) Income statement movements (521) (357) 1,149
Temporary differences (520) (412) 1,255
Capital allowances (467) (446) (310) Provisions and other allowances (94) 191 199 Capital gains taxation asset – – 1,279 Secondary taxation credits raised/(utilised) 41 (157) 87
Underprovision prior year (1) – (106) Change in taxation rate – 55 –
The balance comprises: (990) (1,347) (198)
Capital allowances (2,527) (2,870) (3,181) Provisions and other allowances 1,197 1,340 1,434 Capital gains taxation asset – – 1,279 STC taxation credits 340 183 270
Deferred taxation balance is made up as follows: (990) (1,347) (198)
Deferred taxation assets 340 183 1,549 Deferred taxation liabilities (1,330) (1,530) (1,747)
Unutilised STC credits 2,718 1,830 2,700
Secondary taxation on companies (STC) is provided for at a rate of 10% on the amount by which dividends declared by the Company exceeds dividends received. The deferred taxation asset is raised as it is probable that it will be utilised in future. The asset will be released as a taxation expense when dividends are declared.
The deferred taxation asset represents STC credits on past dividends received that are available to be utilised against dividends declared. The deferred taxation asset also includes deferred tax on capital gains tax (CGT) base cost of the Vodacom Group (Proprietary) Limited and Swiftnet (Proprietary) Limited (Swiftnet) investments that will be utilised against the future CGT liability on the Vodacom and Swiftnet transactions. It is considered probable that these credits will be utilised in the future. The asset will be released as a taxation expense when dividends are declared and when the CGT liability arises.
The deferred taxation liability increased mainly due to the increase in the difference between the carrying value and taxation value of assets, as a result of the change in the estimate of useful lives of assets. Telkom fins (company) NEW 8/12/09 6:58 PM Page 290
290 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
15. INVENTORIES 839 873 1,331
Gross inventories 972 1,072 1,522 Write-down of inventories to net realisable value (133) (199) (191)
Inventories consist of the following categories: 839 873 1,331
Installation material, maintenance material and network equipment 771 827 1,048 Merchandise 68 46 284
Write-down of inventories to net realisable value 133 199 191
Opening balance 63 133 199 Charged to selling, general and administrative expenses 152 164 167 Inventories written-off (82) (98) (174)
Inventory levels as at March 31, 2009, 2008 and 2007 have increased due to the accelerated roll-out of the Next Generation Network required to improve customer service, and the acquisition of merchandise for the W-CDMA roll-out.
16. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 34 16.1 Assets held for sale 34 Joint venture Vodacom Group (Proprietary) Limited (Vodacom) –
50% shareholding at cost (R50)
In the current financial year the Company announced a decision to dispose of its entire shareholding in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group Plc and unbundling its remaining 35% stake to its shareholders pursuant to a listing of Vodacom on the main board of the JSE Limited. The decision was taken in line with the Company’s strategy to unlock shareholder value.
This investment is reclassified as held-for-sale in terms of IFRS5 as all the requirements for being classified as held-for-sale are met.
Subsidiary Swiftnet (Proprietary) Limited (Swiftnet) 34
100% shareholding at cost 25 Loan 9
In February 2009, Telkom’s management took a decision to dispose of its 100% investment in Swiftnet, trading under the name Fastnet Wireless Services. Swiftnet has been classified as held for sale as all criteria for this classification have been met. Telkom fins (company) NEW 8/12/09 6:58 PM Page 291
Telkom Annual Report 2009 291
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
16. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (continued) 16.2 Discontinued operations Subsidiary Telkom Media (Proprietary) Limited
On August 31, 2006, Telkom created a new subsidiary, Telkom Media (Proprietary) Limited with a black economic empowerment (BEE) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.
On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum.
Telkom Media was classified as held for sale in September 2008 interim financial statements. At year end the investment did not meet the held for sale criteria as management was unable to sell the investment for its expected price and therefore decided to abandon it.
2007 2008 2009 Rm Rm Rm 17. TRADE AND OTHER RECEIVABLES 5,920 6,859 6,420
Trade receivables 3,831 4,316 4,239
Gross trade receivables 3,984 4,476 4,444 Impairment of receivables (153) (160) (205)
Prepayments and other receivables 2,089 2,543 2,181
Impairment allowance account for receivables 153 160 205
Opening balance 184 153 160 Charged to selling, general and administrative expenses 137 217 285 Receivables written-off (168) (210) (240)
Refer to note 12 for detailed credit risk analysis.
18. OTHER FINANCIAL ASSETS AND LIABILITIES 229 443 1,198 Other financial assets consist of:
Held-to-maturity Repurchase agreements – – 1,044 At fair value through profit or loss 229 443 154
Bills of exchange 98 – – Derivative instruments (refer to note 12) 131 443 154
Repurchase agreements The Company manages a portfolio of repurchase agreements in the South African capital and money markets, with a view to generating additional investment income on the favourable interest rates provided on these transactions. Interest received from the borrower is based on the current market related yield. There were no repurchase agreements held at March 31, 2008 and 2007.
Bills of exchange The fair value of bills of exchange has been calculated with reference to the Bond Exchange of South Africa quoted prices.
Derivative instruments Derivative assets at fair value consists of interest rate swaps of R4 million (2008: RNil; 2007: RNil) and forward exchange contracts of R150 million (2008: R443 million; 2007: R131 million).
Other financial liabilities consist of: At fair value through profit or loss Derivative instruments (57) (168) (225)
Derivative liabilities at fair value consists of interest rate swaps of R72 million (2008: RNil; 2007: R26 million) and forward exchange contracts of R153 million (2008: R168 million; 2007: R31 million). Telkom fins (company) NEW 8/12/09 6:58 PM Page 292
292 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
19. CASH AND CASH EQUIVALENTS Cash shown as current assets 176 483 941
Cash and bank balances 76 83 601 Short-term deposits 100 400 340
Credit facilities utilised – (41) (106)
Net cash and cash equivalents 176 442 835
Undrawn borrowing facilities 6,566 5,894 6,226 The undrawn borrowing facilities are unsecured when drawn, bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date, are subject to annual review and are in place to ensure liquidity. At March 31, 2009, R3,000 million of these undrawn facilities were committed.
Borrowing powers To borrow money, Telkom’s directors may mortgage or encumber Telkom’s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to restrictive financial covenants of the loan facility as indicated on note 23. Telkom fins (company) NEW 8/12/09 6:58 PM Page 293
Telkom Annual Report 2009 293
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
20. SHARE CAPITAL Authorised and issued share capital and share premium are made up as follows:
Authorised 10,000 10,000 10,000
999,999,998 ordinary shares of R10 each 10,000 10,000 10,000 1 class A ordinary share of R10 – – – 1 class B ordinary share of R10 – – –
Issued and fully paid 5,329 5,208 5,208
520,783,898 (2008: 520,784,184; 2007: 532,855,528) ordinary shares of R10 each 5,329 5,208 5,208 1 (2008: 1; 2007: 1) class A ordinary share of R10 – – – 1 (2008: 1; 2007: 1) class B ordinary share of R10 – – –
The following table illustrates the movement in the number of shares issued:
Number of Number of Number of shares shares shares
Shares in issue at beginning of year 544,944,901 532,855,530 520,784,186 Shares bought back and cancelled (12,089,371) (12,071,344) (286)
Shares in issue at end of year 532,855,530 520,784,186 520,783,900
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of the Company.
Share buy-back During the financial year Telkom bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and cancelled in order to allow Telkom shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This reduced share capital by R2,860 and retained earnings by R27,565.
During the year ended March 31, 2008 Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced share capital by R121 million and retained earnings by R1,526 million.
During the year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million.
Capital management Refer to note 12 for detailed capital management disclosure. Telkom fins (company) NEW 8/12/09 6:58 PM Page 294
294 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
21. TREASURY SHARE RESERVE (1,778) (1,642) (1,521)
This reserve represents amounts paid by Telkom to Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, subsidiaries, for the acquisition of the Company’s shares to be utilised in terms of the Telkom Conditional Share Plan (TCSP).
Treasury shares At March 31, 2009, 11,646,680 (2008: 10,493,141; 2007: 12,237,016) and 8,143,556 (2008: 10,849,058; 2007: 10,849,058) ordinary shares in Telkom, with a fair value of R1,229 million (2008: R1,377 million; 2007: R2,031 million) and R859 million (2008: R1,423 million; 2007: R1,801 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively.
The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited are reserved for issue in terms of the TCSP.
The decrease in the number of treasury shares is due to 1,552,029 (2008: 1,743,375; 2007: 450,505) 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 R228 million (2008: R301 million; 2007: R59 million).
22. SHARE-BASED COMPENSATION RESERVE This reserve represents the cumulative grant fair value of the equity- settled share-based payment transactions recognised in employee expenses over the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 25).
No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of the shares granted, commencing on the grant date.
The following table illustrates the movement within the share-based compensation reserve: Balance at beginning of year 151 257 643 Net increase in equity 106 386 433
Employee cost 141 522 554 Vesting and transfer of shares (35) (136) (121)
Balance at end of year 257 643 1,076
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008: R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee expenses for the year. Telkom fins (company) NEW 8/12/09 6:58 PM Page 295
Telkom Annual Report 2009 295
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
23. INTEREST-BEARING DEBT Non-current interest-bearing debt 3,308 7,336 10,193
Total interest-bearing debt (refer to note 12) 9,083 13,362 17,704
Gross interest-bearing debt 10,416 14,403 18,296 Discount on debt instruments issued (2,185) (1,898) (1,576) Finance leases 852 857 984
Less: Current portion of interest-bearing debt (5,775) (6,026) (7,511)
Local debt (5,771) (6,000) (7,476)
Locally registered Telkom debt instruments (4,432) – – Call borrowings – (2,600) – Term loans – – (2,000) Commercial paper bills (1,339) (3,400) (5,476)
Foreign debt – – – Finance leases (4) (26) (35)
Total interest-bearing debt is made up as follows: 9,083 13,362 17,704
(a) Local debt 8,125 12,365 16,582
Locally registered Telkom debt instruments 6,786 8,164 11,106
Name, maturity, rate p.a., nominal value TK01, 2008, 10%, RNil (2008: RNil; 2007: R4,680 million) 4,432 – – TL12, 2012, 12.45%, R1,060 million (2008: RNil; 2007: RNil) – – 1,059 TL15, 2015, 11.9%, R1,160 million (2008: RNil; 2007: RNil) – – 1,159 TL20, 2020, 6%, R2,500 million (2008: R2,500 million; 2007: R2,500 million) 1,246 1,283 1,325 PP02, 2010, 0%, R430 million (2008: R430 million; 2007: R430 million) 264 304 349 PP03, 2010, 0%, R1,350 million (2008: R1,350 million; 2007: R1,350 million) 844 977 1,131 Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million; 2007: RNil) – 2,600 – Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million; 2007: RNil) – 3,000 2,000 Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil; 2007: RNil) – – 4,083
Total interest-bearing debt is made up of R17,704 million debt at amortised cost (2008: R13,362 million debt at amortised cost; 2007: R8,985 million debt at amortised cost and R98 million debt at fair value through profit or loss). Telkom fins (company) NEW 8/12/09 6:58 PM Page 296
296 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
23. INTEREST-BEARING DEBT (continued) Local bonds The local Telkom bonds are unsecured, but a Side letter to the Subscription Agreement (as amended) of the TL20 bond contains a number of restrictive covenants which, if not met, could result in the early redemption of the loan. The local bonds limit Telkom’s ability to create encumbrances on revenue or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. The term loan agreements limit Telkom’s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without prior written consent of the Lenders, which will not be unreasonably withheld. The syndicated loan agreement contains restrictive covenants as well as restrictions on encumbrances, disposals, Group guarantees and Group loans.
Commercial paper bills 1,339 4,201 5,476 Rate p.a., nominal value 2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million (2008: R4,383 million; 2007: R1,350 million)
(b) Foreign debt 106 140 138 Maturity, rate p.a., nominal value Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%; 2007: 0.10% – 0.14%), e11 million (2008: e11 million; 2007: e11 million)
(c) Finance leases 852 857 984 The finance leases are secured by buildings with a carrying value of R152 million (2008: R174 million; 2007: R197 million) and office equipment with a book value of R6 million (2008: R14 million; 2007: R6 million) (refer to note 9). These amounts are repayable within periods ranging from 1 to 11 years. Interest rates vary between 13.43% and 37.78%.
Included in non-current and current debt is: Debt guaranteed by the South African Government 4,537 140 138
The Company may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of 1991. The borrowing powers of the Company are set out as per note 19.
Repayments/refinancing of current portion of interest-bearing debt The Company issued new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million respectively and entered into a syndicated loan agreement with a nominal value of R4,100 million during the current year. Commercial Paper Bills with a nominal value of R11,025 million were issued and Commercial Paper debt with a nominal value of R9,849 million was repaid during the current year.
The R7,559 million nominal value of current portion of interest-bearing debt as at March 31, 2009 is expected to be repaid/refinanced from proceeds of the Vodacom sale.
Management believes that sufficient funding facilities will be available at the date of repayment/refinancing. Telkom fins (company) NEW 8/12/09 6:58 PM Page 297
Telkom Annual Report 2009 297
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
24. PROVISIONS 1,203 1,445 1,830
Employee related 2,351 2,477 3,079
Annual leave 363 364 415
Balance at beginning of year 316 363 364 Charged to employee expenses 53 10 66 Leave paid (6) (9) (15)
Post-retirement medical aid (refer to note 25) 1,120 1,336 1,723
Balance at beginning of year 2,589 1,120 1,336 Interest cost 285 321 426 Current service cost 83 84 95 Expected return on plan asset (188) (257) (223) Actuarial loss 149 129 157 Termination settlement – – (5) Plan asset – initial recognition (1,720) – – Contributions paid (78) (61) (63)
Telephone rebates (refer to note 25) 282 287 325
Balance at beginning of year 198 282 287 Interest cost 19 22 39 Current service cost 4 3 6 Past service cost 76 2 2 Actuarial loss 5 – 14 Benefits paid (20) (22) (23)
Bonus 586 490 616
Balance at beginning of year 637 586 490 Charged to employee expenses 656 473 577 Payments made (707) (569) (451)
Non-employee related 558 608 704
Supplier dispute (refer to note 35) 527 569 664
Balance at beginning of year – 527 569 Net movements 527 42 95
Other 31 39 40
Less: Current portion of provisions (1,706) (1,640) (1,953)
Annual leave (363) (364) (415) Post-retirement medical aid (185) (185) (224) Telephone rebates (26) (26) (29) Bonus (586) (490) (616) Supplier dispute (refer to note 35) (527) (569) (664) Other (19) (6) (5) Telkom fins (company) NEW 8/12/09 6:58 PM Page 298
298 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
24. PROVISIONS (continued) Annual leave In terms of the Company’s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.
Bonus The bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is payable to all qualifying employees bi-annually after the Company’s results have been made public.
Supplier dispute The Company provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in note 35. The net movement in the provision of R95 million consists of finance charges and fair value movements.
Other Included in other provisions is an amount provided for asset retirement obligations.
25. EMPLOYEE BENEFITS The Company provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund. Membership to one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years.
At March 31, 2009, the Company employed 23,520 employees (2008: 24,879; 2007: 25,864).
Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented.
The Telkom Pension Fund The Telkom Pension Fund is a defined benefit fund that was established in terms of the Post Office Amendment Act 85, of 1991.
The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after unrecognised gains. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised).
With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the year ended March 31, 2007 a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is disclosed below. Telkom fins (company) NEW 8/12/09 6:58 PM Page 299
Telkom Annual Report 2009 299
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) The Telkom Pension Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations 22 21 21 Expected return on plan assets (19) (27) (28) Recognised actuarial loss/(gain) 9 (16) – Settlement loss/(gain) 21 (2) (3) Asset limitation – 29 39
Net periodic pension expense recognised 33 5 29
Pension fund contributions (refer to note 5.1) 8 5 (1)
The status of the pension plan obligation is as follows: At beginning of year 281 205 204 Interest and service cost 22 21 21 Employee contributions 2 2 2 Benefits paid (2) (3) (5) Settlements (70) (15) (22) Actuarial gain (28) (6) (1)
Benefit obligation at end of year 205 204 199
Plan assets at fair value: At beginning of year 243 284 311 Expected return on plan assets 19 27 28 Benefits paid (2) (3) (5) Contributions 10 8 2 Settlements (61) (15) (22) Actuarial gain/(loss) 75 10 (67)
Plan assets at end of year 284 311 247 Telkom fins (company) NEW 8/12/09 6:58 PM Page 300
300 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) The Telkom Pension Fund (continued) Present value of funded obligation 205 204 199 Fair value of plan assets (284) (311) (247)
Fund surplus (79) (107) (48) Unrecognised net actuarial gain/(loss) 25 23 (46)
Net surplus (54) (84) (94) Asset limitation – 29 39
Recognised net asset (54) (55) (55)
Expected return on plan assets 19 27 28 Actuarial return/(loss) on plan assets 75 10 (67)
Actual return/(loss) on plan assets 94 37 (39)
Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Yield on government bonds (%) 7.5 9.0 8.7 Long-term return on equities (%) 10.5 11.0 12.0 Long-term return on cash (%) 5.5 7.0 7.5 Expected return on plan assets (%) 9.7 9.8 10.5 Salary inflation rate (%) 6.0 7.5 7.2 Pension increase allowance (%) 2.9 4.3 4.0
The overall long-term expected rate of return on assets is 10.5%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Pension Fund and expected long-term return of these assets, of which South African equities and bonds are the largest contributors.
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%) 100.0 100.0 100.0 The number of employees registered under the Telkom Pension Fund 153 146 123 The fund portfolio consists of the following: Equities (%) 74 54 57 Bonds (%) 5 5 25 Cash (%) 3 23 3 Foreign investments (%) 16 18 15 Insurance policies (%) 2 – –
The total expected contributions payable to the pension fund for the next financial year are R1 million. Telkom fins (company) NEW 8/12/09 6:58 PM Page 301
Telkom Annual Report 2009 301
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
25. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the Government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred.
The Telkom Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess, belong to the participants of the scheme. The Company is unable to benefit from the excess in the form of future reduced contributions.
Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position of R1,549 million after unrecognised losses.
The Telkom Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets, Telkom would be required to fund the statutory deficit.
The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that the Company has a potential asset with regard to this Fund.
The funded status of the Telkom Retirement Fund is disclosed below:
2007 2008 2009 Rm Rm Rm
Telkom Retirement Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations 312 493 616 Expected return on plan assets (489) (686) (796) Recognised actuarial gain (145) – –
Net periodic pension expense not recognised (asset limitation) (322) (193) (180)
Retirement fund contributions (refer to note 5.1) 439 460 460
Benefit obligation: At beginning of year 4,377 6,581 7,101 Interest cost 312 493 616 Benefits paid (486) (488) (520) Liability for new pensioners 44 14 143 Actuarial loss/(gain) 2,334 501 (636)
Benefit obligation at end of year 6,581 7,101 6,704
Plan assets at fair value: At beginning of year 5,973 7,661 7,991 Expected return on plan assets 489 686 796 Benefits paid (486) (488) (520) Asset backing new pensioners’ liabilities 44 14 143 Actuarial gain/(loss) 1,641 118 (1,735)
Plan assets at end of year 7,661 7,991 6,675 Telkom fins (company) NEW 8/12/09 6:58 PM Page 302
302 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) Present value of funded obligation 6,581 7,101 6,704 Fair value of plan assets (7,661) (7,991) (6,675)
Fund (surplus)/deficit (1,080) (890) 29 Unrecognised net actuarial loss (96) (478) (1,578)
Unrecognised net asset (1,176) (1,368) (1,549)
Expected return on plan assets 489 686 796 Actuarial gain/(loss) on plan assets 1,641 118 (1,735)
Actual gain/(loss) on plan assets 2,130 804 (939)
Included in the fair value of plan assets is: Office buildings occupied by Telkom 371 596 619 Telkom bonds 21 10 – Telkom shares 284 141 132
The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds.
Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Yield on government bonds (%) 7.5 9.0 8.7 Long-term return on equities (%) 10.5 11.0 12.0 Long-term return on cash (%) 5.5 7.0 7.5 Expected return on plan assets (%) 9.3 10.3 10.7 Pension increase allowance (%) 4.5 6.0 4.0
The overall long-term expected rate of return on assets is 10.7%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Retirement Fund and expected long- term return on these assets, of which South African equities, foreign investments and South African index-linked bonds are the largest contributors.
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%) 100 100 100 The number of pensioners registered under the Telkom Retirement Fund 14,451 14,255 13,617 The number of in-service employees registered under the Telkom Retirement Fund 25,766 24,939 23,389 Telkom fins (company) NEW 8/12/09 6:58 PM Page 303
Telkom Annual Report 2009 303
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) The fund portfolio consists of the following: Equities (%) 59 70 55 Property (%) 2 2 – Bonds (%) 19 11 5 Cash (%) 7 1 5 Foreign investments (%) 13 16 20 Index linked (%) – – 15
The expected pension benefits payments for the year ending March 31, 2010 are R541,000.
Medical benefits The Company makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 24. The Company has terminated future post-retirement medical benefits in respect of employees joining after July 1, 2000.
There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those who retired after 1994 (Post-94); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap, which increases annually with the average salary increase.
Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, 2009.
The Company has allocated certain investments to fund this liability as set out in note 11.
2007 2008 2009 Rm Rm Rm Medical aid Benefit obligation: At beginning of year 3,889 4,366 4,831 Interest cost 285 321 426 Current service cost 83 84 95 Actuarial loss 281 246 246 Termination settlement – – (5) Benefits paid from plan assets (94) (125) (141) Contributions paid by the Company (78) (61) (63)
Benefit obligation at end of year 4,366 4,831 5,389 Telkom fins (company) NEW 8/12/09 6:58 PM Page 304
304 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) Medical benefits (continued) Plan assets at fair value: At beginning of year – 1,961 1,929 Plan asset – initial recognition 1,720 – – Expected return on plan assets 188 257 223 Benefits paid from plan assets (94) (125) (141) Actuarial gain/(loss) 147 (164) (393)
Plan assets at end of year 1,961 1,929 1,618
Present value of funded obligation 4,366 4,831 5,389 Fair value of plan assets (1,961) (1,929) (1,618)
Fund deficit 2,405 2,902 3,771 Unrecognised net actuarial loss (1,285) (1,566) (2,048)
Liability as disclosed in the balance sheet (refer to note 24) 1,120 1,336 1,723
Expected return on plan assets 188 257 223 Actuarial return on plan assets 147 (164) (393)
Actual gain/(loss) on plan assets 335 93 (170)
Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Expected return on plan assets (%) 13.5 12.0 11.0 Salary inflation rate (%) 6.0 7.5 7.2 Medical inflation rate (%) 6.5 8.0 7.7
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Contractual retirement age 65 65 65 Average retirement age 60 60 60 Number of members 17,119 15,526 13,883 Number of pensioners 8,494 8,430 8,397 Telkom fins (company) NEW 8/12/09 6:58 PM Page 305
Telkom Annual Report 2009 305
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
25. EMPLOYEE BENEFITS (continued) Medical benefits (continued) The valuation results are sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions: Current assumption Decrease Increase Rm Rm Rm
Medical cost inflation rate 7.7% -1.0% +1.0%
Benefit obligation 5,389 (736) 921 Percentage change (13.7)% 17.1%
Service cost and interest cost 2009/2010 555 (84) 108 Percentage change (15.1)% 19.5%
Discount rate 8.7% -1.0% +1.0%
Benefit obligation 5,389 933 (734) Percentage change 17.3% (13.6)% Service cost and interest cost 2009/2010 555 46 (37) Percentage change 8.3% (6.7)%
Post-retirement mortality rate PA(90) ultimate- 1 -10.0% +10.0%
Benefit obligation 5,389 221 (197) Percentage change 4.1% (3.7)% Service cost and interest cost 2009/2010 555 23 (20) Percentage change 4.1% (3.6)%
2007 2008 2009
The fund portfolio consists of the following: Equities (%) 59 56 30 Bonds (%) 3 2 2 Cash and money market investments (%) 21 33 10 Foreign investments (%) 9 9 9 Insurance policies (%) 8 – 49 Telkom fins (company) NEW 8/12/09 6:58 PM Page 306
306 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
25. EMPLOYEE BENEFITS (continued) Telephone rebates The Company provides telephone rebates to its pensioners. The most recent actuarial valuation was performed at March 31, 2009. Eligible employees must be employed by the Company until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan.
The status of the telephone rebate liability is disclosed below:
2007 2008 2009 Rm Rm Rm Benefit obligation opening balance 251 307 443 Service cost 4 3 6 Interest cost 19 22 39 Actuarial (gain)/loss (39) 133 19 Amendments 93 – – Benefits paid (21) (22) (23)
Present value of unfunded obligation 307 443 484 Unrecognised net actuarial loss and past service cost (25) (156) (159)
Liability as disclosed in the balance sheet (refer to note 24) 282 287 325
Principal actuarial assumptions were as follows: Discount rate (%) 7.5 9.0 8.7 Rebate inflation rate (%) – 4.0 4.0 Contractual retirement age 65 65 65 Average retirement age 60 60 60
The assumed rates of mortality are determined by reference to the standard published mortality table PA (90) Ultimate standard tables, as published by the Institute and Faculty of Actuaries in London and Scotland, rated down one year to value the pensioners.
Number of members 19,515 18,766 17,034 Number of pensioners 10,918 10,680 10,499
Telkom Conditional Share Plan Telkom’s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees awarded in 2004 and 2005 is 0% in year one and 33% in each of the three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met.
The Telkom Board approved the fourth enhanced allocation of shares to employees as at September 4, 2007, with a grant date of September 27, 2007, the day that the employees and the Company shared a common understanding of the terms and conditions of the grant. A total number of 6,089,810 shares were granted.
The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares. Telkom fins (company) NEW 8/12/09 6:58 PM Page 307
Telkom Annual Report 2009 307
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
25. EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years; 2007: 1.75 years).
2007 2008 2009
The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year 2,414,207 1,883,991 420,590 Granted during the year 1,212 252 – Forfeited during the year (80,923) (43,790) (3,985) Vested during the year (450,505) (1,419,863) (416,605)
Outstanding at end of the year 1,883,991 420,590 –
The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant: Outstanding at beginning of the year 1,930,687 1,864,041 1,435,387 Granted during the year 1,005 3,469 52,954 Forfeited during the year (67,651) (108,177) (45,188) Vested during the year – (323,946) (1,135,424)
Outstanding at end of the year 1,864,041 1,435,387 307,729
The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant: Outstanding at beginning of the year – 1,773,361 1,640,980 Granted during the year 1,825,488 833 – Forfeited during the year (52,127) (133,214) (132,614)
Outstanding at end of the year 1,773,361 1,640,980 1,508,366
The following table illustrates the movement of the maximum number of shares that will vest to employees relating to the additional November 2006 grant: Outstanding at beginning of the year – – 4,812,305 Granted during the year – 4,984,693 25,775 Forfeited during the year – (172,388) (389,357)
Outstanding at end of the year – 4,812,305 4,448,723
The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant: Outstanding at beginning of the year – – 5,846,636 Granted during the year – 6,117,163 23,650 Forfeited during the year – (270,527) (509,185)
Outstanding at end of the year – 5,846,636 5,361,101 Telkom fins (company) NEW 8/12/09 6:58 PM Page 308
308 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
25. EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The fair value of the shares granted have been calculated by an actuary using the Black-Scholes-Merton model and the following values at grant date: August 8, June 23, November 2, September 4, 2004 2005 2006 2007 Grant Grant Grant Grant
Market share price (R) 77.50 111.00 141.25 173.00 Dividend yield (%) 2.60 3.60 3.50 3.50
2007 2008 2009 Rm Rm Rm
The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) 5 5 9 Meeting specified performance criteria (%) 100 100 75
The amounts for the current and previous four years are as follows: 2005 2006 2007 2008 2009 Rm Rm Rm Rm Rm
Telkom Pension Fund Defined benefit obligation (186) (281) (205) (204) (199) Plan assets 231 243 284 311 247
Surplus/(deficit) 45 (38) 79 107 48 Asset limitation – – – (29) (39) Unrecognised actuarial loss/(gain) 89 118 (25) (23) 46
Recognised net asset 134 80 54 55 55
Experience adjustment on assets 75 10 (67) Experience adjustment on liabilities 28 (6) 1
Telkom Retirement Fund Defined benefit obligation (4,020) (4,377) (6,581) (7,101) (6,704) Plan assets 4,477 5,973 7,661 7,991 6,675
Surplus/(deficit) 457 1,596 1,080 890 (29) Unrecognised actuarial gain/(loss) 312 (742) 96 478 1,578
Unrecognised net asset 769 854 1,176 1,368 1,549
Experience adjustment on assets* 1,641 118 (1,735) Experience adjustment on liabilities* 1,234 485 (645) Telkom fins (company) NEW 8/12/09 6:58 PM Page 309
Telkom Annual Report 2009 309
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2005 2006 2007 2008 2009 Rm Rm Rm Rm Rm
25. EMPLOYEE BENEFITS (continued) Medical benefits Defined benefit obligation (3,057) (3,889) (4,366) (4,831) (5,389) Plan assets – – 1,961 1,929 1,618
Deficit (3,057) (3,889) (2,405) (2,902) (3,771) Unrecognised actuarial loss 648 1,300 1,285 1,566 2,048
Liability recognised (2,409) (2,589) (1,120) (1,336) (1,723)
Experience adjustment on assets 147 (164) (393) Experience adjustment on liabilities 28 193 246
Telephone rebates Defined benefit obligation (177) (251) (307) (443) (484) Unrecognised actuarial (gain)/loss (2) 53 25 156 159
Liability recognised (179) (198) (282) (287) (325)
Experience adjustment on liabilities (25) 2 2
The experience adjustments on assets and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been disclosed due to the fact that it was impractical to determine the information.
* During the March 31, 2007 year end Telkom actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of plan assets. This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end.
2007 2008 2009 Rm Rm Rm
26. DEFERRED REVENUE 1,846 2,294 2,822
Non-current deferred revenue 739 870 996 Current portion of deferred revenue 1,107 1,424 1,826
Included in deferred revenue is profit on the sale and leaseback of certain Telkom buildings of R107 million, consisting of a non-current portion of R96 million (2008: R107 million; 2007: R118 million) and a current portion of R11 million (2008: R11 million; 2007: R11 million). A profit of R11 million per annum is recognised in income on a straight-line basis, over the period of the lease ending 2019 (refer to note 34). Telkom fins (company) NEW 8/12/09 6:58 PM Page 310
310 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
27. TRADE AND OTHER PAYABLES 4,333 4,923 5,424
Trade payables 2,761 3,267 3,035 Finance cost accrued 22 39 156 Accruals and other payables 1,550 1,617 2,233
Accruals and other payables mainly represent amounts payable for goods received, net of Value Added Tax obligations and licence fees.
Included in accruals and other payables are amounts owed to Rossal No 65 (Proprietary) Limited of R342 million (2008: RNil; 2007: R148 million) and Intekom (Proprietary) Limited of R23 million (2008: R13 million; 2007: R5 million).
28. RECONCILIATION OF PROFIT FOR THE YEAR TO CASH GENERATED FROM OPERATIONS
Cash generated from operations 12,660 12,662 12,027
Profit for the year 8,391 7,967 5,277 Finance charges and fair value movements 1,027 1,289 1,459 Taxation 2,690 2,599 516 Investment income (3,202) (3,739) (2,906) Interest received from debtors (189) (248) (404) Non-cash items 4,565 4,637 7,981
Depreciation, amortisation and write-offs 3,583 3,732 4,358 Cost of equipment disposed when recognising finance leases 240 88 71 Recognition of the FIFA brand intangible asset from deferred revenue – – (261) Increase in provisions 1,103 757 1,439 Profit on disposal of property, plant and equipment and intangible assets (15) (167) (32) Profit on disposal of investment (364) – – Interest received from subsidiaries – – 221 Loss on disposal of property, plant and equipment and intangible assets 1 2 6 Impairment of investments and loans 17 225 2,179
(Increase)/decrease in working capital (622) 157 104
Inventories (459) (202) (627) Accounts receivable (319) (196) 848 Accounts payable 156 555 (117) Telkom fins (company) NEW 8/12/09 6:58 PM Page 311
Telkom Annual Report 2009 311
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
29. DIVIDEND RECEIVED 2,950 3,536 3,242
Dividend income per income statement (refer to note 6) 3,006 3,597 2,747 Dividend accrued for the previous year 1,479 1,535 1,595 Dividend accrued for the current year (1,535) (1,596) (1,100)
Dividend received consists of: 2,950 3,536 3,242
Dividend received from joint venture 2,650 2,825 3,095 Dividend received from subsidiaries 300 711 147
30. FINANCE CHARGES PAID (886) (842) (466)
Finance charges per income statement (1,027) (1,289) (1,460) Non-cash items 141 447 994
Movements in interest accruals (81) 49 255 Net discount amortised 409 568 698 Fair value adjustment (172) (275) (29) Unrealised (loss)/gain (15) 105 70
31. TAXATION PAID (3,852) (1,716) (1,764)
Taxation (payable)/receivable at beginning of year (1,164) 519 (7) South African normal company taxation (excluding deferred taxation) (1,874) (1,879) (1,510) Secondary taxation on companies (295) (363) (156) Taxation (payable)/receivable at end of year (519) 7 (91)
32. DIVIDEND PAID (4,874) (5,858) (3,435)
Dividend payable at beginning of year (4) (15) (20) Declared during the year – dividend on ordinary shares: (4,885) (5,863) (3,438)
Final dividend for 2006: 500 cents (2,714) – – Special dividend for 2006: 400 cents (2,171) – – Final dividend for 2007: 600 cents – (3,198) – Special dividend for 2007: 500 cents – (2,665) – Final dividend for 2008 : 660 cents (3,438)
Dividend payable at end of year 15 20 23 Telkom fins (company) NEW 8/12/09 6:58 PM Page 312
312 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
33. ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY Multi-Links Telecommunications (Proprietary) Limited (Multi-Links) Telkom acquired 75% of the issued share capital of Multi-Links Telecommunications Limited through Telkom International (Proprietary) Limited, from Kenston Investment Limited on May 1, 2007. Telkom also granted Kenston the irrevocable right and option (put option) to require Telkom to acquire all of the shares held by Kenston (25% shareholding) in Multi-Links, at any time during the 90 day period following the second anniversary of the effective date. The put option was exercised on January 21, 2009 for R1,328 million (US$130 million at US$1 = R10,2188).
2007 2008 2009 Rm Rm Rm
34. COMMITMENTS Capital commitments Capital commitments authorised 7,000 7,000 6,991
Commitments against authorised capital expenditure 507 652 539 Authorised capital expenditure not yet contracted 6,493 6,348 6,452
Capital commitments comprise commitments for property, plant and equipment and software included in intangible assets.
Management expects these commitments to be financed from proceeds of Vodacom sale.
2010 FIFA World Cup commitments The FIFA World Cup commitment is an executory contract which requires the Company to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixed- line telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter, Telkom owns a tier 3 sponsorship that grants Telkom a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. Telkom entered into a barter transaction in return for which it has an outstanding commitment to FIFA of R243 million (2008: R260 million). This has been recognised in intangible assets (note 10). Telkom fins (company) NEW 8/12/09 6:58 PM Page 313
Telkom Annual Report 2009 313
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
Total <1 year 1 – 5 years >5 years Rm Rm Rm Rm
34. COMMITMENTS (continued) Operating lease commitments and receivables 2009 Cash flow Land and buildings 432 158 262 12 Rental receivable on buildings (271) (99) (170) (2) Vehicles 1,137 261 876 – Equipment 15 6 9 – Customer premises equipment receivable 88 49 39 –
Total cash flow 1,401 375 1,016 10
The above figures represent actual cash flows relating to operating leases expected during the periods specified. However, due to the straight-lining effect of operating leases, the amounts that would be recognised in the income statement in the periods specified, would be as follows:
Income statement Land and buildings 399 152 237 10 Rental receivable on buildings (250) (96) (153) (1) Vehicles 1,137 261 876 – Equipment 15 6 9 – Customer premises equipment receivable 88 49 39 –
Total to be recognised in the income statement 1,389 372 1,008 9
Vehicles, equipment and customer premises equipment have no fixed annual escalation, therefore the cash flows and income statement recognition would be the same.
2008 Cash flow Land and buildings 366 141 224 1 Rental receivable on buildings (266) (94) (169) (3) Vehicles 1,430 226 1,204 – Equipment 13 10 3 – Customer premises equipment receivable (84) (45) (39) –
Total cash flow 1,459 238 1,223 (2)
Income statement Land and buildings 330 133 196 1 Rental receivable on buildings (246) (92) (152) (2) Vehicles 1,430 226 1,204 – Equipment 13 10 3 – Customer premises equipment receivable (84) (45) (39) –
Total to be recognised in the income statement 1,443 232 1,212 (1) Telkom fins (company) NEW 8/12/09 6:58 PM Page 314
314 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
Total <1 year 1 – 5 years >5 years Rm Rm Rm Rm
34. COMMITMENTS (continued) Operating lease commitments and receivables (continued) 2007 Cash flow Land and buildings 371 134 236 1 Rental receivable on buildings (269) (91) (174) (4) Vehicles 564 564 – – Equipment 23 6 17 – Customer premises equipment receivable (57) (30) (27) –
Total cash flow 632 583 52 (3)
Income statement Land and buildings 332 128 203 1 Rental receivable on buildings (249) (90) (156) (3) Vehicles 564 564 – – Equipment 23 6 17 – Customer premises equipment receivable (57) (30) (27) –
Total to be recognised in the income statement 613 578 37 (2)
Operating leases The Company leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are ten years with other leases signed for five and three years. The majority of the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term.
The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%.
Penalties in terms of the lease agreements are only payable should Telkom vacate the premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the note above. Onerous leases for buildings, of which the Company has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions, refer to note 24.
The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, 2013.
In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airports which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement.
The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually. Telkom fins (company) NEW 8/12/09 6:58 PM Page 315
Telkom Annual Report 2009 315
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
34. COMMITMENTS (continued) Operating leases (continued) The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, 2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24, 2009. In terms of these agreements the leases of individual equipment shall be valid at a fixed fee for the entire period.
Total <1 year 1 – 5 years >5 years Rm Rm Rm Rm Finance lease commitments Vehicles 2009 Minimum lease payments 187 47 140 – Finance charges (38) (15) (23) –
Finance lease obligation 149 32 117 –
2008 Minimum lease payments 242 48 194 – Finance charges (59) (20) (39) –
Finance lease obligation 183 28 155 –
Buildings 2009 Minimum lease payments 1,652 111 545 995 Finance charges (822) (111) (426) (284)
Finance lease obligation 830 – 119 711
2008 Minimum lease payments 1,778 126 502 1,150 Finance charges (936) (114) (439) (383)
Finance lease obligation* 842 12 63 767
2007 Minimum lease payments 1,897 120 487 1,290 Finance charges (1,051) (116) (446) (489)
Finance lease obligation 846 4 41 801
Equipment 2009 Minimum lease payments 7 5 2 – Finance charges (2) (1) (1) –
Finance lease obligation 5 4 1 –
*These prior year figures have been restated to include the finance lease obligation with regard to the Campus property. Telkom fins (company) NEW 8/12/09 6:58 PM Page 316
316 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
Total <1 year 1 - 5 years >5 years Rm Rm Rm Rm
34. COMMITMENTS (continued) Finance lease commitments (continued) Equipment (continued) 2008 Minimum lease payments 16 – 16 – Finance charges (2) – (2) –
Finance lease obligation 14 – 14 –
2007 Minimum lease payments 6 – 6 – Finance charges ––––
Finance lease obligation 6 – 6 –
Finance leases Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013.
A major portion of the finance leases on buildings relates to the sale and lease-back of the Company’s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages.
Finance charges accruing on one of the Company’s building leases exceed the lease payments for the next three years. Minimum lease payments for the next five years do not result in any income accruing to the Company.
Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for the period of three years ending in 2011.
35. CONTINGENCIES Supplier dispute Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator of the International Court of Arbitration, operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration proceeding relates to the cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-to-end customer assurance and activation system by Telcordia.
In September 2002, the arbitrator found that Telkom had wrongfully repudiated the contract and a partial award was issued by the arbitrator in favour of Telcordia. Telkom subsequently filed an application in the South African High Court to review and set aside the partial award.
On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of Telkom. On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom.
On November 29, 2004, the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey. Telkom fins (company) NEW 8/12/09 6:58 PM Page 317
Telkom Annual Report 2009 317
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Supplier dispute (continued) The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following the successful upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving around the Supreme Court of Appeals’ failure to recognise Telkom’s rights of access to the courts under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom’s appeal with costs. The Constitutional Court judgment brought to finality the dispute over the merits of Telcordia’s claim against Telkom and the parties reconvened the arbitration in May 2007 to deal with the amount of damages to which Telcordia is entitled.
Two hearings were held at the International Dispute Resolutions Centre, or IDRC. The first hearing was held in London on May 21, 2007 and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the damages hearing.
The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the application by Telcordia for the striking out of part of Telkom’s defence on the basis that Telkom had raised issues in its defence that had already been heard by the arbitrator prior to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for determination of the damages.
The mediation took place in London in February and April of 2008 without success. In the interim the parties have agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was held before the arbitrator in October 2008 during which the arbitrator permitted Telkom to amend its statement of defence. Further hearings were held before the software expert in November 2008 and he has made his report available. Further hearings took place before the arbitrator in April 2009.
The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers) before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact on the quantum of the other claims. The arbitrator has confirmed that the final hearing will be from January 25 to February 10, 2010 in Johannesburg.
Although Telkom is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. Telkom will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above Telkom’s provision would increase Telkom’s liabilities and decrease its net profit, which could have a material adverse effect on its financial condition, cash flows and results of operations.
A provision has been raised based on management’s best estimate of the probable payments in this regard.
2007 2008 2009 Rm Rm Rm
Supplier dispute liability included in current portion of provisions 527 569 664*
The provision has increased from March 31, 2007 due to exchange rate movements. * US$70 million (2008: US$70 million; 2007 US$70 million). Telkom fins (company) NEW 8/12/09 6:58 PM Page 318
318 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Competition Commission Telkom is a party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging anti-competitive practices described below. If Telkom were found to have committed prohibited practices as contained in the Competition Act, 1998, as amended, Telkom could be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender.
On July 31, 2008, Telkom received a summons issued by the Competition Commission requesting information in connection with investigations being conducted by the Competition Commission into five complaints against Telkom described in greater detail below by the Internet Service Association, MWEB, Internet solutions and Verizon SA Limited. The summons was subsequently withdrawn by the Competition Commission following on agreement with Telkom in a co-operative process with the Competition Commission as part of the Competition Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar year.
As competition continues to increase, we expect that we will become involved in an increasing number of disputes regarding the legality of services and products provided by us and third parties. These disputes may range from court lawsuits to complaints lodged by or against us with various regulatory bodies. We are currently unable to predict the amount that we may eventually be required to pay in these proceedings, however, we have not included provisions for any of these claims in our financial statements. In addition, we may need to spend substantial amounts defending or prosecuting these claims even if we are ultimately successful. If Telkom is required to cease these practices, divest itself of the relevant businesses or pay significant fines, Telkom’s business and financial condition could be materially adversely affected and its revenue and net profit could decline. We may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause our indebtedness to increase.
Independent Cellular Services Provider Association of South Africa (ICSPA) In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the ‘premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by Telkom. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to its High Court application in respect of utilisation of the ‘premicell’ device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. Telkom filed its answering affidavit on November 28, 2003. ICSPA has taken no further action since then.
The South African Value Added Network Services (SAVA) On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed complaints against Telkom at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom’s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom fins (company) NEW 8/12/09 6:58 PM Page 319
Telkom Annual Report 2009 319
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Competition Commission (continued) The South African Value Added Network Services (SAVA) (continued) Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the South African High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the review application, Telkom also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application and filed an answering affidavit.
The main complaint at the Competition Commission was held over pending the outcome of the review application.
The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the Competition Commission to refer the SAVA complaints and the Omnilink complaint against Telkom discussed below to the Competition Tribunal. The decision was made based on three grounds, namely that:
• the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA;
• the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission was allowed to investigate the complaints were invalid; and
• the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in the SAVA complaints.
The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to deal with competition matters in the electronic communications industry).
On july 3, 2008, the Competition Commission filed an application for leave to appeal the decision of the High Court on the basis that the judge erred on the issue of bias as well as his finding that issues surrounding the extension of time to investigate the issues constitutes a ground for review. Telkom then filed an application for leave to cross-appeal on July 11, 2008. The main basis of Telkom’s cross-appeal is that Telkom believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending the outcome of the appeal and cross-appeal.
This matter is not expected to be finalised within the 2010 financial year.
Omnilink On August 22, 2002, Omnilink filed a complaint against Telkom at the Competition Commission alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above. Telkom fins (company) NEW 8/12/09 6:58 PM Page 320
320 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Competition Commission (continued) Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom’s discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s Cellsaver discount plan.
The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there have been no further developments on this matter.
The Internet Service Providers Association (ISPA) In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information.
MWEB and Internet Solutions (IS) On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the architecture of Telkom’s ADSL access route and the manner in which internet service providers can only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth on Telkom’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS and MWEB’s replying affidavit.
Since then, Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application.
MWEB On June 5, 2007, MWEB brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim relief against Telkom to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. MWEB further applied for an order that Telkom implement the migration of end customers from Telkom PSTS ADSL access to MWEB without interruption of the service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over” as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB. Telkom fins (company) NEW 8/12/09 6:58 PM Page 321
Telkom Annual Report 2009 321
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Competition Commission (continued) MWEB (continued) The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by Telkom. The parties are in further negotiations.
Verizon SA Limited (Verizon) Verizon filed a complaint against Telkom on March 22, 2007 alleging that Telkom charges an excessive price on services rendered to Verizon, thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in offering prices to end-users which are lower than the prices at which it sells rights of access to its infrastructure on a wholesale basis to Verizon, and that Telkom engages in price discrimination against Verizon.
Internet Solutions (IS) IS filed a complaint against Telkom at the Competition Commission during December 2007. The complaint alleges abusive conduct by Telkom. IS specifically alleges that Telkom is charging excessive prices that bear no reasonable relation to the economic value of the goods or services, that Telkom has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients; engaging in margin squeeze, that Telkom has introduced a series of bundled products (namely Telkom Closer Products) that limit the ability of rivals in particular markets to compete effectively, and Telkom is offering discriminatory prices in relation to a number of infrastructural and service items that IS is compelled to purchase from Telkom.
While that complaint was being investigated by the Competition Commission, IS brought an application to the Competition Commission for interim relief requesting: that Telkom be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private network services to its customers no higher than the lowest retail price for such connection charged to Telkom’s VPN Supreme customers and ordering that the costs of the application be paid by Telkom.
Telkom opposed the application by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the interim relief application to date.
Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi) Maredi served a notice of motion on Telkom, Ericsson SA and Telsaf Data (Pty) Limited on January 8, 2009. The matter relates to a tender published by Telkom for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson. Telkom fins (company) NEW 8/12/09 6:58 PM Page 322
322 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
35. CONTINGENCIES (continued) Competition Commission (continued) Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi) (continued) Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent Telkom from entering into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender. Maredi also requested an order that the court review and set aside the award of the tender to Telsaf and Ericsson or either of the aforementioned parties, and refer the tender back to Telkom in order for Telkom to reconsider its award. Maredi alleged that there were certain irregularities in the tender process in that Telkom did not follow fair procedures by failing to comply with its own mandatory procedural requirements, that Telkom acted arbitrarily and in bad faith, that Telkom was biased in favour of Ericsson and that Ericsson should have been disqualified as it failed to meet Telkom’s critical criteria as set out in the tender.
Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations by Maredi of compliance by them to the technical critical criteria, were refuted by Telkom. Telkom and Ericsson opposed the application and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the ordinary course and Telkom is opposing the application.
Telkom is not currently able to predict when these disputes may be resolved or the amount that it may eventually be required to pay, however, it has not included provisions for all of these claims in its annual financial statements. In addition, Telkom may need to spend substantial amounts defending or prosecuting these claims even if it was ultimately successful. If Telkom were to lose these or future legal and arbitration proceedings, it could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause its revenue and net profit to decline and have a material adverse impact on its business and financial condition. Telkom may be required to fund any penalties or damages from cash flows or drawings on its credit facilities, which could cause its indebtedness to increase.
Telkom is party to various additional proceedings and lawsuits in the ordinary course of its business, which management does not believe will have a material adverse impact on Telkom.
Negative working capital ratio At each of the financial periods ended March 31, 2009, 2008 and 2007 the Company had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities. Telkom fins (company) NEW 8/12/09 6:58 PM Page 323
Telkom Annual Report 2009 323
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
36. DIRECTORS’ INTERESTS ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom’s Board members, are the South African Government’s representative on Telkom’s Board of Directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%, 2007: 38.83%) of Telkom’s shares.
B Molefe is a Public Investment Corporation (‘PIC’) representative on Telkom’s Board of Directors. As at March 31, 2009 the PIC held 15.63% (2008: 15.23%, 2007: 15.27%) of Telkom’s shares.
Beneficial Non-beneficial Direct Indirect Direct Indirect
Directors’ shareholding (Number of shares) 2009 Executive RJ September 90,815 1,820 – – PG Nelson 19,182 – – –
109,997 1,820 – –
Non-executive PG Joubert – 15,000 – – D Barber – 1,200 – –
– 16,200 – –
2008 Executive RJ September 7,155 – – –
Total 7,155 – – –
2007 Non-executive TF Mosololi 455 – – –
Total 455 – – –
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been reflected in the above information.
2007 2008 2009 Rm Rm Rm
Directors’ emoluments 7 36 20
Executive For services as directors 4 31 15 Non-executive For services as directors 3 5 5 Telkom fins (company) NEW 8/12/09 6:58 PM Page 324
324 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
36. DIRECTORS’ INTERESTS (continued) Directors’ emoluments (continued) Performance Fringe and Fees Remuneration bonus other benefits Total RRRRR 2009 Emoluments per director: Non-executive 5,028,084 – – – 5,028,084
ST Arnold 1,030,000 – – – 1,030,000 B du Plessis 498,000 – – – 498,000 PSC Luthuli 642,000 – – – 642,000 KST Matthews 441,000 – – – 441,000 B Molefe 159,551 – – – 159,551 AG Rhoda 124,001 – – – 124,001 RJ Huntley 533,000 – – – 533,000 Dr E Spio-Garbrah** 622,750 – – – 622,750 Dr VB Lawrence** 359,000 – – – 359,000 DD Barber 293,667 – – – 293,667 PG Joubert 302,778 – – – 302,778
Executive – 4,530,912 2,289,947 7,848,357 14,669,216
RJ September* – 3,555,800 1,841,396 7,430,452 12,827,648 PG Nelson* – 975,112 448,551 417,905 1,841,568
Total emoluments – paid by Telkom 5,005,747 4,530,912 2,289,947 7,848,357 19,674,963
2008 Emoluments per director: Non-executive 4,633,933 – – – 4,633,933
ST Arnold 1,124,373 – – – 1,124,373 B du Plessis 393,967 – – – 393,967 MJ Lamberti – – – – – PSC Luthuli 502,117 – – – 502,117 TD Mahloele 357,684 – – – 357,684 KST Matthews 501,217 – – – 501,217 TF Mosololi 174,960 – – – 174,960 M Mostert *** 229,433 – – – 229,433 DD Tabata 250,583 – – – 250,583 YR Tenza 305,633 – – – 305,633 PL Zim 5,333 – – – 5,333 B Molefe 20,497 – – – 20,497 A Rhoda 14,286 – – – 14,286 RJ Huntley 193,833 – – – 193,833 Dr E Spio-Garbrah** 273,841 – – – 273,841 Dr VB Lawrence** 286,176 – – – 286,176
Executive – 14,489,833 3,436,308 13,244,896 31,171,037
RJ September* – 2,453,757 3,436,308 13,218,772 19,108,837
CEO – 1,016,524 3,436,308 10,438,538 14,891,370 Acting CEO – 1,437,233 – 2,780,234 4,217,467
LRR Molotsane* – 12,036,076 – 26,124 12,062,200
Total emoluments – paid by Telkom 4,633,933 14,489,833 3,436,308 13,244,896 35,804,970 Telkom fins (company) NEW 8/12/09 6:58 PM Page 325
Telkom Annual Report 2009 325
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
36. DIRECTORS’ INTERESTS (continued) Directors’ emoluments (continued) Performance Fringe and Fees Remuneration bonus other benefits Total RRRRR 2007 Emoluments per director: Non-executive 2,641,168 – – – 2,641,168
NE Mtshotshisa 463,050 – – – 463,050 ST Arnold 353,719 – – – 353,719 TCP Chikane 32,670 – – – 32,670 B du Plessis 213,367 – – – 213,367 PSC Luthuli 205,417 – – – 205,417 TD Mahloele 166,667 – – – 166,667 K Matthews 109,643 – – – 109,643 TF Mosololi 214,417 – – – 214,417 M Mostert 232,417 – – – 232,417 DD Tabata 175,367 – – – 175,367 YR Tenza 321,767 – – – 321,767 PL Zim 152,667 – – – 152,667
Executive – 2,272,785 – 1,653,202 3,925,987
LRR Molotsane* – 2,272,785 – 1,653,202 3,925,987
Total emoluments – paid by Telkom 2,641,168 2,272,785 – 1,653,202 6,567,155
* Included in fringe and other benefits is a pension contribution for LRR Molotsane of RNil (2008: R4,690; 2007: R295,462), RJ September of R462,254 (2008: R280,261; 2007: RNil) and PG Nelson of R126,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the Telkom Re tirement Fund. ** Foreign directors. *** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the Company and the shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During 2008 M Mostert led all efforts in this regard and was remunerated accordingly. Moreover in compliance with the principles of good governance, the Board took legal advice and established that there was no conflict of interest arising out of his involvement in the transaction evaluated. Telkom fins (company) NEW 8/12/09 6:58 PM Page 326
326 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
37. RELATED PARTIES Details of material transactions and balances with related parties not disclosed separately in the annual financial statements were as follows: 2007 2008 2009 Rm Rm Rm With joint venture: Vodacom Group (Proprietary) Limited Related party balances Trade receivables 122 99 121 Dividend receivable 1,450 1,595 1,100 Trade payables (706) (691) (650)
Related party transactions Revenue (1,510) (1,632) (1,781) Expenses 2,974 3,050 3,066 Dividend received (2,700) (2,970) (2,600) Audit fees 6 5 4
Revenue includes interconnect fees and lease and installation of transmission lines.
Expenses mostly represent interconnect expenses.
With shareholders: Public Investment Corporation There were no material transactions between the Company and the Public Investment Corporation.
Government Related party balances Trade receivables 271 326 386
Related party transactions Revenue (2,458) (2,623) (2,767)
With subsidiaries: Trudon Proprietary Limited (formerly trading as TDS Directory Operations (Proprietary) Limited) Related party balances Trade receivables 6 7 10 Trade payables (100) (151) (141) Dividend receivable 84 – –
Related party transactions Revenue (57) (59) (62) Expenses 12 20 15 Dividend received (149) (120) (47) Telkom fins (company) NEW 8/12/09 6:58 PM Page 327
Telkom Annual Report 2009 327
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
37. RELATED PARTIES (continued) With subsidiaries: (continued) Swiftnet (Proprietary) Limited Related party balances Trade receivables – – 1 Trade payables (14) (12) (15) Loan from subsidiary – – 10
Related party transactions Revenue (16) (18) (17) Expenses ––1 Income includes data calls and billing fees.
Rossal No 65 (Proprietary) Limited Related party balances Accruals and other payables (148) – (342) Loan to subsidiary – 30 –
The loan is unsecured, interest-free and has no fixed repayment terms. The loan has been subordinated in favour of other creditors.
Related party transactions Dividend paid 110 115 59 Dividend received (56) (290) (29)
Acajou Investments (Proprietary) Limited Related party balances (Accruals and other payables)/receivables (98) – 285
Related party transactions Dividend paid 98 119 72 Dividend received (100) (217) (71)
Intekom (Proprietary) Limited Related party balances Accruals and other payables (5) (13) (23)
Related party transactions Expenses 7 8 10
Q-Trunk (Proprietary) Limited Related party balances Loan to subsidiary 30 26 22 Impairment of loan (30) (26) (22)
The loan is unsecured, interest-free and has no fixed repayment terms. The loan has been subordinated in favour of other creditors.
Related party transactions Expenses 6 6 6 Telkom fins (company) NEW 8/12/09 6:58 PM Page 328
328 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
37. RELATED PARTIES (continued) With subsidiaries: (continued) Special purpose entity – cell captive Related party balances Investment – sinking fund (refer to note 11) 535 535 535
Related party transactions Investment income (19) – –
Africa Online Limited (Africa Online) Related party balances Loan to subsidiary – 74 236 Trade receivables – – 4 Trade payables – (4) –
Related party transactions Revenue – (4) – Investment income – (2) (11)
The loan is unsecured and bears interest at 3 month US$ LIBOR plus 5%. The loan has no fixed repayment terms.
Multi-Links Telecommunications (Proprietary) Limited (Multi-Links) Related party balances Loan to subsidiary – 840 5,225 Trade receivables – – 75 Trade payables – (21) –
Related party transactions Revenue – (21) (55) Investment income – (34) (178)
The loan is unsecured and bears interest at 3 month US$ LIBOR plus 5%. The loan may be prepaid in full or in whole, provided that each part prepayment may not be less than US$1 million. The advances must be repaid on May 1, 2009, July 1, 2009 and January 29, 2010.
Telkom International (Proprietary) Limited Related party transactions Loan to subsidiary – 1,985 1,985 Impairment of loan – – (874)
The loan has been used to purchase a 75% shareholding in Multi-Links Telecommunications (Proprietary) Limited. The loan is unsecured and has no fixed repayment term. Telkom fins (company) NEW 8/12/09 6:58 PM Page 329
Telkom Annual Report 2009 329
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
2007 2008 2009 Rm Rm Rm
37. RELATED PARTIES (continued) With subsidiaries: (continued) Telkom Media (Proprietary) Limited Related party transactions Loan to subsidiary – 326 471 Impairment of loan – (217) (471)
The loan is interest-free and has no repayment terms.
Telkom Foundation Related party transactions Expenses 54 58 54
With entities under common control: Major public entities Related party balances Trade receivables 51 26 50 Trade payables (2) (5) (3)
The outstanding balances are unsecured and will be settled in cash in the ordinary course of business.
Related party transactions Revenue (400) (485) (445) Expenses 206 201 180 Rent received (29) (21) (20) Rent paid 18 18 19
Income with major public entities for the year ended March 31, 2007 has been restated due to additional BAN numbers being included in our calculation of income with major public entities. The effect of this is only on the disclosure of the related party note and has a RNil effect on the Company’s profit.
Key management personnel compensation: (Including directors’ emoluments) Related party transactions Short-term employee benefits 108 114 54 Post-employment benefits 3 3 5 Termination benefits – 27 – Equity compensation benefits 8 24 36
The fair value of the shares that vested in the current year is R11 million (2008: R12 million; 2007: RNil). Telkom fins (company) NEW 8/12/09 6:58 PM Page 330
330 Telkom Annual Report 2009
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
37. RELATED PARTIES (continued) Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above, outstanding balances at the year end are unsecured, interest-free (except for interest charged on overdue telephone accounts) and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million (US$3 million) provided to Africa Online Limited, there have been no guarantees provided or received for related party receivables or payables. Except as indicated above for the year ended March 31, 2009, the Company has not impaired any amounts owed by related parties (2008: RNil; 2007: RNil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
38. SIGNIFICANT EVENTS Telkom Renaissance On November 14, 2008, Telkom’s Board of Directors approved the new organisation structure which is designed to fit Telkom’s defend and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called Telkom Renaissance.
The Group has been restructured into three operating Business Units namely Telkom South Africa, Telkom International and Telkom Data Centre Operations. The Telkom Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling, reorganising, revitalising and re-engineering happens in order to make the new structure function optimally.
This initiative is a complete transformation of the way Telkom focuses on servicing its customers and creating value for its stakeholders. It is a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of Telkom’s strategy to maintain and grow market share in South Africa whilst building a strong footprint on the African continent.
Capability Management Telkom will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its transforming information, communications and technology business.
The transformation of the communications industry and increasing market and competitive pressure has put communication companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result capability management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. Capability management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service provider relationships improving performance in other functional areas.
Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service delivery across Telkom.
Given the challenges Telkom faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial, operational and transformational targets, customer expectations and shareholder expectations are met.
The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will focus on the following:
• Identify and assess existing capabilities;
• Establish a Telkom Capability Inventory;
• Determine future capability requirements;
• Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and Telkom fins (company) NEW 8/12/09 6:58 PM Page 331
Telkom Annual Report 2009 331
Notes to the annual financial statements (continued) for the three years ended March 31, 2009
38. SIGNIFICANT EVENTS (continued) Capability Management (continued) • Enable Telkom South Africa, Telkom International and Telkom Data Centre Operations to: – Improve resource efficiency; – Improve capital productivity; and – Improve service delivery.
A memorandum of understanding was entered into between Telkom and organised labour which included issues such as the deferment of the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a restructuring forum where all restructuring initiatives will be debated between the parties concerned.
Telkom Management Services (Proprietary) Limited (TMS) TMS was registered as a company during August 2008. Telkom’s Board approved the establishment of TMS as a part of Telkom’s strategic plan to grow revenue and expand geographic reach.
Appointment of director On November 10, 2008, Telkom announced the appointment of Mr Peter Nelson as Chief Financial Officer and director of the Company with effect from December 8, 2008.
39. SUBSEQUENT EVENTS Dividends The Telkom Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on July 17, 2009.
Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited On November 10, 2008, Telkom International (Proprietary) Limited, a wholly owned subsidiary of Telkom, announced it had entered into agreements to acquire 100% of MWEB Africa Limited (‘MWEB Africa’) and 75% of MWEB Namibia (Proprietary) Limited (’MWEB Namibia‘) . The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million (approximately R498 million) with a deferred payment of US$14,18 million due when the profits of MWEB Group for the year ended March 31, 2009 are finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited respectively, which are members of the Naspers Limited Group.
MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in Botswana and distributors in 26 sub-Saharan African countries.
The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions.
The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being obtained in certain African jurisdictions.
Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled.
AT&T strategic agreement On April 16, 2009, Telkom and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s global networking reach to sub-Saharan Africa and boost Telkom’s strategy to grow a strong ICT footprint on the African continent. The agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services to multinational customers, ether based in or seeking to extend their operations in sub-Saharan Africa.
Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would
• directly connect the Telkom regional network and the AT&T global network;
• deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points;
• enhance mobile service capabilities for corporate customers in sub-Saharan Africa;
• extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered in or seeking to expand sites in sub-Saharan Africa;
• explore other potential opportunities in areas such as Telepresence, hosting and professional services; and
• expand the existing global wholesale voice services relationship between Telkom Group and AT&T. Telkom fins (company) NEW 8/12/09 6:58 PM Page 332
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Notes to the annual financial statements (continued) for the three years ended March 31, 2009
39. SUBSEQUENT EVENTS (continued) Telkom Media (Proprietary) Limited (Telkom Media) On August 31, 2006, Telkom created a new subsidiary, Telkom Media (Proprietary) Limited, with a black economic empowerment (‘BEE’) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.
On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum. Telkom Media did not meet the held for sale criteria at year end as management were unable to sell the disposal group for its expected price and therefore decided to abandon it.
Subsequent to year end Telkom was approached by potential buyers of Telkom’s interest in Telkom Media and negotiations with the potential buyer were concluded. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Proprietary) Limited for a nominal amount.
Disposal and unbundling of stake in Vodacom In 2008 Telkom announced a decision to dispose of its entire stake in Vodacom through selling of 15% of its stake to Vodafone, a wholly owned subsidiary of Vodafone Group plc and unbundling its remaining 35% stake to its shareholders pursuant to a listing of Vodacom on the main board of JSE Limited.
On May 18, 2009 Vodacom was successfully listed on the main board of the JSE Limited and a special dividend of R19 was distributed to all Telkom shareholders. Telkom successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009.
Bookbuilding of Vodacom Group (Proprietary) Limited shares On June 2, 2009, Telkom announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million for "ineligible shareholders". The directors of Telkom, in consultation with Vodafone, determined that Telkom shareholders in the United States of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of Telkom, which was completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions.
The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in proportion to their entitlement to Vodacom shares.
New York Stock Exchange listing Given the current global economic climate and the absolute necessity for Telkom to reduce its cost profile, the Board has decided to delist from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict governance compliance and transparent financial reporting.
Telkom is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global investors. Telkom intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United States of America.
Telkom Communications International (Proprietary) Limited The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that Telkom Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009.
Other matters The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Company and the results of its operations. Telkom fins (company) NEW 8/12/09 6:58 PM Page 333
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Notes to the annual financial statements (continued) for the three years ended March 31, 2009
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Company has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective: IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS financial statements) as one of the following amounts:
• Cost determined in accordance with IAS27
• At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments: Recognition and Measurement
• The previous GAAP carrying amount of the investment at the date of transition to IFRS
This determination is made for each investment, rather than being a policy decision.
The amendment does not have an impact on the annual financial statements.
IFRS2 Share-based Payment: Vesting Conditions and Cancellations (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. The amendment will not have a material impact on the Company’s financial statements.
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended) This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not have a material impact on the Company’s financial statements.
IFRS3 Business Combinations (revised) The revisions are effective for annual periods beginning on or after July 1, 2009 .The revised standard still applies the acquisition method of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The revised standard will not have an impact on the annual financial statements.
IFRS7 Financial Instruments: Disclosures (amended) The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.
IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.
IFRIC9 Reassessment of Embedded Derivatives (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives. Telkom fins (company) NEW 8/12/09 6:58 PM Page 334
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Notes to the annual financial statements (continued) for the three years ended March 31, 2009
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale. IFRIC13 is not relevant to the Company’s operations because none of the Company’s companies operate any loyalty programmes.
Where the cost of fulfilling the awards is expected to exceed the consideration received, the entity will have to recognise an onerous contract liability. The impact of this amendment is being evaluated.
IFRIC15 Agreements for the Construction of Real Estate The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue.
This interpretation is not relevant to the Company’s operations as the Company does not construct real estates.
IFRIC16 Hedges of a Net Investment in a Foreign Operation The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group. The interpretation will not have an impact on the Company’s financial statements.
IFRIC17 Distributions of Non-Cash Assets to Owners The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or a cash alternative. The impact of the amendment is being evaluated.
IFRIC 18 Transfer of Assets from Customers The interpretation is effective for annual periods beginning on or after July 1, 2009.
IFRIC18 clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment (‘PPE’) 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. The IFRIC also provides guidance where an entity receives cash from a customer that must be used only to acquire or construct an item of PPE in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services. The impact of this interpretation is currently being evaluated.
IAS1 Presentation of Financial Statement (revised) The revised standard is effective for annual periods beginning on or after January 1, 2009.
IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement by different names: the ‘statement of financial position’ and ‘statement of cash flows’, respectively. The revision to the standard will result in changes in the way the annual financial statements are presented.
IAS7 Cash Flow Statement: Consequential Amendments arising from Amendments to IAS16 The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating activities. The impact of this amendment is being evaluated.
IAS23 Borrowing Costs (revised) The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets to be capitalised. The Company does not expect the adoption of the standard to have a material impact. Telkom fins (company) NEW 8/12/09 6:58 PM Page 335
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Notes to the annual financial statements (continued) for the three years ended March 31, 2009
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IAS27 Consolidated and Separate Financial Statements (revised) The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated.
IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following changes in respect of the holding company’s separate financial statements:
• The deletion of the ‘cost method’. Making the distinction between pre- and post-acquisition profits is no longer required. All dividends will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment; and
• In cases of reorganisations where a new parent is inserted above an existing parent of the Group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. The impact of this amended standard is currently being evaluated.
Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity only on liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amended standard is being evaluated.
IAS39: Financial Instruments: Recognition and Measurement (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives.
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended) The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The amendment will not have an impact on the financial statements as Telkom does not apply hedge accounting. Telkom fins (company) NEW 8/12/09 6:58 PM Page 336
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Notes to the annual financial statements (continued) for the three years ended March 31, 2009
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) Changes as a result of the annual improvements project A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1, 2009. These standards were as follows:
IFRS5 Non-Current Assets Held for Sale and Discontinued Operations IAS1 Presentation of Financial Statements IAS16 Property, Plant and Equipment IAS19 Employee Benefits IAS20 Accounting for Government Grants and Disclosure of Government Assistance IAS23 Borrowing Costs IAS27 Consolidated and Separate Financial Statements IAS28 Investments in Associates IAS29 Financial Reporting in Hyperinflationary Economies IAS31 Interests in Joint Ventures IAS36 Impairment of Assets IAS38 Intangible Assets IAS39 Financial Instruments: Recognition and Measurement IAS40 Investment Property IAS41 Agriculture.
The Company will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted during the 2011 financial year. The Company is currently evaluating the effects of the amendments. Telkom fins (company) NEW 8/12/09 6:58 PM Page 337
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Shareholder analysis at March 31, 2009
Number of shareholders % Holdings %
Range of shareholders 1 – 100 shares 68,789 71.69 2,392,802 0.46 101 – 1 000 shares 24,353 25.38 6,839,429 1.31 1 001 – 10 000 shares 2,031 2.12 5,683,371 1.09 10 001 – 50 000 shares 380 0.40 9,281,138 1.78 50 001 – 100 000 shares 157 0.16 11,252,414 2.16 100 001 – 1 000 000 shares 217 0.23 59,384,767 11.40 1 000 001 and more shares 33 0.03 425,949,977 81.80
95,960 100.00 520,783,898 100.00
Type of shareholder Banks 147 0.15 56,436,518 10.84 Close corporations 163 0.17 236,071 0.05 Empowerment 1 0.00 37,506,809 7.20 Endowment funds 232 0.24 734,227 0.14 Individuals 91,625 95.48 11,570,245 2.22 Insurance companies 78 0.08 26,072,715 5.01 Investment companies 67 0.07 13,538,084 2.60 Medical aid schemes 20 0.02 437,317 0.08 Mutual funds 422 0.44 40,790,503 7.83 Nominees and trusts 2,438 2.54 2,869,011 0.55 Other corporations (including the Government of the Republic of South Africa) 126 0.13 207,218,515 39.79 Own holdings 2 0.00 19,790,236 3.80 Retirement funds 350 0.36 101,615,937 19.51 Private companies 263 0.27 1,583,493 0.30 Public companies 25 0.03 375,871 0.07 Share trusts 1 0.00 8,346 0.00
95,960 100.00 520,783,898 100.00
Geographical holdings by owner South Africa 95,522 99.54 447,187,584 85.87 United States 128 0.13 51,178,233 9.83 United Kingdom 99 0.10 15,573,222 2.99 Europe 65 0.07 5,506,841 1.06 Other 146 0.15 1,338,018 0.26
95,960 100.00 520,783,898 100.00
Beneficial shareholders of more than 2% The government of the Republic of South Africa 207,038,058 39.76 Black Ginger 33 (Proprietary) Limited 46,604,996 8.95 Public Investment Corporation 34,773,817 6.67 Elephant Consortium NewShelf 772 (Proprietary) Limited 37,506,809 7.20 Liberty Group 18,151,712 3.49 Rossal No 65 (Proprietary) Limited Equities 11,646,680 2.24
355,722,072 68.31 Telkom fins (company) NEW 8/12/09 6:58 PM Page 338
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Shareholder analysis continued at March 31, 2009
Holdings %
Public and non-public shareholders Non-public shareholders 260,388,774 50.78
The Government of the Republic of South Africa 207,038,058 39.76 Empowerment 37,506,809 7.20 Government buffer account 9,461 0.00 Diabo share trust 8,346 0.00 Telkom Treasury Stock 19,790,236 3.80 Executive and non-executive directors* 83,544 0.02 Subsidiaries directors* 24,098 0.00
Public shareholders Institutional and retail investors 256,323,346 49.22
520,783,898 100.00
* Director holdings consists of direct and indirect holdings. The information above is based on registered shareholders, except where only beneficial shareholders’ information was available. Telkom fins (company) NEW 8/12/09 6:58 PM Page 339
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Definitions
3G CARRIER PRE-SELECTION The generic term, 3G, is used to denote the next generation of mobile Carrier pre-selection is usually initiated by the telecoms Regulator. systems designed to support high-speed data transmission (144 Kbps It enables individuals to choose which telecom will carry their traffic and higher) and Internet Protocol (IP)-based services in fixed, portable (mainly long distance) by a signalling contract rather than having to and mobile environments. As envisaged by the ITU, the 3G system will dial extra digits. integrate different service coverage zones and be a global platform and the necessary infrastructure for the distribution of converged CDMA (CODE DIVISION MULTIPLE ACCESS) service, whether mobile or fixed, voice or data, telecommunications, CDMA is one of many technologies for digital transmission of radio content or computing. signals between, for example, mobile telephones and radio base stations. In CDMA, which is a spread-spectrum modulation technology, ADSL (ASYMMETRICAL DIGITAL SUBSCRIBER LINE) each call is assigned a unique “pseudorandom” sequence of ADSL is a broadband access standard which uses existing copper lines frequency shifts that serve as a code to distinguish it. The mobile phone to offer high-speed digital connections over the local loop. ADSL is then instructed to decipher only a particular code to pluck, as it were, transmits data asymmetrically, meaning that the bandwidth usage is the right conversation off the air. much higher in one direction than the other. ADSL provides greater bandwidth from the exchange to the customer (ie. downloading) than CIRCUIT from the customer to the exchange (ie. sending). A circuit is a connection or line between two points. This connection can be made through various media, including copper, coaxial cable, ARPU fibre or microwave. A telephone exchange is a circuit switch. Vodacom’s average monthly revenue per customer, or ARPU, is calculated by dividing the average monthly revenue during the period DECT (DIGITAL ENHANCED CORDLESS by the average monthly total reported customer base during the period. TELECOMMUNICATIONS) ARPU excludes revenue from equipment sales, other sales and services DECT is the standard for cordless telephones. DECT phones and revenue from national and international users roaming on communicate using the PSTN (public switched telephone network) Vodacom’s networks. through a small base station in the home or office and have a working radius of between 50 and 300 metres. ATM (ASYNCHRONOUS TRANSFER MODE) ATM is a high-speed Wide Area Network (WAN), connection- EBITDA oriented, packet-switching data communications protocol that allows EBITDA represents profit for the year before taxation, finance charges, voice, data and video to be delivered across existing local and Wide investment income and depreciation, amortisation, impairment and Area Networks. ATM divides data into cells and can handle data write-offs. traffic in bursts. It is asynchronous, in that the stream of cells from one EDGE (ENHANCED DATA FOR GSM EVOLUTION) particular user is not necessarily continuous. EDGE is a technology designed to enhance GSM and TDMA systems BANDWIDTH with respect to data rates and is widely considered to be the GSM Bandwidth is a measure of the quantity of signals that can travel over evolution beyond GPRS. It enhances the data capabilities of GSM and a transmission medium such as copper or a glass fibre strand. It is the TDMA systems by altering the RF modulation scheme to allow greater available space available to carry a signal. The greater the data rates per time slot. Because it uses a different modulation bandwidth, the greater the information carrying capacity. Bandwidth is technique across the air-interface, EDGE requires different mobile measured in bits per second. terminals/ handsets than those designed for the GSM air-interface.
BROADBAND EFFECTIVE TAX RATE Broadband is a method of measuring the capacity of different types of The effective tax rate is the tax charge in the income statement divided transmission. Digital bandwidth is measured in the rate of bits by pre-tax profit. transmitted per second (bps). For example, an individual ISDN channel ETHERNET has a bandwidth of 64 Kbps, meaning that it transmits 64,000 bits Ethernet is a protocol that defines how data is transmitted to and (digital signals) every second. received from LANs. It is the most prevalent LAN protocol, with speeds CAGR of up to 10 Mbps. Compound Annual Growth Rate. Telkom fins (company) NEW 8/12/09 6:58 PM Page 340
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Definitions continued
EVDO (EVOLUTION-DATA OPTIMISED OR EVOLUTION- local area networks and between end-points in a wide area network. DATA ONLY) The network effectively provides a permanent circuit, which means that EVDO is a telecommunications standard for the wireless transmission of the customer sees a continuous, dedicated connection, but does not data through radio signals, typically for broadband Internet access. pay for a full-time leased line. It uses multiplexing techniques including code division multiple access GPRS (GENERAL PACKET RADIO SERVICE) (CDMA) as well as time division multiple access (TDMA) to maximise GPRS is a packet rather than a circuit-based technology. GPRS allows both individual user’s throughput and the overall system throughput. for faster data transmission speed to both GSM and TDMA (IS-136) FIBRE OPTICS networks. GPRS is a packet-switched technology that overlays the Fibre optics is where messages or signals are sent via light rather than circuit-switched GSM network. The service can be introduced to electrical signals down a very thin strand of glass. Light transmission cellular networks by infrastructure. enables much higher data rates than conventional wire, coaxial cable GSM (GLOBAL SYSTEM FOR MOBILE) and many forms of radio. Signals travel at the speed of light and do GSM is a second generation digital mobile cellular technology using not generate nor are subject to interference. a combination of frequency division multiple access (FDMA) and time FIBRE RINGS division multiple access (TDMA). GSM operates in several frequency Fibre rings have come to be used in many fibre networks as it provides bands: 400 MHz, 900 MHz and 1800 MHz. On the TDMA side, more network resiliency: if there is a failure along a route and a ring is there are eight timeslots or channels carrying calls, which operate on broken, the direction of the traffic can be reversed and the traffic will the same frequency. Unlike other cellular systems, GSM provides a still reach its final destination. high degree of security by using subscriber identity module (SIM) cards and GSM encryption. FIXED ACCESS LINES Fixed access lines are comprised of public switched HSDPA telecommunications network lines, or PSTN lines, including integrated High Speed Downlink Packet Access. services digital network channels, or ISDN channels, and public and IAS private payphones, but excluding internal lines in service. International Accounting Standards. FIXED ACCESS LINES PER EMPLOYEE IFRS To calculate the number of access lines per employee the total number International Financial Reporting Standards. of access lines is divided by the number of employees at the end of the period. INTERCONNECTION Interconnection refers to the joining of two or more networks. Networks FIXED-LINE PENETRATION need to interconnect to enable traffic to be transmitted to and from Fixed-line penetration or teledensity is based on the total number of destinations. The amounts paid and received by the operators vary telephone lines in service at the end of the period per 100 persons in according to distance, time, the direction of traffic, and the type of the population of South Africa. Population is the estimated South networks involved. African population at the mid-year in the periods indicated as published by Statistics South Africa, a South African Government INTEREST COVER department. Interest cover is calculated by dividing EBIT by the net interest charge in the income statement. It is a measure of income gearing. FIXED-LINE TRAFFIC Fixed-line traffic, other than international outgoing mobile traffic, ISDN (INTEGRATED SERVICES DIGITAL NETWORK) international interconnection traffic and international Voice over Internet ISDN is a data communications standard used to transmit digital Protocol traffic, is calculated by dividing traffic operating revenue for signals over ordinary copper telephone cables. This is one technology the particular category by the weighted average tariff for such for overcoming the “last mile” of copper cables from the local category during the relevant period. Fixed-line international outgoing exchange to the subscribers premises, which has proved a bottleneck mobile traffic and international interconnection traffic are based on the for Internet access, for example. ISDN allows to carry voice and data traffic registered through the respective exchanges and reflected in simultaneously, in each of at least two channels capable of carrying international interconnection invoices. International Voice over Internet 64 Kbps. It provides up to 128 Kbps and a total capacity of 144 Protocol traffic is based on the traffic reflected in invoices. Kbps exist.
FRAME RELAY ITU (INTERNATIONAL TELECOMMUNICATIONS UNION) Frame relay is a widely implemented telecommunications service ITU is the global technical standard-setting body for designed for cost-efficient data transmission for data traffic between telecommunications services. Telkom fins (company) NEW 8/12/09 6:58 PM Page 341
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Definitions continued
LAN (LOCAL AREA NETWORK) NET DEBT TO TOTAL EQUITY A LAN is a group of devices that communicate with each other within Net debt to total equity is a measure of book leverage (gearing): net a limited geographic area, such as an office. debt in the balance sheet divided by total equity (the sum of shareholders’ funds plus minority interests). LEASED LINE A leased line is a telecommunications transmission circuit that is NGN (NEXT GENERATION NETWORK) reserved by a communications provider for the private use of a A Next Generation Network is a packet-based network able to customer. provide services including telecommunication services and able to make use of multiple broadband, QoS-enabled transport technologies. LIBOR It offers unrestricted access by users to different service providers. London Interbank Offer Rate. OPERATING FREE CASH FLOW LOCAL LOOP Operating free cash flow is defined as cash flow from operating The local loop is the final connection between the exchange and the activities, after interest and taxation, before dividends paid, less cash home or office. It is also known as the last mile. flow from investing activities. MICROWAVE PACKET SWITCHING Microwave is radio transmission using very short wavelengths. Packet switching is designed specifically for data traffic, as it cuts the MMS (MULTIMEDIA MESSAGING SERVICES) information up into small packets, which are each sent across the MMS is a service developed jointly together with 3GPP, allows users network separately and are then reassembled at the final destination. to combine sounds with images and text when sending messages, This allows more users to share a given amount of bandwidth. X.25, much like the text-only SMS. ATM and frame relay are all packet switching techniques.
MOBILE CHURN POP (POINT OF PRESENCE) Vodacom’s churn is calculated by dividing the average monthly number A POP is a service provider’s location for connecting to users. of disconnections during the period by the average monthly total Generally, POPs refer to the location where people can dial into the reported customer base during the period. provider’s computer. Most providers have several POPs to allow low- cost local access via telephone lines. MOBILE PENETRATION Vodacom calculates penetration, or teledensity, based on the total PSTN (PUBLIC SWITCHED TELEPHONE NETWORK) number of customers at the end of the period per 100 persons in the The PSTN is a collection of interconnected voice telephone networks, population of South Africa. Population is the estimated South African either for a given country or the whole world. It is the sum of the parts. population at the mid-year in the periods indicated as published by It was originally entirely analog, but now increasingly digital (indeed Statistics South Africa, a South African Governmental department. in many developed countries digitisation has reached 100%), these MOBILE TRAFFIC networks can be either state-owned or commercially owned. PSTN is Vodacom’s traffic comprises total traffic registered on Vodacom’s distinct from closed private networks (although these may interconnect network, including bundled minutes, outgoing international roaming to the PSTN) and from public data networks (PDN). calls and calls to free services, but excluding national and incoming REVENUE PER FIXED ACCESS LINE international roaming calls. Revenue per fixed access line is calculated by dividing total fixed-line MOU (MOBILE MINUTES OF USE) revenue during the period, excluding data and directories and other revenue, by the average number of fixed access lines during the Vodacom’s average monthly minutes of use per customer, or average period. MOU, is calculated by dividing the average monthly minutes during the period by the average monthly total reported customer base during RICA the period. MOU excludes calls to free services, bundled minutes and Regulation of Interception of Communication and Provision of data minutes. Communication- related Information Act.
NET DEBT ROA (RETURN ON ASSETS) Net debt is all interest-bearing debt finance (long-term and short-term) Return on Assets is calculated by dividing net profit (annualised) by total less cash and marketable securities. assets. Telkom fins (company) NEW 8/12/09 6:58 PM Page 342
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Definitions continued
ROE (RETURN ON EQUITY) WAN (WIDE AREA NETWORK) Return on Equity is calculated by dividing net income by the average A WAN comprises LANs in different geographic locations that are of the shareholders’ funds. connected, often over the public network.
SDH (SYNCHRONOUS DIGITAL HIERARCHY) WAP (WIRELESS APPLICATION PROTOCOL) SDH is used in most modern systems, where multimedia can be WAP is an application environment designed to bridge the gap transmitted at high speeds. The networks are shaped in a ring, so that between the mobile and Internet worlds. It is a set of communication if there is a problem, the traffic can be redirected in the other direction protocols for wireless devices designed to provide vendor-neutral and and the caller will not detect the interruption. technology- neutral access to the Internet and advanced telecommunications services. SMS (SHORT MESSAGE SERVICE) SMS refers to short, usually text-based messages sent by or to a W-CDMA (WIDEBAND CODE DIVISION MULTIPLE ACCESS) wireless subscriber. They are not delivered to the recipient instantly and W-CDMA is a 3G mobile network that supports services like high- have some degree of transmission time delay. SMS messages are speed Internet access, video and high quality voice transmission. usually limited to total character lengths of 140 to 160 characters. WIMAX SWITCH WiMAX is a standard for extending broadband wireless access to new A switch is a computer that acts as a conduit and director of traffic. It locations and over longer distances. The technology is expected to is a means of sharing resources as a network. enable multimedia applications with wireless connectivity and typically with a range of up to 30 km. It is a standard for fixed wireless access TOTAL INTEREST-BEARING DEBT with substantially higher bandwidth capabilities than cellular networks. Total interest-bearing debt is defined as short- and long-term interest- bearing debt, including credit facilities, finance leases and other The emergence of further enhancements to the standard will enable financial liabilities. nomadic data communications across an entire metropolitan area network linking homes and businesses to the core telecommunications UMTS (UNIVERSAL MOBILE TELECOMMUNICATIONS network. WiMAX can be viewed as a technology complementing SYSTEM) existing ADSL broadband offerings. UMTS is the Western European name for the 3G WCDMA standard adopted as an evolutionary path by the GSM world. However, it utilises the radio spectrum in a fundamentally different manner than GSM. UMTS is based on DCMA technology and the GSM standard is based on TDMA technology.
VOIP (VOICE OVER INTERNET PROTOCOL) Voice over Internet Protocol is a protocol enabling voice calls to be made over the Internet. Rather than a dedicated circuit being set up between the caller and receiver, as with ordinary phone calls, the voice conversation is digitised and transmitted over Internet Protocol using packet-switched data networks. Telkom fins (company) NEW 8/12/09 6:58 PM Page 343
Telkom Annual Report 2009 343
Special note regarding forward-looking statements
Many of the statements included in this annual report, as well as oral Competition Commission and others; any requirements that we statements that may be made by us or by officers, directors or unbundle the local loop, our ability to negotiate favourable terms, rates employees acting on behalf of us, constitute or are based on forward and conditions for the provision of interconnection services and looking statements within the meaning of the U.S. Private Securities facilities leasing services or if ICASA finds that we have significant Litigation Reform Act of 1995, specifically Section 27A of the U.S. market power or otherwise imposes unfavourable terms and conditions Securities Act of 1933, as amended, and Section 21E of the U.S. on us; our ability to implement and recover the substantial capital and Securities Exchange Act of 1934, as amended. All statements, other operational costs associated with carrier preselection, number than statements of historical facts, including, among others, statements portability and the monitoring, interception and customer registration regarding our mobile and other strategies, future financial position and requirements contained in the South African Regulation of Interception plans, objectives, capital expenditures, projected costs and of Communications and Provisions of Communication-Related anticipated cost savings and financing plans, as well as projected Information Act and the impact of these requirements on our business; levels of growth in the communications market, are forward looking Telkom’s ability to comply with the South African Public Finance statements. Forward looking statements can generally be identified by Management Act and South African Public Audit Act and the impact of the use of terminology such as “may”, “will”, “should”, “expect”, the Municipal Property Rates Act; fluctuations in the value of the Rand “envisage”, “intend”, “plan”, “project”, “estimate”, “anticipate”, and inflation rates; the impact of unemployment, poverty, crime, HIV “believe”, “hope”, “can”, “is designed to” or similar phrases, although infection, labour laws and labour relations, exchange control the absence of such words does not necessarily mean that a statement restrictions and power outages in South Africa; and other matters not is not forward looking. yet known to us or not currently considered material by us.
These forward looking statements involve a number of known and We caution you not to place undue reliance on these forward looking unknown risks, uncertainties and other factors that could cause our statements. All written and oral forward looking statements attributable actual results and outcomes to be materially different from historical to us, or persons acting on our behalf, are qualified in their entirety by results or from any future results expressed or implied by such forward these cautionary statements. Moreover, unless we are required by law looking statements. Among the factors that could cause our actual to update these statements, we will not necessarily update any of these results or outcomes to differ materially from our expectations are those statements after the date of this annual report, either to conform them risks identified in the Sustainability report – Enterprise Risk Management to actual results or to changes in our expectations. – Risk factors, including, but not limited to, the effect of global economic and financial conditions on us, any changes to our mobile strategy and our inability to successfully implement such strategy and organisational changes thereto, our ability to turn around Multi-Links’s financial performance; increased competition in the South African communications and data communications markets; our ability to implement our strategy of transforming from basic voice and data connectivity to fully converged solutions, developments in the regulatory environment; continued mobile growth and reductions in Telkom’s net interconnect margins; Telkom’s ability to expand its operations and make investments and acquisitions in other African countries and the general economic, political, social and legal conditions in South Africa and in other countries where Telkom invests; our ability to improve and maintain our management information and other systems; our ability to attract and retain key personnel and partners; our ability to replace revenue, profits and cash flows previously received from Vodacom with revenue, profits and cash flows from our existing and new businesses; our negative working capital; changes in technology and delays in the implementation of new technologies; our ability to reduce theft, vandalism, network and payphone fraud and lost revenue to non- licensed operators; the amount of damages Telkom is ultimately required to pay to Telcordia Technologies Incorporated; the outcome of regulatory, legal and arbitration proceedings, including tariff approvals, and the outcome of Telkom’s hearings before the Telkom fins (company) NEW 8/12/09 6:58 PM Page 344
344 Telkom Annual Report 2009
Notice of annual general meeting
Telkom SA Limited (Incorporated in the Republic of South Africa) (Registration number 1991/005476/06 (JSE and NYSE share code: TKG) ISIN: ZAE000044897) (Telkom or the Company)
Notice is hereby given that the seventeenth annual general meeting of members will be held on Wednesday 16 September 2009 in The Bill Gallagher Room, Sandton Convention Centre, Maude Street, Sandton, South Africa at 10:00 to conduct the following business:
1. To receive and consider the annual financial statements for the year ended 31 March 2009.
2. To elect Mr DD Barber as a director who in terms of the articles of association retires by rotation. Being eligible, Mr Barber is available for re-election. His profile may be found on page 29 of the annual report.
3. To re-appoint Ernst & Young Inc as auditors of the Company, to hold office until the conclusion of the next annual general meeting of the Company and to note that the individual registered auditor who will undertake the audit during the financial year ending 31 March 2010 is Mr R Hillen.
SPECIAL BUSINESS To consider and if deemed fit, pass the following special resolutions:
Special resolution number 1 It is resolved that the Company’s articles of association be and are hereby amended as follows –
1. In article 1.1.1.58 in line 4 the words “and the Company’s subsidiaries expressly include Vodacom and its subsidiaries” are deleted
2. Article 1.1.1.66 is deleted.
Reason for and effect of special resolution number 1: The reason for and effect of special resolution number 1 is to clean up the Articles by deleting all references in the Articles that are no longer applicable, namely references to Vodacom, as Vodacom is no longer an associate company of the Company.
Special resolution number 2 RESOLVED THAT the directors of the Company be and are hereby authorised to approve the purchase by the Company, or by any of its subsidiaries, of the Company’s ordinary shares subject to the provisions of the Companies Act, 1973, as amended, and the Listings Requirements of JSE Limited (JSE) provided that:
a) the general authority granted to the directors shall be valid only until the Company’s next annual general meeting and shall not extend beyond 15 (fifteen) months from the date of this resolution;
b) any general purchase by the Company and/or any of its subsidiaries of the Company’s ordinary shares in issue shall not in aggregate in any one financial year exceed 20% (twenty percent) of the Company’s issued ordinary share capital at the time that the authority is granted;
c) no acquisition may be made at a price more than 10% (ten percent) above the weighted average of the market value of the ordinary share for the 5 (five) business days immediately preceding the date of such acquisition;
d) the repurchase of the ordinary shares are effected through the order book operated by the JSE trading system and done without any prior understanding or arrangement between the Company and the counter party (reported trades are prohibited);
e) the Company may only appoint one agent at any point in time to effect any repurchase(s) on the Company’s behalf;
f) the Company or its subsidiary may not repurchase ordinary shares during a prohibited period;
g) the general authority may be varied or revoked by special resolution of the members prior to the next annual general meeting of the Company; and Telkom fins (company) NEW 8/12/09 6:58 PM Page 345
Telkom Annual Report 2009 345
h) should the Company or any subsidiary cumulatively repurchase, redeem or cancel 3% (three percent) of the initial number of the Company’s ordinary shares in terms of this general authority and for each 3% (three percent) in aggregate of the initial number of that class acquired thereafter in terms of this general authority, and announcement shall be made in terms of the Listings Requirements of the JSE.”
Having considered the effect on the Company of the maximum repurchase under this general authority, the directors are of the opinion that:
• the Company and the Group will be able in the ordinary course of business to pay its debts for a period of 12 (twelve) months after the date of this notice of annual general meeting;
• the assets of the Company and the Group will be in excess of the liabilities of the Company and the Group for a period of 12 (twelve) months after the date of this notice of annual general meeting which assets and liabilities have been valued in accordance with the accounting policies used in the audited financial statements of the Group for the year ended March 31, 2009;
• the share capital and reserves of the Company and the Group will be adequate for the ordinary business purposes for a period of 12 (twelve) months after the date of this notice of annual general meeting; and
• the working capital of the Company and Group are considered adequate for ordinary business purposes for a period of 12 (twelve) months after the date of this notice of annual general meeting.
The Board will ensure that the Company’s sponsor provides the JSE with the necessary report on the adequacy of the working capital of the Company and its subsidiaries in terms of the JSE Listings Requirements prior to the commencement of any share repurchase in terms of this special resolution.
Reasons for and effect of special resolution number 2: The reason for this special resolution is to grant the Company’s directors a renewable general authority or permit a subsidiary Company to acquire ordinary shares of the Company. The effect of this special resolution is to confer a general authority on the directors of the Company to repurchase ordinary shares of the Company which are in issue from time to time.
The Board has considered the impact of a repurchase of up to 20% (twenty percent) of the Company’s shares, being the maximum permissible under a general authority in terms of the JSE Listings Requirements. Should the opportunity arise and should the directors deem it in all respects to be advantageous to the Company to repurchase such shares, it is deemed appropriate that the directors be authorised to repurchase the Company’s shares.
Additional disclosures required in terms of the JSE Listings Requirements Directors and management – refer to pages 28 to 32 of the annual report. Major shareholders – refer to page 3 of the annual report. Directors’ interests in securities – refer to page 229 of the annual report. Share capital of the Company – refer to page 196 of the annual report.
Directors’ responsibility statement The directors, whose names appear on pages 28 and 29 of the annual report collectively and individually accept full responsibility for the accuracy of the information pertaining to this special resolution and certify to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or misleading and that all reasonable enquiries to ascertain such facts have been made and that this special resolution contains all information required by the Listings Requirements of the JSE.
Litigation statement The directors, whose names appear on pages 28 and 29 of the annual report , are not aware of any legal or arbitration proceedings, including proceedings that are pending or threatened other than what has been disclosed on page 223, that may have or have had in the previous twelve months a material effect on the Group’s financial position.
Material change Other than the facts and developments reported on in the annual report which was posted to shareholders [with this notice/or similar wording], there have been no material changes in the affairs or financial position of the Company and its subsidiaries since the date of signature of the annual financial statements and the date of this notice. Telkom fins (company) NEW 8/12/09 6:58 PM Page 346
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Notice of annual general meeting continued
VOTING AND PROXIES Ordinary shareholders are entitled to attend, speak and vote at the annual general meeting.
Ordinary shareholders may appoint a proxy to attend, speak and vote in their stead. A proxy need not be a shareholder of the Company.
Shareholders holding dematerialised shares, but not in their own name, must furnish their Central Securities Depositary Participant (CSDP) or broker with their instructions for voting at the annual general meeting. If your CSDP or broker, as the case may be, does not obtain instructions from you, it will be obliged to act in terms of your mandate furnished to it, or if the mandate is silent in this regard, complete the relevant form of proxy attached.
Unless you advise your CSDP or broker, in terms of the agreement between you and your CSDP or broker by the cut off time stipulated therein, that you wish to attend the annual general meeting or send a proxy to represent you at this annual general meeting, your CSDP or broker will assume that you do not wish to attend the annual general meeting or send a proxy.
If you wish to attend the annual general meeting or send a proxy, you must request your CSDP or broker to issue the necessary letter of authority to you. Shareholders holding dematerialised shares in their own name, or holding shares that are not dematerialised, and who are unable to attend the annual general meeting and wish to be represented thereat, must complete the relevant form of proxy attached in accordance with the instructions therein and lodge it with or mail it to the transfer secretaries.
Forms of proxy should be forwarded to reach the transfer secretaries, Computershare Investor Services (Pty) Ltd by no later than 10:00 on Tuesday 15 September 2009.
The completion of a form of proxy will not preclude a shareholder from attending the annual general meeting.
By order of the Board
Per: ML Lephadi Group Secretary
10 July 2009 Telkom fins (company) NEW 8/12/09 6:58 PM Page 347
Telkom Annual Report 2009
Form of proxy
Telkom SA Limited (Incorporated in the Republic of South Africa) (Registration number 1991/005476/06 (JSE and NYSE share code: TKG) ISIN: ZAE000044897) (Telkom or the Company)
(For completion by certificated shareholders and own-name dematerialised shareholders . Members entitled to attend and vote at the annual general meeting may appoint one or more proxies to attend ,vote and speak at the annual general meeting in his stead.Such proxy/ies need not be a member/s of Telkom.)
For use at the seventeenth annual general meeting of shareholders of Telkom to be held on Wednesday 16 September 2009 in The Bill Gallagher Room, Sandton Convention Centre, Maude Street, Sandton, South Africa, South Africa at 10:00
I/We (name in BLOCK LETTERS)
Of (address in BLOCK LETTERS)
Being a member/members of the Company holding ordinary shares in the Company,
do hereby appoint:
of
or failing him/her
of
or
of
or failing him/her, the Chairman of the annual general meeting as my/our proxy to represent me/us at the annual general meeting to be held on Wednesday 16 September 2009 at 10:00 or at any adjournment thereof, as follows:
For Against Abstain
1. To receive and adopt the annual financial statements for the year ended 31 March 2009
2. To re-elect Mr DD Barber as a director in terms of the company’s articles of association
3. To re-appoint Ernst & Young Inc as auditors of the company, to hold office until the conclusion of the next annual general meeting
4. Special resolution number 1
5. Special resolution number 2
and generally to act as my/our proxy at the said annual general meeting.
(Indicate with an “x” or the relevant number of shares, in the applicable space, how you wish your votes to be cast.)
Unless otherwise directed the proxy will vote as he/she thinks fit.
Signed at this day of 2009
Signature of member assisted by (where applicable)
Please read the notes on the reverse side hereof. Telkom fins (company) NEW 8/12/09 6:58 PM Page 348
Telkom Annual Report 2009
Notes
1. A member entitled to attend and vote at the annual general meeting may appoint one or more proxies to attend, vote and speak in his/her stead at the annual general meeting. A proxy need not be a member of the Company.
2. A shareholder may insert the name of a proxy or the names of two alternative proxies of his/her choice in the space(s) provided, with or without deleting “the Chairman of the annual general meeting”, but any such deletion or insertion must be initialled by the shareholder. Any insertion or deletion not complying with the aforegoing will be declared not to have been validly effected. The person whose name stands first on this form of proxy and who is present at the annual general meeting will be entitled to act as proxy to the exclusion of those whose names follow. In the event that no names are
3. A shareholder’s instructions to the proxy must be indicated by the insertion of an “X” or the relevant number of votes exercisable by that shareholder in the appropriate box provided. An “X” in the appropriate box indicates the maximum number of votes exercisable by that shareholder. Failure to comply with the above will be deemed to authorise the proxy to vote or abstain from voting at the annual general meeting as he/she deems fit in respect of all the shareholder’s votes exercisable thereat. A shareholder or his/her proxy is not obliged to use all the votes exercisable by the shareholder or by his/her proxy, but the total of the votes cast and in respect of which abstention is recorded, may not exceed the maximum number of votes exercisable by the shareholder or by his/her proxy
4. To be effective, completed forms of proxy must be lodged with the company’s South African transfer secretaries, Computershare Investor Services (Proprietary) Limited, no less than 24 hours before the time appointed for the holding of the annual general meeting, excluding Saturdays, Sundays and public holidays. As the annual general meeting is to be held at 10:00 on Wednesday, 16 September 2009 forms of proxy must be lodged no later than 10:00 on Tuesday, 15 September 2009.
5. The completion and lodging of this form of proxy will not preclude the relevant shareholder from attending the annual general meeting and speaking and voting in person thereat instead of any proxy appointed in terms hereof.
6. The Chairman of the annual general meeting may reject or accept any form of proxy which is not completed and/or received other than in compliance with these notes.
7. Any alteration to this form, of proxy other than a deletion of alternatives, must be initialled by the signatory.
8. Documentary evidence establishing the authority of the person signing this form of proxy in a representative or other legal capacity must be attached to this form of proxy unless previously recorded by the Company or the transfer secretaries or waived by the Chairman of the annual general meeting.
9. Where there are joint holders of shares:
• any one holder may sign this form of proxy; and
• the vote of the senior shareholder (for that purpose, seniority will be determined by the order in which the names of the shareholders appear in the Company’s register) who tenders a vote (whether in person or by proxy) will
10. This form of proxy is not for completion by those shareholders who have dematerialised their shares (other than those whose shareholding is recorded in their own name in the sub-register maintained by their Central Securities Depository Participant (CSDP). Such shareholders should provide their CSDP, broker or nominee with their voting instructions.
South African transfer secretaries Computershare Investor Services (Proprietary) Limited Ground Floor, 70 Marshall Street Johannesburg, South Africa, 2001 (PO Box 61051, Marshalltown, 2107)