Telkom SA Limited Annual Report 2006 focused on creating long-term value Telkom’s vision is to be a leading customer and employee centred ICT solutions service provider. Group overview Annual financial statements 2 Financial highlights 151 Directors’ responsibility statement 3 Operational highlights 151 Company secretary’s certificate 4 About Telkom 152 Report of the independent auditors 5 Group structure 154 Directors’ report 6 A focused strategic direction 156 Consolidated income statement 8 Looking forward to 2007 157 Consolidated balance sheet 10 Macro economic overview 158 Consolidated statement of changes 14 The South African communications industry in equity 159 Consolidated cash flow statement Management review 160 Notes to the consolidated annual 19 Chairman’s review financial statements 22 Board of directors 254 Company income statement 26 Chief officers 255 Company balance sheet 28 Management team 256 Company statement of changes in equity 30 Chief executive officer’s review 257 Company cash flow statement 258 Notes to the annual financial statements Sustainability review 304 Supplementary information 37 Sustainability review 41 Corporate governance Shareholder information 52 Risk management 305 Shareholder analysis 56 Global reporting initiative contents index 307 Definitions 58 Black economic empowerment 311 Special note regarding 65 Human capital management forward-looking statements 77 Safety, health and environment ibc Administration 84 Corporate social investment Performance review 89 Five-year operational review 90 Operational review 122 Three-year financial review 123 Financial review Group overview Telkom intends to compete across the ICT value chain and to be a leader in the sector Financial highlights Shareholder returns of R9 per share dividend payment and R1.5 billion spent on share buybacks 10.3% growth in 30.3% growth in 43.2% EBITDA margin operating revenue operating profit to R47.6 billion to R14.7 billion 43.2 47,625 14,677 40.9 40.7 43,160 40,582 11,261 9,338 2004 20052006 2004 2005 2006 2004 2005 2006 Revenue (ZAR million) Operating profit (ZAR million) EBITDA margin (%) Return on assets 35.0% increase Strengthened (after tax) up to 25.6% in HEPS balance sheet 61.2 1,727 25.6 19.8 1,279 17.9 875 26.3 23.2 2004 20052006 2004 2005 2006 2004 2005 2006 ROA (%) HEPS (ZAR cents) Net debt to equity (%) 2 Operational highlights Customer growth and retention • 41.2% growth in managed data network sites to 16,887 • 146.2% growth in ADSL subscribers to 143,509 • 25.7% growth in Internet customers to 284,908 • Telkom CLOSER sign up of 71,317 customers in three months • 51.9% growth in total mobile customers to 23.5 million ■ 49% growth in South African mobile customers ■ 65% growth in other African mobile customers Operational excellence • 12.9% increase in fixed-lines per fixed-line employee to 184 • 35.9% improvement in SA mobile customers per employee to 4,451 15.0% data revenue Successful ADSL 51.9% growth in total growth1 rollout plan mobile customers 6,649 143,509 23,520 5,784 5,028 15,483 11,217 58,278 20,145 2004 2005 2006 2004 2005 2006 2004 2005 2006 Data revenue growth ADSL subscribers Total mobile customers (ZAR million) (number of) (thousands) 1Before inter-segmental eliminations Segment contribution Operating revenue1 Operating profit1 EBITDA1 Profit attributable to equity holders1 Fixed 67% Fixed 75% Fixed 75% Fixed 81% Mobile 33% Mobile 25% Mobile 25% Mobile 19% 1After inter-segmental eliminations 3 About Telkom Telkom SA Limited is currently the only provider of public switched communications services in South Africa, providing fixed-line voice and data services. In addition, Telkom participates in the South African mobile communications market through its 50% interest in Vodacom, the largest mobile communications network operator in South Africa based on total estimated customers. Telkom’s infrastructure is composed of terrestrial, undersea and satellite communication networks and pathways, broadband circuits and connections that enables voice, data and video communication services. Key facts • Listed on the JSE South Africa and the New York Stock Exchange Inc. • Group revenue: R47.6 billion • Group total assets: R57.5 billion • Internet subscribers in South Africa: 284,908 • ADSL subscribers in South Africa: 143,509 • Total mobile customers: 23.5 million (South Africa and other African countries) Shareholders as at March 31, 2006 Elephant Telkom Government PIC Consortium subsidiaries Freefloat The Government of The Public Investment The Elephant Rossal No 65 Included in the the Republic of Corporation (PIC), Consortium is a (Pty) Ltd holds 2.3% freefloat are South Africa is the an investment Black Economic (12,687,521 9,408,452 shares largest shareholder management Empowerment shares) which was held by 85,432 in Telkom. The company wholly group, which purchased for the retail shareholders Government holds owned by the through Newshelf Telkom Conditional representing 1.7% the Class A share. Government, invests 772 (Pty) Ltd, holds Share Plan. Acajou of Telkom’s issued funds on behalf of shares in Telkom Investments (Pty) Ltd shares. public sector entities. which it acquired holds 2.0% The PIC holds 8.6% from the PIC. (10,849,058 of Telkom’s issued shares) which was shares and the class purchased for B share acquired purposes other than from Thintana the Telkom Communications Conditional LLC in November Share Plan. 2004. In addition, the PIC also holds 7.1% of Telkom’s issued shares acquired in the market. 38.0% 15.7% 5.6% 4.3% 36.4% 4 Group structure 50% joint venture 64.9% 100% Telkom Directory Vodacom Group Services Swiftnet Vodacom Group (Pty) Ltd Telkom Directory Services Swiftnet (Pty) Ltd trades under is a leading mobile (Pty) Ltd (TDS) provides the name FastNet Wireless communications company in Yellow and White page Service. FastNet provides South Africa, providing mobile directory services, an synchronous wireless access communications services to electronic directory service, on Telkom’s X.25 network, 23.5 million customers in 10118 ‘The Talking Yellow Saponet-P, to its customer South Africa, Tanzania, pages’ and an online web base. Services include retail Lesotho, the DRC and directory service. credit card and cheque Mozambique. Vodacom has terminal verification, telemetry, an estimated market share of security and fleet management. 58% in South Africa. 5 A focused strategic direction Vision 2010 Telkom’s vision is to be a leading customer and employee centred Information Communication and Technology (ICT) solutions service provider. Although the enhancement of customer satisfaction and employee engagement is embedded in its vision, Telkom understands that leadership depends on balancing and advancing the interests of all stakeholders. The Group’s strategy focuses on creating value for all stakeholders including achieving sustainable and healthy financial returns for shareholders. To ensure Telkom can sustain the creation of value in response to developments in its dynamic and changing market environment, management determined certain shifts in strategic emphasis in the 2006 financial year. Telkom’s ‘Vision 2010’ focuses on five strategic pillars to sustain long-term value creation for all its stakeholders, and sets specific goals to be achieved by 2010. Enhancing customer satisfaction through customer centricity Customer centricity will underpin all Telkom’s efforts to be a leader in the ICT sector. It is a key deliverable for customer-facing and support staff. Core objective: To develop a customer centric culture that permeates the entire organisation through people, processes and systems, with the objective of making Telkom the customer’s ICT service provider of choice. 2010 goal: • To improve Telkom’s rating in the South African customer survey index. Engaging employees to maintain competitive advantage Employee centricity will provide Telkom with focus and direction as it acknowledges the only way to shape the future is through its employees. Core objective: To develop initiatives to enhance employee satisfaction and sustain a culture of engagement with all Telkom employees. 2010 goals: • Position Telkom as an employer of choice. • Improve performance and productivity. • Build employee competencies and enhancing Telkom’s leadership capabilities. • Transforming towards a customer centric corporate culture. 6 Evolving the fixed-line network to a NGN to support profitable growth through prudent cost management Telkom is embracing and will seek to continue to provide compelling value propositions to all customer segments across the ICT value chain, and creates opportunities to reduce the cost of operating the network, by implementing an Internet Protocol (IP)-based operating platform, or Next Generation Network (NGN). Core objective: To evolve the network, operating support systems, IT and skills fit to a NGN in order to support Telkom’s growth strategy, while expanding existing services and applying continuing prudent cost management. 2010 goal: • Substantial progress in attaining a full ICT-capable NGN. Retaining revenue and generating growth Telkom’s aim is to minimise the impact of competition from existing and new entrants and penetrate new markets to supplement diminishing revenue streams. These objectives include possible international expansion, with Telkom continuing to explore opportunities particularly in other African markets. Core objective: To develop new generation offerings in rapidly transforming markets to counter and maintain diminishing revenue streams