Telkom delivers strong results

Telkom SA, the largest communication group in South Africa, today announced group annual results for the year ended 31 March 2006. The group delivered a strong performance across both business segments primarily as a result of continued growth in the fixed-line and mobile business and cost reductions in the former.

The group also declared a higher ordinary annual dividend of 500c per share on 2 June 2006 and a special dividend of 400c per share, payable on 14 July 2006 for shareholders registered on 7 July 2006.

Telkom CEO, Papi Molotsane, said: "The Telkom group has delivered another strong set of results with headline earnings per share growth of 36.1% to 1 740.5c per share. The fixed-line business performance was driven mainly from revenue growth of 4.1% and a decrease in operating expenses of 3.2%. The mobile business contributed with customer growth of 11.8 million gross connections."

Molotsane added that Telkom stood at an important point in its development in an industry undergoing fundamental changes.

"Our customers require increasingly sophisticated products and services as technologies converge and the industry worldwide moves to an IP-based operating standard. In view of this, and with greater certainty in the local regulatory dispensation following accelerated liberalisation of the market, management has redefined its strategy to compete across the ICT value chain," Molotsane stated.

Group financial highlights:

* Operating revenue up 10.3% to R47,625 million
* 30.3 % growth in operating profit to R14,677 million
* 43.2% group EBITDA margin
* 1.6% net debt decrease to R6,828 million, and net debt to equity of 23.2%
* Headline earnings increased by 36.1% to 1 740.5c per share
* Basic earnings per share increased by 39.9% to 1 744.7c
* Cash generated from operations increased 5.9% to R19,724 million and facilitated capital expenditure of R7,396 million and the repurchase of 12 086 920 Telkom shares to the value of R1,502 million
* Our net debt to equity ratio fell to 23.2% as at 31 March 2006, from 26.3% in the previous financial year, which is below the announced targeted range of between 50% and 70 %
* Also, on 2 June 2006, as part of the company`s commitment to the optimal use of capital, the Telkom board approved a R2 billion share buy-back programme.

The group delivered on its strategic intent during the financial year to 31 March 2006 by fulfilling customer needs, introducing new and innovative products and delivering impressive financial returns to shareholders.

The group`s fixed-line business continues to do well, with fixed-line revenues improving 4.1%, despite tariff reductions across its product range and the loss of dial-up minutes due to the roll-out of ADSL. The tariff reductions were offset by strong volume growth in data services, increased revenue from mobile outgoing calls and rental and service fees.

Operating margins improved further due to employee expenses reductions and lower depreciation due to the extension of useful lives of assets. The group also achieved a 14.4% increase in data revenue over the year ended 31 March 2006 with good growth in all data revenue categories.

ADSL adoption in the consumer and small and medium business segment increased 146% from 58 278 to 143 509 services. The company has a focused roll-out strategy to achieve ADSL penetration of 15% - 20% of fixed access lines by 2010.

The explosion of broadband demand during the year has resulted in strong growth in leased line and other data service revenue of 11.1%. In addition, the group has successfully trialled WiMax and has been allocated frequency spectrum by ICASA.

As a customer-centric ICT solutions partner for corporate and business customers, Telkom provides higher-level products and services to our traditional voice and data products. The company`s VPN Supreme and Customer Network Care products, aimed mainly at the large to medium business, are enjoying considerable success.

To improve the experience of customers, value-adding bundled products and services, such as Telkom Closer, were launched in January 2006. Demand for the product has been strong, resulting in the sign-up of 71 317 customers in three months to 31 March 2006. Other value-enhancing products include Spacestream (providing satellite access) and Office Suite providing office functionality to the SME market.

In order to provide end-to-end ICT solutions, Telkom has made an offer to Business Connexion`s (BCX`s) shareholders to acquire 100% of BCX for R2.5 billion. The BCX acquisition will also provide an opportunity for Telkom to create shareholder value.

Telkom customers are set to benefit from overall price reductions from August this year if price changes filed by the company are approved by the Independent Communication Authority of South Africa (ICASA).

Telkom filed an overall price decrease of 2.1% on its regulated basket of products and services with ICASA this morning. If accepted, the proposed price changes will become effective from 1st August 2006.

Major proposed price changes include:

* ADSL rental: 24% average decrease
* Long distance: 10% decrease
* International: 10% average decrease
* Data: 9% average decrease
* Rental: 8% increase

Rebalancing of tariffs will continue to eliminate cross-subsidisation and to allow effective competition in all areas going forward. The price reductions are expected to result in increased volume, which should have an offsetting effect. The reduction of telecommunication costs should benefit all South Africans, contributing positively to the economy. In addition to a 9% price decrease on the DSL192, the service will be upgraded to the DSL 384 service, depending on the availability of network infrastructure.

Besides its focus on customer-centricity, Telkom is also employee-centric and the company invests significantly in its employees to ensure that appropriate skills are available to meet customer requirements. For the year ended 31 March 2006, Telkom spent R400.1 million on training and development and employees participated in 160 274 facilitator-led training days.

In line with customer demand and sound financial criteria, Telkom will continue to invest in improving its network and the orderly migration to an IP-based network to supply next-generation products and services.

There was also a strong performance from Vodacom, Telkom`s 50% subsidiary.

Mobile customers increased 51.9 % during the year, reinforcing Vodacom`s market leadership position in South Africa. Exceptional customer growth and improved efficiencies resulted in a stable EBITDA margin of 34.7%.

Vodacom data revenue increased by 52.1% to R1,019 million (50% share) for the year ended 31 March 2006, with growth in mobile data revenue being largely attributable to the launch of new data initiatives such as 3G, HSDPA, Vodafone Live!, Blackberry and the continued popularity of SMS.

Vodacom improved its market share in the year-ending 31 March 2006, to 58% and increased its net profit by 32%. Operating efficiencies were maintained while EBITDA margins decreased marginally to 34.7% from 35.1% in the previous financial year.

Outside South Africa, Vodacom grew its customer base by 64.8% to 4.4 million customers.

There are various regulatory issues affecting the industry and Telkom. Through constructive dialogue, the company will always endeavour to achieve a regulatory framework that is realistic, equitable and beneficial to the industry. Key regulatory issues include the Electronic Communications (EC) Act, the ICASA Amendment Bill, interconnection and facility leasing, number portability (NP), local loop unbundling, draft ADSL regulations, Interception of Communication and Communication-related Act as well as legislation providing for subscriber registration.

However, Telkom is confident that it is well placed to deal with all regulatory challenges and, by analysing multiple regulatory scenarios, is adequately prepared for changes in regulation. After all, each regulatory change creates challenges as well as opportunities, which Telkom intends to explore.

In her budget speech delivered to Parliament at the end of May 2006, the minister announced her intention to shortly issue policy directions to ICASA setting out the priorities for implementing the provisions of the EC Act. Among these will be the regulation of access to submarine cables and the unbundling of the local loop. The minister also announced the establishment of a Broadband Advisory Council to advise her on the development of a broadband policy for South Africa, and that Sentech will form the core of the country`s wireless broadband infrastructure network.

As a good corporate citizen, Telkom has consistently striven to operate within South Africa`s laws and has effectively done so in the field of empowerment. In this field, Telkom has always viewed South Africa`s effective transformation as imperative for its own sustainable long-term growth. The draft information and communications technology (ICT) BEE charter is expected to be aligned with the Department of Trade and Industry (DTI) Codes of Good Practice during July 2006.

To demonstrate its commitment to delivering meaningful and truly broad-based empowerment to the majority of South Africa`s people, Telkom spent R6.4 billion on empowered or significantly empowered suppliers for the year ended 31 March 2006.

Telkom`s transformation progress has been consistently recognised and the Company was placed fifth out of 200 companies in the annual 2006 FM/Empowerdex Most Empowered Company in SA survey.

Telkom`s social investment programme through the Telkom Foundation has continued to contribute to the positive transformation of disadvantaged communities through social investments aimed at achieving sustainable development.

The Telkom Foundation has repeatedly received numerous awards and recognition.

Telkom`s vision is to be a leading customer and employee-centred ICT solutions service provider. Telkom is focused on balancing the needs of all stakeholders to ensure long-term sustainable and profitable growth of the business for shareholders.

The accelerated liberalisation of the market, in particular the implications of the Electronic Communications Act, the emergence of new technologies and customer demand is clearly material to Telkom`s strategic intentions.

Telkom believes that it is strongly positioned to compete in a liberalised market. Customer service excellence through a skilled and dedicated workforce, greater product and service choice as well as added value for customers will ensure long-term value creation.

Telkom will also pursue opportunities to provide the full spectrum of ICT solutions including voice, data, video and Internet services increasingly through broadband penetration.

To ensure that Telkom can sustain the creation of value relative to developments in its dynamic market environment, management have determined certain shifts in strategic emphasis.

Telkom will focus on the following imperatives to sustain long-term value creation for all its stakeholders:

* Investing in the development of employees to maintain competitive advantage
* Enhancing customer satisfaction through customer centricity
* Retaining revenue and generating growth
* Evolving to a next generation network in order to support profitable growth through prudent cost management
* Repositioning Telkom stakeholder management to create healthy external relationships

In addition, the evolution to an IP-centric network is a business imperative, which cannot be delayed. It is imperative that the company increases investment in its network to reduce the cost of operating the network and to be able to deliver fully converged products and services to meet customer needs in a rapidly changing technological environment.

Acceleration of Telkom`s broadband penetration is a critical element of this strategy. The technology has reached critical mass and is set to become the technology of choice as demonstrated globally.

The evolution to a next-generation network is a phased approach based on sound commercial criteria and will be required to exploit new opportunities in the ICT solutions market and bring down the cost of telecommunications in South Africa.

The first phase, expected to last three years, is mainly concentrated on enabling the network for broadband services.

The second phase is the conversion of existing products and services to NGN. Depending on customer demand and profitability, this phase is expected to be complete by 2015 when Telkom should have a predominantly IP network with most products and services on the new platform.

Delaying the investment will result in lost opportunities and erode Telkom`s ability to retain existing customers through new services, features and functionality.

Given the centrality of ICT to economic growth and social development, Telkom remains strategically important to the achievement of national objectives and will continue to invest significantly in the development of a viable and vibrant marketplace.

In this context, Telkom is also exploring opportunities outside South Africa`s borders where there is potential for growth.

Fixed-line revenues in the year ending 31 March 2007 are expected to be impacted by tariffs, increased competition and the migration from dial-up to ADSL and the introduction of cost-based interconnection. Telkom`s strategic initiatives to improve service levels are expected to result in above-inflationary increases in operating expenses, the result being an expected fixed-line EBITDA margin between 37% and 40%.

Fixed-line CAPEX is expected to be between 18% and 22% of revenue. The increase from the financial year ended 31 March 2006 is due to capacity increases and the evolution to an IP centric network for the introduction of next-generation networks.

The mobile business is focused at maintaining its market share. Through improved efficiencies, the EDITDA margin is expected to remain constant.

However, over the next financial year, Telkom`s net debt to equity target remains the same at 50% to 70%.

In presenting this year`s results, Molotsane emphasised that Telkom has set its sights on being a leading ICT solutions provider. "Our strategy aims to create long-term value for all stakeholders through customer-centricity, investing in our employees and our network, defending and growing revenues, playing a central role in South Africa`s competitiveness and growth, and thereby, making healthy financial returns for our shareholders sustainable," explained Molotsane.