In announcing continued revenue growth for the year ended 31 March 2007 across both its fixed line and mobile business segments, Telkom SA today reiterated its vision of becoming the leading customer and employee-centred ICT solutions service provider.
The company added that it would continue its focus on balancing the needs of all stakeholders, often with conflicting interests, ensuring long-term sustainable and profitable growth of the business for shareholders and contributing positively to the South African economy.
In continuing to create value for its shareholders, the group declared an ordinary annual dividend of 600 cents per share and a special dividend of 500 cents per share on 13 June 2007, both payable on 9 July 2007, for shareholders recorded in the register of the company at close of business on 6 July 2007.
In addition, the fixed-line business remains the major contributor to the group, with the fixed line segment contributing 63% (versus 37% from the mobile sector) towards operating revenue; 68% (versus 32% from mobile) towards operating profit and 72% (versus mobile 28%) towards profit attributable to equity holders after inter-segmental eliminations.
Fixed-line revenue increased by 1.7% to R33 295 million, largely as a result of a 12.6% increase in data revenue and an 8.3% growth in subscriptions and connections.
Highlights of the group financial key performance areas include:
* Group operating revenue increased by 8.4% to R51 619 million;
* Operating profit decreased marginally by 1.4% to R14 470 million;
* The Group EBITDA (earnings before interest, tax, depreciation and amortisation) margin decreased to 38.3% as at 31 March 2007 (compared to 43.2% at 31 March 2006) mainly due to higher fixed-line operating expenditure. The fixed-line business delivered an EBITDA margin of 38%, including the effect of raising the Telcordia provision of R527 million (USD70 million). The margin of 38% is within management's guidance of 37% to 40%;
* Forty-five percent net debt increase to R9 901 million, and net debt-to-equity ratio of 30.9%;
* Headline earnings per share decreased by 1% to 1 710.7 cents per share and basic earnings per share decreased by 3.7% to 1 681 cents per share. The reduced earnings are attributable to a decrease in operating profit due to an increase in operating expenses. These factors were partially offset by an 8.4% increase in operating revenue and an 8% reduction in finance charges.
Cash generated from operations increased by 4% to R20 520 million. This facilitated capital expenditure of R10 037 million and the repurchase of 12.1 million Telkom shares to the value of R1.6 billion. The net debt-to-equity ratio of 30.9% at 31 March 2007, remains below the announced targeted range of between 50% and 70%, but is an improvement from the gearing of 23.2% at 31 March 2006.
Telkom acting CEO, Reuben September, stated: "The Telkom Group has delivered continued revenue growth in its mobile business segment and its fixed-line business segment in the face of increasing competition in the telecommunication sector."
He added that fixed-line revenue grew by 1.7%, despite tariff decreases and competition from mobile operators, VANS and ISPs. "The fixed-line segment continued to focus on defending its revenue through value-adding bundled products and term and value discount plans for corporate customers. The group's fixed-line segment showed its ability to deliver data solutions to support the group's revenue growth," stated September.
He also highlighted Telkom's expansion strategy: "Telkom is proud to have delivered on its acquisition strategy with the acquisition of Africa Online during the year, and Nigerian-based Multi-Links subsequent to year end."
September added that Vodacom again delivered an exceptional performance, increasing its subscriber base by 28.2% to 30.2 million customers. He also alluded to the increasingly competitive telecoms landscape, but emphasised that Telkom was prepared for the challenges that lay ahead.
September stated: "Telkom now enters a challenging period with Neotel as its fixed-line competitor, coupled with significant pressure on its product and services pricing."
However, to continue its drive to create value for its shareholders as well as protect and grow its market while taking telecommunications into the future, Telkom needs to invest in its future. This is being achieved through investment into its next generation network (NGN), Telkom Media (a company created to deliver on Telkom's triple play strategy) and other parts of Africa. Investment in the NGN is a key enabler for delivering the required benefits in terms of products and services at a reduced cost with increasing volumes.
The focus on building a world-class NGN is already delivering benefits and is a key enabler in the company's ability to provide innovative and value-adding voice and data solutions particularly to the corporate market. While mobile growth remains strong, the growth of data products and broadband is a focal area for the fixed-line business.
In this regard, the company's pricing strategy is founded on increasing volume, penetration and customer loyalty. This includes improving the value offered by Telkom's calling plans and bundles, especially on entry-level packages.
Broadband price reductions, in particular, will enable the company to remain competitive by driving up volumes - thereby enabling the company to reduce prices by leveraging its growing economies of scale.
In addition, tariff re-balancing will align tariffs to costs, while further rebalancing will reduce arbitrage risks, including a reduction in long-distance and international usage fees.
The company's pricing on data services will also decrease, largely to consolidate its strong data growth.
In the interests of competitive pricing, volume growth and offering greater value to its customers, Telkom today filed an overall average tariffs decrease of 1.2% on its regulated basket of products and services with the Independent Communications Authority of South Africa (ICASA). Pending regulator approval, the price adjustments will become effective on 1 August 2007.
Telkom is confident that the reduction of telecommunication costs will benefit all South Africans and contribute positively to the economy.
Competitive pricing and offering greater value to customers are key elements of Telkom's strategic focus of improving customer centricity. This includes improvements in managing customer relationships, learning from acquired customer information and consistently placing the customer at the centre of decision-making.
That Telkom continues to offer a premium data service is evidenced by a 78.1% growth in ADSL subscribers to 255 633, a 14.3% growth in the 64kbit/sec equivalent circuit, and a 22.2% growth in Internet satellite subscribers.
ADSL subscriber growth is targeted to reach 420 000 for the year ending 31 March 2008, with Telkom aiming to achieve ADSL penetration of 15% to 20% of fixed access lines by 2010/2011. The introduction of new service offerings and increased volumes through aggressive price reductions will be the main vehicle to achieve this target in an increasingly competitive environment.
The ADSL self-install option has improved the average-time-to-install. This has come down from 31 days to 23 days on average, where infrastructure is available. The self-install option has been utilised by 28 779 customers as at 31 March 2007.
Pre-provisioning of the network will further shorten installation times. In addition, Telkom upgraded its DSL 192 users to a 384Kbit/s at no additional cost, and is now offering 4Mbit/s for DSL 1024 customers. A broadband demand register will capture and identify areas of growth for future build. Port automation is also designed to improve Telkom's ability to deliver ADSL services faster.
The exciting Do Broadband offering, which includes bundled ADSL access and a TelkomInternet account at discounted rates, should stimulate ADSL demand and provide Telkom customers with the quality, speed and content demanded in SA.
Strong data growth is also indicated by a 7.1% increase in Internet customers to 305 013. This includes dial-up, ADSL and satellite Internet users.
Telkom has a holistic wire-line and wireless approach to broadband. To complement its ADSL roll-out countrywide, the company has successfully trialled WiMax. Fourteen sites with base stations are currently operational in Pretoria, Cape Town and Durban. A further 57 sites with base stations will be built countrywide.
The increased demand for broadband during the year ended 31 March 2007, has resulted in strong growth in leased line and other data services revenue of 10.2%. Revenue from cellular operator fixed links has increased by 21.8% as a result of the strong growth of mobile data offerings. Growth in mobile data revenue is mainly due to data initiatives such as 3G, HSDPA, Vodafone Live!, Vodafone Simply, Blackberry and the continued popularity of SMS. Revenue from managed data networks has increased by 16.3% during the year ended 31 March 2007.
Vodacom's data revenue increased by 64% to R3 342 million (50% share: R1 671 million) for the year ended 31 March 2007 contributing 8.1% to mobile operating revenue.
While Telkom seeks to defend its traditional offerings as it aggressively builds for the new, cost management remains a key focus area. Nevertheless, the company's growth profile looks increasingly impressive.
Subject to the approval of the Competition Authorities, Telkom has made an offer to Business Connexion (BCX) to acquire 100% of BCX for R2.4 billion. BCX is expected to create shareholder value as it enables Telkom to enter the data hosting and desktop management market. These services are complementary to the value adding products and services being developed within Telkom.
On 31 August 2006, Telkom announced the creation of Telkom Media, which has applied to ICASA for a commercial satellite and cable subscription broadcast licence. Telkom Media's vision is to be Africa's "digital media provider of choice" and is developing a set of new digital media services to address the diverse needs of both the consumer and business markets.
Telkom Media is seeking to develop a digital service portfolio across three core service areas:
* Content and service over the Internet (online content services and ISP services);
* Content and services over satellite (Satellite TV and radio); and
* Content and services over a "quality of service" network (IPTV, including broadcast and on-demand TV and interactive services).
Telkom Media has funding of over R7.5 billion over eight years. Its basic bouquet of channels is estimated to cost no more than R100 per month.
Evolving into a Pan-African service provider is also one of the company's growth initiatives, with the aggressive expansion of Africa Online and Multi-Links being key considerations in this context.
Africa Online, acquired for R150 million during February 2007, is an Internet Service Provider with operations in Kenya, Tanzania, Cote d'Ivoire, Ghana, Uganda, Namibia, Swaziland and Zimbabwe. The investment approach focuses on brand development, creation and development of customer channels, improvement of network systems, human resources development and an expansion drive targeting other African countries. The expansion in Africa will be through a service provider strategy that is aligned with Telkom's domestic fixed/mobile service provider Strategy.
MultiLinks - a private telecommunications operator in Nigeria, with a Unified Access Licence allowing fixed, mobile, fixed-wireless, international and data service - was acquired in April 2007 for R1 985 million (USD280 million). Via the acquisition of Multi-Links, Telkom has established a key regional footprint on the West Coast of Africa.
Increasing capacity and network speed are also pivotal to growth initiatives. Increased demand and bandwidth-hungry applications have required Telkom to upgrade its capacity. Telkom spent R6 599 million during the year ended 31 March 2007, on its capital expenditure programme in line with its five year R30 billion capital expenditure programme. It is estimated that Telkom will spend approximately R7 billion on capital expenditure in the financial year ended 31 March 2008.
In addition to the evolution to the NGN, Telkom continues to invest significantly in its employees to ensure that the appropriate business skills are available to meet customer requirements. In recognising the value of our employees, Telkom acknowledges that a skilled and experienced workforce remains its competitive advantage. Due to rapidly changing technology, increasing specialisation and capacity requirements, Telkom spent R425.9 million on training and developing its employees for the year ended 31 March 2007.
With regard to black economic empowerment (BEE), Telkom views the country's transformation as imperative for its own long-term sustainable growth. Telkom believes that BEE should seek to deliver meaningful and truly broad-based empowerment to the majority of South Africa's people. Telkom spent R8.8 billion on empowered or significantly empowered suppliers for the year ended 31 March 2007.
In addition, the Vodacom Group is in the process of finalising a R7.5 billion BEE equity deal whereby both BEE partners and employees have the opportunity to share in the success of Vodacom South Africa. The deal is expected to be completed by the end of the 2008 financial year.
With regard to CSI initiatives, Telkom's contribution to social investment programmes via the Telkom Foundation continues to positively impact the country in three main areas:
* Education and training;
* Empowerment of women, children and people with disabilities;
* ICT planning and infrastructure roll-out.
Inherent in the rapidly changing telecommunications landscape and liberalisation of the market, are continuous regulatory challenges covering, inter alia, competition issues and policy changes. Through constructive dialogue, Telkom consistently endeavours to achieve a framework that is realistic, equitable and beneficial to the industry as well as the company.
Telkom is confident of dealing with all regulatory issues and actively seeks to explore opportunities within the changing regulatory framework. Through active engagement with the regulator and multiple-scenario planning, Telkom ensures that it is prepared for changes in regulation.
The key regulatory changes include:
* Electronic Communications Act
* RICA Act
* ICASA Amendment Act
* Interconnection and facilities leasing
* Number portability
* Local loop unbundling
* ADSL regulations
Vodacom's results are proportionately consolidated into the Telkom Group's consolidated financial statements. This means that 50% of Vodacom's results are included in each of the line items in the Telkom Group's consolidated financial results.
With a 28.2% increase in its subscriber base to 30.2 million, Vodacom continues to show impressive growth. Revenue increased by 20.9% to R41.1 billion. South African mobile customers increased by 20.1% to 23 million for the year ended 31 March 2007, reinforcing Vodacom's market leadership position in SA. Customers grew 55.3% to 3.2 million in Tanzania, 67.5% to 2.6 million customers in the Democratic Republic of Congo, 35.4% to 279 000 customers in Lesotho, and 101.6% to 988 000 customers in Mozambique.
Exceptional customer growth and improved efficiencies in the mobile business resulted in a stable EBITDA margin at 34.6% against a declining ARPU due to lower income segment customer connections.
Going forward, the accelerated liberalisation of the market, the emergence of new technologies and customer demand are material to Telkom's strategic intentions. Strongly positioned to compete effectively, 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 sustain long-term value creation for all its stakeholders, Telkom will focus on the following imperatives:
* Continued investment in the development of employees to maintain competitive advantage;
* Enhancing customer satisfaction through customer centricity;
* Retaining revenue and generating growth;
* Evolving to an NGN in order to support profitable growth through prudent cost management; and
* Repositioning Telkom stakeholder management to create healthy external relationships.
Having delivered a strong financial performance for the year ended 31 March 2007, fixed-line revenue in the financial year ending 31 March 2008 are expected to be impacted by tariffs, increased competition, migration from dial-up services to ADSL services and the introduction of cost-based interconnection.
Strategic initiatives to improve service levels are expected to result in above-inflationary increases in operating expenses, resulting in an expected fixed-line EBITDA margin of between 37% and 40%. No material changes to the EBITDA margin is expected in the mobile business.
In the year ahead, fixed-line CAPEX is expected to be between 18% and 22% of revenue, while group net debt-to-equity target remains at 50% to 70%. In delivering another set of strong results, Telkom this year also spelt out its capacity to deal with the challenges that lie ahead in a rapidly changing, robustly competitive and increasingly liberalised telecommunications landscape.
"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," concluded September.
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