Mergers, Acquisitions and Financial Results

Telkom last week announced strong group annual results for the year ended March 31, 2004, with healthy increases in operating revenue and operating profit, positive cash flow growth, and excellent growth in both headline and basic earnings per share. The group financial highlights for 2004 include:

* 8,8% group revenue growth to R40,795bn;
* 39,5% growth in operating profit to R9,088bn;
* 40% group Ebitda margin;
* Group return on assets of 18%;
* Net debt to equity of 61%;
* Total dividend of 200 cents per share paid for the year.

Commenting on the results, Group CEO of Telkom, Sizwe Nxasana, says: "The management of the Telkom Group is pleased to report strong results in our first full year as a listed company that has seen us execute well on strategy and deliver growing returns to our shareholders.

"Group operational highlights include the Telkom Group achieving robust operational performance across all levels of the business, with delivery against its three strategic pillars of customer growth and retention, operational efficiencies and innovation and sustaining the development of the marketplace."

Key achievements include:

* 14% growth of data revenue, 44% growth in Internet subscribers, 17% growth in ISDN channels and 661% growth in ADSL subscribers;
* The launch of VPN Supreme;
* Growth of voicemail accounts to nearly one million. Value-added fixed-line voice packages penetrate 64% of residential customer base;
* The introduction of new fixed-line calling plans, like Xtratime;
* The winning of 14 international call centre customers;
* The introduction of on-line ordering, payments and billing;
* Re-branded TelkomDirect retail outlets;
* The distribution deal with Vodashop;
* Property development deals to ensure upfront communications availability;
* Mobile customer growth of 30% to 11,2m customers with contract customer growth of 20%;
* Mobile gross connections of 6m, compared to 4m in the prior year;
* African mobile customer growth of 93%;
* Mobile data revenue growth of 59%.

Nxasana adds, "Telkom aggressively promoted data products to the consumer and SMME markets through campaigns in the past financial year, which advanced the group’s strategy of becoming the data provider of choice."   The increase in revenue growth was said to be mainly due to higher demand for data services in the medium and small business segment, with leased line revenue growing by 17,7%, which was offset by a 2,2% decrease in mobile leased facilities revenue, due to network optimisation initiatives by the mobile operators.

There has also been a stringent focus on key business imperatives. The execution of group strategy helped Telkom SA to grow headline earnings per share by 175% to 863,6 cents, from 314 cents in its first full year as a listed company.

The group declared a final dividend of 110c per share, thanks to sustained revenue from traditional voice services and market endorsement of value-added data and mobile services. Telkom’s strategy to defend core revenues and enhance operating efficiencies lifted group operating revenue by 8,8% to R40,795bn (2003: R37,507bn).

Basic earnings per share grew by 177,5% to 812 cents (2003: 292,6 cents) through a 39,5% increase in operating profit to R9,088bn (2003: R6,514bn)and a reduction of finance charges, which included net losses of R776m arising from measuring derivates at fair value and currency volatility. Ebitda margins expanded to 40% from 35%, underpinning the generation of strong cash flows.

Telkom advanced on its stated plan to contain net debt to equity within a 50 - 70% range. Net debt decreased by 33,8% to R13,362bn (2003: R20,171bn), bringing the net debt to equity ratio to 60,6%, compared to 109,9% in the previous period.

Group capital expenditure decreased by 7,1%, and represented 13% of group revenue, in line with the group’s guidance of maintaining capital expenditure in the range of 12 to 15% of group revenues.

The mobile segment accounted for 25% of group operating revenue, driven largely by customer growth that is evident in a decrease in contract churn.

"Telkom has also allocated R7,7m in its 2004/05 financial year to programmes designed to control the HIV/Aids pandemic," Nxasana adds.

Telkom’s strategy is to enhance education campaigns and to offer voluntary counselling, testing and treatment for affected staff across the country. Telkom estimates HIV/Aids prevalence at 9,6% within its workplace, which is considerably lower than the country’s estimate of 26,5%.

Nxasana says, "People are Telkom’s most important competitive asset, and are key to it being an efficient and cost-effective group. The group has implemented a strategic human capital management plan, which seeks to protect and nurture its people. Telkom’s people are driving operational efficiencies and innovation within the group, and are the people behind customer retention."

Black Economic Empowerment (BEE) also underpins Telkom’s drive for sustainability. Telkom has advanced its strategy, which elevates BEE as a crucial growth imperative for Telkom, by directing R5bn to BEE suppliers in the 2004 financial year. And, in its efforts to contribute to the development of a broad-based black middle class, Telkom created an estimated R560m in value for over 100 000 retail shareholders, who subscribed to Telkom’s Initial Public Offering (IPO).

Telkom has also proceeded with a socially responsible approach to headcount reductions, which has been boosted by the Agency for Career Opportunities. This is an initiative to help employees, often through re-skilling, to become re-employed either internally or externally.

Telkom reduced its fixed-line headcount by 8,5% (excluding subsidiaries) to 32 358 in the 2004 financial year, with only 3,6% of losses being involuntary retrenchments. Telkom aims to reduce employee numbers on an annual basis by 7 to 10% per annum, including natural attrition. This will be largely enabled through the Operational Support Systems (OSS) initiative, which aims to provide automated solutions to enhance revenue and reduce costs. Already, increased employee productivity has been reflected in growth from 137 to 149 lines per employee.

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