We have changed the revenue presentation to align to internal business focus areas. Voice revenue is classified as usage or subscription revenue and customer premises equipment and sales revenue is disclosed separately. Prior year numbers have been restated to reflect the new presentation format.
Group operating revenue increased 1.1% to R32,483 million (2013: R32,143 million), driven by higher mobile handset and equipment sales, growth in mobile data and IT Business services data revenue, offset by a decline in voice revenue.
Fixed-line voice usage revenue continued on a downward trend, decreasing 7.6% to R7,934 million (2013: R8,591 million). This can be attributed to a 2.1% decline in voice minutes, resulting from fixed-to-mobile substitution, with a decrease of approximately R190 million relating to the pass through of reduced mobile termination rates to fixed-line customers. In addition, fixed-line voice usage was impacted by a decline in number of lines of 4.8%.The number of business lines decreased due to the consolidation of business activities and cost saving initiatives.
Fixed-line subscriptions revenue grew 0.9% to R7,812 million (2013: R7,743 million) as a result of average line rental tariff increases of 6%.
While revenue from our mobile operations grew 72.7%, mobile voice and subscriber revenue decreased 20.4%. This can be attributed to the expiry of bulk hybrid contracts and a clean-up of our debtors' book which has resulted in improved quality of our customer base. The decrease in post-paid voice revenue was partially offset by higher pre-paid voice and subscriptions revenue, supported by an increase in subscribers and ARPU. Mobile interconnection revenue increased slightly by 3.9%.
Fixed-line domestic interconnection revenue decreased 18.5% to R458 million (2013: R562 million), primarily driven by the reduction in fixed termination rates.
The 1.3% increase in fixed-line international interconnection revenue to R971 million (2013: R959 million) was driven by higher switched hubbing revenue. However, this was partially offset by a reduction in volumes of international outgoing calls by mobile operators.
Revenue from data connectivity services decreased 0.9% to R5,544 million (2013: R5,595 million), caused by a decline in Diginet, and Megalines revenue, due to increased competition and migration to Metro Ethernet services. This was partially offset by an increase in Metro Ethernet services revenue. ADSL revenue also increased, which was driven by a 6.5% increase in ADSL subscribers to 926,944 (2013: 870,505).
With continued self-provisioning by other licenced operators, revenue from mobile leased line facilities remained under pressure and declined 8.9% to R1,789 million (2013: R1,963 million).
Higher internet and IP Connect revenue was supported by a 3.6% increase in internet access and related services revenue.
Managed data network services revenue decreased 8.6% to R919 million (2013: R1,005 million) which was caused by a reclassification of revenue to IT services revenue of approximately R62 million from 1 April 2013,discounts offered to customers and the migration of customers to lower cost solutions. We increased the number of sites by 6.3% to 47,125 (2013: 44,328).
In line with our strategy to focus on data, we offered enticing data deals and promotional products which led to an increase in data subscribers, and a 80.2% increase in mobile data revenue to R656 million (2013: R364 million).
We made some key strategic wins in the IT market during the year which boosted our IT Business services data revenue which increased 69.3% to R347 million (2013: R205 million).
A strategic decision was made to discontinue sales of PC and gaming equipment, which caused a 6.1% decline in customer premises equipment sales to R307 million (2013: R327 million). Despite this, our rentals increased 7.7% to R758 million (2013: R704 million) due to increased uptake in next generation equipment rentals and higher tariffs.
Mobile handset and equipment sales revenue increased 271.2%, driven by higher bulk sales to dealers and a sharp increase in Smartphone and Tablet sales.
Other revenue increased 61.7% to R367 million (2013: R227 million) as we recognised higher revenue from expired cards and higher co-location revenue generated from an increase in the number of sites.
Other income includes profit on the disposal of investments, property, plant and equipment as well as interest received from debtors and sundry income.
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Payments to other operators | 3 944 | 4 460 | 11.6 |
| Direct cost | 560 | 373 | (50.1) |
| Cost of sales | 1 938 | 1 176 | (64.8) |
| Total | 6 442 | 6 009 | (7.2) |
The increase in direct expenses was as a result of an increase in mobile equipment sales and higher subscriber acquisition cost, which was partly offset by a decrease in mobile termination rates.
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Payments to other operators | 3 920 | 4 434 | 11.6 |
| Mobile network operators | 2 308 | 2 901 | 20.4 |
| International network operators | 946 | 904 | (4.6) |
| Fixed-line network operators | 338 | 368 | 8.2 |
| Data commitments | 328 | 261 | (25.7) |
| Direct cost | 560 | 373 | (50.1) |
| Cost of sales | 1 616 | 856 | (88.8) |
| Total | 6 096 | 5 663 | (7.6) |
Payment to other operators decreased 11.6% as a result of a reduction in mobile termination rates which was moderately offset by higher data commitments.
Direct cost grew 50.1% following an increase in mobile sales acquisition costs relating to an increase in active mobile subscribers.
The 88.8% increase in cost of sales is largely attributed to the increase in cost of mobile handsets and tablets sold.
Year ended 31 March |
|||||||
|---|---|---|---|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
||||
| Employee expenses1 | 9,306 | 9,563 | 2.7 | ||||
| Selling, general and administrative expenses2,3 | 4,682 | 5,059 | 7.5 | ||||
| Service fees1 | 3,110 | 2,996 | (3.8) | ||||
| Operating leases | 1,052 | 925 | (13.7) | ||||
| Depreciation, amortisation, impairments and write-offs4 | 5,937 | 6,180 | 3.9 | ||||
| Total | 24,087 | 24,723 | 2.6 | ||||
| Restatements and reclassifications of comparative information | |||||||
| 1.Motor insurance scheme expenses of R84 million, previous included in service fees have been reclassified to employee expenses. In addition employee expenses have increased by R144 million as a result if the adoption of IAS19R and we have excluded the voluntary severance and early retirement cost of R434 million. | |||||||
| 2. Sundry revenue of R128 million previously included in other expenses was reallocated to other income. | |||||||
| 3. The provision for the Competition Commission fine of R592 million are excluded from the results above and R1,229 million of direct cost and cost of sales are reclassified as direct expenses. | |||||||
| 4. The R12 billion impairment has been excluded from the results and impairments and write-offs have increased by R25 million due to the amendment to IAS16. | |||||||
Group operating expenses decreased by 2.6% to R24,087 million (2013: R24,723 million) in the year ended 31 March 2014, primarily due to depreciation savings resulting from the R12 billion impairment in the prior year and lower bad debts.
Year ended 31 March |
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|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Telkom | 23,704 | 24,319 | 2.5 |
| Trudon | 294 | 322 | 8.7 |
| Swiftnet | 89 | 82 | (8.5) |
| Total | 24,087 | 24,723 | 2.6 |
Year ended 31 March |
|||||||
|---|---|---|---|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
||||
| Employee expenses1 | 9,037 | 9,287 | 2.7 | ||||
| Salaries and wages | 7,103 | 7,285 | 2.5 | ||||
| Benefits1 | 2,315 | 2,479 | 6.6 | ||||
| Workforce reduction expenses2 | 75 | 43 | (74.4) | ||||
| Employee related expenses capitalised | (456) | (520) | (12.3) | ||||
| Selling,general and administrative expenses2,3,5 | 4,695 | 5,050 | 7.0 | ||||
| Materials and maintenance | 3,020 | 3,104 | 2.7 | ||||
| Marketing3 | 799 | 856 | 6.7 | ||||
| Bad debts | 170 | 315 | 46.0 | ||||
| Other4,5 | 706 | 775 | 8.9 | ||||
| Service fees1 | 3,096 | 2,984 | (3.8) | ||||
| Property management | 1,741 | 1,659 | (4.9) | ||||
| Consultants,security and other1 | 1,355 | 1,325 | (2.3) | ||||
| Operating leases | 1,004 | 880 | (14.1) | ||||
| Buildings | 455 | 385 | (18.2) | ||||
| Equipment | 35 | 35 | - | ||||
| Vehicles | 514 | 460 | (11.7) | ||||
| Depreciation,amortisation,impairment and write-offs6 | 5,872 | 6,118 | 4.0 | ||||
| Depreciation | 4,588 | 5,044 | 9.0 | ||||
| Amortisation | 652 | 873 | 25.3 | ||||
| Impairments and write-offs6 | 632 | 201 | (214.4) | ||||
| Total | 23,704 | 24,319 | 2.5 | ||||
| Restatements and reclassifications of comparative information | |||||||
| 1. Motor insurance scheme expenses of R84 million, previous included in service fees have been reclassified to employee expenses. In addition benefits have increased by R144 million as a result if the adoption of IAS19R and R276 million relating to voluntary severance packages. | |||||||
| 2. Voluntary severance and early retirement cost of R710 million excluded. | |||||||
| 3. Market research expenses of R81 million has been reallocated from marketing expenses to other expenses. | |||||||
| 4. Sundry revenue of R128 million previously included in other expenses was reallocated to other income. | |||||||
| 5. The provision for the Competition Commission fine of R592 million is excluded from the results above and R1,229 million of direct cost and cost of sales are reclassified as direct expenses. | |||||||
| 6. The R12 billion impairment has been excluded from the results and impairments and write-offs have increased by R25 million due to the amendment to IAS16. | |||||||
Employee expenses were 2,7% lower due to lower full time salary cost as headcount decreased by 9,5%. Part time employee costs, lower provision for bonus and lower overtime also contributed to the decrease. This was negated by a 6,8% average salary increase for bargaining unit employees, a 3,6% average salary increase for management employees and a R103 million curtailment loss on the retirement fund in the 2014 financial year. The curtailment loss relates to the impact on plan assets as a result of the closing of the voluntary severance and early retirement packages offered in the 2013 financial year.
Selling, general and administrative expenses decreased 7.0% to R4,695 million (2013: R5,050 million), as a result of lower bad debts which decreased 46.0% due to improved ADSL and mobile credit vetting systems, lower materials and maintenance, resulting from various cost saving initiatives, lower inventory write-offs and marketing expenses. This, however, was partly offset by higher licence fees.
Space optimisation projects, repairs and renovation of mobile buildings and masts and higher electricity costs led to a 4.9% increase in property management expenses. Consultants, security and other service fees increased 2.3%, which was driven by higher costs incurred relating to the Company's transformation programme.
Building leases increased 18.2% as a result of annual escalations and an increase in the number of mobile sites acquired. The 11.7% increase in vehicle leases was mainly attributed to a payment made to terminate 500 vehicles early, which saw a decrease in number of vehicles to 6,066 (2013: 6,848).
Depreciation decreased 4.0% to R5,872 million (2013: R6,118 million). This decline relates to the R12 billion impairment of the asset base in March 2013. However, this was partially offset by accelerated depreciation from reviewing the useful lives of new connections installed to customer premises and a 60.8% increase in depreciation of our mobile assets. The increase in mobile depreciation is driven by the continued expansion of the mobile network.
Impairment and write-offs increased significantly to R632 million (2013: R201million). With effect from 1 April 2013, Telkom adopted an amendment to IAS 16, property plant and equipment (PPE) which clarifies that spare parts previously included in inventory be classified as PPE if they meet the definition of PPE. Consequently, certain legacy and technologically aged items were reclassified to PPE from inventory. An impairment was recognised regarding these assets in line with the requirements of IFRS.
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Payments to other operators | 482 | 482 | - |
| Direct cost | 461 | 294 | (56.8) |
| Cost of sales | 1 056 | 416 | (153.8) |
| Employee expenses | 359 | 333 | (7.8) |
| Selling, general and administrative expenses | 988 | 1 077 | 8.3 |
| Service fees | 144 | 245 | 41.2 |
| Operating leases | 220 | 187 | (17.6) |
| Depreciation, amortisation, impairments and write-offs | 598 | 372 | (60.8) |
| Total | 4 308 | 3 406 | (26.5) |
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Telkom | 7,797 | 7,474 | 4.3 |
| EBITDA margin(%) | 24.9 | 24.2 | 0.7 |
| Trudon | 573 | 580 | (1.2) |
| EBITDA margin(%) | 51.5 | 50.9 | 0.6 |
| Swiftnet | - | 7 | (100.0) |
| EBITDA margin(%) | - | 7.4 | (7.4) |
| Total | 8,370 | 8,061 | 3.8 |
Investment income consists of interest received on short-term investments and bank accounts. Investment income decreased by 36.9% to R176 million (2013: R279 million) as a result of lower cash balances held by the Group.
Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances.
Foreign exchange and fair value gains decreased 20.4% to R344 million (2013: R432 million). This decrease was caused by lower fair value gains on derivatives due to the implementation of hedge accounting effective 1 October 2013 and partly offset by higher fair value gains realised on trading in the underlying assets held by the Cell Captive. Interest expense decreased 3.0% to R636 million (2013: R656 million) as a result of a 38.5% decrease in interest bearing debt from 31 March 2014 and lower interest rates.
The Group’s capital structure remains strong. Net debt, including financial assets and liabilities, decreased 0.8% to R2,108 million from R2,125 million as at 31 March 2013, resulting in a net debt to EBITDA ratio of 0.3 times. On 31 March 2014, the Group had cash balances, including other financial assets and liabilities, of R1,930 million (2013: R4,461 million).
Current liabilities decreased in the year ended 31 March 2014 as we settled the R2.0 billion syndicated loan.
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Cash generated from operations before dividends paid as reported | 6 490 | 7 649 | (15.2) |
| Add back: Payment to Competition Commission | 291 | - | - |
| Add back: Payment to insurer for post retirement medical aid | 878 | - | - |
| Add back: Voluntary severance and early retirement cost | 710 | - | - |
| Less: Taxation refund received | (854) | ||
| Normalised cash generated from operations before dividends paid | 7 515 | 7 649 | (1.8) |
| Cash paid for capital expenditure | (6 370) | (5 627) | (13.2) |
| Free Cash Flow | 1 145 | 2 022 | (43.4) |
Free cash flow decreased 43.4% to R1,145 million (2013: R2,022 million) as a result of an increase in foreign payments triggered by a weakened rand against the major currencies as well as a 13.2% increase in our capital expenditure.
Year ended 31 March |
|||
|---|---|---|---|
| In ZAR millions | 2014 |
2013 |
% |
| Baseline | 1 837 | 2 057 | 10.7 |
| Network evolution | 2 439 | 1 232 | (98.0) |
| Mobile | 1 368 | 1 548 | 11.6 |
| Sustenance | 198 | 310 | 36.1 |
| Effectiveness and efficiency | 162 | 121 | (33.9) |
| Support | 357 | 377 | 5.3 |
| Other | 27 | 26 | (3.8) |
| Trudon | 45 | 63 | 28.6 |
| Swiftnet | 25 | 34 | 26.5 |
| Total | 6 458 | 5 768 | (12.0) |
Baseline capital expenditure of R1,837 million (2013: R2,057 million) consists largely of the deployment of technologies to support the growing data services business, links to the mobile cellular operators and access line deployment in selected high growth commercial and business areas. The reduction in expenditure for the year is due to the provision of xDSL and Metro Ethernet services under the Next Generation Network programme, included in the network evolution category.
Expenditure on network evolution of R2,439 million (2013: R1,232 million) related to the continued rollout of the Next Generation Network programme which aims to modernise the legacy voice network, provide high speed broadband in select areas and to address the associated operational and business support systems. The expenditure on this programme has increased as it accelerates beyond the initial phase.
Mobile capital expenditure decreased 11.6% to R1,368 million (2013: R1,548 million), due to the shift to a more concentrated rollout in the four major metropolitan areas.
The sustenance category expenditure of R198 million (2013: R310 million) was largely linked to the replacement of obsolete power systems as well as the replacement and modernisation of the access and core network.
The increase in the effectiveness and efficiency category to R162 million (2013: R121 million) was as a result of the movement of staff from leased buildings to owned buildings and various IT efficiency projects.
The support capital expenditure of R357 million (2013: R377 million) is primarily related to rebranding Telkom stores during the year, the provision of new buildings and building extensions in support of network growth and building compliance upgrades. This capital expenditure decreased 5.3% because a number of projects which were started in previous years were completed.