Johannesburg, South Africa - 13 June 2014, Telkom SA SOC Limited (JSE: TKG) today announced Group annual results for the year ended 31 March 2014.

Message from Telkom Group CEO Sipho Maseko

Our efforts to turn Telkom around are starting to produce results. Our headline earnings per share from continuing operations excluding once offs for the year was 388,0 cents, up 35,1% on the previous year. Basic earnings per share increased to 285,2 cents from 268,5 cents in the prior financial year.

In the past financial year, in line with our guidance to stabilise revenues, we have achieved revenue growth of 1,1% for the year, confirming that we still face significant challenges largely as a result of the sustained pressure on our fixed-line revenues. Group reported revenue was R32,5 billion compared with R32,1 billion in the prior period. Our operating expenses, excluding depreciation, decreased 2,1% to R18,2 billion, from R18,5 billion last year, a commendable achievement when you consider that in real terms this translates to an 8,2% reduction in operating expenses. This can be attributed to lower employee cost, lower bad debts as we improved our credit vetting processes and efficiencies gained on various cost management initiatives including a reduction in marketing expenditure and lower inventory write-offs. We began to realise some significant efficiencies in our third party spend by improving our facilities management, and rationalising our property portfolio.

This resulted in an improvement in EBITDA , which grew 3,8% to R8,4 billion. Our free cash flow remained strong at R1,2 billion, after capital investment of R6,5 billion, which increased 12,0% year-on-year. This can be largely attributed to the substantial investment in our Next Generation Network. The Group is lowly geared, with year-on-year net debt decreasing 0,8% to R2,1 billion, which will ensure that we remain in a position to fund our capital expenditure programme.

Prospects

Based on our guidance provided in November 2013, the Group plans to reinstate the dividend in the 2015 financial year, subject to the financial performance of the Group, the operating environment, growth opportunities and debt and cash flow levels. The Board has decided not to declare a dividend in respect of the financial year ended 31 March 2014.

Going forward, we expect to see continued pressure on fixed-line voice revenues, intensified by strong competition, a challenging macro-economic environment and effects of regulatory interventions. Our objective to further stabilise and grow revenue is dependent on effectively positioning our resources to drive value and achieving efficiencies across our operating cost base to improve EBITDA margins. This will require us to focus our capital expenditure on areas that generate satisfactory returns for our shareholders, and to avoid unprofitable operations.

We aim to successfully conclude the proposed MTN South Africa and Business Connexion transactions within the current financial year, enabling us to rapidly fill gaps in our service and product offering, which we believe will improve Telkom's competitiveness, profitability and ability to provide fully converged solutions to our customers.

Financial guidance

Further cautionary

Shareholders are referred to the cautionary announcements published on the Securities Exchange News Service of the JSE Limited on 6 and 7 March 2014 and on 23 April 2014. Shareholders are advised that Telkom and MTN South Africa remain in discussions regarding the potential extension of their existing roaming agreement to include bilateral roaming and outsourcing of the operation of Telkom's radio access network, which if successfully concluded may have a material effect on the price of Telkom's securities.

Accordingly, shareholders are advised to continue to exercise caution when dealing in Telkom securities until a further announcement in this regard is made.

Results from operations

The Group recorded a profit after tax of R4 billion. This is significantly higher than the previous year and was driven by:

• a R2 169 million net curtailment gain recognised on the post-retirement medical aid liability and R246 million related tax benefit on the R878 million settlement;
• the R12 billion asset impairment included in the 2013 financial year;
• R592 million provision for the Competition Commission fines included in the prior year; and
• R434 million voluntary severance and early retirement cost included in the prior year.

As we reported at our interim results, the company reassessed the underlying assumptions used to determine the value of the post-retirement medical aid liability for qualifying employees. The growth assumption for the subsidisation amount at retirement was capped at 0% and employees were offered a settlement calculated at the economic value of their liability. This curtailment and subsequent settlement was the main contributor to a net non-cash gain of approximately R2 169 million and a reduction in the post-retirement medical aid liability.

The once-off items above are not part of the results from core operations for the year under review and have therefore been excluded from the discussion below.

The Group recorded a profit after tax of R1 577 million (2013: R1 494 million) and EBITDA of R8 370 million (2013: R8 061 million).

The changes from our transformation process are starting to positively impact our financial performance. However, we still face significant challenges in our fixed-line voice and mobile business, including fixed-to-mobile substitution and being the fourth entrant into a highly competitive mobile market. Our net revenue decreased by 0,4%, driven by a continued decline in fixed voice revenue, partially offset by lower payments to mobile operators which resulted from the reduction in mobile termination rates. We recorded promising growth of 80,2% in mobile data revenue and 69,3% in IT Business services revenue. Data revenue now constitutes approximately 33,8% of Group revenue which increased 1,7% from the prior reporting period. Data volumes, however, were negatively impacted by an increasingly competitive pricing landscape.

We managed to reduce operating cost by 2,1%. This reduction was largely driven by lower full time and part time employee costs and bonus payments, lower bad debts from improved credit vetting systems, and savings on materials and maintenance from efficiencies gained from various cost management initiatives. In addition, we reduced marketing expenditure and managed to limit inventory write-offs.

The Group generated strong cash flows, resulting in a healthy capital structure. In addition, interest bearing debt decreased 38,5% to R4,1 billion at 31 March 2014.

Report structure

In line with the Group's convergence strategy, key performance indicators are measured and evaluated on a Group-wide basis. The Group therefore consists of one operating segment.

However, this report provides further details of the fixed-line business which offers fixed-line access and data communication services through Telkom South Africa, and the mobile business which offers mobile voice services, data services and handset sales through Telkom Mobile. The contribution of the subsidiaries, Trudon and Swiftnet, are also shown separately. The Telkom category represents Telkom Company's contribution to the Group including consolidation entries.

The comparative information for March 2013 has been restated as a result of the adoption of IAS 19R, the amendment to IAS 16, the reclassification of iWayAfrica as a discontinued operation and to account for the change in accounting policy regarding the Cell Captive. Refer to note 2.1 in the condensed consolidated provisional financial statements.

In addition the following items have been reclassified to provide more relevant disclosure:

• Direct cost of R373 million and cost of sales of R1 176 million have been reclassified from selling, general and administrative expenses to direct cost and cost of sales, respectively.
• Sundry revenue of R128 million has been reclassified from selling, general and administrative expenses to other income.
• Motor insurance scheme expenses of R84 million, previously included in service fees, has been reclassified to employee expenses.

Group salient features for the year ended 31 march 2014

• ADSL subscribers increased 6.5% to 926,944.
• Calling plan subscribers increased 1.3% to 867,874.
• Managed data network sites increased 6.3% to 47,125.
• Active mobile subscribers increased 17.6% to 1,803,675 with a blended ARPU of R62.79.
• Mobile sites integrated increased 22.3% to 2,428.
• 1,183 LTE sites integrated.
• Operating revenue up 1.1% to R32.5 billion.
  • Fixed-line voice and interconnection revenue decreased 7.4% to R9.4 billion.
  • Fixed-line data revenue decreased 1.1% to R10.3 billion.
  • Mobile revenue increased 72.7% to R2,347 million.
  • Mobile data revenue increased 80.2% to R656 million.
• EBITDA excluding the once off items improved 3.8% to R8.4 billion.
• Headline earnings per share excluding the once off items increased 35.1% to 388.0 cents.
• Operating expenses, excluding depreciation, decreased 2.1% to R18.2 billion
• Free cash flow generated remains strong at R1,145 million.
• Group interest bearing debt decreased 38.5% to R4.1 billion.