Group Operating Revenue

Group operating revenue increased 1,2 percent to R31 675 million (March 2014: R31 288 million), driven by higher mobile voice and data revenue, higher IT Business Services revenue and higher equipment sales. This was partly offset by the continuous decline in fixed-line voice revenue and lower data leased line revenue resulting from self-provisioning by other licensed operators.

Fixed-line voice usage revenue continued its downward trend, decreasing 13,5 percent to R6 867 million (March 2014: R7 934 million). This can be attributed to a 9,6 percent decline in voice minutes, resulting from fixed-to-mobile substitution and a 4,9 percent decline in the number of lines. The decrease was in business as well as residential lines. Business lines decreased due to the consolidation of business activities and cost-saving initiatives.

Fixed-line subscriptions revenue grew 2,5 percent to R8 005 million (March 2014: R7 812 million) as a result of average line rental tariff increases of around 6 percent.

Mobile voice and subscriber revenue increased 46,0 percent to R717 million (March 2014: R491 million). This can be attributed to a 21,2 percent increase in the number of active mobile subscribers and a 19,5 percent increase in blended ARPU.

Interconnection revenue remained relatively flat. The decrease in international interconnection revenue was due to lower international outgoing traffic volumes.

Revenue from data connectivity services decreased 0,4 percent to R5 441 million (March 2014: R5 461 million), caused by a decline in Diginet and IPLC revenue, due to increased competition and migration to Metro Ethernet services. This was partially offset by an increase in ADSL revenue and Metro Ethernet services. ADSL revenue increased as a result of a 7,9 percent increase in ADSL subscribers to 1 005 286 (March 2014: 931 858).

With continued self-provisioning by other licensed operators, revenue from leased line facilities remained under pressure and declined 22,0 percent to R1 395 million (March 2014: R1 789 million).

Higher growth of 9,3 percent increase in Internet access and related services revenue was supported by a 7,5 percent increase in Internet subscribers.

Managed data network services revenue increased 13,8 percent to R1 046 million (March 2014: R919 million) due to an increase in the number of VPN Supreme and satellite services customers.

In line with our strategy to focus on data, we offered attractive data deals and promotional products which led to an increase in data subscribers, and a 50,6 percent increase in mobile data revenue to R988 million (March 2014: R656 million).

We won some key strategic deals in the IT market, which boosted our IT Business Services data revenue by 82,4 percent to R633 million (March 2014: R347 million).

The strategic decision that was made to discontinue sales of PC and gaming equipment saw a 19,5 percent decline in customer premises equipment sales to R247 million (March 2014: R307 million). Despite this, our rentals increased 14,1 percent to R865 million (March 2014: R758 million) due to increased uptake in next generation equipment rentals and higher tariffs.

Mobile handset and equipment sales revenue increased 42,0 percent, driven by higher bulk sales to dealers and a sharp increase in smartphone and tablet sales.

Group Other Income

Other income includes profit on the disposal of investments, property, plant and equipment as well as interest received from debtors and sundry income.

Other income increased 31,6 percent to R699 million (March 2014: R531 million) as a result of higher profit on sale of properties.

Group Direct Expenses

Telkom direct expenses

Payments to mobile operators decreased 37,2 percent as a result of a reduction in mobile termination rates. The 34,4 percent increase in cost of sales is largely attributed to the increase in the cost of mobile device sales.

Group Operating Expenses

Group operating expenses including depreciation, amortisation, impairments and write offs decreased by 2,7 percent to R23 157 million (March 2014: R23 791 million) in the year ended 31 March 2015, primarily due to asset impairments and accelerated depreciation on new connections installed to customer premises included in the prior year as well as lower employee expenses as a result of the curtailment of the post-retirement medical aid liability in the prior year.

Telkom operating expenditure

Employee expenses were 3,7 percent lower due to the curtailment of the post-retirement medical aid liability for in-service members and pensioners, a 4,5% reduction in full-time employee headcount and lower part-time staff headcount. This was offset by a 6,2 percent average salary increase for bargaining unit employees and a 6,0 percent average salary increase for management employees.

Selling, general and administrative expenses remained relatively flat. More focused marketing expenses resulted in a decrease of 10,6 percent to R714 million (March 2014: R799 million). This was partially offset by increased bad debts as we made provision based on the adverse economic conditions affecting payment patterns. The other category decreased 9,4 percent to R761 million (March 2015: R840 million) as we settled certain pending litigation, partially offset by higher inventory write-offs and licence fees.

Space optimisation projects and higher electricity tariffs led to an 11,1 percent increase in property management expenses. Consultants, security and other service fees decreased 5,9 percent, driven by lower consulting costs incurred relating to the Company’s transformation programme.

The 5,8% decrease in vehicle leases was mainly attributed to fewer kilometres travelled, a lower average cost of fuel and benefits from contract renegotiations.

Depreciation decreased 2,3 percent to R4 481 million (March 2014: R4 588 million) due to higher accelerated depreciation on new connections installed to customer premises included in the prior year. Impairments and write-offs declined 65,0 percent to R221 million (March 2014: R632 million). This decline is largely attributable to the impairment of certain legacy and technologically aged items in the prior year.

Mobile operating expenditure

Details of Telkom Mobile operating expenditure are provided below.

Investment income

Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 73,6 percent to R283 million (March 2014: R163 million) as a result of higher cash balances held by the Group.

Finance charges and fair value movements

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 the cell captive as well as foreign exchange gains and losses on foreign currency denominated transactions and balances.

Foreign exchange and fair value gains decreased 74,1 percent to R89 million (March 2014: R344 million). This decrease was caused by lower fair value gains on derivatives due to the implementation of hedge accounting effective 1 October 2013, which results in certain foreign exchange gains and losses not being recognised in earnings in the current period. Lower fair value gains realised on the underlying assets held by the cell captive also contributed to the decrease. The interest expense decreased 11,9 percent to R560 million (March 2014: R636 million) as a result of lower debt levels.

Taxation

The normalised consolidated tax expense excludes the R546 million (March 2014: R246 million) benefit from the payment to an insurer for our post-retirement medical aid liability to in service members and pensioners and the R165 million tax benefit on the voluntary severance and retrenchment expenses. The normalised consolidated tax expense decreased by 10,0 percent to R543 million (March 2014: R603 million) mainly as a result of favourable prior year adjustments of R337 million (March 2014: R224 million unfavourable) and the recognition of a deferred tax asset of R250 million (March 2014: Nil).

Consolidated statement of financial position

The Group’s capital structure remains strong. Net debt, including financial assets and liabilities, decreased 92,8 percent to R151 million from R2 092 million as at 31 March 2014, resulting in a net debt to EBITDA ratio of 0,02 times. On 31 March 2015, the Group had cash balances, including other financial assets and liabilities, of R4 677 million (31 March 2014: R1 930 million). The higher cash balances emanate from a measured approach to capital investment with a focus on returns as well as cash received from a R1 billion loan secured to extend our debt maturity profile.

Free Cash Flow

Free cash flow increased significantly to R3 898 million (March 2014: R1 145 million) as a result of the 15,1 percent increase in EBITDA and a 21,3 percent decrease in cash paid for capital expenditure.

Group capital expenditure

Our capital expenditure programme is aligned to our strategy to build our next generation network and grow mobile and converged service offerings.

Group capital expenditure, which includes spend on intangible assets, decreased 21,4 percent to R5 164 million (March 2014: R6 566 million) and represents 16,3 percent of Group operating revenue (March 2014: 21,0 percent).

Baseline capital expenditure of R1 834 million (March 2014: R1 837 million) consists largely of the deployment of technologies to support the growing data services business, Internet capacity growth, links to the mobile cellular operators and access line deployment in selected high-growth commercial and business areas.

Network evolution expenditure of R1 504 million (March 2014: R2 439 million) is related to the continued rollout of the next generation network programme which aims to modernise the legacy voice network, provide high-speed broadband in selected areas and to address the associated operational and business support systems. The lower expenditure is largely due to a more rigorous focus on project selection, in accordance with the group’s focus on efficient execution of its strategy. Our roll out was also impacted by civil work required to install fibre to the home and business.

Mobile capital expenditure decreased 64,8 percent to R481 million (March 2014: R1 368 million), due to the shift to a more concentrated rollout in major metropolitan areas. The current focus on the radio access network (RAN) is to complete existing projects and to provide capacity to relieve congestion in identified growth areas.

The sustenance category expenditure of R224 million (March 2014: R198 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 is due to a focus on access network rehabilitation, mainly to improve the customer experience for voice and ADSL services.

The increase in the effectiveness and efficiency category to R543 million (March 2014: R162 million) resulted from a number of projects, including the relocation of Telkom head office staff to Centurion, a contact centre consolidation initiative and the replacement of electric lighting with lower energy LED lights.

The support capital expenditure of R348 million (March 2014: R357 million) is primarily related to the provision of new buildings and building extensions in support of network growth, building compliance upgrades, the replacement of obsolete personal computers and the purchase of test equipment for technical staff.