Group Operating Revenue

Group operating revenue increased 13.9 percent to R37 325 million (March 2015: R32 760 million), driven by the acquisition of Business Connexion, higher mobile data revenue, fixed-line subscription revenue and higher equipment sales. This was offset by the continuous decline in fixed-line voice revenue and lower data connectivity which includes leased line revenue driven by our intention to migrate traditional revenue to bundled and next generation products and services.

Fixed-line voice usage revenue decreased by 12.2 percent to R6 029 million (March 2015: R6 867 million) driven by competition, our migration of voice customers to bundled and annuity products and a 6.5 percent decline in the number of lines.

Fixed-line subscriptions revenue grew 5.2 percent to R8 421 million (March 2015: R8 005 million) as a result of customers migrating to bundled offerings and average line rental tariff increases for business and residential customers.

Mobile voice and subscriber revenue increased 18.4 percent to R849 million (March 2015: R717 million). This can be attributed to a 23.8 percent increase in the number of active mobile subscribers and a 19.2 percent increase in blended ARPU.

Interconnection revenue decreased 15.1 percent to R1 267 million (March 2015: R1 493 million) due to competitive pricing.

Group data revenue including BCX increased 29.2 percent to R14.7 billion which constitutes 39.4 percent of the total revenue.

Revenue from data connectivity services decreased 1.1 percent to R6 763 million (March 2015: R6 836 million), caused by a decline in revenue from leased lines.

The decrease is partly offset by growth in Metro-Ethernet and Mega line services as a result of migration and an increase in ADSL revenue driven by a 2.2 percent increase in Broadband subscribers to 1 027 507 (March 2015: 1 005 286).

Higher growth of 7.6 percent in Internet access and related services revenue to R1 971 million (March 2015: R1 832 million) was as a result of higher uptake on uncapped services.

Managed data network services revenue increased 6.7 percent to R1 116 million (March 2015: R1 046 million) due to higher VPN supreme and satellite revenue.

Mobile data revenue increased 59.4 percent to R1 575 million (March 2015: R988 million) driven by our strategy to focus on data which led to a 72 percent increase in mobile data traffic.

IT Business Services of the group increased 411.1 percent to R3 235 million (March 2015: R633 million) due to the inclusion of BCX.

Group customer premises equipment sales increased 61.6 percent to R4 370 million (March 2015: R2 704 million) mainly due to increased mobile handset and equipment sales and the inclusion of BCX.

Group Other Income

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

Other income increased 75.2 percent to R1 281 million (March 2015: R731 million) mainly as a result of higher profit on sale of properties.

Group Direct Expenses

Group direct expenses increased 58 percent to R9.8 billion as a result of the consolidation of Business Connexion from 1 September 2015.

Telkom direct expenses

Payments to international operators decreased 14.8 percent as a result of interconnect traffic lost due to competitive pricing. We regained lost traffic in the latter part of the year under review.

Higher direct cost is driven by an increase in subscriber acquisition costs

Group Operating Expenses

Group operating expenses including depreciation, amortisation, impairments and write-offs were flat at R23.3 billion (March 2015: R23.4 billion) for the year ended 31 March 2016. Telkom’s operating expenses decreased 5.2 percent due to lower employee expenses and effective property management cost.

Telkom operating expenditure

Employee expenses were 9.6 percent lower due a lower headcount emanating from voluntary severance and retirement packages and the outsourcing of the call centres in the previous period. The headcount decreased 24.9 percent to 13 766 full-time employees. This was offset by a 6.6 percent average salary increase for bargaining unit employees and a 6.1 percent average salary increase for management employees.

Selling, general and administrative expenses increased 3.3 percent to R4 819 million (March 2015: R4 664 million) mainly due to cost relating to the outsourcing of our call centres.

Service fees decreased 9.9 percent to R2 893 million (March 2015: R3 209 million) largely due to effective property management partly offset by an increase in costs incurred relating to the company’s transformation programme.

The 12.2 percent decrease in vehicle leases was mainly attributed to the transition of our vehicle supply contract despite initial disruption during the execution of this initiative.

Building leases increased 11.7 percent to R508 million (March 2015: R455 million) as a result of an increase in the site lease cost on mobile masts.

Depreciation decreased 3.4 percent to R5 274 million (March 2015: R5 459 million) due to lower asset write-offs and acceleration.

Mobile operating expenditure

Business Connexion operating expenditure

Investment income

Investment income consists of interest received on short-term investments and bank accounts. Investment income decreased by 30.7 percent to R203 million (March 2015: R293 million) as a result of lower 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 movements decreased 213.5 percent to a loss of R101 million (March 2015: R89 million gain). This decrease was mainly attributable to a fair value loss (prior year was a gain) on revaluation of the underlying assets held by the cell captive. The interest expense decreased 7.3 percent to R521 million (March 2015: R562 million) as a result of lower debt levels.

Taxation

The reported tax expense increased by 1 971.4 percent to R524 million (March 2015: R28 million credit). The lower 2015 expense was mainly as a result of the settlement of the post-retirement medical aid liability related to the post-1994 pensioners and the reversal of provisions relating to the 2010 tax year.

The normalised tax expense increased by 52.4 percent to R1 041 million (March 2015: R683 million) and excludes the R517 million (March 2015: R711 million) tax benefit on the voluntary severance and retrenchment expenses and other one-off items.

Consolidated statement of financial position

The group’s capital structure remains strong. Net debt, including financial assets and liabilities, increased to R1 373 million from R123 million as at 31 March 2015, resulting in a net debt to EBITDA ratio of 0.1 times. On 31 March 2016, the group had cash balances and other money market investments of R4.2 billion (31 March 2015: R4.7 billion). The lower cash balances emanate from significant cash outflows including the cash payment for BCX, dividend payment and voluntary early retirement and severance package costs. Despite the significant cash outflows we remain lowly geared with a comfortable debt maturity profile.

Free Cash Flow

Group capital expenditure

Our capital expenditure programme has been aligned to focus on the growth areas of our business which include fibre to the home and LTE as well as cost and operational efficiencies emanating from network rehabilitation and our Operating Support System (OSS) and Business Support System (BSS) programme.

Group capital expenditure, which includes spend on intangible assets, increased 16.8 percent to R6 090 million (March 2015: R5 214 million) and represents 16.3 percent of group operating revenue (March 2015: 15.9 percent).

The Fibre to the Home expenditure of R757 million (March 2015: R252 million) has been aligned to the company strategy and there is an enhanced focus on fibre deployment, with a stated plan to pass one million homes by 2018.

Mobile capital expenditure increased 37 percent to R660 million (March 2015: R481 million), due to the focus on continued LTE deployment, for the provision of fixed wireless access via LTE and Mobile LTE products and is intended to project and grow our customer base.

OSS/BSS programme expenditure increased 34.7 percent to R544 million (March 2015: R404 million) and is focused on operational and business support systems to ensure fulfilment assurance and billing requirements relating to our product portfolio. The programme will continue to focus on the improvement of operational efficiencies and will support the launch of next generation products.

Network rehabilitation and sustainment category expenditure of R674 million (March 2015: R429 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 to improve the customer experience for voice and ADSL services.

Service on Demand expenditure increased 3.2 percent to R1 540 million (March 2015: R1 492 million). Service on Demand provides network “last-mile” connectivity and the related customer premises equipment to fulfil customer orders.

The expenditure on the next generation network decreased from R857 million in March 2015 to R553 million in March 2016 due to the prioritisation of the Fibre to the Home/Business and the OSS/BSS programmes.

Other capital expenditure of R1 033 million (March 2015: R1 036 million) is due to enhanced operating and capital expenditure efficiencies, incremental revenue growth, buildings and our Centurion campus optimisation.