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Operating results

Operating results

Group summary financial information

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     Service revenue 54 052   52 184   48 671   3.6   7.2 Revenue 61 197   58 535   55 442   4.5   5.6 EBITDA 20 594   19 782   18 196   4.1   8.7 Operating profit 13 696   11 238   12 005   21.9   (6.4) Net profit 7 979   4 200   6 192   90.0   (32.2) Free cash flow 8 829   7 212   3 176   22.4   127.1 Capital expenditure 6 311   6 636   6 906   (4.9)   (3.9) Net debt 9 458   12 161   17 537   (22.2)   (30.7) Basic earnings per share (cents) 561   282   409   98.9   (31.1) Headline earnings per share (cents) 656   510   417   28.6   22.3 Contribution margin (%) 54.9   54.3   53.3         EBITDA margin (%) 33.7   33.8   32.8         Operating profit margin (%) 22.4   19.2   21.7         Effective tax rate (%) 36.9   53.0   39.5         Net profit margin (%) 13.0   7.2   11.2         Net debt/EBITDA (times) 0.5   0.6   1.0         Capex intensity (%) 10.3   11.3   12.5

The Group has reclassified certain numbers previously reported to align with reporting practices of its ultimate parent.

for full details of reclassifications.

Revenue

Service revenue

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     South Africa 46 392   44 324   41 182   4.7   7.6 International 7 957   8 071   7 570   (1.4)   6.6 Corporate and eliminations (297)   (211)   (81)   (40.8)   (160.5) Service revenue 54 052   52 184   48 671   3.6   7.2

Revenue

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     South Africa 53 371   50 431   47 733   5.8   5.7 International 8 196   8 420   7 902   (2.7)   6.6 Corporate and eliminations (370)   (316)   (193)   (17.1)   (63.7) Revenue 61 197   58 535   55 442   4.5   5.6

Group revenue and service revenue for the year ended 31 March 2011 increased 6.4%(*) and 5.5%(*) respectively (reported 4.5% and 3.6% respectively), underpinned by continued growth in Group data and voice revenue offset by a decline in interconnect revenue from South Africa. The South African rand strengthened against all other functional currencies, negatively impacting reported revenue and service revenue of the International operations which declined 2.7% and 1.4% respectively. Revenue and service revenue from the International operations increased 10.5%(*) and 11.6%(*) respectively. Customers increased 9.0% to 43.5 million across the Group, with South Africa contributing 61.0% of the total base. Contract customer growth remained strong, up 14.2% to 5.3 million. Prepaid customers increased 8.4% to 38.2 million, mainly from the International operations as the South Africa prepaid customer base was negatively impacted by the change in the disconnection rule.

Revenue analysis

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     Mobile voice 32 181   31 338   31 025   2.7   1.0 Mobile interconnect 7 230   8 742   9 099   (17.3)   (3.9) Mobile messaging 3 192   2 964   2 797   7.7   6.0 Mobile data 6 433   4 749   3 639   35.5   30.5 Other service revenue 5 016   4 391   2 111   14.2   108.0 Service revenue 54 052   52 184   48 671   3.6   7.2 Equipment revenue 6 440   5 591   5 300   15.2   5.5 Non-service revenue 705   760   1 471   (7.2)   (48.3) Revenue 61 197   58 535   55 442   4.5   5.6

Group voice revenue increased 2.7% to R32 181 million, with 88.8% contributed by South Africa. Group voice traffic increased 19.0% offset by a decline in the effective price per minute of 18.0%. Group interconnect revenue declined 17.3% to R7 230 million, largely as a result of a reduction in fixed-mobile traffic combined with the decline in mobile termination rates ('MTRs') in South Africa. International interconnect revenue declined 18.9%, due to unfavourable foreign exchange movements as well as increased price competition in DRC. Group data revenue increased 35.5% to R6 433 million underpinned by a 39.4% growth in data customers to 10.2 million. Group data usage increased by 54.6% offset by a decline in the effective rate per MB of 17.4%. Other service revenue increased 14.2% to R5 016 million. This resulted primarily from a higher contribution from converged services across the Group as well as a positive variance on the provision carried in connection with customer loyalty programmes. Vodacom adopted IFRIC 13: Customer Loyalty programmes ('IFRIC 13') in the prior year which resulted in an expense of R119 million being recognised in other service revenue on 1 April 2009. Equipment revenue increased 15.2% to R6 440 million. The increase was mainly contributed by South Africa and resulted from an increase of 40.6% of units sold to 8.1 million over the year offset by a reduction in the average selling price of 18.8% over the prior year. Non-service revenue declined 7.2% to R705 million mainly due to a significant reduction in the price of both new prepaid starter packs and contract SIM cards, offset by higher gross connections.

Operating expenses1

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     South Africa 33 758   31 850   31 590   6.0   0.8 International 7 348   7 243   5 968   1.4   21.4 Corporate and eliminations (468)   (323)   (231)   (44.9)   (39.8) Operating expenses1 40 638   38 770   37 327   4.8   3.9

Note: 1. Excluding BBBEE charge, depreciation, amortisation and impairment losses.

Group operating expenses increased 6.8%(*) to R40 638 million (4.8% reported). In South Africa, operating expenses increased 5.3%(*) (6.0% reported), below revenue growth of 5.8%. International operating expense growth of 16.2%(*) (1.4% reported) was mainly due to difficult trading conditions in Gateway.

Expenditure analysis

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     Direct expenses 27 600   26 764   25 913   3.1   3.3 Staff expenses 4 024   3 878   3 268   3.8   18.7 Publicity expenses 2 086   1 848   1 875   12.9   (1.4) Other operating expenses 6 928   6 280   6 271   10.3   0.1 Operating expenses 40 638   38 770   37 327   4.8   3.9 BBBEE charge –   –   1 315   –   (100.0) Depreciation and amortisation 5 355   5 157   4 683   3.8   10.1 Impairment losses 1 508   3 370   112   (55.3)   > 200.0 Expenditure 47 501   47 297   43 437   0.4   8.9

Group direct expenses, excluding the impact of MTRs in South Africa, increased 6.7%. The Group contribution margin increased slightly to 54.9% while the South African contribution margin improved from 55.0% to 56.5% due to a lower net contribution from interconnect and customer and distribution costs. Group staff expenses increased 3.8% to R4 024 million due to an average increase in salaries of 7.0%, offset by a reduction in headcount from 7 643 in the prior year to 7 481 in the current year. Group staff expenses as a percentage of revenue remained stable at 6.6%. Group publicity expenses were impacted by the brand refresh expenses across all entities excluding DRC and Gateway. Excluding the brand refresh expenses, Group publicity expenses increased by 0.4% and decreased as a percentage of revenue from 3.2% in the prior year to 3.0%. Group other operating expenses increased 10.3% to R6 928 million impacted by the net trading foreign exchange gain of R11 million (2010: R192 million gain) and additional costs incurred for links not cancelled as planned due to the delay in self-provisioning of fibre in South Africa.

EBITDA

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     South Africa 19 653   18 578   16 222   5.8   14.5 International 840   1 176   1 935   (28.6)   (39.2) Corporate and eliminations 101   28   39   > 200.0   (28.2) EBITDA 20 594   19 782   18 196   4.1   8.7

Group EBITDA increased 5.8%(*) (4.1% reported) to R20 594 million, and the EBITDA margin remained relatively stable at 33.7% (2010: 33.8%). South Africa contributed 95.4% (2010: 93.9%) to Group EBITDA for the year. Group EBITDA was negatively impacted by unfavourable foreign exchange movements and difficult trading conditions in Gateway. International EBITDA declined 20.7%(*) (28.6% reported) with the margin declining from 14.0% in the prior year to 10.2%. In aggregate, the International mobile operations expanded its EBITDA margin.

Note: 1. Restated to 2011 foreign exchange rates and excluding trading foreign exchange.

Operating profit

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     South Africa 15 522   14 763   11 372   5.1   29.8 International (1 902)   (3 358)   637   43.4   < (200.0) Corporate and eliminations 76   (167)   (4)   145.5   < (200.0) Operating profit 13 696   11 238   12 005   21.9   (6.4)

Operating profit increased 21.9% to R13 696 million, primarily due to a reduction in impairment losses (mainly relating to Gateway) from R3 370 million in the prior year to R1 508 million. Operating profit increased 5.0%(*), excluding the impact of impairment losses.

Net finance charges

Year ended 31 March   % change Rm 2011    2010    2009   10/11   09/10                     Finance income 109   124    108   (12.1)   14.8 Finance costs (864)   (1 602)   (1 459)   (46.1)   9.8 Remeasurement of loans receivable  28   (375)   –   107.5   n/a Net (loss)/gain on translation of foreign-denominated assets and liabilities (131)   (23)   39   > 200.0   159.0 Net loss on derivatives (164)   (396)   (437)   (58.6)   (9.4) Other (36)   –   –   n/a   n/a Net finance charges (1 058)   (2 272)   (1 749)   (53.4)   29.9

Net finance charges reduced from R2 272 million in the prior year to R1 058 million for the year ended 31 March 2011, mainly due to lower net finance costs in the current year and the negative impact of the remeasurement of loans receivable of R375 million in the prior year. The net loss on translation of foreign-denominated assets and liabilities increased over the prior year due to the impact of the stronger rand on cash held in foreign currency, while the net loss on derivatives, mainly from the revaluation of foreign exchange contracts in South Africa, decreased 58.6%. Finance costs for the year reduced by R738 million compared to the prior year as a result of average debt declining to R11 033 million compared to R15 200 million in the prior year coupled with the benefit of lower interest rates. The average cost of debt reduced from 9.0% to 7.7%.

Taxation

The tax expense of R4 659 million for the year declined 1.8% compared to March 2010 due to the non-recurrence of the derecognition of DRC's deferred tax asset offset by an increase in secondary tax on companies ('STC') relating to the timing of the dividend declared. The effective tax rate declined from 53.0% to 36.9% as a result of a decrease in non-deductible impairment losses and the derecognition of a deferred tax asset in the prior year.

Group tax reconciliation

Year ended 31 March 2011 Rate   2010 Rate   Rm %   Rm % Profit before tax 12 638     8 945   Expected income tax expense 3 539 28.0   2 505 28.0 Unproductive interest 11 0.1   98 1.1 Non-deductible interest 90 0.7   93 1.0 BBBEE charge 18 0.1   30 0.3 Secondary tax on companies 531 4.2   171 1.9 Foreign currency translations and revaluation of tax base of qualifying assets (69) (0.5)   (561) (6.3) Other 65 0.5   113 1.3 Effective tax rate (pre impairment losses and unrecognised tax assets) 4 185 33.1   2 449 27.3 Unrecognised tax assets 171 1.4   1 313 14.7 Impairment losses 303 2.4   983 11.0 Total income tax expense/effective tax rate 4 659 36.9   4 745 53.0

Earnings

Year ended 31 March   % change Rm 2011   2010   2009   10/11   09/10                     Adjusted headline earnings 9 598   8 443   7 525   13.7   12.2 Adjusted for:                   BBBEE charge –   –   (1 315)   n/a   (100.0) Derecognition of DRC deferred tax asset –   (489)   –   (100.0)   n/a Remeasurement of loans receivable 28   (375)   –   107.5   n/a Headline earnings 9 626   7 579   6 210   27.0   22.0 Impairment losses and other (1 381)   (3 383)   (121)   (59.2)   > 200.0 Earnings 8 245   4 196   6 089   96.5   (31.1) Weighted average number of shares outstanding                   Basic (’000) 1 468 409   1 486 284   1 487 954

Basic earnings per share for the year increased from 282 cents per share to 561 cents per share, impacted by impairment losses and the derecognition of DRC's deferred tax asset in the prior year. Headline earnings per share, which excludes impairment losses, increased 28.6% to 656 cents per share. Excluding the impact of several non-recurring charges in the prior year, adjusted headline earnings per share increased 15.1% from 568 cents to 654 cents per share mainly due to the growth in EBITDA and the reduction in net finance charges.

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