Chief Executive Officer’s review

	During the past year Vodacom started its transformation into a total communications provider. Our acquisition of Gateway has boosted our presence in Africa, and we have shown robust organic growth in our mobile, broadband and converged ICT businesses.
Pieter Uys Chief Executive Officer

The last 14 months have been seminal for the Vodacom Group. We concluded our BBBEE transaction and aquired the leading pan-African carrier services and connectivity provider, Gateway. We said farewell to one of our founding shareholders, Telkom, and became a subsidiary of the other, Vodafone Group, making us part of the world’s leading mobile communications group, and we listed on the JSE Limited.

In the 12 months to 31 March 2009, notwithstanding the detailed preparation and intense focus required by these defining events, and the pervasive impacts of an unprecedented economic downturn, I am pleased to report that Vodacom demonstrated its quality and resilience. The Group delivered a solid set of results and we made steady progress in our strategy to be a leading provider of total communications in sub-Saharan Africa.

Financial performance

In the latter part of the financial year, the effect of the deteriorating global macroeconomic conditions were felt in the businesses, particularly in the DRC where the dramatic impact on the economy of collapsing mineral resource prices and mine closures affected revenue and profitability. The slowdown in the South African economy has to some degree filtered through to the mobile market.

Revenue rose 14.5% to R55 187 million, largely as a result of a 16.5% increase in our customer base to 39.6 million and the 28.8% increase in data revenue to R6 441 million. Organic revenue growth for the year was 12.9%. EBITDA increased 10.5% to R18 196 million, and the group EBITDA margin decreased to 33.0% from 34.2% in the prior year mainly due to the BBBEE transaction expenses, operating costs relating to the establishment of Vodacom Business and margin pressure in the DRC. Operating profit for the year was down 3.9% to R12 005 million, affected by the BBBEE charge of R1 382 million. Excluding this charge, operating profit was up 7.2% to R13 387 million.

Headline earnings per share decreased 21.0% to 417 cents per share, compared to 528 cents per share in the prior year. Excluding the BBBEE charge of R1 382 million, adjusted headline earnings per share decreased 3.4% to 510 cents per share. The reduction in adjusted headline earnings per share is largely due to the substantial increase in finance charges resulting from the higher gearing in the business. Net debt rose to R17 537 million as at 31 March 2009, compared to R8 663 million a year before, reflecting the raising of new debt to refinance existing debt and fund both capital expenditure and the acquisition of Gateway.

Cash generated from operations remained stable at R16 351 million, as compared to R16 334 million in the prior year. Net cash flows utilised in investing activities increased from R7 502 million to R12 750 million mainly due to the acquisition of Gateway for R5.3 billion and continued capital investment. Pleasingly, the Group generated operating free cash flow after capital expenditure of R9 140 million.

Performance against strategy

Our strategy to be the leading provider of total communications in sub-Saharan Africa is based on four interlinking objectives:

• To grow our core mobile business;
• To lead in broadband and connectivity services;
• To develop ICT converged solutions; and
• To expand in sub-Saharan Africa.

Vodacom’s pursuit of leadership in all our markets is inspired by our vision of democratising access to world-class communications. Our vision contemplates extending the revolutionary possibilities that ICT offers for socio-economic development in Africa and providing a better quality of life for all her people.

In the early years of Vodacom’s development we dreamed of democratising access to voice telephony in South Africa, and the growth in mobile communications has surpassed even our most optimistic early expectations. Subsequently, we have made significant progress in our international operations, and today Vodacom is the market leader in four of five of the countries in which we operate. In recent years the scope of our vision has grown with the advance of data communications, broadband penetration and the internet, which is being reflected in converging licensing regimes in our markets. Vodacom’s strategy now encapsulates the prospect of democratising access to data in an increasingly IP-enabled world, and we are moving strongly into the converged ICT landscape.

The rapid convergence of new information and communication technologies, liberalising telecommunications markets and intense pricing pressure are reshaping our competitive landscape rapidly and fundamentally. In our home market of South Africa, around 250 individual ECS and ECNS licenses were awarded under the ECA. To position Vodacom to defend its market leadership and take up the opportunities of this new era in communications, we have set our sights on being a leading total communications provider.

Our first point of strategic focus is to grow our core mobile business and in the period we added 5.6 million new customers, half of the total in South Africa and the other half in our international operations, which now represent just under a third of our total customer base. Vodacom now serves nearly 40 million customers in five countries with a total population of more than 180 million. The low penetration of mobile communications in sub-Saharan Africa, which is home to three quarters of the continent’s population, holds much promise for future growth.

The customer growth achieved in the year under review has rewarded our focused initiatives to continuously improve our core business in South Africa and leverage our competencies into our international operations. We have been effective in attracting and retaining customers through enhanced customer care, which has improved customer satisfaction measures significantly, and targeted loyalty programmes in our various markets, which have stabilised churn. In South Africa, overall churn reduced and in our international operations it remained relatively constant. Ongoing innovation in the products and services, and value we offer our customers also spurred growth with notable examples in South Africa being the introduction of lower denomination vouchers and Yebo4Less, the dynamically priced prepaid product which enjoyed significant uptake of 4.8 million customers, 20.4% of our prepaid customer base.

We continue to concentrate on controlling costs and driving operational efficiencies, for instance by leveraging the procurement strength of Vodacom and the wider Vodafone Group to secure volume-based pricing of handsets. We have also developed our distribution network, extending our reach to customers through multiple channels and new community-based initiatives, such as YeboTradas, to reach out to customers in remote areas. A tenet of our approach to distribution has always been to incentivise loyalty in our distribution channels by providing suitable margin to our distribution partners at every level, and thereby not only extending our reach but also driving entrepreneurial activity.

In line with our second strategic objective to lead in broadband and connectivity services, we have entrenched our position as South Africa’s largest broadband provider. In the year we launched more affordable products and bundled packages to drive penetration and usage of data, and continued to provide our customers with access to new generation products and high-speed broadband connectivity. By year end we had grown our broadband customer base 80.0% to 720 000 customers. Some 5 million customers use various packet data technologies on our network and we have one million active email account users. The potential to extend broadband connectivity and online services is significant, with around 3 million 3G-enabled handsets already on Vodacom’s network in South Africa together with our drive to further lower the cost of internet capable handsets and netbooks through Vodafone.

We are constantly deploying new technologies that provide more capacity and higher speed more cost-effectively as they are more spectrum efficient, use less power and are less costly to maintain. In the year we increased the total number of 3G sites to 2 880, complemented by an additional 141 WiMAX sites deployed in partnership with WBS. Our programme to self-provide transmission capacity is well on track in South Africa, with eight of the planned 11 metropolitan fibre rings completed in the year. We have also moved forward in our infrastructure sharing plan, with agreement reached to begin the construction of a 5 000 km national fibre network jointly with MTN and Neotel. These self-provisioning initiatives are aimed at allowing us to better manage transmission costs and the quality of our service going forward.

Gateway’s extensive pan-African network complements our network build-out, which includes access to international bandwidth via satellite and terrestrial links, and the development of a continent-wide MPLS network. We are also involved in new submarine cable projects that will provide substantial new international broadband capacity for the continent, and are developing our own in-country links to connect to international landing points. Notably, we are investing in the West Africa Cable System (“WACS”), a 3.84 terabit per second fibre optic submarine cable that will link countries in Southern Africa, West Africa and Europe with high capacity international bandwidth. The cable system will cover 14 000 km and cost US$600 million to build. WACS is expected to be ready for service in early 2011.

Our new generation network has enabled us to be decisive in taking up the opportunities of liberalising ICT markets to develop converged solutions for corporates and consumers, our third strategic objective. Hand-in-hand with driving access to data connectivity, we continue to develop value-added data services, including the provision of online content. In the consumer space, our offerings include Mobile Internet, Vodafone live!, mobile advertising, money transfer services and social networking.

Vodacom SA’s exclusive launch of Mobile Internet in June 2008 has made accessing the internet easier and cheaper, and has stimulated the number of customers using their mobile phones as an access device. In February 2009, we launched Vodafone Connect Via the Phone which enables customers to use a 3G phone as a modem to access the internet from their PCs or laptops. With internet penetration at a low 9.5% in South Africa and less than 1% in most of the rest of Africa, there is substantial opportunity for growth in IP services. As new broadband capacity comes on stream nationally and internationally, internet penetration and usage is set to grow significantly and our new offerings will come into their own.

Vodacom Mobile Media has established itself as a pioneer in the mobile media space, not only in South Africa but also internationally as one of the leading operators in the development of the mobile advertising opportunity within the Vodafone Group. Improvements to the content and overall experience offered on Vodafone live!, which hosts a range of online services, has converted into an average of more than 2.5 million unique users a month accessing the portal, with an average of around 15% of these visits converting into online purchases of music, games, news and movies. We have begun to explore the delivery of financial services via the mobile phone and we introduced M-PESA in Tanzania, which enables customers to use their handsets to transfer money and buy airtime, goods and services. We have also ventured into the burgeoning world of social networking, with our Social Media division developing The Grid, a unique location-based social networking platform.

In the enterprise market, Vodacom Business had a successful first year, attracting top talent in the ICT industry and developing a full suite of products. The skills and comprehensive product portfolio we can now offer have translated into some impressive new business wins for Vodacom Business, underpinned by its construction of a best-of-breed infrastructure layer. This includes bringing fibre to customers’ doorsteps, which is being planned in conjunction with the construction of the metro fibre rings. During the year we also built a state-of-the-art data centre at a total cost of R100 million, and made the small but strategic acquisition of StorTech, which is a specialist in the hosting environment and provides us with the necessary capacity and skills in this area.

Our acquisition of Gateway provides the thrust for our final strategic objective to expand in sub-Saharan Africa. The acquisition has given Vodacom a much larger international footprint and a springboard for further expansion. Gateway provides us with new market entry points and local market understanding, and offers attractive synergies. Gateway continued to extend its network in the period with the opening of two new offices in Kenya and Uganda, and launched IPJetDirect, a new offering to provide high-speed low-latency internet connectivity. We have made progress identifying synergies between Vodacom and Gateway, specifically in international voice and carrier data services. As the leading provider of managed network IT solutions to blue-chip multinational clients on the continent, Gateway is expected to provide growth impetus particularly in the enterprise market.

All our strategic endeavours are supported by our ongoing investment in the brand. We believe that developing and maintaining a strong and popular brand is a powerful driver of successfully delivering total communications services in Africa. Vodacom has managed to achieve iconic brand status in South Africa and is much-loved in our other markets, continuing to win accolades in the year. We will continue to deepen the relationship our customers have with our brand through national sponsorships, loyalty programmes and relevant advertising, while also investing substantially in the upliftment of communities.

Vodacom has proven to be a a powerful agent for change in the communities in which we operate, and this year the Vodacom Foundation, which manages our CSI efforts, celebrated its tenth anniversary. During the past decade the Vodacom Foundation has invested half a billion rand in social upliftment activities, focusing on education, health and security. The opportunities for democratising access to new communications products and services are fruitless if our communities are marginalised from sustainable progress, and our intention to be a force for good are as much a part of the Vodacom way as our investments in our core competencies as a communications provider.

Outlook

Vodafone’s 15% increase in its shareholding in Vodacom to 65% at the time of listing has commuted our status from partner network to a subsidiary and the exclusive investment vehicle in sub-Saharan Africa of a global mobile communications leader. Vodacom already derives benefit from the economies of scale and shared expertise across the Vodafone Group, which operates networks in 30 countries and has a proportionate customer base of some 303 million. Besides exclusive access to new product launches and global research and development capability, the benefits of our relationship with Vodafone extend to benchmarking our operations against global standards of excellence. As we move forward, the benefits accruing from our relationship are set to increase.

In South Africa lower interest rates, inflation and fuel prices in the year ahead are expected to provide some relief to consumers, but the global macroeconomic conditions are expected to continue affecting the business segment possibly resulting in further increases in unemployment. As customers continue to contain their spending, we will seek to offer them greater value. To further mitigate the pressure on top-line growth and preserve our margins, we will continue driving efficiencies across the business – Gateway and our relationship with Vodafone will be key to unlocking further synergies. We expect trading conditions to remain challenging in our international operations, with economic weakness persisting in the DRC and aggressive competition in all our markets.

Our investments in optimising all aspects of our business are ongoing and we will continue to position the Group for organic growth in the sub-Saharan African communications markets, which remain among the fastest growing in the world. Vodacom’s strong cash flow and balance sheet will provide the flexibility to invest prudently in strategic growth opportunities as they arise and to return significant amounts of cash to shareholders on a sustainable basis. Although the difficult conditions are set to continue, we will persist in our strategy to be a leader in total communications. We look to the future with much confidence in our ability to grow profitably, and suitable circumspection given the difficult economic environment.

Priorities for the year ahead

• Increase performance and profitability of all our operations;
• Contain costs and leverage Vodafone global cost benefits;
• Market leadership in all countries of operation;
• Deliver returns on the investment in Vodacom Business; and
• Integrate Gateway and maximise synergies.

Appreciation

On behalf of all the people of Vodacom, I extend thanks to our outgoing Board members and to Telkom for their contribution to Vodacom’s success. To Alan Knott-Craig, we record our deepest respect and appreciation for his visionary leadership. We extend a warm welcome to our new chairman, Peter Moyo, and the new Board members and appreciate the wealth of experience they bring to the Group.

Finally, my personal thanks to all our people. It is due to their calibre and commitment that we have been able to negotiate the complexities of change, competition and adverse conditions to deliver a resilient performance for the year. I am excited by the prospect of further progress in realising our aspiration to democratise access to worldclass communications and the associated opportunities for progress in sub-Saharan Africa.