SALIENT FEATURES

The 2013 financial results reaffirm the need to act with urgency to turn our Group’s performance around. The Board decided to impair the carrying value of the assets of the Group by R12 billion for the year ended 31 March 2013. The impairment review was prompted by the considerable period of time that Telkom’s shares have been trading at significantly lower value compared to its net asset value. After the impairment the net asset value per share is R34. The impairment takes into account the impact on the financial returns of the Group in light of technology changes, competition from mobile operators and evolving regulatory landscape over more than a decade. These factors have eroded the returns from legacy assets.

The impairment charge is a non-cash item and it will not impact the significant cash flow (EBITDA), which the Group generates from its operations. It is akin to an accelerated depreciation charge, which has no impact on Telkom’s strong cash position, low indebtedness and ability to fund its capital programme from its own resources. Basic earnings per share from continuing operations, however, has been adversely impacted by the once off non-cashimpairment charge and is therefore 2,286 cents per share lower than the comparative period for the year ended 31 March 2013. Excluding the R12 billion impairment charge, basic earnings per share is 63.6 cents higher than the prior year.

The non-cash impairment charge is excluded from headline earnings per share from continuing operations, which is 237.7 cents per share (73.2%) lower than the prior year. The decline in headline earnings is largely as a result of the cost of VSPs and a provision for the Competition Tribunal fines and continued pressure on our fixed voice revenues.

The Board is committed to taking the necessary steps to address the major challenges that have impacted the financial performance of the Group in recent years. To this end, management aims to strengthen customer relationships and to improve operational efficiency. The Board is also currently reviewing the strategy and execution plans of the Group with a view to improving the return on invested capital. Shareholders will be informed of progress on these matters in due course.

Results from operations

The impairment discussed above has no bearing on the results from operations for the year under review and has accordingly been excluded.

The Group recorded a profit after tax of R501 million excluding the R12 billion impairment charge (2012: R179 million) and an EBITDA of R7,109 million (2012: R8,546 million). The results for the year include a provision of R592 million for the settlement of the long-standing dispute with the Competition Commission and the net cost of R434 million for VSPs.

Revenue has declined by 1.7% as a result of a 4.7% decline in fixed voice revenue. Data revenue constituted 33.2% of group revenue and increased by 5.5%. Lower prices on data due to competitive offerings continue to negate the volume growth experienced in this area.

Operating expenses excluding depreciation increased by 2.7% as a consequence of a rise in employee expenses of 14.2%.

Employee expenses were impacted by a 6.5% average salary increase, and the VSP payments.

The Group recorded cost savings on payments to other operators in the fixed-line business of approximately R748 million, being a direct result of the lower mobile termination rates and lower operating costs in our mobile business mainly due to lower subscriber acquisition costs.

The Group continues to generate strong cash flows, with free cash flow of R2.1 billion for the year. The Group’s capital structure remains solid, with net debt decreasing to R2.1 billion at year-end.

The payment of an ordinary dividend has been considered with reference to Telkom’s current and expected future challenges, performance, debt and cash flow levels. Telkom’s strategic objectives of network transformation and the building of its mobile business will see dividends being considered on an annual basis based on the performance of the Group. The Board has decided not to declare a dividend in respect of the financial year ended 31 March 2013.

Segment structure

During the year under review the Group’s segment structure was changed to better reflect the chief operating decision makers’ (Executive Committee) assessment of the Group’s performance. Due to the Convergence Strategy announced in July 2012, the Executive Committee now manages the business on a combined basis, thereby combining the previously reported Telkom Fixed-Line and Telkom Mobile segments. This reflects the financial information reviewed by the Executive Committee when making decisions about performance and resource allocation and is consistent with the manner in which the Telkom network generates revenue, i.e. on a combined basis.

The Telkom segment provides fixed-line access, fixed-lineusage, data communications services (through Telkom and Cybernest), mobile voice services and handset sales.

Due to the Group’s convergence strategy, key performance indicators are measured and evaluated on an overall basis. This report, however, provides further details of the fixed-line business that provides fixed-line access and data communications services through Telkom South Africa, and the mobile business that provides mobile voice services, data services and handset sales through Telkom Mobile. The contribution of the iWayAfrica, Trudon and Swiftnet subsidiaries are also shown separately.

Operating revenue

Group operating revenue decreased by 1.7% to R32,501 million (2012: R33,079 million) for the year ended 31 March 2013. The decrease is mainly due to lower fixed- line voice usage revenue, partially offset by an increase in mobile and data revenue.

Group operating revenue

We have changed the revenue presentation to align to internal business focus areas. Voice revenue is classified as usage or subscription revenue and customer premises equipment and sales revenue is disclosed separately. Prior year numbers have been restated to reflect the new presentation format.

The following table shows operating revenue broken down by major revenue streams and as a percentage of total revenue and the percentage change by major revenue stream for the years indicated.

Voice

Voice revenue consists of revenue from local, long distance,fixed-to-mobile, fixed-to-fixed and international outgoing calls. Traffic revenue is principally a function of tariffs and the volume, duration and mix between relatively more expensive domestic long distance, international and fixed-to-mobile calls and relatively less expensive local calls.

The following table sets forth information related to ourfixed-line voice usage revenue for the years indicated.

Fixed-line voice usage revenue decreased 9.6% to R8,591 million (2012: R9,501 million) largely as a result of a 4.9% decrease in voice minutes mainly due to continued mobile substitution, the impact of the decrease in fixed termination rates of approximately R136 million from 1 April 2012 and a decrease of approximately R118 million relating to the pass through of 33% of the decrease in mobile termination rates to fixed-line customers from 1 August 2012. The 4.9% decrease in the number of lines also contributed to the decrease.

Telkom filed a 1.7% overall decrease in basic voice and data services, including the decrease in mobile termination rates, effective 1 August 2011 with ICASA and a 1.2% overall increase in basic voice and data services effective 1 August 2012.

On 1 August 2011 we decreased the price of local peak calls after the first unit by 3.2% to 42.0 cents per minute (VAT inclusive). The price of local off peak calls remained unchanged at 20.7 cents per minute. On 1 August 2012 the price of local peak and off peak calls remained unchanged.

The fixed-line long distance tariffs decreased 12.3% to 57.0 cents per minute on 1 August 2011 and remained unchanged on 1 August 2012.

The minimum charge to all international destinations decreased 12.3% on 1 August 2011, and tariffs to most international destinations such as Zimbabwe, the UK and USA were decreased. Although the minimum charge to all international destinations remained unchanged on 1 August 2012, tariffs to certain destinations were increased and others were decrease. Some popular destinations like the United Kingdom and United States of America remained unchanged.

Revenue from subscriptions consists of revenue from installation and reconnection fees, monthly rental charges, revenue from subscription based calling plans and value added voice services for post-paid and prepaid PSTN lines, including ISDN channels and private pay phones. Revenue from subscription-based calling plans includes revenue from Telkom’s subscription-based plans, Telkom Closer and Supreme Call, which are bundled products on post-paidPSTN lines that include discounted rates and free minutes for a fixed monthly subscription fee.

Fixed-line subscriptions revenue is principally a function of the number and mix of residential and business lines in service, the number of private pay phones in service and the corresponding charges. The following table sets forth information related to our fixed-line voice subscription revenue during the years indicated.

Fixed-line subscriptions revenue increased 1.3% to R7,743 million (2012: R7,643 million) as a result of a 5% and 6% increase in residential and prepaid line rental tariffs effective 1 August 2011 and 1 August 2012, respectively, partially offset by the decrease in the number of lines.

The post-paid residential and business line rental both increased by 5% and 6% on 1 August 2011 and 1 August 2012, respectively. In the 2013 financial year, revenue fromsubscription-based calling plans decreased primarily due to a decrease in traffic, partially offset by a 4.6% increase in customers subscribing to these packages.

The decrease in the number of post-paid lines in service in the 2013 financial year was primarily as a result of a decrease in residential prepaid and post-paid PSTN lines as well as a decrease in business PSTN lines, partially offset by an increase in ADSL lines. The decrease in business lines was mainly due to mobile substitution and the use of other technologies such as voice over IP. The decrease in prepaid PSTN lines in the 2013 financial year was primarily due to the migration of customers to calling plan packages. Private pay phones decreased as we continue to optimise our pay phone base.

Mobile voice and subscription revenue decreased 7.6% and interconnection revenue decreased 25.5% as a result of a 15.3% decrease in the number of post-paid subscribers as well as a 17.1% decrease in blended ARPU. The decrease inpost-paid subscribers was due to a cleanup of debtors and an improvement to the credit vetting systems.

Interconnection

We generate revenue from interconnection services for traffic from calls made by other operators’ customers that terminate on or transit through our network. Revenue from interconnection services includes payments from mobile domestic, fixed domestic and international operators regardless of where the traffic originates or terminates.

Interconnection revenue from domestic operators includes revenue for call termination from mobile domestic networks, as well as access to other services, such as emergency services and directory enquiry services.

Fixed-line domestic interconnection revenue decreased 11.2% to R562 million (2012: R633 million) primarily due to the 18% average decrease in fixed termination rates.

Interconnection revenue from international mobile operators includes international outgoing calls from mobile domestic networks and amounts paid by foreign operators for the use of our network to terminate calls made by customers of such operators and payments from foreign operators for interconnection hubbing traffic through our network to other foreign networks.

Fixed-line international interconnection revenue decreased by 14.4% to R959 million (2012: R1,120 million) largely as a result of the loss of traffic due to competitors using their own routes.

Data

Data services comprise data transmission services, including leased lines and packet based services, managed data networking services and Internet access and related information technology services. In addition, data services include revenue from ADSL. Revenue from data services is mainly a function of the number of subscriptions, tariffs, bandwidth and distance.

The slow data growth is mainly as a result of pricing pressures, increased self-provisioning by mobile operators and lower Internet access revenue. ADSL subscribers increased 5.2% to 870,505 when compared to the previous year. Data, however, continues to be an area of growth.

Telkom is also heavily focused on increasing broadband and data related revenue to diversify its reliance away from fixed-line voice.

Data connectivity revenue comprises revenue from our services such as Diginet, DSL, IPLC and Megalines.

Revenue from data connectivity services increased due to an increase in ADSL revenue as a result of an increase in the number of subscribers and growth in Diginet revenue, partially offset by a decrease in IPLC revenue.

Data connectivity increased 4.8% to R5,595 million (2012: R5,339 million) mainly as a result of a 5.2% increase in the number of ADSL subscribers to 870,505 (2012: 827,091).

Revenue from mobile leased line facilities decreased 4.3% to R1,963 million (2012: R2,051 million) due to continued self provisioning by other operators.

Internet access revenue decreased 1.9% due to a decreased in wholesale internet exchange ports leased.

Managed data network services revenue increased 11.8% to R1,005 million (2012: R899 million) as a result of a 13.9% increase in the number of sites to 44,328 (2012: 38,902).

Mobile data revenue increased 123.3% due to an increase in the number of data subscribers and the data deals and promotional products launched during the year in line with our strategy to focus on data.

Cybernest’s data revenue increased 144.0% to R205 million (2012: R84 million) as a result of good traction in the IT market with key strategic wins.

Customer premises equipment sales and rentals

Customer premises equipment sales decreased 23.9% to R327 million (2012: R430 million) due to the discontinuation of the sale of PC and gaming equipment as it does not form part of Telkom’s core business.

Customer premises equipment rentals increased 8.0% to R704 million (2012: R652 million) due to an increase in tariffs.

Mobile handset and equipment sales revenue increased 36.4% mainly as a result of the bulk sales of Apple handsets to an Apple authorised distributor.

OTHER

Other revenue includes revenue relating to co-location of other licensed operators on Telkom owned properties, the sale of materials and revenue related to the recovery of costs for work performed on behalf of other licensed operators. Other revenue decreased 20.1% to R227 million (2012: R284 million) due to lower revenue recognised from expired cards, partially offset by higher co-location revenue.

Other income

Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets, royalty income as well as interest received from debtors. Other income in the 2012 financial year includes the profit on disposal of Multi-Links of R167 million and a donation of two mobile base station controllers received from a supplier. iWayAfrica’s other income includes R30 million profit on disposal of investment in joint venture in the 2013 financial year.

Operating expenses

Operating expenditure contribution per segment

Group operating expenses, excluding the R12 billion impairment charge increased by 2.2% to R31,950 million (2012: R31,250 million) in the year ended 31 March 2013, primarily due to the R434 million net provision, after curtailment gains for the voluntary severance and early retirement packages, R592 million provision for the fines handed down to Telkom by the Competition Tribunal, the average annual salary increases of 6.5% and accelerated depreciation of R667 million. This was partially offset by a decrease in payments to other operators due to the decrease in mobile termination rates and the R569 million impairment of iWayAfrica in the 2012 financial year.

Telkom operating expenditure

Employee expenses

Employee expenses consist mainly of salaries and wages for employees, including bonuses and other incentives, benefits and workforce reduction expenses. Employee expenses increased by 14.5% in the year ended 31 March 2013, primarily due to the R434 million net cost relating to voluntary severance and early retirement packages, the average annual salary increase of 6.5% and a higher bonus provision. 1,411 bargaining unit and 178 management employees exited up to 31 May 2013 as part of the process.

Payments to other network operators

Payments to other network operators include settlement payments paid to the three South African mobile communications network operators, Neotel for terminating calls on their networks and to international network operators for terminating outgoing international calls and traffic transiting through their networks. Payments to mobile operators decreased 19.5% due to the reduction in mobile termination rates from 73 cents to 56 cents with effect from 1 March 2012.

Selling, general and administrative expenses

Selling, general and administrative expenses include materials and maintenance costs, marketing expenditures, debtors impairment, theft, losses and other expenses, including obsolete stock and cost of sales. Selling, general and administrative expenses decreased by 0.3% to R6,743 million (2012: R6,760 million).

Materials and maintenance expenses include subcontractor payments and consumables required to maintain our network.

Materials and maintenance increased 16.2% mainly due to expenditure on data processing equipment for the mobile business systems and on the integration of independent business systems as well growth in external customer infrastructure by Cybernest.

Marketing expenses decreased 7.1% due to lower marketing expenditure by Telkom Mobile as we refocus the business.

Bad debts decreased 42.7% due to an improvement to the mobile credit vetting systems. Debtor’s impairment as a percentage of revenue improved from 1.8% in the 2012 financial year to 1.0% in the 2013 financial year.

The decrease in the other category was primarily as a result of a decrease in mobile sales acquisition cost as we refocus our convergence strategy, partially offset by the provision for the fines imposed by the Competition Tribunal and a higher spectrum license fee provision due to the change in the regulation.

Service fees

Service fees include payments in respect of the management of our properties, to total facilities management company, a facilities and property management company, consultants and security. Consultants comprise fees paid to collection agents and to providers of other professional services and external auditors. Security refers to services to safeguard the network and contracts to ensure a safe work environment, such as guard services.

Property management expenses increased 10.5% mainly due to annual increases in electricity and water.

Our carbon footprint and electricity consumption is calculated on page 108.

Lower consulting fees was incurred in the current year as the prior year included fees relating to the Multi-Linkstransaction, strategic workforce planning and increasing efficiencies through a shared services centre, partially offset by higher mobile consulting fees for building capacity in marketing, sales, network and commercial areas.

Operating leases

Operating leases include payments in respect of equipment, buildings and vehicles.

Operating leases increased 16.4% as a result of an increase in the number of mobile sites acquired and higher building leases.

Vehicle leases increased as a result of inflation and fuel increases, partially offset by a 10.2% reduction in the number of vehicles from 7,606 to 6,833.

Depreciation, amortisation, impairment and write-offs

Depreciation increased 11.2% due to accelerated depreciation as a result of the review of the useful lives of the existing network equipment as we invest to transform into a commercially led next generation network. Amortisation also increased 32.9% as a result of the review of the useful lives of the existing software systems. Impairments and write-offs increased significantly due to the impairment of legacy assets.

Details of operating expenditure related to our mobile business that is included in Telkom’s operating expenditure are provided below for additional information.

Mobile operating expenses

Investment income

Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 26.5% to R301 million (2012: R238 million) as a result of higher cash balances.

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 foreign exchange gains and losses on foreign currency denominated transactions and balances.

Foreign exchange and fair value losses decreased significantly to a gain of R397 million (2012: loss of R1,107 million). The decrease was mainly due to the cumulative amount of exchange differences of R1,292 million previously recognised in equity, recognised in profit and loss on disposal of Multi-Links in the prior year. A higher fair value gain on assets held by the Cell Captive also contributed. The interest expense decreased 13.7% to R660 million (2012: R765 million) mainly as a result of a 7.4% decrease in interest-bearing debt and lower interest rates.

Taxation

The consolidated tax expense from continuing operations decreased to R490 million (2012: R595 million) due to lower taxable profit in the 2013 financial year and secondary tax on companies included in the prior year. The consolidated effective tax rate for the year ended 31 March 2013, excluding the R12 billion impairment charge and non-deductable Competition Commission fines is 50.6%. The consolidated effective tax rate for the 2012 financial year was 33.4% if the effect of the sale of Multi-Links and the group impairment of iWayAfrica is excluded. The higher effective tax rate in the 2013 financial year is mainly as a result of higher non-deductable expenditure including the provision for the Competition Tribunal fines.

Non-controlling interests

Non-controlling interests in the income of subsidiaries decreased to R123 million in the year ended 31 March 2013 (2012: R126 million) due to the lower net profit of Trudon.

LIQUIDITY AND CAPITAL RESOURCES

Group liquidity and capital resources

The following table shows information regarding our consolidated cash flows for the periods indicated.

⁽¹⁾ Repurchase agreements were reclassified from financing activities to investing activities.

Cash flows from operating activities

Our primary sources of liquidity are cash flows from operating activities and borrowings. We intend to fund our expenses, indebtedness and working capital requirements from cash generated from our operations and from capital raised in the markets. The year on year increase in cash flows from operating activities in the 2013 financial year is mainly due to higher non-cash items such as the provision for the Competition Tribunal fines, voluntary severance and early retirement packages and the post retirement medical aid provision, lower dividends paid in the 2013 financial year as well as lower taxation paid, partially offset by lower cash received from customers due to lower revenue.

Cash flows from investing activities

Cash flows from investing activities relate primarily to investments in our network. Cash flow invested in property, plant, equipment and intangible assets were 20.4% higher than the previous year, partially offset by a decrease in our investment in repurchase agreements.

Cash flows from financing activities

Cash flows from financing activities are primarily a function of borrowing activities. In the 2013 financial year, loans repaid exceeded loans raised by R701 million due to the repayment of the TL20 bond of R1,060 million.

Working capital

We had negative consolidated working capital of approximately R1.5 billion as of 31 March 2013, compared to consolidated working capital of approximately R497 million as of 31 March 2012.

The decrease in working capital in the 2013 financial year was primarily due to the syndicated loan of R2.0 billion reaching maturity in December 2013 and classified as a current liability. Telkom’s Group cash flows from operations, together with the credit facilities will be sufficient to meet Telkom’s present working capital requirements for the 12 months from the date of this integrated report.

We intend to fund current liabilities through a combination of operating cash flows and with borrowings available under existing credit facilities. We had R6.5 billion available under existing credit facilities as of 31 March 2013.

We had cash and net financial assets of R4.5 billion available at 31 March 2013 (2012: R3.2 billion).

Debt maturity

The following table sets forth our consolidated indebtedness including finance leases as of 31 March 2013:

Capital expenditures and investments

Group capital expenditure, which includes spend on intangible assets, increased by 20.0% to R5,738 million (2012: R4,783 million) and represents 17.7% of group operating revenue (2012: 14.5%).

The following table shows the Telkom Group’s investment in property, plant and equipment including intangible assets from continuing operations for the periods indicated:

Baseline capital expenditure of R2,057 million (2012: R1,858 million) was largely for the deployment of technologies to support the growing data services business, links to the mobile cellular operators and expenditure for access line deployment in selected high-growth commercial and business areas. The increased expenditure for the year can be attributed to growth in the IP Network, Customer Specific Solutions and the transport network.

Expenditure on network evolution of R1,232 million (2012: R733 million) was mainly for the initial phase rollout of the NGN programme to modernise the legacy voice network, provide high speed ADSL service in selected areas and address the associated operational and business support systems. Expenditure has increased as the programme progressed beyond the pilot phase.

Mobile capital expenditure increased 12.8% as we continue to invest in our mobile network and distribution channels.

The sustainment category expenditure of R310 million (2012: R146 million) was largely for the replacement of obsolete power systems as well as the replacement and modernisation of the access and core network. The increase for the year can be attributed to the replacement of obsolete equipment in the core transport network.

The decrease in the effectiveness and efficiency category was mainly due to expenditure on management systems in the prior year not recurring.

The support capital expenditure of R342 million (2012: R329 million) is mainly for provision of new buildings and building extensions in support of network growth and for the compliance upgrading of existing equipment buildings, including the associated AC power and air-conditioning.

The expenditure on regulatory requirements of R26 million (2012: R61 million) is primarily to institute regulatory changes to customer-facing functions. A number of projects are reaching conclusion, resulting in a reduced expenditure over the year.