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Operational and financial performance review

for the year ended 31 December 2010

Sifiso Dabengwa"Most operations increased their share of the subscriber market, notwithstanding fiercer competition and pressure on tariffs."

Sound operational and financial performance

MTN Group performed well in 2010 under challenging market conditions and despite being negatively impacted by the strong rand. As more than 68% of MTNís revenue is generated outside South Africa, the translation into rand of the 2010 results had a significant impact on final reported figures. Most operations increased their share of the subscriber market, notwithstanding fiercer competition and pressure on tariffs with the Group achieving a 22% increase in subscribers to 141,6 million. However, the growth in subscribers is slowing as penetration increases and markets become more competitive. Constant currency revenue growth of 14% was still relatively satisfying. Penetration into lower usage segments of the markets and to a lesser extent lower tariffs, have, however, shifted the attention of the business model to focus on knowing your customer and catering for their evolving needs in order to sustain market share. Cost control has also become more important to maintain the profitability of the business. In 2010, the Group increased its EBITDA margin by 2,9% to 44%, excluding the MTN Zakhele transaction.

MTN continues to consider its mix of operations as the performance in South Africa, Nigeria and Iran remains key to the Groupís results. Ghana and Syria are the two next largest operations by revenue and are therefore also described in more detail in the pages that follow. The impact of the conversion of the BOT in Syria to a full licence will be positive for increasing Syriaís contribution to EBITDA. The upfront licence fee and lower revenue share change the EBITDA margin positively for the operations. The management of the various operations is bolstered by a regional focus headed by the three regional VPs. The three largest countries contribute 61,6% to the total group subscribers and 58,8% to the total proportionate subscribers.

Elections in November 2010 in CŰte díIvoire resulted in a prolonged standoff between the presidential candidates causing widespread disruption. Our results were not impacted in 2010, but contrivation in 2011 is expected to have some negative impact on the operation.

Benefiting from a clearly defined operational framework

These results were underpinned by a clearly defined operational framework which has and will continue to benefit operations going forward.

With the customer at its centre, MTNís operational framework focuses on working to provide the best experience for each of the Groupís 141,6 million subscribers. We believe that the starting point for our operational framework is the Groupís segmented approach to the market, which offers customers products and services appropriate to each particular sector. In the year, MTN worked to develop a more sophisticated customer segmentation model. This not only provides customers with wider product options but also allows MTN to penetrate low usage segments while ensuring efficient network utilisation.

Ensuring the right products and value-added service offering are vital to operational success. In addition to establishing new revenue streams, a more holistic offering is a critical element for maintaining market share and growing competitive advantage. In 2010, MTN continued to roll out MobileMoney, which had 4,3 million customers by year end. The Group is working to expand the functionality of this service, now available in 11 markets. It is developing a network of merchants in order that MobileMoney substitute banks in places where the banking system is underdeveloped and where credit cards are not widely used.

MTN recently entered into a partnership with three established money transfer groups , including Western Union, to capitalise on the market for international remittances. The Group has also launched initiatives to engage with the African diaspora so that they choose MTN as their remittance partner.

2010 marked a real shift in the role of data in the mobile market for MTN. The increasing affordability, or what some call ďdemocratisationĒ, of data-capable handsets has given more consumers access to these smartphones. The take-off in the use of social media, has further stimulated demand. Appropriate bandwidth and good quality content are necessary to meet customer demand. In 2010, MTN continued to invest in capacity on various undersea cables and in fibre roll out. In August, MTN linked in to EASSy (the Eastern Africa Submarine Cable System), after gaining partial access to the EIG (Europe India Gateway) system in February. This will allow both MTN and customers to benefit from lower bandwidth costs assisting with the growth in data solutions.

Recognising that product and service innovation is essential to keep data growth on a sharp upward trajectory, MTN established the Group-level innovation function in the year, as mentioned by the CEO. It compiled a roadmap of MTNís data and smartphone strategy, the network capability required to support it, as well as the Groupís strategy to ensure that those customers who currently do not use the internet get connected. In pursuit of better applications and progressively richer and more relevant content, MTN is now entering various partnerships with suitable content providers.

MTN has identified the need to deliver cloud computing (where software and information are provided over the internet) to service small- and medium-sized corporate customers. The Group is also working on introducing near-field communication, whose potential future applications could include electronic ticketing, electronic money, electronic keys, identity documents and so forth.

Quality of service and timeously, efficiently and effectively investing and upgrading of networks and IT technology Ė whether it be reliable, clear voice or sophisticated data products Ė are critical to delivering on the customer promise in large markets and small. In addition to the heavy infrastructure investments made in 2008 and 2009, MTN invested a further R19,5 billion in network infrastructure in 2010 which has enabled operations to maintain and/or improve in the quality of their networks. The systems to support future products and services will increasingly go beyond traditional transmission, core and radio networks.

Efficient and deep distribution is also an important determinant of success: if customers have to travel far, or to inconvenient locations to buy airtime, they will be less inclined to do so. MTN recorded significant improvements in distribution in the year with more electronic recharge options and a refined distribution framework to ensure a deep and broad distribution footprint, the right locations and a quality experience at all customer touch points while also ensuring that commission structures to dealers are managed efficiently.

Experienced people are an essential part of MTNís competitive advantage, and the increasing number of mobile licences across the footprint means the necessary skills are in demand. MTN Group continuously works to offer the best employee value proposition in the industry and safeguard its key talent. It benefits from the numerous training programmes delivered by the MTN Academy and through the Groupís e-learning platform. In 2010, MTN rotated a number of senior employees between different operations, facilitating a greater sharing of knowledge and experience, and helping develop employeesí careers.

Brand preference often determines whether or not a customer joins or stays with a network.

MTN’s sponsorship of the 2010 FIFA World Cupô greatly supported brand perception in the year, differentiating and propelling it decisively into the global brand arena. At the time of writing, MTN had just been ranked as Africaís most valuable brand, and the only African global brand in the 2011 BrandFinance Global 500. The Groupís efforts to understand its customersí motivation, needs, aspirations and values have been important in developing customer satisfaction, brand loyalty and sustainable success. These are core to the brandís promise and success.

Delivering on MTN’s financial framework

To sustain MTNís momentum, MTN further developed its financial framework in the year.

MTN has shown delivery on its financial framework due to the strong operational performance, allowing the Company to pay 55% of adjusted headline earnings per share, taking the dividend yield to 4%, a significant increase from a year ago. For ease of understanding the underlining operational performance, the impact of MTN Zakhele has been excluded, and has been separately detailed where appropriate. The total cost of the transaction, together with the related ESOP scheme, was R2,9 billion which is included in EBITDA for statutory purposes.

Due to the strong rand, the contribution of South Africa increased relative to other operations. MTNís earnings and EBITDA continue to be dominated by South Africa and Nigeria which currently make up 60,4% of total revenue and 70% of EBITDA. Due to local shareholding levels, this changes when calculated on a proportionate basis to 53,4% of revenue and 59,3% of EBITDA.


Profit analysis

            Constant  
                currency  
            Variance   variance  
  (ZAR million) 2010   2009   %   %  
 
Revenue analysis
               
  Airtime and subscription 78 400   76 814   2      
  Interconnect 17 012   19 516   (13)      
  Data* 6 206   4 182   48      
  SMS 6 570   5 437   21      
  Connection fee 544   605   (10)      
  Mobile telephones and accessories 3 678   3 279   12,2      
  Other 2 274   2 114   7,7      
 
Total revenue
114 684   111 947   2,5   14  
  Direct network operating costs 16 818   15 925   5,61      
  Costs of handsets and other accessories 6 819   6 297   8,29      
  Interconnect and roaming costs 12 593   15 166   (16,97)      
  Employee benefits costs 5 961   5 843   2,02      
  Selling, distribution and marketing expenses 14 741   14 649   0,63      
  Other 7 242   8 004   (9,52)      
 
Total
64 174   65 884   (2,6)      
 
EBITDA (excluding MTN Zakhele)
50 510   46 063   9,7   23  
 
EBITDA margin % (excluding MTN Zakhele)
44,0   41,1   2,9 points      
  MTN Zakhele costs 2 973              
 
EBITDA (including MTN Zakhele)
47 537   46 063   3,2      

Capital expenditure

            Authorised      
  (ZAR million) 2010   2009   2011      
 
South and East Africa
5 421   8 645   5 676      
 
West and Central Africa
9 919   16 518   10 723      
 
Middle East and North Africa
3 402   5 785   4 871      
 
Head office companies
724   300   861      
 
Total
19 466   31 248   22 131      

*In the AFS on page 141, MTN Business Solutions is included in other revenue for 2009.

Revenue analysis

In 2010, most operations reported strong organic growth as existing businesses increased their numbers of subscribers (albeit at reduced marginal average revenue per user), leading to good gains in revenue in local currency. Subscriber numbers increased by 22% to 141,6 million. MTNís reported results were dampened by the randís gains against the currencies of the Groupís main operations. The average Ghanaian cedi exchange rate dropped 18% versus the rand, the Iranian rial lost 17% and the Nigerian naira was 16% weaker. Total revenue increased 2,5% to R114,7 billion. On a constant-currency basis, revenue grew 14%.

The regulatory reductions in mobile termination rates in South Africa and Nigeria caused a 13% drop in the Groupís interconnect revenue, but higher on-net traffic offset some of the decline. Revenue received a boost from a 48% increase in data revenue, albeit off a low base. The pricing of access to MTN networks was reduced in the year, resulting in a 10% decrease in connection fee revenue.

The strong showing in data growth was led by MTN South Africa, where the Group reported revenue of R3,6 billion from data and R2,49 billion from SMS. Together they accounted for 17% of MTN South Africaís revenue. MTN South Africa also recorded sales of R1,2 billion from MTN Business, up from R0,86 billion in 2009. In Iran, SMS revenue and to a lesser extent the uptake of GPRS services lifted the contribution of data and SMS to MTN Irancellís revenue to 20%. MTN Nigeria also showed a growing contribution of data in the year.

Numerous initiatives Ė in terms of technology enhancements, network capacity and product development Ė to further bolster the role of data in MTNís revenue mix are detailed later in this report.

The higher revenue figures, coupled with good control of operational costs and other efficiencies, helped lift earnings before interest, tax, depreciation and amortisation (EBITDA) by 9,7% to R50,5 billion. Reported results were negatively affected by the strong rand. Had currencies remained unchanged in the year, the EBITDA increase would have been 23%.

The Groupís EBITDA margin grew by 2,9 percentage points to 44%, driven mainly by margin expansion in Nigeria, Iran and South Africa (as well as improvements in Afghanistan, Syria and Zambia and despite margin deterioration in Sudan, Cameroon and Benin). This figure excludes the effect of MTN Zakhele. Without excluding this, the margin would have been 41,4% in the year.

The most notable cost achievements in the year were the selling, distribution and marketing costs up only 0,63%; interconnect cost down 18%. Despite the lower interconnect revenue in the year, the increase in on-net traffic had a positive impact on the margin contribution of interconnect to the Group following mobile termination rates cut in Nigeria and South Africa. Supply chain decreases (as the strategy to pursue more passive infrastructure sharing continued to bear fruit), the benefits of shared services and outsourcing, as well as standardisation and optimisation of systems and processes are expected to only make a meaningful impact in the years ahead. Details on these initiatives are provided in the chief executive officerís report.

MTN reduced capital expenditure (capex) in most operations after 2009ís peak spending. Total capital expenditure for the year was R19,5 billion, down from R31,2 billion. The final capex figure was also helped by the stronger rand, leading to a R2,3 billion saving, as well as reductions in the price of capital equipment. The ratio of capex to revenue fell to 17% from 28% in 2009. For 2011, the Group has authorised capex of R22,13 billion, with increases planned mainly for Nigeria, Syria and other MENA operations.

Interest, tax and depreciation

  Net finance costs         %  
  (ZAR million) 2010   2009   variance  
  Net interest paid 1 925   2 201   (12,5)  
  Net forex losses 924   1 106   (16,5)  
  Functional currency losses 1 223   3 204   (61,8)  
  Put option 22   (701)   (103,0)  
 
Total
4 094   5 810   (29,5)  

  Tax         %  
  (ZAR million) 2010   2009   variance  
  Normal tax 7 834   6 425   21,9  
  Deferred tax 1 984   992   100,0  
  STC and other withholding tax 1 450   1 195   21,3  
 
Total
11 268   8 612   30,8  
 
Effective tax rate (%)
36,3   33,4   1,7 pts  
 
Effective tax rate including
           
 
MTN Zakhele (%)
40,1          

Net finance costs decreased by 29,5% to R4,1 billion in 2010 from R5,8 billion, due to a 61,8% reduction in functional currency losses to R1,2 billion at the end of December 2010. This was following capital restructuring of subsidiary holding companies. Functional currency losses relate to the foreign currency cash balances in Mauritius and reduced by 16,5% to R924 million.

The Groupís effective tax rate increased to 36,3% from 33,4% in 2009. This was mainly the result of the additional secondary tax on companies (STC) on the maiden interim dividend and the reduced effect of the Nigerian put option on profit before tax. The decrease in the Nigerian investment allowance as a result of reduced capital expenditure in that country also contributed to the higher tax rate. On including the impact of MTN Zakhele, the effective tax rate increased to 40,1% due to the nondeductibility of these expenses.

The Groupís depreciation charge increased by 12% to R13,2 billion for 2010. This was mainly the result of the impact of the first full year of depreciation in respect of the significant 2009 capital expenditure programme.

Earnings per share

After excluding the impact of MTN Zakhele, adjusted headline earnings per share (HEPS) increased by 20,5% to 909,1 cents. These adjusted figures exclude the impact of the put options in respect of subsidiaries.

Minority or non-controlling interests remained stable at R2,5 billion because of lower rand earnings from the Groupís non-South African operations and an increased contribution by the South African operation to Group profit after tax.

Balance sheet highlights

Net cash

The Groupís cash and cash equivalents increased R12,8 billion at year end, mainly the result of the R11,7 billion reduction in capital expenditure in 2010. This was also a key driver of the increase in approximate free cash flow for the period to R31,0 billion from R14,9 billion in 2009. The increase in cash and cash equivalents, combined with marginally lower gross debt levels, resulted in a net cash position of R905 million at end-December 2010, compared to a net debt position of R12,2 billion in 2009. This enabled the Group, in the absence of compelling acquisition opportunities, to meet the objective of its financial framework by ensuring greater returns to shareholders by way of increased dividends.

Looking forward

MTN is relatively confident of its ability to balance the need to increase returns to shareholders, while taking advantage of suitable, value-accretive acquisitions.

But as regulation and competition continue to intensify, revenue growth from traditional sources is likely to slow. The Group will therefore work to counter this decline by leveraging opportunities for data growth and facilitating an increase in the availability of smartphones. It will continue to have a segmented approach to the market, offering sector-specific products and services to customers. Despite increasing mobile penetration, the Group believes there is still opportunity to extend voice and data services to those who do not currently use a mobile. MTN acknowledges the role ahead of partners to further develop value-added services.

Effective network investment and rollout is a priority to ensure that network quality remains one of MTNís key competitive advantages. The Group will continue to upgrade and optimise networks to meet increased demand for data services and has approved capital expenditure of R22,1 billion for 2011.

EBITDA margin expansion remains an important goal, but necessitates greater efficiencies and is greatly affected by the mix of the various operationsí contributions. MTN will continue to evaluate individual markets for opportunities to share both passive infrastructure and fibre, with benefits for the Groupís environmental footprint as well as costs.

In the year ahead, MTN will leverage the new structural framework formed for key projects including cost-effective platforms for delivery of data and services; the ongoing standardisation of systems and processes; increased centralisation of procurement activities and rationalisation of suppliers; and shared services and outsourcing. Rather than follow a ďbig bangĒ approach, the Group plans to establish successful shared services and outsourcing models in certain markets, before extending them to other operations.

MTN will continue to investigate options to improve sustainable returns to shareholders now that a higher dividend payout policy has been adopted. It will also engage with authorities to sustain the social and commercial success of the telecommunications sector.

The Group expects net additions of 16,9 million subscribers in 2011, led by growth in Nigeria, Iran and South Africa.

Subscriber net additions guidance for 2011

Net additions 000’s    
South Africa 2 000  
Nigeria 4 200  
Ghana 390  
Iran 3 350  
Syria 600  
Rest 6 385  
Total
16 925  

For more details on the outlook for each of MTNís top five operations, please read the country reports in the pages that follow.

Sifiso Dabengwa
Group chief operating officer

Nazir Patel
Group chief financial officer

March 2011