At the start of the 2010 financial year we once again set ourselves some challenging goals and objectives. Despite an uncertain regulatory environment, a lack of clarity on interconnect rates, intense competition and deflationary pricing, we once again set ourselves the task of taking on the incumbent operators and proving the viability of our business model. Although we did not achieve all our goals we would like to share with you the results of our efforts as well as provide some insight into our future growth strategy.

FINANCIAL

We achieved revenues of R2.07 billion and operating profit of R108 million. We generated R251 million in cash from operations and ended the year with R164 million in cash on the balance sheet, an increase of 78%. We generated a net loss for the year of R680 million as a result of impairments to goodwill and intangible assets amounting to R842 million. Headline earnings, which are not impacted by the impairments to goodwill and intangible assets, grew 4% to 6.45 cents per share.

In terms of International Financial Reporting Standards (IFRS) Vox is required to assess at the end of each reporting period whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the recoverable amount of the assets. Since the last fiscal year, the Independent Communications Authority of South Africa (ICASA) has proposed significant changes to wholesale interconnection rates to be implemented via a glide path over a number of years. The first drop in interconnection rates was implemented on 1 March 2010 and Vox has based its assumptions on future reductions in interconnection rates as communicated by ICASA on 29 October 2010.

As a result of these changes, Vox has valued the Least Cost Routing (LCR) business based on managements’ best estimate of the impact that these changes will have on future cash flows. In addition, the Group assessed the value of certain acquired consumer ISP intangible assets based on expected future cash flows to be received through its subsidiary, @lantic. The net effect of this valuation process is that a portion of the goodwill and intangible assets attributable to these cash generating units is being impaired, the majority of which lies within the LCR business.

INTERCONNECT

The clarity we now have in the regulatory environment means Vox Telecom is able to focus on its vision of striving to be the leading independent, alternative provider of voice and data solutions to the southern African market. In anticipation of the change in interconnect rates, we have been building and developing our own network. The launch of Cristal Vox in 2009 is in direct response to this change.

Cristal Vox is the result of four years of experience in the voice market and has resulted in the launch of a telco grade quality voice solution. Cristal Vox allows Vox to provide a complete voice solution to service all of our customers’ needs for both inbound and outbound calls. The impact of this is reduced communication costs for our customers and improved margins for the Group.

With Local Number Portability (LNP) now available we have experienced an increased take-up of Cristal Vox by our corporate customer base. The change in the interconnect landscape now allows all subsidiaries within the Vox Group to offer competitive outbound and inbound retail rates to their customers on all types of voice traffic.

PRODUCTS
This year was once again remarkable in terms of the level of innovation within Vox Telecom. Fishbone, our world-class line bonding solution continues to be the gold standard in South Africa and is the best selling product in our history.

In addition, our mid-market video conferencing solution, Eyeris, in partnership with our technology partner, Imago, has been well received particularly in the SME market. In addition, we launched Vox Cocktail, our re-branded ADSL solution, which is well priced to compete against all operators in the highly competitive ADSL market. During the year we launched Periscope (our corporate Virtual Private Network (VPN) solution), Zeppelin (a corporate wireless solution) and Voxair (our teleconferencing service). We believe our level of innovation will continue to place pressure on our competitors and provide our customers with practical, well-priced products that deliver reliable proven technology solutions to meet their business needs.

@LANTIC

Our consumer ISP division, @lantic, had a challenging year and churned approximately 12,000 customers with revenues remaining constant at R199 million. However, @lantic managed to increase Average Revenue Per User (ARPU) from approximately R153 as at the end of 2009 to R157, as a result of upgrading customers and offering new products and services including the Vox Supafone and Cristal Vox.

@lantic will be highly focused on growing ARPU across the entire customer base in the forthcoming financial year by offering new products and upgrading existing customers. @lantic remains the third largest consumer ISP in South Africa with over 123,000 customers and a market share of approximately 14%.

VOX ORION
Vox Orion’s revenue declined by 9% to R1.2 billion largely as a result of the changes in the Mobile Termination Rate (MTR) environment as the majority of its customers use cellular LCR products as this has historically resulted in major savings when making outbound calls from Telkom to one of the mobile operator networks. The decline in revenue was further compounded by managements’ strategic decision to position the Group for future growth by placing a freeze on the renewal of LCR SIM cards with the networks as these SIMs came out of contract. As a result revenues from Connection Incentive Bonuses (CIBs) are down R88 million when compared to the prior period.

Vox Orion is now aggressively converting customers to Cristal Vox, but as this requires technical changes at customer sites and new contracts to be signed, the sales cycle is longer. As at 31 October 2010 Vox Orion had submitted 1,315 Cristal Vox proposals to its largest revenue generating customers with an acceptance rate of 22% and 63% of proposals under review; and successfully converted 34 million voice minutes onto the Vox network (previously LCR customers). Over the longer term Vox Orion will benefit from margin improvements once their major voice customers have been converted to the Cristal Vox solution.

Furthermore, with LNP now available we anticipate an increased take-up of Cristal Vox by the Vox Orion corporate customer base. The change in the interconnect landscape now allows Vox Orion as well as other subsidiaries within the Vox Group to offer competitive outbound and inbound retail rates to their customers on all types of traffic, instead of merely focusing on capturing a customer’s cellular traffic.

VOX DATAPRO
Vox Datapro, our corporate data division further consolidated its position in the data market growing overall external revenues in this segment 9% to R351 million across 7,540 customers. Vox Datapro’s revenue growth was diluted during the period due to the re-allocation of certain wholesale business to Vox Core. On an adjusted comparative basis Vox Datapro would have grown by 36% and ARPU would have increased to R5,122 per month from R5,031 per month as at end of August 2009.

Vox Datapro also grew its voice business substantially during the period, generating 83 million billed Cristal Vox minutes. We expect that Vox Datapro will continue to benefit from the capability to offer corporate customers a converged voice and data solution. In line with global trends, we expect to continue to see significant growth in the data market segment and will continue to focus on increasing ARPU across our corporate customer base as well as driving further growth from new customers as the demand for bandwidth continues unabated.

VOXCORE
Vox Core is our internal division responsible for the management of our voice and data network. However, Vox Core is also an aggregator of traffic for smaller Electronic Communications Network (ECNS) licencees and also manages wholesale relationships with local and international telecom operators.

During the period Vox Core grew its wholesale business 138% to R234 million and made a significant contribution to group performance. Vox Core is a critical supplier to the Group’s customer-facing business units, in particular Vox Datapro and Vox Orion, and needs to deliver a reliable, robust, high quality network that meets the demands of our customer base.

Vox Core completed a major upgrade of our network infrastructure with the final roll-out of Juniper switches and further upgrades of our national data centres. We will continue to invest in our network on a demand basis in order to meet the requirements of a growing voice and data business.

VOX TELEPRENEUR

We have always been known for innovation in the South African market and in February 2008 we launched a consumer voice offering under the Vox Telepreneur brand. Since our launch we have signed on over 4,300 dealers and acquired over 12,500 customers with an ARPU of R283, the fastest growing start-up in our history.

For the first time in the South African telecommunications market consumers receive rebates for incoming calls on our own number ranges. We have now also launched Vox Telepreneur products into the retail channel in partnership with Makro and Dion Wired and expect to look at additional partnerships to expand our distribution over the coming year. We expect to see strong growth in this market segment and will continue to challenge the status quo in this segment of our business offering.

VOX AMVIA
Vox Amvia, the leading supplier of corporate faxing solutions to the South Africa market grew revenue 15% to R36 million. Vox Amvia resells RightFax, which is developed and marketed by Open Text, a US based company that is a global leader in document management. Vox Amvia also represents a significant opportunity with respect to the disintermediation of fax traffic, which is now enhanced by our ability to port corporate fax numbers for the first time. We are marketing the Vox Amvia products directly, with channel partners and through our voice and data divisions and have high expectations for this business over the next few years.

CUSTOMERS
More than 15,000 corporate customers and 130,000 consumers trust us as their supplier of a critical telecommunications product or service. We understand the investment in time and effort that is required to build relationships and demonstrate delivery and performance on a consistent basis.

We pride ourselves on the fact that we think differently to the competition and are prepared to challenge the status quo as evidenced by new offerings such as Cristal Vox, Fishbone, Eyeris, Periscope and Zeppelin. Vox customers expect outstanding execution, superior customer service and continuous innovation. Furthermore, we understand our responsibility to reduce the overall telecommunications cost structure of our customers and we will continue to ensure we meet this need with reliable, innovative products.