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Chairman's Message

Anil Obeyesekere, P.C.

Transforming yet again
SLT closed the year once again on a positive note. The year was full of challenges but the Company responded magnificently to these challenges and posted yet another strong performance.

Economy Grows after the Tsunami
Recovering well after the tsunami, the economy grew by 5.1% in the first half of 2005. The services sector performed even better and grew by 6.4% during the first half of 2005. The growth was due in large measure to developments in telecommunications, port services, storage and warehousing, public administration, and the export trade.

The transport, storage and communications sector recorded the highest sectoral growth, growing by 15.4% during the first half of the year, as against a growth of 13.9% during the first half of the previous year. The largest contribution came from the telecommunications sub-sector, mainly driven by the growth in mobile phone usage, which increased by 53% during the first half of 2005. A substantial growth of 14.5% was also seen in the subscriber network of Fixed Access-Wireless Local Loop telephones, supported by the new Code Division Multiple Access (CDMA) technology.

With the new CDMA technology and the continuing expansion of the mobile telephone network, it is anticipated that the telecommunications subscriber network, would expand by 19.5% in 2006.

Another Positive year
Group’s revenue grew by 10% to reach Rs. 32.5 billion during the past year. Of this revenue 66% came from local telephone services, 24% came from international telephone services and 9% came from data and other services. Operating profits increased by 26%. Pre-tax profits were Rs. 4.8 billion and post-tax profits were Rs. 3.1 billion respectively. These are highest figures achieved by the Company since privatisation.

A reduction in interest expenses and an effective treasury management boosted our profits. The new income tax surcharge had a negative impact on the bottom line.

Stepping into the Region
Over the past 10 years we have established ourselves as the only fully integrated communications service provider in this country. In 2005, we took concrete steps towards becoming a major player in the regional telecommunications market. Our investments in infrastructure, human resources and technology have provided the foundation for this next phase of growth. We will continue to expand in the local market and continue with our efforts at offering the domestic customer the widest and most cost efficient choice coupled with the latest in technology. At the same time we pursue aggressively new markets in the region and beyond. Our technology strategy completely supports this.

Our global coverage was significantly strengthened with the undersea optical fibre links: SEA-ME-WE-3 and SEA-ME-WE-4. The Bharat-Lanka link will bring a whole new dimension to our international connectivity and provide a backbone to link East Asia with the Sub-Continent, the Middle East and Europe. The local fibre optic capacity was also strengthed.

Meeting the Challenges Head on
There were three main challenges that the Company faced over the past year. The first was the imposition of the International Telecommunications Operators’ Levy (ITL). Based on the Finance Act No. 11 of 2004 enacted by the Parliament in late 2004, a levy was imposed on International Telecommunication Operators with retrospective effect dating back to March 2003.

In 2005, there was an increase in the volume of ‘incoming minutes’. The ITL paid was still less than the previous the provision for 2003. The ITL for 2005 was paid for 12 months.

As in the previous year, the Company continues to recognise the expense arising from ITL in arriving at the results for the year. This was unexpected and had consequences for our bottom line, yet we were able to cope.

The Gazette notification of 31 March 2005 provides that each domestic PSTN operator may claim two thirds of the Telecommunications Development Charge(TDC) funds, for the development of their telecommunications network in unserved and underserved areas of Sri Lanka. This will be determined by the Telecommunications Regulatory Commission (TRC), within a period of three years.

The other challenge was the delay in approving our CDMA licence. The licence was finally made available in August 2005, and we entered the market as a third player in October. Despite our late entry we were able to attract 35,000 CDMA customers in a matter of two months and continue to do so at a phenomenal rate.

A more realistic tariff rate implemented in September 2003 was stymied by the Consumer Association of Lanka and the matter is before the Supreme Court. We are waiting for a speedy resolution of this matter to move forward with a time based tariff structure for our domestic voice service which will be simpler and easy to understand.

Exceeding Targets and Broadening Coverage
Last year we had targeted 60,000 new connections. However, due largely to the dynamism of our staff we exceeded this target by a third and installed 100,000 new connections by the year end.

SLT continues to hold 82% of the market share in fixed line operations and 65% of the market in data services. Our coverage is by far the widest and our links penetrate even the most rural of areas. Our coverage is supported by offices and maintenance centres countrywide. SLT Citylink CDMA broaden the horizon of communication on wireless connectivity.

In 18 months Mobitel rolled out its 300th base GSM station and by the end of 2005 it had 420,062 customers or 19% of the mobile market.

Since it launched its state-of-the-art EDGE/GPRS GSM network in January 2004 the Company has grown at an unprecedented rate of 300%. So far the Company has invested in excess of US$ 140 million in its GSM network and is working on enhancing its coverage to meet the growing demand. A further US$ 40 million has been targeted for the next phase of operations which is due to be completed in October 2006.

In 2005, Mobitel launched a dual band IDD solution: the first network to offer this solution. This is part of the Company’s strategy of providing customers with the widest possible choice using the most modern technology.

High Ranking Reaffirmed
LMD ranked SLT for the second consecutive year as the No. 1 Company in Sri Lanka for the fiscal year 2004/05. The grading is performed annually by LMD with analysis of the turnover, payable dividends, stock market reserves, assets and capital reserves of the companies listed at the share market. LMD also ranked SLT as Sri Lanka’s most valuable brand for a second time in succession.

The Brand value of SLT was further enhanced when we were presented with the National Icon Award for the most preferred brand in the Information & Communications Technology sector, which is held annually by the Sri Lanka Institute of Marketing.

Last year ‘Business Today’ placed SLT among the top ten companies in this country. We were ranked 3rd in this prestigious group. These awards recognise the Company’s performance in the past ten years and acknowledge its potential for the future.

Excellence in Reporting
The Institute of Chartered Accountants of Sri Lanka adjudged the Annual Report of SLT for the financial year 2004 as the first runner-up in the Services sector at its Annual Report Awards Competition. Further, SLT was placed in the second position in the Communication and IT Category of the “Best Presented Accounts Award 2004” competition held by the South Asian Federation of Accountants (SAFA). The criteria of selection prove the Company’s high standards in ensuring transparency, good governance and compliance with statutory and best accounting practices.

Achieving High Standards
In 2005, Fitch Ratings Lanka reconfirmed the AAA (sri) domestic rating of SLT. They further upgraded SLT’s foreign currency rating from ‘B+’ to ‘BB-’. This is in recognition of our robust market position and strong growth prospects.

Standard & Poor’s Rating Services revised its outlook on SLT from negative to stable. At the same time S&P affirmed its B+ foreign currency and BB- local currency corporate credit ratings on the Company.

Taking Customer Service to New Levels
It is our service quality that will attract customers. The newer players in the market are also developing rapidly and beginning to use technology to develop their product portfolio. We need to take our customer service to new levels to ensure that our existing clients stay with us and we continue to attract new customers to our network.

Staff Commitment Grows
Iwould like to thank employees at every level and in every part of the country for their efforts. Without their hard work and commitment the Company would not have performed the way it did.

My thanks also to my colleagues on the Board for their advice and guidance. I look forward to another rewarding year.