| Mon 19 Nov 2007, 7:00 | | TKG - Telkom SA Limited - interim results for the |
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TKG
TKG
TKG - Telkom SA Limited - interim results for the six months ended September 30,
2007
Telkom SA Limited
Registration no. 1991/005476/06
JSE and NYSE share code: TKG
ISIN: ZAE000044897
Telkom Group interim results
for the six months ended September 30, 2007
1 Overview
Johannesburg, South Africa - November 19, 2007, Telkom SA Limited (JSE and
NYSE: TKG) today announced reviewed Group results for the six months ended
September 30, 2007.
The Group announced a 15.1% decline in headline earnings per share compared to
the six months ended September 30, 2006. The performance is primarily reflective
of price reductions and value propositions through bundled services offered by
the fixed-line company together with increased operational expenditure as a
result of the fixed-line business continued drive to improve customer services,
maintain and improve the network and build a first class Next Generation Network
(NGN) capable of delivering converged Information, Communication and Technology
(ICT) services to its customers in South Africa and Africa. Vodacom once again
delivered a commendable performance.
Group Financial Key Performance Areas For The Six Months Ended
September 30, 2007
* Group operating revenue up 8.3% to R27,227 million
* 4.8% decline in group operating profit to R7,313 million
* 37.5% group EBITDA margin
* 50.9% net debt increase to R17,732 million, and a net debt to equity ratio of
60.0%
* Headline earnings decreased by 15.1% to 742.3 cents per share
* Basic earnings decreased by 16.6% to 724.3 cents per share
Statement by Reuben September, Acting Chief Executive Officer:
"The Telkom Group has delivered continued revenue growth largely as a result of
the 17.2% revenue growth delivered by the Vodacom Group. The fixed-line
segment`s revenue increased by 0.5% to R16,108 million. This performance is
primarily reflective of the increased competition in the telecommunications
landscape together with Telkom`s commitment to reducing the cost of
telecommunications services through price reductions and significant value
propositions to our customers.
Telkom has embarked on its mobile review strategy in order to drive the value of
a converged services offering through the NGN for the benefit of the South
African and other African countries` consumer and for the benefit of our
shareholders. In addition, Telkom is undergoing a structural transformation in
order to leverage efficiencies and capability management within the fixed-line
business. The fixed-line segment faces significant operational challenges as a
result of increasing competition, fixed to mobile substitution, deregulation and
rapidly changing business models within the ICT sector. It is therefore
imperative that the fixed-line business strives towards an integrated offering
to defend and grow its revenue streams. These strategic initiatives are
essential to the future strength of Telkom`s offering.
Vodacom again delivered an exceptional performance increasing its total
subscriber base 22.6% to 31.6 million customers for the six months ended
September 30, 2007 and maintaining its EBITDA margin at 33.3% compared to 33.8%
in the six months ended September 30, 2006 .
Telkom`s infrastructure building process is progressing well. We are proceeding
according to our timelines and are significantly increasing the network
bandwidth, capacity and availability of advanced solutions. It is vital that we
deliver the capacity to all our customers especially as applications grow more
and more bandwidth hungry. Telkom is also a key partner in delivering the 2010
World Cup Soccer to the global community and our ability to do so seamlessly is
dependant on the investment in our network. We believe that the acquisitions of
Africa Online and Multi-Links provide a good platform for execution of our Pan
African Service Provider Strategy which intends to expand the international
connectivity and availability of internet and data solutions to major African
cities as well as expand the global footprint for South African Multinational
companies. The creation of Telkom Media will provide Telkom with another
converged service offering and the deployment of NGN transport and access
technologies, products and services will enhance Telkom`s ability to diversify
and grow its revenue streams. We acknowledge that Telkom faces many challenges
but are also excited about the new opportunities presenting themselves through
the opportunity to provide converged products and services."
Financial Performance
Group operating revenue increased 8.3% to R27,227 million, while operating
profit decreased by 4.8% to R7,313 million. The Group EBITDA margin decreased to
37.5% as at September 30, 2007, compared to 40.7% at September 30, 2006, mainly
due to higher fixed-line operating expenditure which decreased the fixed-line
EBITDA margin by 13.0% to 38.2% as at September 30, 2007 (September 30, 2006:
43.9%). The EBITDA margin for the mobile business decreased marginally from
33.8% to 33.3% as at September 30, 2007, primarily due to declining ARPUs as a
result of increased lower spending customers connected.
Headline earnings per share decreased by 15.1% to 742.3 cents per share and
basic earnings per share decreased by 16.6% to 724.3 cents per share. The
reduced earnings can be attributed to a decrease in operating profit due to a
13.8% increase in operating expenses and a 122.4% increase in finance charges.
An aggressive marketing initiative comprising the bundling of services at
discounted rates and a reduction in tariffs, together with increased investment
in materials and maintenance to improve the reliability of the network and
improve customer services has led to the increase in operational expenditure.
Depreciation has also increased as a result of the capital expenditure programme
and changes in the fair value of financial instruments arising from the stronger
rand as well as the increased cost of funding and have contributed to the
decline in net profit for the period.
Cash flows from operating activities decreased 11.5% to R683 million, cash flow
utilised in investing activities increased by 71.3% to R7,028 million and cash
flows from financing activities increased from R817 million used in financing
activities to R4,520 million received from financing activities during the six
months ended September 30, 2007. Our group net debt to equity ratio of 42.0% at
September 30, 2006 has increased to 60.0% at September 30, 2007 now within our
targeted net debt to equity range of 50% to 70%.
Summary Group Financial Results
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Operating revenue 51,619 25,147 27,227 8.3
Operating profit 14,470 7,685 7,313 (4.8)
EBITDA1 19,785 10,225 10,214 (0.1)
Capital expenditure2 10,246 4,190 4,443 6.0
Operating free cash flow 3,728 1,396 (633) (145.3)
Net debt 10,026 11,751 17,732 50.9
Basic EPS (ZAR cents) 1,681.0 868.1 724.3 (16.6)
Headline EPS (ZAR cents)1 1,710.7 874.7 742.3 (15.1)
Operating profit margin (%) 28.0 30.6 26.9
EBITDA margin (%) 38.3 40.7 37.5
Net debt to equity (%) 31.3 42.0 60.0
After tax operating return on 22.7 11.9 9.2
assets (%)3
Capex to revenue (%)3 19.8 16.7 16.3
1. EBITDA and headline earnings have been reconciled to net profit - Refer to
page 58.
2. Including spend on intangibles
3. Not annualised
Operational Data
The following data represents the operational data for the Group`s fixed-line,
mobile and other segments:
As at As at
March 31, September 30,
2007 2006 2007 %
Fixed-line data
Fixed access lines (`000)1 4,642 4,675 4,621 (1.2)
Postpaid - PSTN 2,971 2,996 2,950 (1.5)
Postpaid - ISDN channels 718 708 735 3.8
Prepaid 795 807 782 (3.1)
Payphones 158 164 154 (6.1)
Fixed-line penetration rate 9.8 9.9 9.8 (1.0)
(%)
Revenue per fixed access 5,276 2,611 2,588 (0.9)
line (ZAR)
Total fixed-line traffic 29,344 15,068 13,762 (8.7)
(millions of minutes)
Local 16,655 8,658 7,114 (17.8)
Long distance 4,250 2,297 2,347 2.2
Fixed-to-mobile 4,103 2,014 2,093 3.9
International outgoing 558 265 305 15.1
International VoIP 38 20 22 10.0
Interconnection 3,740 1,814 1,881 3.7
Mobile interconnection 2,419 1,170 1,226 4.8
Fixed interconnection - - 16 -
International 1,321 644 639 (0.8)
interconnection
Managed data network sites 21,879 19,890 23,224 16.8
Internet subscribers2 305,013 300,570 337,853 12.4
ADSL subscribers3 255,633 190,172 335,112 76.2
Calling plan subscribers 288,881 180,168 396,589 120.1
Fixed-line employees 25,864 25,826 25,570 (1.0)
(excluding subsidiaries)
Fixed access lines per fixed-180 181 181 -
line employee4
Mobile data5
Total customers (`000) 30,150 25,753 31,564 22.6
South Africa
Mobile customers (`000) 23,004 20,201 23,297 15.3
Contract customers 3,013 2,675 3,409 27.4
Prepaid customers 19,896 17,440 19,790 13.5
Community services 95 86 98 14.0
telephones
Mobile churn (%) 33.8 43.0 45.9 6.7
Contract churn 9.7 11.0 8.3 (24.6)
Prepaid churn 37.5 47.7 51.9 8.8
Estimated mobile market 57.7 59.0 56.0 (5.1)
share (%)6
Mobile penetration (%) 84.2 72.2 86.8 20.2
Total mobile traffic 20,383 9,669 11,024 14.0
(millions of minutes)7
Mobile ARPU (ZAR) 125 124 119 (4.0)
Contract ARPU 517 528 487 (7.8)
Prepaid ARPU 63 61 59 (3.3)
Community services 902 1,017 711 (30.1)
Number of mobile employees8 4,577 4,315 4,716 9.3
Mobile customers per mobile 5,026 4,682 4,940 5.5
employee
Other African countries
Mobile customers (`000) 7,146 5,552 8,267 48.9
Number of mobile employees 1,404 1,184 1,524 28.7
Number of mobile customers
per
mobile employee 5,090 4,689 5,425 15.7
Other data
Africa Online
Number of subscribers 14,542 - 14,411 -
Multi-Links
Number of subscribers 185,619 - 262,431 -
1. Excludes Telkom internal lines of 109,000 (September 30, 2006: 108,000).
2. Includes Telkom Internet ADSL, satellite and dial-up subscribers.
3. Excludes Telkom internal lines of 523 (September 30, 2006: 397).
4. Based on number of fixed-line employees, excluding subsidiaries.
5. 100% of Vodacom data.
6. Based on Vodacom estimates.
7. Traffic for the six months ended September 30, 2006 was restated to exclude
packet switch data traffic.
8. Includes Holding company and Mauritius employees.
2 Operational overview
Positioning Telkom For The Future
Telkom is positioning itself to take advantage of the future converged services
environment that is fast becoming global best practice and particularly so for
the incumbent fixed-line operators.
The competitive landscape has changed radically over the last few years with the
mobile operators, Internet Service Providers and Value Added Network service
providers increasingly entering what has traditionally been the fixed-line
domain. Neotel is also building its network and services capabilities, albeit
slower than initially anticipated, and the regulatory environment is geared to
generate competition in the fixed-line environment. As a result, we are seeing
fixed-line revenue being eroded through both competition and price reductions
which are necessary to defend and grow revenue also benefiting of the South
African consumer through lower telecommunication service costs.
In order to counteract this negative revenue trend, Telkom is developing the
capabilities to offer the full suite of converged services that encompass fixed,
mobile, data and multimedia services. Our investment in our Next Generation
Network (NGN) will allow us to offer these products and services and will
provide us with the ability to offer premium customer service through the
intelligence and speed of this internet protocol based network. Telkom believes
that these new products and services will compete effectively and provide us
with the ability to counteract price reductions. The NGN is also vital to
ensuring South Africa`s ability to communicate with global operators utilising
similar technology and to provide the speeds, functionality and reach to service
South African companies expanding beyond our borders.
Telkom`s pursuit of an integrated business model to deliver converged services
has led to the review of our mobile strategy announced at the annual results
presentation for the year ended March 31, 2007 held on June 13, 2007. Subsequent
to this announcement, Telkom released a cautionary announcement on September 3,
2007 advising shareholders that it had entered into discussions with Vodafone
Group Plc and MTN Group Limited. On October 11, 2007 a further cautionary
announcement was issued advising shareholders that talks are on-going and to
continue exercising caution when dealing in the company`s securities.
There can be no guarantees that Telkom`s mobile strategy will change or that any
change will be successfull.
Vodacom Delivers Strong Performance
Vodacom again performed exceptionally well in the six months to September 30,
2007 delivering 17.2% growth in revenue to R22,815 million (Telkom Group 50%
share: R11,407 million) with a South African market share of approximately 56%.
Vodacom increased its profit from operations by 15.0% to R5,714 million (Telkom
Group 50% share: R2,856 million) and increased net profit by 17.5% to R3,658
million (Telkom Group 50% share: R1,829 million) and, in the face of declining
ARPUs primarily as a result of lower income segment customer connections and
aggressive drives to attract and retain customers, admirably delivered a 33.3%
EBITDA margin down 1.5% from the 33.8% EBITDA margin achieved for the six months
ended September 30, 2006.
Vodacom`s total customer base increased by a net of 5.8 million customers to
31.6 million customers as at September 30, 2007. South African mobile customers
increased by 15.3% to 23.3 million (September 30, 2006: 20.2 million) for the
six months ended September 30, 2007, reinforcing Vodacom`s market leadership
position in South Africa. Vodacom`s other African operations customer base grew
by 41.8% to 3.7 million (September 30, 2006: 2.6 million) customers in Tanzania,
by 56.8% to 3.2 million (September 30, 2006: 2.0 million) customers in the
Democratic Republic of Congo, by 39.5% to 332 thousand (September 30, 2006: 238
thousand) customers in Lesotho, and by 55.5% to 1.1 million (September 30, 2006:
694 thousand) customers in Mozambique.
Vodacom has implemented a supplementary disconnection rule that will disconnect
inactive prepaid SIM cards after 13 months of being kept in an active state by
call forwarding to voicemail only and having not had any other revenue
generating activity on the Vodacom network. This rule has led to the
disconnection of an additional 2.9 million prepaid SIM cards in September 2007,
increasing churn on the prepaid customer base to 51.9% for the period under
review. Prepaid churn was 47.7% for the six months ended September 30, 2006.
This rule change will however provide a better reflection of active prepaid SIM
cards on the network and is expected to bolster ARPUs. Vodacom`s focus on
customer care and retention saw South African contract churn at 8.3% (September
30, 2006: 11.0%). The blended South African ARPU over the year was R119
(September 30, 2006: R124) supported in part by the clean-up of the subscriber
base.
Vodacom`s data revenue increased by 45.2% to R2,096 million (Telkom Group 50%
share: R1,048 million) for the six months ended September 30, 2007 contributing
9.2% for the six months ended September 30, 2007 (September 30, 2006: 7.4%) to
mobile operating revenue.
Vodacom`s other African operations contributed 11.0% (September 30, 2006: 9.7%)
to revenue for the six months ended September 30, 2007 with 8.3 million
(September 30, 2006: 5.6 million) customers as of September 30, 2007. These
operations constitute 26.2% of Vodacom`s total customer base. All of Vodacom`s
other African operations, with the exception of Vodacom Mozambique, are
profitable. Mozambique remains a tough market but the outlook, and particularly
the competitive landscape, has improved and we continue to believe that in the
medium to long-term it will contribute to the overall growth of Vodacom.
Vodacom continues to pursue attractive acquisition opportunities in Africa.
Defensive Strategies Affect Fixed-Line Revenue
Data products and high-value added services coupled with innovative products and
solutions has led to an increase in Telkom`s fixed-line`s revenue of only 0.5%
to R16,108 million for the six months ended September 30, 2007. Revenue from
local calls decreased by 9.6% to R2,125 million, affected primarily by the loss
of dial-up minutes due to our ADSL rollout and cannibalisation by our bundled
products and mobile services. Revenue from long distance calls decreased by
14.9% to R1,219 million primarily as a result of a 10% tariff decrease on August
1, 2006 and a 10% decrease on August 1, 2007. These tariff decreases were partly
offset by a 2.2% increase in volumes. Revenue from fixed to mobile calls
increased by 0.2% to R3,794 million primarily as a result of increased volumes
of 3.9%. Tariffs on international calls were reduced by an average of 9.9% on
August 1, 2006 and an average of 9% on August 1, 2007 leading in part to a
pleasing 15.1% increase in volumes and a 1.0% increase in revenue to R498
million. Interconnection revenue increased by 6.7% to R833 million. Subscription
revenue increased by 16.7% to R3,559 million primarily reflecting our tariff
rebalancing in this area with rental tariff increases of 8% on August 1, 2006
and by 12% on August 1, 2007. Data revenue increased by 9.8% to R3,975 million
despite tariff reductions on our data products and an average reduction of 9% on
August 1, 2006 and by an average of 12% on August 1, 2007.
The revenue mix is clearly indicative of Telkom`s defensive strategies. Large
global and corporate customers have benefited from Telkom`s value propositions
through term and volume discounts in return for longer-term contracts. The
Closer bundles have seen a 75.4% increase in revenue and Supreme Call revenue
has increased tenfold over the comparative reporting period. As a result,
annuity revenue, which excludes line installations, reconnection fees, CPE sales
and any usage or traffic related revenue, has increased by 14.6% to R3,340
million. Telkom believes that its focus on its revenue opportunities from data
and high-value added services as well as the innovative products and solutions
being developed in line with the Next Generation Network roll-out.
ADSL Performance
ADSL subscribers grew by 76.2% to 335,112 subscribers for the six months ended
September 30, 2007 over the comparative reporting period and have grown by 31.1%
since March 31, 2007. Continued growth is expected to be stimulated by the
commoditisation of ADSL, the Do Broadband offering, the Self Install Option, DSL
port automation and wholesale services. Telkom is currently on track to reach
its target of 420,000 subscribers for the year ending March 31, 2008. Telkom
aims to achieve ADSL penetration of 15% - 20% of fixed access lines by 2010/2011
with the introduction of new service offerings and aggressive price reductions.
Internet customers, including dial-up subscribers, ADSL customers powered by
Telkom Internet and Internet satellite subscribers have increased by 12.4% to
337,853 customers as at September 30, 2007. The commoditisation of the ADSL
product has resulted in a larger resource pool being made available for ADSL
installations leading, together with the impact of the Self Install Option, to a
further reduction in the average time to install (ATTI) to 21 working days from
the 23 working days achieved for the year ended March 31, 2007. The Service
Level Target as per ICASA`s ADSL Regulations is 30 working days and Telkom is
pleased to have achieved this target which is easier to do for non-build orders
that already have infrastructure provisioned when the order is placed. Telkom is
also proud of the fact that only 19% of orders received where infrastructure
still needs to be built are outside the 30 day Service Level Target.
The introduction of Telkom`s Self Install Option is expected to continue to
improve the ATTI. As at March 31, 2007, 34% of all ADSL installations were done
through the Self Install Option. As at September 30, 2007, 59% of all ADSL
installations were Self Installs. The Self Install Option has had a significant
impact on the net monthly installs with the months of August 2007 and September
2007 exceeding the monthly install target by 11% and 28% respectively.
Further effort has gone into improving our customer satisfaction levels. DSL
automation has automated the port allocation resulting in fewer errors and
further reducing the lead time associated with the allocation of a DSL port in
the fulfillment process. A broadband demand register has been set up to hold
orders that cannot be serviced due to infrastructure constraints. This
intelligence is being used to align our DSL build programme with actual demand.
In addition, the Broadband Service Assurance Solution being developed will
provide users with self-help and self-diagnostic tools. This is particularly
important to Internet Service Providers who will be able to provide first line
maintenance and support capabilities, improving their customer service. The
launch of the wholesale ADSL product offering in April 2007 has contributed to
the growth of ADSL with 2,545 services being sold during the period ended
September 30, 2007.
Our ADSL footprint coverage has increased to 89% up from 82% at March 31, 2007.
In addition, Telkom has increased its footprint in traditional townships to 69%.
In extending and complimenting our ADSL footprint Telkom has increased WiMAX
capable base stations to 27 sites now active on the network, up from 14 sites at
March 31, 2007. Our target at this stage remains to build a further 71 WiMAX
capable base stations.
Explosive Broadband Demand
Demand for broadband has been explosive as corporate data solutions demand
additional capacity, the Do Broadband portal delivers more content and demand
for international content continues to grow, particularly from the mobile
operators as a result of the price decreases in 3G and HSDPA by the mobile
operators. Revenue from cellular operator fixed-links has increased by 12% to
R899 million (September 30, 2006: R803 million) for the six months ended
September 30, 2007. Growth in mobile data revenue of 45.2% to R1,048 million
(September 30,2006: R722 million) for the six months ended September 30, 2007 is
mainly due to data initiatives such as 3G, HSDPA, Vodafone Live!, Vodafone
Simply, BlackberryRegistered and the continued popularity of SMS. In addition,
revenue from managed data network sites has increased by 22.7% to R313 million
(September 30, 2006: R255 million) and the number of sites have increased by
16.8% to 23,224 sites at September 30, 2007 over the comparative reporting
period. Revenue from virtual private networks has increased by 34.4% to R215
million (September 30, 2006: R160 million) for the six months ended September
30, 2007.
Diversifying Revenue Streams
Recognising that Telkom`s traditional voice revenue is diminishing, Telkom has
increased its focus on data products and value added services. In addition,
Telkom has initiated the process to further diversify its revenue streams
through the creation of Telkom Media and the acquisition of Africa Online and
Multi-Links.
Africa Online
During February 2007, Telkom acquired 100% of the issued share capital of Africa
Online for a total cost of R150 million (GBP10.32 million). As the largest Pan-
African ISP in sub-Saharan Africa, Africa Online offers a wide range of services
to suit a variety of customer needs. With operations in Cote d`Ivoire, Ghana,
Kenya, Namibia, Swaziland, Tanzania, Uganda, Zimbabwe and Zambia, Africa Online
is positioned to provide both individuals and organisations alike with scalable
solutions based on each client`s specific needs.
Africa Online`s investment approach focuses on brand development, creation and
development of customer channels, improvement of network systems, human
resources development and an expansion drive targeting other African countries.
Africa Online will seek to grow its presence from 9 to 15 countries within 3
years.
With the evident lack of fixed infrastructure on the continent, Africa Online`s
growth plans will be achieved through the expansion of its wireless and
satellite networks. The focus will be on increasing its wireless broadband
infrastructure roll-out particularly in East and West Africa. In addition to its
corporate wireless service, Africa Online will seek to drive Broadband VSAT
services particularly to corporates and multi-nationals.
The synergistic opportunities between Africa Online and Telkom include VSAT
services, international voice termination where Africa Online is licensed to
provide voice services, Telkom providing telecommunications services to Africa
Online`s customer requirements in South Africa and Africa Online providing
Telkom Internet services to its customer base.
An aggressive penetration of the wireless broadband market is planned for
current consumer and small business markets in Kenya, Tanzania and Ghana with
new deployments planned for early 2008.
Africa Online will seek to position itself as a leading Pan African ICT provider
as it expands into new African markets and provides services through Telkom into
South Africa and through its growing affiliate network. Utilising this footprint
on the continent, Africa Online is forming key strategic partnerships with
multinationals, major carriers and virtual network operators in Africa and
Europe to provide services to its customers on the continent.
Africa Online`s revenue for the six months ended September 30, 2007 was R 46
million, EBITDA margin stood at 2.2% and net operating loss at R5 million. The
net operating loss is as a result of significant interest charges. Africa Online
is not expected to have a positive cash flow until at least in the year ending
March 31, 2010. Africa Online is seeking to grow its subscribers across all
product ranges from 14,411 on September 30, 2007 to 16,600 in March 2008.
Capital expenditure is estimated at approximately R80 million (USD 11.6 million)
for the year ending March 31, 2008.
Multi-Links
Multi-Links, a Private Telecommunication Operator in Nigeria in which Telkom
holds 75% of its share capital, has a Unified Access License allowing fixed,
mobile, fixed-wireless, international and data service, was acquired in April
2007 for R1,985 million (USD280 million).
Multi-Links will focus on brand awareness and promotional campaigns to increase
its revenue from fixed-wireless and mobile customers and will offer easy to
understand high-value bundles, differentiated on voice quality and service.
Broadband internet with ISP services targeting high value bundles and high
quality IP NGN services are planned to be launched for Government, Corporate and
Business customers.
Critical to its business plan is the aggressive roll out of infrastructure.
Multi-Links` technology and network strategy is relying on a green fields
scenario due to the relatively small size of the installed base. The network
expansion plans therefore utilise the latest technologies, allowing for
maximising network efficiencies, minimising network operational costs while also
having the capability to support and offer "new wave" service on one
standardised network.
The core network expansion plans are based on NGN Soft Switches and Media
Gateways, NGN-SDH transmission, a national fibre optic network and international
connectivity that has fibre access to the international submarine fibre network.
In the Access network, a combination of CDMA 20001X EV-DO and Metro Ethernet
technologies will be used for rapid deployment of services.
A suite of IP Enterprise Solutions will be designed to allow Multi-Links to
differentiate its offer to various segments, while maintaining good value at the
right price with national coverage. Multi-Links also plans to launch carrier
quality wholesale voice, data and internet bandwidth in Nigeria. These services
carried over the NGN architecture are expected to offer the wholesale market
improved reliability, access to higher bandwidth and quality through service
level guarantees.
Capital expenditure is estimated at approximately R1,576 million (USD 229
million) for the year ending March 31, 2008.
Telkom Media
Telkom SA created Telkom Media (Pty) Ltd early in 2006, a joint venture to
explore various avenues in the information, communications and entertainment
(ICE) environment; including cable and satellite subscription broadcast
television, online and content services. Other partners in the joint venture are
Videovision Entertainment, MSG Afrika Media and WDB Investment Holdings (Pty)
Ltd. This shareholding combines a wealth of electronic media expertise.
On August 31, 2006 Telkom Media applied for a commercial satellite and cable
subscribers broadcast licence. The Independent Communication Authority of South
Africa (ICASA) granted Telkom Media a commercial satellite and cable
subscription broadcast license in September 2007. Telkom Media`s vision is to be
Africa`s "digital media provider of choice" and it is developing a set of new
digital media services to address the diverse needs of both the consumer and
business markets. Telkom Media will seek to provide services through a wide
range of digital platforms, positioning itself in new high growth areas of the
information, communication and entertainment market.
Based on our research we believe that there is clear market space for a new pay
TV proposition in the South African market (over 40% of South African
households). There is currently a market that does not believe the current pay-
TV offerings match their particular requirements. At present, this segment is
untapped, but represents a significant and under-served market which we believe
can be effectively served given an appropriately priced and packaged pay TV
offering. We believe that more flexibility in the structure of packages will
pave the way for greater affordability, allowing us to offer multi-channel
television that represents value for money.
In addition, our Triple Play focus group research demonstrates that in addition
to demand for pay TV services, there is significant interest in the enhanced
information, communications and entertainment experiences that are enabled by
IP-
based platforms. This suggests the South African market can support an advanced
convergent IPTV proposition.
The target audience will be the universal television audience.
The satellite service is expected to focus on the middle LSMs.
The IPTV service is expected to focus on the upper LSMs.
We will seek to provide multi-channel television with an element of choice and
value for money that is not currently available to the market. In addition,
Telkom Media`s funding required for the year ending March 31, 2008 is estimated
at R803 million.
Telkom Media will seek to launch a satellite bouquet of between 40 and 50
channels. The company has secured exclusive access to a number of premium
international channels, with high brand equity and entertainment value. While
premium soccer, rugby and cricket rights are unavailable for the next few years,
Telkom Media is in the process of securing exclusive rights to alternative
offerings. The company will also be commissioning exclusive, high-profile
entertainment content locally.
Improving Customer Service
Improved customer service is vital to defending and growing revenue. Sustainable
and profitable growth in the customer base requires creating and strengthening
capabilities focused on managing customer relationships and learning from
acquired customer information. This will allow Telkom to manage the customer
experience and anticipate customer needs.
A Customer Centricity Office was established in May 2006 to formulate a Customer
Centricity Roadmap. Sixty seven initiatives were developed to build foundational
customer centricity capabilities. Thirty eight of those have already kicked off.
A key tenent of the drive is to "treat different customers differently".
Telkom`s customer service was previously structured around different functions
and different products. Telkom is currently designing its systems and structures
around different customer groupings, particularly as customers now demand
service on multiple functions and products. Customer segmentation based on value
will allow Telkom to understand customer equity better and to give additional
value and services to high-value customers. Understanding an individual
customer`s breakeven point and anticipating their future requirements will allow
Telkom to intelligently determine value enhancers and cross selling
opportunities of products designed to meet and exceed the breakeven point.
Telkom`s call centre master plan has been designed to compliment customer
segmentation through dedicated agents for high value customers, upfront
identification and routing of complex calls to specialised agents and upfront
resolution of high volume simple calls by a universal agent. This is a vital
element in making it easier for our customers to do business with us. The roll-
out of the plan is expected to commence soon.
Part of Telkom`s Customer Centricity drive is also improving the service
delivery processes. This is evident in the improvement in the DSL installation
and assurance processes. Telkom is currently working on improving sub-rate
installations, specific solutions and enhanced DSL process improvement.
Competitive Pricing And Volume Growth
Telkom announced an overall average tariffs decrease on our regulated basket of
products and services of 1.2%, which became effective on August 1, 2007.
Telkom expects that its future tariff rebalancing will continue to focus on the
relationships between actual costs and tariffs of Subscription and Connections
and Traffic in order to more accurately reflect underlying costs and to capture
volume. The reduction of telecommunication costs should benefit all South
Africans and contribute positively to the economy.
KEY NEXT GENERATION NETWORK, CAPACITY AND PRODUCT DEVELOPMENTS
Telkom is in the 3rd year of its NGN build out programme. Customer demands and
global standards necessitate the provision of services and particularly
bandwidth that is only possible utilising the intelligence of an NGN system.
Further to the information supplied in the results presentation for the year
ended March 31, 2007, the following achievements are worth mentioning:
* An increase of the ADSL footprint to 2501 DSLAMs.
* 52 Metro Ethernet sites deployed in Gauteng and Western Cape using 10Gbit and
1Gbit line systems.
* Dense Wave Division Multiplexing (DWDM) system capable of forty 10Gbit/s
signals over a single pair of fibre. The first system was deployed between
Gauteng and Durban. The full deployment of this technology provided the
potential to increase transport bandwidth capability.
* Automatic self-healing re-routing of bandwidth on national layer.
* National and local transport network increased by 167 nodes growing the
network bandwidth potential by 1.2Tbit/s. Further expansion is planned which
will increase the bandwidth potential by 2.2 Tbit/s.
* Network Interactive Voice Response System deployed which offers advanced
speech services such as automated speech recognition and a text-to-speech
applications enabling Corporate customers and Telkom to enhance their voice
systems.
* Diginet and Diginet Plus services are being increased through the further
installation of 6 core nodes. A further 3 core nodes are in planning phase. The
bandwidth potential will increase by 86Gbit/s.
* 8,000 2Mbit/s equivalent links have been provided to mobile cellular operators
in the six months ended September 30, 2007 - a 13.5% increase in bandwidth.
* IMAX has been introduced into the system and is ready to carry traffic. IMAX
has the ability to carry narrowband and broadband services for wire line legacy
and converged services.
Telkom spent R2,647 million (September 30, 2006: R2,599 million) during the six
months ended September 30, 2007 on its capital expenditure programme. This is in
line with its five year R30 billion capital expenditure programme. Projects are
considered in terms of the Internal Rate of Return. Existing infrastructure is
optimised to decrease capital requirements for service provisioning. It is
estimated that Telkom will spend approximately R7.0 billion on fixed-line
capital expenditure in the financial year ending March 31, 2008.
Fixed-Line Operating Expenses - Reflective Of Company and Network Transformation
Telkom group posted a 13.8% increase in operating expenses for the six months
ended September 30, 2007 in line with the 12.3% increase recorded at the year
ended March 31, 2007. The fixed-line operating expenses increased by 6.6% to
R12,011 million (September 30, 2006: R11,272 million) for the six months ended
September 30, 2007. The increase in operating expenses is reflective of the
running of the legacy and NGN elements to the networks and the extensive effort
to improve and develop new systems, services and products. This is particularly
evident in the increase in maintenance by 12.0% to R1,044 million (September 30,
2006: R932 million) for the six months ended September 30, 2007. Preserving the
legacy systems remains vital to servicing our customers until the NGN is fully
in place. Salaries and wages also increased by 12.6% to R2,770 million
(September 30, 2006: R2,460 million) reflecting the annual salary increases and
incentives to retain our employees whose specialists skills are in short supply
and highly attractive to our competitors. The capital expenditure programme,
strategy and an impairment of certain information support systems impacted on
depreciation, amortisation, impairments and write-offs which has increased by
8.9% to R1,868 million for the six months ended September 30, 2007 (September
30, 2006: R1,715 million).
Increasing Share Allocations
On September 4, 2007 Telkom`s Board of Directors enhanced the allocation of
shares to employees in terms of Telkom`s Conditional Share Plan to enhance its
support of Telkom`s reward strategy, specifically in terms of appropriately
incentivising employees and enhancing Telkom`s ability to attract and retain top
talent. The revised allocations will not only enable Telkom to attract, motivate
and retain employees but will also work towards promoting performance as a
motivational aspect in sharing in the wealth created by the company through
achieving targets in line with Telkom`s strategic intent.
The Board allocated 6,089,810 shares to employees with a grant date of September
27, 2007 and enhanced the November 2006 grant by an additional 4,966,860 shares.
This share based compensation expense for the six months ended September 30,
2007 was R26 million.
Management Restructuring
Subsequent to the interim results period ended September 30, 2007 Telkom
announced a restructuring of its Executive Committee to consist of the following
positions and employees:
Chief Executive Officer - Reuben September (Acting)
Responsible for strategic and operational oversight of the entire Group.
Chief of Finance - Deon Fredericks (Acting)
Responsible for treasury, accounting, procurement and internal audit.
Chief of Operations - Motlatsi Nzeku
Responsible for network infrastructure provisioning, network field operations,
network core operations, retail sales and marketing, call centres and
information operations.
Chief of Global Operations and Subsidiaries - Thami Msimango
Responsible for global and local subsidiaries, sales and marketing operations
for multinational and wholesale customers.
Chief of Human Resources - Charlotte Mokoena
Overall responsibility for corporate services, human resources operations and
international human resources.
Chief of Strategy - Naas Fourie (Acting)
Responsible for group strategy, corporate business development, market
development, corporate communications, investor relations and integration
strategy.
Chief of Corporate Governance - Ouma Rasethaba
Responsible for group legal services, regulatory and policy, the Telkom
Foundation and group company secretarial.
The new structure of the EXCO has been designed in such a way that it:
* Creates specialised focus areas to aggressively pursue customer groups that
have been identified through the customer segmentation process.
* Creates sector specialists in appropriate areas.
* Ensures a coherent Group approach to marketing, pricing and product and
services development.
* Enhances effective and efficient resource utilisation throughout the Group.
* Increases the coherence and speed of deployment to the market.
* Creates a unified technology view of both Information Systems Services and
Information Systems Development.
* Creates smoother integration of and resource deployment to Telkom`s
subsidiaries.
* Aligns with Telkom`s Mobile Strategy Review process which is still ongoing.
* Better serve multi-national and wholesale customers through the most
appropriate channels.
The new structure aims to boost revenue and reduce cost through efficient
management of all resources including labour.
The Regulatory Environment
Telkom faces continuous regulatory challenges covering inter alia competition
issues and changes in policies. Through constructive dialogue, the Company
endeavours to achieve a regulatory framework that is realistic, equitable and
beneficial to the industry. The following details the main regulatory issues
affecting the industry and Telkom.
Electronic Communications (EC) Act
The EC Act, No 36 of 2005, came into effect on July 19, 2006. The primary aim of
the Act is to promote convergence in the broadcasting, broadcasting signal
distribution and telecoms sectors and to provide the legal framework for
convergence of these sectors. The Act aims to liberalise the market further and
will result in a change in the licensing structure. Essentially, separate
licences will be granted for the provision of infrastructure, communication
services and broadcasting services. All existing licensees will need to be
issued with new licences.
The EC Act creates challenges as well as opportunities that Telkom will
certainly explore. In particular, its expected impact on Telkom includes the
following primary areas:
* Conversion of licences to network licences and service licences;
* Impact on price controls, terms and conditions of access and interconnection &
facilities leasing.
ICASA Amendment Act
A bill amending the ICASA Act was enacted on July 19, 2006. The main provisions
of this Act determine in greater detail the functions of the Authority, amended
the procedure for appointment and removal of councillors and cover the
establishment of a Complaints and Compliance Committee.
Interconnection and facilities leasing
Current regulations make provision for cost based interconnection and facility
leasing. Telkom submitted its regulatory accounts on a current cost basis to
ICASA in September 2005 and an update in September 2006. The Company also
submitted long run incremental costs (LRIC) statements on September 29, 2006.
The Electronic Communications Act requires ICASA to analyse the various markets
and should an operator be declared to have Significant Market Power in any
market, cost based prices may be imposed. The recent focus by ICASA on
termination rates may force MTN, Vodacom and Telkom to implement cost based
termination prices.
Telkom continuously engages in negotiations for interconnection, shared access
and facilities leasing agreements. Interconnectivity agreements with Neotel and
the majority of VANS have been concluded.
Number Portability (NP)
In terms of regulations published in September 2005, Telkom is expected to
provide blocks of 10,000 numbers two months after Neotel`s launch of services,
blocks of 1,000 numbers four months after Neotel`s launch of services and
individual number portability 12 months after the request. Functional
specifications for the implementation of NP between fixed-line operators are
being negotiated.
Neotel requested NP in February 2006 and discussions on the implementation of
the required inter-operator systems are under way.
Local Loop Unbundling (LLU)
Telkom is required, in terms of existing legislation, to provide Neotel with
shared access to its local loop.
Although the Telecommunications Act, 103 of 1996, provides that no general local
loop unbundling will be required for the first two years of operation of Neotel,
the EC Act, which repeals the Telecommunications Act, makes provision for
unbundling of the local loop, subject to ICASA making the necessary regulations.
The Minister of Communications (the Minister) has recently expressed that the
unbundling of the local loop (LLU) process should be implemented urgently and
has made a call for the regulator to make use of the report of the LLU committee
and its recommendations. The Minister has subsequently, in policy directions,
stated that the unbundling process should be completed by 2011.
ADSL Regulations
ICASA has issued regulations on August 17, 2006 on the provision of ADSL
services. The main provisions of the regulations relate to minimum standards of
service that operators must adhere to.
The Minister of Communications policy directions of September 17, 2007
On September 17, 2007 the Minister published a response addressing regulatory
issues raised in the EC Act and directing ICASA:
* to address the unbundling of the local loop, details of which are noted above;
* to urgently consider whether none, or only certain, of the existing VANS
licensees can be authorised to provide services as well as provide and operate
facilities/networks. ICASA would have to issue network service licenses for such
networks; ICASA has subsequently facilitated a VAN`s conversion workshop in
which all existing licensees commented on the policy directives published by the
Minister;
* to allocate spectrum for a single national network for mobile broadcasting,
prescribe regulations governing the co-ordination between licenses, and also
prescribe procedures for awarding spectrum licenses for competing applications;
* to merge the Under Serviced Areas License operators where there is more than
one operator licence per province and issue one Provincial Under-Serviced Area
Network Operators licence where each would be licensed for individual networks
and services; and
* to consider prioritising and urgently prescribing a list of essential
facilities ensuring that the electronic communications facilities connected to
the SAT-3/WASC/SAFE submarine cable can be accessed soon and prices for access
to the cable be regulated.
Protocol on the Nepad broadband ICT infrastructure network
The protocol on the Nepad broadband ICT Infrastructure network project has been
ratified by Parliament.The main objectives of this protocol are:
* to promote and facilitate the provision of ICT broadband infrastructure in
Eastern and Southern Africa; and
* to facilitate the incorporation and/or utilisation of existing national and/or
regional networks into the NEPAD ICT Broadband infrastructure network.
Broadband INFRACO Bill
A bill is currently in the process of being enacted in Parliament and should be
assented to the President by the end of the year. The main provision of this
Bill is to establish a state owned provider of broadband infrastructure.
ECA Amendment Bill
A bill amending the EC Act is currently in the process of being enacted in
Parliament and should be assented to the President by the end of the year. The
main provision of this Bill is to determine the licensing of state owned
entities. Essentially the Bill is aimed at facilitating the licensing of
INFRACO, the NEPAD protocol SPV and municipalities outside the normal processes
stipulated in the ECA.
Defining end-to-end leased lines and other wholesale markets
The market review process undertaken by ICASA is aimed at determining the scope
and boundaries of various fixed-line wholesale and retail markets (e.g. local
access, national long distance, international, etc.). In terms of the process,
ICASA is expected to:
* define the relevant markets;
* assess Telkom`s market power and dominance in each market; and
* propose pro-competition regulations on Telkom.
Conclusion
Telkom is confident that it is well placed to deal with all regulatory issues.
Telkom actively engages with both policymakers (Parliamentary Committees) and
the regulator (ICASA) and plans and analyses multiple regulatory scenarios to
ensure that it is prepared for changes in regulation.
Prospects For The Six Months Ahead
Fixed-line revenues in the financial year ending March 31, 2008 are expected to
be impacted by tariffs, increased competition and the continued migration from
dial-up services to ADSL services and the introduction of cost-based
interconnection. Our strategic initiatives to improve service levels are
expected to result in above inflationary increases in operating expenses, the
result being an expected fixed-line EBITDA margin between 37% and 40%.
Employee expenses are expected to increase to cater for the strong demand for
Telkom`s products and services which are expected to increase as prices are
further reduced in competitive response actions. Fixed-line CAPEX is expected to
be between 18% and 22% of revenue.
The mobile business is focused at maintaining its market share and acquiring
operations in Africa. Through improved efficiencies, no material change to the
mobile EBITDA margin is expected.
The Group net debt to equity target remains at 50% to 70%.
3 Group performance
Group Operating Revenue
Group operating revenue increased by 8.3% to R27,227 million (September 30,
2006: R25,147 million) in the six months ended September 30, 2007. Fixed-line
operating revenue, before inter-segmental eliminations, increased by 0.5% to
R16,108 million primarily due to growth in subscription, interconnection and
data revenues, partially offset by lower traffic revenue. Mobile operating
revenue, before inter-segmental eliminations, increased by 17.2% to R11,407
million primarily due to customer growth offset by declining ARPUs.
Group Operating Expenses
Group operating expenses increased by 13.8% to R20,118 million (September
30,2006: R17,675 million) in the six months ended September 30, 2007, primarily
due to a 17.9% increase in operating expenses in the mobile segment to R8,573
million (before inter-segmental eliminations). Fixed-line operating expenses
increased by 6.6% to R12,011, before inter-segmental eliminations primarily due
to increased selling general and administrative expenses, depreciation,
amortization, impairment and write-offs and payments to other operators and
services rendered, partially offset by a decrease in employee expenses and
operating leases. The increase in mobile operating expenses of 17.9%, before
inter-segmental eliminations, was primarily due to increased gross connections
resulting in increased costs to connect customers onto the network as well as
increases in staff expenses as a result of more competitive salaries being
offered and the increase in the headcount to support the growth in operations
and higher customer care flexi staff cost.
Investment Income
Investment income consists of interest received on short-term investments and
bank accounts. Investment income decreased by 23.5% to R130 million (September
30, 2006: R170 million), largely as a result of less cash available for short-
term investments due to higher expenditure.
Finance Charges
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. Finance charges increased by 122.4% to
R972 million (September 30, 2006: R437 million) in the six months ended
September 30, 2007, primarily due to a 28.7% increase in interest expense to
R867 million (September 30, 2006: R673 million) as a result of the 50.9%
increase in net debt to R17,732 million (September 30, 2006: R11,751 million).
Net debt increased mainly as a result of the issuance of commercial paper debt
during the period and other short-term borrowings at the end of the period. In
addition to the increase in the interest expense, net fair value and exchange
movements on financial instruments resulted in a loss of R105 million for the
six months ended September 30, 2007 (September 30, 2006: Gain of R236 million).
Taxation
Consolidated tax expense decreased by 5.8% to R2,678 million (September 30,
2006: R2,844 million) in the six months ended September 30, 2007. The
consolidated effective tax rate for the six months ended September 30, 2007 was
41.4% (September 30, 2006: 38.3%). Telkom Company`s effective tax rate was 42.7%
(September 30, 2006: 28.8%). The higher effective tax rate for Telkom Company in
the six months ended September 30, 2007 was due to the lower profit before tax
resulting from the Vodacom interim dividend being declared after September 2007,
this also resulted in a higher taxation charge because the Secondary Tax on
Companies (STC) credit on the Vodacom interim dividend was only brought into
account after September 30, 2007.
Vodacom`s effective tax rate decreased to 30.6% (September 30, 2006: 37.3%). The
decrease is due to STC on the Vodacom interim dividend which was only declared
after September 30, 2007.
Profit For The Year And Earnings Per Share
Profit attributable to the equity holders of Telkom, excluding minority
interest, decreased by 17.8% to R3,700 million (September 30, 2006: R4,500
million) in the six months ended September 30, 2007.
Group basic earnings per share decreased by 16.6% to 724.3 cents (September 30,
2006: 868.1 cents) and Group headline earnings per share decreased by 15.1% to
742.3 cents (September 30, 2006: 874.7 cents).
4 Group balance sheet
The Group`s balance sheet retained its strength and moved towards a more
efficient capital structure. Net debt, after financial assets and liabilities,
increased by 50.9% to R17,732 million (September 30, 2006: R11,751 million)
resulting in a net debt to equity ratio of 60.0% from 42.0% at September 30,
2006. On September 30, 2007, the Group had cash balances of R778 million
(September 30, 2006: R718 million).
Interest-bearing debt, including credit facilities utilised, increased by 38.5%
to R17,766 million (September 30, 2006: R12,831 million) in the six months ended
September 30, 2007. The Group raised commercial paper bills with a nominal value
of R11,908 million for the six months ended September 30, 2007 of which R8,510
million was redeemed by September 30, 2007.
5 Group cash flow
Cash flows from operating activities decreased by 11.5% to R683 million
(September 30, 2006: R772 million), primarily due to higher dividend payments
and decreased cash generated from operations partially offset by lower taxation
paid. Cash flows utilised in investing activities increased by 71.3% to R7,028
million (September 30, 2006: 4,102 million), primarily due to acquisitions and
increased capital expenditure in both the mobile and fixed-line segments. Cash
flows from financing activities includes loans raised of R13,194 million, of
which R11,908 million represents the nominal value of commercial paper debt
issued during the six months ended September 30, 2007. R8,510 million nominal
commercial paper debt issued was repaid during the six months ended September
30, 2007.
SUMMARY
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Cash generated from 20,520 9,046 8,313 (8.1)
operations
Cash from operating
activities
(after tax, interest and 9,356 772 683 (11.5)
dividends)
Investing activities (10,412) (4,102) (7,028) 71.3
Financing activities (2,920) (817) 4,520 (653.2)
Net decrease in cash (3,976) (4,147) (1,825) (56.0)
6 Group capital expenditure
Group capital expenditure which includes spend on intangible assets, increased
by 6.0% to R4,443 million (September 30, 2006: R4,190 million) and represents
16.3% of Group revenue (September 30, 2006: 16.7%).
Group Capital Expenditure
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Fixed-line 6,599 2,599 2,647 1.8
Mobile 3,608 1,571 1,648 4.9
Other 39 20 148 640.0
10,246 4,190 4,443 6.0
Fixed-Line Capital Expenditure
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Baseline 3,409 1,377 1,854 34.6
Portfolio 3,001 1,078 765 (29.0)
Revenue generating 159 93 6 (93.5)
Network evolution 784 273 204 (25.3)
Sustainment 416 173 114 (34.1)
Effectiveness and 1,141 417 352 (15.6)
efficiency
Support 501 122 89 (27.0)
Regulatory 189 144 15 (89.6)
Other - - 13 -
6,599 2,599 2,647 1.8
Fixed-line capital expenditure which includes spending on intangible assets,
increased by 1.8% to R2,647 million (September 30, 2006: R2,599 million) and
represents 16.4% of fixed-line revenue (September 30, 2006: 16.2%). Baseline and
revenue generating capital expenditure of R1,854 million (September 30, 2006:
R1,377 million) was largely for the deployment of technologies to support the
growing data services business (including ADSL footprint), links to the mobile
cellular operators and expenditure for access line deployment in selected high
growth residential areas. The continued focus on rehabilitating the access
network and increasing the efficiencies and redundancies in the transport
network contributed to the network evolution and sustainment capital expenditure
of R318 million (September 30, 2006: R446 million).
Telkom continues to focus on its operations support system investment with
current emphasis on workforce management, provisioning and fulfilment, assurance
and customer care, hardware technology upgrades on the billing platform and
performance and service management. During the six months ended September 30,
2007, R352 million (September 30, 2006: R417 million) was spent on the
implementation of several systems.
Mobile Capital Expenditure
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Property , plant and 3,069 1,367 977 (28.5)
equipment
Intangible assets 539 204 671 228.9
3,608 1,571 1,648 4.9
Mobile capital expenditure, which includes spending on intangible assets (50% of
Vodacom`s capital expenditure), increased by 4.9% to R1,648 million (September
30, 2006: R1,571 million) and represents 14.4% of mobile revenue (September 30,
2006 16.1%) and was mainly spent on the cellular network infrastructure
consisting of radio, switching and transmission network infrastructure and
computer software. The decrease in capital expenditure in other African
countries was largely as a result of decreased investments in Tanzania,
Democratic Republic of the Congo and Mozambique offset by an increase in
investment in Lesotho.
Other Capital Expenditure
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Other 39 20 148 640.0
Other capital expenditure consists of additions to property, plant and equipment
for our subsidiaries TDS Directory Operations (Proprietary) Limited, Swiftnet
(Proprietary) Limited, Telkom Media (Proprietary) Limited, Africa Online
Limited and Multi-Links Telecommunications Limited. Other capital expenditure,
which includes spending on intangibles, increased by 640.0% to R148 million
(September 30, 2006: R20 million) and represents 16.4% of other revenue
(September 30, 2006: 3.8%).
7 Segment performance
Telkom`s operating structure comprises three segments, fixed-line, mobile and
other. The fixed-line segment provides fixed-line voice and data communications
services through Telkom. The mobile segment provides mobile services through our
50% joint venture interest in Vodacom. The other segment provides directory
services through our 64.9% owned subsidiary, TDS Directory Operations, wireless
data services through our wholly owned subsidiary, Swiftnet, internet services
in Cote d`Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and
Zimbabwe, through our wholly owned subsidiary, Africa Online Limited and fixed,
mobile, data, long distance and international telecommunications services
throughout Nigeria, through our 75% owned subsidiary, Multi-Links as well as
recently formed Telkom Media.
Vodacom`s results are proportionately consolidated into the Telkom Group`s
consolidated financial statements. This means that we include 50% of Vodacom`s
results in each of the line items in the Telkom Group`s consolidated financial
statements.
The financial information provided below is all before any inter-segmental
eliminations.
Summary
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Operating revenue 51,619 25,147 27,227 8.3
Fixed-line 32,454 16,025 16,108 0.5
Mobile 20,573 9,733 11,407 17.2
Other 1,222 522 902 72.8
Inter-segmental (2,630) (1,133) (1,190) 5.0
eliminations
Operating profit 14,470 7,685 7,313 (4.8)
Fixed-line 8,947 5,316 4,286 (19.4)
Mobile 5,430 2,483 2,856 15.0
Other 687 248 181 (27.0)
Inter-segmental (594) (362) (10) (97.2)
eliminations
Operating profit margin (%) 28.0 30.6 26.9 (12.1)
Fixed-line 27.6 33.2 26.6 (19.9)
Mobile 26.4 25.5 25.0 (2.0)
Other 56.2 47.5 20.1 (57.7)
EBITDA 19,785 10,225 10,214 (0.1)
Fixed-line 12,530 7,031 6,153 (12.5)
Mobile 7,122 3,289 3,799 15.5
Other 727 267 272 1.9
Inter-segmental (594) (362) (10) (97.2)
eliminations
EBITDA margin (%) 38.3 40.7 37.5 (7.9)
Fixed-line 38.6 43.9 38.2 (13.0)
Mobile 34.6 33.8 33.3 (1.5)
Other 59.5 51.1 30.0 (41.3)
Fixed-Line Segment
The fixed-line segment accounted for 56.7% (September 30, 2006: 61.0%) of Group
operating revenues (before inter-segmental eliminations) and 58.5% (September
30, 2006: 66.1%) of Group operating profit for the six months ended September
30, 2007.
The financial information presented below for the fixed-line segment is before
inter-segmental eliminations.
Summary
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Revenue 32,454 16,025 16,108 0.5
Operating profit 8,947 5,316 4,286 (19.4)
EBITDA 12,530 7,031 6,153 (12.5)
Capital expenditure1 6,599 2,599 2,647 1.8
Operating profit margin 27.6 33.2 26.6 (19.9)
(%)
EBITDA margin (%) 38.6 43.9 38.2 (13.0)
Capex to revenue (%) 20.3 16.2 16.4 1.2
1. Including spend on intangible assets
Fixed-Line Operating Revenue
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Subscriptions and 6,286 3,050 3,559 16.7
connections
Traffic 16,740 8,448 7,636 (9.6)
Local 5,384 2,735 2,125 (22.3)
Long distance 2,722 1,432 1,219 (14.9)
Fixed-to-mobile 7,646 3,788 3,794 0.2
International outgoing 988 493 498 1.0
Interconnection 1,639 781 833 6.7
Mobile operators 816 400 407 1.8
Fixed operators - - 5 -
International operators 823 381 421 10.5
Data 7,489 3,621 3,975 9.8
Leased lines and other 5,825 2,818 3,076 9.2
data
Mobile leased 1,664 803 899 12.0
facilities
Other 300 125 105 (16.0)
32,454 16,025 16,108 0.5
Operating revenue from the fixed-line segment, before inter-segmental
eliminations, increased by 0.5% to R16,108 million (September 30, 2006: R16,025
million) primarily due to increased subscription, data and interconnection
revenues, partially offset by a decline in traffic revenue.
Subscription and connections revenue grew by 16.7% to R3,559 million (September
30, 2006: R3,050 million) largely as a result of increased rental tariffs,
increased subscribers on Telkom Closer and SupremeCall, increased sales of PABXs
and penetration of higher value-added services.
Traffic revenue decreased by 9.6% as a result of the acceleration of broadband
adoption and the resultant loss of internet dial-up minutes as well as the
increasing substitution of calls placed using mobile services rather than fixed-
line services. Traffic, including VoIP traffic but excluding interconnection
traffic, decreased by 8.8% to 11,859 million minutes (September 30, 2006: 13,009
million minutes).
Interconnection revenue increased by 6.7% to R833 million (September 30, 2006:
R781 million) largely as a result of an increase of 10.5% in international
interconnection revenue. The increased interconnection revenue from
international operators is mainly a result of increased tariffs partially offset
by a 0.8% decrease in international interconnection traffic minutes to 639
million minutes (September 30, 2006: 644 million minutes). Mobile
interconnection revenue increased by 1.8% to R407 million (September 30, 2006:
R400 million) primarily due to increased interconnection traffic from mobile
operators. Mobile interconnection traffic minutes increased by 4.8% to 1,226
million minutes (September 30, 2006: 1,170 million minutes) in the six months
ended September 30, 2007.
Data revenue increased by 9.8% to R3,975 million (September 30, 2006: R 3,621
million) mainly due to higher demand for data services, including ADSL, in the
medium and small business segment. The increase in mobile leased facilities is
largely due to the rollout of 3G networks by the mobile operators.
Fixed-Line Operating Expenses
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Employee expenses 7,096 3,526 3,414 (3.2)
Salaries and wages 5,078 2,460 2,770 12.6
Benefits 2,690 1,375 1,022 (25.7)
Other 24 14 3 (78.6)
Employee related (696) (323) (381) 18.0
expenses capitalised
Payments to other network 6,461 3,097 3,362 8.6
operators
Payment to mobile 5,425 2,618 2,812 7.4
operators
Payment to 1,036 479 550 14.8
international operators
SG&A 4,028 1,491 1,845 23.7
Materials and 1,900 932 1,044 12.0
maintenance
Marketing 604 216 271 25.5
Bad debts 137 62 89 43.5
Other 1,387 281 441 56.9
Services rendered 2,288 1,069 1,186 10.9
Property management 1,140 558 608 9.0
Consultants and 1,148 511 578 13.1
security
Operating leases 762 374 337 (9.9)
Depreciation,
amortisation, impairment
and write offs 3,583 1,715 1,867 8.9
24,218 11,272 12,011 6.6
Fixed-line operating expenses, before inter-segmental eliminations, increased by
6.6% in the six months ended September 30, 2007, to R12,011 million (September
30, 2006: R11,272 million), primarily due to increased selling, general and
administrative expenses, salaries and wages, payments to other network
operators, depreciation, amortisation, impairment and write-offs and services
rendered partially offset by a decrease in employee benefits and other expenses
and operating leases.
Employee expenses decreased by 3.2%, largely due to a decrease in benefits
offset by increased salaries and wages as a result of increased resources,
including contractors and temporary workers, necessary to deliver on improving
service levels and the deployment of the NGN as well as salary increases.
Payments to other network operators increased by 8.6% as a result of increased
payments to mobile and international operators. Payments to mobile operators
increased by 7.4%, largely as a result of a 3.8% increase in fixed-to-mobile
traffic. Payments to international operators increased by 14.8% primarily due to
the increase of volumes in switched hubbing and a 15.1% increase in
international outgoing traffic volumes.
Selling, general and administrative expenses increased by 23.7% as a result of
increased marketing expenses, materials and maintenance and bad debts.
Services rendered increased by 10.9% with property management expenses
increasing 9.0% primarily as a result of increased electricity, rates and taxes.
Consultants and security costs increased by 13.1% primarily as a result of
increased cost to explore local and international investment and expansion
opportunities as well as higher security and legal costs.
Operating leases decreased by 9.9% primarily due to reduced cost per
renegotiated contracts effective August 1, 2007 as well as 3.8% reduction in the
vehicle fleet from 9,691 vehicles at September 30, 2006 to 9,327 vehicles at
September 30, 2007. Building leases increased by 13.2% predominantly due to new
leases signed during the 2007 financial year mainly for Telkom Direct shops,
annual escalations, partially offset by lease terminations.
The 8.9% increase in the depreciation, amortisation, impairment and write-offs
to R1,867 million (September 30, 2006: R1,715 million) was mainly as a result of
an impairment of certain information and operating support systems and the
amortisation due to intangibles capitalised. The capital expenditure programme
also impacted on depreciation, amortisation, impairments and write-offs.
Fixed-line operating profit decreased by 19.4% to R4,286 million (September 30,
2006: R5,316 million) with an operating profit margin of 26.6% (September 30,
2006: 33.2%).
EBITDA decreased by 12.5% to R6,153 million (September 30, 2006: R7,031
million), with EBITDA margins decreasing to 38.2%. (September 30, 2006: 43.9%).
Mobile Segment
The mobile segment accounted for 40.1% of Group operating revenue (September 30,
2006: 37.0%) (before inter-segmental eliminations) and 39.0% of Group operating
profits (September 30, 2006: 30.9%). Vodacom`s operational statistics are
presented below at 100%, but all financial figures represent the 50% that is
proportionately consolidated in the Group and presented before inter-segmental
eliminations.
Summary
Year ended Six months ended
September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Operating revenue 20,573 9,733 11,407 17.2
Operating profit 5,430 2,483 2,856 15.0
EBITDA 7,122 3,289 3,799 15.5
Capital expenditure1 3,608 1,571 1,648 4.9
Operating profit margin (%) 26.4 25.5 25.0 (2.0)
EBITDA margin (%) 34.6 33.8 33.3 (1.5)
Capex to revenue (%) 17.5 16.1 14.4 (10.6)
1. Including spend on intangibles
Mobile Operating Revenue
Year ended Six months ended
September 30
March 31,
In ZAR millions 2007 2006 2007 %
Airtime and access 11,854 5,656 6,474 14.5
Data 1,671 722 1,048 45.2
Interconnect 3,918 1,861 2,152 15.6
Equipment sales 2,350 1,156 1,196 3.5
International airtime 653 278 476 71.2
Other 127 60 61 1.7
20,573 9,733 11,407 17.2
Operating revenue from the mobile segment increased by 17.2%, before inter-
segmental eliminations, to R11,407 million (September 30, 2006: R9,733 million),
primarily driven by customer growth partially offset by declining Average
Monthly Revenue Per User (ARPUs) in all operations. Revenue from Vodacom`s
operations outside of South Africa increased by 33.4% to R1,258 million
(September 30, 2006: R943 million) for the six months ended September 30, 2007.
The growth in revenue can largely be attributed to a 22.6% increase in Vodacom`s
total customers to 31.6 million as of September 30, 2007, (September 30, 2006:
25.8 million), resulting from strong growth in prepaid and contract customers in
South Africa and 48.9% growth in customers outside of South Africa. In South
Africa, total ARPUs decreased by 4.0% to R119 (September 30, 2006: R124) for the
six months ended September 30, 2007. Contract ARPUs decreased 7.8% to R487
(September 30, 2006: R528) and prepaid ARPUs decreased by 3.3% to R59 (September
30, 2006: R61) for the six months ended September 30, 2007.
Vodacom`s continued focus on the implementation of upgrade and retention
policies in the six months ended September 30, 2007, ensured contract churn of
only 8.3% (September 30, 2006: 11.0%). Prepaid churn of 51.9% for the six months
ended September 30, 2007, (September 30, 2006: 47.7%) was largely the result of
a once-off rule change that will disconnect inactive prepaid SIM cards after 13
months of being kept in an active state by call forwarding to voicemail only and
having not had any other revenue generating activity on the Vodacom network.
This rule has led to the disconnection of an additional 2.9 million prepaid SIM
cards in September 2007., The blended South African ARPU over the six months
ended September 30, 2007 was R119 (September 30, 2006: R124) supported in part
by the clean-up of the subscriber base.
Data revenue increased by 45.2 % and represents 9.2% of mobile revenue during
the six months ended September 30, 2007 (September 30, 2006: 7.4%). The growth
was largely due to the popularity of SMS and data initiatives such as 3G, HSDPA,
BlackberryRegistered Mobile TV, Vodafone live! as well as other data products.
Vodacom South Africa transmitted 2.2 billion SMS messages (September 30, 2006:
2.2 billion), over its network during the six months ended September 30, 2007.
Mobile interconnect revenue increased by 15.6% to R2,152 million for the six
months ended September 30, 2007 (September 30, 2006: R1,861 million) , primarily
due to an increase in the number of fixed-line calls terminating on Vodacom`s
network as a result of the increased number of Vodacom customers and South
African mobile users.
Equipment sales increased by 3.5% to R1,196 million for the six months ended
September 30, 2007 (September 30, 2006: R1,156 million) primarily due to the
growth of the customer base and cheaper handsets combined with added
functionality of new phones based on new technologies. South African handset
sale volumes increased by 4.0% to 2.3 million units (September 30, 2006: 2.2
million units) during the six months ended September 30, 2007.
Vodacom`s international airtime revenue consist largely of international calls
by Vodacom`s customers, roaming revenue from Vodacom customers making and
receiving calls while abroad and revenue from international customers roaming on
Vodacom`s network. International airtime revenue increased 71.2% to R476 million
for the six months ended September 30, 2007 (September 30, 2006: R278 million)
MOBILE OPERATING EXPENSES
Year ended Six months ended September 30
March 31,
In ZAR millions 2007 2006 2007 %
Employee expenses 1,186 539 732 35.8
Payments to other operators 2,818 1,337 1,577 18.0
SG&A 8,778 4,286 4,972 16.0
Services rendered 82 37 54 45.9
Operating leases 629 269 295 9.7
Depreciation, amortisation,
impairment
and write offs 1,692 806 943 17.0
15,185 7,274 8,573 17.9
Mobile operating expenses, before inter-segmental eliminations, increased by
17.9% to R8,573 million for the six months ended September 30, 2007 (September
30, 2006: R7,274 million), primarily due to increased employee expenses, selling
and distribution costs, services rendered, operating leases, payments to other
operators and depreciation, amortisation, impairment and write offs.
Mobile employee expenses increased by 35.8% to R732 million for the six months
ended September 30, 2007 (September 30, 2006: R539 million), primarily due to a
13.5% increase in the total number of employees to 6,240 to support the growth
in operations. Employee productivity has improved in all of Vodacom`s
operations, as measured by customers per employee, increasing by 8.0% to 5,058
customers per employee.
Mobile payments to other operators increased by 18.0% to R1,577 million
(September 30,2006: R1,337 million) in the six months ended September 30, 2007,
primarily as a result of increased outgoing traffic terminating on the other
mobile networks relative to traffic terminating on the fixed-line network.
Mobile selling, general and administrative expenses increased by 16.0% to R4,972
million for the six months ended September 30, 2007 (September 30, 2006: R4,286
million), primarily due to an increase in selling, distribution and marketing
expenses mainly driven by new technologies and enhancing brand presence in all
operations to support the growth in South African and other African operations.
Mobile depreciation, amortisation, impairment and write-offs increased by 17.0%
to R943 million for the six months ended September 30, 2007 (September 30, 2006:
R806 million), primarily as a result of increased capital expenditure on network
equipment with the roll-out of 3G/HSPDA networks.
Telkom`s 50% share of Vodacom`s profit from operations increased by 15.0% to
R2,856 million for the six months ended September 30, 2007 (September 30, 2006:
R2,483 million) and the mobile operating profit margin decreased to 25.0%
(September 30, 2006: 25.5%). Mobile EBITDA increased by 15.5% to R3,799 million
for the six months ended September 30, 2007 (September 30, 2006: R3,289 million)
with EBITDA margins decreasing to 33.3% (September 30,2006: 33.8%).
Other Segment
The other segment accounted for 3.2% of Group operating revenue (September 30,
2006: 2.0%) (before inter-segmental eliminations) and 2.5% of Group operating
profits (September 30, 2006: 3.0%).
Summary
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Operating revenue 1,222 522 902 72.8
Operating profit 687 248 181 (27.0)
EBITDA 727 267 270 1.1
Capital expenditure 39 20 149 645.0
Operating profit margin 56.2 47.5 20.1 (57.8)
(%)
EBITDA margin (%) 59.5 51.1 29.9 (41.5)
Capex to revenue (%) 3.2 3.8 16.5 331.1
Other Operating Revenue
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Other 1,222 522 902 72.8
Other operating revenue before inter segmental eliminations increased by 72.8%
in the six months ended September 30, 2007 to R902 million (September 30, 2006:
R 522 million) primarily driven by the inclusion in the current period of
revenue generated by our newly acquired subsidiaries, Multi-links and Africa
Online.
Other Operating Expenses
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2007 2006 2007 %
Employee expenses 174 85 149 75.3
Payments to other 10 6 137 2,183.3
operators
SG&A 335 171 333 94.7
Services rendered 5 2 22 1,000.0
Operating leases 25 12 17 41.7
Depreciation,
amortisation,
impairment and write offs 40 19 89 368.4
589 295 747 153.2
Other operating expenses, before inter-segmental eliminations, increased by
153.2% to R747 million (September 30, 2006: R295 million) in the six months
ended September 30, 2007 primarily due to the inclusion in the six months ended
September 30, 2007 of operating expenses relating to our newly acquired
subsidiaries, Multi-Links and Africa Online and the creation of Telkom Media
resulting in significant increases across all expenditure categories. Multi-
links was the main contributor to the increases in payments to other operators
and Multi-Links and TDS Operations was the main contributors to selling, general
and administrative expenditure.
8 Employees
Fixed-Line
Year Six months ended
ended September 30,
March 31,
2007 2006 2007 %
Telkom Company 25,864 25,826 25,570 (1.0)
Lines per employee 180 181 181 -
Movement In Fixed-Line Employees
(Telkom Company only)
Year Six months ended
ended September 30,
March 31,
2007 2006 2007
Opening balance 25,575 25,575 25,864
Appointments 1,486 793 510
Employee losses (1,197) (542) (804)
Workforce reductions (20) (6) (4)
Voluntary early retirement (7) (4) (2)
Voluntary severance (13) (2) (2)
Natural attrition (1,177) (536) (800)
Closing balance 25,864 25,826 25,570
Mobile Employees
Year Six months ended
ended September 30,
March 31,
2007 2006 2007 %
South Africa1 4,577 4,315 4,716 9.3
Customers per employee1 5,026 4,682 4,940 5.5
Other African countries 1,404 1,184 1,524 28.7
Customers per employee 5,090 4,689 5,425 15.7
Vodacom Group1 5,981 5,499 6,240 13.5
Customers per employee1 5,041 4,683 5,058 8.0
1. Including employees for holding company and Mauritius of 207 (September 30,
2006: 178) as at September 30, 2007.
Other
Year Six months ended
ended September 30,
March 31,
2007 2006 2007 %
Swiftnet 76 75 71 (5.3)
TDS Directory Operations 549 533 622 16.7
Africa Online 308 - 351 -
Multi-Links - - 673 -
Telkom Media - - 72 -
9 Condensed consolidated interim financial statements
Report On Review of Condensed Consolidated Interim Financial Statements To The
Shareholders Of Telkom SA Limited
Introduction
We have reviewed the accompanying condensed consolidated interim balance sheet
of Telkom SA Limited as at September 30, 2007 and the related condensed
consolidated interim statements of income, changes in equity and cash flows for
the six-month period then ended, and a summary of significant accounting
policies and other explanatory notes.
Management is responsible for the preparation and presentation of these
condensed consolidated interim financial statements in accordance with
International Financial Reporting Standard IAS 34 Interim Financial Reporting
("IAS 34"). Our responsibility is to express a conclusion on these condensed
consolidated interim financial statements based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements 2410, "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity". A review of interim financial information
consists of making inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance with
International Standards on Auditing and consequently does not enable us to
obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe
that the accompanying condensed consolidated interim financial statements are
not prepared, in all material respects, in accordance with IAS 34.
Registered Auditor
November16, 2007
Pretoria
Condensed consolidated interim income statement
for the six months ended September 30, 2007
Audited Reviewed Reviewed
March 31, September September
30, 30,
2007 2006 2007
Notes Rm Rm Rm
Total revenue 3.1 52,157 25,476 27,538
Operating revenue 3.2 51,619 25,147 27,227
Other income 4 384 213 204
Operating expenses 37,533 17,675 20,118
Employee expenses 5.1 8,454 4,149 4,320
Payments to other operators 5.2 7,590 3,609 4,220
Selling, general and 5.3 12,902 5,839 6,917
administrative expenses
Services rendered 5.4 2,291 1,103 1,268
Operating leases 5.5 981 435 492
Depreciation, amortisation,
impairment
and write-offs 5.6 5,315 2,540 2,901
Operating profit 14,470 7,685 7,313
Investment income 235 170 130
Finance charges and fair value 1,125 437 972
movement
Interest 1,327 673 867
Foreign exchange and fair (202) (236) 105
value movement
Profit before taxation 13,580 7,418 6,471
Taxation 6 4,731 2,844 2,678
Profit for the year/period 8,849 4,574 3,793
Attributable to:
Equity holders of Telkom 8,646 4,500 3,700
Minority interest 203 74 93
8,849 4,574 3,793
Basic earnings per share 8 1,681.0 868.1 724.3
(cents)
Diluted earnings per share 8 1,676.3 866.4 719.5
(cents)
Dividend per share (cents) 8 900.0 900.0 1,100.0
Condensed consolidated interim balance sheet
at September 30, 2007
Audited Reviewed Reviewed
March 31, September 30, September
30,
2007 2006 2007
Notes Rm Rm Rm
Assets
Non-current assets 48,770 45,042 52,284
Property, plant and 10 41,254 39,165 42,757
equipment
Intangible assets 11 5,111 4,042 7,412
Investments 1,384 1,170 1,443
Deferred expenses 270 256 248
Finance lease receivables 158 77 172
Deferred taxation 12 593 332 252
Current assets 10,376 10,309 11,311
Short-term investments 77 65 79
Inventories 13 1,093 1,266 1,541
Income tax receivable 520 - 18
Current portion of deferred 287 244 324
expenses
Current portion of finance 88 40 121
lease receivables
Trade and other receivables 7,303 7,400 8,236
Other financial assets 259 576 214
Cash and cash equivalents 14 749 718 778
Total assets 59,146 55,351 63,595
Equity and liabilities
Equity attributable to
equity holders
of Telkom 31,724 27,675 29,106
Share capital and premium 15 5,329 5,339 5,329
Treasury shares 16 (1,774) (1,775) (1,638)
Share-based compensation 17 257 203 147
reserve
Non-distributable reserves 1,413 1,233 712
Retained earnings 26,499 22,675 24,556
Minority interest 284 325 469
Total equity 32,008 28,000 29,575
Non-current liabilities 8,554 12,148 9,838
Interest-bearing debt 18 4,338 8,544 4,501
Other financial liabilities 36 - 707
Provisions 1,443 1,128 1,551
Deferred revenue 1,021 985 1,053
Deferred taxation 12 1,716 1,491 2,026
Current liabilities 18,584 15,203 24,182
Trade and other payables 7,237 6,774 6,729
Shareholders for dividend 7 15 9 21
Current portion of interest- 18 6,026 3,722 10,962
bearing debt
Current portion of 2,095 1,375 1,592
provisions
Current portion of deferred 1,983 1,961 2,202
revenue
Income tax payable 594 583 122
Other financial liabilities 193 214 251
Credit facilities utilised 14 441 565 2,303
Total liabilities 27,138 27,351 34,020
Total equity and liabilities 59,146 55,351 63,595
Condensed consolidated interim statement of changes in equity
for the six months ended September 30, 2007
Attributable to equity holders of
Telkom
Share Share Treasury
capital premium shares
Rm Rm Rm
Balance at April 1, 2006 5,449 1,342 (1,809)
Total recognised income and
expense
Profit for the period
Foreign currency translation
reserve (net of tax of R5
million)
Dividend declared (refer to
note 7)
Transfer to non-distributable
reserves
Net increase in Share-based
compensation
reserve (refer to note 17)
Shares vested and re-issued 34
(refer to notes 16 and 17)
Acquisition of minorities
Shares bought back and (110) (1,342)
cancelled
Balance at September 30, 2006 5,339 - (1,775)
Balance at April 1, 2006 5,449 1,342 (1,809)
Total recognised income and
expense
Profit for the year
Foreign currency translation
reserve (net of tax of R4
million)
Dividend declared (refer to
note 7)
Transfer to non-distributable
reserves
Net increase in Share-based
compensation
reserve (refer to note 17)
Shares vested and re-issued 35
(refer to notes 16 and 17)
Acquisition of subsidiaries
and minorities
Shares bought back and (120) (1,342)
cancelled
Balance at March 31, 2007 5,329 - (1,774)
Total recognised income and
expense
Profit for the period
Foreign currency translation
reserve (net of tax of R2
million)
Transfer to non-distributable
reserves
Dividend declared (refer to
note 7)
Net increase in Share-based
compensation
reserve (refer to note 17)
Shares vested and re-issued 136
(refer to notes 16 and 17)
Acquisition of subsidiaries
and minorities (refer to note
19)
Minority put option (refer to
note 19)
Balance at September 30, 2007 5,329 - (1,638)
Attributable to equity holders of
Telkom
Share-based Non-
distribu Retained
compensation table
reserve Total
reserves earnings
Rm Rm Rm Rm
Balance at April 1, 2006 151 1,128 22,904 29,165
Total recognised income 56 4,500 4,556
and expense
Profit for the period 4,500 4,500
Foreign currency 56 56
translation reserve (net
of tax of R5 million)
Dividend declared (refer (4,678)
to note 7) (4,678)
Transfer to non- 49 (49) -
distributable reserves
Net increase in Share-
based compensation
reserve (refer to note 86 86
17)
Shares vested and re- (34) -
issued (refer to notes 16
and 17)
Acquisition of minorities -
Shares bought back and (2)
cancelled (1,454)
Balance at September 30, 203 1,233 22,675 27,675
2006
Balance at April 1, 2006 151 1,128 22,904 29,165
Total recognised income 46 8,646 8,692
and expense
Profit for the year 8,646 8,646
Foreign currency 46 46
translation reserve (net
of tax of R4 million)
Dividend declared (refer (4,678)
to note 7) (4,678)
Transfer to non- 239 (239) -
distributable reserves
Net increase in Share-
based compensation
reserve (refer to note 141 141
17)
Shares vested and re- (35) -
issued (refer to notes 16
and 17)
Acquisition of -
subsidiaries and
minorities
Shares bought back and (134)
cancelled (1,596)
Balance at March 31, 2007 257 1,413 26,499 31,724
Total recognised income (56) 3,700 3,644
and expense
Profit for the period 3,700 3,700
Foreign currency (56) (56)
translation reserve (net
of tax of R2 million)
Transfer to non- 16 (16) -
distributable reserves
Dividend declared (refer
to note 7) (5,627) (5,627)
Net increase in Share-
based compensation
reserve (refer to note 26 26
17)
Shares vested and re- (136) -
issued (refer to notes 16
and 17)
Acquisition of -
subsidiaries and
minorities (refer to note
19)
Minority put option (661) (661)
(refer to note 19)
Balance at September 30, 147 712 24,556 29,106
2007
Minority Total
interest equity
Rm Rm
Balance at April 1, 2006 301 29,466
Total recognised income and expense 88 4,644
Profit for the period 74 4,574
Foreign currency translation reserve 14 70
(net of tax of R5 million)
Dividend declared (refer to note 7) (53) (4,731)
Transfer to non-distributable reserves -
Net increase in Share-based
compensation
reserve (refer to note 17) 86
Shares vested and re-issued (refer to -
notes 16 and 17)
Acquisition of minorities (11) (11)
Shares bought back and cancelled (1,454)
Balance at September 30, 2006 325 28,000
Balance at April 1, 2006 301 29,466
Total recognised income and expense 217 8,909
Profit for the year 203 8,849
Foreign currency translation reserve 14 60
(net of tax of R4 million)
Dividend declared (refer to note 7) (166) (4,844)
Transfer to non-distributable reserves -
Net increase in Share-based
compensation
reserve (refer to note 17) 141
Shares vested and re-issued (refer to -
notes 16 and 17)
Acquisition of subsidiaries and (68) (68)
minorities
Shares bought back and cancelled (1,596)
Balance at March 31, 2007 284 32,008
Total recognised income and expense 87 3,731
Profit for the period 93 3,793
Foreign currency translation reserve (6) (62)
(net of tax of R2 million)
Transfer to non-distributable reserves -
Dividend declared (refer to note 7) (5,627)
Net increase in Share-based
compensation
reserve (refer to note 17) 26
Shares vested and re-issued (refer to -
notes 16 and 17)
Acquisition of subsidiaries and 98 98
minorities (refer to note 19)
Minority put option (refer to note 19) (661)
Balance at September 30, 2007 469 29,575
Condensed consolidated interim cash flow statement
for the six months ended September 30, 2007
Audited Reviewed Reviewed
March 31, September September 30,
30,
2007 2006 2007
Notes Rm Rm Rm
Cash flows from operating 9,356 772 683
activities
Cash receipts from 50,979 24,369 27,048
customers
Cash paid to suppliers and (30,459) (15,323) (18,735)
employees
Cash generated from 20,520 9,046 8,313
operations
Interest received 422 276 251
Dividend received 3 3 -
Finance charges paid (1,115) (593) (128)
Taxation paid (5,690) (3,234) (2,041)
Cash generated from
operations before
dividend paid 14,140 5,498 6,395
Dividend paid 7 (4,784) (4,726) (5,712)
Cash flows from investing (10,412) (4,102) (7,028)
activities
Proceeds on disposal of
property, plant and
equipment and intangible 54 6 33
assets
Proceeds on disposal of 77 275 8
investment
Additions to property,
plant and equipment
and intangible assets (10,037) (4,193) (4,533)
Acquisition of subsidiaries 19 (445) - (2,480)
and minorities
Additions to other (61) (190) (56)
investments
Cash flows from financing (2,920) (817) 4,520
activities
Loans raised 5,624 2,148 13,194
Loans repaid (6,922) (1,368) (8,694)
Shares bought back and (1,596) (1,403) -
cancelled
Finance lease capital (37) (15) (26)
repaid
Decrease/(increase) in net 11 (179) 46
financial assets
Net decrease in cash and
cash equivalents (3,976) (4,147) (1,825)
Net cash and cash
equivalents at beginning
of year 4,255 4,255 308
Effect of foreign exchange 29 45 (8)
rate differences
Net cash and cash
equivalents at end
of year/period 14 308 153 (1,525)
Notes to the condensed consolidated interim financial statements
for the six months ended September 30, 2007
1 Corporate information
Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the
Republic of South Africa (`South Africa`) whose shares are publicly traded. The
main objective of Telkom, its subsidiaries and joint ventures (`the Group`) is
to supply telecommunication, broadcasting, multimedia, technology, information
and other related information technology services to the general public, as well
as mobile communication services through the Vodacom Group (Proprietary) Limited
(`Vodacom`) in South Africa and certain other African countries. The Group`s
services and products include:
* fixed-line subscription and connection services to postpaid, prepaid and
private payphone customers using PSTN lines, including ISDN lines, and the sale
of subscription based value-added voice services and customer premises equipment
rental and sales;
* fixed-line traffic services to postpaid, prepaid and payphones customers,
including local, long distance, fixed-to-mobile, international outgoing and
international voice-over-internet protocol traffic services;
* interconnection services, including terminating and transiting traffic from
South African mobile operators, as well as from international operators and
transiting traffic from mobile to international destinations;
* fixed-line data services, including domestic and international data
transmission services, such as point-to-point leased lines, ADSL services,
packet-based services, managed data networking services and internet access and
related information technology services;
* e-commerce, including internet access service provider, application service
provider, hosting, data storage, e-mail and security services;
* directory services, through our TDS Directory Operations Group, wireless data
services, through our Swiftnet subsidiary, internet services outside South
Africa, through our Africa Online Limited subsidiary and information,
communication and telecommunication operating services in Nigeria, through our
newly acquired Multi-Links Telecommunications (Proprietary) Limited subsidiary;
and
* mobile communications services, including voice services, data services,
value-
added services and handset sales through Vodacom.
The condensed consolidated interim financial statements of the Group for the six
months ended September 30, 2007 were authorised for issue in accordance with a
resolution of the directors on November 16, 2007.
2 Basis of preparation and accounting policies
Basis of preparation
The condensed consolidated interim financial statements have been prepared in
accordance with IAS34 Interim Financial Reporting and in compliance with the
South African Companies Act,1973.
The condensed consolidated interim financial statements are prepared on the
historical cost basis, with the exception of certain financial instruments and
share-based payments which are measured at fair value. The results of the
interim period are not necessarily indicative of the results for the entire
year, and these reviewed financial statements should be read in conjunction with
the audited financial statements for the year ended March 31, 2007.
The preparation of condensed consolidated interim financial statements requires
the use of estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Although these estimates are based on management`s
best knowledge of current events and actions that the Group may undertake in the
future, actual results may differ from those estimates.
Significant accounting policies
The Group`s significant accounting policies and methods of computation are
consistent with those applied in the previous financial year except for the
following:
* the Group has adopted Circular 8/2007, IFRS7, IFRIC8, IFRIC9, IFRIC10 and
IFRIC11.
2 Basis of preparation and accounting policies (continued)
Significant accounting policies (continued)
* the Group has adopted the amendment to IAS1, effective for annual periods
beginning on or after January 1, 2007.
* the Group has changed its primary segment reporting basis.
The principal effects of these changes are discussed below.
Circular 8/2007 Headline earnings
The circular was issued by the South African Institute of Chartered Accountants
and is applicable for financial periods ending on or after August 31, 2007.
Circular 8/2007 supercedes Circular 7/2002 and it defines rules for calculating
headline earnings per share, which is an additional per share measure permitted
by IAS33 Earnings per Share. It further requires a disclosure of a detailed
reconciliation of headline earnings to the earnings numbers used in the
calculation of basic earnings per share in accordance with the requirements of
IAS33. The Group adopted the provisions of Circular 8/2007 in the reporting
period beginning on April 1, 2007 and the impact is disclosed in the financial
statements of the Group.
Amendment to IAS1 Presentation of Financial Statements
As a result of the development of IFRS7 Financial Instruments: Disclosures, IAS1
has been amended to require the disclosure of the entity`s objective, policies
and processes for managing capital, quantitative data about what the entity
regards as capital, whether the entity has complied with any capital
requirements and if it has not complied, the consequences of such non-
compliance. The effect of this amendment will be included in the consolidated
annual financial statements for the year ended March 31, 2008 since the
disclosure of the consolidated interim financial statements is condensed.
IFRS7 Financial Instruments: Disclosures
An entity shall apply this standard for annual periods beginning on or after
January 1, 2007. IFRS7 adds certain new disclosures to those currently required
by IAS32. It also replaces the disclosure currently required by IAS32. All
financial instruments disclosures will now be provided in terms of IFRS7. The
remaining parts of IAS32 now only deal with the classification and presentation
of financial instruments. One of the main disclosure requirements added by IFRS7
is that an entity must group its financial instruments into classes of similar
instruments, and when disclosures are required, make disclosures by class. IFRS7
also requires information about the significance of financial instruments and
information about the nature and extent of risks arising from financial
instruments. The impact of this standard will be to expand on certain
disclosures relating to financial instruments and will require additional
disclosures not currently disclosed. The effect of this standard will be
included in the consolidated annual financial statements for the year ending
March 31, 2008 since the disclosure of the consolidated interim financial
statements is condensed.
IFRIC8 Scope of IFRS2
The interpretation is effective for annual periods beginning on or after May 1,
2006. IFRIC8 clarifies that IFRS2 applies to transactions in which an entity
receives goods or services as consideration for equity instruments of the
entity. This includes transactions in which the entity cannot identify
specifically some or all of the goods or services received. The impact of this
interpretation on the condensed consolidated interim financial statements is not
material since the Group has not transacted with third parties using equity as a
purchase consideration for the transaction, other than those paid to employees
in share-based payment transactions.
IFRIC9 Reassessment of Embedded Derivatives
The interpretation is effective for annual periods beginning on or after June 1,
2006. IFRIC9 clarifies that an entity is required to separate an embedded
derivative from the host contract and account for it as a derivative when the
entity first becomes a party to the contract. It further clarifies that
reassessment is only allowed when there is a change in the terms of the contract
which significantly modifies the cash flows that would otherwise be required
under the contract. The impact of this interpretation on the condensed
consolidated interim financial statements is not material.
2 Basis of preparation and accounting policies (continued)
Significant accounting policies (continued)
IFRIC10 Interim Financial Reporting and Impairment
The interpretation is effective for annual periods beginning on or after
November 1, 2006. IFRIC10 clarifies that an entity should not reverse an
impairment loss recognised in a previous interim period in respect of goodwill
or an investment in either an equity instrument classified as available for sale
or financial asset carried at cost. The impact of this interpretation on the
condensed consolidated interim financial statements is not material.
IFRIC11 IFRS2 - Group and Treasury Share Transactions
The interpretation is effective for annual periods beginning on or after March
1, 2007. The IFRIC clarifies that regardless of whether the entity chooses or is
required to buy equity instruments from another party to satisfy its obligations
to its employees under the share-based payment arrangement by delivery of its
own shares, the transaction should be accounted for as equity settled. This
interpretation also applies regardless of whether the employee`s rights to the
equity instruments were granted by the entity itself or by its shareholders or
was settled by the entity itself or its shareholders. Share-based payments
involving the Group`s own equity instruments in which the Group chooses or is
required to buy its own equity instruments to settle the share-based payment
obligation are currently accounted for as equity-settled share-based payment
transactions under IFRS2. The interpretation has no further impact on the
condensed consolidated interim financial statements.
Segmental reporting
The Group has changed its segmental reporting in line with the realignment of
internal reporting structures. The Group is managed in three business segments,
which form the primary segment reporting basis: Fixed-line, Mobile and Other.
The `Other` business segment includes newly acquired Multi-Links
Telecommunications (Proprietary) Limited and Africa Online Limited, as well as
recently formed Telkom Media (Proprietary) Limited. It also includes TDS
Directory Operations Group and Swiftnet (Proprietary) Limited, which was
previously included in the Fixed-line segment.
March 31, September September
30, 30,
2007 2006 2007
Rm Rm Rm
3 Revenue
3.1 Total revenue 52,157 25,476 27,538
Operating revenue 51,619 25,147 27,227
Other income (excluding profit on
disposal of
property, plant and equipment and
investments,
refer to note 4) 303 159 181
Investment income 235 170 130
3.2 Operating revenue 51,619 25,147 27,227
Fixed-line 32,454 16,025 16,108
Mobile 20,573 9,733 11,407
Other 1,222 522 902
Eliminations (2,630) (1,133) (1,190)
Fixed-line 32,454 16,025 16,108
Subscriptions, connections 6,286 3,050 3,559
and other usage
Traffic 16,740 8,448 7,636
Domestic (local and long 8,106 4,167 3,344
distance)
Fixed-to-mobile 7,646 3,788 3,794
International (outgoing) 988 493 498
Interconnection 1,639 781 833
Data 7,489 3,621 3,975
Other 300 125 105
4 Other income 384 213 204
Other income (included in Total 303 159 181
revenue, refer to note 3)
Interest received from debtors 190 98 124
Sundry income 113 61 57
Profit on disposal of property,
plant and equipment
and intangible assets 29 11 19
Profit on disposal of investment 52 43 4
5 Operating expenses
Operating expenses comprise:
5.1 Employee expenses 8,454 4,149 4,320
Salaries and wages 6,362 3,049 3,602
Medical aid contributions 385 189 203
Retirement contributions 496 250 297
Post-retirement benefits 467 232 154
Share-based compensation expense
(refer to note 17) 141 86 26
Other benefits 1,299 666 420
Employee expenses capitalised (696) (323) (382)
Other benefits
Other benefits include skills
development, annual
leave, performance incentive and
service bonuses.
5.2 Payments to other operators 7,590 3,609 4,220
Payments to other network
operators consist of
expenses in respect of
interconnection with other
network operators.
5.3 Selling, general and
administrative expenses 12,902 5,839 6,917
Selling and administrative 9,248 4,138 4,871
expenses
Maintenance 2,286 1,113 1,300
Marketing 1,215 520 638
Bad debts 153 68 108
Included in the selling and
administrative expenses
for March 31, 2007 is an amount
of R510 million
provided for the dispute with
Telcordia as discussed
in note 21.
5.4 Services rendered 2,291 1,103 1,268
Facilities and property
management 1,142 558 610
Consultancy services 266 106 133
Security and other 821 422 506
Auditors` remuneration 62 17 19
5.5 Operating leases 981 435 492
Buildings 284 101 167
Transmission and data lines 63 27 63
Equipment 80 37 28
Vehicles 554 270 234
5 Operating expenses (continued)
5.6 Depreciation, amortisation,
impairment
and write-offs 5,315 2,540 2,901
Depreciation of property, plant 4,483 2,191 2,377
and equipment
Amortisation of intangible assets 536 263 368
Impairment of property, plant and
equipment and
intangible assets 12 19 89
Reversal of impairment of
property,
plant and equipment - - (9)
Write-offs of property, plant and
equipment
and intangible assets 284 67 76
Due to the changed usage patterns of certain items of property, plant
and equipment and intangible assets, the Group reviewed their
remaining useful lives as at March 31, 2007. The assets affected were
certain items included in Network equipment, Support equipment,
Furniture and Office equipment, Data processing equipment and
Software, Other equipment and Intangible assets. The revised
estimated useful lives of these assets resulted in a net decrease of
the current period depreciation and amortisation charge of R89
million.
6 Taxation 4,731 2,844 2,678
South African normal company 3,528 1,797 1,681
taxation
Deferred taxation 516 537 617
Secondary Taxation on Companies 670 464 363
(`STC`)
Foreign taxation 17 46 17
The net deferred taxation expense results mainly from the extension
of useful lives which is offset slightly by STC tax credits.
The STC expense was provided for at a rate of 12.5% on the amount by
which dividends declared exceeded dividends received. Deferred tax
assets relating to STC credits are provided for at a rate of 10%.
7 Dividend paid (4,784) (4,726) (5,712)
Dividends payable at beginning of (4) (4) (15)
year
Declared during the year/period:
Dividends
on ordinary shares (4,678) (4,678) (5,627)
Final dividend for 2006: 500 (2,599) (2,599) -
cents
Special dividend for 2006: 400 (2,079) (2,079) -
cents
Final dividend for 2007: 600 - - (3,069)
cents
Special dividend for 2007: 500 - - (2,558)
cents
Dividends paid to minority (117) (53) (91)
shareholders
Dividends payable at end of 15 9 21
year/period
8. Earnings and dividend per share
Basic earnings per 1,681.0 868.1 724.3
share (cents)
The calculation of earnings per share is based on profit
attributable to equity holders of Telkom for the period of R3,700
million (September 30, 2006: R4,500 million; March 31, 2007:
R8,646 million) and 510,865,274 (September 30, 2006: 518,369,738;
March 31, 2007: 514,341,282) weighted average number of ordinary
shares in issue.
Diluted earnings per 1,676.3 866.4 719.5
share (cents)
The calculation of diluted earnings per share is based on earnings
for the period of R3,700 million (September 30, 2006: R4,500
million; March 31, 2007: R8,646 million) and 514,222,317 diluted
weighted average number of ordinary shares (September 30, 2006:
519,407,752; March 31, 2007: 515,763,579). The adjustment in the
weighted average number of shares is as a result of the expected
future vesting of shares already allocated to employees under the
Telkom Conditional Share Plan.
Headline earnings per 1,710.7 874.7 742.3
share (cents)*
The calculation of headline earnings per share is based on
headline earnings of R3,792 million (September 30, 2006: R4,534
million; March 31, 2007: R8,799 million) and 510,865,274
(September 30, 2006: 518,369,738; March 31, 2007: 514,341,282)
weighted average number of ordinary shares in issue.
Diluted headline 1,706.0 872.9 737.4
earnings per share
(cents)*
The calculation of diluted headline earnings per share is based on
headline earnings of R3,792 million (September 30, 2006: R4,534
million; March 31, 2007: R8,799 million) and 514,222,317
(September 30, 2006: 519,407,752; March 31, 2007: 515,763,579)
diluted weighted average number of ordinary shares in issue. The
adjustment in the weighted average number of shares is as a result
of the expected future vesting of shares already allocated to
employees under the Telkom Conditional Share Plan.
Reconciliation of weighted average number of ordinary shares:
Ordinary shares in 544,944,899 544,944,899 532,855,528
issue (refer to note
15)
Weighted average number (7,442,253) (3,338,889) -
of shares bought back
Weighted average number
of treasury shares (23,086,074) (23,086,119) (21,342,291)
Weighted average number (75,290) (150,153) (647,963)
of shares prior to
vesting
Weighted average number 514,341,282 518,369,738 510,865,274
of shares outstanding
Reconciliation between earnings and
headline earnings:
Earnings as reported 8,646 4,500 3,700
Adjustments:
Profit on disposal of (52) (43) (4)
investment
Profit on disposal of
property, plant and
equipment and
intangible assets (29) 5 (19)
Impairment of property, plant and
equipment and 12 19 89
intangible assets
Reversal of impairment
of property, plant
and equipment - - (9)
Write-offs of property, 284 67 76
plant and equipment
Tax effects (62) (14) (41)
Headline earnings 8,799 4,534 3,792
Reconciliation of diluted weighted average
number of ordinary shares:
Weighted average number 514,341,282 518,369,738 510,865,274
of shares outstanding
Expected future vesting 1,422,297 1,038,014 3,357,043
of shares
Weighted average number 515,763,579 519,407,752 514,222,317
of shares outstanding
Dividend per share 900.0 900.0 1,100.0
(cents)
The calculation of dividend per share is based on dividends of R5,627 million
(September 30, 2006: R4,678 million; March 31, 2007: R4,678 million) declared on
June 8, 2007 and 511,513,237 (September 30, 2006: 519,711,092; March 31, 2007:
519,711,236) number of ordinary shares outstanding on the date of dividend
declaration. The reduction in the number of shares represents the number of
treasury shares held on date of payment.
*The disclosure of headline earnings is a requirement of the JSE Limited and is
not a recognised measure under IFRS and US GAAP. It has been calculated in
accordance with the South African Institute of Chartered Accountants` circular
issued in this regard.
9. Net asset value per share 6,223.2 5,417.9 5,690.2
(cents)
The calculation of net asset value per share is based on net assets of
R29,106 million (September 30, 2006: R27,675 million; March 31, 2007: R31,724
million) and 511,513,237 (September 30, 2006: 510,804,915; March 31, 2007:
509,769,454) number of ordinary shares outstanding.
10. Property, plant and
equipment
Additions and disposals of
property, plant and
equipment were as follows:
Additions 8,648 3,913 3,580
Disposals (50) (16) (19)
11. Intangible assets
Additions (including business 1,841 438 2,820
combinations)
Included in the additions for September 30, 2007, is R1,684 million goodwill
and R244 million for other intangible assets recognised as a result of the
acquisition of Multi-Links Telecommunications (Proprietary) Limited as well
as R475 million goodwill as a result of the acquisition of the minorities of
Smartphone SP (Proprietary) Limited and Smartcom (Proprietary) Limited by the
Vodacom Group. The remaining additions relate to the software intangible
asset class.
There were no disposals of intangible assets during the six months ended
September 30, 2007.
12. Deferred taxation (1,123) (1,159) (1,774)
Deferred tax assets 593 332 252
Deferred tax liabilities (1,716) (1,491) (2,026)
The major part of the deferred tax asset relates to taxation losses,
provisions and deferred income recognised in the Vodacom Group.
The deferred tax liability increased mainly due to the increase in the
temporary differences between the carrying value and tax base of assets,
resulting from the change in the estimate of useful lives, as well as from
the acquisition of Multi-Links Telecommunications (Proprietary) Limited.
13. Inventories 1,093 1,266 1,541
Gross inventories 1,275 1,402 1,732
Write-down of inventories to net (182) (136) (191)
realisable value
14. Net cash and cash 308 153 (1,525)
equivalents
Cash shown as current assets 749 718 778
Cash and bank balances 649 718 778
Short-term deposits 100 - -
Credit facilities utilised (441) (565) (2,303)
Undrawn borrowing facilities 8,658 9,796 7,864
The undrawn borrowing facilities are unsecured, when drawn bear interest at a
rate linked to the prime interest rate, have no specific maturity date and
are subject to annual review. The facilities are in place to ensure
liquidity.
Borrowing powers
To borrow money, the directors may mortgage or encumber Telkom`s property or
any part thereof and issue debentures, whether secured or unsecured, whether
outright as a security or debt, liability or obligation of Telkom or any
third party. For this purpose the borrowing powers of Telkom are unlimited,
but are subject to the restrictive financial covenants of the TL20 loan.
15. Share capital and premium
Issued and fully paid 5,329 5,339 5,329
532,855,526 (September 30, 2006:
533,891,032;
March 31, 2007: 532,855,526)
ordinary shares of
R10 each 5,329 5,339 5,329
1 (September 30, 2006: 1; March
31, 2007: 1)
Class A ordinary share of R10 - - -
1 (September 30, 2006: 1; March
31, 2007: 1)
Class B ordinary share of R10 - - -
The following table illustrates
the movement within the number
of shares issued:
Number of Number of Number of
shares shares shares
Shares in issue at beginning of 544,944,899 544,944,899 532,855,528
year
Shares bought back and cancelled (12,089,371) (11,053,865) -
Shares in issue at end of 532,855,528 533,891,034 532,855,528
year/period
The class A and class B ordinary shares rank equally with the ordinary shares
in respect of rights to dividends but differ in respect of the right to
appoint directors. Full details of the voting rights of ordinary class A and
class B shares are documented in the Articles of Association of Telkom.
The unissued shares are under the control of the directors of Telkom until
the next Annual General Meeting.
16. Treasury shares (1,774) (1,775) (1,638)
At September 30, 2007, 10,493,233 (September 30, 2006: 12,237,061; March 31,
2007: 12,237,016) and 10,849,058 (September 30, 2006: 10,849,058; March 31,
2007: 10,849,058) ordinary shares in Telkom, with a fair value of R1,821
million (September 30, 2006: R1,646 million; March 31, 2007: R2,031 million)
and R1,882 million (September 30, 2006: R1,459 million; March 31, 2007:
R1,801 million) are held as treasury shares by its subsidiaries Rossal No 65
(Proprietary) Limited and Acajou Investments (Proprietary) Limited,
respectively.
The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue
in terms of the Telkom Conditional Share Plan (`TCSP`). In addition, the
directors agreed that, subject to JSE Listing requirements, the treasury
shares held by Acajou Investments (Proprietary) Limited be made available to
the TCSP to make up for the current shortfall in the share scheme after the
additional grants during the current period (refer to note 17).
The reduction in the treasury shares is due to 1,743,783 shares that vested
in terms of the TCSP during the six months ended September 30, 2007.
17. Share-based compensation reserve
The Telkom Board approved a fourth and final enhanced allocation of shares to
employees on September 4, 2007, with a grant date of September 27, 2007, the day
that the employees and Telkom shared a common understanding of the terms and
conditions of this grant. A total of 6,089,810 shares were granted. No
consideration is payable on the shares issued to employees, but performance
criteria will have to be met in order for the granted shares to vest. The
ultimate number of shares that will vest may differ based on certain individual
and Telkom performance conditions being met. The related compensation expense is
recognised over the vesting period of shares granted, commencing on the grant
date.
The Board has also approved an enhanced allocation for the November 2006 grant
on September 4, 2007, with a grant date of September 27, 2007. The number of
additional shares granted with respect to the 2006 allocation is 4,966,860
shares.
The following table illustrates the movement within the
Share-based compensation
reserve:
March 31, September 30, September 30,
2007 2006 2007
Rm Rm Rm
Balance at beginning of year 151 151 257
Net increase/(decrease) in 106 52 (110)
equity
Employee cost* 141 86 26
Vesting and transfer of shares (35) (34) (136)
Balance at end of year/ period 257 203 147
*The decrease in the employee cost for the current period is mainly as a result
of the change in assumptions listed below.
The principal assumptions used in calculating the expected number of shares that
will vest are as follows:
Employee turnover (%) 5 5 5
Meeting specified performance 100 100 50
criteria - 2008 vesting (%)
Meeting specified performance
criteria - all
remaining vesting (%) 100 100 100
At September 30, 2007 the estimated total compensation expense to be recognised
over the vesting period was R2,095 million (September 30, 2006: R375 million;
March 31, 2007: R580 million), of which R26 million (September 30, 2006: R86
million; March 31, 2007: R141 million) was recognised in employee expenses for
the six months ended September 30, 2007.
18. Interest-bearing debt
Long-term portion of 4,338 8,544 4,501
interest-bearing debt
Local debt 2,359 6,484 2,457
Foreign debt 820 857 923
Finance leases 1,159 1,203 1,121
Current portion of 6,026 3,722 10,962
interest-bearing debt
Local debt 5,772 3,437 10,718
Foreign debt 193 237 167
Finance leases 61 48 77
Movements in borrowings
for the period are as
follows:
Repayments/financing
Commercial Paper Bills with a nominal value of R11,908 million were issued
during the period under review. Repayments of Commercial Paper Bills debt to the
value of R8,510 million were made during the period including the R1,350 million
nominal value that was outstanding at March 31, 2007. Commercial Paper Bills
with a nominal value of R4,748 million as at September 30, 2007 is expected to
be repaid/refinanced from cash flow operations and the issue of new debt
instruments upon maturity.
Repayments/refinancing of current portion of interest-bearing debt
The repayment/refinancing of R10,962 million of the current portion of interest-
bearing debt will depend on the market circumstances at the time of repayment.
Included in the R10,962 million current portion is R4,680 million nominal value
of the TK01 bond due on March 31, 2008.
Management believes that sufficient funding facilities will be available at the
date of repayment/refinancing.
September 30,
2007
Rm
19 Acquisitions and disposals of subsidiaries
and minorities
19.1 Acquisitions
By Telkom
Africa Online Limited (`AOL`)
On February 23, 2007 Telkom acquired 100%
shareholding of AOL from
African Lakes Corporation for a total cost
of R150 million, with a resulting
goodwill of R145 million.
Multi-Links Telecommunications (Proprietary)
Limited (`Multi-Links`)
On May 1, 2007 Telkom acquired a 75%
shareholding of Multi-Links for a total
cost of R1,985 million.
Multi-Links is a Nigerian Private
Telecommunications Operator with a Unified
Access License providing fixed, mobile,
data, long distance and international
telecommunications services throughout
Nigeria. Multi-Links is domiciled and
incorporated in Nigeria.
At this stage Telkom has not taken a
decision to dispose of any operations as a
result of the combination.
The following intangible assets were
identified and fair valued at period end:
Customer relationships 88
Licence 37
Brand 119
244
The goodwill recognised at September 30,
2007 was provisionally
calculated as follows:
Purchase price 1,985
Fair value of intangible assets valued to (244)
date
Deferred taxation raised on intangible 78
assets
Contingencies recognised 35
Deferred tax assets recognised (35)
Less: Net asset value acquired (excluding (235)
fair value of intangible assets)
Minority interests 100
Goodwill 1,684
The purchase price allocation will be
completed in the 2008 financial year.
Goodwill has not been tested for impairment
as the accounting is provisional and has not
been allocated to the various cash-
generating units.
Revenue amounting to R310 million and profit
of R5 million are included in the condensed
consolidated interim financial statements.
Revenue would have amounted to R330 million
and profit to
R6 million if Multi-Links had been
consolidated for the full six months ended
September 30, 2007.
September 30,
2007
Rm
19 Acquisitions and disposals of subsidiaries
and minorities (continued)
19.1 Acquisitions (continued)
By the Group`s 50% joint venture, Vodacom
Smartphone SP (Proprietary) Limited and
subsidiaries (`Smartphone SP`)
On August 31, 2007 the Vodacom Group
increased its interest in the equity of
Smartphone SP from 70% to 100%. The
acquisition was accounted for using the
parent entity extension method.
Minority interest acquired 2
Goodwill 466
Purchase price (including capitalised cost) 468
Capitalised cost payable (1)
Cash consideration 467
Smartcom (Proprietary) Limited (`Smartcom`)
On September 1, 2007 the Vodacom Group
increased its interest in the equity of
Smartcom from 88% to 100%. The acquisition
was accounted for using the parent
entity extension method.
Minority interest acquired (< R1 million) -
Goodwill 9
Purchase price 9
By the Group`s subsidiary, Telkom Media
(Proprietary) Limited (`Telkom Media`)
On August 13, 2007 Telkom Media acquired a
45% shareholding in One Africa
Television (Proprietary) Limited and
Downlink (Proprietary) Limited respectively,
two
companies registered in the Republic of
Namibia, for a total cost of R18 million.
Purchase price 18
19.2 Disposals of Subsidiaries
By the Group`s 50% joint venture, Vodacom
Ithuba Smartcall (Proprietary) Limited
(`Ithuba Smartcall`)
On September 3, 2007, the Group disposed of
its 52% interest in Ithuba Smartcall.
The fair value of the assets and liabilities
disposed of was less than R1 million.
Stand 13 Eastwood Road Dunkeld (Proprietary)
Limited
On September 3, 2007, the Group disposed of
its 100% interest in Stand 13
Eastwood Road Dunkeld (Proprietary) Limited.
The fair value of the assets and
liabilities disposed was as follows:
Carrying amount of net assets disposed of 4
Capital gain on disposal 4
Selling price 8
19.3 Minority put options
Congolese Wireless Network s.p.r.l. put option
In terms of a shareholder agreement, the minority shareholder in Vodacom Congo
(RDC) s.p.r.l., Congolese Wireless Network s.p.r.l., has a put option which came
into effect three years after the commencement date, December 1, 2001, and for a
maximum of five years thereafter. The option price will be fair market value of
the related shares at the date the put option is exercised. The option
liability`s value increased to R337 million (Group share: R169 million)
(September 30, 2006: R183 million (Group share: R92 million); March 31, 2007:
R249 million (Group share: R125 million)). The liability is reflected as a
short-
term financial liability.
Multi-Links put option
In terms of the sale agreement between Telkom and the previous shareholders of
Multi-Links, the minorities have been granted a put option that requires Telkom
to purchase all of the minorities` shares in Multi-Links, if the minorities put
their shares to Telkom. The put option is exercisable within 90 days of the
second anniversary of signing the sales agreement. A liability of R661 million
has been recognised in this regard and is included in other non-current
financial liabilities.
March 31, September September
30, 30,
2007 2006 2007
Rm Rm Rm
20 Commitments
Capital commitments
Capital commitments authorised 11,167 6,621 9,440
Fixed-line 7,000 3,940 4,480
Mobile 4,159 2,666 3,516
Other 8 15 1,444
Commitments against authorised 1,099 2,067 2,875
capital expenditure
Fixed-line 506 719 1,482
Mobile 591 1,346 918
Other 2 2 475
Authorised capital expenditure not 10,068 4,554 6,565
yet contracted
Fixed-line 6,494 3,221 2,998
Mobile 3,568 1,320 2,598
Other 6 13 969
Capital commitments comprise of commitments for property, plant and equipment
and intangible assets.
Management expects these commitments to be financed from internally generated
cash and other borrowings.
2010 FIFA World Cup Commitments
The FIFA World Cup commitments is an executory contract which requires the Group
to develop the fixed-line components of the necessary telecommunications
infrastructure needed to broadcast this event to the world. This encompasses the
provisioning of the fixed-line telecommunications related products and services
and, where applicable, the services of qualified personnel necessary for the
planning, management, delivery, installation and de-installation, operation,
maintenance and satisfactory functioning of these products and services.
Furthermore as a National Supporter, Telkom owns a tier 3 sponsorship that
grants Telkom a package of advertising, promotional and marketing rights that
are exercisable within the borders of South Africa.
March 31, September September
30, 30,
2007 2006 2007
Rm Rm Rm
21 Contingencies
Third parties 28 31 40
Fixed-line 19 23 18
Mobile 4 3 17
Other 5 5 5
Third parties
These amounts represent sundry disputes with suppliers that are not individually
significant and that the Group does not intend to settle.
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance and
activation system to be supplied by Telcordia. In the 2001 financial year, the
agreement with Telcordia was terminated and in that year, Telkom wrote off R119
million of this investment. Following an assessment of the viability of the
project, the balance of the Telcordia investment was written off in the 2002
financial year. During March 2001, the dispute was taken to arbitration where
Telcordia was seeking approximately USD130 million plus interest at a rate of
15.50% per year which was subsequently increased to USD 172 million plus
interest at a rate for 15.50% for money outstanding and damages.
The parties have since reached an advanced stage in their preparation to
determine the quantum payable by Telkom to Telcordia. Following the ruling by
the Constitutional Court, two hearings were held at the International Dispute
Resolutions Centre (`IDRC`). The first hearing was held in London on May 21,
2007 and was a `directions hearing` in terms of which the parties consented to a
ruling by the arbitrator setting out a consolidated list of proposals and issues
to form part of the quantum hearing.
In the second hearing in London at the IDRC on June 25 and 26, 2007 the
arbitrator set out a list of issues for determination at the quantum hearing.
At a subsequent hearing during July 2007 in London the arbitrator ruled that the
rate in terms of the Prescribed Rate of Interest will apply on both damages and
debt claims, permitted Telcordia to a further amount in addition to the existing
claim, permitted VAT to be claimed on Telcordia`s claim, where applicable, and
set out an agreed timetable for the future conduct of proceedings. A full
hearing will take place between April 28, 2008 and May 23, 2008 in South Africa
and further argument to take place between June 9, 2008 and June 20, 2008 in
London.
A provision has been recognised based on management`s best estimate of the
probable payments in this regard.
March September September
31, 30, 30,
2007 2006 2007
Rm Rm Rm
Supplier dispute
liability included
in current portion
of provisions 527 - 441
The provision has decreased from March 31, 2007 due to provisional payments made
and exchange rate movements.
Competition Commission
The South African Value Added Network Services (`SAVA`)
Telkom filed its replying affidavit on August 1, 2007. The application review of
the matter has been set down for hearing on April 24, 2008 and April 25, 2008.
The matter is being held over pending decision by the High Court regarding the
jurisdiction of the Competition Tribunal to hear the matter.
Omnilink
Omnilink alleged that Telkom was abusing its dominance by discriminating in its
price for Diginet services as against those charged to VANS and the price
charged to customers who apply for a Telkom IVPN solution. The Competition
Commission conducted an enquiry and subsequently referred the complaint,
together with the SAVA complaint, to the Competition Tribunal for adjudication.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal
Telkom has not yet filed its answering affidavit in the main complaint before
the Tribunal and it appears as if Orion is not actively pursuing this matter any
further.
The Internet Service Providers Association (`ISPA`)
The Competition Commission has formally requested Telkom to provide it with
certain records of orders placed for certain services, in an attempt to first
investigate the latter aspects of the complaint. Telkom has provided the records
requested and no further activity has occurred since.
M-Web and Internet Solutions (`IS`)
To date there has been no further movement on this matter, either in the filing
of a replying affidavit by IS/M-Web in the interim relief application or in the
investigation of the matter by the Competition Commission.
M-Web
On June 5, 2007 M-Web brought an application against Telkom for interim relief
at the Competition Tribunal in regards to the manner in which Telkom provides
wholesale ADSL internet connections. M-Web requested the Competition Tribunal to
grant an order of interim relief against Telkom to charge M-Web a wholesale
price for the provision of ADSL internet connections which is not higher than
the lowest retail price. M-Web further applied for an order that Telkom
implement the migration of end customers from Telkom PSTS (ADSL access) to M-Web
without interruption of the service. Although Telkom raised the objection that
the Competition Tribunal does not have jurisdiction to hear the matter in its
answering affidavit filed at the Competition Tribunal, Telkom has also filed an
application in the Transvaal Provincial Division of the High Court on July 3,
2007 for an order declaring that the Competition Tribunal does not have
jurisdiction to hear the application made to it by M-Web.
The application has been set down for hearing on April 29 and 30, 2008. The main
matter is being held over pending the outcome of the application in the High
Court. As is the case with the SAVA matter, only if the High Court decides that
the Competition Tribunal does have jurisdiction to hear the matter, will the
matter again be set down for hearing.
The Group`s exposure is 50% of the following items:
Retention Incentives
The Vodacom Group has committed a maximum R902 million (March 31, 2007: R652
million) in respect of customers already beyond their normal 24 month contract
period, but who have not yet upgraded into new contracts, and therefore have not
utilised the incentive available for such upgrades. The Group has not provided
for this liability, as no legal obligation exists, since the customers have not
yet entered into new contracts.
Equity investments
The Vodacom Group through Vodacom Ventures (Proprietary) Limited has acquired a
35% equity stake in X-Link Communications (Proprietary) Limited for R12 million,
which is subject to Competition Commission approval. The Board of Vodacom Group
(Proprietary) Limited has also approved the exercise of the option to acquire a
further 15.5% equity investment in WBS Holdings (Proprietary) Limited should
certain suspensive conditions be fulfilled.
Put and call options
In terms of various shareholders` agreements, put and call options exist for the
acquisition of shares in various companies. None of the put and call options
have any value at any of the periods presented as the conditions set out in the
agreements have not been met.
Negative working capital ratio
At each of the financial periods ended September 30, 2007 and 2006 and the year
ended March 31, 2007 Telkom had a negative working capital ratio. A negative
working capital ratio arises when current liabilities are greater than current
assets. Current liabilities are intended to be financed from operating cash
flows, new borrowings and borrowings available under existing credit facilities.
March 31, September September
30, 30,
2007 2006 2007
Rm Rm Rm
22 Segment information
Eliminations represent the inter-
segmental transactions that have
been eliminated against segment
results. The mobile segment
represents the Group`s joint venture
Vodacom.
Business Segment
Consolidated operating revenue 51,619 25,147 27,227
Fixed-line 32,454 16,025 16,108
Mobile 20,573 9,733 11,407
Other 1,222 522 902
Elimination (2,630) (1,133) (1,190)
Consolidated other income 384 213 204
Fixed-line 711 563 189
Mobile 42 24 22
Other 54 21 26
Elimination (423) (395) (33)
Consolidated operating expenses 37,533 17,675 20,118
Fixed-line 24,218 11,272 12,011
Mobile 15,185 7,274 8,573
Other 589 295 747
Elimination (2,459) (1,166) (1,213)
Consolidated operating profit 14,470 7,685 7,313
Fixed-line 8,947 5,316 4,286
Mobile 5,430 2,483 2,856
Other 687 248 181
Elimination (594) (362) (10)
Consolidated investment income 235 170 130
Fixed-line 3,422 1,850 839
Mobile 36 14 24
Other 8 4 8
Elimination (3,231) (1,698) (741)
Consolidated finance charges 1,125 437 972
Fixed-line 856 426 704
Mobile 269 12 247
Other - (1) 20
Elimination - - 1
Consolidated taxation 4,731 2,844 2,678
Fixed-line 2,652 1,831 1,798
Mobile 1,918 928 806
Other 161 85 74
Minority interests 203 74 93
Mobile 109 21 31
Other 94 53 62
Profit attributable to equity 8,646 4,500 3,700
holders of Telkom
Fixed-line 8,861 4,909 2,623
Mobile 3,170 1,536 1,796
Other 440 115 33
Elimination (3,825) (2,060) (752)
Consolidated assets 57,426 53,540 61,859
Fixed-line 44,241 41,397 43,295
Mobile 14,026 13,029 15,296
Other 939 857 3,670
Elimination (1,780) (1,743) (402)
Investments 1,461 1,235 1,522
Fixed-line 2,166 1,844 4,533
Mobile 181 123 168
Other - - 32
Elimination (886) (732) (3,211)
Other financial assets 259 576 214
Fixed-line 4,061 3,538 3,900
Mobile 28 142 15
Other 1 - -
Elimination (3,831) (3,104) (3,701)
Total assets 59,146 55,351 63,595
Consolidated liabilities 15,951 14,288 17,477
Fixed-line 8,239 7,176 10,237
Mobile 7,416 6,897 7,364
Other 374 284 375
Elimination (78) (69) (499)
Interest-bearing debt 10,364 12,266 15,463
Fixed-line 9,113 10,923 14,185
Mobile 1,278 1,372 1,181
Other 4 7 488
Elimination (31) (36) (391)
Other financial liabilities 229 214 958
Fixed-line 3,889 3,224 4,433
Mobile 159 95 227
Other 13 - -
Elimination (3,832) (3,105) (3,702)
Tax liabilities 594 583 122
Fixed-line - 315 -
Mobile 556 241 104
Other 38 27 18
Total liabilities 27,138 27,351 34,020
Other segment information
Capital expenditure for property, 8,648 3,913 3,580
plant and equipment
Fixed-line 5,547 2,526 2,464
Mobile 3,069 1,367 977
Other 32 20 139
Capital expenditure for intangible 1,598 277 863
assets
Fixed-line 1,052 73 183
Mobile 539 204 671
Other 7 - 9
Depreciation and amortisation 5,019 2,454 2,745
Fixed-line 3,299 1,648 1,702
Mobile 1,681 787 952
Other 39 19 91
Impairment and asset write-offs 296 86 156
Fixed-line 284 67 165
Mobile 12 19 (9)
23 Related parties
Details of material transactions and balances with related parties not disclosed
separately in the condensed consolidated interim financial statements were as
follows:
March September September
31, 30, 30,
2007 2006 2007
Rm Rm Rm
With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances
Trade receivables 61 59 44
Trade payables (353) (303) (388)
Related party transactions
Revenue (755) (375) (385)
Expenses 1,494 725 754
Audit fees 3 1 2
Revenue includes interconnect fees and
lease and installation of transmission
lines.
Expenses mostly represent interconnect
expenses.
With shareholders:
Government
Related party balances
Trade receivables 271 236 298
Related party transactions
Revenue (2,458) (1,105) (1,277)
With entities under common control:
Major public entities
Related party balances
Trade receivables 59 47 42
Trade payables (6) (5) (16)
The outstanding balances are unsecured and
will be settled in cash in the ordinary
course of business.
Related party transactions
Revenue (369) (150) (185)
Expenses 238 94 114
Rent received (29) (9) (10)
Rent paid 27 35 10
Key management personnel compensation:
(Including directors` emoluments)
Related party transactions
Short-term employee benefits* 176 112 126
Post employment benefits 14 7 12
Termination benefits - - 16
Equity compensation benefits 8 2 14
Other long term benefits 27 4 7
*The comparatives for September 30, 2006 were restated to include directors`
emoluments of Vodacom which were previously excluded as well as to reclassify
certain amounts to other long-term benefits.
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services
are made at arm`s length prices. Except as indicated above, outstanding
balances at the end of the period are unsecured, interest free and settlement
occurs in cash. There have been no guarantees provided or received for related
party receivables or payables. Except as indicated above for the period ended
September 30, 2007, the Group has not made any impairment of amounts owed by
related parties (September 30, 2006: RNil; March 31, 2007: RNil). This
assessment is undertaken each financial year through examining the financial
position of the related party and the market in which the related party
operates.
24 Significant events
Swiftnet (Proprietary) Limited
Telkom is in the process of selling a 30% shareholding in its subsidiary Swifnet
(Proprietary) Limited in order to comply with existing licence requirements from
the Independent Communications Authority of South Africa (`ICASA`). The 30%
shareholding has in principle been sold to empowerment investors, the Radio
Surveilance Consortium (`RSC`), for R55 million. The transaction, however, is
still subject to an ICASA approval process.
Telkom Media (Proprietary) Limited
On August 31, 2006 Telkom created a new subsidiary, Telkom Media (Proprietary)
Limited with a Black Economic Empowerment (`BEE`) shareholding. ICASA awarded
Telkom Media a commercial satellite and cable subscription broadcast licence on
September 12, 2007.
The BEE shareholders are Videovision Entertainment, MSG Afrika Media and WDB
Investment Holdings (Proprietary) Limited. At September 30, 2007 these shares
have not been transferred as arrangements have not been concluded between the
parties.
Mobile strategy
Telkom issued a cautionary announcement on September 3, 2007, which advised
shareholders that discussions are underway with Vodafone plc and MTN Group
Limited, in line with our mobile strategy of combining both fixed and mobile
telephony to mitigate the slower growth of fixed-line usage. Telkom`s focus is
on achieving integration with the mobile partner that the company will choose to
move forward with to deliver fixed and mobile services to compliment each other,
a strong African footprint and an ability to offer converged services to our
customers in the future.
The Board is committed, through the mobile strategy review, to explore all
options to accelerate Telkom`s long-term sustainable growth strategy.
25 Subsequent events
The directors are not aware of any other matters or circumstances since the
consolidated interim financial statements for the six months ended September 30,
2007 and the date of this report, not otherwise dealt with in the consolidated
interim financial statements, which significantly affects the financial position
of the Group and the results of its operations.
10 Supplementary Information
Year ended Six months ended
March 31, September 30,
In ZAR millions 2007 2006 2007
EBITDA
Earnings before interest, taxation,
depreciation
and amortisation (EBITDA) can be
reconciled as
follows:
EBITDA 19,785 10,225 10,214
Depreciation, amortisation, impairment (5,315) (2,540) (2,901)
and write-offs
Investment income 235 170 130
Finance charges (1,125) (437) (972)
Taxation (4,731) (2,844) (2,678)
Minority interests (203) (74) (93)
Net profit 8,646 4,500 3,700
Headline earnings
The disclosure of headline earnings is a
requirement of
the JSE Securities Exchange, South
Africa and is not a
recognised measure under US GAAP.
Headline earnings can be reconciled as
follows:
Earnings as reported 8,646 4,500 3,700
Profit on disposal of investment (52) (43) (4)
Net profit and loss on disposal of
property, plant and
equipment and intangible assets (29) 5 (19)
Impairment of property, plant and
equipment and
intangible assets 12 19 89
Reversal of impairment of property, - - (9)
plant and equipment
Write-offs of property, plant and 284 67 76
equipment
Tax effects (62) (14) (41)
Headline earnings 8,799 4,534 3,792
US DOLLAR CONVENIENCE
Year ended Six months
ended
March 31, September
30,
2007 2007
Revenue 7,503 3,957
Operating profits 2,103 1,063
Net profit 1,286 551
EBITDA 2,876 1,485
EPS (cents) 244.3 105.3
Net debt 1,457 2,577
Total assets 8,597 9,243
Cash flow from operating activities 1,360 99
Cash flow used in investing activities (1,513) (1022)
Cash flow used in financing activities (424) (657)
Exchange rate
Period end1
US$1 = ZAR 6.88 6.88
1. Noon buying rate
Diversifying Revenue Streams.
Contacts
Investor relations Media relations Retail investors
Nicola White Lulu Letlape Computershare
+27 12 311 5720 +27 12 311 4301 086 110 0948
whitenh@telkom.co.za Letlapll@tekom.co.za
The information contained in this document is also available on Telkom`s
investor relations website
http://www.telkom.co.za/ir
Telkom SA Limited is listed on the JSE Limited and the New York Stock Exchange.
Information may be accessed on Reuters under the symbols TKG.J and TKG.N and on
Bloomberg under the symbol TKG.JH.
Special note regarding forward-looking statements
All of the statements included in this document, as well as oral statements that
may be made by us or by officers, directors or employees acting on behalf of us,
that are not statements of historical facts constitute or are based on forward-
looking statements within the meaning of the US Private Securities Litigation
Reform Act of 1995, specifically Section 27A of the US Securities Act of 1933,
as amended, and Section 21E of the US Securities Exchange Act of 1934, as
amended. These forward-looking statements involve a number of known and unknown
risks, uncertainties and other factors that could cause our actual results and
outcomes to be materially different from historical results or from any future
results expressed or implied by such forward-looking statements. Among the
factors that could cause our actual results or outcomes to differ materially
from our expectations are those risks identified in Item 3. "Key Information-
Risk Factors," of Telkom`s most recent Annual Report on Form 20-F filed with the
US Securities and Exchange Commission (SEC) and its other filings and
submissions with the SEC which are available on Telkom`s website at
www.telkom.co.za/ir, including, but not limited to any changes to Telkom`s
mobile strategy and its ability to successfully implement such strategy and
organisational changes thereto, increased competition in the South African
telecommunications markets; developments in the regulatory environment;
continued mobile growth and reductions in Vodacom`s and Telkom`s net
interconnect margins; Vodacom`s and Telkom`s ability to expand their operations
and make investments and acquisitions in other African and other countries and
the general economic, political, social and legal conditions in South Africa and
in other countries where Vodacom and Telkom invest; our ability to attract and
retain key personnel; our inability to appoint a majority of Vodacom`s directors
and the consensus approval rights at Vodacom that may limit our flexibility and
ability to implement our preferred strategies; Vodacom`s continued payment of
dividends or distributions to us; our ability to improve and maintain our
management information and other systems; our negative working capital; changes
in technology and delays in the implementation of new technologies; our ability
to reduce theft, vandalism, network and payphone fraud and lost revenue to non-
licensed operators; our ability to improve our internal control over financial
reporting; health risks related to mobile handsets, base stations and associated
equipment; risks related to our control by the Government of the Republic of
South Africa and major shareholders and the South African Government`s other
positions in the telecommunication industry; the outcome of regulatory, legal
and arbitration proceedings, including tariff approvals, and the outcome of
Telkom`s hearing before the Competition Commission; its proceedings with
Telcordia Technologies Incorporated and others; our ability to negotiate
favourable terms, rates and conditions for the provision of interconnection
services and facilities leasing services; our ability to implement and recover
the substantial capital and operational costs associated with carrier pre-
selection, Number Portability and the monitoring, interception and customer
registration requirements contained in the South African Regulation of
Interception of Communication and Provision of Communication - Related
Information Act; Telkom`s ability to comply with the South African Public
Finance Management Act and South African Public Audit Act and the impact of the
Municipal Property Rates Act; fluctuations in the value of the Rand; the impact
of unemployment, poverty, crime and HIV infection, labour laws and exchange
control restrictions in South Africa; and other matters not yet known to us or
not currently considered material by us.
We caution you not to place undue reliance on these forward-looking statements.
All written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are qualified in their entirety by these cautionary
statements. Moreover, unless we are required by law to update these statements,
we will not necessarily update any of these statements after the date hereof,
either to conform them to actual results or to changes in our expectation.
The information contained in this document is also available on Telkom`s
investor relations website
http://www.telkom.co.za/ir
Date: 19/11/2007 07:00:13 Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
