| Mon 23 Nov 2009, 14:30 | | TKG - Telkom SA Limited - Interim Results for the Six Months Ended |
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TKG
TKG
TKG - Telkom SA Limited - Interim Results for the Six Months Ended
September 30, 2009
Telkom SA Limited
(Registration number 1991/005476/06)
JSE share code: TKG
ISIN: ZAE000044897
TELKOM SA LIMITED GROUP INTERIM RESULTS
for the six months ended September 30, 2009
The information contained in this document is also available on Telkom`s
investor relations website www.telkom.co.za/ir.
Telkom SA Limited is listed on the JSE Limited. Information may be
accessed on Reuters under the symbols TKG.J and TKG.N and on Bloomberg
under the symbol TKG.JH. Information contained on Reuters and Bloomberg
is provided by a third party and is not incorporated by reference herein.
Telkom has not approved or verified such information and does not accept
any liability for the accuracy of such information.
Special note regarding forward looking statements
Many 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, constitute or are based on forward looking
statements.
All statements, other than statements of historical facts, including,
among others, statements regarding our mobile and other strategies,
future financial position and plans, objectives, capital expenditures,
projected costs and anticipated cost savings and financing plans, as well
as projected levels of growth in the communications market, are forward
looking statements. Forward looking statements can generally be
identified by the use of terminology such as "may", "will", "should",
"expect", "envisage", "intend", "plan", "project", "estimate",
"anticipate", "believe", "hope", "can", "is designed to" or similar
phrases, although the absence of such words does not necessarily mean
that a statement is not forward looking. 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 including but not limited to those risks identified in
Telkom`s most recent annual report which are available on Telkom`s
website at www.telkom.co.za/ir.
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 of this document, either to conform them to
actual results or to changes in our expectations.
The reported results for the period are distorted by the accounting for
the sale and unbundling of our 50% stake in Vodacom and related
transactions, the sale of Telkom Media and the impairment of the goodwill
of Multi-Links. Unless otherwise indicated, the discussion below is based
on adjusted results, excluding the items above, and is based on
continuing operations as reconciled under the financial performance
section of this announcement.
GROUP SALIENT FEATURES FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009
- Vodacom transaction accounts for profit of R40.4 billion.
- Impairment of Multi-Links goodwill of R2,148 million.
- Operating revenue up 4.0% to R18.7 billion.
- Headline earnings per share from continuing operations decreased by
37.9% to 242.2 cents.
- Basic earnings per share decreased 141.2% to a loss of 150.2 cents per
share.
- Group EBITDA margin decreased to 27.3% from 32.3%.
- Total dividends paid out during the reporting period of R11.2 billion.
- Net debt reduced by R8.7 billion decreasing annualised net debt to
EBITDA from 1.4 times to 0.8 times.
- Group restructuring into distinct profit centres 85% complete.
- New data centre operation business unit launched - branded Cybernest.
- 51.1% increase in Do broadband subscribers.
Group operating revenue from continuing operations increased 4.0% to
R18.7 billion, while EBITDA decreased 12.2% to R5.1 billion. The Group
EBITDA margin decreased to 27.3% as at September 30, 2009, compared to
32.3% at September 30, 2008, mainly due to higher operating expenditure
of Telkom South Africa which decreased the Telkom South Africa EBITDA
margin to 35.2% as at September 30, 2009 (September 30, 2008: 39.9%).
Headline earnings from continuing operations decreased by 37.9% to 242.2
cents per share as a result of increased operating expenditure in Telkom
South Africa and the corporate centre, partially offset by higher
revenue. Basic earnings per share decreased 141.2% at a loss of 150.2
cents per share for the six months ended September 30, 2009, compared to
earnings of 364.5 cents per share at September 30, 2008. The reduced
basic earnings per share can mainly be attributed to the impairment of
the goodwill of Multi-Links.
Annualised return on assets before taxation decreased from 17.4% to 12.9%
due to the lower operating profit and a lower asset base excluding cash
balances.
1. OVERVIEW
Johannesburg, South Africa - November 23, 2009, Telkom SA Limited (JSE:
TKG) today announced Group interim results for the six months ended
September 30, 2009.
Segment structure
The Telkom South Africa segment provides fixed-line access and voice
services, fixed-mobile and data communications services through Telkom
South Africa. The Multi-Links segment provides fixed, mobile, data and
international communications services in Nigeria through our Multi-Links
subsidiary. The other segment is split geographically between
international and South Africa. Other international category provides
internet services outside South Africa, through our Africa Online and
MWEB Africa subsidiaries and management services through our Telkom
Management Services Company. The Other South African category includes
the Trudon Group, formerly known as TDS Directory Operations, and the
Group`s corporate centre.
Our 50% share of Vodacom`s results, Telkom Media and Swiftnet`s results
are disclosed as discontinued operations in terms of IFRS5 in the Telkom
Group`s consolidated financial statements.
Statement by Reuben September, Chief Executive Officer:
"The impact of competition and the weaker economic environment are
evident in the Telkom Group`s financial results for the six months ended
September 30, 2009. The negative effect of growing competition and fixed
to mobile substitution is starkly highlighted in the 9.0% decrease in
Telkom South Africa`s traffic revenue. This continuing trend justifies
the imperative for our Group to enter the mobile market and particularly
the mobile data market. Our continued efforts to move traditional traffic
revenues into annuity type products and data products exacerbates the
decline. In addition, data revenue posted more modest revenue growth of
8.7% as a result of increased competition and pricing pressures in this
segment of our business. Our Group operating expenditure grew 12.0%
reflecting higher than inflationary increases as a result of higher
payments to international operators, salary increases, provisioning for
slow moving inventory and higher operating leases in Multi-Links. The
restructuring of Telkom and optimisation of its balance sheet to create
leaner, focused business units was expected to incur restructuring costs
in the short term. On the positive side, the Group exhibited strong
management of the capital expenditure programme and an extremely healthy
net debt position with annualised net debt to EBITDA of 0.8 times.
Our strategy seeking to re-position the Telkom Group is imperative given
the tough operating environment. Similar to the strategies of other
leading operators in the world, we are focusing on growing other revenue
streams to compensate for the decline in fixed voice revenues. We are
expanding into other geographic markets and into other domestic markets,
for example our data centre operations and mobile strategy. We are
improving our execution in current growth markets.
In addition, we are strongly focused on reducing our costs in order to
protect our profits and we remain committed to a 10% reduction in
operating expenses by the 2011/12 financial year. While control of
discretionary expenditure is showing immediate reduction, other areas
under focus require careful planning and execution to ensure long-term
success. These areas include supplier negotiations, improved inventory
management, IT costs, maintenance costs and synergies through mobile
capabilities and data centre operations.
Telkom Renaissance, dealing with the remodelling, reorganisation,
revitalisation and re-engineering of Telkom is gaining traction and we
have achieved important milestones. The reorganisation of Telkom South
Africa into new business units is 85% complete. Specific work streams are
focused on business process engineering and cost efficiencies. The
business plans for both the mobile strategy and data centre operations
have been approved by the board of directors after extensive market
research. Multi-Links remains a major concern, but is beginning to show
slight improvements to its operating performance and the integration of
Africa Online and MWEB Africa is proceeding well.
Despite the difficulties, the commitment of my team to positioning Telkom
to aggressively compete in the South African and African markets is
gaining momentum. Our data centre operation, branded Cybernest, was
launched on November 19, 2009. This initiative is further evidence of our
drive to diversify and grow our revenue streams and take costs out of our
current operations. Free cash flow generation is critical to the
valuation of Telkom and everything we are doing is aimed at this target.
It is a long-term process requiring harsh reviews of our capital
expenditure programme and business processes.
I am confident that the strength inherent in the fixed-line network and
the business leadership and operations skills of our employees will allow
us to offer our markets simple, quality, cost effective services that
will be competitive in our markets."
2. OPERATIONAL DATA
Six months ended
September 30,
2008 2009 %
Telkom South Africa
ADSL subscribers1 491,774 602,720 22.6
Calling plan subscribers 521,704 651,359 24.9
Closer subscribers 507,985 636,010 25.2
Supreme call subscribers 13,719 15,349 11.9
W-CDMA subscribers - 8,744 -
Do Broadband subscribers 154,095 232,796 51.1
Fixed access lines (`000)1 4,504 4,398 (2.4)
Postpaid - PSTN 2,839 2,694 (5.1)
Postpaid - ISDN channels 772 785 1.7
Prepaid 754 797 5.7
Payphones 139 122 (12.2)
Fixed-line penetration rate (%) 9.3 8.9 (4.3)
Revenue per fixed access line 2,635 2,679 1.7
(ZAR)
Total fixed-line traffic 12,709 11,785 (7.3)
(millions of minutes)
Local 4,688 3,670 (21.7)
Long distance 1,870 1,656 (11.4)
Fixed-to-mobile 2,111 1,906 (9.7)
International outgoing 319 307 (3.8)
International VoIP 17 22 29.4
Subscription based calling 1,704 1,869 9.7
plans
Interconnection 2,000 2,355 17.8
Domestic mobile 1,241 1,184 (4.6)
interconnection
Domestic fixed 160 333 108.1
interconnection
International interconnection 599 838 39.9
Managed data network sites 28,051 29,842 6.4
Internet all access subscribers2 395,088 445,334 12.7
Fixed-line employees 24,075 23,445 (2.6)
Fixed access lines per fixed-line 187 188 0.5
employee
Movement in fixed-line employees
Opening balance 24,879 23,520 (5.5)
Appointments 503 397 (21.1)
Employee losses (1,307) (472) (63.9)
Workforce reductions (4) - -
Natural attrition (1,303) (472) (63.8)
Closing balance 24,075 23,445 (2.6)
Multi-Links
Active subscribers 1,571,102 2,036,404 29.6
Employees3 1,006 1,060 5.4
Other International
Africa Online subscribers 17,773 16,368 (7.9)
Africa Online employees4 357 307 (14.0)
MWEB Africa subscribers - 22,137 -
MWEB Africa employees - 345 -
Other South African
Trudon employees 532 531 (0.2)
1. Excludes Telkom internal lines.
2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers.
3. Employees have decreased 5.7% from 1,124 recorded at March 31, 2009.
4. Excluding UUNet joint venture partner`s subscribers and employees in
Kenya.
3. OPERATIONAL OVERVIEW
TELKOM SOUTH AFRICA
The South African ICT market is seeing a shift in activity to increased
efficiencies and marginal economies of scale. Bandwidth aggregation and
infrastructure-build initiatives are a reality and service availability
proliferates. There are also definitive signs of product innovation from
ICT providers across the board, leading to increased choice available to
customers. These initiatives lead to customer migration to a wider range
of service providers. Customers are more frequently using services of
more than one provider. This means that retail customers are using
services from a wider range of providers who can give them access to a
wider range of services. Migration is evident in the broadband markets
with mobile broadband being a significant driver. Also the virtual
network product market is growing with a commensurate shift in voice and
data market share. Competition is impacting Telkom`s revenue generation
and, as a result, Telkom is re-engineering its business into leaner, more
flexible business units, developing new revenue streams through mobile
services and data centre operations and creating opportunities for cost
efficiencies. These initiatives take time and incur upfront costs.
We are confident that our initiatives will ensure Telkom is the wholesale
provider of choice for operators in the market. Our retail business is
focused on providing an independent, value focused service. We aim to
provide sustainable and growing shareholder value.
Voice revenue
The continued competitive pressure in the voice market has seen declines
in our traffic revenue streams. This is as a result of our drive to offer
significant value through products, managed network services and virtual
private networks which shifts traffic revenue into other revenue streams.
The effect of fixed-to-mobile substitution and least cost routing is also
clear, as is the need for us to develop a mobile service in order to win
back traffic onto the Telkom network. We continue to focus on growing our
annuity revenue streams through subscription based calling plans. Annuity
revenues grew 6.1% to R3,816 million. Telkom Closer subscribers have
increased 25.2% to 636,010 and Supreme call subscribers have increased
11.9% to 15,349. The current line penetration rate for Closer packages is
47.8% up from 41.9% at March 31, 2009.
Telkom has dedicated programmes to stimulate prepaid and postpaid usage
including the Waya Waya campaign, the Recharge campaign and the Bafana
Bafana campaign. In addition, we are marketing the benefits of the Closer
packages. In the enterprise market, Telkom continues to promote its
discount plans for both voice products and customer premise equipment.
We continue to focus on reducing customer churn, increasing customer
loyalty and promoting the value offered by fixed-line services through
many initiatives such as continued enhancement to the Closer packages,
free line installation to all of Telkom`s ex customers, telemarketing and
direct marketing.
Interconnection revenue
Interconnection revenue increased 52.5% to R1,458 million reflecting the
increased volumes carried on mobile networks, significant tariff
increases on interconnect traffic destined for Zimbabwe, the growth of
Neotel, VANs and ISPs and Telkom carrying increased traffic from
international operators into Africa. We have specifically targeted
international hubbing revenues despite their lower margins as they add
scale and bottom-line benefits.
Margins on foreign interconnection revenues have declined as a result of
the strength of the Rand and timing delays in adjusting pricing in line
with developments in foreign markets.
Mobile termination rate developments
On November 12, 2009 the Minister of Communications announced a reduction
in the peak mobile interconnect rate from 125 cents to 89 cents. Off-peak
mobile rates are unchanged at 77 cents. This comes into effect from
February 2010 with MTN adopting it a month later. The final outcome of
current negotiations regarding the glide path for mobile termination
rates between ICASA and operators is difficult to predict. Telkom will
pass the benefit of the cut in mobile termination rates directly to the
consumer which will impact both Telkom`s revenue line and payment to
other operators` expenses line.
We may see a slight acceleration in fixed to mobile substitution in the
consumer market and may also see an increase in fixed to mobile traffic
as mobile calls become cheaper. However, the reduced rates do strengthen
our position against least cost routing and we expect to begin winning
traffic back.
Broadband revenue
ADSL subscribers increased 22.6% to 602,720 when compared to the
September 30, 2008 reporting period. At March 31, 2009 ADSL subscribers
totalled 548,015. Do Broadband subscribers have increased 51.1% to
232,796. At March 31, 2009 Do Broadband subscribers totalled 188,540.
Broadband penetration as a percentage of residential postpaid lines
equals 17.5%, up from 15.4% at March 31, 2009.
Telkom continues to aggressively promote its broadband packages through
focusing our marketing efforts on particular customer groupings and the
up-selling of the higher end broadband packages which offer substantial
value. We have also put in effort to promote entry-level ADSL packages
with extremely competitive pricing. We continue to make every effort to
increase the bandwidth available to our customers and are currently
negotiating a triple play partnership in order to provide our customers
with enhanced content. Speeds of 4 mbps are available to selective
services. We have signed agreements with two partners for our gated
community initiative, the benefits of which we expect to start showing in
the 2010/11 financial year. We intend to provide gated communities with
speeds up to 8 mbps.
Data revenue
Total data revenue increased 8.7% to R4,849 million despite significant
price reductions. Data connectivity services revenue increased 2.8% to
R2,476 million. Mobile leased line revenue increased 14.0% to R983
million and Internet access and related services increased 27.0% to R889
million. Managed data network services increased 5.4% to R468 million,
which included an increase of 27.8% in satellite services and a 0.9%
decrease in VPN services. VPN services decreased as a result of the
September 30, 2008 total including a once-off sale of routers to a
corporate client totalling R89 million. Managed network sites increased
6.4% to 29,842 sites.
Telkom is facing competition on price for traditional data services. We
continue to maximise the benefit of our capacity and ability to provide
quality and security. We are also offering innovative products and
services using the intelligence of our next generation network. The scope
and quality of our data services are unmatched. In addition, the scale of
our global undersea cable system provides additional competitiveness.
We are focusing on differentiating our service through creating
attractive, value propositions. Our differentiators include the
reliability of our comprehensive service level agreements that are
flexible and can be designed to match customer requirements. Other
differentiators that we are working towards include: providing full
communication and converged solutions that are clean and simple to
understand.
In order to make these a reality we need to add mobility and data centre
services to the array of services we offer. We need to invest in several
areas before "simplicity" can become a reality for our customers.
Cost management
Our target is to reduce operating expenditure by 10% by the 2011/12
financial year.
Telkom Renaissance and the associate reorganisation into customer focused
business units have allowed us to improve profit and loss accountability
throughout the Group. It is also allowing us to more easily identify
potential cost savings. As expected, expenses increased in the short term
as a result of the reorganisation of the business units, clean up of
inventories and costs associated with increasing under sea cable capacity
and provisioning for the World Cup 2010.
The areas of cost savings centre around reducing our product portfolio
and terminating unprofitable product lines, renegotiating all maintenance
and supply contracts, reducing IT spend and focusing on shorter term IT
projects, retiring legacy systems. We have reopened discussions with
labour regarding outsourcing in the IT arena. We have specific
Renaissance work streams concentrating on service delivery remodelling,
business process re-engineering and have identified the major cost saving
opportunities within our wholesale and networks division. The roll-out of
our wireless access network will enable us to provide connectivity in a
more cost effective manner.
We have been optimising vacancies created through natural attrition and
have been making use of some temporary staff in the short term. We have
also been actively managing overtime and contractor spend in order to
offset costs as far as possible.
As we restructured the company and pulled back on the capital expenditure
programme during the six months under review, we could not immediately
reduce staffing and contractor levels and therefore expensed certain
labour costs which would otherwise have been capitalised. During the
period our expenditure increased as a direct result of our restructuring,
the pull back in capital expenditure programmes and the delay in the
implementation of our mobile strategy pending detailed market studies.
Telkom SA has actively managed services rendered and operating leases by
introducing efficiencies in all possible areas to ensure that the
inflationary cost impact could be fully offset (specific focus on
consultants, fleet costs and distribution commissions).
Write downs and provisions were required as a result of technology
obsolete inventory and items classified as slow moving inventory as a
result of the economic slow down. In addition, a contributing factor was
that high value stock orders had already been placed in order to service
the previously higher capital expenditure programme. A decision was made
to provide against these stock items as the capital cost of completing
the projects for which these items were ordered would outweigh the value
of inventory losses.
Telkom Mobile
Telkom is at an inflection point with growth in traditional fixed-line
voice revenues declining. The majority of global fixed-line incumbents
have discovered that a successful operation requires an integrated mobile
business. We believe that there is a market opportunity in South Africa
as mobile voice and especially mobile data are still experiencing growth.
Telkom has a competitive advantage by virtue of its existing asset and
customer base. The mobile business could also assist Telkom in addressing
fixed-line cost challenges and will position Telkom more competitively in
the market. A product range spanning both mobile and fixed value pools
will help Telkom defend itself more effectively against competitors.
Telkom`s mobile business plan was approved during the period under
review. Information regarding our network build and go to market strategy
cannot be disclosed due to competitive sensitivities.
We estimate that the capital expenditure required to implement mobility
will be a maximum of R6 billion over five years.
We are negotiating innovative financing structures with our suppliers in
order to potentially reduce our capital investment in favour of operating
lease-type payments which include technology renewal. In addition, we are
in the process of negotiating arrangements regarding co-location and
sharing which may reduce our capital investment and enhance our speed to
market. We are employing the latest technology combining both 2G and 3G
composite technologies which significantly reduce inter-operability
costs.
We have 8,744 existing W-CDMA subscribers who were provided with mobile
data service and fixed look-alike products in those areas hard hit by
copper theft.
Cybernest - Our data centre operation
Telkom`s move into the data centre operations business unit forms part of
our drive to grow revenues. It is a natural progression for a
telecommunication provider up the value-added IT services chain. Telkom
is uniquely placed to enter the data centre market and offer significant
value to our customers by utilising the strength of our underlying
network, our large enterprise customer base and the operational skill set
developed in providing data centre services to Telkom - the biggest user
of data centre services in South Africa. We are a carrier neutral data
centre capable of providing independent services to other
telecommunications operators.
International demand for data centres exceeds supply by approximately
6:1. South Africa`s requirements are also accelerating. Telkom`s proven
track record indicates that we have the required stability, reliability
and flexibility to succeed in the data centre environment. Telkom manages
more than 32,000 mailboxes, 700,000 emails per day and some 30,000
managed devices. We also manage over 4,000 servers and more than 1,460
operating systems and databases. We process approximately 9.7 million
emails per day as part of our ISP services. We are ideally positioned in
terms of size, volume, experience and skills.
Telkom formally launched its data centre operation, branded Cybernest, in
Bellville, Cape Town on November 19, 2009. The current economic downturn
is creating opportunities as firms look to cut costs. We are actively
pursuing strategic alliances to bolster our product offering and will
capitalise on the decreasing cost of bandwidth and the convergence
opportunities provided by our next generation network and move into
mobile services.
Having the data centre as an independent business unit should allow
increased focus on reducing the costs associated with these facilities.
We have also ensured that our facility complies with best in class
"green" infrastructure and operating principles which will enhance the
attractiveness of our service offering.
Multi-Links - Nigeria
The Nigerian Multi-Links operation started to show steady improvements
although it remains our major challenge and we have impaired an
additional R2,148 million of goodwill. The improvement is evidenced by
the achievement of consecutive monthly revenue milestones, declining
month on month operating expenditure costs and its 3G broadband
equivalent product (`EVDO`) growing strongly, while maintaining its
monthly EBITDA margin improvements.
Trading conditions continue to be tough as a result of local economic
factors and pricing pressures. The relative strength of the Rand
reporting currency against the Nigerian Naira has adversely affected our
reported results. A key focus area in Nigeria continues to be the
provisioning of an extensive fibre network for future benefit and good
progress has been made in this regard over the last six month period,
albeit under a significantly reduced capital expenditure programme. Newly
established distribution channels are still in their formative stage of
development. In addition, in order to manage the high level of inventory
we have continued to subsidise handsets through targeted promotions in
selected geographic areas to increase capacity utilisation. In addition
we have taken provisions against certain handset models with the
intention of liquidating these items.
The monthly revenue growth has continued its upward trajectory having
exceeded the 3 billion Naira level for the first time and has continued
to do so for both August 2009 and September 2009. Revenue has continued
to remain above this new level for the first month subsequently to the
period under review. Second quarter revenues increased by 41% over the
first quarter as various initiatives, including international carrier
services, have come to fruition.
Active voice subscribers increased 30% to 2,036,404 from 1,571,102
recorded at September 30, 2008 and 1,863,131 recorded at March 31, 2009.
ARPU has decreased to USD7 from USD13 at September 30, 2008 and USD12 at
March 31, 2009 (excluding non-revenue generating subscribers). The medium-
term target of USD10 ARPUs is still possible.
Data subscribers - EVDO subscribers - increased to 18,924 from 2,644, an
increase of 615.7%, at March 31, 2009 and are generating USD30 ARPUs.
EVDO revenues are now exceeding narrowband data revenues. Fixed data
customers increased 24% to 454 for equivalent 2 megabits circuits
representing four wholesale operators and five corporate clients.
Targeted promotions were introduced to revive inactive subscribers and
stimulate on-net usage early in the financial year. Mobile data services
via EVDO were re-launched at the beginning of the second quarter. A
number of value-added services targeted for the corporate sector were
also launched during this period. The marketing approach and internal
structures were also re-structured to put emphasis on the inherent
strength of the Telkom Group in the data services. To this effect, the
Sales, Products, Service Management and Business Solutions were re-
structured to create the necessary focus. International Carrier Services
was also established as a separate division to aggressively pursue
international voice revenue opportunities using Telkom Group`s global
relationships. A key focus is to ensure aggressive execution of the
programme to increase penetration into the corporate and business markets
via mobile and fixed data services.
The period under review must be categorised as a period of reviewing
lessons of the past, setting the baseline and implementing plans for
clear operational turn-around.
Operating expenses increased by 35.4% to 22,301 million Naira. Employee
expenses increased to 1,138 million Naira as strategic staff were
recruited. However, Multi-Links is currently undergoing a headcount
rationalisation including outsourcing of non-core activities. This has
seen the headcount being reduced from 1,124 at April 1, 2009 to 1,060 at
period end, a 5.7% reduction. Additional rationalisation activities are
still in progress.
Payments to other operators increased by 6.6% to 5,131 million Naira as a
result of increased outgoing minutes. These additional minutes were
primarily driven by the new revenue stream of international carrier
services. This business is expected to open new revenue streams for Multi-
Links.
Selling, general and administrative expenses increased 15.3% as a result
of increased maintenance costs, marketing and expatriate fees. Handset
subsidies totalled 2,208 million Naira with the average cost per unit
equal to 4,891 Naira, including inventory write-downs. The subsidy
reflects revenue minus cost of sales and is a negative value. These
subsidies reflect less about the operating business model and more about
the need to drive down higher than normal levels of inventory. These
inventory levels continue to reduce on a monthly basis with anticipated
seasonal demand to further accelerate the reduction. Whilst we expect
handset subsidies to be minimal in the 2010/11 financial year as most of
the voice handsets would have been dealt with by the financial year
ending March 31, 2010, there is still a risk of additional write downs if
anticipated seasonal demand does not materialise.
Key issues were identified that hampered Multi-Links`s customer
acquisition drive, the most significant of which was the management of
the dealers. Due to lack of both systems and staff, Multi-Links could not
properly account and manage the performance of each dealer or the
tracking of customer ongoing revenue generating potential. As a result,
management effort was spent on dispute resolution and dealer boycott
meetings to ensure an amenable relationship with our dealer partners. As
part of an investment in improving the distribution system, a new dealer
structure was put in place early in the financial year with the
appointment of a single super-dealer. The total commission paid into the
new distribution system increased 248%. During the first months of this
agreement all outstanding disputes with dealers were also settled which
accounts for the large increase in commission paid. The increased
commission has as yet not translated to increased revenue as there were
certain start up costs relating to the appointment of the super-dealer.
The super-dealer has expended effort in cleaning up the quality of sub
dealers that Multi-Links intends to use going forward and agreeing on
performance targets. In addition, the fact that Multi-Links now deals
with one super-dealer for handsets, data terminals and recharge cards
that are sold in the Nigerian market is system traceable until it is
retired. This has assisted in strengthening the integrity of the pipeline
to the end subscriber, thereby minimising risks surrounding equipment and
revenue leakages going forward.
Operating leases increased by 150.5% to 2,290 million Naira as a result
of the increased utilisation of leased infrastructure as opposed to owned
infrastructure, specifically as it relates to cell sites. This translates
to significant capital expenditure savings. Further savings to date have
been realised from contract renegotiation with other benefits and other
cost reductions realised from the management of staff costs.
Initiatives to reduce operational expenditure include the leasing of cell
sites, outsourcing of diesel supply and reductions on property leases. A
top priority is to speed up the deployment of capital work in progress by
identifying those assets that can be quickly commissioned. We continue to
renegotiate all supplier contracts.
The EBITDA margin reported at September 30, 2008 was negative 19.8%. A
negative 11.9% EBITDA margin was reported at March 31, 2009. Results to
the six months ended September 30, 2009 produced a negative 20.0% EBITDA
margin. However, the monthly trend of the EBITDA margin is on a positive
trajectory, with the latest month EBITDA coming in at single digit
negative territory.
Multi-Links reported an EBITDA loss of R164 million for the half year
period ended September 30, 2009.
The balance sheet of Multi-Links is such that it is over-geared and
unable to raise debt and creditor financing. Accordingly Multi-Links is
being recapitalized with preference share capital in order to enable the
company to repay existing debt and negotiate third party financing.
We continue to review all options with regard to consolidation and/or any
other opportunities in Nigeria to accelerate the turnaround of Multi-
Links.
Africa Online and MWEB Africa
The integration of Africa Online and MWEB Africa is proceeding well.
Full country reviews including local shareholders, regulatory
authorities, supplier and business contracts, tax evaluations, sale and
purchase agreements and restructuring plans are nearing completion. We
look forward to completing this process so that the integrated management
team can proceed with growing the business.
Guidance
Our target is to reduce operating expenditure by 10% by the 2011/12
financial year.
Capital expenditure for the Group is expected to range between 20% and
23% of revenue over the next financial year including the first year
impact of our mobile investment.
The targeted ceiling net debt to EBITDA is aimed at a maximum of 1.4
times.
Targets in a transforming industry such as ours are inherently risky,
particularly in later years and investors should not place undue reliance
on such targets. Our ability to meet such targets is subject to a number
of risks and uncertainties and there could be no assurance that we could
meet such targets. See the special note regarding forward-looking
statements.
4. FINANCIAL PERFORMANCE
The Telkom Group believes that adjusted earnings more accurately reflect
the Group`s operational performance. Headline earnings are adjusted to
exclude the effects of the sale and unbundling of our 50% share in
Vodacom, the changes to the Telkom Conditional Share Plan as a result of
the Vodacom transaction, the profit on sale of Telkom Media and the
impairment of the goodwill of Multi-Links. Unless otherwise indicated,
the discussion below is based on adjusted results, excluding the items
below, and is based on continuing operations.
The Nigerian operations reported EBITDA losses at similar levels to those
of September 2008. Trading conditions remain tough as a result of local
economic factors, pricing pressures, handset subsidies and newly
established distribution channels. The newly appointed distribution
agents are still at an early stage of establishing new distribution
channels and average revenues per subscriber remained low in an intensely
competitive market. The weaker Nigerian economy has placed increased
pressure on consumer spending.
The impact of the items discussed above on Group earnings for
the six month period is as follows:
Unusual item Line item affected Value
Profit on the sale of Other income R18,535 million
our 15% share in
Vodacom
Profit on the Gain on distribution R25,688 million
unbundling of our 35% of assets
share in Vodacom
Capital gains tax on Taxation R1,353 million
the sale and
unbundling
Secondary taxation on Taxation R977 million
companies (`STC`) on
the special dividend
relating to the sale
of Vodacom
Reversal of the Taxation R421 million
deferred tax asset
relating to capital
gains tax on the
Vodacom sale
Compensation expense Employee expenses R946 million
recognised in terms of
IFRS2 relating to the
amendment of the
Telkom Conditional
Share Plan
Impairment of goodwill Depreciation, R2,148 million
of Multi-Links Nigeria amortisation,
impairments and
write-offs
STC on the special Taxation R135 million
dividend declared
Fair value loss on the Foreign exchange and R166 million
Vodacom shares held fair value movement
Profit on disposal of Other income R68 million
Telkom Media
The statement of comprehensive income for the six months period ended
September 30, 2008 has been adjusted to remove the effects of elimination
of our 50% share in Vodacom, the impairment of the Africa Online
investment and the gain on the revaluation of the Multi-Links put option
to enable year on year comparison.
Reconciliation of adjusted group statement of comprehensive income
Effects
Reported of the Other
Continuing operations September Vodacom unusual
In ZAR millions 2008 transaction items
Operating revenue 17,598 393 -
Other income 211 - -
Operating expenses 13,805 771 (34)
Employee expenses 4,045 -
Payments to other 3,240 754 -
operators
Selling, general and 2,742 14 -
administrative expenses
Service fees 1,230 - -
Operating leases 357 3 -
Depreciation, 2,191 - (34)
amortisation, impairments
and write-offs
Results from operating 4,004 (378) 34
activities
Gain on distribution of - - -
assets
Investment income 124 - -
Finance charges and fair 693 - 146
value movements
Interest 891 - -
Foreign exchange and fair (198) - 146
value movement
Profit before taxation 3,435 (378) (112)
Taxation 1,065 - -
Profit from continuing 2,370 (378) (112)
operations
EBITDA
EBITDA margin (%)
Closing rate at beginning
of the period
Closing rate at end of the
period
Average Naira/Rand
exchange rate
Adjusted Effects
September Reported of the
Continuing operations 2008 September Vodacom
In ZAR millions (unaudited) 2009 Transaction
Operating revenue 17,991 18,706 -
Other income 211 18,811 (18,535)
Operating expenses 14,542 19,380 (946)
Employee expenses 4,045 5,341 (946)
Payments to other 3,994 4,269 -
operators
Selling, general and 2,756 3,330 -
administrative expenses
Service fees 1,230 1,340 -
Operating leases 360 474 -
Depreciation, 2,157 4,626 -
amortisation, impairments
and write-offs
Results from operating 3,660 18,137 (17,589)
activities
Gain on distribution of - 25,688 (25,688)
assets
Investment income 124 280 -
Finance charges and fair 839 793 (166)
value movements
Interest 891 748 -
Foreign exchange and fair (52) 45 (166)
value movement
Profit before taxation 2,945 43,312 (43,111)
Taxation 1,065 3,699 (2,751)
Profit from continuing 1,880 39,613 (40,360)
operations
EBITDA 5,817
EBITDA margin (%) 32.3
Average Naira/Rand N15.286
exchange rate
Closing rate at beginning N14.390
of the period
Closing rate at end of the N14.197
period
Adjusted
Other September
Continuing operations unusual 2009
In ZAR millions items (unaudited)
Operating revenue - 18,706 4.0
Other income (68) 208 (1.4)
Operating expenses (2,148) 16,286 12.0
Employee expenses - 4,395 8.7
Payments to other - 4,269 6.9
operators
Selling, general and - 3,330 20.8
administrative expenses
Service fees - 1,340 8.9
Operating leases - 474 31.7
Depreciation, (2,148) 2,478 14.9
amortisation, impairments
and write-offs
Results from operating 2,080 2,628 (28.2)
activities
Gain on distribution of - - -
assets
Investment income - 280 125.8
Finance charges and fair - 627 (25.3)
value movements
Interest - 748 (16.0)
Foreign exchange and fair - (121) 132.7
value movement
Profit before taxation 2,080 2,281 (22.5)
Taxation (135) 813 (23.7)
Profit from continuing 2,215 1,468 (21.9)
operations
EBITDA 5,106 (12.2)
EBITDA margin (%) 27.3 (15.5)
Average Naira/Rand N18.528 21.2
exchange rate
Closing rate at beginning N15.563 8.2
of the period
Closing rate at end of the N19.600 38.1
period
GROUP OPERATING REVENUE
Six months ended
September 30
In ZAR millions 2008 2009 %
Telkom South Africa 16,554 17,026 2.9
Multi-Links 813 818 0.6
Other International 63 234 271.4
MWEB Africa - 153 n/a
Africa Online 63 81 28.6
Other South African 600 660 10.0
Trudon 581 638 9.8
Corporate centre 19 22 15.8
Eliminations (39) (32) (17.9)
Total 17,991 18,706 4.0
Group operating revenue increased by 4.0% to R18,706 million (September
30, 2008: R17,991 million) in the six months ended September 30, 2009.
The increase is mainly due to higher revenue from Telkom South Africa and
the inclusion of revenue of our newly acquired MWEB Africa subsidiary.
Multi-Links` operating revenue increased by 23.3% to 15,325 million Naira
from September 2008. Voice revenue increased 16.8% to 14,125 million
Naira with traffic revenue improving 2.5% to 8,744 million Naira,
subscription and sales revenue decreasing 25.2% to 1,881 million Naira,
interconnect revenue increasing 78.2% to 1,874 million Naira and the
newly established hubbing revenue generating 1,626 million Naira. Multi-
Links`s increased focus on data services has resulted in revenues
increasing by 261.4% to 1,200 million Naira.
The relative strength of our reporting currency against the Nigerian
Naira has adversely affected the Rand revenue growth of the Nigerian
operations at a Telkom group level.
TELKOM SOUTH AFRICA OPERATING REVENUE
Six months ended
September 30
In ZAR millions 2008 2009 %
Subscriptions and connections 3,233 3,344 3.4
Traffic 7,833 7,126 (9.0)
Local 1,881 1,637 (13.0)
Long distance 1,048 923 (11.9)
Fixed-to-mobile 3,803 3,362 (11.6)
International outgoing 481 472 (1.9)
Subscription based calling 620 732 18.1
plans
Interconnection 956 1,458 52.5
Mobile 445 604 35.7
Fixed 36 96 166.7
International 475 758 59.6
Data 4,459 4,849 8.7
Leased lines and other 3,597 3,866 7.5
Mobile leased facilities 862 983 14.0
Other 73 249 241.1
Total 16,554 17,026 2.9
Operating revenue from the Telkom South Africa segment increased by 2.9%
to R17,026 million (September 30, 2008: R16,554 million) primarily due to
higher interconnection revenue, growth in data revenues, an increase in
revenue from subscriptions and connections and subscription based calling
plans, partially offset by lower traffic revenue.
Subscription and connections revenue grew by 3.4% to R3,344 million
(September 30, 2008: R3,233 million) largely as a result of increased
line rental tariffs.
Traffic revenue decreased by 9.0% as a result of the increasing
substitution of calls placed using mobile services rather than fixed-line
services and the acceleration of broadband adoption and the resultant
loss of internet dial-up minutes. This was partially offset by an
increase in revenue from subscription based calling plans by 18.1% to
R732 million primarily due to increased volumes as a result of a 24.9%
increase in the number of subscribers to 651,359 (September 30, 2008:
521,704) in the six months ended September 30, 2009.
Interconnection revenue increased by 52.5% to R1,458 million (September
30, 2008: R956 million) largely as a result of an increase of 59.6% in
international interconnection revenue, a 35.7% increase in mobile
interconnection revenue and a significant increase in domestic fixed-line
interconnection revenue. The increased interconnection revenue from
international operators is mainly a result of higher volumes on switched
hubbing due to increased volumes and a result of an agreement signed with
an operator in the United States to transit traffic mostly to African
destinations. The increase in mobile interconnection revenue was driven
by price increases on traffic destined for Zimbabwe. Fixed
interconnection revenue increased as a result of increased volumes by
VANS, Neotel and Sentech.
Data revenue increased by 8.7% to R4,849 million (September 30, 2008:
R4,459 million) mainly due to an increase in internet access and related
services, higher revenue from mobile leased lines and a growing demand
for data services, including ADSL.
Other revenue increased as a result of R153 million received from the
Department of Communications for the provisioning of the
telecommunications infrastructure for the FIFA World Cup. The
corresponding cost of R153 million is included in selling, general and
administrative expenses.
GROUP OTHER INCOME
Six months ended
September 30
In ZAR millions 2008 2009 %
Telkom South Africa 150 178 18.7
Multi-Links 3 2 (33.3)
Other South African 93 195 109.7
Trudon 29 27 (6.9)
Corporate centre 64 168 162.5
Eliminations (35) (167) 377.1
Total 211 208 (1.4)
Other income includes profit on the disposal of investments, property,
plant and equipment and intangible assets as well as interest received on
loans to subsidiaries. Adjusted group other income remained flat. The
increase in other income in the corporate centre was due to higher
interest received on the loans to Multi-Links, Africa Online and MWEB
Africa, which is eliminated on consolidation.
GROUP OPERATING EXPENSES
Six months ended
September 30
In ZAR millions 2008 2009 %
Employee expenses 4,045 4,395 8.7
Payments to other operators 3,994 4,269 6.9
Selling, general and 2,756 3,330 20.8
administrative expenses
Service fees 1,230 1,340 8.9
Operating leases 360 474 31.7
Depreciation, amortisation, 2,157 2,478 14.9
impairments and write-offs
Total 14,542 16,286 12.0
Group operating expenses increased by 12.0% to R16,286 million (September
30, 2008: R14,542 million) in the six months ended September 30, 2009,
due to an increase in selling, general and administrative expenses,
employee expenses, depreciation, payments to other operators and
operating leases. The increases in employee expenses, payments to other
operators and selling, general and administrative expenses are mainly
attributable to Telkom South Africa, the increase in service fees is
attributable to the corporate centre and the increase in operating leases
to Multi-Links. Depreciation increased as a result of increases in Telkom
South Africa as well as Multi-Links.
OPERATING EXPENDITURE CONTRIBUTION PER SEGMENT
Six months ended
September 30
In ZAR millions 2008 2009 %
Telkom South Africa 11,978 13,342 11.4
Multi-Links 1,081 1,191 10.2
Other International 168 275 63.7
MWEB Africa - 143 -
Africa Online 71 95 33.8
Telkom International 97 33 (66.0)
Telkom Management Services - 4 -
Other South African 1,377 1,505 9.3
Trudon 321 350 9.0
Corporate centre 1,056 1,155 9.4
Eliminations (62) (27) (56.5)
Total 14,542 16,286 12.0
The increase in group operating expenses was driven by an increase in the
operating expenses of Telkom South Africa and the corporate centre as
well as the inclusion of five months` operating expenses of our newly
acquired MWEB Africa subsidiary. Corporate centre operating expenses
increased as a result of higher consultant fees paid for the
implementation of our strategy and reorganisation of the Group through
Project Renaissance.
TELKOM SOUTH AFRICA OPERATING EXPENSES
Six months ended
September 30
In ZAR millions 2008 2009 %
Employee expenses 3,294 3,595 9.1
Salaries and wages 2,987 3,393 13.6
Benefits 655 486 (25.8)
Employee related expenses (348) (284) (18.4)
capitalised
Payments to other network 3,663 3,929 7.3
operators
Payment to mobile operators 2,807 2,524 (10.1)
Payment to international 726 1,273 75.3
operators
Payment to fixed-line operators 130 132 1.5
Selling, general and 1,733 2,274 31.2
administrative expenses
Materials and maintenance 1,021 1,206 18.1
Marketing 124 119 (4.0)
Bad debts 119 145 21.8
Other 469 804 71.4
Service fees 1,082 1,088 0.6
Property management 565 630 11.5
Consultants and security 517 458 (11.4)
Operating leases 325 326 0.3
Depreciation, amortisation, 1,881 2,130 13.2
impairment and write-offs
Depreciation 1,579 1,787 13.2
Amortisation 241 310 28.6
Impairments and write-offs 61 33 (45.9)
Total 11,978 13,342 11.4
Telkom South Africa`s operating expenses increased by 11.4% in the six
months ended September 30, 2009, to R13,342 million (September 30, 2008:
R11,978 million), primarily due to increased employee expenses, selling,
general and administrative expenses, payments to other network operators
and depreciation, amortisation, impairment and write-offs.
Employee expenses increased by 9.1% in the six months ended September 30,
2009 primarily due higher salaries and wages as a result of average
annual salary increases of 7.5% as agreed with the unions as well as the
one time adjustment to accelerate the elimination of disparities
translating to an 11.2% average increase for the bargaining unit.
Payments to other network operators increased by 7.3% as a result of
increased payments to international and fixed-line operators, partially
offset by lower payments to mobile operators. Payments to international
operators increased by 75.3% primarily due to the increase of volumes in
switched hubbing and international outgoing, as well as higher settlement
rates impacted by the mix of traffic destinations such as Zimbabwe.
Payments to mobile operators decreased by 10.1%, largely due to a 9.7%
decrease in fixed-to-mobile traffic volumes.
Selling, general and administrative expenses increased by 31.2% primarily
as a result of write downs and increased provisions of technology
obsolete inventory and items classified as slow moving inventory as a
result of the economic slow down. In addition, a contributing factor was
that high value stock orders had already been placed in order to service
the previously higher capital expenditure programme. A decision was made
to provide against these stock items as the capital cost of completing
the projects for which these items were ordered would outweigh the value
of inventory losses. Materials and maintenance expenses were also higher
during the period. From April 1, 2009, ICASA changed the base of
calculation of licence fees from 0.1% of revenue from PSTS and VANS to
1.5% of gross profit, which resulted in a R32 million increase in the
provision for the six months.
The 13.2% increase in the depreciation, amortisation, impairment and
write-offs to R2,130 million (September 30, 2008: R1,881 million) was
mainly as a result of higher depreciation due to the higher levels of
investment in telecommunications network equipment and data processing
equipment in recent years.
MULTI-LINKS OPERATING EXPENSES
Six months ended
September 30
In Naira millions 2008 2009 %
Employee expenses 558 1,138 103.9
Payments to other operators 4,813 5,131 6.6
Selling, general and administrative 8,427 9,718 15.3
expenses
Service fees 167 169 1.2
Operating leases 914 2,290 150.5
Depreciation, amortisation, 1,593 3,855 142.0
impairments and write-offs
Total 16,472 22,301 35.4
Employee expenses increased by 103.9% in the six months ended September
30, 2009 primarily due to the recruitment of new staff to fill strategic
positions in the period under review and the realignment and
restructuring of salaries. Staff levels have however been reduced from
those recorded at March 31, 2009.
Selling, general and administrative expenses increased 15.3% as a result
of increased maintenance costs, marketing and expatriate fees. Handset
subsidies totalled 2,208 million Naira with the average cost per unit
equal to 4,891 Naira, excluding inventory write-downs. These subsidies
reflect less about the operating business model and more about the need
to drive down higher than normal levels of inventory. These inventory
levels continue to reduce on a monthly basis with anticipated seasonal
demand to further accelerate the reduction. Whilst we expect handset
subsidies to be minimal in the 2010/11 financial year as most of the
voice handsets would have been dealt with by the financial year ending
March 31, 2009, there is still a risk of write-downs if anticipated
seasonal demand does not materialise.
Operating leases increased significantly as a result of the increased
utilisation of leased infrastructure as opposed to owned infrastructure,
specifically relating to cell sites.
Depreciation, amortisation, impairments and write-offs increased
significantly due to the high investment in IT assets to support the
expansion program and the network roll out during the period.
INVESTMENT INCOME
Investment income consists of interest received on short-term investments
and bank accounts. Investment income increased by 125.8% to R280 million
(September 30, 2008: R124 million), largely as a result of increased
short-term deposits.
FINANCE CHARGES AND FAIR VALUE MOVEMENTS
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains
and losses on financial instruments and foreign exchange gains and losses
on foreign currency denominated transactions and balances. Finance
charges and fair value movements decreased by 25.3% to R627 million
(September 30, 2008: R839 million) in the six months ended September 30,
2009, primarily due to a 16.0% decrease in interest expense to R748
million (September 30, 2008: R891 million) mainly as a result of the
53.2% decrease in Group`s net debt to R7.7 billion (September 30, 2008:
R16.4 billion) and lower interest rates. Net fair value and foreign
exchange rate movements resulted in a gain of R121 million for the six
months ended September 30, 2009 (September 30, 2008: R52 million). The
increase in the gain was mainly attributable to a fair value gain on the
mark to market valuation of investments held by our cell captive.
The balance sheet of Multi-Links is such that it is over-geared and
unable to raise debt and creditor financing. Accordingly Multi-Links is
being recapitalised with preference share capital in order to enable the
company to repay existing debt and negotiate third party financing.
From a Group perspective, Telkom`s loans to Multi-Links are accounted for
as part of the Group`s net investment in a foreign operation. Exchange
rate differences are therefore recognised in other comprehensive income
and reclassified from equity to profit and loss in the event of a
disposal of the net investment.
TAXATION
Consolidated tax expense from continuing operations decreased by 23.7% to
R813 million (September 30, 2008: R1,065 million) in the six months ended
September 30, 2009 due to lower profitability. The consolidated effective
tax rate for the six months ended September 30, 2009 was 35.6% (September
30, 2008:34.8%).
PROFIT FROM CONTINUING OPERATIONS
The following represents the respective company`s contribution after
eliminations to the consolidated profit from continuing operations.
Six months ended
September 30
In ZAR millions 2008 2009 %
Telkom Company including Cell 1,891 1,529 (19.1)
Captive
Multi-Links (235) (297) (26.4)
MWEB Africa - 5 -
Africa Online (8) (12) (50.0)
Telkom Management Services - (4) -
Trudon 232 247 6.5
Profit from continuing 1,880 1,468 (21.9)
operations
The decrease in profit from continuing operations was mainly attributable
to Telkom Company.
PROFIT FROM DISCONTINUED OPERATIONS
Six months ended
September 30
In ZAR millions 2008 2009 %
Vodacom 1,513 - -
Swiftnet 14 18 28.6
Telkom Media (82) 106 229.3
Total 1,445 124 (91.4)
The profit from Telkom Media includes the reversal of the onerous lease
liability.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The Group`s financial position remains strong. Net debt, after financial
assets and liabilities, from continuing operations and excluding Vodacom
at September 2008, decreased by 53.2% to R7,669 million (September 30,
2008: R16,404 million) resulting in an annualised net debt to EBITDA
ratio of 0.8 times from 1.4 times at September 30, 2008. On September 30,
2009, the Group had cash balances of R3.1 billion (September 30, 2008:
R279 million excluding Vodacom).
The proceeds retained from the Vodacom transaction contributed to the
improvement. Telkom Company repaid R820 million of the revolving
syndicated loan during the six months ended September 30, 2009. The
Company issued commercial paper bills with a nominal value of R2,260
million for the six months ended September 30, 2009 and commercial paper
bills with a nominal value of R7,319 million were repaid by September 30,
2009. These financing facilities remain available to Telkom.
FREE CASH FLOW
The Group`s cash flow for the six month period include R20.6 billion
proceeds received on the sale of our 15% stake in Vodacom, taxation paid
relating to the Vodacom transaction and special dividend of R1.8 billion.
Excluding the effects of the above, the group`s free cash flow amounted
to R611 million.
Dividends paid amounted to R11.2 billion which includes the R19.00 per
share dividend relating to the Vodacom transaction and the special
dividend of R2.60 per share.
GROUP CAPITAL EXPENDITURE
Group capital expenditure which includes spend on intangible assets,
decreased by 39.4% to R2,755 million (September 30, 2008: R4,544 million)
and represents 14.7% of Group revenue (September 30, 2008: 25.3%).
Six months ended
September 30
In ZAR millions 2008 2009 %
Telkom South Africa 2,721 1,924 (29.3)
Multi-Links 1,770 709 (59.9)
Other International - 25 -
Africa Online - 21 -
Telkom International - 4 -
Other South African 53 97 83.0
Trudon 30 28 (6.7)
Corporate centre 23 69 200.0
Total 4,544 2,755 (39.4)
The decrease in capital expenditure was driven by a decrease in the
capital expenditure of Multi-Links and Telkom South Africa.
TELKOM SOUTH AFRICA CAPITAL EXPENDITURE
Six months ended
September 30
In ZAR millions 2008 2009 %
Baseline 1,512 1,158 (23.4)
Revenue generating 9 1 (88.9)
Network evolution 607 390 (35.7)
Sustainment 39 16 (59.0)
Effectiveness and efficiency 400 193 (51.8)
Support 154 153 (0.6)
Regulatory and other 13 -
Total 2,721 1,924 (29.3)
Telkom South Africa`s capital expenditure, which includes spending on
intangible assets, decreased by 29.3% to R1,924 million (September 30,
2008: R2,721 million) and represents 11.3% of Telkom South Africa`s
revenue (September 30, 2008: 16.4%). Baseline capital expenditure of
R1,158 million (September 30, 2008: R1,512 million) was largely for the
deployment of technologies to support the growing data services business
(including the ADSL footprint), links to the mobile cellular operators
and expenditure for access line deployment in selected high growth
commercial and business areas. The lower expenditure for the period can
be attributed to a more measured approach to the rollout of
infrastructure to meet short-term demand and revenue generating services.
The continued focus on rehabilitating the access network and increasing
the efficiencies and reducing redundancies in the transport network as
well as the initiation of the fixed-wireless roll-out contributed to the
network evolution and sustainment capital expenditure of R406 million
(September 30, 2008: R646 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 and property
optimisation. During the six months ended September 30, 2009, R193
million (September 30, 2008: R400 million) was spent on the
implementation of several systems.
AUDITORS` REVIEW REPORT
Our auditors, Ernst & Young Inc. have reviewed the condensed consolidated
interim financial statements. The unmodified review report is available
for inspection at the Company`s registered office.
Condensed consolidated interim statement of comprehensive income
for the six months ended September 30, 2009
Restated* Restated* Reviewed
March September September
31 30 30
2009 2008 2009
Note Rm Rm Rm
Continuing operations
Total revenue 3 36,433 17,922 19,169
Operating revenue 35,940 17,598 18,706
Other income 20 343 211 18,811
Operating expenses 29,537 13,805 19,380
Employee expenses 7,987 4,045 5,341
Payments to other 6,919 3,240 4,269
operators
Selling, general and 5,772 2,742 3,330
administrative expenses
Service fees 2,756 1,230 1,340
Operating leases 823 357 474
Depreciation, 4 5,280 2,191 4,626
amortisation, impairment
and write-offs
Results from operating 6,746 4,004 18,137
activities
Investment income 181 124 280
Gain on distribution of 20 - - 25,688
non-cash asset
Finance charges and fair 2,843 693 793
value movements
Interest 1,732 891 748
Foreign exchange and 1,111 (198) 45
fair value movement
loss/(gain)
Profit before taxation 4,084 3,435 43,312
Taxation 5 1,769 1,065 3,699
Profit from continuing 2,315 2,370 39,613
operations
Profit from discontinued 2,181 1,445 124
operations
Profit for the 4,496 3,815 39,737
year/period
Other comprehensive
income
Exchange differences on 6 30 84 (1,587)
translating foreign
operations
Exchange differences - - (189)
realised
Available-for-sale 6 (8) - 8
financial assets
Defined benefit plan 6 (1,824) (1,694) 732
actuarial (losses)/gains
Defined benefit plan 6 941 924 (722)
asset limitations
Income tax relating to 6 244 212 323
components of other
comprehensive income
Other comprehensive (617) (474) (1,435)
income for the
year/period (net of
taxation)
Total comprehensive 3,879 3,341 38,302
income
Profit attributable to:
Owners of Telkom 4,419 3,752 39,661
Non-controlling 77 63 76
interest
Profit for the 4,496 3,815 39,737
year/period
Total comprehensive
income attributable to:
Owners of Telkom 3,804 3,284 38,226
Non-controlling 75 57 76
interest
Total comprehensive 3,879 3,341 38,302
income for the
year/period
Total operations
Basic earnings per share 7 882.6 749.8 7,882.0
(cents)
Diluted earnings per 7 868.5 741.8 7,865.5
share (cents)
Dividend per share 7 660.0 660.0 375.0
(cents)
Continuing operations
Basic earnings per share 7 457.4 469.2 7,857.3
(cents)
Diluted earnings per 7 449.9 464.2 7,841.2
share (cents)
* The amounts have been restated for the effect of the discontinued
operations and disposal groups held for sale as well as the change in
accounting policy for the defined benefit plan, refer to note 2.
Condensed consolidated interim statement of financial position
at September 30, 2009
Restated Restated Reviewed
March September September
31 30 30
2009 2008 2009
Note Rm Rm Rm
ASSETS
Non-current assets 51,010 60,225 47,477
Property, plant and 9 41,418 49,024 41,086
equipment
Intangible assets 9 7,232 8,456 4,602
Deferred taxation 10 756 688 84
Other non-current assets 1,604 2,057 1,705
Current assets 11,287 12,449 13,888
Inventories 11 1,974 1,755 1,938
Income tax receivable 91 100 1
Trade and other 5,980 9,164 6,731
receivables
Cash and cash 1,931 705 3,134
equivalents
Other current assets 1,311 725 2,084
Assets of disposal 23,482 53 77
groups classified as
held for sale
Total assets 85,779 72,727 61,442
EQUITY AND LIABILITIES
Equity attributable to 34,642 31,983 32,335
owners of the parent
Share capital 5,208 5,208 5,208
Treasury shares 12 (1,517) (1,522) (1,170)
Share-based compensation 13 1,076 938 1,852
reserve
Non-distributable 1,758 1,342 528
reserves
Retained earnings 27,241 26,017 25,917
Reserves of disposal 876 - -
groups classified as
held for sale
Non-controlling 853 578 321
interests
Total equity 35,495 32,561 32,656
Non-current liabilities 16,959 17,391 14,057
Interest-bearing debt 14 10,653 10,692 7,950
Deferred taxation 10 1,204 1,418 938
Other non-current 5,102 5,281 5,169
liabilities
Current liabilities 17,452 22,715 14,714
Trade and other payables 5,538 8,117 5,313
Shareholders for 23 24 36
dividend
Current portion of 14 7,622 6,767 4,430
interest-bearing debt
Income tax payable 50 475 881
Credit facilities 127 1,882 162
utilised
Other current 4,092 5,450 3,892
liabilities
Liabilities of disposal 15,873 60 15
groups classified as
held for sale
Total liabilities 50,284 40,166 28,786
Total equity and 85,779 72,727 61,442
liabilities
Condensed consolidated interim statement of changes in equity
for the six months ended September 30, 2009
Restated Restated Reviewed
March September September
31 30 30
2009 2008 2009
Note Rm Rm Rm
Balance at April 1 33,337 33,337 35,495
Attributable to owners 32,815 32,815 34,642
of Telkom
Non-controlling 522 522 853
interests
Change in accounting (1,226) (1,226) -
policy
Restated opening balance 32,111 32,111 35,495
Total comprehensive 3,879 3,341 38,302
income for the
year/period
Profit for the 4,496 3,815 39,737
year/period
Other comprehensive (617) (474) (1,435)
income
Exchange differences on 24 81 (1,261)
translating foreign
operations
Exchange differences - - (189)
realised
Available-for-sale (8) - 8
investment
Net defined benefit plan (633) (555) 7
losses
Dividend declared (3,339) (3,332) (41,711)
Increase in share-based 14 554 411 1,123
compensation reserve
Acquisition of 667 - -
subsidiaries
Put option 661 - -
Reserves derecognised on - - (553)
disposal of Vodacom
Reversal of at - 30 -
acquisition contingent
liability
Broad-based black 962 - -
economic empowerment
transaction in Vodacom
Balance at March 35,495 32,561 32,656
31/September 30
Attributable to owners 34,642 31,983 32,335
of Telkom
Non-controlling 853 578 321
interests
Condensed consolidated interim statement of cash flow
for the six months ended September 30, 2009
Audited Reviewed Reviewed
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
Cash flows from operating 11,432 3,033 (9,211)
activities
Cash receipts from customers 61,302 29,710 17,814
Cash paid to suppliers and (40,908) (21,360) (13,693)
employees
Cash generated from operations 20,394 8,350 4,121
Interest received 485 299 280
Finance charges paid (2,164) (337) (313)
Taxation paid (3,947) (1,951) (2,067)
Cash generated from operations 14,768 6,361 2,021
before dividend paid
Dividend paid (3,336) (3,328) (11,232)
Cash flows from investing (17,005) (5,262) 17,400
activities
Proceeds on disposal of 43 23 30
property, plant and equipment
and intangible assets
Proceeds on disposal of - - 20,599
investment
Additions to property, plant and (13,191) (5,131) (3,044)
equipment and intangible assets
Acquisition of subsidiaries and (3,778) - (185)
minorities
Additions to other investments (79) (154) -
Cash flows from financing 7,093 1,254 (6,997)
activities
Loans raised 18,168 10,105 2,710
Loans repaid (10,212) (9,127) (8,503)
Finance lease capital repaid (136) (14) (329)
(Increase)/decrease in net (727) 290 (875)
financial assets
Net increase/(decrease) in cash 1,520 (975) 1,192
and cash equivalents
Net cash and cash equivalents at (208) (208) 1,780
beginning of year*
Effect of foreign exchange rate (30) 6 -
differences
Net cash and cash equivalents at 1,282 (1,177) 2,972
end of year/period
* Net cash and cash equivalent 1,282
as previously reported
Cash and cash equivalents in 522
disposal groups
Adjusted cash and cash 1,804
equivalents at the beginning of
the year
Cash and cash equivalents in (24)
disposal groups
Cash and cash equivalents 1,780
Notes to the condensed consolidated interim financial statements
for the six months ended September 30, 2009
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 and its subsidiaries (`the Group`)
is to supply telecommunication, broadcasting, multimedia, technology,
mobile communication, information and other related information
technology services in South Africa and certain other African countries.
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 Listings Requirements of the JSE Limited and 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 grant date
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, 2009.
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
Except as described below, the accounting policies applied by the Group
in the interim financial statements are consistent with those applied in
the previous financial year.
IFRS3 Business combinations
The Group has early adopted IFRS3 Business Combinations (revised) and
IAS27 Consolidated and Separate Financial Statements (revised) for
business combinations occurring in the financial reporting period
starting April 1, 2009. All business combinations occurring on or after
April 1, 2009 were accounted for by applying the acquisition method as
disclosed in Note 15.
The Group measures goodwill at the fair value of the consideration
transferred including the recognised amount of any non-controlling
interest in the acquiree, less the net recognised amount of identifiable
assets acquired and liabilities assumed, all measured as of the
acquisition date.
The consideration transferred includes the fair value of the assets
transferred, the liabilities incurred by the Group to the previous owners
of the acquiree and equity interest issued by the Group. Consideration
transferred also includes any contingent consideration at fair value.
Any transaction costs that the Group incurs in connection with the
business combination such as legal fees, due diligence fees and other
professional and consultation fees are expensed as incurred.
A contingent liability of the acquiree is assumed in a business
combination only if such a liability represents a present obligation
which arises as a result of a past event, and its fair value can be
measured reliably.
The change in accounting policy was applied prospectively and had no
impact on earnings per share.
IAS27 Consolidated and Separate Financial Statements
The Group has adopted IAS27 (revised) for the acquisition of non-
controlling interests occurring in the financial period starting April 1,
2009. In terms of the new accounting policy, acquisitions of non-
controlling interest are accounted for as transaction with equity holders
in their capacity as equity holders and therefore no goodwill is
recognised as a result of such transactions. Previously goodwill was
recognised arising on the acquisition of non-controlling interest in the
subsidiary, and that represented the excess of the cost of the additional
investment over the carrying amount of the interest in the net assets
acquired at the date of the exchange.
The change in accounting policy was applied prospectively and had no
impact on earnings per share.
IFRS8 Operating Segments
As of April 1, 2009, the Group determines and presents operating segments
based on the information that is internally provided to the Executive
Committee, which is the Group`s chief operating decision maker. This
change in accounting policy is due to the adoption of IFRS8 Operating
Segments. The impact is disclosed in note 18.
The Executive Committee assesses the performance of the operating
segments based on a measure of adjusted earnings before interest and tax
(`EBIT`). This measurement basis excludes the effects of non-operating
expenditure from the operating segments, such as restructuring costs,
legal expenses and impairments. Other information provided to them is
measured in a manner consistent with that in the financial statements.
IAS1 Presentation of Financial statements
IAS1 (revised) introduces a statement of comprehensive income, previously
the income statement, with two optional formats and refers to the balance
sheet and cash flow statement by different names: the `statement of
financial position` and `statement of cash flows`, respectively. The
Group has elected to present the statement of comprehensive income using
the single statement approach.
The Group presents all owner changes in equity under the consolidated
statement of changes in equity. All non-owner changes in equity are
presented in the statement of comprehensive income under other
comprehensive income.
The presentation of comparatives information has been changed in order to
comply with the new revised standard.
There is no impact on earnings per share since the standard focuses on
presentation issues.
IAS19 Employee Benefits
As of April 1, 2009, the Group changed its accounting policy on defined
benefits by adopting the option available under IAS 19 Employee Benefits,
paragraph 93A. Under this option, actuarial gains and losses are
recognised in other comprehensive income in the period in which they
occur. The Group believes that recognising actuarial gains and losses in
other comprehensive income results in better disclosure in the statement
of financial position.
The impact of the change in accounting policy has been retrospectively
applied in accordance with IAS8 Accounting Policies, Changes in
Accounting Estimates and Errors. The financial quantification of this
change is disclosed below.
Balance as Balance
previously Employee as
reported benefits restated
Rm Rm Rm
Change in accounting policy
September 30, 2008
Statement of Comprehensive
Income
Employee costs 4,228 (183) 4,045
Taxation 1,010 55 1,065
Other comprehensive income
Defined benefit plan actuarial - 1,694 1,694
gains and losses
Asset limitation - (924) (924)
Tax effect on defined benefit - (474) (474)
plan actuarial gains and losses
Tax effect on asset limitation - 259 259
Statement of Financial Position
Equity
Restated retained earnings 27,670 (1,653) 26,017
Non-current liabilities
Provisions 1,846 2,294 4,140
Deferred tax liability 2,060 (642) 1,418
March 31, 2009
Statement of Comprehensive
Income
Employee costs 8,345 (358) 7,987
Taxation 1,660 109 1,769
Other comprehensive income
Defined benefit plan actuarial - 1,824 1,824
losses
Asset limitation - (941) (941)
Tax effect on defined benefit - (513) (513)
plan actuarial losses
Tax effect on asset limitation - 263 263
Statement of Financial Position
Equity
Restated retained earnings 28,852 (1,611) 27,241
Non-current liabilities
Provisions 1,875 2,230 4,105
Deferred tax liability 1,823 (619) 1,204
IFRIC17 Distributions of Non-Cash Assets to Owners
IFRIC17 provides guidance on when and how a liability for certain
distributions of non-cash assets to owners, acting in their capacity as
owners, are recognised and measured, and how to account for settlement of
that liability.
The Group has early adopted IFRIC17 as well as specific paragraphs of
IFRS5 as amended by IFRIC17. The amendments specify that a non-current
asset or disposal group held for distribution to owners of the entity
shall be accounted for in accordance with the provisions of the amended
IFRS5.
The Vodacom 35% interest unbundling transaction was accounted for in
accordance with the requirements of the new interpretation IFRIC17 and
had a material impact on the Group financial statements as disclosed in
note 20.
Circular 3/2009 Headline Earnings
Circular 3/2009 Headline Earnings was issued by the South African
Institute of Chartered Accountants (`SAICA`) and is effective for
financial periods (interim and/or annual periods) ending on or after
August 31, 2009.
Circular 3/2009 supercedes Circular 8/2007, as it updates the latter with
the amendments and revisions to International Financial Reporting
Standards (`IFRS`) issued between June 2007 and April 2009. The only
changes to Circular 8/2007 are some of the detailed rules in Section C
for amendments and revisions to specific IFRSs, as well as the new
terminology brought in by IAS1 Presentation of Financial Statements.
The following new standards, amendments to standards and interpretations
which are mandatory for financial periods beginning January 1, 2009 do
not have an impact on the Group:
IFRS1 and IAS27 (amendment) Cost of an Investment on First Time Adoption
IFRS2 (amendment) Vesting Conditions
IFRS7 (amendment) Improving disclosures about financial instruments
IAS1 (revised) Presentation of Financial Statements - Amendments relating
to disclosure of puttable instruments and obligations arising on
liquidation
IAS16 (amendment) Property, Plant and Equipment - Recoverable amount
IAS16/IAS7 (amendment) Property, Plant and Equipment - Sale of assets
held for rental
IAS19 (amendment) Employee Benefits
IAS20 (amendment) Government Grants
IAS23 (amendment) Borrowing Costs
IAS28/IAS32/IFRS7 (amendment) Investments in Associates - Consequential
amendments arising from amendments to IFRS3
IAS28 (amendment) Investment in Associates - Impairment testing
IAS31/IAS32/IFRS7 (amendment) Interest in Joint Ventures - Consequential
amendments arising from amendments to IFRS3
IAS32/IAS1 (amendment) Puttable Financial Instruments and Obligations
Arising on Liquidation
IAS39 (amendment) Financial Instruments: Recognition and Measurement
IFRIC13 Customer Loyalty Programmes
IFRIC15 Agreements for the Construction of Real Estate
IFRIC16 Hedges of a Net Investment in a Foreign Operation
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
3. TOTAL REVENUE 36,433 17,922 19,169
Operating revenue 35,940 17,598 18,706
Other income (excluding profit on 312 200 183
disposal of property, plant and
equipment and investments)
Investment income 181 124 280
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
4. DEPRECIATION, AMORTISATION, 5,280 2,191 4,626
IMPAIRMENT AND WRITE-OFFS
Depreciation of property, plant and 3,733 1,800 2,085
equipment
Amortisation of intangible assets 724 269 359
Impairment of property, plant and 501 35 2,148
equipment and intangible assets
Write-offs of property, plant and 322 87 34
equipment and intangible assets
The impairment charge of R2,148 million for September 2009 relates to the
goodwill impairment of Multi-Links.
5. TAXATION 1,769 1,065 3,699
South African normal company 1,767 917 2,067
taxation
Deferred taxation (164) (15) 721
Secondary Taxation on Companies 164 163 911
(`STC`)
Foreign taxation 2 - -
Included in the current period`s normal company taxation and deferred
taxation expense is capital gains tax of R1,345 million and the reversal
of R421 million relating to the deferred taxation asset on the
investments which were held for sale.
STC is provided for at a rate of 10% on the amount by which dividends
declared by Telkom exceeds dividends received.
Included in the STC current period expense is the impact of the Vodacom
transaction dividend.
6. TAXATION EFFECTS OF OTHER
COMPREHENSIVE INCOME
Tax effects relating to each
component of other comprehensive
income
Exchange differences on translating 30 84 (1,587)
foreign operations
Tax effect of exchange differences (6) (3) 326
on translating foreign operations
Net foreign currency translation 24 81 (1,261)
differences for foreign operations
Exchange differences realised - - (189)
Tax effect of exchange differences - - -
realised
Net exchange differences realised - - (189)
Available-for-sale financial assets (8) - 8
Tax effect of available-for-sale - - -
financial assets
Net available-for-sale financial (8) - 8
assets
Defined benefit plan actuarial (1,824) (1,694) 732
(losses)/gains
Tax effect of defined benefit plan 513 474 (205)
actuarial balance
Net defined benefit plan actuarial (1,311) (1,220) 527
(losses)/gains
Defined benefit plan asset 941 924 (722)
limitations
Tax effect of defined benefit plan (263) (259) 202
asset limitations
Net defined benefit plan asset 678 665 (520)
limitations
Other comprehensive income for the (861) (686) (1,758)
year/period before tax
Tax effect of other comprehensive 244 212 323
income for the year/period
Other comprehensive income for the (617) (474) (1,435)
year/period net of tax
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
7. EARNINGS AND DIVIDEND
PER SHARE
Total operations
Basic earnings per share 882.6 749.8 7,882.0
(cents)
Diluted earnings per 868.5 741.8 7,865.5
share (cents)
Headline earnings per 1,044.3 771.2 (139.1)
share (cents)
Diluted headline earnings 1,027.7 763.0 (138.8)
per share (cents)
Continuing operations
Basic earnings per share 457.4 469.2 7,857.3
(cents)
Diluted earnings per 449.9 464.2 7,841.2
share (cents)
Basic headline earnings 606.7 488.2 (163.8)
per share (cents)
Diluted headline earnings 597.1 483.0 (163.4)
per share (cents)
Reconciliation of
weighted average number
of ordinary shares:
Ordinary shares in issue 520,784,186 520,784,186 520,783,900
Weighted average number (27) - -
of shares bought back
Weighted average number (20,083,621) (20,408,368) (17,596,506)
of treasury shares
Weighted average number 500,700,538 500,375,818 503,187,394
of shares outstanding
Reconciliation of diluted
weighted average number
of ordinary shares:
Weighted average number 500,700,538 500,375,818 503,187,394
of shares outstanding
Expected future vesting 8,082,103 5,398,009 1,031,110
of shares
Diluted weighted average 508,782,641 505,773,827 504,218,504
number of shares
outstanding
Total operations
Reconciliation between
earnings and headline
earnings:
Profit attributable to 4,419 3,752 39,661
equity holders of Telkom
Adjustments:
Profit on disposal of - - (18,605)
investment
Profit on disposal of (25) (7) (24)
property, plant and
equipment and intangible
assets
Impairment of property, 557 45 2,148
plant and equipment and
intangible assets
Write-offs of property, 322 87 34
plant and equipment
Gain on distribution of - - (25,688)
non-cash asset
Tax effects (44) (18) 1,774
Headline earnings 5,229 3,859 (700)
Continuing operations
Reconciliation between
earnings and headline
earnings:
Profit from continuing 2,315 2,370 39,613
operations
Non-controlling interest (26) (22) (76)
Earnings as reported 2,289 2,348 39,537
Adjustments:
Profit on disposal of - - (18,605)
investment
Profit on disposal of (32) (11) (24)
property, plant and
equipment and intangible
assets
Impairment of property, 501 34 2,148
plant and equipment and
intangible assets
Write-offs of property, 322 87 34
plant and equipment
Gain on distribution of - - (25,688)
non-cash asset
Tax effects (42) (15) 1,774
Headline earnings 3,038 2,443 (824)
Discontinued operations
Reconciliation between
earnings and headline
earnings:
Profit from discontinued 2,181 1,445 124
operations
Non-controlling interest (51) (41) -
Earnings as reported 2,130 1,404 124
Adjustments:
Profit on disposal of 7 4 -
property, plant and
equipment and intangible
assets
Impairment of property, 56 11 -
plant and equipment and
intangible assets
Tax effects (2) (3) -
Headline earnings 2,191 1,416 124
Dividend per share 660.0 660.0 375.0
(cents)
The calculation of
dividend per share is
based on dividends of
R1,894 million (September
30, 2008: R3,306 million;
March 31, 2009: R3,306
million) and 505,008,190
(September 30, 2008:
500,941,029; March 31,
2009: 500,941,029) 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.
Vodacom dividend - - 7,750.0
The Vodacom dividend
consisted of a once off
cash dividend of 1,900.0
cents per share totalling
R9,740 million and a 35%
unbundling share valued
at 5,850.0 cents per
share with a total value
of R29,990 million.
8. NET ASSET VALUE PER 6,914.7 6,391.8 6,402.9
SHARE (cents)
The calculation of net asset value per share is based on net
assets of R32,335 million (September 30, 2008: R31,983 million;
March 31, 2009: R34,642 million) and 505,008,190 (September 30,
2008: 500,375,818; March 31, 2009: 500,993,664) number of ordinary
shares outstanding at period end.
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
9. CAPITAL EXPENDITURE
INCURRED
Property, plant and 8,725 5,585 2,616
equipment
Intangible assets 2,215 587 687
(including business
combinations)
A major portion of this capital expenditure relates to
theexpansion of existing networks to provide capacity forgrowth in
services with focus on the Next GenerationNetwork technologies.
Included in the additions of intangible assets for the current
period is an amount of R548 million recognised as a result of the
acquisition of MWEB Africa Limited and MWEB Namibia (Proprietary)
Limited.
10. DEFERRED TAXATION (448) (730) (854)
Deferred tax assets 756 688 84
Deferred tax liabilities (1,204) (1,418) (938)
Unutilised Secondary 2,730 1,603 29
Taxation on Companies
(`STC`) credits
The decrease in the deferred tax asset is due to a reversal of a
previously recognised asset relating to the Vodacom transaction.
The deferred taxation asset also includes STC credits on past
dividends received that are available to be utilised against
dividends declared.
11. INVENTORIES 1,974 1,755 1,938
Gross inventories 2,165 2,007 2,232
Write-down of inventories (191) (252) (294)
to net realisable value
Inventory levels have increased due to the roll out of the Next
Generation Network. The write-down of inventory has increased due
to stock obsolescence.
12. TREASURY SHARES (1,517) (1,522) (1,170)
At September 30, 2009 7,632,154 (September 30, 2008: 8,994,097;
March 31, 2009: 11,646,680) and 8,143,556 (September 30, 2008:
10,849,058; March 31, 2009: 10,849,058) ordinary shares in Telkom,
with a fair value of R330 million (September 30, 2008: R945
million; March 31, 2009: R1,229 million)and R352 million
(September 30, 2008: R1,140 million; March 31, 2009: R859 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 and Acajou
Investments (Proprietary) Limited are reserved for issue in terms
of the Telkom Conditional Share Plan (`TCSP`).
The reduction in the number of treasury shares is due to 4,014,526
(September 30, 2008: 1,551,963; March 31, 2009: 1,551,963) shares
that vested in terms of theTCSP during the six months ended
September 30, 2009.
13. SHARE-BASED COMPENSATION RESERVE
This reserve represents the cumulative grant date fair value of
the equity-settled share-based payment transactions recognised in
employee expenses during the vesting period of the equity
instruments granted to employees in terms of the Telkom
Conditional Share Plan.
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
conditionsbeing met. The related compensation expense is
recognised over the vesting period of the shares granted,
commencing on the grant date.
The following table illustrates the movement within the Share-
based compensation reserve:
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
Balance at beginning of 643 643 1,076
year/period
Net increase in equity 433 295 776
Employee cost* 554 411 1,123
Vesting and transfer of (121) (116) (347)
shares
Balance at end of 1,076 938 1,852
year/period
* The increase in employee costs for September 30, 2009 is due to
the modification of the Telkom Conditional Share Plan.
The principal assumptions used in calculating the expected number
of shares that will vest are as follows:
Employee turnover (%) 9 5 9
Meeting specified 75 100 100
performance criteria -
all remaining vesting (%)
At September 30, 2009 the estimated total compensation expense to
be recognised over the vesting period was R1,658 million
(September 30, 2008: R2,151 million; March 31, 2009: R1,824
million), of which R177 million (September 30, 2008: R411 million;
March 31, 2009: R554 million) was recognised in employee expenses
for the six months ended September 30, 2009.
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
14. INTEREST-BEARING DEBT
Non-current portion of 10,653 10,692 7,950
interest-bearing debt
Local debt 9,114 8,419 6,831
Foreign debt 589 746 184
Finance leases 950 1,527 935
Current portion of 7,622 6,767 4,430
interest-bearing debt
Local debt 7,546 5,684 4,393
Foreign debt 40 970 -
Finance leases 36 113 37
Movements in borrowings
for the period are as
follows:
Repayments/financing
Telkom repaid R820 million of the syndicated loan during the
current interim period. Commercial Paper Bills with a nominal
value of R2,260 million were issued and Commercial PaperDebt with
a nominal value of R7,319 million was repaid during the interim
period ended September 30, 2009.
The R4,430 million nominal value of the current portion of
interest-bearing debt as at September, 30 2009 is expected to be
repaid/refinanced from cash flow from operations and the issue of
new debt instruments upon maturity.
Management believes that sufficient funding facilities will be
available at the date of repayment/refinancing.
15. ACQUISITION OF SUBSIDIARIES
MWEB Africa Limited and MWEB Namibia (Proprietary) Limited
Telkom International (Proprietary) Limited, a wholly owned
subsidiary of Telkom SA Limited, acquired 100% of MWEB Africa
Limited from Multichoice Africa Limited, and 75% of MWEB Namibia
(Proprietary) Limited from MIH Holdings Limited effective April
21, 2009. Both Multichoice Africa Limited and MIH Holdings Limited
are members of the Naspers Limited Group.
The acquisition of MWEB is part of the Group`s strategy of growing
its broadband and solidifying its market position through
acquisitions.
The goodwill from the acquisition is partially attributable to the
following:
- Certain licences that could not be valued separately from the
MWEB group, but contribute significantly to goodwill as the MWEB
business would cease to exist without the licence rights.
- The skills and technical talent of the acquired business`s
workforce, and the synergies expected to be achieved from
integrating the acquiree into the Group`s existing internet
service provision.
The goodwill is also attributable to the MWEB Group`s position as
Africa`s largest satellite-based internet service provider in Sub-
Saharan Africa.
The purchase price paid by Telkom International was USD55 million
determined as follows:
- USD1.5 million for the Namibian Cash Generating Unit
- USD53.5 million for the Mauritian Cash Generating Unit
The fair value of the assets and liabilities acquired were
determined as follows:
Net assets acquired 94
Fair value of intangible assets 83
Deferred tax on intangible assets (20)
Fair value of net assets 157
Goodwill on acquisition 28
Purchase price for net asset fair value 185
Acquisition of loans receivable 312
Purchase price 497
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
16. COMMITMENTS
Capital commitments
Capital commitments 7,928 14,600 5,532
authorised
Commitments against 1,393 7,015 1,210
authorised capital
expenditure
Authorised capital 6,535 7,585 4,322
expenditure not yet
contracted
Capital commitments
comprise commitments for
property, plant and
equipment and software
included in intangible
assets.
The decrease in capital
commitments for September
30,2009 is due to the
exclusion of Vodacom
(September 2008:R3,987
million).
17. CONTINGENCIES
Supplier dispute
Supplier dispute 664 603 565*
liability included in
current portion of
provisions
*USD75 million
There is a dispute between Telkom and Telcordia arising from the
development and installation of an integrated end to end customer
assurance and activation system, which was supposed to have been supplied
by Telcordia.
The agreement was terminated in the 2001 financial year and the dispute
was taken to arbitration where Telcordia was seeking approximately US$130
million plus interest at a rate of 15.5% per year for money outstanding
and damages.
A number of hearings took place during the 2008 and 2009 financial year
without success.
Telkom has in the interim also requested a referral to the independent
third party expert of the technical issues arising from the systems
integration amendment. A hearing surrounding the technical issues has
been held during the period November 3 - 21, 2008 where the independent
expert released his report and recommended that some aspects of
Telcordia`s claim be reduced. The arbitrator has not made a final
decision in this regard.
The parties have agreed to argue the issue of systems integration at an
experts-only hearing before the independent expert, which hearing
commenced on October 2, 2009. The final evidentiary hearing will be held
over a two week period in January 2010 and February 2010.
A provision has been recognised based on management`s best estimate of
the probable payments in this regard.
Competition Commission
Independent Cellular Service Providers` Association of South Africa
(`ICSPA`)
In 2002, the Independent Cellular Service Providers` Association of South
Africa (`ICSPA`) filed a complaint against Telkom at the Competition
Commission (the `CC`) in terms of the Competition Act, alleging that
Telkom had entered into contracts with big corporations, providing large
discounts with the effect of discouraging the corporates from using the
"premicell" device installed by their members. ICSPA also alleged various
contraventions of the Competition Act by Telkom.
Telkom provided the CC with certain information requested, and also
referred the CC to Telkom`s High Court application in respect of
utilisation of the "premicell" device. The CC declined to refer the
matter to the Competition Tribunal (the `CT`). The complainant itself
then referred the matter to the CT on September 18, 2003 but has done
nothing since, notwithstanding the fact that Telkom filed its answering
affidavit on November 28, 2003.
The South African Value Added Network Services (`SAVA`)
Telkom`s application for review against the CC and the CT in the High
Court was successful and the decision of the CC to refer the SAVA Main
Complaint to the CT, was set aside.
On July 3, 2008 the CC filed an application for leave to appeal the
decision of the High Court on the basis that the judge erred on the issue
of bias as well as his finding that issues surrounding the extension of
time to investigate the issues constitutes a ground for review.
Telkom then filed an application for leave to cross-appeal on July 11,
2008. The main basis of Telkom`s cross-appeal is that Telkom believes
that the judge erred in failing to make a decision as to whether ICASA or
the CC and CT should deal with this type of complaint.
The application for leave to appeal as well as the application for leave
to cross-appeal were granted by the Pretoria High Court on October 9,
2008. The appeal and cross-appeal will be argued before the Supreme Court
of Appeal on November 2, 2009. The judgement was reserved including the
issue whether ICASA or the CC and CT should deal with this type of
complaint.
If the Supreme Court of Appeals find that the CT does have jurisdiction
to hear the SAVA main complaint and the CT finds that Telkom committed a
prohibited practice as set out in the Competition Act, the CT may impose
a maximum administrative penalty of 10% of Telkom`s annual turnover in
the RSA and its exports from the RSA during Telkom`s preceding financial
year. However, Telkom has been advised by external legal counsel that the
CT has to date not imposed the maximum penalty on any offender.
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
CC conducted an enquiry and subsequently referred the complaint, together
with the SAVA complaint, to the CT for adjudication. This matter is
currently being dealt with together with the SAVA matter as discussed
above.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal
In April 2003, Orion filed a complaint against Telkom, Standard Bank and
Edcon at the CC concerning Telkom offering discounts on public switched
telecommunication services to corporate customers. The CC completed its
investigation and decided that there was no prima facie evidence of any
contravention of the Competition Act by Telkom. However, in terms of
section 51 of the Competition Act, a party may also refer a matter to the
CT. Orion, simultaneously with filing its complaint at the CC, filed an
application with CT, for an interim order interdicting and restraining
Telkom from offering reduced rates to Orion`s corporate customers.
Telkom has not yet filed its answering affidavit in the main complaint
before the CT and it appears as if Orion is not actively pursuing this
matter any further.
Cape Chamber of Commerce
The Cape Chamber of Commerce laid a complaint at the CC due to Telkom`s
refusal to offer HomeDSL to business customers. Telkom replied to the CC
on November 3, 2005.Telkom also met with the CC for an informal
discussion and provided them with certain information. Due to the nature
of Telkom`s ADSL product offerings since August 2006, Telkom requested
the CC on November 15, 2006 to finalise the matter since the activity
complained of has been addressed. There has been no further activity on
this matter.
ValueCard
A complaint was lodged at the CC regarding the Telkom Closer Package.
ValueCard, as a small business, wants to receive the Telkom Closer
Package which is only available for residential customers. The complaint
was served on Telkom on March 19, 2008. Telkom is still awaiting
investigation of this complaint by the CC.
Competition Commission referrals
The CC served a notice of motion on Telkom on October 26, 2009, in which
it referred the complaints by ISPA, MWEB and IS, Verizon, MWEB, and IS
respectively, to the CT.
In the notice of motion the CC requests an order against Telkom in the
following terms:
1. Declaring that over the complaint period (2005 - 2007):
- Telkom charged excessive prices to first tier ISPs for high bandwidth
national leased lines (namely leased lines with bandwidth above 2 Mbps);
- Telkom charged excessive prices to first tier ISPs for international
private leased lines (`IPLCs`);
- Telkom set its prices for Diginet lines, high bandwidth leased lines
and IP Connect as charged to other first-tier ISPs (or, in the case of
Diginet access lines, to end customers using the IP networks of such
first tier ISPs) "at levels which, in relation to the prices charged by
Telkom for the same services to its own retail and wholesale customers
acquiring bundled Diginet or ADSL access and IP network services from
Telkom, made it impossible for such other ISPs to compete cost-
effectively with Telkom" (this essentially relates to Telkom`s VPN
Supreme product);
2. Interdicting Telkom from continuing with the conduct referred to in
paragraph 1 above;
3. In respect of certain of the contraventions above, an order directing
Telkom to pay a penalty equal to 10% of its turnover for the financial
year ended March 31, 2009;
4. An order in terms of which Telkom would be discouraged from
perpetuating the conduct referred to in paragraph 1 above, by having the
CT direct Telkom to provide the CC on an annual basis with such data and
information as is necessary to enable the CC to assess whether Telkom is
charging prices for the services mentioned in paragraph 1 above such that
it prevents other ISPs from competing cost-effectively with Telkom. The
form and nature of such data is to be agreed to between Telkom and the CC
or, in the event that no agreement can be reached within two months of an
order by the CT, in a form directed by the CT.
In respect of the order requested from the CT directing Telkom to pay a
penalty equal to "10% of Telkom`s turnover for the financial year ended
March 31, 2009", we have been advised by external legal counsel that the
CT has not to date imposed the maximum penalty of 10% on any offender.
External legal counsel has further confirmed that, in terms of the
Competition Act, the CT must consider a number of factors before deciding
to impose the full 10% penalty. These factors include issues such as
whether the guilty party is a repeat offender, the extent to which the
party has co-operated with the CC and the CT, the nature, duration,
gravity and extent of the contravention, etc.
Telkom has commenced preparations for opposing the referral.
Negative working capital ratio
At each of the interim financial periods ended September 30, 2009 and
2008 and the year ended March 31, 2009 the Company 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.
18. SEGMENT INFORMATION
As of the beginning of the year the Group changed the reporting of its
segment information to be in line with IFRS8 Segment Reporting.
Previously the segments were fixed-line, mobile and other. The new
reporting segments are business units that are separately managed.
The Group consists of three segments.
The Telkom SA segment provides fixed-line access, fixed-mobile and data
communications services through Telkom South Africa.
The Multi-Links segment provides fixed, mobile, data and international
communications services in Nigeria.
Other International provides internet services outside South Africa,
through Africa Online and MWEB Africa subsidiaries and management
services through Telkom Management Services Company.
Other South Africa includes Trudon Group, formerly known as TDS Directory
Operations, and the Group`s corporate centre.
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
Business Segment
Consolidated operating revenue 35,940 17,598 18,706
Telkom South Africa 33,642 16,554 17,026
Multi-Links 1,900 813 818
Other 1,299 663 894
International 194 63 234
South Africa 1,105 600 660
Elimination of intersegmental (901) (432) (32)
revenue
Consolidated operating profit 7,247 4,038 2,628
Telkom South Africa 9,220 4,726 3,862
Multi-Links (522) (265) (371)
Other (1,833) (789) (691)
International (178) (105) (41)
South Africa (1,655) (684) (650)
Elimination of intersegmental 382 366 (172)
transactions
Reconciliation
Adjusted EBIT for reportable 7,247 4,038 2,628
segments
Profit on disposal of - - 18,603
investment
Compensation expense - - (946)
Impairment of goodwill (501) (34) (2,148)
Operating profit 6,746 4,004 18,137
Investment income 181 124 280
Gain on distribution of non- - - 25,688
cash asset
Finance charges and fair value (2,843) (693) (793)
movement
Profit before taxation and 4,084 3,435 43,312
discontinued operations
March September September
31 30 30
2009 2008 2009
Rm Rm Rm
19. RELATED PARTIES
Details of material transactions
and balances with related
parties not disclosed separately
in the condensed consolidated
interim financial statements
were as follows:
With shareholders:
Government
Trade receivables 386 358 302
Revenue (2,767) (1,385) (1,360)
With entities under common
control:
Major public entities
Trade receivables 52 48 85
Trade payables (3) (26) (6)
The outstanding balances are
unsecured and will be settled in
cash in the ordinary course of
business
Revenue (446) (214) (165)
Expenses 212 64 106
Rent received (20) (10) (11)
Rent paid 19 11 11
20. SIGNIFICANT EVENTS
Disposal of Vodacom Group (Proprietary) Limited
Telkom disposed of its interest in Vodacom by selling 15% to Vodafone
Group Plc (`Vodafone`) and unbundling the remaining 35% to existing
shareholders of Telkom.
Telkom sold 15% of its entire share capital to Vodafone Group Plc
(`Vodafone`) for R22,500 million less the attributable net debt of
Vodacom as at September 30, 2008.
Telkom agreed to distribute 50% of the after tax proceeds from the sale
transaction to Telkom shareholders by way of a special dividend, which
amounted to R9,740 million.
The carrying amount of the net asset value at disposal date was R6,825
million. This resulted in a gain of R18,535 million being recognised in
Other income.
The remaining 35% was distributed to the existing shareholders of Telkom
and accounted for in terms of IFRC17, Distribution of Non-Cash Assets to
Owners. The fair value was calculated with reference to the Vodacom
listing price at May 18, 2009. A gain on distribution was recognised in
the statement of comprehensive income of R25,688 million.
The impact of the shareholder approval on the amendment of the Telkom
Conditional Share Plan is an expense of R946 million.
21. SUBSEQUENT EVENTS
Change of Chairman
Mrs Shirley Lue Arnold retired as a non-executive director and Chairman
of Telkom on conclusion of her three year contract on November 1, 2009.
Mrs Arnold presided over a number of strategic and organisational
changes, including the Vodacom transaction, the African expansion and the
more recent group restructure. Telkom is extremely grateful to Mrs Arnold
and wishes to thank and acknowledge her for her leadership, dedication,
contribution and service to the Telkom Group.
Mr Jeff Molobela was appointed as a non-executive director (for a three
year period) and as Chairman (for a 1 year period) with effect from
November 1, 2009.
Other matters
The directors are not aware of any other matter or circumstance since the
period ended September 30, 2009 and the date of this report, not
otherwise dealt with in the financial statements, which significantly
affects the financial position of the Group and the results of its
operations.
For more information please visit our website: www.telkom.co.za/ir
23 November 2009
Sponsor: UBS South Africa (Pty) Ltd
Date: 23/11/2009 14:30:01 Produced by the JSE SENS Department.
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