| Mon 22 Nov 2010, 7:15 | | TKG - Telkom SA Limited - Telkom SA Limited Group interim results for the six |
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TKG
TKG
TKG - Telkom SA Limited - Telkom SA Limited Group interim results for the six
months ended 30 September 2010
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 30 September
2010
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 symbol TKGJ.J and on Bloomberg under the symbol TKG.SJ.
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 comparative period are materially impacted by the
accounting for the sale and unbundling of our 50% stake in Vodacom and related
transactions and the impairment of Multi-Links.
Unless otherwise indicated, the discussion below is based on normalised
results, excluding the items above, and is based on continuing operations.
GROUP SALIENT FEATURES FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2010
- Normalised operating revenue down 5.4% to R17.6 billion.
- Voice revenue decreased 19.1% to R6.9 billion.
- Data revenue increased 14.9% to R5.6 billion.
- ADSL subscribers increased 16.0% to 699,368.
- Calling plan subscribers increased 17.0% to 762,070.
- Managed data network sites increased 10.7% to 33,023.
- Normalised operating expenses decreased 6.3% to R15.1 billion.
- Normalised free cash flow increased 2.0% to R623 million.
- Normalised fixed-line free cash flow increased 136.0% to R1,442 million.
- Normalised EBITDA margin increased to 28.9% from 27.5%.
- Normalised headline earnings per share from continuing operations decreased
by 5.3% to 265.7 cents.
- Normalised basic earnings per share from continuing operations decreased
6.8% to 260.2 cents per share.
1. OVERVIEW
Johannesburg, South Africa - 22 November 2010, Telkom SA Limited (JSE: TKG)
today announced Group interim results for the six months ended 30 September
2010.
Segment structure
The Group`s reporting segments are business units that are separately managed.
The Group consists of two reportable segments. The Telkom South Africa 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 through our Multi-
Links subsidiary. The other category is a reconciling item which is split
geographically between International and South Africa. Telkom International
category provides internet services outside South Africa, through the
iWayAfrica subsidiary. The South African category includes Trudon Group,
Swiftnet, Data Centre Operations and the Group`s corporate centre.
The Data Centre Operations was shown as part of the Telkom South Africa
segment in the March 2010 results as the information was still in the process
of being split out. As the information is now available the results of the
Data Centre Operations were moved to the other category as it does not meet
the quantitative thresholds for disclosure as a separate segment.
Statement by Jeffrey Hedberg, Acting Group Chief Executive Officer:
"The six months under review have been challenging but exciting. The crowning
achievements are Telkom`s flawless delivery of the Soccer World Cup 2010 and
the build up to the launch of 8ta, our new mobile service. The South African
telecommunications industry is becoming more competitive and the regulatory
environment continues to pose challenges to all operators. It is imperative
that Telkom changes the way it operates in order to defend its revenue and
grow into new revenue streams. This is an enormous task given the complexity
of Telkom`s systems, networks and human resources. In addition, Telkom has had
to deal with significant management changes. These dynamics create an
excellent opportunity for new management to stabilise the business and then
execute on its plan to improve the financial performance of the Telkom Group.
We intend to focus on the following key areas:
- Leadership and organisation - communicate deliverable decisions and enforce
accountability.
- EBITDA and cash flow focus - challenge the status quo and demand innovation;
drive revenue through our exclusive differentiators; continued commitment to
cost efficiencies; efficient capital allocation to drive revenue growth.
- 8ta - provide innovative packages that allow people to talk more, are
difficult to replicate and take advantage of the full range of
telecommunication services that only an integrated fixed and mobile operator
can offer.
- Drive broadband - through convergence and bundling; take advantage of the
network built for the Soccer World Cup 2010.
- Multi-Links - exit the CDMA business.
While not exhaustive, the above five focus areas provide clarity for the
organisation, demand transparency, responsiveness, courage and resilience and
most importantly, are measurable.
Telkom`s results for the six months ended 30 September 2010 paint a picture of
an organisation under pressure with revenue down 5.4% to R17.6 billion, EBITDA
down 0.6% to R5.1 billion and profit from continuing operations down 9.3% to
R1.4 billion.
It is essential to stabilise the business, which we are doing through exiting
the CDMA business in Nigeria and focusing iWayAfrica mainly on corporate
customers. This allows us to allocate capital to those areas that will drive
revenue growth and promote cost efficiencies.
The introduction of our mobile service, 8ta, provides Telkom with an essential
tool for retaining and growing our customer base. It is expected to assist in
both revenue growth and cost efficiencies. We are excited by the response this
emotive brand has generated and look forward to it complementing our suite of
competitive products and services."
2. OPERATIONAL DATA
for the six months ended
30 September
2009 2010 %
Telkom South Africa
ADSL subscribers1 602,720 699,368 16.0
Calling plan subscribers 651,359 762,070 17.0
Closer subscribers 636,010 738,396 16.1
Supreme call subscribers 15,349 23,674 54.2
Fixed-line W-CDMA subscribers 8,744 24,282 177.7
WiMAX subscribers 3,201 2,935 (8.3)
Internet all access subscribers2 445,334 535,794 20.3
Fixed access lines (`000)3 4,398 4,234 (3.7)
Postpaid - PSTN 2,694 2,592 (3.8)
Postpaid - ISDN channels 785 776 (1.1)
Prepaid 797 748 (6.1)
Payphones 122 118 (3.3)
Fixed-line penetration rate (%) 8.9 8.5 (4.5)
Revenue per fixed access line (ZAR) 2,679 2,374 (11.4)
Total fixed-line traffic (millions 11,785 10,520 (10.7)
of minutes)
Local 3,670 2,929 (20.2)
Long distance 1,656 1,437 (13.2)
Fixed-to-mobile 1,886 1,816 (3.7)
Fixed-to-fixed 20 43 115.0
International outgoing 307 238 (22.5)
International VoIP 22 33 50.0
Subscription based calling plans 1,869 1,994 6.7
Interconnection 2,355 2,030 (13.8)
Domestic mobile interconnection 1,184 1,041 (12.1)
Domestic fixed interconnection 333 506 52.0
International interconnection 838 483 (42.4)
Managed data network sites 29,842 33,023 10.7
Telkom Company employees 23,445 23,013 (1.8)
Fixed access lines per employee4 188 184 (2.1)
Multi-Links
Active subscribers 2,055,550 1,938,921 (5.7)
CDMA 2,036,404 1,865,767 (8.4)
EVDO 18,692 72,422 287.4
Data leased lines 454 732 61.2
Total traffic (millions of minutes) 619 440 (28.9)
Estimated CDMA market share (%) 12.0 11.2 (6.7)
Market penetration (%)
GSM (%) 87.5 88.5 1.1
CDMA (%) 13.1 11.2 (14.5)
Fixed (%) 1.9 0.3 (84.2)
Employees 1,060 757 (28.6)
Permanent 735 537 (26.9)
Expatriate 83 53 (36.1)
Temporary 242 167 (31.0)
Customer per employee 1,939 2,561 32.1
Other International
iWayAfrica subscribers5 38,505 26,816 (30.4)
iWayAfrica employees5 652 567 (13.0)
Other South African
Trudon employees 531 520 (2.1)
Swiftnet employees 99 107 8.1
1. Excludes Telkom internal lines and includes business, consumer, corporate,
government and wholesale customers.
2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers.
3. Excludes Telkom internal lines.
4. Based on number of Telkom Company employees, excluding subsidiaries.
5. Excluding UUNet joint venture partner`s subscribers and employees in Kenya.
3. OPERATIONAL OVERVIEW
Telkom South Africa
Telkom South Africa remains focused on ensuring its competitiveness in terms
of pricing, product and service mix. The competitive environment demands price
decreases together with higher speed and service level increases. This places
pressure on both revenue and investment in the network. In response Telkom
South Africa continues to defend revenue through highlighting the value and
quality offered by the fixed-line, developing innovative new products, growing
annuity voice and data products and moving up the ICT value chain through
Cybernest.
Following the launch of 8ta our focus into the future will be on offering
fully converged products that marry mobile voice and data services with the
quality and resilience of the fixed-line to both the enterprise and
residential markets.
Voice revenue
Voice revenues declined 19.1% to R6.9 billion as a result of lower minutes of
use and lower tariffs. Telkom elected to pass 100% of the benefit of the drop
in mobile termination rates from 125 cents per minute to 89 cents per minute
to its customers. Local voice revenue declined 10.8% to R1.5 billion, long
distance voice revenue was down by 12.4% to R809 million, fixed-to-mobile
revenue was down 24.0% to R2.5 billion and international outgoing revenue
declined 19.9% to R378 million. Our continued drive to convert customers to
annuity revenue streams saw revenue from subscription based calling plans grow
10.2% to R807 million. Voice annuity revenue, which includes line rental,
calling plans, customer premise equipment rental and value added services grew
1.5% to R3.9 billion. Telkom Closer subscribers grew 16.1% to 738,396 and
Supreme Call subscribers grew 54.2% to 23,674. Traffic revenue is also
continuing to be converted to data revenue through our drive to grow Virtual
Private Networks and managed network services.
We continue to focus on reducing customer churn, increasing customer loyalty
and promoting the value offered by fixed-line converged services through many
initiatives such as continued enhancement to the Closer packages, free line
installation to all of Telkom`s former customers returning, telemarketing and
direct marketing.
Interconnection revenue
Interconnection revenue decreased 37.4% to R912 million reflecting the 41.1%
decrease in mobile domestic interconnection revenue to R356 million, which
includes mobile-to-fixed revenue (down 5.3% to R252 million) and international
mobile outgoing revenue (down 69.2% to R104 million). The decline in mobile
interconnection revenue is as a result of continuing mobile substitution and
the sharp decline in international mobile outgoing revenue is as a result of
lower volumes, especially on switched hubbing, due to operators using
alternate international gateway providers. Fixed domestic interconnection
revenue grew 118.8% to R210 million as Neotel gained further traction.
International interconnection revenue declined 54.4% to R346 million as we are
more selective with our switched hubbing revenue, which is impacted by
exchange rates and decreased 76.2% to R116 million. International incoming
revenue dropped 15.1% to R230 million.
Mobile and fixed-line termination rate developments
On 29 October 2010, ICASA published its final Call Termination Rate
regulations for both fixed and mobile networks.
Vodacom and MTN are obliged to reduce call termination on their networks as
follows:
Peak Off-peak
Current R0.89 R0.77
1 March 2011 R0.73 R0.65
1 March 2012 R0.56 R0.52
1 March 2013 R0.40 R0.40
As from 1 March 2013 there will be no distinction between peak and off-peak
rates in respect of call termination services.
Smaller market players - both 8ta and Cell C - may charge up to 20% more for
call terminating on their networks between 1 March 2011 and 28 February 2012.
Thereafter the maximum premium they may charge falls to 15% on 1 March 2012
and finally to 10% on 1 March 2013.
The regulation also reduces Telkom`s fixed termination rates and removes the
differentiation between peak and off-peak rates in respect of call termination
services by 1 March 2013.
Local calls National calls
Peak Off-peak Peak Off-peak
Current - calls from R0.29 R0.16 R0.29 R0.16
MCOs(1)
Current - calls from R0.23 R0.12 R0.33 R0.19
Neotel and VANS(2)
1 March 2011 - all R0.20 R0.12 R0.28 R0.19
operators
1 March 2012 - all R0.15 R0.12 R0.25 R0.19
operators
1 March 2013 - all R0.12 R0.12 R0.19 R0.19
operators
(1) Mobile Cellular Operators.
(2) Value Added Network Service Providers.
Telkom is pleased to have secured asymmetric mobile termination rates.
Asymmetry is positive for 8ta and may or may not be positive for Telkom`s
fixed-line service depending on the level of pass through and traffic
patterns.
The mobile termination rate cut from 125 cents per minute to 89 cents per
minute effective from March 2010 resulted in Telkom`s fixed-to-mobile voice
revenue falling R640 million. Telkom elected to pass through 100% of the
benefit of the reduction to its customers. Payments to other operators
decreased R616 million resulting in a net loss for Telkom of R24 million.
Broadband and data revenue
Total data revenue increased 14.9% to R5,550 million despite significant price
reductions with effect from 1 August 2009. Data connectivity services revenue
increased 9.3% to R2,707 million which includes the 23.4% increase in ADSL
revenue to R790 million. Leased line revenue increased 13.5% to R1,116
million. Mobile leased line revenue continues to grow healthily, despite self-
provisioning, reflecting the growing demand for bandwidth. Internet access and
related services revenue increased 13.5% to R986 million and managed data
network services revenue increased 37.3% to R641 million. Managed network
sites grew 10.7% to 33,023.
ADSL subscribers increased 16.0% to 699,368 when compared to the 30 September
2009 reporting period. Broadband remains a growth area for Telkom and more
capital is being allocated to this revenue stream. 10 Mbps services and new PC
broadband bundles have been launched. Telkom Simple, a campaign offering fast
internet, free landline calls and free installation for R369 per month will
run from 12 September 2010 to 15 December 2010. 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 maximum
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.
Telkom is facing stiff 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. We are focusing on
differentiating our service. 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,
including mobility and data centre services that offer value and are clean and
simple to understand.
Cost management
Operating expenditure decreased 6.3% to R15.1 billion. This was largely as a
result of the reduction in payment to other operators of 28.6% to R3,057
million. Employee expenses increased 10.0% to R4,853 million as a result of
the 7.5% annual salary increase and R144 million workforce reduction expenses.
Selling, general and administrative expenses decreased 10.5% to R2,848 million
due to lower inventory write-offs, service fees increased 5.3% to R1,411
million mainly due to electricity increases and operating leases grew 11.0% to
R526 million due to higher cell site leases in Multi-Links. Also included in
operating expenditure is R205 million relating to 8ta operational expenditure.
Telkom is firmly committed to reducing its costs. This must be done in a
manner to ensure sustainable, long term benefits. All elements of our
operating model - network and IT, marketing, channel and customer, corporate
services - have been examined and cost saving projects have been initiated.
Excluding payments to other operators, depreciation, amortization, impairments
and write-offs, mobile operating expenditure of R205 million and the R144
million workforce reduction expenses, operating expenses decreased 1.3%. We
are continuing to explore and execute on all cost efficiency opportunities.
We have continued optimising staff vacancies through natural attrition and
have been actively managing overtime and contractor spending in order to
manage costs as far as possible. We launched voluntary separation packages for
management employees with 186 employees approved to take advantage of the
packages at a cost of R144 million. The benefits of the reduction in employee
expenses are expected in the second half of the 2011 financial year.
8ta - Telkom`s mobile service
8ta was successfully launched on 18 October 2010. On 18 November 2010 8ta had
signed up 186,033 new customers, all of whom comply with RICA.
8ta`s approach is one of simplicity, quality, value and authenticity. We
intend to be innovative and aggressive but rational. We provide differentiated
products and pricing, which are difficult to replicate, and importantly,
encourage primary SIM usage.
As promised, Telkom launched post paid products on 8 November 2010 and intends
to launch fully converged products to corporate and consumers in the first
half of the 2011 calendar year. Competitors have yet to replicate our offer at
a rate of 65c for calls terminating on Telkom`s fixed-line network. This will
provide an attractive incentive to corporate customers in future.
Telkom has existing distribution channels and points of presence that are used
for the distribution of Telkom WorldCall and pre-paid cards. We have simply
added another product - 8ta - to this existing distribution channel and gone
further to secure additional national distribution partners. 8ta is working
with 51 dealers with 3,000 points of presence around South Africa. We have
also ensured that we are able to reach deeply into semi-urban and rural areas
through the use of independent micro distributors.
8ta has constructed 800 base stations. As previously announced, we are working
through an order to build a further 2,000 base stations. In addition, we are
using the avenues of co-location and infrastructure sharing as much as
possible to reduce the extent of our capital outlay.
Telkom is at an inflection point with growth in traditional fixed-line voice
revenues declining. 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 business
and customer base. This is particularly so as wireless voice growth slows and
converged data becomes more prevalent. A product range spanning both mobile
and fixed value pools will assist Telkom to defend itself more effectively
against competitors and to grow revenues. The mobile business is designed to
also assist Telkom in addressing fixed-line cost challenges and to position
Telkom more competitively in the market. To this end Telkom will undertake
best endeavours to attain the market share required to achieve its required
IRR.
Telkom also plans to use mobile technology to offer fixed-line services in
areas where Telkom is experiencing operational challenges such as copper
theft, breakages, slow copper roll-out to new greenfield areas, etc. This will
assist the company in being more responsive to its customers` needs.
We estimate that the capital expenditure required to implement mobility will
be a maximum of R6 billion over five years.
Cybernest
Cybernest has been in operation for a year and has gained considerable
traction in the market. While the majority of the R614 million revenue
achieved in the six months to 30 September 2010 is generated from Telkom, non-
Telkom revenue has increased 94.7% from a low base to R37 million.
There has been pleasing interest from businesses wishing to outsource part or
all of their IT infrastructure and services. Various industry verticals,
particularly mining and retail, have displayed a keen interest to focus on
their core business and this has afforded Cybernest the opportunity to secure
a number of notable deals ranging from hosting, storage, security, disaster
recovery and messaging. In addition, Cybernest has managed to secure two total
outsource deals, a considerable achievement given that total outsourcing was
planned to commence towards the end of this financial year. The average size
of deal won is increasing as our credibility grows with customers moving
towards Cybernest fully owning their infrastructure on either a shared or
dedicated basis, and providing managed services out of our facilities.
Cybernest has afforded the Telkom Group the opportunity of decreasing non-
standard and non-useful infrastructure through the promotion of industrialised
infrastructures and technologies and increased automation. The sharing of
resources and merging of operating teams has also allowed headcount to grow
more slowly than activities. Cybernest continues to focus on key partnerships
with various industry leaders in order to offer tailor made solutions to the
market that are cost effective, efficient and reliable.
Trudon
Trudon`s revenue increased by 1.4% to R647 million while EBITDA declined 8.1%
to R305 million. Operating profit decreased 8.9% to R287 million.
The core printed directories business has reached maturity in South Africa as
evidenced by the reduction in Trudon`s revenue growth. In the European and
United States markets, directory businesses are in decline. To combat this
decline, directory businesses are growing their presence in the online search
arena. In this arena Google is the dominant player and is a formidable
competitor.
In addition, directory companies are trying to build or access content via
multi-platforms including mobile and online. Directory companies have moved
away from their traditional core focus into areas where they are not the
dominant players, for example online search and advertising.
To keep pace with the changes in the marketplace, Trudon is busy evolving from
being a publisher of traditional print products to being a local search
solutions provider. Print usage by subscribers has reduced and younger users
access information primarily through internet and mobile channels, rather than
printed white or yellow pages. Trudon has no choice but to follow this
migration and build up its capabilities and capacity to offer these products.
The online expansion will require capital investment and we anticipate capital
investment of approximately R110 million over the following two financial
years.
Multi-Links
Operating revenue decreased 9.0% to R744 million and operating expenses
decreased 15.4% to R1,008 million. The loss from operating activities improved
by 29.4% to a loss of R262 million.
Multi-Links incurred R158 million of capital expenditure for the six months
ended 30 September 2010. The expenditure mainly relates to the completion of
assets under construction. The net asset value has been impaired by a further
R201 million.
The Telkom Group board has mandated management to review options for the exit
of the CDMA business. We have received a number of expressions of interest
which will be evaluated and quantified over the next quarter.
The backbone network which includes 4,639 km of Multi-Links owned fibre and a
further 2,034 km of fibre through swap arrangements, has performed well in the
six months under review with data leased lines growing 61.2% to 732 lines.
Guidance
Capital expenditure for the Group is expected to range between 20% and 25% of
revenue over the current financial year including the impact of our mobile
investment. Given the current run rate, the Telkom Group may deliver a capital
expenditure to revenue ratio at the lower end of the stated guidance.
The targeted ceiling net debt to EBITDA is aimed at a maximum of 1.4 times. In
the short term we will operate at lower levels pending the cash outflows
associated with the mobile related capital expenditure.
4. FINANCIAL PERFORMANCE
The Telkom Group believes that normalised earnings more accurately reflect the
Group`s operational performance.
Unless otherwise indicated, the discussion below is based on normalised
results, excluding the items below, and is based on continuing operations.
The statement of comprehensive income for the six months ended 30 September
2010 has been adjusted to remove the effects of the impact of the Soccer World
Cup contract entered into with the Department of Communications, the
amortisation of the FIFA brand intangible asset, the impairment of the net
asset value of Multi-Links, and fair value gain on the Vodacom shares held.
The statement of comprehensive income for the six months ended 30 September
2009 has been adjusted to remove the effects of the sale and unbundling of our
50% share in Vodacom, the profit on sale of Telkom Media, the impairment of
Multi-Links, the impact of the Soccer World Cup contract entered into with the
Department of Communications and the amortisation of the FIFA brand intangible
asset to enable year on year comparison.
The impact of the items discussed above on Group earnings as reported is as
follows:
Reconciliation of normalised group statement of comprehensive income
Restated Effects of Other Normalised
Continuing operations September Vodacom unusual September
In ZAR millions 2009 transaction items 2009
Operating revenue 18,761 (153)(6) 18,608
Other income 18,814 (18,535)(1) (68)(7) 211
Operating expenses 19,418 (946) (2,341) 16,131
Employee expenses 5,359 (946)(2) - 4,413
Payments to other 4,284 - - 4,284
operators
Selling, general and 3,335 - (153)(6) 3,182
administrative
expenses
Service fees 1,340 - - 1,340
Operating leases 474 - - 474
Depreciation, 4,626 - (2,188)(8) 2,438
amortisation,
impairment and write-
offs
Results from operating 18,157 (17,589) 2,120 2,688
activities
Investment income 280 - - 280
Gain on distribution 25,688 (25,688)(3) - -
of asset
Finance charges and 794 (166) - 628
fair value movements
Interest 749 - - 749
Foreign exchange and 45 (166)(4) - (121)
fair value movement
Profit before taxation 43,331 (43,111) 2,120 2,340
Taxation 3,700 (2,751)(5) (135)(9) 814
Profit from continuing 39,631 (40,360) 2,255 1,526
operations
EBITDA 5,126
EBITDA margin (%) 27.5
Basic earnings per 7,860.9 279.0
share - continuing
operations
Headline earnings per (160.2) 280.6
share - continuing
operations
Rand/Naira exchange
rate
Closing rate at N15.56
beginning of the year
Closing rate at end of N19.60
the period
Period average rate N18.63
(Source: Reuters)
Reported Other Normalised
Continuing operations September unusual September Variance
In ZAR millions 2010 items 2010 %
Operating revenue 17,667 (63)(6) 17,604 (5.4)
Other income 184 - 184 (12.8)
Operating expenses 15,417 (304) 15,113 6.3
Employee expenses 4,853 4,853 (10.0)
Payments to other 3,057 3,057 28.6
operators
Selling, general and 2,911 (63)(6) 2,848 10.5
administrative
expenses
Service fees 1,411 1,411 (5.3)
Operating leases 526 526 (11.0)
Depreciation, 2,659 (241)(10) 2,418 0.8
amortisation,
impairment and write-
offs
Results from operating 2,434 241 2,675 (0.5)
activities
Investment income 133 133 (52.5)
Gain on distribution - - -
of asset
Finance charges and 659 25 684 (8.9)
fair value movements
Interest 514 514 31.4
Foreign exchange and 145 25(4) 170 240.5
fair value movement
Profit before taxation 1,908 216 2,124 (9.2)
Taxation 830 (90)(9) 740 9.1
Profit from continuing 1,078 306 1,384 (9.3)
operations
EBITDA 5,093 (0.6)
EBITDA margin (%) 28.9 5.1
Basic earnings per 198.6 260.2 (6.8)
share - continuing
operations
Headline earnings per 243.5 265.7 (5.3)
share - continuing
operations
Rand/Naira exchange
rate
Closing rate at N19.60 26.0
beginning of the year
Closing rate at end of N22.17 13.1
the period
Period average rate N20.35 9.2
(Source: Reuters)
1. Profit on disposal of our 15% share of Vodacom.
2. Compensation expense recognised in terms of IFRS2 relating to the amendment
of the Telkom Conditional Share Plan.
3. Gain on distribution of our 35% share in Vodacom.
4. Fair value (loss)/gain on the Vodacom shares held.
5. Includes R1,353 million capital gains taxation on the sale of Vodacom, R977
million secondary taxation on companies on the R19 special dividend and R421
million reversal of the deferred tax asset raised.
6. Revenue and expenses recognised on the contract entered into with the
Department of Communications for the Soccer World Cup.
7. Profit on sale of Telkom Media.
8. Includes R2,148 million impairment of Multi-Links goodwill and R40 million
amortisation of the FIFA brand intangible asset.
9. Secondary taxation on the special dividend.
10. Includes R201 million impairment of Multi-Links assets and R40 million
amortisation of the FIFA brand intangible asset.
GROUP OPERATING REVENUE
for the six months ended
30 September
In ZAR millions 2009 2010 %
Telkom South Africa 16,854 15,905 (5.6)
Multi-Links 818 744 (9.0)
Other International 234 222 (5.1)
iWayAfrica 234 222 (5.1)
Other South African 733 1,356 85.0
Trudon 638 647 1.4
Swiftnet 54 61 13.0
Data Centre Operations 19 614 -
Corporate centre 22 34 54.5
Eliminations (31) (623) -
Total 18,608 17,604 (5.4)
Group operating revenue decreased by 5.4% to R17,604 million (30 September
2009: R18,608 million) in the six months ended 30 September 2010. The decrease
is mainly due to the 100% pass through to customers of the reduction in mobile
termination rates, lower switched hubbing volumes and a decline in Multi-
Links`s voice revenue as a result of lower voice traffic volumes and higher
churn. Data Centre Operations includes R577 million of revenue from Telkom SA
in terms of the transfer pricing policy effective from 1 April 2010. This
revenue is eliminated on consolidation.
Telkom South Africa operating revenue
for the six months ended
30 September
In ZAR millions 2009 2010 %
Subscriptions and connections 3,344 3,300 (1.3)
Traffic 7,126 6,032 (15.4)
Local 1,637 1,461 (10.8)
Long distance 923 809 (12.4)
Fixed-to-mobile 3,347 2,543 (24.0)
Fixed-to-fixed 15 34 126.7
International outgoing 472 378 (19.9)
Subscription based calling plans 732 807 10.2
Interconnection 1,458 912 (37.4)
Mobile 604 356 (41.1)
Fixed 96 210 118.8
International 758 346 (54.4)
Data 4,830 5,550 14.9
Leased lines and other 3,847 4,434 15.3
Mobile leased facilities 983 1,116 13.5
Other 96 111 15.6
Total 16,854 15,905 (5.6)
Operating revenue from the Telkom South Africa segment decreased by 5.6% to
R15,905 million (30 September 2009: R16,854 million) primarily due to lower
fixed-to-mobile traffic revenue and lower international and mobile
interconnection revenue, partially offset by growth in data revenues.
Subscription and connections revenue decreased by 1.3% to R3,300 million (30
September 2009: R3,344 million) largely as a result of a decrease in the
number of postpaid and prepaid access lines.
Traffic revenue decreased by 15.4% mainly due to a reduction in mobile
termination rates and lower fixed-to-mobile volumes due to the increasing
substitution of calls placed using mobile services rather than fixed-line
services. This was partially offset by an increase in revenue from
subscription based calling plans by 10.2% to R807 million primarily due to
increased volumes as a result of a 17.0% increase in the number of subscribers
to 762,070 (30 September 2009: 651,359).
Interconnection revenue decreased by 37.4% to R912 million (30 September 2009:
R1,458 million) largely as a result of a decrease of 54.4% in international
interconnection revenue and a 41.1% decrease in mobile interconnection
revenue. International interconnection revenue decreased primarily due to
lower volumes on switched hubbing. The decrease in mobile interconnection
revenue is mainly as a result of the decrease in mobile termination rates.
Fixed interconnection revenue increased mainly due to increased volumes from
Neotel and VANS.
Data revenue increased 14.9% to R5,550 million (30 September 2009: R4,830
million) mainly due to revenue generated by the Soccer World Cup, a growing
demand for services, including ADSL, a 13.5% increase in revenue from leased
line facilities to mobile operators, growth in managed data network services
and an increase in internet access and related services.
Multi-Links operating revenue
for the six months ended
30 September
In Naira millions 2009 2010 %
Subscriptions and connections 1,881 1,538 (18.2)
Traffic 8,745 6,590 (24.6)
Interconnection 3,499 5,013 43.3
Data 1,200 1,910 59.2
Directories and other - 14 -
Total 15,325 15,065 (1.7)
Multi-Links operating revenue decreased by 1.7% to 15,065 million Naira (30
September 2009: 15,325 million Naira).
Subscriptions and connections revenue decreased 18.2% due to the termination
of access fees as a result of increased competition. Traffic revenue decreased
24.6% mainly due to a decrease in traffic volumes and higher churn rates
during the period under review.
Interconnection revenue increased 43.3% due to the introduction of hubbing
revenue through a new line of business, namely International Carrier Services.
Multi-Links` increased focus on data services resulted in a 59.2% increase in
data revenue mainly due to an increase in equivalent 2 megabit circuit
services and the expansion of mobile broadband (EVDO) services.
GROUP OTHER INCOME
for the six months ended
30 September
In ZAR millions 2009 2010 %
Telkom South Africa 162 155 (4.3)
Multi-Links 2 2 -
Other International - 22 -
iWayAfrica - 9 -
Telkom International - 13 -
Other South African 213 64 (70.0)
Trudon 27 19 (29.6)
Swiftnet 3 2 (33.3)
Corporate centre 183 43 (76.5)
Eliminations (166) (59) (64.5)
Total 211 184 (12.8)
Other income includes profit on the disposal of investments, property, plant
and equipment and intangible assets as well as interest received from debtors
and on loans to subsidiaries. Interest received from subsidiaries was
significantly lower for the six months ended 30 September 2010 due to the
impairment of the Multi-Links loans as well as part of the Multi-Links loan
being interest free from 30 September 2009 onwards. Interest received from
subsidiaries is eliminated on consolidation. The decrease in other income
after elimination is as a result of lower interest received from debtors due
to the lowering of the interest rate charged.
GROUP OPERATING EXPENSES
for the six months ended
30 September
In ZAR millions 2009 2010 %
Employee expenses 4,413 4,853 (10.0)
Payments to other operators 4,284 3,057 28.6
Selling, general and 3,182 2,848 10.5
administrative expenses
Service fees 1,340 1,411 (5.3)
Operating leases 474 526 (11.0)
Depreciation, amortisation, 2,438 2,418 0.8
impairments and write-offs
Total 16,131 15,113 6.3
Group operating expenses decreased by 6.3% to R15,113 million (30 September
2009: R16,131 million) in the six months ended 30 September 2010, primarily
due to a decrease in payments to other operators partially offset by an
increase in employee expenses. The decrease in payments to other operators is
mainly due to the reduction in mobile termination rates and lower
international switched hubbing volumes in Telkom South Africa. The increase in
employee expenses is due to the increase in salaries and wages in Telkom South
Africa as a result of the 7.5% annual salary increase negotiated with the
unions and workforce reduction expenses of R144 million incurred. Lower
selling, general and administrative expenses are mainly attributable to lower
inventory write-offs in the corporate centre. Operating leases increased
largely as a result of Multi-Links`s increased utilisation of leased cell
sites.
Operating expenditure contribution per segment
for the six months ended
30 September
In ZAR millions 2009 2010 %
Telkom South Africa 12,591 12,411 1.4
Multi-Links 1,191 1,008 15.4
Other International 275 308 (12.0)
iWayAfrica 238 276 (16.0)
Telkom International 33 17 48.5
Telkom Management Services 4 15 (275.0)
Other South African 2,119 2,042 3.6
Trudon 350 379 (8.3)
Swiftnet 55 56 (1.8)
Data Centre Operations 480 516 (7.5)
Corporate centre 1,234 1,091 11.6
Eliminations (45) (656) -
Total 16,131 15,113 6.3
The 6.3% decrease in group operating expenses was primarily driven by a
decrease in Telkom SA`s payments to other operators resulting from the
decrease in mobile termination rates, the decrease in Multi-Links`s
depreciation as a result of the impairment of assets in March 2010 and lower
inventory write downs in Corporate centre.
Telkom South Africa operating expenses (excluding mobile expenditure)
for the six months ended
30 September
In ZAR millions 2009 2010 %
Employee expenses 3,550 3,851 (8.5)
Salaries and wages 2,846 2,958 (3.9)
Benefits 987 990 (0.3)
Workforce reduction expenses - 103 -
Employee related expenses (283) (200) 29.3
capitalised
Payments to other network 3,929 2,659 32.3
operators
Payment to mobile operators 2,524 1,848 26.8
Payment to international 1,273 574 54.9
operators
Payment to fixed-line operators 132 237 (79.5)
Selling, general and 1,771 1,713 3.3
administrative expenses
Materials and maintenance 1,033 939 9.1
Marketing 120 138 (15.0)
Bad debts 145 255 (75.9)
Other 473 381 19.5
Service fees 1,085 1,646 (51.7)
Property management 624 667 (6.9)
Consultants and security 461 979 (112.4)
Operating leases 316 327 (3.5)
Depreciation, amortisation, 1,940 2,010 (3.6)
impairments and write-offs
Depreciation 1,687 1,700 (0.8)
Amortisation 231 260 (12.6)
Impairments and write-offs 22 50 (127.3)
Total 12,591 12,206 3.1
Telkom South Africa`s operating expenses, excluding mobile expenditure,
decreased by 3.1% in the six months ended 30 September 2010, to R12,206
million (30 September 2009: R12,591 million), primarily due to lower payments
to international operators as a result of lower volumes on switched hubbing
and lower payments to mobile operators due to the reduction in mobile
termination rates, partially offset by higher consultants and security costs.
Employee expenses increased by 8.5% in the six months ended 30 September 2010,
primarily due to higher salaries and wages as a result of average annual
salary increases of 7.5% as agreed with the unions as well as workforce
reduction expenses of R103 million incurred for management employees,
partially offset by lower headcount.
Payments to international network operators decreased 54.9% due to lower
volumes on switched hubbing and mobile international traffic. Payments to
mobile operators decreased 26.8%, largely due to a 28.8% reduction in mobile
termination rates with effect from 1 March 2010. The decrease in mobile
termination rates contributed to a R640 million decrease in fixed-to-mobile
revenue and a R616 million decrease in payments to mobile operators.
Selling, general and administrative expenses decreased by 3.3% primarily as a
result of lower materials and maintenance resulting from cost saving
initiatives, lower provision for licence fees due to lower gross profit
partially offset by higher bad debt.
Service fees increased by 51.7% primarily due to a R517 million intercompany
charge by Cybernest for services performed as the transfer pricing policy was
introduced on 1 April 2010. This cost is eliminated on consolidation. Higher
property management fees as a result of electricity increases also contributed
to the increase.
Mobile operating expenses (part of Telkom South Africa operating expenses but
excluded from above)
for the six months ended
30 September
In ZAR millions 2009 2010 %
Employee expenses - 49 -
Payments to other network - - -
operators
Selling, general and - 117 -
administrative expenses
Service fees - 37 -
Operating leases - 2 -
Depreciation, amortisation, - - -
impairments and write-offs
Total - 205 -
8ta employed 180 employees at 30 September 2010. Selling, general and
administrative expenses relate mostly to network maintenance and marketing
expenses in preparation for the launch. Service fees relate to consultants
assisting with the implementation of the business plan.
Multi-Links operating expenses
for the six months ended
30 September
In Naira millions 2009 2010 %
Employee expenses 1,138 1,106 2.8
Payments to other network 5,131 5,135 (0.1)
operators
Selling, general and 9,718 9,314 4.2
administrative expenses
Service fees 169 369 (118.3)
Operating leases 2,290 3,184 (39.0)
Depreciation, amortisation, 3,855 1,250 67.6
impairments and write-offs
Total 22,301 20,358 (8.7)
Employee expenses decreased by 2.8% in the six months ended 30 September 2010,
primarily as a result of the headcount optimisation programme.
Payments to other operators increased 0.1% mainly due to the increase of 1.8
billion Naira in hubbing expenses. This was offset by a decrease of 1.7
billion Naira in interconnection charges which arose as a result of a decline
in off-net traffic and the introduction of the new NCC regulatory
interconnection regime.
Selling, general and administrative expenses decreased 4.2% as a result of
lower inventory write downs partially offset by higher bad debt. Handset
subsidies totalled 2,867 million Naira and is included in selling, general and
administrative expense.
Service fees increased significantly mainly due to the use of consultants for
short term projects rather than appointing permanent staff.
Operating leases increased 39.0% as a result of increased utilisation of
leased infrastructure, specifically relating to cell sites rental to support
sales and marketing strategy.
Depreciation, amortisation, impairments and write-offs decreased significantly
as a result of the impairment of Multi-Links assets on 31 March 2010.
EBITDA PER SEGMENT
for the six months ended
30 September
In ZAR millions 2009 2010 %
Telkom South Africa 6,365 5,659 (11.1)
EBITDA margin (%) 37.8 35.6
Multi-Links (164) (201) (22.6)
EBITDA margin (%) (20.0) (27.0)
Other International (10) (38) (280.0)
EBITDA margin (%) (4.3) (17.1)
Other South African (923) (306) 66.8
EBITDA margin (%) (125.9) (22.6)
Eliminations (142) (21) 85.2
Total 5,126 5,093 (0.6)
INVESTMENT INCOME
Investment income consists of interest received on short term investments and
bank accounts. Investment income decreased by 52.5% to R133 million (30
September 2009: R280 million), largely as a result of lower cash balances and
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 8.9% to R684 million (30 September 2009:
R628 million) in the six months ended 30 September 2010, primarily due to a
31.4% decrease in interest expense to R514 million (30 September 2009: R749
million) mainly as a result of the 11.0% decrease in the Group`s net debt to
R6.8 billion (30 September 2009: R7.7 billion) and lower interest rates. Net
fair value and foreign exchange rate movements resulted in a loss of R170
million for the six months ended 30 September 2010 (30 September 2009: gain of
R121 million). Higher fair value and exchange rate losses were incurred due to
the mark to market valuation of forward exchange contracts and interest rate
swap agreements as a result of the strengthening of the Rand, particularly
against the US dollar, and lower interest rates.
TAXATION
The consolidated tax expense from continuing operations decreased to R740
million (30 September 2009: R814 million). The consolidated effective tax rate
for the six months ended 30 September 2010 was 34.8% (30 September 2009:
34.8%).
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The Group`s financial position remains strong. Net debt, after financial
assets and liabilities, from continuing operations increased by 44.6% to
R6,828 million from R4,723 million as at 31 March 2010 resulting in a net debt
to EBITDA ratio of 0.7 times from 0.5 times at 31 March 2010. On 30 September
2010, the Group had cash balances of R736 million (31 March 2010: R3.8
billion). The proceeds retained from the Vodacom transaction contributed to
the higher balances as at 31 March 2010.
The decrease in cash is mainly attributable to the repayment of private
placings debt instruments with a nominal value of R1,780 million on maturity
and the dividend payment of R3 per share.
The Group`s working capital improved from negative working capital of R50
million as at 31 March 2010 to positive working capital of R769 million,
mainly due to a R1.2 billion reduction in trade and other payables and a R1.2
billion reduction in short term provisions. The reduction in trade and other
payables is attributable to the reduction in capital expenditure and the
reduction in short term provisions is primarily as a result of the R608
million payment made to Telcordia for the supplier dispute, a decrease in the
provision for bonuses due to the payment in June 2010 as well as a decrease in
the short term provision for post-retirement medical benefits for the six
month period vs 12 months in March 2010.
NORMALISED FREE CASH FLOW
for the six months ended
30 September
In ZAR millions 2009 2010 %
Cash generated from operations 2,021 1,883 (6.8)
Add back: Half of Vodacom capital 677 - -
gains tax
Add back: STC on special dividend 1,112 90 (91.9)
Add back: Payment to Telcordia - 608 -
Add back: Employee reduction - 144 -
expenses
Less: Cash flows from investing (3,199) (2,102) (34.3)
activities excluding Vodacom
proceeds
Normalised free cash flow 611 623 2.0
Mobile operating expenditure - 205 -
Mobile capital expenditure - 614 -
Normalised fixed-line free cash 611 1,442 136.0
flow
Excluding the effects of the R608 million payment to Telcordia regarding the
supplier dispute, STC on the special dividend and employee reduction expenses
the Group`s free cash flow increased 2.0% to R623 million from R611 million as
at 30 September 2009. The inclusion of R205 million operating expenditure and
R614 million capital expenditure relating to start up costs of the mobile
business decreased free cash flow. Excluding the effects of the mobile
business the fixed-line free cash flow increased 136.0% to R1,442 million.
GROUP CAPITAL EXPENDITURE
Group capital expenditure, which includes spend on intangible assets,
decreased by 21.6% to R2,165 million (30 September 2009: R2,762 million) and
represents 12.3% of Group revenue (30 September 2009: 14.8%).
for the six months ended
30 September
In ZAR millions 2009 2010 %
Telkom South Africa 1,914 1,903 (0.6)
Multi-Links 709 158 (77.7)
Other International 25 13 (48.0)
iWayAfrica 21 8 (61.9)
Telkom International 4 5 25.0
Other South African 114 91 (20.2)
Trudon 28 28 -
Swiftnet 7 9 28.6
Data Centre Operations 53 42 (20.8)
Corporate centre 26 12 (53.8)
Total 2,762 2,165 (21.6)
The decrease in capital expenditure was mainly driven by a decrease in the
capital expenditure of Multi-Links.
Telkom South Africa capital expenditure
for the six months ended
30 September
In ZAR millions 2009 2010 %
Baseline 1,160 815 (29.7)
Revenue generating 1 614 -
Network evolution 424 239 (43.6)
Sustainment 16 30 87.5
Effectiveness and efficiency 193 87 (54.9)
Support 107 99 (7.5)
Regulatory and other 13 19 46.2
Total 1,914 1,903 (0.6)
Telkom South Africa`s capital expenditure, which includes spending on
intangible assets, decreased by 0.6% to R1,903 million (30 September 2009:
R1,914 million) and represents 12.0% of Telkom South Africa`s revenue (30
September 2009: 11.4%).
Baseline capital expenditure of R815 million (30 September 2009: R1,160
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 contributed to the network evolution and
sustainment capital expenditure.
The significant increase in revenue generating capital expenditure was as a
result of the mobile business case. We have constructed 800 base stations by
the launch date on 18 October 2010.
The decrease in expenditure on network evolution was mainly because the
project for the deployment of automated restoration functionality for the
National Transport Network, the provisioning of bandwidth for the Soccer World
Cup and for future national capacity growth requirements was largely concluded
in the 2009 financial year.
Telkom continues to focus on its operations support systems with current
emphasis on workforce management, provisioning and fulfilment, assurance and
customer care, hardware technology upgrades on the enterprise networks and
performance and service management and property optimisation. During the six
months ended 30 September 2010, R87 million (30 September 2009: R193 million)
was spent on the implementation of several systems.
The support capital expenditure of R99 million (30 September 2009: R107
million) is mainly for provision of new buildings and building extensions in
support of network growth and for the development and upgrading of existing
equipment buildings, including the associated AC power and air conditioning.
The expenditure on regulatory requirements is primarily for a system to store
and manage customer identification documentation and for the initial phase of
the Number Portability project.
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 30 September 2010
Restated* Reviewed
30 September 30 September
2009 2010
Notes Rm Rm
Continuing operations
Total revenue 3 19,226 17,973
Operating revenue 18,761 17,667
Other income 4 18,814 184
Operating expenses 19,418 15,417
Employee expenses 5.1 5,359 4,853
Payments to other operators 5.2 4,284 3,057
Selling, general and administrative 5.3 3,335 2,911
expenses
Service fees 1,340 1,411
Operating leases 5.4 474 526
Depreciation, amortisation, 5.5 4,626 2,659
impairment and write-offs
Results from operating activities 18,157 2,434
Investment income 280 133
Gain on distribution of assets 4 25,688 -
Finance charges and fair value 6 794 659
movements
Interest 749 514
Foreign exchange and fair value 45 145
movement
Profit before taxation 43,331 1,908
Taxation 7 3,700 830
Profit from continuing operations 39,631 1,078
Profit from discontinued operation 106 -
Profit for the period 39,737 1,078
Other comprehensive income
Exchange differences on translating (1,587) (77)
foreign operations
Realised exchange differences on (189) -
translating foreign operations
Available-for-sale investment 8 -
Defined benefit plan actuarial 732 (236)
gains/(losses)
Defined benefit plan asset (722) 123
limitations
Income tax relating to components 8 323 32
of other comprehensive income
Other comprehensive income for the (1,435) (158)
year, net of taxation
Total comprehensive income 38,302 920
Profit attributable to:
Owners of Telkom 39,661 1,009
Non-controlling interest 76 69
Profit for the period 39,737 1,078
Total comprehensive income
attributable to:
Owners of Telkom 38,226 851
Non-controlling interest 76 69
Total comprehensive income for the 38,302 920
period
Total operations
Basic earnings per share (cents) 9 7,882.0 198.6
Diluted earnings per share (cents) 9 7,865.8 198.6
Continuing operations
Basic earnings per share (cents) 9 7,860.9 198.6
Diluted earnings per share (cents) 9 7,844.8 198.6
* The amounts have been restated for the effect of Swiftnet (Proprietary)
Limited no longer being classified as a disposal group held for sale.
Condensed consolidated interim statement of financial position
at 30 September 2010
Audited Reviewed
31 March 30 September
2010 2010
Notes Rm Rm
Assets
Non-current assets 44,518 43,797
Property, plant and equipment 37,938 37,585
Intangible assets 4,338 4,112
Investments 1,437 1,534
Deferred expenses 156 145
Other financial assets 341 153
Finance lease receivables 250 217
Deferred taxation 58 51
Current assets 12,301 9,153
Inventories 1,274 1,299
Income tax receivable 2 8
Current portion of deferred 48 42
expenses
Current portion of finance lease 109 109
receivables
Trade and other receivables 5,981 6,049
Other financial assets 1,032 821
Cash and cash equivalents 12 3,855 825
Total assets 56,819 52,950
Equity and liabilities
Equity attributable to owners of 29,925 29,346
the parent
Share capital 5,208 5,208
Treasury shares 13 (1,171) (770)
Share-based compensation reserve* 2,060 -
Non-distributable reserves 620 629
Retained earnings 23,208 24,279
Non-controlling interests 339 336
Total equity 30,264 29,682
Non-current liabilities 14,204 14,884
Interest-bearing debt 14 7,925 7,899
Other financial liabilities 19 95
Provisions 15 4,355 4,866
Deferred revenue 1,068 1,142
Deferred taxation 837 882
Current liabilities 12,351 8,384
Trade and other payables 16 5,549 4,334
Shareholders for dividend 23 22
Current portion of interest-bearing 14 1,812 390
debt
Current portion of provisions 15 2,556 1,307
Current portion of deferred revenue 2,051 1,861
Income tax payable 165 227
Other financial liabilities 133 154
Credit facilities utilised 12 62 89
Total liabilities 26,555 23,268
Total equity and liabilities 56,819 52,950
* Share-based compensation reserve has been transferred to retained earnings
as a result of the final vesting that occurred during the period ended 30
September 2010.
Condensed consolidated interim statement of changes in equity
for the six months ended 30 September 2010
Reviewed Reviewed
30 September 30 September
2009 2010
Rm Rm
Balance at 1 April 35,495 30,264
Attributable to owners of Telkom 34,642 29,925
Non-controlling interests 853 339
Total comprehensive income for the period 38,302 920
Profit for the period 39,737 1,078
Other comprehensive income (1,435) (158)
Exchange differences on translating foreign (1,261) (77)
operations
Realised exchange differences on translating (189) -
foreign operations
Available-for-sale investment 8 -
Net defined benefit plan losses and asset 7 (81)
limitations
Dividend paid (41,711) (1,588)
Increase in share-based compensation reserve 1,123 86
Reserves derecognised on disposal of Vodacom (553) -
Balance at 30 September 32,656 29,682
Attributable to owners of Telkom 32,335 29,346
Non-controlling interests 321 336
Condensed consolidated interim statement of cash flows
for the six months ended 30 September 2010
Reviewed Reviewed
30 September 30 September
2009 2010
Rm Rm
Cash flows from operating activities (9,211) 294
Cash receipts from customers 17,814 17,658
Cash paid to suppliers and employees (13,693) (14,979)
Cash generated from operations 4,121 2,679
Interest received 280 270
Finance charges paid (313) (377)
Taxation paid (2,067) (689)
Cash generated from operations before 2,021 1,883
dividend paid
Dividend paid (11,232) (1,589)
Cash flows from investing activities 17,402 (2,102)
Proceeds on disposal of property, plant and 30 6
equipment and intangible assets
Proceeds on disposal of investment 20,599 -
Additions to property, plant and equipment (3,044) (2,099)
and intangible assets
Acquisition of subsidiaries and joint (183) (9)
venture
Cash flows from financing activities (6,999) (1,275)
Loans raised 2,710 291
Loans repaid (8,503) (1,832)
Acquisition of non-controlling interest (2) -
Finance lease capital repaid (329) (83)
(Increase)/decrease in net financial assets (875) 349
Net increase/(decrease) in cash and cash 1,192 (3,083)
equivalents
Net cash and cash equivalents at beginning 1,780 3,793
of period
Effect of foreign exchange rate differences - 26
Net cash and cash equivalents at end of 2,972 736
period
Notes to the condensed consolidated interim financial statements
for the six months ended 30 September 2010
1. Corporate information
Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the
Republic of South Africa (`South Africa`) whose shares are publicly traded.
The main objective of Telkom, its subsidiaries and joint ventures (`the
Group`) is to supply telecommunication, broadcasting, multimedia, technology,
information and other related information technology services to the general
public, as well as mobile communication services 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 31 March
2010.
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 and methods of computation
applied by the Group in the condensed consolidated interim financial
statements are consistent with those applied in the annual financial
statements dated 31 March 2010.
IAS24 (revised) Related Party Disclosures
The Group has early adopted the revised IAS24 partial exemption from the
disclosure requirements for government related entities for the financial
reporting period starting 1 April 2010.
In terms of the above partial exemption of the revised standard, government
related entities are required to disclose only those transactions that are
either individually significant or collectively significant in transactions
with government and major public entities.
The disclosures have been applied retrospectively.
IFRIC18 Transfers of Assets from Customers
As of 1 April 2010, the Group adopted IFRIC18 which clarifies the requirements
of IFRS for agreements in which an entity receives from a customer an item of
property, plant and equipment that the entity must then use either to connect
the customer to a network or to provide the customer with ongoing access to a
supply of goods or services.
This interpretation does not have a material impact on contracts that Telkom
has with external customers.
Change in Accounting Policy
IAS31 Interests in Joint Ventures
As of 1 April 2010, the Group changed its accounting policy for interests in
joint ventures from proportionate consolidation to equity accounting.
The Group believes that equity accounting aligns it with the expected changes
to the standard dealing with joint ventures likely to be issued as a new IFRS.
The Number Portability Company which was acquired in April 2010 will be
accounted for in terms of the new policy.
This change in accounting policy has no retrospective impact on the Group
financial statements.
The following new standards, amendments to standards and interpretations which
are mandatory for financial periods beginning after 1 January 2010 do not have
a material impact on the Group:
IFRS2 (amendment) Share-based Payments - Amendments relating to group cash-
settled share-based payment transactions
IFRS2 (amendment) Share-based Payments - Scope of IFRS2 and revised IFRS3
IFRS5 (amendment) Non-current Assets held for Sale and Discontinued Operations
- Plan to sell the controlling interest in a subsidiary
IFRS5 (amendment) Non-current Assets held for Sale and Discontinued Operations
- Disclosure on non-current assets (disposal groups) classified as held for
sale or discontinued operations
IFRS8 (amendment) Operating Segments - Disclosure of information about segment
assets
IAS1 (amendment) Presentation of Financial Statements - Current/non-current
classification of convertible instruments
IAS7 (amendment) Statement of Cash Flows - Classification of expenditures on
unrecognised assets
IAS17 (amendment) Leases - Classification of leases of land and buildings
IAS32 (amendment) Financial Instruments - Classification of rights issue
IAS36 (amendment) Impairment of Assets - Unit of accounting for goodwill
impairment test
IAS38 (amendment) Intangible Assets - Additional consequential amendments
arising from revised IFRS3
IAS38 (amendment) Intangible Assets - Measuring the fair value of an item of
an intangible asset acquired in a business combination
IAS39 (amendment) Financial Instruments - Eligible hedged items
IAS39 (amendment) Financial Instruments - Scope exemption for business
combination contracts
IAS39 (amendment) Financial Instruments - Cash flow hedge accounting
IAS39 (amendment) Financial Instruments - Assessment of loan prepayments
penalties as embedded derivatives
IFRIC9 (amendment) Reassessment of Embedded Derivatives - Scope of IFRIC9 and
revised IFRS3
IFRIC16 (amendment) Hedges of a Net Investment in a Foreign Operation -
Amendment to the restriction on the entity that can hold hedging instruments
Restated
30 September 30 September
2009 2010
Rm Rm
3. Total revenue 19,226 17,973
Operating revenue 18,761 17,667
Other income (excluding profit on disposal 185 173
of property, plant and equipment,
intangible assets and investments)
Investment income 280 133
Operating revenue decreased partially due
to a reduction in interconnection revenue
as a result of the mobile termination rate
cut compared to the prior year and lower
volumes on switched hubbing.
The decrease in investment income is as a
result of lower cash balances.
30 September 30 September
2009 2010
Rm Rm
4. Disposal groups
Disposal of Vodacom Group (Proprietary)
Limited
Telkom disposed of its 50% interest in
Vodacom by selling 15% to Vodafone Group
Plc ("Vodafone") and unbundling the
remaining 35% to existing shareholders in
Telkom on 18 May 2009.
Amounts included in the statement of
comprehensive income:
Other income 18,535 -
Gain on distribution of assets 25,688 -
Restated
30 September 30 September
2009 2010
Rm Rm
5. Operating expenses
5.1 Employee expenses 5,359 4,853
Included in September 2009 is R951 million
share-based compensation expense as a
result of the change in the vesting
conditions of the conditional share plan
relating to the Vodacom transaction. If
this once-off payment is excluded the 10%
increase in employee expenses is partly
attributable to a 7.5% salary increase that
was agreed upon with the unions and
workforce reduction expenditure of
approximately R144 million.
5.2 Payments to other operators 4,284 3,057
The decrease in payments to other operators
is mainly due to the effect of the mobile
termination rate cut compared to the prior
year, and the lower volumes on switched
hubbing.
5.3 Selling, general and administrative 3,335 2,911
expenses
Selling, general and administrative
expenses decreased as a result of lower
stock write-offs.
5.4 Operating leases 474 526
Increase in operating leases is mainly as a
result of increased utilisation of leased
infrastructure in Multi-Links specifically
relating to cell sites rental.
5.5 Depreciation, amortisation, impairment 4,626 2,659
and write-offs
Depreciation of property, plant and 2,085 2,028
equipment
Amortisation of intangible assets 359 378
Impairment of property, plant and equipment 2,148 201
and intangible assets
Write-offs of property, plant and equipment 34 52
and intangible assets
The impairment charge of R201 million
relates to Multi-Links (30 September 2009:
R2,148 million).
6. Finance charges and fair value movements 794 659
Finance charges on interest-bearing debt 749 514
Local debt 835 573
Foreign debt 66 3
Less: Finance charges capitalised (152) (62)
Foreign exchange gains and losses and fair 45 145
value movement
Foreign exchange (gains)/losses (200) 55
Fair value adjustments on derivative 245 90
instruments
The decrease in the finance charges is due to lower debt levels and lower
interest rates over the period under review.
Higher fair value and exchange rate losses were incurred due to the mark to
market valuation of forward exchange contracts and interest rate swap
agreements as a result of the strengthening of the Rand, particularly against
the US dollar.
Restated
30 September 30 September
2009 2010
Rm Rm
7. Taxation 3,700 830
South African normal company taxation 2,068 586
Deferred taxation 721 86
Secondary taxation on companies (`STC`) 911 156
Foreign taxation - 2
Included in the current period`s normal company taxation and deferred taxation
expense is capital gains tax of RNil (30 September 2009: R1,345 million) and a
reversal of RNil million (30 September 2009: 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 exceed dividends received.
Included in the STC for the comparative period is the impact of the Vodacom
transaction dividend.
30 September 30 September
2009 2010
Rm Rm
8. Taxation effects of other comprehensive
income
Tax effects relating to each component of
other comprehensive income
Exchange differences on translating foreign (1,587) (77)
operations
Tax effect of exchange differences on 326 -
translating foreign operations
Net foreign currency translation (1,261) (77)
differences for foreign operations
Realised exchange differences on (189) -
translating foreign operations
Tax effect of realised exchange differences - -
on translating foreign operations
Net realised exchange differences on (189) -
translating foreign operations
Available-for-sale investment 8 -
Tax effect of available-for-sale investment - -
Net available-for-sale investment 8 -
Defined benefit plan actuarial 732 (236)
gains/(losses)
Tax effect of defined benefit plan (205) 66
actuarial balance
Net defined benefit plan actuarial 527 (170)
gains/(losses)
Defined benefit plan asset limitations (722) 123
Tax effect of defined benefit plan asset 202 (34)
limitations
Net defined benefit plan asset limitations (520) 89
Other comprehensive income for the period (1,758) (190)
before taxation
Tax effect of other comprehensive income 323 32
for the period
Other comprehensive income for the period (1,435) (158)
net of taxation
30 September 30 September
2009 2010
Rm Rm
9. Earnings per share
Total operations
Basic earnings per share (cents) 7,882.0 198.6
Diluted earnings per share (cents) 7,865.8 198.6
Headline earnings per share (cents) (139.1) 243.6
Diluted headline earnings per share (cents) (138.8) 243.6
Continuing operations
Basic earnings per share (cents) 7,860.9 198.6
Diluted earnings per share (cents) 7,844.8 198.6
Headline earnings per share (cents) (160.2) 243.6
Diluted headline earnings per share (cents) (159.9) 243.6
Reconciliation of weighted average number
of ordinary shares:
Ordinary shares in issue 520,783,900 520,783,900
Weighted average number of treasury shares (17,596,506) (12,635,247)
Weighted average number of shares 503,187,394 508,148,653
outstanding
Reconciliation of diluted weighted average
number of ordinary shares
Weighted average number of shares 503,187,394 508,148,653
outstanding
Expected future vesting of shares 1,031,110 -
Diluted weighted average number of shares 504,218,504 508,148,653
outstanding
Total operations
Reconciliation between earnings and
headline earnings:
Profit attributable to equity holders of 39,661 1,009
Telkom
Adjustments:
Profit on disposal of investments (18,605) -
Profit on disposal of property, plant and (24) (11)
equipment and intangible assets
Impairment loss on property, plant and 2,148 201
equipment and intangible assets
Write-offs of property, plant and equipment 34 52
and intangible assets
Gain on distribution of assets (25,688) -
Tax effects 1,774 (13)
Headline earnings (700) 1,238
Continuing operations
Reconciliation between earnings and
headline earnings:
Profit from continuing operations 39,631 1,078
Non-controlling interest (76) (69)
Earnings as reported 39,555 1,009
Profit on disposal of investments (18,605) -
Profit on disposal of property, plant and (24) (11)
equipment and intangible assets
Impairment loss on property, plant and 2,148 201
equipment and intangible assets
Write-offs of property, plant and equipment 34 52
and intangible assets
Gain on distribution of assets (25,688) -
Tax effects 1,774 (13)
Headline earnings (806) 1,238
Discontinuing operations
Reconciliation between earnings and
headline earnings:
Profit from discontinued operations 106 -
Non-controlling interest - -
Earnings from discontinued operations 106 -
attributable to equity holders of Telkom
Headline earnings 106 -
Dividend per share (cents) 375.0 300.0
The calculation of dividend per share is
based on dividends of R1,532 million (30
September 2009: R1,894 million) declared on
18 June 2010 (30 September 2009: 19 June
2009) and a number of ordinary shares on
the date of dividend declaration of
510,638,013 (30 September 2009:
505,008,190). The reduction in the number
of shares represents the number of treasury
shares held on date of payment.
Vodacom dividend per share (cents) 7,750.0 -
The Vodacom dividend consists of a once-off
cash dividend of Nil cents (30 September
2009: 1,900.0 cents) per share totalling
RNil (30 September 2009: R9,740 million)
and a 35% unbundling share valued at Nil
cents (30 September 2009: 5,850.0 cents)
per share with a total value of RNil (30
September 2009: R29,990 million).
31 March 30 September
2010 2010
Rm Rm
10. Net asset value per share 5,919.9 5,746.9
The calculation of net asset value per
share is based on net assets of R29,346
million (31 March 2010: R29,925 million)
and 510,638,013 (31 March 2010:
505,496,644) number of ordinary shares
outstanding. The decrease in the net asset
value is mainly due to the increase in net
debt of R2.1 billion.
11. Capital expenditure incurred
Property, plant and equipment 4,964 2,004
Intangible assets (including business 910 162
combinations)
Capital expenditure was largely for the
deployment of technologies to support the
growing data services business, links to
the mobile cellular operators, expenditure
for access line deployment and construction
of mobile base stations.
12. Net cash and cash equivalents 3,793 736
Cash shown as current assets 3,855 825
Cash and bank balances 828 642
Short-term deposits 3,027 183
Credit facility utilised (62) (89)
The significant decrease in cash and bank
balances and short term deposits is due to
the payment for the mobile expansion
capital expenditure and operating expenses,
the settlement of the Telcordia dispute
(approximately R608 million) as well as the
repayment of the private placings debt
instrument (PPO3).
31 March 30 September
2010 2010
Rm Rm
13. Treasury shares (1,171) (770)
The reserve represents amounts paid by
Telkom to subsidiaries, Rossal No 65
(Proprietary) Limited and Acajou
Investments (Proprietary) Limited for the
acquisition of Telkom`s shares to be
utilised in terms of the Telkom Conditional
Share Plan (`TCSP`).
At 30 September 2010, 2,002,331 (31 March
2010: 7,143,700) and 8,143,556 (31 March
2010: 8,143,556) ordinary shares in Telkom,
with a fair value of R77 million (31 March
2010: R244 million) and R313 million (31
March 2010: R278 million) are held as
treasury shares by its subsidiaries Rossal
No 65 (Proprietary) Limited and Acajou
Investments (Proprietary) Limited,
respectively.
The reduction in the number of treasury
shares is due to 5,141,369 (31 March 2010:
4,457,699) shares that vested in terms of
the TCSP during the six months ended 30
September 2010.
14. Interest-bearing debt
Non-current interest-bearing debt 7,925 7,899
Local debt 6,863 6,895
Foreign debt 156 126
Finance leases 906 878
Current portion of interest-bearing debt 1,812 390
Local debt 1,711 291
Foreign debt 55 46
Finance leases 46 53
Repayments/refinancing
The Group repaid private placings debt
instruments with a nominal value of R1,780
million on maturity.
The R390 million nominal value of current
portion of interest-bearing debt as at 30
September 2010 is expected to be
repaid/refinanced from available cash,
operational cash flow and the issue of new
debt instruments.
Management believes that sufficient funding
will be available at the date of
repayment/refinancing.
31 March 30 September
2010 2010
Rm Rm
15. Provisions
Non-current portion of provisions 4,355 4,866
Employee related 4,304 4,818
Non-employee related 51 48
Current portion of provisions 2,556 1,307
Employee related 1,963 1,287
Non-employee related 593 20
The increase in non-current provisions is
mainly due to the increase in post-
retirement medical aid.
The reduction of the current portion of
provisions is attributable to the
settlement of the Telcordia dispute
(approximately R608 million) as well as
only six months bonus provision being made
to date.
16. Trade and other payables 5,549 4,334
The decrease in the vendors` balances is
due to less purchase requirements for
projects made in the first half of the
financial year and also due to the
strengthening of the Rand against the major
foreign currencies in the period under
review.
17. Commitments
Capital commitments authorised 7,270 5,214
Commitments against authorised capital 1,680 1,953
expenditure
Authorised capital expenditure not yet 5,590 3,261
contracted
Capital commitments are largely
attributable to purchases of property,
plant and equipment and software (included
in intangible assets).
Included in commitments against authorised
capital expenditure and authorised capital
expenditure not yet contracted, is R1,489
million (31 March 2010: RNil million) and
R233 million (31 March 2010: RNil million)
respectively which relates to Telkom
Mobile.
Management expects these commitments to be
financed from internally generated cash and
other borrowings.
18. Contingencies
This condensed set of financial statements includes only an update of the
contingencies that were reflected in the most recent annual financial
statements and should be read in conjunction with the disclosures in the
Group`s March 2010 financial statements.
SUPPLIER DISPUTE
Telcordia Settlement
The arbitrator`s award was delivered on 11 June 2010. The arbitrator awarded
an amount of USD30.5 million, excluding interest from March 2001, to
Telcordia. Telkom paid an amount of USD8.7 million during 2007, which was in
respect of conceded claims. The amount of the claim, plus interest thereon, as
at 30 June 2010 was approximately USD82.7 million. The parties settled the
matter on the basis that Telkom pay an amount of USD80 million, plus
applicable VAT, which was paid.
Radio Surveillance Security Services (Pty) Limited (`RSSS`)
RSSS invoiced Telkom R97 million in August 2010 for apparent upgrades and/or
replacement of alarm systems dating back to 2008. No contract was concluded
between Telkom and RSSS to perform these upgrades, nor were there any orders
placed by Telkom with RSSS to proceed with the upgrades and/or replacements.
Telkom has launched an investigation to confirm whether the services were
actually rendered, however management has not been able to confirm this to
date. Telkom`s inhouse counsel is of the view that the invoice should not be
paid.
COMPETITION COMMISSION
Telkom is party to a number of legal proceedings filed by several parties with
the South African Competition Commission (`CC`) alleging anti-competitive
practices described below. Some of the complaints filed at the CC have been
referred by the CC to the Competition Tribunal (`CT`) for adjudication.
Should the CC find that Telkom committed a prohibited practice as set out in
the Competition Act, the CT may impose a maximum administrative penalty of 10
percent of Telkom`s annual turnover in 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 in
respect of the contraventions Telkom is being accused of.
The South African Value Added Network Services (`SAVA`)
The South African Vans Association (`SAVA`) filed complaints against Telkom at
the CC on 7 May 2002 regarding certain alleged anti-competitive practices by
Telkom. The CC referred this matter to the CT, together with the Omnilink
matter discussed below. Telkom has filed its opposing affidavit and the CC has
filed a replying affidavit. The matter was set down for hearing by the CT from
30 May 2011 to 17 June 2011. On 27 September 2010, the CC filed an application
to amend its papers to include a margin squeeze allegation. Telkom is opposing
this application which has been set down for hearing at the CT in November
2010. Telkom is also preparing for the hearing of the main complaint.
Omnilink
On 22 August 2002, Omnilink filed a complaint against Telkom at the CC
alleging that Telkom was abusing its dominance by discriminating in its price
for Diginet services between those charged to VANS and the price charged to
Telkom customers who apply for a Telkom VPN solution. The CC referred this
complaint, together with the SAVA complaint, to the CT for adjudication. This
matter is currently being dealt with together with the SAVA matter discussed
above.
A pre-trial hearing was held and the matter was set down for hearing from 30
May 2011 to 17 June 2011.
Competition Commission Multiple Complaints Referral
The CC served an application on Telkom on 26 October 2009, in which it
referred certain aspects of the complaints against Telkom by MWEB and Internet
Solutions, the Internet Service Providers Association ("ISPA"), MWEB, Internet
Solutions and Verizon respectively ("Multiple Complaints"), to the CT. The CC
furthermore filed a notice of non-referral in respect of those aspects of the
complaints not referred by it to the CT.
Telkom opposed the Multiple Complaints referral and filed an exception
application, due to the CC`s papers being vague and embarrassing and certain
complaints being alleged cumulatively as opposed to in the alternative. Telkom
also raised certain constitutional points relating to the definition of
"excessive pricing" in the Competition Act and the implications of the said
definition. The exception application was heard on 11 October 2010 and the
parties are awaiting the CC`s ruling. Telkom will only be expected to file an
answer to the main complaint once the exception has been finalised.
Internet Solutions (`IS`)
IS self-referred certain aspects of their complaint, namely those parts of
their complaint which were non-referred by the CC, to the CT on 26 November
2009. The IS complaint referral and the Multiple Complaints referral are being
dealt with together at the CT.
In this matter too, Telkom filed an exception to IS` referral papers. The
exception application was heard on 11 October 2010, together with the
exception application in the Multiple Complaints referral matter. At the
hearing of the exception, the parties were instructed by the CT to attempt to
reach agreement as to the manner in which IS would amend their papers to
remove the cause for exception. No agreement was reached and both parties
rather submitted proposals to the CT as to an appropriate ruling. The matter
was finalised on the aforementioned basis and the parties are now awaiting the
CC`s ruling. Telkom will only be expected to file an answer to the IS self-
referral once the exception has been finalised.
Directory Solutions CC v Trudon (Proprietary) Limited (`Trudon`) and Telkom
Directory Solutions lodged a complaint at the CC on 25 March 2010 alleging
that Trudon is abusing its dominance in the market in contravention of section
8 of the Competition Act 89 of 1998.
The complainant alleges:
- that Trudon refuses to publish the complainant`s own entries;
- that Trudon refuses to advise the complainant timeously of the opening and
closing canvas dates;
- that Trudon insists on receiving advance payment for entries submitted by
the complainant on behalf of consumers whilst other entries submitted to
Trudon directly by consumers are paid for on a monthly basis; and
- that Trudon`s conduct is aimed at forcing the complainant out of the
market.
In November 2009, Directory Solutions launched an application for interim
relief at the CT, requesting an order that:
"The First Respondent be ordered to publish all entries submitted by the
Applicant to First Respondent on behalf of Applicant`s customers in the
applicable telephone directories of the Second Respondent, with immediate
effect, pending the outcome of the complaint lodged by the Applicant against
the First and Second Respondent under reference 2009APR4384.
The First Respondent be prohibited from demanding payment upfront from the
Applicant`s customers as a prerequisite for publication of their entries on
the basis that First Respondent contravenes Section 8 of the Competition Act
89 of 1998".
On 8 April 2010, the CT made an interim order in favour of Directory
Solutions. Trudon and Telkom lodged an appeal at the Competition Appeal Court
and the Competition Appeal Court ruled in favour of Telkom and Trudon on 17
June 2010, setting aside the interim order made by the CT. Directory Solutions
then brought an application for special leave to appeal to the Supreme Court
of Appeal, which is pending.
Chorus Call (Proprietary) Limited (`Chorus Call`)
Chorus Call filed a complaint at the CC on 26 May 2009, alleging that "there
is no difference in the prices Telkom charges its customers for national or
long-distance peak calls, irrespective of the point of termination. For local
peak calls, Telkom`s minimum rate for calls on its network is R0.650
(including VAT) and R0.00653 (including VAT) per second. Rates for Telkom`s
peak local calls to a Neotel number are the same as the national rate. This
pricing method results in Telkom calls to a Neotel number costing 66% more
than a call terminating on Telkom`s network." Telkom has not yet been provided
with a full copy of the complaint.
The CC has forwarded various questionnaires to Telkom since March 2010 to
which Telkom has responded.
ECN Telecommunications (Proprietary) Limited (`ECN`)
ECN filed a complaint at the CC on 16 October 2009 alleging that "Telkom is
marking up calls made by its subscribers to ECN`s network to such an extent
(by more than 100%) that ECN is being prevented from competing in the fixed
line call termination market. As a direct result of Telkom`s dominant
position, nearly 100% of the calls that originate on fixed lines are made by
Telkom subscribers. This means that Telkom has the ability to off-set retail
tariffs at a level that will prevent ECN`s fixed lines from becoming a
competitive alternative to Telkom`s fixed lines. ECN regards Telkom`s
excessive pricing of calls to ECN as (a) an abuse of its dominant position (b)
a clear attempt to lessen competition in the market and (c) as being contrary
to the public interest..."
Telkom has not yet been provided with a full copy of the complaint. The CC has
forwarded various questionnaires to Telkom since March 2010 to which Telkom
has responded.
Phuthuma Networks (Proprietary) Limited (`Phuthuma`)
Telkom was informed by the CC that a complaint was filed by Phuthuma at the
CC, wherein Phuthuma alleges that "Telkom has contravened section 8(c) of the
Competition Act no 89 of 1998, as amended, by abusing its dominant position in
engaging in anti-competitive conduct in the telegraphic and telex maritime
services market by unilaterally awarding these services to Networks Telex." On
28 June 2010, the CC decided not to refer the complaint to the CT, but the
complainant self-referred the matter to the CT on 20 July 2010, alleging that
Telkom engaged in an exclusionary act "by appointing Network Telex in 2007
without any formal procurement process." Telkom filed its opposing affidavit
and Phuthuma has filed a replying affidavit. A pre-hearing has been scheduled
for 1 December 2010.
GENERAL LITIGATION MATTERS
Maredi Telecom and Broadcasting (Proprietary) Limited (`Maredi`)
Maredi served an application on Telkom, Ericsson SA and Telsaf Data
(Proprietary) Limited on 8 January 2009. The matter relates to a tender
published by Telkom for the supply of point to point split mount microwave
equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were
shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson.
Maredi applied for an urgent court order, with a court hearing date set for 3
February 2009, requesting that the court prevent Telkom from entering into a
contract with Ericsson and Telsaf or either party, and from ordering goods or
services from Ericsson and Telsaf pursuant to the tender. Maredi also
requested an order (the review application) that the court review and set
aside the award of the tender to Telsaf and Ericsson or either of the
aforementioned parties, and refer the tender back to Telkom in order for
Telkom to reconsider its award. Maredi alleged that there were certain
irregularities in the tender process.
Telkom and Ericsson opposed the application. On 20 February 2009 the High
Court dismissed Maredi`s urgent application with costs. However, Maredi is
proceeding with the review application in the ordinary course and Telkom is
opposing the application.
The matter is not yet set down for hearing.
Phuthuma Networks (Proprietary) Limited (`Phuthuma`)
Phuthuma served a summons on Telkom on 20 August 2009, wherein it is claiming
various amounts as damages. Phuthuma has based its claim for damages on
various allegations inter alia an allegation that Telkom had failed to
adjudicate a tender in accordance with a fair, transparent, competitive and
cost-effective procurement policy.
The tender was published on 30 November 2007 for the outsourcing of Telkom`s
Telex and Gentex Services and for the provision of a solution to support the
maritime industry requirements. The validity period was 180 days during which
period Telkom was required to make an award. Telkom had cancelled the tender
on 10 June 2009 without making any award, due to the expiry of the validity
period.
Phuthuma is claiming:
Damages of R3.7 billion alternatively R5.5 billion further alternatively R1.8
billion plus interest at 15.5 % per annum from April 2008, alternatively from
30 April 2009 being date of notice in terms of Act 40 of 2002, further
alternatively from date of service of the summons plus costs of suit plus
further and or alternate relief.
Telkom is defending the matter. The matter has been set down for hearing on 17
February 2011.
South African National Road Agency Limited (`SANRAL`)
On 1 October 2008, an application issued out of the Pietermaritzburg Division
of the KwaZulu Natal High Court was served upon Telkom by SANRAL. In terms of
the application, SANRAL is seeking a declaratory order and an interdict. The
interdict has not been brought on an urgent basis and arises from a long
standing dispute between Telkom and SANRAL regarding the latter`s right to
refuse Telkom access to its road reserves and to claim huge levies in lieu of
Telkom`s occupation thereof. Telkom had over many years attempted to negotiate
an agreement with SANRAL.
With regard to the declaratory order, SANRAL has requested the court to
declare that Telkom cannot enter upon SANRAL`s land for any purpose whatsoever
without SANRAL`s permission and subject to prescriptions referred to in S48(3)
(b) of the SANRAL Act. In addition as part of the declaratory order, SANRAL
has also requested the court to declare that the installation of facilities
installed by Telkom on that portion of the N2 national road reserve at section
32 between kilometres 8.2 and the town of Pongola was and is unlawful.
Judgement was granted against Telkom on 25 October 2010 in respect of the
declaratory only. The order issued by the court requires Telkom to acquire the
permission of SANRAL in terms of section 48 of the SANRAL Act and subject to
the prescriptions of section 48 (3)(b) whenever it enters land under SANRAL`s
control. Telkom is appealing against the judgement.
Bihati Solutions (Proprietary) Limited/RFP101 (`Bihati`)
The matter arises from a tender which was published on 8 November 2007 for the
provision of network services. Telkom failed to make an award during the
validity period of 120 days or the purported extension granted by the
shortlisted bidders. An award was subsequently made during November 2008 after
the validity period had expired. Telkom had obtained an opinion from senior
counsel after it received challenges from the unsuccessful bidders regarding
the validity of the award made under the tender. As a consequence of counsel`s
opinion, the Telkom Board resolved to review and set aside the aforesaid
award.
Prior to Telkom filing an application for the review and setting aside of its
award made, Bihati served an application on Telkom for the review and setting
aside the Telkom Board`s decision to review and setting aside of its earlier
decision to award a tender to Bihati and five other service providers. Telkom
is opposing Bihati`s application. Telkom has requested the court to order that
the two applications be heard simultaneously. The applications were heard on
18 November 2010. Judgement was reserved.
COMPLAINTS AND COMPLIANCE COMMITTEE ICASA COMPLAINT
Phuthuma Networks (Proprietary) Limited (`Phuthuma`)
During February 2010 Phuthuma lodged a complaint against Telkom at the
Complaints and Compliance Committee of ICASA. The complaint is that Telkom has
contravened the provisions of the repealed Tele-communications Act as well as
the conditions of its licence. Telkom made submissions to the Committee. The
matter is part heard and the hearing will resume again during the course of
2011.
30 September 30 September
2009 2010
Rm Rm
19. Segment information
The Group`s reporting segments are business
units that are separately managed.
The Group consists of two reportable
segments namely Telkom South Africa and
Multi-Links.
The Telkom South Africa 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 through
the Multi-Links subsidiary.
The other category is a reconciling item
which is split geographically between
international and South Africa.
Telkom international category provides
internet services outside South Africa,
through the iWayAfrica subsidiary (formerly
Africa Online Limited and MWEB Africa
Limited) and management services through the
Telkom Management Services Company.
The South African category includes Trudon
Group, Swiftnet, Data Centre Operations and
the Group`s corporate centre.
The Data Centre Operations was shown as part
of the Telkom South Africa segment in the
March 2010 results as the financial
information was still in the process of
being split out. As the information is now
available the results of the Data Centre
Operations were moved to the other category
as it does not meet the quantitative
thresholds for disclosure as a separate
segment. In addition a transfer pricing
policy was implemented with effect from 1
April 2010 for internal transactions between
the Data Centre Operations and other
business units. Included in the Data Centre
Operations under the other category is
internal revenue of R577 million for the six
months ended 30 September 2010 that is
eliminated on consolidation.
Consolidated operating revenue 18,761 17,667
Telkom South Africa 17,007 15,968
Multi-Links 818 744
Other
International 234 222
South African 733 1,356
Elimination (31) (623)
Consolidated operating profit 2,648 2,635
Telkom South Africa 4,385 3,609
Multi-Links (371) (262)
Other
International (41) (65)
South African (1,173) (622)
Elimination (152) (25)
Reconciliation
Adjusted EBIT for reportable segments 2,648 2,635
Gain on sale of investment 18,603 -
Compensation expense (946) -
Impairment of goodwill and assets (2,148) (201)
Operating profit 18,157 2,434
Investment income 280 133
Gain on distribution of assets 25,688 -
Finance charges and fair value movement (794) (659)
Profit before taxation and discontinued 43,331 1,908
operations
31 March 30 September 30 September
2010 2009 2010
Rm Rm Rm
20. Related parties
Details of material transactions
and balances with related parties
are as follows:
With shareholders:
Government of South Africa
Related party transactions
Revenue 2,861 1,360 1,439
Individually significant revenue 1,070 535 523
City of Cape Town 75 37 37
Correctional Services 73 39 32
Department of Health: Gauteng 36 18 27
Department of Justice 78 39 43
South African National Defence 72 37 34
Force: (CSF)
South African Police Services 523 254 251
South African Revenue Services 68 39 26
S.I.T.A. (Pty) Limited 145 72 73
Collectively significant revenue 1,791 825 916
Related party balances
Trade receivables 353 302 360
With entities under common
control:
Major public entities
Related party balances
Trade receivables 39 85 162
Trade payables (8) (6) (3)
Related party transactions
Revenue (381) (165) (189)
Expenses 222 106 99
Individually significant expenses: 110 56 50
South African Post Office
Collectively significant expenses 112 50 49
Rent received (29) (11) (16)
Rent paid 22 11 12
Key management personnel
compensation:
Related party transactions
Short-term employee benefits 137 67 78
Post-employment benefits 7 3 4
Equity compensation benefits 21 3 3
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services
are made at arm`s length prices. Except as indicated above, outstanding
balances at the end of September 2010 are unsecured, interest free and
settlement occurs in cash. There have been no guarantees provided or received
for related party receivables or payables.
21. Significant matters
Resignation of Telkom Group Chief Executive Officer
Telkom announced on 4 June 2010 that Mr Reuben September will retire as Group
Chief Executive Officer ("GCEO") and also relinquish his directorship at the
expiry of his contract. However Mr Reuben September agreed with the Telkom
Board to step down as GCEO and resigned as a director from 7 July 2010.
Appointment of Acting Group Chief Executive Officer
The Telkom Board has commenced the process of appointing a new GCEO. In the
interim Mr Jeffrey Hedberg has been appointed as Acting GCEO.
The Telkom Board believes that these arrangements provide leadership,
continuity and stability at an important time given a number of key strategic
and operational deliverables.
A successor to Mr September will be announced in due course.
Resignation of Telkom Group Chief Financial Officer
Telkom announced on 13 July 2010 that Mr Peter Nelson retired as Group Chief
Financial Officer ("GCFO") and also relinquished his directorship.
The Board thanked Mr Peter Nelson for his valuable contribution to Telkom and
has wished him well.
Appointment of Acting Group Chief Financial Officer
Under the leadership of the Acting Group CEO, Mr Jeffrey Hedberg, the Group
has initiated the process of appointing a new CFO. Mr Deon Fredericks, Group
Executive: Accounting Services will act as CFO until the process has been
finalised.
Change in directors
Mr B Molefe resigned as a non-executive director (Class B Shareholder
representative) of the Board of Telkom with effect from 20 April 2010 as a
result of the expiry of his employment contract with the Public Investment
Corporation Limited.
Mr Younaid Waja was appointed as a non-executive director (Class B Shareholder
representative) on the Board of Telkom with effect from 20 April 2010. In
terms of the Company`s articles of association, the Public Investment
Corporation Limited, Telkom`s Class B shareholder, has the prerogative of
appointing the Class B shareholder representative.
Mr D Barber resigned as a non-executive director of the Board of Telkom with
effect from 20 April 2010.
Dr Ekwow Spio-Garbrah resigned as a non-executive director (Class A
Shareholder representative) of the Board of Telkom with effect from 1 May
2010.
Telkom concluded a roaming agreement with MTN South Africa
On 14 April 2010, Telkom announced that in line with its mobile strategy it
concluded a five year national roaming agreement with MTN South Africa in
terms of which Telkom and its customers will have national access to MTN`s 2G
and 3G network throughout South Africa. Telkom placed orders to build 2 000
new base stations in selected high density areas over the next two years.
The capital outlay for mobile related investments over the next five years is
expected to be approximately R6 billion. The conclusion of the roaming
agreement with MTN South Africa enhances Telkom`s ability to offer Telkom
customers extensive national mobile coverage from day one of launch and
accordingly, is key to the delivery of a successful mobile strategy.
Voluntary severance packages
On 31 March 2010, the Board approved the offering of voluntary severance
packages (VSPs) and voluntary early retirement packages (VERPs) to all
management employees from 28 April 2010 until 2 July 2010. 186 employees
accepted the packages, resulting in a cost of R144 million.
Integration of MWEB Africa Limited and Africa Online Limited
During the year management initiated the integration of MWEB Africa Limited
and Africa Online Limited into a single entity, iWayAfrica. Management
believes the integration will achieve financial synergies by improving
economies of scale and eliminating duplication of functions. The integration
process is ongoing.
22. Subsequent events
Telkom launches its mobile brand under a new name called: 8ta
On 18 October 2010 Telkom launched its new mobile brand called "8ta".
The launch of Telkom`s mobile brand under the new name 8ta is undoubtedly the
most significant achievement to date, one that will allow Telkom to not only
counter the threat posed by competition such as fixed-to-mobile substitution
(and the resulting decline in fixed-line voice revenue) but also grow Telkom
revenue by providing mobile services and products to consumer and business
markets.
Launching a retail brand is a massive undertaking that consists of a myriad of
components - among other things the network and technology aspects, billing,
products and services, distribution channels and the marketing drive to create
awareness and generate sales.
Key brand attributes:
8ta is built on a number of core pillars. These give the brand a unique
personality that tells the customer what 8ta stands for and why it is
different to other brands in the mobile market:
- Value: "more bang for your buck", in other words more value for your money.
- Simplicity: products that are easy to understand, buy and use.
- Quality: network clarity and reliability, as well as the quality of the
customer experience we offer.
- Innovation: deploying new mobile technologies and rapidly bringing new
services to market.
- Authenticity: a South African brand for South Africa.
Government extends the chairman`s contract
On 12 November 2010, the Government announced the renewal of the chairman`s
contract, Mr Jeff Molobela, for two months to give the Cabinet time to decide
on his future. In addition to the above, Dr Victor Lawrence and Jackie
Huntley`s respective contracts which came to an end on 15 November 2010, were
extended for an additional two months.
Public Finance Management Act (PFMA)
Telkom`s 3 year exemption from certain sections of the PFMA ended on 25
October 2010. The Minister of Communications has recommended a further 3 years
exemption to the Minister of Finance for approval.
Multi-Links Telecommunications Limited
The Telkom Group Board has mandated management to review options of exiting
the CDMA business. Telkom has received a number of expressions of interests
which will be evaluated and quantified over the next quarter.
Other matters
The directors are not aware of any other matter or circumstance since the
financial period ended 30 September 2010 and the date of this report, or
otherwise dealt with in the financial statements, which significantly affects
the financial position of the Group and the results of its operations.
www.telkom.co.za
Sponsor: UBS South Africa (Pty) Ltd
Date: 22/11/2010 07:15:01 Produced by the JSE SENS Department.
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