| Mon 21 Nov 2011, 7:05 | | TKG - Telkom SA Limited - Telkom SA Limited Group Interim Results for the |
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TKG
TKG
TKG - Telkom SA Limited - Telkom SA Limited Group Interim Results for the
six months ended 30 September 2011
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 2011
The information contained in this document is also available on Telkom`s
investor relations website www.telkom.co.za/ir
Telkom SA Limited is listed on the JSE Limited. Information may be
accessed on Reuters under the symbols 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.
Group salient features for the six months ended 30 September 2011
ADSL subscribers increased 13.7% to 795,419.
- Calling plan subscribers increased 4.7% to 797,827.
- Internet all access subscribers increased 3.9% to 556,886.
- Managed data network sites increased 12.6% to 37,181.
- Active mobile subscribers of 1,140,289 with a blended ARPU of R63.32
- Operating revenue down 3.2% to R16.4 billion.
- Voice revenue decreased 5.5% to R6.6 billion.
- Data revenue decreased 7.9% to R5.1 billion.
- Operating expenses increased 8.2% to R15.4 billion.
- Fixed-line operating expenses decreased 3.9% to R11.7 billion.
- EBITDA margin decreased to 26.9% from 31.3%.
-Basic earnings per share decreased 70.8% to 85.2 cents per share.
-Headline earnings per share from continuing operations decreased by
35.5% to 191.7 cents.
- Free cash flow of R1.5 billion.
1. OVERVIEW
Johannesburg, South Africa - 21 November 2011, Telkom SA Limited (JSE:
TKG) today announced Group interim results for the six months ended 30
September 2011.
Segment structure
The Group`s reporting segments are business units that are separately
managed. The Group consists of two reportable segments. The fixed-line
segment provides fixed-line access and data communications services
through Telkom South Africa. The mobile segment provides mobile voice
services, data services and handset sales through 8ta.
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.
Comparative information has been restated to reflect the internal
restructuring between the Telkom fixed-line segment and the corporate
centre.
The Multi-Links results are presented as discontinued operations.
Statement by Nombulelo Moholi, Group Chief Executive Officer:
"The six months under review have been very challenging. The traditional
fixed-line market is shrinking as fixed-line voice moves to mobile and
into less profitable data revenue streams and as price competition
intensifies particularly in the data market. Line losses continue, self
provisioning is growing which negatively impacts our wholesale revenues
and regulatory intervention through termination rate cuts impacts our
revenue streams. In addition, our mobile business is taking longer than
expected to reach our targets. Operating revenue for the reporting period
declined 3.2% to R16.4 billion.
Operating expenditure increased 8.2% to R15.4 billion. The increase in
operating expenditure is largely as a result of the R445 million
impairment of iWayAfrica, higher depreciation which reflects our on-going
investment in the network and mobile start-up expenditure after
intercompany eliminations of R1.4 billion. The fixed-line business kept
costs in check with operating expenditure decreasing 3.9% to R11.7
billion. Growing the EBITDA margin in the fixed-line business from 37.5%
to 39.1% given current market conditions is an achievement. Cost control
will remain a key area of focus.
As a result of declining revenue and increasing costs, our EBITDA margin
declined to 26.9% from 31.3% in the previous reporting period. Our
headline earnings per share decreased 35.5% to 191.7 cents.
Our results paint a tough picture of current operations.
It is therefore imperative that we move into select adjacent markets to
grow our revenue streams. We are transforming our network to allow us to
move further into the mobile and select value-added ICT markets. Capital
allocation is prefaced on customer requirements, commercial returns and
the ability to differentiate. For Telkom, full convergence, an aggressive
move into the broadband arena and improving performance of the mobile
business will be the hallmarks of the successful execution of our
strategy".
2. OPERATIONAL DATA
Six months ended
30 September
2010 2011 %
Telkom South Africa
ADSL subscribers1 699,368 795,419 13.7
Calling plan subscribers 762,070 797,827 4.7
Closer subscribers 738,396 767,121 3.9
Supreme call subscribers 23,674 30,706 29.7
WiMAX subscribers 2,935 3,364 14.6
Internet all access 535,794 556,886 3.9
subscribers2
Fixed access lines (`000)3 4,234 4,073 (3.8)
Post-paid - PSTN 2,592 2,513 (3.0)
Post-paid - ISDN channels 776 767 (1.2)
Pre-paid 748 675 (9.8)
Payphones 118 118 -
Fixed-line penetration rate (%) 8.5 8.1 (4.7)
Revenue per fixed access line 2,374 2,402 1.2
(ZAR)
Total fixed-line traffic 10,520 9,797 (6.9)
(millions of minutes)
Local 2,929 2,367 (19.2)
Long distance 1,437 1,371 (4.6)
Fixed-to-mobile 1,816 1,844 1.5
Fixed-to-fixed 43 73 69.8
International outgoing 271 203 (25.1)
Subscription based calling 1,994 1,847 (7.4)
plans
Interconnection 2,030 2,092 3.1
Domestic mobile interconnection 1,041 1,172 12.6
Domestic fixed interconnection 506 497 (1.8)
International interconnection 483 423 (12.4)
Managed data network sites 33,023 37,181 12.6
Telkom Company employees 23,013 20,953 (9.0)
Fixed access lines per 184 194 5.4
employee4
Other International
iWayAfrica
Active subscribers5 26,816 23,326 (13.0)
Employees5 567 494 (12.9)
Customer per employees5 47 47 -
Other South African
Trudon employees 520 528 1.5
Swiftnet employees 107 114 6.5
Year Six months ended
ended
31 March 30 September %
2011 2011
Telkom Mobile
Total subscribers 1,199,596 2,203,419 83.7
Active subscribers6 473,604 1,140,289 140.8
Pre-paid 440,775 882,888 100.3
Post-paid 32,829 257,401 684.1
Base stations constructed 970 1,399 44.2
Employees7 228 267 17.1
ARPU (Rand)6 22.60 63.32 180.2
Pre-paid 15.86 20.47 29.1
Post-paid 238.57 286.09 19.9
Churn % - pre-paid - 41 -
Minutes of use
Pre-paid 10 21 110.0
Post-paid 235 109 (53.6)
Blended 19 36 89.5
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.
6. Based on a subscriber who has participated in a revenue generating
activity within the last 90 days.
7. Included in Telkom Company employees.
3. STRATEGIC DIRECTION
Globally, telecoms operators are coming under intense pressure as growth
in fixed and mobile voice revenues slows considerably. The decline of
fixed-line voice is a common theme across all markets. In comparison, a
burgeoning appetite for data has boosted growth in broadband services.
Broadband and new data intense services are challenging to monetise
particularly in low density geographies like South Africa. Telco
operators are also facing increasing competitive pressure from non
telecom players like Internet and software players (e.g., Google, Skype,
retailers, media players, handset manufacturers and infrastructure
providers e.g., Huawei).
The South African market mirrors these global trends. The changing
domestic regulatory environment and increasing competition are forcing
Telkom to re-assess its product and service offering. Notably, the
interconnect glide path will drive a further decline in fixed revenues,
while the advent of Local Loop Unbundling has potential to put additional
revenues at risk.
In addition, Telkom faces a series of internal challenges. Our labour
productivity has room to improve, while we deal with an ageing workforce.
We have not fully achieved our previous strategic goals, so a focus on
execution is required. Finally, and most critically from a financial
perspective, capital availability is scarce and cash flow will be
constrained over the next three years.
In this context, we understand that we must make a significant step
change in our strategy and approach to execution, not simply to defend
our market share, but to grow our business and our revenues. It is also
clear that we need to be the best we can be in our current businesses
while accessing growing revenue pools in selected adjacencies. Telkom is
making two large investments (8ta and Network Transformation). Our
entrance into adjacencies will need to be measured, with a strong focus
on risk mitigation.
To this end, we have set out to review and align our overall strategy and
implement a five year plan that will enable us to achieve our
aspirations. Our strategy is driven by a number of strategic thrusts
across our four strategic areas, including:
- Growing and defending profitable revenues in Consumer by increasing
broadband penetration in South Africa, while playing a strong role as a
content aggregator;
- Growing and defending profitable revenues for Business customers
through entry into high growth adjacencies focusing on Convergence, Value
Added Services and ICT offerings;
- Delivering on our mobile investment by executing on our aspirations to
achieve 12% - 15% market share of revenues by 2015/16 and providing a
unique Telkom converged offering; and
- Transforming the network through the successful rollout of a next
generation network that is commercially led.
Executing on these strategic imperatives will be challenging, but we have
a strong foundation of recent successes on which to build. We launched
South Africa`s fourth mobile player, 8ta, in 2010 and have recently
launched Telkom Business Mobile to early excitement in the market.
Cybernest has also seen some early successes, and there has been progress
on the network transformation. Internally, a number of positive changes
in the management team will provide more stability after years of
uncertainty, and we have defined clear strategies and plans to achieve
the aspirations.
The next step is to start putting the building blocks in place. We must
align our regulatory and stakeholder management approach to our
aspirations. In addition, we will need greater cross functional
management of key initiatives, e.g., customer service, distribution and
fixed mobile convergence. We have also laid out plans to rebalance our
human capital in order to consolidate our labour cost position while
effectively building the skills that will take Telkom into a new phase of
performance.
Telkom`s recent past has been challenging and uncertain, but through a
cohesive and accountable culture that maintains an unwavering focus on
execution, we hope to achieve our aspirations.
4. OPERATIONAL OVERVIEW
Voice revenue
Voice revenues declined 5.5% to R6,562 million as a result of lower
minutes of use due to mobile substitution and, to a lesser extent, lower
tariffs. Most categories of voice revenue declined and we expect
traditional voice revenue to continue declining. Revenue from
subscription based calling plans grew 1.5% to R819 million. The slowdown
in calling plan revenue growth reflects the increased penetration of
these products and difficult macro economic conditions as customers
switch to the lower priced Telkom Closer 1 and 2 products. Voice annuity
revenue, which includes line rental, calling plans, customer premises
equipment rental and value added services grew 2.9% to R3,983 million.
Interconnection revenue
Interconnection revenue decreased 8.6% to R834 million reflecting a
decrease in international interconnection tariffs and lower volumes on
switched hubbing. There is a plethora of capacity in the international
connectivity market and prices are expected to continue declining.
Broadband and data revenue
Total data revenue decreased 7.9% to R5,114 million as a result of income
generated from the Soccer World Cup in the previous year. Excluding
Soccer World Cup related revenue, data revenue decreased 2.1% as a result
of increased self provisioning and lower internet access revenue.
ADSL subscribers increased 13.7% to 795,419 when compared to the 30
September 2010 reporting period. Telkom`s share of net additions within
the entire broadband market is declining as a result of the rapid growth
in mobile broadband. With Telkom`s DSL penetration (excluding wholesale
DSL) standing at only 19.5% of the fixed-line base there is opportunity
for Telkom to offset declines in voice revenues by growing broadband
penetration. We are enabling our target offering through high speeds and
caps which include consistently greater value for the same price and an
uncapped offering.
We acknowledge that the broadband market is dominated by mobile players
largely as a result of Telkom`s slow time to install and undifferentiated
product offerings. This is as a result of network and technology
constraints. These issues are being dealt with and we are focusing our
efforts on delivering consistent, best in class customer experience and
improving current customer satisfaction. We will also simplify and
streamline our product offerings and communication. Our new product
catalogue will be launched in November 2011. We are using new approaches
in how we distribute these products, specifically developing our push
(e.g., external sales agents) and new pull channels (e.g., third party
retailers and online), while ensuring our staff are knowledgeable and
customer oriented in our current channels.
Data traffic is growing exponentially but is difficult to monetise and
requires considerable capital investment. For this reason our network
transformation is prefaced on customer requirements and commercial
returns and is prioritised towards `no-regret" moves. We are also
required to explore new business models, including select partnerships,
in order to tap into innovation and aggregate the most relevant services
and applications.
Operating expenses
Operating expenditure increased 8.2% to R15,382 million. This was largely
as a result of mobile start-up operating expenditure after intercompany
eliminations of R1,408 million and the impairment of iWayAfrica goodwill
of R445 million. The fixed-line business reduced operating expenditure
3.9% to R11,693 million. Telkom is firmly committed to reducing its cost
base. This must be done in a manner that ensures sustainable, long-term
benefits. We have continued optimising staff vacancies through natural
attrition and have been actively managing overtime and contractors spend
in order to manage costs as far as possible. Other initiatives focus on
increasing revenue per customer, product and channel rationalisation,
contact centre consolidation, better management of capitalised cost and
capital work in progress and process optimisation throughout the
business. Management are aware that cost reduction, no matter how
difficult, is essential.
8ta - Telkom`s mobile service
Since 8ta`s launch a year ago on 14 October 2010, several key milestones
have been accomplished:
8ta has been recognised for having the best data products offering great
value for money. MyBroadband awarded 8ta "Mobile Data Provider of the
Year (2011)" and "Mobile Maverick of the Year (2011)". We have achieved a
strong performance in post-paid and data exceeding internal targets.
While the distribution network is still in the early stages of
development in terms of scale, training and merchandising, we have
secured a fairly wide distribution with 113 Telkom Direct Stores, 6
Flagships stores, approximately 70,000 airtime points of sale,
approximately 68,000 SIM card points of sale, and approximately 400 post-
paid points of sale. We launched with 100% network coverage from day one
as a result of the roaming agreement with MTN. Our network build out
currently allows us to provide 8ta coverage to approximately 45% of the
population in South Africa. Currently around 43% of all voice traffic and
84% of data traffic is carried on the 8ta network. We have completed
construction of 1,399 base stations of which 1,052 are on the air. In
addition, we recently launched a full suite of mobile products for
Business that have been well received by the market.
8ta achieved revenue of R301 million and an EBITDA loss of R1,083 million
for the six months ending 30 September 2011. Total revenue generating
subscribers equalled 1,140,289 with pre-paid contributing 882,888 and
post-paid 257,401. Pre-paid ARPU was R20.47 and post-paid ARPU R286.09.
Blended ARPU was R63.32.
At 30 September 2011 our market share was 1.9% with on-net traffic
totalling 3% and off-net traffic 97%.
Our main challenge is slower than budgeted pre-paid growth. Issues with
getting distribution fully up-and-running have slowed us down. We are
working jointly with our distribution partners to complete systems
integration and are designing innovative commission structures to grow
our footprint. We will also drive greater demand for the 8ta pre-paid
product through increased focus on marketing and clear messaging on the
value proposition of our products.
8ta offers the best value data product in the market. The Go Big data
promotion was well received by the public and subscriber up take has been
strong. We intend to offer new propositions early in the 2012 calendar
year to strengthen our data offering and cater for new customer segments.
We will also further leverage convergence as a differentiator, seamlessly
switching between fixed and mobile infrastructure.
We are expanding our network coverage in high demand areas to cater for
pent up demand. Fifty trial LTE sites are also being rolled out to
prepare for future customer requirements of higher speeds and improved
quality of service.
We expect to achieve an EBITDA loss for our mobile segment for the year
ending 31 March 2012 of approximately R2.2 billion after eliminations and
R2.5 billion before eliminations.
Cybernest
Cybernest has continued to gain traction in the market. While the
majority of the R695 million revenue achieved in the six months to 30
September 2011 is generated from Telkom, non-Telkom revenue has increased
5.4% to R39 million. We are focusing our efforts on large customers with
customised solutions and addressing smaller customers with packaged
offers. Cybernest continues to optimise its network design to provide
flexible solutions to high bandwidth client requirements. We continue
with capacity increases, improving the network management and
connectivity and increasing automation to improve productivity. We also
continue to build our sales team and build credibility with customers
through our strategic partnerships with industry leaders. Our product
portfolio is growing as we moved up the IT value chain and we are working
closely with Telkom SA`s enterprise team to offer customers expanded
products and services. We remain optimistic about the prospects for this
business.
Trudon
Trudon`s revenue decreased by 1.2% to R639 million while EBITDA and
operating profit remained flat.
The core printed directories business has reached maturity in South
Africa. To keep pace with the changes in the marketplace, Trudon is
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. This move will require capital
investment of R145 million over the following two financial years.
iWayAfrica
During the six month under review iWayAfrica saw a decline in revenues of
21.2% to R175 million. Operating loss excluding the impairment improved
26.7% to a loss of R33 million.
Telkom management is considering options to restructure this business. It
is acknowledged that a footprint in Africa is desirable but not at any
cost to the core Telkom business and only if management time can be
justified on profitable operations.
Multi-Links
The sale of Multi-Links was concluded on 3 October 2011 and therefore did
not impact the results for the six months ended 30 September 2011. Multi-
Links had an operating loss of R269 million for the six months that is
included in discontinued operations.
The sale of Multi-Links will result in the recognition of a net loss of
approximately R1 billion mainly due to the cumulative amount of exchange
differences previously recognised in equity, that will be recognised in
profit and loss on disposal of the Multi-Links foreign operation in the
second half of the 2011 financial year.
Telkom incurred costs of R80 million for the six months ended 30
September 2011 to exit this business that is included in continuing
operations.
Regulatory
The two most pressing regulatory pressures currently are spectrum fees
and local loop unbundling. Telkom is committed to continually engage with
ICASA for the benefit of both the industry and Telkom.
Spectrum licence fees and access - ICASA introduced Administrative
Incentive Pricing (AIP) of spectrum through Regulations on 27 August
2010. These Regulations set the various pricing formulae that will be
used in future to determine spectrum fees payable by licensees. The main
aim of the regulations is to create incentives for spectrum users to
optimise the effective and efficient use of the radio frequency spectrum,
by incentivising the use of higher frequencies and in non-urban areas.
The objective is to ensure that spectrum fees calculated through AIP
reflect the market value of the radio frequency spectrum.
Currently there is uncertainty regarding the implementation of the
various formulae and data tables. Telkom and other industry players have
formally requested further engagements with the Authority on the
regulations. The indication from the Authority is that the implementation
date of these regulations will be postponed. The implementation of these
regulations has been postponed by ICASA to 1 April 2012 to allow ICASA to
get the necessary systems in place to implement the new pricing formulae.
Telkom is awaiting a formal communication by ICASA in this regard.
The new proposed fee structure is expected to substantially increase the
total spectrum fees payable by Telkom. Telkom is working on various
options to reduce this amount using the incentive mechanisms built into
the pricing formulae; however even after such optimisations, Telkom`s
spectrum fees are still expected to increase by a significant amount.
Local Loop Unbundling - Local Loop Unbundling (LLU) in its original form
is a regulatory mandated process that allows multiple telecommunications
operators to access and provide services over the last-mile copper
infrastructure (i.e. from the local exchange to the customer premises)
that is traditionally owned by the incumbent operator. The risk that LLU
poses to Telkom`s profitability is dependent upon the form and details of
implementation that will be imposed by ICASA, neither of which are known
at this point in time. In addition, Telkom is not the same company it was
when LLU was first considered and the market has changed significantly,
particularly access technology. Telkom is of the view that any process
which ICASA may follow to introduce LLU is likely to be undertaken on a
legal basis which is not clearly defined in the Electronic Communications
Act. The process will thus be open to interpretation and possibly result
in disputes. Telkom has analysed various LLU options, and will continue
to engage with key stakeholders.
Public hearings on LLU have been held and we await ICASA`s publication to
the Minister and Department of Communications on their findings and
conclusion.
KT Corporation transaction and further cautionary announcement
Shareholders are referred to the SENS announcement released on 14 October
2011 regarding Telkom entering into discussions with KT Corporation (KT)
regarding KT potentially acquiring a strategic equity shareholding of 20%
in the post-issue ordinary share capital of Telkom.
Discussions are continuing regarding areas of mutual strategic and
business cooperation and long-term agreements required to formalise the
relationship. Management view the transaction in a positive light given
KT`s experience and wealth of skills in all areas of Telkom`s strategic
aspirations.
Shareholders are advised to continue to exercise caution when dealing in
the Company`s securities until a further announcement is made.
Guidance
Capital expenditure for the Group is expected to range between 15% and
20% of revenue over the current financial year including the impact of
our mobile investment.
The targeted net debt to EBITDA is aimed at 1.4 times. In the short term
we will operate at lower levels pending the cash outflows associated with
the mobile related capital expenditure.
5. FINANCIAL PERFORMANCE
The reported results for September 2010 have been restated for the effect
of Multi-Links being classified as a disposal group held for sale.
Group operating revenue
Six months ended
30 September
In ZAR millions 2010 2011 %
Fixed-line 15,968 15,345 (3.9)
Mobile - 301 -
Other International
iWayAfrica 222 175 (21.2)
Other South African
Trudon 647 639 (1.2)
Swiftnet 61 65 6.6
Data Centre Operations 614 695 13.2
Corporate centre 34 21 (38.2)
Eliminations (620) (854) 37.7
Total 16,926 16,387 (3.2)
Group operating revenue decreased by 3.2% to R16,387 million (30
September 2010: R16,926 million) in the six months ended 30 September
2011. The decrease is mainly due to lower fixed-line data and traffic
revenues partially offset by mobile revenue included since the launch of
8ta in October 2010. Data Centre Operations includes R656 million (30
September 2010: R577 million) of internal revenue received from Telkom SA
in terms of the transfer pricing policy. This revenue is eliminated on
consolidation.
Fixed-line operating revenue
Six months ended
30 September
In ZAR millions 2010 2011 %
Subscriptions and connections 3,300 3,415 3.5
Traffic 6,032 5,728 (5.0)
Local 1,461 1,257 (14.0)
Long distance 809 734 (9.3)
Fixed-to-mobile 2,543 2,574 1.2
Fixed-to-fixed 34 53 55.9
International outgoing 378 291 (23.0)
Subscription based calling plans 807 819 1.5
Interconnection 912 834 (8.6)
Mobile 356 462 29.8
Fixed 210 125 (40.5)
International 346 247 (28.6)
Data 5,550 5,114 (7.9)
Data connectivity 2,707 2,670 (1.4)
Leased line facilities 1,116 1,069 (4.2)
Internet access and related 986 806 (18.3)
services
Managed data network services 641 545 (15.0)
Multi-media services 100 24 (76.0)
Other 174 254 46.0
Total 15,968 15,345 (3.9)
Operating revenue from the fixed-line segment decreased by 3.9% to
R15,345 million (30 September 2010: R15,968 million) primarily due to
lower data revenue as a result of the inclusion of the revenue generated
during the Soccer World Cup in the prior year and lower traffic revenue,
partially offset by growth in subscriptions and connections revenue.
Subscription and connections revenue increased by 3.5% to R3,415 million
(30 September 2010: R3,300 million) largely as a result of higher tariffs
partially offset by a decrease in the number of post-paid and pre-paid
access lines.
Traffic revenue decreased by 5.0% mainly due to lower local and long-
distance revenue as a result of the substitution by mobile and ADSL and
increased competition through VANS and Neotel. International outgoing
revenue also shows a decreasing trend as a result of increased
competition and newer technologies.
Interconnection revenue decreased by 8.6% to R834 million (30 September
2010: R912 million) largely as a result of a decrease of 28.6% in
international interconnection revenue and a 40.5% decrease in fixed
interconnection revenue, partially offset by an increase in mobile
domestic interconnection revenue. International interconnection revenue
decreased primarily due to a decrease in tariffs and lower volumes on
switched hubbing. The decrease in fixed domestic interconnection revenue
is mainly as a result of lower volumes. Mobile interconnection revenue
increased mainly due to higher volumes offset by lower price.
Data revenue decreased 7.9% to R5,114 million (30 September 2010: R5,550
million) mainly due to the inclusion of the revenue generated from the
Soccer World Cup in the prior year and lower SAIX internet access and
related revenue.
Mobile operating revenue
Six months ended
30 September
In ZAR millions 2010 2011 %
Mobile outgoing - 130 -
Post-paid - 107 -
Pre-paid - 23 -
Mobile interconnection - 37 -
Fixed domestic - 2 -
Mobile incoming - 35 -
Subscriptions and value added services - 49 -
Data - 44 -
Internal revenue - 41 -
Total - 301 -
GROUP OTHER INCOME
Six months ended
30 September
In ZAR millions 2010 2011 %
Fixed-line 126 109 (13.5)
Mobile - 51 -
Other International -
iWayAfrica 9 4 (55.6)
Telkom International 13 10 (23.1)
Other South African
Trudon 19 20 5.3
Swiftnet 2 2 -
Corporate centre 73 101 38.4
Eliminations (59) (79) 33.9
Total 183 218 19.1
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. Mobile other income relates to
a donation of two base station controllers received. Interest received
from subsidiaries is eliminated on consolidation.
GROUP OPERATING EXPENSES
Six months ended
30 September
In ZAR millions 2010 2011 %
Employee expenses 4,799 4,542 5.4
Payments to other operators 2,788 2,653 4.8
Selling, general and administrative 2,465 3,124 (26.7)
expenses
Service fees 1,392 1,476 (6.0)
Operating leases 370 397 (7.3)
Depreciation, amortisation, impairments 2,399 3,190 (33.0)
and write-offs
Total 14,213 15,382 (8.2)
Group operating expenses increased by 8.2% to R15,382 million (30
September 2010: R14,213 million) in the six months ended 30 September
2011, primarily due to an increase in depreciation, amortisation,
impairments and write-offs and selling, general and administrative
expenses and partially offset by a decrease in employee expenses and
payments to other operators.
The increase in selling, general and administrative expenses is mainly
due to the inclusion of mobile expenses for the period partially offset
by a decrease in fixed-line bad debts and inventory write downs. Included
in the depreciation, amortisation, impairments and write-offs is the R445
million goodwill impairment of iWayAfrica. The decrease in employee
expenses is due to savings resulting from voluntary severance packages
offered in the prior year. Lower payments to other operators are mainly
attributable to the decrease in mobile and fixed-line termination rates,
partially offset by the inclusion of 8ta`s payments to other operators.
Service fees increased largely as a result of consulting fees relating to
the sale of Multi-Links.
Operating expenditure contribution per segment
Six months ended
30 September
In ZAR millions 2010 2011 %
Fixed-line 12,162 11,693 3.9
Mobile 205 1,510 (636.6)
Other International
iWayAfrica 276 657 (138.0)
Telkom International 17 15 11.8
Telkom Management Services 16 - 100.0
Other South African
Trudon 379 372 1.8
Swiftnet 56 58 (3.6)
Data Centre Operations 516 547 (6.0)
Corporate centre 1,238 1,415 (14.3)
Eliminations (652) (885) (35.7)
Total 14,213 15,382 (8.2)
The 8.2% increase in group operating expenses was primarily driven by the
inclusion of mobile expenses for the full period and the R445 million
impairment of the goodwill of iWayAfrica. This was partially offset by a
decrease in employee expenses and payments to other operators and
selling, general and administrative expenses in the fixed-line segment.
Fixed-line operating expenses
Six months ended
30 September
In ZAR millions 2010 2011 %
Employee expenses 3,768 3,492 7.3
Salaries and wages 2,885 2,815 2.4
Benefits 980 873 10.9
Workforce reduction expenses 103 6 94.2
Employee related expenses capitalised (200) (202) (1.0)
Payments to other network operators 2,659 2,395 9.9
Payment to mobile operators 1,848 1,614 12.7
Payment to international operators 574 629 (9.6)
Payment to fixed-line operators 237 152 35.9
Selling, general and administrative 1,790 1,684 5.9
expenses
Materials and maintenance 939 981 (4.5)
Marketing 138 210 (52.2)
Bad debts 255 74 71.0
Other 458 419 8.5
Service fees 1,568 1,562 0.4
Property management 667 645 3.3
Consultants and security 901 917 (1.8)
Operating leases 327 315 3.7
Buildings 76 79 (3.9)
Equipment 20 7 65.0
Vehicles 231 229 0.9
Depreciation, amortisation, impairments 2,050 2,245 (9.5)
and write-offs
Depreciation 1,700 1,869 (9.9)
Amortisation 300 270 10.0
Impairments and write-offs 50 106 (112.0)
Total 12,162 11,693 3.9
Fixed-line expenditure decreased 3.9% in the six months ended 30
September 2011, to R11,693 million (30 September 2010: R12,162 million),
primarily due to lower employee expenses, payments to mobile operators
and selling, general and administrative expenses.
Employee expenses decreased by 7.3% in the six months ended 30 September
2011, primarily due to lower salaries and wages and workforce reduction
expenses as a result of the voluntary severance packages offered in the
prior year and the expected return on plan assets of the Telkom
Retirement Fund exceeded the interest and service cost. This was
partially offset by higher mobile headcount and annual salary increases.
Payments to mobile operators decreased 12.7% largely due to the reduction
in mobile termination rates from 89 cents to 73 cents with effect from 1
March 2011. Payments to international network operators increased 9.6%
due to higher volumes predominantly due to higher volumes mainly to
Zimbabwe and Mozambique.
Selling, general and administrative expenses decreased by 5.9% primarily
as a result of lower bad debts and inventory write offs, partially offset
by an increase in marketing expenses due to an increase in advertising
and the restructuring of the market intelligence division from the
corporate centre to the fixed-line segment.
Mobile operating expenses
Six months ended
30 September
In ZAR millions 2010 2011 %
Employee expenses 49 90 (83,7)
Payments to other network operators - 169 -
Selling, general and administrative 117 1,001 (755.6)
expenses
Service fees 37 136 (267.6)
Operating leases 2 39 (1,850.0)
Depreciation, amortisation, - 75 -
impairments and write-offs
Total 205 1,510 (636.6)
Selling, general and administrative expenses relate mostly to direct
network cost, maintenance and marketing expenses and includes bad debts.
8ta employees increased 17.1% since March 2011 to 267 employees.
EBITDA PER SEGMENT (before eliminations)
Six months ended
30 September
In ZAR millions 2010 2011 %
Fixed-line 5,982 6,006 0.4
EBITDA margin (%) 37.5 39.1
Mobile (205) (1,083) 428.3
EBITDA margin (%) - (359.8)
Other International (39) (17) (56.4)
EBITDA margin (%) (17.6) (9.7)
Other South African (423) (446) 5.4
EBITDA margin (%) (31.2) (31.4)
Eliminations (20) (47) 135.0
Total 5,295 4,413 (16.7)
INVESTMENT INCOME
Investment income consists of interest received on short-term investments
and bank accounts. Investment income decreased by 16.5% to R111 million
(30 September 2010: R133 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 59.3% to R264 million (30
September 2010: R649 million) in the six months ended 30 September 2011,
primarily due to a 24.8% decrease in interest expense to R379 million (30
September 2010: R504 million) mainly as a result of the 6.2% decrease
from March 2011 in the Group`s net debt to R4,605 million and lower
interest rates. Net fair value and foreign exchange rate movements
resulted in a gain of R115 million for the six months ended 30 September
2011 (30 September 2010: loss of R145 million). The fair value and
exchange rate gains were incurred due to the mark to market valuation of
forward exchange contracts as a result of the weakening of the Rand
against major currencies.
TAXATION
The consolidated tax expense from continuing operations decreased to R568
million (30 September 2010: R830 million). The consolidated effective tax
rate for the six months ended 30 September 2011 was 53.1% (30 September
2010: 34.9%). The increase in the effective tax rate is mainly due to non-
deductible impairment of the loan to Multi-Links and impairment of the
investment and loans to iWayAfrica. These loans and impairments are
reversed on consolidation.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The Group`s financial position remains strong. Net debt, after financial
assets and liabilities, from continuing operations decreased by 6.2% to
R4,605 million from R4,907 million as at 31 March 2011 resulting in a net
debt to EBITDA ratio of 0.5 times at 30 September 2011 and 31 March 2011.
On 30 September 2011, the Group had cash balances of R1,267 million (31
March 2011: R1,773 million).
The decrease in cash is mainly attributable to the repayment of a portion
of the syndicated loan of R1,280 million.
The Group`s current assets exceeded current liabilities by R59 million.
The current portion of interest bearing debt increased due to the TL12
bond of R1,060 million that matures in April 2012. This was partially
offset by a decrease in the current portion of employee related
provisions due to the bonus provision being included only for six months.
Free cash flow
Six months ended
30 September
In ZAR millions 2010 2011 %
Cash generated from operations 1,883 2,987 58.6
before dividends paid
Add back: Multi-Links operating cash 406 75 (81.5)
flows
Less: Cash flows from investing (2,102) (1,629) 22.5
activities
Add back: Multi-Links cash flows 173 21 (87.9)
from investing activities
Free cash flow 360 1,454 303.9
Free cash flow in the six months ended 30 September 2010 includes the
R608 million payment to Telcordia regarding the supplier dispute, R90
million STC on the special dividend, and R144 million employee reduction
expenses.
Lower capital expenditure also contributed to the increase in free cash
flow.
GROUP CAPITAL EXPENDITURE
Group capital expenditure which includes spend on intangible assets,
decreased by 10.1% to R1,805 million (30 September 2010: R2,007 million)
and represents 11.0% of group revenue (30 September 2010: 11.9%).
Six months ended
30 September
In ZAR millions 2010 2011 %
Fixed-line 1,289 1,152 (10.6)
Mobile 614 558 (9.1)
Other International
iWayAfrica 8 4 (50.0)
Telkom International 5 - (100.0)
Other South African
Trudon 28 44 57.1
Swiftnet 9 23 155.6
Data Centre Operations 42 4 (90.5)
Corporate centre 12 20 66.7
Total 2,007 1,805 (10.1)
Fixed-line capital expenditure
Six months ended
30 September
In ZAR millions 2010 2011 %
Baseline 815 747 (8.3)
Network evolution 239 237 (0.8)
Sustainment 30 57 90.0
Effectiveness and efficiency 87 64 (26.4)
Support 99 35 (64.6)
Regulatory and other 19 12 (36.8)
Total 1,289 1,152 (10.6)
Fixed-line capital expenditure, which includes spending on intangible
assets, decreased by 10.6% to R1,152 million (30 September 2010: R1,289
million) and represents 7.5% of fixed-line revenue (30 September 2010:
8.1%).
Baseline capital expenditure of R747 million (30 September 2010: R815
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 roll-out of infrastructure to meet short-term demand for revenue
generating services.
The expenditure on network evolution of R237 million (30 September 2010:
R239 million) was mainly for the deployment of capacity and automated
restoration functionality for the National Transport Network, for
continuation of the three approved submarine cable business cases and for
the migration of identified Voice systems onto next-generation
technologies.
The sustainment expenditure of R57 million (30 September 2010: R30
million) is mainly attributed to the replacement of several obsolete
network elements, direct-current (DC) power systems and for the
replacement of the Telkom head-office PABX system.
Telkom continues to focus on its operations support systems with current
emphasis on hardware technology upgrades on the enterprise networks.
During the six months ended 30 September 2011 R64 million (30 September
2010: R87 million) was spent on the implementation of several systems.
The support capital expenditure of R35 million (30 September 2010: R99
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 the
continuation of the lawful interception project, to implement a system to
store and manage customer identification documentation.
Mobile expenditure was mainly for the construction of mobile base
stations, the radio access network and mobile operating support systems.
The Corporate Centre expenditure was mainly for supply-chain enhancements
and for property-related capital expenditure requirements.
Auditors` Review Report
Our auditors, Ernst and 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 2011
Restated* Reviewed
30 September 30 September
2010 2011
Notes Rm Rm
Continuing operations
Total revenue 4 17,231 16,701
Operating revenue 16,926 16,387
Other income 183 218
Operating expenses 14,213 15,382
Employee expenses 5.1 4,799 4,542
Payments to other operators 5.2 2,788 2,653
Selling, general and 5.3 2,465 3,124
administrative expenses
Service fees 5.4 1,392 1,476
Operating leases 5.5 370 397
Depreciation, amortisation, 5.6 2,399 3,190
impairment and write-offs
Results from operating activities 2,896 1,223
Investment income 133 111
Finance charges and fair value 649 264
movements
Interest 504 379
Foreign exchange and fair value 145 (115)
movement
Profit before taxation 2,380 1,070
Taxation 6 830 568
Profit from continuing operations 1,550 502
Loss from discontinued operation 7 (472) (269)
Profit for the period 1,078 233
Other comprehensive income
Exchange differences on (77) 50
translating foreign operations
Defined benefit plan actuarial (236) (44)
losses
Defined benefit plan asset 123 3
limitations
Income tax relating to components 32 11
of other comprehensive income
Other comprehensive income for 8 (158) 20
the period, net of taxation
Total comprehensive income 920 253
Profit attributable to:
Owners of Telkom 1,009 166
Non-controlling interest 69 67
Profit for the period 1,078 233
Total comprehensive income
attributable to:
Owners of Telkom 851 186
Non-controlling interest 69 67
Total comprehensive income for 920 253
the period
Total operations
Basic and diluted earnings per 9 198.6 32.5
share (cents)
Continuing operations
Basic and diluted earnings per 9 291.5 85.2
share (cents)
*The amounts have been restated for the effect of Multi-Links being
classified as a disposal group held for sale.
Condensed consolidated interim statement of financial position
at 30 September 2011
Audited Reviewed
31 March 30 September
2010 2011
Notes Rm Rm
Assets
Non-current assets 43,943 42,409
Property, plant and equipment 37,304 36,525
Intangible assets 3,965 3,299
Investments 2,103 2,138
Deferred expenses 83 49
Finance lease receivables 239 240
Deferred taxation 56 43
Other financial assets 193 115
Current assets 10,315 9,713
Inventories 1,121 1,039
Income tax receivable 105 20
Current portion of deferred 10 -
expenses
Current portion of finance lease 118 124
receivables
Trade and other receivables 5,503 5,824
Other financial assets 1,674 1,396
Cash and cash equivalents 11 1,784 1,310
Assets of disposal groups 7 89 228
classified as held for sale
Total assets 54,347 52,350
Equity and liabilities
Equity attributable to owners of 29,635 29,087
the parent
Share capital 5,208 5,208
Treasury shares (771) (771)
Non-distributable reserves 1,764 1,789
Retained earnings 24,467 23,872
Reserves of disposal groups 7 (1,033) (1,011)
classified as held for sale
Non-controlling interests 387 374
Total equity 30,022 29,461
Non-current liabilities 14,974 12,840
Interest-bearing debt 13 8,198 5,908
Other financial liabilities 69 30
Employee related provisions 14 4,711 5,096
Non-employee related provisions 14 29 48
Deferred revenue 1,073 925
Deferred taxation 894 833
Current liabilities 8,899 9,654
Trade and other payables 4,782 4,732
Shareholders for dividend 21 24
Current portion of interest- 13 157 1,362
bearing debt
Current portion of employee 14 1,932 1,241
related provisions
Current portion of non-employee 14 86 41
related provisions
Current portion of deferred 1,771 1,851
revenue
Income tax payable 16 277
Other financial liabilities 123 83
Credit facilities utilised 11 11 43
Liabilities of disposal groups 7 452 395
classified as held for sale
Total liabilities 24,325 22,889
Total equity and liabilities 54,347 52,350
Condensed consolidated interim statement of changes in equity
for the six months ended 30 September 2011
Reviewed Reviewed
30 September 30 September
2010 2011
Rm Rm
Balance at 1 April 30,264 30,022
Attributable to owners of Telkom 29,925 29,635
Non-controlling interests 339 387
Total comprehensive income for the period 920 253
Profit for the period 1,078 233
Other comprehensive income (158) 20
Exchange differences on translating (77) 50
foreign operations
Net defined benefit plan losses and asset (81) (30)
limitations
Dividend paid (1,588) (814)
Increase in share-based compensation 86 -
reserve
Balance at 30 September 29,682 29,461
Attributable to owners of Telkom 29,346 29,087
Non-controlling interests 336 374
Condensed consolidated interim statement of cash flows
for the six months ended 30 September 2011
Reviewed Reviewed
30 September 30 September
2010 2011
Rm Rm
Cash flows from operating activities 294 2,175
Cash receipts from customers 17,658 15,914
Cash paid to suppliers and employees (14,979) (12,553)
Cash generated from operations 2,679 3,361
Interest received 270 311
Finance charges paid (377) (413)
Taxation paid (689) (272)
Cash generated from operations before 1,883 2,987
dividend paid
Dividend paid (1,589) (812)
Cash flows from investing activities (2,102) (1,629)
Proceeds on disposal of property, plant 6 10
and equipment and intangible assets
Additions to property, plant and (2,099) (1,639)
equipment and intangible assets
Acquisition of subsidiaries and joint (9) -
venture
Cash flows from financing activities (1,275) (1,046)
Loans raised 291 851
Loans repaid (1,832) (2,079)
Finance lease capital repaid (83) (87)
Decrease in net financial assets 349 269
Net decrease in cash and cash equivalents (3,083) (500)
Net cash and cash equivalents at 3,793 1,773
beginning of period
Effect of foreign exchange rate 26 (6)
differences
Net cash and cash equivalents at end of 736 1,267
period*
*For September 2010 and 2011 cash flow activities on discontinued
operations refer to note 7.
Notes to the condensed consolidated interim financial statements
for the six months ended 30 September 2011
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 IAS 34 Interim Financial Reporting and in
compliance with the Listings Requirements of the JSE Limited and the
South African Companies Act, 2008.
The condensed consolidated interim financial statements are prepared on
the historical cost basis, with the exception of certain financial
instruments initially (and sometimes subsequently) measured at fair value
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 2011.
The preparation of condensed consolidated interim financial statements
requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Although
these estimates are based on management`s best knowledge of current
events and actions that the Group may undertake in the future, actual
results may differ from those estimates.
Significant accounting policies
The interim financial statements have been prepared in accordance with
the accounting policies adopted in the Group`s last annual financial
statements for the year ended 31 March 2011, except for the adoption of
Improvements to IFRSs (2010 Improvements) as of 1 January 2011. The 2010
Improvements made several minor amendments to IFRSs. The relevant
amendments and their effects on the current period or prior periods are
described below.
The accounting policies have been applied consistently throughout the
Group for the purposes of preparation of these interim financial
statements.
IAS 1 Presentation of Financial Statements
The amendment requires entities to present for each component of equity,
an analysis of other comprehensive income either in the statement of
changes in equity or in the notes. The Group provides this analysis in
note 8.
IAS 34 Interim Financial Reporting
The amendment clarifies that it is unnecessary for interim financial
statements to provide relatively insignificant updates as the users of
financial statements have access to the most recent annual report.
The amendment requires additional disclosures for fair values and changes
in classification of financial assets, as well as changes to contingent
assets and liabilities in interim condensed financial statements. The
Group has illustrated those amendments in note 12 (consistent with prior
periods).
IFRS 3 Business Combinations
The measurement options available for non-controlling interest (NCI) have
been amended. Only components of NCI that constitute a present ownership
interest that entitles their holder to a proportionate share of the
entity`s net assets in the event of liquidation shall be measured at
either fair value or at the present ownership instruments` proportionate
share of the acquiree`s identifiable net assets. All other components are
to be measured at their acquisition date fair value. The amendment does
not have a material impact on the Group financial statement.
IFRS 7 Financial Instruments: Disclosures
The amendment emphasises the link between qualitative and quantitative
disclosures to enable users of financial statements to form an overall
picture of the nature and extent of risks arising from financial
instruments. Detailed IFRS 7 disclosures are provided in the annual
financial statements.
Other amendments resulting from Improvements to IFRSs to the following
standards did not have any impact on the Group
IFRS 3 Business Combinations - Clarification that contingent
considerations arising from business combination prior to adoption of
IFRS 3 (as revised in 2008) are accounted for in accordance with IFRS 3
(2005).
IFRS 3 Business Combinations - Accounting for unreplaced and voluntarily
replaced share-based payment awards within a business combination.
IAS 27 Consolidated and Separate Financial Statements - Amendments
clarifying that the consequential amendments to IAS 21 The Effects of
Changes in Foreign Exchange Rates, IAS 28 and IAS 31 resulting from IAS
27 (2008) should be applied prospectively.
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their interactions - Prepayments of a minimum funding
requirement.
IFRIC 19 Extinguishing Financial Liabilities with Equity instruments -
Interpretation clarifies the requirements of IFRSs in dealing with debt
for equity swaps.
Standards and interpretations in issue not yet adopted and not yet
effective
The new standards, amendments to standards and interpretations in issue
have not yet been adopted and not yet effective. All standards are
effective for annual periods beginning on or after the stated effective
date.
IAS 1 Presentation of Financial Statements - Amendments to revise the way
other comprehensive income is presented (effective 1 July 2011)
IAS 12 Income Taxes - Limited scope amendments on the recovery of
underlying assets (effective 1 January 2012)
IAS 19 Employee benefits - Amended standard resulting from the Post-
Employment Benefits and Termination Benefits projects (effective 1
January 2013)
IAS 27 Consolidated and Separate Financial Statements - Reissued as IAS
27 Separate Financial Statemets (effective 1 January 2013)
IAS 28 Investments in Associates - Reissued as IAS 28 Investments in
Associates and Joint Ventures (as amended in 2011) (effective 1 January
2013)
IFRS 7 Financial Instruments Disclosures - Amendments enhancing
disclosures about transfers of financial assets (effective 1 July 2011)
IFRS 9 Financial Instruments - Classification and Measurement (effective
1 January 2013)
IFRS 10 Consolidated Financial Statements (effective 1 January 2013)
IFRS 11 Joint Arrangements (effective 1 January 2013)
IFRS 12 Disclosure of Interests in Other Entities (effective 1 January
2013)
IFRS 13 Fair Value Measurements (effective 1 January 2013)
The condensed consolidated interim financial statements were authorised
for issue by the Board of Directors on18 November 2011.
The condensed consolidated interim financial statements were prepared by
Mrs Dashni Sinivasan (Executive: Statutory Reporting) and supervised by
Mr Deon Fredericks (Deputy Chief Financial Officer).
3. Segment information
The Group consists of two reportable segments namely Telkom fixed-line
and Telkom Mobile.
The Telkom fixed-line segment provides fixed-line access, fixed-mobile
and data communications services through Telkom South Africa.
The Telkom Mobile segment provides mobile voice services, data services
and handset sales through 8ta.
The Other category is a reconciling item which is split geographically
between International and South Africa.
The International category provides internet services outside South
Africa, through the iWayAfrica Group.
The South African category includes Trudon Group, Swiftnet, Data Centre
Operations (Cybernest) and the Group`s Corporate Centre.
Included in the Data Centre Operations under the Other category is
internal revenue of R656 million for the six months ended 30 September
2011 (30 September 2010: R577 million) that is eliminated on
consolidation.
Comparative information has been restated to reflect the reclassification
on Multi-Links fixed-line as discontinued operations, as well as the
internal restructuring between the Telkom fixed-line segment and the
corporate centre which included moving the human resource and finance
functions from Telkom fixed-line to the corporate centre.
During the six month period ended 30 September 2011, there have been no
changes from prior periods in the measurement methods used to determine
operating segments and reported segment profit and loss.
Restated
30 September 30 September
2010 2011
Rm Rm
Business segments
Consolidated operating revenue 16,926 16,387
Telkom South Africa 15,968 15,345
Telkom Mobile - 301
Other 1,578 1,595
International 222 175
South African 1,356 1,420
Elimination of intersegmental revenue (620) (854)
Consolidated operating profit 2,896 1,668
Telkom South Africa 3,932 3,761
Telkom Mobile (205) (1,158)
Other (804) (887)
International (65) (38)
South African (739) (849)
Elimination of intersegmental (27) (48)
transactions
Reconciliation
Adjusted EBIT for reportable segments 2,896 1,668
Impairment of goodwill and property, - (445)
plant and equipment
Operating profit 2,896 1,223
Investment income 133 111
Finance charges and fair value movement (649) (264)
Profit before taxation and discontinued 2,380 1,070
operations
4. Total revenue 17,231 16,701
Operating revenue 16,926 16,387
Other income (excluding profit on 172 203
disposal of property, plant and
equipment, intangible assets)
Investment income 133 111
Operating revenue decreased due to the
inclusion of FIFA data revenue in the
prior period, reduced fixed-line voice
traffic revenue and lower switched
hubbing volumes.
5. Operating expenses 14,213 15,382
5.1 Employee expenses 4,799 4,542
The decrease in salaries and wages is
mainly due to savings of the voluntary
employee severance packages process in
the 2010 reporting period offset by an
average salary increase of 7% as agreed
with the unions for the current financial
year.
5.2 Payments to other operators 2,788 2,653
The decrease in payment to other
operators is mainly due to the reduction
of mobile and fixed-line termination
rates.
5.3 Selling, general and administrative 2,465 3,124
expenses
Selling, general and administrative
expenses increased mainly as a result of
mobile direct costs.
5.4 Service fees 1,392 1,476
Service fees increased as a result of
consultant costs, mainly due to the exit
of Multi-Links.
5.5 Operating leases 370 397
Operating leases increased as a result of
mobile site leases.
5.6 Depreciation, amortisation, 2,399 3,190
impairment and write-offs
Depreciation of property, plant and 1,968 2,251
equipment
Amortisation of intangible assets 379 339
Impairment of property, plant and - 445
equipment and intangible assets
Write-offs of property, plant and 52 155
equipment and intangible assets
The increase in depreciation is due
mainly to the review of the useful lives
of property, plant and equipment limited
to the current focus on the modernisation
of the network.
The impairment charge of R445 million
relates to iWayAfrica Group goodwill
impairment (30 September 2010: Nil).
Increase in write-off is mainly as a
result of scrapping of assets due to
technical obsolesence.
6. Taxation 830 568
South African normal company taxation 586 536
Deferred taxation 86 (38)
Secondary Taxation on Companies (STC) 156 69
Foreign taxation 2 1
The decrease in deferred taxation is
primarily as a result of an increase in
the accelerated depreciation on fixed
assets and an increase in provisions.
The decrease in STC is due to the lower
dividend paid during the year.
STC is provided for at a rate of 10% on
the amount by which dividends declared by
Telkom exceed dividends received.
7. Disposal group
Multi-Links Telecommunications Limited (Multi-Links)
On 26 November 2010, Telkom announced that the Board had mandated
management to review options for the exit of the CDMA business of Multi-
Links in Nigeria.
On 10 June 2011 the Telkom Board decided to stop funding Multi-Links
after the deal to sell the CDMA business of Multi-Links to Visafone
Communications fell through as a result of certain conditions precedent
to the transaction not being met.
On 26 June 2011 the Telkom Board made a decision to sell the entire
issued share capital of Multi-Links to Helios Towers Nigeria Limited. The
sale was conditional on inter-alia regulatory approvals. The completion
date for the sale transaction was 3 October 2011.
As at 26 June 2011 the CDMA business of Multi-Linkscontinued being
classified as held for sale and the fixed-line business was also
classified as discontinued on this day.
Multi-Links` assets and liabilities were remeasured to the lower of
carrying amount and fair value less costs to sell at the date of held-for-
sale classification, 26 June 2011, and the date of disposal 3 October
2011.
The impact of the sale transaction is disclosed in note 20.
Restated
30 September 30 September
2010 2011
Rm Rm
Analysis of the results of discontinued
operations:
Revenue* 742 159
Expenses* (1,214) (428)
Loss before taxation of discontinued (472) (269)
operations
Taxation - -
Loss after taxation of discontinued (472) (269)
operations
Pre-tax loss recognised on the re- - -
measurement of assets of disposal group to
fair value less costs to sell**
Loss for the year from discontinued (472) (269)
operations
* Revenue comprises operating revenue,
other income and investment income.
Expenses comprises operating expenses,
finance charges and impairment of R198
million (2010: R201 million).
** The carrying amount and fair value less
cost to sell are both negative, thus
limited to nil.
31 March 30 September
2011 2011
Rm Rm
The major classes of assets and
liabilities of the business classified as
a disposal group:
Assets 89 228
Property, plant and equipment 29 70
Inventories 13 -
Trade and other receivables 23 46
Deferred expenses 10 84
Cash and cash equivalents 14 28
Liabilities 452 395
Interest-bearing debt 7 62
Non-current portion of provisions 5 7
Current provisions 2 8
Trade and other payables 367 248
Deferred revenue 18 53
Credit facilities utilised 53 17
Reserve of disposal group held for sale
Exchange difference on translating the (1,033) (1,011)
disposal group
30 September 30 September
2010 2011
Rm Rm
The net cash flows attributable to the
operating, investing and financing
activities of discontinued operations:
Operating cash flows (406) (75)
Investing cash flows (173) (21)
Financing cash flows 435 143
Total cash (outflow)/inflow (144) 47
8. Taxation effects of other comprehensive
income
Taxation effects relating to each
component of other comprehensive income
Exchange differences on translating (77) 50
foreign operations
Taxation effect of exchange differences on - -
translating foreign operations
Net foreign currency translation (77) 50
differences for foreign operations
Defined benefit plan actuarial losses (236) (44)
Taxation effect of defined benefit plan 66 12
actuarial losses
Net defined benefit plan actuarial losses (170) (32)
Defined benefit plan asset limitations 123 3
Taxation effect of defined benefit plan (34) (1)
asset limitations
Net defined benefit plan asset limitations 89 2
Other comprehensive income for the period (190) 9
before taxation
Taxation effect of other comprehensive 32 11
income for the period
Other comprehensive income for the period (158) 20
net of taxation
Restated
30 September 30 September
2010 2011
Rm Rm
9. Earnings per share
Total operations
Basic and diluted earnings per share 198.6 32.5
(cents)
Headline earnings and diluted headline 243.6 177.8
earnings per share (cents)
Continuing operations
Basic and diluted earnings per share 291.5 85.2
(cents)
Headline earnings and diluted headline 297.0 191.7
earnings per share (cents)
Discontinued operations
Basic and diluted earnings per share (92.9) (52.7)
(cents)
Headline earnings and diluted headline (53.3) (13.9)
earnings per share (cents)
Reconciliation of weighted average number
of ordinary shares:
Ordinary shares in issue 520,783,900 520,783,900
Weighted average number of treasury shares (12,635,247) (10,145,611)
Weighted average number of shares 508,148,653 510,638,289
outstanding
Reconciliation of diluted weighted average
number of ordinary shares
Diluted weighted average number of shares 508,148,653 510,638,289
outstanding
Total operations
Reconciliation between earnings and
headline earnings:
Profit attributable to equity holders of 1,009 166
Telkom
Adjustments:
Profit on disposal of property, plant and (11) (15)
equipment and intangible assets
Impairment loss on property, plant and 201 643
equipment and intangible assets
Write-offs of property, plant and 52 155
equipment and intangible assets
Taxation effects (13) (41)
Headline earnings from total operations 1,238 908
Continuing operations
Reconciliation between earnings and
headline earnings:
Pofit from continuing operations 1,550 502
Non-controlling interest (69) (67)
Earnings from continuing operations 1,481 435
attributable to equity holders of Telkom
Profit on disposal of property, plant and (11) (15)
equipment and intangible assets
Impairment loss on property, plant and - 445
equipment and intangible assets
Write-offs of property, plant and 52 155
equipment and intangible assets
Taxation effects (13) (41)
Headline earnings from continuing 1,509 979
operations
Discontinued operations
Reconciliation between earnings and
headline earnings:
Loss from discontinued operations (472) (269)
Non-controlling interest - -
Earnings from discontinued operations (472) (269)
attributable to equity holders of Telkom
Impairment loss on property, plant and 201 198
equipment and intangible assets
Headline earnings from discontinued (271) (71)
operations
Dividend per share (cents) 300.0 145.0
The calculation of dividend per share is
based on dividends of R740 million (30
September 2010: R1,532 million) declared
on 10 June 2011 (30 September 2010: 18
June 2010) and a number of ordinary shares
on the date of dividend declaration of
510,638,289 (30 September 2010:
510,638,013). The reduction in the number
of shares represents the number oftreasury
shares held on date of payment.
31 March 30 September
2011 2011
Rm Rm
10. Capital additions
Property, plant and equipment 4,333 1,721
Intangible assets 431 139
The capital additions for the six months
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.
Included in the property, plant and
equipment additions is R51 million that
relates to donation in kind received of
two base station controllers which were
installed and capitalised by Telkom
Mobile.
11. Net cash and cash equivalents 1,773 1,267
Cash shown as current assets 1,784 1,310
Cash and bank balances 757 502
Short-term deposits 1,027 808
Credit facilities utilised (11) (43)
The decrease in cash and bank balances and
short-term deposits is due to the
repayment of a portion of the syndicated
loan and the settlement of Multi-Links
operational expenses.
12. Financial risk management
Exposure to continuously changing market conditions has made management
of financial risk critical for the Group. Treasury policies, risk limits
and control procedures are continuously monitored by the Board of
Directors through its Audit and Risk Committee.
The interim condensed consolidated financial statements do not include
all financial risk management information and disclosures required in the
annual financial statements, and should be read in conjunction with the
Group`s annual financial statements as at 31 March 2011.
12.1 Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due. The Group is exposed to liquidity
risk as a result of uncertain cash flows as well as capital commitments
of the Group.
Liquidity risk is managed by the Group`s Treasury team in accordance with
policies and guidelines formulated by the Group`s Executive Committee. In
terms of its borrowing requirements the Group ensures that sufficient
facilities exist to meet its immediate obligations.
Compared to the 2011 financial year end, there was no material change in
the contractual undiscounted cash out flows for financial liabilities.
12.2 Fair value hierarchy
The table analyses financial instruments carried at fair value, by
valuation method.
The different levels have been defined as follows:
a) Quoted prices in active markets for identical assets or liabilities
(level 1).
b) Inputs other than quoted prices, that are observable for the asset or
liability (level 2).
c) Inputs for the asset or liability that are not based on observable
market data (level 3).
The following table presents the Group`s assets and liabilities that are
measured at fair value as at 30 September 2011.
30 September 2011 Total Level 1 Level 2 Level 3
Rm Rm Rm Rm
Assets measured at fair value
Forward exchange contracts 326 - 326 -
Investment in Cell Captive 2,127 - 2,127 -
Cross currency swaps 74 - 74 -
Liabilities measured at fair
value
Interest rate swaps (61) - (61) -
Forward exchange contracts (52) - (52) -
31 March 2011 Total Level 1 Level 2 Level 3
Rm Rm Rm Rm
Assets measured at fair value
Forward exchange contracts 194 - 194 -
Investment in Cell Captive 2,094 - 2,094 -
Liabilities measured at fair
value
Interest rate swaps (25) - (25) -
Cross currency swaps (16) - (16) -
Forward exchange contracts (151) - (151) -
The fair value of the financial assets and financial liabilities are
sensitive to exchange rates and interest rates movements. The Rand
depreciated against major currencies during September 2011 resulting in
unrealised fair value gains. The volatility of the exchange rates also
had an impact on the fair values of these instruments.
During the six month period ended 30 September 2011, there were no
transfers between the fair value levels. The movement in the forward
exchange contract is due to fair value gains on revaluation of these
instruments as a result of the weaker Rand against major currencies at
the end of September 2011. No transfers between any level of fair value
hierarchy took place in the comparative period.
31 March 30 September
2011 2011
Rm Rm
13. Interest-bearing debt
Non-current interest-bearing debt 8,198 5,908
Local debt 6,918 4,609
Foreign debt 429 486
Finance leases 851 813
Current portion of interest-bearing debt 157 1,362
Local debt - 1,159
Foreign debt 98 134
Finance leases 59 69
Repayments/refinancing
The Group partially repaid the syndicated loan of R1,280 million from
available cash to reduce its interest expense and manage liquidity when
the loan matures in December 2013.
The current portion of interest-bearing debt of R1,362 million (nominal)
as at 30 September 2011, includes the TL12 bond of R1,060 million that
matures in April 2012. This current portion is expected to be repaid from
available, operational cash flows or the issue of new debt instruments.
Management believes that sufficient funding facilities will be available
at the date of repayment/refinancing.
31 March 30 September
2011 2011
Rm Rm
14. Provisions
Non-current portion of provisions 4,740 5,144
Employee related 4,711 5,096
Non-employee related 29 48
Current portion of provisions 2,018 1,282
Employee related 1,932 1,241
Non-employee related 86 41
The increase in non-current provisions is mainly due to the post-
retirement medical aid provisions as a result of medical inflation.
The reduction of the current portion of provisions is attributable to
only six months bonus provision being made to date.
15. Commitments
Capital commitments authorised 7,522 5,800
Commitments against authorised capital 1,072 1,371
expenditure
Authorised capital expenditure not yet 6,450 4,429
contracted
Capital commitments are largely attributable to purchasesof 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 R783 million (31
March 2011: R873 million) and R670 million (31 March 2011: R1,132
million) respectively which relates to Telkom Mobile.
Management expects these commitments to be financed from internally
generated cash and other borrowings.
16. Contingencies
These contingencies must be read in conjunction with 31 March 2011 annual
financial statements.
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% 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)
This matter relates to the complaints filed by SAVA on 7 May 2002 and a
complaint filed by Omnilink (in August 2002) against Telkom at the CC,
regarding certain alleged anti-competitive practices by Telkom. These
complaints were referred by the CC to the CT on 24 February 2004.
The matter was set down for hearing at the CT from 17 to 28 October 2011
and from 1 to 9 December 2011. During an interlocutory skirmish regarding
discovery by Telkom, the CT expressed a disconcerting view regarding its
intention to consider an excessive pricing case different to that pleaded
by the CC, despite two orders by the CT dismissing attempts by the CC to
plead an excessive pricing case of this nature.
Telkom raised its concern in this regard in a letter to the CC. At the
close of the first session that was set down for hearing (from 17 to 28
October 2011), the CT closed its case. This means that the CC has led all
of its witnesses (factual and expert witnesses) and Telkom`s counsel had
an opportunity to cross examine each witness. The matter will now proceed
on 1 December 2011 and Telkom expects to complete leading all of its
evidence during the session set down in December (1 to 9 December 2011).
The matter should thus be finalised as concerns of leading of evidence by
9 December 2011. The CT has, in anticipation of the matter being fully
heard during December, set down the dates of 13 to 15 February 2012 for
hearing arguments from both sides, whereafter it will make its ruling.
Between now and 1 December 2011, the Telkom team will thus be preparing
to lead Telkom`s evidence at the next session.
Competition Commission Multiple Complaints Referral
The CC served a notice of motion on Telkom on 26 October 2009, in which
it referred complaints against Telkom by MWEB and Internet Solutions (IS)
as well as the Internet Service Providers Association (ISPA), MWEB, IS
and Verizon respectively to the CT. The CC alleged certain anti-
competitive practices by Telkom.
Telkom opposed the Multiple Complaints Referral and filed an exception
application which was heard by the CT, and dismissed on 4 February 2011.
As Telkom was struggling to obtain consent to access certain confidential
information belonging to the complainants in the matter to enable Telkom
to finalise its response, it launched an application to the CT in terms
of section 45 of the Competition Act for a ruling regarding access to
such confidential information. Almost simultaneously the CC filed an
application in which it has asked the CT to compel the filing of Telkom`s
answer. In its application the CC asked the CT to order that Telkom must
file its answer within five days of the ruling by the CT in the CC`s
application. The pleading in both applications was now closed and the
matters were set down jointly for hearing by the CT from 5 to 9 March
2012.
Internet Solutions (IS)
IS filed a complaint at the CC in December 2007, alleging certain anti-
competitive practices by Telkom.
Certain parts of this complaint were referred to the CT by the CC. The
non-referred parts of the complaint were self-referred by IS. Telkom
filed an exception to IS` referral papers and the CT ruled that IS must
amend its papers. However, the papers remain excipiable and Telkom has
thus filed a second exception application on 4 April 2011. Telkom is
awaiting IS` response to this exception application. Should Telkom`s
exception application be upheld, IS` amended referral may be set aside,
alternatively the CT may order IS to amend its papers, in which case
Telkom will have to plead to IS` amended papers.
Phutuma Networks (Proprietary) Limited (Phutuma)
Telkom was informed by the CC that a complaint was filed by Phutuma at
the CC, wherein Phutuma 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. The CC non-referred the complaint on 28
June 2010.
However, Phutuma self-referred its complaint 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 in which it raised certain preliminary points, and
Phutuma filed its replying affidavit. Telkom`s preliminary points were
upheld by the CT on 2 March 2011 and Phutuma`s Complaint was dismissed
with costs. Phutuma is appealing this decision and has filed a notice of
appeal to the Competition Appeal Court.
HIGH COURT
Phutuma Networks (Proprietary) Limited (Phutuma)
On 20 August 2009 Phutuma served a summons on Telkom for damages arising
from a tender published on 30 November 2007 for outsourcing of the telex
and Gentex services and for the provision of a solution to support the
maritime industry requirements. The tender was cancelled on 10 June 2009,
without any award being made, due to the expiration of the validity
period. Phutuma has alleged that Telkom had awarded the tender to a third
party outside a fair, transparent, competitive and cost effective
procurement process. It has claimed damages of R3,730,433,545.00,
alternatively R5,513,876,290.00, and further alternatively
R1,771,683,580.00 plus interest at 15.5% per annum to date of payment
from April 2008, alternatively from 30 April 2009 being the date of
notice in terms of Act 40 of 2002, further alternatively from date of
service of this summons plus costs of suit and further and/alternative
relief. The matter was set down for trial from 24 October until 18
November 2011. On 24 October 2011 Phutuma brought an application to
compel Telkom to make better discovery of documents and an application to
adjourn the trial. The court dismissed Phutuma`s application for better
discovery with costs. The court also adjourned the matter sine die and
Phutuma was ordered to pay costs including Senior Counsel`s costs for two
days and 50% for Senior Counsel`s fee for preparation of trial.
South African National Road Agency Limited (SANRAL)
During October 2009, SANRAL applied to the KwaZulu-Natal High Court for
an interdict and declaratory order against Telkom. SANRAL requested the
Court to grant an order preventing Telkom from installing facilities
without compliance to the SANRAL Act and to remove facilities installed
by Telkom in the N2 National road reserve in KwaZulu-Natal as part of
Telkom`s FIFA project. On 25 October 2010, the Court granted a
declaratory which prohibits Telkom from entering SANRAL`s land without
compliance to the SANRAL Act. Telkom has filed an appeal to the full
bench in High Court which will be heard on 6 February 2012.
Bihati Solutions (Proprietary) Limited (Bihati)
The matter arises from an award which was made on 8 November 2007 outside
the validity period of 180 days, relating to construction of network
services. In November 2009 the Board resolved to apply to the North
Gauteng High Court to set aside the aforementioned award. Concurrently
with the Telkom application to set aside the award, Bihati also applied
to the North Gauteng High Court for the review and setting aside of the
Board`s decision. On 7 January 2011 the Court granted Telkom`s
application and dismissed Bihati`s application. Bihati was granted leave
to appeal by the Supreme Court of Appeals. Telkom is opposing the appeal.
SUPPLIER DISPUTE
African Prepaid Services Nigeria (APSN)
On 25 November 2010, Multi-Links (MLT) terminated a Super Dealer
Agreement with APSN. On 14 June 2011, APSN delivered a statement of claim
to MLT`s attorneys in which it is claiming amongst other claims, a total
amount of US$481,199,101. MLT has filed a plea and a counterclaim for
US$123,855,166 to the APSN claim. APSN has filed its defence to the MLT
counterclaim. As part of the agreement of sale Telkom has guaranteed to
accept liability for certain litigation claims against MTL if these
claims exceed US$10 million. It is considered not to be probable that the
claims will exceed the US$10 million. The arbitration is set down for
hearing from 5 November 2012 until 14 December 2012.
Radio Surveillance Security Services SA (Proprietary) Limited (RSSS)
On 14 September 2011, RSSS served a summons against Tekom for
R215,661,865.88 (including VAT) plus interest at the legal rate from 1
September 2011 and costs of suit. RSSS alleges that the monies are due
for alleged upgrading and rendering of equipment purchased by Telkom to
be compliant with the Telkom M3010 standard. Telkom defended the matter
and filed an opposing affidavit against an application for summary
judgement. RSSS has withdrawn the action against Telkom, with each party
paying its own costs.
On 14 September 2011, RSSS served a summons on Telkom for payment of
various amounts for monitoring, maintenance and relocation of alarms
purchased by Telkom during or about 2006. In its summons RSSS is claiming
(a) R9,913,782.00 (inclusive of VAT) plus interest from 28 February 2011
to date of payment of account (b) interest at the legal rate on various
amounts computed from different alleged due dates for payment (c) costs
of suit. Telkom defended the matter and filed an opposing affidavit
against an application for summary judgement. RSSS has withdrawn the
action against Telkom with each partying paying its own costs.
COMPLAINTS AND COMPLIANCE COMMITTEE ICASA COMPLAINT
Phutuma Networks (Proprietary) Limited (Phutuma)
During February 2010 Phutuma lodged a complaint against Telkom at the
Complaints and Compliance Committee (CCC) of ICASA. The complaint is that
Telkom has contravened the Preferential Procurement Framework Act, the
Broad Based Black Economic Empowerment Act, the provisions of the
repealed Telecommunications Act as well as the conditions of its licence.
Telkom made submissions to the Committee.
In July 2010 the matter was postponed to enable Phutuma to redraw its
submissions in line with the Electronic Communications Act (ECA) and the
new communication licences issued to Telkom. This was necessary for the
CCC to have jurisdiction as the CCC cannot make rulings in relation to
contraventions of the Preferential Procurement Act and/or the Broad Based
Black Economic Empowerment Act. In March 2011, Phutuma had still not
amended its complaint to be in line with the ECA and the new licences
issued to Telkom. However, they raised new issues and there was an
argument on the question of whether they were entitled to raise new
issues. It is the judgment in respect of this issue, i.e. whether they
are entitled to raise new issues not raised in the original complaint,
which is outstanding and there is no indication of when this judgment
will be handed down.
OTHER
National Consumer Commission (NCC)
During the period, the NCC notified Telkom and 8ta that their standard
terms and conditions were not compliant with the Consumer Protection Act
(CPA). Telkom and 8ta subsequently amended their standard terms and
conditions and are awaiting the NCC`s comments. The NCC issued Consent
Orders on Telkom who have objected to these. If the NCC finds Telkom and
8ta to be non-compliant with the CPA, an administrative penalty of 10% of
turnover may be imposed.
Hip Oils Topco Limited (Hip Oils)
Telkom has undertaken to indemnify any actual or contingent liabilities,
obligations or other indebtedness of any nature owed or owing to trade,
financial and other creditors of Multi-Links where such liability,
obligation or other indebtedness was incurred and not disclosed to Hip
Oils prior to the completion date.
Tax Matters
The Group is regularly subject to an evaluation, by tax authorities, of
its direct and indirect tax filings. The consequence of such reviews is
that disputes can arise with tax authorities over the interpretation or
application of certain tax rules applicable to the Group`s business.
These disputes may not necessarily be resolved in a manner that is
favourable to the Group. Additionally, the resolution of the disputes
could result in an obligation to the Group.
31 March 30 September 30 September
2011 2010 2011
Rm Rm Rm
17. Related parties
Details of material transactions
and balances with related parties
are as follows:
With shareholders:
Government of South Africa
Related party balances
Trade receivables 354 360 355
Trade payables
Department of Communications (371) (370) (374)
Related party transactions
Revenue 2,904 1,439 1,597
Individually significant revenue* 1,151 540 550
City of Cape Town 95 48 47
Department of Correctional 66 32 35
Services
Department of Health: Gauteng 65 27 30
Department of Justice 97 43 52
South African National Defence 68 34 30
Force: (CSF)
South African Police Services 557 251 257
South African Revenue Services 49 26 22
S.I.T.A. (Proprietary) Limited 154 79 77
Collectively significant revenue* 1,753 899 1,047
* The nature of the individually
and collectively significant
revenue consists mostly of data
revenue.
At 30 September 2011, the
Governmentof South Africa held
39.76% (2010: 39.76%) of Telkom`s
shares and the Public Investment
Corporation held 3.92% (2010:
3.92%) of Telkom`s shares and a
further 8.95% (2010: 8.95%)
through Black Ginger 33
(Proprietary) Limited.
With entities under common
control:
Major public entities
Related party balances
Trade receivables 25 162 15
Trade payables (1) (3) (1)
The outstanding balances are
unsecured and will be settled in
cash in the ordinary course of
business.
Related party transactions
Revenue (332) (189) (218)
Expenses 163 103 106
Individually significant expenses: 151 95 99
South African Post Office 55 50 47
Eskom 84 37 52
South African Broadcast 12 8 -
Corporation
Collectively significant expenses 12 8 7
Rent received (28) (15) (13)
Individually significant rent (24) (13) (11)
received: South African Post
Office
Collectively significant rent (4) (2) (2)
received
Rent paid 24 12 11
Individually significant rent
paid:
South African Post Office 14 7 7
Collectively significant rent paid 10 5 4
Key management personnel
compensation:
Related party transactions
Short-term employee benefits 137 78 76
Post-employment benefits 7 4 4
Equity compensation benefits 12 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. There
have been no guarantees provided
or received for related party
receivables or payables.
18. Significant matters
Appointment of Chief Financial Officer and director
On 29 June 2011 the Telkom Board announced the appointment of Mr Jacques
Schindehutte as Chief Financial Officer of Telkom with effect from 1
August 2011.
Appointment of Independent Non-executive Director
On 4 July 2011 the Telkom Board announced the appointment of Mr Itumeleng
Kgaboesele as an independent non-executive director of Telkom with effect
from 1 July 2011.
Dividends
The Telkom Board declared an ordinary dividend of 145 cents (2010: 125
cents) per share and a special dividend of Nil cents (2010: 175 cents)
per share on 10 June 2011, payable on 11 July 2011 to shareholders
registered on 8 July 2011. The Secondary Taxation on Companies impact is
R47 million.
19. Subsequent events
Telkom and KT Corporation
Telkom and KT Corporation have entered into discussions regarding a
potential strategic venture that would, if implemented, result in KT
Corporation acquiring a strategic equity shareholding of 20% in the post-
issue ordinary share capital of Telkom and the companies entering into
long-term agreements to formalise the relationship and identified areas
of mutual strategic and business cooperation.
Multi-Links Telecommunications Limited
On 26 June 2011 the Telkom Board made a decision to sell the entire
issued share capital of Multi-Links to Helios Towers Nigeria Limited. The
sale was conditional on inter-alia regulatory approvals. The completion
date for the transaction was 3 October 2011. Refer to note 20 for Pro-
forma financial statements.
Other matters
The directors are not aware of any other matter or circumstance since the
financial period ended 30 September 2011 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.
20. Pro-forma condensed consolidated interim financial statements
Pro-forma condensed consolidated interim statement of comprehensive
income
Reviewed Disposal Pro-forma
30 September of 30 September
2011 Multi-Links 2011
Rm Rm Rm
Operating revenue 16,387 - 16,387
Other income 218 167 385
Operating expenses 15,382 - 15,382
Results from operating 1,223 167 1,390
activities
Investment income 111 - 111
Finance charges and fair 264 1,343 1,607
value movements
Interest 379 - 379
Foreign exchange and fair (115) 1,343 1,228
value movement
Profit before taxation 1,070 (1,176) (106)
Taxation 568 (204) 364
Profit/(loss) from 502 (972) (470)
continuing operations
Loss from discontinued 269 - 269
operation
Profit/(loss) for the period 233 (972) (739)
Total comprehensive 253 (972) (719)
income/(loss)
Earnings per share (cents) 32.5 (157.8)
Headline earnings per share 177.8 177.8
(cents)
Reconciliation of pro-forma
headline earnings for the
period ended 30 September
2011
Headline earnings
calculation
Basic earnings 166 (972) (806)
Profit on disposal of (15) - (15)
property, plant and
equipment
Profit on disposal of - (167) (167)
investment
Foreign exchange differences - 1 343 1 343
realised
Impairment loss on property, 643 - 643
plant and equipment and
intangible assets
Write-off of property, plant 155 - 155
and equipment and intangible
assets
Taxation effects (41) (204) (245)
Headline earnings 908 - 908
Pro-forma condensed
consolidated interim
statement of financial
position
Assets
Non-current assets 42,409 - 42,409
Current assets 9,713 - 9,713
Assets of disposal groups 228 (228) -
classified as held for sale
Total assets 52,350 (228) 52,122
Equity and liabilities
Total equity 29,461 39 29,500
Non-current liabilities 12,840 34 12,874
Current liabilities 9,654 94 9,748
Liabilities of disposal 395 (395) -
groups classified as held
for sale
Total liabilities 22,889 (267) 22,622
Total equity and liabilities 52,350 (228) 52,122
21 November 2011
Sponsor: UBS South Africa (Pty) Ltd
Date: 21/11/2011 07:05:01 Produced by the JSE SENS Department.
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