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Telkom - Group Interim Results for the six months ended September 30, 2006
Telkom SA Limited
(Registration Number 1991/005476/06)
Share Code: TKG
ISIN: ZAE000044897
JSE and NYSE Share Code TKG
("Telkom")
Index
1. Highlights 2
2. Operational overview 6
3. Group performance 12
4. Group balance sheet 13
5. Group cash flow 13
6. Group capital expenditure 14
7. Segment performance 15
8. Employees 21
9. Condensed consolidated interim financial statements 22
10. Supplementary information 55
1. Highlights
Johannesburg, South Africa - November 13, 2006, Telkom SA Limited (JSE and
NYSE: TKG), South Africa"s largest communications group today announced Group
results for the six months ended September 30, 2006. The Group delivered a
solid performance across both business segments primarily as a result of
continued growth in the fixed-line and mobile businesses.
GROUP FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006
- Operating revenue up 7.3% to R25,147 million
- 0.8% growth in operating profit to R7,685 million
- 40.7% group EBITDA margin
- 6.6% net debt increase to R11,659 million, and net debt to equity ratio
of 41.6%
- Headline earnings increased by 10.6% to 874.7 cents per share
- Basic earnings increased by 7.5% to 868.1 cents per share
Statement by Papi Molotsane, Chief Executive Officer:
"The Telkom Group has delivered a commendable performance across all business
segments, reporting headline earnings per share growth of 10.6% to 874.7
cents per share.
The fixed-line business" focus on growing annuity revenue streams and
increasing the contribution of data services has resulted in revenue
increasing by 0.7%. The 3.1% increase in operating expenses to maintain the
quality and functionality of our network is a testament to our determination
to improve service levels.
The mobile business has again delivered an excellent performance increasing
estimated market share to 59%.
Telkom is operating in a challenging environment and our commitment of
staying ahead of the curve is evident in the 41.0% increase in fixed-line
capital expenditure. It is imperative that we be able to take our customers
into the future ICT landscape. We believe that the next generation network we
are deploying will provide our customers with world class ICT solutions and
ensure long-term sustainable returns for our shareholders."
SOLID FINANCIAL PERFORMANCE
The Group has delivered a solid performance for the six months ended
September 30, 2006. Group operating revenue increased 7.3% to R25,147 million
and group operating profit increased 0.8% to R7,685 million. The Group
earnings before interest, tax, depreciation and amortisation ("EBITDA")
margin declined to 40.7% compared to 44.5% in the six months ended September
30, 2005. This was mainly due to a lower fixed-line EBITDA margin of 42.0%
for the six months ended September 30, 2006 compared to 46.6%, for the six
months ended September 30, 2005, as a result of increased fixed-line
operating expenditure partially offset by strong fixed-line data revenue
growth. The EBITDA margin of 33.8% for the mobile business decreased
marginally compared to 34.4% in the six months ended September 30, 2005
mainly as a result of increased operating expenditure partially offset by
increased revenues resulting from strong customer growth.
Headline earnings per share for the six months ended September 30, 2006 grew
by 10.6% to 874.7 cents per share and basic earnings per share grew 7.5% to
868.1 cents per share. The strong growth in earnings was attributed to the
increase in operating profit and a 41.3% reduction in finance charges.
Cash generated from operations increased 4.9% to R9,046 million and
facilitated capital expenditure of R4,193 million and the repurchase of
11,053,865 Telkom ordinary shares to the value of R1,454 million. Our Group
net debt to equity ratio of 41.6% at September 30, 2006, has increased from
23.2% at March 31, 2006.
Summary group financial results
Year ended
March 31, Six months ended September 30
Restated Restated
In ZAR millions 2006 2005 2006 %
Operating revenue 47,625 23,447 25,147 7.3
Operating profit 14,677 7,625 7,685 0.8
EBITDA3 20,553 10,429 10,225 (2.0)
Capital 7,506 3,096 4,190 35.3
expenditure1
Operating free 7,104 2,645 1,396 (47.2)
cash flow
Net debt 6,828 10,935 11,659 6.6
Basic EPS (ZAR 1,746.1 807.4 868.1 7.5
cents)
Headline EPS (ZAR 1,728.6 790.6 874.7 10.6
cents)3
Operating profit 30.8 32.5 30.6
margin (%)
EBITDA margin (%) 43.2 44.5 40.7
Net debt to 23.2 44.6 41.6
equity (%)
After tax 25.6 13.0 11.9
operating return
on assets (%)2
Capex to revenue 15.8 13.2 16.7
(%)2
1. Including spend on intangibles
2. Not annualized
3. EBITDA and headline earnings have been reconciled to net profit - Refer to
page 55
OPERATIONAL DATA
As at
March 31, As at September 30
2006 2005 2006 %
Fixed-line data
Fixed access lines ("000)1 4,708 4,730 4,675 (1.2)
Postpaid - PSTN 2,996 3,011 2,996 (0.5)
Postpaid - ISDN channels 693 682 708 3.8
Prepaid 854 870 807 (7.2)
Payphones 165 167 164 (1.8)
Fixed-line penetration rate (%) 10.0 10.1 9.9 (2.0)
Revenue per fixed access line 5,304 2,661 2,611 (1.9)
(ZAR)6
Total fixed-line traffic (millions 31,015 15,905 14,844 (6.7)
of minutes) 6
Local 18,253 9,523 8,430 (11.5)
Long distance 4,446 2,258 2,298 1.8
Fixed-to-mobile 4,064 2,027 2,017 (0.5)
International outgoing 515 246 265 7.7
International VoIP 83 47 20 (57.4)
Interconnection 3,654 1,804 1,814 0.6
Mobile interconnection 2,299 1,117 1,170 4.7
International interconnection 1,355 687 644 (6.3)
Managed data network sites 16,887 14,316 19,890 38.9
Internet subscribers 2 284,908 261,721 300,570 14.8
ADSL subscribers 3 143,509 95,290 190,172 99.6
Fixed-line employees
(excluding subsidiaries) 25,575 25,636 25,826 0.7
Fixed-line employees
(including subsidiaries) 26,156 26,222 26,434 0.8
Fixed access lines per fixed-line 184 185 181 (2.2)
employee 4
Mobile data 4
Total customers ("000) 23,520 19,122 25,753 34.7
South Africa
Mobile customers ("000) 19,162 15,773 20,201 28.1
Contract 2,362 2,092 2,675 27.9
Prepaid 16,770 13,653 17,440 27.7
Community services telephones 30 28 86 207.1
Mobile churn (%) 17.7 17.4 43 147.1
Contract 10.0 9.3 11.0 18.3
Prepaid 18.8 18.7 47.7 155.1
Estimated mobile market share (%) 57.9 56.9 59.0 3.5
Mobile penetration (%) 70.6 59.1 72.2 22.2
Total mobile traffic (millions of 17,066 8,038 9,721 20.9
minutes) 6
Mobile ARPU (ZAR) 6 139 147 124 (15.6)
Contract 572 588 528 (10.2)
Prepaid 69 71 61 (14.1)
Community services 1,796 1,960 1,017 (48.1)
Number of mobile employees 4,148 4,119 4,137 0.4
Mobile customers per mobile 4,620 3,829 4,883 27.5
employee
Other African countries
Mobile customers (thousands) 4,358 3,349 5,552 65.8
Number of mobile employees 1,154 1,181 1,184 0.3
Number of mobile customers per
mobile employee 3,776 2,836 4,689 65.3
1. Excludes Telkom internal lines of 107,604 (September 30, 2005: 106,513)
2. Includes Telkom Internet ADSL, satellite and dial-up subscribers
3. Excludes Telkom internal lines of 397(September 30, 2005: 299)
4. Based on number of Fixed-line employees, excluding subsidiaries
5. 100% of Vodacom data
6. For the six months ended
2. Operational overview
DELIVERED TO ALL STAKEHOLDERS
The Group is delivering on its strategic intent to create long-term value for
stakeholders in the six months ended September 30, 2006 by striving to
fulfill customer needs through introducing innovative products and delivering
solid financial returns to shareholders.
The fixed-line revenue held up well, improving 0.7% despite tariff reductions
on certain products and the loss of dial-up minutes due to our ADSL rollout.
The decrease in call traffic volumes of 7% were offset by 65% volume growth
in data services, increased revenue from subscriptions and connections and
rental and service fees. EBITDA margins decreased mainly due to an increase
in employee expenses as a result of an increased headcount necessary to
deliver on improving service levels and the deployment of the NGN as well as
salary increases, increased medical aid expenses and increased bonus
provisioning. Selling, general and administrative expenses increased as
expected largely due to material and maintenance and marketing. Depreciation
was 18.8% lower due to the extension of useful lives of certain assets.
South African Mobile customers increased 28.1% during the six months to
September 30, 2006, reinforcing Vodacom"s market leadership position in South
Africa. Exceptional customer growth and continued efficiencies in the mobile
business resulted in a marginal EBITDA margin decrease of 33.8% against a
15.6% decline in South African ARPUs.
INCREASING IMPORTANCE OF DATA REVENUE
The fixed-line business achieved a 13.5% increase in data revenue for the six
months ended September 30, 2006, with strong growth in all data revenue
categories.
ADSL adoption in the consumer and small and medium size business segment
increased in the 2006 interim period to 190,172 subscribers. Telkom has
accelerated the fibre roll-out to shorten copper loop lengths and accelerated
the roll-out of IMAX - an integrated multi access platform - for wireline
services and WIMAX for wireless services. The ADSL customisation of SA"s self
install option is close to completion. Telkom is well on its way to achieve
ADSL penetration of 15% - 20% of fixed access lines by 2010.
The continuing demand for broadband during the six months ended September 30,
2006, has resulted in strong growth in fixed-line"s leased line and other
data services revenue of 8.8%. Revenue from cellular operator fixed links has
increased from R600 million in the six months ended September 30, 2005 to
R803 million in the six months ended September 30, 2006, mainly as a result
of the roll-out of cellular operators" 3G networks.
Telkom"s vision is to become an ICT solutions partner for corporate and
business customers, moving up the value chain, providing higher value
products and services to our traditional voice and data customers. This
strategy has been validated by our success in winning large corporate
customer accounts and delivering to their ICT requirements from voice
products and services to network management. Our VPN Supreme and Customer
Network Care products aimed mainly at the medium to large sized business,
have enjoyed success through alignment with customers" requirements.
Vodacom"s data revenue increased by 61.5% to R722 million (50% share) for the
six months ended September 30, 2006 from R447 million (50% share) for the six
months ended September 30, 2005, contributing 7.4% (September 30, 2005: 5.5%)
to mobile operating revenue.
Growth in mobile data revenue is mainly due to the launch of new data
initiatives such as 3G, HSDPA, Mobile TV, Vodafone live!, BlackBerry and the
continued popularity of SMS.
Telkom made an offer to Business Connexion"s ("BCX") shareholders to acquire
100% of BCX for R2.5 billion. The offer price constitutes R9 per share, plus
BCX to pay a special dividend of 25 cents per share. Telkom believes that the
BCX acquisition provides a good opportunity to create shareholder value as it
enables Telkom to enter the data hosting and desktop management market. These
services are complementary to the value adding products and services being
developed within Telkom. The Competition Commission has agreed to refer the
matter to the Competition Tribunal by November 17, 2006 and a pre-hearing is
scheduled at the Competition Commission for November 24, 2006.
On August 31, 2006 Telkom announced the creation of Telkom Media (Pty) Ltd, a
private company with a 41.5% Black Economic Empowerment shareholding, which
on August 31,2006 applied to ICASA for a commercial satellite and cable
subscription broadcast licence. Telkom Media will offer two media- and
entertainment services: satellite pay-TV and cable TV (IPTV). Initial
offerings in the satellite subscription service will provide subscribers with
access to seven locally compiled television channels which will contain a
significant amount of local content. Entry into the bouquet will be priced at
a level that is favourable to the majority of South Africans.
Telkom"s entrance into the pay-TV market opens new opportunities for it in
the Information, Communications and Entertainment space and is in line with
its strategy to provide converged solutions and satisfy the diverse needs of
an increasingly sophisticated customer base.
POSITIVE CUSTOMER RESPONSE TO NEW INNOVATIVE PRODUCTS AND SERVICES
Telkom"s aim to secure and increase its annuity revenue streams and to
enhance the customer experience by introducing innovative value enhancing
bundled products and services has been borne out by the phenomenal take up of
Telkom Closer and other enhanced PC bundled products.
Telkom Closer bundles rental, call answer, Standard time minutes and Callmore
minutes into a package which allows the customer to pay a flat monthly
charge. Demand for the product has been strong, resulting in the sign up of
180,258 customers since the launch in February 2006.
PC Bundled products introduced in July 2005 have already been accepted well
by the market with 920 bundles sold in the month of September 2006. The
multiple choices of bundled options should lead to increased network
utilisation.
Another new product, Telkom PD Connect, is geared towards gated communities,
multi tenanted complexes and business developments. The product offers
bundled voice, data and video services and is promoted through a strategic
alliance between Telkom and property developers.
The business segment has responded positively to both Telkom Supreme Call and
particularly well to VPN Supreme which has shown 355% growth in the last 18
months. Telkom"s Internet Protocol VPN extended coverage now spans across 70
countries and over 700 cities globally.
Other value added products that have received a positive response include:
- The provision of free medical emergency response for fixed-line
customers by Netcare 911;
- SpaceStream providing satellite access; and Office Suite providing
office
functionality to the small and medium enterprise market.
Through bundled products Telkom intends to increase its annuity income,
create a value comparison for the customer and improve our competitive
position.
Telkom"s strategic intent to retain and grow revenue has led to the
development of a flat rate plan to combat the negative minutes of use trend
in the consumer market. In addition, arbitrage opportunities between local
and long distance and the gap between Standard time and Callmore rates are
being reduced while continuous tariff rebalancing is taking place.
TOTAL MOBILE CUSTOMERS UP BY 34.7% TO 25.8 MILLION
Vodacom performed strongly in the six months ending September 30, 2006,
improving estimated South African market share to approximately 59%. Telkom"s
50% share of Vodacom"s profit from operation increased 17.5% to
R2,483 million. Mobile operating profit margin decreased to 25.5% while
mobile EBITDA increased 18.2% to R3,289 million. EBITDA margin decreased to
33.8% from 34.4% in the previous comparable period.
Vodacom"s South Africa customer base increased 28.1% to 20.2 million
customers.
Vodacom South Africa"s continued focus on retentions in the six months ended
September 30, 2006 ensured a low South African contract churn of 11.0%
(September 30, 2005: 9.3%). South African prepaid churn of 47.7% for the six
months ended September 30, 2006 was largely the result of a once-off rule
change to disconnect 2.4 million SIM cards which were only carrying call
forward traffic to voicemail. The blended South African ARPU over the six
months ended September 30, 2006 was R124, (September 30, 2005: R147).
Outside South Africa, Vodacom grew its customer base by 65.8% to 5.6 million
customers as at September 30, 2006 (September 30, 2005: 3.3 million). Vodacom
Tanzania achieved a substantial 61.5% increase in customers to 2.6 million as
at September 30, 2006(September 30, 2005: 1.6 million). Vodacom Congo saw a
64.0% increase in customers to 2.0 million customers as at September 30, 2006
(September 30, 2005: 1.2 million). Vodacom Lesotho increased its customer
base by 39.2% to 238,000 customers as at September 30, 2006(September 30,
2005: 171,000). Vodacom Mozambique increased its customer base substantially
by 106.5% to 694,000 customers as at September 30, 2006 (September 30, 2005:
336,000).
FOCUSED ON ACHIEVING IMPROVED SERVICE LEVELS
The increased demand for our products and services has seen our service
levels come under pressure necessitating an increase in headcount to improve
service levels.
One of Telkom"s key strategic focus areas is improving customer centricity.
This includes network reliability and market focused products and services.
Indirect customer interface has been enhanced through indirect sales channels
(for distribution of Telkom products by Woolworths), Smart Moves (to simplify
adoption of services by new home owners in partnership with banking
institutions) and the External Sales Agent Programme which allows vendors to
sell Telkom products and services.
Telkom has also repositioned customer facing outlets and launched projects to
improve customer communication and improve the internal processes for the
installation of new services.
COMPETITIVE PRICING AND VOLUME GROWTH
Telkom reduced prices on it"s regulated basket of products and services by
2.1%.
From August 1, 2006, the following price changes have been effective:
- ADSL rental 24% average decrease
- Long distance 10% decrease
- International 10% average decrease
- Data 9% average decrease
- Rental (analogue lines) 8% increase
Rebalancing of tariffs is designed to allow effective competition in all
areas going forward. The reduction of telecommunication costs should benefit
all South Africans and contribute positively to the economy.
CONTINUOUS ADVANCEMENT OF OUR NETWORK
Currently Telkom is deploying Metro Ethernet NG-SDH, a platform for converged
multimedia services to support metropolitan network bandwidth requirements
and soft-switching platforms, aimed mainly at the business community. The
deployment of IMAX - a multi service access platform including narrowband and
broadband service for wireline application together with WiFi and WiMAX is
being accelerated. IMAX is largely for the benefit of residential consumer
markets. Various IP based services such as VoIP, IPTV and hosted PBX are
being implemented as replacement technology for the backbone network.
In line with customer demand and sound financial criteria, we will continue
to invest in improving our network and the orderly migration to an IP base
network to supply next generation products and services.
RECOGNITION OF THE VALUE OF OUR EMPLOYEES
Telkom believes that its skilled and experienced workforce is its competitive
advantage. Rapidly changing technology, increasing specialisation
requirements and capacity gaps necessitate ongoing development and training
requirements. Telkom continues to invest significantly in its employees to
ensure that the appropriate business skills are available to meet customer
requirements.
For the six months ended September 30, 2006, Telkom spent R228.7 million
(September 30, 2005:R105.3 million) on training and development and employees
participated in 76,004 (September 30, 2005: 71,646) facilitator led training
days.
SIGNIFICANT RETURNS TO SHAREHOLDERS AND EMPLOYEE SHARE OWNERSHIP
In the six months ended September 30, 2006, the Company repurchased 11.1
million shares to the value of R1,454 million (including costs) which are in
the process of being cancelled as issued share capital and restored as
authorised but unissued share capital.
The AGM held on October 20, 2006 granted the Board of Directors further
authority to buy back shares to a limit of 20% of shares in issue.
The Telkom Board approved a grant of 1,824,984 shares with effect from June
2, 2006, to employees in terms of the Telkom Conditional Share Plan.
As previously communicated, Telkom aims to pay a steadily growing annual
ordinary dividend. The level of dividend will be based upon a number of
factors, including, among other things, the assessment of financial results,
available growth opportunities,capital and operating expenditure requirements
the Group"s net debt level, interest coverage and future expectations,
including internal cash flows and share buybacks.
THE REGULATORY ENVIRONMENT
Telkom faces regulatory challenges and through constructive dialogue
endeavours to achieve a regulatory framework that is realistic, equitable and
beneficial to the industry. The following details the main regulatory issues
affecting the industry and Telkom.
Electronic Communications(EC) Act
The EC Act, No 36 of 2005, was promulgated on July 19, 2006. The primary aim
of the Act is to promote convergence in the broadcasting, broadcasting signal
distribution and telecoms sectors and to provide the legal framework for
convergence of these sectors.
The Act will liberalise the market further and will result in a change in the
licensing structure. Essentially, separate licenses will be granted for the
provision of infrastructure, communication services and broadcasting
services. All existing licensees will need to be issued with new licenses.
The EC Act creates challenges as well as opportunities that Telkom will
certainly explore. In parallel with the EC Act, the ICASA Act has been
amended, effective from July19, 2006.
Interconnection and Facilities Leasing
Current regulations make provision for cost based interconnection and
facilities leasing. Telkom submitted its regulatory accounts on a fully
allocated costs basis to ICASA in September 2005, and long run incremental
costs (LRIC) statements were submitted on September 29, 2006 together with
updated fully allocated costs regulatory accounts.
Operators classified as "major" operators are required to supply
interconnection services and facilities that ICASA has determined to be
"essential" to "public" operators at cost based tariffs as entitled to by the
provisions of their licenses. Telkom has been declared a "major" operator by
ICASA.
Public hearings were held by ICASA on new interconnection and facilities
leasing regulations in late March 2006. The final regulation has not yet been
published. The draft regulations propose that LRIC based interconnection be
extended to all licensees.
Telkom and NeotelPty) Limited, South Africa"s second national operator are in
talks on interconnection and facilities leasing agreements.
Number Portability (NP)
In terms of regulations published in September 2005, Telkom is expected to
provide portability in blocks of 10,000 numbers two months after Neotel"s,
launch of services in blocks of 1,000 numbers four months after Neotel"s
launch of services and individual number portability 12 months after it is
requested to provide it. Neotel has, requested NP in February 2006 and
discussions on the implementation of the required inter-operator systems are
under way. However, since the functional specifications for the
implementation of NP between fixed-line operators have not yet been finalised
no material progress can be made in this regard.
ICASA has indicated that mobile Number Portability will be introduced as from
November 10, 2006.
Local loop unbundling
Telkom is required, in terms of existing regulations, to provide Neotel with
shared access to its local loop.
Although the Telecommunications Act, 103 of 1996, provided that no general
local loop unbundling will be required for the first two years of operation
of Neotel, the EC Act, which repeals the Telecommunications Act, makes
provision for unbundling of the local loop, subject to ICASA making the
necessary regulations.
ADSL regulations
ADSL regulations have been published. These primarily provide a framework for
the terms and conditions under which ADSL services must be provided, and the
tariffs structure thereto.
Interception of Communication and Communication-related Information Act
The effective date of the Act is September 30, 2005 with the exception of the
provisions dealing with customer registration which is effective June 30,
2006.
Subscriber registration
The Act requires customers to produce an identification document and a
physical address which the operator must verify.
The mobile operators have succeeded in obtaining, in principle, support for
an electronic registration process. The legislative amendments to effect the
changes have not yet been effected.
Telkom and Vodacom are in a position to intercept communications and register
subscribers. However, the Act does place onerous conditions on operators and,
therefore, Telkom continues to engage the authorities on the practical
implications of the Act.
Conclusion
Telkom believes that it is well placed to deal with all regulatory challenges
facing Telkom. Telkom actively plans and analyses multiple regulatory
scenarios to ensure that it is prepared for changes in regulation.
TELKOM IS A LEADER IN TRANSFORMATION
Telkom has always viewed South Africa"s effective transformation as
imperative for its own sustainable
long-term growth. Telkom concurs with the view that BEE should seek to
deliver meaningful and truly broad-based empowerment to the majority of South
Africa"s people. The draft Information and Communication Technology ICT BEE
Charter has been agreed to by the industry and it is expected to be aligned
with the Department of Trade and Industry (DTI) Codes of Good Practice. DTI"s
Codes are in draft form and are awaiting finalisation.
Telkom spent R3.9 billion on empowered or significantly empowered suppliers
for six months ended September 30, 2006.
Telkom"s transformation progress has been consistently recognised. Telkom was
placed fifth out of 200 companies in the annual 2006 FM/Empowerdex Most
Empowered Company in SA Survey.
Telkom"s social investment programme through the Telkom Foundation has
continued to contribute to the positive transformation of disadvantaged
communities through social investments aimed at achieving sustainable
development. The social investment programmes have continued to focus on the
following three main focus areas:
- Education and Training;
- Empowerment of Women, Children and People with Disabilities; and
- ICT Planning and Infrastructure rollout.
The Telkom Foundation was recognised for its commitment, receiving numerous
awards and recognition. The most notable being the PMR Awards for first
overall winner on corporate care within the telecommunications sector, gold
status on social upliftment, BEE, job creation and training.
STRATEGY
Telkom"s vision is to be a leading customer and employee centred Information
and Communications Technology (ICT) solutions service provider. Telkom is
delivering on balancing the needs of all stakeholders to ensure long-term
sustainable and profitable growth of the business.
The accelerated liberalisation of the market, in particular the implications
of the Electronic Communications Act, the emergence of new technologies and
customer demand is clearly material to Telkom"s strategic intentions. Telkom
believes that it is strongly positioned to compete effectively in a
liberalised market. Customer service excellence through a skilled and
dedicated workforce with greater product and service choice and value for
customers will ensure long-term value creation. Telkom will pursue
opportunities to provide the full spectrum of ICT solutions including voice,
data, video and internet services increasingly through broadband penetration.
To ensure that Telkom can sustain the creation of value relative to
developments in its dynamic and changing market environment, management are
now implementing the shifts in strategic emphasis detailed in
April 2006.
Telkom is focusing on the following primary imperatives to sustain long-term
value creation for all its stakeholders:
- Investing in the development of employees to maintain competitive
advantage;
- Enhancing customer satisfaction through customer centricity;
- Retaining revenue and generating growth;
- Evolving to a Next Generation Network in order to support profitable growth
through prudent
cost management; and
- Repositioning Telkom stakeholder management to create healthy external
relationships.
The realisation of Telkom"s strategic intentions ultimately lies in the hands
of Telkom"s people.
The evolution to an IP centric network is a business imperative.
The evolution to a Next Generation Network in a phased approach which is
based on sound commercial criteria and is being designed to enable Telkom to
exploit new opportunities in the ICT solutions market.
Given the centrality of ICT to economic growth and social development, Telkom
remains strategically important to the achievement of national objectives and
will continue to invest significantly in the development of a viable and
vibrant marketplace.
Telkom is exploring opportunities outside its borders where there is
potential for growth, healthy returns and long-term value creation for its
stakeholders. The focus is on data acquisitions and fixed/mobile
opportunities. A detailed evaluation process is followed for each opportunity
to ensure it is a strategic fit, all risks and resource requirements are
understood and that the potential returns exceed our minimum requirements.
Prospects for the six months ahead
Fixed-line revenues in the financial year ending March 31, 2007 are expected
to be impacted by tariff decreases, increased competition and the migration
from dial-up traffic to ADSL. Our strategic initiatives to improve service
levels are expected to result in above inflationary increases in operating
expenses. The slower than expected start up of Neotel, market share losses
and the non-implementation of Fully Allocated costs, Number Portability and
Carrier Pre Selection is likely to see Telkom at the higher end of, or
slightly above the guidance provided in April 2006 for fixed-line EBITDA
margin of between 37% and 40% for the year ending March 31, 2007.
Fixed-line CAPEX is expected to be between 18% and 22% of revenue. The
increase from the financial year ended March 31, 2006 is due to capacity
increases and the accelerated evolution to an IP centric network for the
introduction of a Next Generation Network.
The mobile business is focused on maintaining its market share and growing
revenue through value-added services. Through improved efficiencies, the
EBITDA margin is expected to remain fairly stable.
The Group net debt to equity target remains the same at 50% to 70%.
3. Group performance
GROUP OPERATING REVENUE
Group operating revenue increased 7.3% to R25,147 million (September 30,
2005: R23,447 million) in the six months ended September 30, 2006. Fixed-line
operating revenue, after inter-segmental eliminations, increased 0.4% to
R16,139 million primarily due to solid growth in data services and increased
subscription revenue, partially offset by lower traffic and interconnection
revenues. Mobile operating revenue, after inter-segmental eliminations,
increased 22.2% to R9,008 million primarily due to customer growth offset by
declining ARPUs.
GROUP OPERATING EXPENSES
Group operating expenses increased 9.7% to R17,675 million (September 30,
2005: R16,109 million) in the six months ended September 30, 2006, primarily
due to a 21.7% increase in operating expenses in the mobile segment to R6,899
million (after inter-segmental eliminations). Fixed-line operating expenses
increased 3.2% to R10,776 (after inter-segmental eliminations) primarily due
to increased employee expenses, selling, general and administrative expenses,
services rendered and operating leases, partially offset by a decrease in
depreciation, amortisation, impairment and write-offs and payments to other
operators. The increase in mobile operating expenses of 21.7%, after inter
segmental eliminations, was primarily due to increased gross connections
resulting in increased costs to connect customers onto the network as well as
increases in staff expenses due to an increase in the headcount to support
the growth in operations. Mobile payments to other operators also increased
as a result of the increased outgoing traffic terminating on other mobile
networks relative to traffic terminating on the fixed-line network.
INVESTMENT INCOME
Investment income consists of interest received on short-term investments and
bank accounts. Investment income decreased 21.7% to R170 million (September
30, 2005: R217 million), largely as a result of less cash available for short-
term investments due to higher taxation payments.
FINANCE CHARGES
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains and
losses on financial instruments and foreign exchange gains and losses.
Finance charges decreased 41.3% to R437 million (September 30, 2005: R744
million) in the six months ended September 30, 2006, primarily due to a 4.4%
decrease in interest expense to R673 million (September 30, 2005: R704
million) as a result of the redemption of local and foreign loans. In
addition to the decrease in the interest expense, net fair value and exchange
gains on financial instruments of R236 million (September 30, 2006: 126)
4. Group balance sheet
Solid operating performance across the Group has seen the balance sheet
retain its strength and move towards a more efficient capital structure. Net
debt, after financial assets and liabilities, increased 6.6% to R11,659
million (September 30, 2005: R10,935 million) resulting in a net debt to
equity ratio of 41.6% from 44.6% at September 30, 2005. On September 30,
2006, the Group had cash balances of R718 million.
During the six months ended September 30, 2006, 11.1 million shares were
repurchased for R1,454 million. These shares are in the process of being
cancelled as issued share capital and restored as authorised but unissued
share capital. Interest-bearing debt, including credit facilities utilised,
decreased 6.2% to R12,831 million (September 30, 2005: R13,675 million) in
the six months ended September 30, 2006. The Group repaid R430 million of the
commercial paper debt by September 30, 2006, which was partially offset by
R1,146 million nominal value of commercial paper issued during the six months
ended September 30, 2006.
5.Group cash flow
Cash flows from operating activities decreased 11.8% to R772 million
(September 30, 2005: R875 million), primarily due to higher taxation payments
offset in part by increased operational cash flows. Cash flows utilised in
investing activities increased 33.3% to R4,102 million (September 30, 2005:
3,078 million), primarily due to increased capital expenditure in both the
mobile and fixed-line segments. Cash utilised in financing activities
primarily consists of R1,403 million for share buybacks and a R430 million
repayment of commercial paper bills, which was partially offset by R1,146
million nominal value commercial paper bills issued during the six months
ended September 30, 2006.
SUMMARY
Year
ended
March Six months ended September 30
31,
In ZAR millions 2006 2005 2006 %
Cash generated from 19,724 8,625 9,046 4.9
operations
Cash from operating
activities
(after tax, interest and 9,506 875 772 (11.8)
dividends)
Investing activities (7,286) (3,078) (4,102) 33.3
Financing activities (258) 859 (817) (195.1)
Net increase/(decrease) 1,962 (1,344) (4,147) 208.6
in cash
6. Group capital expenditure
Group capital expenditure which included spend on intangibles, increased
35.3% to R4,190 million (September 30, 2005: R3,096 million) and represents
16.7% of Group revenue (September 30, 2005: 13.2%).
FIXED-LINE CAPITAL EXPENDITURE
Year ended Six months ended September 30
March 31,
In ZAR millions 2006 2005 2006 %
Baseline 2,128 851 1,377 61.8
Portfolio 2,756 963 1,078 11.9
''Revenue 374 150 93 (38.0)
generating
''Network 330 76 273 259.2
evolution
''Sustainment 596 130 173 33.1
''Effectiveness 1,080 515 417 (19.0)
and efficiency
''Support 376 92 122 32.6
Regulatory 15 16 143 793.8
Other 36 28 21 (25.0)
4,935 1,858 2,619 41.0
Fixed-line capital expenditure which include spending on intangibles,
increased 41.0% to R2,619 million (September 30, 2005: R1,858 million) and
represents 15.9% of fixed-line revenue (September 30, 2005: 11.3%). Baseline
and revenue generating capital expenditure of R1,470 million (September 30,
2005: R1,001 million) was largely for the deployment of technologies to
support the growing data services business (including ADSL footprint), links
to the mobile cellular operators and expenditure for access line deployment
in selected high growth residential areas. The continued focus on
rehabilitating the access network and increasing the efficiencies and
redundancies in the transport network contributed to the network evolution
and sustainment capital expenditure of R446 million (September 30, 2005: R206
million).
Telkom continues to focus on its operations support system investment with
current emphasis on workforce management, provisioning and fulfilment,
assurance and customer care, hardware technology upgrades on the billing
platform and performance and service management. During the six months ended
September 30, 2006, R417 million (September 30, 2005: R515 million) was spent
on the implementation of several systems.
MOBILE CAPITAL EXPENDITURE
Year ended
March 31, Six months ended
September 30
In ZAR millions 2006 2005 2006 %
South Africa 2,200 1,072 1,263 17.8
Other African countries 371 166 308 85.5
2,571 1,238 1,571 26.9
Mobile capital expenditure which include spending on intangibles, (50% of
Vodacom"s capital expenditure) increased 26.9% to R1,571 million (September
30, 2005: R1,238 million) and represents 16.1% of mobile revenue (September
30, 2005: 15.3%) and was mainly spent on the cellular network infrastructure
as a result of increased investment in South Africa for growth and investment
in 3G technologies. The increase in capital expenditure in other African
countries is largely was a result of an increased investment in Tanzania to
accommodate the substantial growth in the subscriber base during the year.
7. Segment Performance
Telkom"s operating structure comprises two segments, fixed-line and mobile.
The fixed-line segment provides fixed-line voice and data communications
services through Telkom; directory services through our 64.9% owned
subsidiary, TDS Directory Operations and wireless data services through our
wholly owned subsidiary, Swiftnet. The mobile segment consists of our 50%
joint venture interest in Vodacom.
Vodacom"s results are proportionately consolidated into the Telkom Group"s
consolidated financial statements. This means that we include 50% of
Vodacom"s results in each of the line items in the Telkom Group"s
consolidated financial statements. Telkom Directory Services, Swiftnet,
Rossal No 65 and Acajou Investments are subsidiaries which are fully
consolidated in the Telkom Group"s consolidated financial statements.
SUMMARY
Year ended Six months ended September 30
March 31, Restated
In ZAR millions 2006 2005 2006 %
Operating revenue 47,625 23,447 25,147 7.3
Fixed-line 32,749 16,398 16,514 0.7
Mobile 17,021 8,088 9,733 20.3
Inter-segmental (2,145) (1,039) (1,100) 5.9
eliminations
Operating profit 14,677 7,625 7,685 0.8
Fixed-line 10,242 5,512 5,202 (5.6)
Mobile 4,435 2,113 2,483 17.5
Inter-segmental - - - -
eliminations
Operating profit 30.8 32.5 30.6 (5.8)
margin (%)
Fixed-line 31.3 33.6 31.5 (6.3)
Mobile 26.1 26.1 25.5 (2.4)
EBITDA 20,553 10,429 10,225 (2.0)
Fixed-line 14,646 7,647 6,936 (9.3)
Mobile 5,907 2,782 3,289 18.2
Inter-segmental - - - -
eliminations
EBITDA margin (%) 43.2 44.5 40.7 (8.6)
Fixed-line 44.7 46.6 42.0 (9.9)
Mobile 34.7 34.4 33.8 (1.8)
FIXED-LINE SEGMENT
The fixed-line segment provides fixed-line voice and data communications
services through Telkom, directory services through our 64.9% owned
subsidiary, Telkom Directory Services, and wireless data services through our
wholly owned subsidiary, Swiftnet. The fixed-line segment accounted for 64.2%
(September 30, 2005: 68.6%) of Group operating revenues (after inter-
segmental eliminations) and 72.2% (September 30, 2005: 77.5%) of Group
operating profit at September 30, 2006.
The financial information presented below for the fixed-line segment is
before inter-segmental eliminations.
SUMMARY
Year ended Six months ended September 30
March 31, Restated
In ZAR millions 2006 2005 2006 %
Revenue 32,749 16,398 16,514 0.7
Operating profit 10,242 5,512 5,202 (5.6)
EBITDA 14,646 7,647 6,936 (9.3)
Capital 4,935 1,858 2,619 41.0
expenditure1
Operating profit 31.3 33.6 31.5 (6.3)
margin (%)
EBITDA margin (%) 44.7 46.6 42.0 (9.9)
Capex to revenue 15.1 11.3 15.9 40.7
(%)
1.'Including spend on intangibles
FIXED-LINE OPERATING REVENUE
Year ended Six months ended September 30
March 31, Restated
In ZAR millions 2006 2005 2006 %
Subscriptions and 5,803 2,836 3,050 7.5
connections
Traffic 17,563 8,936 8,448 (5.5)
Local 5,753 2,966 2,735 (7.8)
Long distance 3,162 1,667 1,432 (14.1)
Fixed-to-mobile 7,647 3,821 3,788 (0.9)
International 1,001 482 493 2.3
outgoing
Interconnection 1,654 844 781 (7.5)
Mobile operators1 760 361 400 10.8
International 894 483 381 (21.1)
operators
Data 6,649 3,189 3,621 13.5
Leased lines and 5,282 2,589 2,818 8.8
other data
Mobile leased 1,367 600 803 33.8
facilities2
Directories and 1,080 593 614 3.5
other
32,749 16,398 16,514 0.7
1. Interconnection revenue includes revenue from Vodacom of R239 million
(September 30, 2005: R206 million), 50% of which is eliminated on
consolidation
2. Data revenue includes revenue from Vodacom of R462 million (September 30,
2005: R367 million), 50% of which is eliminated on consolidation
Operating revenue from the fixed-line segment, before inter-segmental
eliminations, increased 0.7% to R16,514 million (September 30, 2005: R16,398
million) primarily due to strong growth in data services revenue and
increased subscription revenue, partially offset by a decline in traffic and
interconnection revenues.
Subscription and connections revenue grew 7.5% largely as a result of
increased rental tariffs, increased sales of customer premises equipment,
including PABX"s, and penetration of higher value-added services.
Traffic revenue decreased 5.5% as a result of the acceleration of broadband
adoption and the resultant loss of internet dial-up minutes as well as the
increasing substitution of calls placed using mobile services rather than
fixed-line services. Traffic, including VoIP traffic but excluding
interconnection traffic, decreased 7.4% to 13,009 million minutes (September
30, 2005: 14,053 million minutes).
Interconnection revenue decreased 7.5% largely as a result of a decrease of
21.1% in international interconnection revenue. The decreased interconnection
revenue from international operators is mainly as a result of a 6.3% decrease
in international interconnection traffic minutes to 644 million minutes
(September 30, 2005: 687 million minutes). Mobile interconnection revenue
increased 10.8% to R400 million (September 30, 2005: R361 million) primarily
due to increased interconnection traffic from mobile operators.
Mobile interconnection traffic minutes increased by 4.7% to 1,170 million
minutes (September 30, 2005: 1,117 million minutes) in the six months ended
September 30, 2006.
Data revenue increased 13.5% mainly due to higher demand for data services,
including ADSL, in the medium and small business segment with leased line and
other data revenue growing 8.8% and mobile leased line revenue growing by
33.8%. The increase in mobile leased facilities is largely due to the rollout
of 3G networks by the mobile operators.
FIXED-LINE OPERATING EXPENSES
Year ended Six months ended September 30
March 31,
In ZAR millions 2006 2005 2006 %
Employee expenses 6,470 3,143 3,610 14.9
''Salaries and 4,592 2,240 2,531 13.0
wages
''Benefits 2,410 1,154 1,388 20.3
''Workforce 88 45 14 (68.9)
reduction
expenses
''Employee (620) (296) (323) 9.1
related expenses
capitalised
Payments to other 6,150 3,129 3,099 (1.0)
network
operators1
''Payment to 5,231 2,612 2,620 0.3
mobile operators
''Payment to 919 517 479 (7.4)
international
operators
SG&A 3,086 1,437 1,606 11.8
''Materials and 1,617 799 935 17.0
maintenance
''Marketing 413 159 231 45.3
''Bad debts 187 39 70 79.5
''Other 869 440 370 (15.9)
Services rendered 2,050 945 1,066 12.8
''Property 1,107 529 558 5.5
management
''Consultants and 943 416 508 22.1
security
Operating leases 777 367 386 5.2
Depreciation,
amortisation,
impairment
and write-offs 4,404 2,135 1,734 (18.8)
22,937 11,156 11,501 3.1
1. Payments to other network operators include payments made to Vodacom of
R1,423 million (September 30, 2005: R1,430 million), 50% of which is
eliminated on consolidation
Fixed-line operating expenses, before inter-segmental eliminations, increased
3.1% in the six months ended September 30, 2006, to R11,501 million
(September 30, 2005: R11,156 million), primarily due to increased employee
expenses, services rendered, operating leases and selling, general and
administrative expenses offset by a decrease in depreciation, amortisation,
impairment and write-offs and payment to other operators.
Employee expenses increased 14.9%, largely due to increased salary and wages
and benefits expenses as result of an increased headcount necessary to
deliver on improving service levels and the deployment of the NGN as well as
salary increases, increases to medical aid expenses and increased bonus
provisioning.
Payments to other network operators decreased marginally by 1.0% as a result
of lower payments to international operators, partially offset by higher
payments to mobile operators. Payments to mobile operators increased 0.3%,
largely as a result of increased commitment from the fax to e-mail service
offset by a 0.5% decrease in fixed-to-mobile traffic. Payments to
international operators decreased 7.4% primarily due to the decrease of
volumes in switched hubbing, partiallyoffset by a 7.7% increase in
international outgoing traffic volumes.
Selling, general and administrative expenses increased 11.8% as a result of a
increased marketing expenses, materials and maintenance and bad debts.
Services rendered increased 12.8% with property management expenses
increasing 5.5% as a result of increased maintenance. Consultants and
security costs increased 22.1% primarily as a result of increased cost
associated with the next generation network deployment, customer centricity
programmes and the regulatory accounting and Sarbanes-Oxley compliance
project. Additional increases were as a result of the higher costs of
transporting equipment from warehouses to final drop-off points due to an
increased number of reported faults resulting from adverse weather
conditions.
Operating leases increased 5.2% primarily as a result of increased vehicle
lease rates, increased vehicle maintenance and increased ad-hoc vehicle
rentals offset in part by a 0.2% reduction in the vehicle fleet from 9,710
vehicles at September 30, 2005 to 9,691 vehicles at September 30, 2006.
In recognition of changed usage patterns of certain items of property, plant
and equipment and intangible assets, the Group reviewed their remaining
useful lives as at March 31, 2006. The assets affected were certain items
included in network equipment, support equipment, office equipment and IT
software and hardware. The revised estimated useful lives resulted in a
decrease of 18.8% in the depreciation, amortisation, impairment and write-
offs to R1,734 million (September 30, 2005: R2,135 million).
Fixed-line operating profit decreased 5.6% to R5,202 million (September 30,
2005: R5,512 million)
with an operating profit margin of 31.5% (September 30, 2005: 33.6%).
EBITDA decreased 9.3% to R6,936 million (September 30, 2005: R7,647 million),
with EBITDA margins decreasing to 42.0%. (September 30, 2005: 46.6%).
MOBILE SEGMENT
The mobile segment accounted for 35.8% of Group operating revenue (September
30, 2005: 31.4%) (after inter-segmental eliminations) and 27.8% of Group
operating profits (September 30, 2005: 22.5%). Vodacom"s operational
statistics are presented below at 100%, but all financial figures represent
the 50% that is proportionately consolidated in the Group and presented
before inter-segmental eliminations.
SUMMARY
Year ended
March 31, Six months ended September 30
In ZAR millions 2006 2005 2006 %
Operating revenue 17,021 8,088 9,733 20.3
Operating profit 4,435 2,113 2,483 17.5
EBITDA 5,907 2,782 3,289 18.2
Capital 2,571 1,238 1,571 26.9
expenditure1
Operating profit 26.1 26.1 25.5 (2.3)
margin (%)
EBITDA margin (%) 34.7 34.4 33.8 (1.8)
Capex to revenue 15.1 15.3 16.1 5.2
(%)
1. Including spend on intangibles
MOBILE OPERATING REVENUE
Year ended
March 31, Six months ended September 30
In ZAR millions 2006 2005 2006 %
Airtime and access 10,043 4,791 5,656 18.1
Data 1,019 447 722 61.5
Interconnect1 3,348 1,593 1,861 16.8
Equipment sales 1,993 955 1,156 21.0
International 486 242 278 14.9
airtime
Other 132 60 60 -
17,021 8,088 9,733 20.3
1. Interconnect revenue includes revenue from Telkom fixed-lines of R712
million (September 30, 2005: R715 million), which is eliminated on
consolidation
Operating revenue from the mobile segment increased 20.3%, before inter-
segmental eliminations, to R9,733 million (September 30, 2005: R8,088
million), primarily driven by customer growth partially offset by declining
Average Monthly Revenue Per User (ARPUs) in all operations. Revenue from
Vodacom"s operations outside of South Africa as a percentage of Vodacom"s
total mobile operating revenue increased to 9.7% to R943 million (September
30, 2005: R706 million).
The growth in revenue can largely be attributed to a 34.7% increase in
Vodacom"s total customers to 25,8 million as of September 30, 2006,
(September 30, 2005: 19,1 million), resulting from strong growth in prepaid
and contract customers in South Africa and 65.8% growth in customers outside
of South Africa. In South Africa, total ARPUs decreased 15.6% to R124
(September 30, 2005: R147) for the six months ended September 30, 2006.
Contract ARPUs decreased 10.2% to R528 (September 30, 2005: R588) and prepaid
ARPUs decreased 14.1% to R61 (September 30, 2005: R71) for the six months
ended September 30, 2006.
Vodacom"s continued focus on the implementation of upgrade and retention
policies in the six months ended September 30, 2006, ensured contract churn
of only 11.0% (September 30, 2005: 9.3%). Prepaid churn of 47.7% for the six
months ended September 30, 2006, (September 30, 2005: 18.7%) was largely the
result of a once-off rule change to disconnect 2.4 million SIM cards, which
were only carrying call forward traffic to voicemail.
Data revenue increased 61.5% and represents 7.4% of mobile revenue. The
growth was largely due to the popularity of SMS and data initiatives such as
3G, HSDPA, Blackberry Mobile TV, Vodafone live! as well as other data
products. Vodacom South Africa transmitted 2.2 billion SMS messages
(September 30, 2005: 1.5 billion over its network during the six months ended
September 30, 2006.
Mobile interconnect revenue increased by 16.8%, primarily due to an increase
in the number of fixed-line calls terminating on Vodacom"s network as a
result of the increased number of Vodacom customers and South African mobile
users.
Equipment sales increased 21.0% primarily due to the growth of the customer
base and cheaper handsets combined with added functionality of new phones
based on new technologies. South African handset sale volumes increased by
22.2% to 2,2 million units (September 30, 2005: 1.8 million).
Vodacom"s international airtime revenue is largely international calls by
Vodacom"s customers, roaming revenue from Vodacom customers making and
receiving calls while abroad and revenue from international customers roaming
on Vodacom"s network. International airtime revenue increased 14.9%.
MOBILE OPERATING EXPENSES
Year ended
March 31, Six months ended September 30
In ZAR millions 2006 2005 2006 %
Employee expenses 1,019 472 539 14.2
Payments to other 2,317 1,084 1,337 23.3
operators1
SG&A 7,328 3,552 4,286 20.7
Services rendered 65 28 37 32.1
Operating leases2 435 190 269 41.6
Depreciation,
amortisation,
impairment
and write offs 1,472 669 806 20.5
12,636 5,995 7,274 21.3
1. Payments to other operators include payments to Telkom fixed-line of R120
million (September 30, 2005: R103 million), which are eliminated on
consolidation
2. Operating leases include payments to Telkom fixed-line of R217 million
(September 30, 2005: R183 million), which are eliminated on consolidation
Mobile operating expenses, before inter-segmental eliminations, increased by
21.3% in the six months ended September 30, 2006, primarily due to increased
employee expenses, selling and distribution costs, services rendered,
operating leases and payments to other operators.
Mobile employee expenses increased 14.2%, primarily due to a 1.3% increase in
the total number of employees to 5,499 to support the growth in operations.
Employee productivity has improved in all of Vodacom"s operations, as
measured by customer per employee, increasing by 32.9% to 4,683 customers per
employee.
Mobile payments to other operators increased 23.3% to R1,337 million
(September 30, 2005: R1,084 million) in the six months ended September 30,
2006, primarily as a result of increased outgoing traffic terminating on the
other mobile networks relative to traffic terminating on the fixed-line
network
Mobile selling, general and administrative expenses increased 20.7% in the
six months ended September 30, 2006, primarily due to an increase in selling,
distribution and marketing expenses mainly driven by new technologies and
enhancing brand presence in all operations to support the growth in South
African and other African operations.
Mobile depreciation, amortisation, impairment and write-offs increased by
20.5% to R806 million in the six months ended September 30, 2006 primarily as
a result of a partial impairment reversal of Vodacom Mozambique"s asset
impairment in the prior period.
Telkom"s 50% share of Vodacom"s profit from operations increased 17.5% to
R2,483 million and the mobile operating profit margin decreased to 25.5%.
Mobile EBITDA increased 18.2% to R3,289 million with EBITDA margins
decreasing to 33.8%.
8. Employees
FIXED-LINE
Year ended
March 31, Six months ended September 30
2006 2005 2006 %
Telkom Company 25,575 25,636 25,826 0.7
Lines per employee 184 185 181 (2.2)
Subsidiaries 581 586 608 3.8
Fixed-line 26,156 26,222 26,434 0.8
employees at
period end
MOVEMENT IN FIXED-LINE EMPLOYEES
(Telkom Company only, excluding subsidiaries)
Year ended Six months ended
March 31, September 30
2006 2005 2006
Opening balance 28,972 28,972 25,575
Appointments 686 199 793
Employee losses (4,083) (3,535) (542)
Workforce (2,990) (2,972) (6)
reductions
Voluntary early (674) (670) (4)
retirement
Voluntary (2,295) (2,281) (2)
severance
Involuntary (21) (21) -
reductions
Natural attrition (1,093) (563) (536)
Closing balance 25,575 25,636 25,826
MOBILE EMPLOYEES
Year ended
March 31, Six months ended September 30
2006 2005 2006 %
South Africa 4,148 4,119 4,137 0.4
Customers per 4,620 3,829 4,883 27.5
employee
Other African 1,154 1,181 1,184 0.3
countries
Customers per 3,776 2,836 4,689 65.3
employee
Vodacom Group1 5,459 5,426 5,499 1.6
Customers per 4,308 3,524 4,683 32.9
employee1
1. Including employees for holding company and Mauritius of 178 (September
30, 2005:126)
9. Condensed Consolidated Interim Financial Statements
REVIEW REPORT of the independent auditors
Our auditors, Ernst & Young, have reviewed the condensed consolidated interim
financial statements as set out on pages 22 to 54. Their unqualified review
report is available for inspection at the Company"s registered office.
Condensed consolidated interim income statement for the six months ended
September 30, 2006
Restated Restated Reviewed
March 31, September 30, September 30,
2006 2005 2006
Notes Rm Rm Rm
Total revenue 3.1 48,260 23,761 25,476
Operating revenue 3.2 47,625 23,447 25,147
Other income 4 480 287 213
Operating 33,428 16,109 17,675
expenses
Employee expenses 7,489 3,615 4,149
Payments to other 6,826 3,404 3,609
operators
Selling, general 10,273 4,925 5,839
and
administrative
expenses
Services rendered 2,114 973 1,103
Operating leases 850 388 435
Depreciation,
amortisation,
impairment and 5 5,876 2,804 2,540
write-offs
Operating profit 14,677 7,625 7,685
Investment income 397 217 170
Finance charges 1,223 744 437
Interest 1,346 704 673
Foreign exchange (123) 40 (236)
and fair value
effect
Profit before 13,851 7,098 7,418
taxation
Taxation 6 4,523 2,739 2,844
Profit for the 9,328 4,359 4,574
year/period
Attributable to:
Equity holders of 9,189 4,288 4,500
Telkom
Minority interest 139 71 74
9,328 4,359 4,574
Basic earnings 8 1,746.1 807.4 868.1
per share (cents)
Diluted earnings 8 1,736.6 804.6 866.4
per share (cents)
Dividend per 8 900.0 900.0 900.0
share (cents)
Condensed consolidated interim balance sheet
at September 30, 2006
Restated Restated Reviewed
March 31, September 30, September 30,
2006 2005 2006
Notes Rm Rm Rm
Assets
Non-current 44,813 42,879 45,082
assets
Property, plant 10 37,274 36,542 39,165
and equipment
Intangible assets 11 3,910 3,411 4,042
Investments 12 2,894 2,513 1,170
Deferred expenses 254 144 256
Finance lease - - 117
receivables
Deferred taxation 13 481 269 332
Current assets 12,731 10,624 10,269
Short-term 69 10 65
investments
Current portion 226 229 244
of deferred
expenses
Inventories 14 814 822 1,266
Trade and other 6,399 6,473 7,400
receivables
Financial assets 275 394 576
Cash and cash 15 4,948 2,696 718
equivalents
Total assets 57,544 53,503 55,351
Equity and
liabilities
Equity
attributable to
equity holders
of Telkom 29,165 24,210 27,675
Share capital and 16 6,791 6,791 5,339
premium
Treasury shares 16 (1,809) (1,809) (1,775)
Share-based 17 151 91 203
compensation
reserve
Non-distributable 1,128 757 1,233
reserves
Retained earnings 22,904 18,380 22,675
Minority interest 301 313 325
Total equity 29,466 24,523 28,000
Non-current 12,391 14,470 12,148
liabilities
Interest-bearing 18 7,655 9,702 8,544
debt
Provisions 12 2,677 2,666 1,128
Deferred revenue 991 967 985
Deferred taxation 13 1,068 1,135 1,491
Current 15,687 14,510 15,203
liabilities
Trade and other 6,103 5,796 6,866
payables
Shareholders for 7 4 6 9
dividend
Current portion 18 3,468 2,228 3,722
of interest-
bearing debt
Current portion 1,660 1,026 1,375
of provisions
Current portion 1,975 1,783 1,961
of deferred
revenue
Income tax 6 1,549 1,576 583
payable
Financial 235 350 122
liabilities
Credit facilities 15 693 1,745 565
utilised
Total liabilities 28,078 28,980 27,351
Total equity and 57,544 53,503 55,351
liabilities
Condensed consolidated interim statement of changes in equity
for the six months ended September 30, 2006
Attributable to ordinary
shareholders
Share Share Treasury
capital premium shares
Rm Rm Rm
Balance at 5,570 2,723 (1,812)
April 1, 2005
as previously
reported
Change in
accounting
policy - Net
investment in
a
foreign
operation
(Refer to
note 2)
Restated 5,570 2,723 (1,812)
balance at
April 1, 2005
Total
recognised
income and
expense -
Profit for
the period
Dividend
declared of
900 cents per
share (Refer
to note 7)
Transfer to
non-
distributable
reserves
Foreign
currency
translation
reserve (net
of tax of
RNil)
Net increase
in Share-
based
compensation
reserve
(Refer to
note 17)
Shares vested 3
and re-issued
(Refer to
notes 16 and
17)
Acquisition
of subsidiary
Shares bought (121) (1,381)
back and
cancelled
(Refer to
note 16)
Restated 5,449 1,342 (1,809)
balance at
September 30,
2005
Restated 5,570 2,723 (1,812)
balance at
April 1, 2005
Total
recognised
income and
expense -
Profit for
the year
Dividend
declared of
900 cents per
share (Refer
to note 7)
Transfer to
non-
distributable
reserves
Foreign
currency
translation
reserve (net
of tax of
RNil)
Net increase
in Share-
based
compensation
reserve
(Refer to
note 17)
Shares vested 3
and re-issued
(Refer to
notes 16 and
17)
Acquisition
of subsidiary
Shares bought (121) (1,381)
back and
cancelled
(Refer to
note 16)
Restated 5,449 1,342 (1,809)
balance at
March 31,
2006
Total
recognised
income and
expense -
Profit for
the period
Dividend
declared of
900 cents per
share (Refer
to note 7)
Transfer to
non-
distributable
reserves
Foreign
currency
translation
reserve (net
of tax of R5
million)
Net increase
in Share-
based
compensation
reserve
(Refer to
note 17)
Shares vested 34
and re-issued
(Refer to
notes 16 and
17)
Acquisition
of minorities
(Refer to
note 23)
Shares bought (110) (1,342)
back and
cancelled
(Refer to
note 16)
Balance at 5,339 - (1,775)
September 30,
2006
Attributable to ordinary shareholders
Share- Non-
based
Compen- Distri- Retained Minority Total
sation butable
reserve reserves earnings Total interest equity
Rm Rm Rm Rm Rm Rm
Balance at 68 361 19,231 26,141 220 26,361
April 1, 2005
as previously
reported
Change in
accounting
policy - Net
investment in
a
foreign (1) 1 - -
operation
(Refer to
note 2)
Restated 68 360 19,232 26,141 220 26,361
balance at
April 1, 2005
Total 4,288 4,288 71 4,359
recognised
income and
expense -
Profit for
the period
Dividend (4,801) (4,801) (4,801)
declared of
900 cents per
share (Refer
to note 7)
Transfer to 339 (339) - -
non-
distributable
reserves
Foreign 58 58 (1) 57
currency
translation
reserve (net
of tax of
RNil)
Net increase
in Share-
based
compensation
reserve
(Refer to 26 26 26
note 17)
Shares vested (3) - -
and re-issued
(Refer to
notes 16 and
17)
Acquisition - 23 23
of subsidiary
Shares bought (1,502) (1,502)
back and
cancelled
(Refer to
note 16)
Restated 91 757 18,380 24,210 313 24,523
balance at
September 30,
2005
Restated 68 360 19,232 26,141 220 26,361
balance at
April 1, 2005
Total 9,189 9,189 139 9,328
recognised
income and
expense -
Profit for
the year
Dividend (4,801) (4,801) (78) (4,879)
declared of
900 cents per
share (Refer
to note 7)
Transfer to 716 (716) - -
non-
distributable
reserves
Foreign 52 52 (7) 45
currency
translation
reserve (net
of tax of
RNil)
Net increase
in Share-
based
compensation
reserve
(Refer to 86 86 86
note 17)
Shares vested (3) - -
and re-issued
(Refer to
notes 16 and
17)
Acquisition - 27 27
of subsidiary
Shares bought (1,502) (1,502)
back and
cancelled
(Refer to
note 16)
Restated 151 1,128 22,904 29,165 301 29,466
balance at
March 31,
2006
Total 4,500 4,500 74 4,574
recognised
income and
expense -
Profit for
the period
Dividend (4,678) (4,678) (53) (4,731)
declared of
900 cents per
share (Refer
to note 7)
Transfer to 49 (49) - -
non-
distributable
reserves
Foreign 56 56 14 70
currency
translation
reserve (net
of tax of R5
million)
Net increase
in Share-
based
compensation
reserve
(Refer to 86 86 86
note 17)
Shares vested (34) - -
and re-issued
(Refer to
notes 16 and
17)
Acquisition - (11) (11)
of minorities
(Refer to
note 23)
Shares bought (2) (1,454) (1,454)
back and
cancelled
(Refer to
note 16)
Balance at 203 1,233 22,675 27,675 325 28,000
September 30,
2006
Condensed consolidated interim cash flow statement
for the six months ended September 30, 2006
Audited Reviewed Reviewed
March 31, September 30, September 30,
2006 2005 2006
Notes Rm Rm Rm
Cash flows from 9,506 875 772
operating
activities
Cash receipts from 46,958 22,756 24,369
customers
Cash paid to (27,234) (14,131) (15,323)
suppliers and
employees
Cash generated from 19,724 8,625 9,046
operations
Interest received 482 253 276
Dividend received 50 27 3
Finance charges (1,316) (712) (593)
paid
Taxation paid 6 (4,550) (2,470) (3,234)
Cash generated from
operations
before dividend 14,390 5,723 5,498
paid
Dividend paid 7 (4,884) (4,848) (4,726)
Cash flows from (7,286) (3,078) (4,102)
investing
activities
Proceeds on
disposal of
property,
plant and equipment 92 138 6
and intangible
assets
Proceeds on 493 15 275
disposal of
investment
Additions to
property, plant and
equipment
and intangible (7,396) (3,084) (4,193)
assets
Additions to other (475) (147) (190)
investments
Cash flows from (258) 859 (817)
financing
activities
Shares bought back (1,502) (1,502) (1,403)
Loans raised 4,123 3,678 2,148
Loans repaid (7,399) (5,892) (1,368)
Finance lease (24) (11) (15)
capital repaid
Decrease/(increase) 4,544 4,586 (179)
in net financial
assets
Net
increase/(decrease)
in
cash and cash 1,962 (1,344) (4,147)
equivalents
Net cash and cash
equivalents
at beginning of the 2,301 2,301 4,255
year
Effect of foreign (8) (6) 45
exchange rate
differences
Net cash and cash
equivalents
at end of the 15 4,255 951 153
year/period
Notes to the condensed consolidated interim financial statements
for the six months ended September 30, 2006
1. Corporate information
Telkom SA Limited (`Telkom") is a limited liability company incorporated and
domiciled in the Republic of South Africa (`South Africa") whose shares are
publicly traded. The company, its subsidiaries and joint ventures (`the
Group") is the leading provider of fixed-line voice and data communications
services in South Africa and mobile communications services through the
Vodacom Group (Proprietary) Limited (`Vodacom") in South Africa and certain
other African countries. The Group"s services and products include:
- fixed-line voice services, including subscriptions and connections
services, local, long distance, fixed-to-mobile and international voice
services, interconnection and hubbing communications services, international
voice-over-internet protocol services, subscription based value-added voice
services and customer premises equipment sales and rental;
- fixed-line data services, including domestic and international data
transmission services, such as point-to-point leased lines, ADSL services and
packet-based services, managed data networking services and internet access
and related information technology services;
- directory and wireless data services through our TDS Directory Operations
and Swiftnet subsidiaries, respectively; and
- mobile communications services, including voice services, data services,
value-added services and handset sales through Vodacom.
The condensed consolidated interim financial statements of the Group for the
six months ended September 30, 2006 were authorised for issue in accordance
with a resolution of the directors on November 9, 2006.
2.Basis of preparation and accounting policies
Basis of preparation
The condensed consolidated interim financial statements have been prepared in
accordance with IAS34 Interim Financial Reporting and in compliance with the
South African Companies Act, 1973. The condensed consolidated interim
financial statements are prepared on the historical cost basis, with the
exception of certain financial instruments and share-based payments which are
measured at fair value. The results of the interim period are not necessarily
indicative of the results for the entire year, and these reviewed financial
statements should be read in conjunction with the audited financial
statements for the year ended March 31, 2006.
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 condensed consolidated interim 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 accounting policies and methods of computation followed for presenting
the condensed consolidated interim financial statements are consistent with
those applied in the financial statements for the year ended March 31, 2006,
except that the Group has adopted the amendments to IAS21 (revised) and IAS39
(revised), and IFRIC4 and IFRIC7 with effect from April 1, 2006. The Group
has also adopted an accounting policy regarding the acquisition of minority
interests in subsidiary companies in terms of IAS8.
2. Basis of preparation and accounting policies (continued)
Adoption of amendments to standards and new interpretations
- Amendment to IAS21 The Effects of Changes in Foreign Exchange Rates
(revised)
The amendment, Net Investment in a Foreign Operation, requires that even if a
monetary item (which is part of a net investment) is denominated in a
currency which is neither that of the reporting entity or the foreign
operation, the resulting exchange difference should be recognised in equity.
This treatment is similar to the treatment where a monetary item is
denominated in the currency of the reporting entity or that of the foreign
operation. The impact of this amendment on previously reported results is
reflected in the table at the end of this note.
- Amendments to IAS39 Financial Instruments: Recognition and Measurement
(revised)
The revision of IAS39 relates to three amendments to the existing standard.
The first amendment requires that issuers of financial guarantee contracts
include the resulting liabilities in their balance sheet. The amendment
defines a financial guarantee contract as a contract that requires the issuer
to make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in accordance with
the original or modified terms of a debt instrument. The amendment has not
had any impact on the Group"s financial statements.
The second amendment concerns cash flow hedge accounting of forecast
intragroup transactions. This amendment has not had any impact on the Group"s
financial statements since the Group"s derivative transactions do not qualify
for hedge accounting under the specific rules of IAS39.
The fair value option amendment to IAS39 introduces additional requirements
to be met before the fair value option may be used. The amendment has not had
any impact on the Group"s financial statements since the Group has not
designated any financial assets or liabilities into the category `at fair
value through profit or loss".
- IFRIC4 Determining whether an Arrangement contains a Lease
Under IFRIC4, where an entity enters into a service arrangement that depends
on the use of a specific asset and conveys the right to control this specific
asset to the customer, the arrangement should be assessed to determine
whether it contains a lease. Once it has been concluded that an arrangement
contains a lease, it should be assessed against criteria in IAS17 to
determine if the arrangement should be recognised as a finance lease or an
operating lease. The transitional provision of IFRIC4 does not require
retrospective application, however, it does require the Group to assess
existing arrangements at the
beginning of the earliest period for which comparative information under IFRS
is presented on the basis of facts and circumstances existing at the start of
that period. The effect of this interpretation was not considered material
for prior periods. The cumulative effect of this interpretation for the six
months ended September 30, 2006 was an increase in Profit before taxation of
R44 million and an increase in Taxation of R14 million which resulted in an
increase in Profit for the period of R30 million. It further resulted in a
Finance lease receivable of R117 million being recognised in the Balance
sheet at September 30, 2006.
- IFRIC7 Applying the Restatement Approach under IAS29 Financial Reporting in
Hyperinflationary Economies
The IFRIC provides guidance on determining the measuring unit current at the
balance sheet date. It also provides guidance on how to account for the
deferred tax opening balance in restated financial statements. The
interpretation does not have any impact since the Group does not operate in a
hyperinflationary economy and does not have significant investments in
hyperinflationary economies.
2. Basis of preparation and accounting policies (continued)
New accounting policy
Acquisition of minorities
The Group has developed an accounting policy regarding the acquisition of
minority interests in subsidiary companies in terms of IAS8 paragraph 10.
Minority shareholders are treated as equity participants and, therefore, all
acquisitions of minority interests by the Group in subsidiary companies are
accounted for using the parent entity extension method. Under this method,
the assets and liabilities of the subsidiary are not restated to reflect
their fair values at the date of the acquisition. The difference between the
purchase price and the minorities" share of the assets and liabilities
reflected within the consolidated balance sheet at the date of the
acquisition is recorded as goodwill. The adoption of this policy has not had
any impact on previously reported results.
Change in accounting policy
Revenue recognition
To ensure comparability with other telecommunications entities reporting
under IFRS and to better reflect Telkom"s customer retention focus, Telkom
retrospectively changed its accounting policy in terms of IAS8.14(b) at March
31, 2006 with regards to the recognition of fixed-line installation and
activation revenues. Previously such revenue was recognised when the
installation and activation of customers had occurred because it was viewed
as the culmination of a separate earnings process. The revised accounting
policy is to recognise such revenues (and the related costs) systematically
over the expected duration of the customer relationship because it is
considered to be part of the customers" ongoing rights to telecommunication
services and the operator"s continuing involvement. This treatment provides
more reliable and relevant information about this transaction with the
entity"s customers. Telkom changed its accounting policy in the second half
of the 2006 financial year. The impact of the change at September 30, 2005,
is reflected in the table at the end of this note.
Prior period restatements
Property, plant and equipment
In compliance with the revised IAS16, Telkom reassesses the useful lives of
its assets at the end of each financial year and adjusts the depreciation
charge prospectively. Due to the significant volume of assets, the process of
reassessing the useful lives for the financial year ending March 31, 2005 was
finalised after the release of the September 30, 2005 interim results. The
comparative amounts for September 2005 have therefore been restated to
reflect the relevant portion of the change in depreciation estimate that was
recognised in the second half of the 2006 financial year.
Other Balance sheet restatements
At March 31, 2006, the Group made certain retrospective changes to its
application of certain accounting standards. These changes had no effect on
the prior year net profit as they only represent reclassifications into
different line items as reported. The September 30, 2005 comparatives have
been adjusted accordingly. The changes were:
- IT software under construction have been reclassified from Property, plant
and equipment to Intangible assets. The Group has identified and recorded
certain software that was previously included as part of Property, plant and
equipment as a separate intangible asset because it was not considered an
integral part of the related hardware;
- Financial assets and liabilities previously classified as non-current, have
been reclassified to current assets and liabilities, as they represent
derivatives classified as held for trading;
2. Basis of preparation and accounting policies (continued)
Prior period restatements (continued)
Other Balance sheet restatements (continued)
- Investment properties have been restated to Property, plant and equipment.
The Vodacom Group previously classified its Vodaworld property as an
investment property. However, the primary purpose of the property is to
service and connect Vodacom customers. The property, therefore, does not meet
the criteria of IAS40 Investment Property, i.e. to earn rentals or for
capital appreciation; and
- The effect on the balance sheet of the straight-lining of leases was
disclosed separately as Operating lease assets and Operating lease
liabilities in the September 30, 2005 condensed consolidated interim
financial statements. These amounts have been reclassified as Deferred
expenses and Deferred revenue respectively to be consistent with the
presentation in the March 31, 2006 consolidated annual financial statements.
The following table reflects the values of the different line items prior and
subsequent to the changes in accounting policy and prior period restatements
as discussed in this note:
Change in
accounting policies
Net
Balances investment
as in a Revenue
previously foreign recogni-
reported operation tion
Rm Rm Rm
September 30,
2005
Income
Statement
Operating 23,456 (9)
revenue
Depreciation,
amortisation,
impairment 2,921
and write-
offs
Finance 745 (1)
charges
Taxation 2,708 (3)
Profit
attributable
to equity
holders of 4,210 1 (6)
Telkom
Balance Sheet
Non-current
assets
Property,
plant
and equipment 37,156
Investment 24
properties
Intangible 2,656
assets
Other 107
financial
assets
Operating 15
lease asset
Deferred 127
expenses
Current
assets
Financial 287
assets
Equity
Non- 759 (2)
distributable
reserves
Retained 18,986 2 (689)
earnings
September 30,
2005
(continued)
Non-current
liabilities
Deferred 1,382 (281)
taxation
Operating 61
lease
liabilities
Deferred 263 639
revenue
Other 63
financial
liabilities
Current
liabilities
Current
portion of
deferred
revenue 1,452 331
Financial 287
liabilities
March 31,
2006
Income
Statement
Finance 1,233 (10)
charges
Taxation 4,520 3
Profit
attributable
to
equity 9,182 7
holders of
Telkom
Balance Sheet
Equity
Non- 1,136 (8)
distributable
reserves
Retained 22,896 8
earnings
Prior period restatements
Property, Financial
plant and assets/ Investment
equipment Software liabilities properties
Rm Rm Rm Rm
September 30,
2005
Income
Statement
Operating
revenue
Depreciation,
amortisation,
impairment (117)
and write-
offs
Finance
charges
Taxation 34
Profit
attributable
to equity
holders of 83
Telkom
Balance Sheet
Non-current
assets
Property,
plant
and equipment 117 (755) 24
Investment (24)
properties
Intangible 755
assets
Other (107)
financial
assets
Operating
lease asset
Deferred
expenses
Current
assets
Financial 107
assets
Equity
Non-
distributable
reserves
Retained 83
earnings
September 30,
2005
(continued)
Non-current
liabilities
Deferred 34
taxation
Operating
lease
liabilities
Deferred
revenue
Other (63)
financial
liabilities
Current
liabilities
Current
portion of
deferred
revenue
Financial 63
liabilities
March 31,
2006
Income
Statement
Finance
charges
Taxation
Profit
attributable
to
equity
holders of
Telkom
Balance Sheet
Equity
Non-
distributable
reserves
Retained
earnings
Prior period
restatements
Operating
lease Balances
assets/ as
liabilities restated
Rm Rm
September 30,
2005
Income
Statement
Operating 23,447
revenue
Depreciation,
amortisation,
impairment 2,804
and write-
offs
Finance 744
charges
Taxation 2,739
Profit
attributable
to equity
holders of 4,288
Telkom
Balance Sheet
Non-current
assets
Property,
plant
and equipment 36,542
Investment -
properties
Intangible 3,411
assets
Other -
financial
assets
Operating (15) -
lease asset
Deferred 17 144
expenses
Current
assets
Financial 394
assets
Equity
Non- 757
distributable
reserves
Retained (2) 18,380
earnings
September 30,
2005
(continued)
Non-current
liabilities
Deferred 1,135
taxation
Operating (61) -
lease
liabilities
Deferred 65 967
revenue
Other -
financial
liabilities
Current
liabilities
Current
portion of
deferred
revenue 1,783
Financial 350
liabilities
March 31,
2006
Income
Statement
Finance 1,223
charges
Taxation 4,523
Profit
attributable
to
equity 9,189
holders of
Telkom
Balance Sheet
Equity
Non- 1,128
distributable
reserves
Retained 22,904
earnings
3. Revenue
3.1 Total revenue 48,260 23,761 25,476
Operating revenue 47,625 23,447 25,147
Other income (excluding profit on 238 97 159
disposal of property, plant and
equipment and investments, refer
to note 4)
Investment income 397 217 170
3.2 Operating revenue 47,625 23,447 25,147
Fixed-line 32,039 16,074 16,139
Mobile 15,586 7,373 9,008
Fixed-line 32,039 16,074 16,139
Subscriptions, connections and 5,803 2,836 3,050
other usage
Traffic 17,534 8,912 8,447
''Domestic (local and long 8,886 4,608 4,166
distance)
''Fixed-to-mobile 7,647 3,821 3,788
''International (outgoing) 1,001 483 493
Interconnection 1,433 733 670
Data 6,223 3,012 3,363
Directories and other 1,046 581 609
Change in comparatives
Operating revenue has decreased by R9 million for September 30, 2005 due to
the change in fixed-line accounting policy at March 31, 2006 for recognising
connection revenues (Refer to note 2).
4. Other income 480 287 213
Other income
(Included in Total revenue, refer to 238 97 159
note 3)
Interest received from debtors 136 63 98
Sundry income 102 34 61
Profit on disposal of property, plant 79 68 11
and equipment and intangible assets
Profit on disposal of investment 163 122 43
5. Depreciation, 5,876 2,804 2,540
amortisation,impairment and write-
offs
Depreciation of property, plant and 5,154 2,479 2,191
equipment
Amortisation of intangible assets 560 261 263
Impairment of property, plant and - - 19
equipment
Reversal of impairment of property,
plant
and equipment (26) (34) -
Write-offs of property, plant and 188 98 67
equipment*
* These costs represent individual assets written-off, none of which are
individually material.
In recognition of the changed usage patterns of certain items of property,
plant and equipment and intangible assets, the Group reviewed their remaining
useful lives as at March 31, 2006. The assets affected were certain items
included in Network equipment, Support equipment, Office equipment and IT
software and hardware. The revised estimated useful lives of these assets as
set out below, resulted in a decrease of the current period depreciation and
amortisation charges of R445 million (March 31, 2006: R405 million).
Previous Revised
life life
Years Years
Property, plant and equipment
Network equipment 2 - 15 3 - 30
Support equipment 8 11
Furniture and office equipment 6 - 10 11 - 15
Data processing equipment and software 7 10
Other 5 - 10 10 - 15
Intangible assets 7 10
Software
Impairment of property, plant and equipment and intangible assets
Due to the competitive and economic environment in which VM, S.A.R.L.
operates in Mozambique, the Group assessed the assets for impairment in
accordance with the requirements of IAS36 Impairment of Assets (`IAS36"). The
recoverable amount of these assets has been determined based on the fair
value of the assets less costs to sell at September 30, 2006. The fair value
of the assets was obtained from a knowledgeable, willing party on an arm"s
length basis, based on the assumption that the assets would be disposed of on
an item by item basis. The amount with which the carrying amount exceeded the
recoverable amount is recognised as an impairment loss. The reversal of the
impairment loss in the prior year/period related to an increase in the fair
value of infrastructure assets.
Change in comparatives
The comparatives were restated by R117 million for September 30, 2005 due to
the revision of the estimated useful lives of Property, plant and equipment.
The adjustment is a consequence of the change in estimate performed at March
31, 2005 (Refer to note 2).
March 31, September September
30, 30,
2006 2005 2006
Rm Rm Rm
6. Taxation 4,523 2,739 2,844
South African normal 3,763 1,920 1,797
company taxation
Deferred taxation 173 431 537
Secondary Taxation on 585 383 464
Companies
Foreign taxation 2 5 46
The deferred taxation expense mainly relates to temporary differences on
normal company taxation and Secondary Taxation on Companies.
During the six months ended September 30, 2006 the Group paid R3,234 million
to the South African Revenue Service for normal company taxation (R2,770
million) and Secondary Taxation on Companies (R464 million):
Taxation paid (4,550) (2,470) (3,234)
Tax liability at beginning of year (1,711) (1,711) (1,549)
Taxation (3,795) (1,944) (1,804)
Secondary Taxation on Companies (585) (383) (464)
Business combination (8) (8) -
Tax liability at end of year/period 1,549 1,576 583
Change in comparatives
Deferred taxation has decreased by R3 million for the period ended September
30, 2005 due to the change in fixed-line"s accounting policy for recognising
connection revenues (Refer to note 2).
Deferred taxation has also increased by R34 million for the period ended
September 30, 2005 due to the restatement of fixed-line"s depreciation as a
result of the revision of the estimated useful lives of Property, plant and
equipment (Refer to note 2).
7. Dividends paid 4,884 4,848 4,726
Dividends payable at beginning of year 7 7 4
Declared during the year/period:
Dividends on ordinary shares: 4,881 4,847 4,731
''Final dividend for 2005: 400 cents 2,134 2,134 -
''Special dividend for 2005: 500 cents 2,667 2,667 -
''Final dividend for 2006: 500 cents - - 2,599
''Special dividend for 2006: 400 cents - - 2,079
''Dividends paid to minority 80 46 53
shareholders
Dividends payable at end of year/period (4) (6) (9)
March 31, September September
30, 30,
2006 2005 2006
8. Earnings per share
Basic earnings per 1,746.1 807.4 868.1
share (cents)
The calculation of earnings per share is based on profit attributable to
equity holders of Telkom for the year/period of R4,500 million (September 30,
2005: R4,288 million; March 31, 2006: R9,189 million) and 518,369,738
(September 30, 2005: 531,102,429; March 31, 2006: 526,271,093) weighted
average number of ordinary shares outstanding.
Reconciliation of weighted average number of ordinary shares:
Ordinary shares in 544,944,899 544,944,899 533,891,034
issue
Weighted average (18,673,806) (13,842,470) (15,521,296)
number of treasury
shares and shares
bought back
Weighted average 526,271,093 531,102,429 518,369,738
number of shares
outstanding
Diluted earnings per 1,736.6 804.6 866.4
share (cents)
The calculation of diluted earnings per share is based on earnings for the
year/period of R4,500 million (September 30, 2005: R4,288 million; March 31,
2006: R9,189 million) and 519,407,752 diluted weighted average number of
ordinary shares (September 30, 2005: 532,939,130; March 31, 2006:
529,152,318). The adjustment in the weighted average number of shares is as a
result of the expected future vesting of shares already allocated to
employees under the
Telkom Conditional Share Plan.
Headline earnings per 1,728.6 790.6 874.7
share (cents)*
The calculation of headline earnings per share is based on headline earnings
of R4,534 million (September 30, 2005: R4,199 million; March 31, 2006: R9,097
million) and 518,369,738 (September 30, 2005: 531,102,429; March 31, 2006:
526,271,093) weighted average number of ordinary shares outstanding.
Diluted headline 1,719.2 787.9 872.9
earnings per share
(cents)*
The calculation of diluted headline earnings per share is based on headline
earnings of R4,534 million (September 30, 2005: R4,199 million; March 31,
2006: R9,097 million) and 519,407,752 (September 30, 2005: 532,939,130; March
31, 2006: 529,152,318) diluted weighted average number of ordinary shares in
issue. The adjustment in the weighted average number of shares is as a result
of the expected future vesting of shares already allocated to employees under
the Telkom Conditional Share Plan.
Reconciliation between earnings and headline earnings:
Earnings as reported 9,189 4,288 4,500
Adjustments:
Profit on disposal of investment (163) (122) (43)
Net (profit)/loss on disposal of property, (79) (68) 5
plant and equipment and intangible assets
(Reversal of impairment)/impairment of (26) (34) 19
property, plant and equipment and intangible
assets
Write-offs of property, plant and equipment 188 98 67
Acquisition of subsidiary (35) - -
Tax and minority interest effects 23 37 (14)
Headline earnings 9,097 4,199 4,534
March 31, September September
30, 30,
2006 2005 2006
Reconciliation of
diluted weighted
average number of
ordinary shares
Ordinary shares in 544,944,899 544,944,899 533,891,034
issue
Expected future vesting 2,881,225 1,836,701 1,038,014
of shares
Weighted average number (18,673,806) (13,842,470) (15,521,296)
of treasury shares and
shares bought back
Weighted average number 529,152,318 532,939,130 519,407,752
of shares outstanding
Dividend per share 900.0 900.0 900.0
(cents)
The calculation of dividend per share is based on dividends of R4,678 million
(September 30, 2005: R4,801 million; March 31, 2006: R4,801 million) declared
on June 2, 2006 and 519,711,092 (September 30, 2005: 533,465,571; March 31,
2006: 533,465,571) number of ordinary shares outstanding (net of treasury
shares at the date of payment).
* The disclosure of headline earnings and diluted headline earnings per share
is a requirement of the JSE Securities Exchange of South Africa and is not a
recognised measure under IFRS and US GAAP. It has been calculated in
accordance with the South African Institute of Chartered Accountants"
circular issued in this regard.
Change in comparatives
The amounts for basic, diluted, headline and diluted headline earnings per
share for March 31, 2006 and September 30, 2005 have changed as a result of
the change in accounting policies and restatements as discussed in note 2.
The effect of the change on previously reported numbers is immaterial.
March 31, September 30, September 30,
2006 2005 2006
9. Net asset value per 5,593.5 4,643.2 5,417.9
share (cents)
The calculation of net asset value per share is based on net assets of
R27,675 million (September 30, 2005: R24,210 million; March 31, 2006: R29,165
million) and 510,804,915 (September 30, 2005: 521,408,320; March 31, 2006:
521,408,320) number of ordinary shares outstanding.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
10. Property,
plant and
equipment
Additions 6,310 2,565 3,913
A major portion of this capital expenditure relates to the expansion of
existing networks and services.
Disposals (56) (10) (16)
Change in comparatives
The carrying amount of Property, plant and equipment has been restated by
R755 million at September 30, 2005, due to the reclassification of software
under construction from Property, plant and equipment to Intangible assets
(Refer to note 2).
The carrying amount of Property, plant and equipment has also been restated
by R117 million at September 30, 2005 due to the revision of the estimated
useful lives of Property, plant and equipment (Refer to note 2).
The carrying amount of Property, plant and equipment has further been
restated with R24 million for September 30, 2005 due to the reclassification
of investment properties (Refer to note 2).
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
11. Intangible assets
Additions 1,196 531 438
Disposals (19) (18) -
Included in Additions is R161 million goodwill resulting from the acquisition
by the Vodacom Group of the minorities of Smartphone SP (Proprietary)'Limited
and Smartcom (Proprietary) Limited (Refer to note 23).
Change in comparatives
The carrying amount of Intangible assets has been restated by R755 million at
September 30, 2005, due to the reclassification of software under
construction from Property, plant and equipment to Intangible assets (Refer
to note 2).
12. Post-retirement medical aid plan asset
Included in Provisions as at March 31, 2006 was R2,607 million (September 30,
2005: R2,474 million) for the Group"s post-retirement medical liability. The
liability is funded with an investment in a cell captive, which was included
in Investments for the year ended March 31, 2006 to the value of R2,819
million (September 30, 2005: R2,492 million).
During the six months ended September 30, 2006, an addendum to the cell
captive annuity policy contract was signed, which resulted in the annuity
policy qualifying as a plan asset. This has effectively changed the
presentation of the liability and the asset as the annuity policy meets the
definition of a plan asset in terms of IAS19 which requires the liability to
be reduced by the fair value of the plan asset. The effect of this on the
condensed consolidated interim financial statements is a reduction in
investments and liabilities to the value of R1,759 million.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
The status of the
medical aid plan is as
follows:
Present value of 3,904 3,122 4,003
funded obligation
Fair value of plan - (1,759)
assets -
Fund status 3,904 3,122 2,244
Unrecognised net (1,297) (648) (1,221)
actuarial loss
Benefit obligation 2,607 2,474
13. Deferred taxation (587) (866) (1,159)
Deferred tax assets 481 269 332
Deferred tax liabilities (1,068) (1,135) (1,491)
The major part of the deferred tax asset relates to taxation losses,
provisions and deferred income recognised in the Vodacom Group.
The remaining balance has been recognised in Telkom in respect of STC credits
on past dividends received that are available to be utilised against
dividends declared. It is considered probable that these credits will be
utilised in the future. The asset will be released as a tax expense when
dividends are declared.
The deferred tax liability has increased mainly due to the increase in the
difference between the carrying value and tax value of assets, resulting from
the change in the estimate of useful lives of assets.
Change in comparatives
Deferred taxation has decreased by R281 million for September 30, 2005 due to
the change in fixed-line policy for recognising connection revenues (Refer to
note 2).
The comparatives have also been restated due to a restatement of depreciation
and amortisation as a result of the revision of the estimated useful lives of
assets with R34 million for September 30, 2005 (Refer to note 2).
March September September
31, 30, 30,
2006 2005 2006
Rm Rm Rm
14. Inventories 814 822 1,266
Gross inventories 916 905 1,402
Write-down of inventories (102) (83) (136)
to net realisable value
Inventories consist of the 814 822 1,266
following categories:
Installation material, 487 459 755
maintenance material and
network equipment
Merchandise 327 363 511
Inventory levels as at September 30, 2006 have increased due to the roll-out
of the next generation network and increased inventory required to improve
customer service.
15. Net cash and cash equivalents 4,255 951 153
Cash shown as current assets 4,948 2,696 718
''Cash and bank balances 1,853 2,476 718
''Short-term deposits 3,095 220 -
Credit facilities utilised (693) (1,745) (565)
Undrawn borrowing facilities 9,519 7,977 9,796
The undrawn borrowing facilities are unsecured, bear interest at a rate
linked to the prime interest rate, have no specific maturity date and are
subject to annual review. The facilities are in place to ensure liquidity.
Borrowing powers
To borrow money, Telkom"s directors may mortgage or encumber Telkom"s
property or any part thereof and issue debentures, whether secured or
unsecured, whether outright or as security for debt, liability or obligation
of Telkom or any third party. For this purpose the borrowing powers of Telkom
are unlimited, but are subject to the restrictive financial covenants of the
TL20 loan.
March 31, September September
30, 30,
2006 2005 2006
Rm Rm Rm
16. Number of shares in
issue
Issued and fully paid 6,791 6,791 5,339
533,891,032 (September 5,449 5,449 5,339
30, 2005: 544,944,897;
March 31, 2006:
544,944,897) ordinary
shares of R10 each
1 (September 30, 2005: - - -
1; March 31, 2006: 1)
Class A ordinary share
of R10
1 (September 30, 2005: - - -
1; March 31, 2006: 1)
Class B ordinary share
of R10
Share premium 1,342 1,342 -
Number of Number of Number of
shares shares shares
The following table
illustrates the
movement within the
number of shares
issued:
Shares in issue at 557,031,819 557,031,819 544,944,899
beginning of year
Shares bought back (12,086,920) (12,086,920) (11,053,865)
Shares in issue at end 544,944,899 544,944,899 533,891,034
of year/period
The unissued shares are under the control of the directors of Telkom until
the next Annual General Meeting. The directors have been given the authority
by the shareholders to buy back Telkom"s own shares up to a limit of 20% of
the issued share capital as at October 20, 2006. This authority expires at
the next Annual General Meeting.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
Treasury shares (1,809) (1,809) (1,775)
At September 30, 2006 12,237,061 (September 30, 2005: 12,687,521; March 31,
2006: 12,687,521) and 10,849,058 (September 30, 2005: 10,849,058; March 31,
2006: 10,849,058) ordinary shares in Telkom, with a fair value of R1,646
million (September 30, 2005: R1,600 million; March 31, 2006: R2,038 million)
and R1,459 million (September 30, 2005: R1,369 million; March 31, 2006:
R1,743 million) are currently held as treasury shares by its subsidiaries
Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary)
Limited respectively.
The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue
in terms of the Telkom Conditional Share Plan (TCSP) (Refer to note 17).
The reduction in the treasury shares is due to 450,460 shares that vested in
terms of the TCSP during the six months ended September 30, 2006.
Share buy-back
During the six months ended September 30, 2006 Telkom bought back 11,053,865
ordinary shares at a total consideration of R1,454 million. This reduced
Share capital by R110 million, Share premium by R1,342 million and Retained
earnings by R2 million.
During the year ended March 31, 2006 Telkom bought back 12,086,920 ordinary
shares at a total consideration of R1,502 million. This reduced Share capital
by R121 million and Share premium by R1,381 million.
The shares bought back in the current period are in the process of being
cancelled from the issued share capital by the Registrar of Companies.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
17. Share-based
compensation
reserve
The compensation reserve represents the cumulative fair value of the equity-
settled share-based payment transactions recognised in employee expenses
during the vesting period of the equity instruments granted to all employees
in terms of the Telkom Conditional Share Plan.
Balance at 68 68 151
beginning of year
Net increase in 83 23 52
equity
Employee cost 120 60 86
Accelerated (37) (37) -
vesting of shares
Vesting and - - (34)
transfer of shares
Balance at end of 151 91 203
year/period
The following tables illustrate the movement of the maximum number of shares
that will vest to employees:
Number of Number of Number of
shares shares shares
August 2004 grant:
Outstanding at beginning 2,943,124 2,943,124 2,414,207
of the year
Granted during the 90 - 1,077
year/period
Forfeited during the (67,573) (43,792) (38,226)
year/period
Settled during the (444,093) (416,903) -
year/period
Vested during the (17,341) (17,341) (450,460)
year/period
Outstanding at end of the 2,414,207 2,465,088 1,926,598
year/period
June 2005 grant:
Outstanding at beginning - - 1,930,687
of the year
Granted during the 2,024,465 2,024,387 935
year/period
Forfeited during the (62,354) (30,503) (32,564)
year/period
Settled during the (19,096) - -
year/period
Vested during the (12,328) (12,328) -
year/period
Outstanding at end of the 1,930,687 1,981,556 1,899,058
year/period
At September 30, 2006 the estimated total compensation expense to be
recognised over the vesting period is R375 million (September 30, 2005: R376
million; March 31, 2006: R381 million), of which R86 million (September 30,
2005: R55 million; March 31, 2006: R127 million) was recognised in employee
expenses for the six months ended September 30, 2006.
March 31, September September 30,
30,
2006 2005 2006
Rm Rm Rm
Interest-
bearing debt
Long-term 7,655 9,702 8,544
portion of
interest-
bearing debt
Local debt 6,296 8,320 6,484
Foreign debt 127 198 857
Finance 1,232 1,184 1,203
leases
Current 3,468 2,228 3,722
portion of
interest-
bearing debt
Local debt 2,642 1,433 3,437
Foreign debt 786 763 237
Finance 40 32 48
leases
Movements in borrowings for the six month period ended September 30, 2006 are
as follows:
Repayments/refinancing
Commercial Paper Bills with a nominal value of R430 million were redeemed in
the current financial period. These redemptions were financed with cash flow
from operations. Commercial Paper Bills with a nominal value of R1,146
million were issued and were outstanding as at September 30, 2006. These
Commercial Paper Bills range in maturities from 3 to 5 days.
The medium-term loan to Vodacom International Limited that amounts to R1,382
million (Group share: R691 million) was refinanced during the current period.
The loan is now repayable on July 26, 2009 and bears interest at an effective
interest rate of LIBOR plus 0.35%.
Repayment/refinancing of current portion of interest-bearing debt
The repayment/refinancing of R3,722 million of the current portion of
interest-bearing debt will depend
on the market circumstances at the time of repayment. Included in the R3,722
million current portion is R2,100 million nominal value of the TL06 local
bond that was repaid/refinanced on October 31, 2006 with cash from operations
and Commercial Paper Bills respectively.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
March 31, September September
30, 30,
2006 2005 2006
Rm Rm Rm
19. Commitments
Capital commitments
Capital commitments 10,265 4,938 6,621
authorised
Fixed-line 6,519 3,236 3,955
Mobile 3,746 1,702 2,666
Commitments against 842 1,264 2,067
authorized capital
expenditure
Fixed-line 200 550 721
Mobile 642 714 1,346
Authorised capital 9,423 3,674 4,554
expenditure not yet
contracted
Fixed-line 6,319 2,686 3,234
Mobile 3,104 988 1,320
Management expects these commitments to be financed from internally generated
cash and other borrowings.
Other
The Group exposure is 50% of the following items:
Regulation of Interception of Communications and Communications-Related
Information Act (`the Act")
The Act was proclaimed in the Government Gazette and has been made effective
September 30, 2005 with the exception of the provisions dealing with customer
registration which will come into effect once the legislative amendments
allowing for electronic registration process are finalised. The cellular
operators have succeeded in obtaining in principle support by the Department
of Justice for an electronic registration process. The legislative amendments
necessary to allow for electronic registration process are anticipated to be
finalised before the end of 2006. Though the legislative process is still to
be finalised, the other obligations imposed on the telecommunications
services providers in terms of the legislation have become effective. In
particular, the Vodacom Group had until May 28, 2006 to acquire and implement
the monitoring and interception facilities as per the technical
specifications of the facilities agreed upon between the Group and the
Department of Justice and promulgated on November 28, 2005. A reliable
estimate of capital and operating costs that will potentially be incurred in
order to comply with the provisions of the Act going forward cannot be
determined at this stage.
Global Alliance fees
The Vodacom Group pays annual fees from February 18, 2005 for the services
provided by Vodafone Group Plc. The fee is calculated as a percentage of
revenue and amounts to R119 million (March 31, 2006: R175 million).
Cointel VAS (Proprietary) Limited
An offer to acquire the remaining 49% interest in Cointel VAS (Proprietary)
Limited (`Cointel") for R147 million from the minority shareholders was made
and accepted. The effective date of the transaction is October 4, 2006.
Subsequent to the purchase, Cointel will be fully sold by Vodacom Group
(Proprietary) Limited to Smartphone SP (Proprietary) Limited for R300 million
effective October 9, 2006. The Vodacom Group"s effective shareholding in
Cointel will therefore increase from 51% to 70% subsequent to the completion
of these transactions.
Africell Cellular Services (Proprietary) Limited
An offer to acquire the cellular business of Africell Cellular Services
(Proprietary) Limited for R80 million was made and accepted. Competition
Commission approval has been obtained and the effective date of the
transaction is October 1, 2006. Management is still in the process of
determining the fair value of all the identifiable assets, liabilities and
contingent liabilities relating to Africell and disclosure thereof as
required per IFRS3 Business Combinations would therefore be premature.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
20. Contingencies
Third parties 30 30 31
Fixed-line 27 30 28
Mobile 3 - 3
Guarantee of 55 61 45
employee housing
loans
Third parties
These amounts represent sundry disputes with third parties that are not
individually significant and that the Group does not intend to settle.
Guarantee of employee housing loans
Telkom guarantees a certain portion of employees" housing loans. The amount
guaranteed differs depending on facts such as employment period and salary
rates. When an employee leaves the employment of Telkom, any housing debt
guaranteed by Telkom is settled before any pension payout can be made to the
employee. Telkom recognises a provision when it becomes probable that a
guarantee will be called. There is no provision outstanding in respect of
these contingencies. The maximum amount of the guarantee in the event of the
default is as disclosed above.
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance
and activation system to be supplied by Telcordia. In the 2001 financial
year, the agreement with Telcordia was terminated and in that year, the
Company wrote off R119 million of this investment. Following an assessment of
the viability of the project, the balance of the Telcordia investment was
written off in the 2002 financial year. During March 2001, the dispute was
taken to arbitration where Telcordia was seeking approximately USD130 million
plus interest at a rate of 15.50% per year for money outstanding and damages.
In September 2002, a partial ruling was issued by the arbitrator in favour of
Telcordia. Telkom brought an application in the High Court in South Africa to
review and set aside the partial award. Judgement in Telkom"s favour was
handed down on November 27, 2003.
On July 29, 2004, Telcordia filed a further petition to enforce the
arbitrator"s partial award in the District Court of New Jersey, USA. On
December 8, 2004 the court dismissed Telcordia"s petition. Telcordia"s
subsequent appeal was dismissed by the 3rd Circuit Appeal Court with one
exception - it reversed the issue of the dismissal of the previous courts"
decision on the basis that the US courts did not have personal jurisdiction
over Telkom. Telkom has instructed its attorneys to pursue an appeal on this
aspect only, to prevent Telcordia from bringing similar petitions in the
future.
On November 29, 2004, the Supreme Court of Appeals, Bloemfontein granted
Telcordia leave to appeal. The appeal was set down for hearing on October 30
and 31, 2006. Judgement is expected to be handed down before the end of 2006.
The dispute between Telkom and Telcordia and the amount of Telkom"s liability
are not expected to be finalised until the end of 2006. As Telkom does not
believe it has a present obligation, it has provided RNil (September 30,
2005: RNil, March 31, 2006: RNil) for its estimate of probable liabilities.
Competition Commission
The South African Value Added Network Services
The South African Value Added Network Services (`SAVA"), an association of
value added network services (`VANS") providers, filed complaints against
Telkom at the Competition Commission regarding alleged anti-competitive
practices on the part of Telkom. Certain of the complaints have been referred
to the Competition Tribunal by the Competition Commission for adjudication. A
maximum administrative penalty of up to 10%, calculated with reference to
Telkom"s annual turnover, excluding the turnover of subsidiaries and joint
ventures, for the financial year prior to the complaint date, may be imposed
if it is found that Telkom has committed a prohibited practice as set out in
the Competition Act, 1998 (as amended). The Competition Commission has to
date not imposed the maximum penalty.
Telkom has brought an application in the High Court in respect of the
Competition Tribunal"s jurisdiction to adjudicate this matter. Only the
Competition Commission has opposed the application. Telkom is currently
waiting for certain confidential documents contained in the Competition
Commission"s record of proceedings, after which Telkom may supplement their
papers if necessary and after which the Competition Commission must file
their answering affidavit. Telkom"s attorneys are corresponding with the
Competition Commission in this regard. Telkom is currently waiting for the
Competition Commission to file its record of proceedings. The Competition
Commission has now approached the High Court on application for an order
directing which of the confidential documents can be included in the record
of proceedings.
Telkom does not expect the Competition Tribunal to adjudicate on this matter
within the next financial year.
The Internet Service Providers Association
The Internet Service Providers Association (`ISPA"), an association of
internet service providers (`ISPs"), filed complaints against Telkom at the
Competition Commission regarding alleged anti-competitive practices on the
part of Telkom. A maximum administrative penalty of up to 10%, calculated
with reference to Telkom"s annual turnover, excluding the turnover of
subsidiaries and joint ventures, for the financial year prior to the
complaint date, may be imposed if it is found that Telkom has committed a
prohibited practice as set out in the Competition Act, 1998 (as amended). The
complaints deal with the cost of access to the South African Internet
Exchange (`SAIX"), the prices offered by TelkomInternet, the alleged delay in
provision of facilities to ISPs and the alleged favourable installation
timelines offered to TelkomInternet customers. The Competition Commission has
formally requested Telkom to provide it with certain records of orders placed
for certain services, in an attempt to first investigate the latter aspects
of the complaint.
Retention incentives
The Vodacom Group has committed a maximum of R1,296 million (September 30,
2005: R243 million; March 31, 2006: R456 million) in respect of customers
already beyond their normal 24 month contract period, but who have not yet
upgraded to new contracts, and therefore have not utilised the incentive
available for such upgrades. The Group has not provided for this liability,
as no legal obligation exists, since the customers have not yet entered into
new contracts.
Activation bonuses
The Vodacom Group has a potential liability in respect of activation bonuses
payable related to starterpacks sold which have not yet been validated. The
exposure is estimated at approximately R8 million (March 31, 2006: R9
million).
Negative working capital ratio
At each of the financial periods ended September 30, 2006, September 30, 2005
and the year ended March 31, 2006 the Group had a negative working capital
ratio. A negative working capital ratio arises when current liabilities are
greater than current assets. Current liabilities are intended to be financed
from operating cash flows, new borrowings and borrowings available under
existing credit facilities.
VM, S.A.R.L. call option
In terms of the shareholders" agreement, the Vodacom Group"s minority
shareholder in VM, S.A.R.L., Empresa Mocambicana De Telecommunicacoes
S.A.R.L. (`Emotel") has a call option for a period of four years following
the commencement date, August 23, 2003. In terms of the option, Emotel shall
be entitled to call on Vodacom International Limited such number of shares in
and claims on loan accounts against VM, S.A.R.L. as constitute 25% of the
entire issued share capital of that company. Emotel can exercise this option
in full increments of 1%. The option can only be exercised on April 1 or
October 1 of each calendar year for the duration of the option. The option
price is specified in the shareholders" agreement. The call option has a RNil
value at September 30, 2006 (March 31, 2006: RNil).
Smartphone SP (Proprietary) Limited put option
In terms of the shareholders" agreement, the minority shareholders of
Smartphone SP (Proprietary) Limited have a put option against Vodacom Group
(Proprietary) Limited, should the Vodacom Group or the company terminate or
fail to renew the service provider agreement for any reason other than the
expiry or cancellation of the Group"s South African licence. The put option
has a RNil value at September 30, 2006 (March 31, 2006: RNil) as the
conditions set out in the agreement have not been met.
Smartcom (Proprietary) Limited put option
In terms of the agreement between the Vodacom Group, Smartphone SP
(Proprietary) Limited (`Smartphone") and the minority shareholders of
Smartcom (Proprietary) Limited (`Smartcom"), all shareholders of Smartcom
have a put option against the Vodacom Group, should the Vodacom Group reduce
the standard service provider discount below certain percentages as
stipulated in the put option agreement. The put option has a RNil value at
September 30, 2006 (March 31, 2006: RNil) as the conditions set out in the
agreement have not been met.
Congolese Wireless Network s.p.r.l. put option
In terms of a shareholders" agreement, the Vodacom Group"s joint venture
partner in Vodacom Congo (RDC) s.p.r.l., Congolese Wireless Network s.p.r.l.
(`CWN") has a put option which comes into effect three years after the
commencement date, December 1, 2001, and for a maximum of five years
thereafter. In terms of the option, CWN shall be entitled to put to Vodacom
International Limited such number of shares in and claims on its loan account
against Vodacom Congo (RDC) s.p.r.l. as constitute 19% of the entire issued
share capital of that company. CWN can exercise this option in a maximum of
three tranches and each tranche must consist of at least 5% of the entire
issued share capital of Vodacom Congo (RDC) s.p.r.l. The option price will be
fair market value of the related shares at the date the put option is
exercised.
In terms of IAS32 Financial Instruments: Disclosure and Presentation
(`IAS32"), a contract that contains an obligation for an entity to purchase
its own equity instruments for cash or another financial asset gives rise to
a financial liability for the present value of the redemption amount. In
accordance with IAS39 Financial Instruments: Recognition and Measurement
(`IAS39"), all subsequent changes in the fair value of the financial
liability should be recognised as income or expense within the consolidated
income statement.
In terms of IAS32, the put option gives rise to a financial liability of R183
million (Group share: R92 million) at September 30, 2006 (March 31, 2006:
RNil).
Cointel VAS (Proprietary) Limited put option
In terms of the sale of shares agreement between the Vodacom Group and the
sellers of shares in Cointel VAS (Proprietary) Limited (`Cointel"), the
sellers have been granted a put option that requires Vodacom Group to
purchase all (and not part only) of the sellers" shares in Cointel. The
sellers will only be capable to exercise the put option if the recharge
agreement with Vodacom (Proprietary) Limited is not continued after August
31, 2008 on terms and conditions reasonably acceptable to the sellers. The
put option has a RNil value at September 30, 2006 (March 31, 2006: RNil) as
the conditions set out in the agreement have not been met.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
21. Segment information
Eliminations represent
the inter-segmental
transactions that have
been eliminated
against segment
results. The mobile
segment represents the
Group"s joint venture
Vodacom.
Business Segment
Consolidated revenue 47,625 23,447 25,147
Fixed-line 32,749 16,398 16,514
''To external 32,039 16,074 16,139
customers
''Intercompany 710 324 375
Mobile 17,021 8,088 9,733
''To external 15,586 7,373 9,008
customers
''Intercompany 1,435 715 725
Elimination (2,145) (1,039) (1,100)
Other income 480 287 213
Fixed-line 430 270 189
Mobile 50 20 24
Elimination - (3) -
Operating expenses 33,428 16,109 17,675
Fixed-line 22,937 11,156 11,501
Elimination (1,435) (718) (725)
Mobile 12,636 5,995 7,274
Elimination (710) (324) (375)
Consolidated operating 14,677 7,625 7,685
profit
Fixed-line 10,242 5,512 5,202
Elimination 725 394 350
Mobile 4,435 2,113 2,483
Elimination (725) (394) (350)
Consolidated 397 217 170
investment income
Fixed-line 2,583 1,037 1,406
Elimination (2,250) (850) (1,250)
Mobile 64 30 14
Consolidated finance 1,223 744 437
charges
Fixed-line 839 524 425
Mobile 384 220 12
Consolidated taxation 4,523 2,739 2,844
Fixed-line 2,981 2,012 1,916
Mobile 1,542 727 928
Minority interests 139 71 74
Fixed-line 81 59 53
Mobile 58 12 21
Profit attributable to 9,189 4,288 4,500
equity holders of
Telkom
Fixed-line 8,924 3,954 4,214
Elimination (1,525) (456) (900)
Mobile 2,515 1,184 1,536
Elimination (725) (394) (350)
Consolidated assets 54,306 50,586 53,540
Fixed-line 43,748 39,199 42,120
Mobile 12,262 12,550 13,029
Elimination (1,704) (1,163) (1,609)
Investments 2,963 2,523 1,235
Fixed-line 2,861 2,523 1,112
Mobile 102 - 123
Financial assets 275 394 576
Fixed-line 256 262 434
Mobile 19 132 142
Total assets 57,544 53,503 55,351
Consolidated 15,171 15,124 14,380
liabilities
Fixed-line 10,409 9,603 9,000
Mobile 6,466 6,684 6,989
Elimination (1,704) (1,163) (1,609)
Interest-bearing debt 11,123 11,930 12,266
Fixed-line 9,889 10,638 10,894
Mobile 1,234 1,292 1,372
Financial liabilities 235 350 122
Fixed-line 205 297 119
Mobile 30 53 3
Tax liabilities 1,549 1,576 583
Fixed-line 1,234 1,298 342
Mobile 315 278 241
Total liabilities 28,078 28,980 27,351
Other segment
information
Capital expenditure 6,310 2,565 3,913
for property, plant
and equipment
Fixed-line 3,960 1,423 2,546
Mobile 2,350 1,142 1,367
Capital expenditure 1,196 531 277
for intangible assets
Fixed-line 975 435 73
Mobile 221 96 204
Depreciation and 5,714 2,740 2,454
amortisation
Fixed-line 4,216 2,037 1,667
Mobile 1,498 703 787
Impairment and asset 162 64 86
write-offs
Fixed-line 188 98 67
Mobile (26) (34) 19
March September September
31, 30, 30,
2006 2005 2006
Rm Rm Rm
22. Related parties
Details of material
transactions and balances
with related parties not
disclosed elsewhere in
the condensed
consolidated interim
financial statements were
as follows:
With joint venture:
Vodacom Group
(Proprietary) Limited
Related party balances
Trade receivables 48 46 59
Trade payables (256) (267) (303)
Related party
transactions
Income (710) (324) (375)
Expenses 1,435 715 725
Audit fees 3 1 1
With shareholder:
Government
Related party balances
Trade receivables 194 214 236
Related party
transactions
Revenue (2,106) (1,060) (1,105)
With entities under
common control:
Major public entities
Related party balances
Trade receivables 30 32 46
Trade payables (2) (2) (5)
The outstanding balances
are unsecured and will be
settled in cash in the
ordinary course of
business.
Related party
transactions
Revenue (346) (172) (149)
Expenses 172 79 94
Rent received (17) (5) (9)
Rent paid 56 5 35
With key management
personnel:
(Including directors"
emoluments)
Short-term employee 171 90 114
benefits*
Post-employment benefits 4 1 3
Termination benefits 12 2 -
Equity compensation 6 3 2
benefits
* The comparatives for March 31, 2006 and September 30, 2005 were restated to
include directors" emoluments of Vodacom which were previously excluded.
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services
are made at arm"s length prices. Except as indicated above, outstanding
balances at the year-end are unsecured, interest free and settlement occurs
in cash. There have been no guarantees provided or received for any related
party receivables or payables. Except as indicated above, for the six months
ended September 30, 2006, the Group has not made any impairment of amounts
owed by related parties (September 30, 2005: Nil; March 31, 2006: Nil). This
assessment is undertaken each financial year through examining the financial
position of the related party and the market in which the related party
operates.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
23. Acquisition of minorities
Smartphone SP (Proprietary) Limited and subsidiaries
On August 30, 2006, the Vodacom Group acquired a further 19% interest in the
equity of Smartphone SP (Proprietary) Limited, which had a 85.75%
shareholding in Smartcom (Proprietary) Limited at that time, 100%
shareholding in Stand 13 Eastwood Road Dunkeld (Proprietary) Limited and 52%
shareholding in Ithuba Smartcall (Proprietary) Limited. The acquisition was
preliminarily accounted for using the parent entity extension method.
Minority interest acquired 11
Goodwill 157
Purchase price (including capitalised cost) 168
The purchase price (excluding capitalised cost) of R167 million was payable
at September 30, 2006 and included as part of Trade and other payables at
that date. The goodwill related to the acquisition represents future
synergies and are allocated to the South African cash-generating unit.
Smartcom (Proprietary) Limited
On September 13, 2006, the Vodacom Group acquired a further 2.25% interest in
the equity of Smartcom (Proprietary) Limited. The acquisition was
preliminarily accounted for using the parent entity extension method.
Minority interest acquired (Revenue 7,744 3,692 3,241 (12.2)
Operating profits 2,387 1,201 990 (17.6)
Net profit 1,516 686 589 (14.1)
EBITDA 3,342 1,642 1,318 (19.7)
EPS (cents) 283.9 127.1 111.9 (12.0)
Net debt 1,110 1,722 1,502 (12.8)
Total assets 9,357 8,426 7,133 (15.3)
Cash flow from 1,546 138 99 (28.3)
operating activities
Cash flow used in (1,185) (485) (529) 9.1
investing activities
Cash flow used in (42) 135 (105) (177.8)
financing activities
Exchange rate
Period end1
US$1 = ZAR 6.15 6.35 7.76 22.2
1. Noon buying rate
11. Special Note Regarding Forward-looking Statements
All of the statements included in this document, as well as oral statements
that may be made by us or by officers, directors or employees acting on
behalf of us, that are not statements of historical facts constitute or are
based on forward-looking statements within the meaning of the US Private
Securities Litigation Reform Act of 1995, specifically Section 27A of the US
Securities Act of 1933, as amended, and Section 21E of the US Securities
Exchange Act of 1934, as amended. These forward-looking statements involve a
number of known and unknown risks, uncertainties and other factors that could
cause our actual results and outcomes to be materially different from
historical results or from any future results expressed or implied by such
forward-looking statements. Among the factors that could cause our actual
results or outcomes to differ materially from our expectations are those
risks identified in Item 3. "Key Information-Risk Factors," of Telkom"s most
recent Annual Report on Form 20-F filed with the US Securities and Exchange
Commission (SEC) and its other filings and submissions with the SEC which are
available on Telkom"s website at www.telkom.co.za/ir, including, but not
limited to, increased competition in the South African telecommunications
markets; developments in the regulatory environment; continued mobile growth
and reductions in Vodacom"s and Telkom"s net interconnect margins; Vodacom"s
and Telkom"s ability to expand their operations and make investments and
acquisitions in other African and other countries and the general economic,
political, social and legal conditions in South Africa and in other countries
where Vodacom and Telkom invest; our ability to attract and retain key
personnel; our inability to appoint a majority of Vodacom"s directors and the
consensus approval rights at Vodacom that may limit our flexibility and
ability to implement our preferred strategies; Vodacom"s continued payment of
dividends or distributions to us; our ability to improve and maintain our
management information and other systems; our negative working capital;
changes in technology and delays in the implementation of new technologies;
our ability to reduce theft, vandalism, network and payphone fraud and lost
revenue to non-licensed operators; our ability to improve our internal
control over financial reporting; health risks related to mobile handsets,
base stations and associated equipment; risks related to our control by the
Government of the Republic of South Africa and major shareholders and the
South African Government"s other positions in the telecommunications
industry; the outcome of regulatory, legal and arbitration proceedings,
including tariff approvals, and the outcome of Telkom"s hearing before the
Competition Commission; its proceedings with Telcordia Technologies
Incorporated and others; our ability to negotiate favourable terms, rates and
conditions for the provision of interconnection services and facilities; our
ability to implement and recover the substantial capital and operational
costs associated with carrier pre-selection, Number Portability and the
monitoring, interception and customer registration requirements contained in
the South African Regulation of Interception of Communication and Provision
of Communication - Related Information Act; Telkom"s ability to comply with
the South African Public Finance Management Act and South African Public
Audit Act and the impact of the Municipal Property Rates Act; fluctuations in
the value of the Rand; the impact of unemployment, poverty, crime and HIV
infection, labour laws and exchange control restrictions in South Africa; and
other matters not yet known to us or not currently considered material by us.
We caution you not to place undue reliance on these forward-looking
statements. All written and oral forward-looking statements attributable to
us, or persons acting on our behalf, are qualified in their entirety by these
cautionary statements. Moreover, unless we are required by law to update
these statements, we will not necessarily update any of these statements
after the date hereof, either to conform them to actual results or to changes
in our expectation.
Date: 13/11/2006 07:45:29 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
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