Wrap Text
TKG - Telkom - Reviewed Interim Results For The Six Months Ended September
30, 2008
Telkom SA Limited
Registration number 1991/005476/06)
JSE and NYSE Share code: TKG
ISIN: ZAE000044897
"Telkom")
Telkom Group - Reviewed interim results for the six months ended September
30, 2008
1. Overview
Johannesburg, South Africa - November 17, 2008, Telkom SA Limited (JSE and
NYSE: TKG) today announced reviewed Group results for the six months ended
September 30, 2008.
GROUP FINANCIAL KEY PERFORMANCE AREAS FOR THE SIX MONTHS ENDED SEPTEMBER 30,
2008
* Operating revenue up 9.8% to R29.9 billion
* Group EBITDA decreased by 2.8% to R10.0 billion.
* Group EBITDA margin decreased from 37.7% to 33.4%.
* Operating profit decreased by 9.3% to R6.7 billion.
* Net debt to EBITDA increased to 2.0 times from 1.7 times at September 30,
2007.
* Cash generated from operations increased by 0.5% to R8.3 billion.
* Headline earnings per share increased by 0.4% to 745.2 cents per share.
Statement by Reuben September, Chief Executive Officer:
"Despite the difficult market conditions the Telkom Group delivered a
pleasing 9.8% growth in revenue to R29,884 million. Vodacom once again
delivered a strong performance with revenue increasing 14.0% to R26 billion
and customers increasing 13.1% to 35.7 million. We are proud of the fixed-
line`s revenue growth of 2.8% to R16,565 million. The fixed-line has become
a preferred provider in the data market as a result of superior quality and
speed is evident in the strong growth in data revenues. Data revenues
increased 12.2% to R4,459 million.
The need for the repositioning of the fixed-line in today`s extremely
competitive environment is evident in the continuing decline in our
traditional voice revenues. Traffic revenues decreased 3.0% to R7,833
million. The fixed-line`s strength in the data market and need to combat
fixed-mobile substitution led to the Board recommending to shareholders on
November 6, 2008 the sale of 15% of Telkom`s stake in Vodacom to the
Vodafone Group and the further unbundling of the remaining 35% stake in
Vodacom to Telkom shareholders. The consideration for the 15% stake in
Vodacom is R22.5 billion less 15% of Vodacom`s net debt at September 30,
2008 being R1.55 billion. Shareholders are required to approve the sale to
Vodafone, the unbundling of the remaining 35% and Telkom`s retention of 50%
of the proceeds with the remainder being distributed to Telkom shareholders
through a special dividend.
I am excited about Telkom`s repositioning within the market. Our strength is
our network, our corporate customer relations and our data solutions and we
intend to utilise the proceeds to leverage this strength for the benefit of
all shareholders. Our key focus areas are fixed-mobile convergence, data and
content services and geographic expansion. We intend to accelerate the
expansion of our network including the Next Generation Network, selectively
build a mobile network and explore acquisitive opportunities. The ability to
pull traffic back on to the fixed-line`s network through mobile service
offerings and leverage the NGN for full convergence and high value add data
services will enhance Telkom`s core defend and grow strategy.
The next couple of years will see exciting changes for Telkom and our
ability to provide premium services to our customers. We remain committed to
improving services to our customers and generating returns for our
shareholders. This will require substantial investment in our network and
dedication from Telkom`s employees. We are firmly focused on becoming a
leading Information, Communication and Technology service provider in
Africa."
Financial performance
Group operating revenue increased 9.8% to R29.9 billion, while operating
profit decreased by 9.3% to R6.7 billion. The Group EBITDA margin decreased
to 33.4% as at September 30, 2008, compared to 37.7% at September 30, 2007,
mainly due to higher fixed-line operating expenditure which decreased the
fixed-line EBITDA margin by 17.0% to 31.7% as at September 30, 2008
(September 30, 2007: 38.2%). The EBITDA margin for the mobile segment
remained flat at 33.3%.
Headline earnings per share increased by 0.4% to 745.2 cents per share and
basic earnings per share remained flat at 723.9 cents per share for the six
months ended September 30, 2008, compared to 724.3 cents per share at
September 30, 2007. The reduced earnings can be attributed to a decrease in
operating profit due to a 16.9% increase in operating expenses partially
offset by a lower taxation expense.
Cash flows from operating activities increased by 344.1% to R3,033 million,
cash flow utilised in investing activities decreased by 25.1% to R5,262
million and cash flows from financing activities decreased from R4,520
million to R1,254 million during the six months ended September 30, 2008.
SUMMARY GROUP FINANCIAL RESULTS
Year Six months ended
ended September 30,
March 31,
In ZAR millions 2008 2007 2008 %
Operating revenue 56,271 27,227 29,884 9.8
Operating profit 14,619 7,364 6,676 (9.3)
EBITDA1 20,743 10,265 9,982 (2.8)
Capital expenditure2 11,666 4,420 6,140 38.9
Operating free cash flow 2,229 (633) 1,099 273.6
Net debt 16,615 17,732 19,622 10.7
Basic EPS (ZAR cents) 1,565.0 724.3 723.9 (0.1)
Headline EPS (ZAR cents)1 1,634.8 742.3 745.2 0.4
Operating profit margin(%) 26.0 27.0 22.3 (17.4)
EBITDA margin(%) 36.9 37.7 33.4 (11.4)
Net debt to EBITDA 0.8 1.7 2.0 13.8
After tax operating return on 18.6 9.3 8.2 (11.8)
assets(%)3
Capex to revenue(%)3 20.7 16.2 20.5 26.5
The assets and liabilities of Telkom Media have been presented as held for
sale following a decision made by the Telkom Board in March 2008 to
substantially reduce its investment in Telkom Media. Prior year amounts have
been adjusted to show the effect of the discontinued operation held for
sale.
1. EBITDA and earnings have been reconciled to net profit - Refer to section
10.
2. Including spend on intangible assets.
3. Not annualised.
OPERATIONAL DATA
As at March As at September
31, 30,
2008 2007 2008 %
Fixed-line data
ADSL subscribers3 412,190 335,112 491,774 46.7
Calling plan subscribers 451,122 396,589 507,985 28.1
Fixed access lines (`000)1 4,532 4,621 4,504 (2.5)
Postpaid - PSTN 2,893 2,950 2,839 (3.8)
Postpaid - ISDN channels 754 735 772 5.0
Prepaid 743 782 754 (3.6)
Payphones 143 154 139 (9.7)
Fixed-line penetration 9.5 9.8 9.3 (5.1)
rate(%)
Revenue per fixed access 5,250 2,588 2,635 1.8
line(ZAR)
Total fixed-line traffic 26,926 13,959 12,709 (9.0)
(millions of minutes)
Local 11,317 6,198 4,688 (24.4)
Long distance 3,870 2,016 1,870 (7.2)
Fixed-to-mobile 4,169 2,093 2,111 0.9
International outgoing 635 305 319 4.6
International VoIP 43 21 17 (19.0)
Interconnection 3,895 1,881 2,000 6.3
Domestic mobile 2,502 1,226 1,241 1.2
interconnection
Domestic fixed 113 16 160 900.0
interconnection
International interconnection 1,280 639 599 (6.3)
Subscription based calling 2,997 1,445 1,704 17.9
plans
Managed data network sites 25,112 23,224 28,051 20.8
Internet all access 358,066 335,230 395,088 17.9
subscribers2
Fixed-line employees 24,879 25,570 24,075 (5.8)
(excluding subsidiaries)
Fixed access lines per fixed- 182 181 187 3.3
line employee4
Mobile data5
Total customers(`000) 33,994 31,564 35,689 13.1
South Africa
Mobile customers(`000) 24,821 23,297 25,245 8.4
Contract customers 3,541 3,409 3,735 9.6
Prepaid customers 21,177 19,790 21,391 8.1
Community services telephones 103 98 119 21.4
Mobile churn(%) 42.3 45.9 42.3 (7.8)
Contract churn 8.3 8.3 9.7 16.9
Prepaid churn 47.9 51.9 48.1 (7.3)
Estimated mobile market 55 56 53 (5.4)
share(%)6
Mobile penetration(%) 94 87 100 14.9
Total mobile traffic 22,769 11,024 11,793 7.0
(millions of minutes)
Mobile ARPU(ZAR)7 128 122 132 8.2
Contract ARPU 486 487 481 (1.2)
Prepaid ARPU 62 59 66 11.9
Community services 689 711 584 (17.9)
Number of mobile employees8 4,849 4,716 4,979 5.6
Mobile customers per mobile 5,119 4,940 5,070 2.6
employee
Other African countries
Mobile customers(`000) 9,173 8,267 10,444 26.3
Number of mobile employees 1,992 1,524 1,609 5.6
Number of mobile customers 4,605 5,425 6,491 19.6
per mobile employee
Other data
Africa Online
Number of subscribers9 17,252 14,411 17,773 n/a
Number of employees 379 351 357 1.7
Multi-Links
Number of subscribers 813,392 262,431 1,780,984 578.6
Number of employees 680 673 1,006 49.5
1. Excludes Telkom internal lines of 110,733 (September 30, 2007:109,000).
2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers.
3. Excludes Telkom internal lines of 880 (September 30, 2007:691).
4. Based on number of fixed-line employees, excluding subsidiaries.
5. 100% of Vodacom data.
6. Based on Vodacom estimates.
7. With effect from April 1, 2008, ARPU calculations include revenues from
national roamers and international visitors roaming on Vodacom`s network.
Historical ARPU numbers have been restated in line with this new
methodology.
8. Includes Holding company and Mauritius employees.
9. From April 1, 2008, Africa Online changed the method of counting
subscribers to include all the individual corporate sites as individual
customers. The comparative information for September 2007 has not been
restated.
2. Operational overview
LEVERAGING OUR CORE NETWORK STRENGTH
The competitive landscape has changed radically over the last few years with
the mobile operators, Internet Service Providers and Value Added Networks
increasingly entering what has traditionally been the fixed-line domain.
Neotel is building its network and services capabilities and competing on
price. The regulatory environment is also geared to generate competition in
the fixed-line environment. As a result we are seeing the fixed-line revenue
being eroded through both competition and price reductions which are
necessary to maintain volume and to act for the benefit of the South African
consumer through lowering the costs of telecommunication services. The fixed-
line business intends to aggressively reposition itself within the African
telecommunications environment.
Telkom`s prime asset and core strength is its network. Telkom`s Board and
management have developed strategies to leverage this asset to drive revenue
and profit growth into the future. No other telecommunications operator in
South Africa has a network that can deliver the speed, quality and
reliability of the fixed-line network. The continued growth in the Next
Generation Network (NGN) is also providing the network intelligence to
provide innovative, cost effective solutions which can be brought to the
market rapidly. Telkom intends to exploit this opportunity for leveraging
the network to provide for the increasing demand for capacity, new data and
converged products. Global developments are initiating exciting
opportunities to utilise the NGN for sourcing revenue from both vendors and
customers through allowing access to the intelligence and strength of an
open platform. Telkom`s drive to capitalise on fixed-mobile convergence
products through high value adding bundles will leverage the network
further. In this respect, Telkom is uniquely positioned in that it has built
and owns the backbone infrastructure for the mobile networks in South
Africa. Telkom also has the opportunity to explore methods of exploiting
the arbitrage between fixed and mobile pricing and benefitting from the
saving on interconnection costs. Having mobile capabilities will also
improve Telkom`s ability to secure opportunities for growth on the African
continent. Telkom`s strength in the data market will be enhanced by the
extension of data hosting capabilities in South Africa and Africa. There is
significant opportunity to extract synergies through the bundling of network
services with IT and hosting capabilities. In addition, corporates and
multinationals in Africa require international connectivity and data
solutions.
The conclusion of Telkom`s mobile strategy review with the announcement on
November 6, 2008 of the sale of 15% of Telkom`s stake in Vodacom to the
Vodafone Group and the unbundling of the remaining 35% stake to Telkom`s
shareholders will result in the termination of the shareholder agreement
between Telkom and Vodafone. The ending of the restrictive conditions
contained in that agreement will allow Telkom rapidly and aggressively to
reposition itself to take advantage of the strength of the fixed-line
network to move in to fixed-mobile convergence.
DEFEND AND GROW STRATEGY SHOWING CONTINUED SUCCESS
Telkom continues to drive revenue into annuity based streams through bundled
products in order to defend and grow revenues. Annuity revenues increased
7.6% to R3,595 million at September 30, 2008. Annuity revenues exclude line
installations, reconnection fees and CPE sales.
Telkom Closer packages increased 28.1% to 507,985 calling plans with a
notable 92.6% increase in the entry level Telkom Closer 1 plan to 9,906
bundles. Supreme Call packages targeted at the enterprise market grew 23.7%
to 13,919 packages. Subscription based calling plans revenue increased 40.6%
to R620 million. Telkom also continues to migrate corporate customers into
long term contracts providing benefits in relation to term and volume
discounts.
Bundled products reduce churn and incentivise customers to remain loyal to
Telkom. The cannibalisation effect, augmented by continuing fixed to mobile
substitution, is evident in our traffic revenues. Revenue from local traffic
decreased 11.5% to R1,881 million with local minutes decreasing 24.4% to
4,688 million minutes. Long distance revenues decreased 14.0% to R1,048
million with minutes decreasing 7.2% to 1,870 million minutes. Fixed to
mobile traffic revenues remained flat at R3,803 million with minutes also
remaining flat at 2,111 million minutes. International outgoing revenues
decreased 3.4% to R481 million with minutes increasing 4.6% to 319 million
minutes. Interconnection revenue increased 14.8% to R956 million.
It is evident that Telkom needs to offer fully converged services including
mobility in order to pull traffic back onto the fixed-line network. We look
forward to offering our customers fully converged bundles offering
significantly enhanced services and value.
DATA CONTINUES TO GROW STRONGLY
Data revenues grew 12.2% to R4,459 million. Internet access and related
services revenue grew 30.2% to R700 million and managed data network
services revenue increased by 42.1% to R444 million. Revenue from leased
lines decreased by 4.2% to R862 million as a result of decreased pricing in
order to combat self provisioning by other operators. Telkom is confident
that its revised pricing combats continued moves from other operators to
self provide. Telkom`s scale makes it difficult for other operators to
compete on the cost of leased line provisioning.
ADSL subscribers grew by 46.7% to 491,774 subscribers over the comparative
reporting period and Do Broadband subscribers increased to 154,095 from
78,780 at September 30, 2007. Continued growth has been stimulated by the
commoditisation of ADSL, the Do Broadband offering, the Self Install Option,
DSL port automation and wholesale services. Telkom continues to target ADSL
penetration of 15% - 20% of fixed access lines by 2010/2011 with the
introduction of new service offerings and aggressive price reductions.
Telkom`s continued focus on improving customer service has led to an
improvement in the average time to install (ATTI) to 17 working days from
the 20 working days achieved for the year ended March 31, 2008.
The introduction of the Self Install Option is expected to continue to
improve the ATTI. As at March 31, 2008 57% of all ADSL installations were
done through the Self Install Option. As at September 30, 2008 60% of all
ADSL installations were Self Installs. The Self Install Option has been very
successful but does tie up the call centres as our agents guide customers
through the installation process.
Further effort has gone into improving our customer satisfaction levels. DSL
automation has automated the port allocation resulting in fewer errors and
further reducing the lead time associated with the allocation of the DSL
ports. A broadband demand register has been set up to hold orders that
cannot be serviced due to infrastructure constraints. This intelligence is
being used to align our DSL build programme with actual demand. In addition,
the Broadband Service Assurance Solution being developed will provide users
with self-help and self-diagnostic tools. This is particularly important to
Internet Service Providers who will be able to provide first line
maintenance and support capabilities, improving their customer service. The
launch of the wholesale ADSL product offering has contributed to the growth
of ADSL with 35,688 services being sold during the period ending September
30, 2008 up from 21,469 sold to March 31, 2008.
ADSL DSLAMs have increased from 2,660 at March 31, 2008 to 3,036 at
September 30, 2008 covering more than 92% of Telkom`s existing customer
footprint. In extending and complimenting our ADSL footprint, Telkom
continues to roll out WiMAX base stations and is on track to reach the
target of 76 base stations by March 31, 2009. Telkom has 50 WiMAX base
stations currently installed. WiMAX has been deployed to provide broadband
connectivity to customers that are not in the ADSL footprint and in areas
that have been hard hit by copper theft and in high maintenance areas.
VODACOM DELIVERS STRONG PERFORMANCE
Vodacom again performed exceptionally well in the six months to September
30, 2008 delivering 14.0% growth in revenue to R26,016 million with a South
African market share of approximately 53%. Vodacom increased its profit from
operations by 12.5% to R6,430 million and increased net profit by 2.7%
to R3,694 million (Telkom Group 50% share: R1,847 million) and delivered a
constant EBITDA margin of 33.3%.
Vodacom`s total customer base increased by a net of 4.1 million customers to
35.7 million customers as at September 30, 2008. South African mobile
customers increased by 8.4% to 25.2 million (September 30, 2007: 23.3
million) for the six months ended September 30, 2008, reinforcing Vodacom`s
market leadership position in South Africa. Customers grew by 34.1% to 4.9
million (September 30, 2007: 3.7 million) customers in Tanzania, by 18.8% to
3.8 million (September 30, 2007: 3.2 million) customers in the Democratic
Republic of Congo, by 35.5% to 450 thousand (September 30, 2007: 332
thousand) customers in Lesotho, and by 19.3% to 1.3 million (September 30,
2007: 1.1 million) customers in Mozambique.
Vodacom`s data revenue increased by 43.3% to R3,004 million (50% share:
R1,502 million) for the six months ended September 30, 2008 contributing
11.5% (September 30, 2007: 9.2%) to mobile operating revenue.
Vodacom`s other African operations contributed 12.7% (September 30, 2007:
11.0%) to revenue with 10.4 million (September 30, 2007: 8.3 million)
customers. These operations constitute 29.3% of the total customer base. All
of Vodacom`s other African operations, with the exception of Vodacom
Mozambique, are profitable. Mozambique remains a tough market but the
outlook, and particularly the competitive landscape, has improved and we
remain confident that in the medium to long-term it will contribute to the
overall growth of Vodacom.
On the conclusion of the transaction with Vodafone, Vodacom will be listed
on the JSE with Telkom shareholders owning a direct equity stake of 35% in
Vodacom. Vodacom will be used as Vodafone`s vehicle for expansion in sub-
Saharan Africa excluding, North Africa, Ghana and Kenya. Vodacom will seek
to comply with best corporate governance practices and have an independent,
non-executive chairman and a majority of non executive directors. Vodacom
will be free from having often miss-aligned shareholder strategies and is
expected to benefit from simpler decision making processes as a result of
Vodafone`s majority control. Vodacom will be able to capitalise on
Vodafone`s product range and enormous research and development expertise.
FIXED-MOBILE CONVERGENCE
Telkom announced at the Analyst day on March 31, 2008 that it intends to
build a fixed-wireless network to provide mobile data services and fixed-
wireless voice services. An initial footprint of 38 base stations has been
established in Pretoria and Johannesburg. The target is to have in excess of
220 operational base stations by March 31, 2009. Telkom has completed trials
on both our voice and data services during September 2008. The first paying
external trial customers were connected on September 29, 2008. The trials
have been very successful. Customer feedback has been very positive about
the quality of the services and the overall value proposition on our fixed-
wireless and nomadic data products. The nomadic voice product is still going
through internal product development and we will add trial customers early
in December 2008. The internal trials have been successful and we expect
that the customer trials on this service will also be successful.
The first 38 base stations were dimensioned for 3,000 voice subscribers and
600 data subscribers at 24 Kbits (Committed Information Rate). All future
stations will be dimensioned for 1,000 voice subscribers and 200 data
subscribers at 24 Kbits. The base stations can be enabled (software
upgradable) anytime for higher subscriber numbers.
On conclusion of the Vodacom transaction, expected in the first half of
2009, Telkom will be able to provide its customers with mobile voice
services. We are looking forward to execute on the selective build out of
the mobile network. We intend to target our corporate customers and high
income residential areas by adding mobility into the bundled service they
already utilise from Telkom. We will also use mobility to reduce the cost of
servicing areas affected by copper theft and high maintenance costs.
Telkom`s ability to service rural areas will be greatly enhanced by the use
of more economical mobile technology.
The products and services to be launched on this technology will certainly
give our customers a lasting positive experience. This innovative 3G network
supports services such as high-speed internet access, video and high-quality
voice transmission. We are initially focusing on providing fixed-voice and
fixed-wireless data services and within weeks, we also plan to roll-out
nomadic voice services. The network footprint will be expanded rapidly
during the next 6 months.
AFRICAN INVESTMENTS
Telkom continues to pursue growth by diversifying our revenue streams into
African markets that offer high growth potential. We are still in the early
phases of our move into Africa and are continuing to build out both Multi-
Links and Africa Online. We are pleased to announce the acquisition of M-Web
Africa Limited and 75% of M-Web Namibia (Pty) Limited for USD63 million. The
Telkom Management Services Company is assessing various options particularly
with regard to the privatisation and potential management contract
opportunities in relation to a number of African incumbent operators.
MULTI-LINKS
Telkom owns 75% of Multi-Links, a private telecommunications operator with a
Universal Access License in Nigeria allowing fixed, mobile, fixed-wireless,
international and data services.
Multi-Links performed well in growing its subscriber base to 1,780,984
subscribers at September 30, 2008. For the twelve month period, Multi-Links
added 1,518,553 subscribers of which 967,592 subscribers were connected
since March 31, 2008.
As at October 31, 2008 Multi-Links` subscriber base had grown to 2,108,649
subscribers. October also saw the launch of broadband EVDO (3G equivalent)
data services in Lagos and Abuja which are expected to significantly enhance
Multi-Links` revenue streams and service offerings, especially once these
services are extended to other regions in the near future.
Multi-Links` service offerings currently include voice services on fixed and
mobile handsets, closed user group and business centre services. Mobile
internet access is provided to approximately 70,000 narrowband subscribers
and 240 broadband EVDO subscribers at present. Local and international
leased lines are also being provided to corporate customers.
Multi-Links reported revenue of R813 million (2007: R310 million), a loss
before tax of R289 million (2007: profit before tax R4.6 million) and a net
loss for the period of R254 million. The deferred tax credit is largely due
to assessed losses.
Voice and data revenue contributed 72% of total revenue for the six month
period, handset sales 20% and interconnect revenues 8%. Operating expenses
of R1,081 million mainly consist of selling general and administrative
expenses contributing 55% (2007: 41%), which are largely attributable to
handset subsidies. Payments to other operators is the next largest
contributor to operating expenses at 29% of the total operating expenses.
Multi-Links` EBITDA percentage for the six month period was negative at
19.8%, largely due to the handset subsidies incurred. A positive EBITDA is
however forecast for the full year under review.
The Average Revenue per User (ARPU) achieved for the six month period ended
September, 30 2008 was USD14. ARPU has fallen significantly during this
period as a result of the rapidly expanding subscriber base whilst the
revenues attributable to these new subscribers were not earned for the full
six month period. In addition the launch of our mobile data package, EVDO,
was delayed and only launched in October 2008. ARPUs are expected to
increase slightly by the end of the current financial year as the
subscribers added during the first six months of the financial year start
generating revenues over a longer period of use.
Multi-Links reported total minutes of use of 737,483,022 representing
133,919,542 incoming minutes of use and 603,563,480 outgoing minutes of use.
In order to improve financial performance Multi-Links is capitalising on
fibre swapping, improving point of sales, customer distribution channels,
operating and business support systems and driving wholesale leasing.
Net debt has increased to approximately R2.9 billion (2007: R302 million) as
a result of the capital infrastructure roll out. The capital expenditures
are being funded with a US dollar denominated shareholder`s loan from Telkom
SA Ltd and vendor financing arrangements from key suppliers. Interest
charges due to Telkom for the six month period amounted to R47.1 million out
of the total interest charge of R48.2 million.
Multi-Links invested approximately R1,730 million (2007: R128 million) in
capital expenditure during the period under review and grew its access
network to 589 transmission stations and its fibre deployment to 3,800 kms
by September 30, 2008. The total capital expenditure for the full year is
expected to be in the region of R4 billion.
In addition, Multi-Links has commissioned a Huawei packet exchange in Abuja
with a capacity of 300,000 subscribers, extended the Lagos switch capacity
by 250,000 subscribers and established a new main network site in Gbagada,
Lagos. The Lagos Metro Ethernet ring has now been completed and Abuja is
nearing completion. Plans are underway for the deployment of Metro Ethernet
rings in Kanu, Kaduna and the Delta region. Six NGN nodes are planned to be
built in the 2009 financial year greatly extending Multi-Links` ability to
provide data products to corporate customers.
Multi-Links has 11 Customer Services Branches across Nigeria, with 20 more
being planned to open before March, 31 2009. It is represented by Customer
Services Branches or contact points in all 29 states that it operates in.
The call centre receives an average of 27,000 calls a day. Larger premises
to accommodate additional call centre staff are being sourced.
The prospects for Multi-Links are strong and the company intends to
capitalise on Telkom`s brand and access to international data connectivity.
The resilience and quality of international connectivity via the SAT3
submarine cable provides great opportunities to Multi-Links in servicing the
corporate, wholesale and retail markets in Nigeria.
AFRICA ONLINE
Africa Online increased its revenues to R63 million in the six months ended
September 30, 2008. The major contributors to revenue were consumer wireless
and broadband VSAT services.
Consumer wireless revenue growth was predominantly in Kenya and Uganda and
the introduction of wireless in Tanzania, whilst growth in Pan African
business revenues accounted for the increase in Broadband VSAT.
Africa Online assumed responsibility for Telkom`s African VSATs in January
2008, with the responsibility to perform service activation and assurance of
various VSAT and point to point satellite links in neighbouring countries
and on the rest of the African continent. Growing this business is expected
to have future revenue generating capabilities for Africa Online.
The company reported a positive EBITDA margin of 1.6% and an operating loss
of R8 million largely as a result of the interest paid on Telkom`s
shareholder funding.
Africa Online`s infrastructure roll out has not progressed as rapidly as
expected due to longer than anticipated equipment lead times experienced in
several countries of operation.
M-WEB AFRICA
Telkom announced the acquisition of M-Web Africa Limited and 75% of M-Web
Namibia (Pty) Limited for USD63 million (approximately R610 million).
M-Web Africa is an internet services provider in Sub-Saharan Africa
(excluding South Africa) and also provides network access services in some
countries. Although its operations are largely focused on corporate
customers, M-Web Africa`s predominantly satellite-based internet access
offerings allows the company to reach a wide range of customers, many of
whom are not reached by traditional fixed-line infrastructures.
The M-Web Africa group is headquartered in Mauritius with operations in
Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency
arrangement in Botswana and distributors in 26 sub-Saharan African
countries.
The successful conclusion of the agreements being entered into is subject to
conditions precedent, including regulatory approvals being obtained in
certain African jurisdictions.
Telkom anticipates that it will extract significant synergies from the
combination of M-Web Africa and Africa Online. These two companies can
leverage the strength of Telkom`s ISP services into Africa. The Africa
Online business, coupled with M-Web Africa, will strengthen Telkom`s
position as a pan-African information and communication technology service
provider with the depth to provide retail and wholesale customers with the
services they require.
TELKOM MEDIA
Telkom announced on March 31, 2008 that it will substantially reduce its
shareholding in Telkom Media. Negotiations with a potential investor have
progressed and an announcement of the details of this transaction can be
expected shortly.
The Telkom SA Ltd shareholder loan of R430 million to Telkom Media has been
fully impaired as at September 30, 2008. R217 million was impaired up to
March 31, 2008 and an additional R213 million in the six months ended
September 30, 2008.
IMPROVING CUSTOMER SERVICE
Improved customer service is vital to defending and growing revenue.
Sustainable and profitable growth in the customer base requires creating and
strengthening capabilities focused on managing customer relationships and
learning from acquired customer information. This will allow Telkom to
manage the customer experience and anticipate customer needs.
The following key activities are taking place during the 2009 financial
year:
* The establishment of a robust customer data and customer analytics (CA)
project is underway.
* A refined customer segmentation programme based on value and needs is
underway. Residential macro and micro segmentation results were finalised
during October 2008. It is expected that the Enterprise market programme
will be completed by mid December 2008. This provides Telkom with a new
segmentation framework that will provide increased and renewed focus on our
different customer segments.
* Improved churn management - Churn modelling will be completed during the
first quarter of 2009.
* We have introduced Customer Portfolio Management (CPM) for all segments to
move away from being predominantly product centric. Segment managers for
segments have been appointed. The transition period commenced in October
2008 and will be completed by March 2009. The full roll-out of CPM will
commence in the 2009 financial year.
* Contact centre network has been streamlined to make it easier for
customers to access and interact with Telkom. We managed to improve the
percentage of calls answered within 20 seconds (SVL) across our contact
centres. The mass and enterprise markets SVL improved by 7% and we managed
to handle 1,128,036 more calls compared to the same period last year.
Overall we answered 9,985,106 calls. Within operator services we improved
the average Speed of Answer by 184%. As a result of the demand for our
broadband products, the key focus for the next six months will be to enhance
our service delivery within the ADSL contact centres.
* Customer communication has been improved. The escalation process has been
redesigned and was implemented on September 1, 2008. A new Telkom
persona/voice was introduced into Call Centres with simplified call flows
and options available to customers.
The above initiative demonstrates Telkom`s commitment to improving customer
service levels.
KEY NEXT GENERATION NETWORK, CAPACITY AND PRODUCT DEVELOPMENTS
Telkom is in the 3rd year of its NGN build out programme. Customer demands
and global standards necessitate the provision of services and particularly
bandwidth that is only possible utilising the intelligence of an NGN system.
Telkom intends to maintain the strength and capacity of its network as a
differentiator over our competitors. The following key achievements are
worth mentioning:
* An increase of the ADSL footprint to 3,036 DSLAMs, covering more than 92%
of Telkom`s existing customer footprint.
* An increase of the Metro Ethernet footprint to 103 nodes deployed in major
cities, using 10Gbit/s and 1Gbit/s line systems. i.e. at Cape Town (18),
Johannesburg (48), Pretoria (8) Durban (18) and Port Elizabeth (11).
* Dense Wave Division Multiplexing (DWDM) systems capable of forty 10Gbit/s
signals over a single pair of fibre. The first system was deployed between
Gauteng and Durban. The full deployment of this technology will provide the
potential to increase the transport bandwidth capability. A significant
rollout of these systems between all major cities in SA is currently
underway and expected to be completed during the 2009 financial year.
* The rollout of switches to provide automatic self-healing re-routing of
bandwidth on the national layer is underway and expected to be completed
during the 2009 financial year.
* Total International IP bandwidth has increased by 0.67 Gbits/s to a total
of 5.166 Gbits/s.
* ATM network available bandwidth on the core and metro layers has increased
by 23 Gbits/s to a combined 170 Gbits.
* Network Interactive Voice Response System deployed which offers advanced
speech services such as automated speech recognition and a text-to-speech
application enabling Corporate customers and Telkom to enhance their voice
systems.
* 237 Wi-Fi hotspots have been deployed at strategic partner locations.
* Fibre deployment has increased from 117,000 cable.kms to 128,000
cable.kms, which is a growth of 9.5%. Cable.kms refers to the "pure" length
of fibre irrespective of the number of fibre strains.
* IMAX has been introduced into the system and is ready to carry traffic.
IMAX has the ability to carry narrowband and broadband services for wire
line legacy and converged services.
THE REGULATORY ENVIRONMENT
Telkom faces continuous regulatory challenges covering inter alia
competition issues and changes in policies. Through constructive dialogue,
the Company endeavours to achieve a regulatory framework that is realistic,
equitable and beneficial to the industry. The following details the main
changes to the regulatory environment affecting the industry and Telkom
during the year.
Electronic Communications Act (ECA)
ICASA had to address the task of developing the market regulation framework.
ICASA has issued since December 2007 some 10 draft regulations, dealing with
the identification and definition of the various relevant markets, the
methodologies for analysing these markets to determine the level of
competition, or lack thereof, proposed rules on the leasing of communication
facilities, on interconnection, on the special treatment of facilities that
are deemed to be "essential" and on the owners thereof. Telkom will, of
course, be affected for the most part by all these developments.
Regarding the pro competition regulations, in March 2008 ICASA published
draft regulations on the processes and methodologies that ICASA will use for
the definition of the relevant markets, for determining the effectiveness of
competition in markets, for the identification of licensees having
significant market power, and for ensuring that pro-competitive remedies
imposed are reasonable and proportionate in addressing market failure.
Licence conversion
ICASA has started a process of converting our licenses to the new licensing
framework. Regulations providing the framework to convert our PSTS and VANS
licenses have been published by ICASA, including the standard terms and
conditions that will apply to all electronic communications services and all
electronic communications network services licenses, including ours. ICASA
has proposed draft additional conditions applicable to the electronic
communications service and electronic communications network service
licences that will be issued to existing licensees, including Telkom. ICASA,
after taking into account the comments received, is expected to publish
final proposed terms and conditions for public comment. It is, however not
likely that ICASA will complete the licence conversion process before the
end of December 2008. We presume that the technology neutrality of the
Electronic Communications Act will result in us being able to explore new
horizons; how far we will be allowed to go, however, and at what cost, is
not yet clear.
Telkom continuously engages in negotiations for interconnection, shared
access and facilities leasing agreements. Interconnectivity agreements with
Neotel and the majority of VANS have been concluded.
Number portability (NP)
Mobile number portability has been in operation since 2006. Anecdotal
evidence is that mobile porting in South Africa was slower than it was
expected to be, although the high cost of implementation has duly
materialised. Fixed-line porting, essentially between Telkom and Neotel, has
not yet happened. Testing of inter-operator systems is in progress and some
form of portability is expected to soon be in place. The existence of very
active VoIP service providers has led to further competition for our fixed-
line network. Carrier pre-selection between Telkom and Neotel has also not
yet been established, as Neotel has not yet been allocated the necessary
selection codes by ICASA.
Local loop unbundling (LLU)
Telkom is required, in terms of existing legislation, to provide Neotel with
shared access to its local loop. Although the Telecommunications Act, 103 of
1996, provided that no general local loop unbundling would be required after
the first two years of operation of Neotel, the EC Act, which repeals the
Telecommunications Act, makes provision for unbundling of the local loop,
subject to ICASA making the necessary regulations. The Minister of
Communications published policy decisions that the process of unbundling the
local loop in South Africa should be urgently implemented and completed by
2011. On May 23, 2007, the Local Loop Unbundling Committee set up by the
Minister of Communications to develop appropriate policies for the
unbundling of the local loop in South Africa recommended, amongst other
things:
* three forms of local loop unbundling to be considered, full unbundling of
the metallic loop, line sharing and wholesale bit stream access; and
* the regulatory process, with full industry participation has commenced and
implementation must be completed in 2011.
Defining end-to-end leased lines and other wholesale markets
The market review process undertaken by ICASA is aimed at determining the
scope and boundaries of various fixed-line wholesale and retail markets
(e.g. local access, national long distance, international, etc.). In terms
of the process, ICASA is expected to:
* define the relevant markets:
* assess Telkom`s market power and dominance in each market: and
* propose pro-competition regulations on Telkom.
3. Group performance
GROUP OPERATING REVENUE
Group operating revenue increased by 9.8% to R29,884 million (September 30,
2007: R27,227 million) in the six months ended September 30, 2008. Fixed-
line operating revenue, before inter-segmental eliminations, increased by
2.8% to R16.6 billion primarily due to growth in data revenues, higher
revenue from interconnection and subscriptions and connections, partially
offset by lower traffic revenue. Mobile operating revenue, before inter-
segmental eliminations, increased by 14.0% to R13,008 million primarily due
to customer growth in all countries of operation.
GROUP OPERATING EXPENSES
Group operating expenses increased by 16.9% to R23,454 million (September
30, 2007: R20,067 million) in the six months ended September 30, 2008,
primarily due to a 12.5% increase in operating expenses in the fixed-line
segment to R13,515 million (before inter-segmental eliminations) and a 14.5%
increase in operating expenses in the mobile segment to R9,820 million
(before inter-segmental eliminations). Fixed-line operating expenses
increased primarily due to increased employee expenses, payments to other
operators, selling, general and administrative expenses, depreciation,
amortisation, impairment and write-offs and services rendered, partially
offset by a decrease in operating leases. The increase in mobile operating
expenses was primarily due to increased gross connections resulting in
increased costs to connect customers onto the network as well as increased
payments to other operators, depreciation and amortisation and increased
staff expenses.
INVESTMENT INCOME
Investment income consists of interest received on short-term investments
and bank accounts. Investment income increased by 4.6% to R136 million
(September 30, 2007: R130 million), largely as a result of increased
interest rates.
FINANCE CHARGES
Finance charges include interest paid on local and foreign borrowings,
amortised discounts on bonds and commercial paper bills, fair value gains
and losses on financial instruments and foreign exchange gains and losses on
foreign currency denominated transactions and balances. Finance charges
increased by 6.6% to R1,036 million (September 30, 2007: R972 million) in
the six months ended September 30, 2008, primarily due to a 45.1% increase
in interest expense to R1,258 million (September 30, 2007: R867 million) as
a result of the 10.7% increase in net debt to R19,622 million (September 30,
2007: R17,732 million). In addition to the increase in the interest expense,
net fair value and exchange movements on financial instruments resulted in a
gain of R222 million for the six months ended September 30, 2008 (September
30, 2007: Loss of R105 million). The gain was mainly attributable to the
revaluation of the Multi-Links put option.
TAXATION
Consolidated tax expense decreased by 25.0% to R2,009 million (September 30,
2007: R2,678 million) in the six months ended September 30, 2008. The
consolidated effective tax rate for the six months ended September 30, 2008
was 34.8% (September 30, 2007: 41.1%). Telkom Company`s effective tax rate
was 23.2% (September 30, 2007: 42.7%). The lower effective tax rate for
Telkom Company in the six months ended September 30, 2008 was due to the
Vodacom dividend received in the current period, but not in the six months
ended September 30, 2007.
Vodacom`s effective tax rate increased to 34.6% (September 30, 2007: 30.6%).
The increase is mainly due to the STC charge on the dividend declared in the
six months ended September 30, 2008.
PROFIT FOR THE YEAR AND EARNINGS PER SHARE
Profit attributable to the equity holders of Telkom, decreased by 2.1% to
R3,622 million (September 30, 2007: R3,700 million) in the six months ended
September 30, 2008.
Group basic earnings per share remained flat at 723.9 cents per share
(September 30, 2007: 724.3 cents) and Group headline earnings per share
increased by 0.4% to 745.2 cents per share (September 30, 2007: 742.3
cents).
4. Group balance sheet
The Group`s balance sheet retained its strength and moved towards a more
efficient capital structure. Net debt, after financial assets and
liabilities, increased by 10.7% to R19,622 million (September 30, 2007:
R17,732 million) resulting in a net debt to EBITDA ratio of 2.0 times from
1.7 times at September 30, 2007. On September 30, 2008, the Group had cash
balances of R705 million (September 30, 2007: R778 million).
Interest-bearing debt, including credit facilities utilised, increased by
8.9% to R19,341 million (September 30, 2007: R17,766 million) in the six
months ended September 30, 2008. Telkom Company issued new local bonds, the
TL12 and TL15 with a nominal value of R1,060 million and R1,160 million
respectively as well as money market term borrowings of R3,000 million
during the six months ended September 30, 2008. The Group issued commercial
paper bills with a nominal value of R6,316 million for the six months ended
September 30, 2008 of which commercial paper bills with a nominal value of
R6,684 million were repaid by September 30, 2008.
5. Group cash flow
Cash flows from operating activities increased by 344.1% to R3,033 million
(September 30, 2007: R683 million), primarily due to lower dividend and tax
payments partially offset by higher cash paid to suppliers and employees as
a result of increased expenditure. Cash flows utilised in investing
activities decreased by 25.1% to R5,262 million (September 30, 2007: R7,028
million), primarily due to acquisitions in the six months ended September
30, 2007, partially offset by higher capital expenditure in both the fixed-
line and other segments. Cash flows from financing activities includes loans
raised of R10,105 million, partially offset by loans repaid of R9,127
million. Commercial paper debt with a nominal value of R6,684 million was
repaid during the six months ended September 30, 2008.
SUMMARY
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Cash generated from 21,256 8,313 8,350 0.5
operations
Cash from operating 10,603 683 3,033 344.1
activities (after tax,
interest and dividends)
Investing activities (14,106) (7,028) (5,262) (25.1)
Financing activities 2,943 4,520 1,254 (72.3)
Net decrease in cash (560) (1,825) (975) (46.6)
The decrease in cash is as a result of the decision to continue to repay
outstanding debt with minimal additional debt in order to avoid the current
high interest rates and in the view of the expected cash inflow from the
sale of 15% of our stake in Vodacom.
6. Group capital expenditure
Group capital expenditure which includes spend on intangible assets,
increased by 38.9% to R6,140 million (September 30, 2007: R4,420 million)
and represents 20.5% of Group revenue (September 30, 2007: 16.2%).
GROUP CAPITAL EXPENDITURE
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Fixed-line 6,793 2,647 2,744 3.7
Mobile 3,460 1,648 1,578 (4.2)
Other 1,413 125 1,818 1,354.4
11,666 4,420 6,140 38.9
FIXED-LINE CAPITAL EXPENDITURE
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Baseline 4,039 1,854 1,512 (18.4)
Portfolio 2,718 765 1,232 61.0
Revenue generating 57 6 9 50.0
Network evolution 1,092 204 607 197.5
Sustainment 277 114 39 (65.8)
Effectiveness and 841 352 401 13.9
efficiency
Support 451 89 176 97.8
Regulatory and other 36 28 - -
6,793 2,647 2,744 3.7
Fixed-line capital expenditure which includes spending on intangible assets,
increased by 3.7% to R2,744 million (September 30, 2007: R2,647 million) and
represents 16.6% of fixed-line revenue (September 30, 2007: 16.4%). Baseline
capital expenditure of R1,512 million (September 30, 2007: R1,854 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
commercial and 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 R646 million (September 30, 2007: R318 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, 2008, R401 million (September 30, 2007: R352 million) was
spent on the implementation of several systems.
MOBILE CAPITAL EXPENDITURE
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Property, plant and 2,475 977 1,253 28.2
equipment
Intangible assets 985 671 325 (51.6)
3,460 1,648 1,578 (4.2)
Mobile capital expenditure, which includes spending on intangible assets,
decreased by 4.2% to R1,578 million (September 30, 2007: R1,648 million) and
represents 12.1% of mobile revenue (September 30, 2007 14.4%) and was mainly
spent on the cellular network infrastructure consisting of radio, switching
and transmission network infrastructure and computer software.
OTHER CAPITAL EXPENDITURE
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Other 1,413 125 1,818 1,354.4
Other capital expenditure consists of additions to property, plant and
equipment for our subsidiaries TDS Directory Operations (Proprietary)
Limited, Swiftnet (Proprietary) Limited, Africa Online Limited and Multi-
Links Telecommunications Limited. Other capital expenditure, which includes
spending on intangible assets, increased significantly to R1,818 million
(September 30, 2007: R125 million) and represents 120.7% of other revenue
(September 30, 2007: 13.9%). The significant increase in capital expenditure
in the other segment is primarily due to the expansion of Multi-Links to
build capacity for mobile voice and data products within the Nigerian
market.
7. Segment performance
Telkom`s operating structure comprises three segments, fixed-line, mobile
and other. The fixed-line segment provides fixed-line voice and data
communications services through Telkom. The mobile segment provides mobile
services through our 50% joint venture interest in Vodacom. The other
segment provides fixed, mobile, data, long distance and international
telecommunications services throughout Nigeria, through our 75% owned
subsidiary, Multi-Links, directory services through our 64.9% owned
subsidiary, TDS Directory Operations, internet services in Cote d`Ivoire,
Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe,
through our wholly owned subsidiary, Africa Online Limited and wireless data
services through our wholly owned subsidiary, Swiftnet.
Vodacom`s results are proportionately consolidated into the Telkom Group`s
consolidated financial statements. This means that we include 50% of
Vodacom`s results in each of the line items in the Telkom Group`s
consolidated financial statements.
The financial information provided below is before any inter-segmental
eliminations.
SUMMARY
Year Six months ended
ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Operating revenue 56,271 27,227 29,884 9.8
Fixed-line 32,572 16,108 16,565 2.8
Mobile 24,089 11,407 13,008 14.0
Other 1,979 902 1,506 67.0
Inter-segmental (2,369) (1,190) (1,195) 0.4
eliminations
Operating profit 14,619 7,364 6,676 (9.3)
Fixed-line 8,107 4,286 3,257 (24.0)
Mobile 6,247 2,856 3,220 12.7
Other 367 232 20 (91.4)
Inter-segmental (102) (10) 179 -
eliminations
Operating profit margin 26.0 27.0 22.3 (17.4)
(%)
Fixed-line 24.9 26.6 19.7 (25.9)
Mobile 25.9 25.0 24.8 (0.8)
Other 18.5 25.7 1.3 (94.9)
EBITDA 20,743 10,265 9,982 (2.8)
Fixed-line 11,839 6,154 5,252 (14.7)
Mobile 8,217 3,799 4,329 14.0
Other 504 322 188 (41.6)
Inter-segmental 183 (10) 213 -
eliminations
EBITDA margin (%) 36.9 37.7 33.4 (11.4)
Fixed-line 36.3 38.2 31.7 (17.0)
Mobile 34.1 33.3 33.3 -
Other 25.5 35.7 12.5 (65.0)
FIXED-LINE SEGMENT
The fixed-line segment accounted for 55.5% (September 30, 2007: 59.2%) of
Group operating revenues (before inter-segmental eliminations) and 48.8%
(September 30, 2007: 58.2%) of Group operating profit for the six months
ended September 30, 2008.
The financial information presented below for the fixed-line segment is
before inter-segmental eliminations.
SUMMARY
Year Six months ended
ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Revenue 32,572 16,108 16,565 2.8
Operating profit 8,107 4,286 3,257 (24.0)
EBITDA 11,839 6,154 5,252 (14.7)
Capital expenditure1 6,793 2,647 2,744 3.7
Operating profit margin (%) 24.9 26.6 19.7 (25.9)
EBITDA margin (%) 36.3 38.2 31.7 (17.0)
Capex to revenue (%) 20.9 16.4 16.6 1.2
1. Including spend on intangible assets
FIXED-LINE OPERATING REVENUE
Year Six months ended
ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Subscriptions and 6,330 3,118 3,233 3.7
connections
Traffic 15,950 8,077 7,833 (3.0)
Local 4,076 2,125 1,881 (11.5)
Long distance 2,252 1,219 1,048 (14.0)
Fixed-to-mobile 7,557 3,794 3,803 0.2
International outgoing 986 498 481 (3.4)
Subscription based calling 1,079 441 620 40.6
plans
Interconnection 1,757 833 956 14.8
Mobile operators 838 407 445 9.3
Fixed operators 28 5 36 620.0
International operators 891 421 475 12.8
Data 8,308 3,975 4,459 12.2
Leased lines and other data 6,460 3,076 3,597 16.9
Mobile leased facilities 1,848 899 862 (4.1)
Other 227 105 84 (20.0)
32,572 16,108 16,565 2.8
Operating revenue from the fixed-line segment, before inter-segmental
eliminations, increased by 2.8% to R16,565 million (September 30, 2007:
R16,108 million) primarily due to increased data, interconnection and
subscription and connection revenues, partially offset by a decline in
traffic revenue.
Subscription and connections revenue grew by 3.7% to R3,233 million
(September 30, 2007: R3,118 million) largely as a result of increased rental
tariffs and the increase in the number of ISDN channels.
Traffic revenue decreased by 3.0% 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. Revenue from subscription based calling
plans increased 40.6% to R620 million primarily due to increased volumes as
a result of a 28.1% increase in the number of subscribers to 507,985
(September 30, 2007: 396,589) in the six months ended September 30, 2008.
Interconnection revenue increased by 14.8% to R956 million (September 30,
2007: R833 million) largely as a result of an increase of 12.8% in
international interconnection revenue and a 9.3% increase in domestic mobile
interconnection revenue. The increased interconnection revenue from
international operators is mainly a result of higher exchange rates
partially offset by a 6.3% decrease in international interconnection traffic
minutes to 599 million minutes (September 30, 2007: 639 million minutes).
Mobile interconnection revenue increased by 9.3% to R445 million (September
30, 2007: R407 million) primarily due to increased interconnection traffic
from mobile operators. Mobile interconnection traffic minutes increased by
1.2% to 1,241 million minutes (September 30, 2007: 1,226 million minutes) in
the six months ended September 30, 2008.
Data revenue increased by 12.2% to R4,459 million (September 30, 2007:
R3,975 million) mainly due to higher demand for data services, including
ADSL, an increase in internet access and related services and managed data
network services.
FIXED-LINE OPERATING EXPENSES
Year Six months ended
ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Employee expenses 7,397 3,414 4,079 19.5
Salaries and wages 5,509 2,770 2,867 3.5
Benefits 2,671 1,022 1,557 52.3
Other 3 3 3 -
Employee related expenses (786) (381) (348) (8.7)
capitalised
Payments to other network 6,902 3,362 3,663 9.0
operators
Payment to mobile operators 5,460 2,811 2,967 5.5
Payment to international 1,208 440 566 28.6
operators
Payment to fixed-line 234 111 130 17.1
operators
SG&A 3,899 1,844 2,237 21.3
Materials and maintenance 1,996 1,044 1,062 1.7
Marketing 583 271 260 (4.1)
Bad debts 217 89 118 32.6
Other 1,103 440 797 81.1
Services rendered 2,413 1,186 1,213 2.3
Property management 1,222 608 612 0.7
Consultants and security 1,191 578 601 4.0
Operating leases 619 337 328 (2.7)
Depreciation, amortisation, 3,732 1,868 1,995 6.8
impairment and write-offs
24,962 12,011 13,515 12.5
Fixed-line operating expenses, before inter-segmental eliminations,
increased by 12.5% in the six months ended September 30, 2008, to R13,515
million (September 30, 2007: R12,011 million), primarily due to increased
employee expenses, payments to other network operators, selling, general and
administrative expenses, depreciation, amortisation, impairment and write-
offs and services rendered partially offset by a decrease in operating
leases.
Employee expenses increased by 19.5%, largely due to increased share option
grant expenses as a result of the higher number of shares awarded, increase
in medical aid provision for pensioners and increased salaries and wages as
a result of salary increases. Included in salaries and wages is an 11%
general increase for the bargaining unit employees (September 2007: 6.85%)
based on a new agreement concluded with labour unions.
Payments to other network operators increased by 9.0% as a result of
increased payments to mobile and international operators. Payments to
mobile operators increased by 5.5%, largely due to increased mobile outgoing
traffic during peak hours as a result of discount structures offered in the
corporate segment. Payments to international operators increased by 28.6%
primarily due to the increase of volumes in switched hubbing and the higher
exchange rates.
Selling, general and administrative expenses increased by 21.3% primarily as
a result of the R213 million impairment of the Telkom Media loan and the R34
million impairment of the Africa Online investment.
Services rendered increased by 2.3% mainly as a result of increased security
costs to secure the copper network and increased transport cost due to
higher fuel prices.
Operating leases decreased by 2.7% primarily due to a 10.9% reduction in the
vehicle fleet from 9,327 vehicles at September 30, 2007 to 8,313 vehicles at
September 30, 2008.
The 6.8% increase in the depreciation, amortisation, impairment and write-
offs to R1,995 million (September 30, 2007: R1,868 million) was mainly as a
result of higher capital expenditure and less significant extension of
useful lives of assets in the current period.
Fixed-line operating profit decreased by 24.0% to R3,257 million (September
30, 2007: R4,286 million) with an operating profit margin of 19.7%
(September 30, 2007: 26.6%).
EBITDA decreased by 14.7% to R5,252 million (September 30, 2007: R6,154
million), with the EBITDA margin decreasing to 31.7%. (September 30, 2007:
38.2%).
MOBILE SEGMENT
The mobile segment accounted for 43.5% of Group operating revenue (September
30, 2007: 41.9%) (before inter-segmental eliminations) and 48.2% of Group
operating profits (September 30, 2007: 38.8%). Vodacom`s operational
statistics are presented below at 100%, but all financial figures represent
the 50% that is proportionately consolidated in the Group and presented
before inter-segmental eliminations.
SUMMARY
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Operating revenue 24,089 11,407 13,008 14.0
Operating profit 6,247 2,856 3,220 12.7
EBITDA 8,217 3,799 4,329 14.0
Capital expenditure1 3,460 1,648 1,578 (4.2)
Operating profit 25.9 25.0 24.8 (0.8)
margin (%)
EBITDA margin (%) 34.1 33.3 33.3 -
Capex to revenue (%) 14.4 14.4 12.1 (16.0)
1.'Including spend on intangible assets
MOBILE OPERATING REVENUE
Year Six months ended
ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Airtime and access 13,548 6,474 7,304 12.8
Data 2,501 1,048 1,502 43.3
Interconnect 4,443 2,152 2,372 10.2
Equipment sales 2,526 1,196 1,245 4.1
International airtime 918 476 487 2.3
Other 153 61 98 60.7
24,089 11,407 13,008 14.0
Operating revenue from the mobile segment increased by 14.0%, before inter-
segmental eliminations, to R13,008 million (September 30, 2007: R11,407
million), primarily driven by customer growth in all operations and higher
data penetration levels. Revenue from Vodacom`s operations outside of South
Africa increased by 31.2% to R1,650 million (September 30, 2007: R1,258
million) for the six months ended September 30, 2008.
The growth in revenue can largely be attributed to a 13.1% increase in
Vodacom`s total customers to 35.7 million as of September 30, 2008,
(September 30, 2007: 31.6 million), resulting from strong growth in prepaid
and contract customers in South Africa and 26.3% growth in customers outside
of South Africa. In South Africa, total ARPUs increased by 8.2% to R132
(September 30, 2007: R122) for the six months ended September 30, 2008.
Contract ARPUs decreased 1.2% to R481 (September 30, 2007: R487) and prepaid
ARPUs increased by 11.9% to R66 (September 30, 2007: R59) for the six months
ended September 30, 2008.
Data revenue increased by 43.3% and represents 11.5% of mobile revenue
during the six months ended September 30, 2008 (September 30, 2007: 9.2%).
The growth was largely due to higher penetration levels and more affordable
product offerings. Vodacom South Africa transmitted 2.4 billion SMS messages
(September 30, 2007: 2.2 billion), over its network during the six months
ended September 30, 2008.
Mobile interconnect revenue increased by 10.2% to R2,372 million for the six
months ended September 30, 2008 (September 30, 2007: R2,152 million) ,
primarily as a result of the increased number of Vodacom customers and the
related increase in incoming traffic.
Equipment sales increased by 4.1% to R1,245 million for the six months ended
September 30, 2008 (September 30, 2007: R1,196 million) primarily due to the
growth of the customer base. South African handset sales volumes increased
by 2.0% to 2.4 million units (September 30, 2007: 2.3 million units) during
the six months ended September 30, 2008.
Vodacom`s international airtime revenue consists largely of international
calls by Vodacom`s customers, roaming revenue from Vodacom customers making
and receiving calls while abroad and revenue from international customers
roaming on Vodacom`s network. International airtime revenue increased 2.3%
to R487 million for the six months ended September 30, 2008 (September 30,
2007: R476 million).
MOBILE OPERATING EXPENSES
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Employee expenses 1,488 732 853 16.5
Payments to other operators 3,279 1,577 1,839 16.6
SG&A 10,271 4,972 5,559 11.8
Services rendered 115 54 81 50.0
Operating leases 775 295 379 28.5
Depreciation, amortisation, 1,970 943 1,109 17.6
impairment and write-offs
17,898 8,573 9,820 14.5
Mobile operating expenses, before inter-segmental eliminations, increased by
14.5% to R9,820 million for the six months ended September 30, 2008
(September 30, 2007: R8,573 million), primarily due to increased selling and
distribution costs, payments to other operators, depreciation, amortisation,
impairment and write-offs, employee expenses, operating leases and services
rendered.
Mobile employee expenses increased by 16.5% to R853 million for the six
months ended September 30, 2008 (September 30, 2007: R732 million),
primarily due to a 5.6% increase in the total number of employees to 6,588
mainly as a result of the strengthening of management structures to support
the growth in ongoing operations. Annual salary increases and increased
provisions for long-term incentive schemes also contributed to the increased
employee expenses. Employee productivity has improved in all of Vodacom`s
operations, as measured by customers per employee, increased by 7.1% to
5,417 customers per employee.
Mobile payments to other operators increased by 16.6% to R1,839 million
(September 30, 2007: R1,577 million) in the six months ended September 30,
2008, primarily as a result of increased outgoing traffic terminating on the
other mobile networks relative to traffic terminating on the fixed-line
network.
Mobile selling, general and administrative expenses increased by 11.8% to
R5,559 million for the six months ended September 30, 2008 (September 30,
2007: R4,972 million), primarily due to an increase in selling, distribution
and marketing expenses mainly driven by new technologies and enhancing brand
presence in all operations to support the growth in South African and other
African operations.
Mobile depreciation, amortisation, impairment and write-offs increased by
17.6% to R1,109 million for the six months ended September 30, 2008
(September 30, 2007: R943 million), primarily as a result of increased
capital expenditure upgrading and expanding Vodacom`s networks.
Telkom`s 50% share of Vodacom`s profit from operations increased by 12.7% to
R3,220 million for the six months ended September 30, 2008 (September 30,
2007: R2,856 million) and the mobile operating profit margin decreased to
24.8% (September 30, 2007: 25.0%). Mobile EBITDA increased by 14.0% to
R4,329 million for the six months ended September 30, 2008 (September 30,
2007: R3,799 million) with the EBITDA margin remaining at 33.3%.
OTHER SEGMENT
The other segment accounted for 5.0% of Group operating revenue (September
30, 2007: 3.3%) (before inter-segmental eliminations) and 0.3% of Group
operating profits (September 30, 2007: 3.1%).
SUMMARY
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Operating revenue 1,979 902 1,506 67.0
Operating profit 367 232 20 (91.4)
EBITDA 504 322 188 (41.6)
Capital expenditure 1 1,413 125 1,818 1,354.4
Operating profit margin 18.5 25.7 1.3 (94.9)
(%)
EBITDA margin (%) 25.5 35.7 12.5 (65.0)
Capex to revenue (%) 71.4 13.9 120.7 768.3
1.'Including spend on intangible assets
The following table shows the contributions to other operating expenses by
each of the four subsidiaries contained in our other segment and the
percentage change for the period indicated.
OTHER OPERATING REVENUE
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Multi-Links 845 310 813 162.3
TDS Directory Operations 930 498 581 16.7
Africa Online 110 46 63 37.0
Swiftnet 94 48 49 2.1
1,979 902 1,506 67.0
Other operating revenue before inter segmental eliminations increased by
67.0% in the six months ended September 30, 2008 to R1,506 million
(September 30, 2007: R902 million) primarily driven by the increase in
revenue generated by Multi-Links as a result of the increase in number of
subscribers.
OTHER OPERATING EXPENSES
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Employee expenses 251 124 156 25.8
Payments to other 698 137 347 153.3
operators
SG&A 505 320 798 149.4
Services rendered 26 9 17 88.9
Operating leases 62 16 35 118.8
Depreciation, 137 90 168 86.7
amortisation, impairment
and write-offs
1,679 696 1,521 118.5
Other operating expenses, before inter-segmental eliminations, increased by
118.5% to R1,521 million (September 30, 2007: R696 million) in the six
months ended September 20, 2008 primarily due to the increase in operating
expenses of Multi-Links.
The following table shows the contributions to other operating expenses by
each of the four subsidiaries contained in our other segment and the
percentage change for the period indicated.
Year ended Six months ended
March 31, September 30,
In ZAR millions 2008 2007 2008 %
Multi-Links 942 319 1,081 238.9
TDS Directory Operations 530 282 321 13.8
Africa Online 118 53 71 34.0
Swiftnet 89 42 48 14.3
1,679 696 1,521 118.5
8. Employees
FIXED-LINE
Year ended Six months ended
March 31, September 30,
2008 2007 2008 %
Telkom Company 24,879 25,570 24,075 (5.9)
Lines per employee 182 181 187 3.3
MOBILE EMPLOYEES
Year ended Six months ended
March 31, September 30,
2008 2007 2008 %
South Africa1,2 4,849 4,716 4,979 5.6
Customers per 5,119 4,940 5,070 2.6
employee1,2
Other African 1,992 1,524 1,609 5.6
countries2
Customers per 4,605 5,425 6,491 19.6
employee2
Vodacom Group1,2 6,841 6,240 6,588 5.6
Customers per 4,969 5,058 5,417 7.1
employee1,2
1. Includes Holding Company and Mauritius employees.
2. Includes Agency temporary employees.
OTHER
Year ended Six months ended
March 31, September 30,
2008 2007 2008 %
Swiftnet 85 71 86 21.1
TDS Directory Operations 610 622 524 (15.8)
Africa Online 379 351 357 1.7
Multi-Links 680 673 1,006 49.5
9. Condensed consolidated interim statements
REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO
THE SHAREHOLDERS OF TELKOM SA LIMITED
Introduction
We have reviewed the accompanying interim condensed consolidated balance
sheet of Telkom SA Limited as at September 30, 2008 and the related interim
condensed consolidated statements of income, changes in equity and cash
flows for the six-month period then ended, and a summary of significant
accounting policies and other explanatory notes.
Management is responsible for the preparation and fair presentation of these
interim condensed consolidated financial statements in accordance with
International Financial Reporting Standard IAS 34 Interim Financial
Reporting (`IAS 34`). Our responsibility is to express a conclusion on these
interim condensed consolidated financial statements based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements 2410, `Review of Interim Financial Information Performed by the
Independent Auditor of the Entity`. A review of interim financial
information consists of making inquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing and
consequently does not enable us to obtain assurance that we would become
aware of all significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying interim condensed consolidated financial
statements do not present fairly, in all material respects, the financial
position of the entity as at September 30, 2008, and of its financial
performance and its cash flows for the six- month period then ended in
accordance with IAS 34.
Ernst & Young Inc.
Registered Auditor
November 14, 2008
Pretoria
Condensed consolidated interim income statement
for the six months ended September 30, 2008
Audited* Reviewed* Reviewed
March 31, September September
30, 30,
2008 2007 2008
Notes Rm Rm Rm
Total revenue 3.1 56,851 27,538 30,261
Operating revenue 3.2 56,271 27,227 29,884
Other income 534 204 246
Operating expenses 42,186 20,067 23,454
Employee expenses 4.1 9,131 4,295 5,087
Payments to other operators 4.2 9,169 4,220 4,972
Selling, general and 4.3 14,382 6,908 8,302
administrative expenses
Service fees 4.4 2,552 1,252 1,310
Operating leases 4.5 828 491 477
Depreciation, amortisation, 4.6 6,124 2,901 3,306
impairment and write-offs
Operating profit 14,619 7,364 6,676
Investment income 197 130 136
Finance charges and fair value 1,797 972 1,036
movement
Interest 1,879 867 1,258
Foreign exchange and fair value (82) 105 (222)
movement
Profit before taxation 13,019 6,522 5,776
Taxation 5 4,705 2,678 2,009
Loss for the period from 14 142 51 82
disposal group held for sale
Profit for the year/period 8,172 3,793 3,685
Attributable to:
Equity holders of Telkom 7,975 3,700 3,622
Minority interest 197 93 63
8,172 3,793 3,685
Basic earnings per share 7 1,565.0 724.3 723.9
(cents)
Diluted earnings per share 7 1,546.9 719.5 716.1
(cents)
Dividend per share (cents) 7 1,100.0 1,100.0 660.0
*The amounts have been adjusted to disclose the effect of Disposal group
held for sale as disclosed in note 14.
Condensed consolidated interim balance sheet
at September 30, 2008
Audited* Reviewed* Reviewed
March 31, September September
30, 30,
2008 2007 2008
Notes Rm Rm Rm
ASSETS
Non-current assets 57,744 52,231 60,225
Property, plant and equipment 9 46,815 42,743 49,024
Intangible assets 10 8,451 7,391 8,456
Investments 1,448 1,425 1,590
Deferred expenses 221 248 197
Finance lease receivables 206 172 270
Deferred taxation 11 603 252 688
Current assets 12,586 11,310 12,449
Short-term investments 51 79 56
Inventories 12 1,287 1,541 1,755
Income tax receivable 9 18 100
Current portion of deferred 362 324 368
expenses
Current portion of finance lease 166 121 179
receivables
Trade and other receivables 8,969 8,235 9,164
Other financial assets 614 214 122
Cash and cash equivalents 13 1,128 778 705
Disposal group held for sale - 14 42 54 53
assets
Total assets 70,372 63,595 72,727
EQUITY AND LIABILITIES
Equity attributable to equity 32,815 29,106 33,635
holders of Telkom
Share capital and premium 15 5,208 5,329 5,208
Treasury shares 16 (1,638) (1,638) (1,522)
Share-based compensation reserve 17 643 147 938
Non-distributable reserves 1,292 712 1,341
Retained earnings 27,310 24,556 27,670
Minority interest 522 469 578
Total equity 33,337 29,575 34,213
Non-current liabilities 15,081 9,838 15,739
Interest-bearing debt 18 9,395 4,501 10,692
Other financial liabilities 919 707 -
Provisions 1,660 1,551 1,846
Deferred revenue 1,128 1,053 1,141
Deferred taxation 11 1,979 2,026 2,060
Current liabilities 21,873 24,167 22,715
Trade and other payables 8,740 6,720 8,117
Shareholders for dividend 6 20 21 24
Current portion of interest- 18 6,330 10,962 6,767
bearing debt
Current portion of provisions 2,154 1,586 1,762
Current portion of deferred 2,593 2,202 2,580
revenue
Income tax payable 323 122 475
Other financial liabilities 371 251 1,108
Credit facilities utilised 13 1,342 2,303 1,882
Disposal group held for sale - 14 81 15 60
liabilities
Total liabilities 37,035 34,020 38,514
Total equity and liabilities 70,372 63,595 72,727
*The amounts have been adjusted to disclose the effect of Disposal group
held for sale as disclosed in note 14.
Condensed consolidated interim statement of changes in equity
for the six months ended September 30, 2008
Attributable to equity
holders of Telkom
Share Treasury
capital shares
Rm Rm
Balance at April 1, 2007 5,329 (1,774)
Total recognised income and expense
Profit for the period
Foreign currency translation reserve (net of
tax of R2 million)
Dividend declared (refer to note 6)
Transfer to non-distributable reserves
Increase in Share-based compensation reserve
(refer to note 17)
Shares vested and re-issued (refer to notes 136
16 and 17)
Acquisition of subsidiaries and minorities
Minority put option (refer to note 19)
Balance at September 30, 2007 5,329 (1,638)
Balance at April 1, 2007 5,329 (1,774)
Total recognised income and expense
Profit for the year
Revaluation of available-for-sale (net of
tax of R1 million)
Foreign currency translation reserve (net of
tax of R6 million)
Dividend declared (refer to note 6)
Transfer to non-distributable reserves
Increase in Share-based compensation reserve
(refer to note 17)
Shares vested and re-issued (refer to notes 136
16 and 17)
Acquisition of subsidiaries and minorities
Shares bought back and cancelled (121)
Minority put option (refer to note 19)
Balance at March 31, 2008 5,208 (1,638)
Total recognised income and expense
Profit for the period
Foreign currency translation reserve (net of tax
of R2 million)
Dividend declared (refer to note 6)
Transfer from non-distributable reserves
Reversal of at acquisition contingent liability
Increase in Share-based compensation reserve
(refer to note 17)
Shares vested and re-issued (refer to notes 16 116
and 17)
Balance at September 30, 2008 5,208 (1,522)
Attributable to equity holders of Telkom
Share-based Non-
compensation distributable Retained
reserve reserves earnings Total
Rm Rm Rm Rm
Balance at April 257 1,413 26,499 31,724
1, 2007
Total recognised (56) 3,700 3,644
income and expense
Profit for the 3,700 3,700
period
Foreign currency (56) (56)
translation
reserve (net of
tax of R2 million)
Dividend declared (5,627) (5,627)
(refer to note 6)
Transfer to non- 16 (16) -
distributable
reserves
Increase in Share- 26 26
based compensation
reserve (refer to
note 17)
Shares vested and re- (136) -
issued (refer to
notes 16 and 17)
Acquisition of -
subsidiaries and
minorities
Minority put option (661) (661)
(refer to note 19)
Balance at September 147 712 24,556 29,106
30, 2007
Balance at April 1, 257 1,413 26,499 31,724
2007
Total recognised 529 7,975 8,504
income and expense
Profit for the year 7,975 7,975
Revaluation of 8 8
available-for-sale
(net of tax of R1
million)
Foreign currency 521 521
translation reserve
(net of tax of R6
million)
Dividend declared (5,627) (5,627)
(refer to note 6)
Transfer to non- 11 (11) -
distributable
reserves
Increase in Share- 522 522
based compensation
reserve (refer to
note 17)
Shares vested and re- (136) -
issued (refer to
notes 16 and 17)
Acquisition of -
subsidiaries and
minorities
Shares bought back (1,526) (1,647)
and cancelled
Minority put option (661) (661)
(refer to note 19)
Balance at March 31, 643 1,292 27,310 32,815
2008
Total recognised 63 3,622 3,685
income and expense
Profit for the 3,622 3,622
period
Foreign currency 63 63
translation reserve
(net of tax of R2
million)
Dividend declared (3,306) (3,306)
(refer to note 6)
Transfer from non- (14) 14 -
distributable
reserves
Reversal of at 30 30
acquisition
contingent liability
Increase in Share- 411 411
based compensation
reserve (refer to
note 17)
Shares vested and re- (116) -
issued (refer to
notes 16 and 17)
Balance at September 938 1,341 27,670 33,635
30, 2008
Minority Total
interest equity
Rm Rm
Balance at April 1, 2007 284 32,008
Total recognised income and expense 87 3,731
Profit for the period 93 3,793
Foreign currency translation reserve (net of (6) (62)
tax of R2 million)
Dividend declared (refer to note 6) - (5,627)
Transfer to non-distributable reserves -
Increase in Share-based compensation reserve 26
(refer to note 17)
Shares vested and re-issued (refer to notes 16 -
and 17)
Acquisition of subsidiaries and minorities 98 98
Minority put option (refer to note 19) (661)
Balance at September 30, 2007 469 29,575
Balance at April 1, 2007 284 32,008
Total recognised income and expense 226 8,730
Profit for the year 197 8,172
Revaluation of available-for-sale (net of tax 8
of R1 million)
Foreign currency translation reserve (net of 29 550
tax of R6 million)
Dividend declared (refer to note 6) (65) (5,692)
Transfer to non-distributable reserves -
Increase in Share-based compensation reserve 522
(refer to note 17)
Shares vested and re-issued (refer to notes 16 -
and 17)
Acquisition of subsidiaries and minorities 77 77
Shares bought back and cancelled (1,647)
Minority put option (refer to note 19) (661)
Balance at March 31, 2008 522 33,337
Total recognised income and expense 82 3,767
Profit for the period 63 3,685
Foreign currency translation reserve (net of 19 82
tax of R2 million)
Dividend declared (refer to note 6) (26) (3,332)
Transfer from non-distributable reserves -
Reversal of at acquisition contingent 30
liability
Increase in Share-based compensation reserve 411
(refer to note 17)
Shares vested and re-issued (refer to notes 16 -
and 17)
Balance at September 30, 2008 578 34,213
Condensed consolidated interim cash flow statement
for the six months ended September 30, 2008
Audited Reviewed Reviewed
March 31, September 30, September
30,
2008 2007 2008
Notes Rm Rm Rm
Cash flows from operating 10,603 683 3,033
activities
Cash receipts from customers 55,627 27,048 29,710
Cash paid to suppliers and (34,371) (18,735) (21,360)
employees
Cash generated from 21,256 8,313 8,350
operations
Interest received 433 251 299
Finance charges paid (1,077) (128) (337)
Taxation paid (4,277) (2,041) (1,951)
Cash generated from 16,335 6,395 6,361
operations before dividend
paid
Dividend paid 6 (5,732) (5,712) (3,328)
Cash flows from investing (14,106) (7,028) (5,262)
activities
Proceeds on disposal of 169 33 23
property, plant and
equipment and intangible
assets
Proceeds on disposal of 8 8 -
investment
Additions to property, plant (11,657) (4,533) (5,131)
and equipment and intangible
assets
Acquisition of subsidiaries (2,462) (2,480) -
and minorities
Additions to other (164) (56) (154)
investments
Cash flows from financing 2,943 4,520 1,254
activities
Loans raised 23,877 13,194 10,105
Loans repaid (19,315) (8,694) (9,127)
Shares bought back and (1,647) - -
cancelled
Finance lease capital repaid (61) (26) (14)
Decrease in net financial 89 46 290
assets
Net decrease in cash and (560) (1,825) (975)
cash equivalents
Net cash and cash 308 308 (208)
equivalents at beginning of
year
Effect of foreign exchange 44 (8) 6
rate differences
Net cash and cash 13 (208) (1,525) (1,177)
equivalents at end of
year/period
Notes to the condensed consolidated interim financial statements
for the six months ended September 30, 2008
1. CORPORATE INFORMATION
Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the
Republic of South Africa (`South Africa`) whose shares are publicly traded.
The main objective of Telkom, its subsidiaries and joint ventures (`the
Group`) is to supply telecommunication, broadcasting, multimedia,
technology, information and other related information technology services to
the general public, as well as mobile communication services through the
Vodacom Group (Proprietary) Limited (`Vodacom`) in South Africa and certain
other African countries. The Group`s services and products include:
* fixed-line subscription and connection services to postpaid, prepaid and
private payphone customers using PSTN lines, including ISDN lines, and the
sale of subscription based value-added voice services and customer premises
equipment rental and sales;
* fixed-line traffic services to postpaid, prepaid and payphone customers,
including local, long distance, fixed-to-mobile, international outgoing and
international voice-over-internet protocol traffic services;
* interconnection services, including terminating and transiting traffic
from South African mobile operators, as well as from international operators
and transiting traffic from mobile to international destinations;
* fixed-line data services, including domestic and international data
transmission services, such as point-to-point leased lines, ADSL services,
packet-based services, managed data networking services and internet access
and related information technology services;
* e-commerce, including internet access service provider, application
service provider, hosting, data storage, e-mail and security services;
* directory services, through our TDS Directory Operations Group, wireless
data services, through our Swiftnet (Proprietary) Limited subsidiary,
internet services outside South Africa, through our Africa Online Limited
subsidiary and information, communication and telecommunication operating
services in Nigeria, through Multi-Links Telecommunications Limited
subsidiary; and
* mobile communications services, including voice services, data services,
value-added services and handset sales through Vodacom.
The condensed consolidated interim financial statements of the Group for the
six months ended September 30, 2008 were authorised for issue in accordance
with a resolution of the directors on November 14, 2008.
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 grant date fair value. The
results of the interim period are not necessarily indicative of the results
for the entire year, and these reviewed financial statements should be read
in conjunction with the audited financial statements for the year ended
March 31, 2008.
The preparation of condensed consolidated interim financial statements
requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Although these
estimates are based on management`s best knowledge of current events and
actions that the Group may undertake in the future, actual results may
differ from those estimates.
Significant accounting policies
The Group`s significant accounting policies and methods of computation are
consistent with those applied in the previous financial year except for the
following:
* the Group has adopted IFRIC12 service concession arrangements
* the Group has adopted IFRIC14 the limit on a defined benefit asset,
minimum funding requirements and their interaction.
IFRIC12 Service Concession Arrangements
The interpretation is effective for annual periods beginning on or after
January 1, 2008. The interpretation defines service concession arrangements
as arrangements whereby a government or other body grants contracts for the
supply of public services such as roads, energy distributions, prisons or
hospitals to private operators. The interpretation draws a distinction
between two types of service concession arrangements (1) where the operator
receives a financial asset, specifically an unconditional right to receive
cash or another financial asset from the government in return for
constructing or upgrading the public sector asset, and (2) where the
operator receives an intangible asset; a right to charge for the use of the
public sector asset that it constructs or upgrades.
The operator measures both the financial asset and the intangible asset at
fair value. The operator of a service concession arrangement measures
revenue in accordance with IAS11 and IAS18 for the service it performs.
The adoption of the interpretation does not have an impact on the Group`s
financial statements.
IFRIC14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements
and their Interaction
The interpretation is effective for annual periods beginning on or after
January 1, 2008 and addresses the interaction between a minimum funding
requirement and the limit placed by paragraph 58 of IAS19 on the measurement
of the defined benefit asset. When determining the limit on a defined
benefit asset in accordance with IAS19.58, the interpretation requires an
entity to measure any economic benefits available to them in the form of
refunds or reductions in future contributions at the maximum amount that is
consistent with the terms and conditions of the plan and any statutory
requirements in the jurisdiction of the plan. The interpretation states that
the employer only needs to have an unconditional right to use the surplus at
some point during the life of the plan or on its wind up in order for a
surplus to be recognised. The Telkom Pension fund meets the interpretation
criteria for recognition of the asset, since it has an unconditional right
to use the surplus.
The adoption of the interpretation does not have an impact on the Group`s
financial statements since the Group has always recognised an asset.
March 31, September 30, September
30,
2008 2007 2008
Rm Rm Rm
3. REVENUE**
3.1 Total revenue 56,851 27,538 30,261
Operating revenue 56,271 27,227 29,884
Other income (excluding profit on 383 181 241
disposal of property, plant and
equipment and investments)
Investment income 197 130 136
3.2 Operating revenue 56,271 27,227 29,884
Fixed-line 32,572 16,108 16,565
Mobile 24,089 11,407 13,008
Other 1,993 902 1,517
Disposal group held for sale (14) - (11)
Eliminations (2,369) (1,190) (1,195)
Fixed-line 32,572 16,108 16,565
Subscriptions, connections and other 6,330 3,118 3,233
usage
Traffic 15,950 8,077 7,833
Domestic (local and long distance) 6,328 3,344 2,929
Fixed-to-mobile 7,557 3,794 3,803
International (outgoing) 986 498 481
Subscription based calling plans* 1,079 441 620
Interconnection 1,757 833 956
Data 8,308 3,975 4,459
Sundry revenue 227 105 84
*At March 31, 2008 the Group reclassified calling plans from domestic
traffic into a separate revenue line item, to disclose revenue earned from
subscription based calling plans. The September 30, 2007 amounts for fixed-
line have been reclassified accordingly.
**Refer to note 14 for Disposal group held for sale.
4. OPERATING EXPENSES**
Operating expenses comprise:
4.1 Employee expenses 9,131 4,295 5,087
Salaries and wages 7,115 3,577 3,752
Medical aid contributions 416 203 212
Retirement contributions 593 297 354
Post-retirement benefits 310 154 262
Share-based compensation expense 522 26 411
(refer to note 17)
Other benefits 976 420 445
Employee expenses capitalised (801) (382) (349)
Other benefits
Other benefits include skills
development, annual leave,
performance incentive and service
bonuses.
4.2 Payments to other operators 9,169 4,220 4,972
Payments to other network operators
consist of expenses in respect of
interconnection with other network
operators.
4.3 Selling, general and 14,382 6,908 8,302
administrative expenses
Selling and administrative expenses 10,327 4,862 6,069
Maintenance 2,508 1,300 1,349
Marketing 1,247 638 729
Bad debts 300 108 155
4.4 Service fees 2,552 1,252 1,310
Facilities and property management 1,228 610 617
Consultancy services 273 117 124
Security and other 982 506 552
Auditors` remuneration 69 19 17
4.5 Operating leases 828 491 477
Land and buildings 162 166 109
Transmission and data lines 187 63 123
Equipment 48 28 19
Vehicles 431 234 226
4.6 Depreciation, amortisation, 6,124 2,901 3,306
impairment and write-offs
Depreciation of property, plant and 4,853 2,377 2,747
equipment
Amortisation of intangible assets 742 368 427
Impairment of property, plant and 244 89 45
equipment and intangible assets
Reversal of impairment of property, - (9) -
plant and equipment
Write-offs of property, plant and 285 76 87
equipment and intangible assets
Due to the competitive and economic environment in which VM, S.A.R.L
operates in Mozambique and the delays in fully implementing the expansion
strategy in Africa Online Limited, the Group assessed the assets for
impairment in accordance with the requirements of IAS 36: Impairment of
Assets. The recoverable amount of VM was based on the fair value less cost
of disposal and the recoverable amount of Africa Online was based on value
in use. The amount with which the carrying amount exceeded the recoverable
amount is recognised as an impairment loss. The prior year reversal of the
impairment loss related to an increase in the fair value of infrastructure
assets due to exchange rate fluctuations.
**Refer to note 14 for Disposal group held for sale.
5. TAXATION** 4,705 2,678 2,009
South African normal company 3,757 1,681 1,577
taxation
Deferred taxation 219 617 (13)
Secondary Taxation on Companies 678 363 313
(`STC`)
Foreign taxation 51 17 132
The decrease in deferred taxation and STC was mainly due to the lower
dividend declared which resulted in a lower STC charge.
**Refer to note 14 for Disposal group held for sale.
6. DIVIDEND PAID (5,732) (5,712) (3,328)
Dividends payable at (15) (15) (20)
beginning of year
Declared during the
year/period:
Dividends on ordinary (5,627) (5,627) (3,306)
shares
Final dividend for 2007: (3,069) (3,069) -
600 cents
Special dividend for (2,558) (2,558) -
2007: 500 cents
Final dividend for 2008: - - (3,306)
660 cents
Dividends paid to (110) (91) (26)
minority shareholders
Dividends payable at end 20 21 24
of year/period
7. EARNINGS AND DIVIDEND
PER SHARE
Basic earnings per share 1,565.0 724.3 723.9
(cents)
The calculation of
earnings per share is
based on profit
attributable to equity
holders of Telkom for
the period of R3,622
million (September 30,
2007: R3,700 million;
March 31, 2008: R7,975
million) and 500,375,818
(September 30, 2007:
510,865,276; March 31,
2008: 509,595,092)
weighted average number
of ordinary shares in
issue.
Diluted earnings 1,546.9 719.5 716.1
pershare (cents)
The calculation of
diluted earnings per
share is based on
earnings for the year of
R3,622 million
(September 30, 2007:
R3,700 million; March
31, 2008: R7,975
million) and 505,773,827
diluted weighted average
number of ordinary
shares (September 30,
2007: 514,222,319; March
31, 2008: 515,541,966).
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 1,634.8 742.3 745.2
share (cents)*
The calculation of
headline earnings per
share is based on
headline earnings of
R3,729 million
(September 30, 2007:
R3,792 million; March
31, 2008: R8,331
million) and 500,375,818
(September 30, 2007:
510,865,276; March 31,
2008: 509,595,092)
weighted average number
of ordinary shares in
issue.
Diluted headline 1,616.0 737.4 737.3
earnings per share
(cents)*
The calculation of
diluted headline
earnings per share is
based on headline
earnings of R3,729
million (September 30,
2007: R3,792 million;
March 31, 2008: R8,331
million) and 505,773,827
(September 30, 2007:
514,222,319; March 31,
2008: 515,541,966)
diluted weighted average
number of ordinary
shares in issue. The
adjustment in the
weighted average number
of shares is as a result
of the expected future
vesting of shares
already allocated to
employees under the
Telkom Conditional Share
Plan.
Reconciliation of
weighted average number
of ordinary shares:
Ordinary shares in issue 532,855,530 532,855,530 520,784,186
(refer to note 15)
Weighted average number (1,594,241) - -
of shares bought back
Weighted average number (21,666,197) (21,990,254) (20,408,368)
of treasury shares
Weighted average number 509,595,092 510,865,276 500,375,818
of shares outstanding
Reconciliation between
earnings and headline
earnings:
Earnings as reported 7,975 3,700 3,622
Adjustments:
Profit on disposal of (4) (4) -
investment
Profit on disposal of (147) (19) (7)
property, plant and
equipment and intangible
assets
Impairment of property, 244 89 45
plant and equipment and
intangible assets
Reversal of impairment - (9) -
of property, plant and
equipment
Write-offs of property, 285 76 87
plant and equipment
Tax effects (26) (41) (18)
Minority interest 4 - -
Headline earnings 8,331 3,792 3,729
Reconciliation of
diluted weighted average
number of ordinary
shares:
Weighted average number 509,595,090 510,865,276 500,375,818
of shares outstanding
Expected future vesting 5,946,876 3,357,043 5,398,009
of shares
Diluted weighted average 515,541,966 514,222,319 505,773,827
number of shares
outstanding
Dividend per share 1,100.0 1,100.0 660.0
(cents)
The calculation of
dividend per share is
based on dividends of
R3,306 million
(September 30, 2007:
R5,627 million; March
31, 2008: R5,627
million) and 500,941,029
(September 30, 2007:
511,513,237; March 31,
2008: 511,513,237)
number of ordinary
shares outstanding on
the date of dividend
declaration. The
reduction in the number
of shares represents the
number of treasury
shares held on date of
payment.
*The disclosure of
headline earnings is a
requirement of the JSE
Limited and is not a
recognised measure under
IFRS. It has been
calculated in accordance
with the South African
Institute of Chartered
Accountants` circular
issued in this regard.
8. NET ASSET VALUE PER 6,570.3 5,690.2 6,721.9
SHARE (CENTS)
The calculation of net
asset value per share is
based on net assets of
R33,635 million
(September 30, 2007:
R29,106 million; March
31, 2008: R32,815
million) and 500,375,818
(September 30, 2007:
511,513,237; March 31,
2008: 499,441,985)
number of ordinary
shares outstanding.
9. PROPERTY, PLANT AND EQUIPMENT
Additions 10,108 3,580 5,585
Disposals (122) (19) (57)
A major portion of this capital
expenditure relates to the
expansion of existing networks and
services across the Telkom Group.
An extensive build program with
focus on Next Generation Network
technologies at Telkom has
resulted in an increase in
property, plant and equipment
additions which is expected to
continue over the next few years.
Included in additions for Telkom
is an amount of R178 million
(September 30, 2007: R26 million;
March 31, 2008: R31 million) that
refers to finance leases and site
restoration costs.
10. INTANGIBLE ASSETS
Additions 3,720 2,820 587
Included in additions for
September 30, 2007 and March 31,
2008 are intangibles relating to
business combinations.
There were no disposals of
intangible assets during the six
months ended September 30, 2008
and 2007 and the year ended March
31, 2008.
11. DEFERRED TAXATION (1,376) (1,774) (1,372)
Deferred tax assets 603 252 688
Deferred tax liabilities (1,979) (2,026) (2,060)
Unutilised Secondary Taxation on
Companies
(`STC`) credits 1,830 265 1,603
The deferred tax asset represents
STC credits on past dividends
received that are available to be
utilised against dividends
declared. The tax asset will be
utilised when dividends are
declared.
12. INVENTORIES 1,287 1,541 1,755
Gross inventories 1,535 1,732 2,007
Write-down of inventories to net (248) (191) (252)
realisable value
The increase of inventory levels since March 2008 was mainly due to the roll-
out of the Next Generation Network, a higher demand on Telkom internet
products and an increase in cable stock.
The increase in merchandise in the current period is due to the accelerated
acquisition of merchandise to limit the Group`s exposure to foreign currency
fluctuations.
13. NET CASH AND CASH (208) (1,525) (1,177)
EQUIVALENTS
Cash shown as current assets 1,134 778 705
Cash and bank balances 664 778 684
Short-term deposits 470 - 21
Credit facilities utilised (1,342) (2,303) (1,882)
Disposal group held for sale -
Telkom Media included above 6 - 1
Undrawn borrowing facilities 7,565 7,864 6,819
The undrawn borrowing facilities are unsecured, when drawn bear interest at
a rate linked to the prime interest rate, have no specific maturity date and
are subject to annual review. The facilities are in place to ensure
liquidity. At September 30, 2008 R3,000 million of these undrawn facilities
were committed by Telkom.
Borrowing powers
To borrow money, the directors may mortgage or encumber Telkom`s property or
any part thereof and issue debentures, whether secured or unsecured, whether
outright as a security or debt, liability or obligation of Telkom or any
third party. For this purpose the borrowing powers of Telkom are unlimited,
but are subject to the restrictive financial covenants of the TL20 loan as
well as the conditions and covenants of the Bridge Loan facility.
14. DISPOSAL GROUP HELD FOR SALE
The assets and liabilities for
Telkom Media have been presented
as held for sale following a
decision made by the Telkom SA
board in March 2008 to
substantially reduce its
investment in Telkom Media.
Subsequent to period end, interest
was expressed in the discontinued
operation from a third party.
Terms are currently being
negotiated.
The results of discontinued
operations, and the result
recognised on the re-measurement
of assets or disposal group is as
follows:
Revenue 14 - 11
Expenses (157) (51) (93)
Loss before taxation of disposal (143) (51) (82)
group held for sale
Taxation 1 - -
Loss after taxation of disposal (142) (51) (82)
group held for sale
The net cash flows attributable to
the operating, investing and
financing activities of disposal
group
Operating cash flows (95) (34) (89)
Investing cash flows (218) (41) (31)
Financing cash flows 319 75 116
Total cash flows 6 - (4)
Assets 42 54 53
Liabilities 81 15 60
15. SHARE CAPITAL AND PREMIUM
Issued and fully paid 5,208 5,329 5,208
520,784,184 (September 30, 2007: 5,208 5,329 5,208
532,855,528; March 31, 2008:
520,784,184) ordinary shares of
R10 each
1 (September 30, 2007: 1; March - - -
31, 2008: 1) Class A ordinary
share of R10
1 (September 30, 2007: 1; March - - -
31, 2008: 1) Class B ordinary
share of R10
The following table illustrates the movement within the number of shares
issued:
Number of Number of Number of
shares shares shares
Shares in issue at 532,855,530 532,855,530 520,784,186
beginning of year/period
Shares bought back and (12,071,344) - -
cancelled
Shares in issue at end of 520,784,186 532,855,530 520,784,186
year/period
The rights of class A and class B ordinary shares rank equally with the
ordinary shares in respect of rights to dividends but differ in respect of
the right to appoint directors. Full details of the voting rights of
ordinary class A and class B shares are documented in the Articles of
Association of Telkom.
The directors have been given authority to buy back Telkom`s own shares up
to a limit of 20% of the issued share capital as at September 22, 2008. This
authority expires at the next Annual General Meeting.
16. TREASURY SHARES (1,638) (1,638) (1,522)
At September 30, 2008 8,994,097 (September 30, 2007: 10,493,233; March 31,
2008: 10,493,141) and 10,849,058 (September 30, 2007: 10,849,058; March 31,
2008: 10,849,058) ordinary shares in Telkom, with a fair value of R945
million (September 30, 2007: R1,821 million; March 31, 2008: R1,377 million)
and R1,140 million (September 30, 2007: R1,882 million; March 31, 2008:
R1,423 million) are held as treasury shares by its subsidiaries Rossal No 65
(Proprietary) Limited and Acajou Investments (Proprietary) Limited,
respectively.
The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments
(Proprietary) Limited are reserved for issue in terms of the Telkom
Conditional Share Plan (`TCSP`).
The reduction in the number of treasury shares is due to 1,499,044
(September 30, 2007: 1,743,783; March 31, 2008: 1,743,875) shares that
vested in terms of the TCSP during the six months ended September 30, 2008.
17. SHARE-BASED COMPENSATION RESERVE
This 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 employees in terms of
the Telkom Conditional Share Plan.
No consideration is payable on the shares issued to employees, but
performance criteria will have to be met in order for the granted shares to
vest. The ultimate number of shares that will vest may differ based on
certain individual and Telkom performance conditions being met. The related
compensation expense is recognised over the vesting period of the shares
granted, commencing on the grant date.
The following table illustrates the movement within the Share-based
compensation reserve:
Balance at beginning of 257 257 643
year/period
Net increase/(decrease) in equity 386 (110) 295
Employee cost* 522 26 411
Vesting and transfer of shares (136) (136) (116)
Balance at end of year/period 643 147 938
*The increase in the employee
cost for the current period is
mainly due to the additional
shares allocated in September
2007 and the change in
assumptions as revised below.
The principal assumptions used in
calculating the expected number
of shares that will vest are as
follows:
Employee turnover (%) 5 5 5
Meeting specified performance 100 50 100
criteria - 2009 vesting (%)
Meeting specified performance 100 100 100
criteria - all remaining vesting
(%)
At September 30, 2008 the estimated total compensation expense to be
recognised over the vesting period was R2,151 million (September 30, 2007:
R2,095 million; March 31, 2008: R2,151 million), of which R411 million
(September 30, 2007: R26 million; March 31, 2008: R522 million) was
recognised in employee expenses for the six months ended September 30, 2008.
18. INTEREST-BEARING DEBT**
Non-current portion of interest- 9,395 4,501 10,692
bearing debt
Local debt 6,875 2,457 8,419
Foreign debt 1,433 923 746
Finance leases 1,087 1,121 1,527
Current portion of interest- 6,330 10,962 6,767
bearing debt
Local debt 6,001 10,718 5,684
Foreign debt 202 167 970
Finance leases 127 77 113
Movements in borrowings for the period are as follows:
Repayments/refinancing
The Company issued new local bonds, the TL12 and TL15 with a nominal value
of R1,060 million and R1,160 million respectively as well as Money Market
Term Borrowings of R3,000 million during the period under review. Commercial
Paper Bills with a nominal value of R6,316 million were issued and
Commercial Paper debt with a nominal value of R6,684 million were repaid
during the period under review. Included in the current portion at September
30, 2007 was a amount of R4,500 million relating to the TK01 which was
repaid on March 31, 2008.
The R6,767 million current portion of debt as at September 30, 2008 is
expected to be repaid/refinanced from cash flow from operations and the
issue of new debt instruments upon maturity.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
**Amounts net of Disposal group held for sale.
19. FINANCIAL LIABILITIES
19.1 Congolese Wireless Network s.p.r.l. put option
In terms of a shareholder agreement, the minority shareholder in Vodacom
Congo (RDC) s.p.r.l., Congolese Wireless Network s.p.r.l., has a put option
which came into effect three years after the commencement date, December 1,
2001, and for a maximum of five years thereafter. The option price will be
the fair market value of the related shares at the date the put option is
exercised. The option liability`s value is R328 million (Group share: R164
million) (September 30, 2007: R337 million; March 31, 2008: R396 million
(Group share: September 30, 2007: R169 million; March 31, 2008: R198
million)). The financial liability has been classified as current.
19.2 Multi-Links put option
In terms of the sale agreement signed on May 1, 2007 between Telkom and the
previous shareholders of Multi-Links, the minorities have been granted a put
option that requires Telkom to purchase all of the minorities` shares in
Multi-Links, if the minorities put their shares to Telkom. The put option is
exercisable within 90 days of the second anniversary of signing the sales
agreement. A liability of R773 million (March 31, 2008; R919 million) has
been recognised in this regard. R661 million was initially recognised
directly in equity. The financial liability has been classified as current.
20. COMMITMENTS
Capital commitments
Capital commitments authorised 15,198 9,440 14,600
Fixed-line 7,000 4,480 5,162
Mobile 5,211 3,516 3,987
Other 2,987 1,444 5,451
Commitments against authorised 3,504 2,875 7,015
capital expenditure
Fixed-line 652 1,482 1,127
Mobile 800 918 1,328
Other 2,052 475 4,560
Authorised capital expenditure 11,694 6,565 7,585
not yet contracted
Fixed-line 6,348 2,998 4,035
Mobile 4,411 2,598 2,660
Other 935 969 890
Capital commitments comprise of commitments for property, plant and
equipment and intangible assets.
Management expects these commitments to be financed from internally
generated cash and other borrowings.
2010 FIFA World Cup Commitments
The FIFA World Cup commitment is an executory contract which requires the
Group to develop the fixed-line components of the necessary
telecommunications infrastructure needed to broadcast this event to the
world. This encompasses the provisioning of the fixed-line
telecommunications related products and services and, where applicable, the
services of qualified personnel necessary for the planning, management,
delivery, installation and de-installation, operation, maintenance and
satisfactory functioning of these products and services. Furthermore as a
National Supporter, Telkom owns a tier 3 sponsorship that grants Telkom a
package of advertising, promotional and marketing rights that are
exercisable within the borders of South Africa. The total value of the
commitment for the period ended September 30, 2008 amounted to USD35
million.
21. CONTINGENCIES
Third parties 27 40 26
Fixed-line 18 18 18
Mobile 4 17 3
Other 5 5 5
Third parties
These amounts represent sundry disputes with suppliers that are not
individually significant and that the Group does not intend to settle.
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance
and activation system to be supplied by Telcordia. In the 2001 financial
year, the agreement with Telcordia was terminated and in that year, Telkom
wrote off R119 million of this investment. Following an assessment of the
viability of the project, the balance of the Telcordia investment was
written off in the 2002 financial year. During March 2001, the dispute was
taken to arbitration where Telcordia was seeking approximately USD130
million plus interest at a rate of 15.5% per year which was subsequently
increased to USD172 million plus interest at a rate of 15.5% per year for
money outstanding and damages.
The parties have since reached an advanced stage in their preparation to
determine the quantum payable by Telkom to Telcordia. Following the ruling
by the Constitutional Court, two hearings were held at the International
Dispute Resolutions Centre (IDRC). The first hearing was held in London on
May 21, 2007 and was a `directions hearing` in terms of which the parties
consented to a ruling by the arbitrator setting out a consolidated list of
proposals and issues to form part of the quantum hearing.
In the second hearing in London at the IDRC on June 25 and 26, 2007 the
arbitrator set out a list of issues for determination at the quantum
hearing.
At a subsequent hearing during July 2007 in London the arbitrator ruled that
the rate in terms of the Prescribed Rate of Interest will apply on both
damages and debt claims, permitted Telcordia to a further amount to
Telcordia`s existing claims, permitted VAT to be claimed on Telcordia`s
claim, where applicable, and set out an agreed timetable for the future
conduct of proceedings.
A mediation took place, without success, during February and April 2008.
In the interim the parties have agreed to the appointment by the arbitrator
of a third party expert to deal with the technical issues in relation to the
software that was required to be provided by Telcordia, who will make a
recommendation to the arbitrator in dealing with the amount of the claims.
The arbitrator confirmed certain dates for the compliance of procedural
steps to be taken by all the parties before final dates could be agreed upon
for the hearing of the evidence on the quantum.
A hearing took place before the arbitrator in Johannesburg on October 23 and
24, 2008 in respect of the pending interlocutory applications.
Telkom has in the interim also requested a referral to the independent third
expert of the technical issues arising from the systems integration
amendment. A hearing has been scheduled to be heard before the third party
expert and will take place in Johannesburg from November 3 to 21, 2008.
After the third party expert`s hearing he will be required to file a report
and may be called to give evidence and undergo cross-examination on his
report before the arbitrator.
A provision has been recognised based on management`s best estimate of the
probable payments in this regard.
21. CONTINGENCIES (continued)
Supplier dispute liability 569 441 603*
included in current portion of
provisions
* USD72 million
Competition Commission
If found guilty, Telkom could be required to cease these practices, divest
these businesses and 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 on
any offender.
The South African Value Added Network Services (`SAVA`)
On July 3, 2008 the Competition Commission filed an application for leave to
appeal the decision of the High Court on the basis that the judge erred on
the issue of bias as well as his finding that issues surrounding the
extension of time to investigate the issues constitutes a ground for review.
Telkom then filed an application for leave to cross-appeal on July 11, 2008.
The main basis of Telkom`s cross-appeal is that Telkom believes that the
judge erred in failing to make a decision as to whether ICASA or the
Competition Commission and Competition Tribunal should deal with this type
of complaint.
The application for leave to appeal as well as the application for leave to
cross-appeal were granted by the Pretoria High Court on October 9, 2008. The
appeal and cross-appeal will be argued before the Supreme Court of Appeal,
and the Main Complaint before the Competition Tribunal will continue to be
held over pending the outcome of the appeal and cross-appeal.
Omnilink
Omnilink alleged that Telkom was abusing its dominance by discriminating in
its price for Diginet services as against those charged to VANS and the
price charged to customers who apply for a Telkom IVPN solution. The
Competition Commission conducted an enquiry and subsequently referred the
complaint, together with the SAVA complaint, to the Competition Tribunal for
adjudication. The matter is currently being dealt with together with the
SAVA matter as discussed above.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal
Telkom has not yet filed its answering affidavit in the main complaint
before the Tribunal and it appears as if Orion is not actively pursuing this
matter any further.
The Internet Service Providers Association (`ISPA`)
The Competition Commission has formally requested Telkom to provide it with
certain records of orders placed for certain services, in an attempt to
first investigate the aspects of the complaint. Telkom has provided the
records requested.
The complaints by ISPA at the Competition Commission were also mentioned as
being the subject of an investigation by the Competition Commission, in a
summons issued by the Competition Commission and forwarded to Telkom on July
31, 2008. The summons has subsequently been withdrawn by agreement with the
Competition Commission, but Telkom is still engaged in a co-operative
process with the Competition Commission as part of the Competition
Commission`s ongoing investigations into this complaint.
21. CONTINGENCIES (continued)
Competition Commission (continued)
M-Web and Internet Solutions (`IS`)
To date there has been no further movement on this matter, either in the
filing of a replying affidavit by IS/M-Web in the interim relief application
or in the investigation of the matter by the Competition Commission.
The complaint by M-Web and IS at the Competition Commission was also one of
the complaints mentioned as being the subject of investigation as discussed
above.
M-Web
This application was set down for hearing during the first quarter of the
2009 financial year. The parties have entered into settlement negotiations,
which resulted in the withdrawal of the interim relief application by M-Web
as well as withdrawal of the jurisdictional challenge by Telkom. The parties
are in further negotiations.
The complaint by M-Web at the Competition Commission was also one of the
complaints mentioned as being the subject of investigation as discussed
above.
The Group`s exposure is 50% of the following items in the Vodacom Group:
Retention Incentives
The Group has committed a maximum R1,317 million (2007: R652 million; 2006:
R456 million) in respect of customers already beyond their normal 24 month
contract period, but who have not yet upgraded into new contracts, and
therefore have not utilised the incentive available for such upgrades. The
Group has not provided for this liability, as no legal obligation exists,
since the customers have not yet entered into new contracts.
Universal Service Obligation
The Group has a potential liability of R147.5 million in respect of the 1800
MHz Universal Service Obligation in terms of the distribution costs relating
to the 2.5 million SIM cards.
Various legal contingencies
The Group is currently involved in various legal proceedings against it. The
Group in consultation with its legal counsel has assessed the outcome of
these proceedings and the likelihood that certain of these cases are not
likely to be in the Group`s favour. Following this assessment, the Group`s
management has determined that no provision is required in respect of these
legal proceedings as at September 30, 2008.
Unresolved taxation matters
The Group is regularly subject to an evaluation by the taxation authorities
of its direct and indirect taxation filings. The consequence of such reviews
is that disputes can arise with the taxation authorities over the
interpretation or application of certain taxation rules applicable to the
Group`s business. These disputes may not necessarily be resolved in a manner
that is favourable for the Group. Additionally the resolution of the
disputes could result in an obligation for the Group.
The Group has discussions with relevant taxation authorities on specific
matters regarding the application and interpretation of taxation legislation
affecting the Group and the industry in which it operates. No reliable
assessment can be made at this time of any exposure, if any, that the Group
may incur.
The Group has considered all matters in dispute with the taxation
authorities and has assessed the deductibility of expenses initially
disallowed for taxation purposes. Deferred taxation assets have only been
recognised in this regard if it is probable that the Group will succeed in
its disagreements with the taxation authorities.
Put and call options
In terms of various shareholders` agreements, put and call options exist for
the acquisition of shares in various companies. Except as disclosed in note
19, none of the put and call options have any value at any of the periods
presented as the conditions set out in the agreements have not been met.
Customer registration
The telecommunications industry in the Democratic Republic of the Congo is
subject to a recently promulgated ministerial decree requiring the
registration of the entire customer base of all network operators. This
decree requires prescribed particulars of all customers to be obtained and
maintained by June 30, 2008. Verbal extension up to December 31, 2008 has
been obtained and the Group is making every effort to obtain the required
information within the allowed timeframe.
Contingent asset
Litigation is being instituted for the recovery of certain fees paid by the
Vodacom Group. The information usually required by IAS 37: Provisions,
Contingent Liabilities and Contingent Assets, is not disclosed on the
grounds that it can be expected to prejudice seriously the outcome of the
litigation. The directors are of the opinion that a claim may be successful
and that the amount recovered could be significant.
Negative working capital ratio
At each of the financial periods ended September 30, 2008 and 2007 and the
year ended March 31, 2008 Telkom had a negative working capital ratio. A
negative working capital ratio arises when current liabilities are greater
than current assets. Current liabilities are intended to be financed from
operating cash flows, new borrowings and borrowings available under existing
credit facilities.
22. SEGMENT INFORMATION
Eliminations represent the inter-
segmental transactions that have been
eliminated against segment results.
Business Segment
Consolidated operating revenue 56,271 27,227 29,884
Fixed-line 32,572 16,108 16,565
Elimination (830) (420) (414)
Mobile 24,089 11,407 13,008
Elimination (1,519) (754) (771)
Other 1,993 902 1,517
Elimination (20) (16) (10)
Disposal group held for sale - Telkom (14) - (11)
Media included in Other
Consolidated other income 534 204 246
Fixed-line 497 189 207
Elimination (86) (33) (28)
Mobile 56 22 32
Other 67 26 35
Consolidated operating expenses 42,186 20,067 23,454
Fixed-line 24,962 12,011 13,515
Elimination (1,709) (784) (1,031)
Mobile 17,898 8,573 9,820
Elimination (805) (395) (393)
Other 2,115 747 1,648
Elimination (124) (34) (12)
Disposal group held for sale - Telkom (151) (51) (93)
Media included in Other
Consolidated operating profit 14,619 7,364 6,676
Fixed-line 8,107 4,286 3,257
Elimination 793 331 589
Mobile 6,247 2,856 3,220
Elimination (714) (359) (378)
Other (55) 181 (96)
Elimination 104 18 2
Disposal group held for sale - Telkom 137 51 82
Media included in Other
Consolidated investment income 197 130 136
Fixed-line 3,975 98 1,661
Elimination (3,832) - (1,547)
Mobile 27 24 11
Other 27 8 11
Consolidated finance charges 1,797 972 1,036
Fixed-line 1,277 704 845
Mobile 240 247 342
Other 320 21 (151)
Elimination (34) - -
Disposal group held for sale - Telkom (6) - -
Media included in Other
Consolidated taxation 4,705 2,678 2,009
Fixed-line 2,630 1,798 974
Mobile 2,055 806 998
Other 19 74 37
Disposal group held for sale - Telkom 1 - -
Media included in Other
Minority interests 197 93 63
Mobile 73 31 41
Other 124 62 22
Profit attributable to equity holders 7,975 3,700 3,622
of Telkom
Fixed-line 8,175 1,882 3,099
Elimination (3,039) 331 (958)
Mobile 3,906 1,796 1,850
Elimination (714) (359) (378)
Other (491) 32 7
Elimination 138 18 2
*Operating expenses
Other 1,679 696 1,521
Prior to consolidation adjustments 2,115 747 1,648
Consolidation adjustments (285) - (34)
Disposal group held for sale - Telkom (151) (51) (93)
Media included in Other
Consolidated assets 68,259 61,859 70,959
Fixed-line 47,829 43,295 48,171
Elimination (1,604) (93) (1,475)
Mobile 16,743 15,296 17,892
Elimination (278) (280) (358)
Other* 5,734 3,670 6,850
Elimination* (165) (29) (121)
*Included in Other is Disposal group 42 36 53
held for sale - Telkom Media
Investments 1,499 1,522 1,646
Fixed-line 4,917 3,988 6,672
Elimination (3,607) (2,666) (5,226)
Mobile 176 168 187
Other* 13 32 13
*Included in Other is Disposal group - 18 -
held for sale - Telkom Media
Other financial assets 614 214 122
Fixed-line 445 199 92
Mobile 169 15 30
Total assets 70,372 63,595 72,727
Consolidated liabilities 19,689 17,477 19,463
Fixed-line 11,892 10,218 11,156
Elimination (495) (548) (496)
Mobile 8,871 7,364 9,502
Elimination (1,542) (38) (1,493)
Other* 971 485 751
Elimination* (8) (4) 43
*Included in Other is Disposal group 73 15 51
held for sale - Telkom Media
Interest-bearing debt 15,733 15,463 17,468
Fixed-line 13,362 14,185 14,668
Mobile 1,815 1,181 1,810
Other* 556 488 990
Elimination* - (391) -
*Included in Other is Disposal group 8 - 9
held for sale - Telkom Media
Other financial liabilities 1,290 958 1,108
Fixed-line 167 731 152
Mobile 204 227 183
Other 919 - 773
Tax liabilities 323 122 475
Fixed-line 7 - 168
Mobile 290 104 261
Other 26 18 46
Total liabilities 37,035 34,020 38,514
Other segment information
Capital expenditure for property, 10,108 3,580 5,585
plant and equipment
Fixed-line 6,044 2,464 2,550
Mobile 2,475 977 1,253
Other* 1,589 139 1,782
*Included in Other is Disposal group 209 14 31
held for sale - Telkom Media
Capital expenditure for intangible 1,791 863 587
assets
Fixed-line 749 183 194
Mobile 985 671 325
Other* 57 9 68
*Included in Other is Disposal group 31 9 1
held for sale - Telkom Media
Depreciation and amortisation 5,595 2,745 3,174
Fixed-line 3,470 1,704 1,908
Mobile 1,955 951 1,098
Other 176 90 176
Disposal group - Telkom Media (6) - (8)
included in Other
Impairment and asset write-offs 529 156 132
Fixed-line 262 165 87
Mobile 15 (9) 11
Other 252 - 34
23. RELATED PARTIES
Details of material transactions
and balances with related parties
not disclosed separately in the
condensed consolidated interim
financial statements were as
follows:
With joint venture:
Vodacom Group (Proprietary) Limited
Related party balances
Trade receivables 51 (44) 58
Trade payables (346) (388) (377)
Related party transactions
Revenue (816) (385) (404)
Expenses 1,525 754 776
Audit fees 3 2 2
Revenue includes interconnect fees
and lease and installation of
transmission lines
Expenses mostly represent
interconnect expenses
With shareholders:
Government
Related party balances
Trade receivables 326 298 358
Related party transactions
Revenue (2,623) (1,277) (1,385)
With entities under common control:
Major public entities
Related party balances
Trade receivables 28 42 48
Trade payables (25) (16) (26)
The outstanding balances are
unsecured and will be settled in
cash in the ordinary course of
business
Related party transactions
Revenue (486) (185) (214)
Expenses 243 114 64
Rent received (21) (10) (10)
Rent paid 22 10 11
Key management personnel
compensation:
Including directors` emoluments
Related party transactions
Short-term employee benefits 231 126 61
Post employment benefits 12 12 4
Termination benefits 27 16 -
Equity compensation benefits 29 14 15
Other long term benefits 16 7 5
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication
services are made at arms length prices. Except as indicated above,
outstanding balances at the end of the period are unsecured, interest free
(except for interest charged on overdue telephone accounts) and settlement
occurs in cash. There have been no guarantees provided or received for
related party receivables or payables. Except as indicated above for the
period ended September 30, 2008, Telkom has impairment a loan of R430
million (September 30, 2007: Nil; March 31, 2008: R217 million). This
assessment is undertaken each financial year through examining the financial
position of the related party and the market in which the related party
operates.
24. SIGNIFICANT EVENTS
Swiftnet (Proprietary) Limited
Telkom is in the process of selling a 30% shareholding in its subsidiary
Swiftnet (Proprietary) Limited (`Swiftnet`) in order to comply with existing
licence requirements from the Independent Communications Authority of South
Africa (`ICASA`). The proposed sale of the shares to the Radio Surveillance
Consortium (`RSC`), has not been approved by ICASA and Telkom is assessing
the way forward.
Telkom Media (Proprietary) Limited
On August 31, 2006 Telkom created a new subsidiary, Telkom Media with a
Black Economic Empowerment (`BEE`) shareholding. ICASA awarded Telkom Media
a commercial satellite and cable subscription broadcast licence on September
12, 2007.
In March 31, 2008, the Board took the decision to substantially reduce its
investment in Telkom Media and negotiations with a potential investor have
progressed. An announcement of the details of this transaction can be
expected shortly, hence the investment in Telkom Media meets all the
conditions for classification as held for sale as top management is
committed to a plan to sell, the asset is available for immediate sale and
an active programme to locate a buyer has been initiated. The investment is
therefore classified as held for sale in terms of IFRS5.
Subsequent to period end, a third party expressed interest to acquire Telkom
Media. Terms are currently being negotiated.
Capability Management
Telkom seeks to manage costs by realigning its structure and resources to
better match its transforming information, communications and technology
business and to improve customer service. The transformation of the
communications industry and increasing market and competitive pressure has
put communication companies such as Telkom under increasing revenue and
expense constraints while being required to improve customer service. As a
result a capability management initiative has been launched which is
designed to ensure that the capabilities needed to succeed in a converged
communications market are established through the optimal utilisation of
external as well as internal capabilities, extracting effiencencies, where
possible, through scale of a rapidly maturing retail and wholesale market
and better organised functional areas in a more deregulated and liberalised
communications market. The capability management initiative includes the
internal consolidation of certain functional areas and the selection of
strategic long-term partners with proven performance for other functional
areas.
The areas which are expected to be impacted are the call centres,
operations, ancillary services, network service providers, network field
operations, network core operations, information technology operations and
retail outlets.
Telkom is engaging with labour to map the way forward. A memorandum of
understanding was entered into between Telkom and Organised Labour which
included issues such as the establishment of a restructuring forum,
deferment of implementation post April 2009, Organised Labour obtaining the
services of an advisor and continuation of investigative work.
Telkom Management Services (Proprietary) Limited (`TMS`)
TMS was registered as a company during August 2008. Telkom`s Board approved
the establishment of TMS as a part of Telkom`s strategic plan to grow
revenue and expand geographic reach.
25. SUBSEQUENT EVENTS
Vodacom sale transaction
On May 30, 2008 Telkom received a non-binding proposal from a wholly-owned
subsidiary of Vodafone Group Plc (`Vodafone`). In terms of this proposal,
Vodafone is seeking a stake in Vodacom Group (Proprietary) Limited
(`Vodacom`) from Telkom. The proposed consideration for this stake is
R22,500 million less the attributable net debt of Vodacom at the time of
signature and will be settled in cash.
The proposed transaction is subject to, inter alia, Telkom unbundling its
remaining stake in Vodacom to its shareholders pursuant to a listing of
Vodacom on the main board of the JSE Limited.
In October 2008, Telkom Board obtained approval from the major shareholder
(The Government of the South African Republic) to dispose of 15% of the
shares at the consideration of R22,500 million net of debt. The transaction
is still subject to the approval of 75% of the shareholders and other
suspensive conditions before conclusion of the transaction.
The following disclosure presents significant items of Vodacom financial
results, position and cash flows which have been proportionately
consolidated into the Group.
Revenue 22,570 10,654 12,238
Expenses 17,093 8,178 9,427
Profit before taxation 5,319 2,274 2,511
Taxation 2,055 806 998
Profit after taxation 3,264 1,468 1,513
Assets and Liabilities:
Property, plant and equipment 9,559 8,582 10,115
Intangible assets 2,112 1,877 2,163
Trade and other receivables 3,132 3,008 3,354
Interest-bearing debt 1,815 1,180 1,810
Trade and other payables 3,630 2,833 4,049
Deferred revenue 1,373 1,352 1,368
Credit facilities utilised 1,298 2,293 1,682
Net cash flows
Operating cash flow 2,563 535 1,028
Investing cash flow (3,751) (2,321) (1,944)
Financing cash flow 1,617 2,229 798
Total cash flow 429 443 (118)
Appointment of director
On November 10, 2008 Telkom announced the appointment of Mr Peter Nelson as
Chief Financial Officer and director of the company with effect from
December 8, 2008.
Acquisition of M-Web Africa and majority equity stake in M-Web Namibia
On November 10, 2008, Telkom International (Proprietary) Limited, a wholly-
owned subsidiary of Telkom, announced it has entered into agreements to
acquire 100% of M-Web Africa Limited (`M-Web Africa`) and 75% of M-Web
Namibia (Proprietary) Limited. The purchase price for the M-Web Africa group
including AFSAT and M-Web Namibia is US$63 million (approximately R610
million). These shareholdings will be acquired from Multichoice Africa
Limited and MIH Holdings Limited respectively, which are members of the
Naspers Limited Group.
M-Web Africa is an internet services provider in sub-Saharan Africa
(excluding South Africa) which also provides network access services in some
countries and is headquartered in Mauritius with operations in Namibia,
Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in
Botswana and distributors in 26 sub-Saharan African countries.
The successful conclusion of the agreements being entered into is subject to
conditions precedent, including regulatory approvals being obtained in
certain African jurisdictions.
Foreign exchange gains/losses
In response to global market conditions the South African Rand has lost
considerable value against foreign currencies (USD, Euro, Sterling). This
will create fluctuations with respect to foreign exchange gains/losses and
fair value movements.
The Group is exposed to 50% of the following items in the Vodacom Group:
Broad Based Black Economic Empowerment (`BBBEE`)
Subsequent to the reporting date, the Group finalised a R7.5 billion BBBEE
equity deal whereby strategic business partners, the black public, business
partners and employees will have the opportunity to participate in the
ownership of Vodacom (Proprietary) Limited (`Vodacom SA`) going forward. The
black public and business partners obtained ownership in Vodacom SA via a
public offer. The prospectus relating to the public offer was issued on July
30, 2008 and applications for shares closed on September 11, 2008 (`closing
date`). The public offer was approximately three times oversubscribed and
the share allotment was therefore pro-rated according to the rules stated in
the prospectus. The final share issue took place on October 8, 2008.
Indebtedness incurred subsequent to period end
Subsequent to September 30, 2008, the Group obtained funding from a
consortium of lenders in the amount of R6.5 billion. The funding will be
utilised to refinance existing short-term debt as well as for capital
expenditure and working capital requirements. The facility is linked to
JIBAR and is repayable between 3 and 7 years.
VM, S.A.R.L.
On May 12, 2008 the Group entered into an agreement to sell 5% of its 90%
holding in VM, S.A.R.L, leaving the Group with an 85% equity investment in
VM, S.A.R.L. The transaction was effective on October 2, 2008 since all
suspensive conditions were met on this date.
Gateway Telecommunications SA (Proprietary) Limited (`Gateway`)
The Group has agreed to acquire the carrier services and business network
solutions business of Gateway for an enterprise value of approximately
US$675 million plus make a whole payment of approximately US$25 million in
relation to Gateway`s high-yield bond. The purchase agreement is subject to
certain conditions precedent including approval from the relevant
competition authorities in South Africa. Once these conditions are met the
transaction will be effective.
Storage Technology Services (Proprietary) Limited (`StorTech`)
The Group has agreed to acquire a controlling interest of 51% in StorTech, a
managed services company, for R140 million. StorTech`s portfolio complements
the Group`s enterprise solutions-focused division and expands upon the
Group`s data centre services capabilities. The transaction remains subject
to certain conditions precedent, including approval from the relevant
competition authorities in South Africa. Once these conditions are met the
transaction will be effective.
WBS Holdings (Proprietary) Limited (`WBS`)
On October 1, 2008 the Group exercised its option to acquire an additional
14.9% of WBS for R119.2 million.
Other matters
The directors are not aware of any other matter or circumstance since the
period ended September 30, 2008 and the date of this report, not otherwise
dealt with in the financial statements, which significantly affects the
financial position of the Group and the results of its operations.
10. Supplementary Information
EBITDA
Earnings before interest,
taxation, depreciation and
amortisation
(EBITDA) can be reconciled
as follows:
EBITDA 20,743 10,265 9,982
Depreciation, amortisation, (6,124) (2,901) (3,306)
impairment and write-offs
Investment income 197 130 136
Finance charges (1,797) (972) (1,036)
Taxation (4,705) (2,678) (2,009)
Loss from discontinued (142) (51) (82)
operations held for sale
Minority interests (197) (93) (63)
Net profit 7,975 3,700 3,622
US DOLLAR CONVENIENCE
Revenue 6,913 3,592
Operating profits 1,796 802
Net profit 980 436
EBITDA 2,548 1,200
EPS (cents) 192.3 87.0
Net debt 2,041 2,358
Total assets 8,645 8,741
Cash flow from operating activities 1,303 365
Cash flow used in investing activities (1,733) (633)
Cash flow used in financing activities 362 151
Exchange rate
Period end1
US$1 - ZAR 8.14 8.32
1. Noon buying rate
11. DEFINITIONS
3G
The generic term, 3G, is used to denote the next generation of mobile
systems designed to support high-speed data transmission (144 Kbps and
higher) and Internet Protocol (IP)-based services in fixed, portable and
mobile environments. As envisaged by the ITU, the 3G system will integrate
different service coverage zones and be a global platform and the necessary
infrastructure for the distribution of converged service, whether mobile or
fixed, voice or data, telecommunications, content or computing.
ADSL (Asymmetrical Digital Subscriber Line)
ADSL is a broadband access standard which uses existing copper lines to
offer high-speed digital connections over the local loop. ADSL transmits
data asymmetrically, meaning that the bandwidth usage is much higher in one
direction than the other. ADSL provides greater bandwidth from the exchange
to the customer (ie. downloading) than from the customer to the exchange
(ie. sending).
ARPU
Vodacom`s average monthly revenue per customer, or ARPU, is calculated by
dividing the average monthly revenue during the period by the average
monthly total reported customer base during the period. ARPU excludes
revenue from equipment sales, other sales and services and revenue from
national and international users roaming on Vodacom`s networks.
ATM (Asynchronous Transfer Mode)
ATM is a high-speed Wide Area Network (WAN), connection-oriented, packet-
switching data communications protocol that allows voice, data and video to
be delivered across existing local and Wide Area Networks.
ATM divides data into cells and can handle data traffic in bursts. It is
asynchronous, in that the stream of cells from one particular user is not
necessarily continuous.
Bandwidth
Bandwidth is a measure of the quantity of signals that can travel over a
transmission medium such as copper or a glass fibre strand. It is the
available space available to carry a signal. The greater the bandwidth, the
greater the information carrying capacity. Bandwidth is measured in bits per
second.
Broadband
Broadband is a method of measuring the capacity of different types of
transmission. Digital bandwidth is measured in the rate of bits transmitted
per second (bps). For example, an individual ISDN channel has a bandwidth of
64 kilobits per second (Kbps), meaning that it transmits 64,000 bits
(digital signals) every second.
CAGR
Compound Annual Growth Rate.
Carrier pre-selection
Carrier pre-selection is usually initiated by the telecoms Regulator. It
enables individuals to choose which telecom will carry their traffic (mainly
long distance) by a signalling contract rather than having to dial extra
digits.
CDMA (Code Division Multiple Access)
CDMA is one of many technologies for digital transmission of radio signals
between, for example, mobile telephones and radio base stations. In CDMA,
which is a spread-spectrum modulation technology, each call is assigned a
unique "pseudorandom" sequence of frequency shifts that serve as a code to
distinguish it. The mobile phone is then instructed to decipher only a
particular code to pluck, as it were, the right conversation off the air.
CDMA is the technology of choice for 3G mobile systems. CDMA, however, also
refers to a particular air-interface standard (a fact that is often a source
of confusion).
Circuit
A circuit is a connection or line between two points. This connection can be
made through various media, including copper, coaxial cable, fibre or
microwave. A telephone exchange is a circuit switch.
DECT (Digital Enhanced Cordless Telecommunications)
DECT is the standard for cordless telephones. DECT phones communicate using
the PSTN (public switched telephone network) through a small base station in
the home or office and have a working radius of between 50 and 300 metres.
EBITDA
EBITDA represents profit for the year before taxation, finance charges,
investment income and depreciation, amortisation, impairment and write-offs.
EDGE (Enhanced Data for GSM evolution)
EDGE is a technology designed to enhance GSM and TDMA systems with respect
to data rates and is widely considered to be the GSM evolution beyond GPRS.
It enhances the data capabilities of GSM and TDMA systems by altering the RF
modulation scheme to allow greater data rates per time slot. Because it uses
a different modulation technique across the air-interface, EDGE requires
different mobile terminals handsets than those designed for the GSM air-
interface.
Effective tax rate
The effective tax rate is the tax charge in the income statement divided by
pre-tax profit.
Ethernet
Ethernet is a protocol that defines how data is transmitted to and received
from LANs. It is the most prevalent LAN protocol, with speeds of up to 10
Mbps.
Fibre optics
Fibre optics is where messages or signals are sent via light rather than
electrical signals down a very thin strand of glass. Light transmission
enables much higher data rates than conventional wire, coaxial cable and
many forms of radio. Signals travel at the speed of light and do not
generate nor are subject to interference.
Fibre rings
Fibre rings have come to be used in many fibre networks as it provides more
network resiliency: if there is a failure along a route and a ring is
broken, the direction of the traffic can be reversed and the traffic will
still reach its final destination.
Fixed access lines
Fixed access lines are comprised of public switched telecommunications
network lines, or PSTN lines, including integrated services digital network
channels, or ISDN channels, and public and private payphones, but excluding
internal lines in service.
Fixed access lines per employee
To calculate the number of access lines per employee the total number of
access lines is divided by the number of employees at the end of the period.
Fixed-line penetration
Fixed-line penetration or teledensity is based on the total number of
telephone lines in service at the end of the period per 100 persons in the
population of South Africa. Population is the estimated South African
population at the mid-year in the periods indicated as published by
Statistics South Africa, a South African Government department.
Fixed-line traffic
Fixed-line traffic, other than international outgoing mobile traffic,
international interconnection traffic and international Voice over Internet
Protocol traffic, is calculated by dividing traffic operating revenue for
the particular category by the weighted average tariff for such category
during the relevant period. Fixed-line international outgoing mobile traffic
and international interconnection traffic are based on the traffic
registered through the respective exchanges and reflected in international
interconnection invoices. International Voice over Internet Protocol traffic
is based on the traffic reflected in invoices.
Frame relay
Frame relay is a widely implemented telecommunications service designed for
cost-efficient data transmission for data traffic between local area
networks and between end-points in a wide area network. The network
effectively provides a permanent circuit, which means that the customer sees
a continuous, dedicated connection, but does not pay for a full-time leased
line.
GPRS (General Packet Radio Service)
GPRS is a packet rather than a circuit-based technology. GPRS allows for
faster data transmission speed to both GSM and TDMA (IS-136) networks. GPRS
is a packet-switched technology that overlays the circuit-switched GSM
network. The service can be introduced to cellular networks by
infrastructure.
GSM (Global System for Mobile)
GSM is a second generation digital mobile cellular technology using a
combination of frequency division multiple access (FDMA) and time division
multiple access (TDMA). GSM operates in several frequency bands: 400 MHz,
900 MHz and 1800 MHz. On the TDMA side, there are eight timeslots or
channels carrying calls, which operate on the same frequency. Unlike other
cellular systems, GSM provides a high degree of security by using subscriber
identity module (SIM) cards and GSM encryption.
HSDPA
High Speed Downlink Packet Access.
IAS
International Accounting Standards.
IFRS
International Financial Reporting Standards.
Interconnection
Interconnection refers to the joining of two or more networks. Networks need
to interconnect to enable traffic to be transmitted to and from
destinations. The amounts paid and received by the operators vary according
to distance, time, the direction of traffic, and the type of networks
involved.
Interest cover
Interest cover is calculated by dividing EBIT by the net interest charge in
the income statement. It is a measure of income gearing.
ISDN (Integrated Services Digital Network)
ISDN is a data communications standard used to transmit digital signals over
ordinary copper telephone cables. This is one technology for overcoming the
"last mile" of copper cables from the local exchange to the subscribers
premises, which has proved a bottleneck for Internet access, for example.
ISDN allows to carry voice and data simultaneously, in each of at least two
channels capable of carrying 64 Kbps. It provides up to 128 Kbps and a total
capacity of 144 Kbps exist.
ITU (International Telecommunications Union)
ITU is the global technical standard-setting body for telecommunications
services.
LAN (Local Area Network)
A LAN is a group of devices that communicate with each other within a
limited geographic area, such as an office.
Leased line
A leased line is a telecommunications transmission circuit that is reserved
by a communications provider for the private use of a customer.
LIBOR
London Interbank Offer Rate.
Local loop
The local loop is the final connection between the exchange and the home or
office. It is also known as the last mile.
Microwave
Microwave is radio transmission using very short wavelengths.
MMS (Multimedia Messaging Services)
MMS is a service developed jointly together with 3GPP, allows users to
combine sounds with images and text when sending messages, much like the
text-only SMS.
Mobile churn
Vodacom`s churn is calculated by dividing the average monthly number of
disconnections during the period by the average monthly total reported
customer base during the period.
Mobile penetration
Vodacom calculates penetration, or teledensity, based on the total number of
customers at the end of the period per 100 persons in the population of
South Africa. Population is the estimated South African population at the
mid-year in the periods indicated as published by Statistics South Africa, a
South African Governmental department.
Mobile traffic
Vodacom`s traffic comprises total traffic registered on Vodacom`s network,
including bundled minutes, outgoing international roaming calls and calls to
free services, but excluding national and incoming international roaming
calls.
MOU (Mobile Minutes of Use)
Vodacom`s average monthly minutes of use per customer, or average MOU, is
calculated by dividing the average monthly minutes during the period by the
average monthly total reported customer base during the period. MOU excludes
calls to free services, bundled minutes and data minutes.
Net debt
Net debt is all interest-bearing debt finance (long-term and short-term)
less cash and marketable securities.
Net debt to total equity
Net debt to total equity is a measure of book leverage (gearing): net debt
in the balance sheet divided by total equity (the sum of shareholders` funds
plus minority interests).
Operating free cash flow
Operating free cash flow is defined as cash flow from operating activities,
after interest and taxation, before dividends paid, less cash flow from
investing activities.
Packet switching
Packet switching is designed specifically for data traffic, as it cuts the
information up into small packets, which are each sent across the network
separately and are then reassembled at the final destination. This allows
more users to share a given amount of bandwidth. X.25, ATM and frame relay
are all packet switching techniques.
POP (Point of Presence)
A POP is a service provider`s location for connecting to users. Generally,
POPs refer to the location where people can dial into the provider`s
computer. Most providers have several POPs to allow low-cost local access
via telephone lines.
PSTN (Public Switched Telephone Network)
The PSTN is a collection of interconnected voice telephone networks, either
for a given country or the whole world. It is the sum of the parts. It was
originally entirely analog, but now increasingly digital (indeed in many
developed countries digitisation has reached 100%), these networks can be
either state-owned or commercially owned. PSTN is distinct from closed
private networks (although these may interconnect to the PSTN) and from
public data networks (PDN).
Revenue per fixed access line
Revenue per fixed access line is calculated by dividing total fixed-line
revenue during the period, excluding data and directories and other revenue,
by the average number of fixed access lines during the period.
RICA
Regulation of Interception of Communication and Provision of Communication-
related Information Act.
ROA (Return on Assets)
Return on Assets is calculated by dividing net profit (annualised) by total
assets.
ROE (Return on Equity)
Return on Equity is calculated by dividing net income by the average of the
shareholders` funds.
SDH (Synchronous Digital Hierarchy)
SDH is used in most modern systems, where multimedia can be transmitted at
high speeds. The networks are shaped in a ring, so that if there is a
problem, the traffic can be redirected in the other direction and the caller
will not detect the interruption.
SMS (Short Message Service)
SMS refers to short, usually text-based messages sent by or to a wireless
subscriber. They are not delivered to the recipient instantly and have some
degree of transmission time delay. SMS messages are usually limited to total
character lengths of 140 to 160 characters.
Switch
A switch is a computer that acts as a conduit and director of traffic. It is
a means of sharing resources as a network.
Total interest-bearing debt
Total interest-bearing debt is defined as short- and long-term interest
bearing debt, including credit facilities, finance leases and other
financial liabilities.
UMTS (Universal Mobile Telecommunications System)
UMTS is the Western European name for the 3G WCDMA standard adopted as an
evolutionary path by the GSM world. However, it utilises the radio spectrum
in a fundamentally different manner than GSM.
UMTS is based on DCMA technology and the GSM standard is based on TDMA
technology.
VoIP (Voice over Internet Protocol)
Voice over Internet Protocol is a protocol enabling voice calls to be made
over the Internet. Rather than a dedicated circuit being set up between the
caller and receiver, as with ordinary phone calls, the voice conversation is
digitised and transmitted over Internet Protocol using packet-switched data
networks.
WAN (Wide Area Network)
A WAN comprises LANs in different geographic locations that are connected,
often over the public network.
WAP (Wireless Application Protocol)
WAP is an application environment designed to bridge the gap between the
mobile and Internet worlds. It is a set of communication protocols for
wireless devices designed to provide vendor-neutral and technologyneutral
access to the Internet and advanced telecommunications services.
WiMAX
WiMAX is a standard for extending broadband wireless access to new locations
and over longer distances. The technology is expected to enable multimedia
applications with wireless connectivity and typically with a range of up to
30 km. It is a standard for fixed wireless access with substantially higher
bandwidth capabilities than cellular networks.
The emergence of further enhancements to the standard wil enable nomadic
data communications accross an entire metropolitan area network linking
homes and businesses to the core telecommunications network. WiMAX can be
viewed as a technology complementing existing ADSL broadband offerings.
Johannesburg
17 November 2008
Sponsor
UBS South Africa (Pty) Ltd
Date: 17/11/2008 07:06:01 Supplied by www.sharenet.co.za
Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
