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TKG - Telkom SA Limited - Interim Results for the Six Months Ended

Release Date: 23/11/2009 14:30
Code(s): TKG
Wrap Text

TKG - Telkom SA Limited - Interim Results for the Six Months Ended September 30, 2009 Telkom SA Limited (Registration number 1991/005476/06) JSE share code: TKG ISIN: ZAE000044897 TELKOM SA LIMITED GROUP INTERIM RESULTS for the six months ended September 30, 2009 The information contained in this document is also available on Telkom`s investor relations website www.telkom.co.za/ir. Telkom SA Limited is listed on the JSE Limited. Information may be accessed on Reuters under the symbols TKG.J and TKG.N and on Bloomberg under the symbol TKG.JH. Information contained on Reuters and Bloomberg is provided by a third party and is not incorporated by reference herein. Telkom has not approved or verified such information and does not accept any liability for the accuracy of such information. Special note regarding forward looking statements Many of the statements included in this document, as well as oral statements that may be made by us or by officers, directors or employees acting on behalf of us, constitute or are based on forward looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our mobile and other strategies, future financial position and plans, objectives, capital expenditures, projected costs and anticipated cost savings and financing plans, as well as projected levels of growth in the communications market, are forward looking statements. Forward looking statements can generally be identified by the use of terminology such as "may", "will", "should", "expect", "envisage", "intend", "plan", "project", "estimate", "anticipate", "believe", "hope", "can", "is designed to" or similar phrases, although the absence of such words does not necessarily mean that a statement is not forward looking. These forward looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward looking statements. Among the factors that could cause our actual results or outcomes to differ materially from our expectations including but not limited to those risks identified in Telkom`s most recent annual report which are available on Telkom`s website at www.telkom.co.za/ir. We caution you not to place undue reliance on these forward looking statements. All written and oral forward looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Moreover, unless we are required by law to update these statements, we will not necessarily update any of these statements after the date of this document, either to conform them to actual results or to changes in our expectations. The reported results for the period are distorted by the accounting for the sale and unbundling of our 50% stake in Vodacom and related transactions, the sale of Telkom Media and the impairment of the goodwill of Multi-Links. Unless otherwise indicated, the discussion below is based on adjusted results, excluding the items above, and is based on continuing operations as reconciled under the financial performance section of this announcement. GROUP SALIENT FEATURES FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 - Vodacom transaction accounts for profit of R40.4 billion. - Impairment of Multi-Links goodwill of R2,148 million. - Operating revenue up 4.0% to R18.7 billion. - Headline earnings per share from continuing operations decreased by 37.9% to 242.2 cents. - Basic earnings per share decreased 141.2% to a loss of 150.2 cents per share. - Group EBITDA margin decreased to 27.3% from 32.3%. - Total dividends paid out during the reporting period of R11.2 billion. - Net debt reduced by R8.7 billion decreasing annualised net debt to EBITDA from 1.4 times to 0.8 times. - Group restructuring into distinct profit centres 85% complete. - New data centre operation business unit launched - branded Cybernest. - 51.1% increase in Do broadband subscribers. Group operating revenue from continuing operations increased 4.0% to R18.7 billion, while EBITDA decreased 12.2% to R5.1 billion. The Group EBITDA margin decreased to 27.3% as at September 30, 2009, compared to 32.3% at September 30, 2008, mainly due to higher operating expenditure of Telkom South Africa which decreased the Telkom South Africa EBITDA margin to 35.2% as at September 30, 2009 (September 30, 2008: 39.9%). Headline earnings from continuing operations decreased by 37.9% to 242.2 cents per share as a result of increased operating expenditure in Telkom South Africa and the corporate centre, partially offset by higher revenue. Basic earnings per share decreased 141.2% at a loss of 150.2 cents per share for the six months ended September 30, 2009, compared to earnings of 364.5 cents per share at September 30, 2008. The reduced basic earnings per share can mainly be attributed to the impairment of the goodwill of Multi-Links. Annualised return on assets before taxation decreased from 17.4% to 12.9% due to the lower operating profit and a lower asset base excluding cash balances. 1. OVERVIEW Johannesburg, South Africa - November 23, 2009, Telkom SA Limited (JSE: TKG) today announced Group interim results for the six months ended September 30, 2009. Segment structure The Telkom South Africa segment provides fixed-line access and voice services, fixed-mobile and data communications services through Telkom South Africa. The Multi-Links segment provides fixed, mobile, data and international communications services in Nigeria through our Multi-Links subsidiary. The other segment is split geographically between international and South Africa. Other international category provides internet services outside South Africa, through our Africa Online and MWEB Africa subsidiaries and management services through our Telkom Management Services Company. The Other South African category includes the Trudon Group, formerly known as TDS Directory Operations, and the Group`s corporate centre. Our 50% share of Vodacom`s results, Telkom Media and Swiftnet`s results are disclosed as discontinued operations in terms of IFRS5 in the Telkom Group`s consolidated financial statements. Statement by Reuben September, Chief Executive Officer: "The impact of competition and the weaker economic environment are evident in the Telkom Group`s financial results for the six months ended September 30, 2009. The negative effect of growing competition and fixed to mobile substitution is starkly highlighted in the 9.0% decrease in Telkom South Africa`s traffic revenue. This continuing trend justifies the imperative for our Group to enter the mobile market and particularly the mobile data market. Our continued efforts to move traditional traffic revenues into annuity type products and data products exacerbates the decline. In addition, data revenue posted more modest revenue growth of 8.7% as a result of increased competition and pricing pressures in this segment of our business. Our Group operating expenditure grew 12.0% reflecting higher than inflationary increases as a result of higher payments to international operators, salary increases, provisioning for slow moving inventory and higher operating leases in Multi-Links. The restructuring of Telkom and optimisation of its balance sheet to create leaner, focused business units was expected to incur restructuring costs in the short term. On the positive side, the Group exhibited strong management of the capital expenditure programme and an extremely healthy net debt position with annualised net debt to EBITDA of 0.8 times. Our strategy seeking to re-position the Telkom Group is imperative given the tough operating environment. Similar to the strategies of other leading operators in the world, we are focusing on growing other revenue streams to compensate for the decline in fixed voice revenues. We are expanding into other geographic markets and into other domestic markets, for example our data centre operations and mobile strategy. We are improving our execution in current growth markets. In addition, we are strongly focused on reducing our costs in order to protect our profits and we remain committed to a 10% reduction in operating expenses by the 2011/12 financial year. While control of discretionary expenditure is showing immediate reduction, other areas under focus require careful planning and execution to ensure long-term success. These areas include supplier negotiations, improved inventory management, IT costs, maintenance costs and synergies through mobile capabilities and data centre operations. Telkom Renaissance, dealing with the remodelling, reorganisation, revitalisation and re-engineering of Telkom is gaining traction and we have achieved important milestones. The reorganisation of Telkom South Africa into new business units is 85% complete. Specific work streams are focused on business process engineering and cost efficiencies. The business plans for both the mobile strategy and data centre operations have been approved by the board of directors after extensive market research. Multi-Links remains a major concern, but is beginning to show slight improvements to its operating performance and the integration of Africa Online and MWEB Africa is proceeding well. Despite the difficulties, the commitment of my team to positioning Telkom to aggressively compete in the South African and African markets is gaining momentum. Our data centre operation, branded Cybernest, was launched on November 19, 2009. This initiative is further evidence of our drive to diversify and grow our revenue streams and take costs out of our current operations. Free cash flow generation is critical to the valuation of Telkom and everything we are doing is aimed at this target. It is a long-term process requiring harsh reviews of our capital expenditure programme and business processes. I am confident that the strength inherent in the fixed-line network and the business leadership and operations skills of our employees will allow us to offer our markets simple, quality, cost effective services that will be competitive in our markets." 2. OPERATIONAL DATA Six months ended September 30, 2008 2009 % Telkom South Africa ADSL subscribers1 491,774 602,720 22.6 Calling plan subscribers 521,704 651,359 24.9 Closer subscribers 507,985 636,010 25.2 Supreme call subscribers 13,719 15,349 11.9 W-CDMA subscribers - 8,744 - Do Broadband subscribers 154,095 232,796 51.1 Fixed access lines (`000)1 4,504 4,398 (2.4) Postpaid - PSTN 2,839 2,694 (5.1) Postpaid - ISDN channels 772 785 1.7 Prepaid 754 797 5.7 Payphones 139 122 (12.2) Fixed-line penetration rate (%) 9.3 8.9 (4.3) Revenue per fixed access line 2,635 2,679 1.7 (ZAR) Total fixed-line traffic 12,709 11,785 (7.3) (millions of minutes) Local 4,688 3,670 (21.7) Long distance 1,870 1,656 (11.4) Fixed-to-mobile 2,111 1,906 (9.7) International outgoing 319 307 (3.8) International VoIP 17 22 29.4 Subscription based calling 1,704 1,869 9.7 plans Interconnection 2,000 2,355 17.8 Domestic mobile 1,241 1,184 (4.6) interconnection Domestic fixed 160 333 108.1 interconnection International interconnection 599 838 39.9 Managed data network sites 28,051 29,842 6.4 Internet all access subscribers2 395,088 445,334 12.7 Fixed-line employees 24,075 23,445 (2.6) Fixed access lines per fixed-line 187 188 0.5 employee Movement in fixed-line employees Opening balance 24,879 23,520 (5.5) Appointments 503 397 (21.1) Employee losses (1,307) (472) (63.9) Workforce reductions (4) - - Natural attrition (1,303) (472) (63.8) Closing balance 24,075 23,445 (2.6) Multi-Links Active subscribers 1,571,102 2,036,404 29.6 Employees3 1,006 1,060 5.4 Other International Africa Online subscribers 17,773 16,368 (7.9) Africa Online employees4 357 307 (14.0) MWEB Africa subscribers - 22,137 - MWEB Africa employees - 345 - Other South African Trudon employees 532 531 (0.2) 1. Excludes Telkom internal lines. 2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers. 3. Employees have decreased 5.7% from 1,124 recorded at March 31, 2009. 4. Excluding UUNet joint venture partner`s subscribers and employees in Kenya. 3. OPERATIONAL OVERVIEW TELKOM SOUTH AFRICA The South African ICT market is seeing a shift in activity to increased efficiencies and marginal economies of scale. Bandwidth aggregation and infrastructure-build initiatives are a reality and service availability proliferates. There are also definitive signs of product innovation from ICT providers across the board, leading to increased choice available to customers. These initiatives lead to customer migration to a wider range of service providers. Customers are more frequently using services of more than one provider. This means that retail customers are using services from a wider range of providers who can give them access to a wider range of services. Migration is evident in the broadband markets with mobile broadband being a significant driver. Also the virtual network product market is growing with a commensurate shift in voice and data market share. Competition is impacting Telkom`s revenue generation and, as a result, Telkom is re-engineering its business into leaner, more flexible business units, developing new revenue streams through mobile services and data centre operations and creating opportunities for cost efficiencies. These initiatives take time and incur upfront costs. We are confident that our initiatives will ensure Telkom is the wholesale provider of choice for operators in the market. Our retail business is focused on providing an independent, value focused service. We aim to provide sustainable and growing shareholder value. Voice revenue The continued competitive pressure in the voice market has seen declines in our traffic revenue streams. This is as a result of our drive to offer significant value through products, managed network services and virtual private networks which shifts traffic revenue into other revenue streams. The effect of fixed-to-mobile substitution and least cost routing is also clear, as is the need for us to develop a mobile service in order to win back traffic onto the Telkom network. We continue to focus on growing our annuity revenue streams through subscription based calling plans. Annuity revenues grew 6.1% to R3,816 million. Telkom Closer subscribers have increased 25.2% to 636,010 and Supreme call subscribers have increased 11.9% to 15,349. The current line penetration rate for Closer packages is 47.8% up from 41.9% at March 31, 2009. Telkom has dedicated programmes to stimulate prepaid and postpaid usage including the Waya Waya campaign, the Recharge campaign and the Bafana Bafana campaign. In addition, we are marketing the benefits of the Closer packages. In the enterprise market, Telkom continues to promote its discount plans for both voice products and customer premise equipment. We continue to focus on reducing customer churn, increasing customer loyalty and promoting the value offered by fixed-line services through many initiatives such as continued enhancement to the Closer packages, free line installation to all of Telkom`s ex customers, telemarketing and direct marketing. Interconnection revenue Interconnection revenue increased 52.5% to R1,458 million reflecting the increased volumes carried on mobile networks, significant tariff increases on interconnect traffic destined for Zimbabwe, the growth of Neotel, VANs and ISPs and Telkom carrying increased traffic from international operators into Africa. We have specifically targeted international hubbing revenues despite their lower margins as they add scale and bottom-line benefits. Margins on foreign interconnection revenues have declined as a result of the strength of the Rand and timing delays in adjusting pricing in line with developments in foreign markets. Mobile termination rate developments On November 12, 2009 the Minister of Communications announced a reduction in the peak mobile interconnect rate from 125 cents to 89 cents. Off-peak mobile rates are unchanged at 77 cents. This comes into effect from February 2010 with MTN adopting it a month later. The final outcome of current negotiations regarding the glide path for mobile termination rates between ICASA and operators is difficult to predict. Telkom will pass the benefit of the cut in mobile termination rates directly to the consumer which will impact both Telkom`s revenue line and payment to other operators` expenses line. We may see a slight acceleration in fixed to mobile substitution in the consumer market and may also see an increase in fixed to mobile traffic as mobile calls become cheaper. However, the reduced rates do strengthen our position against least cost routing and we expect to begin winning traffic back. Broadband revenue ADSL subscribers increased 22.6% to 602,720 when compared to the September 30, 2008 reporting period. At March 31, 2009 ADSL subscribers totalled 548,015. Do Broadband subscribers have increased 51.1% to 232,796. At March 31, 2009 Do Broadband subscribers totalled 188,540. Broadband penetration as a percentage of residential postpaid lines equals 17.5%, up from 15.4% at March 31, 2009. Telkom continues to aggressively promote its broadband packages through focusing our marketing efforts on particular customer groupings and the up-selling of the higher end broadband packages which offer substantial value. We have also put in effort to promote entry-level ADSL packages with extremely competitive pricing. We continue to make every effort to increase the bandwidth available to our customers and are currently negotiating a triple play partnership in order to provide our customers with enhanced content. Speeds of 4 mbps are available to selective services. We have signed agreements with two partners for our gated community initiative, the benefits of which we expect to start showing in the 2010/11 financial year. We intend to provide gated communities with speeds up to 8 mbps. Data revenue Total data revenue increased 8.7% to R4,849 million despite significant price reductions. Data connectivity services revenue increased 2.8% to R2,476 million. Mobile leased line revenue increased 14.0% to R983 million and Internet access and related services increased 27.0% to R889 million. Managed data network services increased 5.4% to R468 million, which included an increase of 27.8% in satellite services and a 0.9% decrease in VPN services. VPN services decreased as a result of the September 30, 2008 total including a once-off sale of routers to a corporate client totalling R89 million. Managed network sites increased 6.4% to 29,842 sites. Telkom is facing competition on price for traditional data services. We continue to maximise the benefit of our capacity and ability to provide quality and security. We are also offering innovative products and services using the intelligence of our next generation network. The scope and quality of our data services are unmatched. In addition, the scale of our global undersea cable system provides additional competitiveness. We are focusing on differentiating our service through creating attractive, value propositions. Our differentiators include the reliability of our comprehensive service level agreements that are flexible and can be designed to match customer requirements. Other differentiators that we are working towards include: providing full communication and converged solutions that are clean and simple to understand. In order to make these a reality we need to add mobility and data centre services to the array of services we offer. We need to invest in several areas before "simplicity" can become a reality for our customers. Cost management Our target is to reduce operating expenditure by 10% by the 2011/12 financial year. Telkom Renaissance and the associate reorganisation into customer focused business units have allowed us to improve profit and loss accountability throughout the Group. It is also allowing us to more easily identify potential cost savings. As expected, expenses increased in the short term as a result of the reorganisation of the business units, clean up of inventories and costs associated with increasing under sea cable capacity and provisioning for the World Cup 2010. The areas of cost savings centre around reducing our product portfolio and terminating unprofitable product lines, renegotiating all maintenance and supply contracts, reducing IT spend and focusing on shorter term IT projects, retiring legacy systems. We have reopened discussions with labour regarding outsourcing in the IT arena. We have specific Renaissance work streams concentrating on service delivery remodelling, business process re-engineering and have identified the major cost saving opportunities within our wholesale and networks division. The roll-out of our wireless access network will enable us to provide connectivity in a more cost effective manner. We have been optimising vacancies created through natural attrition and have been making use of some temporary staff in the short term. We have also been actively managing overtime and contractor spend in order to offset costs as far as possible. As we restructured the company and pulled back on the capital expenditure programme during the six months under review, we could not immediately reduce staffing and contractor levels and therefore expensed certain labour costs which would otherwise have been capitalised. During the period our expenditure increased as a direct result of our restructuring, the pull back in capital expenditure programmes and the delay in the implementation of our mobile strategy pending detailed market studies. Telkom SA has actively managed services rendered and operating leases by introducing efficiencies in all possible areas to ensure that the inflationary cost impact could be fully offset (specific focus on consultants, fleet costs and distribution commissions). Write downs and provisions were required as a result of technology obsolete inventory and items classified as slow moving inventory as a result of the economic slow down. In addition, a contributing factor was that high value stock orders had already been placed in order to service the previously higher capital expenditure programme. A decision was made to provide against these stock items as the capital cost of completing the projects for which these items were ordered would outweigh the value of inventory losses. Telkom Mobile Telkom is at an inflection point with growth in traditional fixed-line voice revenues declining. The majority of global fixed-line incumbents have discovered that a successful operation requires an integrated mobile business. We believe that there is a market opportunity in South Africa as mobile voice and especially mobile data are still experiencing growth. Telkom has a competitive advantage by virtue of its existing asset and customer base. The mobile business could also assist Telkom in addressing fixed-line cost challenges and will position Telkom more competitively in the market. A product range spanning both mobile and fixed value pools will help Telkom defend itself more effectively against competitors. Telkom`s mobile business plan was approved during the period under review. Information regarding our network build and go to market strategy cannot be disclosed due to competitive sensitivities. We estimate that the capital expenditure required to implement mobility will be a maximum of R6 billion over five years. We are negotiating innovative financing structures with our suppliers in order to potentially reduce our capital investment in favour of operating lease-type payments which include technology renewal. In addition, we are in the process of negotiating arrangements regarding co-location and sharing which may reduce our capital investment and enhance our speed to market. We are employing the latest technology combining both 2G and 3G composite technologies which significantly reduce inter-operability costs. We have 8,744 existing W-CDMA subscribers who were provided with mobile data service and fixed look-alike products in those areas hard hit by copper theft. Cybernest - Our data centre operation Telkom`s move into the data centre operations business unit forms part of our drive to grow revenues. It is a natural progression for a telecommunication provider up the value-added IT services chain. Telkom is uniquely placed to enter the data centre market and offer significant value to our customers by utilising the strength of our underlying network, our large enterprise customer base and the operational skill set developed in providing data centre services to Telkom - the biggest user of data centre services in South Africa. We are a carrier neutral data centre capable of providing independent services to other telecommunications operators. International demand for data centres exceeds supply by approximately 6:1. South Africa`s requirements are also accelerating. Telkom`s proven track record indicates that we have the required stability, reliability and flexibility to succeed in the data centre environment. Telkom manages more than 32,000 mailboxes, 700,000 emails per day and some 30,000 managed devices. We also manage over 4,000 servers and more than 1,460 operating systems and databases. We process approximately 9.7 million emails per day as part of our ISP services. We are ideally positioned in terms of size, volume, experience and skills. Telkom formally launched its data centre operation, branded Cybernest, in Bellville, Cape Town on November 19, 2009. The current economic downturn is creating opportunities as firms look to cut costs. We are actively pursuing strategic alliances to bolster our product offering and will capitalise on the decreasing cost of bandwidth and the convergence opportunities provided by our next generation network and move into mobile services. Having the data centre as an independent business unit should allow increased focus on reducing the costs associated with these facilities. We have also ensured that our facility complies with best in class "green" infrastructure and operating principles which will enhance the attractiveness of our service offering. Multi-Links - Nigeria The Nigerian Multi-Links operation started to show steady improvements although it remains our major challenge and we have impaired an additional R2,148 million of goodwill. The improvement is evidenced by the achievement of consecutive monthly revenue milestones, declining month on month operating expenditure costs and its 3G broadband equivalent product (`EVDO`) growing strongly, while maintaining its monthly EBITDA margin improvements. Trading conditions continue to be tough as a result of local economic factors and pricing pressures. The relative strength of the Rand reporting currency against the Nigerian Naira has adversely affected our reported results. A key focus area in Nigeria continues to be the provisioning of an extensive fibre network for future benefit and good progress has been made in this regard over the last six month period, albeit under a significantly reduced capital expenditure programme. Newly established distribution channels are still in their formative stage of development. In addition, in order to manage the high level of inventory we have continued to subsidise handsets through targeted promotions in selected geographic areas to increase capacity utilisation. In addition we have taken provisions against certain handset models with the intention of liquidating these items. The monthly revenue growth has continued its upward trajectory having exceeded the 3 billion Naira level for the first time and has continued to do so for both August 2009 and September 2009. Revenue has continued to remain above this new level for the first month subsequently to the period under review. Second quarter revenues increased by 41% over the first quarter as various initiatives, including international carrier services, have come to fruition. Active voice subscribers increased 30% to 2,036,404 from 1,571,102 recorded at September 30, 2008 and 1,863,131 recorded at March 31, 2009. ARPU has decreased to USD7 from USD13 at September 30, 2008 and USD12 at March 31, 2009 (excluding non-revenue generating subscribers). The medium- term target of USD10 ARPUs is still possible. Data subscribers - EVDO subscribers - increased to 18,924 from 2,644, an increase of 615.7%, at March 31, 2009 and are generating USD30 ARPUs. EVDO revenues are now exceeding narrowband data revenues. Fixed data customers increased 24% to 454 for equivalent 2 megabits circuits representing four wholesale operators and five corporate clients. Targeted promotions were introduced to revive inactive subscribers and stimulate on-net usage early in the financial year. Mobile data services via EVDO were re-launched at the beginning of the second quarter. A number of value-added services targeted for the corporate sector were also launched during this period. The marketing approach and internal structures were also re-structured to put emphasis on the inherent strength of the Telkom Group in the data services. To this effect, the Sales, Products, Service Management and Business Solutions were re- structured to create the necessary focus. International Carrier Services was also established as a separate division to aggressively pursue international voice revenue opportunities using Telkom Group`s global relationships. A key focus is to ensure aggressive execution of the programme to increase penetration into the corporate and business markets via mobile and fixed data services. The period under review must be categorised as a period of reviewing lessons of the past, setting the baseline and implementing plans for clear operational turn-around. Operating expenses increased by 35.4% to 22,301 million Naira. Employee expenses increased to 1,138 million Naira as strategic staff were recruited. However, Multi-Links is currently undergoing a headcount rationalisation including outsourcing of non-core activities. This has seen the headcount being reduced from 1,124 at April 1, 2009 to 1,060 at period end, a 5.7% reduction. Additional rationalisation activities are still in progress. Payments to other operators increased by 6.6% to 5,131 million Naira as a result of increased outgoing minutes. These additional minutes were primarily driven by the new revenue stream of international carrier services. This business is expected to open new revenue streams for Multi- Links. Selling, general and administrative expenses increased 15.3% as a result of increased maintenance costs, marketing and expatriate fees. Handset subsidies totalled 2,208 million Naira with the average cost per unit equal to 4,891 Naira, including inventory write-downs. The subsidy reflects revenue minus cost of sales and is a negative value. These subsidies reflect less about the operating business model and more about the need to drive down higher than normal levels of inventory. These inventory levels continue to reduce on a monthly basis with anticipated seasonal demand to further accelerate the reduction. Whilst we expect handset subsidies to be minimal in the 2010/11 financial year as most of the voice handsets would have been dealt with by the financial year ending March 31, 2010, there is still a risk of additional write downs if anticipated seasonal demand does not materialise. Key issues were identified that hampered Multi-Links`s customer acquisition drive, the most significant of which was the management of the dealers. Due to lack of both systems and staff, Multi-Links could not properly account and manage the performance of each dealer or the tracking of customer ongoing revenue generating potential. As a result, management effort was spent on dispute resolution and dealer boycott meetings to ensure an amenable relationship with our dealer partners. As part of an investment in improving the distribution system, a new dealer structure was put in place early in the financial year with the appointment of a single super-dealer. The total commission paid into the new distribution system increased 248%. During the first months of this agreement all outstanding disputes with dealers were also settled which accounts for the large increase in commission paid. The increased commission has as yet not translated to increased revenue as there were certain start up costs relating to the appointment of the super-dealer. The super-dealer has expended effort in cleaning up the quality of sub dealers that Multi-Links intends to use going forward and agreeing on performance targets. In addition, the fact that Multi-Links now deals with one super-dealer for handsets, data terminals and recharge cards that are sold in the Nigerian market is system traceable until it is retired. This has assisted in strengthening the integrity of the pipeline to the end subscriber, thereby minimising risks surrounding equipment and revenue leakages going forward. Operating leases increased by 150.5% to 2,290 million Naira as a result of the increased utilisation of leased infrastructure as opposed to owned infrastructure, specifically as it relates to cell sites. This translates to significant capital expenditure savings. Further savings to date have been realised from contract renegotiation with other benefits and other cost reductions realised from the management of staff costs. Initiatives to reduce operational expenditure include the leasing of cell sites, outsourcing of diesel supply and reductions on property leases. A top priority is to speed up the deployment of capital work in progress by identifying those assets that can be quickly commissioned. We continue to renegotiate all supplier contracts. The EBITDA margin reported at September 30, 2008 was negative 19.8%. A negative 11.9% EBITDA margin was reported at March 31, 2009. Results to the six months ended September 30, 2009 produced a negative 20.0% EBITDA margin. However, the monthly trend of the EBITDA margin is on a positive trajectory, with the latest month EBITDA coming in at single digit negative territory. Multi-Links reported an EBITDA loss of R164 million for the half year period ended September 30, 2009. The balance sheet of Multi-Links is such that it is over-geared and unable to raise debt and creditor financing. Accordingly Multi-Links is being recapitalized with preference share capital in order to enable the company to repay existing debt and negotiate third party financing. We continue to review all options with regard to consolidation and/or any other opportunities in Nigeria to accelerate the turnaround of Multi- Links. Africa Online and MWEB Africa The integration of Africa Online and MWEB Africa is proceeding well. Full country reviews including local shareholders, regulatory authorities, supplier and business contracts, tax evaluations, sale and purchase agreements and restructuring plans are nearing completion. We look forward to completing this process so that the integrated management team can proceed with growing the business. Guidance Our target is to reduce operating expenditure by 10% by the 2011/12 financial year. Capital expenditure for the Group is expected to range between 20% and 23% of revenue over the next financial year including the first year impact of our mobile investment. The targeted ceiling net debt to EBITDA is aimed at a maximum of 1.4 times. Targets in a transforming industry such as ours are inherently risky, particularly in later years and investors should not place undue reliance on such targets. Our ability to meet such targets is subject to a number of risks and uncertainties and there could be no assurance that we could meet such targets. See the special note regarding forward-looking statements. 4. FINANCIAL PERFORMANCE The Telkom Group believes that adjusted earnings more accurately reflect the Group`s operational performance. Headline earnings are adjusted to exclude the effects of the sale and unbundling of our 50% share in Vodacom, the changes to the Telkom Conditional Share Plan as a result of the Vodacom transaction, the profit on sale of Telkom Media and the impairment of the goodwill of Multi-Links. Unless otherwise indicated, the discussion below is based on adjusted results, excluding the items below, and is based on continuing operations. The Nigerian operations reported EBITDA losses at similar levels to those of September 2008. Trading conditions remain tough as a result of local economic factors, pricing pressures, handset subsidies and newly established distribution channels. The newly appointed distribution agents are still at an early stage of establishing new distribution channels and average revenues per subscriber remained low in an intensely competitive market. The weaker Nigerian economy has placed increased pressure on consumer spending. The impact of the items discussed above on Group earnings for the six month period is as follows: Unusual item Line item affected Value Profit on the sale of Other income R18,535 million our 15% share in Vodacom Profit on the Gain on distribution R25,688 million unbundling of our 35% of assets share in Vodacom Capital gains tax on Taxation R1,353 million the sale and unbundling Secondary taxation on Taxation R977 million companies (`STC`) on the special dividend relating to the sale of Vodacom Reversal of the Taxation R421 million deferred tax asset relating to capital gains tax on the Vodacom sale Compensation expense Employee expenses R946 million recognised in terms of IFRS2 relating to the amendment of the Telkom Conditional Share Plan Impairment of goodwill Depreciation, R2,148 million of Multi-Links Nigeria amortisation, impairments and write-offs STC on the special Taxation R135 million dividend declared Fair value loss on the Foreign exchange and R166 million Vodacom shares held fair value movement Profit on disposal of Other income R68 million Telkom Media The statement of comprehensive income for the six months period ended September 30, 2008 has been adjusted to remove the effects of elimination of our 50% share in Vodacom, the impairment of the Africa Online investment and the gain on the revaluation of the Multi-Links put option to enable year on year comparison. Reconciliation of adjusted group statement of comprehensive income Effects
Reported of the Other Continuing operations September Vodacom unusual In ZAR millions 2008 transaction items Operating revenue 17,598 393 - Other income 211 - - Operating expenses 13,805 771 (34) Employee expenses 4,045 - Payments to other 3,240 754 - operators Selling, general and 2,742 14 - administrative expenses Service fees 1,230 - - Operating leases 357 3 - Depreciation, 2,191 - (34) amortisation, impairments and write-offs Results from operating 4,004 (378) 34 activities Gain on distribution of - - - assets Investment income 124 - - Finance charges and fair 693 - 146 value movements Interest 891 - - Foreign exchange and fair (198) - 146 value movement Profit before taxation 3,435 (378) (112) Taxation 1,065 - - Profit from continuing 2,370 (378) (112) operations EBITDA EBITDA margin (%) Closing rate at beginning of the period Closing rate at end of the period Average Naira/Rand exchange rate Adjusted Effects September Reported of the
Continuing operations 2008 September Vodacom In ZAR millions (unaudited) 2009 Transaction Operating revenue 17,991 18,706 - Other income 211 18,811 (18,535) Operating expenses 14,542 19,380 (946) Employee expenses 4,045 5,341 (946) Payments to other 3,994 4,269 - operators Selling, general and 2,756 3,330 - administrative expenses Service fees 1,230 1,340 - Operating leases 360 474 - Depreciation, 2,157 4,626 - amortisation, impairments and write-offs Results from operating 3,660 18,137 (17,589) activities Gain on distribution of - 25,688 (25,688) assets Investment income 124 280 - Finance charges and fair 839 793 (166) value movements Interest 891 748 - Foreign exchange and fair (52) 45 (166) value movement Profit before taxation 2,945 43,312 (43,111) Taxation 1,065 3,699 (2,751) Profit from continuing 1,880 39,613 (40,360) operations EBITDA 5,817 EBITDA margin (%) 32.3 Average Naira/Rand N15.286 exchange rate Closing rate at beginning N14.390 of the period Closing rate at end of the N14.197 period Adjusted Other September Continuing operations unusual 2009 In ZAR millions items (unaudited) Operating revenue - 18,706 4.0 Other income (68) 208 (1.4) Operating expenses (2,148) 16,286 12.0 Employee expenses - 4,395 8.7 Payments to other - 4,269 6.9 operators Selling, general and - 3,330 20.8 administrative expenses Service fees - 1,340 8.9 Operating leases - 474 31.7 Depreciation, (2,148) 2,478 14.9 amortisation, impairments and write-offs Results from operating 2,080 2,628 (28.2) activities Gain on distribution of - - - assets Investment income - 280 125.8 Finance charges and fair - 627 (25.3) value movements Interest - 748 (16.0) Foreign exchange and fair - (121) 132.7 value movement Profit before taxation 2,080 2,281 (22.5) Taxation (135) 813 (23.7) Profit from continuing 2,215 1,468 (21.9) operations EBITDA 5,106 (12.2) EBITDA margin (%) 27.3 (15.5) Average Naira/Rand N18.528 21.2 exchange rate Closing rate at beginning N15.563 8.2 of the period Closing rate at end of the N19.600 38.1 period GROUP OPERATING REVENUE Six months ended September 30 In ZAR millions 2008 2009 % Telkom South Africa 16,554 17,026 2.9 Multi-Links 813 818 0.6 Other International 63 234 271.4 MWEB Africa - 153 n/a Africa Online 63 81 28.6 Other South African 600 660 10.0 Trudon 581 638 9.8 Corporate centre 19 22 15.8 Eliminations (39) (32) (17.9) Total 17,991 18,706 4.0 Group operating revenue increased by 4.0% to R18,706 million (September 30, 2008: R17,991 million) in the six months ended September 30, 2009. The increase is mainly due to higher revenue from Telkom South Africa and the inclusion of revenue of our newly acquired MWEB Africa subsidiary. Multi-Links` operating revenue increased by 23.3% to 15,325 million Naira from September 2008. Voice revenue increased 16.8% to 14,125 million Naira with traffic revenue improving 2.5% to 8,744 million Naira, subscription and sales revenue decreasing 25.2% to 1,881 million Naira, interconnect revenue increasing 78.2% to 1,874 million Naira and the newly established hubbing revenue generating 1,626 million Naira. Multi- Links`s increased focus on data services has resulted in revenues increasing by 261.4% to 1,200 million Naira. The relative strength of our reporting currency against the Nigerian Naira has adversely affected the Rand revenue growth of the Nigerian operations at a Telkom group level. TELKOM SOUTH AFRICA OPERATING REVENUE Six months ended September 30
In ZAR millions 2008 2009 % Subscriptions and connections 3,233 3,344 3.4 Traffic 7,833 7,126 (9.0) Local 1,881 1,637 (13.0) Long distance 1,048 923 (11.9) Fixed-to-mobile 3,803 3,362 (11.6) International outgoing 481 472 (1.9) Subscription based calling 620 732 18.1 plans Interconnection 956 1,458 52.5 Mobile 445 604 35.7 Fixed 36 96 166.7 International 475 758 59.6 Data 4,459 4,849 8.7 Leased lines and other 3,597 3,866 7.5 Mobile leased facilities 862 983 14.0 Other 73 249 241.1 Total 16,554 17,026 2.9 Operating revenue from the Telkom South Africa segment increased by 2.9% to R17,026 million (September 30, 2008: R16,554 million) primarily due to higher interconnection revenue, growth in data revenues, an increase in revenue from subscriptions and connections and subscription based calling plans, partially offset by lower traffic revenue. Subscription and connections revenue grew by 3.4% to R3,344 million (September 30, 2008: R3,233 million) largely as a result of increased line rental tariffs. Traffic revenue decreased by 9.0% as a result of the increasing substitution of calls placed using mobile services rather than fixed-line services and the acceleration of broadband adoption and the resultant loss of internet dial-up minutes. This was partially offset by an increase in revenue from subscription based calling plans by 18.1% to R732 million primarily due to increased volumes as a result of a 24.9% increase in the number of subscribers to 651,359 (September 30, 2008: 521,704) in the six months ended September 30, 2009. Interconnection revenue increased by 52.5% to R1,458 million (September 30, 2008: R956 million) largely as a result of an increase of 59.6% in international interconnection revenue, a 35.7% increase in mobile interconnection revenue and a significant increase in domestic fixed-line interconnection revenue. The increased interconnection revenue from international operators is mainly a result of higher volumes on switched hubbing due to increased volumes and a result of an agreement signed with an operator in the United States to transit traffic mostly to African destinations. The increase in mobile interconnection revenue was driven by price increases on traffic destined for Zimbabwe. Fixed interconnection revenue increased as a result of increased volumes by VANS, Neotel and Sentech. Data revenue increased by 8.7% to R4,849 million (September 30, 2008: R4,459 million) mainly due to an increase in internet access and related services, higher revenue from mobile leased lines and a growing demand for data services, including ADSL. Other revenue increased as a result of R153 million received from the Department of Communications for the provisioning of the telecommunications infrastructure for the FIFA World Cup. The corresponding cost of R153 million is included in selling, general and administrative expenses. GROUP OTHER INCOME Six months ended September 30 In ZAR millions 2008 2009 % Telkom South Africa 150 178 18.7 Multi-Links 3 2 (33.3) Other South African 93 195 109.7 Trudon 29 27 (6.9) Corporate centre 64 168 162.5 Eliminations (35) (167) 377.1 Total 211 208 (1.4) Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets as well as interest received on loans to subsidiaries. Adjusted group other income remained flat. The increase in other income in the corporate centre was due to higher interest received on the loans to Multi-Links, Africa Online and MWEB Africa, which is eliminated on consolidation. GROUP OPERATING EXPENSES Six months ended September 30 In ZAR millions 2008 2009 % Employee expenses 4,045 4,395 8.7 Payments to other operators 3,994 4,269 6.9 Selling, general and 2,756 3,330 20.8 administrative expenses Service fees 1,230 1,340 8.9 Operating leases 360 474 31.7 Depreciation, amortisation, 2,157 2,478 14.9 impairments and write-offs Total 14,542 16,286 12.0 Group operating expenses increased by 12.0% to R16,286 million (September 30, 2008: R14,542 million) in the six months ended September 30, 2009, due to an increase in selling, general and administrative expenses, employee expenses, depreciation, payments to other operators and operating leases. The increases in employee expenses, payments to other operators and selling, general and administrative expenses are mainly attributable to Telkom South Africa, the increase in service fees is attributable to the corporate centre and the increase in operating leases to Multi-Links. Depreciation increased as a result of increases in Telkom South Africa as well as Multi-Links. OPERATING EXPENDITURE CONTRIBUTION PER SEGMENT Six months ended September 30 In ZAR millions 2008 2009 % Telkom South Africa 11,978 13,342 11.4 Multi-Links 1,081 1,191 10.2 Other International 168 275 63.7 MWEB Africa - 143 - Africa Online 71 95 33.8 Telkom International 97 33 (66.0) Telkom Management Services - 4 - Other South African 1,377 1,505 9.3 Trudon 321 350 9.0 Corporate centre 1,056 1,155 9.4 Eliminations (62) (27) (56.5) Total 14,542 16,286 12.0 The increase in group operating expenses was driven by an increase in the operating expenses of Telkom South Africa and the corporate centre as well as the inclusion of five months` operating expenses of our newly acquired MWEB Africa subsidiary. Corporate centre operating expenses increased as a result of higher consultant fees paid for the implementation of our strategy and reorganisation of the Group through Project Renaissance. TELKOM SOUTH AFRICA OPERATING EXPENSES Six months ended
September 30 In ZAR millions 2008 2009 % Employee expenses 3,294 3,595 9.1 Salaries and wages 2,987 3,393 13.6 Benefits 655 486 (25.8) Employee related expenses (348) (284) (18.4) capitalised Payments to other network 3,663 3,929 7.3 operators Payment to mobile operators 2,807 2,524 (10.1) Payment to international 726 1,273 75.3 operators Payment to fixed-line operators 130 132 1.5 Selling, general and 1,733 2,274 31.2 administrative expenses Materials and maintenance 1,021 1,206 18.1 Marketing 124 119 (4.0) Bad debts 119 145 21.8 Other 469 804 71.4 Service fees 1,082 1,088 0.6 Property management 565 630 11.5 Consultants and security 517 458 (11.4) Operating leases 325 326 0.3 Depreciation, amortisation, 1,881 2,130 13.2 impairment and write-offs Depreciation 1,579 1,787 13.2 Amortisation 241 310 28.6 Impairments and write-offs 61 33 (45.9) Total 11,978 13,342 11.4 Telkom South Africa`s operating expenses increased by 11.4% in the six months ended September 30, 2009, to R13,342 million (September 30, 2008: R11,978 million), primarily due to increased employee expenses, selling, general and administrative expenses, payments to other network operators and depreciation, amortisation, impairment and write-offs. Employee expenses increased by 9.1% in the six months ended September 30, 2009 primarily due higher salaries and wages as a result of average annual salary increases of 7.5% as agreed with the unions as well as the one time adjustment to accelerate the elimination of disparities translating to an 11.2% average increase for the bargaining unit. Payments to other network operators increased by 7.3% as a result of increased payments to international and fixed-line operators, partially offset by lower payments to mobile operators. Payments to international operators increased by 75.3% primarily due to the increase of volumes in switched hubbing and international outgoing, as well as higher settlement rates impacted by the mix of traffic destinations such as Zimbabwe. Payments to mobile operators decreased by 10.1%, largely due to a 9.7% decrease in fixed-to-mobile traffic volumes. Selling, general and administrative expenses increased by 31.2% primarily as a result of write downs and increased provisions of technology obsolete inventory and items classified as slow moving inventory as a result of the economic slow down. In addition, a contributing factor was that high value stock orders had already been placed in order to service the previously higher capital expenditure programme. A decision was made to provide against these stock items as the capital cost of completing the projects for which these items were ordered would outweigh the value of inventory losses. Materials and maintenance expenses were also higher during the period. From April 1, 2009, ICASA changed the base of calculation of licence fees from 0.1% of revenue from PSTS and VANS to 1.5% of gross profit, which resulted in a R32 million increase in the provision for the six months. The 13.2% increase in the depreciation, amortisation, impairment and write-offs to R2,130 million (September 30, 2008: R1,881 million) was mainly as a result of higher depreciation due to the higher levels of investment in telecommunications network equipment and data processing equipment in recent years. MULTI-LINKS OPERATING EXPENSES Six months ended September 30
In Naira millions 2008 2009 % Employee expenses 558 1,138 103.9 Payments to other operators 4,813 5,131 6.6 Selling, general and administrative 8,427 9,718 15.3 expenses Service fees 167 169 1.2 Operating leases 914 2,290 150.5 Depreciation, amortisation, 1,593 3,855 142.0 impairments and write-offs Total 16,472 22,301 35.4 Employee expenses increased by 103.9% in the six months ended September 30, 2009 primarily due to the recruitment of new staff to fill strategic positions in the period under review and the realignment and restructuring of salaries. Staff levels have however been reduced from those recorded at March 31, 2009. Selling, general and administrative expenses increased 15.3% as a result of increased maintenance costs, marketing and expatriate fees. Handset subsidies totalled 2,208 million Naira with the average cost per unit equal to 4,891 Naira, excluding inventory write-downs. These subsidies reflect less about the operating business model and more about the need to drive down higher than normal levels of inventory. These inventory levels continue to reduce on a monthly basis with anticipated seasonal demand to further accelerate the reduction. Whilst we expect handset subsidies to be minimal in the 2010/11 financial year as most of the voice handsets would have been dealt with by the financial year ending March 31, 2009, there is still a risk of write-downs if anticipated seasonal demand does not materialise. Operating leases increased significantly as a result of the increased utilisation of leased infrastructure as opposed to owned infrastructure, specifically relating to cell sites. Depreciation, amortisation, impairments and write-offs increased significantly due to the high investment in IT assets to support the expansion program and the network roll out during the period. INVESTMENT INCOME Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 125.8% to R280 million (September 30, 2008: R124 million), largely as a result of increased short-term deposits. FINANCE CHARGES AND FAIR VALUE MOVEMENTS Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements decreased by 25.3% to R627 million (September 30, 2008: R839 million) in the six months ended September 30, 2009, primarily due to a 16.0% decrease in interest expense to R748 million (September 30, 2008: R891 million) mainly as a result of the 53.2% decrease in Group`s net debt to R7.7 billion (September 30, 2008: R16.4 billion) and lower interest rates. Net fair value and foreign exchange rate movements resulted in a gain of R121 million for the six months ended September 30, 2009 (September 30, 2008: R52 million). The increase in the gain was mainly attributable to a fair value gain on the mark to market valuation of investments held by our cell captive. The balance sheet of Multi-Links is such that it is over-geared and unable to raise debt and creditor financing. Accordingly Multi-Links is being recapitalised with preference share capital in order to enable the company to repay existing debt and negotiate third party financing. From a Group perspective, Telkom`s loans to Multi-Links are accounted for as part of the Group`s net investment in a foreign operation. Exchange rate differences are therefore recognised in other comprehensive income and reclassified from equity to profit and loss in the event of a disposal of the net investment. TAXATION Consolidated tax expense from continuing operations decreased by 23.7% to R813 million (September 30, 2008: R1,065 million) in the six months ended September 30, 2009 due to lower profitability. The consolidated effective tax rate for the six months ended September 30, 2009 was 35.6% (September 30, 2008:34.8%). PROFIT FROM CONTINUING OPERATIONS The following represents the respective company`s contribution after eliminations to the consolidated profit from continuing operations. Six months ended
September 30 In ZAR millions 2008 2009 % Telkom Company including Cell 1,891 1,529 (19.1) Captive Multi-Links (235) (297) (26.4) MWEB Africa - 5 - Africa Online (8) (12) (50.0) Telkom Management Services - (4) - Trudon 232 247 6.5 Profit from continuing 1,880 1,468 (21.9) operations The decrease in profit from continuing operations was mainly attributable to Telkom Company. PROFIT FROM DISCONTINUED OPERATIONS Six months ended September 30
In ZAR millions 2008 2009 % Vodacom 1,513 - - Swiftnet 14 18 28.6 Telkom Media (82) 106 229.3 Total 1,445 124 (91.4) The profit from Telkom Media includes the reversal of the onerous lease liability. CONSOLIDATED STATEMENT OF FINANCIAL POSITION The Group`s financial position remains strong. Net debt, after financial assets and liabilities, from continuing operations and excluding Vodacom at September 2008, decreased by 53.2% to R7,669 million (September 30, 2008: R16,404 million) resulting in an annualised net debt to EBITDA ratio of 0.8 times from 1.4 times at September 30, 2008. On September 30, 2009, the Group had cash balances of R3.1 billion (September 30, 2008: R279 million excluding Vodacom). The proceeds retained from the Vodacom transaction contributed to the improvement. Telkom Company repaid R820 million of the revolving syndicated loan during the six months ended September 30, 2009. The Company issued commercial paper bills with a nominal value of R2,260 million for the six months ended September 30, 2009 and commercial paper bills with a nominal value of R7,319 million were repaid by September 30, 2009. These financing facilities remain available to Telkom. FREE CASH FLOW The Group`s cash flow for the six month period include R20.6 billion proceeds received on the sale of our 15% stake in Vodacom, taxation paid relating to the Vodacom transaction and special dividend of R1.8 billion. Excluding the effects of the above, the group`s free cash flow amounted to R611 million. Dividends paid amounted to R11.2 billion which includes the R19.00 per share dividend relating to the Vodacom transaction and the special dividend of R2.60 per share. GROUP CAPITAL EXPENDITURE Group capital expenditure which includes spend on intangible assets, decreased by 39.4% to R2,755 million (September 30, 2008: R4,544 million) and represents 14.7% of Group revenue (September 30, 2008: 25.3%). Six months ended
September 30 In ZAR millions 2008 2009 % Telkom South Africa 2,721 1,924 (29.3) Multi-Links 1,770 709 (59.9) Other International - 25 - Africa Online - 21 - Telkom International - 4 - Other South African 53 97 83.0 Trudon 30 28 (6.7) Corporate centre 23 69 200.0 Total 4,544 2,755 (39.4) The decrease in capital expenditure was driven by a decrease in the capital expenditure of Multi-Links and Telkom South Africa. TELKOM SOUTH AFRICA CAPITAL EXPENDITURE Six months ended September 30
In ZAR millions 2008 2009 % Baseline 1,512 1,158 (23.4) Revenue generating 9 1 (88.9) Network evolution 607 390 (35.7) Sustainment 39 16 (59.0) Effectiveness and efficiency 400 193 (51.8) Support 154 153 (0.6) Regulatory and other 13 - Total 2,721 1,924 (29.3) Telkom South Africa`s capital expenditure, which includes spending on intangible assets, decreased by 29.3% to R1,924 million (September 30, 2008: R2,721 million) and represents 11.3% of Telkom South Africa`s revenue (September 30, 2008: 16.4%). Baseline capital expenditure of R1,158 million (September 30, 2008: R1,512 million) was largely for the deployment of technologies to support the growing data services business (including the ADSL footprint), links to the mobile cellular operators and expenditure for access line deployment in selected high growth commercial and business areas. The lower expenditure for the period can be attributed to a more measured approach to the rollout of infrastructure to meet short-term demand and revenue generating services. The continued focus on rehabilitating the access network and increasing the efficiencies and reducing redundancies in the transport network as well as the initiation of the fixed-wireless roll-out contributed to the network evolution and sustainment capital expenditure of R406 million (September 30, 2008: R646 million). Telkom continues to focus on its operations support system investment with current emphasis on workforce management, provisioning and fulfilment, assurance and customer care, hardware technology upgrades on the billing platform and performance and service management and property optimisation. During the six months ended September 30, 2009, R193 million (September 30, 2008: R400 million) was spent on the implementation of several systems. AUDITORS` REVIEW REPORT Our auditors, Ernst & Young Inc. have reviewed the condensed consolidated interim financial statements. The unmodified review report is available for inspection at the Company`s registered office. Condensed consolidated interim statement of comprehensive income for the six months ended September 30, 2009 Restated* Restated* Reviewed March September September
31 30 30 2009 2008 2009 Note Rm Rm Rm Continuing operations Total revenue 3 36,433 17,922 19,169 Operating revenue 35,940 17,598 18,706 Other income 20 343 211 18,811 Operating expenses 29,537 13,805 19,380 Employee expenses 7,987 4,045 5,341 Payments to other 6,919 3,240 4,269 operators Selling, general and 5,772 2,742 3,330 administrative expenses Service fees 2,756 1,230 1,340 Operating leases 823 357 474 Depreciation, 4 5,280 2,191 4,626 amortisation, impairment and write-offs Results from operating 6,746 4,004 18,137 activities Investment income 181 124 280 Gain on distribution of 20 - - 25,688 non-cash asset Finance charges and fair 2,843 693 793 value movements Interest 1,732 891 748 Foreign exchange and 1,111 (198) 45 fair value movement loss/(gain) Profit before taxation 4,084 3,435 43,312 Taxation 5 1,769 1,065 3,699 Profit from continuing 2,315 2,370 39,613 operations Profit from discontinued 2,181 1,445 124 operations Profit for the 4,496 3,815 39,737 year/period Other comprehensive income Exchange differences on 6 30 84 (1,587) translating foreign operations Exchange differences - - (189) realised Available-for-sale 6 (8) - 8 financial assets Defined benefit plan 6 (1,824) (1,694) 732 actuarial (losses)/gains Defined benefit plan 6 941 924 (722) asset limitations Income tax relating to 6 244 212 323 components of other comprehensive income Other comprehensive (617) (474) (1,435) income for the year/period (net of taxation) Total comprehensive 3,879 3,341 38,302 income Profit attributable to: Owners of Telkom 4,419 3,752 39,661 Non-controlling 77 63 76 interest Profit for the 4,496 3,815 39,737 year/period Total comprehensive income attributable to: Owners of Telkom 3,804 3,284 38,226 Non-controlling 75 57 76 interest Total comprehensive 3,879 3,341 38,302 income for the year/period Total operations Basic earnings per share 7 882.6 749.8 7,882.0 (cents) Diluted earnings per 7 868.5 741.8 7,865.5 share (cents) Dividend per share 7 660.0 660.0 375.0 (cents) Continuing operations Basic earnings per share 7 457.4 469.2 7,857.3 (cents) Diluted earnings per 7 449.9 464.2 7,841.2 share (cents) * The amounts have been restated for the effect of the discontinued operations and disposal groups held for sale as well as the change in accounting policy for the defined benefit plan, refer to note 2. Condensed consolidated interim statement of financial position at September 30, 2009 Restated Restated Reviewed March September September
31 30 30 2009 2008 2009 Note Rm Rm Rm ASSETS Non-current assets 51,010 60,225 47,477 Property, plant and 9 41,418 49,024 41,086 equipment Intangible assets 9 7,232 8,456 4,602 Deferred taxation 10 756 688 84 Other non-current assets 1,604 2,057 1,705 Current assets 11,287 12,449 13,888 Inventories 11 1,974 1,755 1,938 Income tax receivable 91 100 1 Trade and other 5,980 9,164 6,731 receivables Cash and cash 1,931 705 3,134 equivalents Other current assets 1,311 725 2,084 Assets of disposal 23,482 53 77 groups classified as held for sale Total assets 85,779 72,727 61,442 EQUITY AND LIABILITIES Equity attributable to 34,642 31,983 32,335 owners of the parent Share capital 5,208 5,208 5,208 Treasury shares 12 (1,517) (1,522) (1,170) Share-based compensation 13 1,076 938 1,852 reserve Non-distributable 1,758 1,342 528 reserves Retained earnings 27,241 26,017 25,917 Reserves of disposal 876 - - groups classified as held for sale Non-controlling 853 578 321 interests Total equity 35,495 32,561 32,656 Non-current liabilities 16,959 17,391 14,057 Interest-bearing debt 14 10,653 10,692 7,950 Deferred taxation 10 1,204 1,418 938 Other non-current 5,102 5,281 5,169 liabilities Current liabilities 17,452 22,715 14,714 Trade and other payables 5,538 8,117 5,313 Shareholders for 23 24 36 dividend Current portion of 14 7,622 6,767 4,430 interest-bearing debt Income tax payable 50 475 881 Credit facilities 127 1,882 162 utilised Other current 4,092 5,450 3,892 liabilities Liabilities of disposal 15,873 60 15 groups classified as held for sale Total liabilities 50,284 40,166 28,786 Total equity and 85,779 72,727 61,442 liabilities Condensed consolidated interim statement of changes in equity for the six months ended September 30, 2009 Restated Restated Reviewed March September September
31 30 30 2009 2008 2009 Note Rm Rm Rm Balance at April 1 33,337 33,337 35,495 Attributable to owners 32,815 32,815 34,642 of Telkom Non-controlling 522 522 853 interests Change in accounting (1,226) (1,226) - policy Restated opening balance 32,111 32,111 35,495 Total comprehensive 3,879 3,341 38,302 income for the year/period Profit for the 4,496 3,815 39,737 year/period Other comprehensive (617) (474) (1,435) income Exchange differences on 24 81 (1,261) translating foreign operations Exchange differences - - (189) realised Available-for-sale (8) - 8 investment Net defined benefit plan (633) (555) 7 losses Dividend declared (3,339) (3,332) (41,711) Increase in share-based 14 554 411 1,123 compensation reserve Acquisition of 667 - - subsidiaries Put option 661 - - Reserves derecognised on - - (553) disposal of Vodacom Reversal of at - 30 - acquisition contingent liability Broad-based black 962 - - economic empowerment transaction in Vodacom Balance at March 35,495 32,561 32,656 31/September 30 Attributable to owners 34,642 31,983 32,335 of Telkom Non-controlling 853 578 321 interests Condensed consolidated interim statement of cash flow for the six months ended September 30, 2009 Audited Reviewed Reviewed March September September 31 30 30
2009 2008 2009 Rm Rm Rm Cash flows from operating 11,432 3,033 (9,211) activities Cash receipts from customers 61,302 29,710 17,814 Cash paid to suppliers and (40,908) (21,360) (13,693) employees Cash generated from operations 20,394 8,350 4,121 Interest received 485 299 280 Finance charges paid (2,164) (337) (313) Taxation paid (3,947) (1,951) (2,067) Cash generated from operations 14,768 6,361 2,021 before dividend paid Dividend paid (3,336) (3,328) (11,232) Cash flows from investing (17,005) (5,262) 17,400 activities Proceeds on disposal of 43 23 30 property, plant and equipment and intangible assets Proceeds on disposal of - - 20,599 investment Additions to property, plant and (13,191) (5,131) (3,044) equipment and intangible assets Acquisition of subsidiaries and (3,778) - (185) minorities Additions to other investments (79) (154) - Cash flows from financing 7,093 1,254 (6,997) activities Loans raised 18,168 10,105 2,710 Loans repaid (10,212) (9,127) (8,503) Finance lease capital repaid (136) (14) (329) (Increase)/decrease in net (727) 290 (875) financial assets Net increase/(decrease) in cash 1,520 (975) 1,192 and cash equivalents Net cash and cash equivalents at (208) (208) 1,780 beginning of year* Effect of foreign exchange rate (30) 6 - differences Net cash and cash equivalents at 1,282 (1,177) 2,972 end of year/period * Net cash and cash equivalent 1,282 as previously reported Cash and cash equivalents in 522 disposal groups Adjusted cash and cash 1,804 equivalents at the beginning of the year Cash and cash equivalents in (24) disposal groups Cash and cash equivalents 1,780 Notes to the condensed consolidated interim financial statements for the six months ended September 30, 2009 1. CORPORATE INFORMATION Telkom SA Limited (`Telkom`) is a company incorporated and domiciled in the Republic of South Africa (`South Africa`) whose shares are publicly traded. The main objective of Telkom and its subsidiaries (`the Group`) is to supply telecommunication, broadcasting, multimedia, technology, mobile communication, information and other related information technology services in South Africa and certain other African countries. 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES Basis of preparation The condensed consolidated interim financial statements have been prepared in accordance with IAS34 Interim Financial Reporting and in compliance with the Listings Requirements of the JSE Limited and the South African Companies Act,1973. The condensed consolidated interim financial statements are prepared on the historical cost basis, with the exception of certain financial instruments and share-based payments which are measured at grant date fair value. The results of the interim period are not necessarily indicative of the results for the entire year, and these reviewed financial statements should be read in conjunction with the audited financial statements for the year ended March 31, 2009. The preparation of condensed consolidated interim financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates are based on management`s best knowledge of current events and actions that the Group may undertake in the future, actual results may differ from those estimates. Significant accounting policies Except as described below, the accounting policies applied by the Group in the interim financial statements are consistent with those applied in the previous financial year. IFRS3 Business combinations The Group has early adopted IFRS3 Business Combinations (revised) and IAS27 Consolidated and Separate Financial Statements (revised) for business combinations occurring in the financial reporting period starting April 1, 2009. All business combinations occurring on or after April 1, 2009 were accounted for by applying the acquisition method as disclosed in Note 15. The Group measures goodwill at the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount of identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. The consideration transferred includes the fair value of the assets transferred, the liabilities incurred by the Group to the previous owners of the acquiree and equity interest issued by the Group. Consideration transferred also includes any contingent consideration at fair value. Any transaction costs that the Group incurs in connection with the business combination such as legal fees, due diligence fees and other professional and consultation fees are expensed as incurred. A contingent liability of the acquiree is assumed in a business combination only if such a liability represents a present obligation which arises as a result of a past event, and its fair value can be measured reliably. The change in accounting policy was applied prospectively and had no impact on earnings per share. IAS27 Consolidated and Separate Financial Statements The Group has adopted IAS27 (revised) for the acquisition of non- controlling interests occurring in the financial period starting April 1, 2009. In terms of the new accounting policy, acquisitions of non- controlling interest are accounted for as transaction with equity holders in their capacity as equity holders and therefore no goodwill is recognised as a result of such transactions. Previously goodwill was recognised arising on the acquisition of non-controlling interest in the subsidiary, and that represented the excess of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of the exchange. The change in accounting policy was applied prospectively and had no impact on earnings per share. IFRS8 Operating Segments As of April 1, 2009, the Group determines and presents operating segments based on the information that is internally provided to the Executive Committee, which is the Group`s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS8 Operating Segments. The impact is disclosed in note 18. The Executive Committee assesses the performance of the operating segments based on a measure of adjusted earnings before interest and tax (`EBIT`). This measurement basis excludes the effects of non-operating expenditure from the operating segments, such as restructuring costs, legal expenses and impairments. Other information provided to them is measured in a manner consistent with that in the financial statements. IAS1 Presentation of Financial statements IAS1 (revised) introduces a statement of comprehensive income, previously the income statement, with two optional formats and refers to the balance sheet and cash flow statement by different names: the `statement of financial position` and `statement of cash flows`, respectively. The Group has elected to present the statement of comprehensive income using the single statement approach. The Group presents all owner changes in equity under the consolidated statement of changes in equity. All non-owner changes in equity are presented in the statement of comprehensive income under other comprehensive income. The presentation of comparatives information has been changed in order to comply with the new revised standard. There is no impact on earnings per share since the standard focuses on presentation issues. IAS19 Employee Benefits As of April 1, 2009, the Group changed its accounting policy on defined benefits by adopting the option available under IAS 19 Employee Benefits, paragraph 93A. Under this option, actuarial gains and losses are recognised in other comprehensive income in the period in which they occur. The Group believes that recognising actuarial gains and losses in other comprehensive income results in better disclosure in the statement of financial position. The impact of the change in accounting policy has been retrospectively applied in accordance with IAS8 Accounting Policies, Changes in Accounting Estimates and Errors. The financial quantification of this change is disclosed below. Balance as Balance previously Employee as
reported benefits restated Rm Rm Rm Change in accounting policy September 30, 2008 Statement of Comprehensive Income Employee costs 4,228 (183) 4,045 Taxation 1,010 55 1,065 Other comprehensive income Defined benefit plan actuarial - 1,694 1,694 gains and losses Asset limitation - (924) (924) Tax effect on defined benefit - (474) (474) plan actuarial gains and losses Tax effect on asset limitation - 259 259 Statement of Financial Position Equity Restated retained earnings 27,670 (1,653) 26,017 Non-current liabilities Provisions 1,846 2,294 4,140 Deferred tax liability 2,060 (642) 1,418 March 31, 2009 Statement of Comprehensive Income Employee costs 8,345 (358) 7,987 Taxation 1,660 109 1,769 Other comprehensive income Defined benefit plan actuarial - 1,824 1,824 losses Asset limitation - (941) (941) Tax effect on defined benefit - (513) (513) plan actuarial losses Tax effect on asset limitation - 263 263 Statement of Financial Position Equity Restated retained earnings 28,852 (1,611) 27,241 Non-current liabilities Provisions 1,875 2,230 4,105 Deferred tax liability 1,823 (619) 1,204 IFRIC17 Distributions of Non-Cash Assets to Owners IFRIC17 provides guidance on when and how a liability for certain distributions of non-cash assets to owners, acting in their capacity as owners, are recognised and measured, and how to account for settlement of that liability. The Group has early adopted IFRIC17 as well as specific paragraphs of IFRS5 as amended by IFRIC17. The amendments specify that a non-current asset or disposal group held for distribution to owners of the entity shall be accounted for in accordance with the provisions of the amended IFRS5. The Vodacom 35% interest unbundling transaction was accounted for in accordance with the requirements of the new interpretation IFRIC17 and had a material impact on the Group financial statements as disclosed in note 20. Circular 3/2009 Headline Earnings Circular 3/2009 Headline Earnings was issued by the South African Institute of Chartered Accountants (`SAICA`) and is effective for financial periods (interim and/or annual periods) ending on or after August 31, 2009. Circular 3/2009 supercedes Circular 8/2007, as it updates the latter with the amendments and revisions to International Financial Reporting Standards (`IFRS`) issued between June 2007 and April 2009. The only changes to Circular 8/2007 are some of the detailed rules in Section C for amendments and revisions to specific IFRSs, as well as the new terminology brought in by IAS1 Presentation of Financial Statements. The following new standards, amendments to standards and interpretations which are mandatory for financial periods beginning January 1, 2009 do not have an impact on the Group: IFRS1 and IAS27 (amendment) Cost of an Investment on First Time Adoption IFRS2 (amendment) Vesting Conditions IFRS7 (amendment) Improving disclosures about financial instruments IAS1 (revised) Presentation of Financial Statements - Amendments relating to disclosure of puttable instruments and obligations arising on liquidation IAS16 (amendment) Property, Plant and Equipment - Recoverable amount IAS16/IAS7 (amendment) Property, Plant and Equipment - Sale of assets held for rental IAS19 (amendment) Employee Benefits IAS20 (amendment) Government Grants IAS23 (amendment) Borrowing Costs IAS28/IAS32/IFRS7 (amendment) Investments in Associates - Consequential amendments arising from amendments to IFRS3 IAS28 (amendment) Investment in Associates - Impairment testing IAS31/IAS32/IFRS7 (amendment) Interest in Joint Ventures - Consequential amendments arising from amendments to IFRS3 IAS32/IAS1 (amendment) Puttable Financial Instruments and Obligations Arising on Liquidation IAS39 (amendment) Financial Instruments: Recognition and Measurement IFRIC13 Customer Loyalty Programmes IFRIC15 Agreements for the Construction of Real Estate IFRIC16 Hedges of a Net Investment in a Foreign Operation March September September 31 30 30
2009 2008 2009 Rm Rm Rm 3. TOTAL REVENUE 36,433 17,922 19,169 Operating revenue 35,940 17,598 18,706 Other income (excluding profit on 312 200 183 disposal of property, plant and equipment and investments) Investment income 181 124 280 March September September 31 30 30 2009 2008 2009
Rm Rm Rm 4. DEPRECIATION, AMORTISATION, 5,280 2,191 4,626 IMPAIRMENT AND WRITE-OFFS Depreciation of property, plant and 3,733 1,800 2,085 equipment Amortisation of intangible assets 724 269 359 Impairment of property, plant and 501 35 2,148 equipment and intangible assets Write-offs of property, plant and 322 87 34 equipment and intangible assets The impairment charge of R2,148 million for September 2009 relates to the goodwill impairment of Multi-Links. 5. TAXATION 1,769 1,065 3,699 South African normal company 1,767 917 2,067 taxation Deferred taxation (164) (15) 721 Secondary Taxation on Companies 164 163 911 (`STC`) Foreign taxation 2 - - Included in the current period`s normal company taxation and deferred taxation expense is capital gains tax of R1,345 million and the reversal of R421 million relating to the deferred taxation asset on the investments which were held for sale. STC is provided for at a rate of 10% on the amount by which dividends declared by Telkom exceeds dividends received. Included in the STC current period expense is the impact of the Vodacom transaction dividend. 6. TAXATION EFFECTS OF OTHER COMPREHENSIVE INCOME Tax effects relating to each component of other comprehensive income Exchange differences on translating 30 84 (1,587) foreign operations Tax effect of exchange differences (6) (3) 326 on translating foreign operations Net foreign currency translation 24 81 (1,261) differences for foreign operations Exchange differences realised - - (189) Tax effect of exchange differences - - - realised Net exchange differences realised - - (189) Available-for-sale financial assets (8) - 8 Tax effect of available-for-sale - - - financial assets Net available-for-sale financial (8) - 8 assets Defined benefit plan actuarial (1,824) (1,694) 732 (losses)/gains Tax effect of defined benefit plan 513 474 (205) actuarial balance Net defined benefit plan actuarial (1,311) (1,220) 527 (losses)/gains Defined benefit plan asset 941 924 (722) limitations Tax effect of defined benefit plan (263) (259) 202 asset limitations Net defined benefit plan asset 678 665 (520) limitations Other comprehensive income for the (861) (686) (1,758) year/period before tax Tax effect of other comprehensive 244 212 323 income for the year/period Other comprehensive income for the (617) (474) (1,435) year/period net of tax March September September 31 30 30 2009 2008 2009
Rm Rm Rm 7. EARNINGS AND DIVIDEND PER SHARE Total operations Basic earnings per share 882.6 749.8 7,882.0 (cents) Diluted earnings per 868.5 741.8 7,865.5 share (cents) Headline earnings per 1,044.3 771.2 (139.1) share (cents) Diluted headline earnings 1,027.7 763.0 (138.8) per share (cents) Continuing operations Basic earnings per share 457.4 469.2 7,857.3 (cents) Diluted earnings per 449.9 464.2 7,841.2 share (cents) Basic headline earnings 606.7 488.2 (163.8) per share (cents) Diluted headline earnings 597.1 483.0 (163.4) per share (cents) Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue 520,784,186 520,784,186 520,783,900 Weighted average number (27) - - of shares bought back Weighted average number (20,083,621) (20,408,368) (17,596,506) of treasury shares Weighted average number 500,700,538 500,375,818 503,187,394 of shares outstanding Reconciliation of diluted weighted average number of ordinary shares: Weighted average number 500,700,538 500,375,818 503,187,394 of shares outstanding Expected future vesting 8,082,103 5,398,009 1,031,110 of shares Diluted weighted average 508,782,641 505,773,827 504,218,504 number of shares outstanding Total operations Reconciliation between earnings and headline earnings: Profit attributable to 4,419 3,752 39,661 equity holders of Telkom Adjustments: Profit on disposal of - - (18,605) investment Profit on disposal of (25) (7) (24) property, plant and equipment and intangible assets Impairment of property, 557 45 2,148 plant and equipment and intangible assets Write-offs of property, 322 87 34 plant and equipment Gain on distribution of - - (25,688) non-cash asset Tax effects (44) (18) 1,774 Headline earnings 5,229 3,859 (700) Continuing operations Reconciliation between earnings and headline earnings: Profit from continuing 2,315 2,370 39,613 operations Non-controlling interest (26) (22) (76) Earnings as reported 2,289 2,348 39,537 Adjustments: Profit on disposal of - - (18,605) investment Profit on disposal of (32) (11) (24) property, plant and equipment and intangible assets Impairment of property, 501 34 2,148 plant and equipment and intangible assets Write-offs of property, 322 87 34 plant and equipment Gain on distribution of - - (25,688) non-cash asset Tax effects (42) (15) 1,774 Headline earnings 3,038 2,443 (824) Discontinued operations Reconciliation between earnings and headline earnings: Profit from discontinued 2,181 1,445 124 operations Non-controlling interest (51) (41) - Earnings as reported 2,130 1,404 124 Adjustments: Profit on disposal of 7 4 - property, plant and equipment and intangible assets Impairment of property, 56 11 - plant and equipment and intangible assets Tax effects (2) (3) - Headline earnings 2,191 1,416 124 Dividend per share 660.0 660.0 375.0 (cents) The calculation of dividend per share is based on dividends of R1,894 million (September 30, 2008: R3,306 million; March 31, 2009: R3,306 million) and 505,008,190 (September 30, 2008: 500,941,029; March 31, 2009: 500,941,029) number of ordinary shares outstanding on the date of dividend declaration. The reduction in the number of shares represents the number of treasury shares held on date of payment. Vodacom dividend - - 7,750.0 The Vodacom dividend consisted of a once off cash dividend of 1,900.0 cents per share totalling R9,740 million and a 35% unbundling share valued at 5,850.0 cents per share with a total value of R29,990 million. 8. NET ASSET VALUE PER 6,914.7 6,391.8 6,402.9 SHARE (cents) The calculation of net asset value per share is based on net assets of R32,335 million (September 30, 2008: R31,983 million; March 31, 2009: R34,642 million) and 505,008,190 (September 30, 2008: 500,375,818; March 31, 2009: 500,993,664) number of ordinary shares outstanding at period end. March September September 31 30 30
2009 2008 2009 Rm Rm Rm 9. CAPITAL EXPENDITURE INCURRED Property, plant and 8,725 5,585 2,616 equipment Intangible assets 2,215 587 687 (including business combinations) A major portion of this capital expenditure relates to theexpansion of existing networks to provide capacity forgrowth in services with focus on the Next GenerationNetwork technologies. Included in the additions of intangible assets for the current period is an amount of R548 million recognised as a result of the acquisition of MWEB Africa Limited and MWEB Namibia (Proprietary) Limited. 10. DEFERRED TAXATION (448) (730) (854) Deferred tax assets 756 688 84 Deferred tax liabilities (1,204) (1,418) (938) Unutilised Secondary 2,730 1,603 29 Taxation on Companies (`STC`) credits The decrease in the deferred tax asset is due to a reversal of a previously recognised asset relating to the Vodacom transaction. The deferred taxation asset also includes STC credits on past dividends received that are available to be utilised against dividends declared. 11. INVENTORIES 1,974 1,755 1,938 Gross inventories 2,165 2,007 2,232 Write-down of inventories (191) (252) (294) to net realisable value Inventory levels have increased due to the roll out of the Next Generation Network. The write-down of inventory has increased due to stock obsolescence. 12. TREASURY SHARES (1,517) (1,522) (1,170) At September 30, 2009 7,632,154 (September 30, 2008: 8,994,097; March 31, 2009: 11,646,680) and 8,143,556 (September 30, 2008: 10,849,058; March 31, 2009: 10,849,058) ordinary shares in Telkom, with a fair value of R330 million (September 30, 2008: R945 million; March 31, 2009: R1,229 million)and R352 million (September 30, 2008: R1,140 million; March 31, 2009: R859 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary)Limited and Acajou Investments (Proprietary) Limited, respectively. The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited are reserved for issue in terms of the Telkom Conditional Share Plan (`TCSP`). The reduction in the number of treasury shares is due to 4,014,526 (September 30, 2008: 1,551,963; March 31, 2009: 1,551,963) shares that vested in terms of theTCSP during the six months ended September 30, 2009. 13. SHARE-BASED COMPENSATION RESERVE This reserve represents the cumulative grant date fair value of the equity-settled share-based payment transactions recognised in employee expenses during the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan. No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditionsbeing met. The related compensation expense is recognised over the vesting period of the shares granted, commencing on the grant date. The following table illustrates the movement within the Share- based compensation reserve: March September September 31 30 30 2009 2008 2009 Rm Rm Rm
Balance at beginning of 643 643 1,076 year/period Net increase in equity 433 295 776 Employee cost* 554 411 1,123 Vesting and transfer of (121) (116) (347) shares Balance at end of 1,076 938 1,852 year/period * The increase in employee costs for September 30, 2009 is due to the modification of the Telkom Conditional Share Plan. The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) 9 5 9 Meeting specified 75 100 100 performance criteria - all remaining vesting (%) At September 30, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,658 million (September 30, 2008: R2,151 million; March 31, 2009: R1,824 million), of which R177 million (September 30, 2008: R411 million; March 31, 2009: R554 million) was recognised in employee expenses for the six months ended September 30, 2009. March September September 31 30 30 2009 2008 2009
Rm Rm Rm 14. INTEREST-BEARING DEBT Non-current portion of 10,653 10,692 7,950 interest-bearing debt Local debt 9,114 8,419 6,831 Foreign debt 589 746 184 Finance leases 950 1,527 935 Current portion of 7,622 6,767 4,430 interest-bearing debt Local debt 7,546 5,684 4,393 Foreign debt 40 970 - Finance leases 36 113 37 Movements in borrowings for the period are as follows:
Repayments/financing Telkom repaid R820 million of the syndicated loan during the current interim period. Commercial Paper Bills with a nominal value of R2,260 million were issued and Commercial PaperDebt with a nominal value of R7,319 million was repaid during the interim period ended September 30, 2009. The R4,430 million nominal value of the current portion of interest-bearing debt as at September, 30 2009 is expected to be repaid/refinanced from cash flow from operations and the issue of new debt instruments upon maturity.
Management believes that sufficient funding facilities will be available at the date of repayment/refinancing. 15. ACQUISITION OF SUBSIDIARIES MWEB Africa Limited and MWEB Namibia (Proprietary) Limited Telkom International (Proprietary) Limited, a wholly owned subsidiary of Telkom SA Limited, acquired 100% of MWEB Africa Limited from Multichoice Africa Limited, and 75% of MWEB Namibia (Proprietary) Limited from MIH Holdings Limited effective April 21, 2009. Both Multichoice Africa Limited and MIH Holdings Limited are members of the Naspers Limited Group.
The acquisition of MWEB is part of the Group`s strategy of growing its broadband and solidifying its market position through acquisitions.
The goodwill from the acquisition is partially attributable to the following: - Certain licences that could not be valued separately from the MWEB group, but contribute significantly to goodwill as the MWEB business would cease to exist without the licence rights. - The skills and technical talent of the acquired business`s workforce, and the synergies expected to be achieved from integrating the acquiree into the Group`s existing internet service provision. The goodwill is also attributable to the MWEB Group`s position as Africa`s largest satellite-based internet service provider in Sub- Saharan Africa. The purchase price paid by Telkom International was USD55 million determined as follows: - USD1.5 million for the Namibian Cash Generating Unit - USD53.5 million for the Mauritian Cash Generating Unit The fair value of the assets and liabilities acquired were determined as follows: Net assets acquired 94 Fair value of intangible assets 83 Deferred tax on intangible assets (20) Fair value of net assets 157 Goodwill on acquisition 28 Purchase price for net asset fair value 185 Acquisition of loans receivable 312 Purchase price 497 March September September 31 30 30
2009 2008 2009 Rm Rm Rm 16. COMMITMENTS Capital commitments Capital commitments 7,928 14,600 5,532 authorised Commitments against 1,393 7,015 1,210 authorised capital expenditure Authorised capital 6,535 7,585 4,322 expenditure not yet contracted Capital commitments comprise commitments for property, plant and equipment and software included in intangible assets. The decrease in capital commitments for September 30,2009 is due to the exclusion of Vodacom (September 2008:R3,987 million). 17. CONTINGENCIES Supplier dispute Supplier dispute 664 603 565* liability included in current portion of provisions *USD75 million There is a dispute between Telkom and Telcordia arising from the development and installation of an integrated end to end customer assurance and activation system, which was supposed to have been supplied by Telcordia. The agreement was terminated in the 2001 financial year and the dispute was taken to arbitration where Telcordia was seeking approximately US$130 million plus interest at a rate of 15.5% per year for money outstanding and damages. A number of hearings took place during the 2008 and 2009 financial year without success. Telkom has in the interim also requested a referral to the independent third party expert of the technical issues arising from the systems integration amendment. A hearing surrounding the technical issues has been held during the period November 3 - 21, 2008 where the independent expert released his report and recommended that some aspects of Telcordia`s claim be reduced. The arbitrator has not made a final decision in this regard. The parties have agreed to argue the issue of systems integration at an experts-only hearing before the independent expert, which hearing commenced on October 2, 2009. The final evidentiary hearing will be held over a two week period in January 2010 and February 2010. A provision has been recognised based on management`s best estimate of the probable payments in this regard. Competition Commission Independent Cellular Service Providers` Association of South Africa (`ICSPA`) In 2002, the Independent Cellular Service Providers` Association of South Africa (`ICSPA`) filed a complaint against Telkom at the Competition Commission (the `CC`) in terms of the Competition Act, alleging that Telkom had entered into contracts with big corporations, providing large discounts with the effect of discouraging the corporates from using the "premicell" device installed by their members. ICSPA also alleged various contraventions of the Competition Act by Telkom. Telkom provided the CC with certain information requested, and also referred the CC to Telkom`s High Court application in respect of utilisation of the "premicell" device. The CC declined to refer the matter to the Competition Tribunal (the `CT`). The complainant itself then referred the matter to the CT on September 18, 2003 but has done nothing since, notwithstanding the fact that Telkom filed its answering affidavit on November 28, 2003. The South African Value Added Network Services (`SAVA`) Telkom`s application for review against the CC and the CT in the High Court was successful and the decision of the CC to refer the SAVA Main Complaint to the CT, was set aside. On July 3, 2008 the CC filed an application for leave to appeal the decision of the High Court on the basis that the judge erred on the issue of bias as well as his finding that issues surrounding the extension of time to investigate the issues constitutes a ground for review. Telkom then filed an application for leave to cross-appeal on July 11, 2008. The main basis of Telkom`s cross-appeal is that Telkom believes that the judge erred in failing to make a decision as to whether ICASA or the CC and CT should deal with this type of complaint. The application for leave to appeal as well as the application for leave to cross-appeal were granted by the Pretoria High Court on October 9, 2008. The appeal and cross-appeal will be argued before the Supreme Court of Appeal on November 2, 2009. The judgement was reserved including the issue whether ICASA or the CC and CT should deal with this type of complaint. If the Supreme Court of Appeals find that the CT does have jurisdiction to hear the SAVA main complaint and the CT finds that Telkom committed a prohibited practice as set out in the Competition Act, the CT may impose a maximum administrative penalty of 10% of Telkom`s annual turnover in the RSA and its exports from the RSA during Telkom`s preceding financial year. However, Telkom has been advised by external legal counsel that the CT has to date not imposed the maximum penalty on any offender. Omnilink Omnilink alleged that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom IVPN solution. The CC conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the CT for adjudication. This matter is currently being dealt with together with the SAVA matter as discussed above. Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the CC concerning Telkom offering discounts on public switched telecommunication services to corporate customers. The CC completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act by Telkom. However, in terms of section 51 of the Competition Act, a party may also refer a matter to the CT. Orion, simultaneously with filing its complaint at the CC, filed an application with CT, for an interim order interdicting and restraining Telkom from offering reduced rates to Orion`s corporate customers. Telkom has not yet filed its answering affidavit in the main complaint before the CT and it appears as if Orion is not actively pursuing this matter any further. Cape Chamber of Commerce The Cape Chamber of Commerce laid a complaint at the CC due to Telkom`s refusal to offer HomeDSL to business customers. Telkom replied to the CC on November 3, 2005.Telkom also met with the CC for an informal discussion and provided them with certain information. Due to the nature of Telkom`s ADSL product offerings since August 2006, Telkom requested the CC on November 15, 2006 to finalise the matter since the activity complained of has been addressed. There has been no further activity on this matter. ValueCard A complaint was lodged at the CC regarding the Telkom Closer Package. ValueCard, as a small business, wants to receive the Telkom Closer Package which is only available for residential customers. The complaint was served on Telkom on March 19, 2008. Telkom is still awaiting investigation of this complaint by the CC. Competition Commission referrals The CC served a notice of motion on Telkom on October 26, 2009, in which it referred the complaints by ISPA, MWEB and IS, Verizon, MWEB, and IS respectively, to the CT. In the notice of motion the CC requests an order against Telkom in the following terms: 1. Declaring that over the complaint period (2005 - 2007): - Telkom charged excessive prices to first tier ISPs for high bandwidth national leased lines (namely leased lines with bandwidth above 2 Mbps); - Telkom charged excessive prices to first tier ISPs for international private leased lines (`IPLCs`); - Telkom set its prices for Diginet lines, high bandwidth leased lines and IP Connect as charged to other first-tier ISPs (or, in the case of Diginet access lines, to end customers using the IP networks of such first tier ISPs) "at levels which, in relation to the prices charged by Telkom for the same services to its own retail and wholesale customers acquiring bundled Diginet or ADSL access and IP network services from Telkom, made it impossible for such other ISPs to compete cost- effectively with Telkom" (this essentially relates to Telkom`s VPN Supreme product); 2. Interdicting Telkom from continuing with the conduct referred to in paragraph 1 above; 3. In respect of certain of the contraventions above, an order directing Telkom to pay a penalty equal to 10% of its turnover for the financial year ended March 31, 2009; 4. An order in terms of which Telkom would be discouraged from perpetuating the conduct referred to in paragraph 1 above, by having the CT direct Telkom to provide the CC on an annual basis with such data and information as is necessary to enable the CC to assess whether Telkom is charging prices for the services mentioned in paragraph 1 above such that it prevents other ISPs from competing cost-effectively with Telkom. The form and nature of such data is to be agreed to between Telkom and the CC or, in the event that no agreement can be reached within two months of an order by the CT, in a form directed by the CT. In respect of the order requested from the CT directing Telkom to pay a penalty equal to "10% of Telkom`s turnover for the financial year ended March 31, 2009", we have been advised by external legal counsel that the CT has not to date imposed the maximum penalty of 10% on any offender. External legal counsel has further confirmed that, in terms of the Competition Act, the CT must consider a number of factors before deciding to impose the full 10% penalty. These factors include issues such as whether the guilty party is a repeat offender, the extent to which the party has co-operated with the CC and the CT, the nature, duration, gravity and extent of the contravention, etc. Telkom has commenced preparations for opposing the referral. Negative working capital ratio At each of the interim financial periods ended September 30, 2009 and 2008 and the year ended March 31, 2009 the Company had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities. 18. SEGMENT INFORMATION As of the beginning of the year the Group changed the reporting of its segment information to be in line with IFRS8 Segment Reporting. Previously the segments were fixed-line, mobile and other. The new reporting segments are business units that are separately managed. The Group consists of three segments. The Telkom SA segment provides fixed-line access, fixed-mobile and data communications services through Telkom South Africa. The Multi-Links segment provides fixed, mobile, data and international communications services in Nigeria. Other International provides internet services outside South Africa, through Africa Online and MWEB Africa subsidiaries and management services through Telkom Management Services Company. Other South Africa includes Trudon Group, formerly known as TDS Directory Operations, and the Group`s corporate centre. March September September
31 30 30 2009 2008 2009 Rm Rm Rm Business Segment Consolidated operating revenue 35,940 17,598 18,706 Telkom South Africa 33,642 16,554 17,026 Multi-Links 1,900 813 818 Other 1,299 663 894 International 194 63 234 South Africa 1,105 600 660 Elimination of intersegmental (901) (432) (32) revenue Consolidated operating profit 7,247 4,038 2,628 Telkom South Africa 9,220 4,726 3,862 Multi-Links (522) (265) (371) Other (1,833) (789) (691) International (178) (105) (41) South Africa (1,655) (684) (650) Elimination of intersegmental 382 366 (172) transactions Reconciliation Adjusted EBIT for reportable 7,247 4,038 2,628 segments Profit on disposal of - - 18,603 investment Compensation expense - - (946) Impairment of goodwill (501) (34) (2,148) Operating profit 6,746 4,004 18,137 Investment income 181 124 280 Gain on distribution of non- - - 25,688 cash asset Finance charges and fair value (2,843) (693) (793) movement Profit before taxation and 4,084 3,435 43,312 discontinued operations March September September
31 30 30 2009 2008 2009 Rm Rm Rm 19. RELATED PARTIES Details of material transactions and balances with related parties not disclosed separately in the condensed consolidated interim financial statements were as follows: With shareholders: Government Trade receivables 386 358 302 Revenue (2,767) (1,385) (1,360) With entities under common control: Major public entities Trade receivables 52 48 85 Trade payables (3) (26) (6) The outstanding balances are unsecured and will be settled in cash in the ordinary course of business Revenue (446) (214) (165) Expenses 212 64 106 Rent received (20) (10) (11) Rent paid 19 11 11 20. SIGNIFICANT EVENTS Disposal of Vodacom Group (Proprietary) Limited Telkom disposed of its interest in Vodacom by selling 15% to Vodafone Group Plc (`Vodafone`) and unbundling the remaining 35% to existing shareholders of Telkom. Telkom sold 15% of its entire share capital to Vodafone Group Plc (`Vodafone`) for R22,500 million less the attributable net debt of Vodacom as at September 30, 2008. Telkom agreed to distribute 50% of the after tax proceeds from the sale transaction to Telkom shareholders by way of a special dividend, which amounted to R9,740 million. The carrying amount of the net asset value at disposal date was R6,825 million. This resulted in a gain of R18,535 million being recognised in Other income. The remaining 35% was distributed to the existing shareholders of Telkom and accounted for in terms of IFRC17, Distribution of Non-Cash Assets to Owners. The fair value was calculated with reference to the Vodacom listing price at May 18, 2009. A gain on distribution was recognised in the statement of comprehensive income of R25,688 million. The impact of the shareholder approval on the amendment of the Telkom Conditional Share Plan is an expense of R946 million. 21. SUBSEQUENT EVENTS Change of Chairman Mrs Shirley Lue Arnold retired as a non-executive director and Chairman of Telkom on conclusion of her three year contract on November 1, 2009. Mrs Arnold presided over a number of strategic and organisational changes, including the Vodacom transaction, the African expansion and the more recent group restructure. Telkom is extremely grateful to Mrs Arnold and wishes to thank and acknowledge her for her leadership, dedication, contribution and service to the Telkom Group. Mr Jeff Molobela was appointed as a non-executive director (for a three year period) and as Chairman (for a 1 year period) with effect from November 1, 2009. Other matters The directors are not aware of any other matter or circumstance since the period ended September 30, 2009 and the date of this report, not otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of its operations. For more information please visit our website: www.telkom.co.za/ir 23 November 2009 Sponsor: UBS South Africa (Pty) Ltd Date: 23/11/2009 14:30:01 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.

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