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TKG - Telkom SA Limited - Telkom SA Limited Group Interim Results for the

Release Date: 21/11/2011 07:05
Code(s): TKG
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TKG - Telkom SA Limited - Telkom SA Limited Group Interim Results for the six months ended 30 September 2011 Telkom SA Limited (Registration number 1991/005476/06) JSE share code: TKG ISIN: ZAE000044897 Telkom SA Limited Group Interim Results for the six months ended 30 September 2011 The information contained in this document is also available on Telkom`s investor relations website www.telkom.co.za/ir Telkom SA Limited is listed on the JSE Limited. Information may be accessed on Reuters under the symbols TKGJ.J and on Bloomberg under the symbol TKG.SJ. Information contained on Reuters and Bloomberg is provided by a third party and is not incorporated by reference herein. Telkom has not approved or verified such information and does not accept any liability for the accuracy of such information. Special note regarding forward-looking statements Many of the statements included in this document, as well as oral statements that may be made by us or by officers, directors or employees acting on behalf of us, constitute or are based on forward looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our mobile and other strategies, future financial position and plans, objectives, capital expenditures, projected costs and anticipated cost savings and financing plans, as well as projected levels of growth in the communications market, are forward looking statements. Forward looking statements can generally be identified by the use of terminology such as "may", "will", "should", "expect", "envisage", "intend", "plan", "project", "estimate", "anticipate", "believe", "hope", "can", "is designed to" or similar phrases, although the absence of such words does not necessarily mean that a statement is not forward looking. These forward looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward looking statements. Among the factors that could cause our actual results or outcomes to differ materially from our expectations including but not limited to those risks identified in Telkom`s most recent annual report which are available on Telkom`s website at www.telkom.co.za/ir We caution you not to place undue reliance on these forward looking statements. All written and oral forward looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Moreover, unless we are required by law to update these statements, we will not necessarily update any of these statements after the date of this document, either to conform them to actual results or to changes in our expectations. Group salient features for the six months ended 30 September 2011 ADSL subscribers increased 13.7% to 795,419. - Calling plan subscribers increased 4.7% to 797,827. - Internet all access subscribers increased 3.9% to 556,886. - Managed data network sites increased 12.6% to 37,181. - Active mobile subscribers of 1,140,289 with a blended ARPU of R63.32 - Operating revenue down 3.2% to R16.4 billion. - Voice revenue decreased 5.5% to R6.6 billion. - Data revenue decreased 7.9% to R5.1 billion. - Operating expenses increased 8.2% to R15.4 billion. - Fixed-line operating expenses decreased 3.9% to R11.7 billion. - EBITDA margin decreased to 26.9% from 31.3%. -Basic earnings per share decreased 70.8% to 85.2 cents per share. -Headline earnings per share from continuing operations decreased by 35.5% to 191.7 cents. - Free cash flow of R1.5 billion. 1. OVERVIEW Johannesburg, South Africa - 21 November 2011, Telkom SA Limited (JSE: TKG) today announced Group interim results for the six months ended 30 September 2011. Segment structure The Group`s reporting segments are business units that are separately managed. The Group consists of two reportable segments. The fixed-line segment provides fixed-line access and data communications services through Telkom South Africa. The mobile segment provides mobile voice services, data services and handset sales through 8ta. The "other" category is a reconciling item which is split geographically between International and South Africa. Telkom International category provides internet services outside South Africa, through the iWayAfrica subsidiary. The South African category includes Trudon Group, Swiftnet, Data Centre Operations and the Group`s corporate centre. Comparative information has been restated to reflect the internal restructuring between the Telkom fixed-line segment and the corporate centre. The Multi-Links results are presented as discontinued operations. Statement by Nombulelo Moholi, Group Chief Executive Officer: "The six months under review have been very challenging. The traditional fixed-line market is shrinking as fixed-line voice moves to mobile and into less profitable data revenue streams and as price competition intensifies particularly in the data market. Line losses continue, self provisioning is growing which negatively impacts our wholesale revenues and regulatory intervention through termination rate cuts impacts our revenue streams. In addition, our mobile business is taking longer than expected to reach our targets. Operating revenue for the reporting period declined 3.2% to R16.4 billion. Operating expenditure increased 8.2% to R15.4 billion. The increase in operating expenditure is largely as a result of the R445 million impairment of iWayAfrica, higher depreciation which reflects our on-going investment in the network and mobile start-up expenditure after intercompany eliminations of R1.4 billion. The fixed-line business kept costs in check with operating expenditure decreasing 3.9% to R11.7 billion. Growing the EBITDA margin in the fixed-line business from 37.5% to 39.1% given current market conditions is an achievement. Cost control will remain a key area of focus. As a result of declining revenue and increasing costs, our EBITDA margin declined to 26.9% from 31.3% in the previous reporting period. Our headline earnings per share decreased 35.5% to 191.7 cents. Our results paint a tough picture of current operations. It is therefore imperative that we move into select adjacent markets to grow our revenue streams. We are transforming our network to allow us to move further into the mobile and select value-added ICT markets. Capital allocation is prefaced on customer requirements, commercial returns and the ability to differentiate. For Telkom, full convergence, an aggressive move into the broadband arena and improving performance of the mobile business will be the hallmarks of the successful execution of our strategy". 2. OPERATIONAL DATA Six months ended 30 September
2010 2011 % Telkom South Africa ADSL subscribers1 699,368 795,419 13.7 Calling plan subscribers 762,070 797,827 4.7 Closer subscribers 738,396 767,121 3.9 Supreme call subscribers 23,674 30,706 29.7 WiMAX subscribers 2,935 3,364 14.6 Internet all access 535,794 556,886 3.9 subscribers2 Fixed access lines (`000)3 4,234 4,073 (3.8) Post-paid - PSTN 2,592 2,513 (3.0) Post-paid - ISDN channels 776 767 (1.2) Pre-paid 748 675 (9.8) Payphones 118 118 - Fixed-line penetration rate (%) 8.5 8.1 (4.7) Revenue per fixed access line 2,374 2,402 1.2 (ZAR) Total fixed-line traffic 10,520 9,797 (6.9) (millions of minutes) Local 2,929 2,367 (19.2) Long distance 1,437 1,371 (4.6) Fixed-to-mobile 1,816 1,844 1.5 Fixed-to-fixed 43 73 69.8 International outgoing 271 203 (25.1) Subscription based calling 1,994 1,847 (7.4) plans Interconnection 2,030 2,092 3.1 Domestic mobile interconnection 1,041 1,172 12.6 Domestic fixed interconnection 506 497 (1.8) International interconnection 483 423 (12.4) Managed data network sites 33,023 37,181 12.6 Telkom Company employees 23,013 20,953 (9.0) Fixed access lines per 184 194 5.4 employee4 Other International iWayAfrica Active subscribers5 26,816 23,326 (13.0) Employees5 567 494 (12.9) Customer per employees5 47 47 - Other South African Trudon employees 520 528 1.5 Swiftnet employees 107 114 6.5 Year Six months ended
ended 31 March 30 September % 2011 2011 Telkom Mobile Total subscribers 1,199,596 2,203,419 83.7 Active subscribers6 473,604 1,140,289 140.8 Pre-paid 440,775 882,888 100.3 Post-paid 32,829 257,401 684.1 Base stations constructed 970 1,399 44.2 Employees7 228 267 17.1 ARPU (Rand)6 22.60 63.32 180.2 Pre-paid 15.86 20.47 29.1 Post-paid 238.57 286.09 19.9 Churn % - pre-paid - 41 - Minutes of use Pre-paid 10 21 110.0 Post-paid 235 109 (53.6) Blended 19 36 89.5 1. Excludes Telkom internal lines and includes business, consumer, corporate, government and wholesale customers. 2. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers. 3. Excludes Telkom internal lines. 4. Based on number of Telkom Company employees, excluding subsidiaries. 5. Excluding UUNet joint venture partner`s subscribers and employees in Kenya. 6. Based on a subscriber who has participated in a revenue generating activity within the last 90 days. 7. Included in Telkom Company employees. 3. STRATEGIC DIRECTION Globally, telecoms operators are coming under intense pressure as growth in fixed and mobile voice revenues slows considerably. The decline of fixed-line voice is a common theme across all markets. In comparison, a burgeoning appetite for data has boosted growth in broadband services. Broadband and new data intense services are challenging to monetise particularly in low density geographies like South Africa. Telco operators are also facing increasing competitive pressure from non telecom players like Internet and software players (e.g., Google, Skype, retailers, media players, handset manufacturers and infrastructure providers e.g., Huawei). The South African market mirrors these global trends. The changing domestic regulatory environment and increasing competition are forcing Telkom to re-assess its product and service offering. Notably, the interconnect glide path will drive a further decline in fixed revenues, while the advent of Local Loop Unbundling has potential to put additional revenues at risk. In addition, Telkom faces a series of internal challenges. Our labour productivity has room to improve, while we deal with an ageing workforce. We have not fully achieved our previous strategic goals, so a focus on execution is required. Finally, and most critically from a financial perspective, capital availability is scarce and cash flow will be constrained over the next three years. In this context, we understand that we must make a significant step change in our strategy and approach to execution, not simply to defend our market share, but to grow our business and our revenues. It is also clear that we need to be the best we can be in our current businesses while accessing growing revenue pools in selected adjacencies. Telkom is making two large investments (8ta and Network Transformation). Our entrance into adjacencies will need to be measured, with a strong focus on risk mitigation. To this end, we have set out to review and align our overall strategy and implement a five year plan that will enable us to achieve our aspirations. Our strategy is driven by a number of strategic thrusts across our four strategic areas, including: - Growing and defending profitable revenues in Consumer by increasing broadband penetration in South Africa, while playing a strong role as a content aggregator; - Growing and defending profitable revenues for Business customers through entry into high growth adjacencies focusing on Convergence, Value Added Services and ICT offerings; - Delivering on our mobile investment by executing on our aspirations to achieve 12% - 15% market share of revenues by 2015/16 and providing a unique Telkom converged offering; and - Transforming the network through the successful rollout of a next generation network that is commercially led. Executing on these strategic imperatives will be challenging, but we have a strong foundation of recent successes on which to build. We launched South Africa`s fourth mobile player, 8ta, in 2010 and have recently launched Telkom Business Mobile to early excitement in the market. Cybernest has also seen some early successes, and there has been progress on the network transformation. Internally, a number of positive changes in the management team will provide more stability after years of uncertainty, and we have defined clear strategies and plans to achieve the aspirations. The next step is to start putting the building blocks in place. We must align our regulatory and stakeholder management approach to our aspirations. In addition, we will need greater cross functional management of key initiatives, e.g., customer service, distribution and fixed mobile convergence. We have also laid out plans to rebalance our human capital in order to consolidate our labour cost position while effectively building the skills that will take Telkom into a new phase of performance. Telkom`s recent past has been challenging and uncertain, but through a cohesive and accountable culture that maintains an unwavering focus on execution, we hope to achieve our aspirations. 4. OPERATIONAL OVERVIEW Voice revenue Voice revenues declined 5.5% to R6,562 million as a result of lower minutes of use due to mobile substitution and, to a lesser extent, lower tariffs. Most categories of voice revenue declined and we expect traditional voice revenue to continue declining. Revenue from subscription based calling plans grew 1.5% to R819 million. The slowdown in calling plan revenue growth reflects the increased penetration of these products and difficult macro economic conditions as customers switch to the lower priced Telkom Closer 1 and 2 products. Voice annuity revenue, which includes line rental, calling plans, customer premises equipment rental and value added services grew 2.9% to R3,983 million. Interconnection revenue Interconnection revenue decreased 8.6% to R834 million reflecting a decrease in international interconnection tariffs and lower volumes on switched hubbing. There is a plethora of capacity in the international connectivity market and prices are expected to continue declining. Broadband and data revenue Total data revenue decreased 7.9% to R5,114 million as a result of income generated from the Soccer World Cup in the previous year. Excluding Soccer World Cup related revenue, data revenue decreased 2.1% as a result of increased self provisioning and lower internet access revenue. ADSL subscribers increased 13.7% to 795,419 when compared to the 30 September 2010 reporting period. Telkom`s share of net additions within the entire broadband market is declining as a result of the rapid growth in mobile broadband. With Telkom`s DSL penetration (excluding wholesale DSL) standing at only 19.5% of the fixed-line base there is opportunity for Telkom to offset declines in voice revenues by growing broadband penetration. We are enabling our target offering through high speeds and caps which include consistently greater value for the same price and an uncapped offering. We acknowledge that the broadband market is dominated by mobile players largely as a result of Telkom`s slow time to install and undifferentiated product offerings. This is as a result of network and technology constraints. These issues are being dealt with and we are focusing our efforts on delivering consistent, best in class customer experience and improving current customer satisfaction. We will also simplify and streamline our product offerings and communication. Our new product catalogue will be launched in November 2011. We are using new approaches in how we distribute these products, specifically developing our push (e.g., external sales agents) and new pull channels (e.g., third party retailers and online), while ensuring our staff are knowledgeable and customer oriented in our current channels. Data traffic is growing exponentially but is difficult to monetise and requires considerable capital investment. For this reason our network transformation is prefaced on customer requirements and commercial returns and is prioritised towards `no-regret" moves. We are also required to explore new business models, including select partnerships, in order to tap into innovation and aggregate the most relevant services and applications. Operating expenses Operating expenditure increased 8.2% to R15,382 million. This was largely as a result of mobile start-up operating expenditure after intercompany eliminations of R1,408 million and the impairment of iWayAfrica goodwill of R445 million. The fixed-line business reduced operating expenditure 3.9% to R11,693 million. Telkom is firmly committed to reducing its cost base. This must be done in a manner that ensures sustainable, long-term benefits. We have continued optimising staff vacancies through natural attrition and have been actively managing overtime and contractors spend in order to manage costs as far as possible. Other initiatives focus on increasing revenue per customer, product and channel rationalisation, contact centre consolidation, better management of capitalised cost and capital work in progress and process optimisation throughout the business. Management are aware that cost reduction, no matter how difficult, is essential. 8ta - Telkom`s mobile service Since 8ta`s launch a year ago on 14 October 2010, several key milestones have been accomplished: 8ta has been recognised for having the best data products offering great value for money. MyBroadband awarded 8ta "Mobile Data Provider of the Year (2011)" and "Mobile Maverick of the Year (2011)". We have achieved a strong performance in post-paid and data exceeding internal targets. While the distribution network is still in the early stages of development in terms of scale, training and merchandising, we have secured a fairly wide distribution with 113 Telkom Direct Stores, 6 Flagships stores, approximately 70,000 airtime points of sale, approximately 68,000 SIM card points of sale, and approximately 400 post- paid points of sale. We launched with 100% network coverage from day one as a result of the roaming agreement with MTN. Our network build out currently allows us to provide 8ta coverage to approximately 45% of the population in South Africa. Currently around 43% of all voice traffic and 84% of data traffic is carried on the 8ta network. We have completed construction of 1,399 base stations of which 1,052 are on the air. In addition, we recently launched a full suite of mobile products for Business that have been well received by the market. 8ta achieved revenue of R301 million and an EBITDA loss of R1,083 million for the six months ending 30 September 2011. Total revenue generating subscribers equalled 1,140,289 with pre-paid contributing 882,888 and post-paid 257,401. Pre-paid ARPU was R20.47 and post-paid ARPU R286.09. Blended ARPU was R63.32. At 30 September 2011 our market share was 1.9% with on-net traffic totalling 3% and off-net traffic 97%. Our main challenge is slower than budgeted pre-paid growth. Issues with getting distribution fully up-and-running have slowed us down. We are working jointly with our distribution partners to complete systems integration and are designing innovative commission structures to grow our footprint. We will also drive greater demand for the 8ta pre-paid product through increased focus on marketing and clear messaging on the value proposition of our products. 8ta offers the best value data product in the market. The Go Big data promotion was well received by the public and subscriber up take has been strong. We intend to offer new propositions early in the 2012 calendar year to strengthen our data offering and cater for new customer segments. We will also further leverage convergence as a differentiator, seamlessly switching between fixed and mobile infrastructure. We are expanding our network coverage in high demand areas to cater for pent up demand. Fifty trial LTE sites are also being rolled out to prepare for future customer requirements of higher speeds and improved quality of service. We expect to achieve an EBITDA loss for our mobile segment for the year ending 31 March 2012 of approximately R2.2 billion after eliminations and R2.5 billion before eliminations. Cybernest Cybernest has continued to gain traction in the market. While the majority of the R695 million revenue achieved in the six months to 30 September 2011 is generated from Telkom, non-Telkom revenue has increased 5.4% to R39 million. We are focusing our efforts on large customers with customised solutions and addressing smaller customers with packaged offers. Cybernest continues to optimise its network design to provide flexible solutions to high bandwidth client requirements. We continue with capacity increases, improving the network management and connectivity and increasing automation to improve productivity. We also continue to build our sales team and build credibility with customers through our strategic partnerships with industry leaders. Our product portfolio is growing as we moved up the IT value chain and we are working closely with Telkom SA`s enterprise team to offer customers expanded products and services. We remain optimistic about the prospects for this business. Trudon Trudon`s revenue decreased by 1.2% to R639 million while EBITDA and operating profit remained flat. The core printed directories business has reached maturity in South Africa. To keep pace with the changes in the marketplace, Trudon is evolving from being a publisher of traditional print products to being a local search solutions provider. Print usage by subscribers has reduced and younger users access information primarily through internet and mobile channels, rather than printed white or yellow pages. Trudon has no choice but to follow this migration and build up its capabilities and capacity to offer these products. This move will require capital investment of R145 million over the following two financial years. iWayAfrica During the six month under review iWayAfrica saw a decline in revenues of 21.2% to R175 million. Operating loss excluding the impairment improved 26.7% to a loss of R33 million. Telkom management is considering options to restructure this business. It is acknowledged that a footprint in Africa is desirable but not at any cost to the core Telkom business and only if management time can be justified on profitable operations. Multi-Links The sale of Multi-Links was concluded on 3 October 2011 and therefore did not impact the results for the six months ended 30 September 2011. Multi- Links had an operating loss of R269 million for the six months that is included in discontinued operations. The sale of Multi-Links will result in the recognition of a net loss of approximately R1 billion mainly due to the cumulative amount of exchange differences previously recognised in equity, that will be recognised in profit and loss on disposal of the Multi-Links foreign operation in the second half of the 2011 financial year. Telkom incurred costs of R80 million for the six months ended 30 September 2011 to exit this business that is included in continuing operations. Regulatory The two most pressing regulatory pressures currently are spectrum fees and local loop unbundling. Telkom is committed to continually engage with ICASA for the benefit of both the industry and Telkom. Spectrum licence fees and access - ICASA introduced Administrative Incentive Pricing (AIP) of spectrum through Regulations on 27 August 2010. These Regulations set the various pricing formulae that will be used in future to determine spectrum fees payable by licensees. The main aim of the regulations is to create incentives for spectrum users to optimise the effective and efficient use of the radio frequency spectrum, by incentivising the use of higher frequencies and in non-urban areas. The objective is to ensure that spectrum fees calculated through AIP reflect the market value of the radio frequency spectrum. Currently there is uncertainty regarding the implementation of the various formulae and data tables. Telkom and other industry players have formally requested further engagements with the Authority on the regulations. The indication from the Authority is that the implementation date of these regulations will be postponed. The implementation of these regulations has been postponed by ICASA to 1 April 2012 to allow ICASA to get the necessary systems in place to implement the new pricing formulae. Telkom is awaiting a formal communication by ICASA in this regard. The new proposed fee structure is expected to substantially increase the total spectrum fees payable by Telkom. Telkom is working on various options to reduce this amount using the incentive mechanisms built into the pricing formulae; however even after such optimisations, Telkom`s spectrum fees are still expected to increase by a significant amount. Local Loop Unbundling - Local Loop Unbundling (LLU) in its original form is a regulatory mandated process that allows multiple telecommunications operators to access and provide services over the last-mile copper infrastructure (i.e. from the local exchange to the customer premises) that is traditionally owned by the incumbent operator. The risk that LLU poses to Telkom`s profitability is dependent upon the form and details of implementation that will be imposed by ICASA, neither of which are known at this point in time. In addition, Telkom is not the same company it was when LLU was first considered and the market has changed significantly, particularly access technology. Telkom is of the view that any process which ICASA may follow to introduce LLU is likely to be undertaken on a legal basis which is not clearly defined in the Electronic Communications Act. The process will thus be open to interpretation and possibly result in disputes. Telkom has analysed various LLU options, and will continue to engage with key stakeholders. Public hearings on LLU have been held and we await ICASA`s publication to the Minister and Department of Communications on their findings and conclusion. KT Corporation transaction and further cautionary announcement Shareholders are referred to the SENS announcement released on 14 October 2011 regarding Telkom entering into discussions with KT Corporation (KT) regarding KT potentially acquiring a strategic equity shareholding of 20% in the post-issue ordinary share capital of Telkom. Discussions are continuing regarding areas of mutual strategic and business cooperation and long-term agreements required to formalise the relationship. Management view the transaction in a positive light given KT`s experience and wealth of skills in all areas of Telkom`s strategic aspirations. Shareholders are advised to continue to exercise caution when dealing in the Company`s securities until a further announcement is made. Guidance Capital expenditure for the Group is expected to range between 15% and 20% of revenue over the current financial year including the impact of our mobile investment. The targeted net debt to EBITDA is aimed at 1.4 times. In the short term we will operate at lower levels pending the cash outflows associated with the mobile related capital expenditure. 5. FINANCIAL PERFORMANCE The reported results for September 2010 have been restated for the effect of Multi-Links being classified as a disposal group held for sale. Group operating revenue Six months ended 30 September
In ZAR millions 2010 2011 % Fixed-line 15,968 15,345 (3.9) Mobile - 301 - Other International iWayAfrica 222 175 (21.2) Other South African Trudon 647 639 (1.2) Swiftnet 61 65 6.6 Data Centre Operations 614 695 13.2 Corporate centre 34 21 (38.2) Eliminations (620) (854) 37.7 Total 16,926 16,387 (3.2) Group operating revenue decreased by 3.2% to R16,387 million (30 September 2010: R16,926 million) in the six months ended 30 September 2011. The decrease is mainly due to lower fixed-line data and traffic revenues partially offset by mobile revenue included since the launch of 8ta in October 2010. Data Centre Operations includes R656 million (30 September 2010: R577 million) of internal revenue received from Telkom SA in terms of the transfer pricing policy. This revenue is eliminated on consolidation. Fixed-line operating revenue Six months ended 30 September In ZAR millions 2010 2011 % Subscriptions and connections 3,300 3,415 3.5 Traffic 6,032 5,728 (5.0) Local 1,461 1,257 (14.0) Long distance 809 734 (9.3) Fixed-to-mobile 2,543 2,574 1.2 Fixed-to-fixed 34 53 55.9 International outgoing 378 291 (23.0) Subscription based calling plans 807 819 1.5 Interconnection 912 834 (8.6) Mobile 356 462 29.8 Fixed 210 125 (40.5) International 346 247 (28.6) Data 5,550 5,114 (7.9) Data connectivity 2,707 2,670 (1.4) Leased line facilities 1,116 1,069 (4.2) Internet access and related 986 806 (18.3) services Managed data network services 641 545 (15.0) Multi-media services 100 24 (76.0) Other 174 254 46.0 Total 15,968 15,345 (3.9) Operating revenue from the fixed-line segment decreased by 3.9% to R15,345 million (30 September 2010: R15,968 million) primarily due to lower data revenue as a result of the inclusion of the revenue generated during the Soccer World Cup in the prior year and lower traffic revenue, partially offset by growth in subscriptions and connections revenue. Subscription and connections revenue increased by 3.5% to R3,415 million (30 September 2010: R3,300 million) largely as a result of higher tariffs partially offset by a decrease in the number of post-paid and pre-paid access lines. Traffic revenue decreased by 5.0% mainly due to lower local and long- distance revenue as a result of the substitution by mobile and ADSL and increased competition through VANS and Neotel. International outgoing revenue also shows a decreasing trend as a result of increased competition and newer technologies. Interconnection revenue decreased by 8.6% to R834 million (30 September 2010: R912 million) largely as a result of a decrease of 28.6% in international interconnection revenue and a 40.5% decrease in fixed interconnection revenue, partially offset by an increase in mobile domestic interconnection revenue. International interconnection revenue decreased primarily due to a decrease in tariffs and lower volumes on switched hubbing. The decrease in fixed domestic interconnection revenue is mainly as a result of lower volumes. Mobile interconnection revenue increased mainly due to higher volumes offset by lower price. Data revenue decreased 7.9% to R5,114 million (30 September 2010: R5,550 million) mainly due to the inclusion of the revenue generated from the Soccer World Cup in the prior year and lower SAIX internet access and related revenue. Mobile operating revenue Six months ended 30 September In ZAR millions 2010 2011 % Mobile outgoing - 130 - Post-paid - 107 - Pre-paid - 23 - Mobile interconnection - 37 - Fixed domestic - 2 - Mobile incoming - 35 - Subscriptions and value added services - 49 - Data - 44 - Internal revenue - 41 - Total - 301 - GROUP OTHER INCOME Six months ended
30 September In ZAR millions 2010 2011 % Fixed-line 126 109 (13.5) Mobile - 51 - Other International - iWayAfrica 9 4 (55.6) Telkom International 13 10 (23.1) Other South African Trudon 19 20 5.3 Swiftnet 2 2 - Corporate centre 73 101 38.4 Eliminations (59) (79) 33.9 Total 183 218 19.1 Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets as well as interest received from debtors and on loans to subsidiaries. Mobile other income relates to a donation of two base station controllers received. Interest received from subsidiaries is eliminated on consolidation. GROUP OPERATING EXPENSES Six months ended
30 September In ZAR millions 2010 2011 % Employee expenses 4,799 4,542 5.4 Payments to other operators 2,788 2,653 4.8 Selling, general and administrative 2,465 3,124 (26.7) expenses Service fees 1,392 1,476 (6.0) Operating leases 370 397 (7.3) Depreciation, amortisation, impairments 2,399 3,190 (33.0) and write-offs Total 14,213 15,382 (8.2) Group operating expenses increased by 8.2% to R15,382 million (30 September 2010: R14,213 million) in the six months ended 30 September 2011, primarily due to an increase in depreciation, amortisation, impairments and write-offs and selling, general and administrative expenses and partially offset by a decrease in employee expenses and payments to other operators. The increase in selling, general and administrative expenses is mainly due to the inclusion of mobile expenses for the period partially offset by a decrease in fixed-line bad debts and inventory write downs. Included in the depreciation, amortisation, impairments and write-offs is the R445 million goodwill impairment of iWayAfrica. The decrease in employee expenses is due to savings resulting from voluntary severance packages offered in the prior year. Lower payments to other operators are mainly attributable to the decrease in mobile and fixed-line termination rates, partially offset by the inclusion of 8ta`s payments to other operators. Service fees increased largely as a result of consulting fees relating to the sale of Multi-Links. Operating expenditure contribution per segment Six months ended 30 September In ZAR millions 2010 2011 % Fixed-line 12,162 11,693 3.9 Mobile 205 1,510 (636.6) Other International iWayAfrica 276 657 (138.0) Telkom International 17 15 11.8 Telkom Management Services 16 - 100.0 Other South African Trudon 379 372 1.8 Swiftnet 56 58 (3.6) Data Centre Operations 516 547 (6.0) Corporate centre 1,238 1,415 (14.3) Eliminations (652) (885) (35.7) Total 14,213 15,382 (8.2) The 8.2% increase in group operating expenses was primarily driven by the inclusion of mobile expenses for the full period and the R445 million impairment of the goodwill of iWayAfrica. This was partially offset by a decrease in employee expenses and payments to other operators and selling, general and administrative expenses in the fixed-line segment. Fixed-line operating expenses Six months ended
30 September In ZAR millions 2010 2011 % Employee expenses 3,768 3,492 7.3 Salaries and wages 2,885 2,815 2.4 Benefits 980 873 10.9 Workforce reduction expenses 103 6 94.2 Employee related expenses capitalised (200) (202) (1.0) Payments to other network operators 2,659 2,395 9.9 Payment to mobile operators 1,848 1,614 12.7 Payment to international operators 574 629 (9.6) Payment to fixed-line operators 237 152 35.9 Selling, general and administrative 1,790 1,684 5.9 expenses Materials and maintenance 939 981 (4.5) Marketing 138 210 (52.2) Bad debts 255 74 71.0 Other 458 419 8.5 Service fees 1,568 1,562 0.4 Property management 667 645 3.3 Consultants and security 901 917 (1.8) Operating leases 327 315 3.7 Buildings 76 79 (3.9) Equipment 20 7 65.0 Vehicles 231 229 0.9 Depreciation, amortisation, impairments 2,050 2,245 (9.5) and write-offs Depreciation 1,700 1,869 (9.9) Amortisation 300 270 10.0 Impairments and write-offs 50 106 (112.0) Total 12,162 11,693 3.9 Fixed-line expenditure decreased 3.9% in the six months ended 30 September 2011, to R11,693 million (30 September 2010: R12,162 million), primarily due to lower employee expenses, payments to mobile operators and selling, general and administrative expenses. Employee expenses decreased by 7.3% in the six months ended 30 September 2011, primarily due to lower salaries and wages and workforce reduction expenses as a result of the voluntary severance packages offered in the prior year and the expected return on plan assets of the Telkom Retirement Fund exceeded the interest and service cost. This was partially offset by higher mobile headcount and annual salary increases. Payments to mobile operators decreased 12.7% largely due to the reduction in mobile termination rates from 89 cents to 73 cents with effect from 1 March 2011. Payments to international network operators increased 9.6% due to higher volumes predominantly due to higher volumes mainly to Zimbabwe and Mozambique. Selling, general and administrative expenses decreased by 5.9% primarily as a result of lower bad debts and inventory write offs, partially offset by an increase in marketing expenses due to an increase in advertising and the restructuring of the market intelligence division from the corporate centre to the fixed-line segment. Mobile operating expenses Six months ended
30 September In ZAR millions 2010 2011 % Employee expenses 49 90 (83,7) Payments to other network operators - 169 - Selling, general and administrative 117 1,001 (755.6) expenses Service fees 37 136 (267.6) Operating leases 2 39 (1,850.0) Depreciation, amortisation, - 75 - impairments and write-offs Total 205 1,510 (636.6) Selling, general and administrative expenses relate mostly to direct network cost, maintenance and marketing expenses and includes bad debts. 8ta employees increased 17.1% since March 2011 to 267 employees. EBITDA PER SEGMENT (before eliminations) Six months ended
30 September In ZAR millions 2010 2011 % Fixed-line 5,982 6,006 0.4 EBITDA margin (%) 37.5 39.1 Mobile (205) (1,083) 428.3 EBITDA margin (%) - (359.8) Other International (39) (17) (56.4) EBITDA margin (%) (17.6) (9.7) Other South African (423) (446) 5.4 EBITDA margin (%) (31.2) (31.4) Eliminations (20) (47) 135.0 Total 5,295 4,413 (16.7) INVESTMENT INCOME Investment income consists of interest received on short-term investments and bank accounts. Investment income decreased by 16.5% to R111 million (30 September 2010: R133 million), largely as a result of lower cash balances and short term deposits. FINANCE CHARGES AND FAIR VALUE MOVEMENTS Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements decreased by 59.3% to R264 million (30 September 2010: R649 million) in the six months ended 30 September 2011, primarily due to a 24.8% decrease in interest expense to R379 million (30 September 2010: R504 million) mainly as a result of the 6.2% decrease from March 2011 in the Group`s net debt to R4,605 million and lower interest rates. Net fair value and foreign exchange rate movements resulted in a gain of R115 million for the six months ended 30 September 2011 (30 September 2010: loss of R145 million). The fair value and exchange rate gains were incurred due to the mark to market valuation of forward exchange contracts as a result of the weakening of the Rand against major currencies. TAXATION The consolidated tax expense from continuing operations decreased to R568 million (30 September 2010: R830 million). The consolidated effective tax rate for the six months ended 30 September 2011 was 53.1% (30 September 2010: 34.9%). The increase in the effective tax rate is mainly due to non- deductible impairment of the loan to Multi-Links and impairment of the investment and loans to iWayAfrica. These loans and impairments are reversed on consolidation. CONSOLIDATED STATEMENT OF FINANCIAL POSITION The Group`s financial position remains strong. Net debt, after financial assets and liabilities, from continuing operations decreased by 6.2% to R4,605 million from R4,907 million as at 31 March 2011 resulting in a net debt to EBITDA ratio of 0.5 times at 30 September 2011 and 31 March 2011. On 30 September 2011, the Group had cash balances of R1,267 million (31 March 2011: R1,773 million). The decrease in cash is mainly attributable to the repayment of a portion of the syndicated loan of R1,280 million. The Group`s current assets exceeded current liabilities by R59 million. The current portion of interest bearing debt increased due to the TL12 bond of R1,060 million that matures in April 2012. This was partially offset by a decrease in the current portion of employee related provisions due to the bonus provision being included only for six months. Free cash flow Six months ended 30 September In ZAR millions 2010 2011 % Cash generated from operations 1,883 2,987 58.6 before dividends paid Add back: Multi-Links operating cash 406 75 (81.5) flows Less: Cash flows from investing (2,102) (1,629) 22.5 activities Add back: Multi-Links cash flows 173 21 (87.9) from investing activities Free cash flow 360 1,454 303.9 Free cash flow in the six months ended 30 September 2010 includes the R608 million payment to Telcordia regarding the supplier dispute, R90 million STC on the special dividend, and R144 million employee reduction expenses. Lower capital expenditure also contributed to the increase in free cash flow. GROUP CAPITAL EXPENDITURE Group capital expenditure which includes spend on intangible assets, decreased by 10.1% to R1,805 million (30 September 2010: R2,007 million) and represents 11.0% of group revenue (30 September 2010: 11.9%). Six months ended 30 September
In ZAR millions 2010 2011 % Fixed-line 1,289 1,152 (10.6) Mobile 614 558 (9.1) Other International iWayAfrica 8 4 (50.0) Telkom International 5 - (100.0) Other South African Trudon 28 44 57.1 Swiftnet 9 23 155.6 Data Centre Operations 42 4 (90.5) Corporate centre 12 20 66.7 Total 2,007 1,805 (10.1) Fixed-line capital expenditure Six months ended 30 September In ZAR millions 2010 2011 % Baseline 815 747 (8.3) Network evolution 239 237 (0.8) Sustainment 30 57 90.0 Effectiveness and efficiency 87 64 (26.4) Support 99 35 (64.6) Regulatory and other 19 12 (36.8) Total 1,289 1,152 (10.6) Fixed-line capital expenditure, which includes spending on intangible assets, decreased by 10.6% to R1,152 million (30 September 2010: R1,289 million) and represents 7.5% of fixed-line revenue (30 September 2010: 8.1%). Baseline capital expenditure of R747 million (30 September 2010: R815 million) was largely for the deployment of technologies to support the growing data services business (including the ADSL footprint), links to the mobile cellular operators and expenditure for access line deployment in selected high growth commercial and business areas. The lower expenditure for the period can be attributed to a more measured approach to the roll-out of infrastructure to meet short-term demand for revenue generating services. The expenditure on network evolution of R237 million (30 September 2010: R239 million) was mainly for the deployment of capacity and automated restoration functionality for the National Transport Network, for continuation of the three approved submarine cable business cases and for the migration of identified Voice systems onto next-generation technologies. The sustainment expenditure of R57 million (30 September 2010: R30 million) is mainly attributed to the replacement of several obsolete network elements, direct-current (DC) power systems and for the replacement of the Telkom head-office PABX system. Telkom continues to focus on its operations support systems with current emphasis on hardware technology upgrades on the enterprise networks. During the six months ended 30 September 2011 R64 million (30 September 2010: R87 million) was spent on the implementation of several systems. The support capital expenditure of R35 million (30 September 2010: R99 million) is mainly for provision of new buildings and building extensions in support of network growth and for the development and upgrading of existing equipment buildings, including the associated AC power and air conditioning. The expenditure on regulatory requirements is primarily for the continuation of the lawful interception project, to implement a system to store and manage customer identification documentation. Mobile expenditure was mainly for the construction of mobile base stations, the radio access network and mobile operating support systems. The Corporate Centre expenditure was mainly for supply-chain enhancements and for property-related capital expenditure requirements. Auditors` Review Report Our auditors, Ernst and Young Inc. have reviewed the condensed consolidated interim financial statements. The unmodified review report is available for inspection at the Company`s registered office. Condensed consolidated interim statement of comprehensive income for the six months ended 30 September 2011 Restated* Reviewed
30 September 30 September 2010 2011 Notes Rm Rm Continuing operations Total revenue 4 17,231 16,701 Operating revenue 16,926 16,387 Other income 183 218 Operating expenses 14,213 15,382 Employee expenses 5.1 4,799 4,542 Payments to other operators 5.2 2,788 2,653 Selling, general and 5.3 2,465 3,124 administrative expenses Service fees 5.4 1,392 1,476 Operating leases 5.5 370 397 Depreciation, amortisation, 5.6 2,399 3,190 impairment and write-offs Results from operating activities 2,896 1,223 Investment income 133 111 Finance charges and fair value 649 264 movements Interest 504 379 Foreign exchange and fair value 145 (115) movement Profit before taxation 2,380 1,070 Taxation 6 830 568 Profit from continuing operations 1,550 502 Loss from discontinued operation 7 (472) (269) Profit for the period 1,078 233 Other comprehensive income Exchange differences on (77) 50 translating foreign operations Defined benefit plan actuarial (236) (44) losses Defined benefit plan asset 123 3 limitations Income tax relating to components 32 11 of other comprehensive income Other comprehensive income for 8 (158) 20 the period, net of taxation Total comprehensive income 920 253 Profit attributable to: Owners of Telkom 1,009 166 Non-controlling interest 69 67 Profit for the period 1,078 233 Total comprehensive income attributable to: Owners of Telkom 851 186 Non-controlling interest 69 67 Total comprehensive income for 920 253 the period Total operations Basic and diluted earnings per 9 198.6 32.5 share (cents) Continuing operations Basic and diluted earnings per 9 291.5 85.2 share (cents) *The amounts have been restated for the effect of Multi-Links being classified as a disposal group held for sale. Condensed consolidated interim statement of financial position at 30 September 2011 Audited Reviewed 31 March 30 September 2010 2011 Notes Rm Rm
Assets Non-current assets 43,943 42,409 Property, plant and equipment 37,304 36,525 Intangible assets 3,965 3,299 Investments 2,103 2,138 Deferred expenses 83 49 Finance lease receivables 239 240 Deferred taxation 56 43 Other financial assets 193 115 Current assets 10,315 9,713 Inventories 1,121 1,039 Income tax receivable 105 20 Current portion of deferred 10 - expenses Current portion of finance lease 118 124 receivables Trade and other receivables 5,503 5,824 Other financial assets 1,674 1,396 Cash and cash equivalents 11 1,784 1,310 Assets of disposal groups 7 89 228 classified as held for sale Total assets 54,347 52,350 Equity and liabilities Equity attributable to owners of 29,635 29,087 the parent Share capital 5,208 5,208 Treasury shares (771) (771) Non-distributable reserves 1,764 1,789 Retained earnings 24,467 23,872 Reserves of disposal groups 7 (1,033) (1,011) classified as held for sale Non-controlling interests 387 374 Total equity 30,022 29,461 Non-current liabilities 14,974 12,840 Interest-bearing debt 13 8,198 5,908 Other financial liabilities 69 30 Employee related provisions 14 4,711 5,096 Non-employee related provisions 14 29 48 Deferred revenue 1,073 925 Deferred taxation 894 833 Current liabilities 8,899 9,654 Trade and other payables 4,782 4,732 Shareholders for dividend 21 24 Current portion of interest- 13 157 1,362 bearing debt Current portion of employee 14 1,932 1,241 related provisions Current portion of non-employee 14 86 41 related provisions Current portion of deferred 1,771 1,851 revenue Income tax payable 16 277 Other financial liabilities 123 83 Credit facilities utilised 11 11 43 Liabilities of disposal groups 7 452 395 classified as held for sale Total liabilities 24,325 22,889 Total equity and liabilities 54,347 52,350 Condensed consolidated interim statement of changes in equity for the six months ended 30 September 2011 Reviewed Reviewed 30 September 30 September 2010 2011 Rm Rm
Balance at 1 April 30,264 30,022 Attributable to owners of Telkom 29,925 29,635 Non-controlling interests 339 387 Total comprehensive income for the period 920 253 Profit for the period 1,078 233 Other comprehensive income (158) 20 Exchange differences on translating (77) 50 foreign operations Net defined benefit plan losses and asset (81) (30) limitations Dividend paid (1,588) (814) Increase in share-based compensation 86 - reserve Balance at 30 September 29,682 29,461 Attributable to owners of Telkom 29,346 29,087 Non-controlling interests 336 374 Condensed consolidated interim statement of cash flows for the six months ended 30 September 2011 Reviewed Reviewed 30 September 30 September
2010 2011 Rm Rm Cash flows from operating activities 294 2,175 Cash receipts from customers 17,658 15,914 Cash paid to suppliers and employees (14,979) (12,553) Cash generated from operations 2,679 3,361 Interest received 270 311 Finance charges paid (377) (413) Taxation paid (689) (272) Cash generated from operations before 1,883 2,987 dividend paid Dividend paid (1,589) (812) Cash flows from investing activities (2,102) (1,629) Proceeds on disposal of property, plant 6 10 and equipment and intangible assets Additions to property, plant and (2,099) (1,639) equipment and intangible assets Acquisition of subsidiaries and joint (9) - venture Cash flows from financing activities (1,275) (1,046) Loans raised 291 851 Loans repaid (1,832) (2,079) Finance lease capital repaid (83) (87) Decrease in net financial assets 349 269 Net decrease in cash and cash equivalents (3,083) (500) Net cash and cash equivalents at 3,793 1,773 beginning of period Effect of foreign exchange rate 26 (6) differences Net cash and cash equivalents at end of 736 1,267 period* *For September 2010 and 2011 cash flow activities on discontinued operations refer to note 7. Notes to the condensed consolidated interim financial statements for the six months ended 30 September 2011 1. Corporate information Telkom SA Limited (Telkom) is a company incorporated and domiciled in the Republic of South Africa (South Africa) whose shares are publicly traded. The main objective of Telkom, its subsidiaries and joint ventures (the Group) is to supply telecommunication, broadcasting, multimedia, technology, information and other related information technology services to the general public, as well as mobile communication services in South Africa and certain other African countries. 2. Basis of preparation and accounting policies Basis of preparation The condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and in compliance with the Listings Requirements of the JSE Limited and the South African Companies Act, 2008. The condensed consolidated interim financial statements are prepared on the historical cost basis, with the exception of certain financial instruments initially (and sometimes subsequently) measured at fair value and share-based payments which are measured at grant date fair value. The results of the interim period are not necessarily indicative of the results for the entire year, and these reviewed financial statements should be read in conjunction with the audited financial statements for the year ended 31 March 2011. The preparation of condensed consolidated interim financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates are based on management`s best knowledge of current events and actions that the Group may undertake in the future, actual results may differ from those estimates. Significant accounting policies The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group`s last annual financial statements for the year ended 31 March 2011, except for the adoption of Improvements to IFRSs (2010 Improvements) as of 1 January 2011. The 2010 Improvements made several minor amendments to IFRSs. The relevant amendments and their effects on the current period or prior periods are described below. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these interim financial statements. IAS 1 Presentation of Financial Statements The amendment requires entities to present for each component of equity, an analysis of other comprehensive income either in the statement of changes in equity or in the notes. The Group provides this analysis in note 8. IAS 34 Interim Financial Reporting The amendment clarifies that it is unnecessary for interim financial statements to provide relatively insignificant updates as the users of financial statements have access to the most recent annual report. The amendment requires additional disclosures for fair values and changes in classification of financial assets, as well as changes to contingent assets and liabilities in interim condensed financial statements. The Group has illustrated those amendments in note 12 (consistent with prior periods). IFRS 3 Business Combinations The measurement options available for non-controlling interest (NCI) have been amended. Only components of NCI that constitute a present ownership interest that entitles their holder to a proportionate share of the entity`s net assets in the event of liquidation shall be measured at either fair value or at the present ownership instruments` proportionate share of the acquiree`s identifiable net assets. All other components are to be measured at their acquisition date fair value. The amendment does not have a material impact on the Group financial statement. IFRS 7 Financial Instruments: Disclosures The amendment emphasises the link between qualitative and quantitative disclosures to enable users of financial statements to form an overall picture of the nature and extent of risks arising from financial instruments. Detailed IFRS 7 disclosures are provided in the annual financial statements. Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the Group IFRS 3 Business Combinations - Clarification that contingent considerations arising from business combination prior to adoption of IFRS 3 (as revised in 2008) are accounted for in accordance with IFRS 3 (2005). IFRS 3 Business Combinations - Accounting for unreplaced and voluntarily replaced share-based payment awards within a business combination. IAS 27 Consolidated and Separate Financial Statements - Amendments clarifying that the consequential amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28 and IAS 31 resulting from IAS 27 (2008) should be applied prospectively. IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interactions - Prepayments of a minimum funding requirement. IFRIC 19 Extinguishing Financial Liabilities with Equity instruments - Interpretation clarifies the requirements of IFRSs in dealing with debt for equity swaps. Standards and interpretations in issue not yet adopted and not yet effective The new standards, amendments to standards and interpretations in issue have not yet been adopted and not yet effective. All standards are effective for annual periods beginning on or after the stated effective date. IAS 1 Presentation of Financial Statements - Amendments to revise the way other comprehensive income is presented (effective 1 July 2011) IAS 12 Income Taxes - Limited scope amendments on the recovery of underlying assets (effective 1 January 2012) IAS 19 Employee benefits - Amended standard resulting from the Post- Employment Benefits and Termination Benefits projects (effective 1 January 2013) IAS 27 Consolidated and Separate Financial Statements - Reissued as IAS 27 Separate Financial Statemets (effective 1 January 2013) IAS 28 Investments in Associates - Reissued as IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) (effective 1 January 2013) IFRS 7 Financial Instruments Disclosures - Amendments enhancing disclosures about transfers of financial assets (effective 1 July 2011) IFRS 9 Financial Instruments - Classification and Measurement (effective 1 January 2013) IFRS 10 Consolidated Financial Statements (effective 1 January 2013) IFRS 11 Joint Arrangements (effective 1 January 2013) IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013) IFRS 13 Fair Value Measurements (effective 1 January 2013) The condensed consolidated interim financial statements were authorised for issue by the Board of Directors on18 November 2011. The condensed consolidated interim financial statements were prepared by Mrs Dashni Sinivasan (Executive: Statutory Reporting) and supervised by Mr Deon Fredericks (Deputy Chief Financial Officer). 3. Segment information The Group consists of two reportable segments namely Telkom fixed-line and Telkom Mobile. The Telkom fixed-line segment provides fixed-line access, fixed-mobile and data communications services through Telkom South Africa. The Telkom Mobile segment provides mobile voice services, data services and handset sales through 8ta. The Other category is a reconciling item which is split geographically between International and South Africa. The International category provides internet services outside South Africa, through the iWayAfrica Group. The South African category includes Trudon Group, Swiftnet, Data Centre Operations (Cybernest) and the Group`s Corporate Centre. Included in the Data Centre Operations under the Other category is internal revenue of R656 million for the six months ended 30 September 2011 (30 September 2010: R577 million) that is eliminated on consolidation. Comparative information has been restated to reflect the reclassification on Multi-Links fixed-line as discontinued operations, as well as the internal restructuring between the Telkom fixed-line segment and the corporate centre which included moving the human resource and finance functions from Telkom fixed-line to the corporate centre. During the six month period ended 30 September 2011, there have been no changes from prior periods in the measurement methods used to determine operating segments and reported segment profit and loss. Restated 30 September 30 September 2010 2011 Rm Rm
Business segments Consolidated operating revenue 16,926 16,387 Telkom South Africa 15,968 15,345 Telkom Mobile - 301 Other 1,578 1,595 International 222 175 South African 1,356 1,420 Elimination of intersegmental revenue (620) (854) Consolidated operating profit 2,896 1,668 Telkom South Africa 3,932 3,761 Telkom Mobile (205) (1,158) Other (804) (887) International (65) (38) South African (739) (849) Elimination of intersegmental (27) (48) transactions Reconciliation Adjusted EBIT for reportable segments 2,896 1,668 Impairment of goodwill and property, - (445) plant and equipment Operating profit 2,896 1,223 Investment income 133 111 Finance charges and fair value movement (649) (264) Profit before taxation and discontinued 2,380 1,070 operations 4. Total revenue 17,231 16,701 Operating revenue 16,926 16,387 Other income (excluding profit on 172 203 disposal of property, plant and equipment, intangible assets) Investment income 133 111 Operating revenue decreased due to the inclusion of FIFA data revenue in the prior period, reduced fixed-line voice traffic revenue and lower switched hubbing volumes. 5. Operating expenses 14,213 15,382
5.1 Employee expenses 4,799 4,542 The decrease in salaries and wages is mainly due to savings of the voluntary employee severance packages process in the 2010 reporting period offset by an average salary increase of 7% as agreed with the unions for the current financial year. 5.2 Payments to other operators 2,788 2,653 The decrease in payment to other operators is mainly due to the reduction of mobile and fixed-line termination rates. 5.3 Selling, general and administrative 2,465 3,124 expenses Selling, general and administrative expenses increased mainly as a result of mobile direct costs. 5.4 Service fees 1,392 1,476 Service fees increased as a result of consultant costs, mainly due to the exit of Multi-Links. 5.5 Operating leases 370 397 Operating leases increased as a result of mobile site leases. 5.6 Depreciation, amortisation, 2,399 3,190 impairment and write-offs Depreciation of property, plant and 1,968 2,251 equipment Amortisation of intangible assets 379 339 Impairment of property, plant and - 445 equipment and intangible assets Write-offs of property, plant and 52 155 equipment and intangible assets
The increase in depreciation is due mainly to the review of the useful lives of property, plant and equipment limited to the current focus on the modernisation of the network. The impairment charge of R445 million relates to iWayAfrica Group goodwill impairment (30 September 2010: Nil). Increase in write-off is mainly as a result of scrapping of assets due to technical obsolesence. 6. Taxation 830 568 South African normal company taxation 586 536 Deferred taxation 86 (38) Secondary Taxation on Companies (STC) 156 69 Foreign taxation 2 1 The decrease in deferred taxation is primarily as a result of an increase in the accelerated depreciation on fixed assets and an increase in provisions.
The decrease in STC is due to the lower dividend paid during the year. STC is provided for at a rate of 10% on the amount by which dividends declared by Telkom exceed dividends received. 7. Disposal group Multi-Links Telecommunications Limited (Multi-Links) On 26 November 2010, Telkom announced that the Board had mandated management to review options for the exit of the CDMA business of Multi- Links in Nigeria. On 10 June 2011 the Telkom Board decided to stop funding Multi-Links after the deal to sell the CDMA business of Multi-Links to Visafone Communications fell through as a result of certain conditions precedent to the transaction not being met. On 26 June 2011 the Telkom Board made a decision to sell the entire issued share capital of Multi-Links to Helios Towers Nigeria Limited. The sale was conditional on inter-alia regulatory approvals. The completion date for the sale transaction was 3 October 2011. As at 26 June 2011 the CDMA business of Multi-Linkscontinued being classified as held for sale and the fixed-line business was also classified as discontinued on this day. Multi-Links` assets and liabilities were remeasured to the lower of carrying amount and fair value less costs to sell at the date of held-for- sale classification, 26 June 2011, and the date of disposal 3 October 2011. The impact of the sale transaction is disclosed in note 20. Restated 30 September 30 September
2010 2011 Rm Rm Analysis of the results of discontinued operations: Revenue* 742 159 Expenses* (1,214) (428) Loss before taxation of discontinued (472) (269) operations Taxation - - Loss after taxation of discontinued (472) (269) operations Pre-tax loss recognised on the re- - - measurement of assets of disposal group to fair value less costs to sell** Loss for the year from discontinued (472) (269) operations * Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses, finance charges and impairment of R198 million (2010: R201 million). ** The carrying amount and fair value less cost to sell are both negative, thus limited to nil. 31 March 30 September 2011 2011 Rm Rm The major classes of assets and liabilities of the business classified as a disposal group: Assets 89 228 Property, plant and equipment 29 70 Inventories 13 - Trade and other receivables 23 46 Deferred expenses 10 84 Cash and cash equivalents 14 28 Liabilities 452 395 Interest-bearing debt 7 62 Non-current portion of provisions 5 7 Current provisions 2 8 Trade and other payables 367 248 Deferred revenue 18 53 Credit facilities utilised 53 17 Reserve of disposal group held for sale Exchange difference on translating the (1,033) (1,011) disposal group 30 September 30 September 2010 2011
Rm Rm The net cash flows attributable to the operating, investing and financing activities of discontinued operations: Operating cash flows (406) (75) Investing cash flows (173) (21) Financing cash flows 435 143 Total cash (outflow)/inflow (144) 47 8. Taxation effects of other comprehensive income Taxation effects relating to each component of other comprehensive income Exchange differences on translating (77) 50 foreign operations Taxation effect of exchange differences on - - translating foreign operations Net foreign currency translation (77) 50 differences for foreign operations Defined benefit plan actuarial losses (236) (44) Taxation effect of defined benefit plan 66 12 actuarial losses Net defined benefit plan actuarial losses (170) (32) Defined benefit plan asset limitations 123 3 Taxation effect of defined benefit plan (34) (1) asset limitations Net defined benefit plan asset limitations 89 2 Other comprehensive income for the period (190) 9 before taxation Taxation effect of other comprehensive 32 11 income for the period Other comprehensive income for the period (158) 20 net of taxation Restated 30 September 30 September 2010 2011 Rm Rm
9. Earnings per share Total operations Basic and diluted earnings per share 198.6 32.5 (cents) Headline earnings and diluted headline 243.6 177.8 earnings per share (cents) Continuing operations Basic and diluted earnings per share 291.5 85.2 (cents) Headline earnings and diluted headline 297.0 191.7 earnings per share (cents) Discontinued operations Basic and diluted earnings per share (92.9) (52.7) (cents) Headline earnings and diluted headline (53.3) (13.9) earnings per share (cents) Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue 520,783,900 520,783,900 Weighted average number of treasury shares (12,635,247) (10,145,611) Weighted average number of shares 508,148,653 510,638,289 outstanding Reconciliation of diluted weighted average number of ordinary shares Diluted weighted average number of shares 508,148,653 510,638,289 outstanding Total operations Reconciliation between earnings and headline earnings: Profit attributable to equity holders of 1,009 166 Telkom Adjustments: Profit on disposal of property, plant and (11) (15) equipment and intangible assets Impairment loss on property, plant and 201 643 equipment and intangible assets Write-offs of property, plant and 52 155 equipment and intangible assets Taxation effects (13) (41) Headline earnings from total operations 1,238 908 Continuing operations Reconciliation between earnings and headline earnings: Pofit from continuing operations 1,550 502 Non-controlling interest (69) (67) Earnings from continuing operations 1,481 435 attributable to equity holders of Telkom Profit on disposal of property, plant and (11) (15) equipment and intangible assets Impairment loss on property, plant and - 445 equipment and intangible assets Write-offs of property, plant and 52 155 equipment and intangible assets Taxation effects (13) (41) Headline earnings from continuing 1,509 979 operations Discontinued operations Reconciliation between earnings and headline earnings: Loss from discontinued operations (472) (269) Non-controlling interest - - Earnings from discontinued operations (472) (269) attributable to equity holders of Telkom Impairment loss on property, plant and 201 198 equipment and intangible assets Headline earnings from discontinued (271) (71) operations Dividend per share (cents) 300.0 145.0 The calculation of dividend per share is based on dividends of R740 million (30 September 2010: R1,532 million) declared on 10 June 2011 (30 September 2010: 18 June 2010) and a number of ordinary shares on the date of dividend declaration of 510,638,289 (30 September 2010: 510,638,013). The reduction in the number of shares represents the number oftreasury shares held on date of payment. 31 March 30 September 2011 2011 Rm Rm 10. Capital additions Property, plant and equipment 4,333 1,721 Intangible assets 431 139 The capital additions for the six months was largely for the deployment of technologies to support the growing data services business, links to the mobile cellular operators, expenditure for access line deployment and construction of mobile base stations. Included in the property, plant and equipment additions is R51 million that relates to donation in kind received of two base station controllers which were installed and capitalised by Telkom Mobile. 11. Net cash and cash equivalents 1,773 1,267 Cash shown as current assets 1,784 1,310 Cash and bank balances 757 502 Short-term deposits 1,027 808 Credit facilities utilised (11) (43) The decrease in cash and bank balances and short-term deposits is due to the repayment of a portion of the syndicated loan and the settlement of Multi-Links operational expenses. 12. Financial risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Group. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors through its Audit and Risk Committee. The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group`s annual financial statements as at 31 March 2011. 12.1 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments of the Group. Liquidity risk is managed by the Group`s Treasury team in accordance with policies and guidelines formulated by the Group`s Executive Committee. In terms of its borrowing requirements the Group ensures that sufficient facilities exist to meet its immediate obligations. Compared to the 2011 financial year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities. 12.2 Fair value hierarchy The table analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: a) Quoted prices in active markets for identical assets or liabilities (level 1). b) Inputs other than quoted prices, that are observable for the asset or liability (level 2). c) Inputs for the asset or liability that are not based on observable market data (level 3). The following table presents the Group`s assets and liabilities that are measured at fair value as at 30 September 2011. 30 September 2011 Total Level 1 Level 2 Level 3 Rm Rm Rm Rm Assets measured at fair value Forward exchange contracts 326 - 326 - Investment in Cell Captive 2,127 - 2,127 - Cross currency swaps 74 - 74 - Liabilities measured at fair value Interest rate swaps (61) - (61) - Forward exchange contracts (52) - (52) - 31 March 2011 Total Level 1 Level 2 Level 3 Rm Rm Rm Rm Assets measured at fair value Forward exchange contracts 194 - 194 - Investment in Cell Captive 2,094 - 2,094 - Liabilities measured at fair value Interest rate swaps (25) - (25) - Cross currency swaps (16) - (16) - Forward exchange contracts (151) - (151) - The fair value of the financial assets and financial liabilities are sensitive to exchange rates and interest rates movements. The Rand depreciated against major currencies during September 2011 resulting in unrealised fair value gains. The volatility of the exchange rates also had an impact on the fair values of these instruments. During the six month period ended 30 September 2011, there were no transfers between the fair value levels. The movement in the forward exchange contract is due to fair value gains on revaluation of these instruments as a result of the weaker Rand against major currencies at the end of September 2011. No transfers between any level of fair value hierarchy took place in the comparative period. 31 March 30 September 2011 2011 Rm Rm 13. Interest-bearing debt Non-current interest-bearing debt 8,198 5,908 Local debt 6,918 4,609 Foreign debt 429 486 Finance leases 851 813 Current portion of interest-bearing debt 157 1,362 Local debt - 1,159 Foreign debt 98 134 Finance leases 59 69 Repayments/refinancing The Group partially repaid the syndicated loan of R1,280 million from available cash to reduce its interest expense and manage liquidity when the loan matures in December 2013. The current portion of interest-bearing debt of R1,362 million (nominal) as at 30 September 2011, includes the TL12 bond of R1,060 million that matures in April 2012. This current portion is expected to be repaid from available, operational cash flows or the issue of new debt instruments. Management believes that sufficient funding facilities will be available at the date of repayment/refinancing. 31 March 30 September 2011 2011
Rm Rm 14. Provisions Non-current portion of provisions 4,740 5,144 Employee related 4,711 5,096 Non-employee related 29 48 Current portion of provisions 2,018 1,282 Employee related 1,932 1,241 Non-employee related 86 41 The increase in non-current provisions is mainly due to the post- retirement medical aid provisions as a result of medical inflation. The reduction of the current portion of provisions is attributable to only six months bonus provision being made to date. 15. Commitments Capital commitments authorised 7,522 5,800 Commitments against authorised capital 1,072 1,371 expenditure Authorised capital expenditure not yet 6,450 4,429 contracted Capital commitments are largely attributable to purchasesof property, plant and equipment and software (included in intangible assets). Included in commitments against authorised capital expenditure and authorised capital expenditure not yet contracted, is R783 million (31 March 2011: R873 million) and R670 million (31 March 2011: R1,132 million) respectively which relates to Telkom Mobile. Management expects these commitments to be financed from internally generated cash and other borrowings. 16. Contingencies These contingencies must be read in conjunction with 31 March 2011 annual financial statements. COMPETITION COMMISSION Telkom is party to a number of legal proceedings filed by several parties with the South African Competition Commission (CC) alleging anti- competitive practices described below. Some of the complaints filed at the CC have been referred by the CC to the Competition Tribunal (CT) for adjudication. Should the CC find that Telkom committed a prohibited practice as set out in the Competition Act, the CT may impose a maximum administrative penalty of 10% of Telkom`s annual turnover in the RSA during Telkom`s preceding financial year. However, Telkom has been advised by external legal counsel that the CT has to date not imposed the maximum penalty on any offender in respect of the contraventions Telkom is being accused of. The South African Value Added Network Services (SAVA) This matter relates to the complaints filed by SAVA on 7 May 2002 and a complaint filed by Omnilink (in August 2002) against Telkom at the CC, regarding certain alleged anti-competitive practices by Telkom. These complaints were referred by the CC to the CT on 24 February 2004. The matter was set down for hearing at the CT from 17 to 28 October 2011 and from 1 to 9 December 2011. During an interlocutory skirmish regarding discovery by Telkom, the CT expressed a disconcerting view regarding its intention to consider an excessive pricing case different to that pleaded by the CC, despite two orders by the CT dismissing attempts by the CC to plead an excessive pricing case of this nature. Telkom raised its concern in this regard in a letter to the CC. At the close of the first session that was set down for hearing (from 17 to 28 October 2011), the CT closed its case. This means that the CC has led all of its witnesses (factual and expert witnesses) and Telkom`s counsel had an opportunity to cross examine each witness. The matter will now proceed on 1 December 2011 and Telkom expects to complete leading all of its evidence during the session set down in December (1 to 9 December 2011). The matter should thus be finalised as concerns of leading of evidence by 9 December 2011. The CT has, in anticipation of the matter being fully heard during December, set down the dates of 13 to 15 February 2012 for hearing arguments from both sides, whereafter it will make its ruling. Between now and 1 December 2011, the Telkom team will thus be preparing to lead Telkom`s evidence at the next session. Competition Commission Multiple Complaints Referral The CC served a notice of motion on Telkom on 26 October 2009, in which it referred complaints against Telkom by MWEB and Internet Solutions (IS) as well as the Internet Service Providers Association (ISPA), MWEB, IS and Verizon respectively to the CT. The CC alleged certain anti- competitive practices by Telkom. Telkom opposed the Multiple Complaints Referral and filed an exception application which was heard by the CT, and dismissed on 4 February 2011. As Telkom was struggling to obtain consent to access certain confidential information belonging to the complainants in the matter to enable Telkom to finalise its response, it launched an application to the CT in terms of section 45 of the Competition Act for a ruling regarding access to such confidential information. Almost simultaneously the CC filed an application in which it has asked the CT to compel the filing of Telkom`s answer. In its application the CC asked the CT to order that Telkom must file its answer within five days of the ruling by the CT in the CC`s application. The pleading in both applications was now closed and the matters were set down jointly for hearing by the CT from 5 to 9 March 2012. Internet Solutions (IS) IS filed a complaint at the CC in December 2007, alleging certain anti- competitive practices by Telkom. Certain parts of this complaint were referred to the CT by the CC. The non-referred parts of the complaint were self-referred by IS. Telkom filed an exception to IS` referral papers and the CT ruled that IS must amend its papers. However, the papers remain excipiable and Telkom has thus filed a second exception application on 4 April 2011. Telkom is awaiting IS` response to this exception application. Should Telkom`s exception application be upheld, IS` amended referral may be set aside, alternatively the CT may order IS to amend its papers, in which case Telkom will have to plead to IS` amended papers. Phutuma Networks (Proprietary) Limited (Phutuma) Telkom was informed by the CC that a complaint was filed by Phutuma at the CC, wherein Phutuma alleges that Telkom has contravened section 8(c) of the Competition Act no. 89 of 1998, as amended, by abusing its dominant position in engaging in anti-competitive conduct in the telegraphic and telex maritime services market by unilaterally awarding these services to Networks Telex. The CC non-referred the complaint on 28 June 2010. However, Phutuma self-referred its complaint to the CT on 20 July 2010, alleging that Telkom engaged in an exclusionary act by appointing Network Telex in 2007 "without any formal procurement process". Telkom filed its opposing affidavit in which it raised certain preliminary points, and Phutuma filed its replying affidavit. Telkom`s preliminary points were upheld by the CT on 2 March 2011 and Phutuma`s Complaint was dismissed with costs. Phutuma is appealing this decision and has filed a notice of appeal to the Competition Appeal Court. HIGH COURT Phutuma Networks (Proprietary) Limited (Phutuma) On 20 August 2009 Phutuma served a summons on Telkom for damages arising from a tender published on 30 November 2007 for outsourcing of the telex and Gentex services and for the provision of a solution to support the maritime industry requirements. The tender was cancelled on 10 June 2009, without any award being made, due to the expiration of the validity period. Phutuma has alleged that Telkom had awarded the tender to a third party outside a fair, transparent, competitive and cost effective procurement process. It has claimed damages of R3,730,433,545.00, alternatively R5,513,876,290.00, and further alternatively R1,771,683,580.00 plus interest at 15.5% per annum to date of payment from April 2008, alternatively from 30 April 2009 being the date of notice in terms of Act 40 of 2002, further alternatively from date of service of this summons plus costs of suit and further and/alternative relief. The matter was set down for trial from 24 October until 18 November 2011. On 24 October 2011 Phutuma brought an application to compel Telkom to make better discovery of documents and an application to adjourn the trial. The court dismissed Phutuma`s application for better discovery with costs. The court also adjourned the matter sine die and Phutuma was ordered to pay costs including Senior Counsel`s costs for two days and 50% for Senior Counsel`s fee for preparation of trial. South African National Road Agency Limited (SANRAL) During October 2009, SANRAL applied to the KwaZulu-Natal High Court for an interdict and declaratory order against Telkom. SANRAL requested the Court to grant an order preventing Telkom from installing facilities without compliance to the SANRAL Act and to remove facilities installed by Telkom in the N2 National road reserve in KwaZulu-Natal as part of Telkom`s FIFA project. On 25 October 2010, the Court granted a declaratory which prohibits Telkom from entering SANRAL`s land without compliance to the SANRAL Act. Telkom has filed an appeal to the full bench in High Court which will be heard on 6 February 2012. Bihati Solutions (Proprietary) Limited (Bihati) The matter arises from an award which was made on 8 November 2007 outside the validity period of 180 days, relating to construction of network services. In November 2009 the Board resolved to apply to the North Gauteng High Court to set aside the aforementioned award. Concurrently with the Telkom application to set aside the award, Bihati also applied to the North Gauteng High Court for the review and setting aside of the Board`s decision. On 7 January 2011 the Court granted Telkom`s application and dismissed Bihati`s application. Bihati was granted leave to appeal by the Supreme Court of Appeals. Telkom is opposing the appeal. SUPPLIER DISPUTE African Prepaid Services Nigeria (APSN) On 25 November 2010, Multi-Links (MLT) terminated a Super Dealer Agreement with APSN. On 14 June 2011, APSN delivered a statement of claim to MLT`s attorneys in which it is claiming amongst other claims, a total amount of US$481,199,101. MLT has filed a plea and a counterclaim for US$123,855,166 to the APSN claim. APSN has filed its defence to the MLT counterclaim. As part of the agreement of sale Telkom has guaranteed to accept liability for certain litigation claims against MTL if these claims exceed US$10 million. It is considered not to be probable that the claims will exceed the US$10 million. The arbitration is set down for hearing from 5 November 2012 until 14 December 2012. Radio Surveillance Security Services SA (Proprietary) Limited (RSSS) On 14 September 2011, RSSS served a summons against Tekom for R215,661,865.88 (including VAT) plus interest at the legal rate from 1 September 2011 and costs of suit. RSSS alleges that the monies are due for alleged upgrading and rendering of equipment purchased by Telkom to be compliant with the Telkom M3010 standard. Telkom defended the matter and filed an opposing affidavit against an application for summary judgement. RSSS has withdrawn the action against Telkom, with each party paying its own costs. On 14 September 2011, RSSS served a summons on Telkom for payment of various amounts for monitoring, maintenance and relocation of alarms purchased by Telkom during or about 2006. In its summons RSSS is claiming (a) R9,913,782.00 (inclusive of VAT) plus interest from 28 February 2011 to date of payment of account (b) interest at the legal rate on various amounts computed from different alleged due dates for payment (c) costs of suit. Telkom defended the matter and filed an opposing affidavit against an application for summary judgement. RSSS has withdrawn the action against Telkom with each partying paying its own costs. COMPLAINTS AND COMPLIANCE COMMITTEE ICASA COMPLAINT Phutuma Networks (Proprietary) Limited (Phutuma) During February 2010 Phutuma lodged a complaint against Telkom at the Complaints and Compliance Committee (CCC) of ICASA. The complaint is that Telkom has contravened the Preferential Procurement Framework Act, the Broad Based Black Economic Empowerment Act, the provisions of the repealed Telecommunications Act as well as the conditions of its licence. Telkom made submissions to the Committee. In July 2010 the matter was postponed to enable Phutuma to redraw its submissions in line with the Electronic Communications Act (ECA) and the new communication licences issued to Telkom. This was necessary for the CCC to have jurisdiction as the CCC cannot make rulings in relation to contraventions of the Preferential Procurement Act and/or the Broad Based Black Economic Empowerment Act. In March 2011, Phutuma had still not amended its complaint to be in line with the ECA and the new licences issued to Telkom. However, they raised new issues and there was an argument on the question of whether they were entitled to raise new issues. It is the judgment in respect of this issue, i.e. whether they are entitled to raise new issues not raised in the original complaint, which is outstanding and there is no indication of when this judgment will be handed down. OTHER National Consumer Commission (NCC) During the period, the NCC notified Telkom and 8ta that their standard terms and conditions were not compliant with the Consumer Protection Act (CPA). Telkom and 8ta subsequently amended their standard terms and conditions and are awaiting the NCC`s comments. The NCC issued Consent Orders on Telkom who have objected to these. If the NCC finds Telkom and 8ta to be non-compliant with the CPA, an administrative penalty of 10% of turnover may be imposed. Hip Oils Topco Limited (Hip Oils) Telkom has undertaken to indemnify any actual or contingent liabilities, obligations or other indebtedness of any nature owed or owing to trade, financial and other creditors of Multi-Links where such liability, obligation or other indebtedness was incurred and not disclosed to Hip Oils prior to the completion date. Tax Matters The Group is regularly subject to an evaluation, by tax authorities, of its direct and indirect tax filings. The consequence of such reviews is that disputes can arise with tax authorities over the interpretation or application of certain tax rules applicable to the Group`s business. These disputes may not necessarily be resolved in a manner that is favourable to the Group. Additionally, the resolution of the disputes could result in an obligation to the Group. 31 March 30 September 30 September 2011 2010 2011 Rm Rm Rm 17. Related parties Details of material transactions and balances with related parties are as follows: With shareholders: Government of South Africa Related party balances Trade receivables 354 360 355 Trade payables Department of Communications (371) (370) (374) Related party transactions Revenue 2,904 1,439 1,597 Individually significant revenue* 1,151 540 550 City of Cape Town 95 48 47 Department of Correctional 66 32 35 Services Department of Health: Gauteng 65 27 30 Department of Justice 97 43 52 South African National Defence 68 34 30 Force: (CSF) South African Police Services 557 251 257 South African Revenue Services 49 26 22 S.I.T.A. (Proprietary) Limited 154 79 77 Collectively significant revenue* 1,753 899 1,047 * The nature of the individually and collectively significant revenue consists mostly of data revenue.
At 30 September 2011, the Governmentof South Africa held 39.76% (2010: 39.76%) of Telkom`s shares and the Public Investment Corporation held 3.92% (2010: 3.92%) of Telkom`s shares and a further 8.95% (2010: 8.95%) through Black Ginger 33 (Proprietary) Limited. With entities under common control: Major public entities Related party balances Trade receivables 25 162 15 Trade payables (1) (3) (1) The outstanding balances are unsecured and will be settled in cash in the ordinary course of business. Related party transactions Revenue (332) (189) (218) Expenses 163 103 106 Individually significant expenses: 151 95 99 South African Post Office 55 50 47 Eskom 84 37 52 South African Broadcast 12 8 - Corporation Collectively significant expenses 12 8 7 Rent received (28) (15) (13) Individually significant rent (24) (13) (11) received: South African Post Office Collectively significant rent (4) (2) (2) received Rent paid 24 12 11 Individually significant rent paid: South African Post Office 14 7 7 Collectively significant rent paid 10 5 4 Key management personnel compensation: Related party transactions Short-term employee benefits 137 78 76 Post-employment benefits 7 4 4 Equity compensation benefits 12 3 - Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services are made at arm`s length prices. There have been no guarantees provided or received for related party receivables or payables. 18. Significant matters Appointment of Chief Financial Officer and director On 29 June 2011 the Telkom Board announced the appointment of Mr Jacques Schindehutte as Chief Financial Officer of Telkom with effect from 1 August 2011. Appointment of Independent Non-executive Director On 4 July 2011 the Telkom Board announced the appointment of Mr Itumeleng Kgaboesele as an independent non-executive director of Telkom with effect from 1 July 2011. Dividends The Telkom Board declared an ordinary dividend of 145 cents (2010: 125 cents) per share and a special dividend of Nil cents (2010: 175 cents) per share on 10 June 2011, payable on 11 July 2011 to shareholders registered on 8 July 2011. The Secondary Taxation on Companies impact is R47 million. 19. Subsequent events Telkom and KT Corporation Telkom and KT Corporation have entered into discussions regarding a potential strategic venture that would, if implemented, result in KT Corporation acquiring a strategic equity shareholding of 20% in the post- issue ordinary share capital of Telkom and the companies entering into long-term agreements to formalise the relationship and identified areas of mutual strategic and business cooperation. Multi-Links Telecommunications Limited On 26 June 2011 the Telkom Board made a decision to sell the entire issued share capital of Multi-Links to Helios Towers Nigeria Limited. The sale was conditional on inter-alia regulatory approvals. The completion date for the transaction was 3 October 2011. Refer to note 20 for Pro- forma financial statements. Other matters The directors are not aware of any other matter or circumstance since the financial period ended 30 September 2011 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of its operations. 20. Pro-forma condensed consolidated interim financial statements Pro-forma condensed consolidated interim statement of comprehensive income Reviewed Disposal Pro-forma 30 September of 30 September 2011 Multi-Links 2011
Rm Rm Rm Operating revenue 16,387 - 16,387 Other income 218 167 385 Operating expenses 15,382 - 15,382 Results from operating 1,223 167 1,390 activities Investment income 111 - 111 Finance charges and fair 264 1,343 1,607 value movements Interest 379 - 379 Foreign exchange and fair (115) 1,343 1,228 value movement Profit before taxation 1,070 (1,176) (106) Taxation 568 (204) 364 Profit/(loss) from 502 (972) (470) continuing operations Loss from discontinued 269 - 269 operation Profit/(loss) for the period 233 (972) (739) Total comprehensive 253 (972) (719) income/(loss) Earnings per share (cents) 32.5 (157.8) Headline earnings per share 177.8 177.8 (cents) Reconciliation of pro-forma headline earnings for the period ended 30 September 2011 Headline earnings calculation Basic earnings 166 (972) (806) Profit on disposal of (15) - (15) property, plant and equipment Profit on disposal of - (167) (167) investment Foreign exchange differences - 1 343 1 343 realised Impairment loss on property, 643 - 643 plant and equipment and intangible assets Write-off of property, plant 155 - 155 and equipment and intangible assets Taxation effects (41) (204) (245) Headline earnings 908 - 908 Pro-forma condensed consolidated interim statement of financial position Assets Non-current assets 42,409 - 42,409 Current assets 9,713 - 9,713 Assets of disposal groups 228 (228) - classified as held for sale Total assets 52,350 (228) 52,122 Equity and liabilities Total equity 29,461 39 29,500 Non-current liabilities 12,840 34 12,874 Current liabilities 9,654 94 9,748 Liabilities of disposal 395 (395) - groups classified as held for sale Total liabilities 22,889 (267) 22,622 Total equity and liabilities 52,350 (228) 52,122 21 November 2011 Sponsor: UBS South Africa (Pty) Ltd Date: 21/11/2011 07:05:01 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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