Group operating revenue increased 20.6 percent to R20 237 million (September 2015: R16 782 million), driven by the acquisition of BCX and higher mobile revenue. This was partly offset by the decline in fixed-line voice revenue.

Fixed-line voice usage and subscription revenue decreased by 4.4 percent to R6 965 million (September 2015: R7 286 million) driven by competition, mobile substitution, a 7.0 percent decline in the number of lines and customers migrating to lower value bundled offerings

Mobile voice and subscriber revenue increased 30.0 percent to R520 million (September 2015: R400 million). This can be attributed to a 42.3 percent increase in the number of active mobile subscribers and sustained blended ARPU of R88.84 (September 2015: R89.05).

Interconnection revenue decreased 11.2 percent to R531 million (September 2015: R598 million) due to competitive pricing.

Revenue from data connectivity services increased slightly to R3 327 million (September 2015: R3 309 million). The slight increase is due to the growth in Metro-Ethernet services as a result of the migration of customers from legacy leased lines and an increase in broadband revenue driven by a 0.3 percent increase in fixed broadband subscribers to 1 018 405 (September 2015: 1 015 307). Since March 2016 we have seen a migration from ADSL to LTE products. Mobile broadband subscribers increased 44.5 percent to 2 275 513 (September 2015: 1 575 038).

Growth of 1.4 percent in Internet access and related services revenue to R994 million (September 2015: R980 million) due to an increase in e-Business revenue.

Managed data network services revenue increased 5.2 percent to R566 million (September 2015: R538 million) due to higher VPN supreme and satellite revenue.

Mobile data revenue increased 43.2 percent to R1 018 million (September 2015: R711 million) driven by our strategy to focus on data which led to a 134.7% increase in mobile data traffic.

Group customer premises equipment sales increased 15.3 percent to R1 707 million (September 2015: R1 480 million) mainly due to increased mobile handset and equipment sales.

Other income includes profit on the disposal of investments, property, plant and equipment, interest received from debtors and sundry income.

Other income decreased 29.0 percent to R401 million (September 2015: R565 million) due to a decline in properties sold in the current period, partly offset by R57 million profit from BCX for a 60% sale of their share in Nanoteq effective 30 September 2016.

Group direct expenses increased 89.1 percent to R6.4 billion mainly as a result of the consolidation of BCX.

Payments to mobile network operators decreased 10.0 percent to R688 million (30 September 2015: R764 million) mainly driven by interconnect traffic lost due to competitive pricing.

Payments to international network operators decreased 8.8 percent to R291 million (30 September 2015: R319 million) as a result of interconnect traffic lost due to competitive pricing.

Payments to fixed-line network operators decreased 20.3 percent to R110 million (30 September 2015: R138 million) due to lower traffic volumes from VANS and other fixed-line operators.

Direct cost increased 42.8 percent as a result of an increase in the subscriber acquisition costs due to the significant growth in our mobile subscribers.

Including the consolidation of BCX for six months in the current period and one month in the prior corresponding period total group operating expenses increased by 1.0% to R11 658 million (September 2015: R11 543 million).

Telkom’s operating expenses decreased 6.4 percent mainly as a result of employee cost optimisation and cost initiatives implemented in the prior corresponding period.

Employee expenses were 14.6 percent lower due a lower headcount emanating from voluntary severance and retirement packages and the outsourcing of the call centres in the prior corresponding period. The headcount decreased 14.3 percent to 12 184 full-time employees. No increases were granted to bargaining unit and management employees. A performance pay structure was implemented for the bargaining unit with an average incentive payment of 6% for the period ended 30 September 2016.

Selling, general and administrative expenses increased 6.6 percent to R2 663 million (September 2015: R2 497 million) mainly due to increased outsourcing cost and our focus on service improvement.

Service fees decreased 11.1 percent to R1 281 million (September 2015: R1 441 million) largely due to effective property management through successful contract negotiations. The 27.5 percent decrease in vehicle leases was mainly attributed to the transition of our vehicle supply contract in the prior corresponding period.

Depreciation increased 1.5 percent to R2 598 million (September 2015: R2 559 million) due to accelerated depreciation as we intensify our roll-out of fibre and LTE as new technologies and higher asset write-offs. The group reassessed the useful lives on certain technologies. The reassessment of useful lives had the effect of increasing the depreciation expense for the period ended 30 September 2016 by R165 million (2015: R98 million). The total depreciation for future periods will be lower due to the reassessment.

Investment income

Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 10.3 percent to R128 million (September 2015: R116 million) mainly as a result of the inclusion of BCX for six months in the current period and one month in the prior corresponding period.

Taxation

The normalised tax expense decreased by 1.1 percent to R519 million (September 2015: R525 million) and excludes the R446 million tax benefit on the voluntary severance and retrenchment expenses in the prior corresponding period

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 the cell captive as well as foreign exchange gains and losses on foreign currency denominated transactions and balances.

Foreign exchange and fair value movements decreased 16.1 percent to a loss of R78 million (September 2015: R93 million loss). This decrease was mainly attributable to a fair value gain (prior year was a loss) on revaluation of the underlying assets held by the cell captive as a result of favourable market conditions, partly offset by the strengthening of the Rand against foreign currencies and a foreign currency devaluation impact of R35 million recorded by BCX. The interest expense increased 24.5 percent to R300 million (September 2015: R 241 million) mainly attributable to new term debt raised.

Consolidated statement of financial position

Despite the decrease in net debt, including financial assets and liabilities, to R3 428 million from R4 011 million as at 30 September 2015, our Group’s capital structure remains strong with a net debt to EBITDA ratio of 0.3 times. On 30 September 2016, the Group had cash balances, including other financial assets and liabilities of R1 530 million (30 September 2015: R623 million). We remain lowly geared with a comfortable debt maturity profile.

Free cash flow decreased 83.3% due to an increase in capital expenditure as we focus on our fibre and LTE roll out.

Group capital expenditure

Our capital expenditure programme has been aligned to focus on the growth areas of our business which include Fibre to the home and LTE as well as cost and operational efficiencies emanating from network rehabilitation and our OSS/BSS programme.

Group capital expenditure, which includes spend on intangible assets, increased 55.8 percent to R3 639 million (September 2015: R2 335 million) and represents 18.0 percent of Group operating revenue (September 2015: 13.9 percent).

The Fibre expenditure of R929 million (September 2015: R343 million) has been aligned to the company strategy and there is an enhanced focus on FTTH/B deployment.

Mobile capital expenditure increased 277.1 percent to R758 million (September 2015: R201 million), due to the focus on continued LTE deployment, for the provision of fixed wireless access via LTE and Mobile LTE products and the continued roll-out of the 1 800 MHz re-farming project.

OSS/BSS programme expenditure increased 100.6 percent to R325 million (September 2015: R162 million) and is focused on operational and business support systems to ensure fulfilment assurance and billing requirements relating to our product portfolio. The NGN OSS/BSS programme will continue to focus on the improvement of operational efficiencies and will support the launch of next generation products.

Network rehabilitation and sustainment category expenditure of R192 million (September 2015: R167 million) was largely linked to the replacement of obsolete power systems as well as the replacement and modernisation of the access and core network. The increase is due to a focus on access network rehabilitation to improve the customer experience for voice and data services.

Service on Demand expenditure decreased 6.9 percent to R658 million (September 2015: R707 million). The focus area of this expenditure spans across revenue protection and revenue growth with an expected return profile in the short to medium term.

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The core network growth expenditure increased to R392 million from R87 million in September 2015 and is related to the continued roll-out of the next generation network.

The 61.9 percent decrease in other capital expenditure of R158 million (September 2015: R415 million) is mainly attributable to the Centurion campus optimisation expenses incurred in the prior period and the focus of the key company initiatives.

Annexure A

Below are the results of BCX for the six months ended 30 September 2016 and one month ended 30 September 2015 that have been consolidated before inter-group eliminations:

* Cost of sales
When inventories are sold, the carrying amount is recognised as part of cost of sales. Any write-down of inventories to net realisable value and any loss of inventory or reversals of previous write-downs or losses are recognised in cost of sales in the period the write-down, losses or reversal occurs. Manpower costs, depreciation charges and any other expenses incurred in delivering a service are also recognised as part of cost of sales.

BCX has seen a healthy growth in its solutions and service delivery and international business areas partly offset by a decline in smart office connection revenue. BCX also increased its capacity for innovative business solutions by purchasing the business of relational database consulting enabling it to expand its existing offerings while, at the same time, improving its Oracle service offering.

Stable international revenue growth has been recorded in Nigeria, Mozambique and Namibia. Growth in the international business is driven by cloud-based service offerings combined with large scale public sector opportunities. The business has however been negatively impacted by the foreign currency devaluation in Nigeria and Mozambique.

Cost incurred by BCX relating to the revenue generated internally amounts to R782 million. Please note that these numbers are not eliminated on consolidation. Excluding these costs BCX generated external operating profit of R325 million.