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Telkom puts the focus on execution

Telkom Group CEO, Nombulelo Moholi, has emphasised an unwavering focus on execution of its strategy when the group's results were announced today.

Ms Moholi described the South African telecommunications market as one under intense pressure as growth in fixed and mobile voice revenues slows considerably. She noted that this reflected global trends with the "decline of fixed voice" being a common theme across all markets. In response Telkom has to tread the fine balance of managing the decline in Fixed Line revenue while investing wisely to capture new revenue streams.

The interim results cover the six months ended 30 September 2011.

Headline earnings per share declined by 36% to 191.7 cents per share largely as a result of the start-up losses relating to the group's entry into the mobile market.

Earnings before interest, tax, depreciation and amortisation (EBITDA) of R4.4 billion were recorded and reconfirm the strong cash flow generating capability of the group. Although 17% lower than the corresponding period because of the mobile initiative, this enabled the company to invest a further R1.8 billion of capital expenditure without changing its low utilisation of debt financing.

Operating revenue for the period under review declined by 3.2% to R16.4 billion. Services that recorded revenue growth in the last 6 months include Subscriptions and Connections (up 3.5%), Calling Plans (up 1.5%), Fixed to Mobile (up 1.2%) and mobile interconnection revenue (up 29.8%). Data revenue declined by 7.9% to R5.7 billion even though good growth was recorded in ADSL and Internet access subscriber numbers.

Operating expenses, excluding depreciation and impairments, have been curtailed and have increased by only 3.2% to R12.2 billion. "Growing the EBITDA margin in the fixed-line business from 37.5% to 39.1% given current market conditions is an achievement," said Ms Moholi.

The changing domestic regulatory environment and increasing competition has forced Telkom to rethink its model and service offering. The interconnect glide path will drive a further decline in fixed revenues, while the advent of Local Loop Unbundling has the potential to put additional revenues at risk.

"Telkom faces a series of formidable challenges. 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 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," said Ms Moholi

Telkom has set out to review and align its overall strategy and implement a 5 year plan that will enable the company to achieve its aspirations. The strategy is driven by a number of thrusts across 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 Telkom has a committed and competent workforce, extensive infrastructure assets and a leadership team that is determined to succeed, she said.

The salient features of the Group's results for the six months ended 30 September 2011 were:

• 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.
• 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 expenses increased 8.2 % to R15.4 billion.
• Fixed-line operating expenses decreased 3.9% to R11.7 billion.
• Free cash flow of R1.5 billion.
• EBITDA margin decreased to 26.9% from 31.3%.
• Headline earnings per share from continuing operations decreased by 35.5% to 191.7 cents.
• Basic earnings per share decreased 70.8% to 85.2 cents per share.

ADSL subscribers increased 13.7% to 795,419 when compared to the 30 September 2010 reporting period. However, 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," said Ms Moholi.

"We launched South Africa's fourth consumer mobile player, 8.ta, 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.

Commenting on the mobile arm of business, Ms Moholi revealed that South Africa's fourth mobile operator, 8.ta, which was launched in October 2011 has achieved several successes to date including: 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 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 has been well received by the market," she added.

8.ta 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.

"Being the fourth entrant in a mature market that has two dominant players is proving to be every bit as challenging as market commentators predicted. Our challenge will be to reduce the drain on the group EBITDA over the next few years but failure is not an option. Management's number one priority is to differentiate our mobile offering to enterprise and consumer customers. This differentiation lies primarily in leveraging our strong position in the fixed line arena." said Ms Moholi.

She explained that 8.ta had faced a number of challenges, "Our main concern is the slower than planned pre-paid revenue growth. This is the direct result of our inability to optimise conventional distribution channels. We are working jointly with our distribution partners to complete systems integration and are designing innovative commission structures to grow our footprint. "

8.ta will continue to offer 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 good.

"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."

Ms Moholi referred to the SENS announcement release on 14 October 2011 regarding Telkom entering into discussions with KT Corporation (KT) to explore 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. Management remains positive disposed to the transaction because KT has a proven track record in executing a strategy similar to that of Telkom. This partner will help us expedite and de-risk the execution of our strategy" she said. I want to reiterate my commitment to work constructively with all the stakeholders of Telkom, especially labour, to ensure the success of Telkom.