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Telkom stabilises the business for future growth

Group salient features for the six months ended 30 September 2013

• Profit after tax increased 41.1% to R773 million
• Headline earnings per share increased 121.8% to 224.2 cents
• Revenue increased 0.3% to R16,2 billion
• Mobile data revenue increase 50.0% to R303 million
• EBITDA decreased 0.4% to R3.9 billion
• Operating expenses increased 2.4% to R12,496 million
• Capital expenditure increased 49.5% to R3,173 million

Telkom SA SOC Limited today reported its Group interim results for the six months ended 30 September 2013 with headline earnings per share of 224.2 cents from 101.1 cents in the prior reporting period. This was primarily due to higher fair value gains as a result of the weakening rand and lower payments to mobile operators relating to the decrease in mobile termination rates. It excludes the curtailment gain of R2,173 million recognised on the post-retirement medical aid liability and the provision for the Competition Commission fine of R389 million in the prior period.

Operating revenue increased 0.3% to R16,2 billion due to higher mobile data and Business IT services revenue, which was partially offset by lower fixed-line voice revenue. Mobile data revenue increased 50% to R303 million resulting from a rise in the number of data subscribers and data deals and promotions launched during the period.

"These results show that we are improving efficiencies and laying the foundation to stabilise Telkom's business performance," said Sipho Maseko, Group Chief Executive Officer at Telkom.

"We are actively cutting costs, the Group continues to generate strong cash flows and we are investing in our access network infrastructure which will improve our competitiveness and revenues in the years ahead."

Maseko highlighted the increase in data revenues - mobile data revenue increased by 50% while revenues from Telkom's Business IT services were up by 110%.

"Telkom is working hard to capture the data opportunity in South Africa. Data revenue constituted 33.7% of group revenue and increased by 3.1% overall. Lower prices on data due to competitive offerings continue to negate the volume growth experienced in this area. While we are encouraged by the improvement in mobile data revenue, we continue to explore all avenues to de-risk the mobile business."

Excluding the curtailment gain recognised on the post-retirement medical aid liability and the provision for the Competition Commission fine in the prior period, operating expenditure increased 2.4% to R12,496 million. The Group's capital structure remains sound, despite large cash outflows resulting from payments of severance packages, higher creditor payments resulting from the weakening of the Rand against major currencies, payment of part of the Competition Tribunal fine and an increase in capital expenditure. Net debt, after financial assets and liabilities, decreased 4.6% to R2,029 million from R2,122 million.

"Through prudent cost management, we aim to stabilise the Group's financial performance going forward," said Maseko. "While we have made progress in curbing operating expenditure to some extent, it will take time to transform Group revenue into strong positive growth."

Capital expenditure increased 49.5% to R3,173 million from R2,123 million. Telkom continues to invest in modernising its network to provide high speed, quality and reliable broadband to all South Africans. The scale of its network is unparalleled and is a key enabler for the Group to lead in data transmission.

"Defining our role clearly as a listed national fixed line and mobile service provider will allow us to address shareholder expectations. Through its people, technology and infrastructure, Telkom has the unique opportunity to meet the needs of all its stakeholders: our shareholders, customers, employees and the broader society," added Maseko.

Looking ahead, the CEO said Telkom was instilling a disciplined approach to capital allocation. It would invest in areas where it had leadership, and place a greater emphasis on productivity and returns. Infrastructure investment, in particular, would be returns-driven.

"Telkom has the most extensive infrastructure network in the country. We need to monetise that advantage and drive the take-up in high-speed broadband services enabled by our Next Generation Network. Additionaly, the National Broadband Plan has the potential to provide Telkom with the opportunity to improve the scale and efficiency of its network.

"There is a window of opportunity for Telkom to become the leader in data transmission, but we must act with speed and determination to commercialise our competitive advantage. We will invest in the right technologies, drive execution capability and connectivity," he said.

Telkom's Board and management team have already resolved several long-standing issues affecting the performance of the Group, including impairing a large portion of the Group's legacy assets, settling Competition Commission penalties, and reviewing the post-retirement medical aid liability.

The curtailment gain recognised for the post-retirement medical aid liability resulted from a review of the underlying actuarial assumptions that support the recorded liability. Extensive consultations took place with the staff members that were eligible for post-retirement medical aid benefits. An offer was made at economic value to qualifying employees to settle the liability. The offer was accepted by 81% of eligible staff members. The offer was not compulsory and eligible staff also had the option to retain the benefit with Telkom or have them transferred to an insurer. The growth assumption for the subsidisation amount at retirement were capped at 0%

Note to editors: The net curtailment gain of R2,173 million recognised on the post-retirement medical aid liability is not part of the results from operations for the period under review and has been excluded in the discussion above. A provision of R389 million for the Competition Commission fine in the prior period has also been excluded for comparative purposes.

Telkom is a leading communications services provider in South Africa. We had consolidated operating revenue of R16.8 billion and normalised profit after tax of R1, 683 million for the period ended 30 September 2015. Total assets amounted to R41.9 billion and equity attributable to the owners of Telkom to R23.5 billion as of 30 September 2015. The group generated normalised free cash flow of R1.4 billion for the period ended 30 September 2015.