The Nigerian operations reported EBITDA losses at similar levels to those of September 2008. Trading conditions remain tough as a result of local economic factors, pricing pressures, handset subsidies and newly established distribution channels. The newly appointed distribution agents are still at an early stage of establishing new distribution channels and average revenues per subscriber remained low in an intensely competitive market. The weaker Nigerian economy has placed increased pressure on consumer spending.
The impact of the items discussed above on group earnings for the six month period is as follows:
Unusual item |
Line item affected |
Value |
---|---|---|
Profit on the sale of 15% of our share in Vodacom | Other income | R18,535 million |
Profit on the unbundling of 35% of our share in Vodacom | Gain on distribution of assets | R25,688 million |
Capital gains tax on the sale and unbundling | Taxation | R1,353 million |
Secondary taxation on companies ('STC') on the special dividend relating to the sale of Vodacom | Taxation | R977 million |
Reversal of the deferred tax asset relating to capital gains tax on the Vodacom sale | Taxation | R421 million |
Compensation expense recognised in terms of IFRS2 relating to the amendment of the Telkom Conditional Share Plan | Employee expenses | R946 million |
Impairment of goodwill of Multi-Links Nigeria | Depreciation, amortisation, impairments and write-offs | R2,148 million |
STC on the special dividend declared | Taxation | R135 million |
Fair value loss on the Vodacom shares held | Foreign exchange and fair value movement | R166 million |
Profit on disposal of Telkom Media | Other income | R68 million |
The statement of comprehensive income for the six months period ended September 30, 2008 has been adjusted to remove the effects of elimination of our 50% share in Vodacom, the impairment of the Africa Online investment and the gain on the revaluation of the Multi-Links put option to enable year on year comparison.
View Reconciliation of adjusted group statement of comprehensive incomeSix months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Telkom South Africa | 16,554 | 17,026 | 2.9 |
Multi-Links | 813 | 818 | 0.6 |
Other International | 63 | 234 | 271.4 |
MWEB Africa | - | 153 | n/a |
Africa Online | 63 | 81 | 28.6 |
Other South African | 600 | 660 | 10.0 |
Trudon | 581 | 638 | 9.8 |
Corporate centre | 19 | 22 | 15.8 |
Eliminations | (39) | (32) | (17.9) |
Total | 17,991 | 18,706 | 4.0 |
Group operating revenue increased by 4.0% to R18,706 million (September 30, 2008: R17,991 million) in the six months ended September 30, 2009. The increase is mainly due to higher revenue from Telkom South Africa and the inclusion of revenue of our newly acquired MWEB Africa subsidiary.
Multi-Links' operating revenue increased by 23.3% to 15,325 million Naira from September 2008. Voice revenue increased 16.8% to 14,125 million Naira with traffic revenue improving 2.5% to 8,744 million Naira, subscription and sales revenue decreasing 25.2% to 1,881 million Naira, interconnect revenue increasing 78.2% to 1,874 million Naira and the newly established hubbing revenue generating 1,626 million Naira. Multi-Links's increased focus on data services has resulted in revenues increasing by 261.4% to 1,200 million Naira.
The relative strength of our reporting currency against the Nigerian Naira has adversely affected the Rand revenue growth of the Nigerian operations at a Telkom group level.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Subscriptions and connections | 3,233 | 3,344 | 3.4 |
Traffic | 7,833 | 7,126 | (9.0) |
Local | 1,881 | 1,637 | (13.0) |
Long distance | 1,048 | 923 | (11.9) |
Fixed-to-mobile | 3,803 | 3,362 | (11.6) |
International outgoing | 481 | 472 | (1.9) |
Subscription based calling plans | 620 | 732 | 18.1 |
Interconnection | 956 | 1,458 | 52.5 |
Mobile | 445 | 604 | 35.7 |
Fixed | 36 | 96 | 166.7 |
International | 475 | 758 | 59.6 |
Data | 4,459 | 4,849 | 8.7 |
Leased lines and other | 3,597 | 3,866 | 7.5 |
Mobile leased facilities | 862 | 983 | 14.0 |
Other | 73 | 249 | 241.1 |
Total | 16,554 | 17,026 | 2.9 |
Operating revenue from the Telkom South Africa segment increased by 2.9% to R17,026 million (September 30, 2008: R16,554 million) primarily due to higher interconnection revenue, growth in data revenues, an increase in revenue from subscriptions and connections and subscription based calling plans, partially offset by lower traffic revenue.
Subscription and connections revenue grew by 3.4% to R3,344 million (September 30, 2008: R3,233 million) largely as a result of increased line rental tariffs.
Traffic revenue decreased by 9.0% as a result of the increasing substitution of calls placed using mobile services rather than fixed-line services and the acceleration of broadband adoption and the resultant loss of internet dial-up minutes. This was partially offset by an increase in revenue from subscription based calling plans by 18.1% to R732 million primarily due to increased volumes as a result of a 24.9% increase in the number of subscribers to 651,359 (September 30, 2008: 521,704) in the six months ended September 30, 2009.
Interconnection revenue increased by 52.5% to R1,458 million (September 30, 2008: R956 million) largely as a result of an increase of 59.6% in international interconnection revenue, a 35.7% increase in mobile interconnection revenue and a significant increase in domestic fixed-line interconnection revenue. The increased interconnection revenue from international operators is mainly a result of higher volumes on switched hubbing due to increased volumes and a result of an agreement signed with an operator in the United States to transit traffic mostly to African destinations. The increase in mobile interconnection revenue was driven by price increases on traffic destined for Zimbabwe. Fixed interconnection revenue increased as a result of increased volumes by VANS, Neotel and Sentech.
Data revenue increased by 8.7% to R4,849 million (September 30, 2008: R4,459 million) mainly due to an increase in internet access and related services, higher revenue from mobile leased lines and a growing demand for data services, including ADSL.
Other revenue increased as a result of R153 million received from the Department of Communications for the provisioning of the telecommunications infrastructure for the FIFA World Cup. The corresponding cost of R153 million is included in selling, general and administrative expenses.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Telkom South Africa | 150 | 178 | 18.7 |
Multi-Links | 3 | 2 | (33.3) |
Other South Afican | 93 | 195 | 109.7 |
Trudon | 29 | 27 | (6.9) |
Corporate centre | 64 | 168 | 162.5 |
Eliminations | (35) | (167) | 377.1 |
Total | 211 | 208 | (1.4) |
Other income includes profit on the disposal of investments, property, plant and equipment and intangible assets as well as interest received on loans to subsidiaries. Adjusted group other income remained flat. The increase in other income in the corporate centre was due to higher interest received on the loans to Multi-Links, Africa Online and MWEB Africa, which is eliminated on consolidation.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Employee expenses | 4,045 | 4,395 | 8.7 |
Payments to other operators | 3,994 | 4,269 | 6.9 |
Selling, general and administrative expenses | 2,756 | 3,330 | 20.8 |
Service fees | 1,230 | 1,340 | 8.9 |
Operating leases | 360 | 474 | 31.7 |
Depreciation,amortisation, impairments and write-offs | 2,157 | 2,478 | 14.9 |
Total | 14,542 | 16,286 | 12.0 |
Group operating expenses increased by 12.0% to R16,286 million (September 30, 2008: R14,542 million) in the six months ended September 30, 2009, due to an increase in selling, general and administrative expenses, employee expenses, depreciation, payments to other operators and operating leases. The increases in employee expenses, payments to other operators and selling, general and administrative expenses are mainly attributable to Telkom South Africa, the increase in service fees is attributable to the corporate centre and the increase in operating leases to Multi-Links. Depreciation increased as a result of increases in Telkom South Africa as well as Multi-Links.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Telkom South Africa | 11,978 | 13,342 | 11.4 |
Multi-Links | 1,081 | 1,191 | 10.2 |
Other International | 168 | 275 | 63.7 |
MWEB Africa | - | 143 | - |
Africa Online | 71 | 95 | 33.8 |
Telkom International | 97 | 33 | (66.0) |
Telkom Management Services | - | 4 | - |
Other South African | 1,377 | 1,505 | 9.3 |
Trudon | 321 | 350 | 9.0 |
Corporate centre | 1,056 | 1,155 | 9.4 |
Eliminations | (62) | (27) | (56.5) |
Total | 14,542 | 16,286 | 12.0 |
The increase in group operating expenses was driven by an increase in the operating expenses of Telkom South Africa and the corporate centre as well as the inclusion of five months' operating expenses of our newly acquired MWEB Africa subsidiary. Corporate centre operating expenses increased as a result of higher consultant fees paid for the implementation of our strategy and reorganisation of the Group through Project Renaissance.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Employee expenses | 3,294 | 3,595 | 9.1 |
Salaries and wages | 2,987 | 3,393 | 13.6 |
Benefits | 655 | 486 | (25.8) |
Employee related expenses capitalised | (348) | (284) | (18.4) |
Payments to other network operators | 3,663 | 3,929 | 7.3 |
Payment to mobile operators | 2,807 | 2,524 | (10.1) |
Payment to international operators | 726 | 1,273 | 75.3 |
Payment to fixed-line operators | 130 | 132 | 1.5 |
Selling, general and administrative expenses | 1,733 | 2,274 | 31.2 |
Materials and maintenance | 1,021 | 1,206 | 18.1 |
Marketing | 124 | 119 | (4.0) |
Bad debts | 119 | 145 | 21.8 |
Other | 469 | 804 | 71.4 |
Service fees | 1,082 | 1,088 | 0.6 |
Property management | 565 | 630 | 11.5 |
Consultants and security | 517 | 458 | (11.4) |
Operating leases | 325 | 326 | 0.3 |
Depreciation, amortisation, impairment and write-offs | 1,881 | 2,130 | 13.2 |
Depreciation | 1,579 | 1,787 | 13.2 |
Amortisation | 241 | 310 | 28.6 |
Impairments and write-offs | 61 | 33 | (45.9) |
Total | 11,978 | 13,342 | 11.4 |
Telkom South Africa's operating expenses increased by 11.4% in the six months ended September 30, 2009, to R13,342 million (September 30, 2008: R11,978 million), primarily due to increased employee expenses, selling, general and administrative expenses, payments to other network operators and depreciation, amortisation, impairment and write-offs.
Employee expenses increased by 9.1% in the six months ended September 30, 2009 primarily due higher salaries and wages as a result of average annual salary increases of 7.5% as agreed with the unions as well as the one time adjustment to accelerate the elimination of disparities translating to an 11.2% average increase for the bargaining unit.
Payments to other network operators increased by 7.3% as a result of increased payments to international and fixed-line operators, partially offset by lower payments to mobile operators. Payments to international operators increased by 75.3% primarily due to the increase of volumes in switched hubbing and international outgoing, as well as higher settlement rates impacted by the mix of traffic destinations such as Zimbabwe. Payments to mobile operators decreased by 10.1%, largely due to a 9.7% decrease in fixed-to-mobile traffic volumes.
Selling, general and administrative expenses increased by 31.2% primarily as a result write downs and increased provisions of technology obsolete inventory and items classified as slow moving inventory as a result of the economic slow down. In addition, a contributing factor was that high value stock orders had already been placed in order to service the previously higher capital expenditure programme. A decision was made to provide against these stock items as the capital cost of completing the projects for which these items were ordered would outweigh the value of inventory losses. Materials and maintenance expenses was also higher during the period. From April 1, 2009, ICASA changed the base of calculation of license fees from 0.1% of revenue from PSTS and VANS to 1.5% of gross profit, which resulted in a R32 million increase in the provision for the six months.
The 13.2% increase in the depreciation, amortisation, impairment and write-offs to R2,130 million (September 30, 2008: R1,881 million) was mainly as a result of higher depreciation due to the higher levels of investment in telecommunications network equipment and data processing equipment in recent years.
Six months ended |
|||
---|---|---|---|
In Naira millions |
2008 |
2009 |
% |
Employee expenses | 558 | 1,138 | 103.9 |
Payments to other operators | 4,813 | 5,131 | 6.6 |
Selling, general and administrative expenses | 8,427 | 9,718 | 15.3 |
Service fees | 167 | 169 | 1.2 |
Operating leases | 914 | 2,290 | 150.5 |
Depreciation, amortisation, impairments and write-offs | 1,593 | 3,855 | 142.0 |
Total | 16,472 | 22,301 | 35.4 |
Employee expenses increased by 103.9% in the six months ended September 30, 2009 primarily due to the recruitment of new staff to fill strategic positions in the period under review and the realignment and restructuring of salaries. Staff levels have however been reduced from those recorded at March 31, 2009.
Selling, general and administrative expenses increased 15.3% as a result of increased maintenance costs, marketing and expatriate fees. Handset subsidies totalled 2,208 million Naira with the average cost per unit equal to 4,891 Naira, excluding inventory write-downs. These subsidies reflect less about the operating business model and more about the need to drive down higher than normal levels of inventory. These inventory levels continue to reduce on a monthly basis with anticipated seasonal demand to further accelerate the reduction. Whilst we expect handset subsidies to be minimal in the 2010/11 financial year as most of the voice handsets would have been dealt with by the financial year ending March 31, 2009, there is still a risk of write downs if anticipated seasonal demand does not materialise.
Operating leases increased significantly as a result of the increased utilisation of leased infrastructure as opposed to owned infrastructure, specifically relating to cell sites.
Depreciation, amortisation, impairments and write-offs increased significantly due to the high investment in IT assets to support the expansion program and the network roll out during the period.
Investment income consists of interest received on short-term investments and bank accounts. Investment income increased by 125.8% to R280 million (September 30, 2008: R124 million), largely as a result of increased short term deposits.
Finance charges include interest paid on local and foreign borrowings, amortised discounts on bonds and commercial paper bills, fair value gains and losses on financial instruments and foreign exchange gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements decreased by 25.3% to R627 million (September 30, 2008: R839 million) in the six months ended September 30, 2009, primarily due to a 16.0% decrease in interest expense to R748 million (September 30, 2008: R891 million) mainly as a result of the 53.2% decrease in Group's net debt to R7.7 billion (September 30, 2008: R16.4 billion) and lower interest rates. Net fair value and foreign exchange rate movements resulted in a gain of R121 million for the six months ended September 30, 2009 (September 30, 2008: R52 million). The increase in the gain was mainly attributable to a fair value gain on the mark to market valuation of investments held by our cell captive.
The balance sheet of Multi-Links is such that it is over-geared and unable to raise debt and creditor financing. Accordingly Multi-Links is being recapitalised with preference share capital in order to enable the company to repay existing debt and negotiate third party financing.
From a Group perspective, Telkom's loans to Multi-Links are accounted for as part of the Group's net investment in a foreign operation. Exchange rate differences are therefore recognised in other comprehensive income and reclassified from equity to profit and loss in the event of a disposal of the net investment.
Consolidated tax expense from continuing operations decreased by 23.7% to R813 million (September 30, 2008: R1,065 million) in the six months ended September 30, 2009 due to lower profitability. The consolidated effective tax rate for the six months ended September 30, 2009 was 35.6% (September 30, 2008:34.8%).
The following represents the respective company's contribution after eliminations to the consolidated profit from continuing operations.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Telkom Company including Cell Captive | 1,891 | 1,529 | (19.1) |
Multi-Links | (235) | (297) | 26.4 |
MWEB Africa | - | 5 | - |
Africa Online | (8) | (12) | (50.0) |
Telkom Management Services | - | (4) | - |
Trudon | 232 | 247 | 6.5 |
Profit from continuing operations | 1,880 | 1,468 | (21.9) |
The decrease in profit from continuing operations was mainly attributable to Telkom Company.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Vodacom | 1,513 | - | - |
Swiftnet | 14 | 18 | 28.6 |
Telkom Media | (82) | 106 | 229.3 |
Total | 1,445 | 124 | (91.4) |
The profit from Telkom Media includes the reversal of the onerous lease liability
The Group's financial position remains strong. Net debt, after financial assets and liabilities, from continuing operations and excluding Vodacom at September 2008, decreased by 53.2% to R7,669 million (September 30, 2008: R16,404 million) resulting in an annualised net debt to EBITDA ratio of 0.8 times from 1.4 times at September 30, 2008. On September 30, 2009, the Group had cash balances of R3.1 billion (September 30, 2008: R279 million excluding Vodacom) . The proceeds retained from the Vodacom transaction contributed to the improvement.
Telkom Company repaid R820 million of the revolving syndicated loan during the six months ended September 30, 2009. The Company issued commercial paper bills with a nominal value of R2,260 million for the six months ended September 30, 2009 and commercial paper bills with a nominal value of R7,319 million were repaid by September 30, 2009. These financing facilities remain available to Telkom.
Condensed consolidated statement of financial positionThe Group's cash flow for the six month period include R20.6 billion proceeds received on the sale of our 15% stake in Vodacom, taxation paid relating to the Vodacom transaction and special dividend of R1.8 billion. Dividends paid amounted to R11.2 billion which includes the R19.00 per share dividend relating to the Vodacom transaction and the special dividend of R2.60 per share. Excluding the effects of the above, the group's free cash flow amounted to R611 million.
Condensed consolidated interim cash flow statementGroup capital expenditure which includes spend on intangible assets, decreased by 39.4% to R2,755 million (September 30, 2008: R4,544 million) and represents 14.7% of Group revenue (September 30, 2008: 25.3%).
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Telkom South Africa | 2,721 | 1,924 | (29.3) |
Multi-Links | 1,770 | 709 | (59.9) |
Other International | - | 25 | - |
Africa Online | - | 21 | - |
Telkom International | - | 4 | - |
Other South African | 53 | 97 | 83.0 |
Trudon | 30 | 28 | (6.7) |
Corporate centre | 23 | 69 | 200.0 |
Total | 4,544 | 2,755 | (39.4) |
The decrease in capital expenditure was driven by a decrease in the capital expenditure of Multi-Links and Telkom South Africa.
Six months ended |
|||
---|---|---|---|
In ZAR millions |
2008 |
2009 |
% |
Baseline | 1,512 | 1,158 | (23.4) |
Revenue generating | 9 | 1 | (88.9) |
Network evolution | 607 | 390 | (35.7) |
Sustainment | 39 | 16 | (59.0) |
Effectiveness and efficiency | 400 | 193 | (51.8) |
Support | 154 | 153 | (0.6) |
Regulatory and other | 13 | - | |
Total | 2,721 | 1,924 | (29.3) |
Telkom South Africa's capital expenditure, which includes spending on intangible assets, decreased by 29.3% to R1,924 million (September 30, 2008: R2,721 million) and represents 11.3% of Telkom South Africa's revenue (September 30, 2008: 16.4%). Baseline capital expenditure of R1,158 million (September 30, 2008: R1,512 million) was largely for the deployment of technologies to support the growing data services business (including the ADSL footprint), links to the mobile cellular operators and expenditure for access line deployment in selected high growth commercial and business areas. The lower expenditure for the period can be attributed to a more measured approach to the rollout of infrastructure to meet short-term demand and revenue generating services. The continued focus on rehabilitating the access network and increasing the efficiencies and reducing redundancies in the transport network as well as the initiation of the fixed-wireless roll-out contributed to the network evolution and sustainment capital expenditure of R406 million (September 30, 2008: R646 million).
Telkom continues to focus on its operations support system investment with current emphasis on workforce management, provisioning and fulfilment, assurance and customer care, hardware technology upgrades on the billing platform and performance and service management and property optimisation. During the six months ended September 30, 2009, R193 million (September 30, 2008: R400 million) was spent on the implementation of several systems.