Group Operating Revenue

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 8•ta 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

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

Group Other Income

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

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 8•ta'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

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 is 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

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 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 mainly 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

Selling, general and administrative expenses relate mostly to direct network cost, maintenance and marketing expenses and includes bad debts. 8•ta employees increased 46.5% since March 2011 to 267 employees.

EBITDA Per Segment (before eliminations)

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). Fair value and exchange rate gains of R230 million 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 (30 September 2010: R90 million loss).

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-deductable 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

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%).

Fixed line capital expenditure

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 rollout 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.