Telkom delivers solid financial performance

South Africa's largest communications group, Telkom SA, today announced group interim results for the six months ended 30 September 2006. The group delivered a solid performance across both business segments primarily as a result of continued growth in the fixed-line and mobile business.

Telkom's CEO, Papi Molotsane, said the Telkom Group had delivered a "commendable performance across all business segments, reporting headline earnings per share growth of 10.6% to 874.7 cents per share".

He attributed a 0.7% increase in revenue to the fixed line business' focus on growing annuity revenue streams and increasing the contribution of data services.

Molotsane added that the mobile business had again delivered an "excellent performance" increasing market share to 59%.

A 3.1% increase in Telkom's fixed-line operating expenses, explained Molotsane, highlighted the company's determination to maintain the quality and functionality of its network as well as our determination to improve service levels.

"Telkom is facing a challenging environment and our commitment to staying ahead of the curve is borne out by the 41% increase in capital expenditure. It is imperative that we are able to take our customers into the future ICT landscape. The next generation network we are deploying will be able to provide our customers with world-class ICT solutions and ensure long-term sustainable returns for our shareholders," said Molotsane.

Group financial highlights:
* Operating revenue up 7.3% to R25,147 million
* 0.8% growth in operating profit to R7,685 million
* 40.7% group EBITDA margin
* 6.6% net debt increase to R11,659 million, and net debt to equity of 41.6%
* Headline earnings increased by 10.6% to 874.7 cents per share
* Basic earnings increased by 7.5% to 868.1 cents per share

In addition, the cash generated from operations increased 4.9% to R9,046 million and facilitated capital expenditure of R4,193 million and the repurchase of 11,053,865 Telkom ordinary shares to the value of R1,454 million. The group net debt to equity ratio of 41.6% at 30 September 2006, has increased from 23.2% (compared to 31 March 2006).

In the six months ended 30 September 2006:
Group operating revenue increased 7.3%. Fixed-line operating revenue, after inter-segmental eliminations, increased 0.4% to R16,139 million primarily due to solid growth in data services and increased subscription revenue. Mobile operating revenue, after inter-segmental eliminations, increased 22.2% to R9,008 million primarily due to customer growth.

Group operating expenses increased 9.7% to R17,675 million, due to a 21.7% increase in operating expenses in the mobile segment to R6,899 million (after inter-segmental eliminations). Fixed-line operating expenses increased 3.2% to R10,776 (after inter-segmental eliminations) primarily due to increased employee expenses, services rendered, operating leases as well as selling, general and administrative expenses. This was partially offset by a decrease in depreciation, amortisation, impairment and write-offs as well as payments to other operators. Mobile operating expenses increased 21.7%, after inter-segmental eliminations.

Investment income decreased 21.7% to R170 million, largely as a result of less cash available for short term investments due to higher taxation payments.

Finance charges decreased 41.3% to R437 million due to a 4.4% decrease in interest expense to R673 million as a result of the redemption of local and foreign loans. In addition, net fair value and exchange gains on financial instruments of R236 million arose primarily as a result of currency movements.

Consolidated tax expense increased 3.8% to R2,844 million. The consolidated effective tax rate was 38.3%. Telkom Company's effective tax rate was 28.7% (30 September 2005: 32.5%). The lower effective tax rate for Telkom Company in the six months ended 30 September 2006, was primarily due to higher exempt income resulting mainly from dividends received. Vodacom's effective tax rate decreased marginally to 37.3% (30 September 2005: 37.9%).

Profit attributable to the equity holders of Telkom increased 4.9% to R4,500 million (30 September 2005: R4,288 million).

The group delivered on its strategic intent of creating long-term value for stakeholders in the six months ended September 2006, by striving to fulfil customer needs, introducing innovative products and delivering solid financial returns to shareholders.

Fixed-line revenue
The group's fixed-line revenue held up well, improving 0.7% despite tariff reductions across Telkom's product range and the loss of dial-up minutes due to the ADSL roll-out. The decrease in call traffic volumes of 7% were offset by a volume growth in data services and increased revenue from subscriptions and connections fees.

EBITDA margins
The fixed-line EBITDA (earnings before interest, tax, depreciation and amortisation) margins decreased mainly due to an increase in employee expenses as a result of an increased headcount (necessitated by the company's customer-centric drive towards improving service levels), deployment of the NGN as well as increases in salaries, medical aid benefits and increased bonus provisioning. Selling, general and administrative expenses also increased but depreciation was 19% lower due to the extension of useful lives of certain assets.

Mobile South African customers increased 34.7% during the six months to 30 September 2006, reinforcing Vodacom's position as a market leader. Despite a 21.3% increase in mobile expenditure, strong customer growth and continued efficiencies in the mobile business resulted in a slight EBITDA margin decrease to 33.8% against a 15.6% decline in ARPUs.

Data revenue
Data revenue is becoming increasingly important, with the fixed-line business achieving a 13.5% increase in data revenue for the six months ended 30 September 2006, with strong growth in all data revenue categories.

Similarly, Vodacom's data revenue increased by 61.5% to R722 million (50% share) for the six months ended September 2006, contributing 7.4% to mobile operating revenue. Growth in mobile data revenue is mainly due to the launch of new data initiatives such as 3G, HSDPA, Mobile TV, Vodafone live!, BlackBerry and the continued popularity of the SMS facility.

Broadband
ADSL adoption in the consumer and small and medium (SME) business segment increased in the 2006 interim period to 190 172 customers. Telkom has accelerated its fibre roll-out to shorten copper loop lengths and has accelerated the roll-out of IMAX (an integrated multi access platform) for wireline services and WIMAX (for wireless services).

To reduce installation time and enhance customer satisfaction, the self-install option is close to completion. Telkom is confident of achieving ADSL penetration of 15%-20% of fixed access lines by 2010.

The increased demand for broadband during the year has resulted in strong growth in the fixed-line's leased line and other data service revenue of 8.8%. Fixed-line revenue from cellular operator fixed links has increased from R600 million in September 2005 to R803 million to September 2006 as a result of the roll-out of cellular operators' 3G networks.

BCX
In order to provide end-to-end ICT solutions, Telkom made an offer to Business Connexion's (BCX) shareholders to acquire 100% of BCX for R2,5 billion. The BCX acquisition also provides a good opportunity for Telkom to create shareholder value and offer services that complement the value-adding products and services that are developed within Telkom. The Competition Commission has agreed to refer the matter to the Competition Tribunal by 17 November 2006 and a pre-hearing is scheduled at the Competition Commission for 24 November 2006.

Customer-centricity through product innovations
Customer experiences continue to be improved by value-adding product and service innovations, as evidenced by the phenomenal take up of Telkom Closer and other enhanced PC bundled products.

Demand for the Telkom Closer product has been strong, resulting in the sign up of 180 258 customers since its launch in February 2006.

PC Bundled products introduced in September 2006 sold 920 bundles within the first month.

Another new product, Telkom PD Connect, is geared towards gated communities, multi-tenanted complexes and business developments. The product bundles voice, data and video services and is promoted through a strategic alliance between Telkom and property developers.

The business segment has responded positively to both Telkom Supreme Call and VPN Supreme which has shown 355% growth in the last 18 months. Telkom's Internet Protocol VPN extended coverage now spans across 70 countries and over 700 cities globally.

Other value-adding products include the provision of free medical emergency response for fixed-line customers by Netcare 911, SpaceStream (provides satellite access) and Office Suite which provides office functionality to the SME market.

Telkom's strategic intent of retaining and growing revenue has largely contributed to the development of a flat rate plan, with the key customer benefit being that this development narrows the gap between local and long distance calls as well as between peak and off peak rates.

Customer-centricity through competitive pricing
Telkom is of the opinion that by reducing telecommunication costs, it would benefit its customers and the South African economy. An average price reduction of 2.1% on the company's regulated basket of products and services became effective from 1 August 2006. Rebalancing of tariffs will further allow effective competition in all areas going forward. The following are some of the price changes that were effected:
* ADSL rental 24% average decrease
* Long distance 10% decrease
* International 10% average decrease
* Data 9% average decrease
* Rental (analogue lines) 8% Increase

Customer-centricity through network advancement
A strong focus on network reliability, market-focused products and services, indirect customer interface channels as well as projects to improve customer communication and internal efficiencies for the installation of new services also constitute part of the company's customer-centred focus.

The continued advancement of Telkom's network is also geared towards improving our customer service levels.

In line with customer demand and sound financial criteria, Telkom will continue to invest in improving our network and the orderly migration to an IP-based network to supply next generation products and services.

The evolution to an IP centric network is a business imperative, and will follow a phased approach which is based on sound commercial criteria that will enable Telkom to exploit new opportunities in the ICT solutions market.

Recognising the value of employees
Apart from a customer-focused strategy, Telkom, being employee-centric, recognises that a skilled and experienced workforce remains our competitive advantage. Telkom continues to invest significantly in our employees to ensure that the appropriate business skills are available to meet customer requirements.

For the six months ended 30 September 2006, Telkom spent R228,7 million (30 September 2005: R190 million) on training and development.

For the six months ended 30 September 2006, Telkom's fixed-line employees, including subsidiaries, numbered 26 434.

Significant returns to shareholders and employee share ownership

In the six months ended September 2006, the company repurchased 11.1 million shares to the value of R1,454 million (including costs) which are in the process of being cancelled as issued share capital and restored as authorised but un-issued capital.

Telkom's AGM, held on 20 October 2006, granted the board of directors further authority to buy back shares to a limit of 20% of shares in issue.

The Telkom board granted 1,824,984 shares with effect from 2 June 2006 to employees in terms of the Telkom Conditional Share Plan.

Telkom aims to pay a steadily growing annual ordinary dividend, which will be based on considerations such as the assessment of financial results, capital and operating expenditure requirements, available growth opportunities, the group's net debt level, interest coverage and future expectations, including internal cash flows and share buybacks.

The regulatory environment
Changes in the regulatory landscape presents Telkom with challenges as well as opportunities, which we intend to explore. Through constructive dialogue, Telkom will strive towards a regulatory framework that is realistic, equitable and beneficial to the industry.

Key regulatory challenges include the Electronic Communications (EC) Act promulgated on 19 July 2006, the ICASA Act, interconnection and facility leasing, number portability (NP), local loop unbundling, ADSL regulations, Interception of Communication and Communication-related Act, and legislation providing for subscriber registration.

The EC Act aims to promote convergence in the broadcasting, broadcasting signal distribution and telecoms sectors and to provide the legal framework for convergence of these sectors. The Act will liberalise the market further and will result in a change in the licensing structure.

The EC Act also makes provision for unbundling of the local loop, subject to ICASA formulating the necessary regulations. Existing legislation, therefore, requires Telkom to provide Neotel with shared access to its local loop.

With regard to interconnection and facility leasing, operators classified as "major" operators have to supply interconnection and facility leasing services to "public" operators at cost-based tariffs that their licence provisions entitle them to. Telkom has been declared a "major" operator by ICASA. Currently, Telkom and Neotel are in talks on interconnection and facility leasing agreements.

ADSL regulations were also published. These provide a framework for the terms and conditions under which ADSL services are to be provided and the tariff structures for these services.

Being a company that actively plans and analyses multiple regulatory scenarios, Telkom believes that we are well placed to deal with regulatory challenges facing Telkom.

Telkom and transformation
As a good corporate citizen, Telkom remains one of the country's main transformation drivers as it has always viewed meaningful transformation as imperative for its own sustainable long-term growth. Consequently, Telkom spent R3.9 billion on empowered or significantly empowered suppliers for the six months ended September 2006.

Telkom's social investment programmes through the Telkom Foundation have continued to contribute to the positive transformation of disadvantaged communities.

Mobile customers
Vodacom performed strongly in the six months ended 30 September 2006, improving market share to approximately 59%. Telkom's 50% share of Vodacom's profit from operation increased 17.5% to R2,483 million. Mobile operating profit margin decreased to 25.5% while mobile EBITDA increased 18.2% to R3,289 million. EBITDA margin decreased to 33.8% from 34.4% in the previous comparable period.

Vodacom's South Africa customer base increased 28.1% to 20.2 million customers.

Outside South Africa, Vodacom grew its customer base by 65.8% to 5.6 million customers (September 30, 2005: 3.3 million).

Fixed-line revenues in the financial year ending 31 March 2007 are expected to be impacted by tariff decreases, increased competition and the migration from dial-up traffic to ADSL. Telkom's strategic initiatives to improve service levels are expected to result in above inflationary increases in operating expenses.

The slower than expected start up of Neotel, market share losses and the non-implementation of fully allocated costs, number portability and carrier pre-selection are likely to see Telkom at the higher end of or slightly above the guidance provided in April 2006 for a fixed-line EBITDA margin of between 37% and 40% for the year ending March 2007.

Fixed-line CAPEX is expected to be between 18% and 22% of revenue.

Through improved efficiencies, the EBITDA margin in the mobile business is expected to remain fairly stable.

The group net debt to equity target remains the same at 50% to 70%.

In presenting Telkom's interim results, Molotsane emphasised that the company was delivering on balancing the needs of all stakeholders to ensure long-term sustainable and profitable growth of the business for shareholders.

He added that the accelerated liberalisation of the market, in particular the implications of the Electronic Communications Act, the emergence of new technologies and customer demand were material to Telkom's strategic intentions.

"Telkom believes that it is strongly positioned to compete effectively in a liberalised market, with customer service excellence, a skilled and dedicated workforce and a greater array of product and service offerings ensuring long-term value creation. Telkom will pursue opportunities to provide the full spectrum of ICT solutions including voice, data, video and Internet services increasingly through broadband penetration," stated Molotsane.

He added that ICT was central to economic growth and social development. "Telkom remains strategically important to the achievement of national objectives and will continue to invest significantly in the development of a viable and vibrant marketplace," concluded Molotsane.