Telkom Group mobile revenue increases to ZAR 926 million

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Telkom SA SOC Limited today, 18 November 2013, announced Group interim results for the six months ended 30 September 2013.

“For the six months period the Group recorded a profit after tax of ZAR2.946 million. This is significantly higher than the previous reporting period and is driven by a ZAR2.173 million net curtailment gain recognised on the post-retirement medical aid liability and higher fair value gains as a result of the weakening of the Rand in the current period and a ZAR389 million provision for Competition Commission fine in the previous six months,” says says Sipho Maseko, Telkom Group CEO.

The company has reassessed the underlying assumptions used to determine the value of the post-retirement medical aid liability for qualifying employees.

The growth assumption for the subsidisation amount at retirement has been capped at 0% and employees were offered a settlement calculated at the economic value of their liability. This curtailment and subsequent settlement is the main contributor to a net non-cash gain of approximately ZAR2.173 million and a reduction in the post-retirement medical aid liability for these qualifying employees.

The net curtailment gain is not part of the results from operations for the period under review and has accordingly been excluded from the discussion below. The prior period also includes a provision of ZAR389 million for the Competition Commission fine. Excluding these items EBITDA is flat compared to the prior period.

The Group recorded a profit after tax of ZAR773 million, excluding the net curtailment gain (2012: ZAR548 million) and an EBITDA excluding net curtailment gain of ZAR3.933 million (2012: ZAR3.948 million excluding the Competition Commission provision).

Our overall financial performance reflects the realities currently facing our business. Our fixed voice business continues to be under pressure and the mobile business continues to face the challenge of gaining market share in a highly competitive market.

“Our net revenue increased by 1.1%, driven by payments to mobile operators which were impacted by the reduction in mobile termination rates. We recorded promising growth of 50.0% in mobile data revenue and 110.2% in IT Business services revenue. Data revenue constituted 33.7% of group revenue and increased by 3.1%. Lower prices on data due to competitive offerings continue to negate the impact of volume growth experienced in this area,” says Maseko.

The Group continues to generate strong cash flows and the capital structure remains solid. Interest bearing debt decreased 34.9% to ZAR4.3 billion at 30 September 2013.

Report structure

In line with the Group’s convergence strategy, key performance indicators are measured and evaluated on an overall basis. The Group therefore consists of one operating segment.

However, this report provides further details of the fixed-line business that provides fixed-line access and data communication services through Telkom South Africa, and the mobile business that provides mobile voice services, data services and handset sales through Telkom Mobile. The contribution of the iWayAfrica, Trudon and Swiftnet subsidiaries are also shown separately.

The comparative information for September 2012 has been restated due to the adoption of IAS 19R and the amendment to IAS 16.

“The Group’s financial performance indicates a challenging industry environment. Despite a considerable increase in the Group’s earnings, owing to several once-off items, underlying operational earnings remain under pressure. The Group reported Headline earnings, excluding the net curtailment gain recognised on the post-retirement medical aid liability, of 224.2 cents from 101.1 cents. This also excludes the provision for Competition Commission fine in the prior reporting period. The increase was primarily due to lower payments to mobile operators resulting from the reduction in mobile termination rates and higher fair value gains as a result of the weakening of the Rand,” says Maseko.

“Operating revenue increased slightly by 0.3% to R16.192 million due to higher mobile and IT Business services revenue, partially offset by lower fixed-line voice revenue. We are encouraged by the improvement in mobile data revenue which increased 50% to ZAR303 million resulting from an increase in the number of data subscribers and data deals and promotions launched during the period. However, we are continuing to explore all avenues to de-risk the Mobile business,” says Maseko.

“Operating expenses decreased by 18.1% to ZAR10.323 million. This is due to the ZAR2.173 million net curtailment gain and the ZAR389 million provision for the Competition Commission fine included in the prior reporting period.

Excluding the gain and Competition Commission provision in the previous year, operating expenses would have increased 2.4%,” says Maseko.

“Our capital structure remains sound despite large cash outflows resulting from payments of severance packages, part of the Competition Commission fine and an increase in our capital expenditure. We continue to invest in modernising our network to provide high speed, quality and reliable broadband to South Africans. For the 2014 financial year, management has taken a prudent approach to cap its capital expenditure to ZAR6.5 billion while the group reviews its options, particularly in mobile,” explains Maseko.

“Telkom’s Board and management team have already resolved several long term issues affecting the performance of the Group. This includes impairing a large portion of the Group’s legacy assets, settling Competition Commission matters, successfully addressing unfair and uncompetitive mobile termination rates and reviewing the post-retirement medical aid liability,” he said.

Defining our role clearly as a listed national incumbent will allow us to address the dichotomy in 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 in which we operate. To achieve this, we must prioritise our objectives to shape the Group’s strategic imperatives and ensure we succeed in the following key areas:

– Financial performance – strategic capital allocations, returns driven to restore financial health

– Customer perception – deliver superior customer service and experience

– Operational excellence and efficiency – drive execution capability and connectivity to own the home

– Infrastructure quality – invest in the right technologies

– Alignment of all stakeholders – Telkom cannot deliver on its strategy without the support of all its stakeholders

“Telkom is instilling a disciplined approach to capital allocation. We will invest in areas where we have leadership, and place a greater emphasis on productivity and returns. Infrastructure investment in particular will 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 the New Generation Network . The National Broadband Plan is an opportunity for Telkom to improve the scale and efficiency of its network,” says Maseko.

“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,” concludes Maseko.

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