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Telkom Reviews H1Telkom Reviews H1

Increased competition, operating expenditure, and reducing cost of telecommunications affect Telkom's headline earnings

November 19, 2007

5 Min Read
Telkom Reviews H1

JOHANNESBURG, SAnnouncing the Telkom Group interim results for the six months ended September 30, 2007,acting CEO Reuben September today said that headline earnings per share declined by 15.1%despite group operating revenue increasing by 8.3%.

September attributed the drop in the Group’s headline earnings to increased competition in thetelecommunications landscape, price reductions as well as increased operational expensesincurred largely as Telkom accelerates building a first class Next Generation Network (NGN)capable of delivering converged Information, Communication and Technology (ICT) services todomestic and African customers.

Highlights of the Group financial key performance areas include:

  • Group operating revenue up 8.3%.

  • 4.8% decline in group operating profit.

  • Group EBITDA margin decreased to 37.5%.

  • 50.9% net debt increase and a net debt to equity ratio of 60.0%.

  • Headline earnings decreased by 15.1%.

  • Basic earnings decreased by 16.6%.

  • Cash flows from operating activities decreased by 11.5%, cash flow utilised in investing activitiesincreased by 71.3% and cash flows financing activities increased by 653.2% during the six monthsended September 30, 2007.

“The Telkom Group has delivered continued revenue growth largely as a result of the 17.2%revenue growth delivered by the Vodacom Group. The fixed-line segment’s revenue increased by0.5%,” said September.

He added: “This performance is reflective of the increased competition in the telecommunicationslandscape coupled with Telkom’s commitment to reducing the cost of telecommunications services throughprice reductions and significant value propositions to our customers.”

September further explained that the fixed-line segment faced significant operational challenges as a resultof increased competition, fixed to mobile substitution, deregulation and rapidly changing business modelswithin the ICT sector.

Against this background, Telkom had to defend and grow its revenue streams, emphasisedSeptember.

“Telkom has embarked on its mobile review strategy in order to drive the value of a converged servicesoffering through our NGN for the benefit of all our customers as well as our shareholders. In addition,Telkom is undergoing a structural transformation in order to leverage efficiencies and capabilitymanagement within the fixed-line business,” stated September.

“Furthermore, Telkom is positioning itself to take advantage of the future converged servicesenvironment that is fast becoming a global best practice. To this end, we are developing thecapabilities to offer the full suite of converged services that encompass fixed, mobile, data andmultimedia services, ” continued September.

He stated that Telkom’s infrastructure building process was progressing well to adequately meetthe demands of bandwidth hungry applications. This was particularly important, stressedSeptember, as Telkom is a key partner in delivering the 2010 FIFA World Cup™ to the globalcommunity. “Our ability to do so seamlessly is dependent on the investment in our network.”

In addition, September stated that Telkom’s acquisitions in Africa – of Africa Online and Multi-Links - would diversify and grow the Company’s revenue streams. He also highlighted some ofthe key factors that affected fixed-line revenue in the short term. These included:

  • Data products, high value-added services coupled with innovative products and solutionsincreased fixed-line revenue by 0.5% for the six months ended September 30, 2007.

  • Revenue from fixed to mobile calls increased by 0.2% due to increased volumes of 3.9%.

  • International call tariffs decreased by an average of 9% in 2007 and 9.9% in 2006. Thisincreased volumes by 15.1%.

  • Data revenue increased by 9.8%.

  • Subscription revenue increased by 16.7%.

  • The Closer bundles saw a 75.4% uptake in subscription revenue and Supreme Callrevenue increased tenfold over the comparative reporting period.

  • Interconnection revenue decreased by 6.7%

  • Revenue from local calls decreased by 9.6% owing to the loss of dial-up minutes due tothe Company’s ADSL roll-out and cannibalisation by our bundled products.

  • Revenue from long distance calls decreased by 14.9% as a result of tariff decreases of10% on August 1, 2006 and 2007. These decreases were partly offset by a 2.2%increase in volumes.

The Company also announced that revenue from managed data sites had increased by 22.7% and thenumber of sites had increased by 16.8% to 23,224 sites over the comparative reporting period. Revenuefrom virtual private networks has increased by 34.4% for the six months ended September 30, 2007.

“Telkom remains focussed on its revenue opportunities from data and high-value added servicesas well as the innovative products and solutions being developed in line with the NGN roll-out,”stated September.

He announced that Telkom’s ADSL performance was very impressive. ADSL subscribers grewby 76.2% to 335,112 over the comparative reporting period and have increased by 31.1% sinceMarch 31, 2007. Significant growth is expected to be stimulated by the commoditisation of ADSL,the Do Broadband offering, the Self-Install Option, ADSL port automation and wholesale services.

“Telkom is currently on track to reach the target of 420,000 subscribers for the year ending March 31, 2008and Telkom aims to achieve ADSL penetration of 15% - 20% of fixed access lines by 2010/2011,”announced September.

In addition, internet customers, including dial-up subscribers, ADSL customers powered by Telkom Internetand Internet satellite subscribers have increased by 12.4% to 337,853 customers as at September 30, 2007.The commoditisation of the ADSL product has resulted in a larger resource pool being made available forADSL installation, leading to a further reduction in the average time to install (ATTI) to 21 days from the 23days achieved for the year ending March 31, 2007.

September continued: “Telkom is pleased to have achieved the target of 30 working days service level target as stipulated by ICASA’s ADSL regulations. This bodes well for our customer centric vision which seeks toincrease customer experience and satisfaction.”

The introduction of the Self-Install Option continues to improve the average time to install and, as atSeptember 30, 2007, 59% of all ADSL installations were Self Installs.A Broadband Demand Register has been set up to hold orders that cannot be serviced due to infrastructureconstraints. “This intelligence is being used to align our DSL build programme with actual demand. Inaddition, the Broadband Service Assurance System being developed will provide users with self-help andself diagnostic tools,” explained September.

This is particularly important to Internet Service Providers (ISPs) who will be able to provide first linemaintenance and support capabilities, resulting in improved customer service. The launch of the wholesaleADSL product offering in April 2007 also contributed to the growth of ADSL services.

Stated September: “Telkom is also pleased to report that the ADSL footprint coverage has increased to89%, up from 82% reported at year end March 31, 2007. Telkom has also increased its footprint in traditionaltownships to 69%.”

In extending and complimenting the Company’s ADSL footprint, Telkom has increased its WiMAX basestations with 27 sites now active on the network. The building of 71 WiMAX base stations remains Telkom’starget.

Emphasising service delivery to all customers, September stated: “Improved customer service is vital todefending and growing revenue. Sustainable and profitable growth in the customer base requires creatingand strengthening capabilities focused on managing customer relationships and learning from acquiredcustomer information. This will allow Telkom to manage the customer experience and anticipate customerneeds.”

Telkom SA Ltd. (NYSE/Johannesburg: TKG)

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