Telkom SOC : | Group Interim Results

Telkom SA SOC Limited

(Registration number 1991/005476/30) JSE share code: TKG

ISIN: ZAE000044897

GROUP INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2017

Special note regarding forward‐looking statements

Many of the statements included in this document, as well as verbal statements that may be made by us or by officers, directors or employees acting on our behalf, constitute or are based on forward‐looking statements.

All statements, other than statements of historical facts, including, among others, statements regarding our convergence and other strategies, future financial position and plans, objectives, capital expenditures, projected costs

and anticipated cost savings and financing plans, as well as projected levels of growth in the communications market, are forward‐looking statements. Forward‐looking statements can generally be identified by the use of terminology such as "may", "will", "should", "expect", "envisage", "intend", "plan", "project", "estimate", "anticipate", "believe", "hope", "can", "is designed to" or similar phrases, although the absence of such words does not necessarily mean that a statement is not forward looking. These forward‐looking statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual results and outcomes to be materially different from historical results or from any future results expressed or implied by such forward‐looking statements. Factors that could cause our actual results or outcomes to differ materially from our expectations, include but are not limited to those risks identified in Telkom's most recent annual report, which is available on Telkom's website at www.telkom.co.za/ir.

We caution you not to place undue reliance on these forward‐looking statements. All written and verbal forward looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Moreover, unless we are required by law to update these statements, we will not necessarily update any of these statements after the date of this document, so that they conform either to the actual results or to changes in our expectations.

The information contained in this document is also available on Telkom's investor relations website www.telkom.co.za/ir.

Telkom SA SOC Limited is listed on the JSE Limited. Information may be accessed on Reuters under the symbol TKGJ.J and on Bloomberg under the symbol TKG.SJ. Information contained on Reuters and Bloomberg is provided by a third party and is not incorporated by reference herein. Telkom has not approved or verified such information and does not accept any liability for the accuracy of such information.

Key indicators

Operating revenue (R million) 2017: 20 109

(2016: 20 237) down 0.6%

Net operating revenue (R million) 2017: 15 791

(2016: 15 928) down 0.9%

EBITDA (R million) 2017: 5 201

(2016: 5 301) down 1.9%

Capital expenditure to revenue (R million) 2017: 3 974

(2016: 3 639) up 9.2%

Information technology revenue (R million) 2017: 3 652

(2016: 3 775) down 3.3%

BEPS (Cents / share) 2017: 316.9

(2016: 340.9) down 7.0%

HEPS (Cents / share) 2017: 303.9

(2016: 328.2) down 7.4%

Cash at the end of the period (R million) 2017: 1 373

(2016: 1 821) down 24.6%

Mobile service revenue (R million) 2017: 2 282

(2016: 1 594) up 43.2%

Data revenue (R million) 2017: 6 507

(2016: 5 932) up 9.7%

Report structure

Telkom provides fixed‐line access and data communication services through Telkom South Africa and the mobile business offers mobile voice services, data services and handset sales through Telkom Mobile.

BCX provides converged infrastructure solutions, information and communication services including cloud, infrastructure, and workspace services; global service integration management; and hardware and network equipment sales in South Africa and African countries.

Results from continuing operations

The comparative information for the period ended 30 September 2016 is restated as a result of a prior year correction relating to fraud in Trudon. The impact was a R61 million decline in profit after tax.

Refer to note 2.2 of the notes to the condensed consolidated interim financial statements for detailed disclosure on the restatement.

The group recorded a profit after tax of R1 659 million (September 2016: R1 760 million) and a 1.9 percent decrease on EBITDA of R5 201 million (September 2016: R5 301 million), resulting in a 7.4 percent decrease in headline earnings per share.

OVERVIEW OF OUR BUSINESS

Johannesburg, South Africa

- 10 November 2017, Telkom SA SOC Limited (JSE: TKG) today announced group interim results for the period ended

30 September 2017.

Message from group CEO: Sipho Maseko

The first half of the year was characterised by a tough economic environment and increased competition. We saw corporate businesses defer their spend on information, communication and technology (ICT) as a result of an uncertain political, economic and policy environment. Even though South Africa exited the technical recession in the second quarter of the year, business confidence remains very low, with a lack of appetite for investment by corporate businesses. Lower spend from government placed a further damper on ICT spend in the public sector.

Telkom Group performance was negatively impacted by the challenging economic environment. BCX was mainly impacted as it is exposed to corporate businesses and the public sector which are both under pressure. In the short term BCX has accelerated cross selling opportunities across the customer base, ensuring that we retain our customers.

The Mobile business growth trajectory continued in the period with strong growth in active customers and stable ARPUs resulting in an increase of 43.2 percent in mobile service revenue. The strong mobile growth which boosted group's performance was underpinned by an expansion of our network, distribution and the launch of innovative products which were well received by our customers. We are pleased that our mobile business received the MyBroadband Best Mobile Broadband Provider of the year award, in the best value for money category. The Ask Africa Orange Index awards, which are

based on customer satisfaction ratings, placed both our mobile business and internet service provider in 2nd and 3rd place respectively against our competitors. In addition, the innovation of mobile has extended to its new content value added service as evidenced by winning the best innovation in the Broadcast Broadband Connection Award from AfricaCom.

Openserve continued its journey of transforming and modernising the network. We expanded the fibre ecosystem with the purpose of stimulating the digital economy. Improved processes and efficiencies led to an increase in the connectivity rate of the homes passed. In the first half of the year, we connected more than 40 percent of homes passed while the active connectivity rate for the entire base is 24.5 percent. With a strong focus on bringing value to our customers, Openserve has brought prices down in the past 12 to 18 months with the recent 25 percent price reduction in IP Connect in the first half of the year. Our efforts to improve customer experience have also been recognised with Openserve receiving two MyBroadband 2017 awards, namely Fixed Broadband Provider of the year as well as 2017 Best Fixed Network.

Investment in our key growth areas, such as fibre and mobile, remains imperative to ensure that we are focused on our medium and long‐term strategy. We remain cognisant of the group revenue pressure and we are diligent in ensuring that we continue to invest on a sustainable basis to improve our returns. We are encouraged by the strong growth in demand in mobile and fibre investments.

Customer experience remains a priority, with the key pillars being people, systems and processes. Having the right talent in the right place at the right time enables us to execute on our strategy. The new IT platform and the digitalisation of our stores have assisted us in improving customer experience. We continue to enhance our engagement models with our corporate customers. With our advanced internal data analytics services, we are able to have faster access to higher quality information that allows us to have a more proactive approach in managing our network, thereby enhancing our decision making in a timeous manner. We will continue to improve our fulfilling and assurance processes.

Sipho Maseko

Group chief executive officer

FINANCIAL CAPITAL

Salient features

• Operating revenue declined slightly by 0.6 percent to R20 109 million

• EBITDA down 1.9 percent to R5 201 million with an EBITDA margin of 25.9 percent

• Headline earnings per share (HEPS) decreased 7.4 percent to 303.9 cents

• Capex increased 9.2 percent to R3 974 million

- Interim dividend decreased 9.9 percent to 118.1 cents per share

Operating revenue impacted by weaker economic conditions

Operating revenue declined slightly by 0.6 percent to R20 109 million mainly impacted by the weak operating environment. The negative revenue impact was higher than expected as a result of deferred corporate ICT spend, reduced spend in the public sector as well as pricing pressures in the wholesale environment.

Group EBITDA impacted by lower revenue

Group EBITDA decreased 1.9 percent to R5 201 million with an EBITDA margin of 25.9 percent impacted by lower revenue.

To respond to the revenue headwinds, we continued to aggressively drive our multiyear cost‐efficiency initiatives as

part of our ongoing business transformation, which included the rationalisation of vacancies and consolidation of positions to align with the new operating model. These measures have had a positive impact in ensuring that our expenses are kept well below inflation.

HEPS decreased based on lower revenues

HEPS decreased 7.4 percent to 303.9 cents mainly as a result of lower revenue. Basic earnings per share (BEPS) decreased 7.0 percent to 316.9 cents.

Investment for future growth

Capex increased 9.2 percent to R 3 974 million with capex to revenue of 19.8 percent in line with our guidance. We remain cognisant of revenue pressures and we are disciplined in extracting returns from our capital investment. Mobile and fibre remain key capex focus areas and we have witnessed strong returns in a form of service revenue growth of 43.2 percent in mobile and an active connectivity rate of 24.5 percent for fibre.

The Mobile business capital investment for the period increased 56.3 percent to R1 185 million. The largest contributor to this spend was the roll‐out of the mobile network, on 3G and FDD LTE for our mobility led services, as well as TDD LTE/LTE Advanced for our nomadic data services. To this end, we increased our sites by 24.1 percent to 3 445, of which 1 945 are TDD LTE enabled and 114 are LTE Advanced. Furthermore, we completed re‐farming of the 1800 MHz spectrum to enable FDD LTE on the older sites.

Openserve continued the investment in the fibre market underpinned by our strategy to modernise the network, resulting in more than 2.4 million premises passed with fibre. This ensures that we maintain and grow market share in the

fibre market. The Consumer market benefited through our focused deployment approach, resulting in 73 710 homes connected with fibre. This translates to an overall active connectivity rate of 24.5 percent.

Service on Demand investment related to providing data connectivity which included a net growth of 6 196 new Metro Ethernet services.

The core network growth investment is primarily related to the packet optical transport network (POTN) roll‐out. In the period, 3.7 terabytes bandwidth was added into the transport network.

Group capital expenditure

September September

2017 2016

Rm Rm %

Fibre	1	177	929	26.7
Mobile	1	185	758	56.3
OSS/BSS	programme	213	325	(34.5)
Network	rehabilitation/sustainment	145	192	(24.5)
Service	on demand	622	658	(5.5)
Core Network		295	392	(24.7)
Other		61	158	(61.4)