...Good morning, and thank you for joining us for the interim results for the six months ending the thirtieth of September. I will give a brief overview of our operating environment. Dirk will come in, give more color on our financials, then I'll come back to do our outlook. To kickstart, a small video just to outline the operating conditions that we faced in the past six months. As you can see, South Africa and our industry has not been spared of the tough economic conditions, most importantly, our consumers. That being said, we're quite pleased that our next generation revenue is making up and holding flat. Equally, we continue to manage the decline in the high margin legacy business.
We faced robust competition, especially in our mobile business, but we responded to ensure that we retain our customers and also grow. Load shedding equally had an impact on our costs, with diesel increasing by over 154% in this current period. But Dirk will shed more color. Let's look at our intrinsic business. We firmly believe that our new technologies are continuing to drive growth. Our investment, as NGN, is beginning to yield fruitful results. If we look at Telkom Consumer, our mobile business has now crossed 80 million subscribers. Equally, 62% of these subscribers are what we call broadband or smart users. We've seen an increase of 14% in our broadband traffic, and this continues to reinforce the fact that Telkom's broadband strategy remains intact. On Openserve, we're seeing the highest connectivity rate at 46.2% of homes connected.
This has been informed by a 916,000 increase in homes passed, and focusing that we increase those homes passed with a 30% connectivity rate. We continue to see demand from Openserve from our MNOs as we gear up ourselves for 5G. Equally, in BCX, our IT growth is beginning to yield positive results. We've seen a 28.5% increase in IT, helping us to manage the legacy decline in this business. Openserve continues... SwiftNet, my apologies, continues to gear ourselves up for 5G readiness, 26 new towers, and also five in-building solutions with a healthy pipeline of over 200 permitted sites. In essence, therefore, our broadband strategy continues to yield the right direction. Equally, we must continue to manage the decline in our legacy business across all our entities.
Like I mentioned, in telecom consumer, we've seen a 28% growth in NGN revenue. Traditional legacy copper in consumer now accounts for 6.2% of the revenue. Openserve, we also continue to see positive growth, particularly in our next generation platform, with over 70% of Openserve's revenue now coming from next generation platform, which is key for us. What's important as well is the number of subscribers that sit on Openserve's network.
More than 10, more than 70% are on megabit speeds of higher than 10. BCX, as I mentioned, trying to mitigate, constantly trying to mitigate the decline in our in our fixed business by driving IT growth. And yes, with SwiftNet, gearing ourselves for a 5G future in terms of making sure the investments are right for that. I will now hand over to Dirk to give us a financial overview. Thank you, Dirk.
Thanks, Serame ...Thank you, Serame, and good morning, everybody. I'll start with the group's salient features. Serame has mentioned some of them in his first slide. Revenue, slightly down 7%. Mostly service revenue that's under pressure. Our EBITDA line impacted by 17% negative growth as a result of service revenue. Revenue is being flat, and an increase in cost in both direct costs as well as OpEx. I'll come back to that in more detail. Our EBITDA margin contracting by 4.7 percentage points. All of this culminates into a significant decline in headline earnings. Our net debt to EBITDA, I think, is at a high, given recent couple of years, and that's as a result of the negative free cash flow of ZAR 1.9 billion. But I'll get into the detail of all these numbers.
So if we start off with, with revenue, as I said, it's a marginal decline. I tried to indicate both in terms of total and in terms of, apologies. Both in terms of total and mobile, the impact of IFRS 15, where we are changing the mix of our mobile products to a more postpaid mix. That has got certainly an impact on your revenue. In terms of IFRS 15, we needs to defer that revenue over a 24- to 36-month period, dependent on the contract. I think you'll note that both the IT as well as the NGN revenue is growing well. IT on 16% and NGN revenue more than 5%. The legacy decline continues. I think that is still the story of our lives, where we are seeing the decline in legacy.
You'll note both on the voice legacy as well as the DSL, the so-called data legacy, that decline. There's still ZAR 4 billion of revenue on the slide in the books that we'll probably only remove over the next 24-36 months. The issue there is your margin on next-generation business, not the same as what we had on legacy, and therefore, very difficult to replace that revenue on a one-by-one basis. EBITDA, impacted by increased expenses. As I said, the move from prepaid to postpaid, clearly, that's got an impact on our direct costs, where we have a higher cost of handsets. That cost is recognized on day one in our income statement, while the revenue only comes through over time. We saw good management of our roaming fees, which is another part of the direct cost.
We're seeing the benefit of the second roaming agreement coming through in the half. Then in terms of OpEx, I think overall OpEx growth of 5% is really at an acceptable level, given more over 7%, CPI, as well as an average 6% salary increase. Having said that, if you look at our cost to revenue ratio growing up to 78%, we do need to look at cost initiatives. We will look at the opportunities in terms of cost on three lines. I've referred to the direct cost. We do believe there's further upside opportunity on the mobile roaming. We will certainly look at the ranging of devices. You know, are we at optimal levels, given the postpaid focus?
Our channel model is busy getting reviewed, where currently majority of our channel in the retail mobile space is own channels, and we're saying: Does that make sense on the long term? How do we move to more self-service channels and franchise models? And then lastly, in terms of our cost lines, there's no sacred cows. We will look at every single line and say, "Where are there opportunities?" We've given the business units their targets and areas to focus on, and certainly, we will do what we can to address the cost to revenue ratio, but mostly on the back of technology changes. As we move from legacy to NGN, we do believe that there's opportunity.
If we just, for a moment, stand still on the mobile postpaid sales, on the slide, you'll note the ZAR 770 million impact of the cost of handsets. That is the single biggest driver of the mobile EBITDA ratio coming down. And as I said, that's a, that's a IFRS function. It's, it's really, us postponing revenue over 24-36 months while we recognize the cost up front. Similarly, on the extension of those contracts, your, your debtors are also paying you over a longer period, which flows straight through to your, to your bottom line. I think the cost to serve, however, on a total mobile picture is still at an acceptable levels, and we see that continuing to improve. It's currently at 27.7%, where a year ago it was at 30.5.
So, so even though we've got the postpaid drive and some other costs, we have brought the cost to serve down, mostly on the back of roaming efficiencies. If we look at our capital allocation process, I think we all know that CapEx... Sorry, I'm going too quickly. Apologies. I think we all know that in terms of sources of capital, it's not something that's in abundance. It's really driven by our operational revenues and profits. Secondly, debt that we raise out in the market, value unlock proceeds, and then to a smaller extent, we do see, following our property consolidation, that we're selling real estate in the market, and that's another source of CapEx. We'll use this CapEx mostly in three areas.
First one, to rebalance the balance sheet, and I'll get to the debt-to-EBITDA levels in the balance sheet in a following slide. But we'll certainly look at our balance sheet structure. Secondly, we will continue to invest. We've set the market parameters for CapEx investment. We'll continue to invest in growth areas because we do believe, on the long term, strategically, it makes sense. Those investments typically been done at a WACC plus level. We're looking at forward-looking internal rate of returns, and we normally don't do a strategic investment if the IRR is not above WACC. And then fourthly, we always look at shareholder returns. It remains a key component, and in that regard, we will reinstate our dividend policy when we announce our results at year-end.
If we then stand still in CapEx area, you will notice that we continue to favor the growth areas. CapEx half on half has increased by 2%. You'll see a slight mix from fiber back to mobile. That's mostly on the back of the spectrum auction, where we paid the cash in the prior year, but we capitalized the assets in the current year. And then secondly, some investment on the RAN network to curtail roaming costs. So we have reprioritized CapEx. We are accelerating the RAN rollout in the areas where the roaming costs are really to our detriment. And we've got the information. We know which areas those volumes are pulling through, and therefore, we've accelerated mobile CapEx to curtail roaming costs. If you look at the fiber, we continue to build fiber to the home.
Remember, I've said previously that in terms of core, in fiber to the base station, fiber to the business, those market was our first area of investment. We are now accelerating fiber to the home. You will note that our fiber homes passed increased by more than 35%. As we speak, we're probably close to 1 million homes passed. We were at 960 at the end of September. But more important, we also increased our homes connected by 34%, which gives us a homes connected ratio of 46.3%. In terms of international benchmark, local benchmark, I think all of you know that at 46%, we are really monetizing our asset.
It remains our focus to roll out fiber in a controlled manner, in a responsible manner, and do it in areas where we are comfortable that we will be able to monetize. Cash flow, let's start at the bottom. Those of you who know me, I normally start with answer. A ZAR 1.9 billion negative free cash flow, informed by two things, by and large. Largely, the ZAR 1 billion deterioration in operational revenue, and secondly, the investment in working capital of just close to ZAR 900 million. That is twofold. That's on inventory, and secondly, on the device debtors book, where that's grown significantly, as well as the trade debtors book as a result of the post-paid mix.
This decline was slightly offset by ZAR 750-odd million of handset sales that we did during the year. We are targeting to do further handset sales. We are targeting to do ZAR 1 billion plus in the current year, excuse me, which will improve the cash flow situation, although we don't believe we will get to positive free cash flow in the current year, but it will certainly improve the situation where we are as we speak. If you then look at balance sheet gearing, I've covered revenue, I've covered EBITDA and cash flow. Clearly, that's impacted the balance sheet gearing. We had to raise new debt to pay for strategic initiatives and strategic capital rollout. You'll note the 1.7 times gearing, as I said, is probably the highest it's been in recent years.
But we still believe with ZAR 2.5 billion of cash and cash equivalents and ZAR 2.3 billion of unused facilities, there's enough headroom to fund and invest in strategic initiatives. When we look at the gearing from a balance sheet structuring position, it's still within acceptable limits. We still believe that our balance sheet is strong, and it is, to a large extent, not overly geared. And just finally, in terms of any covenants from our financiers, our banks, et cetera, we are not close to meeting getting to the covenants, and we're well within all limits. So we're comfortable that, yes, the balance sheet gearing has gone up. We know why. We've got plans in place to claw that back.
But as we said, we are not desperate, thinking that that's at levels that's unacceptable. I think, to close off, that's our financial framework and guidance that we always give to the market. You will note that, given the EBITDA challenges, the continued cost of roaming, we're still gonna continue with the post-paid drive. We've reduced our guidance on both revenue and EBITDA to be low to mid-single digits. And I hate to say that in year one, even that's gonna be a challenge, especially on the EBITDA line. Remember, it's three-year guidance. We do think. Well, it's informed by our forecast and our three- and five-year planning, so we still believe that this guidance is relevant. But year one on EBITDA level will be a challenge.
In terms of CapEx, we will be within our CapEx guidance of 16%-18%, and I've alluded to the debt to EBITDA level, where we're at 1.7. We do expect an improvement by year-end, although we won't go back to 1.2 in the current year, but we have got plans on how to claw that back. And just largely remember that that excludes any value unlock proceeds that might materialize. So with that as conclusion, Serame, I'll hand back to you to talk to us about the future. Thanks.
Thank you, Dirk. As we now go towards our outlook, we do expect similar macro conditions in the market that we've seen to carry on in the second half of the financial year. However, we'll continue to drive focus on our fundamentals. If we look at consumer, as Dirk has mentioned, continue to drive mobile broadband growth. Equally, improve our channels to open up our ability to balance our prepaid and post-paid mix. We are looking at adjacent revenues, like our airtime lending, which is doing very well for us. CapEx investment to minimize the impact of roaming, as well as load shedding, and to continue the legacy exit. As Dirk mentioned out, in Openserve, we've seen good positive growth, not just in fiber to the home, but also fiber to the business and equally, our carrier business.
We will continue to aggressively make sure that we maintain leadership, particularly in the carrier business. Dirk mentioned a number of 46.2% connectivity rate. We're targeting ourselves 50%, highlighting the fact that we're not just putting assets in the ground, but making sure that we convert this investment into real active growth reflected by broadband. As we exit our legacy businesses, we will continue to seek new ways of power to reduce our reliance on diesel as we move forward. On BCX, as mentioned, our IT business is expected to continue to grow. We do look at seeing how can we improve our position in the highly competitive converged comms market, and yes, even in BCX, continuous focus on cost management.
On SwiftNet, it's really about how do we make sure that we drive incremental towers, particularly gearing ourselves for 5G with in-building solutions. As we see more and more of our MNOs upgrading the network, we anticipate more lease renewals. We will continue to manage the legacy exit, this legacy exit from OpenServe and other MNOs. But most importantly, is what we are doing in enhancing our broadband strategy through 5G. 5G is a key enabler to our broadband ambitions, and we firmly believe that we are on the right path. We have started with rolling out our 5Gs. On the consumer side, on the 27th of October, we switched on 136 5G sites across four provinces. We're now sitting at just over 160.
The key enabler of 5G execution remains fiber and fiber backhaul, and we firmly believe that the investment we've made in Openserve gives us the scale, not to just deliver to our own mobile 5G aspirations, but to other MNOs and even potential smaller fiber niche players in terms of backhaul. 5G underpins the success and ambitions of delivery of fiber, definitely underpins the success of a strong 5G strategy. In BCX, BCX is co-building with consumer to see how we can transform 5G in the enterprise market side. We are driving at critical 5G usage examples. We've recently completed a project with the mining industry, and we wish to expand on these. Significant investment in R&D and our own IP in BCX to ensure that we are geared and ready for the explosion of 5G.
As I mentioned in SwiftNet, we are continuing on our R&D in developing in-building solutions to make sure that we have the right ecosystems to drive 5G growth. In fact, SwiftNet has successfully launched its first 5G outdoor distribution antenna system. This work will make sure that we are ready for the 5G onslaught. Looking forward, our strategic priorities. Key for us is how do we strengthen our core business, focus and capitalize on our strength, as Dirk has mentioned. Robust partnership to improve our capabilities. It's about growing our core business, it's about value unlock for our shareholders, and looking at adjacencies to support growth. I have touched on investment of 5G. I have talked about how we want to drive broadband growth in both fixed and mobile.
We've talked about the migration from legacy to next generation and a continuous focus to manage costs. We are in the process now of affirming our value unlock, particularly with Openserve now being a standalone subsidiary and giving us opportunity then to realize the latent investment and value that's captured in there. We will drive partnerships to increase capabilities across our businesses, focusing strongly on innovation to drive customer-centric solutions. Just to go into more detail of what the various business units will be looking at. If we start with Openserve, as I've mentioned, we've completed the structural separation of Openserve.
It gives us opportunity to commercialize this entity, but also, as I mentioned, in 5G, how then do we make sure that we commercialize our fully invested fiber ecosystem, even including offerings like dark fiber? Our partnership with Google on the Equiano project allows us 10 times more capacity for us to deliver for this high-demand ecosystem.
On consumer, we believe that a consideration of an ISP and partnership will go a long way in enhancing our digital-driven customer experience and also reducing the impact of our legacy decline. In BCX, as I mentioned, IT solutions are driving, particularly in areas of cybersecurity and also consulting services. We will seek partnerships in these areas to enhance the service. On SwiftNet, we are in the process of realizing the value of our masts and towers business.
On Gyro, as Dirk mentioned, we'll continue to drive the focus on our properties, aligning with the right partners so that we can deliver or realize the value that's associated in those entities. In summary, therefore, ladies and gentlemen, we believe that the core fundamentals are sound. Our NGN growth is supporting our broadband ambition. We will continue to drive NGN growth while we manage the legacy decline.
A big focus on costs across all business units to make sure that as we exit legacy and also just how we do business, we keep a close focus on our costs. We are ready for 5G. It's a phased rollout, driven by mobile and also supported by BCX, but underpinned by our strong fiber footprint. Our value unlock has gained momentum. We feel we are poised to start realizing the value that's trapped and reflected in our current share price.
We will continue to invest in data-led technologies and partnerships, particularly focusing on innovation and improving customer service. Most importantly, internally, across all business units and our group, we are working on plans to reorganize our organization to make sure that we have a strong focus on execution and delivering value. Thank you very much. I will now open the call to Chorus Call for Q&As. Nondyebo?
Thank you, Serame. My name is Nondyebo Mqulwana. I'm the Group Executive for Investor Relations at Telkom, and I'll be moderating the questions from the investment community. We'll first take questions from the floor, and then we'll go to Chorus Call, and finally, we will look at any questions from the webcast. Are there any questions for Serame and Dirk? Okay, we are now moving on to Chorus Call. Judith, are there any questions from the call?
Nothing at this stage, but ladies and gentlemen, just a reminder, if you'd like to ask a question, please press star and then one.
I have the first question from the webcast. It's from Paula Gilbert, from Connecting Africa. Her first question is: Can you give an update on possible merger deals with Rain and MTN?
Yes, I can. So if we look at Rain, currently from Rain, we have received a proposal. There is no firm binding documents. The teams have been engaging to try and understand what are the potential synergies, all opportunities for growth across these two organizations. So at this point in time, it's all informal conversations. We have set ourselves a target by the end of December to be at a go/no-go position. With MTN, as we indicated, the talks were stalled. However, the strategic imperative and rationale behind MTN and Telkom partnership still remains intact. We will be open to, to conversations continuing further if MTN comes back.
Thank you, Serame. I'm sending it back to you, Judith. Is there any questions from Chorus Call?
No, we have no questions on the lines. My apologies. One is just coming to the queue. That is from Godwill Chahwahwa of Coronation.
Morning, guys. Just a quick question for clarity around your guidance, your low to mid single digit guidance. What is the base year upon which that, I know it's a medium-term guidance, but what is the base year upon which we should work from?
Yeah, Godwill, thanks. As I said, it's a three-year guidance. Thank you, Godwill. It's a three-year guidance, and we use March 2023 as the base year.
March 2023 as the base year?
Yeah.
Judith, are there any further questions?
No, we have no further questions on the lines. Thank you.
Okay, thanks. I have another question from the webcast. It's from Wessel Joubert from Oysterc atcher Investments, and his question is: Would you be willing to sell the whole of Openserve?
I think if you look at the story behind Openserve, its role in how we can realize our broadband strategy, it is a core asset for us. We are definitely not considering selling a majority of Openserve.
The next question comes from Nedbank CIB, Preshendran Odayar. His question is, what is the guidance for the rest of the year on free cash flow, Dirk?
Yeah, as I said, we never give guidance on free cash flow, but we get the question every time. So free cash flow, year to date, ZAR -1.9 billion. We do believe that we should improve from that to year-end, but we do not believe we'll get to positive free cash flow by year-end.
That's all the questions I have at this point. Judith, I'm checking with you for any final questions.
Thank you. At this stage, no further questions on the lines. Thank you.
Okay, I'm opening the floor for the last time, if there's any questions in the room. Thank you. Serame, would you like to present your closing remarks, please?
Thank you. Thank you, ladies and gentlemen. I think that concludes our presentations for today. As I've said, we firmly believe that our broadband strategy is bearing fruit. We have a very big focus on managing our costs, especially as we exit our legacy platforms, and I also mentioned we are restructuring our organization to make sure that we focus on operational efficiency with a key bias on execution. Thank you very much.