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Telecom Reports Solid Half Year Performance

Telecom Reports Solid Half Year Performance

Telecom today reported net earnings of NZ$301 million for the half year ended 31 December 2002 – a decrease of 3.5% on reported net earnings of NZ$312 million for the six months ended 31 December 2001.

On an adjusted basis, net earnings for the half year ended 31 December 2002 increased by 4.2% on the previous corresponding half year^.

Adjusted net earnings for the first half of the previous financial year were NZ$289 million, after making adjustments for gains associated with the prepayment of cross-border leases, the sale of international network capacity, and a lower amortisation charge in the first half of the current financial year due to the write-down of the Group’s investment in AAPT at 30 June 2002.

Overview of Group results Half year ended (NZ$m) Reported group revenues Dec 2002: 2,605 Dec 2001:2,845 Reported net earnings Dec 2002: 301 Dec 2001: 312 Includes: One-off gains after tax Dec 2002: --- Dec 2001:(42)# Amortisation of AAPT goodwill Dec 2002: --- Dec 2001: 19 Adjusted net earnings Dec 2002: 301 Dec 2001: 289

Reported EBITDA* Dec 2002: 1,088 Dec 2001: 1,101 Second quarter dividend per share Dec 2002: 5 cents Dec 2001: 5 cents

# Included in the Dec 2001 results were gains associated with the prepayment of cross-border leases (net of tax NZ$23m) and sale of network capacity (net of tax NZ$19m)

* Earnings before interest, tax, depreciation and amortisation

^ Unless otherwise stated, all comparisons are with the half year ended 31 December 2001. EBITDA for the half year ended 31 December 2002 was NZ$1088 million, down 1.2% on the corresponding period in the previous year.

Overall operating revenues decreased by 8.4% while operating expenses were reduced by 13.0%.

Telecom Board Chairman Dr Roderick Deane said the Group continued to produce a solid operating performance in what is a testing environment for telecommunications companies globally.

“Enormous change is happening across the sector making the environment challenging for all companies. Within that context, Telecom is maintaining its focus on business fundamentals, lifting the performance of its business units.

“Telecom is performing very well given the double handicaps of a tough telco sector and a regulatory environment which is imposing growing burdens on the company.

“In the year to 31 December 2002, Telecom’s balance sheet has been strengthened with the repayment of approximately NZ$600 million in debt.

“Operating cash flow continues to show strength. In the half year ended 31 December 2002, operating cash flow was NZ$776 million – an increase of 50.1% on the previous corresponding period.”

Telecom Chief Executive Theresa Gattung said that in New Zealand, the operation is exhibiting good cost control and resilient performance, with growth in data including mobile data, and the Xtra Internet business.

“Across the Tasman, we are seeing strong cashflow performance, particularly when compared to 12 months ago. Cashflow* in Australia is now NZ$42 million while a year ago that figure was negative NZ$50 million.

“We spent the past year putting in place a lot of the infrastructure that our customers need for the future. Our focus in the coming year will be to use those assets to deliver some very compelling services and offerings to customers.

“Our focus in Australia remains on higher value customers, and improving infrastructure utilisation and supplier agreements.”

* EBITDA less capex

Business unit performance

New Zealand Wireline: New Zealand Wireline comprises fixed line and value-added services to residential, business and corporate markets.

EBITDA for the half year increased 2.5% to NZ$814 million.

Operating revenue decreased by 1.5%. Reduced interconnection and calling revenues were the main cause of the decrease, offset by growth in access line and data revenues.

Operating expenses were down 6.7%, reflecting stringent cost containment.

Telecom continued to see a strong increase in the take-up of its JetStream fast Internet service. Revenue from ADSL was up by 78.6% in the half year to 31 December 2002.

Telecom now has approximately 54,000 JetStream customers, more than double the figure of a year before. About 50% of medium sized businesses across New Zealand are taking advantage of JetStream.

Approximately 83% of Telecom customers can now access high-speed Internet services. Telecom’s recently announced agreement with BCL will extend broadband penetration to more rural and provincial customers in the future.

Data revenue growth was also driven by take-up of Lanlink and frame relay circuits. Lanlink revenue increased by 15.6% while frame relay revenue increased by 36.4% on the previous half year.

New Zealand Mobile: This business provides voice and data on 027 (CDMA) and 025 (TDMA) networks.

EBITDA increased 25.2% for the six months ended 31 December 2002. This reflects a 9.7% decrease in operating expenses as a result of lower customer acquisition costs, and 1% higher revenue.

Total 027 connections reached 241,000 by 31 December 2002, and have since reached 250,000. They represent about 20% of the total Telecom mobile customer base. Approximately 28,000 027 customers can now access Telecom’s fast data Mobile JetStream service, launched in July 2002.

The rise in mobile revenue largely reflects the growth in mobile data revenue, which grew by 225%.

Total mobile Average Revenue Per User (ARPU) for the half year ended 31 December 2002 increased to $46.40, up 6.2% on the previous corresponding half year. The increase largely reflects a focus on higher value customers, especially those using the 027 service, as lower value prepaid customers drop off Telecom’s customer base.

International: International provides New Zealand and Australia with outward and inward calling, managed international data services and carries transit call traffic between destinations worldwide.

Revenue for the half year to 31 December 2002 decreased by 29.2% - largely reflecting the impact of the strengthening New Zealand dollar, renegotiated bilateral agreements with other carriers, and the sale of network capacity in the prior year.

Operating expenses decreased by 22.3% reflecting the stronger New Zealand dollar and renegotiated carrier contracts.

Internet and Directories: Internet and Directories comprises Xtra and Telecom Directories.

EBITDA grew by 16.1% to NZ$65 million for the half year to 31 December 2002. Revenues increased by 11.2% for the six month period while operating expenses increased by 8%.

Xtra continued to show strong growth with Internet revenue up 32.7%. At 31 December 2002, Xtra had 408,000 active dial up customers, up 21.8% on the previous corresponding period.

Australian Consumer: Australian Consumer comprises AAPT’s residential and small business calling and resale business, and the ‘AAPT mobile’ operation, which was previously branded Cellular One.

Australian Consumer EBITDA decreased by 28.9% to NZ$27 million for the six months ended 31 December 2002, which was largely due to prior year one-off impacts of the mobile services agreement with Vodafone signed in November 2001.

Revenues were down 26.3%, while operating expenses fell 26.1%. This reflects the strategy of pursuing higher value customers. Overall, our customer numbers across fixed and mobile have stabilised.

Expressed in Australian dollars, revenues were down 22% and operating expenses decreased by 22%.

Australian Business & Internet: Australian Business & Internet comprises AAPT’s operations in business, corporate and government markets, the Connect Internet business and TCNZA.

Australian Business & Internet EBITDA increased by 75.9% to NZ$51 million. Total operating revenue decreased by 9.1%, while operating expenses were reduced by 14.8%.

This performance reflected the rationalisation of the business, with a strong focus on high value customers.

Expressed in Australian dollars, revenues decreased by 5% while expenses reduced by 11%.

Capital expenditure: Total capital expenditure for the first half of 2002-2003 was NZ$205 million, down 50.4% on the previous corresponding period in 2001-2002.

Telecom has revised its forecast for capital expenditure for the 2002-2003 financial year to $NZ650 million, down from the NZ$730 million forecast previously.

Dividend: Telecom will pay a fully-imputed quarterly dividend of NZ5.0 cents per share. Shares issued in lieu of cash dividends will be offered at a 3% discount to the price calculated under the Telecom Dividend Reinvestment Plan. Dividends will be paid on 14 March 2003 in New Zealand and Australia, and 21 March 2003 in the United States. The books closing dates are 28 February 2003 in New Zealand and Australia, and 27 February 2003 in the United States.

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