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Telecom Delivers On Third Quarter Earnings

Telecom Delivers On Third Quarter Earnings

Telecom reported today net earnings after tax for the nine months to 31 March 2004 of $NZ597 million compared with $NZ498 million for the same period in 2003.

This result included one-off abnormal items of $NZ40 million including a $NZ28 million profit on the sale of Telecom’s 12% stake in Sky Network Television booked in the second quarter of 2003-2004, and $NZ12 million arising from the sale of AAPT’S stake in AOL7 during the third quarter ended 31 March 2004.

Net earnings for the nine months to 31 March 2004 were $NZ557 million when adjusted for the $NZ40 million in abnormal items, an increase of 11.8% compared with the previous corresponding period.

Overview of Group results
Nine months ended (NZ$m)
31 Mar 04 31 Mar 03 Change %
Operating revenue 4,004 3,897 2.7
Abnormal items 40 0 -
EBITDA* 1,781 1,698 4.9
Adjusted EBITDA* 1,741 1,698 2.5
Reported Net earnings 597 498 19.9
Adjusted net earnings (1) 557 498 11.8
Net debt 3,970 4,900 -19.0
Reported net earnings per share 31.1 cents 26.5 cents
* Earnings before interest, taxation, depreciation and amortisation.

Note: all comparisons in the above table and in the commentary below relate to the nine months ended 31 March, 2003 unless otherwise stated.

(1) adjusted for abnormal items.

Telecom announced a rise in dividend for the third quarter to NZ7.5 cents per share from NZ5.0 cents per share, as signalled in February.

Adjusted net earnings for the quarter to 31 March 2004 were $NZ220 million, an increase of 11.7% on the previous corresponding period.

Adjusted EBITDA for the nine months was $NZ1,741 million, an increase of 2.5%.

Operating cash flow rose 8.7% to $NZ1,218 million for the nine months, reflecting operating income growth and lower interest payments.

Adjusted Earnings before interest and tax (EBIT) for the nine months to 31 March 2004 was $NZ1,124 million, a rise of 3.3% while adjusted EBIT for the third quarter was $NZ419 million, an increase of 2.9%.

Telecom Chief Executive Theresa Gattung said the company’s overall performance was pleasing with revenue growth of 5.2% achieved in the third quarter. “Revenue growth and lower interest payments have improved the Group’s bottom line performance.

“We continue to achieve double digit growth in our data and solutions business in New Zealand while mobile data is driving stronger mobile revenue. Total cellular and other mobile revenues grew 9.1% for the quarter.”

Ms Gattung said that Telecom’s CDMA network enabled the company to offer high speed mobile data services, and that meant the company was well positioned to meet increasing demand for these services, with revenues up 71% for the nine months.

“We’re seeing a continuing trend in the business as our focus shifts from traditional areas such as voice calling towards data and IT. In the third quarter we saw a strong increase in the uptake of broadband services and this trend is accelerating.”

Ms Gattung said increased operating expenditure reflected targeted investment in wireless, broadband and data solutions.

“The new regulatory regime is also making its presence felt with the number of wholesale access lines continuing to increase.

“Price pressures continue to impact on the traditional parts of our business although this is also a reflection of substitution as well as increasing competitive pressures.

“In Australia, revenues and fixed line customers were stable overall and our operations continued to be cash flow* positive,” Ms Gattung said.

“In the third quarter, AAPT sold its shareholding in AOL7, with proceeds of $A10 million ($NZ12 million) received. Following the sale, AAPT assumed sole management of approximately 48,000 consumer dial-up and broadband customers.

“In order to serve our customers with a package of fixed, internet and mobile services it was fundamental to return the internet product distribution and operations in-house. This allows us to bring our customer base closer together and leverage common strengths across the AAPT Group.”

“AAPT is continuing to reshape and streamline many of its business operations, with a focus on building sales and marketing capabilities. We are making progress and we expect to see this reflected in our operating performance in future quarters.

“We are pleased that at the same time the rebuilding has been occurring we have seen stability in revenue and EBITDA in our Australian business, and the business remains cash flow* positive.’’

New Zealand

- operating revenue was $NZ2,943 million, up 3.3% on the corresponding nine months
- operating expenses totalled $NZ1,264 million, an increase of 3.7%
- EBITDA for the nine months was $NZ1,679 million, an increase of 3.1%

Revenue growth in the New Zealand business was achieved across most revenue categories.

Data, internet and Telecom Advanced Solutions revenue growth and the strong uptake of Jetstream and value added services have continued to offset a decline in calling revenues.

Local Service comprises fixed line and value-added services to residential, business and corporate markets.

- revenue for the nine months increased 1.8% to $NZ806 million while the number of residential access lines grew 14,000 to 1,425,000 as at 31 March 2004 compared with the previous corresponding period. This is largely a result of net migration and stronger economic conditions.

Calling revenue comprises national calling (national calls, calls to mobile networks and national 0800) and international calling (calls out of and into New Zealand and transit call traffic between destinations worldwide).

- total national calling revenue fell 4.4% to $NZ496 million for the nine months to 31 March 2004, reflecting lower call minutes and lower average prices. The decline in call minutes is partly due to a move away from traditional calling to increased e-mail, mobile calling and internet activity as well as greater competition.

Total international calling revenue declined 21.6% to $NZ207 million for the nine months to 31 March 2004. The decline in international calling revenues was largely due to re-negotiated bi-lateral agreements for call transfers with other carriers resulting in lower average prices.

- outward calling revenue decreased 10% to $NZ117 million due to lower average prices and intensive competition as well as product substitution

- inward calling revenue decreased $NZ29 million to $NZ60 million for the nine months to 31 March 2004

- the strengthening of the New Zealand dollar against the US dollar affected international calling revenues and expenses, with the average NZD:USD exchange rate 24.3% higher for the nine months to 31 March 2004 than for the previous corresponding period.

Interconnection revenues, which includes terminating calls on both fixed line and mobile networks, rose 26.2% to $NZ106 million, driven primarily by mobile interconnection revenue due to growth in text messaging.

Mobile provides voice and data on 027 (CDMA) and 025 (TDMA) networks.

- total mobile revenues (excluding interconnection) for the nine months to 31 March 2004 grew by $NZ26 million to $NZ455 million with mobile data revenues increasing 71.4% to $NZ36 million

- text messaging and other data services continued to drive mobile revenues
- post paid average revenue per user (ARPU) for the nine months to 31 March 2004 was stable at $NZ74.80 per month
- total ARPU including interconnection rose 3.5% to $NZ50.30 per month

Cost of sales increased by $NZ29 million for the nine months to $NZ116 million, reflecting Mobile’s strong marketing push as Telecom continued to upgrade and acquire new customers.

Data, Internet and Solutions revenue increased 14.5% to $NZ514 million.

- Jetstream revenue grew by 69.2% to $NZ66 million for the nine months to 31 March 2004 and by 71.4% to $NZ24 for the third quarter, as uptake in JetStream accelerates

- As at 31 March 2004 Telecom had approximately 103,000 Jetstream connections compared with 54,000 as at 31 March 2003

- Residential connections for the nine months to 31 March 2004 were 67,000

- Lanlink revenue increased 10.7% to $NZ62 million due to growth in managed traffic and an increase in circuits and installations

- Private office and high speed data revenue increased 77.8% to $NZ16 million, reflecting increased use of the service by businesses

- Internet revenue rose by 12.2% to $NZ101 million, as a result of increased customer numbers and the take-up of higher value products

- Telecom Advanced Solutions revenue recorded a 94.4% increase to $NZ35 million for the nine months

Directories revenues grew by $NZ12 million to $NZ182 million, driven by strong sales activity.


The following breakdown of our Australian result is expressed in Australian dollars, including comparisons with prior corresponding periods.

- Australian revenue was $A981 million for the nine months compared with $A974 million for the previous corresponding period in 2003

- EBITDA was stable on $A109 million for the nine months to 31 March 2004 and $A40 million for the third quarter

- EBITDA for the third quarter ended 31 March 2004 excludes a one-off recovery of $A10 million from the sale of AAPT’s stake in AOL7.

Australian Consumer comprises AAPT’s residential and small business fixed line operations, Internet, and AAPT Mobile.

- Australian consumer revenues increased by $A10 million to $A458 million for the nine months to 31 March 2004 and 3.5% to $A147 million for the third quarter

- EBITDA declined $A10 million to $A24 million mostly as a result of bad debts and higher advertising expenditure in the first quarter of 2003-2004 (note this figure excludes the $A10 proceeds from the sale of AOL7)

- As at 31 March 2004 AAPT fixed line customers were up 1.8% on 450,000

- mobile revenue and connection numbers declined largely as a result of the transfer of Vodafone branded pre-paid customers back to Vodafone (under the terms of the MVNO)

Australian Business comprises AAPT’s operations in business, corporate, government and wholesale market, the Connect Internet business and TCNZA.

- Australian business revenue increased 2.4% for the third quarter to $A174 million and was stable at $A525 million for the nine months to 31 March 2004

- EBITDA for the nine months was $A85 million, an increase of 13.3%, and $A29 million for the quarter, a rise of 7.4%

Capital expenditure for the nine months was $NZ401 million, an increase of 7.2% over the corresponding period in 2003, with slightly more than half the total invested in the New Zealand Wired business. The full year forecasted capital expenditure has declined to $NZ600 million from the previous forecast of $NZ650 million. Capital expenditure of $NZ650 million is forecast for 2004-2005.

TDMA Network: Since August 2001, Telecom has been in the process of actively migrating customers from its TDMA mobile network, to the new advanced CDMA network. In the fourth quarter of 2003, Telecom advised that as a result of this migration, an impairment charge may be required in the year ended 30 June 2004 to reflect the revised value of the TDMA infrastructure. Based on current estimates of the rate of CDMA customer migration, Telecom expects that a charge of between NZ$90 million and NZ$110 million (NZ$60 million and NZ$74 million net of tax) may be required in the fourth quarter of the current financial year.

Dividend: Telecom will pay a fully imputed quarterly dividend of NZ7.5 cents per share on 11 June 2004 in New Zealand and Australia, and 18 June 2004 in the United States.

On February 5, 2004 Telecom announced an increase in the dividend pay-out ratio following a comprehensive review by its Board.

After meeting targeted financial ratios during the second quarter of the 2003-2004 year, Telecom announced its new dividend policy is to pay dividends representing approximately 70% of net profit after tax, after adding back amortisation and abnormal non-cash items. This new policy will commence from the first quarter of 2004-2005.

Telecom has retained its dividend reinvestment plan though the 3% discount is no longer available.

The books closing dates are 28 May 2004 in New Zealand and Australia, and 27 May for the United States.

* cash flow defined as EBITDA less capex

Detailed information: The Management Commentary, condensed accounts and presentation can be found at the investor section of

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