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Telecom Delivers Strong Annual Earnings Growth

TELECOM DELIVERS STRONG ANNUAL EARNINGS GROWTH

FOR ORIGINAL FORMATTING SEE...
http://www.telecom-media.co.nz/releases_detail.asp?id=3072

Overview of Group results

Twelve months ended (NZ$m)
------------> 30 Jun 04 30 Jun 03 Change %
Operating revenue 5,352 5,191 3.1
Operating expenses (3,008) (2,875) 4.6
Abnormal items (before tax) (93) - NM
EBITDA* 2,251 2,316 (2.8)
Adjusted EBITDA* 2,344 2,309 1.5
Reported net earnings 754 709 6.3
Adjusted net earnings 775 704 10.1
Net debt 3,756 4,694 (20.0)

Reported net earnings per share 39.2 cents 37.6 cents

* Earnings before interest, taxation, depreciation and amortisation.

Note: All comparisons in the above table and in the commentary below relate to the 12 months ended 30 June 2003 unless otherwise stated. All figures are in New Zealand dollars unless otherwise stated.

Telecom today announced reported net earnings after tax for the 12 months to June 30 2004 of $754 million, an increase of 6.3% on the $709 million reported for the 2003 year.

Adjusted net earnings for the 12 months to 30 June 2004 were $775 million, an increase of 10.1% on the previous corresponding 12 months.

Reported net earnings included a number of abnormal and special items. These were:-

- $28 million gain on the sale of Sky Network Television shares booked in the second quarter of 2004.

- $12 million recovery from the sale of AOL7 reported in the third quarter of 2004.

- tax credit of $29 million in the fourth quarter following a settlement with the IRD relating to tax assessments between 1993-1999.

- $110 million ($74 million net of tax) impairment write-down on the TDMA network in the fourth quarter.

- $23 million ($16 million net of tax) impairment write-down on LMDS assets in the fourth quarter.

Adjusted EBITDA was $2,344 million compared with $2,309 million for the year ended 30 June 2003.

Operating cash flow rose 7.3% to $1,681 million reflecting stronger income growth and lower interest payments.

Telecom Chairman Roderick Deane said the Group's performance was solid with double digit underlying earnings growth achieved in the 2003-2004 year.

"The Group's operating revenue performance was pleasing with 3.1% growth for the 12 months to 30 June 2004 compared with the same period in 2003. Operating margins remain stable despite significant price pressures," Dr Deane said.

"The Group's strong cash flows enabled the balance sheet to be further strengthened with a reduction in net debt of $938 million over the year to 30 June 2004.''

Telecom announced a fully imputed dividend of 9.5 cents per share for the fourth quarter of 2004, higher than the 7.5 cents per share signalled in February.

Dr Deane said he was pleased to announce a revised dividend policy, with a minimum annual payout ratio of 75% of net earnings after tax (after adding back amortisation and relevant non-cash items) effective from 1 July 2004.

"We will look to pay out a minimum of 75% of earnings under the new policy. The actual amount distributed in any year will depend on the performance of the business and macro-economic factors.

"For the 2004-2005 year we are targeting an approximate dividend payout of 85% of net profit after tax (adjusted for amortisation and relevant non-cash items).

"Interim dividends for the first three quarters of 2004-2005 will be 9.5 cents per share. The fourth quarter dividend will be set to reflect the targeted 85% pay-out ratio."

Telecom Chief Executive Theresa Gattung said the Telecom Group's EBITDA performance reflected targeted investment in broadband and mobile.

"Operating revenue growth for the year, particularly in the fourth quarter, was solid and when combined with lower interest payments led to an improvement in the Group's bottom line," Ms Gattung said.

"We are seeing a continuing trend as our business moves away from traditional areas such as voice calling towards data and IT. Our commitment to this trend is reflected in our increased investment in key areas of the business including broadband and mobile, and our acquisition of Gen-i.

"In Australia we had revenue growth and good EBITDA growth on an annual and quarterly basis. We have seen momentum pick up in our Consumer business and we expect to see growth in our Business division with the launch of new IP services this quarter."

New Zealand

- Operating revenue was $3,934 million, up 3.4%.

- Operating expenses increased 6.8% to $1,695 million, reflecting higher investment in targeted areas of the business such as broadband, mobile and calling.

- EBITDA rose 1% to $2,239 million.

- Revenue growth was achieved in most areas. Data, Internet and Telecom Advanced Solutions revenue growth, reflecting strong uptake of Jetstream as well as value added services, continued to offset a decline in calling revenue.

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

- Revenue for the 12 months increased 1.3% to $1,073 million while residential access line increased by approximately 9,000 to 1,425,000.

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 calling revenue decreased 8.8% to $966 million - the decline reflected price reductions and substitution such as email, Internet and mobile usage including text messaging.

Interconnection revenue, which includes termination of calls on both fixed and mobile networks, rose 24.6% to $142 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 rose 7.4% to $612 million for the 12 months to 30 June 2004 and 11.3% to $157 million for the quarter. Text messaging and other data services continued to drive mobile revenues.

- Mobile data was again a highlight with a rise of 75.9% to $51 million for the year and 87.5% to $15 million for the quarter.

- Total ARPU for the 12 months was stable at $34.70 per month (excluding interconnection) and grew 2.5% to $49.80 per month including interconnection.

- At 30 June 2004 there were 1,352,000 mobile customers with 667,000 on CDMA. The 1,352,000 was a rise of 8.2% on the previous corresponding 12 months.

- Mobile cost of sales increased by 37.2% to $155 million due to investment in customer acquisition strategies.

Data, Internet and Solutions revenue increased 13.7% to $706 million.

- Jetstream revenue grew by 67.9% to $94 million for the year and 64.7% to $28 million for the quarter.

- As at 30 June 2004 Telecom had 119,000 Jetstream connections compared with 72,000 as at 30 June 2003.

- Approximately 81,000 of these were residential customers

Directories revenues grew by 6.8% to $221 million, driven by strong sales.

Australia

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

- Australian revenue was up 5.9% to A$343 million for the fourth quarter of 2004 compared with the same quarter in 2003 and increased 2% to A$1,324 million for the 12 months to 30 June 2004

- EBITDA rose 8.3% to A$169 million - boosted by margin growth and lower operating expenses

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

- Australian consumer revenues were A$608 million for the full year, a rise of 2.2%, and A$150 million for the quarter, up 2% on the same quarter in 2003.

- EBITDA rose by 8.3% to A$39 million for the 2004 year.

- Average revenue per fixed-line customer increased 4.9% to A$79.20 per month for the fourth quarter of 2004 compared with the same period in 2003 reflecting a stronger focus on full service offerings.

- Fixed line customers were 480,000 up approximately 6.2% for the year.

The launch of the capped A$59 offer for national and international calling contributed to growth in the customer base, including a 29% increase in multiple service customers.

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

- Operating revenues were stable on A$717 million for the year and up 7.9% for the fourth quarter to A$192 million compared with same quarter in 2003.

- EBITDA increased 8.3% to A$130 million on an annual basis.

Growth in value added services offset the impact of lower prices in data and Internet while calling revenue increased in the fourth quarter due to wholesale growth.

Dividend

Telecom will pay a fully imputed fourth quarter dividend of NZ9.5 cents on 10 September 2004 in New Zealand and Australia, and 17 September 2004 in the United States.

The books' closing dates are 27 August 2004 in New Zealand and 26 August 2004 for the United States.

Telecom has retained its dividend reinvestment plan, however the Board may review this by 30 June 2005.

Capital expenditure for the year ended 30 June 2004 was $608 million, an increase of 1.3% on the previous year. Telecom is forecasting to spend approximately $650 million for the 2004-2005 year.

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

www.telecom.co.nz.


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