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GDC Communications Builds New Platform for Growth

24 August, 2004

Headline: GDC Builds New Platform for Growth

Name of Listed Issuer: GDC Communications Limited
For Half Year Ended: 30 June 2004

This report has been prepared in a manner which complies with generally accepted accounting practice and gives a true and fair view of the matters to which the report relates and is based on unaudited accounts.

Key points– Half-year to 30 June 2004

- Repositioning of the Services division in line with demand and strategic opportunities
- Benefits from restructuring of the Voice Solutions division
- Strong revenue growth from Technology Solutions
- Accelerated investment in skill development and support systems
- Operational costs reduced by more than 20%
- Rights issue to provide further financial and strategic flexibility

Strategic repositioning

GDC’s business activities are continuing to change significantly in response to changes in the market environment, and in the price and capability of technology. The company has been actively reshaped in response to these changes, and now has a unique position and execution capability within these markets.

The main strategic focus has been the successful repositioning of the Services division in the light of the pending expiry of contracts with Telecom New Zealand during 2004 and 2005. This has involved negotiating replacement work on a sub-contract basis, securing contracting work on other telecommunications networks not previously available to the company, and reducing the cost base in line with revenue expectations. These changes have produced a robust competitive platform from which the division can further re-grow revenues in this area.

The repositioning of the Services division has confirmed GDC’s status as an independent company with the systems and skills to maintain its presence in the telecommunications services sector. Whilst the largest proportion of revenue is from the Services division, GDC is also one of the largest independent suppliers of voice solutions to the commercial sector in New Zealand, and has been very successful at marketing and implementing leading edge solutions in the emerging Voice Over IP area. External client service revenues for the company’s ASP (Application Service Provider) operation have grown by more than 45% in comparison with the first half of the previous year. GDC is continuing to extend the quality of its operational infrastructure to stay at the forefront of this developing industry.

As part of the repositioning, the company has accelerated its investment in skill development and support systems, and has increased its overall delivery and execution capability in key areas. This has been achieved whilst reducing operational costs by more than 20% on a year-on-year basis.

During this process, EBITDA has remained consistently positive. Surplus operational cash flow has been used to reduce bank and other borrowings, and these balances are now $1.98 million (32%) lower than at the same time last year. The percentage of current assets to current liabilities has also improved, from 81% to 97%.

Continuing work is necessary to fully reposition the company for growth. Nevertheless, the board is satisfied that its vision for the organisation – to focus on the delivery of integrated voice, network and data solutions as a managed service for customers, supported by high value professional services – remains appropriate and achievable. The opportunity around converged (ie. voice and data) solutions is recognised globally as the major driver for the next wave of investment in technology. GDC remains uniquely positioned in the New Zealand market to profit from this trend.

Rights issue

To support the company’s continuing development the board has resolved to raise additional capital through a rights issue to existing shareholders. The new capital will be used to:
- strengthen GDC’s position in the telecommunications sector by allowing it to move quickly and effectively to acquire other organisations that will add financial and strategic capability
- improve the company’s financial strength and resilience by reducing bank debt.

The terms of the rights issue will be set out in full in a prospectus to be issued to shareholders in September 2004. In summary, they are:

- A four for five offer, at 10 cents per share.
- The new shares will rank equally with existing shares.
- No minimum subscription level.
- Applications may be made over and above entitlements.
- The offer is renounceable, and shareholders may sell or transfer their entitlements in whole or in part.
- Application will be made for listing the New Shares by the NZX.

The directors who own shares in GDC Communications have indicated that it is their intention to collectively take up entitlements or apply for over-subscriptions so as to at least maintain their combined current 18% ownership of the expanded capital base post issue.

Summary of Financial Performance in the Six Months to June 30, 2004.

30 June 2004
$ million 30 June 2003
$ million
Revenue 25.7 27.3
EBITDA 1.3 2.2
EBIT (0.680) (0.247)
Operating Surplus
(Deficit) after income tax (0.686) (0.344)

The results for the six months ended June 30 2004 reflected the loss of the Telecom contracts and restructuring across the company (particularly in the Services and Voice Solutions divisions), strong revenue growth in Technology Solutions, and a substantial reduction in operating costs.

The company maintained positive operating cash flows over the period, and this was applied principally to reducing bank debt. No dividend has been declared for the half year.

Services
Revenue and profitability have declined in our field services and contracting group in line with our expectation as the principal contracts with Telecom mature. However, this business is profitable for us, and the first six months of the year have seen considerable progress with the development strategy outlined in the last annual report. In particular, GDC has secured sub contracting revenue streams sufficient to underpin the required investments in skills and systems and maintain our presence in this industry. The transition to the new subcontracts is now under way, with GDC’s South Island operations terminating at the end of July.

Under the subcontracting agreements, operations will continue in Auckland, Taranaki and Horowhenua after the natural termination of the current patch contracts. These changes are being effected under a well-managed process for handling surplus stock and plant, although some termination costs and a decline in revenue will be evident in the second half results for this division.

An overall shortage of resource is evident in the telecommunications services market and this is expected to become more pronounced as carriers and mobile operators increase their level of investment in new networks. This is expected to create ongoing opportunities for a company with GDC’s experience and skills. The company is pursuing both direct engagement with these opportunities, and actively investigating prospects for diversification or acquisition that would enable us to scale and leverage the core skills that we have in this area.

Voice Solutions
Revenue in the Voice Solutions division declined marginally due to the seasonality of some large orders, but the company remains committed to continuing the overall growth seen in this division last year. Operating expenses decreased by more than 25% as the measures taken to restructure this operation began to be reflected fully in the costs of the group. Continuing to aggressively manage this cost base will be critical if we are to prosper in a competitive market that is increasingly focused on the delivery of services rather than simply hardware.

As a consequence, considerable focus has been given to improving the performance of the voice solutions services group, and growing levels of customer satisfaction reflect the progress we are making in this area. The delivery of professional services in the voice area continues to be a central plank in our strategy, and a considerable investment is being made in a new service delivery management system to support this. Additionally, GDC has established a highly qualified group to operate in the network design, implementation and management area, allowing the company to deliver full end-to-end communications solutions for its customers.

GDC is continuing to build a growing customer base in the larger and more sophisticated end of the voice market, and has also enjoyed specific success in the emerging market for telephony systems built on Internet Protocol (IP) technology. Both of these are growing and attractive areas of the market, and position GDC well for future growth.

Technology Solutions
The Technology Solutions division enjoyed good external revenue growth as contracted services were fully deployed in customer organisations. GDC now has a significant presence in supporting the New Zealand retail sector, and has extended its reach to support retail branch operations in Australia. The portfolio of products being offered was extended to include specific solutions in the mobility area, and will be further expanded with additional applications, managed internet and security products in the current period.

GDC has also taken the decision to consolidate its operations into a single datacentre, and this significant project is now underway. This will establish GDC in the premier facility of its kind in New Zealand and, once fully implemented towards the end of this year, will deliver a number of operational efficiencies and a higher quality of consistent service to our customers.

The focus with the Technology Solutions division is to grow revenue and consistently achieve positive cash flow. A number of steps will be taken in the second half of the year to achieve this by fully leveraging the company’s unique position and skills in the converged market for voice and data solutions.

Summary
GDC has a sound and relevant business model for all the markets in which it operates. However, it is clear that greater scale in all areas would deliver increasing returns for GDC. While some of this can be achieved organically, the company is keen to complete acquisitions that will contribute positively to revenue and profitability within the core areas of business. There is a general trend towards consolidation within the technology and telecommunications industry, and GDC intends to be proactive within this area. A number of attractive acquisition opportunities are apparent in areas that are closely aligned with GDC’s existing business and management capability, and these will be actively pursued in all areas where an attractive business case can be developed.

The board and management are committed to delivering a performance in the second half that shows improvement over the results achieved to date. This will involve the active management of costs and transition activities across the company, the vigorous pursuit of new business and acquisition opportunities, and a clear focus on profitable growth in all areas.

ENDS

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