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Strong NZ Performance in Third Quarter Result

Telecom Delivers Strong New Zealand Performance in Third Quarter Result

5 May 2006

Telecom today reported net earnings after tax of NZ$222 million for the 31 March 2006 quarter compared with NZ$273 million for the same quarter in 2005. Excluding the impact of abnormal items, adjusted net earnings for the three months represent a decrease of NZ$23 million on adjusted earnings for the quarter ended 31 March 2005.

Earnings before interest, taxation, depreciation and amortisation (EBITDA) in the New Zealand operations increased 2.3% to NZ$1,666 million for the nine months to 31 March 2006, and by 3.1% to NZ$591 million for the March 2006 quarter, however this was offset by a decline in earnings in the Group’s Australian business as a result of adverse changes in the competitive environment and wholesale arrangements in Australia.

For the nine months to 31 March 2006 Telecom reported a net loss after tax of NZ$244 million, largely a result of the NZ$897 million January write-down of the carrying value of the Group’s Australian operations. Adjusted net earnings for the nine months were NZ$617 million compared with $643 million for the corresponding period in 2005, a decrease of 4.0%.

Abnormal items for the nine months to 31 March 2006 of $871 million (before tax) are described at the end of this release. No abnormals have occurred since Q2 2006.

Overview of Group results

Nine months (NZ$m) / Quarter ended 31 March

31 March 06 31 March 05 Change % / 31 March 06 31 March 05 Change %

Revenue 4,301 4,219 1.9 / 1,447 1,421 1.8

Expenses (2,648) (2,532) 4.6 / (864) (824) 4.9

Abnormal items (871) 37 NM / 22 (100.0)

Reported EBITDA* 782 1,724 (54.6) / 583 619 (5.8)

Adjusted EBITDA* 1,653 1,687 (2.0) / 583 597 (2.3)

Reported EBIT 259 1,208 (78.6) / 405 452 (10.4)

Adjusted EBIT 1,130 1,171 (3.5) / 405 430 (5.8)

Reported Net (loss)/ earnings (244) 686 (135.6) / 222 273 (18.7)

Adjusted net earnings 617 643 (4.0) / 222 245 (9.4)

Adjusted EPS (cps) 31.5 33.0 (4.5) / 11.3 12.6 (10.0)

* Earnings before interest, taxation, depreciation and amortisation

Note: All comparisons in the above tables and commentary below relate to the nine months to 31 March 2006 and the three months to 31 March 2006, compared with the same periods in 2005. All figures are expressed in New Zealand dollars unless otherwise stated.

The prior comparative results have been restated to comply with International Financial Reporting Standards (IFRS), which Telecom adopted from 1 July 2005.

Telecom Chief Executive Theresa Gattung said the Group’s New Zealand operations had performed strongly in the third quarter, driven by growth in strategic areas where Telecom has been investing.

“During the March quarter the big drivers in performance in New Zealand were mobile, broadband, IT Services and Directories. The growth in those areas more than offset declines in traditional areas such as calling.”

“Our mobile business had another solid March quarter with strong connection growth of 70,000 and lower cost of sales compared with the previous period. The momentum in connections continues to drive double-digit growth in mobile voice and data revenues.

“The superior data performance of EV-D0 is driving mobile broadband business growth and we are poised to deliver even faster mobile broadband speeds when we begin upgrading our current mobile network before Christmas 2006. This network upgrade (revision A) will ensure our customers continue to benefit from New Zealand’s fastest mobile data speeds.

“Last month we launched Freedom, our fixed to mobile convergence consumer package and the initial uptake is very encouraging.

“In broadband we continue to grow strongly with 320,000 residential broadband connections at 31 March 2006 and growth of 41,000 for the March quarter and total broadband connections (384,000) now exceed dial-up connections (331,000) for the first time. There are some 20 service providers now selling UBS services and wholesale connections provided approximately one third of the connection growth for the quarter.

“We are on track to begin the rollout Next Generation Broadband services using ADSL2+ technology later this year.

“In April we launched plans which have faster speeds for existing customers and a new “dollar a day’’ broadband starter plan. We expect strong broadband growth to continue over the next six months, helped by the new plans and the momentum that is developing in the broadband market.

“During April we launched Telecom’s Wholesale Charter as well as new commercial UBS packages for ISPs’ residential and business customers.

“In Australia we are continuing with our investment programme in product, channel and back-office capability as outlined earlier and continue to reposition the business around mass and managed segments.

“The strategic review we announced in December is now complete and that process has confirmed continuing to hold and invest in the Australian business as previously outlined. The review process resulted in a number of proposals from several parties but these proposals did not meet the Group’s requirement from a value or strategic perspective.

“However, we believe that further industry consolidation is both a desirable and a realistic prospect in the future. “

Ms Gattung said she was expecting continued EBITDA growth in the New Zealand operations for the full 2005/2006 year.

New Zealand

Operating revenue was $3,386 million, an increase of 4.7%. Higher operating revenues for mobile, data, broadband and internet, IT services and directories were partly offset by declines in traditional services. EBITDA for the nine months was NZ$1,666 million, a 2.3 increase on the corresponding period and NZ$591 million for the March quarter, an increase of 3.1% compared with the previous March quarter.

Local Service

Total local service revenue decreased 1.8% to $784 million, reflecting mostly businesses migrating from dial-up to broadband. Residential access lines were stable on 1,415,000.

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 was $728 million for the nine months compared with $745 million for the same corresponding period in 2005
* National calling revenue was $444 million, a decrease of 5.7%
* International calling revenue was $248 million, an increase of 3.3%

Total calling revenue was boosted by the impact of international transit revenues, now presented as a gross figure as a result of the adoption of IFRS as of 1 July 2005. Excluding transit revenues, the decrease in calling revenue is a continuation of both the product substitution and increased competition impacting on Telecom’s traditional national and international calling business.

Interconnection revenue, which includes termination of calls on both fixed and mobile networks, increased 4.1% to $126 million, primarily due to mobile interconnection revenues from text messaging growth.

Mobile revenue is derived from voice and data services on Telecom’s 027 network (CDMA) and 025 (TDMA) networks including 3rd generation mobile (T3G) services.

* Total mobile revenues increased 9.8% to $573 million for the nine months and by 7.8% to $193 million for the quarter
* Voice revenue was $393 million, an increase of 2.9% for the nine months
* Data revenue increased 61.8% to $123 million
* Total connections at 31 March 2006 were 1,878,000 an increase of 23.0% (351,000) over the 12 months from 31 March 2005
* Net mobile connections for the quarter ended 31 March 2006 were approximately 70,000
* Total ARPU (average revenue per user – monthly) including interconnection was $45.90, a decrease of 10%. The lower ARPU is a reflection of the large take-up of prepaid services over the past 12 months
* Mobile data revenue growth was boosted by mobile broadband connections as well as services such as Push2Talk, photo and video messaging, Song ID, caller tunes and ring tones


Data revenue increased 6.9% to $327 million for the nine months. Data revenue was driven by increased take-up of managed IP data services. Retail data revenue was $261 million, an increase of 6.5% while wholesale data increased 8.2% to $66 million.

Broadband and Internet

Total revenue increased 22.2% to $253 million for the nine months to 31 March 2006 reflecting strong growth in broadband customers.

* Total broadband residential connections were 320,000, an increase of 88.2%
* Total broadband business connections were 64,000, an increase of 30.6%
* Wholesale connections at 31 March 2006 were 88,000, an increase of 282.6% on the 23,000 reported at 31 March 2005
* In the March quarter residential broadband connections grew by 41,000, while business increased 3,000 (wholesale connections were 13,000)
* Active dial-up customers at 31 March 2006 were 331,000

IT Services (Solutions)

IT services revenue was $249 million, an increase of 19.7%. Included in this is Computerland revenue of $19 million for July and August 2005, which has no comparable amount in the prior period as Computerland was acquired effective 1 September 2005.

Telecom is targeting double the industry growth in this sector for the full year 05/06 following the successful integration of Gen-i and Computerland with Telecom’s IT business.


Directories revenue of $203 million increased by $15 million, driven by strong sales volumes and increased revenues from online services.

Australian performance is expressed in Australian dollars, including comparisons with prior corresponding periods.

* Operating revenues were A$895 million, a decrease of 6.8%
* EBITDA for the nine months was A$58 million, a decrease of 47.7% compared with the previous corresponding period, and A$15 million for the March quarter, a decline of A$25 million.

The March quarter results were impacted by a significant tightening of wholesale prices and terms with Telstra, continued downward pressure on retail prices and the deferral of major project expenditure by key enterprise customers of Gen-i Australia.

AAPT is continuing to invest in systems and technologies to shorten product cycle times, simplify provisioning and improve customer service.

Australian consumer comprises AAPT's residential and small business fixed line, mobile and Internet operations (for the nine months at 31 March 2006)

* Revenue was A$421 million, a decrease of 8.1%
* Operating expenses declined 5.7% to A$329 million
* Business Unit Contribution (revenue less directly attributable costs) was A$92 million, compared with A$109 million for the same corresponding period in 2005

The revenue decline reflects a decrease in mobile revenue due to the move away from selling mobile as a stand alone service, and price declines driven by capped offers.

Broadband and internet revenue increased A$14 million in the nine months ended 31 March 2006 and A$7 million in Q3 compared to the previous corresponding periods. This reflects growth in both dial-up and broadband customers. Broadband customers increased from 21,000 customers a year ago to 81,000 at 31 March 2006 while dial-up customers grew from 76,000 to 93,000 during the same period. Broadband customers are being added at the rate of 7000 per month.

The active fixed line customer base at 31 March 2006 was stable on 451,000 though the number of full service customers increased by 2.3% to nearly 400,000 while bundled customers increased by 79.8% to 209,000.

Australian business comprises AAPT's operations in the business, corporate, government and wholesale markets, and Gen-i Australia (for the nine months at 31 March 2006).

* Revenue was A$474 million, a decrease of 5.8%
* Operating expenses increased 1.1% to A$352 million
* Business unit contribution (revenue less directly attributable costs) was A$122 million, a decrease of 21.3%

Business customers at 31 March 2006 have grown to 15,000 an increase of 44% compared with the previous year. Growth was primarily in the mass area as a result of recent marketing.

The year on year revenue decline reflects price pressures across most product lines (voice, data and internet) and reductions in Toll, VicOne and Customs Tradegate business and the deferral of CBA projects offset in part by growth in small enterprise customers.


Telecom will pay a fully imputed ordinary dividend for the 3rd quarter ended 31 March 2006 of 9.5 cents per share on 9 June 2006 in New Zealand and Australia, and on 16 June 2006 in the United States. The books closing dates are 26 May 2006 on the New Zealand and Australian Stock Exchanges and 25 May 2006 on the New York Stock Exchange.

Telecom will target an ordinary dividend ratio of approximately 85% of net earnings (after adding back relevant non-cash items) for the 2005/2006 year. The dividends for each of the three quarters in the year ending 30 June 2006 were expected to be set at 9.5cps and the dividend for the fourth quarter will be set to reflect the full year targeted pay-out ratio.

As previously signalled Telecom currently expects to pay a further fully imputed special dividend of 5 cents per share at the full year dividend date in 2005/2006, bringing total special dividends in the year ending 30 June 2006 to 10cps.

Telecom will provide an update on the 2006/2007 operating outlook, capital expenditure and shareholder distribution policies in its fourth quarter earnings announcement for 2005/2006.

Capital Expenditure increased by $22 million to $520 million for the nine months with increases across the business with the exception of International and Wireless. Telecom expects total capital expenditure of approximately $750 million for the 2005/2006 year.


The reconciliation of reported and adjusted earnings is set out below, together with an explanation of the current year abnormal items being adjusted for.

Quarter recognised 9 months to 31 March 06 $M / 9 months to 31 March 05 $M

Reported net earnings after tax (244) / 686


Q2 06 Gain on acquisition of Southern Cross Cables Limited (60) /

Q1 05 Gain on sale of retail stores / (10)

Q2 and Q3 05 Gain on buyback of convertible notes / (9)

Q3 05 Recognition of Southern Cross support fees / (37)

Q3 05 Gain on sale of Intelsat / (8)


Q2 06 Write-down of AAPT 897 /

Q2 06 Intercarrier and Regulatory costs 15 /

Q2 06 Provision for legal claims 9 /

Q3 05 Intercarrier cost adjustments / 21

Adjusted net earnings after tax 617 / 643

Telecom has recognised a gain of $60 million on the acquisition of a subsidiary company of Southern Cross Cables. Telecom acquired Southern Cross Cables Limited (New Zealand) for $10 million which holds (tax) assets valued at $70 million. This acquisition makes no difference to the shareholding of Southern Cross Cable.

Intercarrier and regulatory costs of $22 million before tax tax, ($15 million after tax) includes $17.5 million to settle long standing commercial issues with Telstra Clear and a one-off adjustment to the accrued TSO receiveable to reflect a recent determination by the Commerce Commission.

Telecom provided $7 million ($5 million after tax) for the estimated liability that would result from unsuccessful outcomes relating to historical issues under the Fair Trading and Door to Door Sales Acts and a provision of $5 million ($4 million after tax) for the cost of terminating a historical agreement with Hutchison Whampoa. The parties are discussing a revised agreement.

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