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Telecom Full-Year Result

Telecom Full-Year Result

4 August 2006

Telecom today reported a net loss after tax of $435 million for the year to 30 June 2006, compared with net earnings of $967 million for the same period in 2005. For the June 2006 quarter, Telecom reported a $191 million loss compared with net earnings of $281 million for the same period in 2005.

Excluding the impact of abnormal items, adjusted net earnings for the 2006 year were $820 million compared with $857 million for the 2005 June year. Adjusted net earnings for the June quarter were $203 million compared with $214 million for the corresponding period last year.

The reported net loss reflected a $1,291 million (after tax) write-down in the carrying value of the Group’s Australian operations. A write-down of $897 million was recorded at 31 December 2005 and a further $404 million ($394 million after tax) was recognised at 30 June 2006.

The carrying value of the Australian operations has been written down to A$270 million. This reflects the challenging operating conditions in the Australian market with retail prices declining and wholesale prices rising.

Telecom Chief Executive Theresa Gattung said the Group’s New Zealand operations had performed solidly in the June 2006 quarter, with earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 4.1%, and 2.7% for the year.

“Mobile, broadband, directories and IT services all performed strongly while it was pleasing to see stability in access lines and local service revenue and a moderation in expense growth,” Ms Gattung said.

“In broadband we’re seeing strong customer growth following the launch of new, faster plans in April. For the quarter we had net connections of 51,000 including 39,000 from retail and 12,000 from wholesale.

“We now have 435,000 DSL connections – wholesale and retail – which is approximately 25% of all access lines.

“Mobile had another good quarter with double digit voice and data revenue growth (10.4% on PCP) and this was largely driven by data revenue growth.

“Freedom, our converged fixed-mobile offering, is proving popular with customers with more than 50,000 signing up since its launch in April and it is complementing our $10 text offer – which has been confirmed for all of 2007.

“Bundled offerings such as Freedom and the Anytime access and calling plans are increasingly popular because they give customers good value.”

Ms Gattung said the strong performance in New Zealand contrasted with an EBITDA decline in Australia.

“We are responding to the challenges in the Australian operations with significant investment in sales, customer services and IT capabilities to improve customer growth and retention.”

Overview of Group results

12 months (NZ$m) // Quarter ended 30 June 2006
/ 30 June 06 / 30 June 05 / Change % // 30 June 06 / 30 June 05 / Change %

Revenue (excluding abnormals) / 5,755 / 5,650 / 1.9 // 1,454 / 1,431 / 1.6

Expenses (excluding abnormals) / (3,558) / (3,402) / 4.6 // (910) / (870) / 4.6

Abnormal items / (1,275) / 95 / NM // (404) / 58 / NM

Reported EBITDA* / 922 / 2,343 / (60.6) // 140 / 619 / (77.4)

Adjusted EBITDA* / 2,197 / 2,248 / (2.3) // 544 / 561 / (3.0)

Reported EBIT / 217 / 1,645 / (86.8) // (42) / 437 / (109.6)

Adjusted EBIT / 1,492 / 1,550 / (3.7) // 362 / 379 / (4.5)

Reported Net (loss), earnings / (435) / 967 / (145.0) // (191) / 281 / (168.0)

Adjusted net earnings / 820 / 857 / (4.3) // 203 / 214 / (5.1)

Adjusted EPS (cps) / 41.8 / 44.0 / (5.0) // 10.4 / 11.0 / (5.5)

* Earnings before interest, taxation, depreciation and amortisation
Note: All comparisons in the above tables and commentary below relate to the 12 months to 30 June 2006 and the June 2006 quarter, 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.

Abnormal items for the 12 month period are described at the end of this release.

New Zealand

Operating revenue was $4,511 million, an increase of 3.9% for the 12 month period and for the June quarter the increase was 1.7% to $1,125 million. Operating revenue was boosted by growth in mobile, data, broadband and internet, directories which were partially offset by declines in local service, calling, and interconnection. EBITDA for the 12 months increased 2.7% to $2,225 million and 4.1% to $559 million for the June quarter.

Local Service

Total local service revenue was $1,049 million, a decline of 1.3% which reflected businesses migrating from dial-up to broadband services. Total residential access lines were stable on 1,414,000.

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 $976 million for the 12 month period, a decrease of 1.8%

• National calling revenue was $586 million compared to $623 million for the same period in 2005, continuing a trend that has been evident for some time

• International calling revenue was $343 million, an increase of 6.2%

International calling revenue was boosted by the impact of transit revenues, now presented as a gross figure as a result of the adoption of IRRS 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 revenue.

Interconnection revenue, which includes termination of calls on both fixed and mobile networks, was stable on $162 million.

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 9.6% to $774 million for the 12 month period and by 9.2% to $201 million for the June quarter

• Voice revenue increased 2.9% for the year while data revenue was up 54.1% to $171 million over the same period

• Total connections at year-end were 1,703,000 taking into account the one-off adjustment to remove TDMA connections no longer active

• CDMA net connections 64,000 for the quarter, more than offset by TDMA net connection adjustment

• Total ARPU (average revenue per user-monthly) including interconnection was $45.80

• Mobile data revenue grew 54.1% for the year and 37.1% for the June quarter

Data revenue increased 5.8% to $438 million for the year. Data revenue growth was boosted by increased managed IP data services.

Broadband and Internet

• Total revenue increased by 17.9% to $336 million for the year reflecting strong growth in broadband customers.

• Total broadband residential customers were 279,000, an increase of 58.5% for the year while business connections rose 19.1% to 56,000.

• Wholesale connections reached 100,000, an increase of 186%

• In the June 2006 quarter retail residential connections increased 35,000, while business connections increased 4,000 and wholesale connections increased 12,000

• Telecom no longer distinguishes between residential and business connections for its wholesale customers and as a result wholesale connections are reported on a total basis.

IT Services (solutions)

• IT services revenue was $346 million, an increase of 12.3%.

• Revenue growth in IT services was boosted by the inclusion of Computerland revenue of $19 million. Excluding the Computerland revenue, underlying IT services revenue grew by 6.2%.

Directories revenue of $248 million increased by $19 million for the year and $4 million for Q4, mostly driven by volume growth in print directories and increased online activity.


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

• Operating revenues were A$1,192 million, a decrease of 6.2% EBITDA for the 12 months was A$75 million, a decrease of 50.7% compared with the previous corresponding period, and A$17 million for the June quarter, a decline of A$24 million.

The Australian operations were impacted by a significant increase in wholesale prices from Telstra and continued downward pressure on retail prices.

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

Total revenue was A$556 million, a decrease of 7.8%

• Operating expenses declined 5.9% to A$433 million

• Business Unit Contribution (revenue less directly attributable costs) was A$123 million, compared with A$143 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$19 million in the 12 months ended 30 June 2006 and A$5 million in Q4 compared to the previous corresponding periods. This reflects growth in broadband customers which was partly offset by price decreases driven by competitive activity in the sector.

Broadband customers increased from 27,000 customers a year ago to 102,000 at 30 June 2006 while dial-up customers have remained steady on 90,000.

The active fixed line customer base at 30 June 2006 was 444,000, an increase of 1.4% compared to the prior year. The number of full service customers has grown 6% to 408,000 while bundled customers increased by 75.7% to 226,000.

Australian business comprises AAPT's operations in the business, corporate, government and wholesale markets, and Gen-i Australia.

• Total revenue was A$638 million, a decrease of 4.6% for the year

• Operating expenses increased 4.1% to A$477 million

• Business unit contribution (revenue less directly attributable costs) was A$161 million, a decrease of 23.7%

Business customers at 30 June 2006 have grown to 20,000 an increase of 116% compared with the previous year. Growth was primarily in the mass area as a result of recent marketing, with the managed customers numbers remaining stable compared to the previous year.

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

Capital Expenditure increased by 6.8% to $751 million for the year. Telecom is expecting to invest $800 million for the 2006/2007 year.


Telecom will pay a fully imputed ordinary dividend of 7.0 cents per share for the fourth quarter ended 30 June 2006 on 8 September in New Zealand and Australia, and on 15 September 2006 in the United States. The books closing dates are 25 August 2006 on the New Zealand and Australian Stock Exchanges and 24 August 2006 on the New York Exchange.

In line with commitments made last year, Telecom is to pay a fully imputed special dividend of 5c per share, bringing total special dividends in the year ending 30 June 2006 to 10cps.


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 / 12 months to 30 June 2006 $M / 12 months to 30 June 2005 $M

Reported net (loss) earnings after tax / (435) / 967


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)

Q4 05 Gain on sale of INL / / (86)

Add in:

Q2 06 Write-down of Australian operations / 897 /

Q4 06 Write-down of Australian operations* / 394 /

Q2 06 Intercarrier and Regulatory costs * / 15 /

Q3 05 Intercarrier & Regulatory costs * / / 21

Q2 06 Provision for contractual settlements* / 9 /

Q4 05 Write-down of TDMA network * / / 16

Q4 05 Provision for restructuring * / / 3

Adjusted net earnings / 820 / 857

*Figures are net of tax. Other abnormal items are not subject to tax

Australian Operations Carrying Value

An impairment charge of $404 million ($394 million net of tax) was recognised in Q4 06. This followed an impairment charge of $897m in Q2 06. Following these write-downs the Carrying Value of the Australian Operations is now A$270m. These write-downs reflected a number of negative trends impacting the short and longer term earnings outlook for Australia including:

• Telstra’s current stance on wholesale

• Downward pressure on retail pricing

• Deferral of major project expenditure by key corporate customers

Gain on acquisition of Southern Cross Cables Limited

Relates to 100% acquisition of a shareholding in SCCL for $10m, the acquisition resulted in a deferred tax asset of $70m being included in Telecom’s Balance Sheet, because SCCL has no other assets or liabilities $60m of negative goodwill arose on acquisition.

Inter-carrier & Regulatory costs

$17.5m relating to settlement of commercial issues (interconnect, wholesale) with Telstra-Clear. $5m one-off adjustment to the accrued TSO receivable reflecting the recent Commerce Commission determination.

Provision for contractural settlements

$5m relates to estimated liability that would have arisen from an unsuccessful outcome re historic issues under the Fair Trading & Door to Door Sales Acts. $4m relates to terminating an agreement with Hutchison Whampoa for mobile related services and entering into a new services agreement.


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