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Telecom New Zealand Gears Up for Transformation

Telecom New Zealand Gears Up for Transformation

8 February 2008

Telecom New Zealand today reported net earnings of $397 million for the half year to 31 December 2007, compared with half year earnings of $454 million in 2006.

Adjusted net earnings from continuing operations for the half year period were $397 million, compared with $408 million for the comparative period in 2006/2007, a decrease of 2.7%.

This decline is due to a 2.3% decrease in EBITDA and higher depreciation and amortisation costs, which was partly offset by lower net interest expense.

Overview of Group results

/ Half year (NZ$m)

/ 31 Dec 07 / 31 Dec 06 / Change %

Operating revenue / 2,827 / 2,796 / 1.1
Abnormal items ** / / (23) / NM
Expenses / (1,892) / (1,839) / 2.9
Adjusted EBITDA* / 935 / 957 / (2.3)
Total reported net earnings / 397 / 454 / (12.6)
Total adjusted net earnings / 397 / 408 / (2.7)
EPS / 20.7 / 23.4 / (11.5)

* Adjusted EBITDA = Earnings before interest, taxation, depreciation and amortisation and excludes abnormal items

** Refer to abnormals table at the end of this release

Note: All comparisons in the above table and commentary below relate to the half year to 31 December 2007 compared with the same period in 2006, unless otherwise stated. All figures are expressed in New Zealand dollars unless otherwise stated.

For the 31 December 2007 quarter adjusted net earnings were $172 million. For the same comparative period in 2006/2007 total adjusted net earnings were $258 million, or $234 million excluding contributions from Yellow Pages Group.

Telecom New Zealand chief executive Paul Reynolds said that with the finalisation of the company’s Undertakings on operational separation now close, its focus was now very much on the fundamentals of the business.

“While in some areas, notably Wholesale and ICT services, we performed well in the past quarter, in other areas new efforts and momentum is required.

“A transformation is under way. We have made decisions about leadership, structure and focus that will help to secure future momentum for Telecom New Zealand, based on a relentless focus on our customers. The achievement of regulatory clarity has helped to reinforce this focus.

“Our Chorus networks business is up and running, under the leadership of Mark Ratcliffe, and Telecom New Zealand as a whole is on track for Separation Day on 31 March 2008.

“And in October the company announced the accelerated rollout of a fast broadband network, as a central part of our Undertakings on operational separation. This network will support fast broadband speeds across a geographic footprint that is virtually unmatched by any other country.”

Dr Reynolds said the quarter had delivered solid performances in some areas.

“Our Wholesale business performed well, with a continued focus on business development and growth, as did Gen-i with further customer wins including ACC and the Ministry of Social Development accounts.

“We also banked an after tax dividend of NZ$19 million from Southern Cross in the quarter, following the NZ$22 million after-tax dividend received in Q1. We expect a further NZ$10 million to be paid in Q3.

“These highlights were offset by weaker performances in other areas.

“While we had 90,000 mobile connections in the quarter, revenue was weaker.

“We have the opportunity to increase our share of high-value customers and roaming revenues over time, once our WCDMA mobile network is deployed before the end of this year, and as we bring sophisticated new worldmode mobile devices to market, including Blackberry, and Windows Mobile 6 PDA devices.

“Retail broadband connections were weaker for the quarter partly due to aggressive competitor behaviour targeting the consumer customer base.

“During the quarter we implemented a comprehensive range of improvement plans for customers, focusing on speeds, anti-spam and high quality support services that collectively will improve customer service.

“In Australia the integration of Powertel with AAPT is on track for completion in Q3. However, the migration of our retail customers to our customer service platform has proved challenging. We have been experiencing a higher than expected level of calls into our call centres, causing delays in the migration plan.

“While the soundness of the platform itself is not in question, these delays do mean it will take longer to shut down legacy platforms and realise migration cost benefits.”

Dr Reynolds said the quarterly result underlined the need for Telecom New Zealand to keep a relentless customer focus at the heart of its transformation.

“We have therefore begun to re-organise our company, and the incentives facing senior managers, to ensure a much stronger and consistent customer focus.”

Dr Reynolds said EBITDA in the Group’s New Zealand operations was consistent with previous guidance, albeit at the lower end.

NEW ZEALAND

Operating revenue was $2,095 million for the half year to 31 December 2007, a decrease of 2.9% on the previous corresponding period.

Operating revenues increased for data revenue, broadband and internet and IT services. However, revenues for interconnection, mobile and calling fell. Local service revenue was flat.

Access and calling

Total local service revenue was $520 million, a decrease of 0.6%.

The decline in access revenue reflects the migration of customers from retail to wholesale and also customers using other technologies, including mobile.

Residential access lines were 1,397,000 compared with 1,404,000 for the same period in 2006.

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

* National call revenue was $247 million, a decline of 9.9%
* International revenue was $175 million, a decline of 12.9%
* Other revenue of $21 million, dipped 12.5%
* Total calling revenue was $443 million, a decline of 11.2%.

While competitors are targeting Telecom New Zealand’s retail market share, the company has responded with attractive, bundled subscription based products for customers.

Interconnection revenue, which includes termination of calls on both fixed and mobile networks, declined 6.7% to $70 million. The decline reflects the impact of lower mobile termination rates.

Mobile revenue is derived from voice and data services on Telecom’s 027 network (CDMA).

Mobile connection growth continued, but declines in revenue reflected intense price competition and competitor activity.

* Total mobile revenues were $400 million, a decline of 3.1%
* Voice revenues were $253 million, a decline of 3.4%
* Data revenue was $114 million, an increase of 5.6%
* Total connections at 31 December 2007 were 2,115,000, having grown over the 12 months to 31 December 2007 by 244,000
* Net connections for the quarter were 90,000
* Total ARPU (monthly average revenue per user), including interconnection, was $38.60 for the quarter

Data revenue – Total data revenue grew by 3.8% to $216 million. Decreases in traditional data services were partly offset by an increase in managed IP data services. Managed IP data services revenue increased by 12.8% to $97 million.

Total broadband revenue was $145 million, an increase of 5.8%.

* Consumer revenue increased by 15.6% to $89 million, reflecting a move by dial-up customers to broadband
* Business revenue was $27 million, a decline of 30.8%, reflecting the large reduction in business broadband pricing when business and residential prices were aligned in October 2006
* Total broadband connections were 729,000 (includes residential (393,000), business (70,000) and wholesale (211,000) and mobile broadband connections (55,000)
* Total DSL and mobile broadband connections for the quarter were 31,000

Telecom Wholesale - increases in wholesale access lines reflect competitors actively targeting residential customers with bundled access and broadband plans.

* Access revenue was $55 million, an increase of 48.6%
* Calling revenue was $ 9 million, a decline of 10%
* Data revenue was $27 million, an increase of 3.8%
* Broadband revenue was $29 million, an increase of 38.1%
* At 31 December 2007 Wholesale had 219,000 access lines and 211,000 broadband connections

Internet revenue, which is based on dial-up revenue, was $21 million, a decline of 22.2%, reflecting the migration of customers to broadband. There are 211,000 customers on dial-up.

IT services

Total IT revenue was $198 million, an increase of 9.4%, reflecting revenue from new key contracts and our procurement business.

AUSTRALIA

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

* Operating revenues were A$632 million, an increase of 9.9%
* EBITDA was A$37 million, an increase of 270%
* Loss from operations was A$21 million

The integration of APPT and PowerTel continues and will be substantially complete by the end of this financial year with solid cost reductions and EBITDA benefits coming through.

The migration of the consumer customer base to the new online platform has led to higher than expected level of calls into our call centres and this has caused delays in the migration plan. While there are no concerns around the new platform itself, it will take longer to close legacy platforms.

DIVIDEND

Telecom New Zealand will pay a fully imputed ordinary dividend for the quarter ended 31 December 2007 of 7 cents per share on 7 March 2008 in New Zealand and Australia, and on 14 March 2008 in the United States. The book’s closing dates are 22 February 2008 on the New Zealand and Australian Stock Exchanges and 21 February 2008 on the New York Stock Exchange.

Telecom New Zealand will target an ordinary dividend ratio of approximately 75% of net earnings (after adding back relevant non-cash items) for the 2007/2008 year. Subject to there being no adverse change in operating outlook, the dividends for each of the three quarters in the year ending 30 June 2008 will be 7 cents per share and the dividend for the fourth quarter will be set to reflect the full-year targeted pay-out ratio.

From Q1 2007/08 Telecom New Zealand has removed the discount on the dividend reinvestment programme and re-introduced an on-market buy-back to eliminate the increase in capital arising from the plan.

Capital expenditure increased to $411 million compared with $397 million for the same half-year period. For the 2007/2008 financial year, Telecom New Zealand is forecasting capital expenditure of $950 million to $975 million for the full year.

--

Abnormals Table

Quarter recognised / Half Year to 31 Dec 07 / Half Year to 31 Dec 06 /
Reported net earnings / 397 / 454 / (12.6)
Less
Q1 07 Gain on sale of TSCL** / / (20) /
Add
Q2 07 Restructuring charge* / / 18 /
Q2 07 Provision for billing issues* / / 11 /
Adjusted net earnings / 397 / 463 / (14.3)

* * net of tax
* ** not subject to tax


ENDS

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