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Results At Telecom New Zealand On Track

MEDIA RELEASE

7 November, 2008

Results At Telecom New Zealand On Track, Earnings In Line With Guidance

Telecom New Zealand today announced earnings before interest tax depreciation and amortisation (EBITDA) of $466 million for the three months ended 30 September 2008, a 3.3% decline on the equivalent quarter in 2007.

“Telecom’s results for the quarter are in line with guidance,” said CEO Paul Reynolds.

When adjusted to exclude Southern Cross dividends, earnings for the quarter were consistent with Telecom’s full-year guidance of an EBITDA decline of 5% to 8%.

Total revenue for the quarter was $1,443 million, a 2.3% increase on the equivalent quarter for last year. Total expenses were $977m for the quarter, a 5% increase on the equivalent quarter last year.

Capital expenditure for the quarter was $340 million, up 63% on last year

“These results show the significant investment Telecom is making for the long-term health of the business,” said Dr Reynolds.

“The New Zealand telecommunications market is undergoing rapid and profound change. Telecom is responding to increased competition, and providing customer choice by investing in world-class services and revitalising customer experience with a host of initiatives.

“With fibre-to-the-node technology, our new 3G mobile network, and operational separation, Telecom’s change programme continues apace, and all transformation programmes are on track.”

Dr Reynolds noted that Telecom had not yet experienced a significant impact from the current economic downturn. “While our assessment is that the impact on our Group has been relatively mild to date, we will watch unfolding events closely.

“Telecom’s balance sheet remains strong, and thanks to a prudent and farsighted approach to our financing requirements we are well positioned to meet our commitments,” said chief financial officer Russ Houlden.

Net earnings for the quarter were $149 million, a 34% decrease on the equivalent quarter in 2007.

Costs were 5% higher, mainly reflecting salary inflation and increased staffing to deliver operational separation, change programmes and the commitment to improved customer satisfaction. Growth in labour costs is expected to slow significantly against the backdrop of a cooling labour market.

“It is very pleasing to see our focus on customers come through in improved customer satisfaction scores in consumer, business and wholesale,” said Dr Reynolds.

“The key drivers of revenue growth were broadband and IT services, which both delivered double-digit growth compared with the same quarter last year.

“The number of mobile connections grew by 14,000 during the quarter but revenues were down reflecting intense competition. Our decision to accelerate the rollout of 3G mobile nationwide will reposition Telecom with a clear competitive advantage as we renew New Zealand’s mobile landscape.”

Competition in the fixed line area was intense, with a significant increase in competitors migrating customers to unbundled local loop services, contributing to a decline in traditional access and calling revenues.

“Telecom has revised its reporting framework to provide clear accountability for the business units and transparency for investors.

“I’m delighted that we now have a reporting framework that ensures total focus for each line of business on its customers,” said Dr Reynolds.

“This approach will ensure investors have better information while also supporting the delivery of the right outcomes for each line of business’ customers.”

Quarter ended 30 September 2008 2007 Change
$m $m %

Operating revenues and other gains
Local service 266 291 (8.6)
Calling 319 304 4.9
Interconnection 47 45 4.4
Mobile 199 212 (6.1)
Data 160 160 -
Broadband and internet 147 129 14.0
IT services 113 96 17.7
Resale 92 93 (1.1)
Other operating revenue 100 73 37.0
Other gains - 7 NM
1,443 1,410 2.3
Operating expenses
Labour 240 207 15.9
Intercarrier costs 322 306 5.2
Other operating expenses 415 415 -
977 928 5.3

EBITDA 466 482 (3.3)

Depreciation 164 135 21.5
Amortisation 52 45 15.6
Depreciation and amortisation 216 180 20.0

Earnings before interest and tax 250 302 (17.2)
Net finance expense (48) (21) 128.6
Share of associates' profits/(losses) - (1) NM
Income tax expense (53) (55) (3.6)
Net earnings 149 225 (33.8)


Q1 Performance Summary

Chorus

46 exchanges are now unbundled and the fibre-to-the-node rollout is on track, with 164 cabinets now installed as of 7 November.

Chorus now has three non-Telecom customers, following Actrix’s launch in Wellington.

Chorus’ EBITDA declined 8%, reflecting flat revenues and an increase in labour, maintenance and other operating costs.

“While Chorus is performing extremely well, hitting its targets and delivering on the Undertakings, it faces some cost pressures and is currently reviewing commercial arrangements prior to renegotiating terms with its service companies,” said Chorus CEO Mark Ratcliffe.


Wholesale & International

Wholesale continued its market share growth in the quarter ended 30 September 2009, despite facing new competition from UCLL, including UCLL-based wholesale competition.

“Wholesale has delivered new products including enhanced unbundled bitstream access, and local peering. As we move through the rest of the year we expect further new products, including variants on enhanced unbundled bitstream access, backhaul, CDMA wholesale and mobile co-location,” said Telecom Wholesale CEO Matt Crockett.

EBITDA for the quarter was up 2% to $109m, reflecting solid growth in the wholesale business which was offset by a decline in International.

Retail

Telecom Retail CEO Alan Gourdie said Telecom Retail has begun an extensive customer retention and satisfaction programme, including the launch of the Total Home bundle, updated broadband plans, the launch of the Business Hub and marketing activity focused at a street level.

“My team has a clear focus on retaining customers, through re-invigorated marketing, refreshed plans and bundles, and service quality improvements, which are expected to show results from Q2 onwards. All of this will be underpinned by the launch of New Zealand’s best mobile network later in the financial year,” Mr Gourdie said.

Telecom Retail’s EBITDA declined 4%, reflecting a 6% decline in revenues, partially offset by a 7% decline in costs.

Gen-i

Gen-i CEO Chris Quin said large wins in previous quarters, such as Ministry of Justice and ACC, are now billing, helping to push IT solutions revenues up 26%. However, despite overall segment revenue growth of 5% declines in traditional higher margin revenues resulted in an overall EBITDA decline of 5%.

“The focus for the remainder of the year is on continuing to improve quality and margins in the IT Solutions business and on cost in the Telecommunications Solutions business and overall continuing to hold the position of most preferred by clients for ICT,” Mr Quin said.

“We are driving this through a programme that includes the migration of clients off multiple legacy platforms on to a single integrated service management system, allowing and improved experience for clients and cost reductions.”

AAPT

AAPT has recorded an EBITDA decline for the quarter of 24% when the gain on sale of the stand-alone mobile base in the prior year is adjusted for.

The decline in the quarter reflects lower revenues, set-up costs associated with call centre offshoring, and costs associated with the acquisition marketing campaign.

“Guidance for AAPT remains in the A$70-$90m range for the full year, as the business re-prices uneconomic Consumer offers, benefits from Consumer call centre off-shoring flow through, and systematic customer migration off legacy platforms recommences,” said CEO of AAPT, Paul Broad. “We also expect to see a steady decline in Consumer churn as we progress on the transformation of this division.”

Guidance for 2009

Telecom continues to expect a decline in adjusted EBITDA of 5% to 8% for the full year to 30 June 2009, confirming the guidance it gave at the W850 mobile announcement on 15 October 2008.

Dividend

Telecom has declared an ordinary dividend of 6 cents per share, with no imputation credits.

ENDS

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