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Telecom Reports $643 Million Result

Telecom Reports $643 Million Result After Abnormal Costs

Telecom today reported net earnings of NZ$643 million for the year ended 30 June 2001 after substantial abnormal costs incurred as part of the Group’s ongoing transformation.

The result included NZ$245 million in dividends received on Telecom’s investment in the Southern Cross Cable Network, and abnormal write-offs and provisions arising from the previously-announced decision to close down the CDMA wireless network project in Australia. The abnormal items (NZ$192 million after tax) comprised mainly the write-off of AAPT’s A$125 million expenditure on the project until December 2000.

Chairman Roderick Deane said the year ended 30 June 2001 was one of substantial progress in Telecom’s transformation as an Australasian online and communications group

Dr Deane said reported net earnings were down 17.9% from the previous year, but this largely reflected the move to 100% ownership of AAPT and tough decisions taken in positioning Telecom for the future on both sides of the Tasman.

Years ended (NZ Dollars)
June 2001 June 2000
Group revenues $5,636 M $4,350 M
Reported net earnings $643 M $783 M
Abnormal items # ($192 M) $12 M
Southern Cross dividends #221 M -
Adjusted net earnings $614 M $771 M
Impact of AAPT acquisition~($185 M) ($63M)
Group EBITDA * $2,070 M $2,042 M
Final quarter dividend (per share)5 cents 11.5 cents

# Figures are after tax ~ Additional funding costs and amortisation of goodwill, less AAPT surpluses
* Earnings before interest, tax, depreciation and amortisation and excluding abnormal costs and Southern Cross dividends

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“The latest year has seen improvement in the Group’s underlying performance and the foundations are now in place for future years,” Dr Deane said. For the year ended 30 June 2001, Group net earnings were impacted significantly by additional funding costs and amortisation of goodwill associated with the acquisition AAPT.

Chief Executive Theresa Gattung said Telecom had delivered on a range of major undertakings over the past 12 months, including successful completion of the takeover of AAPT which was a sound platform for expansion of the Group’s Australian presence.

Ms Gattung said these achievements included: Success in the delivery of comprehensive services to Commonwealth Bank of Australia Group under a major contract commenced in September 2000;

Sustained growth in revenues in AAPT as the business was integrated into the Telecom Group;

The launch in July 2001 of a CDMA wireless network in New Zealand on time and under budget;

Strategic investment in wireless infrastructure for the Australian market through a third-generation alliance with the Hutchison group, as announced in May 2001;

A broad alliance with Microsoft for leadership in Internet services in New Zealand; and

Success in containing operating costs in the Group’s core New Zealand operations.

Fourth Quarter Dividend

Telecom will pay a fully imputed dividend for the fourth quarter of the year ended 30 June 2001 of NZ5 cents per share, unchanged from the previous three quarters. The dividend will be paid to New Zealand and Australian registered shareholders on 14 September 2001 and to United States registered shareholders on 21 September 2001. (A 3% discount to current market price will apply to shares issued under the dividend reinvestment scheme).

The dividend for the full year will be NZ20 cents per share, down from NZ46 cents for the previous year in line with the revised dividend policy announced in August 2000.

Revenue and Expense Trends

Total Group revenues increased by 29.6% for the year ended 30 June 2001 to $5,636 million, due largely to growth in Australian revenues of 48%. In New Zealand, revenue growth for the year was modest at 1.4%. Operating expenses in New Zealand were up 3.8%, a marked slowdown from 7.3% in the previous year. For the fourth quarter of the year ended 30 June 2001, operating expenses rose by 0.9% -the continuation of a quarterly downward trend in expense growth.

In Australia, revenues for the year reflected the first full 12 months of AAPT’s inclusion in the Telecom Group and the start up of TCNZA, which began servicing the Commonwealth Bank in September 2000. Comparison of the fourth quarter of the year ended 30 June 2001 with the corresponding period in 2000 showed a growth rate in revenues of 38%. Operating expenses grew 37% between the two periods, which was a significant improvement on the previous quarter.

Ms Gattung said the Group was very focused on restraint in operating expenses on both sides of the Tasman. “Expense growth is slowing while revenue growth continues – a very positive indication of the Group’s underlying performance,” she said.

In New Zealand, revenue growth for the year came largely from a 13% gain in Data revenues. This reflected takeup of network services including Frame Relay and Lanlink in the corporate and business markets, as well as the rollout of fast Internet access through the deployment of ADSL in New Zealand.

Telecom’s Internet services revenue was up 18% for the year, with the Xtra customer base growing by 36%. Mobile revenues in New Zealand grew 0.2%, with cellular revenue alone showing growth of 4.0% for the fourth quarter. The Group also recorded growth in its New Zealand national and international revenues.

The trend in New Zealand expenses reflected a 5.3% decline for the year in Mobile cost of sales and an 8.4% decline in total personnel expenses, due partly to contraction in core business headcount.

Australian revenue growth reflected an 11.5% gain in AAPT’s national call revenues for the year, along with growth of 133% in local service revenues. Data revenues in Australia, including AAPT managed network services and the business of TCNZA, grew by 111%. Mobile revenues grew 13% for the year.

Ms Gattung said the Group was very focused on selected growth opportunities in Australia. “Integration of AAPT into the Group has been largely completed and we are developing strategies for each of the former AAPT business units, with a particular emphasis on improving margins in the Voice and Data business.”

Southern Cross Dividends

Ms Gattung said Telecom looked forward to further dividends from its investment in Southern Cross, although these dividends would fluctuate from year to year depending on sales of capacity on the cable network.

"We have previously indicated an expectation of dividends from Southern Cross of US$50 M million over each of the next three years, with the actual level and timing of those dividends dependent on future sales of cable capacity,” Ms Gattung said.

“Southern Cross has advised Telecom that, owing to the slow down being experienced in a number of telecommunications markets around the world, demand for international bandwidth has become less certain,” she said. “Consequently, the timing of future dividends may differ to that originally contemplated, although the expectation of dividends derived over the life of the project remain unchanged."

New Reporting Structure

Telecom will make changes in its financial reporting from the first quarter of the year to 30 June 2002. The Group’s performance will be reported in four segments, showing revenues, expenses and earnings before interest and tax for:

New Zealand Wireline businesses, including esolutions.

Wireless, including mobile businesses in both New Zealand and Australia.

Internet and Directory Services, including Xtra, Yellow Pages and Connect.

International, including AAPT, TCNZA and international network operations.

Ms Gattung said the new structure reflected Telecom’s development as an Australasian online and communications group.


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