Telecom First Quarter Earnings Up 11%

Telecom First Quarter Earnings Up 11%

Telecom today reported a net profit after tax of NZ$162 million for the three months to 30 September 2003 – 11% higher than the NZ$146 million the company reported for the same period in 2002.

EBITDA* for the quarter ended September 30, 2003 was NZ$554 million, an increase of 2.4% over the previous corresponding quarter.

Net earnings per share (EPS) for the quarter were 8.5 cents, compared to 7.8 cents per share for the corresponding quarter in 2002.

Operating cash flow rose 4.8% to NZ$480 million as a result of improved operational performance, lower interest payments and favourable movements in trade receivables.

Operating revenue was NZ$1,321 million, up 1.1% in the 30 September 2003 quarter on the same period last year while expenditure was NZ$767 million, up just 0.3%.

Telecom Chief Executive Theresa Gattung said she was pleased with the Group’s revenue performance and that operating income growth was driven by a programme of sustained and targeted initiatives.

“We are managing a transition over several years from a business based primarily on voice to a business based more on data services. We saw that trend come through strongly in the quarter.

“In New Zealand we saw strong revenue growth in areas we have been targeting, such as data, solutions and mobile,” Ms Gattung said.

“We are still seeing significant price pressures in voice calling in both New Zealand and Australia. But we are making good progress with the new growth areas of our business, such as data and IT services.

“In Australia, we have seen revenues and customer numbers stabilise as a result of our new initiatives in both the consumer and business markets. Importantly, Australia recorded its sixth consecutive quarter of positive cashflow*.”

“We are comfortable with our strategy in Australia and the tighter focus on the services we are offering in that market.”

The Group’s Balance Sheet was strengthened due to the Group’s strong operating cash flow during the quarter, with net debt reducing 14.8% to NZ$4,419 million.

New Zealand

Earnings from operations for the New Zealand business were NZ$392 million, up 2.6% on the first quarter in 2002.

Operating revenue for the New Zealand business increased 3.1% to NZ$965 million while expenditure, including depreciation and amortisation, was up 3.4% to NZ$573 million.

Revenue growth in the New Zealand business was achieved by a stronger performance in mobile and continued growth in the take-up of data and solutions services.

*EBITDA less Capex

EBITDA in New Zealand was 3.4% higher at NZ$546 million in the quarter, driven by tight management of the mix of revenue and expenditure.

While there were gains across most revenue categories these were partly offset by a decline in both national and international calling revenues.

Local Service and Value Added Services comprises fixed line and value-added services to residential, business and corporate markets.

Revenues rose 3.1% to NZ$270 million, in part due to growth in residential access lines. Residential access lines grew 1.1% to 1,421,000 for the September 30, 2003 quarter.

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 calls traffic between destinations worldwide).

Total national calling revenue fell 4% to NZ$166 million, reflecting higher e-mail, Internet and mobile substitution as well as increased competition. National 0800 revenue was down NZ$4 million to NZ$26 million, due to lower call volumes.

Total international calling revenue declined 23.7% to NZ$71 million in the quarter. The biggest impact on international calling revenues came from re-negotiated agreements for call transfers with other carriers which lowered the average price.

Outward calling revenue decreased 9.1% due to lower calling volumes and lower average price, partly reflecting competition and substitution. Inwards calling revenue was down NZ$12 million to NZ$20 million as a result of lower average price which was partly offset by higher call minutes.

The net margin from transit traffic decreased by 35.3% with lower prices more than offsetting growth in transit minutes.

Interconnection, which includes terminating calls on both fixed line and mobile networks, had a 23.1% rise in revenue to $32 million, driven by mobile interconnection revenue and reflecting growth in text messaging activity.

Mobile provides voice and data on 027 (CDMA) and 025 (TDMA) networks.

Mobile revenues grew by 5.8% to $NZ147 million, with mobile data revenues up by 66.7%, driven principally by growth in text messaging and take-up of data services.

The mobile cost of sales increased by 43.9%, reflecting increased connection numbers and strong promotional activity.

At 30 September 2003, there were 407,000 customers connected to Telecom’s CDMA network, compared with 191,000 at the same time in 2002. Overall, Telecom had approximately 1,270,000 mobile connections.

Among Telecom’s CDMA connections, 167,000 can access Mobile JetStream, Telecom’s high speed data mobile data service.

Total mobile average revenue per user (ARPU) for the month increased 7.9% in the quarter to NZ$49 per month.

Data, Internet and Solutions revenue increased 16.6% to NZ$169 million.

Data revenue was up 9.8% to NZ$123 million with strong take-up of Lanlink and ADSL services, up 11.1% and 58.3% respectively to NZ$20 million and NZ$19 million. Telecom had 81,000 JetStream connections at 30 September, 2003 compared with 45,000 at the end of the September quarter in 2002.

Internet revenue increased 17.2% to NZ$34 million due to customer growth and higher value added services.

Xtra customer numbers were 8.5% higher at 434,000, while usage per customer increased 12.2% to 35.7 hours per month.

Advanced Solutions, which includes management of customers’ information, communications and technology needs, recorded a 200% increase in revenue to NZ$12 million.

Directories revenues grew by 3.8% to NZ$55 million, driven by strong sales activity.

Australia

The following breakdown of our Australian result is expressed in Australian dollars, including comparisons with prior corresponding periods.

EBITDA for the Australian group was A$28 million compared with A$33 million for the same quarter in 2002. Operating revenue was A$331 million slightly down on the A$334 million for the same period in 2002. The rise in expenses reflected additional advertising and marketing activity.

Australian Consumer comprises AAPT’s residential and small business fixed line operations, Internet, and AAPT Mobile.

Australian Consumer revenues were down marginally to A$159 million for the quarter. Operating expenses increased 5.4%, reflecting higher marketing and advertising costs.

Customer numbers for the fixed line business increased to 450,000 at 30 September 2003, compared with 446,000 at 30 June 2003. Mobile connections were stable at 282,000 connections unchanged from the previous quarter and up on the 269,000 a year earlier.

Australian Business comprises AAPT’s operations in business, corporate, government and wholesale market, the Connect Internet business and TCNZA.

EBITDA for business increased 20% to A$24 million principally due to lower cost of sales.

Revenues were unchanged on A$179 million with increases in interconnection and internet offset by a drop in calling resale revenue.

Capital expenditure for the group was NZ$91 million for the quarter. For the year to June 2004, Telecom’s current forecast is NZ$650 million – including NZ$460 million in New Zealand, NZ$70 million on International cable capacity, and NZ$120 million in Australia.

TDMA Network: Since August 2001 Telecom has been in the process of actively migrating customers from its TDMA mobile network, to the new advanced CDMA network. In the fourth quarter of 2003, Telecom advised that as a result of this migration, an impairment charge may be required in the year ended 30 June, 2004 to reflect the revised value of the TDMA infrastructure. Based on current estimates of the rate of CDMA customer migration, Telecom now expects that a charge of between NZ$90 million and NZ$110 million (NZ$60 million and NZ$74 million net of tax) may be required in the current financial year.

Sky Television: On 24 October, 2003 Telecom accepted Independent Newspapers Limited (INL) takeover offer of NZ$221 million for its 12% stake in Sky Television, made up of approximately NZ$156 million in cash and the remainder in shares in INL. As a result, Telecom will record a gain on the sale of its investment in Sky of approximately NZ$28 million in the second quarter to 31 December 2003 and hold in excess of 10% of INL shares.

Dividend: Telecom will pay a fully imputed quarterly dividend of NZ5.0 cents per share on 12 December, 2003 in New Zealand and Australia, and on 19 December in the United States.

Shares issued in lieu of cash dividends will be offered at a 3% discount to the price calculated under the Telecom Dividend Reinvestment Plan

The books closing dates are 28 November 2003 in New Zealand and Australia, and 27 November 2003 for the United States.

Detailed information: The Management Commentary, condensed accounts and presentation given to analysts by Chief Executive Theresa Gattung can be found at:

> http://www.telecom.co.nz/invest/financial/index.html

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