Telecom's Key Financials On Track

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Media Release

13 February, 2009

TELECOM'S KEY FINANCIALS ON TRACK, GROUP GUIDANCE MAINTAINED

Telecom New Zealand has today announced adjusted Earnings Before Interest, Taxation Depreciation and Amortisation (EBITDA) of NZ$884 million for the half year to 31 December 2008, within guidance and a 5.5% decline on the equivalent half in the prior year.

“The new management team has made good progress in a slowing economy and delivered strong operating metrics in our focus areas of broadband, mobile and ICT. As a result the key financials of EBITDA, capex and NPAT are on track,” said Paul Reynolds, CEO, Telecom New Zealand. “Revenue has been held constant, the business is managing its operational expenses responsibly, and our major capital investments are on schedule.”

When the one off impact of $101m of impairment charges is included, the EBITDA of $783m represents a decline of 16% on the first half of the prior year.

The $101m of impairment charges includes the previously announced impairment of $33m of GSM mobile equipment, relating to the decision to upgrade to W850 mobile technology, and a $68m write off of goodwill relating to PowerTel, as its carrying value is no longer supported by forecast earnings.

Guidance of Group NPAT of $460m to $500m for the full year is unchanged.

“The impact on Telecom of the economic slowdown does not appear to have accelerated this quarter, and revenues have remained relatively resilient with strong management focus.

“A strong focus on managing our costs was reflected in some key decisions, such as the closure of Ferrit, which will save the business $1m a month, a salary freeze for our senior leaders, and the proposal to off-shore some 250 New Zealand and 350 Australian contact centre and back office roles over the next 18 months. In addition, we have put in place a best practice procurement model, and reduced consultant spend by $5m.

“This tight focus on cost control will be further supported by the Right First Time programme during the rest of the year, which will focus on reducing re-work, improving the product delivery process and refining the sale provisioning and billing processes,” Dr Reynolds said.

“At the same time as we are closely managing our operational costs, our investments for growth are continuing, with capital expenditure of $632m during the half year. The W850 mobile build is on track, and we remain on schedule to launch New Zealand's largest and fastest 3G mobile network in June 2009.

The Fibre-To-The-Node (FTTN) programme is ahead of schedule, delivering average attainable speeds of 13mb/s to customers on the new cabinets, and the fixed line transformation is expected to see the first customers on the new voice over IP technology by the end of the year,” Dr Reynolds said.

ECONOMY

Telecom has assessed the impact of the slowing economy to be up to $10m during the quarter, consistent with Q1.

“The economy continues to be volatile, and while Telecom is not immune to the effects of a downturn the impacts in Q2 were modest. Broadband and mobile growth rates are slowing but given these are both increasingly penetrated markets, it is hard to attribute this impact entirely to current economic conditions,” said Dr Reynolds.

BROADBAND MARKET

Broadband penetration has now reached 50% of all access lines.

“The broadband market continues to grow, however it is growing at a slower rate than the first half of last year. We saw the impact of unbundling during the quarter as some ISPs focus on moving customers onto their own networks.

“After a flat first quarter in broadband the retail business has returned to growth during Q2 as the result of new marketing campaigns, securing 46% of broadband connections during the quarter. ”

MOBILE MARKET

High mobile penetration during Q2 resulted in slower growth, particularly in the post-paid market, where Telecom recorded 11,000 net connections. Christmas sales were strong in pre-paid, delivering 61,000 net pre-paid connections.

“While growth in the mobile voice market is slowing, mobile data continues to grow strongly. Telecom now has 126,000 mobile data customers, including 77,000 mobile data cards, such as the T-stick.

“Our focus during the second half of the financial year will be on ensuring the success of our launch of New Zealand's largest and fastest 3G network. This will bring more retail outlets, exclusive devices, better coverage, value added services that take advantage of the experience that only fibre backhaul can deliver, and simple pricing,” Dr Reynolds said.

TELECOM RETAIL

EBITDA was down 13% in Q2 to $176m, due to a decline in revenues of 7%, which was partially offset by a reduction in costs of 3%.

“Highlights for the quarter were the reduction in home access churn, driven by Streetfighter and new better value bundles such as Totalhome,” said Alan Gourdie, CEO, Telecom Retail. “For the rest of the year we will focus on improving broadband quality and value, reducing churn in the office market, improving our online presence, and retaining customers and stimulating usage on the CDMA mobile network.”

“The launch of W850 in June will also be a pivotal moment for us, and we are committed to delivering an outstanding experience at launch.”

GEN-i

External Revenues were up 5% in Q2, with EBITDA down 3% to $118m in Q2.

“Gen-i saw $310m of client contracts closed in Q2, Mobile revenues holding, IT solutions revenue up 28% and IT solutions EBITDA has grown from $2m to $6m,” said Chris Quin, CEO Gen-i. “Many of our clients are focused on overall cost in their businesses and how to use ICT to enable change.

“In our own business we are managing cost and efficiency tightly with contractor headcount down by 70 in Q2 as an example. Looking forward the focus remains on delivery quality and cost, launching new services like Mobile IP Centrex and working with all of our clients to ensure ICT is addressing the cost pressures in their organisations.”

CHORUS

EBITDA was down 8% to $137m in Q2, partly reflecting the start-up costs of the business.

“Chorus had 214 cabinets installed at end of December and was delivering FTTN broadband to approximately 24,000 customers. In addition, UCLL continues to grow strongly, with 46 unbundled exchanges, primarily in Auckland, and three publicly launched UCLL operators,” said Mark Ratcliffe, CEO, Chorus.

“Our plans for the rest of the year include renegotiating contracts with the service companies, stepping up the FTTN roll out to around 100 cabinets per month, the fibre roll out for mobile networks and delivery of the Undertakings.”

WHOLESALE AND INTERNATIONAL

EBITDA in Q2 was flat at $113m, comprised of Wholesale EBITDA up 8% and International EBITDA down 21%.

“Wholesale has seen ongoing access and broadband growth, however LLU take up and Wholesale competition increased during the quarter,” said Matt Crockett, CEO Telecom Wholesale. “We have been rising to this challenge by putting real focus on strengthening our technology, service and commercial customer value proposition, including confirming we will be launching the world’s fastest DSL technology, VDSL2, in the second quarter of this calendar year.

This is part of our ongoing commitment to provide world-class Wholesale network services and to maintain our position as the preeminent wholesale provider in the New Zealand market.”

AAPT

EBITDA was up 39% to A$18m in Q2, reflecting the success of cost reduction initiatives.

“The re-pricing of Consumer offers is largely complete and we have recommenced legacy system customer migration. To further drive Consumer customer acquisitions, we are commencing a targeted door-to-door campaign this month,” said Paul Broad, CEO, AAPT. “The rest of the year is expected to see the benefits from our off-shoring initiatives, completion of the re-pricing activities and a focus on on-net and data sales.”

TRANSFORMATION, REGULATION AND GUIDANCE

“Our five core transformation programmes are on schedule and we continue to meet our commitments to our stakeholders,” said Dr Reynolds. “We are engaged with the new Government on its super high speed broadband plans, and progress has been made on several regulatory issues, including mobile co-location and sub-loop unbundling, and we have submitted our undertaking on mobile termination rates.”

Guidance is unchanged, with adjusted Group EBITDA still expected to decline in the range of 5 to 8%. Dividend per share remains 6c for Q2, with no imputation credits.

“Despite the challenges of a slowing economy Telecom is on track, meeting its commitments and its guidance. We are investing $1.3bn this year for growth, to give New Zealanders access to world class mobile, broadband and ICT services, and which will be important foundations for the future growth of Telecom and of New Zealand,” said Dr Reynolds.

ENDS

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