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Telecom Delivers Strong Second Half Performance

Telecom Delivers Strong Second Half Performance and Increases Dividend

Telecom New Zealand has today announced adjusted Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) of $1,801m for the year to 30 June 2011, an increase of 2.1% on the previous financial year, and above previous guidance.

When comparing the second half of the year with the previous financial year's H2, adjusted EBITDA increased 4.6% and adjusted Net Earnings increased by 66%.

Effective management focus on improving adjusted Free Cash Flow (FCF) has seen a 53% increase in adjusted FCF on the prior year, up to $887m.

Full year adjusted Revenue was $5,104m, 3.2% down on FY10, while adjusted Expenses, at $3,303m, decreased faster, by 5.8%.

"These results represent a strong operating performance in an increasingly competitive environment," said Paul Reynolds, Telecom CEO. "We are pleased to be able to reflect this in a fully-imputed Q4 dividend of 7.5cps, along with an additional fully-imputed special dividend of a further 2cps, bringing the total dividend for the year to 20cps.

"At the start of 2011, Telecom updated its strategy to reflect New Zealand's challenging and competitive operating environment, create a leaner and more effective operating model, prepare for a fibre future, and ensure an intense focus on FCF through management of capital and operating costs.

"The result of this strategy, known as Vision 2013, is that we have delivered a wide range of positive outcomes, underpinned by the simplified and more effective operating model. Not only has simplification delivered cost savings, it has also improved customer satisfaction across the board through improvements to processes, rationalisation of platforms and reduction in errors and rework.

"Customers have benefited from lower prices overall and better performing products," said Dr Reynolds.

The half also saw Chorus win 70% of Ultra-fast Broadband regions, along with being selected, in partnership with Vodafone, as the Crown's partner for the Rural Broadband Initiative.

"The work to demerge Chorus by the end of the calendar year continues apace, with more information to be made available to shareholders shortly.

"The combination of the successful delivery of the first year of the Vision 2013 strategy, along with Chorus being named as the Crown's partner for UFB and RBI, marks a successful six months for Telecom.

"We are well prepared for the fibre future and the imminent changes to industry structure," said Dr Reynolds.

Mobile, broadband and ICT

Mobile revenue grew by 5% in the second half, when compared to H2 FY10, and mobile data revenues grew by 8% when compared to the equivalent period, reflecting the growth in smartphone and mobile broadband usage.

"82% of mobile revenues are now generated by our XT network. We have been successful in attracting new high value customers, who have average revenues per month of greater than $75, across the consumer, SME and corporate markets.

"Total mobile subscribers decreased by 95,000, with the decline predominantly made up of low value pre-paid CDMA customers going inactive. This trend has had minimal impact on revenues and is likely to continue as we move closer to the close down of the old CDMA network. We remain on track to shut down CDMA by July 2012." he said.

The total New Zealand broadband market continued to grow, with a further 90,000 new broadband subscribers added during the half.

"Telecom Retail's market share of connections has remained stable, at 53%, and retail ARPUs are also steady at around $40, reflecting our focus on winning and retaining high value customers. This is a strong outcome in a highly competitive market.

"Group IT services revenues also increased by 14% in the second half, mainly driven by managed services and procurement. Based on this platform we are seeing satisfactory growth in this market," said Dr Reynolds.

Adjusting items

Telecom announced a number of one-off adjusting items, which distort the underlying performance of the business, and have not been included in the adjusted income statement.

The adjusting items include an $18m gain on the sale of AAPT consumer, $29m of UFB and demerger costs, $42m of earthquake-related costs, and asset impairments of $257m. There is also an $88m tax effect relating to these adjusting items.

The asset impairments relate to the development of assets built to comply with regulatory requirements in Telecom's Undertakings on Operational Separation.

The fundamental change in industry structure resulting from the Government's UFB initiative means that a number of assets built for a copper-based and operationally separated world will no longer be relevant.

The impairment is a non-cash adjustment, meaning it does not affect dividend payments.

"We believe the new industry structure, as outlined in the recently-passed amendments to the Telecommunications Act, will be sustainable for Telecom, the industry, customers and shareholders. It will also see New Zealand move to the forefront of global telecommunications.

"However this will be the third industry structure for telecommunications in New Zealand in five years, and this series of rapid changes has created significant compliance and participation costs. A period of stability should lead to a reduction in wasted investments due to Government interventions in the sector," said Dr Reynolds.

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