Telecom Records Sound Full Year Result

Telecom Records Sound Full Year Result

Telecom today reported net earnings of NZ$709 million for the year ended 30 June 2003 compared to a reported net loss of NZ$188 million for the previous financial year.

On an adjusted basis^ net earnings for the 12 months to 30 June 2003 were NZ$704 million, an increase of 5.4% on adjusted net earnings of NZ$668 million recorded in the year to 30 June 2002.

^ Unless otherwise stated, comparisons are with the 12 months ended 30 June 2002.

Adjusted net earnings for the three months ended 30 June 2003 were NZ$206 million, representing an increase of 2.5% on adjusted net earnings of NZ$201 million for the same quarter in 2001-2002.

On an adjusted basis, EBITDA for the year ended 30 June 2003 was NZ$2,309 million, up 4.9% on the corresponding period in the previous financial year.

Telecom Chief Executive Theresa Gattung said the Telecom Group has cemented its solid performance and is focused on building operational capacity across the group for future growth.

“We have been successful in driving revenues in the growth parts of our business, while at the same time maintaining tight discipline on cost assisted by structural changes to our operating model.

“Overall operating expenses across New Zealand and Australia continue to decrease. They were down by 12.1% in the year ended 30 June 2003.

“In New Zealand, the Group’s operations in the fourth quarter recorded their second consecutive quarter of revenue growth. This increase – coupled with continued control on costs and accrual for the TSO revenue – led to double digit EBITDA growth of 12.1% for the fourth quarter of 2002-2003 over the previous corresponding quarter.”

Ms Gattung said the company’s Australian operations are performing in line with expectations and the building blocks are in place for continued improvement.

“We’ve made considerable progress with margins rising throughout the year.

“Australia is now established as a positive cashflow* contributor to the Group, year on year. Cashflow for the 12 months ended 30 June 2003 was NZ$92 million compared with negative NZ$28 million for the 2001-2002 financial year.

“In Consumer, revenue decline has moderated and the fixed line customer base grew in the fourth quarter. We have launched a range of new packages and revitalised our sales and marketing as part of a programme to attract and retain customers.

* EBITDA less capex

“The performance of our Business and Internet division is showing good momentum, with EBITDA and margins continuing to show healthy increases.”

Ms Gattung said the Group recorded a solid improvement in cash flow.

“Group operating cash flow for the year ended 30 June 2003 was NZ$1,566 million, which was an increase of 15.9% on the previous corresponding period. Over the same time, Telecom’s balance sheet was strengthened further with a reduction in net debt of NZ$606 million.”

Business unit performance

New Zealand

New Zealand Wireline: New Zealand Wireline comprises fixed line and value-added services to residential, business and corporate markets.

Operating revenue increased by 0.6% for the 12 months ended 30 June 2003 while for the fourth quarter, it increased by 4.5% on the previous corresponding period. Fourth quarter revenues benefited from an accrual for TSO revenue of NZ$22 million for the 18 month period ended 30 June 2003.

Operating expenses were down 7.4% for the year ended 30 June 2003. For the fourth quarter, they decreased by 9.4% reflecting a continued drive for cost reduction.

EBITDA for the full year increased 6.7% to NZ$1,684 million and for the last quarter of 2002-2003, it increased by 15.7% on the previous corresponding quarter.

Telecom – through Advanced Solutions – is steadily developing its business in the IT and T industry. Advanced Solutions increased its revenue by over 100% in the 2002-2003 financial year.

Interconnection revenue decreased by 17.0% in the year to 30 June 2003. The decrease is mainly due to the Telecommunications Commissioner’s interconnection determination, which lowered the interconnection rate received by Telecom.

At 30 June 2003, Telecom had approximately 72,000 JetStream connections – up 85% on the 39,000 figure of a year before. Approximately 10,000 customers signed up to fast Internet products in the last quarter of 2002-2003.

Overall data revenues continue to grow steadily. They increased by 4.6% in the 12 months to 30 June 2003. Over the same period, retail data revenues grew by 10.5% while wholesale data revenues were down by 7.1%, largely as a result of consolidation in the industry and lower wholesale data prices due to regulatory changes. Revenue from ADSL was up by 75.0%.

The take-up of LanLink and Frame Relay circuits also contributed to overall data revenue growth. LanLink revenue increased by 10.3% while Frame Relay revenue increased by 21.7% on the previous 12 months.

New Zealand Mobile: This business provides voice and data on 027 (CDMA) and 025 (TDMA) networks.

EBITDA increased 11.2% for the year to 30 June 2003. This reflected a 2.2% increase in operating revenue and a 2.9% decrease in operating expenses for the 12 months ended 30 June 2003. However, in the fourth quarter of 2002-2003, expenses increased by 4.9% on the previous corresponding period, reflecting the investment needed to grow revenues in New Zealand’s highly competitive mobile market.

The total number of Telecom mobile customers was 1,250,000 at 30 June 2003. Of that, 320,000 customers or 26% are on the 027 network. Over 84,000 customers on the CDMA network can now access Telecom’s high-speed data service, Mobile JetStream.

Total mobile Average Revenue Per User (ARPU) for the 2002-2003 year increased to NZ$48.50, up 12.0% on the previous corresponding period. This reflects the ongoing focus on higher value customers and increased mobile data revenues, which leapt by 114.3% to NZ$30 million for the 12 months to 30 June 2003.

International: International provides New Zealand and Australia with outward and inward calling, managed international data services and carries transit call traffic between destinations worldwide.

Revenue for the year ended 30 June 2003 decreased by 25.8%. This decrease was due largely to re-negotiated rates for reciprocal transfer of minutes with other carriers, and the impact of the strengthening New Zealand dollar. In addition, the prior year included one-off gains from the sale of network capacity.

The re-negotiated reciprocal transfer rates and the rising New Zealand dollar also had the impact of decreasing operating expenses, which were down by 22.3% in the year to 30 June 2003.

EBITDA fell by 34.2% to NZ$96 million.

Internet and Directories: Internet and Directories comprises Xtra and Telecom Directories.

EBITDA was 28.2% higher at NZ$159 million for the 12 months to 30 June 2003. Revenues increased by 12.0% for the 2002-2003 financial year while operating expenses increased by 1.1%.

Xtra’s Internet revenue was NZ$135 million, up 27.4% on the previous corresponding 12 months. Xtra had 430,000 active dial up customers as at 30 June 2003 – an increase of 13.2% on a year before.

Australia

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

The EBITDA and EBITDA margin performances of the Group’s Australian businesses have steadily improved throughout the year. EBITDA increased 3.3% to A$156 million while EBITDA margin was 12.0%, up from 10.3% for the 12 months ended 30 June 2002.

Australian Consumer: Australian Consumer comprises AAPT’s residential and small business fixed line operations, Internet, and AAPT Mobile (previously branded Cellular One).

Australian Consumer revenues were down 18.4% for the year ended 30 June 2003, while operating expenses were reduced by 14.8% during the same period.

EBITDA was A$42 million for the 12 months to 30 June 2003 – a decrease of 48.1%. This was partly due to the A$25 million one-off impact recorded in the previous period of the mobile services agreement signed with Vodafone in November 2001.

Fixed line customer numbers were up sequentially quarter on quarter in the Australian Consumer division, following the launch of new offers and marketing initiatives. Fixed line customers numbered 446,000 at 30 June 2003, compared to 441,000 at 31 March 2003.

Mobile customer connections were 282,000 at 30 June 2003, up 25.9% on the 224,000 recorded a year ago although down from 307,000 connections at 31 March 2003. This reflects the strategy of focusing on higher value customers.

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

EBITDA in Australian Business & Internet increased by 62.9% to A$114 million reflecting the shift in revenue mix towards higher margin services, operational savings and improvements in the delivery of service to existing customers.

Total operating revenue decreased by 5.1% over the same period. The revenue base in this part of the business is stabilising however reflecting recent investments in sales and marketing capability.

Operating expenses were reduced by 12.2% in the year to 30 June 2003.

Capital expenditure: Total capital expenditure for the 12 months ended 30 June 2003 was NZ$600 million, which was 22.9% lower than in the 2001-2002 financial year.

Telecom’s current forecast for capital expenditure for the 2003-2004 financial year is NZ$650 million.

Dividend policy: Telecom is focused on maintaining a long-term ‘A’ credit rating and achieving its previously stated credit targets. The Group expects to meet those targets during the 2003-2004 financial year.

Telecom’s current dividend policy is to target a dividend pay-out ratio of around 50% of net earnings, dependent on earnings, cash flow and future investment opportunities.

The company intends to increase dividends over time, mostly likely through a change in the dividend pay-out ratio. This is dependent on the company being comfortable it can maintain its ‘A’ credit rating and meet its credit targets. The timing and quantum of any increase in dividend pay-out ratio will, however, be subject to a number of other factors including the industry outlook, capital and operating plans. Dividend: Telecom will pay a fully-imputed quarterly dividend of NZ5.0 cents per share. Shares issued in lieu of cash dividends will be offered at a 3% discount to the price calculated under the Telecom Dividend Reinvestment Plan. Dividends will be paid on 12 September 2003 in New Zealand and Australia, and 19 September 2003 in the United States. The books closing dates are 29 August 2003 in New Zealand, Australia and 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/latestquarter

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