Telecom Half Year Earnings Increase

Telecom Half Year Earnings Increase

Telecom today reported net earnings after tax for the half year to 31 December 2003 of $NZ365 million – an increase of 21.3 % on the $NZ301 million reported for the corresponding half year.

Reported net earnings included a $NZ28 million gain on the sale of Telecom’s 12% stake in Sky Network Television. Net earnings for the half year to 31 December 2003 were $NZ337 million when adjusted for the Sky gain, an increase of 12% compared with the same period in 2002.

Adjusted operating revenue for the half year was $NZ2,645 million, an increase of 1.5% while operating expenses were up marginally to $NZ1,529 million.

Operating cash flow rose 6.7% to $NZ828 million for the half year, reflecting operating income growth and lower interest payments.

Adjusted EBITDA for the half year was $NZ1,116 million, an increase of 2.6% over the corresponding half year. Telecom’s tax expense was $NZ189 million for the half year.

Telecom Chairman Roderick Deane said the group result was pleasing, with continued revenue growth and cost containment.

“Telecom’s strong cash flows enabled the Balance Sheet to be further strengthened with debt of $NZ902 million being repaid over the past year to 31 December 2003,” Dr Deane said.

Telecom’s net debt as at 31 December 2003 was $NZ4,116 million.

Dr Deane announced an increase in the dividend pay-out ratio, following a comprehensive review by Telecom’s Board.

“As we have signalled to the market for some time, one of our key priorities has been the achievement of certain financial ratios in order to maintain a strong single ‘A’ credit rating. The “A” rating provides Telecom with an appropriate level of financial flexibility and ensures that we can handle adequately the various risks faced by the business.

“During the second quarter of the 2003-04 financial year Telecom achieved its targeted financial ratios.

“Telecom's existing dividend policy is to target a dividend pay-out ratio of around 50% of net earnings. In accordance with this policy, a dividend of 5.0 cents per share has been declared for Q2 2003-04.

“The new dividend policy will commence from first quarter of 2004-05. The policy will be to pay dividends representing approximately 70% of net profit after tax, after adding back amortisation and abnormal non-cash items.

“For the third and fourth quarters of 2003-04, Telecom intends to pay a dividend of NZ7.5 cents per share.

“Subject to the risks associated with Telecom’s financial performance, macro-economic conditions and maintenance of the "A" credit rating, our current intention is to maintain the dividend at this level for the first three quarters of 2004-05, with the fourth quarter dividend payment to reflect the targeted pay-out ratio of 70%.

“The Board believes raising the dividend pay-out ratio sends a clear signal to shareholders of our confidence in the business and our commitment to increasing returns to shareholders.

“The Board also recognises that net debt is likely to decline over time and this may offer potential scope for further increases in shareholder distributions. Any decisions on these matters will depend on the circumstances prevailing at the time.”

Telecom chief executive Theresa Gattung said the revenue uplift and focus on operating costs had led to operating income growth - excluding the Sky gain - of 5.6% for the quarter while lower interest payments had improved the bottom line performance.

“In the NZ business, we are targeting investment in wireless, customer service, broadband services and data solutions, while managing the revenue and expenditure mix to drive EBITDA growth.

“We continue to see price pressures in traditional parts of our business. This is a reflection of substitution as well as increasing competitive pressures. The new regulatory regime has also impacted the business, with the number of access lines we wholesale doubling in the past year.

“We have increased staff in our Advanced Solutions business and also around Internet and broadband to support our new packages launched in November – and we will be rolling out more of these packages in the future to meet increasing demand.

“We’re seeing a continuing trend in the business as our focus shifts from traditional areas such as voice calling towards data and IT – that’s why we’re supporting that trend with more resources.

“In Australia we continue to operate on a cash flow* positive basis – around $NZ100 million on an annualised basis.

* EBITDA (earnings before interest, tax, depreciation and amortisation) less Capex

“Revenue in Australia is stable – we have been investing in sales capability and advertising to support our strategy of targeted growth in the business and consumer markets. Cash flow and EBITDA year on year and quarter on quarter remained on track.”

New Zealand
Earnings from operations for the half year were $NZ785 million, an increase of 3.8% on the corresponding half year.

Operating revenue was $NZ1,931 million, up 3% on the corresponding half year while operating expenses including depreciation and amortisation totalled $NZ1,146 million, an increase of 2.4% over the same period.

EBITDA for the half year was $NZ1,083 million, an increase of 2.8% on the same period to 31 December 2002.

Revenue growth in the New Zealand business was achieved by growth in most revenue categories. Data, internet and Telecom Advanced Solutions growth has continued to offset a decline in calling revenues.

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

Revenue for the half year increased 2.3% to $NZ538 million while the number of residential access lines as at 31 December 2003 grew nearly 1% to 1,415,000.

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 call traffic between destinations worldwide).

Total national calling revenue fell 5.5% to $NZ328 million, reflecting lower call minutes and lower average prices. The decline in call minutes is partly due to a move away from traditional calling to increased e-mail and internet activity as well as greater competition.

Total international calling declined 22.2% to $NZ140 million during the half year. The main impact on international calling revenues were re-negotiated agreements for call transfers with other carriers which had the effect of lowering the average price, but also resulted in lower cost of sales.

Outward calling revenue decreased 10.1% due to lower average prices reflecting increased competition and product substitution; this was partially offset by higher call minutes. Inwards calling revenue decreased $NZ21 million to $NZ39 million as a result of lower average prices and fewer calling minutes.

Interconnection, which includes terminating calls on both fixed line and mobile networks, had a 27.8% rise in revenue to $NZ69 million, driven by mobile interconnection revenue and growth in text messaging activity.

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

Total mobile revenues (including interconnection) grew by 8.1% to $NZ333 million with mobile data revenues increasing 75% to $NZ21 million. Cellular revenue was stable while call minutes increased slightly. Growth in overall revenues was driven by growth in text messaging and other data services.

Post paid Average Revenue Per User (“ARPU”) for the half year to 31 December 2003 was flat on $NZ74.90 (per month). Total ARPU including interconnection increased to $NZ49.90 (per month) from $NZ48.10.

Cost of sales increased by $NZ21 million for the half year to $NZ78 million, reflecting Mobile’s strong marketing push as Telecom continued to upgrade and acquire new customers.

As at 31 December 2003, there were 508,000 CDMA customers compared with 241,000 for the half year to 31 December 2002.

In total, Telecom had 1,302,000 cellular connections at 31 December, up 5.9% from a year earlier.

Data, Internet and Solutions revenue increased 15.3% to $NZ339 million.

Jetstream revenue grew by $NZ17 million to $NZ42 million, as the uptake in Telecom’s ADSL broadband service continued.

As at 31 December 2003, Telecom had around 90,000 Jetstream connections compared with 54,000 a year earlier. Residential DSL connections for the half year were 56,000, an increase of 12% in the past three months. Corporate and small to medium enterprise connections totalled 34,000 for the half year – up 10% in the past three months.

Lanlink revenue increased by 8.1% to $NZ40 million for the half year due to growth in managed traffic and an increase in circuits and installations.

Private office and high speed data revenue grew 100% for the half year, reflecting increased use of the service by businesses.

Internet revenue rose 11.7% to $NZ67 million, resulting from increased customer numbers and the take up of higher value products.

Telecom Advanced Solutions revenue, which includes management of customers’ information, communications and technology needs, recorded a 100% increase to $NZ22 million for the half year.

Directories revenues grew by 8.6% to $NZ101 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.

Australian revenue was $A661 million for the half year compared with $A663 million for the 2002 half year.

EBITDA for the half year was $A69 million compared with $A68 million over the corresponding half year, an increase of 1.5%.

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

Australian Consumer revenues were $A311 million, an increase of 1.6% for the half year and $A158 million for the quarter, a rise of 3.9%.

EBITDA for the half year was $A13 million and $A11 million for the second quarter, a rise of 22.2% compared with the second quarter of 2003.

Bundled offerings were up 20% on the first quarter and fixed line ARPU increased to $A82 per month for the half year compared with $A79 for the corresponding half year. Fixed line customer numbers were stable at 451,000.

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

EBITDA increased 16.7% to $A56 million for the half year and 15.4% to $A30 million for the quarter.

EBITDA growth was supported by back office rationalisation and leveraging shared infrastructure.

Revenue for the half year was $A351 million while expenses were $A295 million, a decrease of 4.5%.

Capital expenditure for the half year was $NZ219 million, an increase of 6.8% over the corresponding period in 2002, with approximately half invested in the New Zealand Wired business.

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 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’s (INL) takeover offer of NZ$221 million for its 12% stake in Sky Television, made up of approximately NZ$157 million in cash and the remainder in shares in INL. Telecom has recorded a gain on the sale of its investment in Sky of approximately NZ$28 million which is shown in the second quarter accounts. Telecom continues to retain more than 10% of INL shares.

Dividend: Telecom will pay a fully imputed quarterly dividend of NZ5.0 cents per share on 12 March 2004 in New Zealand and Australia, and 19 March 2004 in the United States.

Telecom will retain its dividend reinvestment plan but the 3% discount will cease from and including the third quarter of 2004 onwards.

The books closing dates are 27 February 2004 in New Zealand and Australia, and 26 February 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 the investor section of www.telecom.co.nz.

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