TELECOM RESULT CAPS YEAR OF PROGRESS

Telecom New Zealand has today announced adjusted earnings before interest, taxation depreciation and amortisation (EBITDA) of NZ$1,768 million for the year to 30 June 2009, in line with guidance and a 6.5% decline on the prior year.

Adjusted net earnings declined 32% to $483m through a combination of a 20% increase in depreciation and amortisation costs, and a 32% increase in net finance expenses. These increases were partially offset by a 37% decrease in adjusted income tax expense.

“This was a big year for Telecom in which we made significant operational and service improvements on a broad range of fronts. Telecom is getting it right as we invest and re-build with the aim of returning to earnings growth,” said Paul Reynolds, CEO, Telecom. “We improved customer service and public perception, and made huge strides in improving our infrastructure, as exemplified by the successful launch of the XT Mobile Network and significant progress in the roll-out of fibre-to-the-node broadband. These world-class networks form impressive platforms on which to grow and to secure the long-term health of the business.”

Adjusted revenue for the year to 30 June dropped 2% on the prior year, to $5,587m, while adjusted expenses were $3,819m, a 1% increase on the prior year. The decline in revenue was primarily driven by declines in Retail and AAPT which were offset by growth in Wholesale and International.

Expenses growth was driven partly by increased staffing levels to meet the additional client demand in Gen-i and the establishment of Chorus as a separate business unit, as well as salary inflation. However, a focus on labour cost control resulted in labour costs reducing in Q4 FY09.

Adjusted year ended 30 June	2009 $M	2008 $M	Change %	Q409 $M	Q408 $M	Change %
Revenue	5,587	5,673	-2%	1,351	1,459	-7%
Expenses	(3,819)	(3,782)	1%	(945)	(972)	-3%
EBITDA	1,768	1,891	-7%	406	487	-17%
Depreciation & amortisation	(917)	(761)	20%	(261)	(210)	24%
EBIT	851	1,130	-25%	145	277	-48%
Net finance expense	(201)	(152)	32%	(52)	(45)	16%
Share of associates’ losses	(1)	(3)	NM	(1)	(1)	NM
Income tax expense	(166)	(262)	-37%	(22)	(55)	-60%
Net Earnings	483	713	-32%	70	176	-60%
Net earnings attributable to shareholders	481	710	-32%	70	175	-60%
EPS	26	38	-32%	4	10	-60%
DPS	24	29	-17%	6	8	-25%

MOBILE MARKET

Telecom’s XT Mobile Network was launched on 29 May 2009. Although there was a decline of 26,000 connections over the quarter due to subdued activity prior to the launch of XT, after launch Telecom saw strong connections growth in the last month.

“The launch of the XT Mobile Network was a remarkable achievement and surpassed our expectations,” said Dr Reynolds. “Its impact will become apparent in the next quarter's results, but we nevertheless had 165,000 customers on XT by 14 August, showing positive early average usage trends, such as a 20% increase in voice traffic, and a 300% increase in data download traffic compared to our CDMA network.”

BROADBAND MARKET

Growth in the fixed broadband market was somewhat slower towards the year end partly due to increased market penetration.

“The market was characterised by relatively light competitive activity during the quarter as much of the focus was on mobile. We also saw an increase in UCLL migration activity during the quarter,” said Dr Reynolds.

Telecom Retail’s share of net broadband connection growth was 44%, with its overall share of broadband connections at 57%.

ECONOMY

Telecom has assessed the impact of the slowing economy at up to $10m during the quarter, consistent with the first three quarters of the financial year. This brings the total impact for the year to $40m.

“The impact of the economy on Telecom in the fourth quarter was modest. While the impact has remained consistent with the previous three quarters, the potential exists for the impact to increase,” said Russ Houlden, CFO, Telecom.

TELECOM RETAIL

EBITDA was down 6% in Q4 to $180m when compared to the equivalent quarter in the prior year.

“The quarter showed strong XT campaign results, such as 93% awareness of XT in June and 240,000 unique visitors to testdrive.co.nz. We also had more than 400,000 visitors into our 28 retail stores,” said Alan Gourdie, CEO, Telecom Retail. “On broadband, we launched new bundles, with 131,000 customers now signed to the new bundled offers. Home churn increased in line with seasonal activity but has since subsided. We now have 58% of customers in contract.”

“Churn remains high in Office, however, we are reacting to this with a new channel strategy, contracting more of our customers, and enhancements to the Business Hub,” he said.

GEN-i

EBITDA decreased 15% to $107m in Q4 when compared to the equivalent quarter in the prior year. IT Solutions EBITDA in Q4 grew to $13m from $11m, but this was offset by Telecommunication EBITDA declining 18% due primarily to a number of one-off adjustments.

“The quarter saw $446m in client contracts closed, bringing the total to $1.2bn for the year to date,” said Chris Quin, CEO, Gen-i. “The mobility campaign has delivered significant results, and we successfully implemented a single integrated service management platform across telco and IT Services. This played a large part in the 49% growth in IT services EBIT year on year.”

CHORUS

EBITDA was up 2% to $140m in Q4 when compared to the equivalent quarter in the prior year.

“Quarter four saw progress on a range of fronts, including signing contracts with our service companies. 780 cabinets were installed by the end of the quarter, meaning more than 160,000 customers now have access to FTTN services,” said Mark Ratcliffe, CEO, Chorus.

As at 30 June 2009, 64 exchanges had been unbundled, up from 43 in the prior quarter.

WHOLESALE AND INTERNATIONAL

EBITDA in Q4 decreased 20% to $101m when compared to the equivalent quarter in the prior year reflecting pricing changes, increased costs from operational separation and some one-off items.

“We saw strong uptake of Wholesale pricing offers introduced in response to UCLL competition during the quarter,” said Matt Crockett, CEO, Telecom Wholesale. “There was also a significant improvement in customer satisfaction, and we secured Southern Cross capacity to 2012 on favourable terms.”

AAPT

EBITDA was up 10% to A$22m in Q4 when compared to the equivalent quarter in the prior year.

“Our focus during the quarter was on on-net sales, ramping up marketing efforts on brand awareness and more profitable offers, and tight cost control,” said Paul Broad, CEO, AAPT.

“We now have more than 80% of the Consumer base migrated to the Hyperbaric platform, on track for completion later this calendar year.

“Simplification of provisioning and billing systems is driving a more streamlined customer experience and higher grade of service levels.”

FY10 GUIDANCE

Telecom is maintaining its guidance for Adjusted EBITDA in FY10 to be -1% to +2% compared with FY09, subject to potential risks arising from the economic downturn.

For FY10 the level of imputation credits is expected to be nil.

DIVIDEND

A Q4 dividend of 6c per share has been declared, with no imputation credits.