TELECOM DELIVERS TURNAROUND IN FREE CASH FLOW

Telecom New Zealand has today announced adjusted Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) of NZ$1,764 million for the year to 30 June 2010, down 0.2% on the previous financial year and in line with guidance.

“Telecom has halted the significant earnings decline of the previous two years and achieved notable improvements in the trajectory of each of its businesses,” said Paul Reynolds, CEO, Telecom.  “In a year of further recessionary and regulatory impacts, it is especially pleasing to have delivered strong growth in free cash flow of $126m, or 28%, the first such growth since the regulatory shock of 2006.  Our transformation and turnaround programme is on track.”

“Our focus on managing costs has delivered $249m of cost removed from the business during the year, with labour costs down around 3% in the fourth quarter. Capital expenditure was reduced by $130m compared to the previous year.”

While adjusted revenue and other gains for the year fell by 6.3% to $5,271m, mainly reflecting continued competitive and price pressure in the legacy fixed line businesses, adjusted operating expenses fell faster, to $3,507m, a 9.1% decrease on the prior year.

“Chorus, Gen-i and AAPT have each delivered EBITDA growth for the year, and the turnaround in the Retail business is on track for FY11.

“The XT mobile network continued to grow strongly during Q4, with 712,000 customer connections at 30 June 2010, up 20% on the previous quarter.  Total Gen-i mobile revenues were up 12% and Retail mobile broadband revenues were up 98% on Q4 FY09.”

Fixed broadband market growth was stable at around 10% in Q4, with Telecom Retail’s market share steady at 56%.

“On Ultra-fast Broadband (UFB), Telecom has submitted a revised proposal that delivers the Government’s fibre vision through a package of co-investment, structural separation and integration of UFB with the Rural Broadband Initiative.  We look forward to engaging further with Crown Fibre Holdings and the Government on the commercial, regulatory and legislative components of our proposal,” Dr Reynolds said.

ADJUSTED INCOME STATEMENT

Year ended 30 June

CHORUS

Chorus reported EBITDA of $192m for the quarter, flat on the equivalent quarter last year.

“The number of access lines reduced by just 14,000 in the year, suggesting that fixed to mobile substitution has not yet gathered pace in New Zealand. UCLL has continued to grow, with 67,000 lines unbundled in 77 exchanges,” said Brian Hall, acting CEO, Chorus.

“Our fibre to the node programme continues, with 1,995 roadside cabinets installed by 30 June 2010.

“The focus for the next year will include targeting revenue growth through new products, along with participation in the Government’s UFB and RBI initiatives.”

WHOLESALE AND INTERNATIONAL

Wholesale and International reported adjusted EBITDA of $43m for the quarter, a 6.5% decrease on the equivalent quarter last year.

“Wholesale revenue grew by 7% during the quarter, but this was outpaced by increases in internal costs,” said Nick Clarke, acting CEO, Telecom Wholesale.

“Customer satisfaction has improved to a new high and the quarter saw the full launch of a mobile virtual network operator (MVNO) service that now has five customers signed up. The quarter also saw the settlement of the Commerce Commission’s investigation into the whole of New Zealand loyalty offers.”

TELECOM RETAIL

Telecom Retail reported EBITDA of $110m for the quarter, a 14.6 % increase on the equivalent quarter last year.

“A strong focus on reducing customer churn along with reduction in cost has delivered a much improved trajectory for EBITDA, with Telecom Retail on track to return to full year EBITDA growth next financial year,” said Alan Gourdie, CEO, Telecom Retail.

“Looking forward, churn will remain a key focus area, and we will look to reduce it through contracting and bundles. We have also restructured and this will enable us to deliver additional cost-out on top of the $104m delivered to date.”

GEN-i

Gen-i reported EBITDA of $67m for the quarter, a 39.6% increase on the equivalent quarter last year.

“The quarter was our strongest this year in terms of contracts closed, with $638m in contracts signed. It also saw strong revenue growth in mobile, which was up 12% when compared with Q4 last year, but ongoing declines in New Zealand voice and data revenues,” said Chris Quin, CEO, Gen-i.

“The growth in EBITDA has been achieved through a tight focus on costs and growth in Australia, Mobile and IT services as fixed Telco revenues fell.

“The focus for the next financial year will be simplification of our business and transformation to a hosted and integrated solutions client proposition.  We are aiming for growth in mobile, cloud services, trans-Tasman and Australia.”

AAPT

AAPT reported adjusted EBITDA of A$28m for the quarter, a 3.7% increase on the equivalent quarter last year.

“The increase in EBITDA during the quarter delivered a year on year increase in EBITDA of 16%, driven by a focus on cost, moving customers on-net and improved terms from a supplier,” said Paul Broad, CEO, AAPT.

“After the quarter had ended we secured an agreement to sell several Australian assets for A$140m. Assuming the sale of AAPT’s Consumer business is completed as expected, we’ll continue to focus on aligning our operations to a leaner business structure with a single billing system, investment in Ethernet-delivered data services and the development of next-generation IP voice products over our nation-wide network.”

GUIDANCE

Financial guidance assumes retention of AAPT and does not reflect any impact from the Government’s Ultra Fast Broadband initiative, which is likely to reshape the industry.

• FY11 Guidance

• Adjusted EBITDA of $1.72b to $1.78b
• Depreciation and amortization of $1.03m to $1.09m
• Effective tax rate 37%
• Adjusted net earnings of $300m to $340m
• Capex of $1.0b to $1.1b

• FY12 Guidance
  • Adjusted EBITDA to increase by $20m to $80m
  • Effective tax rate of 25% to 28%

• FY13 Guidance
  • Adjusted EBITDA to increase by $20m to $80m
  • Effective tax rate of 25% to 28%
  • Capex around $0.75b

DIVIDEND

A Q4 dividend of 6c per share has been declared, with no imputation credits. The discount on the dividend reinvestment plan (DRP) will be set to nil.

Telecom has announced that for FY11 it will target a payout ratio of 90% of adjusted net earnings.  The dividend is expected to be fully imputed.  The DRP will be retained with nil discount and an on-market buy back will be introduced to eliminate any increase in capital.