Telecom delivers first quater earnings

Telecom today reported net earnings of $225 million for the three months to 30 September 2007, compared with first quarter earnings of $225 million for the same period last year.

Adjusted net earnings for the same comparative periods were $225 million in 2007, compared with $205 million in Q1 2006, an increase of 9.8%. 

Telecom CEO Paul Reynolds said this result came against the backdrop of growing regulatory and competitive change, for which Telecom was well prepared as the company set out to embrace the opportunities offered by operational separation.

“Our future success will be determined by how well we meet our customers’ needs and expectations,” Mr Reynolds said.

“Telecom has signalled its intentions very clearly. We have made a deliberate choice to invest for the future, in an environment of greater regulatory clarity.

“Last week we submitted our Undertakings on operational separation and announced an accelerated build of our next generation access network. This new infrastructure will provide customers in every New Zealand town and city with a world-class platform and access to new services at much higher speeds.

‘‘While operational separation will bring some tough requirements, and is a very complex exercise, we’re now moving to an environment in which the need for any further regulation is greatly reduced.

“Now the challenge is to apply the right customer focus to all our strategies and initiatives going forward.”

During the first quarter Telecom’s Wholesale business was one of the Group’s top performers, while the performances of IT Services and Telecom’s Australian operations were also highlights.

“These strong performances helped balance the impact of the regulatory changes which led to strong competitor activity, particularly in Telecom’s Consumer business during the quarter.”

Telecom’s CFO Marko Bogoievski said the company’s performance was in line with expectations that Telecom had set at its annual result announcement in August.

‘‘Good progress is being made in Australia with the integration of AAPT and PowerTel, a strong leadership team now in place, and the migration of new and existing customers onto a new IT service platform.’’

Mr Bogoievski said Telecom Wholesale showed strong gains in broadband connection growth.

‘‘Gen-i’s ongoing success as New Zealand’s No 1 IT provider is reflected in higher revenues mostly as a result of our customers growing their businesses. These customers include Westpac, Ministry of Justice, Yellow Pages and Fulton Hogan.

In addition, Mr Bogoievski said there was a $1.1 billion capital return successfully completed and a NZ$22 million after tax dividend was received from Southern Cross Cables.

NEW ZEALAND

Operating revenue was $1,043 million for the first quarter, a decrease of 2.9% on the previous corresponding period.

The New Zealand Operations EBITDA declined 6.9% (vs previous corresponding period) when adjusted for the $6.5 million one-off costs associated with the migration of email services in the quarter.

Access and Calling

Total local service revenue was $260 million, a decrease of 1.1%.

The decline in access revenue reflects the migration of customers from retail to wholesale and also customers using other technologies, including mobile while competitors are continuing to build relationships with customers ahead of new regulated services.

Residential access lines were 1,402,000 compared with 1,411,000 for the same period in 2006.

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)

National call revenue was $124 million, a decline of 9.5%
International revenue was $89 million, a decline of 13.6%
Other revenue of $12 million, dipped 7.7%
Total calling revenue was $225 million, a decline of 11.1%
Telecom Retail responded to increased competition by launching new monthly subscription plans for customers. These plans include Talk it Up Downunder ($25 per month to call trans-Tasman) and Talk it Up Overseas ($45 per month to call top 10 international destinations) which complement the popular $10 Freedom plan (a nominated fixed to mobile number) as well as other plans.

Customer numbers on these plans have grown to 197,000 at the end of September from 94,000 at the end of March 2007.

Interconnection revenue, which includes termination of calls on both fixed and mobile networks, declined 5.4% to $35 million. The decline reflects the impact of lower mobile termination rates.

Mobile revenue is derived from voice and data services on Telecom’s 027 network (CDMA).

While mobile connection growth continued, declines in revenues reflected intense price competition and competitor activity.

Total mobile revenues were $199 million, a decline of 1.5%
Voice revenues were $126 million, a decline of 3.1%
Data revenue was $57 million, an increase of 11.8%
Total connections at 30 September 2007 were 2,025,000, having grown by 14.3% over the 12 months to 30 September 2007
Net connections for the quarter were 48,000
Total ARPU (average revenue per user – monthly) including interconnection was $39.20 for the quarter
Data revenue – Total data revenue was stable on $106 million. Decreases in traditional data services were partly offset by an increase in Managed IP data services. Managed IP data services revenue increased $3 million to $46 million.

Total broadband revenue was $69 million, an increase of 4.5%.

Consumer revenue increased by 27.3% to $42 million
Business revenue was $13 million, a decline of 43.5%, reflecting the large reduction in business broadband pricing when business and residential prices were aligned in October 2006
Total broadband connections were 694,000 (includes residential (387,000), business (68,000) and wholesale (188,000) and mobile broadband connections (51,000)
Total DSL and mobile broadband connections for the quarter were 41,000
Wholesale

Increases in wholesale access lines reflect competitors actively targeting residential customers with bundled access and calling plans.

Access revenue was $26 million, an increase of 44.4%
Calling revenue was $8 million, a decline of 11.1%
Data revenue was $13 million
Broadband and Internet revenue was $14 million, an increase of 40%
Total Wholesale revenue $96 million, an increase of 10.3%
At 30 September 2007 Wholesale had 192,000 access lines and 188,000 broadband connections.
Internet revenue, which is based on dial-up revenue, was $11 million, a decline of 26.7% reflecting the migration of customers to broadband. The total number of dial-up customers was 222,000 a decrease of 22.9%.

IT services

Total IT revenue was $96 million, an increase of 12.9%, reflecting the revenue from new key contracts and procurement business.

AUSTRALIA

Australian performance is expressed in Australian dollars, including comparisons with prior corresponding periods.

Operating revenues were A$321 million, an increase of 9.9%
EBITDA was A$23 million, an increase of 360%
Loss from operations was A$5 million, a reduction of 37.5%
An A$6.5 million gain on sale of AAPT’s stand alone mobile customer base was recorded in the quarter. Excluding this gain the increase in EBITDA was 230%.

The business integration of AAPT and PowerTel is well underway and as a result of the merger AAPT’s residential customers can now buy ADSL2+ from PowerTel’s network.

In addition the merged company launched its new online customer service platform in the mass market segment and this has attracted more than 50,000 customers within several months.

DIVIDEND

Telecom will pay a fully imputed ordinary dividend for the quarter ended 30 September 2007 of 7 cents per share on 7 December 2007 in New Zealand and Australia, and on 14 December 2007 in the United States. The books closing dates are 23 November 2007 on the New Zealand and Australian Stock Exchanges and 21 November 2007 on the New York Stock Exchange.

Telecom will target an ordinary dividend ratio of approximately 75% of net earnings (after adding back relevant non-cash items) for the 2007/2008 year. Subject to there being no adverse change in operating outlook the dividends for each of the three quarters in the year ending 30 June 2008 will be 7 cents per share and the dividend for the fourth quarter will be set to reflect the full year targeted pay-out ratio.

From Q1 2007/08 Telecom is removing the discount on the dividend reinvestment programme and re-introducing an on-market buyback to eliminate the increase in capital arising from the plan.

Capital Expenditure increased by 21.3% to $211 million for Q1 compared with the same quarter in 2006. For the 2007/2008 financial year, Telecom is forecasting capital expenditure of $950 million to $975 million for the full year.