TELECOM NEW ZEALAND Q2 FY10 RESULT...

TELECOM NEW ZEALAND

Q2 FY10 RESULT BRIEFING

Chief Executive Officer – Paul ReynoldsChief Financial Officer – Russ Houlden

TELECOM NEW ZEALAND > Q2 FY10 2

CONTENTS

Paul Reynolds

Key messages

Market trends

Mobile

Business unit performance

Russ Houlden

Economy

Group financials

Paul Reynolds

Transformation

Regulation

Guidance

Key messages, market trends, mobile, and business unit performance


GROUP Q2 FY10 KEY MESSAGES

Group Adjusted EBITDA 1.7% up on Q2 FY09, includes Southern Cross dividends of $9m

Full year adjusted Group EBITDA guidance of -1 to +2% maintained

Now expect to be in lower half of range, reflecting continued impacts of the economic downturn and XT mobile outage

Outcomes delivered in quarter

60k connection growth in mobile

Retail 64% of Broadband connection growth

Continued strong reduction in fixed line churn

IT Solutions margin up from 6% to 8% (vs Q2 FY09)

Cost out on track

All enforceable undertakings milestones met

Most complicated quarter to date

2 detailed UFB proposals submitted post quarter end


1 million Broadband connections in the NZ market

Rate of market growth slowing

Q2 a ‘slow’ quarter as market focused on mobile for Xmas

Retail 64% of net connection growth, market share at 57%

BROADBAND MARKET TRENDS

Note – Q2 data is based on a combination of IDC and Telecom estimates. “Other Network” assumed to be constant in quarter. All UCLL connections are assumed to be Broadband connectionsNote – includes all fixed line and cable Broadband, excludes mobile Broadband


MOBILE MARKET TRENDS

Q1 share of revenue stable at ~39%

Telecom connections up 60k in quarterPostpaid connections fell 3k

Driven by migration of CDMA Go One Bill customers to XT prepaid

Prepaid connections up 63kDriven by strong Xmas sales

2 Degrees gaining share~15% of numbers ported to 2 Degrees came from Telecom*

*Sourced from NBR which quotes 2 Degrees press release


XT MOBILE (RETAIL & GEN-i)

NZ mobile revenue 2.5% higher than Q2 FY09

467k XT connections at 31 December

57% postpaid customers

47% new acquisition

Stimulation campaigns increased Consumer usage

Data ARPU up 19% vs Q2 09

Gen-i delivered significant transitions to XT

Roaming revenues up 111% vs Q2 09

Q2 Key Points


XT OUTAGE

XT outage in Jan for ~3 days affected ~5% of sites

Service degradation to ~200k customers on 27 Jan

Triggered by a fault on a piece of ancillary routing hardware

Caused a number of sites mainly in lower South Island to lose service

Surge in handsets continuously trying to re-connect caused overload within the RNC (Radio Network Controller) taking further sites down

Enhanced resilience plan

RNC processor capacity increased

Operational processes tightened

Comprehensive audit was completed in late 2009

As planned, 2 additional RNCs by March in line with connections increase

As planned, additional equipment to augment coverage

As planned, fibre backhaul

Goodwill package announced

Independent review being commissioned


XT MOBILE (RETAIL & GEN-i)

Plan Q3/4

Network HSPA+ fully completedCoverage optimisation and network optimisationImplement XT resilience plan

RetailEnhance customer service experience New pricing innovation, offering targeted price and value New smartphone devices - Google Android phoneDrive mobile Broadband via One to One training sessions

Gen-iLaunch Gen-i mobile officeLeverage HSPA+ and new mobile Broadband pricingIncrease penetration of smart devices to deliver ARPU growth


RETAIL HOME

Home access churn continues to improveFixed to mobile calling caps launchedRefreshed family of Total Home bundles launched

Broadband churn stable 65% of Broadband customers in contractTiVo launched

Broadband Aggregation regulatory milestone met

Renewed focus on International CallingSecure low/mid tier market with high value bundlesNGT Business trial and launch readinessDrive awareness of TiVo and expand channels

Q2 Key Points

Plan Q3/4


RETAIL OFFICE

Contracting improving Business line access churn

Upgrades to Business Broadband driving reduced churn

Strong XT mobile acquisition

Focus on increasing whole of business sales

Further development of the Business Broadband portfolio

Pilot new channel approach

Launch further Hub services

Q2 Key Points

Plan Q3/4


Q2 EBITDA up 9% (vs Q2 FY09) driven by IT Solutions growth, Australia and lower cost$348m in contracts closed vs. $310m in Q2 09Launch of Gen-i WAN and IPEC, part of Cloud roadmap3 new hosted services promised in Q1 now launched Voice and data - declining revenue trends driven by competition, price pressure, and line consolidationMobile - 6% revenue growth, 8% connection growth (vsQ2 09)IT Solutions - margin up from 6% to 8%, targeting 10%Cost out delivering to plan

Focus on growth in mobility, Australia mid-market and Trans-TasmanFurther cost out for new competitive environmentDevelop cloud based services to build IT marginsLaunch new network delivered services

GEN-i

Q2 Key Points

Plan Q3/4


All service company issues resolved

Achieved all Dec 2009 enforceable Undertakings milestones

TelstraClear launched UCLL based services

970,000 customers able to access Broadband at 10Mbps +

Advertising campaign to drive awareness of FTTN programme

Continue work on the Government’s UFB Initiative

Launch of commercial field service products

Increase public awareness of FTTN programme

Support additional UCLL launches

CHORUS

Q2 Key Points

Plan Q3/4


WHOLESALE & INTERNATIONAL

Q2 Key Points

Plan Q3/4

VDSL2 pilot – 10 additional exchangesSubstantial system and process enhancementAll enforceable undertaking milestones metEnhanced UBA service extensions deliveredCost out programs delivering to planEBITDA down 1.6% (vs Q2 09) as Chorus cabinet related input costs outpace revenue growth

International EBITDA improved via focus on costs

WCDMA Network MVNO Q4Seeking regulatory clarity post loyalty decisionSecure key growth opportunities in the ethernet and mobile backhaul marketsInternational voice and other deal developmentWholesale FMO development & undertakings commitments


EBITDA of A$27m, underlying EBITDA flat at A$22mContinued focus on cost outStrong new sales in Business and WholesaleBusiness introduced “AAPT Applications powered by Google”Consumer contracting driving churn reduction

AAPT

Q2 Key Points

Plan Q3/4Further opex reductionContinuation of the Roadie campaignIncrease portion of consumer base on contracts Drive growth through the unlimited Broadband plansInvestment in ADSL2+ and Mid Band Ethernet coverage

Group Financials


Economic impact up to $10m per quarter

Southern Cross dividend of $9m

Investments in HTAL and TMT Ventures re-valued following adoption of IFRS 9

Adjusted Group EBITDA and NPAT guidance maintained

Now expect to be in lower half of range

Capex on track for full year guidance

KEY FINANCIAL MESSAGES


Impact in Q2 of up to $10m EBITDA, YTD up to $20m EBITDA

Impacts evident in market facing business units

Retail – Consumer and SME

Gen-i – affected industry segments include Finance, Real Estate, Manufacturing, Retail, Transport, IT & Telecommunications and Public Sector

Chorus – lower subdivision revenues

Unemployment has risen to 7.3%

ECONOMY


INCOME STATEMENT - REPORTED

Six months ended 31 Dec 2009

$M

2008

$M

Change

%

Revenue 2,671 2,858 -6.5

Expenses (1,799) (2,075) -13.3

EBITDA 872 783 11.4

Depreciation & amortisation (510) (435) 17.2

EBIT 362 348 4.0

Net finance expense (85) (96) -11.5

Share of associates’ losses - - -

Income tax expense (34) (89) -61.8

Net Earnings 243 163 49.1

Net earnings attributable to shareholders 242 162 49.4

EPS 13 9 44.4

DPS 12 12 -


INCOME STATEMENT - ADJUSTED


$M

2008

$M

Change

%

Revenue 2,671 2,858 -6.5

Expenses (1,799) (1,974) -8.9

EBITDA 872 884 -1.4


EBIT 362 449 -19.4

Net finance expense (85) (96) -11.5



Net Earnings 243 254 -4.3

Net earnings attributable to shareholders 242 253 -4.3

EPS 13 13 -

DPS 12 12 -


INCOME STATEMENT - ADJUSTED

Quarter ended 31 Dec 2009

$M

2008

$M

Change

%

Revenue 1,315 1,407 -6.5

Expenses (890) (989) -10.0

EBITDA 425 418 1.7


EBIT 168 199 -15.6

Net finance expense (49) (48) 2.1



Net Earnings 80 105 -23.8

Net earnings attributable to shareholders 80 105 -23.8

EPS 4 6 -33.3

DPS 6 6 -


Q2 BUSINESS UNIT EBITDA (ADJUSTED)

425

8

(1)

28

60

82

62

186

$ M

Quarter ended 31 Dec 09Six months ended 31 Dec 09

$ M Change % Change %

Chorus 374 0.5% -

Wholesale & International 123 0.8% -1.6%

Retail 173 -11.7% -7.9%

Gen-i 100 -10.7% 9.1%

AAPT 66 29.4% -

T&SS - NM -

Corporate 36 12.5% NM

Total EBITDA 872 -1.4% 1.7%


COST OUT - UPDATE

May 2009 Investor Day Long Term Plan FY08 to FY13

Cost increases of $782m

Cost out of $524m

Cumulative cost out programmes

FY09 $113m delivered

FY10 $244m on track


TAX - UPDATE

New Bill before parliament

Potential impacts

Extra $20-30m tax charge FY10

Extra $20-30m tax payment FY11

We will account for it and change Guidance only if/when

“substantively enacted”


FINANCIAL POSITION

31 Dec 09

$M

30 June 09

$M

Cash 296 261

Other current assets 785 927

Non current assets 5,543 5,848

Total Assets 6,624 7,036

Current liabilities 1,276 1,483

Non current liabilities 2,767 2,837

Minority interests 5 5

Equity attributable to shareholders 2,576 2,711

Total Liabilities & Equity 6,624 7,036

Net debt/EBITDA1 1.5x 1.5x

1 = Adjusted EBITDA calculation based on last 12 months

Standard and Poor’s A (Outlook stable)Moody’s Investor Service A3 (Outlook stable)


CASH FLOW


$M

2008

$M

Cash flows from Operating Activities 818 692

Cash flows from Investing Activities (574) (692)

Cash flows from Financing Activities (191) (551)

Foreign exchange movement (18) 82

Net movement in cash 35 (469)


CAPITAL EXPENDITURE


$M

2008

$M

Change

%

XT Mobile Network 29 160

FTTN 78 62

FNT 42 83

NGT Retail 47 12

Separation 92 46

Other Regulatory 5 6

Total transformation and regulation 293 369 (21%)

Total business sustaining 207 265 (22%)

Total Group 500 634 (21%)


FINANCING

Net Debt / EBITDA not to exceed 1.7x

DRP – Q2 discount 2% (previously 3%)

No need to borrow long term in 2010

Transformation and Regulation


SEPARATION TRANSFORMATION

Deliver the Separation Undertakings milestones

Q2 milestones achieved

108 Undertakings milestones delivered to date

All 13 enforceable milestones achieved in Q2

Purpose

Status

Delivered

BUBA/EUBA consumed by Telecom Business Units as input in the supply of Retail Broadband services

Telecom will offer IP Trunking service that consumes HSNS as an input

Jun 10UCLL consumed by BUBA/EUBA

Dec 09 requirements met for UCLL Backhaul

DeliveryEnforceable Milestones

UBA Backhaul consumed by Retail

Broadband resale equivalence (Access to service company schedules )

PSTN number reservation available

EUBA without POTS (50% of lines)

Resale equivalence for ISDN

BUBA/EUBA consumed by Outlier services

One Office stop sell

Stop sell Legacy Data Services

Jun 10UCLL Backhaul consumed by BUBA/EUBA

Jun 10Core FMO Capability Requirements met for BUBA/EUBA

Jun 10PSTN migration progress report

UCLL consumed by Frame Relay

Dec 09 requirements met for UCLL


WHOLESALE FMO TRANSFORMATION

New Fault Management and Test Tools introduced

enables an improved service experience

Covers all Wholesale products (except Interconnection)

Capabilities include:

Improved fault status reporting

B2B option introduced

Integration between Wholesale and Chorus

Network test tools

Ability to book a field service call directly

Truck rolls per install base p.a.5% 2.5%

Mean Time to Repair (truck roll)2.5 days 1.5 days

‘No fault found’ truck rolls38% 10%

Repeat trouble tickets received14% 5%

Forecast Benefits


FIXED NETWORK TRANSFORMATION

Build and migrate services to an all IP Network to support customer innovation and efficiency


IPEC successfully achieved end customer trial with calls being placed to PSTN and Mobile NetworksDecember enforceable milestone met with IP Trunking services offered commercially

Purpose

Status

Delivered

Commercially offered IPEC Trunking service consuming HSNS (High Speed Network Service) (a Wholesale input)

IPEC End User Customer Network Trial complete (IP Trunking solution for Enterprises, Network Only)

Apr 10IP Centrex network design complete

External trial of PLV (to enable Retail to offer VoIP services via a Residential Gateway)

DeliveryMilestone


NGT RETAIL TRANSFORMATION

Create a new lower cost operating model for Retail that underpins world class customer satisfaction

Q2 enforceable milestones achieved

Release 1.3 Design and Build readyAll new Broadband services offered commercially on either BUBA or EUBA

Purpose

Status

Delivered

End customer trials for Retail PLV based on EUBA and Residential Gateway (to enable Retail to offer VoIP services via a Residential Gateway)

All new Broadband moves and adds on BUBA or EUBA equivalent inputs (to provide equivalent provisioning capability)

Apr 10Business trial of final launch capability

Release 1.3 Design and Build ready (software release to improve customer management functionality)

DeliveryMilestone


XT MOBILE NETWORK TRANSFORMATION

Launch NZ’s fastest and highest coverage 3G mobile network targeting 50% market share by revenue

Delivering against investment plan, focus on optimisation

HSPA+ live

New devices that enhance speed

Purpose

Status

Delivered

40 Prepaid roaming agreements in place

April 10Deliver Retail Store upgrades

DeliveryMilestone

HSPA+ upgrade complete

Jun 10Deploy >50 new cell sites (coverage and capacity)


FTTN TRANSFORMATION

Provide world-class Broadband speeds (at least 10-20 mbps) to 80% of NZers


1,389 cabinets delivered

1,167km of fibre laid

Average attainable speed of 17.7 Mb/s for FTTN customers with ADSL 2+ modem

Purpose

Status

Delivered

More than 1,054 cabinets commissioned

More than 1,348 cabinets commissioned

Mar 10More than 1,643 cabinets commissioned

Jun 10More than 1,864 cabinets commissioned

DeliveryMilestone


PUBLIC POLICY AND REGULATIONConstructive engagement

Strong focus on UFB, TSO and RBI regulatory design and driving regulatory simplificationPowerful proposals submitted on UFBResolution of TSO/Rural Broadband Initiative in a form consistent with UFB Rationalisation of unnecessary existing regulation Self-regulation

Wholesale pricingPleased to see Commission consultation on guidelines for Wholesale and Chorus non-discrimination rulesFocus on achieving a set of guidelines that permits appropriate commercial differentiation in pricing offers

MTR We maintain a strong preference for a commercial resolution, outcome now expected by end of Q3 FY10

Resale regulationCommerce Commission investigation into removal of unnecessary resale regulation underway, decisions expected in FY11

VDSLRequest for Commission to clarify the application of existing layer 2 regulation to VDSL


ULTRA FAST BROADBANDTelecom made two detailed submissions on 29 January 2010

Preferred Commercial Model proposal:Fully compliant

Alternative Commercial Model proposal:A national network using our FTTN programme as the logical springboard for the Government’s vision of fibre-to-the-home (FTTH)Leverages Chorus expertise Minimal waste

Proposals align incentives and investment plans of government and shareholders

Telecom is open to discussing alternative proposals that are in the best interests of all stakeholders

33 proposals submitted to Crown Fibre Holdings

This is a complex process and therefore the timing of a decision is uncertain


FY10 GUIDANCE

Adjusted Group EBITDA of -1 to +2%, Now expect to be in lower half of range, reflecting continued impacts of the economic downturn and XT mobile outage

Southern Cross dividends of NZ$50m to NZ$80m

Group depreciation & amortisation approximately NZ$1.00 billion to $1.06 billion

Adjusted effective tax rate of around 25% Subject to changes in tax legislation

Adjusted Group Net Earnings NZ$400m to $440mNow expect to be in lower half of rangeSubject to changes in tax legislation

Group Capital Expenditure of $1.1 billion to $1.2 billion


FY11 – FY13 GUIDANCE

Adjusted Group EBITDA of +4 to +6%, Subject to potential regulatory risks arising from proposals on Ultra Fast Broadband, Rural Broadband and Telecommunications Service Obligations

FY11 effective tax rate around 30-32%; and FY12 onwards effective tax rate 25-30%

FY13 Group capital expenditure of around $0.75 billionSubject to potential regulatory risks


DISCLAIMER

Forward-Looking StatementsThis presentation includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of Telecom. These forward-looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond Telecom’s control, and which may cause actual results to differ materially from those expressed in the statements contained in this presentation. Factors that could cause actual results or performance to differ materially from those expressed or implied in the forward-looking statements are discussed in the second quarter management commentary and in the risk factors and forward-looking statement disclaimer in Telecom’s annual report on Form 20-F for the year ended 30 June 2009 filed with the U.S. Securities and Exchange Commission. Except as required by law or the listing rules of the stock exchanges on which Telecom is listed, Telecom undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Non-GAAP Financial MeasuresTelecom results are reported under International Financial Reporting Standards (IFRS). The non-GAAP financial measures used in this presentation includes, but are not limited to:

Earnings before interest, tax, depreciation and amortisation (‘EBITDA’). Telecom calculates EBITDA by adding back depreciation, amortisation, finance expense, share of associates’ losses and taxation expense to net earnings/(loss) from continuing operations less finance income; andAverage Revenue per User (‘ARPU’). Telecom calculates ARPU as mobile voice and data revenue for the period divided by the average number of customers for the period. This is then divided by the number of months in the period to express the result as a monthly figure.

Telecom believes that these non-GAAP financial measures provide useful information, but that they should not be viewed in isolation, nor considered as a substitute for measures reported in accordance with IFRS.

TELECOM NEW ZEALAND

Q2 FY10 RESULT BRIEFING

Chief Executive Officer – Paul ReynoldsChief Financial Officer – Russ Houlden

TELECOM NEW ZEALAND Q2 FY10 RESULT...

Documents

Transcript of TELECOM NEW ZEALAND Q2 FY10 RESULT...