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Telecom announced today net earnings after tax of NZ$238 million for the financial year ending 30 June 2013, in a result that reflects the early impact of the major strategic shift underway across the group.

During the year, Telecom began changing from a traditional fixed and mobile infrastructure company to a future-oriented competitive provider of communication, entertainment and IT services, delivered over its networks and the Cloud.

Chairman Mark Verbiest said Telecom made some deliberate calls: to grow share in the mobile market, hold share in the broadband market, refocus the Gen-i business services portfolio and significantly reduce operating costs.

“We were conscious these decisions would likely have a negative impact on short-term operating revenues and margins and incur a substantial restructuring charge. However, we believe they have enhanced Telecom’s position for the longer term, by strengthening our customer base and improving our cost competitiveness.”

After adjusting for one-off items (including restructuring costs and asset impairments of $127 million), adjusted Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) from continuing operations were NZ$1,043 million, a 0.5% decrease from FY12.

Total adjusted operating revenues and other gains declined 8.1% to NZ$4,174 million, with much of this attributable to a decline in fixed line revenues.

Capital expenditure was NZ$465 million, an 18.6% increase on FY12 capital expenditure from continuing operations. Major capex items included purchases of 3G mobile spectrum, initial expenses relating to re-engineering of internal IT infrastructure and early investment in a new Optical Transport Network (OTN) to upgrade the core network.

The Directors have declared a second half dividend of 8c per share with 75% imputation, bringing the total dividend for the year to 16c per share, which remains a strong yield. Subject to no adverse change in operating outlook, Telecom intends paying a 16c per share dividend in FY14.

FY13 operational overview

Chief Executive Simon Moutter said Telecom was charting its new course in light of explosive growth in demand for data and mobility services, unprecedented change in the New Zealand industry structure, and the need to sort out complex business platforms, legacy products and high operating cost.

This transition was reflected in a weaker second half financial performance. Adjusted EBITDA for the second half of the year was down 4.1% versus the second half of the prior year, with Retail, Gen-i, Wholesale & International and AAPT all experiencing EBITDA declines, due to the impacts of intense price base competition, partially offset by reduced labour costs.

Although financial performance was weaker, there were encouraging signs of growth and stability in the customer base.

On the back of sharper marketing and pricing, greater focus on customer service and a growing appreciation of the quality of the Telecom Smartphone network, the number of mobile connections has grown significantly since the CDMA network closed in July 2012, with 92,000 net additions in the second half of FY13. 48,000 of the connections were prepaid and 44,000 post-paid.

In the very competitive fixed line broadband market, Telecom held market share at approximately 48% following several years of decline, with 18,000 net additional connections in the second half. As a consequence of holding broadband market share, Retail access line churn is the lowest in 5 years.

Telecom also invested in new service initiatives for customers. These included Telecommunity, an online site where customers can share helpful information and solve problems, and the ‘Tech in a Sec’ TV and online series of videos with helpful hints on a wide range of topics.

Gen-i’s financial performance in the period reflected intense price-based competition and significant portfolio changes to develop a stronger market proposition. These changes included the acquisition in May 2013 of Revera, a market leader in Infrastructure as a Service (IaaS) and data hosting services. Gen-i’s capabilities are being further boosted through a new Christchurch data centre, opened in August 2013, and plans to build a top-tier data centre in Auckland.

A new business unit, Telecom Digital Ventures, was created to act as an in-house 'incubator' and focus on developing new business opportunities.

Mr Moutter said Telecom needed to take swift and bold action during the year to become more competitive and reduce costs. As at 30 June 2013, Telecom group had a total of 6,622 full-time equivalent employees, a reduction of 16.2% from the beginning of the year and of 12.1% from 31 December 2012. This reflected a combination of natural attrition, redundancies and divestments, partially offset by the addition of 151 staff following the Revera acquisition.

“The rationale for changes made to date, and for further changes, is undeniable. We know we must become, and remain, more competitive and we must continue to simplify and speed up our business to succeed in the long-term. We applaud our staff for being up for the challenge, and acknowledge that these hard decisions have incurred an emotional and financial toll,” Mr Moutter commented.

Outlook

Mr Moutter said while good progress had been made during FY13, especially on the cost side, “we are realistic about the performance improvements that must be achieved.”

“The market in which Telecom operates continues to evolve and our business must continue to change at pace. In particular, we will target: a leading position in the mobile market; ensuring we are competitive on costs; and improving the relevance of our marketing efforts, especially in key segments such as young urban customers.

“We will retain a disciplined approach to capital management and will continue to reduce variable costs and simplify the business. This will involve a significant re-engineering programme aimed at rationalising our internal IT infrastructure, and a centrally led programme looking across the business at simplification opportunities.

“Our aspiration is to be a growing New Zealand company, winning by customers choosing us to connect them at the ‘speed of life’.”

Telecom expects its capital expenditure programme for the next three years to average between NZ$400-500 million per annum, however the phasing will vary. Capital expenditure for FY14 is expected to be at the upper end of this range, excluding any investment in new spectrum.

Reflecting on the year, Mr Verbiest said Directors firmly believed Telecom has put itself ‘back in the game’ and were committed to the new strategy being pursued by management.

“It is going to take a concerted and disciplined effort over several years, but we believe this is the right long-term strategic path to build a more valuable company for our shareholders and contribute to a better future for New Zealand.”