Telecom announced today a flat net profit after tax of NZ$167 million for the half year ending 31 December 2013.

Chairman Mark Verbiest says Telecom has been focused for nearly a year now on a clear long-term strategy and is gathering momentum in its execution.

“Over the last year we have moved quickly and decisively, putting several critical foundations in place and making a number of bold market moves," he says.

"We have gained greater traction on our cost competitiveness, increasing the projected free cash flow benefits we believe will be generated by our Turn around Programme, a centrally-driven series of business improvement initiatives.

“Our investments in revamping our mass market brands, Telecom and Skinny, have delivered greater cut-through in key markets.

"This has given us the conviction to move beyond the Telecom name, and better reflect our digital services capability and future focus. Later this year, we intend to change our company name and core customer brands to Spark.”

Earnings for the Group were flat, while underlying lead indicators and revenue performance, especially in mobile, were encouraging. However as expected the ongoing market decline in legacy fixed data and voice, together with the strategic choices made during FY13 to put market share outcomes ahead of short-term financial performance, has continued to impact earnings in New Zealand.

“We expect to see the positive lead indicators from the half year begin to flow more into our financial results from the second half onwards and into the 2015 financial year,” Verbiest adds.

Total operating revenues from continuing operations declined 3.0% to NZ$1,847 million, largely attributable to a 9.2% decline in fixed line revenues. Strong mobile performance saw mobile revenue up 5.8%, partially offsetting the fixed revenue decline.

Operating costs for continuing operations fell 2.1% largely due to ongoing cost reduction initiatives, particularly labour costs. These initiatives were offset by cost growth associated with increased customer numbers and data volumes.

Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) from continuing operations were down 5.8% while net earnings from continuing operations were down 12.5%.

Capital expenditure for continuing operations was up 18.2% to NZ$266 million, reflecting the significant investment in the first half of the year in networks, products and services. Major capital expenditure items included; an ongoing re-engineering programme, upgrade of the core data transport network, and mobile network investment particularly in 4G LTE.

As the previous year’s price-downs in broadband and wholesale are overtaken, the effect is expected to help moderate the rate of decline in legacy fixed revenues in the second half of the financial year.

The Directors have declared a half-year dividend of 8 cents per share, and an intention to pay a minimum of 16 cents per share for the full year. Directors also outlined an aspiration to sustainably increase ordinary dividends over time as the projected improved cash flow performance materialises.

Chief Executive Simon Moutter says that other moves being made in the market are also giving the company additional confidence.

“We’ve continued to make huge investments in New Zealand’s digital networks, launching 4G mobile underpinned by a brand-new core data transport network, building more data center capability and committing to a leadership position in 700MHz spectrum," he adds.

"We have sold the AAPT business in Australia to focus all our efforts on getting it right for New Zealand customers.

“There has also been investment in the digital services so essential to future growth. Notably, we have decided to enter the internet TV market, with a standalone and high-quality internet TV brand, ShowmeTV, to be launched later in the year.”

“We are pleased with our progress to date. We are working hard to become a fast, agile retailer, focused on winning customers. Future oriented. Competitive. Relevant to all New Zealanders. Willing to make bold moves. There’s real momentum building, for our customers and for us.”

Gen-i:

Gen-i has continued to leverage its leadership position in data, mobility and Cloud services to help business and government clients unleash their full potential in a digital world.

During the first half, plans were announced to build new greenfield data centers in Auckland and Wellington and a new data center was opened in Christchurch, further strengthening data hosting capabilities following the acquisition of Revera last year.

Gen-i also won a multi-year contract with the Government’s Network for Learning initiative to build a fast and modern online educational platform for New Zealand schools to maximise the digital learning opportunities created by the ultra-fast broadband (UFB) rollout.

Last year the mass-market Telecom retail brand was revitalised with a new look and the network of Business Hubs for small and medium business customers was relaunched. These moves have shown an immediate impact in increased sales, foot traffic and positive customer feedback.

Digital customer self-service options were also significantly expanded, including the launching of a new Telecom App that has already attracted over 60,000 downloads, and a significant growth in customer take-up of My Telecom and e-billing options.

Telecom has also committed $149 million to four lots (2 x 20MHz) of newly available 700 MHz band radio spectrum to become the biggest player. This will make possible faster and better 4G mobile coverage for less populated parts of New Zealand. This asset has not yet been paid for as the auction process is still under way. The Commerce Commission is deciding on whether or not the purchase of the 4th lot can proceed, which will be followed by an auction round to determine the allocation of positions in the band.

An ongoing programme to re-engineer the IT stack for the business has also progressed well, with the first release of IT improvements on target for the second half of this financial year. This first release, focused on pre-paid mobile, will deliver significant system capability enhancements and improve customer experience, especially across digital channels.

Telecom Digital Ventures, the innovation focused business unit, has continued to develop its portfolio of growth oriented initiatives. This includes a nationwide WiFi network, primarily using revamped phone booths, which now has over 900 hotspots and 300,000 registered users, giving people better connections when out and about and enhancing the value of mobility solutions for business clients.

“Later this year, we will launch ShowmeTV, our new internet TV business," Moutter adds.

"The migration of entertainment to the internet is creating significant disruption to current broadcast TV business models and real opportunities for new online businesses.

"The rapid growth of better broadband via fibre and VDSL means watching TV via streaming over the internet is now a much more viable option for New Zealanders.

"We believe the time is right to enter this market and provide New Zealanders with exciting new choices when it comes to watching video entertainment.”

Outlook

Moutter says the first half results demonstrate a pace and level of change he believes is unparalleled in a large New Zealand business over the last decade.

“We don’t intend to slow down," he adds. "We will continue to address our cost base and strengthen our organisational performance.

"We will focus even harder on becoming more relevant to customers and to modern New Zealand, particularly as we continue our intended transition to Spark.

“We anticipate an improved performance in the second half of this financial year, with broadband revenues beginning to stabilise, mobile growth continuing and our Turnaround Programme delivering tangible free cash flow improvements.”

As a result, adjusted EBITDA from continuing operations for the full year is expected to be in the range of NZ$925 million to $945 million, excluding the sale of AAPT and rebranding costs.

With a lot of the essential network investment for the strategic repositioning of the business already made or committed, capital expenditure from continuing operations for the full year is expected to be NZ$450 to NZ$460m, excluding spectrum, with the capex envelope tightening further in the FY15 to FY17 period.

“There is a lot more hard work to come," Moutter adds. "We’ve got plenty to do to complete our strategic shift and stretch our leadership in data connectivity as well as regain the top spot in the mobile market.

"And all the while, customer needs will continue to evolve as digital life becomes a reality. But we are convinced we are on the right pathway. We’re committed to this course and to playing a major role in New Zealand’s digital future.”