<PAGE>
Telecom Corporation of New Zeland Limited and Subsidaries
Management's Discussion and Analysis of Financial Condition and Results of
Operation
30 JUNE 1999
RESULTS OF OPERATIONS - 30 JUNE 1999
Overview Of Results
Telecom's reported earnings for the quarter ended 30 June 1999 were NZ$202
million compared with NZ$190 million for the quarter ended 30 June 1998 ("Q1
1999"), an increase of NZ$12 million, or 6.3%. Reported earnings per share
("EPS") increased by 6.3% to NZ11.5 cents compared with NZ10.9 cents in Q1 1999.
Telecom has changed its balance date from 31 March to 30 June and is reporting
the quarter ended 30 June 1999 as the transition period.
Normalised earnings (reported earnings excluding the effect of abnormal items
and the release of surplus tax provision) for the transition period were NZ$199
million compared with NZ$190 million for Q1 1999, an increase of NZ$9 million,
or 4.7%. Normalised EPS increased by 4.7% to NZ11.4 cents, compared with NZ10.9
cents in Q1 1999.
================================================================================
Earnings Overview
Quarter Ended 30 June
------------------------
1998 1999 Change
NZ$M NZ$M %
------------------------
Operating revenues (before
abnormals) 826 848 2.7
Net earnings (reported) 190 202 6.3
Abnormal revenue (after tax) - (10) -
Abnormal expenses (after tax) - 15 -
Release of surplus tax - (8) -
provision
------------------------
Normalised earnings 190 199 4.7
------------------------
EBIT* (before abnormals) 325 349 7.4
EBITDA# (before abnormals) 466 487 4.5
Reported earnings per share
(cents) 10.9 11.5 6.3
Normalised earnings per share
(cents) 10.9 11.4 4.7
Dividends per share (cents) 11.5 11.5 -
Weighted average number of
shares outstanding (millions) 1,752 1,753 -
* Earnings before interest and tax.
# Earnings before interest, tax, depreciation and amortisation.
================================================================================
Net cash flows from operating activities increased by NZ$43 million, or 9.6%,
from NZ$450 million in Q1 1999.
OVERVIEW OF SURPLUS FROM OPERATIONS
The table on page 8 shows the major components of Telecom's operating revenues
and expenses for the quarters ended 30 June 1998 and 1999.
Before abnormal items, the surplus from operations as a percentage of revenue
was 39.3% and 41.2% for the quarters ended 30 June 1998 and 1999, respectively.
Reclassifications
Certain reclassifications of prior period's data were made to conform to current
period classifications.
Telecom has revised the classifications of certain operating expense items.
Reclassified operating expenses are set out in the table on page 8. The key
changes are as follows:
. Labour costs and overheads are no longer reallocated to cost of sales,
maintenance and other operating expenses. These costs now remain in labour
and other operating expenses respectively.
. Certain direct costs (previously included in cost of sales) and maintenance
(previously disclosed separately) are now classified as other operating
expenses.
Abnormal Items
Abnormal revenue of NZ$15 million in the transition period was a gain recognised
on the prepayment and early extinguishment of Telecom's obligations relating to
a cross border finance lease.
The costs of buying out of the terms of certain onerous contracts amounting to
NZ$22 million were identified and provided for in the transition period and were
included as abnormal costs. The contracts were onerous as the unavoidable costs
of meeting the contractual obligations exceed their economic benefits.
<PAGE>
Telecom Corporation of New Zeland Limited and Subsidaries
Management's Discussion and Analysis of Financial Condition and Results of
Operation
30 JUNE 1999
Operating Revenues (Before Abnormals)
--------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 22 2. 7
-------------------------------------------------------------------------------
Revenue growth for the transition period was driven largely by growth in
cellular revenue and data revenue. Growth in call volumes did not fully offset
the large price reductions, which resulted in a decline in calling revenues.
Volume Growth
================================================================================
As at and for the quarter ended Change
30 June %
-------------------------------------------------------
1998 1999 99:98
-------------------------------------------------------
Access lines 1,849,400 1,870,100 1.1
Centrex lines 68,600 75,200 9.6
ISDN lines 33,900 52,700 55.5
Call minutes (millions)
Local calls* 784.2 827.6 5.5
National calls # 534.9 522.3 (2.4)
Fixed line to cellular calls 91.1 115.3 26.6
National 0800 calls 128.2 154.5 20.5
International outward calls 91.9 129.6 41.0
International inward calls 81.8 89.2 9.0
Cellular calls 167.1 216.5 29.6
Cellular connections
Total at period end 492,500 677,100 37.5
Average during the
period 484,400 643,000 32.7
Call minder mailboxes 240,500 268,400 11.6
Registered XTRA
customers 119,400 206,300 72.8
* Includes business local calls, residential calls under the NZ20 cents local
calling option and Centrex and VPN local calls.
# Includes Centrex and VPN national calls. Excludes calls from Telecom's fixed
line to cellular networks.
Certain reclassifications of prior years' data were made to conform to current
period classifications.
================================================================================
Local Service
Local service revenues consist of business and residential access, local call
charges (predominantly paid by business customers) including Centrex and VPN,
and enhanced network services products (Smartphone, messaging and call track).
--------------------------------------------------------------------------------
Variation - Increase NZ$ millions %
--------------------------------------------------------------------------------
1999:1998 1 0.4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Change %
Local Service 99:98
--------------------------------------------------------------------------------
Business & residential access
- Revenue (1.4)
- Access lines 1.1
Local calls
- Revenue 6.2
- Call minutes 5.5
--------------------------------------------------------------------------------
Business and residential access revenue for the transition period decreased by
NZ$3 million, or 1.4%, which reflected the net effect of pricing changes
partially offset by an increase in access lines.
Local service revenue and access line growth were affected by the entry of
Saturn Communications into the local service market and increased use of
cellular phones.
Pricing changes that affected the year on year comparisons included:
. A reduction in the monthly rental for new second line connections by
NZ$5.71 to NZ$29.95 from 1 July 1998.
. Price reductions offered to a range of business customers from January
1999.
. The introduction of a reduced second line rental option for new connections
from 1 April 1999.
. An increase in residential line rental of 1.9% in October 1998.
Revenue from local calls increased by NZ$2 million, or 6.2%, for the transition
period due to growth in call volumes.
Revenue from Smartphone, messaging and call track increased by NZ$2 million, or
12.7%, for the transition period.
2
<PAGE>
Telecom Corporation of New Zeland Limited and Subsidaries
Management's Discussion and Analysis of Financial Condition and Results of
Operation
30 JUNE 1999
National
National revenue includes calls to a location outside the caller's local calling
area including Centrex and VPN, calls to cellular networks originating within
the fixed line network, National 0800 calls and operator services charges.
--------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 (4) (2.3)
--------------------------------------------------------------------------------
The decrease for the transition period was largely due to national toll price
reductions. Volume growth rates were affected by the slower growth of the New
Zealand economy and the migration of calls into Telecom's cellular network. The
effect of national toll price reductions was partially offset by increased
revenue from calls from the fixed line to cellular networks and National 0800 as
a result of increased call volumes.
--------------------------------------------------------------------------------
Change %
National 99:98
--------------------------------------------------------------------------------
National calls *
- Revenue (14.2)
- Call minutes (2.4)
Calls to cellular networks
- Revenue 22.1
- Call minutes 26.6
National 0800
- Revenue 6.4
- Call minutes 20.5
* Includes national VPN and Centrex calls.
--------------------------------------------------------------------------------
Compared with last year, the annual average per minute price of national calls,
excluding National 0800 and those made to cellular networks, declined by
approximately 12% to around NZ16 cents.
The following three new calling plans for residential customers were introduced
in May 1999.
NZ$3 Weeknights and Weekends Plan;
NZ$5 Whole of the Day Plan;
Quick Call Plan.
These plans offer different combinations of NZ$3 or NZ$5 capping and/or maximum
off-peak and peak calling rates.
Two new calling packages (HomeFree 200 and HomeFree 400) were launched in
December 1998 for residential customers in seven geographic areas. These
packages combine a low access charge, either 200 or 400 free (peak/off-peak)
minutes and a low flat rate (NZ15 cents per minute) for all local and national
calls once the free minutes have been used.
Further initiatives include Favourite Place New Zealand and Favourite Place
Neighbouring Area which provide a flat fee option for unlimited off-peak calling
to another area in New Zealand chosen by the customer. As at 30 June 1999,
approximately 33,000 customers were enrolled in these plans.
From August 1998, business national toll prices were reduced on average by 16%
for both peak and off peak calling on key routes. In addition, the BEST
(Business Enjoy Savings on Tolls) pricing option was launched in February 1999
and ran until the end of April 1999. This plan provided a ceiling to Business
Market customers on the cost of their tolls, 10% lower than their average
monthly spend.
A Talking Points loyalty programme, which rewards residential customers for
using Telecom's services, was introduced in May 1996. Approximately 681,000
customers had joined the programme at 30 June 1999. The School Connection
loyalty programme, where residential customers nominate schools to receive
sponsorships from Telecom based on customers' usage of Telecom's services, had
approximately 599,000 customers at 30 June 1999.
International
International revenue includes outgoing international calls made in New Zealand,
collect, credit card and "New Zealand Direct" calls to New Zealand, receipts
from overseas telecommunications administrations and companies for calls to New
Zealand that use Telecom's facilities, and calls from international switched
traffic transiting Telecom's facilities.
-----------------------------------------------------
Variation - Decrease NZ$ millions %
-----------------------------------------------------
1999:1998 (14) (13.7)
-----------------------------------------------------
3
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
30 JUNE 1999
-------------------------------------------------------------------------------
International Change
%
99:98
-------------------------------------------------------------------------------
Outward calls
- Revenue (9.3)
- Call minutes 41.0
Inward calls
- Revenue (20.1)
- Call minutes 9.0
Transit call margin
- Margin (19.2)
- Call minutes 60.9
-------------------------------------------------------------------------------
Growth in outward call minutes reflected the volume stimulation from price
specials offered to New Zealand customers and significant price reductions over
the past year. The annual average per minute charge for outward calls of around
NZ39 cents was approximately 36% lower than in Q1 1999, reflecting price
reductions and frequent weekend specials.
Significant price reductions reducing the average price of outward international
tolls by 20% were announced in July 1998.
In April 1999, the weekend caps on Consumer Talk All Day promotions were reduced
from NZ$10 to NZ$5 for Australia and from NZ$15 to NZ$10 for the UK, US, Canada
and Ireland. These two Talk All Day specials at the reduced rates were available
every weekend until the end of the 1999 calendar year.
The decrease in inward call revenue for the transition period resulted largely
from a reduced average price per inward call minute partially offset by the
effect of increased call minutes. The average price per minute for inward calls
decreased by approximately 27% primarily as a result of a reduction in the rates
negotiated for incoming calls and the strengthening New Zealand dollar. In
response to intense competition in the international market, Telecom has
negotiated agreements with the major foreign carriers that, while reducing
rates, have improved outward volumes. The reduced rates and strengthening New
Zealand dollar have a favourable effect on the international outpayment (see
"Cost of Sales").
The decrease in the transit call margin (revenue net of outpayments) for the
transition period was largely attributable to the strengthening New Zealand
dollar and reduced revenue from transit calls for information services.
Telecom's point of presence ("POP") in the US enables it to participate in the
world's most competitive wholesale international market. The low cost routing
option provided by the US POP has enabled Telecom to become more competitive in
the transit call business. Telecom has recently commissioned its own switch in
the US and continues to expand its role in this market by interconnecting with
an increasing number of other carriers in order to secure additional volumes and
further reduce costs.
Other Calling
Other calling revenue is derived principally from Payphones, National 0900,
teleconference, and analogue and dedicated digital voice services.
-------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 (1) (7.7)
-------------------------------------------------------------------------------
The decrease for the transition period was due largely to a reduction in
Payphone revenue as the use of cellular phones increased.
Interconnect
Interconnect revenue is derived from charges for delivering to and accepting
from other service providers local, national, international and 0800 calls.
Installation charges and rental of interconnecting links and service delivery
point charges are also included.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 5 33.3
-------------------------------------------------------------------------------
The increase for the transition period was largely due to new interconnect
carriers, increased activity with existing carriers and number portability
revenue.
4
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
30 JUNE 1999
Cellular and Other Mobile Services
Cellular and other mobile services revenue comprises access and airtime charges
for calls originating from Telecom's cellular network (excluding international
calls), and revenue from paging and mobile radio services.
--------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 18 15.8
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cellular Change %
99:98
--------------------------------------------------------------------------------
Revenue 18.0
Call minutes 29.6
Connections
Total at period end 37.5
Average during the period 32.7
--------------------------------------------------------------------------------
Telecom had 677,100 cellular connections at 30 June 1999 compared with 492,500
at 30 June 1998, an increase of 37.5%. The continued strong growth in
connections was largely due to the introduction of prepaid cellular, and the
"Telecom 2 GO" promotion. The total number of active prepaid customers at 30
June 1999 was 189,000, approximately 28% of total connections. Approximately
290,000 connections, or 43% of total connections, were connected to the "Telecom
2 GO" rate plans (excluding GO Prepaid connections) at 30 June 1999.
Average revenue per customer decreased by approximately 10% compared to last
year, reflecting the recent high number of prepaid connections. Average revenue
per prepaid connection is initially lower as customers utilise their free
airtime minutes.
The total number of cellular connections in New Zealand, including Vodafone's
connections, was estimated to represent approximately 23% of the New Zealand
population.
Data
Data revenue consists principally of revenue from data transmission services,
dedicated leased lines and Internet access.
--------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 15 18.5
--------------------------------------------------------------------------------
Data revenue growth for the transition period is driven by demand for bandwidth
to support business networking and the increased penetration of the Internet.
Telecom's Internet service provider "XTRA" had approximately 206,300 registered
customers at 30 June 1999, compared with 119,400 at 30 June 1998. Of the
registered customers, 80% were active during the last month of the transition
period.
ISDN revenues increased by 24% for the transition period partly reflecting
migration from basic access services. The number of ISDN lines increased by
55.5%.
In February 1999 Telecom introduced a series of data pricing initiatives aimed
at stimulating data growth by making greater bandwidth more affordable. The
initiatives, which were targeted at key corporate and business data users, aimed
to simplify the data pricing structure, by reducing the number of distance
steps, and make wide-area networking more affordable.
Directories
Directories revenue is derived largely from local advertising by businesses in
both The Telephone Book and YELLOW PAGES(R) directories and various database
services.
--------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 1 5.6
--------------------------------------------------------------------------------
Revenue from regional directories increased by 6.4% for the transition period as
a result of both tariff and volume growth in both The Telephone Book and YELLOW
PAGES(R) products. Revenues from specialised and LOCAL DIRECTORIES(TM) remained
relatively stable.
5
<PAGE>
Telecom New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operation
30 JUNE 1999
Equipment Revenue
Equipment revenue includes equipment sales and installation, and CPE rental.
Equipment revenue remained relatively stable compared with Q1 1999.
Miscellaneous Other Services
Miscellaneous other services revenue is derived principally from software
development, telecommunications services provided in the Cook Islands and Samoa
and an international outside plant project.
----------------------------------------------------------------------
Variation-Increase NZ$ %
millions
----------------------------------------------------------------------
1999:1998 1 5.9
----------------------------------------------------------------------
The increase in revenue was largely attributable to the increase in
telecommunications revenue from the Cook Islands and Samoa.
Operating Expenses (Before Abnormals)
----------------------------------------------------------------------
Variation-Decrease NZ$ %
millions
----------------------------------------------------------------------
1999:1998 (2) (0.4)
----------------------------------------------------------------------
Operating expenses for the transition period remained relatively stable. An
increase in cost of sales was more than offset by a net reduction in other cost
items.
Operating expenses excluding abnormal costs as a percentage of revenue were
60.7% and 58.8% for the quarters ended 30 June 1998 and 1999 respectively.
Labour
----------------------------------------------------------------------
Variation-Decrease NZ$ %
millions
----------------------------------------------------------------------
1999:1998 (12) (9.7)
----------------------------------------------------------------------
The decrease in labour costs for the transition period reflected a reduction of
664 in personnel numbers between 30 June 1998 and 1999, largely reflecting the
outsourcing of operator services to SITEL Asia Pacific ("SITEL") during the year
to 31 March 1999. The reduction in labour costs due to the outsourcing was
partially offset by an increase in outsourcing costs (see "Other Operating
Expenses").
The effect of this decrease on labour costs was partially offset by increases
arising from the following factors:
. Salary increases for personnel on individual contracts; and
. Negotiated settlements for personnel covered by collective contracts.
----------------------------------------------------------------------
Personnel Numbers
----------------------------------------------------------------------
Variation to June
1999
-----------------------------------------
June March June June March
1998 1999 1999 1998 1999
-----------------------------------------
Operations 6,529 6,289 5,994 (535) (295)
Other 1,614 1,510 1,485 (129) (25)
-----------------------------------------
8,143 7,799 7,479 (664) (320)
-----------------------------------------
Depreciation
----------------------------------------------------------------------
Variation-Decrease NZ$ %
Millions
----------------------------------------------------------------------
1999:1998 (3) (2.2)
----------------------------------------------------------------------
The decrease in depreciation expense for the transition period was largely due
to a major asset becoming fully depreciated.
This decrease was partially offset by the impact of the increasing fixed asset
base resulting from capital expenditure.
Cost of Sales
Cost of sales are costs directly attributable to revenue earned from
international outward calls and leased circuits, equipment sales, cellular
services and directories.
----------------------------------------------------------------------
Variation-Increase NZ$ %
millions
----------------------------------------------------------------------
1999:1998 9 8.3
----------------------------------------------------------------------
The increase for the transition period was largely in equipment related to
growth in the cellular business. Special promotions to attract new connections
and encourage existing customers to upgrade their mobile phones contributed to
the increase in cost of sales.
Interconnect expenses were also higher reflecting increased volumes.
International cost of sales for outbound calls decreased by 7.6% for the
transition period, primarily due to a rate reduction and the strengthening of
the NZ dollar. The decrease was partially offset by the 41.0% growth in
international outward minutes reflecting the volume stimulation created by price
specials offered to New Zealand customers.
6
<PAGE>
Telecom New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
30 JUNE 1999
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer costs, bad
debts, vehicle costs, office expenses, postage and agency, outsourcing costs and
certain direct costs, which together represented approximately 80% of other
operating expenses before capital recoveries.
----------------------------------------------------------------------
Variation-Increase NZ$ %
millions
----------------------------------------------------------------------
1999:1998 4 3.1
----------------------------------------------------------------------
Other operating expenses for the transition period remained relatively stable.
There were small movements in a number of expense items, the most significant
being an increase in outsourcing costs. This increase primarily reflected the
outsourcing of operator services to SITEL.
Net Interest Expense
----------------------------------------------------------------------
Variation-Decrease NZ$ %
millions
----------------------------------------------------------------------
1999:1998
Interest expense (7) (17.1)
Investment income (4) (25.0)
----------------------------------------------------------------------
Net interest expense (3) (12.0)
----------------------------------------------------------------------
The decrease in net interest expense for the transition period was partly due to
lower short-term interest rates.
The surplus from operations before abnormal items covered net interest (after
investment income but before interest capitalised) and capital note distribution
costs 7.8 times, compared with 6.8 times in Q1 1999.
Taxation
----------------------------------------------------------------------
Variation-Increase NZ$ %
millions
----------------------------------------------------------------------
1999:1998 2 2.1
----------------------------------------------------------------------
The increase in income tax expense for the transition period was largely due to
the NZ$20 million, or 6.7%, increase in the surplus from operations before
income tax, partially offset by the release of surplus tax provision. The
effective tax rate was 30.6% compared with 32.0% for Q1 1999 and a statutory
rate of 33%.
7
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
30 JUNE 1999
OVERVIEW OF SURPLUS FROM OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended Variation
30 June 99:98
--------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages)
1998 % 1999 % $ %
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 263 31.8 264 31.1 1 0.4
Calling
National 175 21.2 171 20.2 (4) (2.3)
International 102 12.3 88 10.4 (14) (13.7)
Other 13 1.6 12 1.4 (1) (7.7)
--------------------------------------------------------
290 35.1 271 32.0 (19) (6.6)
Interconnection 15 1.8 20 2.4 5 33.3
Cellular and other mobile 114 13.8 132 15.6 18 15.8
Data 81 9.8 96 11.3 15 18.5
Other operating revenues
Directories 18 2.2 19 2.2 1 5.6
Equipment 28 3.4 28 3.3 - -
Miscellaneous other 17 2.1 18 2.1 1 5.9
--------------------------------------------------------
63 7.7 65 7.6 2 3.2
--------------------------------------------------------
Total operating revenues (before abnormals) 826 100.0 848 100.0 22 2.7
--------------------------------------------------------
Operating expenses
Labour 124 15.0 112 13.2 (12) (9.7)
Depreciation 139 16.9 136 16.0 (3) (2.2)
Cost of sales 109 13.2 118 13.9 9 8.3
Other operating expenses 129 15.6 133 15.7 4 3.1
--------------------------------------------------------
Total operating expenses (before abnormals) 501 60.7 499 58.8 (2) (0.4)
--------------------------------------------------------
Surplus from operations (before abnormals) 325 39.3 349 41.2 24 7.4
Abnormal revenue - - 15 1.7 15 -
Abnormal costs - - (22) (2.6) (22) -
--------------------------------------------------------
Surplus from operations 325 39.3 342 40.3 17 5.2
========================================================
</TABLE>
KEY PERFORMANCE INDICATORS
<TABLE>
<CAPTION>
Year ended Year ended Quarter Ended
31 March 31 March 30 June
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Operating Margin (%) * 40.5 40.7 39.3 41.2
Asset Utilisation (%) # 73.0 73.0 71.1 ~ 69.4 ~
Net Interest Cover (times) . 7.6 6.9 6.8 7.8
Return on Average Total Assets (%)+ 29.6 29.8 28.0 ~ 28.5 ~
Net Debt/Net Debt plus Capital Funds (%) 43.6 42.9 42.3 48.3
</TABLE>
* Normalised surplus from continuing operations/operating revenue (before
abnormals)
# Operating revenue (before abnormals)/average total assets (net of cash and
short-term investments)
. Normalised surplus from continuing operations/net interest expense (before
interest capitalised) inclusive of capital note coupons
+ Normalised surplus from continuing operations/average total assets (net of
cash and short-term investments)
~ Annualised
8
