Telecom Corporation of New Zealand Limited Annual Report For the year ended 30 June 2011 From here we can do anything… Financial performance – FY11 Adjusted Adjusted free cash Capital expenditure EBITDA $1,801m flow $887m $914m 2009 2010 2011 2009 2010 2011 2009 2010 2011 Improved 2% Improved 53% Expenditure reduced 23% $2.46 20 cents 20 cents Share price Adjusted EPS Dividends declared in FY11 Improved 34% in FY11 Maintained with FY10 90% pay-out ratio ARBN 050 611 277 INTRODUCTION OUR COMPANY PERFORMANCE GOVERNANCE DISCLOSURES INTRODUCTION Contents Introduction 04 Overview Governance 125 Governance at Telecom 05 Chairman’s report 137 Remuneration at Telecom 06 CEO’s report Disclosures 148 Interests’ disclosures Our company 08 Board of directors 150 Shareholder and exchange disclosures 10 Executive team 155 Additional shareholder information 13 Business operations 167 Forward-looking statements 30 Company review 169 Glossary 172 Shareholder inquiries/contact details Performance 50 Key Performance Indicators 51 Business review 75 Auditors’ reports 77 Financial statements 83 Notes to the financial statements Financial calendar FY12 October 2011 Annual Meeting February 2012 Half-year result announced 30 June 2012 Financial year end This report is dated 13 September 2011 and is signed on behalf of the board of Telecom Corporation of New Zealand Limited by Wayne Boyd, chairman, and Paul Reynolds, chief executive officer. Wayne Boyd Paul Reynolds Chairman Chief Executive Officer investor.telecom.co.nz 3 Overview This annual report will be filed with the United States Securities and Exchange Commission on Form 20-F and is divided into five sections: Introduction | The introduction comes from Telecom’s expressly stated otherwise. References to notes are references chairman, Wayne Boyd and CEO, Paul Reynolds. It gives a to notes to the consolidated financial statements. brief overview of Telecom’s activities for FY11 and a signal of References to US$, USD or US dollars are to United States what Telecom expects is to come. dollars, references to A$ and AUD are to Australian dollars and Our company | Our company provides an overview of the references to NZ$ and NZD are to New Zealand dollars. current operating units of Telecom, the current regulatory References to Telecom’s WCDMA mobile network are to environment and other aspects of Telecom, including Telecom’s 3G wideband 850MHz/2100MHz mobile network resources, corporate and social responsibility. which was launched in May 2009 and in 2012 will eventually Performance | Performance gives an overview of Telecom’s replace Telecom’s CDMA mobile network. Telecom’s branded financial results, as well as the results of Telecom’s current XT mobile network operates, along with other MVNOs, on operating units and key risks. It also contains Telecom’s Telecom’s WCDMA mobile network. References to Telecom’s consolidated financial statements for FY11. CDMA mobile network are to Telecom’s CDMA network that Governance | Governance presents corporate governance carries voice traffic and data at a lower relative speed, which at Telecom and provides remuneration information. Telecom has announced will close in July 2012. Disclosures | provides additional information required by Any references to documents and information included on New Zealand company law, the NZX, ASX and NYSE Listing external websites, including Telecom’s website, are provided Rules and additional United States SEC Form 20-F annual for convenience alone and none of the documents or other report (Form 20-F) requirements. information on those websites is incorporated by reference in this annual report. Reference to legislation is to New Zealand When used in this annual report, references to the ‘Company’ legislation and the Government is to the New Zealand are references to Telecom Corporation of New Zealand Limited. Government, unless specifically stated otherwise. References to ‘Telecom’ are to Telecom Corporation of See Glossary for other definitions. New Zealand Limited, together with its subsidiaries and its interests in associates. Information on the proposed demerger is discussed briefly under Regulation, Operating Environment and Disclosures- All references to financial years (eg, FY11, FY10 and FY09) in Material Contracts. Detailed information about the proposed this annual report are to the financial year ended 30 June. demerger and New Telecom and New Chorus is included in the Certain information required by the United States Form 20-F Scheme Booklet dated 13 September 2011, which is available requirements is contained in Telecom’s FY11 consolidated on Telecom’s website at http://investor.telecom.co.nz, and the financial statements, which are included in this annual report. NZX and ASX websites, and will be furnished to the SEC under Information required to be stated as at the most recent cover of Form 6-K on or about 14 September 2011. practicable date, is stated as at 5 September 2011 unless 4 Telecom Annual Report 2011 INTRODUCTION OUR COMPANY PERFORMANCE GOVERNANCE DISCLOSURES Chairman’s report Wayne Boyd, Chairman Your company has taken massive strides in FY11, building on the strategies already in place, making the management decisions necessary to reduce operational costs and ensure continued competitiveness and preparing for a new telecommunications landscape shaped overwhelmingly by ultra-fast broadband. In all of these areas, we have had a successful 12 months. We firmly believe that the deal we reached with the I have been proud to chair Telecom at a time when the Government is in the best interests of you, our shareholders, as Company did so much to support the people of Canterbury well as the industry and New Zealand as a whole. and the West Coast during great tragedy and disruption. Indeed, we have been rigorous in applying this same filter – In Christchurch and Canterbury, our focus is now on helping shareholder interest – to all of our involvement, discussions and locals get back to business and playing our role as a major proposals with respect to the UFB scheme from its inception. employer and contributor to the local economy. In town and country Telecom is a key player in New Zealand’s The pace of work in FY11 barely let up. We stayed focused on telecommunications revolution. Chorus is already working with our mission to be number one in broadband, mobile and ICT, Vodafone to rollout improved broadband infrastructure maintained our compliance with our operational separation in support of the Government’s Rural Broadband Initiative. Undertakings and made a massive effort to bring our UFB and At the board table, we farewelled Sachio Semmoto last Rural Broadband Initiative proposals to fruition. November and thank him for the special insights and A significant reduction in operating costs in FY11 showed that perspectives he brought to the board’s work at a period Paul Reynolds and his management team kept a tight rein on of cascading change for our Company and industry. all types of spending across the Company. Spending has been Longstanding director Rod McGeoch stepped down from reprioritised, subjected to rigorous evaluation and reduced the board in September last year. Rod first joined the board wherever possible. in April 2001, when the New Zealand telecommunications Keeping our spending under control is a key part of staying landscape was vastly different. The board thanks Rod for the competitive in the New Zealand market, in which consumers important part he’s played in helping to navigate Telecom have greater choice of networks, products and services than into the new era. ever before. I am looking forward to our Annual Meeting on 26 October, Following the peak of spending for infrastructure and regulation which by any measure promises to be an historic day for in prior years for investment programmes and management our Company. action the level of capital expenditure also reduced significantly A fourth quarter dividend of 7.5 cents per share and a special in FY11, although it’s clear that Telecom’s investment continues dividend of 2 cents per share has been declared for the fourth to underpin much of the telecommunications industry in quarter of FY11 and will be fully imputed. New Zealand. Thank you for your support of Telecom. Chorus’ selection in May as the Government’s preferred participant in 24 out of 33 UFB regions was a signal moment in the history of Telecom. Wayne Boyd Chairman investor.telecom.co.nz 5 CEO’s report Paul Reynolds, Chief Executive Officer It was another momentous year for Telecom and for the New Zealand market: a year of achievement, preparation for an exciting future, and a year in which the very best qualities of Telecom’s people came to the fore. Indeed, preparing for a telecommunications landscape Simplification of products and processes has been another dominated by ultra-fast broadband, and getting Telecom in operational focus for Telecom in FY11. As part of a major the best possible competitive shape, has been the key theme restructuring, we established a centralised product in Telecom’s progress in FY11. management division with a brief to simplify and reduce There is no question that competition in the New Zealand our range of products in consumer and business markets. and Australian markets intensified significantly in FY11 and Leadership in mobile, ICT and broadband remains the key customers again benefited from lower prices and better- market focus. performing products. The number of connections on our XT mobile network is now Against that backdrop, it is pleasing to note that Telecom well past the one million mark. We are seeing a significant significantly sharpened its competitiveness and improved growth in high-ARPU smartphone users, as they take advantage customer satisfaction in retail, wholesale and enterprise of the performance capabilities of Telecom’s mobile network. markets. Our relentless focus on `customers at our heart’ The pending closure of our legacy CDMA mobile network will is paying off. help to underpin XT’s momentum.