AAPT, TEL’s Australian Operations�� Competitive...

AAPT, TEL’s Australian Operations

�� Competitive conditions impacting on Telecom’s Australian operations continue to be highly challenging. Retail prices continue to decline across all products, while wholesale prices have risen sharply following revisions to key supplier arrangements. This has resulted in a substantial decline in margins. These negative trends have been exacerbated by a deferral of project spend
by Telecom’s enterprise customers. As a result of the revisions to key supplier arrangements, AAPT is currently managing a number of disputes with suppliers. Financial results reflect management’s best estimate of expected outcomes, however final resolution of the disputes could have a further adverse impact on ongoing earnings.

�� Australian mobile revenue has continued to decline following the strategic decision in 2004 to cease selling mobile as a stand-alone product and instead focus on selling customers bundles of multiple products. The sale of AAPT’s prepaid mobile base in Q2 2005-06 further reduced the number of stand-alone mobile customers. AAPT has, however, grown the percentage of its
consumer customer base that are bundled customers to 51.0% at 30 June 2006, an increase of 75.7% from the prior comparable period.

�� To respond to the challenges that the Australian operations are facing, further significant investment has been made in sales, customer service and IT capabilities in AAPT in order to support improved customer acquisition and retention. This investment has had a negative impact on costs and free cash flow in the short-term. This investment continues in 2006-07, and is part of a comprehensive strategic programme designed to fundamentally reposition AAPT services in the mass market.

�� The continuation of the negative factors impacting on Australian Operations has resulted in a further write-down in the carrying value of Telecom’s Australian Operations of $404 million (pretax) in Q4 2005-06, following a write-down in Q2 2005-06 of $897 million.