Aggressive Pricing Sees Telecom NZ Deliver Strong Mobile Subscriber Growth with Margins Suffering

Telecom New Zealand released its first-half fiscal 2014 result which came in slightly below our expectations. Although the result was slightly weaker than expected, Telecom New Zealand guided for underlying earnings before interest, tax, depreciation and amortisation, or EBITDA, in fiscal 2014 of NZD 925 to NZD 945 million, excluding AAPT. On a like-for-like basis, we were forecasting fiscal 2014 underlying EBITDA of NZD 944 million (our actual EBITDA estimate was NZD 1,014 million including AAPT). Earnings guidance implies improved performance in the second half with management citing upside from cost control and strong subscriber growth. However, we remain cautious on the near-term outlook given margin pressures; Telecom New Zealand's market share focused strategy is driving lower average revenue per user, or ARPU, in mobile and broadband. We have lowered our fiscal 2014 EBITDA forecast to NZD 928 million on a like-for-like basis, in line with guidance.