Telecom first-quarter results mixed as regulation, broadband bog down managers

Friday 6th November 2009

Telecom Corp.’s first-quarter results highlight a company distracted by the demands of regulatory change and efforts to re-engage with the government’s plans for national broadband services, investors say.

The company, which boosted its net profit 9.4% to $163 million in the three months ended Sept. 30 on a one-off tax credit, is stretched very thinly across several fronts as policy-makers look to roll-out a nationwide fibre network to enable ultra-fast broadband and regulators continue to breathe down Telecom’s neck over its operational separation undertakings and charges on mobile phone calls to rival networks.

“Telecom’s got too many balls that they’re trying to keep up in the air,” said Alan Moore, who helps manage the equivalent of $350 million worth of assets for Milford Asset Management. “There’s a lot of regulation that’s driving the main focus away from why the company exists.”

Chief executive Paul Reynolds said Telecom was in discussions with the government over the $1.5 billion nationwide roll-out of a fibre network to improve New Zealand’s internet capability.

Reynolds met with Communications Minister Steven Joyce last month amid rising speculation the phone company was at loggerheads with the government over the broadband initiative, culminating in the resignation of the Telecom’s government relations head Dean Schmidt.

“The current structure makes it difficult for Telecom to participate effectively while balancing shareholders’ interests,” Reynolds said in a statement. “Discussions have emphasised our support for the government’s vision and our belief that given the right structure we can partner with government to deliver ultra-fast broadband faster and more cost effectively, to more New Zealanders, than anyone else,” he said.

The shares climbed 2.5% to $2.52 in trading today and have gained about 11% this year.

The company boosted its full-year profit forecast to between $400 million and $440 million, from its previous $370 million to $410 million range, though Moore said Telecom seems overly-reliant on its new XT network to boost performance, and the short-term uptake casts doubts on that strategy.

“You can be sure their competitors aren’t going to be sitting back and letting them go ahead with their plans,” Moore said.

Reynolds said the company’s XT mobile network had a “strong start” and helped underpin the result.

“Telecom saw a net increase of 64,000 mobile customers during Q1, with 242,000 customers on XT at the end of its first full quarter of operation,” he said. “We are delighted that the great customer experience offered by XT encourage customers to use their mobile services more, with an increase of 16% in average revenue per user on like for like customers.”

Telecom increased its customer numbers on the new network by 149,000 to 242,000 in the first quarter. Still, it only raised its overall mobile customer numbers by 64,000 to 2.25 million.

Underlying earnings from the company’s Chorus division rose 1.1% to $188 million as it shed $1 million from its labour costs as it cut back the number of contractors. The unit faced industrial action earlier this year after it contracted out its northern region lines work to Leighton Holdings’ Visionstream.

The phone company received a $35 million dividend from its 50% share in the Southern Cross cable, down from $39 million last year, and it expects full-year dividends of between $50 million and $80 million. It spent $33 million on maintaining the cable in the first quarter to improve its capacity to support additional demand from retail customers.

Telecom’s wholesale and international revenue increased 3.4% to $61 million amid lower fees from rival companies as mobile termination rates declined.

The retail business’ earnings slumped 15% to $91 million, primarily due to the cost of the XT launch, though this was compounded by the ongoing decline in the company’s fixed-line customer base.

Gen-I’s EBITDA tumbled 30% to $40 million as customers reduced the number of lines they use through new technology, eroding the profitability of traditional voice revenues.

Telecom’s Australian unit, AAPT, which has traditionally been an area of weakness for the business, boosted its underlying earnings 61% to A$29 million after it received “favourable pricing from third party carriers” and slashed its intercarrier costs by A$34 million.

The company’s Technology and Shared Services unit, which has now been allocated revenue from the Telecommunications Service Obligation, had an EBITDA of $1 million, while the corporate division saw its earnings shrink 18% to $28 million.

Businesswire.co.nz

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