Telecom 'fast, fair and fearless' restructure will have 'material' impact

Friday 22nd February 2013

Telecom Corp's annual earnings face a material impact from a major overhaul of the business to become a data-driven and mobile-focused telecommunications operator, stripping out more costs and getting away from its old structure.

Chief executive Simon Moutter told an analysts' briefing that Telecom's structure is still based on its vertically integrated history as both network owner and retailer, before the split that saw network company Chorus established as a standalone entity.

Telecom now needs a rapid change to get the company on track towards sustainable profitability, Moutter says. That could have a material impact on the company's earnings, with another update promised at an investor day in May.

"We must have a competitive cost base to succeed in today's fast-changing marketplace," Moutter said. "We are talking about the potential for one-off restructuring costs and portfolio formation that can crystallise one-off costs in the period."

The phone company has focused on stripping out costs for several years as customers' expectations for cheaper services coincided with heavier regulation of monopoly elements of the network that Telecom now no longer owns. Since shedding the Chorus network unit at the end of 2011 and the relevant regulatory regime, the company is now looking at how to position itself in the new marketplace.

"We're shifting from a company focused on building things to a company focused on its products and services," Moutter said.

Telecom firmed up its annual earnings guidance, saying adjusted ebitda will probably be between $1.04 billion and $1.06 billion, before any one-off charges from the restructuring. That's down from $1.09 billion a year earlier, and is at the lower of the previous guidance of flat to single digit decline in annual adjusted ebitda.

Moutter said Telecom is giving up margin at the expense of maintaining its market share amid intense price competition for broadband customers, something it can't afford to keep doing.

"We're not going to downplay the change, nor sugar-coat the impact on a number of our people," he said. "We will do things fast, fairly, and fearlessly."

Moutter said there is potential for write-downs if Telecom exits any of its businesses and won't simply be focused on labour costs, although hundreds of jobs could be at risk.

"We want to optimise the business around areas of highest value to the customer," he said.

Telecom today eked out a 3.7 percent increase in adjusted earnings before interest, tax, depreciation and amortisation, which rose to $506 million in in the six months ended Dec. 31. The company's sales fell 8.5 percent to $2.14 billion, with mobile the only unit to report a gain, rising 2.2 percent to $455 million, making it the biggest earner for the company.

Statutory net profit plunged 84 percent to $162 million, or 9 cents per share, from a period when shareholders reaped $877 million from the distribution of Chorus shares. Stripping out the Chorus effect, profit rose 26 percent.

The shares rose 1.1 percent to $2.23 today. The stock is rated an average 'hold' based on 10 analyst recommendations compiled by Reuters, with a median target price $2.30.

BusinessDesk.co.nz

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