Telecom's abnormal items give abnormally low profit

Friday 17th August 2001

TOUGH TIMES: Theresa Gattung believes the tech-wreck jitteriness is coming to a close but Telecom's bottom line may bump along for some time

By Rob Hosking

Telecom's top brass this week admitted the future revenue prospects are a little less rosy than expected as the company drew a line under several large outlays.

The result was notable for several large "abnormal items" which saw the annual result a long way down from the company's mid-1990s heyday.

Earnings were down nearly 18% on last year, and the net profit was $643 million, down from $783 million last year.

The company also admitted that income from its Southern Cross Cable investment - which returned $221 million over the past financial year - will not only be more "lumpy" than expected but also take a little longer to reach the revenue goals the company set itself.

But the company is also writing off several large one-offs and - at least in part - this is part of what chairman Roderick Deane called the move to 100% ownership of AAPT and the tough decisions taken in positioning Telecom for the future on both sides of the Tasman.

Until last year Telecom had benefited, in part, from the worldwide popularity of telecommunications stocks, chief executive Theresa Gattung said.

"There was an element of 'rising tide lifting all boats' to that," she said. However, she believed the period of reaction to the boom, following the "tech-wreck" of April-May last year and the investor jitteriness about the amount of debt telecommunications carriers were taking on to pay for next generation mobile networks, was now coming to a close.

Investors were now assessing telecommunications firms on a more case-by-case basis, although there were signs they are still struggling with what criteria to judge telecommunications firms by, she said.

Telecom's "clear the decks" approach in this latest annual result appears to be, at least in part, a response to that.

Heading the list of "abnormal" is the cancellation of the CDMA mobile network in Australia. This involved a writeoff of $170 million, plus a $59 million provision for future commitments. These were offset by $214 million in assets recovered, and a $58 million tax benefit, both from the CDMA outlay.

Telecom no longer needs to build this network as it has linked up with Hutchison in the Australian market to build a separate third-generation network using the same technology.

The company has also finally written off its First Media assets, built in the mid-1990s when the company began its own cable television network. The network - essentially a defensive move against Saturn - was canned when the advent of the ADSL technology made it feasible for Telecom to use its existing copper network for such services as its high- speed internet connection Jetstream.

"The cable assets were retained for the provision of future services; however, the usage of these assets has subsequently fallen to minimal levels and the decision has been taken to decommission the network," according to Telecom's management commentary, released with the annual result this week.

The $22 million figure for this includes the cost of writing off those fibre cables and network equipment, plus the costs of decommissioning the network.

The rest of the abnormal items is mostly the cost of writing off other network equipment the company no longer needs.

Other factors in the latest result will raise some eyebrows. The need to contain costs was emphasised, as it so often is at Telecom briefings, and this is only in part because the company is aware investors are looking warily at the amount of debt the company is now carrying.

The company was still in the market for partners across the Tasman, Ms Gattung confirmed yesterday, but it was not actively pursuing them.

"Our focus is not in that area. We can't rule it out but it is not a major issue." There had been "a number of approaches" from Asian carriers, she said, but would not name names.

A feature of the past year has been a rise in cost of sales for Telecom - up $40 million, or 7%.

Mobile cost of sales declined 5.3% but interconnect costs in New Zealand nearly doubled to $44 million. This was largely due to Vodafone's success in the mobile market and the resulting growth in national and incoming international calls to that company's network.

There has also been an increase in calls to other landline carriers such as Clear Communications and Telstra Saturn.

To some extent this is offset by Telecom's growth in overall fixed line to cellular revenue of 9.4%, $26 million. The margin for fixed line to cellular calls also grew, by 7.3%.

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