Telecom's Theresa Gattung

By Jenny Ruth

Wednesday 6th August 2003

Telecom reported a $709 million net profit for the year ended June 30, at the top end of analysts� expectations. While that was a turnaround from last year�s $188 million loss, the previous year�s result included an $850 million write-down of Telecom�s investment in Australia-based AAPT. Excluding one-off items, this year�s result was up 5.4% on the previous year.

Telecom chief executive Theresa Gattung: The result was towards the top end of expectations. We�re quietly very pleased with this result. I think it shows we�ve got momentum � we�ve been very open about the areas where we�ve still got challenges.

SC: You�re emphasising growth. Given that the economy�s expected to slow, where will that growth come from?
TG: Net immigration is probably more important to us than GDP. As long as the population continues to grow, there are going to be more people who want phones � you only have to look at the growth of residential lines. (The number of residential lines grew 2.2% to 1.42 million in the latest year).

We�re assuming that although it�s going to slow down, it�s not going to tank.

In other areas of the business, such as in IT and T, not long ago people said revenues would have to shrink. Advanced Solutions� revenue is growing 100%. This is only tens of millions of dollars, not hundreds of millions, but from the seeds grow the trees. There�s strong growth in non-voice.

You wouldn�t want to get overly excited about it, but the profile has shifted from decline to modest positive growth. We�re not talking huge growth rates, but it makes quite a difference to our bottom line.

SC: In Australia, you�re talking about renewed marketing efforts to consumers. What consumers are you going after and what competitive advantage does AAPT have to offer?
TG: Our focus is on people who we can make money on, people who are attracted to the irreverent brand, those with a profile of making lots of national and international calls. Our competitive advantage is that we don�t have to defend a huge customer base. We only have to go after the customers we want. That means we can make offers such as our line rental saver program where we�re saying, if you bring us your call business, we will rebate in full or in part your line rental.

SC: AAPT is now cash flow positive, how long will it take to make a bottom line contribution?
TG: It�s actually been cash flow positive for five quarters now, $100 million a year and our margins were 15% in the fourth quarter. We�ve never given a time-table. It can be a bit of a mistake to think about the business as entirely separate. In the business market it�s no accident that a lot of the customers we have in Australia are trans-Tasman customers. We understood that New Zealand wasn�t going to remain a market bound by the shores of these islands. We�re quite happy with the traction we�ve made in Australian and we�re now focused on growing customer numbers.

SC: Most analysts think you should have written down AAPT�s value even more than you did. Why do you think they�re wrong?
TG: There are a range of views. I don�t think that�s unanimous. CS First Boston has just come out with a report that concurs with our perspective. We do a review every quarter. Certainly there are some factors going in our favour � our weighted average cost of capital has come down, interest rates have come down. We�re satisfied we�re carrying it at fair value.

We�ve just given details of our TDMA (the mobile analogue 025 network) write-down (Telecom estimates a $70 million to $90 million impairment to the TDMA network as a result of customers migrating to the digital CDMA 027 network). We�re very conscious of our obligations in this area and we�re supported by our auditors in the view that there�s no impairment (to AAPT).v SC: Do you agree that Vodaphone still has the upper hand in the New Zealand mobile market?
TG: We were losing subscribers last year. (Telecom�s cellular connections fell 4.4% to 1.25 million over the year.) We�ve had an issue that the handsets weren�t as sexy as Vodaphone�s. (As far as Telecom�s efforts to reverse the position,) none of this happens overnight. We�ve improved the underlying quality of that customer base. This is a growing market and we�re not getting our share of this market.

SC: You�re currently offering a $10 monthly cap on texting. What�s the average spend on texting?
TG: (The answer to this question was supplied in writing after the interview.) Among our 027 customers, 63% of customers are texters and on average they spend $8 per month on text messages. But among those who text, 20% send more than two text messages a day and so will be saving money with the $10 cap. Among texters, there are some extremely heavy texters, sending as many as 3000 text messages a month -- so they will save a lot of money.

SC: Do you think Vodaphone�s offer to match whatever amounts of money its subscribers chose to pay on prepaid mobiles is a response to Telecom�s offer?
TG: Yes. That offer is open for 10 days. It looks to me like they�re buying time to think about what they�re really going to do. I think texting has moved beyond teenagers � I text nearly every day � but we don�t have many teenaged customers compared to Vodaphone. This (the $10 cap) is a very clever tactical offer. It gets to Vodaphone�s market. But so many of our customers don�t even realise we can do it. It�s definitely put the profile right out there.

SC: While your mobile expenses fell nearly 3% for the year, they were up nearly 5% in the fourth quarter. Is this a sign of what we can expect going forward?
TG: Yes. We�ve been quite clear with the market that we want to fight harder in that space. Part of that (increased costs) will be because we don�t capitalise handset subsidies. We take the cost before we get the revenue so there�s going to be pressure on the bottom line. We don�t want our market share to deteriorate further.

SC: If there was one ghastly part of your results it was the international area, wasn�t it? (Telecom claims 2 �% of the international call market and its operating profit from this area fell from $99 million in the previous year to $45 million in the year ended June 30.) Should Telecom be in this business?
TG: This was a very tough period � prior to this the results have been the star � and we don�t really expect it to get any easier in the next 12 months. It�s down as a result of international bilateral negotiations (with other carriers) and the appreciation of the New Zealand dollar. There�s pressure on margins in this area. Clearly, it�s still a very profitable bottom-line business. We have to be in this business to a certain extent to support our New Zealand customers anyway (as well as calls by New Zealanders or calls to New Zealanders, a lot of this business also involves transit calls to and from other countries.) It makes money, so why wouldn�t you do it?

SC: You want to increase broadband customers. Does this mean prices in this area will come down.
TG: Yes. We�ll shortly be launching lower priced and different priced configurations � it�s not just about price, it�s about ease of use and set up.

SC: That mean margins will inevitable erode as they did when you extended the cellular market?
TG: Not necessarily. It depends on what scale we can get. At some point, depending on what you believe customers will pay for, (such as tie-ups with Sky TV programming,) you have the ability to generate new revenue streams that we don�t necessarily see today. We do back ourselves to change the business model over time. Texting came out of nowhere. Nobody said texting was going to be the killer application. Broadband capability is going to be fundamental.

SC: In a world of CEO positions predominately filled by males, how did you make it to the top? And how have you maintained respect from your male peers? Do your middle management and staff treat you differently depending on whether they are male or female? If so, what is that difference?
TG: It�s interesting the perennial interest in this matter. I think the attributes you need to have are the same for both men and women: dedication, hard work, lots of guts. I think it was a little harder getting to be CEO as a woman � obviously, I�ve chosen not to have kids, so I�ve avoided one of those factors. I�m not treated with any less respect or taken any less seriously because I�m female. You could say, she�s an extrovert person, how much difference does that make? There are a few more women breaking through these days.

Business is a tough game. I�ve come to the view that being a CEO is inherently an unbalanced act. I suspect that few women think that�s a smart thing to do with their lives.

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