Telecom strikes the right note in annual report

Friday 21st September 2001

For such a large and diverse company, Telecom Corporation has relatively little to say for itself in its latest annual report.

Chairman Roderick Deane's comments fill a mere page and a half while chief executive Theresa Gattung takes just one page more.

Even the usual self-congratulatory review of its services, happy customers and community spirit is contained relative to previous reports.

However, what the report lacks in quantity is more than made up in quality. Both Dr Deane and Ms Gattung present lucid and informative reviews of their business without the usual fluff found at the front of many reports.

Dr Deane attributes the company's latest decline in net profit to costs, including writeoffs on a scrapped wireless network, associated with its investment in Australian subsidiary AAPT, without resorting to the usual spin of "restructuring for growth."

Ms Gattung explains the company's strategy in one sentence: "In 2001-02 and beyond, Telecom will focus on revenue growth, cost containment and earnings improvement in New Zealand and Australia."

That sounds simple enough and something every good business aims to achieve. Telecom will need to do this and more if it is to recover lost ground.

Its five-year review, commendably positioned at the front of the report, despite the latest poor result shows gross return on assets has declined to 20% in the year to June 30 from a little under 30% in 1998 and 1999 (years to March 31).

At the same time, its revenues have risen 65% to $5.6 billion in the past three-and-a-bit years while gross profit has risen a mere 6% to $2.1 billion. That smacks of a "growth at any cost" philosophy although, as Dr Deane puts it. "The past year has been one of fundamental change for Telecom and indeed for telcos around the world."

This change has translated into plummeting share prices for telecommunications shares everywhere and Telecom, no doubt sensitive to investor concerns, devotes a page in the report to its price performance over the past two years. A table shows an investment in Telecom would have produced a negative return of 19% in the past year and 19.1% over two. However, it points out this is a considerably better performance than major telcos in the US and Europe.

For those who want more detail about the business beyond the brief chairman and CEO statements, there is an excellent 10-page management commentary which discusses the performance of the company and each of its divisions. Where telephone calls are concerned, an average price per minute is shown.

This highlights one of the challenges facing telcos - declining prices in response to new technology and competition. While in most cases call volumes are modestly higher, charges have fallen steeply. This explains why the company is so focused on cost reduction.

One of the most illuminating pages in the report is labeled "overview of results." This breaks down the company's performance by revenue stream and compares it with the previous year. This will be more useful in a couple of years when consecutive returns from the Australian assets are brought to book. It does show that in the past year the company earned 51.3% in income from last-century voice-down-wire services while 30.6% came from mobile, internet and data services. In 2000, the figures were 58.8% and 31%. The biggest growth has come from something described only as "miscellaneous other." Investors can only hope this represents profitable activity as it now makes up 9.4% of the company.

In keeping with the difficult conditions in the telecommunications sector globally, Telecom has foregone the gloss and glamour of previous reports.

This strikes absolutely the right tone, as do the forthright descriptions of the challenges facing the company and how management intends dealing with them.

The one thing missing is a sense, despite promises of a vigorous pursuit of profit, that the company is confident of delivering a marked improvement for shareholders in the year to come. At least that beats making promises that can't be kept.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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