Telecom rollercoaster share ride continues

By NZPA

Tuesday 12th November 2002

Telecom's rollercoaster share ride continued today after the company delivered a first quarter profit at the bottom end of its own earnings guidance.

The telco, New Zealand's largest listed company, recorded a net profit of $146 million for the three months to September 30, down 3.3 percent on the same period a year earlier.

That was at the lower end of the $145 million-$150 million estimate released by the company last week and about 15 percent below earlier market expectations of $170 million.

Telecom shares shed 11 cents, or 2.2 percent, to $4.70 in immediate response to the result, but went the other way during the afternoon session to a high of $4.91. They closed up 7 cents at $4.88, compared with $5.22 before last week's profit warning.

"I think the market at the moment is very nervous and jittery," Telecom chief executive Theresa Gattung said.

"The Dow (Jones Industrial Index) was off 2 percent overnight. I think (the Telecom fall) was related to that more than anything else."

Ms Gattung defended the firm's decision to warn analysts last week that the quarterly profit wouldn't live up to expectations.

"We believed that we had to tell the market because the numbers were drifting too far from where the result was to be.

"In saying that and nothing else, we created a period of uncertainty, which is not desirable, but we felt that our disclosure obligations meant that... we needed to say something."

Highlights of today's result included moves to improve the company's cashflows through debt repayment. Group cashflow rose by nearly 85 percent to $458 million during the period.

Total debt as at September 30 was $5.41 billion, compared with $5.88 billion a year earlier, and Telecom said it was targeting ratios that will see it reduce debt by about $1 billion this year.

"We've got tight operating discipline, we've got our capital investment focused on returns -- generating significant free cash flow and in turn enabling repayment of debt," Ms Gattung said.

The company expects to reduce its forecast capital expenditure in the year to June to $730 million from $780 million.

Analysts said today's result, in particular the strong cashflow and debt repayment strategy, showed that Telecom was fundamentally a good company.

"I think the structural and thematic story is still there... but it is more of a medium-term story than just a short-term story," Salomon Smith Barney senior analyst Craig Robins said.

The downside to today's result was a reduction in revenue. The company clocked up total group revenues of $1.3 billion during the period, down 7.1 percent on the previous year -- due largely to a $68 million revenue drop across the Tasman.

Telecom's Australian operations -- seen as the Achilles heel of the group -- recorded nil earnings during the period, compared with a $12 million loss a year earlier.

Telecom said it had lost about 30,000 more customers in Australia than expected during a restructuring to focus on higher value customers, but was expecting to bounce back in the second half.

"We're not actually uncomfortable with our flat revenue performance in the underlying business given the changes this area has gone through in the last six months," Ms Gattung said.

"We think the reorganisation of (Australian subsidiary) AAPT... has bedded down well and we expect the benefit of this to be evident in second half."

Telecom will pay an interim dividend of 5 cents per share, unchanged on last year.

The company said today it has topped the 200,000 customer mark in its co-division multiple access (CDMA) mobile business since balance date -- suggesting that moves to cash in on new technology are paying off.

"What we are starting to see in our business is that we are getting traction in terms of revenue growth on wireless," Ms Gattung said.

"That's what's driving the CDMA revenues."

CDMA customers now make up about 16 percent of Telecom's mobile business, with average revenue per post paid unit of $95 a quarter, compared with $73.80 for traditional mobile customers.

Telecom's New Zealand wireline business, which makes up the bulk of the company's profits, recorded earnings of $318 million during the quarter, up 4.3 percent on the same period a year ago. Revenues declined 2.7 percent, however.

Ms Gattung declined to give any further details about Telecom's full-year expectations today.

"It isn't our policy to give specific forecasts of business performance for future periods.

"If in any period the range of analysts' estimates for the full year or the quarter differ materially from what we believe to be the most likely outcome, we will tell the market," she said.

Telecom said last week it was confident of meeting market forecasts of $676 million to $760 million.

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