Telecom opts for slowburner growth plan - CEO

By NZPA

Tuesday 13th August 2002

Telecom chief executive Theresa Gattung carefully corrects suggestions that the company is being cautious about its outlook on revenue growth.

"It's a moderate approach rather than a cautious approach," she maintains.

"I'd say it's a moderated, gated approach, to make decisions, review them, be prepared to chop and change if they don't quite fit."

Such a decision was Telecom's purchase of Australia's third biggest telco, AAPT. Telecom announced at its annual results last week that it was writing down AAPT's value by $850 million, a long anticipated move which came in below the $1 billion some analysts forecast.

Nevertheless, said Telecom chairman Roderick Deane, the purchase was the right one, made when the telco sector globally was a lot more bullish.

Today, that sentiment has soured and Telecom battles like the rest of the industry to prove its value to shareholders. Last week's result -- a $188 million loss thanks to the writedown -- focussed heavily on generating cashflow at the expense of revenue growth.

Further, Ms Gattung told shareholders not to expect revenue growth in Australia in the coming year. But she stresses that doesn't mean revenue growth is forgotten.

"We do expect to return to modest revenue growth in the New Zealand business. The first factor that hinges on is the economy. Some parts of our business are very linked in to the economy."

Despite the loss, Telecom's result was viewed as a fair, if not spectacular outcome by both the market and analysts. The company's share price rallied 11c as investors were buoyed by a 9 percent increase in net earnings, excluding abnormals and last year's Southern Cross Cable dividend.

And if they weren't getting an increase in dividends, they were at least not losing any money -- Telecom will pay a total yearly dividend of 20c per share, the same as last year.

However, that's hardly the sort of thing that sets markets alight compared with the hope of three years ago, a fact Ms Gattung accepts.

"I don't think the market has got the potential of this industry wrong in terms of magnitude, it's just got it wrong in terms of timing, so we're all paying the price for that."

Having shored up its finances to please shareholders and credit rating agencies, Telecom is placing its hopes for revenue growth on new technology.

The company has a capital expenditure budget of $780 million in the coming year, about the same level as last year when the capex budget was halved.

With it, the company hopes to complete the rollout of broadband in New Zealand, and shift to an all-IP network on both sides of the Tasman.

An upgrade to IP -- internet protocol -- standards, and the resulting speed and reliability is what Telecom hopes will give it the edge in the stiffly competitive Australian market.

At this stage the Australian strategy is still unproven. Analysts registered some disappointment over the revenues from the business side of Telecom's Australian arm, which lost $94 million when capex was stripped out of its ebitda (earnings before tax, interest, depreciation and amortisation).

Ms Gattung points to the turnaround in its Australian consumer business, which saw ebitda less capex rise by 152 percent.

"One of the ways we've turned the business into generating cash in the consumer market in the last six months is simply not offering services to customers who we can't make money out of.

"Unlike in New Zealand, there's no expectation in Australia that we would be all things to all people. We don't have to supply services out in the outer boondocks, so we choose not to."

In New Zealand, mobile and data were sore spots for analysts, with mobile ebitda dropping 0.4 percent.

Both are areas Ms Gattung expects improvements in, although she says timing and good old human adaptability are big factors.

She says part of the difficulty with the mobile business is that the CDMA technology that can carry data services didn't exist. Now it does, high value CDMA customers are growing fast, although other areas, such as its Xtra Internet business, are moving faster.

"Some of these services are going to take off first and may remain for a while only in the business market," she says, referring to July's launch of the mobile Jetstream service and even the introduction of cellphones.

"Do you remember when cellphones were bricks and people had a briefcase to carry them around...It took a few years but they eventually became mass market and now do you know a teenager who would give up their cellphone?"

Ms Gattung acknowledges two major events looming on the horizon. The first is a decision by the Telecommunications Commissioner on Telecom's lucrative interconnection fees to other telcos, particularly TelstraClear.

The second is a possible sell-off of the Australian government's remaining 50 percent stake in No 1 telco Telstra. Long-term, this would be good for Telecom "as the Australian government will no longer be owning Telstra and setting the policy and regulatory framework".

"Some things are outside our control... The commissioner will decide what he decides. The process the Commerce Commission goes through is pretty rigorous. I think they're mindful of the need that they are balancing off short-term and long-term and the need to get good outcomes for the country in terms of encouraging people to invest.

"We not unhappy with the process to date. But that's a risk factor in our business we have to actively manage."

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