Telecom shares slide as profit disappoints

By NZPA

Tuesday 12th November 2002

Shares in Telecom Corp took another beating this morning after the stock delivered a first quarter profit at the bottom end of its own earnings guidance.

The telecommunications company, 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 in an unusual move 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. They were trading at $5.22 before last week's profit warning.

Analysts said the stock was still suffering from negative sentiment following the downgrade and moves to tighten regulation of the sector announced last week.

"It's more of a sentiment thing really," Salomon Smith Barney senior analyst Craig Robins said.

"The bottom line is the stock is going to do some work around these levels."

Mr Robins said his company had downgraded its forecasts for Telecom last week and he expected other firms to follow suit.

"Most other analysts will be downgrading their numbers and the tone may be a little softer over coming days and weeks.

"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," he said.

Last year's first quarter result was buoyed by one-off gains on cross-border leases and the sale of international capacity, Telecom said.

After adjusting for those gains, today's net profit was up 8.1 percent on the year ago quarter.

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.

"The revenues in Australia are down but I think the market will take a little bit of comfort from the fact that it is not necessarily the revenues in New Zealand," Mr Robins said.

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

Chief executive Theresa Gattung said the company was maintaining a good operating performance in the current demanding environment.

"In New Zealand, we continue to generate strong operating cash flows and reap the benefits of an ongoing focus on cost reduction," she said.

Net earnings for the New Zealand division were up 3.2 percent on the year ago quarter to $390 million.

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 owns Australia's No 3 carrier AAPT.

"Across the Tasman, our positive cash flow position (earnings before interest, tax, depreciation and amortisation less capital expenditure) has been reinforced, during a period of structural change," Ms Gattung said.

Telecom said group cashflow rose by nearly 85 percent to $458 million during the period, allowing the company to pare back its net debt by $116 million.

Total debt as at September 30 was $5.41 billion, compared with $5.88 billion a year earlier.

Total capital expenditure for the quarter was $76 million, down 45.7 percent the year ago quarter.

Telecom's New Zealand mobile business recorded a 4.1 percent revenue increase during the first quarter compared with September 2001, although total connections fell by 4.7 percent due to a shift in focus from connection growth to targeting higher value customers.

As at September 30, 2002, Telecom had 1.25 million mobile customers compared with 1.3 million a year earlier.

Of those customers, about 194,000, or 15.5 percent, were connected to the co-division multiple access (CDMA) network. Since balance date CDMA customers had topped the 200,000 mark, Telecom said.

Total operating revenue at Telecom's New Zealand international division decreased 30.9 percent as a result of lower calling rates and a strengthening of the New Zealand dollar.

Data revenue fell by 25 percent as a result of lower pricing for data services and the expiry of a leased circuit contract.

No further details were given in today's result about Telecom's full-year expectations.

Telecom said last week it was confident of meeting market forecasts of $676 million-$760 million, adding that the seasonal factors that affected today's result would be ironed out by the end of the year.

The company has had a rocky ride in the past week as investors were spooked by both the profit warning and regulatory rulings on interconnection and telecommunications service obligations (TSO).

Competition watchdog the Commerce Commission last week set a price of 1.13 cents a minute on the rate Telecom and TelstraClear can charge for carrying each others' toll calls on their networks, less than half what Telecom had previously charged.

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