Telecom results signal high hurdles ahead

Telecom shareholders recoiled at the company's full-year results yesterday, slicing 8.42 per cent off the share price before chief executive Paul Reynolds had even finished reporting the results.

Oblivious to the market's reaction, Mr Reynolds said: "It's been an enormous year for Telecom and we're really pleased to have come in in-line with full guidance."

While Telecom's results were within previous company guidance, news on imputation credits for dividends for the 2009 financial year was not.

At Telecom's third-quarter results, the company advised there would be nil imputation credits for the first two quarters of the 2009 financial year.

Yesterday, chief financial officer Russ Houlden said all dividend payouts would probably have nil imputations in the current year.

This was partly because of foreign exchange movements affecting returns on foreign investments, lower-than-average tax payments for the past two years and higher tax depreciation.

Telecom's shares closed 28 cents down yesterday at $3.40.

Mr Houlden said a return to full imputation of dividends was tentatively expected for the 2010 financial year.

Dividends for the first three quarters were expected to be 6 cents per share, in line with the predicted decline in net earnings. Ebitda for 2009 was expected to fall 4 per cent to 6 per cent in the 2009 year and npat to be in the $500 million to $540 million range.

BBY telecommunications analyst Mark McDonnell said the share price fall was the natural response to Telecom's dividend update.

"Clearly what happens with a stock like this is when future dividends are seen as more likely to be lower than higher, the share price will adjust down and that's what's happening," he said.

NZ First Capital analyst Greg Mayne said the change in Telecom's dividend policy, along with a slightly weaker than expected operating performance, and higher depreciation and amortisation alarmed a market already sensitive to bad news.

Telecom will pay 8 cents a share fully imputed dividend for the fourth quarter, compared to 14.5 cents for the fourth quarter last year. Total dividends for 2008 were 29 cents.

Mr McDonnell said yesterday's announcement left him both underwhelmed and concerned for shareholders.

A key worry was that Telecom put capital expenditure for the 2009 year at the top end of the company's guidance at $1.1 billion, compared to $987 million in 2008, while ebitda was expected to decline.

"In an ideal world, when companies are reinvesting significant sums, they are growing their earnings to at least maintain their return on capital, but what we're seeing with Telecom is earnings decreasing and capex increasing, which is about the worst combination," Mr McDonnell said.

While Telecom has indicated it expects a return to growth in 2011, Mr McDonnell was not entirely convinced, saying "a lot of us feel that this is actually more of a structural change than a cyclical one".

The capital spending is mainly for new mobile and fixed line networks and simplifying and automating core systems as well as operational separation, which includes the buildup of network operator Chorus and Telecom Wholesale.

Mr Houlden said the company had seen little effect of the economic downturn in New Zealand so far, with the overall impact being less than $5 million.

Telecom's revenue for the year improved 2 percent on 2007 to $5.67 billion, largely thanks to the acquisition of Australian telecommunications company Powertel last year. The Australian business's ebitda was A$82 million, slightly ahead of previous guidance.

Telecom's full-year result was bolstered by an $89 million dividend from its stake in trans-Tasman cable operator Southern Cross.

Depreciation and amortisation was above Telecom's previous guidance, up 16.7 percent to $761 million. This was mainly because of the acquisition of Powertel, higher capital spending in New Zealand and the reduced operating lives of some network assets.

The figure for 2009 is expected to be $870 million to $920 million.

Full year ebitda for New Zealand operations sank 7.7 percent to $1.84 billion on revenue of $4.2 billion, which was 1.7 percent down on 2007.

Operational expenses were up 6.7 percent to $624 million, which was not surprising but still a concern, Mr Mayne said.

Traditional access and calling revenues continued to slip, with the rising level of competition, particularly with competitors offering "sharper" calling and broadband bundles.

Mr Reynolds said Telecom's competitors, using its exchanges under local loop unbundling, were starting to make their presence felt.

IT services continued strong growth, posting a 20 percent increase in the fourth quarter.

Telecom's mobile revenues for the fourth quarter were down almost 7 per cent. The company is putting great stock in the "phased" introduction of its $300 million WCDMA mobile network in November, although Mr Reynolds said the first customers would be Telecom employees. 

The network will enable Telecom to overcome its problems of providing roaming services in Australia and open up a wider mobile broadband market and provide greater leverage with business customers who use Vodafone for roaming.

Australian telecommunications analyst Paul Budde said introducing the WCDMA network should allow Telecom to halt the decline of its mobile market share but would not bring about significant growth. Once NZ Communications opened the country's third mobile network next year, it would probably take business from Telecom than Vodafone.

IDC telecommunications research manager Rosalie Nelson said that, though dominant telecommunications companies in other countries had been through similar transformations, Telecom was faced with an unprecedented number of challenges and was, in effect, charting new waters.

Telecom would continue to try to shore up its declining traditional calling and telephony services that still made up about 46 per cent of revenues, she said. To do this, she expected to see Telecom offering a greater range of broadband, mobile and fixed line bundles.

At the same time, it would more aggressively market the lower margin and highly competitive "new wave" services - broadband, mobile, data and IT services.

She expected Telecom would focus on dominating the business segment with "whole of business" packages, and forming partnerships with a wider range of software providers.

To do this successfully, Telecom would need to change the culture of its business, not just at executive level but throughout the company, she said.

- © Fairfax NZ News