Fierce competition keeps Telecom earnings down

Aggressive competition ahead of the final draft of the Government's telecommunications regulatory package has helped keep a lid on Telecom's revenues for the three months to September.

First-quarter revenue from Telecom's New Zealand operations, announced yesterday, was down by 2.9 per cent to $1.04 billion, with calling revenue falling 11.1 per cent to $225 million.

Interconnection revenue, which included the termination fees that network providers charge consumers to make calls to competitors' networks, declined 5.4 per cent to $35 million, largely on the back of an agreement with the Government this year to reduce the fees.

While Telecom's Australian operations increased their revenue 9.9 per cent to $387 million, they ended the quarter with a $6.1 million loss. The quarter result was the first to include the results of new Telecom acquisition, network company Powertel.

Telecom's total operating revenue rose 0.1 per cent to $1.41 billion.

Vodafone, with its ISP subsidiary ihug, and second-tier companies like Orcon were named as competitors putting pressure on Telecom in anticipation of the Government's soon-to-be-unveiled regulatory package designed to make the industry more competitive.

As expected, this had accelerated the decline in Telecom's consumer market share and had eroded prices but increased wholesale revenues, which climbed 44 per cent to $26 million, chief operating officer business Simon Moutter said.

National toll calling and fixed-line-to-mobile calling had suffered as people increasingly used mobile phones instead of landlines, he said.

The net increase in mobile connections was 48,000 for the quarter, pushing the number of Telecom mobile connections through the two million mark and to about 46 per cent of market share.

However, a decline of 1.5 per cent in total mobile revenue to $199 million reflected intense competition, Mr Moutter said.

By the end of the results announcement yesterday morning, Telecom shares had fallen 10 cents, closing at the end of the day down 11c at $4.17.

Total broadband revenue rose 4.5 per cent to $69 million, with consumer revenue up 27.3 per cent to $42 million. IT revenue was up 12.9 per cent to $96 million, reflecting revenue from new key contracts and procurement business.

The company upgraded its projection on net profit for the 2007-08 year from between $680 million and $720 to $700 million to $730 million.

Analysts said that, with chief executive Paul Reynolds behind the desk for only four weeks, guidance provided by the company was understandably light on detail.

JP Morgan analyst Laurent Horrut said the market could expect Telecom's share price volatility of the past six months to continue till a detailed strategy was presented.

"What we hear is Telecom is facing all these competitive pressures that you're seeing in the revenue and earnings lines, but what we haven't seen today is what response the company will bring to confront these challenges," he said.

"Until we have clarity, it's going to be difficult for institutional investors to take a punt on what might be."

Mr Reynolds said that, like every major telecommunications company, Telecom needed to shift from being a phone company to one with a "relentless focus on customers", providing services through Internet protocol-based systems.

His announcement last week of a plan to spend $1.4 billion to extend an upgraded ADSL2+ network to all cities and towns with more than 500 phone lines, as part of a deal with the Government to split Telecom into three business units, was central to that strategy, he said.

The next-generation network would allow multiple services to be provided by a single network and mean lower future capital expenditure and overheads as the company reduced its reliance on older systems.

The investment would not blow out Telecom's capital expenditure budget, expected to be $950 million to $975 million for this year, he said.

Chief financial officer Marko Bogoievski said, however, that annual capital expenditure beyond the next year had not been projected.

Mr Reynolds said a significant part of the network had been planned and budgeted for, and a reprioritisation of spending would ensure the wider rollout of the network than had originally been planned.