Telecom falls on news of downturn ahead

Telecom has warned that its New Zealand "core business" could suffer "negative revenue growth" as a result of the Government's regulatory changes.

Shareholders duly shaved 15 cents off the share price.

Reporting its 2007 results yesterday, Telecom predicted after-tax profit for 2008 would be in the $680 million to $715 million range, mainly because of expected lower revenues in New Zealand and the loss of Yellow Pages earnings.

Adjusted net earnings for the 2007 year were $955 million on revenue of $5.56 billion. They excluded the one-off abnormal gain of $2.08 billion from the sale of the Yellow Pages Group.

The company predicted a fall in earnings before interest, tax, depreciation and amortisation of 5 per cent to 8 per cent for 2008.

Chief financial officer Marko Bogoievski said the fall reflected a possible "softening revenue outlook" for the New Zealand market, though this would be partly offset by tighter cost management and business units such as Gen-I performing above expectations.

One analyst said the company's projections fell "significantly" short of expectations.

Another described Telecom's outlook as "worse and getting worser". Shares closed at $4.32.

ABN Amro telecommunications analyst Ian Martin said Telecom had taken a cautious view of its future and the market would correct itself accordingly.

"There's so much change going on so it's hard for Telecom to be specific so the (market) consensus for next year will come down," he said.

Telecom is preparing to split into three separate operating units, as required by the Government, which plans a comprehensive regulatory regime designed to enable Telecom's competitors to wholesale its broadband and use its local loop network.

Telecom management said regulatory changes, particularly the Commerce Commission's recently issued draft phone line rental charges, and the expected response from competitors, were affecting expectations of its future financial and operating performance in New Zealand.

"There's a reasonable prospect of negative revenue growth in the New Zealand numbers," acting chief executive Simon Moutter said.

"There are high levels of uncertainty around how the wholesale market will operate and how competitors will respond, so I think more than ever we have a wide range of scenarios in our plan, and negative revenue growth in New Zealand core business may be a feature of it."

Telecom estimates it will need to spend $200 million over the next four years to meet the Government's requirements for the company's operational separation.

Expenditure on separation in the 2008 financial year is expected to be $20 million to $30 million, rising to about $40 million a year over the next four years.

Telecom expects capital expenditure for the 2008 financial year to be in the $950 million to $975 million range.

This compares with $844 million for the 2007 year, which was up 12.4 per cent on the previous year.

Mr Moutter said the Commerce Commission's draft determination differentiating the price of urban and non-urban phone line rentals had surprised the sector.

But he said if the separate rural/urban pricing was consistent across services and from wholesale through to the retail customers, Telecom would find a way to support the new regime, though getting the numbers right would be critical.

Mr Bogoievski said Telecom's Australian business was off to a positive start in integrating AAPT and new acquisition Powertel, which could expect normal low-single-digit market growth.

For the 2007 year, operating revenue in New Zealand rose 1.2 per cent to $4.3 billion. Higher operating revenues for mobile and IT services were partly offset by falls in interconnection, data and Internet.

Telecom said higher net earnings reflected lower tax and depreciation and amortisation.

The company said slowing revenue growth in the mobile market reflected intense competition and market saturation.