2degrees heads for first surplus in 2012

2degrees says its on track to break even this year. Photo / Supplied
2degrees says its on track to break even this year. Photo / Supplied

Mobile phone operator 2degrees posted an $81.9 million operating loss in its second full year of operation and is on course to break even on an earnings-before-interest-and-tax basis this year, says chief executive Eric Hertz.

2degrees lodged its accounts for calendar year 2011 with the Companies Office this morning, showing 72 per cent revenue growth to $185.4 million as the company heads for its millionth customer at some stage this year.

"We're pleased with progress," Hertz told BusinessDesk. "These results show a 56 per cent decline in operating losses as a proportion of operating revenues. We've become a $185 million (turnover) company in two years,"

The operating loss for calendar 2010 was $73.4 million, on revenues of $107.8 million.

Service revenues almost doubled in the latest period to $152.8 million, compared with $86.8 million in 2010, while equipment and other revenue rose to $32.6 million, from $21.0 million the year before.

Funded by private equity from the US and a Maori investor, Hautaki Trust, 2degrees launched its retail mobile service from scratch in August 2008, and has racked up accumulated losses since inception of $247.4 million, in line with expectations during a three to five year start-up phase.

Hertz said 2degrees was "still in the investment phase," with some $450 million of capital committed to supporting the company's growth and investing in its own national mobile network.

A further $50 million is to be committed this year to support both capital expenditure and operating losses, and equipment supplier Huawei had committed $120 million of financing to help fund network development.

"This year (2012) will be the first year where service revenues will exceed operational expenses. We will be ebit (earnings before interest and tax) positive," said Weiss, although a net tax-paid profit was not expected until between the fifth and seventh year of operation.

As well as building out its 3G mobile network, 2degrees will be on the hook with its competitors, Telecom and Vodafone, for the cost of rolling out a next generation 4G network, when the government allocates new spectrum for even faster mobile data services later next year.

Hertz says the company has just under 20 per cent of the pre-paid mobile market, and around 100,000 of its 950,000-plus customers were on post-payment plans, which were launched in August 2010, along with offerings for small businesses added last year. It expects to sign its millionth customer this year.

Hertz estimated the mobile market in New Zealand was now at approximately 120 per cent penetration, compared with 110 per cent when 2degrees launched, but predicted the explosion in use of tablets and SIM card-based data transmission to control domestic and commercial technologies would see that rise to between 300 per cent and 400 per cent over coming years.

When it came to 4G spectrum allocation, Weiss said the government had a choice between trying to maximise its own revenue through mechanisms such as competitive auctions, but risked shutting out competitors if it took that route.

While the government might forego revenue by specifically allocating spectrum evenly to competing players, economic analysis to date suggested net benefits to New Zealand economy as a whole from more competitive mobile offerings would more than compensate for such lost revenue.

"If they want to ensure it's competitive, they need to get it across the three players," said Hertz, who suggested "some kind of benchmark price" based on international comparisons and New Zealand market characteristics could be used to set spectrum charges.

- BusinessDesk

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