Cable payout softens Telecom's profit slump

By BRIAN FALLOW

Telecom's earnings sagged in the year to the end of June as the profitability of its New Zealand business eroded and its Australian expansion has yet to pay off.

Earnings per share were 36.4c, down 19 per cent from 44.7c the year before.

Telecom will pay a final dividend of 5c on September 14, making 20c for the full year. Last year's dividend was 46c. It has since changed its dividend policy to pay out around 50 per cent of net earnings; previously the payout was often close to 100 per cent.

The net profit of $643 million, down from $783 million last year, was boosted by a $221 million dividend (after tax) from its investment in the Southern Cross transpacific cable.

Telecom expects future dividends from Southern Cross - at least $US150 million ($351.5 million) over the next few years - but their timing and magnitude are uncertain.

The Southern Cross payout was largely offset by $192 million in abnormal expenses, mainly arising from writing off a CDMA wireless network in Australia ($157 million). Much of that investment occurred when AAPT was already a subsidiary of Telecom but behaving more like a state-owned enterprise.

Telecom earns two-thirds of its revenue from its New Zealand operations, where margins have been under pressure.

Its New Zealand revenues grew $51 million or 1.4 per cent to $3.64 billion but operating expenses were up $82 million or 3.8 per cent.

Chief executive Theresa Gattung said the company had turned its cost performance around in the past six months.

"Cost growth in the first couple of quarters of the year was at very high levels, particularly in the first quarter. In the last two quarters it has basically been flat, year on year."

Telecom has 8.3 per cent fewer staff than a year ago.

In Australia, revenue grew almost $1 billion but operating expenses grew by a little more than $1 billion. Revenue growth was 48 per cent last year and expenses grew 50 per cent.

Ms Gattung remains committed to the strategic focus on growth in Australia. "We are not going to get the profits our shareholders expect if we had just maintained a New Zealand focus," she said.

New Zealand cellular revenues were flat despite Telecom lifting the number of cellular customers from 1 million to 1.3 million. Most of the new connections were prepaid phones, which now make up 61 per cent of the total and which significantly dilute average revenue per user (ARPU).

To get ARPU up and trigger a second major growth phase in the cellular business, Telecom is pinning its hopes on the New Zealand CDMA network it launched last month.

It is designed to encourage the development of new data services for the cellphone, such as ASB Bank's new wireless banking service.

The group's overall earnings before interest, tax, depreciation and amortisation were up 1.4 per cent to $2.07 billion.

Telecom shares ended yesterday 2c higher at $5.20.