Gattung seeks growth, as well as savings

By PETER GRIFFIN telecoms writer

Telecom's $709 million profit for the year to June 30 was at the high end of analysts' forecasts and is likely to encourage shareholders hanging on for an eventual increase in dividend payouts.

But can Telecom sustain its current level of profitability for long, considering much of its 5.4 per cent increase in adjusted net earnings for the year was attributed to a buoyant New Zealand economy, immigration and cost-cutting?

"It depends how fast we grow revenues, because if you grow revenues it decreases the cost of sales," said chief executive Theresa Gattung.

She added that cost-saving structural changes - such as the multimillion-dollar outsourcing deals with vendors Alcatel and Lucent, were largely in place.

Telecom has spent the past few quarters making up for sluggish revenue growth with reductions in operating costs.

For the New Zealand business, expenses were down around 8 per cent for the year to just over $1.5 billion. Operating costs in the Australian business decreased by more than 20 per cent.

But Telecom says there is still room for improvement.

"In relation to Australia there is more cost to come out, there's still duplication within the businesses," said Gattung.

But Telecom's strategy appears to be shifting more to one of revenue growth rather than cost-cutting.

Moves to win more business, such as expanding its retail presence, will cost.

"There comes a point when the strategy is not to keep shrinking the business, you have to grow it again," she said.

Telecom executives were yesterday optimistic at a modest increase in revenue from the New Zealand fixed-line business, which delivered $2.8 billion in revenue for the year.

Competitive pressures have generally seen revenue growth for the division stable or declining slightly, but that trend was reversed, particularly in the three months to June 30, when operating revenue was up 4.5 per cent.

Gattung acknowledged that Telecom's fortunes, particularly in its fixed-line business, were closely linked to the robustness of the economy and to an extent the level of net migration, which is beginning to fall.

"If the economy slows down it will take the gloss off it."

But the company figures that less favourable conditions will, over time, be countered by "substitution" - the replacing of core national calling with more valuable data services and mobile to mobile calling.

Telecom said improvements in mobile average revenue per user, growth in data services and the fact that the company now has 72,000 Jetstream customers were signs that the migration was gaining momentum.

"It's a longer-term shift, it's not directly linked to the economy, it's the shift from the voice world to the non-voice world."

Telecom's future depends on customers making this change. As far as Gattung is concerned, the sooner the overall data market increases, the better for everyone.

"Clearly there's more share for us to take in Australia but in New Zealand we're trying to grow the size of the pot. Some of our competitors will benefit but so will we."