Special payout, 3G top of mind for Telecom backers

Telecom's migration of mobile customers to its 3G network and a special dividend will be foremost in investors' minds when the company reports on Friday.

While analysts are expecting good overall results on strong performance in several important markets to significantly overcome lower fixed-line revenue, they do have questions on these two key points.

Telecom launched its third-generation mobile network in November and has been trying to move customers to it since. Exactly how many have migrated to the higher-yielding CDMA network, and what impact they have had on revenue, has thus far been hard to quantify, analysts say.

"A net add for Telecom is difficult to do ... it clouds the issue so much" said ABN Amro analyst David Boyce, because customers on the older TDMA network are spending so little.

Analysts are agreed that Telecom's mobile performance will be strong.

"Mobile continues to be one of their success stories at the moment," said Forsyth Barr analyst Jeremy Simpson.

Mobile revenue, along with strong performances from the internet services and broadband internet businesses, is expected to boost profit over last year.

Telecom acquired IT services firms Gen-i and Computerland last winter, and both are expected to contribute significantly to revenue. Before the acquisitions, Gen-i posted profit of $7 million on revenue of $155 million, while Computerland netted $3.6 million on $26 million.

Broadband, meanwhile, has seen strong growth in uptake since the company dropped prices in its second quarter.

Consensus estimates have Telecom's full-year profit coming in between $820 million and $931 million after one-off gains, on revenue of about $5.5 billion. That would be up from the previous year's profit of $754 million on revenue of $5.3 billion.

Analysts peg the one-off gains at about $130 million, primarily from Telecom's sale of its stake in INL - which garnered about $86 million - as well the sell-off of retail stores and other investments.

Those gains translate into a high likelihood of the company paying out a special dividend, analysts say.

"They've got surplus funds available ... that puts them in a pretty comfortable position from which to look to give some capital back to shareholders," said Deutsche Bank analyst Richard Long.

Analysts expect a regular quarterly dividend of about 10c, and a special dividend of about $400 million, or 10c to 15c a share.

But concerns have arisen whether Telecom should hold on to the extra cash to fend off potential mobile competition from TelstraClear, which last week gave its strongest indication yet that it plans to build a network.

"The market's view is that that would be fairly damaging for Telecom," Goldman Sachs JB Were broker Joe Gallagher said.

Analysts say it will be at least two years before the company could threaten Telecom's bottom line.

- additional reporting: NZPA