Telecom cuts costs as UFB decision looms

Telecom, the country's biggest phone company, kept cutting costs in the first quarter, keeping earnings flat as a decision looms on how the government plans to carve up its fund for ultra-fast broadband.

The Auckland-based company cut 4 per cent from its operating expenses in the latest three months.

Net profit slumped 37 per cent to $103 million in the three months ended September 30, mainly reflecting a bigger tax bill than in the year-earlier period.

Chief executive Paul Reynolds told a briefing today that the company is still in discussions with government officials over tapping the $1.35 billion fund. He would be open to working with other partnering companies willing to leverage off Telecom's existing fibre network.

Investors said the operating results were less significant given the game-changing impact of the government's proposals for broadband.

The shares fell 1.9 per cent to $2.07 on the NZX today.

"I'm sure the boys at Telecom are working hard on the operation, but it's pretty irrelevant" with UFB in the background, said James Lindsay, equities manager at Tyndall Investment Management.

Sources close to the UFB process are indicating the decision will be announced within the next fortnight and that Telecom will be part of the mix.

Reynolds said there was an international move towards extending the life of copper lines, also known as public service telephone networks, which "continues to underpin a significant part of the business."

Telecom boosted its adjusted net profit guidance for this financial year by $30 million to a range of between $330 million to $370 million.

Much of that came from lower depreciation costs after the sale of its AAPT consumer unit. Reynolds refused to narrow guidance, saying people "shouldn't underestimate our resolve in cost reduction."

Free local calling on the fixed-line network meant New Zealanders were more reluctant to give up landlines than overseas, and this was slowing the migration to mobile phones, he said. Retail calling revenues dropped 8.2 per cent to $78 million in the retail unit, while mobile sales fell 5.3 per cent to $144 million.

Under its new dividend policy, Telecom slashed its return to
3.5 cents a share from 6 cents a share a year ago, with adjusted net profit tumbling by almost half to $83 million when the company stripped out the $20 million gain from the sale of some of its Australian units.

The company's troubled XT network, which cost it about $15 million in compensation to its customers in the past year, added 127,000 customers and now makes up almost 39 per cent of the company's total mobile base.

Reynolds said Telecom faced an extra $16 million in regulatory costs with the changes to the Telecommunications Service Obligation, where the company is subsidised by rivals to provide phone services to isolated customers, and associated costs with the government's Rural Broadband Initiative.

It also faced one-off costs of $6 million related to the UFB programme and $3 million from the 7.1 magnitude Canterbury earthquake.

Telecom Wholesale was the worst-performing unit for the phone company in the period with EBITDA down 14 per cent to $37 million as it spent more on acquiring services from Telecom's Chorus unit.

New chief financial officer Nick Olson said the company will switch to reporting on a six-monthly basis in a bid to cut costs, though it will still pay quarterly dividends.

Reynolds said the international voice business was still up for sale.