Telecom on the sales warpath

By PETER GRIFFIN telecoms writer

Telecom delivered a solid profit of $162 million in the three months to September 30, but the quarter may be better remembered for the start of Telecom's fight back against Vodafone in the increasingly cherished mobile market.

Telecom's earnings were up 11 per cent on the same period last year on flat revenue of $1.32 billion. The telco managed to pay down $275 million of debt during the period, leaving it owing $4.4 billion. Earnings before interest tax, depreciation and amortisation rose 2.4 per cent to $554 million. Shareholders receive a dividend for the quarter of 5c a share in December.

The latest set of accounts from Telecom reveal a company that is beginning to chase sales more aggressively and is spending more on advertising, marketing and hiring staff.

That is certainly true of the mobile market, where Telecom chief executive Theresa Gattung readily admits the company has been behind the eight ball.

Aggressive marketing helped Telecom sign up 87,000 to its 027 network in the period in what chief operating officer Simon Moutter described as the "best quarter of upgrades we've had since the birth of that network".

About 407,000 subscribe to the 027 network and 863,000 are on the 025 network with outdated phones.

Mobile voice revenue was flat at $120 million but revenue overall grew 6 per cent and mobile data, the perceived future mobile moneyspinner, jumped 67 per cent to $10 million.

The gains were expensive - mobile cost of sales rose 44 per cent.

But mobile growth had been boosted by the introduction of a $10-a-month text messaging offer. Telecom said that helped to boost interconnection revenue 23 per cent to $32 million because more text messages were sent between Telecom and Vodafone's networks.

Telecom had also bitten the bullet and matched Vodafone on voice deals. Moutter said the strategy would continue - Telecom would match Vodafone blow for blow.

"There is no reason for a customer to leave Telecom on price any more," he said.

The shift in attitude comes after Telecom was outmarketed and outsold by Vodafone, which holds 51 per cent of the market. Observers predict hot competition.

"The previously placid competitive situation in the New Zealand mobile market has spluttered back to life," said ABN Amro in an analyst report this week.

But ABN Amro was critical of Telecom's flat-rate text-messaging move that Vodafone showed no signs of matching.

"[Telecom] will find it difficult to remove these caps and as such has limited the growth of this profit pool and reduced the value placed on the service by customers," the report said.

After talking up the success of the 027 network, Gattung went on to deliver the strongest hint yet that Telecom was preparing to shift to W-CDMA, a third generation (3G) mobile standard that Vodafone and TelstraClear are pursuing.

Telecom will consider spending money this year on "site acquisition" for W-CDMA cell sites around the country. It has already commissioned Swedish equipment maker Ericsson to design plans for W-CDMA network migration.

Analysts estimate a move to W-CDMA could cost Telecom hundreds of millions of dollars while an upgrade of its existing technology might cost less than $100 million.

The W-CDMA planning would not boost capital expenditure for the year which is still set at $650 million, just $91 million of which was spent in the quarter.

There was little to talk about for the mainstay of Telecom's business, the wireline division. Calling revenue fell nearly 11 per cent as Telecom felt the pinch of competition and a move away from the conventional phone.

"That's driven by competitive pressure and substitution to things like texting, email and mobile," said Moutter.