Telecom spurt beats forecasts

By BRIAN FALLOW

Telecom's profitability rebounded in the last quarter of 2001, with earnings per share up 10 per cent on a year earlier.

This follows two quarters in which earnings per share went backwards, by 12 per cent and 16 per cent, compared with levels a year earlier.

Chairman Roderick Deane credited "sturdy" revenue growth and tight control on costs as reasons for the improvement.

The net profit of $161 million bettered analysts' average forecasts by $6 million. It was 15.8 per cent up on the December 2000 quarter, but spread over more shares.

An unchanged dividend of 5c, fully imputed, will be paid on March 22 out of the 8.7c a share profit. Books close on March 8. The improved profit mainly reflected revenue growth of $57 million or 4.1 per cent, but also benefited from a $7 million drop in operating expenses.

Telecom took to profit a $12 million sale of surplus capacity it owns on the Southern Cross transpacific cable. But the December 2000 period also included a one-off contribution, a $25 million settlement from a supplier which failed to deliver.

New Zealand provided only two-thirds of Telecom's revenue but 99 per cent of its operating profit.

Chief executive Theresa Gattung said that in Australia, where Telecom is looking for its longer-term growth, the focus was on improving margins. The move of Commonwealth Bank's call centres from Telstra's infrastructure to Telecom subsidiary AAPT would improve the profitability of that contract.

The company is coy about how long it will be before its Australian expansion covers its cost of capital.

Dr Deane said: "We emphasised when we bought AAPT it would take several years to recover the cost of capital and that is still the case."

Theresa Gattung said that Telecom's share price would continue to be affected by sentiment towards telco stocks, but the company still considered itself a growth stock. Earnings before interest, tax, depreciation and amortisation (EBITDA) at $564 million were 12.8 per cent up on a year ago.

More than two-thirds of that came from the New Zealand wireline (as opposed to wireless) operations.

With the exception of data, these are mature businesses. In the latest quarter, line rental and international calling revenue fell, and national call revenue was flat. Nevertheless, wireline's EBITDA improved 2.3 per cent to $397 million.

Cellular business recorded flat revenues and lower average revenue per user compared with a year ago, on both sides of the Tasman.

International (mainly Australian) business saw revenue growth slow sharply to 3.2 per cent from 24 per cent in September. Operating expenses grew even more slowly, resulting in a 10.5 per cent rise in EBITDA to $63 million. But the $6 million improvement was swamped by a $16 million increase in depreciation, reflecting heavy investment in AAPT's network.

Overall the international segment's operating profit fell 31 per cent to $24 million.

The star performer, Theresa Gattung said, was the internet and directories services group. Xtra, the largest internet service provider in the New Zealand market, had a 39 per cent rise in revenue to $25 million. Total dial-up hours rose 74 per cent.


* Credit ratings agency Moody's has put Telecom under review, because it is "concerned that TCNZ's ability to reduce debt, and/or re-invest for future growth ... is hampered by the underperformance of the Australian operations."