Telecom toughing it out

Theresa Gattung

With a decision to keep its ailing Australian unit, a major regulatory whack looming, a resulting share price plummet - not to mention a political scandal involving the company brewing - things probably couldn't look any worse for Telecom.

The questions on the minds of shareholders are surely whether there is any upside to all the current gloom, and where the company goes from here.

From Telecom's perspective, it insists it's business as usual.

"We're going to get on with it," repeated chief executive Theresa Gattung at the company's third-quarter earnings announcement in Sydney yesterday.

Gattung and chief financial officer Marko Bogoievski read through the company's results matter-of-factly and stuck with the "getting on with it" mantra.

To Telecom shareholders, who have seen $1.6 billion wiped off the market value of the company and their Telecom shares slide by 15 per cent over the past two days, there was little sign of contrition from the company.

But it would be unlike Telecom to take adversity lying down. A raft of regulation is on the way:

* Competitors will by early next year have access to the company's phone network and will be able to offer their own services on it.

* Telecom will also have to separate phone and internet services, which means customers will be able to buy one without the other.

* It will also have to provide wholesale customers unconstrained internet speeds, and regulators - not the company - will set the prices of all these services.

* Last but not least, Telecom will have to enact accounting separation, which will open its books for all to see just how much money its network is making.

Gattung wouldn't go into detail yesterday about what Telecom's response to the Government decision might be, but she said that dealing with regulation was nothing new for the company. It had faced many challenges over many years and backed itself to win in the market.

Bogoievski said the company would make submissions on the legislation as it made its way through Parliament this year, but the company would comply with the end results.

"There are sovereign powers in New Zealand. We know what this means, and we have to comply."

Telecom has in the past threatened legal challenges to regulatory decisions and succeeded in having tough decisions watered-down by doing so. In December, for example, it threatened to ask for a judicial review of a Commerce Commission ruling on TelstraClear's request for better wholesale broadband terms. TelstraClear capitulated and signed a deal with Telecom for worse terms than the ruling would have given.

This situation is different, Bogoievski said, in that it's the Government and not the commission taking action.

He said it was too early to gauge the harshness of the regulatory package, as the details still needed to be ironed out over the next year. But he conceded that what the Government revealed this week was essentially a worst-case scenario for the company.

The company recently presented earnings (earnings before interest, tax, depreciation and amortisation, or ebitda) estimates to investors that incorporated several factors, including regulation and increased competition. The estimates ranged from a 5 to 25 per cent ebitda decline, the worst of which would amount to a hit of about $500 million, Bogoievski said.

The way to limit that decline, he said, was to focus on three areas: protecting the core business, making fundamental changes to the business model, and exploring growth options.

Bogoievski said Telecom had taken steps in all three areas. Over the next five years, two-thirds of value would come from the core business, so the key was to drive the cost of doing business down and thus improve profits on existing revenue.

That was beginning to happen, especially in mobile, he said.

The company also recently announced an executive reshuffle, the first step in redefining the way it does business. By focusing on the retail and business-customers segments instead of a technological division - fixed and wireless - Telecom would be able to take advantage of its product mix better.

As for growth areas, broadband is it. Not only will growth come from increasing customer numbers and internet usage, the company is also eyeing video services in a hard way. Those will be possible once it gets its ADSL2+ technology up and running this year.

Other than that, Bogoievski said, Telecom wasn't in a hurry to get into new revenue streams.

"We can see enough in the future service model cost structure in capital, or enough value tied up in that, that we're focusing on it.

"We don't think [expanding into other markets is] going to be our salvation, we think it's a focus on the business model transition and the development of new, lower-cost ways to service our customers.

"The culmination is that we can see a way through mitigating risks as large as the worst-case scenario if we were to implement the three steps of that component.

"The difficulty is that shareholders will form their own views about our ability [to do that]."