Telecom's margins tighten

By RICHARD BRADDELL

Telecom's rapid growth in revenue failed to flow through to the company's bottom line in the latest quarter, with its profit of $161 million matching brokers' forecasts, but still 23 per cent short of the $209 million it earned in the previous corresponding period.

First quarter revenue at $1.3 billion was 45 per cent higher, helped by a $A284 million contribution from Australian subsidiary AAPT.

If AAPT's figures were excluded, the result was 4.8 per cent down at $200 million.

Included in AAPT's negative impact was $39 million in funding costs, goodwill writedowns and Telecom's share of AAPT's losses. AAPT suffered a $A5.8 million loss in the last quarter and is still several years away from making a profit.



As expected, Telecom slashed its dividend from 11.5c a share to 5c a share, taking its payment down to 55 per cent of earnings.



With its expenses running ahead of revenue, Telecom is in cost-cutting mode, looking for savings in its core data and voice networks and in its sales and service divisions in New Zealand. The purpose of this exercise is to generate funds for the further expansion of AAPT.

While the ruler is being run over New Zealand, AAPT is being treated in a slightly different manner because of its growth status.

Telecom is also looking toward a dividend in the current year that could be of the order of $US100 million ($250 million) from its 50 per cent stake in the Southern Cross cable.

While the dividend will help, Telecom is also mindful that its share of the $2 billion cable project, which multiplies by 120 times the telecommunications capacity between North America and New Zealand, could be borrowed against or sold as a means of releasing capital for other uses.



Chief executive Theresa Gattung said that about 50 per cent of Southern Cross's capacity had been presold.

With a strong growth in demand expected, the cable's owners were exploring ways of either boosting its capacity, or even laying another cable.

Although Telecom is looking to cut operating costs, it is more relaxed about a soaring cost of sales, which climbed 28.4 per cent in the last year due to rapid volume and customer growth in areas such as mobile, international and at AAPT.

Other than confirming that the integration of AAPT was a priority with the creation of single transtasman mobile, internet and international businesses, Ms Gattung offered few fresh insights into how AAPT and the new business units would be managed.

She produced independent market research that indicated that the loss of mobile market share to Vodafone had been arrested, even though the launch of Telecom's CDMA digital network was still seven months away.

But the price repositioning necessary to fend off Vodafone has been costly in revenue terms. Telecom's net customer numbers rose 51,000 in the quarter, but its revenue of $134 million was down 1.5 per cent on the same quarter of 1999.