Market upbeat on Telecom result despite profit drop

Paul Reynolds. Photo / Steven McNicholl

Telecom revealed a strong bill of health yesterday, despite its profits plummeting by more than 50 per cent.

Announcing its final, full-year financial results before splitting in two, the company said it had performed well in an increasingly competitive environment.

Although profits were down, Telecom's chief executive Paul Reynolds said it had been a great year.

"We've grown the business, we've won the bulk of Government [ultra-fast broadband contracts] ... our customer satisfaction is up - so it feels like a very solid performance across the piece," Reynolds said.

The market seemed to agree and Telecom's share price closed at $2.72 up 12c or 4.41 per cent.

However, Telecom's after-tax profit tumbled by 56.5 per cent from $382 million to $166 million for the year to June 30. Revenue was down almost 3 per cent to $5.12 billion and earnings before interest, tax, amortisation and depreciation (ebitda) fell 15.5 per cent to $1.49 billon.

Telecom blamed the low profits on the write-off of $257 million of copper assets that will no longer be relevant if the company breaks up. Other "one-off adjustments" affecting the company's bottom line included de-merger costs and expenses related to the Christchurch earthquake.

These one-offs had no impact on the dividend Telecom will pay, which was 7.5 cents per share for the quarter, with a special dividend of 2 cents per share. This pay-out lifted the annual dividend above expectations to reach 20 cents a share.

When looking past the raw numbers, Forsyth Barr's Guy Hallwright said it was a "strong result".

"Obviously the write-down on the [assets] wasn't anticipated, but it makes perfect sense. The UFB costs are going to finish and the earthquake costs are clearly unusual," he said.

Hallwright also said Telecom seemed to be making gains in the mobile space, albeit slowly.

Although the company shed 98,000 prepaid customers, it had managed to increase the percentage of users on the XT Network, which brings in more revenue per customer.

Craigs Investment Partners' Geoff Zame said Telecom had exceeded expectations and reduced operating expenses for the year by 5.8 per cent.

"The focus [on reducing costs] is rewarding for shareholders and literally starting to pay dividends. The market is rewarding it, you can see [Telecom's] stocks are up when nothing is," Zame said.

Hallwright agreed and said the cost down-sizing would set the company in good shape if its proposed de-merger goes ahead.

As part of its role in the Government's ultra-fast broadband scheme, Telecom will split from its network arm Chorus by the end of the year.

If the move passes a shareholder vote, Chorus will become a separate public company to roll out and own fibre internet cables in 24 towns and cities around New Zealand. Telecom will then be left as a standalone retail business, providing phone, internet, mobile and IT services.

Reynolds said the de-merger plans were progressing well and details would be released to shareholders "very soon".

Telecom could give no future financial guidance for either companies until these documents were released to shareholders, Reynolds said.

He hoped the split would lead to a more stable industry environment and curtail the "hundreds of millions of dollars of waste" Telecom has spent complying with Government regulation since 2008. The majority of these regulations will no longer apply to either Telecom or Chorus after the break-up.