Telecom's growth pays extra dividends

Telecom pleased shareholders yesterday with strong results and a bigger dividend payout.

The company announced a $391 million special dividend of 10c a share, to be paid next year, on top of a regular payout in September of 10c. That meets its targeted ratio of 85 per cent of earnings - a number the company also plans to meet next year.

Year-end profit was $916 million, up 21.5 per cent from $754 million a year earlier, with solid growth in its mobile and data businesses offsetting a further fall in traditional calling.

Excluding abnormal gains of $110 million, mostly resulting from the $86 million sale of its stake in INL, Telecom's profit was $806 million - up only 4 per cent. Revenue increased 4.6 per cent to $5.6 billion.

Of concern to investors was the company's adjusted earnings before depreciation, interest, tax and amortisation (ebitda) of $2.2 billion, which declined 3 per cent from the previous $2.3 billion. Also, operating expenses rose 10.5 per cent to $3.3 billion, largely due to a sharp rise in the cost of mobile sales because of the rollout of its 3G network.

The cost of sales in wireless, which includes handset upgrades for customers and dealer commissions, also climbed significantly - 55.5 per cent to $241 million.

Chief executive Theresa Gattung acknowledged that single-digit revenue growth and a double-digit increase in expenses was "backward" but was indicative "of the heavy-investment phase we're in".

The company spent $608 million on capital items in the year and plans to increase that this year to at least $750 million.

"This revenue is coming at a price," she said, adding that the company was committed to returning to ebitda growth in the coming year.

Analysts tended to agree and said there was no reason to doubt Telecom on this front.

"I would expect there to be a rebound in ebitda," said ABN Amro analyst David Boyce. "That shouldn't be a surprise to anybody."

Boyce said the company's investment in its 3G mobile network, and the cost of moving customers on to it, should be mostly complete by the first quarter.

Analysts are expecting a 2006 profit between $790 million and $851 million, to which Gattung said: "We're comfortable with that."

Chairman Roderick Deane said he was pleased with the company's ability to reduce debt over the past few years and was confident the dividend payout would not affect its credit rating.

Standard & Poor's yesterday applauded Telecom's "strong business profile and commitment to conservative financial policies" and said the dividend payouts would have no immediate effect on its ratings.

The company's revenue is a story of ups and downs, with income from newer businesses managing to offset the downturn in traditional calls. Mobile revenue, driven by the 3G rollout, rose 15.8 per cent to $709 million.

"The star of the quarter would have to be New Zealand wireless, just a fantastic result," Gattung said, adding that she was "amazed at the propensity for customers to take up value-added [3G] services".

Telecom landed more than 50 per cent of the market's revenue growth over the past year and was thus winning big against Vodafone. "Mobile is really gaining momentum. We didn't have it for a while and we've got it back in spades now," she said.

Data revenue also grew by 14 per cent to $588 million, with 147,000 new broadband connections - 37,000 in the fourth quarter - for a total of 259,498 customers. Of those, 205,927 are residential customers.

Regulators have decreed that Telecom needs to achieve 250,000 residential connections by the end of the year and that one-third of those must be through wholesalers, or it risks Government interference.

That could be a problem, as only about 15 per cent of those connections are wholesale. Gattung said Telecom was working hard to achieve that goal and indirectly put blame on the wholesalers.

"We did put a series of offers into the market to help our wholesale customers in turn attract their own customers," she said.

"We need them to take their dial-up bases into the broadband world, otherwise together we won't get to where we need to get."

Gattung also chuckled at the mention of possible further regulation in broadband, and suggested that telecommunication commissioner Douglas Webb's threat last month to separate Telecom's wholesale and retail business was more of "an observation".

"He didn't specifically talk about any particular regulatory intervention," she said.

Meanwhile, traditional calling revenue - still Telecom's bread and butter - fell 7.8 per cent to $898 million.

Gattung wasn't ready to call it curtains on the business. She said the revenue decline slowed in the fourth quarter, helped by the introduction of the new Anytime calling plans.

"There's been a moderation in the rate of calling decline," she said. "It's too soon to say whether this is a trend or not ... but that suggests there's some elasticity in this market."

Chief financial officer Marko Bogoievski said the company would maintain its Australian strategy, with AAPT continuing to focus on trying to get customers to sign on for more than one service.

"If we manage to keep improving this, we will be able to drive down churn."