Overseas efforts hit Telecom

By BRIAN FALLOW

Telecom's earnings per share fell 12 per cent in the September quarter, as its Australian growth strategy remains in the high-hopes, low-profits phase.

Net earnings were $151 million, near analysts' forecasts but down from $161 million in the same quarter last year.

The profit is spread over more shares, following a rights issue, and represents a 12 per cent drop in earnings per share, to 8.1c from 9.2c a year ago. An unchanged dividend of 5c a share will be paid.

Telecom said the decrease in net earnings was mainly due to increased funding costs ($7 million after tax) and goodwill amortisation ($8 million) arising from its purchase last December of the 20 per cent of Australian telco AAPT it did not already own.

But it did not add that the September 2000 bottom line included a $12 million allowance for minority interests. So adjusting for the move to full ownership of AAPT accounts for only $3 million of the $10 million profit decline.

Telecom's numbers continue to show a company deriving almost all of its profits from New Zealand, where many of its businesses are mature and face competitive pressure on their margins.

It looks across the Tasman for its prospective growth but at this stage its Australian business is a drag on profitability.

"We are not satisfied with margins in AAPT and plan a renewed focus on its costs over the next few quarters," chief executive Theresa Gattung said.

The longer-term strategy remained to move more of the Australian business onto Telecom-owned infrastructure to pay out less to other telcos and improve margins, she said.

Telecom's earnings before interest, tax, depreciation and amortisation (ebitda) were $537 million, up from $510 million a year earlier.

New Zealand provided 94 per cent of it.

Three-quarters of ebitda came from what Telecom now calls its New Zealand wireline (as opposed to wireless) business.

Its ebitda was up 8.2 per cent, more because of cost-cutting than the 2 per cent increase in revenues. A 10 per cent reduction in staff contributed to a 5 per cent fall in costs.

Telecom's share of national and international calling was steady, Ms Gattung said. Data revenue grew 12.9 per cent.

But local call revenue was down, in line with a 4.9 per cent drop in the number of business access lines.

The international business, largely AAPT, recorded revenue growth of 24.1 per cent, but operating expenses grew 24.7 per cent and, with the amortisation charge almost doubling, the international business's contribution to pre-tax earnings fell to $21 million from $29 million a year ago.

The wireless business, made up of Telecom Mobile and Cellular One (a reselling operation in Australia), also saw pre-tax earnings fall, reflecting flat revenue, flat operating costs and an increase in the depreciation and amortisation charge.

Telecom is looking to its new CDMA network, which has picked up 50,000 customers since its launch in July, to reverse the "commoditisation" of its New Zealand cellular business.

Across the Tasman it has just signed a reselling deal with Vodafone, and further out is pinning its hopes on a $A400 million ($492 million) investment in a joint venture with Hutchison to offer third-generation (3G) wireless services.

Books close for the 5cps dividend on November 30. It will be paid on December 14.

Last year, Telecom adopted a policy of paying out around 50 per cent of earnings. Previously it paid more than 90 per cent.

The change in dividend policy arose from the adoption of an Australian growth strategy.