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Telecom profit drops on higher spending; stock sinks to new low

Friday 7th November 2008

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Telecom Corp. posted a 34% slump in first-quarter profit on costs to comply with the government-ordered separation of its business units and higher wages. Telecom stock sank to a new record low.

Net income fell to NZ$149 million in the three months ended Sept. 30, from NZ$225 million a year earlier, the company said in a statement. Sales rose 2.3% to NZ$1.44 billion, while expenses increased 5% to $977 million.

The results are the first since Telecom was compelled to separate its wholesale and retail units as part of a government plan to increase competition in high-speed internet services. Capital spending rose 63% to NZ$340 million in the first quarter, with NZ$195 million related to the restructuring and compliance with regulations.

The phone company faces dwindling revenue from its biggest, fixed-line network as more New Zealanders migrate to mobile phones, a market where Telecom competes with the world's biggest operator, Vodafone. The company also faced more rivalry from companies offering local calling services after telecom was forced to unbundle its so-called local loop. Local call revenue fell 8.6% in the latest quarter while broadband and internet sales rose 14%.

"Competition in the fixed line are was intense, with a significant increase in competitors migrating customers to unbundled local loop services, contributing to a decline in traditional access and calling revenues," chief executive Paul Reynolds said in a statement.

"These results show the significant investment Telecom is making for the long-term health of the business," he said.

Telecom stock fell as low as NZ$2.20, a record, and was recently down 2.2% to NZ$2.22.

Labour costs rose 16% to NZ$240 million after the company hired 200 extra IT solutions staff at a cost of NZ$9 million. Its troubled Australian-arm, AAPT, recorded a fall of 46% in EBITDA to A$13 million due to weaker prices and declining customer numbers.

Paul MacBeth,

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