Telecom would cut spending to fund UFB plan

Telecom would shift its capital spend away from copper lines and into fibre to tap the government's fund to roll-out high-speed internet, chief executive Paul Reynolds said.

The company will run down the $1.35 billion it spends on its copper access network and this will be a "fundamental part" of its investment in a partnership with the government. Reynolds wants Telecom to be assured of gaining the Auckland market, given the city's size.

Telecom is considering carving out its network business into a separate listed company as a means to participate in the government's ultrafast broadband proposal that will roll-out fibre to 75% of the country, and provide fast internet to rural areas. Running parallel to the fibre conundrum is Telecom's push for the relaxation of its existing regulatory constraints on the copper network.

"It's certainly the defining issue of this year," said James Lindsay, equities manager at Tyndall Investment Management.

"They need to be able to agree on an outcome that works for them."

The prospect of a demerged unit left ratings agencies nervous, with Standard & Poor's putting the phone company's 'A' rating on negative CreditWatch earlier this month.

Telecom chief financial officer Russ Houlden said a downgrade would add US$194 million to their finance costs and would impact on what decision is made over the proposed demerger.

The phone company reported earnings before interest taxation depreciation and amortisation rose 2.4% to $428 million in the three months ended June 30, though net profit halved to $42 million on new tax treatment of depreciation and a bigger tax bill. Revenue eased 2.8% to $1.34 billion in the period. Full-year earnings fell 4.5% to $382 million, slightly ahead of analysts' expectations.

It kept EBITDA guidance for 2011 at between $1.72 billion and $1.78 billion, with the following two years to increase by $20 million to $80 million each year. The guidance doesn't reflect the impact of the government's ultra-fast broadband initiative, which Telecom says will likely "reshape the industry".

Telecom announced a 6 cents per share dividend with no imputation credits for the quarter.

The shares sank 2.4% to $2.05 in trading today.

Chorus, the company's network business flagged for a potential demerger, posted no change in its EBITDA at $192 million in the quarter, as rising operating costs kept pace with an increase in revenue.

The wholesale and international unit earnings dropped 6.5%, carrying on the trend of declining fixed-line voice services.

The retail unit boosted earnings 15% to $110 million in the quarter as it cut its spend on advertising and reduced the mobile cost of sales.

Gen-i EBITDA surged 40% to $67 million in the quarter as it boosted its IT services revenue by rolling out new products for clients, while Gen-i IT solutions earnings were flat at $17 million in the quarter.

Australian unit AAPT, which had its retail arm sold for A$60 million last month, lifted quarterly earnings 3.7% to $28 million as it slashed 23% from its intercarrier costs.

Telecom's backroom technology & shared services unit reported no earnings for the quarter, while the corporate unit posted an increased loss of $20 million in the period from $11 million a year earlier.

The phone company received a $5 million quarterly dividend from its Southern Cross joint venture, taking its full-year return to $63 million, down from $79 million in 2009

Businesswire.co.nz

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