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Telecom could have muted mobile disappointment

By Rob Hosking

Friday 17th November 2000

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A change in accounting treatment would have seen Telecom's latest quarterly result look better to the tune of $17 million.

The company writes off cellphone acquisition costs immediately, whereas most other carriers in the mobile market in this part of the world capitalise those costs and amortise them over the life of the contracts relating to those mobile handsets.

That would have made mobile cost of sales lower by about $17 million for the three months to Sept 30, the company says.

Chief executive Theresa Gattung said Telecom had considered changing the approach but was sticking to the current method as it was in line with North American GAAP standards.

But that $17 million would have improved the look of the latest result. As the company reorientates itself to take advantage of an increasingly online and mobile market, the costs of doing so are beginning to bite hard on Telecom's bottom line.

And the weight on that bottom line is not confined to the company's purchase of Australian carrier AAPT.

The overall quarterly result showed a net earnings drop from $209 million to $161 million.

But even if AAPT is excluded from that, Telecom's profit dropped from $212 million to $200 million.

Revenues rose considerably during the three months - the top area being the internet-driven data services, which rose $19 million, or 18.4%. Of these, internet revenue was up $3 million, ISDN $4 million (23.5%) and new services such as ADSL, LanLink and frame relay rose $8 million - more than a third up on the same quarter in 1999.

But the big disappointment this quarter was mobile.

Telecom has long identified it as a growth area and is spending $200 million on its new CDMA mobile network, which will come onstream in the second half of 2001.

In the meantime though there is a tapering off of revenue at the same time as costs of providing those services balloon.

Those costs rose by more than a quarter to $43 million - while revenue dropped 1.5% to $134 million.

This reflected the rise in the total number of mobile connections plus special attractions to attract new customers, Ms Gattung said.

Those figures, however, do not include the costs or the revenue from interconnection from fixed lines to mobile networks. Overall interconnection revenue dropped over the quarter by $1 million, and the interconnection costs, increased by $10 million, or 44.5%.

Revenue from Telecom's fixed line to mobile phones increased by $10 million, or 15.9%.

The average price per minute of a call from Telecom's fixed line to a cellphone dropped 2.23% but this was more than offset by increases in all volumes as the numbers of cellphones increased.

The number of New Zealanders with a mobile phone continued to rise and was now at about 41%, Ms Gattung said. More than a million of these are Telecom handsets and the company still expects this market to keep growing for some time.

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