IN DETAIL: Telecom cost-cutting measures fail to halt second-quarter profit slide

Friday 12th February 2010

Telecom has seen its second-quarter profit slide 24% as its strong focus on cutbacks failed to yield bottom-line gains.

The company is looking to cut $131 million from its expenditure this financial year in its so-called ‘Cost Out’ programme, most of which will come from its retail, Gen-I and technology and shared services units, chief financial officer Russ Houlden told an analysts briefing.

Telecom will look to claw back its costs through improving efficiencies where it can, cutting back on travel expenses by using video-conferencing, reducing its Gen-I contractor numbers, renegotiating supplier contracts, and shifting more work offshore, he said.

“There needs to be some top-line (revenue) growth as well,” said James Lindsay, equities manager at Tyndall Investment Management. “It’s a valid focus to get the costs out of the business, as long as it’s not overly encompassing.”

Adjusted net profit, which excludes major impairment charges, fell to $80 million, or 4 cents a share, in the three months ended Dec. 31, from $105 million, or 6 cents a share, a year earlier, the Auckland-based company said in a statement.

Surprisingly, the phone company didn’t increase its expectations for capital expenditure beyond the $1.1 billion to $1.2 billion range forecast despite pitching to participate in the government’s roll-out of the ultra-fast broadband network.

Network division Chorus was put forward by Telecom to take part in the government’s $1.5 billion broadband initiative roll-out a fibre-to-the-home network across 75% of the country, though it’s unclear whether the phone company would have to give up majority control of this division to take part in the scheme.

It also put forward an alternative option offering up the use of its existing network.

Telecom held its guidance at between $400 million and $440 million EBITDA fir the full year, though it said it expects this to be in the lower half of the range.

Operating revenue shrank 6.5% to $1.32 billion and earnings before interest, taxation, depreciation and amortisation surged 34% to $425 million as the phone company slashed operating expenses 18% to $890 million.

“Full year earnings guidance of EBITDA growth between -1% and +2% remains in place, with EBITDA growth now expected to be in the lower half of that range, reflecting the impacts of the economic downturn and the 27 January XT mobile outage” said chief executive Paul Reynolds. “Following the major network outage in January, a strong focus for XT is to restore customer confidence.”

Telecom boosted its guidance last quarter as profits bounced back amid the XT launch of its XT, which kicked off with a hiss and a roar as it attracted 242,000 customers in its first five months of operating.

Since then, the network has struggled for good news, with two major outages in two months forcing Reynolds to make an apology and announce compensation of some $5 million.

The network failure has also put at risk the glamour account of Fonterra, which has postponed the roll-out of Telecom’s network to its 3,000 staff.

Reynolds said customer numbers on the XT network grew to 467,000 by the end of the year, with 47% of them new customers, though he couldn’t quantify the impact the recent outage will have on potential corporate customers.

The phone company kept its dividend unchanged at 6 cents a share. The stock rose 0.4% to $2.32 in trading today, and has declined 8.4% this year.

Businesswire.co.nz

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