Telecom turns spin to gain

By Rob Hosking

Friday 15th November 2002

Telecom borrowed a few tricks from its opposition when it announced its drop in profit this week.

Spin doctors for the new-entrant telcos have long had the tactic of combining a bad financial result with a blistering attack on the regulators, in the hope the media will report the comments and the conflict rather than the result. Generally this works well.

This week it was Telecom's turn. The company posted a first-quarter net profit of $146 million down 3.3% on the $151 million for the same period last year. More damagingly, the result was 15% lower than market expectations of around $170 million.

Total revenue for the company was $1.3 billion, as against $1.4 billion clocked up a year earlier.

In the drive to lower costs, capital spending for the quarter is $76 million down 45.7% on the same period last year.

The company's Australia arm, AAPT, made a particularly tough drive to cut running costs. In the Australian consumer operation the running expenses fell 26.5% as revenue dropped by 21.8%. It was a similar story for the Australian business and internet operation, which saw running costs fall by 10.1% and revenue drop by 5%.

Telecom took a further presentational leaf out of its new entrant competitors when it discussed AAPT. Challenger telcos typically talk about being cashflow positive well before they are in profit, and Telecom is now talking about AAPT in those terms.

The decline in costs will be welcome news to investors analysts have had a beady eye on Telecom's overheads for a while. But the drop-off in revenue has been far less welcome, and Telecom's share price took a further hit in the wake of the result.

A further cause for disquiet is the drop in the number of mobile customers, down from 1.3 million to 1.25 million

The company's result had its good points operating cashflow was $458 million, up nearly 85% on the same period last year.

"In keeping with our debt repayment objectives, the group's strong cashflow performance has enabled us to reduce net debt by $116 million during the quarter," chief executive Theresa Gattung said.

The biggest increase in the company's internet business was in the consumer/residential area. Revenue growth for the consumer segment was up 120%, compared with 9.8% for the business sector. Corporate internet revue growth was "relatively stable."

Ms Gattung came out swinging at recent regulatory decisions in New Zealand, as well as criticism of the company for hiking its charges to rural customers.

"Everyone knows we make a lot of money. We make a lot of money because we invest a lot of money," she said.

The telecommunications commissioner, Douglas Webb, last week issued the decision on the interconnection dispute between Telecom and TelstraClear, and Telecom has hotly condemned the price set.

The interconnection price for TelstraClear to link in to Telecom's network was set at 1.13c a minute, a decision that had caught Telecom by surprise, Ms Gattung said.

The earlier draft decision had been for a price in the range of 1.21-1.42c a minute.

"What is the point of publishing a range of estimates if the market cannot rely on the final decision being within the range?" Ms Gattung said.

She also said that TelstraClear was in effect getting a "free ride" off Telecom's investment in networks and other infrastructure.

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