EARNINGS PREVIEW: Telecom facing threat to network dominance, may post slump in 3Q profit

Thursday 6th May 2010

Telecom, which is threatened with loss of dominance from the government’s roll-out of ultra-fast broadband, is likely to post a slump in third-quarter earnings tomorrow on costs of its XT network outages.

The Auckland-based phone company will report a 47% decline in profit for the three months ended March 31 to $84 million, according to Forsyth Barr analyst Guy Hallwright.

Telecom is paying about $15 million in compensation to customers who lost service on the network since it was launched last year.

The XT outages have been a setback for Telecom, which will face rival operators vying for a share of the government’s $1.5 billion initiative to deliver ultra-fast broadband (UFB) services to 75% of New Zealanders.

The company has rolled out more than 23,500 kilometres of fibre around New Zealand as its prevailing copper network nears the end of its life.

“Telecom’s in a difficult place - there’s a lot of uncertainty on where it will end up,” Hallwright said. “Telecom would still be a significant player running its own network” if rivals grab a share of the government’s broadband initiative, he said.

Chorus, Telecom’s network division, still has gaps to fill in its fibre coverage, on the east coast of the North Island, and Hurunui and Fiordland in the South Island.

Rivals including electricity and gas distributor Vector are campaigning to win a share of the government work. Shares of Telecom recently traded unchanged at $2.15 and have slipped 12% this year.

It sank as low as $2.11 in March, the lowest since the early 1990s, when the phone company was a fledgling on the New Zealand stock exchange.

Hallwright rates the stock a ‘hold’ and said while the price was below its valuation and “close to its low point,” more downbeat news is expected in the coming months.

Telecom was forced to split its retail, wholesale and network businesses by the previous Labour-led administration to speed up the process of local-loop unbundling and improve internet services.

Chief executive Paul Reynolds has indicated further separation to allow it to participate in the government’s broadband roll-out was still a possibility. Last month Reynolds cut earnings guidance for 2011 through 2013, reflecting the government’s reform of uneconomic rural phone services, which will reduce the amount other phone companies have to pay to use Telecom’s lines.

First NZ Capital analyst Greg Main said Telecom runs a real risk if it misses out on the government roll-out, with much of its earnings tied up in its fixed-line network.

“Historically, they’re a network company, which gets its leverage from the network – if you take the network away from them, they’ve got nothing,” he said. Still Mains said losing the contract wouldn’t be the death-knell of Telecom, as it has “already got fibre around the country in areas that demand it, and they’re rolling out their fibre-to-the-node project,” which will add a further 2,500 kilometres over the next four years.

Chorus hit the halfway mark in its government-mandated roll-out of 3,600 roadside fibre optic cable cabinets, which aims to give 80% of the nation’s population access to speeds of up to 20 megabits a second by the end of next year.

In the wake of the embarrassing XT outages, which prompted Reynolds to personally apologise for loss of services and offer compensation, the company hired advisory firm Analysys Mason to review the problems.

Some of its findings may be released with the results tomorrow.James Lindsay, equities manager at Tyndall Investment Management, said it would be “very difficult” to assess how Telecom can participate in the government’s broadband plan without fully separating, and this was making it “incredibly difficult” to form a long-term view on the company.

The prospect of a cut to its dividend payment has also been weighing on the shares, he said.

Businesswire.co.nz

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