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Dividend hike forecast after Telecom's major cost-cutting

By Rob Hosking

Friday 8th August 2003

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An upbeat Telecom chief executive Theresa Gattung promised an increase in dividends and unfurled a $709 million profit for the year to June.

The promise of a dividend rise from the next financial year ­ an increase some analysts tip could go from the current 20c to 50c ­ caused a marked bounce to Telecom's share price.

The dividend promise was not the only reason for the sudden popularity of the stock, however. This week's result appeared to rule a line under a long period of uncertainty for the telecommunications carrier.

"We've seen the removal of a number of uncertainties over the past few months," Ms Gattung said.

The Verizon shareholding was finally sold down, the new regulatory regime in New Zealand firmed up, and the company has found a new chief executive for its Australian operations.

Other issues that have been settled include the refinancing of the Southern Cross cable, which has a five-year extension to its debt, and the re-sale and re-transmission deals with Sky and INL being completed.

The company has also made a ruthless drive on costs and debt, in the face of increased competitive challenges and an economic environment which put most telecommunications stocks firmly in the dog box.

In particular there has been a determined effort to keep capital spending, in an infrastructure-hungry business, as low as possible. After the dotcom boom and bust, investors remain extremely wary of any company in the information technology and telecommunications business that is embarking on major infrastructure rollouts.

The drive on debt and costs received a big nod of approval from Standard & Poor's rating agency. Telecom wants an increase in its credit rating from the agency by the end of the next financial year, and the agency's associate director, corporate & infrastructure ratings, Andrew Lally, said Telecom is on track to meet that goal.

Not all in the garden is rosy, however. On the mobile side ­ perhaps the most intensely competitive part of the telecomm-
unications sector at present ­ Vodafone has stolen a march on Telecom in the youth market.

Over the next few months Telecom is launching a new push into this market, chief operating officer for New Zealand Simon Moutter said.

The company also wants to grow its base of CDMA mobile users beyond the current level of 25%. The recent deal with Nokia to provide new CDMA handsets was expected to help here, Ms Gattung said.

"About 80% of our [non-CDMA] mobile business has had Nokia handsets, so getting the Nokia CDMA deal has been very important for us.

"Most of our customers don't have CDMA, which means they can't roam and they can't text. What we're going to be doing over the next few months is getting that message out that with CDMA you can do both those things.

Elsewhere in New Zealand Telecom will start winding down its existing TDMA mobile network. There is still no date as to when that will close but the shift means that network will take an accounting writedown in value at the end of the current financial year.

The standard national calling revenue in New Zealand took a further decline during the year ­ 1.1% overall but 5.7% for the last quarter. The company did not see the recent steepening of the decline as an aberration, Ms Gattung said. Rather, it showed the increased substitution by email and mobile technologies.

The overall theme of the company's business pressures at present was "managing the decline of voice," she said.

The Australian subsidiary, AAPT, remains problematic for the company, although the picture is brighter than it was a year ago.

"Our Australian margins are now comparable to competitors like Optus ­ something a lot of people said could not happen," said chief financial officer Marko Bogoievski.

The biggest increase in capital spending for the coming year is for AAPT's business market ­ a rise from $67 million this year to $105 million.

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