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Telecom second-quarter underlying profit slumps 24% amid shrinking sales

Friday 12th February 2010

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Telecom announced a 24% slump in underlying second quarter profit as shrinking revenues took their toll in spite of a heavy cost-cutting programme.

Net earnings fell to $80 million, or 4 cents a share, in the three months ended December 31, from $105 million, or 6 cents a share, a year earlier, the Auckland-based company said in a statement. 

Half-yearly net earnings showed a 4.3% fall to $243 million, once adjusted for one-off write-downs in Q2 2008 which sank net earnings to $14 million, and reflecting a strong first quarter. 

Telecom held its guidance for full year net earnings at between $400 million and $440 million, though it said it expects this to be in the "lower half of that range" because of the weak economy and the impacts of the recent XT outages, said chief executive Paul Reynolds in a statement.

“Following the major network outage in January, a strong focus for XT is to restore customer confidence.” 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.  

The result included a $9 million dividend from its 50% share in the Southern Cross cable, taking its first-half dividend to $44 million from $39 million a year earlier.   

Unadjusted quarterly net profit more than quadrupled from $14 million in 2008, which included one-off write downs on its PowerTel subsidiary and mobile network equipment. On a half-year basis, unadjusted net profit surged 49% to $243 million, in line with expectations by analysts.  

Telecom boosted its guidance last quarter as profits bounced back amid the launch of its XT mobile network, 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.  The phone company kept its dividend unchanged at 6 cents a share.

The stock rose 0.9% to $2.31 in trading yesterday, and has declined 8.4% this year. 

Underlying earnings from the company’s Chorus network division were flat at $186 million as gains in sales were offset by increasing expenses.

The network division has been pitched by Telecom to participate in the government’s $1.5 billion broadband initiative to roll-out a fibre network across 75% of the country.  It remains unclear whether the telco would have to give up majority control of Chorus to take part in the scheme. It also put forward an option to use its existing network.  

Telecom’s wholesale and international earnings shrank 1.6% to $62 million as falling mobile termination rates sapped interconnection revenues.

Yesterday, the phone company pushed out the timetable for the reduction in its mobile termination rates to October, bringing it in line with rival Vodafone New Zealand.  

The retail business’s earnings declined 7.9% to $82 million as calling revenues and local services continued to fall, albeit at a slower pace.

Broadband and IT service revenues gained as more customers migrated to the XT network, which also saw a $4 million increase in the cost of sales and commissions during the quarter.  

Gen-I boosted its EBITDA 9.1% to $60 million and Telecom’s Australian unit, AAPT, which has traditionally been an area of weakness for the business, boosted its EBITDA 13% to $27 million as cost-cutting measures succeeded in paring the pace of lost revenue.  

The company’s Technology and Shared Services unit made a loss of $1 million.  

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