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Telecom reins in units' autonomy in bid to cut costs; shares gain

Thursday 27th May 2010

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Telecom is bringing more of its business units’ operations under central management control as it looks to rein in its expenditure as falling prices weigh on earnings.  

Chief executive Paul Reynolds told analysts at a briefing in Sydney that work was underway to cut out duplication within the company and to centralise control amid a soft earnings outlook. He flagged pricing, procurement and strategy as areas that were being brought under central management’s purview.  

“We’re shifting a block of our operational model to more central control,” Reynolds told analysts. “We’re taking resourcing out of the business units, which are getting downsized.” 

The shares gained 1.1% to $1.92 after hitting two-decade lows this week as the company flagged the potential structural separation of its network to participate in the government’s proposed roll-out of ultrafast broadband fibre around the country. Separation could undermine Telecom’s A rating, Standard & Poor’s said. 

Reynolds floated the possibility of a de-merger to achieve a structural separation, leading to two listed companies and giving shareholders exposure to Telecom’s retail and wholesale businesses and to a separate network operator. Any structural separation would have to nullify the regulatory costs Telecom is facing, and Reynolds said non-participation in the government’s plan was still an option, though he was encouraged by Prime Minister John Key’s and Communications Minister Steven Joyce’s response.  

Telecom expects to return to earnings growth in the 2012 financial year, and outgoing chief financial officer Russ Houlden flagged next year as the earnings trough for the company. His so-called “cost-out” programme is forecast to strip $622 million of expenditure over a five-year period, $98 million more than what he flagged at the investor day last year.

Houlden said any gains from cuts to staff levels next year will be offset by inflationary increases in salaries.  

Though Houlden’s forecast assumptions don’t include any decision from government in regards to the ultrafast broadband plan, they do include lower regulatory costs from being granted pauses on some of the undertakings required by the government-mandated operational separation.  

Reynolds said Telecom still faces price pressures after the global downturn forced telecommunications companies to collapse their prices in a bid to hold on to struggling corporate customers, and he said he doesn’t expect this to abate as the world goes through its recovery.  

“Global reaction, particularly in competitive space, will be a permanent risk to pricing,” Reynolds said. “The change in pricing is putting additional pressure on us all.”  

Reynolds said there is potential for Telecom to grow its revenue in its mobile businesses, with after it faced up to the problems with its XT network.

The 3G mobile network suffered from several outages in the early part of the year, forcing an apology from Reynolds, an independent inquiry by Analysys Mason, and some $15 million of compensation to customers.  

Chief technology officer David Havercroft said Telecom had been a leader in outsourcing its services in the past, and it was reevaluating some of its relationships. This included possibility of bringing some services back inhouse, though he didn’t elaborate on which areas could come back into the Telecom fold.  

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