Profit statement a reality check for telco

Telecom's profit announcement yesterday was a good reality check for the company with pressures from the legacy business continuing to drag on it, Craigs Investment Partners broker Chris Timms said.

The competitive pressures in fixed line and mobile were obvious in the result.

''There are some positive signs the strategy is having an impact and the company has increased its confidence in cost out but this will take time to flow through,'' he said.

Telecom, which is changing its name to Spark, reported operating earnings of $452 million from continuing operations for the six months ended December, down 5.8% on the $480 million reported in the previous corresponding period.

Revenue was down 3% to $1.85 billion and earnings before tax were down 9.6% to $208 million.

Net earnings from continuing operations were down 12.5% to $147 million from $168 million but when $20 million of earnings from discontinued operations were included, the reported profit was up 2.5% on the pcp at $167 million.

Telecom also announced it would launch ShowmeTV this year which would be provided over the internet. Forsyth Barr broker Suzanne Kinnaird said she had expected a strong result from Telecom. While it was in line with expectations it was a ''little disappointing'' overall.

Forsyth Barr's current forecasts for the full year were in line with expectations.

''We have assumed a lower cost base for New Zealand operations than Telecom has yet achieved. However, its long-term aspirations of $200 million to $300 million of costs savings from 2016 are at the high end of our expectations.''

The main concern was the continued trend towards a rapid fall in high margin calling towards lower margin mobile and other services.

The launch of a new internet television service would be expensive in terms of content acquisition and development but that was unlikely to hit until the 2015 year, she said.

Mr Timms said Telecom appeared likely to deliver slightly below his full-year expectations with the company providing mid-point operating earnings of $935 million from continuing operations.

Telecom chairman Mark Verbiest said it had been focused for nearly a year on a long-term strategy and it was gathering momentum.

''Over the last year, we have moved quickly and decisively, putting several critical foundations in place and making a number of bold market moves.

''We have gained greater traction on our cost competitiveness, increasing the projected free cash flow benefits we believe will be generated by our `turnaround programme', a centrally driven series of business improvement initiatives.''

The investments in revamping the mass market brands - Telecom and Skinny - had delivered in key markets. That had given the company the conviction to move beyond the Telecom name to better reflect the digital services capability and future focus.

Earnings for the group were flat but lead indicators and revenue performance, especially in mobile, were encouraging, Mr Verbiest said.

As expected, the ongoing fall in legacy fixed data and voice, together with choices made during 2013 to put market share ahead of short-term financial performance, had continued to affect earnings in New Zealand.

''We expect to see the positive lead indicators from the half year begin to flow more into our financial results from the second half onwards and into the 2015 financial year,'' he said.

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