Click photo to enlarge
Telecom chief executive Paul Reynolds, left, and head of
retail for New Zealand Alan Gourdie, in Dunedin last week,
apologise for the XT outage and announce a more than $5
million compensation package. Telecom's recent XT outage is
expected to have negative effect on financial results for
several quarters. Photo by Jane Dawber.
Telecom's quarterly after-tax profit is expected to be
down 20%-40%, with southern broking houses forecasting
declining revenues and debt repayments among immediate issues
at hand.
The recent two-and-a-half-day, multimillion-dollar meltdown
of Telecom's XT mobile service is expected to have
far-reaching implications - more so than just its more than
$5 million compensation package announced in Dunedin last
week - and regulation and competition remain key challenges
for the company.
Telecom is the first of the major listed companies to begin
the month-long reporting season, delivering its second
quarter result tomorrow.
For the quarter to December 2008, Telecom booked an after-tax
profit of $105 million, but that was before abnormal one-off
writedowns of $83 million, mainly for mobile equipment and a
goodwill writeoff, which dragged the profit down to $22
million.
For the quarter to December 2009, broking firm Craigs
Investment Partners is predicting a 39.7% fall to $63 million
while Forsyth Barr has predicted a 19% decline to $85
million.
Craigs predicts a full-year after-tax profit of $409 million,
while Forsyth Barr predictions are in the $400 million-$440
million range.
Craigs broker Peter McIntyre said greater costs associated
with depreciation and amortisation, plus increased interest
payments on debts, such as funding the XT technology and its
marketing roll-out, would all impact on Telecom's
bottom-line.
"The XT issue will take $5 million straight off the bottom
line.
"Telecom is no longer a useful barometer for the market in
our view; structural rather than cyclical issues related to
regulation, technology and competition continue to erode its
operating base," Mr McIntyre said.
Forsyth Barr broker Suzanne Kinnaird said she expected New
Zealand revenue to be down 4.2% and Australian revenues down
13% (which translated to 7% down in New Zealand dollar
terms), mainly due to declines in calling and resale.
"[In New Zealand] we expect continuing declines in fixed
voice revenues to be partly offset by growth in broadband,
internet and mobile, but the overall rate of decline to
remain similar to the last two quarters," Ms Kinnaird said.
Both brokerages maintain a hold recommendation on the stock,
with Forsyth Barr expecting negative news from Telecom in the
months ahead, while Craigs noted there was a risk the
Government's $1.5 billion ultra-fast broadband initiative, in
which private sector companies have been invited to
participate, would affect Telecom's's short-term share price.
Ms Kinnaird said the recent problems associated with the XT
service "would probably slow growth over the next few
quarters", while Mr McIntyre said the "medium-term collateral
damage" could be more costly if customers saw more XT
problems.
"If [XT] continues to give problems, the cost could go into
the tens of millions," Mr McIntyre said.
Ms Kinnaird forecast Telecom would not return to profit
growth until the full-year 2012, with next year affected by
changes to its statutory telecommunication service
obligation, involving the maintenance of urban and rural
services, and probable reductions in mobile termination
rates.
Mr McIntyre forecast about 15% growth for Telecom over the
next two years, beginning in the second half of 2010,
underpinned by tax and equipment writedowns and goodwill,
with after-tax profit rising from $409 million to $462
million for the full-year 2012.
