Telecom result 'not glorious' but expected: analyst

Telecom still has a few years of pain ahead in the scrap for the telecommunications market and faces a mammoth job in limiting the damage done when its much vaunted XT network crashed, says one analyst.

The country's major telecommunications company announced its results for the three months to December today, calling the result "solid".

Earnings of $425 million, before accounting writedowns, were up 1.7 percent, in line with guidance but profit of $80m was 23.8 percent down on the $105m for the same quarter the previous year.

While adjusted revenue for the half year fell by 6.5 percent on the same half in 2008 to $2.67 billion, adjusted operating expenses fell faster, to $1.8 billion, an 8.9 percent decrease on the equivalent half year.

First half net profit was $242 million, up 49.4 percent, and Telecom predicts adjusted group net earnings will be between $400 million and $440 million for the full financial year.

However, earnings were expected to be in the bottom half of the range, in line with the previous year's $400 million earnings, thanks to the economic downturn and much publicised problems with the failure of its XT network.

"It's not a glorious sort of result, but it's not beyond expectations," said Australian telecommunications analyst Paul Budde.

"The reality is that it's going down on all sides, but nevertheless I think Telecom is still holding on. We knew the company had to go through a couple of years of pain before it can turn around and become a new sort of company."

Telecom was one of the few incumbents in the world that had internet market leadership and was not exposed to the sort of local loop unbundling competition faced by the likes of Telstra in Australia.

"That might work in favour of Telecom, that they are so dominant in the internet market that they can avoid the sort of further disastrous declines that you see happening in other parts." However, there was still the rollout of the new $1.5 billion ultra fast broadband network, which the Government was looking to tender out.

"Imagine if the utilities got the job, that would be a massive blow to Telecom," Mr Budde said.

Mr Budde said last month's XT network outage, which was the second in as many months for the new network, would be difficult to value in dollar terms, but more importantly would affect people's trust in the company.

"Telecommunications is so important, there will be horror stories going around about when there was no mobile coverage.

"Lots of businesses like plumbers and carpenters, small builders etc, they only have a mobile number, that's the only thing they advertise on their vans.

"You really have people thinking twice. It adds to the misery that Telecom already has so it's not a vote of confidence and the company is turning around. No, it's further confirmation it's an old world company, it's still a difficult company that you can't totally trust."

Telecom said its new XT mobile network, which launched in May last year, grew during the December quarter to 467,000 connections, after attracting 242,000 customers in its first five months.

New mobile phone player 2degrees announced today that it had signed up 206,000 customers in its first six months and figures also show Vodafone clawed back 9000 customers in the December quarter after 27,000 customers left the network in the previous quarter.

Telecom chief executive Paul Reynolds said a strong focus was to restore confidence in XT.

Telecom is paying out $5 million in compensation to those affected by the outage and said the failure was due to a fault on an ancillary piece of router equipment.

Telecom said it has doubled capacity in backup equipment so if a surge happens such an overload won't happen again.

Mr Budde said Telecom's future was still "critical ill" rather than recovery, which was reflected in the share price.

The past 12 months have been poor for Telecom's share price, despite the market experiencing a resurgence since March. Last year Telecom's share price started at $2.29, reached a year high in August of $2.88 but had this afternoon dropped 3c to $2.28.

Telecom was overtaken as New Zealand's biggest listed company by Fletcher Building, whose shares were worth $5 in March and a much more robust $7.54 today.

"The reality is that the share market is a short-term measurement and in the short term there a no big expectations for Telecom to turn around. There's nothing that's going to happen in the next couple of years that will make it a far more healthier, growth company," Mr Budde said.