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Telecom underlying profit rises 2% on cost-cuts, mobile

Telecom underlying profit rises 2% on cost-cuts, mobile growth; shares gain

By Paul McBeth

Aug. 19 (BusinessDesk) – Telecom Corp. shares gained, even as the broader market sold off, after the country’s biggest phone company posted a 2% increase in underlying profit on cost cuts and higher mobile earnings.

Telecom beat guidance with underlying earnings of $388 million in the 12 months ended June 30, up from $380 million a year ago. That was underpinned by $195 million of cost reductions. The shares rose 3.1% to $2.68, making it one of only three companies to gain on the NZX 50 Index today.

“Cost-cutting across the board has been going very well for them,” said Guy Hallwright, analyst at Forsyth Barr. “This looks like a very strong result.”

The bulk of the savings came from job cuts, with staff numbers reduced by 375 in the year, and a further 130 flagged in the future. The headcount reduction would have been bigger had not Telecom brought 300 IT positions in-house as part of its restructuring programme.

Chief executive Paul Reynolds told a conference call the telecommunications sector is stripping out costs around the world, and Telecom will continue to focus on reducing the expenses line beyond its structural split.

“We don’t know where the end of the line is,” he said, referring to the cost-cutting programme. “In a sense, cost reductions never end.

The result will probably be the last consolidated earnings result before it demerges its network business to free itself from a regulatory burden and tap a chunk of $1.35 billion in tax-payer funding for a nationwide broadband network.

Reynolds declined to give any more guidance on the proposed split, saying all will be revealed when shareholders receive the scheme ahead of this year’s vote. Due to the pending split, Telecom removed guidance for the 2012 financial year.

Net profit sank 57% to $166 million, or 9 cents per share, after the company took a $257 million impairment charge on assets that were to be built for the ageing copper network as part of its operational undertakings.

Chief financial officer Nick Olsen told a conference call Telecom won’t write-down the actual value of the copper lines, as that is being captured through the rate of depreciation.

Hallwright said the write-off was the result of the changes in government policy between successive administrations, which has eroded shareholder value.

Still, it wasn’t surprising and shouldn’t impact on how analysts will view the value of Chorus, he said.

Chorus boosted EBITDA 5.1% to $806 million as it attracted more customers and boosted sales.

Earnings in Telecom’s wholesale and international businesses dropped 42% to $119 million as rising operating costs and intercarrier costs outstripped revenue growth.

The retail business boosted earnings 21% to $493 million after wholesale broadband input prices were reduced. Mobile revenues bounced back from last year’s troubles during the launch of the XT network, even as it lost 95,000 customers with inactive customers on the obsolete CDMA network falling off its books.

The Gen-i unit increased earnings 6.3% to $237 million. The Australian AAPT unit reported a 34% fall in EBITDA to $71 million having sold its consumer division in the period.

Telecom got a $71 million dividend from its 50%-owned Southern Cross undersea cable, from $63 million a year earlier.

The company said it plans to challenge an Inland Revenue Department notice on the treatment of tax and penalties on earnings from offshore subsidiaries amounting to $34 million. If no agreement can be reached, the argument is likely to head to court, it said.

Telecom said it will pay a quarterly dividend of 7.5 cents a share, plus a special dividend of 2 cents a share, taking the annual pay-out to 20 cents.

That beat Forsyth Barr’s estimate of 16 cents.


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