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Telecom lifts earnings margin by cutting costs as sales fall

>h3>Telecom lifts earnings margin by cutting labour, intercarrier costs as annual sales fall 8.6%

By Paul McBeth

Aug. 24 (BusinessDesk) - Telecom Corp, the country's biggest listed company, eked out bigger savings from a falling heading count and cheaper intercarrier costs as an 8.6 percent decline in sales eroded profits in its first annual result without network operator Chorus.

Adjusted net earnings from continuing operations rose to $281 million in the 12 months ended June 30, compared to $88 million a year earlier, the Auckland-based company said in a statement. Statutory profit surged 604 percent to $1.12 billion, or 60 cents per share, including the five months Chorus spent under the Telecom umbrella before being spun-off as a standalone entity. The company took a $257 million charge on its ageing copper lines, which now sit with Chorus, in the 2011 annual result.

Earnings before interest, tax, depreciation and amortisation from continuing operations climbed 42 percent to $1.08 billion, even as sales declined 8.6 percent to $4.58 billion. Analysts were expecting ebitda of $1.1 billion on sales of $4.67 billion.

The improved underlying earnings came from a 4.2 percent reduction in labour costs to $797 million and a 26 percent drop in intercarrier fees to $1.16 billion from cheaper pricing and lower mobile termination rates.

"Change is going on in an operating sense within its businesses from fixed line and calling to more mobile and broadband type products," said Craig Brown, senior investment analyst at OnePath New Zealand in Auckland. "We've seen areas of traditional revenue come down, which is a fairly significant downward negative pressure, but they appear to be doing a pretty reasonable job of managing costs with the improvement in ebidtda."

Telecom said ebitda in the 2013 financial year will be a "flat-to-single-digit-percentage decline" as it invests to keep broadband market share.

"Following the creation of a new industry model post demerger, we expect strong competition to continue," chief executive Simon Moutter said of his first result as the company's new boss.

"Telecom will focus on winning in key markets to drive long-term value and will compete aggressively in fixed line to maintain broadband market share," he said.

The company's retail broadband connections edged up to 599,000 as at June 30 from 591,000 a year earlier.

OnePath's Brown said Telecom faces a competitive environment that may get tougher if rival mobile phone operator Vodafone New Zealand wins regulatory approval to buy fixed-line carrier TelstraClear.

The shares fell 3.8 percent to $2.65, having jumped 34 percent this year since ditching the regulated Chorus unit last November. The stock is rated an average 'hold' based on 11 analyst recommendations compiled by Reuters, with a median target price of $2.45.

The board declared an 11 cents-per-share final dividend taking the annual payout to 20 cents per share.

Telecom's wholesale and international unit, which provides services to other telecommunications providers, reported a 28 percent fall in sales to $745 million, though ebitda rose 6.2 percent to $154 million as it sliced a third from its expenses bill.

The retail business increased earnings 2.6 percent to $506 million with a 4.3 percent decline in sales to $1.93 billion. At the end of the balance date it lifted the number of customers on its XT mobile network 32 percent to 1.57 million, leaving 466,000 on its obsolete CDMA network. The phone company increase average revenue per unit 9.4 percent to $29.14 for mobile customers in fatter data sales.

Telecom's Gen-I, which offers services to businesses, reported a 4.4 Percent fall in sales to $1.36 billion while lifting earnings 11 percent to $263 million as it squeezed its labour costs.

Australian unit AAPT, which divested its consumer division in 2010, reported a 5.6 percent decline in earnings to A$67 million on a 25 percent drop in sales to A$516 million.

The technology and shared services unit, which maintains Telecom's shared systems, reported zero earnings as sales and costs fell by about a fifth, while the corporate segment increased ebitda 19 percent to $37 million with a 25 percent lift in sales to $223 million as it took on greater group responsibilities.

Telecom said the Chorus demerger will lead to cheaper compliance costs, though it faces a risk of more expensive access to the network company's infrastructure if the Commerce Commission de-link the prices of certain services delivered on the copper lines.

The split meant Telecom slashed its capital expenditure by 42 percent to $386 million in the 2012 year, and it signalled it expects to spend $460 million in 2013 which includes the spend on spectrum and an allowance for a data centre.

Chorus will report its debut earnings result as a standalone entity on Monday.


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