Guidance hits Telecom shares

By GARETH VAUGHAN - BusinessDay.co.nz | Friday, 08 August 2008

Telecom shares ended 8 per cent lower today after the company posted a 30 per cent fall in fourth quarter profit and disappointed the market with its guidance for the 2008-09 year.

Although annual profit came in as expected, down 15.5 per cent to $713 million, Telecom said fourth quarter net profit fell to $176 million from $250 million in the same period of last year as it battles increasing competition and rising costs.

It forecast 2008-09 annual profit of between $500 million and $540 million compared to analysts' expectations of about $590 million.

Macquarie Equities analyst Steve Hodgson said the main reason for Telecom's guidance being lower than expected was depreciation and amortisation charges now forecast to be up to $150 million above previous expectations.

This was because of increasing capital expenditure, the falling Kiwi dollar and especially due to a review of the lifecycle of fixed assets.

"No one would describe Telecom's current operating performance as strong but we knew that before this result," Hodgson said. "The higher depreciation track and subsequently lower net profit forecasts are relatively immaterial to value."

Nonetheless, investors punished Telecom sending its shares down as much as 38 cents. However, they recovered some ground to end down 28c, or 8 per cent, at $3.40. 

Meanwhile, Telecom will pay an 8 cents per share fully imputed fourth quarter dividend, compared to a 14.5c per share fourth quarter dividend last year. It said dividends in the first three quarters of the 2008-09 year were expected to be 6c per share each and probably would not have imputation credits, meaning payments would be taxed twice.

Telecom also said this morning annual revenue rose 2 per cent to $5.6 billion.

Telecom is currently battling increasing competition and rising costs as it implements a Government-enforced three way operational separation.

Today's results are the first annual ones presented by Scotsman Paul Reynolds, who replaced Theresa Gattung as Telecom's chief executive last October. When he took the helm, Reynolds pledged to bring a pragmatic and customer focused approach to Telecom.

Earnings before interest, tax, depreciation and amortisation (ebitda) fell 4 per cent to $1.89 billion. Telecom said ebitda was expected to fall by between 4 per cent and 6 per cent in the year to June 2009.

That is in line with guidance given in April when Telecom said earnings would also fall in 2009 and 2010 as calling and internet prices held steady while costs climbed as Telecom built new broadband and mobile phone networks. The company predicts a return to earnings growth in 2011 as costs and capital expenditure fall.

Reynolds said the annual results highlighted the increasingly competitive nature of the New Zealand telecoms landscape. However, Telecom had grown revenue from IT services in the fourth quarter by almost 20 per cent and the building of its new mobile phone network was progressing well.

"Telecom is now operationally separated, a new leadership team has been appointed, and the implementation of our transformation is in full flow," Reynolds said.

"In this new environment customers have more choice and opportunities than ever before."

Fourth quarter revenue rose 4 per cent to $1.45 billion with expenses climbing 7 per cent to $972 million.

Telecom's mobile phone operations had a "challenging" quarter, Reynolds said, with a 7 per cent revenue fall due to price cuts and increased competition. However, broadband and internet revenue rose 6 per cent with more than 40,000 broadband connections added during the quarter.

Ebitda from Telecom's Australian operations, meanwhile, was A$82 million, slightly ahead of guidance.

Telecom had forecast annual net profit of between $700 million and $730 million. Last year the company posted annual profit of $3 billion, although this included $2.08 billion booked from the sale of directories business Yellow Pages. Given this, profit from continuing operations was down 15.5 per cent from $844 million.