4/08/2006

TELECOM BY 2010: EXACTLY WHERE IT IS NOW

Considering everything that's gone on at Telecom in the last few months - the scandal around the Government unbundling report leaked to it, the subsequent $3 billion drop in the company's market value, the departure of Chairman Rod Deane, I thought it would be worth getting along to the company's quarterly earnings briefing held in Wellington today.

The event was well attended due to the fact that Telecom has merged its analyst briefing with that reserved for journalists, and despite the drama of the past months, Telecom succeeded in draining any emotion and colour from the proceedings. Good work on the behalf of their media-savvy executives.

It amazes me that the key executives who attended the briefing are still there at all considering two things: the dire performance of Telecom in Australia (a writedown of AAPT accounts for the loss for the year to June 30 of $450 million) and the fact that none of those top executives was able to judge the regulatory environment well enough to avoid the massive drop in Telecom's market value.

As far as AAPT is concerned, I have to agree with one of the Australian analysts who was on conference call from Sydney when he pointed out that it would probably be more sensible to close AAPT down than plow the $270 million into the fragile business that Telecom plans too over the next couple of years.

Still, what do you do? Sack the entire executive? Who will replace them and who is to say anyone else's judgement would be any better. AAPT was handed to the current executive by the previous administration, but the company's handling of regulatory matters has been unforgivable.

A few things of note from the briefing:

- Telecom's total DSL connections are now at 435,000 or 25 per cent of access lines and outstrip dial-up internet lines which are at 310,000. That shows that as far as Telecom's own internet customers, the transition to broadband is progressing reasonably well. Interestingly, 30 per cent of broadband sales happen online.
- Telecom Mobile continues to steam ahead and mobile data revenue was up 54 per cent year on year to $171 million. People are starting to understand mobile devices and laptop data cards and price drops have boosted uptake.
- Telecom will launch a consumer VoIP service in the next year nad plans to have 500,000 connections by the end of the FY07 financial year - that's an ambitious goal. What will be the drivers to VoIP? Lower prices (unlikely) or enhanced services like call management through a web browser (probably).
- Gen-i is a fast-growing IT powerhouse in New Zealand - revenue of around $950 million.
- Telecom insists it has no current plans to ditch its CDMA mobile network technology in favour of the more popular UMTS technology used by Vodafone and the majority of the world's mobile phone operators.

TELECOM'S STRATEGIC RESPONSE

If Telecom tried to get anything across in this briefing it's that the executive has a strategic response to the regulatory shift that will see the company right. But consider this interesting slide from the presentation which outlines the grim reality for Telecom and it's shareholders:

They're going to have to pull all the stops out just to keep EBITDA at the level it is now.

The loss in revenues associated with reduced prices and the erosion in calling as people move to competitors will be offset by cost-cutting and growth in information, entertainment and ICT services. While Telecom is successfully becoming a IT-centric company, these types of services will not provide Telecom with a major boost in EBITDA over the next few years, they'll serve to maintain the financial performance of the company. Telecom effectively has to work a hell of a lot harder, be more innovative and cut costs by 2010 to have the same financial result then as it has now. The alternative is a drop in EBITDA of up to $500 million by 2010 if it carries on with its pre-unbundling investment and cost-cutting strategies.

BUSINESS AS USUAL (AS CAN BE)

Overall, the earnings briefing oozed the same calm efficiency Telecom briefings are known for. There's an obvious desire on the part of Chairman Boyd and Theresa to send a signal that they have everything under control. The truth is that the fancy Powerpoint slides don't account for any of the emerging technologies that could upturn Telecom's projections in the next couple of years. Uncertain times are ahead and Telecom's success will hinge on how well it takes to the structurally seperated model it choose to adopt and th eunbundled model forced upon it.

** Éconet's managing director wins points for gate crashing the briefing and phoning in some questions about Telecom's mobile business. Theresa answered graciously, but Tex's questions confirmed my doubts about Econet - it's more interested in the business cases of its competitors than it's own "plans" to build a mobile network.

Full details of the results can be downloaded from Telecom's website (www.telecom.co.nz)

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