Telecom earnings: co. dials down full-year earnings expectations, job cuts confirmed

Telecom has reported a half-hear net profit of $163 million for the six months to December 31, in line with analyst expectations, but cautioned on full-year earnings.

In the year-ago period, the company made $1.006 billion, or $129 million adjusted for the Chorus demerger.

Ebitda, up 3.7% to $516 million, ran slightly ahead of a ForBarr estimate of $503 million.

Revenue fell 8.5% to $2.135 billion; ForBarr had anticipated a 2% fall.

The dividend was 8 cents per share, as expected, against the year-ago period's 9 cents.

Telecom shares [NZX:TEL] were up 1.13% to $2.23 in mid-morning trading. Concern about softer earnings outlook was balanced by the news of major cost cutting in the form of a job cull running into the hundreds.

Dialing down full-year earnings expectations
In August 2012, Telecom said it expected flat to low single digit ebitda decline in the current financial year (last year its from continuing operations was $1.08 billion). The company expects adjusted ebitda to be in the range $1.04 billion - $1.06 billion. This change in guidance is primarily due to the broadband market having been more competitive than anticipated previously, the company says, as well as a softening in Gen-i’s outlook.

Big job cuts ahead
"Without sugar-coating it, job cuts will run into the hundreds," Mr Moutter CEO Simon Moutter said on a conference call.

Telecom's cost base was too high relative to its competitiors.

Every business unit would be impacted by what he called a "strategic shift."

There would be a material cost associated with the layoffs over the comming months, which the market would be updated on "in due course"

In August last year, Telecom said its head count was 7619 (down from 8629 before the Chorus spin-off). Since that time, there have been 379 job cuts.

Mr Moutter said in the company's restructure so far, around 150 jobs had gone from the company's retail division, around 100 from tech sevices and around 100 from other areas.

Corporate planning was still underway. He could not give more exact numbers for the cull in months to come.

Mobile gains since August
After several quarters of losing mobile customers, the company reported a net gain of 103,000 mobile customers since August (that is since its massive loss of customers with the loss of its CDMA network) - albeit many of them on the back of a low-margin $19 pre-pay deal.

When the mass of customers lost in the CDMA network closure are factored in, Telecom’s mobile base decreased by 15.2% to 1.723 million customers at 31 December 2012.

Telecom's spin is that most of the customers on its old network were low value customers.

And the company's latest numbers do seem to bear out that ditching-the-deadbeats theory. 

Average revenue per user increased by $5.43 or 18.6% compared to the first half of 2012 to $34.61.

Telecom half-year earnings summary. Click to zoom.

Held line on retail broadband
The company also turned around losses in broadband customers, making a net gain of 13,000.

Mr Moutter says the company will launch its first UFB fibre plans next month.

"Heavy price competition is hurting returns, but we're determined to meet the competition on price," Mr Moutter said on a conference call. Aiming to hold market share around 50% was the right decision.

Holding the line came at heavy cost however, with broadband competion pegged (along with softer Gen-i revenue) for softer full-year earnings guidance.

While broadband customer numbers rose, more generous data allowances and cheaper plans saw broadband/internet revenue fall 14.7% from $238 million to $203 million.

Click to zoom

Divisional results
Telecom's wholesale and international unit lifted adjusted earnings 5.6 percent to $113 million on a 7.4 percent fall in sales to $312 million. The unit got cheaper intercarrier costs from lower costs per minute and its arrangements with Chorus, with sales hit by falling international calls.

Retail increased earnings 3.2 percent to $357 million on a 3.5 percent decline in sales to $928 million. Mobile propped up the unit with broadband sales down on cheaper pricing, and the increase in earnings came from cheaper arrangements with Chorus.

Gen-i's earnings fell 1.6 percent to $186 million on a 4.9 percent decline in sales to $639 million as it faced increasing price competition and had fewer customers on the legacy copper-line services it delivers.

AAPT ebitda shrank 10 percent to $36 million on a 29 percent fall in sales to $263 million as the Australian unit went through the last transition of the sale of its consumer division.

Telecom received a smaller dividend from the Southern Cross Cable of $19 million in the period, compared to $26 million a year earlier. This week, the company teamed up with rivals Vodafone New Zealand and Telstra to look at paying for a new-trans-Tasman cable.

Big plan still unfolding
Mr Moutter said his full strategic plan would be revealed in May.

Today, he said Telecom was moving from "building things to focussing on the technology services market."

But otherwise he stuck to corporate-speak generalities, saying his company would "revolutionise the customer experience," "simplify the business" and "win the future."

(Read some franker comments from the CEO on his company's transition to a data-data-data future here.)

He also reiterated several recent aggresstive initiiatives, including flat rate data roaming in Australia, the transtasman cable joint venture with Telstra and Vodafone, the recently kicked-off 4G trial and the UFB plans launching next month.

On UFB and 4G, he had no further detail. The early phases of both projects were factored into current half-year capex ($466 million) which was not anticipated to change.

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