Telecom slashes spending outlook

UPDATE 10.50am: On a conference call Telecom chief executive Paul Reynolds focused on reduction in capex to $750 million in 2012 – a figure not previously expected to be hit until 2013, and a 25% reduction on this year's spending.

He said savings would come from a reduction in operational separation costs (put at $140 million a year for 2009 and 2010); the "in-sourcing" of 300 IT jobs previously outsourced to IT (on which Telecom "no longer needs to pay a margin"); the completion of the XT network (upgraded earlier this year to HSPA+) and the end of Chorus' fibre-to-the-node roll-out at the end of this calendar year.

Left unsaid was that if Telecom wins Crown fibre, it will then incur the costs of structural separation as it splits into two separately listed companies, one retail, one network.

Dr Reynolds would not comment on how a Crown fibre win would effect the 2012 capex projection of $750 million (which does not include any UFB element).

The company has bowed to reality to a degree, however, by withdrawing its 2013 guidance because of Crown fibre contract uncertainty.

Executive team to shrink further
The Telecom boss noted his company had recently reduced its executive management team from 10 to eight. Further reductions would follow, said Dr Reynolds.

The Telecom boss said topline growth was difficult due to new competition and low market growth overall. He quoted an IDC survey saying there would be growth of only 1% this year.

International off the block
Telecom International was no longer for sale, Dr Reynolds said, admitting there were no takers at the desired price. He noted that many similar business units were for sale around the world (Telecom International brokers toll carriage for phone companies worldwide, including deals that don't involved New Zealand. The business is now very commoditised, and of course affected by the likes of Skype).

The company's shares (NZX: TEL) were up 1.14% to $2.21 in early trading.

8.30am: Telecom, which recently switched to six-monthly reporting under new CFO Nick Olson, has issued a quarterly trading update (its next full update is scheduled for August).

The headline points are that:

• full year cap-ex is expected to be within the $900-930 million range for the 2011 financial year (including Christchurch quake costs), down from the $950 million to $1.0 billion indicated previously, and the second time the company has reduced its spending outlook.
•  a third quarter dividend of 3.5c a share (in line with previously announced), with full imputation. The company reiterated that its dividend reinvestment plan (DRP) and on-market buy back have been suspended due to the current status of UFB negotiations
• 2012 guidance: "adjusted" ebitda increase by $20 million to $80 million
• 2012 guidance change: capex of no more than $750 million – a figure previously not expected to be hit until 2013.
• A Southern Cross dividend of $23 million 
• 1.1 million XT connections reached in the third quarter
• XT rising from 46% to 51% of total mobile connections (representing 77% of revenue).
• A net gain of just 1000 customers over all across the CDMA and XT mobile networks as a whole
• Gen-i has won a Fletcher Building contract covering 5500 voice and data users
• 2013 guidance withdrawn because of Crown fibre certainty

Telecom's full-year 2011 net income and ebitda guidance is unchanged.

On the cap-ex reduction, the company said, "This reduction comes as we complete significant multi-year programmes of investment, such as the XT mobile network and fibre-to-the-node, and look to bring our capex-to-sales ratio closer to that of our international peers."

Chief executive Paul Reynolds said a renegotiation of a major contract with HP/EDS, which saw 300 outsourced IT roles moved back inhouse, was a major savings area, too, because Telecom was no longer paying a margin.

Deutsche Bank analyst Geoff Zame has previously told NBR that Telecom's cap-ex to-sales ratio (what it spends compared to money coming in) is one of the highest of any telco in the world.

Questions over cap-ex reduction
Credit Suisse analyst Greg Main told NBR that the "question is whether the reduced capex relates to projects being put on hold until the UFB is known, or if there are genuine capex savings.

"In reality there is probably a mix but we will have to await the conference call for clarification. In theory the higher free cash flow should result in a small increase in valuations (say five cents per share to 10c a share)."

Mr Main added, "The metrics look reasonable and a continuation of recent trends.

"Small losses in retail access lines, small growth in retail broadband, while mobile subs were flat with small postpaid growth offset by lower prepaid subs. 

"Southern Cross dividends received to date are $62 million compared to our 2011 forecast of $60 million. These can be lumpy but it implies a small upside to our forecasts."

XT users jump from 46% to 51% of total mobile base
The one million claim is now new; the company also said it had more than one million users on XT at the time of its February 11 half year update - but at that time it said XT user s made up 46% of its total mobile customer base.

Dr Reynolds said that Telecom's arpu (average revenue per user per month) continued to improved with the transition to XT.

He did not offer specifics, but Credit Suisse's Greg Main noted that the number of data devices "increased by 17,000 in the quarter which probably explains the postpaid increase but does imply they are still losing some underlying postpaid subs and voice revenues."

Telecom's old CDMA network is due to be have its last remaining service switched off mid 2012.

MOBILE CONNECTIONS

Vodafone: 2,465,000 (46.71%)*
Telecom:  2,193,000 (41.54%)**
2degrees: 580,112 (10.99%)***
MVNOs: 40,000 (0.76%)****

* Vodafone PLC 2011 half-year financial report
** Telecom 2011 third quarter trading update
*** 2degrees public announcement
**** Estimate based on MVNOs' comments to NBR. Mobile virtual network operators resell a wholesale service. Easily the largest is TelstraClear, with around 30,000 mobile customers using a rebadged version of Vodafone's network. Vodafone does not include MVNO numbers in its total.