Spending to trim Telecom profits

Telecom shares slipped yesterday as the company warned that profits would be hit by its investment in new technologies.

Chief executive Theresa Gattung said full-year earnings would be at the low end of analysts' $795 million to $837 million forecasts.

In February, she predicted annual profit of $816 million.

Gattung also expected 2006 profit at the low end of forecasts of $811 million to $880 million.

The predictions came as Telecom said profits for the three months to March were $259 million, up from $232 million in the same period of last year.

At one point yesterday the shares fell 22c to a six-month low of $5.79, before recovering to close down 8c at $5.93.

Gattung remained upbeat. "We're pleased with this result, notwithstanding whatever happens to the share price today, tomorrow or next week," she said from Sydney.

"This is a long-run game. We're managing declines in traditional business [and] we're pleased with momentum in the new areas."

James Lindsay, equity manager at Tyndall Investment Management, said the warning implied downgrades of 3 per cent and 5 per cent in 2005 and 2006 respectively.

Gattung said Telecom's management had chosen not to just "sit and milk the business", embarking on a process she likened to "rebuilding the jumbo while the plane is flying".

It is making "measured investments" in mobile, broadband and IT services to get growth to offset the continuing decline in traditional fixed-line revenue, which fell 11 per cent to $328 million.

She expected growth in costs to outstrip growth in revenue "for some time".

Capital expenditure will be as high as $775 million in 2006, up from $700 million this year.

Telecom is focusing on moving customers from analogue to its more lucrative digital cellphone network and is subsidising handsets.

About a third of Telecom's 1.5 million customers remain on the analogue network. Telecom is also subsidising modems to promote high-speed internet services.

The three-month result was boosted by a $22 million gain from the sale of Telecom's stake in satellite provider Intelsat. Operating revenues grew 3.4 per cent, less than half the 8.8 per cent rise in operating expenses. Cost of sales rose 38 per cent to $231 million. Telecom's acquisition of the Gen-i and Computerland companies increased labour costs by 23 per cent to $177 million in the quarter. The buys were the main reason staff numbers increased by 1315 to 6151 in the last year.

Gattung would not rule out cuts but said Telecom was not on a drive to trim staffing.

Telecom added 64,000 mobile phone customers in the quarter with cellular and other mobile revenue rising 15 per cent to $179 million.

Revenue from IT services increased 44 per cent to $252 million. Residential broadband customers rose 38 per cent quarter-on-quarter to 169,937. Telecom is confident of reaching its 250,000 year-end target. Australian subsidiary AAPT contributed a $5 million profit, up 400 per cent, on revenue down 8 per cent to $333 million. Of Australia, Gattung said: "We have to think outside the box as how, as a small player, we compete in this market."

NEW TRICKS IN BATTLE FOR MARKET SHARE

To counter declining revenue from traditional landlines, Telecom is betting on new technologies.

* So-called third-generation mobile phone services enabling the likes of video streaming, photo and video messaging, and high-speed wireless access to corporate networks.

Chief executive Theresa Gattung said an "exciting range" of cellphones would be available soon.

A deal with American mobile phone operator Sprint has opened handset manufacturers' previously closed doors to Telecom, bolstering negotiating power.

This helped Telecom to compete with rival Vodafone, part of the world's biggest mobile phone company, Vodafone Group.

After ceding dominance of the cellphone market to Vodafone, which has 56 per cent market share, Telecom is striving to claw this back. It is targeting 50 per cent of mobile market revenue growth by the end of June and now claims 43 per cent.

* ADSL technologies, which give high-speed always-on internet access across the old copper network. For home users this allows people to download movie or music clips. Meanwhile businesses such as farmers are increasingly dependent on high-speed internet access to do their banking, accounts and herd management.

* In Australia, where Telecom's subsidiary AAPT faces cut-throat competition for business customers from larger rivals Telstra and Optus, AAPT is refocusing on small- and medium-sized companies. Here Telecom will invest in bundling products and services.

Demands for communication services and the need to keep in touch were insatiable, Gattung said.