KEY POINTS:
Telecom bosses lamenting an "uninspiring" result for the half year to December say that New Zealand's biggest public company is "stretched" and its results will get worse before they get better.
Telecom's problems have come home to roost, combining in what chief executive Paul Reynolds called a "disappointing" result.
Reynolds is sticking to the company guidance that it will end the year on June 30 with New Zealand profits within 8 per cent of last year.
But Goldman Sachs JBWere analyst Tristan Joll said it was disappointing that the company was at the bottom end of its profit guidance.
It would need to work hard to keep the fall in profits under 8 per cent.
Analysts - who said the half year results to December 31 were slightly worse than they expected - say that the company may have already faced off some of the problems through aggressive competition.
As Reynolds faced sharemarket analysts and media yesterday he acknowledged the company had dropped the ball with falling revenue from retail markets such as broadband and mobile phones.
Telecom shares plunged 15c to close at $3.95. At one stage they touched $3.91, their lowest price in 14 1/2 years.
The half-year profit came in at $397 million, down $57 million or 12.6 per cent on the previous corresponding period.
Chief operating officer Simon Moutter said that in his eight years at Telecom he had never seen it so stretched on a wide range of fronts.
"Our people are designing and delivering on the Government separation policy, Commerce Commission regulation, the rapid migration of technology and next generation technology delivering on the promise of better broadband," he said.
Forsyth Barr analyst Guy Hallwright said the market was looking forward to a Telecom briefing for investors on April 10 that could offer more solutions.
In the retail battle Telecom had decided not to match Vodafone which had made a "land grab" by signing up customers for deals that were uneconomic but which reduced Telecom sales. These deals had now ended, he said.
Hallwright and Joll agreed that the offers that hurt Telecom's bottom line may have bought forward some of the problems.
As a result it may have had to deal with some of the problems that had been expected in the 2008-09 financial year, said Hallwright.
Increased costs also rose in part because of increased staff numbers.
Moutter said that staff levels were up by 7 per cent partly because of the extra work generated by its corporate IT division Gen-i.
Labour costs for the second quarter were $149 million, up 18.3 per cent.
Gen-i's success in securing large-scale contracts had also led to additional costs at the start of projects.
Telecom also faced dealing with a number of operational separations. Calling revenues were down, primarily in the toll calling market, because of more customers using their mobiles for calling, and competitive pressure.
About 23,000 residential customers moved their home phone lines from Telecom to one of its retail competitors during the quarter. Mobile voice and data revenue grew just over 1 per cent, at the lowest end of the company's expectations, despite adding 48,000 new mobile connections.
"The outlook is for continued pressure on the overall revenue in mobile with a lot of market activity centring on fixed, mobile and bundled offers," said Moutter.
Telecom is enjoying the benefits of a big increase in people moving to broadband but benefited mostly through its wholesale division, selling capacity to other companies. Wholesale operations were up by 10.6 per cent with broadband and internet up by 31.8.
But of the new broadband users in the six month period only 26 per cent signed up with Telecom.
The company estimates it holds more than 60 per of the internet market. Reynolds said this would fall to below 50 per cent because of the upheavals but said the company would return to 50 to 60 per cent.
Telecom said pre-paid mobile options had worked well but the contract offerings had not been appealing enough. The profits for its Australian operations had been reduce by $10 million and were now $80 to $90 million.
Joll said he agreed that during the present changes in the market, Telecom had to keep a lot of balls in the air, but it had to deal with them.
