Telecom in the red but also in the pink

Theresa Gattung

Thousands of new mobile phone customers propelled Telecom's New Zealand business to a strong second-quarter result and saw it trounce rival Vodafone, despite the company as a whole registering its first loss in 14 quarters.

The company reported an after-tax loss of $665 million for the three months to December after a $897 million writedown of its Australian phone business, but its trading profit in New Zealand grew 3.6 per cent from a year earlier.

Telecom added 135,000 new mobile connections in the second quarter, which fell over the holiday period, for a total of 1.8 million. That dwarfs its rival's 64,000 new customers over the same time and brings Telecom's market share to 47 per cent, with Vodafone - at two million customers - slipping for the fifth straight quarter to 53 per cent from 54 per cent.

"This is the best quarter we've had for several years, maybe ever," said chief executive Theresa Gattung.

But the company's underperformance in broadband strengthened the threat of Government intervention, with Communications Minister David Cunliffe yesterday sending the strongest signal to date that he is leaning toward regulation.

Total residential broadband connections reached 279,123, exceeding Telecom's target of 250,000. Gattung said the gain was evidence of "a strong and growing broadband story" in New Zealand.

But of those connections, only 22 per cent - or 63,495 - came through wholesale customers, missing by a wide margin the Commerce Commission's one-third or 33 per cent target.

In 2003, Telecom avoided regulation that would have opened up its network to competitors by promising to have 250,000 connections by the end of 2005.

It was understood by the industry and the Government that one-third of that total would come through wholesale but Telecom, in November, disputed ever making that promise; instead, it was aiming for one-third of customer growth.

Telecom's chief operating officer, Simon Moutter, said by that measure the company had met its goals.

Cunliffe said Telecom's goals were only "partially met" and a regulatory review was under way, with an announcement planned by mid-year.

"Although more progress on broadband has been made in the past 12 months than in any other year, we have barely kept up with the OECD average. That just shows as a country we need to find another gear still. The aim of the review is to find overdrive," he said.

Telecom's loss was widely expected due to the foreshadowed $897 million writedown that saw Australian unit AAPT's value further downgraded to A$628 million from A$1.4 billion, based on future cashflow forecasts.

Chief financial officer Marko Bogoievski said the company would begin its review of the unit next week, but remained committed to a presence in Australia.

Overall revenue was up 2 per cent to $2.85 billion.

For the half year, Telecom added 207,000 mobile customers versus Vodafone's 95,000.

Moutter attributed the increase to better marketing and an improved selection of handsets.

Total mobile revenue for the half-year increased 10.8 per cent to $380 million from a year earlier.

The strong mobile results helped propel Telecom's New Zealand second-quarter earnings before interest, taxes, depreciation and amortisation to $544 million, up 3.6 per cent on the year.

Gattung said Telecom was on track for positive full-year ebitda growth after posting a decline of 3 per cent for the year ended June 2005.

For the half-year, broadband revenue saw a 25.2 per cent increase, to $169 million.

Telecom's local service revenue continued to decline, falling 1.9 per cent to $523 million and calling revenue was also down 2.6 per cent to $489 million.

The company said both declines were part of a global trend, where customers were moving toward mobile phone and internet-based calling.

Telecom said it would pay a fully imputed dividend of 9.5c a share.