KEY POINTS:
Increased costs and falling calling revenue have sent Telecom's third quarter profit down 28 per cent.
The company yesterday reported a March quarter net profit of $140 million, down from $239 million a year ago, or $195 million excluding the contribution from the sale of the Yellow Pages Group.
The fall contributed to a 22.5 per cent decline in net profit for the nine months to March 31, falling from $693 million a year earlier to $535 million.
Nine-month operating revenue was up 1.4 per cent to $4.21 billion, but expenses rose 4.5 per cent to $2.8 billion. Earnings per share fell to 28c from 35c. A fully imputed dividend of 7c per share was declared.
First NZ Capital analyst Greg Main said the result was in line with expectations and more of the same could be expected in the short term.
"Longer term that's a different story. But I guess that's the crux of the matter at the moment, is that people can see some of the short term issues and they really want to see some long term evidence before they'd re-rate the stock."
Telecom shares closed up 5c at $3.90.
The company is in the middle of a government-imposed reorganisation that is forcing a three-way split and the opening of its network to competitors.
"People weren't looking at the result so much as to what number was reported, they're looking at the result today as an indication as to where the company may be headed," said Main.
Forsyth Barr analyst Guy Hallwright echoed the sentiment.
"The interesting quarters are going to be towards the end of the year when we start to see the new mobile network up and running, but even that, at the last quarter of this calendar year, is probably going to be too early for any real impacts from that."
The March quarter saw a 22.3 per cent increase in broadband and internet revenue. Total DSL broadband connections increased by 40,000, with Telecom Retail securing 48 per cent, up from 26 per cent in the second quarter.
Chief executive Paul Reynolds said overall performance for the quarter was slightly better than expected, reflecting success with market share retention efforts, lower cost of sales in mobile, and an improvement in ebitda in Australia as the benefits of the AAPT-Powertel merger begin to be felt.
Reynolds said progress had been made in ICT and broadband in the past quarter to support the strategy on building customer preference for Telecom's technology.
Supporting this strategy has seen the company's capital spend in the nine months rise 12.7 per cent to $632 million. For the 2007/2008 financial year, it is forecasting capital expenditure of approximately $975 million.
Labour costs, meanwhile, jumped 23 per cent to $216 million. Reynolds said the increase was due to the acquisition of Powertel, growth in new business requiring more staff to service those contracts, and issues of "complexity".
"The business has a great deal more complexity to manage than it did a year or two years ago."
The operational separation, the roll-out of a new fast broadband mobile network and work on future services all required additional staff, he said.
Reynolds said improvements such as the WCDMA mobile network, expected to be operational later this year, would help offset the expected falls in traditional revenue streams. .
"They will progressively over the next two to three years offset the adjustment pressure on our business as a result of regulatory changes and increased competition on our traditional business."
