Telecom sails along on Jetstream

By PETER GRIFFIN IT editor

Telecom trumped analyst expectations with its $232 million profit for the three months ended March, but a note of caution on forecasts for next year's revenue dampened the market's reception of the good news.

The vital signs for the country's largest listed company are good - revenue was nearly $1.4 billion for the quarter, up 5 per cent, while earnings rose 18 per cent.

Telecom shed $930 million of debt in the year ended March and plans to continue aggressively paying down debt, which stood at $4.9 billion at the end of March.

A combination of strong revenue growth in the less traditional parts of Telecom's business - such as data and mobile, asset sale proceeds of $12 million and a lower interest bill - underpinned the result.

Jetstream growth was nearly 70 per cent for the nine months ended March. Revenue for data services overall was up 11 per cent for the same period.

Mobile was up around 6 per cent.

But the old stable of calling revenue is eroding - down nearly 10 per cent in the nine months ended March, thanks to loss of market share and falling prices.

For that nine-month period, Telecom made a profit of $597 million, up 20 per cent on the previous year.

A couple of one-off items pump up the figure: Telecom pocketed $28 million from the sale of its stake in Sky TV, and it also booked $12 million from selling its stake in AOL7, an Australian internet joint venture. It wrote off shareholder advances to the tune of A$115 million in 2002, when it made its huge write-down of Australian arm AAPT.

But analysts went away from a Telecom briefing yesterday digesting a more cautious message on future profit growth.

Telecom told them profit would likely be towards the bottom of forecasts, which range from about $795 million to $880 million, according to banker Macquarie.

"Other than the guidance for [the 2005 financial year], everything looks on track. Most likely market response is off maybe 1 per cent to 2 per cent, particularly given the weaker tone of offshore markets," according to a research note from Macquarie.

For the current financial year, a profit of $767 million is anticipated by analysts.

Telecom will look to capitalise on its growing momentum in mobile where it has spent heavily to catch up with Vodafone and broadband.

"It clearly comes at a cost," said chief executive Theresa Gattung.

While capital expenditure was revised down for the current period by $50 million to $600 million, it appears Telecom is gearing up for a major investment in its existing businesses.

Capital expenditure next year is expected to hit $650 million.

In the area of broadband alone, Telecom will spend $100 million over the next three years.

It is also investing heavily in people.

Some 72 jobs need to be filled, according to the company's website and after trimming headcount, Telecom's staff numbers grew 1 per cent to 4836 in the nine months ended March.

But "organic growth" is the name of the game for Telecom. Gattung scotched rumours that Telecom would follow Telstra into sizeable acquisitions.

"In terms of something big, the answer is no, at least for this management team," she said.

"Grand acquisitions generally lead to grand write-downs."

Telecom's Australian business finished $1 million in the black, down from $8 million a year earlier.

AAPT's chief executive, Jon Stretch, said the result had been hit by bad-debt provisions and higher costs of sales.

Looming on the horizon is more regulatory change for Telecom, with the Commerce Commission investigating mobile termination rates and the Government set to make a decision on local loop unbundling.

A dividend for the third quarter of 7.5c per share will be paid in next month, as signalled at the start of the year when the 50 per cent dividend increase was confirmed.

Telecom's share price closed down 5c at $5.59.