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A 30 per cent fall in fourth-quarter earnings and a forecast of a second year of declining profit sent Telecom's share price on its biggest one-day plunge in more than two years.
Shares in New Zealand's largest listed company yesterday slid by as much as 38c to $3.30 - 10 per cent - after it reported net income for the three months ending June 30 fell from $250 million to $176 million. The stock rallied later in the day to end at $3.40, down 28c.
The fourth-quarter result contributed to a 16 per cent slump in net earnings for the year. Excluding the May 2007 sale of the Yellow Pages group, net earnings from continuing operations fell from $844 million a year earlier to $713 million.
And the company said profit might slump by as much as 30 per cent in the 2009 financial year.
Net income was likely to fall between $500 million and $540 million, keeping in line with chief executive Paul Reynolds' forecast of a fall in earnings over the next three years as prices stayed low, and new broadband and mobile network investments increased costs. Capital expenditure for 2009 was likely to be in the vicinity of $1.1 billion.
While Telecom's revenues grew 2 per cent to $5.67 billion, its operating expenses rose 5 per cent to $3.78 billion, and operating profit (ebitda) consequently fell 2 per cent to $1.89 billion.
Depreciation and amortisation increased by 17 per cent on the previous year, as the company increased its capital expenditure and moved to equipment with shorter lifecycles.
It is the fifth consecutive year that expenses have grown faster than revenues - two and a half times faster on average - squeezing the foundations of the group's profitability.
In the briefing yesterday, Telecom chairman Wayne Boyd said thecompany has entered a new era, and the board and management were committed to the challenges this presented.
"Shareholders have been affected, but the board have a great deal of confidence that the board and management team can navigate its way through this."
A return to profit growth was in the "not too distant future", he said.
Reynolds said he was pleased to achieve the guidance, despite market pressure. Costs had grown as a result of the flowthrough of transformation and regulation, but the company was pleased staff growth was essentially flat between the third and fourth quarters, and labour cost growth had slowed.
Forsyth Barr analyst Guy Hallwright said the decline in profits and the growth in expenses was to be expected.
"Telecom has had some of the highest margins in the business for a telco internationally ... and those margins are coming down to the levels that are closer to what we see in the European or US markets. That's a process that I think will continue."
Hallwright said some margin gain could be obtained from its next generation technology, which required less maintenance and support than the old networks.
First NZ Capital analyst Greg Main said the market reaction had to be put into the context of a weaker trading day, and the stock's recent strong performance.
"These results still highlight that Telecom has a way to go with regard to both its transformation and risks around that transformation. Until you see some positive, clearer signals in operating earnings, these things don't just get turned around on a dime.
"They've got a lot of hard work ahead of them - we believe they will get there eventually - but you don't want to pay for that too far in advance. You want to see some evidence of that before you credit the company too much."
The company declared an ordinary dividend of 8c a share for the quarter, bringing total dividends for the yearto 29c, down from 35.5c a yearearlier.
Its next results, for the first quarter of the 2008-09 financial year, would for the first time reflect the three separate business units.
