AAPT millstone pulls Telecom deep into the red

Dominant position in New Zealand keeps revenues rolling in however

Telecom's Australian operation AAPT continues to hurt the incumbent's financial position. A second write-down of $404 million in AAPT's value saw Telecom report a large full-year loss of $435 million after tax. In 2005, Telecom reported a $967 million profit.

This year, Telecom has written down AAPT by a total of $1,291 million. AAPT was fully purchased in November 2000, after Telecom had acquired 78% of the carrier the year before. The cost of the transaction was around A$2 billion, but with the recent write-downs, Telecom now says AAPT is only worth some A$270 million. It has so far been unable to sell AAPT.

CEO Theresa Gattung singled out the strong performance of the New Zealand market, as a factor offsetting the red-ink haemorrhaging in Australia. At home, Telecom's EBITDA increased by 2.% for the full year.

Less the impact of the troubled Aussie operation, Telecom scored a healthy $820 million for the full year, and $203 million in the June quarter. This compares to $857 million for the last year and $214 million for the June quarter 2005, and shows a slight revenue downturn.

Total revenues were down slightly, 1.9%, from $5.65 billion last year to $5.755 billion this year.

Gattung says broadband, mobile, directories and IT services did well for Telecom. The telco's revenues from mobile services increased 9.6% and now stand at $774 million. Money from voice calls saw a modest 2.7% increase, but data earnings shot up by 54% in comparison. Including interconnection revenues for its mobile network, Telecom's average earnings per customer were $45.80 a month.

Another stellar performer for Telecom was broadband. Earnings in that area are up 17.9% this year to $336 million, on the back of 279,000 residential and 100,000 wholesale customers. The latter two figures grew 58.5 and 186% respectively.

Telecom now has a total of 435,000 broadband customers. Wholesale customers account for just under 23% of the total. This despite Telecom's promise to the government that a third of broadband customers would come from wholesale and resale by the end of last year.

Other revenue-positive items include data, up 5.8% to $438 million and IT services which increased a healthy 12.3% to $346 million. Directories still earn Telecom good money, having brought in $248 million last year, a $19 million increase.

Telecom's international phone service reaped $343 million this year, a 6.2% increase from 2005. However, according to Telecom, the increase is due to an accounting change. The telco has gone from net settlement of calls to gross, which increases both revenue and expenses. National calling meanwhile dipped 5.9% this year to $586 million. The decline in national calling revenue meant Telecom's phone service saw a small, 1.8% decrease last year to $976 million.

Criticised by the government for not ploughing enough of its revenues back into network investment, Telecom's chairman Wayne Boyd announced that the capital expenditure will increase next year. It's a modest increase however, some $49 million or 6.7%. The increase is the same as for the last year.

Interrim dividends are set at 7¢ per share for the first to third quarters of 2006/07 year; Telecom however says it'll reintroduce a three per cent issuance discount for share holders who decide to reinvest the dividends in the company.

A fully imputed special dividend of 5¢ per share is also payable by Telecom, which paid out a total of 10¢ per share in such dividends last year.

Pointing to the future, both Boyd and Gattung say that Telecom was transforming itself to work with the new regulatory environment in New Zealand. The telco intends to formulate a range of legally binding undertakings to ensure its wholesale operation, which it says has been separated from its retail arm, will not discriminate against access seekers and provide equivalent service to them.

An independent oversight group will monitor the undertakings, Gattung says, but didn't give any details to its composition or when it will be formed and become active.

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