Analysts weigh in on Telecom's one billion

IDC says Telecom's numbers show the telco is under pressure to make up for declining revenue through cost cutting

Telecom posted a half-year net revenue of $1 billion this morning, but not all analysts are convinced everything is rosy at New Zealand’s largest telecommunications company.

Glen Saunders, telecommunications analyst for IDC, says a closer look at Telecom’s numbers shows pressure to make up declining revenue through unsustainable cost cutting.

“I didn’t see anything from today that gave me confidence in what the future of the business is, where its revenue is going to come from, and how sustainable its cost base is,” says Saunders.

The company has done well for the challenging environment it is in, but delving deeper into the earnings sheet shows pressures on Telecom’s headline revenues, says Saunders.

Saunders says the revenue figure looks better than it is because of major cost cutting initiatives, including reductions in headcount.

“The only reason Telecom is in a reasonably profitable state at the moment is because it’s been stripping as much cost out as it can while revenue declines,” says Saunders.

Telecom says it reduced costs by 11 percent, and headcount by 5 percent (not including the Chorus demerger), during the second half of its 2011 financial year.

“It doesn’t take a rocket scientist to figure out you can only cut so much cost from a business that size.”

Cost cutting and restructuring is the norm for established telcos facing ever increasing competition, says Guy Hallwright, research director at Forsyth Barr.

Hallwright expects there to be more job losses at Telecom through 2012 as the company looks to make further cost cuts.

“Every incumbent telco around the world is facing declining fixed line because of increased pressures from new players in the market ,” says Hallwright.

Hallwright says telcos overseas are making up the decline in fixed-line revenue through broadband and mobile services.

Telecom added 7000 new broadband connections between July and December last year, and made over $150 million in broadband revenue. In the same period its mobile revenue grew by 12 percent to $445 million.

In the six months to the end of December last year, Telecom’s total fixed line connections declined by around three percent, with revenue declining by around four percent.

Calling revenue declined by 13 percent, which Telecom says is a result of a general downward trend in the volume of calls made in New Zealand, and a reduction in the Mobile Termination Rate (MTR) from May last year.