MONEY TALKS: Ringing the changes Telecom

By Paul McBeth

You don't have to be an avid reader of the business pages to have an opinion on Telecom. In fact it's probably better for your blood pressure if you don't.

Last week we had Telecom parade itself in the six-monthly corporate earnings ritual where it opens up its books for analysts to rake over the coals and use their own arcane methods to predict future profitability. The earnings themselves weren't too much out of the ordinary: falling sales as people quit using landlines, but increased profitability as it scrapes out more and more savings.

Even jobs cuts which will run into the hundreds didn't surprise too much - there was a hint in a Dominion Post story just before earnings and Telecom's been on a drive to trim its wage bill for several years now.

This was all par for the course.

What was more surprising was new chief executive Simon Moutter's looming stamp coming to the company.

Moutter is an old hand when it comes to Telecom. He was seen as Theresa Gattung's heir-apparent, and left to head up Auckland International Airport when he was passed over for the giant Scotsman Paul Reynolds.

Now he's back and has hit the ground running.

At last week's analyst briefing on the latest result, Moutter gave everyone a flash of his hand before the May investor day when all will be revealed.

Teleco faces material restructuring costs which will crystallise losses. Reading between the lines, anything that is losing money will be gone.

"We want to optimise the business around areas of highest value to the customer," Moutter said. And that meant staff wouldn't get any sugar-coating when their jobs are cut as he does things "fast, fairly and fearlessly."

This is brave new territory kind of stuff for a company that's often tread cautiously for fear of upsetting the horses among both politicians, who used to regulate Telecom, and its easily irritated customers.

Nonetheless, Telecom was clearly going to be in for a shake-up once it got rid of Chorus and finished its long-running battles with the competition regulators in the process. We imagined that was going to be in a fibre-based world.

But Moutter has slightly different ideas to what Paul Reynolds regularly told us, with mobile and data services the new centre of his world.

And looking at the numbers you can't argue. Mobile was by far and away the best performing unit for Telecom in the final six months of 2012. It was the only business unit to increase sales, logging $455 million which made it the biggest earner.

Most of that growth was from data services, meaning there's more scope for Telecom to do things without wires than with them. That's a far cry from what we were hearing when Telecom was pitching Chorus to build the government's ultrafast broadband network. In fact, it's and something that should be scaring the infrastructure company.

What's more, Communications Minister Amy Adams has announced the auction later this year of 4G radio spectrum - which lets you go really fast on mobile devices.

For the first time in a while, that means Telecom is looking at new top-line revenue opportunities.

Remember, the way Telecom managed to improve its profitability in the period just gone was by clamping down on the terms of its Chorus contracts, trimming bits here and hardening up deals there.

Which begs the question as to what Telecom should be selling.

Is it worth Telecom continuing to offer landline services over Chorus' copper lines, or should it just ditch that business entirely and use web-based alternatives?

Why does it need to keep its stake in the Southern Cross Cables trans-Pacific fibre-optics company if it's going to co-invest with rivals Vodafone and Telstra to build a new trans-Tasman cable, with much better specifications?

Is it time for Telecom to quit the ill-fated AAPT experiment in Australia altogether, and is the international calling business past its use-by date?

Are there better ways to service corporate clients than through Gen-i? And how long will Telecom keep running its Xtra email service?

These are the more interesting questions to start asking than simply how many more jobs will the company cut.

When Telecom and Chorus went their separate ways, the general thinking was that the network operator would be a run-of-the-mill infrastructure play spitting out regular dividends, while the retail unit would provide growth opportunities as a riskier venture.

Telecom's shares have gained 19 percent since the split in November 2011, recently trading at $2.305 apiece and have paid out 28 cents per share in dividends across three reporting period.

That's not too shabby a return for a company whose costs are more expensive than its rivals, so if you don't have the stomach for a radical overhaul of the second-biggest company on the stock exchange, maybe it might be time to cash in your chips.

Because by the end of the year Telecom is going to be a far cry from the straightforward phone company we all know and love.



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