Telecom NZ: like turning the Queen Mary

David Kennedy/Ovum
08 May 2008
00:00

Telecom New Zealand's third quarter results, released late last week, show that the company is struggling to turn around its grim first-half results. Year-on-year operating revenue in the New Zealand market, which dropped 2.9% the first half, fell 2.2% for the three quarters to hit $2.45bn ($NZ3.14bn). Declines in traditional areas such as PSTN and dial-up Internet were only partly offset by growth in broadband and IT services. EBITDA is still falling, but the rate has dropped to 7.4%, after a half-year fall of 8.0%.

Expenses rose a robust 4.2% compared to the same quarter last year, almost entirely due to rising labor costs. Headcount rose because of internal duplication due to operational separation, a larger network construction workforce, and wage pressure.

TNZ's expectation is that EBITDA will continue its decline into the next financial year, albeit at a slower rate of 4% to 6%.

It is a measure of TNZ's predicament that these results were better than expected. Despite some small gains, TNZ has still not recovered from the disruption caused by the government's extensive re-regulation of the sector.

Some hopeful signs are beginning to emerge. For two years, TNZ has been focused on the government-mandated reforms, and there have also been a series of management changes. These are now largely complete, and the new management can now turn to growing the domestic business and delivering benefits from the acquisition of PowerTel's network in Australia.

As we suggested it would, TNZ's retail broadband performance is bouncing back after a dismal result in the previous quarter. The introduction of new wholesale bitstream services had decimated TNZ's retail growth, but quarterly broadband and Internet revenue grew 14.2% over the previous quarter. TNZ is now winning 48% of new connections, compared to 26% in the previous quarter.

It is disturbing that mobile revenue continued its decline. TNZ faces a tough competitor in Vodafone, but it must lift its game here, especially in data revenue growth where TNZ isn't meeting regional benchmarks.

However, TNZ is also on track to launch its W-CDMA network later this year, and has secured a deal with Brightstar for supply of handsets. If the experience of Telstra in Australia is any guide, TNZ can expect significant ARPU uplift if it can quickly migrate its existing customer base onto the new network. The real benefits will flow when TNZ seizes the opportunity to close down its old CDMA network, but this is still in the future.

Two years ago, TNZ dominated the New Zealand market. Under the new regulatory regime, that can no longer be taken for granted. TNZ is still in the throes of a painful adjustment, and it's too early to say how and when it will emerge. But performance in broadband, and particularly mobile, will be crucial to the final outcome.

David Kennedy, Research Director

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