Telecom will be holding a much anticipated investor day next Wednesday the 15th of May. The key issue for Telecom is declining revenues from its fixed line business due to strong competition leading to lower prices and the loss of customers. Telecom has lowered prices to stop losing customers but the reduction in price for bundled phone access and broadband is now around $75 a month down from around $100 a couple of years ago. This reduction of $25 a month across 600k broadband lines would cost Telecom approximately $180m p.a. in revenues. With Vodafone now offering free calling in its $75 bundle this could further impact Telecoms already declining $250m of calling revenues. To put this in context the consensus earnings for Telecom in 2013 is $322m.
The good news for Telecom is that they have the opportunity to offset falling revenue by lowering costs through reduced headcount, decreased capital expenditure and simplification following the demerger from Chorus. In March Telecom announced a reduction in staff numbers of up to 1200 people resulting in a reduction in payroll costs of around $100m. The market will therefore be looking if there are further measures the company can take to reduce costs but also to generate some revenue growth. One area of growth that Telecom may target is increasing IT services revenue through data centers and the use of cloud computing.
Consensus earnings data from market analysts currently forecasts that Telecom will be able to maintain and marginally grow earnings over the next three years. However, most analysts acknowledge that it will be hard work to do so and have put under perform recommendations on the company. The good news for investors and those seeking income is that if Telecom can maintain earnings it will be able to continue to pay a healthy dividend yield.
Disclosure : Milford Asset Management holds investments in Telecom on behalf of its clients.