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TNZ: Back from the brink‾

11 Aug 2008
00:00
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TNZ's half year results for 2007/08 catalogued the damage caused by two years of major regulatory reform.

This was compounded by the loss of roaming revenue in Australia as Telstra shut down its CDMA network in April 2008, leaving TNZ's CDMA network isolated. Mobile is usually a buffer against PSTN revenue decline, but mobile revenue decline of 3.1% for the half-year left TNZ with falling revenues overall, and an EBITDA decline of 8.0%. Growth in data, IT services and broadband could not offset this.

Full year results released Friday show that TNZ is not out of the woods yet, but there are also glimmers of hope.

Total revenue fell by 1.7%, broadly in line with guidance, and slower than the 2.9% decline for the half-year. EBITDA decline was 7.7% for the full year, which is in line with the half-year result. EBITDA margin fell from 46.3% to 43.5%, partly due to higher labor costs associated with its mobile and FTTN network builds.

It is necessary to unpack this to get a clear picture. The "death dive" in PSTN calling revenue, an alarming 11.2% year-on-year at the half-year mark, has slowed to 8.3% for the full year, and 2.7% on a quarterly basis. Total PSTN access revenues held up, dropping only 0.4%. Despite a continued drift of customers to resale competitors, the stabilization of prices in the competitive market is giving TNZ some much need breathing space.

Retail broadband revenue growth, which had virtually stalled at 3.6% for the half-year, grew 8% for the full year, showing that retail connection growth continues to improve after the dismal Q2 result. Wholesale grew faster however, and we estimate TNZ's retail broadband market share has now fallen to around 60%.

The big weakness is still mobile. The decline of 3.1% in mobile revenue for the half year worsened slightly in the second half, and the full year decline was 3.9%. We do not expect significant improvement until TNZ launches its national 3G/HSPDA network later this year. In the meantime, Vodafone is still soaking up high-ARPU customers who need to roam in the Australian market.

Can TNZ recover its dominance of the New Zealand market‾ Mr. Kennedy compares the overall picture to the Russian defense of Moscow in 1941.

Despite the disruption and defeats of the last two years, TNZ still has deep pockets and an unassailable lead in the fixed infrastructure market. The new FTTN network it is building will enhance its long-run position, even if higher labor costs are pushing down EBITDA margin in the medium term.

The picture in the mobile market is less favorable. TNZ's recent roaming problems have entrenched Vodafone as the mobile leader. In 2009, TNZ must approach the market as a challenger, albeit one with some attractive fixed/mobile bundling options at its disposal. The impending launch of its national 3G/HSPDA network is essential to winning back high-end customers, but it will probably need to price mobile broadband low in order to recover market share.

David Kennedy is a research director responsible for broadband and wireline research

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