Hutchison Blows Half A Billion

The Age

Wednesday March 8, 2006

COLIN KRUGER, SYDNEY

NOT MANY companies can make a $547 million annual loss and claim progress, but Hutchison Telecommunications Australia pointed to the numbers as evidence that its multibillion-dollar investment in 3G mobile services is starting to pay off.

It was certainly an improvement on the $690 million loss for the year to December 31, 2004, but it was strong revenue growth from 3 mobile services, and the subsequent improvement in underlying earnings, that the company drew attention to.

Mobile service revenue lifted by $235 million for the year to $758.2 million, which led to a $220 million improvement in earnings before interest, tax, depreciation and amortisation (EBITDA).

This still left Hutchison with an EBITDA loss to the tune of $180 million for the year.

But the gap is narrowing rapidly as each new customer accelerates the trend towards break-even.

"This largely reflects the fixed-cost nature of the business, ensuring that a high proportion of incremental revenue growth flows to EBITDA," said Hutchison chief executive Kevin Russell.

"(It's) very easy to see why subscriber growth is the No. 1 goal of this management team," said Goldman Sachs JB Were analyst Christian Guerra, in a note to clients yesterday.

Subscriber numbers provided more surprises. Early last month Hutchison announced that it would commence migration of its Orange customers from the older CDMA network to its higher-margin 3 business. The company reported yesterday that 100,000 subscribers had moved across, which was well above its expectations, with minimal customer loss to rival networks.

"This is very encouraging for Hutchison: other competitors have launched focused marketing campaigns encouraging Orange customers to switch providers and, as yet, they don't seem to be working," said Ovum research director Neale Anderson.

Hutchison 3's subscriber base reached 806,000 this month compared with 654,000 users at the end of last year.

Further increase to the number of subscribers bodes well for 3, which reported strong financial growth last year. Service revenue almost doubled to $483 million and, just as significantly, non-voice revenue more than tripled from the previous year to $112.5 million.

Mr Russell said strong 3G subscriber growth was expected in the future, with sales buoyed by the entry of its mobile phone rivals into the market late last year. But he indicated that not all of the competition was welcome.

Telstra, which has distanced itself from its 3G infrastructure sharing agreement with Hutchison, in favour of building its own faster 3G network, was singled out for attention.

"Telstra is clearly, in building the (high-speed mobile) network, looking at a strategy that will try and dominate the mobile marketplace with ubiquitous national coverage," Mr Russell said.

Telstra won't necessarily give access to any other mobile operator, which Mr Russell said was a "competitive issue".

"I think there will be regulatory questions there over the coming couple of years, and I guess we will see how those issues pan out," he said.

None of the above will bring Hutchison within shouting distance of a profit any time soon - losses of around $200 million are forecast for 2008 - but that is not a problem while the telco is backed by Hong Kong billionaire Li Ka-shing.

Hutchison shares dropped 1? to close at 27? yesterday, but are still up for the week.

HUTCHISON'S 3G WOES

? Recorded $547.3 million net loss in 2005, down 20.7 per cent.

? 3G customer base stands at just 806,000.

? Operational revenue up only 18.5 per cent to $916 million.

? Service revenue up 45 per cent to $758.2 million.

© 2006 The Age

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