CABLE & WIRELESS' (C&W) net profit after taxes for the nine months ending December 31, 2003 plunged 46 per cent to $2.2 billion compared to the corresponding figure in 2002 of $1.2 billion.
And, the picture of the three-month period ending December 31, 2003, looks even bleaker. However, for the 450 workers that the company has let go, bleak might just be a term better reserved for them. In the press, on February 17, the company announced that they have closed a number of their business offices. Later on during the day, Wednesday Business understood that staff had been made redundant. The company confirms this. Errol Miller, director of C&W corporate communications states, "The largest number will come from the business offices that are being closed and the remainder from several other areas in the company." From 3,200 employees in 2001, one of the largest staff complement in Jamaica at the time, the company has consistently whittled down that number.
In March of 2003, the company laid of around 60 workers, bringing their numbers to 2,500. Perhaps this latest move is an attempt to stop the bleeding of the company's finances.
Net profits for the September to December 2003 period of $335 million tumbled 59 per cent from $821 million in the September to December 2002 quarter. Earnings per share (EPS) were right in line with the falling profits. For the March to December 2003 period EPS sank by 45.73 per cent compared to the same period in 2002, and the September to December 2003 period fell by 59 per cent. Compounding that, gross operating revenue fell by 10.18 per cent in the 2003 nine month reporting period but only fell by a modest 7.74 in the September to December 2003 quarter.
Looking at its 2003 revenue picture, revenue from voice services in the 9-month reporting period was down 11.62 per cent to $5.0 billion while in the September to December period, revenue was down 8.32 per cent. And while the profit picture looks less than rosy, there was good news to be found in the financials presented.
Cash provided by operating activities (the actual business of providing telecommunications services) was up in the March to December 2003 period by 29 per cent to $4.8 billion. Cash resources leaped by 64 per cent in the same period to $2.4 billion from $1.5 billion in 2002.
SHOULD INVESTORS
LOOK AT C&W?
So then, how should investors look at C&W? Granted, it is the dominant land-line provider and has substantial infrastructure investments in the island. But what of its future prospects? Analysts speak to the challenges faced by the company, but for investors with a long-term horizon, it could be a good pick. Mark Walters, vice-president of treasury and asset management at Dehring Bunting & Golding states, "C&W faces a double whammy. First, competition from Digicel is a great factor, and secondly, the reduction of international rates. In the past, to terminate a call in the United States, C&W collected US$0.60, now rates are down to US$0.03. The company was once a major foreign exchange earner; it is now a net user of foreign exchange. And so, C&W has faced a major cut in revenues that it used to earn. This money earned from the US was used to subsidise the local rates, but this is no longer the case."
Glen Warren, senior risk and research analyst at Guardian Asset Management agrees. "Two years ago, authorities in the U.S. reduced the amount of money C&W could earn from outgoing calls. And that is why local rates have gone up and long distance calls have gone down. It is not out of the goodness of C&W's heart to reduce our cost to make international calls. Because of this, I don't believe that cellular competition is the real reason for the reduced revenue."
Competition or not, the fact is that C&W needs to tackle the areas in their business operations that is a hindrance to increased profits. Our analysts give some outlook as to how that can be accomplished. Mr. Warren states, "C&W has to come good in the mobile market because that is were the revenue will come from." Mr. Walters adds, "C&W needs to maintain a fair share of the mobile market. They need to appeal to the teenagers and younger generation who will spend money on their cellular products. Another area that C&W could look at is the strengthening of the Internet market. Right now for corporate Jamaica they provide the back office infrastructure for Internet and email. Email is becoming the dominant force for communications and C&W should tap into that. In terms of landline services, it has to become stable. An increase of rates should be able to generate revenue."
However, there is a cost to increasing landline rates explains Mr. Warren. "Increases in landline rental rates will hurt C&W in the short term because people will switch to calling on their cell. But even in this, C&W won't lose 100 per cent because some people will utilise the C&W cellular network." And despite the results on the financials, the telecommunications giant has made some moves to put themselves in a better picture.
According to their annual report the company 'managed and shaped' their business in the following manner:
Grew their customer base by returning credit challenged customers to service has
Enhanced their cost-effectiveness and ease of use of our international direct dialling services been looking at its cost structure. It has been selling assets
Broadened our portfolio of Internet services. that don't contribute to the
Enhanced our value added data services proposition. bottom line and they have
Showcased our products and capabilities at a number of innovative customer events.
Explains Mr. Walters, "In response to reduced revenue and increased competition the company has been looking at its cost structure. It has been selling its assets that do not contribute to the bottom line and it has been getting more efficient and lean in their operations. Additionally, they have reduced the number of business offices and outsourced those tasks to independent contractors. Really, did C&W need four business offices in Kingston? The steps they are taking are logical."
But Mr. Walters warns that, "Cutting staff can mean a cut in quality of service. But I am confident that the management can navigate through that." For the coming year, Mr. Walters states, "Overall, they need to look at reducing the expense line. If they can significantly cut expenses then C&W can come back up to profitability." For the stock itself, Mr. Warren states that, "I don't see it rebounding for next year or so. For short-term investors, I would say to get it out of your portfolio. For long term investors I would say hold." Mr. Walters states, "The stock is a watch right now. Specifically, a watch to buy."
- Dennise Williams
