Wellington, May 7 NZPA - Telecom boss Paul Reynolds made soothing noises about the company's troubled new XT mobile network and hit out at the Government today as the telco reported falling third quarter revenue and profit.

He attributed the result to "a very challenging operating environment, including increased competition, the continued impact of the economic slowdown, further regulatory interventions and issues with our XT network".

Along with its accounts for the three months to the end of March, Telecom today also made public a report by British-based Analysys Mason into failures in the XT network. The report found the failures were due to the network and supporting operations not being ready to manage the levels of traffic experienced.

The results showed a 10.1 percent fall in revenue for the third quarter to $1.27b, with adjusted ebitda (earnings before interest, tax, depreciation and amortisation) for the quarter down 2.9 percent to $464m.

Dr Reynolds said that when that ebitda figure was adjusted for the "very volatile" dividends from the Southern Cross cable the result was up 2.7 percent.

In the third quarter the company received $14m from Southern Cross, down from $40m in the third quarter of 2009.

Net profit for the three months to March was down 39 percent from a year earlier to $97m.

A dividend of 6c per share is to be paid for the third quarter, in line with the company's intention of paying dividends of 24c per share for the 2010 financial year.

For the 2011 financial year it introduced a new dividends policy under which the dividend target will be about 90 percent of adjusted net earnings.

Dr Reynolds said the Analysys Mason report into XT was "sobering but it's heartening as well, in the sense that there's some very clear lessons for us and (network designer, builder and operator) Alcatel-Lucent to fix, and we fixed them.

"We've got on with some pretty massive programmes of work in the last quarter to bring XT up to speed," he said. Recommendations in the report had now been substantially carried out.

"We've got a new senior management in Telecom, and at Alcatel-Lucent driving through, first of all, the right governance framework between us and Alcatel-Lucent. That definitely needed some attention to detail," Dr Reynolds said.

"Network performance has indeed improved very significantly."

XT connections grew by 128,000 in the quarter, while mobile revenue in Telecom's Gen-i unit grew 7 percent.

Dr Reynolds also took the opportunity to lament the regulatory environment Telecom was faced with.

"In terms of regulation, we have seen further interventions added to an already very complex regulatory model," he said.

"In addition, while preparing for the radically different, fibre-based world envisaged by the government's UFB (ultra fast broadband) initiative, we are continuing to deliver an operational separation model designed for a copper world."

Telecom had a "very, very significant team" working on the UFB proposal, which would reshape the structure of the industry.

It was clear that Telecom was one of, if not the most, heavily regulated telco in the world, Dr Reynolds said.

New regulatory interventions, such as mobile termination rates and the rural broadband initiative, were being layered on top of existing regulations.

"Delivering all of that at once creates huge congestion in the business. It's clear the playing field is tilted against Telecom."

Deep policy thinking was needed, with UFB needing far reaching regulatory simplification and change.

Telecom chief financial officer Russ Houlden said that in coming up with its new dividend policy the company had modelled several policy options and tested them for various sensitivities.

Investors had a wide range of views on dividend policy, with some favouring extending the 24c dividend floor while others favoured a return to a 75 percent or lower payout ratio.

The 90 percent option was favoured because it was consistent with retaining current credit ratings, and Telecom believed it could be fully imputed.

It also produced a shareholder dividend yield for the 2011 financial year which was consistent with that for 2010 for New Zealand resident shareholders, and it achieved an appropriately managed reduction in the leverage of the business.

NZPA WGT mjd gt