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2degrees makes $82m loss, tips profit in 2012

Revenue grows by 72% to $185.4 million as the company heads for its millionth customer at some stage this year. CEO has 4G spectrum auction warning.

Pattrick Smellie and NBR staff
Thu, 28 Jun 2012

BUSINESSDESK: Mobile phone operator 2degrees posted an $81.9 million operating loss in its second full year of operation and is on course to break even on an earnings-before-interest-and-tax basis this year, chief executive Eric Hertz says.

The company lodged its accounts for calendar 2011 with the Companies Office today, showing 72% revenue growth to $185.4 million as the company heads for its millionth customer at some stage this year.

"We're pleased with progress," Mr Hertz told BusinessDesk. "These results show a 56% decline in operating losses as a proportion of operating revenues. We've become a $185 million [turnover] company in two years,"

The operating loss for calendar 2010 was $73.4 million, on revenues of $107.8 million.

Service revenues almost doubled in the latest period to $152.8 million, compared with $86.8 million in 2010, while equipment and other revenue rose to $32.6 million, from $21.0 million the year before.

Funded by private equity from the US and a Maori investor, Hautaki Trust, 2degrees launched its retail mobile service from scratch in August 2008, and has wracked up accumulated losses since inception of $247.4 million, in line with expectations during a three to five year start-up phase.

Mr Hertz says 2degrees is "still in the investment phase", with some $450 million of capital committed to supporting the company's growth and investing in its own national mobile network.

A further $50 million is to be committed this year to support both capital expenditure and operating losses, and equipment supplier Huawei had committed $120 million of financing to help fund network development.

"This year [2012] will be the first year where service revenues will exceed operational expenses. We will be ebit [earnings before interest and tax] positive," he said, although a net tax-paid profit was not expected until between the fifth and seventh year of operation.

As well as building out its 3G mobile network, 2degrees will be on the hook with its competitors, Telecom and Vodafone, for the cost of rolling out a next generation 4G network, when the government allocates new spectrum for even faster mobile data services later next year.

950,000 customers, 20% of pre-paid market
Mr Hertz ays the company has just under 20% of the pre-paid mobile market, and around 100,000 of its 950,000-plus customers are on post-payment plans, which were launched in August 2010, along with offerings for small businesses added last year.

Mr Hertz estimates the mobile market in New Zealand is now at approximately 120% penetration, compared to 110% when 2degrees launched.

He predicts the explosion in use of tablets and SIM card-based data transmission to control domestic and commercial technologies will see that rise to between 300% and 400% over coming years.

4G spectrum auction warning
On 4G spectrum allocation, Mr Hertz says the government had a choice between trying to maximise its own revenue through mechanisms such as competitive auctions, but risked shutting out competitors if it took that route.

While it might forego revenue by specifically allocating spectrum evenly to competing players, economic analysis to date suggested net benefits to New Zealand economy as a whole from more competitive mobile offerings would more than compensate for such lost revenue.

"If they want to ensure it's competitive they need to get it across the three players," said Mr Hertz, who suggested "some kind of benchmark price" based on international comparisons and New Zealand market characteristics could be used to set spectrum charges.

You've come a long way
Telecommunications Users' Association boss Paul Brislen told NBR ONLINE, "It's great to see them doing so well after such a short space of time. They've shaken up the market and in doing so are nearly at the 1 million customer mark." 

By contrast, Vodafone has around 2.4 million customers, and Telecom about 1.9 million.

"It's a credit to their hard work and it's good to see it paying off for the users," Mr Brislen said.

Pattrick Smellie and NBR staff
Thu, 28 Jun 2012
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2degrees makes $82m loss, tips profit in 2012