Chorus says UFB will cost $300m more than expected

Chorus performance since its Nov 2011 IPO (S&P Capital IQ)

UPDATE / 11.45am: Chorus shares [NZX:CNU] were down 1.97% to $2.98 in late morning trading.

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9.45am: Chorus, the telecommunications network operator spun out by Telecom at the end of 2011, met analyst expectations for its first-half earnings, while raising the forecast cost of building a nationwide ultra-fast broadband network by $300 million.

Earnings before interest, tax, depreciation and amortisation of $331 million in the six months ended December 31 were in line with the $332.5 million forecast by Forsyth Barr analyst Jeremy Simpson.

The Wellington-based company posted a net profit of $84 million, or 22 cents per share, on sales of $525 million, compared to Simpson's expectations of $80.8 million and $516 million, respectively.

The results do not have an easily comparable period, as Chorus was still under the Telecom umbrella until November 2011.

Chorus raised its expectations for the total UFB build to between $1.7 billion and $1.9 billion from a range of $1.4 billion and $1.6 billion, and flagged capital expenditure of $640 million to $690 million this financial year from previous guidance of $560 million to $610 million.

"While we have made progress and reduced deployment costs for about 90 percent of our ultra-fast broadband build areas, we did not anticipate the extreme costs in the remaining 10 percent of areas," chief executive Mark Ratcliffe says in a statement.

"This is specifically because of the significant variability in regional compliance requirements and civil work that is driving up the cost per premises passed."

Rollout consistent

Chorus says the rate of its UFB rollout has been consistent with expectations, with building work completed for 88,590 premises as at December 31, and it is on target to pass 149,000 premises by the end of June this year.

The board declared an interim dividend of 10 cents per share, payable on April 12. The stock fell 1 percent to $3.04 on Friday.

Chorus is at loggerheads with Telecommunications Commissioner Stephen Gale, who surprised the Beehive by indicating he would probably impose sharp cuts to the regulated price of unbundled bitstream access services of the company's ageing copper lines.

That has since been put on ice by Communications Minister Amy Adams, who has brought forward a review of the law governing the sector.

The government has provided Chorus with a $929 million subsidy to build the fibre network and there was an implicit expectation the regulator would go easy on the network operator on its regulated business.

Ms Adams' decision gave Chorus enough certainty to shore up its dividend guidance and it expected to pay 25.5 cents per share in 2014, provided all things remain the same. The board will deliver longer term guidance once the government's review has been completed.

Chorus increased its number of total fixed line connections to 1.79 million as at December 31 from 1.78 million six months earlier.

Baseband copper connections fell to 1.56 million from 1.59 million, while unbundled copper local loop connections rose to 109,000 from 97,000. Fibre connections rose to 15,000 from 10,000 and UBA advanced to 72,000 from 50,000.

(BusinessDesk)

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11 Comments & Questions

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By the time they roll out the UFB the technology will be obsolete – in fact, it already is.

We will just have a newer version of copper via fibre in the ground (or hung on poles as mooted recently to save costs). Meanwhile, other countries like Australia roll out the current fibre versions with bigger capacity.

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Welcome to NZ. Everything here is slower, smaller and cumbersome.

Such a lovely country to live in and plunder though.

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Indeed, just wait for the cost over-runs, budget blowouts and fancy accounting to appear so a select few get very rich out of this white elephant.

It doesn't matter though, the weak willed middle class will just have to work harder and pay more to cover it, as they always have.

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Yes, we are a small country attempting to maintain a first world ICT infrastructure on a very tight budget. What's your point?

Yes, Australia is a bigger country than us and can afford a bigger system.
Your comments really only state the obvious and don't really offer any insight...

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No.

The UFB networks use exactly the same fibre architectures as the NBN network in Australia. Both are a mix of point-to-point and GPON fibre. The P2P products are really aimed at businesses, and the GPON is aimed at the residential customers.

Certainly over time the mix of P2P/GPON and the speeds down each will climb. But right now these are the most pragmatic and appropriate fibre technologies available today for end-users.

If you think you need better then you can buy dark fibre off the LFC and light it yourself. Be my guest. You can get your own 40Gbps channel if you like. But you will pay $$$$$ for it.

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@The Doctor, I'm afraid you're talking rubbish. Fibre is not obsolete and in the long run will be the network technology of choice for most of the world's telecommunications.

The UFB is intended to be a step-change, a way of future proofing our fixed line network. In ten years time you won't want to be on long-run copper as you won't be able to get as much data through it. Fibre will be the answer for most of us and we'll look back on these delays as just so much nonsense.

That's not to say there aren't uses for copper in the interim and we've been calling for an increased emphasis on VDSL2 and associated technologies for some time. Given the rollout of UFB is going to take the rest of the decade it's important we have an alternative in the mean time.

That doesn't touch on the question of LTE and higher speed connectivity to the mobile user - another technology that is rapidly becoming more relevant and which will also rely on fibre to connect the celltowers back to the network.

Fibre isn't obsolete. Not by a long chalk.

Cheers

Paul Brislen

TUANZ CEO

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Mr Brislen

You and others miss my point.

The government is rolling out fibre that has reduced capability to what is now available on the market - in fact, by the time Crown Fibre finished its tender (which it specked out) for UFB it was already old product. Now, two years later and with bugger all households and businesses connected, it is probably three versions behind the global market.

So I am not saying fibre is obsolete - just the specifications that Crown Fibre tendered and Huawei won are now obsolete.

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I suspect you're referring to the GPON versus P2P debate. GPON is a way of sharing the fibre among multiple users - point-to-point means you get your own fibre (or wavelength on the fibre) and in essence unlimited data connection back to the exchange for the rest of time.

The UFB is built as a GPON network for several reasons, not least of which is to provide operators with a business model built on upgrades over the next few years, but also because it's cheaper than P2P and because at this point in time very few users need their own fibre.

That may change (I'd argue it will change) as we become more connected (not people but items - think about your fridge, your security system, your car's computer, your aicon all calling home, updating software, checking in with technical support, etc) and that's why the UFB is built with upgrades to P2P in mind.

On the cost front I've heard numbers ranging from a 5% saving through to 25% by choosing GPON. As time goes by and we catch up with the capacity in the system that upgrade will get cheaper.

Fibre's not obsolete - not by a long chalk.

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You want insight, eh? How about this:
(1) The government screwed up the broadband sector. Copper wire network should be owned by a different company. Then, if not competition, there would at least be contestability between UFB and copper wire networks. There are technologies that can make the copper wires deliver more speed and grunt. But do not look for these to be applied by the Chorus owner of the copper network.
(2) Chorus is only barely a commercial company. The board and management is filled with ex-Telecom bureaucrats whose major skill is in greasing the government. Customers, innovative products or services? Do not expect Chorus to come up with these - not now, not ever. Chorus is only about manipulating the government so that they get pricing to achieve their revenue and profit goals (it's a cost-plus business so don't look for any cost controls from Chorus or the government).
(3) While NZ's small market may preclude most companies from bringing in appropriate technology, that's not necessarily a given. But (1) and (2) above pretty much will prevent this from happening.

Moral of the story - competitive markets are the best option to deliver innovative technology. A government can set frameworks that promote competitive markets. But the NZ government failed to do this in broadband. It has failed to do this in other sectors also (electricity, anyone?). But do not look for change. The government is led by a deal-maker who has no interest and little knowledge of how to build a better NZ economy. And the opposition has nothing to offer in this area.

In NZ, it's not what you know, it's who you know...

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"There was an implicit expectation the regulator would go easy on the network operator on its regulated business."

So help me to get this right: we are giving Chorus $1bn for a fibre network we won't own. At all. While they take their sweet time delivering this, they will also gouge their monopolistic position on copper lines and screw the consumer for profit while the govt sabotages its own cost-plus pricing policy and looks the other way.

This price gouging will also inhibit the uptake of competitive alternatives - e.g., VDSL, which are already capable of delivering 100Mb bandwidth over a large part of the existing urban copper network, and could be expanded to approx 800,000 NZ households. [Chorus charges an extra $20/month or so on top of its inflated ADSL prices for VDSL]

Yet another case study in corporate welfare to add to a quarter century's worth of swindling the taxpayer?

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Completely agree with Paul Brislen. Fibre isn't obsolete and anyone claiming so has no idea what they are talking about. Period.

NZ does have a very long way to go to catch up with rest of the world in telecommunication, but the reality is we are a small economy, our population is less dense then most of other OECD peers and, believe or not, we actually have a high avg salary for skilled worker (if we don't compare to the land flowing with gold and silver - Australia). All of above make it harder and slower for NZ to invest in major infrastructure upgrade. And let's face it, the objective of all corporate is profit and nothing else. Be grateful that our government chip-in enough money to kick-start the fibre rollout.

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