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Snoopy
24-06-2011, 04:07 PM
Telecom investors have been having a very good year, with the share price up 20% from its low excluding dividends. All things going to plan Telecom investors now, will be shareholders in ‘Chorus 2’ around the end of the year.

For all the publicity this proposed deal has had, I have seen very little discussion on the outlook for Chorus, nominally the ‘network arm’ of Telecom. Indeed, even a word by word perusal of Telecom’s last annual report would leave shareholders with only a sketch of an idea of what Chorus does. Unless you understand Chorus, it is very difficult to prescribe what its future might be.

A useful place to start is the Chorus website. (http://www.chorus.co.nz)

SNOOPY

Snoopy
24-06-2011, 04:11 PM
A useful place to start is the Chorus website. (http://www.chorus.co.nz)



As it turns out the Chorus website is not as informative as it might be. From the 21st June news release:

--------------

Telecom is currently unable to provide any information that could reasonably be expected to encourage shareholders to vote either for or against demerger including:

any description of the likely size, performance, and future strategy or areas of activity of either of the two companies that would be created by a demerger;
other commentary relating to the proposed demerger.
Ms Symmans said that Telecom remained committed to openness and transparency with all stakeholders, whenever possible.

“We look forward to being able to re-engage with all of our stakeholders in detail on UFB and the potential demerger transaction as soon as we can.”

-------------

So it seems we potential shareholders are on our own for a while.

SNOOPY

Snoopy
24-06-2011, 04:15 PM
So it seems we potential shareholders are on our own for a while.


OK, here are some things that we do know:

Chorus has the role of connecting 1.8 million NZ homes and businesses (that is the number of line that Telecom has under their Umbrella). Revenue for FY2010 (p54 TEL Annual Report FY2010) was $1,036m.

One national competitor, which resells Chorus services, is an outfit called Snap. Here in Christchurch Snap have been promoting a bundled deal, reselling broadband and phone services complete with free calls all over the South Island for $75 per month. If every Chorus phone line in the country went over to this deal, total retail revenue for Snap would be close to:

1.8m x $75 = $135m

Clearly the wholesale revenue passed onto Chorus would be rather less than that $135m figure. Yet the Chorus revenue for 2010, $1,036m, is of the order of ten times this amount. This shows that Chorus is not just a ‘wholesaler of lines’ as many believe. So where does Chorus’s revenue come from?

Some must come from what is termed ‘property co-location services’. Here Chorus rents out space in boxes (be they telephone exchanges or roadside cabinets). Other phone providers can install within those their own phone equipment.

Chorus also supply (under contract) field services. These are people in vans who run around fixing equipment knocked out through floods, storms, accidents and ‘wear and tear’.

But all of these services are costs that retail users expect to be covered in their access line charges. These costs need to ultimately be recovered from end line customers within line charges. If these costs exceed the line charges received then Chorus cannot make money. So we can deduce that Chorus cannot charge more than around $135m for these services per year.

By Telecom's FY2010 annual report, the revenue attributable to Chorus seems impossibly high. Can anyone explain how this $1,036m of revenue attributed to Chorus might be explained?

SNOOPY

Snoopy
24-06-2011, 04:17 PM
Another big surprise on the Chorus website is that Chorus are responsible for the maintenance of Telecom’s mobile service masts. I found this odd because I had considered that afterTelecom splits , the mobile network will become a possession of the new retail arm ‘Telecom’, much like Vodaphone have their own network of relaying masts in N.Z., and not Chorus. Anyone like to hazard a guess as to why Chorus seems to have responsibility for this bit of the ‘retail’ business?

SNOOPY

janner
24-06-2011, 08:49 PM
I do not have the answers Snoopy..

Thank you for asking the questions..

Graeme
01-07-2011, 12:57 PM
OK, here are some things that we do know:

Chorus has the role of connecting 1.8 million NZ homes and businesses (that is the number of line that Telecom has under their Umbrella). Revenue for FY2010 (p54 TEL Annual Report FY2010) was $1,036m.

One national competitor, which resells Chorus services, is an outfit called Snap. Here in Christchurch Snap have been promoting a bundled deal, reselling broadband and phone services complete with free calls all over the South Island for $75 per month. If every Chorus phone line in the country went over to this deal, total retail revenue for Snap would be close to:

1.8m x $75 = $135m

Clearly the wholesale revenue passed onto Chorus would be rather less than that $135m figure. Yet the Chorus revenue for 2010, $1,036m, is of the order of ten times this amount. This shows that Chorus is not just a ‘wholesaler of lines’ as many believe. So where does Chorus’s revenue come from?

Some must come from what is termed ‘property co-location services’. Here Chorus rents out space in boxes (be they telephone exchanges or roadside cabinets). Other phone providers can install within those their own phone equipment.

Chorus also supply (under contract) field services. These are people in vans who run around fixing equipment knocked out through floods, storms, accidents and ‘wear and tear’.

But all of these services are costs that retail users expect to be covered in their access line charges. These costs need to ultimately be recovered from end line customers within line charges. If these costs exceed the line charges received then Chorus cannot make money. So we can deduce that Chorus cannot charge more than around $135m for these services per year.

By Telecom's FY2010 annual report, the revenue attributable to Chorus seems impossibly high. Can anyone explain how this $1,036m of revenue attributed to Chorus might be explained?

SNOOPY

Hi Snoopy,

Thanks for your analysis. I was wondering how to assess the value of Chorus. Based on Snap's charges the monthly revenue would be 1.8m x 75$ = $135m as you say. But doesnt that mean estimated annual revenue would be 12 x $135m = $1620m? Given likely retail margins that could reduce to the wholesale revenue for Chorus in the Telecom annual report of $1036m.

Now is there some way to estimate the gross and net margins for Chorus?

Snoopy
01-07-2011, 03:42 PM
Hi Snoopy,
Thanks for your analysis. I was wondering how to assess the value of Chorus. Based on Snap's charges the monthly revenue would be 1.8m x 75$ = $135m as you say. But doesnt that mean estimated annual revenue would be 12 x $135m = $1620m? Given likely retail margins that could reduce to the wholesale revenue for Chorus in the Telecom annual report of $1036m.


As the round headed kid would say "Arrrrgh!". You are spot on in spotting my error Graeme.



Now is there some way to estimate the gross and net margins for Chorus?


I presume margins for Chorus will be regulated by the government (?)

SNOOPY