Reach said in December that it expects operating earnings to rise 28 percent to US$648 million in the year to June 2002. As rivals roll out competing networks, however, prices could fall 40 percent, meaning Reach may garner about half its expected profit.
"There's a bit of doubt in the market about the Telstra-CyberWorks alliance and whether it is going to deliver" on earnings, said Andrew King, who helps manage US$159 million at Investors Mutual Ltd, which owns Telstra shares. "It's extremely important to deliver on what you promised to maintain investor confidence."
Reach is building an Internet "backbone," a network of fiber-optic and copper cables it will own or lease, linking Asia and Australia with the rest of the world. It's competing with Asia Global Crossing Ltd, Singapore Telecommunications Ltd's part-owned C2C Pte Ltd, Flag Telecom Holdings Ltd and Level 3 Communications Inc, which are all building or expanding their networks.
CyberWorks fell 1.6 percent today to HK$4.55 and Telstra dropped nearly 2 percent to A$6.47. The shares have fallen 9 percent this month.
Some analysts are even more gloomy about prices than the average prediction of 40 percent to 50 percent declines. "We think it will be more rapid than that," said Jasmine Koh, a regional Internet analyst at UBS Warburg in Hong Kong.
Below target?
Melbourne-based JB Were & Son expects Reach's operating profits will rise just 16 percent to US$587 million in the year through June 30, 2002--a little over half the growth rate Reach expects. Nomura International (HK) Ltd forecasts Reach's operating earnings to fall 30 percent to US$303 million by December 2002.
"You can't be all that positive" about Telstra's Asian expansion given a global slide in telecommunications shares, said Don Hamson, who counts Telstra stock among the A$7.5 billion he helps manage at Westpac Financial Services Ltd. "Longer term, at least they've got a strategic footing (in Asia). Short-term it is going to cause them same pain."
Reach Chairman Gerry Moriarty wasn't available to comment and Martin Ratia, the venture's Sydney-based spokesman declined comment on whether declining prices would make it hard for the company to meet its earnings forecast.
Ratia said Reach expects to be able to outflank rivals because it can offer a global service through agreements with other network companies. Reach has "global connectivity, not just capacity," he said in an interview last week. Merging HKT International's business and Telstra Global Wholesale's international infrastructure assets "effectively doubles the size of our network in terms of available capacity and significantly expands its reach," he said in an email last week.
Granted, some analysts say demand for cable access may exceed expectations, preventing prices from sliding. CyberWorks and Telstra could also bring in a third investor, with its own cables, boosting Reach's ability to compete.
Still, analysts may be underestimating growth in demand in much the same way as they did for mobile phones, said Paul Richardson, an analyst with UBS Warburg. "The rates of growth may slow down and that's what will kill profitability," he said.
Bringing in another shareholder would help spread the high cost and risk of building the cable network and cut the number of wholesalers competing for the same customers. Banks are less willing to lend money for Internet backbone projects due to falling prices and high capital spending needs.
In December, Telstra and CyberWorks borrowed US$1.5 billion rather than the US$2 billion planned for the Internet venture as bankers balked at the bigger loan. Even with the reduced borrowing, Reach could spend 10 percent to 15 percent of sales on capital investment, Moriarty said earlier this month.
When Reach was launched on February 7, Telstra said the company might take on another partner to help finance its expansion and compete more effectively.
Moriarty, Telstra's group managing director for infrastructure services and wholesale was appointed chairman for a two-year term, and the company chose as its chief executive, Alistair Grieve, a former Cable & Wireless HKT Ltd, as deputy chief executive.
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