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Vocus update spooks investors

AAP logoAAP 28/11/2016 Lilly Vitorovich

Vocus Communications has shocked investors with downbeat earnings guidance in the wake of its acquisitions of Nextgen Networks, M2 Group and Amcom, triggering a major share sell-off.

The disappointing trading update was weighed on by a below-expectation earnings contribution from recent acquisition, Nextgen, and soft broadband customer growth as competition across the sector intensifies.

Nextgen, which operates a national fibre telecom network, is expected to deliver underlying earnings of around $41 million for the last eight months in 2016/17, short of market expectations.

Chief executive Geoff Horth said that was below Vocus' expectations at the time of the acquisition, and blamed high customer cancellations, lower profit margins on re-signed contracts and slower sales performance.

Australia's fourth biggest telecommunications group also reported overall broadband customer growth was below expectation due to outages on its primary consumer network. As a result, the company expects net growth in broadband subscribers to be lower in 2017 than in the previous year.

Daniel Mueller, senior analyst at Forager Funds Management, said the company is facing greater competitive pressure, like rivals TPG Telecom, Optus and Telstra, as consumers move to services on the more expensive national broadband network.

"Its getting more competitive. NBN is really just crunching the industry's (profit) margins," Mr Mueller said.

Foad Fadaghi, principal analyst at research firm Telsyte, said there are jitters in the market over the transition to NBN, particularly for challenger organisations like Vocus and TPG.

Investors pushed Vocus shares down nearly 25 per cent during the trading session with the stock ending down $1.41 at $4.35.

IG market strategist Evan Lucas said the update was disappointing, noting that the company has been fuelling growth with aggressive acquisitions.

"The fact that they haven't seen organic growth is a slight concern, and that fact that outlook has been shifted down pretty substantially is quite a change," he said.

Vocus has forecast annual underlying EBITDA of between $430 to $450 million, down from market expectations around the "upper $400 million", according to Mr Lucas.

Vocus expects its full-year result will be skewed towards the second half, partly because of a delay in finalising the Nextgen deal and its underperformance.

Additional investment in consumer sales, marketing and disappointing revenue growth will also weigh on the result.

The group also forecast annual underlying profit after tax of between $205 million to $215 million and revenue of around $1.9 billion.

Mr Horth, who survived a plot by two directors to remove him from the helm in October, told the group's annual meeting in Sydney that the value of the Nextgen business is "strong" and it can rebuild momentum.

He said the company will continue to review its business portfolio, which may lead to the sale of non-core assets or businesses.

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