PCCW's New Internet Strategy Still Focuses On Cost
By ANETTE JONSSON
Of DOW JONES NEWSWIRES
HONG KONG -- Hong Kong-based telecom and Internet giant Pacific Century CyberWorks Ltd. (PCW) finally revealed a long-awaited new strategy for its Internet operations Wednesday, which included lay-offs and a reduction of in-house content production.
The strategy will focus on maintaining margins and growing the company's earnings before interest, tax, depreciation and amortization, executives said at an analyst meeting relayed to reporters by video-link.
But despite months of preparations by the management, the focus is still on cost cutting and the plan introduced few new proposals to help boost revenues, analysts said.
"It's kind of in line what people were expecting, but compared to what the management has been promising - from that angle it is a bit disappointing," said an analyst, who requested anonymity.
Analysts said the fact that PCCW said it will cap investment on Internet operations at US$100 million in 2002-2003 after spending US$190 million this year is positive, and confirmation that the company will acquire content from partnerships instead of its own production shows that it realizes where its strengths and weaknesses lie.
But the key question of how the unit will grow revenue was still left unanswered. "There comes a day when you cannot cut costs anymore and then were will the growth come from?" said an analyst.
But some firm news did come out of the meeting. PCCW said it will launch a new service for its Internet users that will rely on revenues from subscription fees rather than advertising, and which will acquire content from a number of new partnerships.
The company wasn't prepared to announce any of these partners just yet, however, but said it will do so when the service is launched at the end of this month.
Jasmine Koh, telecom analyst with UBS Warburg said apart from the fact that it will aggregate content rather than creating it, this new service, to be called now.com.hk "doesn't seem very different from its previous strategy. I'm still skeptical."
Further, PCCW didn't take the full leap expected by many market participants to close down its overseas Internet operations, which have been contributing significantly to the capital drain of the Internet unit, which lost US$261 million last year.
Indeed, all parts of the division, which includes the multimedia broadband project Network Of the World, Internet services provider Netvigator and the company's interactive TV services iTV, will be kept, and will play a key role for the company going forward, Chairman Richard Li said.
"Our Internet services strategy is designed to provide a value-added service for broadband, which is a key source of growth," Li said.
In its attempts to curtail costs, PCCW said it will lay off 340 staff from its Internet services division from Aug. 20, reducing the total number to 500. This should cut staff costs by US$16 million per year going forward, the company said.
Local media had been speculating about much higher job cuts - up to 4,000 employees - and spanning several other divisions. The union that represents 2,000 of PCCW's total 15,000 employees, said it is bracing itself for further job cuts as part of a broader move to revive the company's prospects.
The management told employee representatives that it had no plans to reduce staff numbers further "at the moment" but declined to reveal any projections for next year.
But investors welcomed the move, which was announced early in the session, and drove PCCW's share price up 7.8% to HK$2.425 in Hong Kong trading before the rest of the strategy plan was revealed.
"The cap on capex spending and the layoff announcements are good news," said UBS Warburg's Koh. "Anything that helps the company's cash-flow is good news."
Other analysts were skeptical whether Wednesday's share price gains will be followed by more in coming sessions however, given the lack of clarity with regard to future revenue streams.
However, the 90% drop in the share price from the record high of HK$27.86 in February last year does leave some room on the upside, they said.
Meanwhile, the company itself expressed optimism about incoming revenues and said the Internet operations will reach cash-flow break-even by December 2003. If that fails, Li said, the company will be looking at either taking the division public, or to bring in strategic partners.
Koh at UBS Warburg said the break-even forecast may be overly ambitious, however, as it is based on assumptions of relatively high growth of the number of subscribers and advertising revenue, which are "quite unlikely" to be achieved.
Li told analysts and reporters that the company is targeting more than 500,000 subscribers for its broadband and interactive TV services in 2003 from 230,000 at end 2000.
But for all its glitches, the new strategy is a move in the right direction, analysts said.
"The steps they have taken seem realistic...but at this stage I consider it work in progress," said Alistair Scott, telecom analyst with Merrill Lynch.
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
(Marco Wan and Sonia Tsang contributed to this article)
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