Debt costs, investment losses slam PCCW results

Pacific Century CyberWorks, the Hong Kong Internet startup that bought incumbent telecommunications carrier Cable & Wireless HKT at the height of the tech-stock frenzy last year, on Wednesday posted a net loss for 2000 of more than HK$6.9 billion (US$884.6 million).

Losses on its basket of investments in other Internet companies, and the cost of loans to finance the US$28.9 billion acquisition of HKT, hit the company hard. PCCW now values the former carrier's business at US$5.7 billion, after the past year's meltdown in IT and telecommunications stocks. With an adjustment for the shortfall in HKT's value, the company is now worth less than it owes, by more than HK$14 billion.

The results came after several bruising days for PCCW in which Chairman Richard Li acknowledged he never graduated from his undergraduate program at Stanford University, contrary to marketing materials presented by the company in the past. Li did not face the press in person on Wednesday; instead, he and other executives presented the results to analysts in one room while reporters watched a live video feed in another room at PCCW headquarters. Other executives came to the media room later for questions, but Li did not join them.

Fixed-line telecommunications services provided the bulk of PCCW's 2000 revenue of HK$7.2 billion, though telecommunications revenue declined 7 percent from the previous year. Its other, fledgling businesses, such as system integration, DSL (digital subscriber line) broadband, Internet data centers and business-to-consumer (B2C) services saw revenue gains over 1999.

A big bite out of the bottom line came from an adjustment for losses on investments, pegged at US$627 million. PCCW pointed especially to big investments in US-based Internet holding company CMGI Inc. and broadband Internet service provider SoftNet Systems Inc.

"We believe this is not just a temporary turn down in those investments ... we believe in this environment it's likely to be permanent," said David Prince, chief financial officer of PCCW.

The annual numbers combined four months of results from the former HKT in 2000, and stand next to year-earlier numbers for a very different PCCW that existed before the acquisition. PCCW revenue for 1999 totaled just HK$152 million, but the company posted a profit of HK$347 million largely from sales of small investments -- and gains in companies such as CMGI, then a high-flying Internet player.

Looking to 2001, PCCW put on top of its priority list the provision of integrated software and services to large enterprises. Jeffrey Bowden, PCCW's executive vice president for strategic integration, gave the example of a bank in Hong Kong to which the company has provided an intranet, customer relationship management software, a call center, Web hosting and data and voice connectivity. It hopes to expand these offerings to Japan, Taiwan, South Korea and Singapore, Bowden said.

Other key businesses include two joint ventures with Telstra Corp. of Australia: CSL, a regional mobile-phone services business, and Reach, a provider of fiber-optic cable capacity across Asia and the Pacific.

Not surprisingly, the company also will focus on reining in costs, Bowden said. PCCW hopes to focus its existing work force on generating more revenue following a tumultuous year. Moreover, he noted the management will strictly hold back losses in its B2C operations to HK$200 million for the year. The company might also dispose of some of its property holdings.

The HKT acquisition last February, in which PCCW beat out rival Singapore Telecommunications Ltd., was the largest-ever corporate takeover in Asia outside Japan. The deal closed just as PCCW was launching an ambitious interactive multimedia service called Network of the World, which has since seen slow customer adoption and declining investment by the cash-strapped company.

The company's stock (HK: 8) closed Wednesday at HK$3.475, down HK$.025, near its 52-week low of HK$3.35.

PCCW, in Hong Kong, can be reached at +852-2514-8888 or via the Web at http://www.pccw.com.

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