TELSTRA'S 36 per cent decline in profit for the six months to December looks alarming, but it is not a surprise and is not an indication the company is in trouble. It is in line with chief executive David Thodey's three-year turnaround plan and is accompanied by a substantial increase in mobile customers.
The profit slide is due to higher operating costs rather than lower sales revenue.
Mr Thodey announced yesterday that the commercial terms of the deal with the government's NBN Co were now finalised, which means that Telstra will soon start reaping $11 billion worth of savings on licence obligations and cash compensation over 20 years.
Telstra has announced a steady interim dividend of 14?, fully franked, to be paid on March 25, and forecast a 28? full-year payout. The chief financial officer at Telstra, John Stanhope, told analysts it should have sufficient tax credits to fully frank a 28? dividend in 2011-12.
News on the NBN deal and the unveiling of its results left Telstra shares 1? lower at $2.89.
The company reiterated forecasts for flat revenue growth and a decline in gross earnings of between 7 and 9 per cent for this financial year as it spent money acquiring new customers and restructuring its business. The bulk of restructuring costs have been incurred in the past six months, including $161 million in staff redundancies.
The forecast will translate to revenue of about $22.6 billion and free cash flow of between $4.5 and $5 billion for the full year. However, these figures will change if wholesale prices fall and could also be affected by the cost of repairing networks damaged by flooding and bushfires.
Income from wholesale services could fall in coming months if the Australian Competition and Consumer Commission's final report on fixed-line pricing principles recommends a reduction in wholesale line rental. A draft report recommended a $5 monthly reduction in wholesale rental costs to $20, which would revalue Telstra's fixed-access network at $7.5 billion, down from $23 billion when it was floated. The final report is due within weeks.
Mr Thodey said Telstra would have to pay for network repairs through operational and capital expenditure and would release a damage bill as soon as possible.
Telstra signed up nearly 1 million mobile phone and broadband customers in the half-year through aggressive price-cutting and higher subsidies for smart phones.
"Shareholders should be very pleased with the exceptional growth in customers," Mr Thodey said. "[It is] the largest growth we have had in over a decade, which shows there is real momentum in this business around customers coming back to Telstra and then being more happy with Telstra services."
Profit margins fell from 35 to 29 per cent on mobile products and from 39 to 33 per cent on fixed broadband, but fixed phones remain lucrative at 59 per cent. "We see this as a two to three-year transition and we are coming halfway through the first year, so we see [margins] coming back in that three-year period," Mr Thodey said.
AT A GLANCE
Half-year 2010 2009
Net profit $1.2b -35.6%
Revenue $12.3b -0.5%
Dividend 14? unchanged
EPS 9.6? -35.5%
Inside
Optus adds 150,000 new mobile customers
Page 5
Frequently Asked Questions about this Article…
Why did Telstra's profit fall by about 36% in the half-year?
Telstra's roughly 36% drop in net profit for the six months to December was driven mainly by higher operating and restructuring costs — not by falling sales revenue. Management says much of the cost was intentional as part of its turnaround plan and customer-acquisition spending.
Is the profit decline a sign that Telstra is in trouble?
According to Telstra's management, the profit slide is in line with CEO David Thodey's three‑year turnaround plan. The company also reported strong customer growth (nearly 1 million new mobile and broadband customers in the half-year), which management points to as evidence the business is regaining momentum rather than deteriorating.
How will the NBN deal affect Telstra's long-term finances and investors?
Telstra has finalised the commercial terms with NBN Co, which the company says will deliver about $11 billion of savings in licence obligations and cash compensation over 20 years. That long‑term saving is material for investors and should help support Telstra's financial position over the coming decades.
What did Telstra announce about dividends and franking — should investors expect income?
Telstra declared an interim dividend of 14 cents, fully franked, to be paid on March 25, and reiterated a forecast full‑year payout of 28 cents. The CFO said the company expects to have sufficient tax credits to fully frank the 28‑cent dividend for 2011–12, which is relevant for income‑seeking shareholders.
How many customers did Telstra add and what drove that growth?
Telstra signed up nearly 1 million new mobile phone and broadband customers in the half‑year. Management attributes the growth to aggressive price cuts and higher subsidies for smartphones, which helped attract customers back to Telstra.
What risks could change Telstra's revenue and cash‑flow forecasts?
Telstra warned its full‑year revenue (forecast around $22.6 billion) and free cash flow ($4.5–$5 billion) could be affected if wholesale prices fall or if network repair costs rise following flood and bushfire damage. In addition, the ACCC's impending final report on fixed‑line pricing could recommend lower wholesale line rental, which would reduce wholesale income.
How have Telstra's profit margins changed, and when might they recover?
Profit margins fell in the period: mobile product margins declined from 35% to 29%, and fixed broadband from 39% to 33% (fixed phones remained about 59%). Management sees this as a two‑ to three‑year transition and expects margins to recover over that timeframe, noting the company is roughly halfway through the first year of the plan.
What restructuring costs did Telstra incur and how do they affect forecasts?
Telstra incurred significant restructuring costs in the half‑year, including $161 million in staff redundancies. The company said it is spending to acquire customers and restructure the business, and reiterated guidance for flat revenue growth with a 7–9% decline in gross earnings for the financial year as a result of those investments and costs.
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