Telstra smarting from costs

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 Telstra will soon start reaping $11 billion worth of savings on licence obligations and cash compensation over 20 years.

Telstra announced a steady interim dividend of 14?, fully franked, to be paid on March 25, and forecast a 28? full-year payout. Chief financial officer John Stanhope told analysts that Telstra 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 has been incurred in the past six months, including $161 million in staff redundancies.

The forecast translates to revenue of about $22.6 billion and free cash flow of between $4.5 billion and $5 billion for the full year. But these figures will change if wholesale prices fall and could also be affected by the cost of repairing networks damaged by flooding, cyclones 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 rent. 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.

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 smartphones.

"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 decreased 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 a 59 per cent profit margin.

"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.

Operating costs rose by $750 million in the half-year, but are expected to be lower in the second half. The cost of subsidies for smartphones leapt by 44 per cent to $475 million, a third incurred by Telstra's Hong Kong-based subsidiary, CSL New World. The average cost of acquiring a new customer was $162 because of increasing demand for smartphones, the highest cost in four years.

The shift away from fixed-line communications continued, with a 3 per cent decline in fixed-line services, a 14 per cent decline in local calls and 9 per cent decline in long-distance calls.