Telstra: Result 2012

Telstra has announced a higher full year profit for the first time in three years. While revenue advanced only 1% to $25.4bn, net profit rose 5% to $3.4bn. The board declared a fully franked final dividend of 14 cents a share, making 28 cents for the year. At the headline level it looks like Telstra is starting to deliver on its turnaround.

But this is a large and complex business and the headline result masks deeper changes. Unsurprisingly, traditional fixed line telephony (or ‘PSTN’) revenues fell 10% as customers switched to mobile and internet-based telecommunications. Other traditional businesses are also struggling with its Sensis media division reporting a 16% decline in revenue as small businesses ditch Yellow Pages advertisements for Google adwords.

Telstra continues to win business in mobile, having added 1.6m customers over the past year (a 13% increase). Telstra has been a clear beneficiary of Vodafone’s woeful performance. Unfortunately winning new customers is costly and requires ongoing capital spending. Not only must Telstra build new towers, but it will need to spend around $2bn on spectrum over the next few years. This means less free cash flow will be available to shareholders, and may mean higher debt levels.

There are more signs that Telstra is shifting towards becoming a more efficient, retail-focused and nimble company. But here's the rub: There’s no alternative. The NBN is looming, which will bring with it fierce competition for fixed line services at a time when more households are ditching them altogether. Wider concerns also remain about Telstra’s ability to pass on the costs of increasing data use (see Telstra Pt I: Five major challenges from 30 May 12 (Hold – $3.54)).

Telstra’s share price has risen 42% over the past year, and 2% since 10 Jul 12 (Hold – $3.82), as investors clamour for its highly sought-after 28-cent dividend. For now, we remain happy to HOLD.