Telstra drops $245 million in profits

Telstra announced a profit after tax of $2.14 billion for the half year ended 31 December 2005, a decrease of $245 million or 10.3 percent on the previous half year. Earnings before interest and tax (EBIT) declined by 7.0 percent or $262 million to $3.5 billion.

"The trends of decelerating revenue growth, PSTN erosion and accelerating costs evident in the second half of fiscal 2005 have continued, producing an earnings decline in line with our negative guidance. We are hard at work rebuilding the company and we are making progress on the strategic plan announced on November 15 2005, but it will take time to have a significant impact on our figures," Telstra chief executive officer, Sol Trujillo, said in a press statement.

Telecommunications analyst Paul Budde said there are no surprises in Telstra's financial results announced today and said this was the first decline in profit of many more to come.

"This is the first year of decrease in profit and not the last. It was obvious Telstra could not have these monopolistic profits for much longer, but even after this decline it still has among the highest telco profits in the world, so there is still a long way to go for Telstra to fall in line with the rest," Budde said.

While total income (excluding finance income) grew by 1.9 percent or $218 million to $11.6 billion due to increases in broadband, mobiles, IP solutions, advertising and directories and pay TV bundling, this was offset by a decline in revenues from PSTN calling products, specialized data and ISDN products.

Total expenses (before finance costs and income tax) increased by 6.3 percent or $480 million to $8.1 billion, due mainly to increased labour costs, goods and services purchased, depreciation and amortization and other expenses supporting revenue growth both domestically and overseas.

Trujillo said in a press statement that the PSTN decline had accelerated slightly faster than expected, with PSTN products revenue falling by 7.6 percent or $313 million for the half year, compared with a decline of 3.4 percent for fiscal 2005. Further migration to mobiles and the Internet saw volume reductions across most call types and reduced yields. Since June 2005, Telstra has lost 180,000 retail lines, of which 80,000 churned to wholesale.

"PSTN revenue is declining at such a rate that the revenue growth engines of broadband, Sensis and wireless are barely compensating yet, given their relatively smaller bases. Further, the continued shift of Telstra's revenue mix to lower-margin products has resulted in margin contraction," Trujillo said.

"Earnings declined at both the EBIT and EBITDA lines compared with the prior corresponding period. EBIT margin declined 2.8 percentage points to 30.5 percent and EBITDA margin decreased 2.3 percentage points to 46.3 percent."

Internet and IP services revenue grew $264 million or 42.3 percent to $888 million, driven by broadband revenue growth of $225 million. Total broadband subscribers continued strong growth to 2.3 million. Telstra added 317,000 retail subscribers in the half-year period.

"We have again increased our broadband market share. It now stands at about 43 percent, up from 37 percent in December 2003, a pleasing result in a market we consider a key to the future," Trujillo said.

Budde said that although subscribers to Telstra's broadband are growing, it is not generating the revenue it should.

"It took Telstra five years more than other companies to move into broadband. So while other companies have had five years to gradually bring their prices down and grow their subscriber base, Telstra has had to do this very rapidly so the revenues coming out are not as high as they could be," he said.

"It's a strategic mistake that they made five years ago that they are now paying for."

Total mobile goods and services revenue, including wholesale mobiles, achieved growth of 4.6 percent or $109 million to $2.5 billion, with data revenues strong.

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