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Telstra Earnings Miss Estimates Amid Mobiles Push

Telstra Second-Half Profit Misses Estimates Amid Mobiles Push
Telstra is having to compete to win lower-margin mobile customers as its former monopoly of fixed-line copper wires is switched off and handed over to NBN Co., a state-owned company building a national broadband network. Photographer: Luis Enrique Ascui/Bloomberg

Telstra Corp., Australia’s largest phone company, posted second-half profit that missed analysts’ estimates as it spent more to add mobile phone customers while winding down its former monopoly fixed-line business.

Net income fell 4.9 percent to A$1.9 billion ($2 billion) in the six months ended June 30, trailing the A$2 billion average of three analysts’ estimates compiled by Bloomberg. Second-half figures were calculated by subtracting first-half earnings from the A$3.4 billion full-year profit the Melbourne-based company reported today.

Telstra is having to compete to win lower-margin mobile customers as its former monopoly of fixed-line copper wires is switched off and handed over to NBN Co., a state-owned company building a national broadband network. Since the NBN program was announced in April 2009, Telstra has raised its mobile customer base by more than 30 percent, a pace that may now slow, Chief Financial Officer Andy Penn said in a phone interview.

“They’ve had some good wins in mobile over the last 24 months but that might have come to an end now,” Jeremy Hook, who helps manage A$250 million as investment director of TMS Capital Pty., said by phone from Sydney. “With the outperformance of the stock in recent times they probably needed to do more for the stock to go up.”

Shares of Telstra fell 2.3 percent to A$3.88 at the close in Sydney, the lowest level since July 24. The S&P/ASX 200 index declined 0.1 percent. Along with yesterday’s 2.5 percent drop, the move capped the biggest two-day losing streak for the stock in almost a year.

Telstra expects earnings before interest, tax, depreciation and amortization this year to rise at a “low single digit” pace with capital spending about 15 percent of sales.

Slowing Growth

Telstra added about 640,000 mobile customers in Australia during the six months ended June 30, Penn said, as it competed with Singapore Telecommunications Ltd.’s Optus unit and the Vodafone Hutchison Australia Pty venture of Vodafone Plc and Hutchison Whampoa Ltd.

“I can’t tell you how the market’s going to grow -- it’s slowed down, there’s no doubt,” Penn said from Melbourne today. “We’ve added three million customers in the last two years. There’s only so much you can do in one country.”

While that’s the slowest growth rate in two years, Telstra now has about 13.8 million mobile customers, equivalent to about 60 percent of Australia’s population. Vodafone Hutchison has lost 732,000 customers over the past two years, according to regulatory statements, due to network problems and aggressive marketing by the two larger companies.

Mobile Gains

Telstra will invest an extra A$500 million in its mobile network over the next two years to improve its advantage, Penn said. That will push up capital spending over the next two years and see free cash flow, or money not used in operations or capital projects, drop next year by as much as 10 percent, to a range of A$4.75 billion to A$5.25 billion.

“The network is becoming a key differentiator,” Chief Executive Officer David Thodey told analysts on a conference call today.

Mobile revenue over the half rose 6.1 percent to A$4.3 billion while fixed-line dropped 11 percent to 2.3 billion, Telstra said.

“The technology industry is hard to forecast but they’re in a good position to deal with that uncertainty,” Mark Freeman, who helps manage about A$4.6 billion as chief investment officer of Australian Foundation Investment Co., said by phone before the results. The Melbourne-based fund manager has about 50 million Telstra shares, making it a top-10 shareholder according to data compiled by Bloomberg.

Government Pact

Telstra, which had a monopoly on phone services in Australia until 1991 and was majority-owned by the government until 2006, signed agreements in March to hand over its copper-wire network to NBN Co.

The company will receive A$11 billion in payments and benefits in return, supporting earnings over the next decade and beyond as it moves from being Australia’s largest supplier of wholesale phone and data services to its largest buyer.

Total sales in the half rose 0.8 percent to A$12.8 billion.

An 2.6 percent rise in operating expenses in the half drove down Ebitda by 1.6 percent to A$5.5 billion.

Telstra’s profit margins are the second-highest among phone companies in developed countries with revenues greater than $10 billion, according to data compiled by Bloomberg.

Still, the shift away from Telstra’s legacy wire network will increase Telstra’s dependence on its less profitable units. The company’s Ebitda margin is 39 percent for its mobile phone business compared to 60 percent for fixed-line phones, and 64 percent for its data and IP services, the company said.

Cash Flow

Total mobile minutes overtook fixed-line calls for the first time in 2011, according to Telstra’s 2011 annual report.

Free cash flow shrank 5.1 percent in the 12 months to A$5.2 billion as the company boosted its capital spending on the mobiles division. The company said July 12 it expects to generate A$2 billion to A$3 billion of ‘excess’ free cash over the next three years, thanks in part to the NBN payments.

The results were hit by a A$130 million impairment charge related to the sale of its New Zealand division, TelstraClear, to Vodafone’s local unit. The NZ$840 million ($684 million) sale was agreed July 12, after the end of the financial year.

Telstra’s 50 percent-owned pay television venture, Foxtel, also completed a A$1.9 billion takeover of its rural-based competitor Austar United Communications during the half-year, though the effects of the deal aren’t included in the group’s results.

A final dividend of 14 Australian cents per share was declared, matching the 14 cents proposed at half-year results. The company said in April that it would maintain the 28 cents per share annual dividend payout through 2013. It’s not raised that level since 2005, according to data compiled by Bloomberg.

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