Telstra First-Half Profit Rises 8.8% on Mobile Customers

Telstra Corp., Australia’s largest phone company, posted first-half profit that matched analyst estimates as 607,000 new mobile customers limited the impact of an 11 percent jump in the cost of smartphones and hardware.

Net income increased 8.8 percent to A$1.6 billion ($1.7 billion) in the six months ended December from A$1.47 billion a year earlier, Melbourne-based Telstra said in a statement today. That matched the A$1.6 billion median estimate of eight analysts surveyed by Bloomberg News.

Telstra’s fourth-generation mobile network, the biggest in Australia, is winning customers and limiting the impact of shrinking demand for traditional fixed-line services. Smaller rivals controlled by Vodafone Group Plc and Singapore Telecommunications Ltd. are revamping their businesses in the country to try and regain market share.

“Telstra continues to take market share in the high growth mobile category,” Michael Wu, an analyst at Morningstar Inc., said in an e-mailed statement today. “Subscribers remain attracted to Telstra’s superior network coverage and speed.”

First-half revenue rose 1 percent to A$12.5 billion, while earnings before interest, tax, depreciation and amortization increased 5 percent to A$4.99 billion, Telstra said.

IPhone 5

Domestic mobile-phone customer numbers increased by 607,000 in the six months through December, Telstra said, giving it 14.4 million subscribers, equivalent to 63 percent of Australia’s population.

Telstra shares rose 1.3 percent to close at A$4.64 in Sydney, increasing its advance in the past year to 35 percent. Telstra has the fourth-best total return over the past 12 months of any Australian company with sales of more than A$10 billion, according to data compiled by Bloomberg.

The cost of goods, including mobile handsets such as Apple Inc.’s iPhone 5 and Samsung Electronics Co.’s Galaxy S3 and other wireless devices, rose 11 percent to A$1.43 billion and outstripped the amount spent on tax and interest payments.

Revenue from mobiles, which overtook the fixed-line unit in 2011, rose 4.6 percent to A$4.56 billion even as the average revenue per user fell 8.5 percent for mobile broadband and 7.1 percent for those on phone contracts.

Mobile Devices

The A$1.43 billion spent on buying electronic devices for customer contracts compares with the A$1 billion Telstra spent on the activity during its 2010 financial year, before it ramped up a push for more mobile subscribers. It outstripped the A$1.22 billion the company spent on tax and interest payments during the most recent period, the accounts show.

“We’ve seen good take-up of the higher-end plans on the iPhone 5,” David Thodey, chief executive officer, told an investor call after the announcement. “The actual returns on the plans, even though there’s a bigger cash cost up-front, are very strong.”

The addition of mobile customers was “another strong performance” in a total mobile market that’s slowing, Chief Financial Officer Andy Penn said in a phone interview today. “I’m very optimistic about the long term future for the mobiles business. You don’t see any shortage of innovation about how to use mobile technology.”

Fixed Lines

Total revenues in Australia’s mobile telecommunications industry shrank 1.5 percent during the year through June 2012 and will stagnate after accounting for inflation this year, before a “modest recovery” in the year starting July 1, Deloitte Access Economics said in a report released today.

“The medium-term outlook for the industry is unusually uncertain,” the report said. “Carriers will invest more in infrastructure to support data usage growth but not receive as high revenue growth.”

Capital spending rose 10 percent to A$1.9 billion, Telstra said in a presentation accompanying the results, while free cash flow -- money not dedicated to capital expenditure or interest payments -- fell 17 percent after stripping out a one-time benefit from the sale of its New Zealand division, TelstraClear.

“It’s going to get harder for them to win market share” over the next year, Fraser McLeish, an analyst with CIMB Group Holdings Bhd. in Sydney, said by phone.

Vodafone Australia and Singapore Telecom’s Optus division will improve their networks over the next year, making it harder for Telstra to take advantage of its superior product to push up prices.

“The revenue growth slowed, and that’s going to be the issue going forward when the competitive environment gets tougher,” McLeish said.

Highest Profit

The result was the company’s highest first-half profit since the 2010 financial year, according to data compiled by Bloomberg. Telstra recorded an average of about 45 percent of annual earnings in its first half over the past five years.

The company affirmed its forecast for “low single digit” growth in Ebitda and total income. On the basis at which it accounts for those measures, total income rose 2.5 percent and Ebitda by 8.7 percent, it said.

Fixed-line sales dropped 4 percent to A$3.66 billion, while revenue at the Data and IP unit, which provides Internet services, edged down 0.1 percent to A$1.55 billion.

Telstra’s digital media division, which includes the Sensis phone directories business and a 50 percent stake in pay-TV provider Foxtel, saw revenues slump 7 percent to A$909 million, the company said.

The company received A$176 million from the government in the half as it starts getting an A$11 billion compensation package for giving up control of its copper-wire network as the state-backed NBN Co. builds a national fiber platform.

Spectrum Auction

Telstra plans to bid for mobile spectrum in an April state auction and may face changes to the NBN plan if Australia’s Labor government loses an election set for Sept. 14.

The company may have to spend A$800 million renewing its digital spectrum this year and another A$1.1 billion buying new spectrum for its mobile services next year, Sameer Chopra, an analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in a Jan. 23 note to clients.

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

Handing over the fixed-line network will see the business shift toward its less profitable mobile business, where revenue per customer has been declining for two years. Telstra’s margin on earnings before interest, tax, depreciation and amortization is 39 percent in mobile compared to 60 percent for fixed-line phones and 64 percent for its data and IP services, the company said in August, when it reported annual results.

Founded as part of Australia’s state-owned postal services, Telstra had a legal monopoly on phone services until 1991 and was majority-owned by the government until 2006.

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