Meeting its market guidance, Telstra has announced an after tax profit down 10.3% (to $2.14 billion) for the six months ended 31 December 2005.
A nice piece of change for just about any other Australian company, but a bit pale looking compared to the incumbent telco’s first half of 2005 which saw it pocket an extra $245 million for its trouble. Earnings before interest and tax (EBIT) declined by 7.0 per cent or $262 million to $3.5 billion.
Telstra Chief Sol Trujillo blamed PSTN erosion, higher costs and slowing revenue growth on the shortfall saying he was working hard at “rebuilding the company” without exactly stipulating when it fell apart. The strategic plan he unveiled in November last year will “take time to have a significant impact on our figures”, he said.
Trujillo said that ” EBIT margin declined 2.8 percentage points to 30.5 per cent and EBITDA margin decreased 2.3 percentage points to 46.3 per cent.”
But the bad news masks the good news. Broadband, mobile phone, IP solutions, advertising and directories and pay TV bundling all grew, but were slightly offset by a decline in PSTN calling products, specialised data and ISDN products – no surprises there. This delivered the company total income (excluding finance income) of $11.6 billion, up 1.9 per cent or $218 million.
Internet and IP services was up 42.3 per cent ($264 million) to $888 million, most of which was broadband revenues which grew by $225 million thanks to the companies 2.3 million subscriber base. Telstra added 317,000 retail subscribers in the half. Trujillo revealed that the company now has “about 43 per cent” of the broadband market, up from 37 per cent in December 2003.
Advertising and directories revenue grew by 6.3 per cent or $56 million to $944 million. The company’s mobile business managed a little growth too. Up $109 million to $2.5 billion (4.6 per cent). Telstra added 345,000 mobile SIOs in the half for a total of 8.6 million – less than half the 20 million or so phone accounts in the country.
However, the company spent up big. Expenses (before finance costs and income tax) rose by 6.3 per cent or $480 million to $8.1 billion, due mainly to ‘increased labour costs, goods and services purchased, depreciation and amortisation and other expenses supporting revenue growth both domestically and overseas’, said the company.
Domestic core operating capital expenditure increased 4.8 per cent or $82 million to $1.8 billion, driven primarily by growth in mobile, broadband and international capacity assets to meet internet demand.
Telstra’s major woes continued to be in its landline segment with the PSTN revenue decline had accelerating ‘slightly faster than expected’. PSTN revenue fell 7.6 per cent or $313 million for the half year, compared with a decline of 3.4 per cent for the year overall. 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.
What remains to be seen is just how far the fall in PSTN revenues can go. With more calls leeching out to mobile phones and IP Telephony, the income from Tolls will eventually bottom out, but at what level?
Trujillo said he expected the tough trading conditions of the first half to continue and reiterated previous guidance that the full year EBIT decline for fiscal 2006 would be in the range of 15 to 20 per cent without a year end restructuring and redundancy provision, and 21 to 26 percent with such a provision.
“The recent deterioration in operating trends and our investment in transforming the business will see earnings fall in the near term. Consistent with our plan, we are taking some tough medicine now to bring the company to financial health and deliver sustainable growth in shareholder value over time.”
However, all this didn’t stop the Telstra Board declaring an interim dividend of 14 cents per share, and a special dividend of 6 cents per share. Both dividends will be fully franked at a tax rate of 30 per cent, and bring total dividend payments to shareholders for the half to 20 cents per share or $2.485 billion.
