Telstra profit plummets 36% in first half, finalises agreement with NBN

Telecommunications giant Telstra has announced a 36% drop in profit for the first half of the year, with various businesses including fixed-line telephone connections and its Sensis subsidiary both haemorrhaging money.

But the company also announced it has finalised agreements with the National Broadband Network Co. over the $11 billion sale of its assets, with more details to be released to the public by July.

Telstra announced a 36% drop in net profit after tax this morning to $1.1 billion, with EBITDA also falling by 13.9% to $4.5 billion.

Investors won’t have to look hard to find the company’s weaknesses. PSTN revenue fell by 8.4% to $2.7 billion, which the company itself says is a sign of a “structural shift away from PSTN driven by both lower usage and line loss”.

Ovum research director David Kennedy says while the results for mobiles were quite strong, Telstra is still a way off from plugging some critical leaks.

“There are still a lot of issues they need to address. The Yellow Pages business hasn’t made a transition to the online environment, and that’s about 10% of their EBITDA. We’re also not seeing a lot of revenue growth in broadband anymore.”

Usage is declining across all of the company’s calling categories and with local calls falling 14%, national long distance minutes falling by 9.3%.

Total fixed internet revenue also fell by $30 million, or 2.8%, to $1.05 billion. Telstra says this decrease was “driven by lower wholesale and hardware revenue partly offset by retail fixed broadband growth”.

Fixed retail broadband revenue including hardware, however, was mostly flat, growing just 0.4% to $794 million.

Telstra is also regarding weakness in its digital and directory businesses, with Sensis revenue falling by a massive 17.8% in the first half of the year.

Sensis’ Yellow Pages revenue declined by 13.7%, which it said was due to a decrease in new business, higher cancellations and lower yields. However, it still expects revenue to increase to double digit growth in the second half of the year.

Telstra also said in its report that it has been severely affected by the floods in Queensland and Victoria, and it will have no idea when an impact will be finalised.

“The floods and cyclone in Queensland, and the floods in upper NSW, Victoria and Tasmania that occurred in January and February 2011 will have a significant impact on Telstra in terms of service recovery and asset replacement.”

“At this stage an estimate of the financial impact of this disaster cannot be made until the full extent of the damage has been assessed.”

It’s obvious where Telstra’s customers are moving – into mobiles. The company’s mobile services revenue grew by 6.5% to $3.4 billion, which included growth of 24.5% for mobile broadband revenue. Mobile hardware revenue grew by a massive 37% to $566 million, while total revenue for mobiles grew by 10% – the highest growth rate in the past three years.

A total of 919,000 mobile customers were added during the half, and 139,000 retail broadband customers were added. Although sales revenue declined by 0.5% to $12.2 billion, the number of total mobile customers in the first half grew to 11.5 million.

But on the other hand, that growth has caused some short-term expenses, with seven out of the 10 most popular post-paid handsets sold being smartphones. Over the long-term, however, Telstra says this should provide ARPU benefits.

Kennedy says this result shows Telstra is clearly focusing on one of its key markets, but also warns there are challenges in that area as well.

“They’ve been very successful in that mobile space. But at the same time, prices have been cut quite substantially. They will need to wind that back in the second half and it will be interesting to see how that will affect customer numbers.”

Telstra addresses this in the report, stating that “we recognise the need to translate this customer momentum into revenue and profitability”.

Telstra has also been focusing on integrating many of its business operations and improving customer standing. Customer satisfaction increased by 1.3% in the second half, it said, and 24/7 call centres have helped with that.

The company is also responding to key trends in the telco market – data allowances have increased, pointing out that while only 1% of customers were on plans with 25GB of data at December 2009, now that number is 32%.

Chief executive David Thodey said the results show that “our strategy is bearing fruit”, but Kennedy says there is a lot more work to do.

“It will be interesting to see if they can turn things around in the fixed broadband side and increase profitability. They are by no means out of the woods yet, but it’s still too early to see how it will pan out.”

As part of the results, Thodey said he had finalised terms with the National Broadband Network Company and that an in-principle agreement had been reached.

“We are working to complete the necessary documentation. As soon as this is finalised by both NBN Co and Telstra, Telstra will be able to provide detailed information on the substance of the proposal. While there is still work to be done, we are on track to put the proposal to shareholders with a target date of July 1, 2011,” he said.

Communications minister Stephen Conroy welcomed the agreement.