Telstra profit slide disappoints investors


Telstra remains Australia's dominant telco with around 70pc total market share

By Grant Holloway
CNN Sydney

MELBOURNE, Australia (CNN) -- Australia's dominant telecom, Telstra, has seen its full-year earnings slip by nearly 10 percent to A$3.66 billion ($2 billion).

The company expects sales to be close to flat in the year ahead, it said Wednesday.

The result came in slightly below market expectations, with the company's shares dipping 2.8 percent to A$4.82 just after midday on the Australian Stock Exchange.

Telstra said the 9.8 percent profit drop was mainly due to a number of one-off items, including large asset sales and the writedown of its hefty retirement provision.

Better than its peers

Chief executive Ziggy Switkowski stressed Wednesday that the company was performing strongly compared to the vast majority of its international peers.


Telstra CEO Ziggy Switkowski was reluctant to make predictions

He pointed to 1.7 percent growth in underlying revenues to A$18.8 billion and a 5 percent hike in underlying earnings before interest and tax to A$6.7 billion.

Free cash flow, excluding investments in Asia, increased by 35.5 percent to A$3.8 billion.

"Cash flow is the true strength of the company in turbulent times and ours is at record levels," Switkowski told a media conference.

Telstra was reluctant to comment on its prospects for the year ahead, saying there were still too many imponderables in the current environment and to make predictions would be "reckless".

Shakeouts ahead

The company forecast sales growth at or about the same 1.7 percent rate for the 2002-03 year.

Switkowski said he thought the coming year would see more shakeouts in the sector and little variation from generally flat trading trends.

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"A flattish outlook", was as bold a prediction as he was prepared to make.

Commenting on the group's Asian ambitions, Switkowski said income from Asian investments were expected to make substantive contributions in the years ahead.

Telstra paid a total of A$4.26 billion to take 100 percent of Regional Wireless Company, which owns Hong Kong mobile carrier CSL, in a much criticized deal with PCCW's Richard Li.

Switkowski said CSL contributed A$79 million to pre-tax earnings for the year.

Market share

He said Telstra's Asian expansion strategy still focused on opportunities in greater China.


Telstra has been attacked for its poor efforts in attracting broadband consumers

The company has development teams in the region to canvas options, "of which there are quite a few," he said.

But he added that any new purchases have to meet strict investment criteria and that Telstra is not looking to do anything adventurous or speculative.

While the company's strong balance sheet enables it to move quickly, Switkowski said he would not be surprised if, a year hence, no significant deals had been made.

A strong 'strategic intent'

He said Telstra was a highly regarded potential partner for telecom deals in the region and the company's "strategic intent" was to do more business in the Asian region.

On the domestic front, Switkowski said overall market share had perhaps fallen one or two percentage points but it remains the dominant carrier, with around 70 percent of the total market.

The market for Internet and data services was softer but mobile services and broadband revenues were up.

Telstra has come in for heavy criticism in the past year over the cost, quality and speed of its broadband rollout in Australia, where almost half the nation's 7.5 million households have some form of online access.

Broadband on track for 1M by 2005

Switkowski said Telstra's broadband subscribers grew by 115 percent to 168,000 customers and the company remained on track to meet its target of 1 million broadband customers by 2005.

Independent telecom analyst Paul Budde told CNN that Telstra was very late arriving in the broadband market in Australia and was only now beginning an aggressive push for small business and retail customers.

He said Telstra had got caught up in the hype of mobile data services and had now lost market share in broadband.

"They've left it too late. Telstra didn't want to cannibalize its very profitable corporate data market by going after small business and the consumer market," he said.

Telstra, 50.1 percent owned by the government, is under pressure to impress the market, as it prepares for possible full privatization late next year.

Regional broadband

Such a sale would likely raise about A$31.5 billion ($17 billion). Analysts expect it would probably be offered in two or three slices to make it more easily digestible by the share market.

But Budde said there is still major business and public opposition to a full privatization of Telstra, with the majority of Australians believing the standard of Telstra services have gone backwards.

He said there is the key problem of who would pay to roll out broadband in regional Australia, an exercise which would cost around A$5 billion.

Telstra is reluctant to do it without government support, something which is currently not forthcoming.

Until that issue is solved, the Telstra selloff will remain on hold, he said.

The company declared a final dividend of 11 cents per share, which will be paid in October to its 1.9 million shareholders.