Mobiles Help Telstra As Fixed-Line Loses Favor

SYDNEY (Dow Jones)--Strong first quarter growth in mobiles helped Telstra Corp. (TLS) beat off the continued decline in its core fixed-line business, but Australia's largest telephone company warned a sharp deterioration in revenue from its traditional telephone services is just around the corner.

The company Wednesday said sales for its first quarter ended Sept. 30, excluding recent acquisitions and income from property and investments, rose 4.2% from a year earlier to A$5.24 billion, beating analysts' expectations. Australian sales, which make up over 90% of revenue, rose 3.9%.

Sales growth was driven by mobiles, with revenue up 9.4% or A$80 million, and by the Internet, pay-television, and directories and advertising divisions.

But revenue from fixed-line telephones, which make up about 40% of total sales, fell 1.0% from a year earlier to A$2 billion, continuing a trend for this business to weaken due to competition from mobiles and e-mail.

An increase in revenue for access to Telstra's fixed-line network wasn't enough to offset a fall in fixed-line calling revenue, which came about despite recent price increases, with fixed lines in use falling by some 30,000 in the quarter.

The decline in fixed-line revenue is "inevitable" but Telstra seems to be "managing quite well" in so far preventing it from accelerating, said Daiwa analyst Jerry Yeu.

"The strong performance from mobiles really highlighted the fact they are able to capture that migration quite well if and when it does accelerate," he said.

Shares in Telstra, which is 51.05% owned by the Australian government, rose 5 cents to an intraday high of A$4.71.

Inflection Point

Chief Executive Ziggy Switkowski said it is too early to know if the telephone market in Australia has reached an "inflection" point, though it is clear mobile telephones are cannibalizing the fixed-line market, in which Telstra has a near monopoly.

"Let me not suggest that we're not close to a quite sharp change" in the fixed-line business, he said during a teleconference.

"We are seeing it elsewhere in the world. PSTN lines in Singapore and Hong Kong are falling in double-digit numbers...in Europe all over the map."

Telstra, which ranks itself as the world's 14th largest telephone company by market capitalization, has internal forecasts for the decline in the fixed-line business but declined to release this "commercially sensitive" information.

Analysts say the key challenge for the company is to obtain enough market share in the fiercely competitive mobiles and broadband markets to offset the loss of fixed-line revenue without sacrificing profit margins.

Telstra competes in the mobiles market against the local units of Vodafone PLC (VOD), Singapore Telecommunications Ltd. (S12.SG) and Hutchison Whampoa (0013.HK).

The company is aiming for a 50% share of the mobiles market by revenue, and Chief Financial Officer John Stanhope told Dow Jones Newswires that share increased slightly to about 47% in the first quarter.

But the recent strong growth in mobiles mightn't be sustained in the last three months of calendar 2004, as the market becomes even more mercenary as Christmas approaches.

"The focus of some of the mobile competitors out there isn't about profitability but more so about taking market share," said Yeu.

Acquisitions

Margins are also under pressure in the rest of the business, with broadband prices cut to stimulate demand and Switkowski noting increased "price aggression" in the important corporate and government telecommunications services market.

Investors are "keen to understand the impact of the revenue growth on the costs and margins of the business" but this information won't be available until the first half result, said Macquarie Bank in a research note.

Telstra said it is aiming to maintain margins in fiscal 2005 ending June 30 at the previous year's level and also held out the prospect of boosting revenue through acquisitions.

Switkowksi said the company has a "few moderate-sized acquisitions in the queue," one of these potentially being Comindico, the operator of an Internet Protocol network, which was placed in administration earlier this year.

Bigger acquisitions are possible once Telstra is fully privatized, and media ownership laws are relaxed, although there is little prospect of the privatization being completed before 2006.

"I do read with interest various comments in the last few days trying to set expectations more reasonably, to expect a T3 (third privatization tranche) event not before 2006, which strikes me, having lived through T1 and T2, as a very reasonable judgment to make at this point in time," Switkowski said

Telstra is set for full privatization after the Liberal-National coalition secured effective control of parliament's Senate upper house in the Oct. 9 federal election. Center-left Labor and minor parties have blocked the full sale of Telstra since 1999, when a second tranche of the company was sold for A$16 billion.

The company in August reported a record full year net profit of A$4.12 billion, up one fifth from A$3.43 billion a year earlier when Telstra wrote off nearly A$1 billion from its Reach undersea cable joint venture with Hong Kong's PCCW Ltd. (PCW).

-By Stephen Wright, Dow Jones Newswires;

61-2-8235-2950; stephen.wright@dowjones.com

-Edited by Paul Godby

(END) Dow Jones Newswires "

Posted to the site on 20th October 2004