Australia's Telstra Net Dives 10%, Grim Outlook"

SYDNEY -(Dow Jones)- Retaining its grim outlook ahead of its A$27 billion (US$20 billion) privatization later this year, Australia's largest telephone company Telstra, Thursday said first half net profit fell 10.3% due to its weakening fixed-line operations.

Telstra said earnings in the six months ended December 31, 2005, fell A$2.14 billion from A$2.39 billion a year earlier.

The result, which comes as Canberra considers whether to proceed with the sale of its remaining 51.8% stake, compared with a 15% fall forecast in a Dow Jones Newswires poll of nine analysts.

"The trends of decelerating revenue growth, PSTN (fixed-line) erosion and accelerating costs so evident in the second half of fiscal 2005 have continued, producing an earnings decline in line with our negative guidance," said Chief Executive Solomon Trujillo. He joined last July after a long career at U.S. West and a short stint at European mobile group Orange, both controversial tenures which some analysts and investors believe have helped put pressure on the stock in recent months.

"The recent deterioration in operating trends and our investment in transforming the business will see earnings fall in the near term," said Trujillo.

"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," he added.

Telstra said earnings before interest and tax, or EBIT, for the year ending June 30, 2006, will fall by up to 26%, with the second half result to be affected by layoffs. Annual revenue growth up until 2010 won't exceed 2.5%, Telstra also said.

Trujillo plans to lay off around 12,000 staff, or a quarter of Telstra's work force, and invest billions of dollars in upgrading networks to reduce the company's reliance on fixed line earnings.

"Certainly the second half result will be very closely watched," said Angus Gluskie of Sydney-based White Funds Management.

"It will be critical given that it is only in the second half that they expect to put though some off their redundancy expenses," he said. "But this result was slightly better than the market was looking for," Gluskie added.

Telstra shares rose 1.8% in early trade to A$4.12, well short of the A$5.07 price when Trujillo joined the company and before his public battles with regulators and Canberra lawmakers.

Cabinet To Discuss Privatization, Broker Panel Advises

The government values Telstra shares at A$4.13 in its budget documents, but has stressed this isn't a firm guide to the final price of the stock in the privatization.

A broker panel led by UBS, Goldman Sachs JBWere and ABN AMRO is advising the government on options for the sale of its third tranche, called T3. Cabinet will consider giving final approval to the process in the next month or so, Finance Minister Nick Minchin said recently.

"I think the market is very underweight Telstra stock," said senior institutional dealer Charlie Aitken at Sydney broker Southern Cross Equities.

"I think T3 will be done easily," Aitken added.

Telstra said group revenue rose 1.9% to A$11.61 billion but revenue from its key fixed-line business declined 7.6% as more customers canceled services in favor of cheaper, and lower margin, mobile services.

"This remains our major concern. The decline in business revenue looks like it has continued to accelerate," said Macquarie Bank client adviser David Halliday.

With more than 95% of Australians owning a mobile phone, Telstra reported slowing revenue growth from its mobile division, with Trujillo pointing to intense competition and aggressive capped calling plans from rivals including Vodafone Group PLC (VOD) and Singapore Telecommunications Ltd. (T48.SG).

The division's revenue rose 4.6% as it signed up 345,000 mobile customers during the half, taking its total to 8.6 million out of an Australian population of 20.5 million.

Telstra's internet division, considered a major driver of growth, reported a 42.3% improvement in revenue as it connected more customers and improved market share, while its Sensis directories business, also touted as a growth engine, reported a 6.3% increase in revenue.

Its Hong Kong-based mobile business CSL, which it recently agreed to merge with New World Mobile Holdings, reported a 9.3% drop in operating income to HK$342 million, although voice revenue continued to be hit by strong competition.

In New Zealand, Telstraclear booked an ebit loss of NZ$16 million.

-By Lyndal McFarland, Dow Jones Newswires;
61-2-8235-2957; lyndal.mcfarland@dowjones.com
-Edited by Ian Pemberton

(END) Dow Jones Newswires "

Posted to the site on 9th February 2006