Telstra shares were sold off yesterday by more than 5% on a disappointing interim earnings release.
The Telco revealed a 3.3% drop in first-half profit to $1.85 billion and said it expects a stronger second half with better economic conditions.
The company earned $1.916 billion in the six months to December 2008.
But the commentary in briefings and the announcement left the market very underwhelmed.
Even though the company had warned of the easing result, the market just didn’t like it.
So they sold the shares off 5.02%, or 17c, to $3.22.
Not helping was the absence of any deal with the Federal Government for Telstra’s involvement in the national broadband network (NBN).
In short the market reckons the company is stuck with a bunch of low yielding assets based around its copper wires, which in turn are dragging down returns from mobiles, broadband and other faster growing businesses.
A deal on the NBN will see those fading assets shovelled off into the NBN.
Revenue fell nearly 3% to $12.342 billion, from the $12.71 billion in the previous corresponding period.
Telstra declared an interim dividend of 14 cents per share, identical to that issued for corresponding period last year.
Earnings before interest, tax, depreciation and amortisation also fell, down 0.3% to $5.317 billion.
That still leaves the company with a solid gross margin of 43c in the dollar, and a net margin of a touch under 15%.
Telstra blamed the fall in revenue on the impact of the strong Australian dollar and the absence of a sold business, KAZ.
But analysts are concerned that the decline in revenue and earnings are occurring in its high margin businesses, the fixed line, or PSTN business, and Sensis directories business.
Revenue for the public switched telephone network (PSTN), (which is the copper wire coming into the home and connecting them) fell 6.8% to $2.9 billion.
That’s faster than the 4.8% fall in the second half of the 2009 financial year.
Sensis was down 5.2% to under $1 billion.
Chief executive David Thodey acknowledged that Telstra faced challenges from strong price competition, the acceleration of homes moving to wireless at the expense of fixed lines (so-called naked DSL) and a stronger Australian dollar.
"Overall, we have seen a decline in adjusted revenues in the first half despite good performances in mobile data, wireless broadband and IP data," Mr Thodey said in a statement to the ASX.
"This reflects challenging market conditions due to changing calling behaviours and stronger price competition."
He said some improvement is expected in some of those areas in the second half.
"Despite these challenges, we expect a modest improvement in the trends in the second half of fiscal 2010 with our new offerings, new pricing plans, and new revenues from major contract wins," he said.
Telstra has downgraded some of its full year guidance, now forecasting a low single digit decline in sales revenue compared to the previous year. EBITDA and EBIT are forecast to grow at low single digit levels, while free cash flow still is expected to reach $6 billion.
Telstra’s ongoing negotiations with the government on NBN remain complex, Mr Thodey said.
"We remain engaged in constructive talks with the Government and NBN Co," he said.
"We remain committed to try to find a mutually acceptable outcome, but the path ahead remains immensely complex.
"Throughout these talks, the best interests of our investors, our employees and our customers have remained paramount and we will continue to keep the market informed when significant developments occur."
Revenue from Telstra’s PSTN continued to decline, driven by lower usage across most calling categories, particularly in local calls and national long distance, plus fewer fixed line services in operation.
Fixed internet revenue was relatively stable compared to the previous corresponding period at $1.083 billion.
Mobile services revenue was up by 4.7% to $3.624 billion, down from the 10% growth rate in the June half of 2009.
Telstra’s mobile services revenue growth grew 10% in the second half of the previous financial year.
"At a product level, performance in the first six months of the year has been mixed but overall our market shares have come under pressure.
"Mobile services revenue growth of 4.7% remains well above our global peer group, although we believe that our focus on profitable growth has come at a slight cost to revenue market share.
"Growth has also continued in fixed retail broadband and IP access, but offsetting this we have seen a significant slowdown in PSTN.
"We see strong demand growth in both mobile and IP, but significant pressure on price," the company said.
It’s the accelerating decline in the PSTN revenue and the slowing rate of growth in mobile that really worried analysts and shareholders yesterday.
That concern made the 5% fall easier to comprehend.
