TELSTRA (TLSYY, Financial) exploited the excitement and anticipation surrounding the launch of the Apple (AAPL, Financial) iPhone 6 to entice and attract more mobile customers in the first half of its fiscal year while reporting first half profits rising 22% to $ 1.61 billion. Australia’s largest telecommunications company was unable to reverse slowing growth in an ever expanding saturated mobile device market segment.
Telstra beat the $1.5 billion average of five analyst forecasts compiled by the Wall Street Journal. This rise was supported by loss in accounting thanks to the sale of Telstra’s directories business.
Business As It Is
The problem however, lies with flailing mobile subscriber numbers. Telstra has become increasingly reliant on mobile device and segment growth to offset long-declining fixed-line revenue. The company has a strategy of investing money into mobile-infrastructure upgrades which has helped attract more customers and support bumper profits over the last decade or so.
Telstra’s continuing operations rose by 7% while earnings before interest, tax, depreciation and amortization edged up 0.5%. Telstra added 366,000 new mobile accounts during this period that was assisted with the release of two new versions of Apple’s new iPhone 6. The net profit from continuing operations rose by 7%, while earnings before tax and interest rose by 0.5%
The Australian telecom giant has modestly bumped its half year dividend payout to 15 cents a share after having kept it constant at 14 cents for eight years. Telstra has also acquired PacNet, an Asian subsea cable operator as well as invested $1.0 billion in 4G spectrum.
The Australian smartphone market is supported by three local mobile operators including Optus and a resurfaced Vodafone (VOD, Financial) Australia. This market is close to 80% penetration driving Telstra to explore and expand into other ways of growing their mobile revenue.
Road ahead
Andy Penn, Telstra’s CFO, says ‘if you look at postpaid there’s no doubt we’ve seen that market slow down. We see plenty of opportunity, though in tablets and in machine to machine.’
The company’s reliance on mobile growth to offset long-declining fixed-line revenue is increasing. However its strategy of plowing cash into mobile infrastructure upgrades is helping them get more customers and support numper profits over the last few years.
On the basis of their profits this half-year, Telstra re-launched a plan to let shareholders reinvest their dividend for the first time since 2008. Analysts see Telstra as a company who will issue a dividend of either 15 cents or 16 cents per share after having kept its dividend flat at 15 cents per share for the half year ending December 2014. Analysts feel the key difference comes down to whether Telstra can reposition themselves as a premium provider given their superior network.
As part of its results announced, Telstra said shareholders coud buy more of the company with their dividends as part of a Dividend Reinvestment Plan (DRP). As of the year ending June 2014, Telstra had about 51 percent of the mobile market and the number of local mobile subscribers reached 16.4 million.
Our Take
Analysts can feel reassured of holding onto their Telstra shares as well as buying more of the company. All that stands between obtaining a larger slice of the mobile market and the investors is their brand repositioning. Once Telstra shows the public they are a premium services provider too, their subscriber numbers will look to double. Right now the competition does not come near them in terms of network range, services, acquisitions or company worth. Australia is Telstra’s turf to capture and investors should feel very bullish about the company.
