Mobile services

iPhone Hunger Fuels Telstra Earnings Growth

Hunger for Apple's iPhone 6 and increased spending on mobile data services by Australian consumers have fueled earnings improvements at Telstra for the last six months of 2014.

The Australian incumbent, whose chief network rivals are SingTel Optus Pty. Ltd. and Vodafone Hutchison Australia , said net profit from continuing operations rose 7% in the half, to 2.1 billion (US$1.6 billion) Australian dollars, compared with the last six months of 2013. Overall revenues increased by 1.6%, to A$13 billion ($10 billion), over the same period.

Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) told investors to expect "broadly flat" revenues and EBITDA over the July 2014 to June 2015 period, compared with the preceding 12 months, implying that in the first six months of 2015 revenues will shrink by 1%, on a year-on-year basis, and EBITDA will remain unchanged.

Free cash flow is expected to come in at A$4.6-5.1 billion ($3.5-3.9 billion) over the June 2014-July 2015 period, compared with A$5.1 billion ($3.9 billion) in the 12 months before.

Telstra excused the forecast by noting that it no longer includes results for Hong Kong CSL Ltd. , the mobile operator it sold for $2.425 billion in May 2014.

Even so, while Australia's economy has flourished on the back of a commodities boom, there have recently been worries about long-term prospects and signs of an economic slowdown following the more recent fall in commodity prices.

The country's mobile market is also showing signs of saturation -- Telstra added about 600,000 customers last year, compared with around 1.4 million in 2013, while growth at its more lucrative postpaid customer base shrank from 261,000 in 2013 to 153,000 last year.

Despite that slowdown, mobile revenues leaped to A$5.3 billion ($4.1 billion) in the last six months of 2014 from A$4.9 billion ($3.8 billion) in the year-earlier period. In contrast to operators in Europe's crowded mobile markets, Telstra has been able to flag continuing growth in average revenue per user, with customers racing to make use of data features on iPhones and other smartphone devices.

Mobile Revenues (A$B)
Source: Telstra
Source: Telstra

"We had our best ever iPhone launch and we have seen growth in the number of connected tablets," said Telstra CEO David Thodey in reference to the recent introduction of the iPhone 6.

Consumers in Europe have been similarly enthused by the latest smartphone gadgetry, but competition has been driving down prices.

Although Australia's market is relatively small in comparison with the biggest in Western Europe, some prominent MVNOs have gone out of business over the last couple of years, reducing pricing pressure in the market.

Nevertheless, Telstra also believes the strong mobile performance is a vindication of its investment in higher-speed mobile broadband technology. The operator spent 13.7% of revenues on capital expenditure in the last six months of 2014 and much of that went on the deployment of a 4G network that now covers 90% of the Australian population.

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Telstra aims to spend 14% of revenues on capex over the July 2014 to June 2015 period and extend 4G services to 94% of the population by mid-2015.

Predictably enough, the performance at the operator's fixed-line business was less encouraging, with an increase in revenues from data services failing to offset the steady decline in the old-fashioned telephony business. Overall fixed-line revenues fell by 1.7% in the last six months of 2014, to A$3.5 billion ($2.7 billion), compared with the same period of 2013.

In December, the operator agreed to a new A$11 billion ($8.5 billion) deal to sell its copper and HFC networks to state-backed NBN Co, which is building a high-speed fiber network that retail operators can use to provide broadband services.

Telstra booked a 7% year-on-year rise in wholesale revenues in the last six months of 2014, to A$1.2 billion ($900 million), driven mainly by an increase in NBN infrastructure payments under an existing arrangement.

Proceeds from the NBN sale are supporting Telstra's investment strategy and allowing it to raise dividend payments to shareholders, although retail competition in Australia's broadband market is set to intensify as NBN rolls out services.

As well as ramping up its mobile data business in Australia, Telstra is also keen to expand its presence in Asian markets. It agreed a $697 million takeover of undersea cable operator Pacnet in December and expects this to double the scale of its Asian enterprise business.

The performance of the Network Applications and Services (NAS) product line was another bright spot for Telstra, with revenues up 18.1% year-on-year, to A$1 billion ($770 million), in the last six months of 2014.

The NAS division sells a range of managed network, unified communications and cloud services.

Telstra's share price dipped 0.62% on the Australian Securities Exchange following the publication of results.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

nasimson 2/19/2015 | 5:43:09 AM
Re: Rough times ahead First mobiles surpassed computers on the email. Then search. Now on shopping. What's next? I guess it would be gaming. Or has that been already?
kq4ym 2/15/2015 | 10:57:54 AM
Re: Rough times ahead With increasing use of mobile for shopping by consumers Telstra is probably making a smart move in figuring that  "strong mobile performance is a vindication of its investment in higher-speed mobile broadband." Mobiles have recently taken over the leas from computers in online shopping.
nasimson 2/13/2015 | 8:41:18 AM
Rough times ahead Telstra is upto very tough competition. Especially from Sing Tel. With Vodafone and Sing Tel striving to gain market share at expense of Telstra, there are rough times ahead for the company.
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