Telstra finally dials up growth

Telstra's mobile growth continues

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 9, 2012 11:36 am AEST

Telstra Corporation Limited (ASX: TLS) has reported its 2012 financial year results and revenues were up 1.1% to $25.4bn, while profits were up 5.4% to $3.4bn, and earnings per share up 5.4% to 27.5cents. The dividend was kept at 28 cents, and the company has forecast it to remain at 28 cents for FY2013, barring any unforeseen issues.

Return on average equity increased to 28.9%, compared to 26.1% in 2011, while return on assets rose to 16.7% up from 15.9%. Gross debt has increased to $17.2bn compared to $16.2bn in 2011, but net debt has fallen to $13.3bn from $13.6bn. Most sectors reported strong operating margins, with mobile at 36%, broadband at 37% and fixed line at 60%.

All up a pleasing result from the company and mostly as expected. Customers on the old copper network are dropping off – as expected, but mobile customers and revenues are increasing nicely.

The performance of the individual sectors are detailed below.

Mobiles

Growth in mobiles was up 8.5%, to $8.7bn, thanks to the company adding 1.6 million new mobile customers during the year – and more than 3 million in the last two years. Telstra now has 13.8m mobile customers, giving the company an enormous share of the mobile market. Mobile now accounts for 34% of the company's total revenue, and is growing. A pleasing sign is that less users are leaving Telstra, with churn falling from 13.4% to 12.2%. This must be tough news for its competitors, such as Optus – owned by Singapore Telecommunications Limited (ASX: SGT).

The growth in mobile revenues is more than accounting for the continuing fall in fixed line (copper) revenues, but will be harder to replicate in future years.

Fixed Line

PSTN fixed line revenues fell 10%,from $5.4bn to $4.8bn, mainly as a result of PSTN customers falling by 300,000 to 6.9 million.

Fixed line retail broadband customers grew 203,000 to 2.6 million, and revenues increased 2.9% to $2.0 billion.

Data and IP

Data and IP Access revenues fell 0.8% to 3.1bn. This sector has some similar products to the fixed line business such as ISDN fixed line communications, mainly focused on business and government clients rather than retail customers.

Media

The media business has some issues with media marketing (Sensis) revenues falling 9.6%. Print revenues fell 22% to $1.0bn with Yellow Pages revenue down 23%, partly offset by digital media, which was up 4.5% to $0.4bn.

Foxtel revenues were up 3.6% to $2.2bn, with customers steady around 1.7m. The company said that there was an increased take up of higher margin premium Foxtel products, which has contributed to the increased revenue. Dual 25% shareholders in Foxtel, News Corporation (ASX: NWS) and Consolidated Media Holdings Limited (ASX: CMJ) will be happy with that news.

NAS

Network applications and services (NAS) revenues were up 10.5% to $1.26bn, indicating this is a fast growing business and according to the company, a dependable annuity style business in future years. An example of this service is when Telstra sets up a network for customers, and then manages that network for the customer. Cloud based services grew at 44%, which should be good news for data centre and internet based businesses such as Vocus Communications Limited (ASX: VOC).

International

International revenues were up 7% to $1.5bn, mainly thanks to an increase in customers in its Hong Kong business.

Outlook

The outlook for 2013 is for low single digit growth – similar to 2012. Free cash flow is expected to be between $4.75bn to $5.25bn, compared to this year's $5.2bn. Telstra expects excess free cash flow to be around $2-$3bn over the next three years.

The impact of the NBN is still difficult to determine. The Federal Opposition has said they will cancel the project, if they win power in 2013. Telstra will still get its $11bn NBN contractual payoff according to the Australian Financial Review, but what happens after that to Telstra's copper network and the NBN infrastructure that has been rolled out to that point is unknown.

With Telstra currently trading on a P/E ratio of 13.7, and paying a fully franked dividend yield of over 7%, it looks slightly expensive, given growth is likely to be fairly low, at least for 2013.

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Motley Fool writer/analyst Mike King owns shares in Vocus Communications. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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