Telstra Finally Dials Up Growth

SYDNEY -- Telstra (ASX: TLS.AX) has reported its 2012 financial year results. Revenue was up 1.1% to AU$25.4 billion, profit was up 5.4% to AU$3.4 billion, and earnings per share were up 5.4% to AU$0.275. The dividend was kept at AU$0.28, and the company has forecast it to remain at AU$0.28 for FY2013, barring any unforeseen issues.

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

All around, it's a pleasing result from the company. Customers on the old copper network are dropping off as expected, but mobile customers and revenue are increasing nicely.

The performance of the individual units is detailed below.

Growth in mobile was up 8.5% to AU$8.7 billion, thanks to the addition of 1.6 million new mobile customers during the year -- and more than 3 million in the last two years. Telstra now has 13.8 million mobile customers, giving the company an enormous share of the mobile market. Mobile now accounts for 34% of the company's total revenue and continues to grow. A pleasing sign is that fewer users are leaving Telstra: Churn fell from 13.4% to 12.2%. This must be tough news for its competitors, such as Optus, which is owned by Singapore Telecommunications.

The growth in mobile revenue is more than accounting for the continuing fall in fixed-line revenue, but it will be harder to replicate in future years.

Fixed line
Public switch telephone network revenue fell 10%from AU$5.4 billion to AU$4.8 billion, mainly because PSTN customers fell by 300,000 to 6.9 million. Meanwhile, fixed-line retail broadband customers grew by 203,000 to 2.6 million, and revenue increased 2.9% to $2 billion.

Data and IP
Data and IP access revenue fell 0.8% to AU$3.1 billion. This sector has some similar products to the fixed-line business, such as ISDN fixed-line communications, which is mainly focused on business and government clients, rather than retail customers.

The media business has some issues, with media marketing (Sensis) revenue falling 9.6%. Print revenue fell 22% to AU$1 billion, with Yellow Pages revenue down 23% but partly offset by digital media, which was up 4.5% to AU$400 million.

Foxtel revenue was up 3.6% to AU$2.2 billion, with customer counts steady around 1.7 million. The company said there was an increased take-up of high-margin premium Foxtel products. News Corp. and Consolidated Media, dual 25% shareholders in Foxtel, will be happy with that news.

Network applications and services revenue was up 10.5% to AU$1.26 billion, indicating that 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. Cloud-based services grew 44%, which should be good news for data center- and Internet-based businesses such as Vocus Communications.

International revenue was up 7% to AU$1.5 billion, mainly thanks to a customer increase at Telstra's Hong Kong business.

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

The impact of the National Broadband Network is still difficult to determine. The Federal Opposition have said they will cancel the project if they win power in 2013. Telstra will still get its AU$11 billion 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 more than 7%, it looks slightly expensive, given that 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. Motley Fool newsletter services have recommended buying shares of Vocus Communications. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.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, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.

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