Australia's Telstra Faces Slowing Mobile Growth

By Ross Kelly 

SYDNEY--Australia's biggest telecommunications company exploited the buzz around Apple Inc.'s latest iPhone to lure more mobile customers in the first half of its fiscal year, but failed to reverse slowing growth in an increasingly saturated cellphone market.

Telstra Corp. said first-half profit rose 22%to 2.09 billion Australian dollars (US$1.61 billion) in the six months to December, beating the A$2.01 billion average of five analyst forecasts compiled by The Wall Street Journal. The rise in earnings was supported by an accounting loss a year earlier on the sale of Telstra's directories business.

Net profit from 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 the period, helped by the launch of two versions of Apple's new iPhone 6. The figure was about half the 739,000 prepaid and postpaid customers it reported a year earlier.

Australia's smartphone market alone--supplied by three mobile operators including Optus and a resurgent Vodafone Australia--is close to 80% penetrated, which has driven Telstra to explore other ways to grow mobile revenue.

"If you look at postpaid there's no doubt we've seen that market slow down," said Andy Penn, Telstra's chief financial officer. "We see plenty of opportunity, though, in tablets and also in machine-to-machine."

Telstra has become increasingly reliant on mobile growth to offset long-declining fixed-line revenue. Its strategy of plowing cash into mobile-infrastructure upgrades has helped attract more customers and support bumper profits over the years.

Many investors' minds are focused now on what Telstra will do with the cash pile it inherited three years ago when it agreed to sell its fixed-line infrastructure progressively to the government for A$11 billion to help build a national broadband network.

The windfall gives the company scope to return more to shareholders through dividends or share buybacks. Yet it has stripped Telstra of an infrastructure monopoly it once had, forcing it to compete harder for retail customers.

Industry analysts have mixed views on how Telstra may spend the rest of its booty. J.P. Morgan last month forecast a further A$5 billion in share buybacks between the 2016 and 2018 fiscal years. Last year, Telstra rewarded shareholders with a A$1 billion buyback.

The company has also bumped up its half-yearly dividend payout modestly over the past year to 15 Australian cents a share--having kept it steady at 14 cents for eight years. It has also invested A$1.3 billion in 4G spectrum and acquired PacNet, an Asian subsea cable operator.

"They're doing a good job and the balance sheet is in an appropriate position," said Tim Carleton, a Sydney-based portfolio manager at Auscap Asset Management. "It's not easy to deploy capital when you're as large as Telstra. They're doing so in a sensible and measured manner."

Write to Ross Kelly at [e-mail]

Access Investor Kit for Telstra Corp. Ltd.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000TLS2

Access Investor Kit for Apple, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0378331005

Access Investor Kit for Telstra Corp. Ltd.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US87969N2045

Subscribe to WSJ: http://online.wsj.com?mod=djnwires