UPDATE: Telstra Boosts Profit After Smartphone Customer Wins

-- Telstra FY profit rises 12% to A$3.81 Billion

-- Company poaches smartphone customers from Vodafone Australia

-- Holds dividend steady, focused on growing profit near-term

(Adds investor comment in 11th and 12th paragraphs; CFO comment on capital management from 13th paragraph.)

By Ross Kelly

SYDNEY--Telstra Corp. (TLS.AU), Australia's biggest telecommunications company by market value, booked a better-than-expected 12% rise in annual profit Thursday after it poached smartphone customers from a glitch-plagued rival.

Sydney-based Telstra, once hampered by the mass exodus of customers away from its traditional fixed-line network, has been one of the strongest performers on the Australian share market in recent years as profits improve and it attracts cautious investors with steady dividend payouts.

The company's profit for the year through June of 3.81 billion Australian dollars (US$3.43 billion) beat the A$3.69 billion average of nine analysts' forecasts compiled by The Wall Street Journal. It continues a gradual turnaround in performance from 2011, when earnings tumbled 17%, and follows a deep cost-cutting drive that involved shifting back-office jobs to India and heavy investments in the company's wireless network.

"Our strategy around improving customer service, as well as focusing on our growth businesses is working," Chief Executive David Thodey said in a statement.

An improvement in the reach and quality of Telstra's mobile offering, including the establishment of a 4G network, has coincided with a rapid deterioration in service quality at Vodafone Australia, an equal joint venture between Vodafone Group PLC (VOD.LN) and Hong Kong's Hutchison Whampoa Ltd. (0013.HK).

Vodafone Australia last month confirmed it lost 551,000 customers in the six months to June 30 alone after its network infrastructure became overstretched. The company is currently in the early stages of a turnaround strategy it says is designed to "resolve the impact of network and customer service issues" that have damaged its brand reputation and performance in the past few years.

Telstra said Thursday it added 1.3 million mobile customers in the year through June.

The company, which is worth A$62 billion, has piles of money to invest.

Last year, it agreed to shut its fixed-line infrastructure progressively and transfer its customers to the Australian-government owned NBN Co.--which is rolling out the country's new high-speed broadband network--in exchange for A$11 billion. The deal, however, strips Telstra of its wholesale infrastructure monopoly, forcing it to compete harder for retail customers.

Investors are holding out for Telstra to eventually start returning some of the A$11 billion broadband windfall in higher dividend payouts or a share buyback. The company held its annual dividend steady at 28 cents per share, without providing guidance for the current financial year.

Shares in the company jumped 1.5% early in Sydney, outperforming a 0.4% rise in the broader market.

"I think it's a great result, delivering on the top line and on expense control," said Rhett Kessler, portfolio manager at Pengana Capital in Sydney, which holds a small amount of Telstra stock.

"If they've got spare capital they'll release it. But if they don't they've got places to invest it. They've done a good job managing capital so far."

Telstra Chief Financial Officer Andy Penn said the company wants to increase dividends over the longer-term.

"But to do so we need to continue to focus on growing our profitability and that's what we're going to focus on in the near term," Mr. Penn said in an interview.

Although Vodafone Australia's woes can't last forever, Mr. Penn said he's optimistic Telstra can keep growing its wireless business through continued investment, and as people keep upgrading to newer and better handsets.

Looking ahead to the current fiscal year, Telstra forecast "low single-digit" percentage growth in revenue and operating earnings. Revenue last year grew by 1.9% and operating earnings, which exclude interest and tax payments, rose 3.9%.

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