Australia's Telstra finds lower-margin growth in first half

By Tom Westbrook

SYDNEY (Reuters) - Telstra Corp Ltd said on Thursday it is offsetting ebbing earnings from its legacy landlines, for now, but that the new growth is coming from much lower-margin businesses.

Profit for the six months to Dec. 31 at Australia's biggest phone company was dragged 5 percent lower, as it wrote down to nothing the value of a six-year experiment in online video streaming.

But excluding the write-off, profit rose as mobile phone revenue grew modestly, against expectations, and earnings lifted sharply in the Network and Applications Services (NAS) division, which sells cloud computing and cybersecurity to corporate clients.

Like incumbent telecoms around the world, Telstra is under immense pressure to find new growth outside declining traditional streams. The performance of its cloud and cybersecurity businesses is encouraging, although with a margin of about 6 percent they are less profitable than the mobile and fixed line businesses, which have margins about 40 percent.

"The NAS business is a less percentage profitable business than our legacy businesses but we're very pleased with the progress that we've made," Telstra Chief Financial Officer Warwick Bray told Reuters in a phone interview.

"We see that very strongly as the future."

The company's overall net profit for the half was A$1.7 billion ($1.35 billion), its lowest interim profit in five years and coming in below an average A$1.9 billion forecast by three analysts polled by Reuters.

Other metrics were tracking within company forecasts, including earnings before interest, tax, depreciation and amortisation, which was A$5.2 billion compared with full-year guidance for between A$10.1 billion and A$10.6 billion.

Shares in the company, which have lost a third of their value in the past 12 months, rose 1.3 percent on Thursday, along with the broader market.

"I think for a re-rate they need growth prospects, and it's not necessarily clear where that comes from," said Ric Spooner, Chief Market Strategist at brokerage CMC Markets.

BROADBAND-AID

On top of the headwinds hitting the sector worldwide, Telstra, itself a former government monopoly, faces an additional challenge from a new government-owned broadband network that is upending Australia's telecommunications landscape.

The fiber-optic system will replace Telstra's copper lines within about four years, and the company forecasts that will lop about A$3 billion from its earnings every year once it is completed.

"We essentially move from being the wholesale provider of fixed networks in Australia to being a reseller," Telstra Chief Executive Andy Penn told analysts on a conference call on Thursday.

The rollout has hurt earnings at rivals TPG Telecom Ltd and Vocus Group Ltd, and was one reason Telstra cut its guidance last year and said it would slash its dividend in 2017-2018.

It announced an interim dividend of 11 Australian cents on Thursday, its lowest half-year payout in 15 years.

($1 = 1.2612 Australian dollars)

(Reporting by Tom Westbrook in Sydney. Additional reporting by Ambar Warrick in Bengaluru; Editing by Stephen Coates)