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Telstra Net Drops on Restructuring Costs
Telecom Firm Boosts Outlook Citing Strides In Turnaround Effort
By Lyndal McFarland
The Wall Street Journal
Friday, February 16, 2007


SYDNEY --  Telstra Corp. said its fiscal first-half net profit declined 21% due to restructuring costs, but an upgraded earnings forecast and a turnaround strategy boosted the company's share price.

Chief Executive Sol Trujillo offered an upbeat outlook for the Australian telecommunications company and said Telstra will begin to report earnings growth as it takes market share from rivals.

Just three months after Canberra's A$15.5 billion (US$12.15 billion) share sale, the former U.S. West chief raised full-year earnings forecasts and said his transformation strategy is beginning to gain traction.

"We have reached a pivot point in our earnings with positive earnings growth to resume in the second half," Mr. Trujillo said.

Telstra's net profit for the six months ended Dec. 31 fell to A$1.7 billion from A$2.14 billion a year earlier, hurt by higher expenses related to Mr. Trujillo's five-year restructuring plan. But the result beat market forecasts for profit of A$1.67 billion.

Revenue rose 2% to A$11.6 billion from A$11.41 billion, and Telstra now expects annual gains of as much as 3% compared with its earlier forecast for gains of as much as 2.5%.

"We are on or ahead of our transformation plan on all fronts," Mr. Trujillo said. "Our financial performance is ahead of guidance.

Operating income fell 16%, also better than the company's guidance for a decline between 17% and 20%.

Telstra said it now expects annual operating income to rise between 3% and 5%, up from its prior forecast for growth between 2% and 4%. Second-half earnings are expected to rise as much as 40%.

"We are winning where it matters -- in 3G, broadband and digital online offerings. We have slowed the PSTN [fixed-line] decline. We are improving service and operational performance," said Mr. Trujillo.

Investors pushed up Telstra's shares 3.9% Thursday to a 17-month high of A$4.54. The stock has added around 21% since the government in November cut its stake in Telstra to about 17% from 51.8% as global sentiment toward the sector has improved.

The shares sold by Canberra, traded separately and known as installment receipts, rose 6.1% to A$3.11 -- extending the windfall for retail investors who paid A$2 a share and for institutions, which paid A$2.10.

"It is certainly a positive that they have increased their guidance. It emphasizes the real changes that are occurring at the cost level," said Atul Lele of White Funds Management in Sydney. "In terms of the strategic level there are still some uncertainties, but on the operations side of the business, it is now clearly on the turnaround path."

While the headline numbers beat forecasts, some analysts cautioned Telstra is paying a high price for growth, particularly in the mobile division where it faces tough competition from Britain's Vodafone Group PLC and Singapore Telecommunications Ltd.'s Optus unit.

Telstra's mobile revenue rose 12% to A$2.8 billion and the company added 707,000 third-generation mobile subscribers in the first half year, Mr. Trujillo said.

Write to Lyndal McFarland at lyndal.mcfarland@dowjones.com

http://online.wsj.com/article/SB117159234192110664.html?mod=hps_us_my_industries