UPDATE 2-Silver lining: Cloud computing at Australia’s Telstra cushions profit plunge

cnbc logo - UPDATE 2-Silver lining: Cloud computing at Australia's Telstra cushions profit plunge

profit plunge@

* Profit hits lowest in six years

Cloud computing revenue rises almost 9 percent

* Shares on track for steepest daily gain in 10 years (Recasts and adds market reaction, analyst and CFO quotes)

By Tom Westbrook

SYDNEY, Aug 16 (Reuters) – Australia’s largest telecom firm Telstra Corp Ltd posted its weakest annual profit in six years as it lost high-margin landline and wholesale business, but signs of growth in cloud computing salved long-suffering investors.

Higher revenue from the network and applications services division, which sells cloud computing and cybersecurity, was the closest the embattled telco came to offsetting losses inflicted by the rollout of a government broadband network.

The division helped limit the fall in Telstra’s profit to a smaller-than-expected 8.4 percent, and its shares that plumbed seven-year lows last month responded with a 6 percent spike – on track for their steepest daily rise in a decade.

“We’ve heard the bad news already for a long time and there’s no longer that shock any more,” said telecommunications analyst Paul Budde, who runs his own consultancy.

“The market has well and truly calculated in that Telstra is not a technology growth stock, but more a traditional utility.”

The results cap a turbulent year for the former government monopoly, which is under great pressure to find growth outside declining traditional streams while dealing with competition in the wireless space from rivals like SingTel’s Optus, Vodafone and TPG Telecom.

Telstra dominates Australia’s mobile telephone and broadband markets, but its mainstay fixed-line business has been upended by the government’s broadband network that is replacing copper wires laid by firm across the continent with a fiber-optic system that the telco must now pay to access.

FIXED-LINE WOES

Telstra is responding with job cuts and by mulling asset sales, but the new network sucked A$800 million ($580 million) from its earnings in the year ended June 30, hitting mostly Telstra’s landline and internet sales where it once earned margins over 50 percent.

“I’d be surprised if we ever got back to those 50 percent margins,” Telstra Chief Financial Officer Warwick Bray told Reuters in a phone interview.

Net profit for the year fell to A$3.6 billion, but this was slightly above analyst forecasts for A$3.4 billion.

Earnings before interest, tax, depreciation and amortization were A$10.1 billion, in line with expectations the firm had trimmed twice since December.

The network and applications services unit was the best performer, with revenue up almost 9 percent to A$3.6 billion.

“It’s a lumpy business but over time we’d be very disappointed if we didn’t meet or beat 8-9 percent growth,” Bray said. “We believe there’s both revenue growth and margin expansion on the way.”

As the company flagged last year, it cut its final dividend nearly a third to 11 Australian cents, the first such drop since Telstra listed in 1997. It reiterated its forecasts for earnings to fall in the current year.

Telstra stock rose 6.4 percent to A$3.08 by 0400 GMT, on track for their biggest daily gain since early 2008. The broader market was down 0.1 percent. ($1 = 1.3826 Australian dollars) (Reporting by Tom Westbrook in Sydney. Additional reporting by Rushil Dutta in Bengaluru; Editing by Phil Berlowitz and Himani Sarkar)

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