February 13, 2019 / 9:59 PM / 8 days ago

UPDATE 3-Australia's Telstra slashes first-half dividend as profit drops

* Net profit drops 28 pct, in line with market expectations

* Interim dividend at A$0.08 vs A$0.11 a year earlier

* Shares hit 10-day low (Adds management quotes and segment detail, updates shares)

By Tom Westbrook

SYDNEY, Feb 14 (Reuters) - Telstra Corp Ltd cut its dividend by 27 percent on Thursday after posting its lowest half-year profit in eight years, as revenue from traditional, high-margin businesses tumbled and growth in new businesses slowed.

Telstra dominates Australia’s mobile and broadband markets. But its mainstay fixed-line phone and internet business is crumbling as a government-owned fibre network, which Telstra must pay to use, replaces a copper system it had monopolised.

The network is half complete yet is hammering Telstra’s profit, which fell over a quarter and dragged down its dividend - once a major reason for holding its stock. Telstra has sought resolve in new areas such as cloud computing but even revenue there has shrunk.

“It’s not looking pretty,” said Tony Cunningham, who heads Perth stockbroker CPS Capital and owns Telstra shares. “A lot of people will run at this dividend announcement. It’s not a good sign... I can’t see what’s going to drive growth.”

Net profit dropped 28 percent in April-December to A$1.23 billion ($872 million), matching market expectations, with only its mobile and international divisions growing revenue.

Telstra cut its interim dividend to 8 Australian cents/share, from 11 cents a year earlier, in line with a lower payout ratio previously flagged.

The results illustrate how Telstra has yet to find ways to offset the impact of the National Broadband Network (NBN) over a decade since it was first announced.

“We’re not the same company we were when we were paying 35 cents in terms of (annual) dividend because of the NBN,” Chief Financial Officer Robyn Denholm told Reuters by phone. “We’re doing everything we can to grow underlying businesses, but we can’t change the trajectory of the NBN impact.”

Telstra stock declined 4 percent in early trade, the steepest in two months, touching a 10-day low. It was trading down 2.5 percent at midday versus a 0.3 percent rise in the broader market.

RINGING OFF

Telstra, a former government monopoly, forecast the NBN to halve its net profit by the time it is completed around 2021 - from A$4.2 billion in 2015 - as it loses its wholesale monopoly on network infrastructure and its retail margin collapses.

“We had assumed that ultimately there would be a residual margin in that business around about the mid teens,” Chief Executive Andy Penn told investors on a conference call. “At the moment the trajectory and the trend is toward no margin.”

So far, Telstra’s response to the NBN has involved cutting about a quarter of its workforce, flagging possible asset sales, and seeking growth in new areas such as mining services, healthcare, video streaming and cloud computing.

Revenue at its most promising new enterprise, selling cloud computing and cybersecurity, fell 4.1 percent in April-December and its profit margin tightened.

Cloud computing comprises 11.6 percent of total revenue, while that from fixed line - which fell 9.3 percent in the first half - makes up almost a fifth. Mobile revenue contributes 38 percent.

Telstra reaffirmed its full-year pre-tax earnings forecast of A$8.7 billion to A$9.4 billion.

($1 = 1.4110 Australian dollars)

Reporting by Tom Westbrook; Additional reporting by Nikhil Kurian Nainan and Nikhil Subba in BENGALURU; Editing by Stephen Coates and Christopher Cushing

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