Telstra’s record profit amidst cost cutting plan

Telstra reports record profit largely due to cost cutting, as the telco strive to boost sales growth.

Australia's biggest telecommunications company has announced its highest ever full-year net profit, of $4.12 billion.

Telstra chief Ziggy Switkowksi was upbeat on the business sector's spend momentum, as the telco announced a 20 percent increase in profit from the previous financial year -- when the telco was forced to writedown ts troubled 'Reach' venture, in Hong Kong.

However, this year's profit was driven by cost-cutting which offset weak sales growth. Last year majority government-owned Telstra announced it was undertaking the Six Sigma process improvement program in order to reduce costs by $800 million by 2006.

Chief financial officer John Stanhope told the media: "We are on track with our $800 million cost reduction program".

Sales increased 1.2 percent which is well below average industry growth of around four percent. Announcing the results, CEO Switkowski restated his goal of last year to lift sales growth to about 4 percent by 2006. In April he staked his job on reaching this target.

That same month Bob Mansfield quit his post as chairman, two months after rumours circulated that a proposal he and Switkowski supported for a takeover of Australia's second-biggest newspaper publisher John Fairfax Holdings was turned down by the board. Mansfield's resignation ignited speculation that Switkowski might be ousted.

However Switkowski remained bullish and forecasted continued growth for the next financial year.

To help reach his 2006 target, Switkowksi oversaw the $333 million takeover of computer services company Kaz Group, which was finalised in July.

Today Switkowski was upbeat on the Kaz acquisition. "We've only had them for three weeks, but it feels like a great coalition," he said.

Telstra expects the Kaz acquisition will help the telco tap the market for managed services from the "the big end" business and government customers.

This customer portfolio has been under the most pressure in terms of revenue growth, something Switkowski attributes to the dot-com recovery. However, he remains adamant Telstra can steal market share in managed services away from "the other guys".

"Corporate and government spending is recovering. Activity level is high, but pricing is sharp so the yield is very demanding. However we have seen good results in the second half and there is a lot of momentum for the year ahead," he said.

He added that with David Thodey, business and government group MD at Telstra, who chairs KAZ, Telstra had "tuned its approach to the corporate market" and also had changed the way its corporate group is resourced in order to be more price competitive.

"It plays to our strengths. If you've got a complex environment you want to move to IP communications, you are dependent on your network, you demand redundancy, you're worried by the volume of spam, worms and Denial of Service attacks, who are you going to turn to? Telstra," said Switkowski. "I wouldn't describe our success as being specific to recovery and confidence in business and government," he added.

Switkowski also said Telstra would abandon its acquisition strategy, in favour of returning excess cash to shareholders.

Rather than buy new businesses, Telstra will buy back up to $750 million of shares and pay an extra dividend as part of a plan to increase returns to shareholders. A final dividend of 13 cents per share for Telstra's 1.8 million shareholders to be paid at the end of October.