Telstra Corporation Ltd (ASX: TLS) released its 2018 financial report this morning showing a 3% increase in total income to $29 billion but a 9% fall in profit to $3.5 billion. Telstra’s final dividend of 11 cents per share was in-line with expectations.

According to a survey by Bloomberg, Telstra was expected to report a profit of $3.47 billion. Therefore, although the profit decline may seem worrisome to some, it appears the result was in-line with expectations.

What’s Going On?

In mobile, Telstra is under pressure to stymie rising competition from mobile providers like iiNet, Optus, TPG Telecom Ltd (ASX: TPM), Vodafone and Vocus Group Ltd’s (ASX: VOC) Dodo.

In 2018, Telstra added 342,000 retail mobile services and 135,000 bundles but said prices on average contracts remain under pressure.

Telstra CEO Andrew Penn said the reduced profit could be explained by a lower amount of average revenue per user (ARPU) and the ongoing nbn rollout.

“…the challenging trading conditions are expected to continue in FY19, including ongoing pressure on ARPU and further negative impact of the nbn network rollout on our underlying earnings,” Telstra CEO Andrew Penn said.

Telecommunications companies are facing a double-whammy when it comes to mobile because they have to invest billions of dollars to upgrade their networks at a time when prices are falling. Telstra plans to set up a separate infrastructure business, InfraCo, to house some of its important assets.

We covered Telstra’s T22 strategy update here: 8,000 jobs to go as part of Telstra strategy 2022 

Telstra recently announced its first unlimited and unrestricted mobile data plan, setting the ceiling on prices for the best mobile plan in Australia. That came in response to an announcement by TPG, which revealed an unlimited mobile plan on its new 5G network for an ongoing price of just $9.95 per month.

“While it is less than two months since we presented our new strategy, we are well into the execution phase, building on the momentum provided by our up to $3 billion strategic investment in Networks for the Future and digitising the company.”

Telstra has already invested $1.5 billion to launch its 5G network, which might be capable of providing download speeds better than a service using the nbn.

“Yesterday we announced we had switched on 5G technology across selected areas of the Gold Coast, making us the first in the country to be 5G ready, and we expect to have more than 200 5G-capable sites live around the country by the end of 2018,” Penn said.

Fixed line products, which includes internet packages like broadband, is also a competitive market but Telstra said it has a 51% share of the nbn market. It added 770,000 nbn connections during the year, taking the total to 1.94 million.

Outlook

Looking forward, Telstra expects its 2019 financial year to be, “a very material year in the migration to the nbn and its impact on Telstra.”

Telstra expects to report income between $26.5 billion and $28.4 billion and free cash flow between $3.1 billion and $3.6 billion (2018: $4.9 billion).

In the past year Telstra shares have fallen from over $4 to their current price of $2.89, according to Google Finance.

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