Telstra warned of further tough times ahead as it restructured ahead of full privatisation, reporting a 10.3 per cent fall in first half year net profit against a year earlier.

Australia’s biggest telecoms company, which earned a net profit of A$2.14bn for the six months ended December 31, reiterated its forecast that full-year earnings would fall 26 per cent in 2006.

Revenue from its high-margin fixed line business, which accounts for a third of total sales, fell a faster-than-expected 7.6 per cent, or A$313m, as customers switched to rivals – including Singapore Telecommunications’ Optus – or cancelled land lines for cheaper mobile phone and Internet services.

Total revenue rose 1.9 per cent to A$11.61bn as its broadband internet division, considered a major driver of growth, reported a higher-than expected sales increase of 42 per cent, and growth in its mobile division, advertising and directories business helped offset the slump in fixed-line sales.

Shares in Telstra have fallen 20 per cent since Sol Trujillo, the US-born former chief of US West and Orange, the European based telecoms company, was hired last July to prepare the telecommunications giant for privatisation.

“The financial trends at Telstra are not good,” Mr Trujillo, chief executive, told analysts in Sydney. “We’ve got a cost structure we can’t afford.”

Mr Trujillo said he would focus on lowering the company’s cost base, which increased 6.3 per cent to A$8.1bn in the first half - a rate of increase more than three times greater than revenue growth.

He confirmed his forecast that earnings before interest and tax could decline by as much as 26 per cent in 2006 as the company implemented its A$10bn plan, announced last November, to cut up to a quarter of its workforce, streamline operations and switch to more efficient technologies.

“The recent deterioration in operating trends and our investment in transforming the business will see earnings fall in the near term,” Mr Trujillo said.

“Consistent with our plan, we are taking some tough medicine now to bring the company to financial health and deliver sustainable growth in shareholder value over time.”

Regulatory settings and safeguards were “extremely important in determining our path forward”, he said.

Mr Trujillo has been engaged in an increasingly bitter dispute over regulation with the Australian government, which will decide next month on the timing and structure of the sale of its remaining 51.8 per cent stake.

In December, the government wiped 20 per cent off its assumed sell-off price, valuing its holding at A$26.4bn, down from A$33.8bn.

Telstra has said that a regulatory decision calling for lower prices could cost it more than A$850m in revenue this year.

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