It appears that Mr Market is finally catching up with Telstra. CEO David Thodey yesterday conceded that forecast revenue would be lower (the third time in six months that Telstra has been forced to reduce its sales guidance) while the company announced a 1.9% drop in profit for the half-year. Telstra’s sales were down across almost every segment of its business, led by its Sensis directories, which reported a 7.3% fall in revenue. About the only area where Telstra appeared to improve its bottom line was in labour costs (which fell from by $185 million or 8.6%) —  proving that about the only thing Telstra management is any good at is sacking workers.

While Telstra happily trumped a 37% increase in free-cash-flow (to $2.6 billion up from $1.9 billion the prior year) that was largely due to a $400 million decrease in capital expenditure, $350 million reduction in payments for intangibles and a lower tax bill. The actual operating cash result of the company didn’t really change.

The continued loss of revenue from fixed lines was not a surprise, although the speed in which customers are turning their back on Telstra’s copper network is alarming. The company reported 362,000 less fixed lines than the corresponding period last year. What should be far more concerning for management and shareholders is Telstra’s anemic growth rates in broadband services (sales rose by only 1.4%) and mobile revenue (which increased by 4.7% courtesy of SMS revenues continue to rise). In fact, Telstra revenue from mobile calls actually fell compared to the prior year, dropping 4.5%. (This contrasts with Telstra’s rival, Optus, which last week reported a surge in mobile revenues by 11% for the December quarter. Optus’ success same almost solely due to is far more aggressive pricing).

The result is yet another nail in the reputation of former Telstra CEO Sol Trujillo and the men who paid him almost $40 million over four years —  led by Donald McGauchie and Charles Macek (who was Telstra’s remuneration committee chair). Much of Telstra’s current predicament (including the NBN debacle and its lack of price competitiveness in mobile and broadband) is due to the poor decision making of Telstra’s former management team. (The Telstra board paid Trujillo millions of dollars in bonuses for (a) showing up; and (b) establishing the company’s 3G phone network. Two years later and Telstra, with its expensive 3G network, is being trounced in the mobile market by its major rivals).

Trujillo’s aggressive approach with the Australian Government and ACCC led to the creation of the NBN, while its high-priced iPhone and broadband deals have led to a massive loss of market share to rivals Optus and Vodafone. It appears that Telstra did not understand its regulatory environment or the price elasticity for its products.

Even Trujillo and his highly paid sidekick Greg Wynn’s much-vaunted IT transformation has failed to deliver anywhere near the savings predicted. The IT transformation plan had McGauchie and the Telstra board so much that it paid Wynn more than $20 million (the vast majority in cash) during his brief tenure as the company’s chief operating officer, as well as $12,000 a day to serve as a consultant.

Telstra’s woes may have come as a surprise to the many highly paid analysts who cover the company but probably not to Crikey readers. We suggested way back in 2007 that Telstra appeared overpriced, noting that:

Telstra is currently trading on a forward price earnings ratio more than 16 times 2007 earnings. This is the multiple of a company with a track record of solid earnings growth (like Woolworths or Wesfarmers) not a stagnant utility with reducing earnings operating in a terribly competitive market.

Telstra is having its high margins eaten away by tough mobile competition (from the likes of 3 and Optus), while fixed-line phone revenues will be further weakened with the continued take up of VoIP and mobile services. All the while Telstra is stuck in a regulatory quagmire with a hostile ACCC.

(The Financial Review today reported, almost three years later, that “Theo Mass at Fortis Investment Partners said Telstra was in a ‘perfect storm’ and ‘getting hit on all fronts’ with ‘people … moving to other platforms whether that be VoIP or mobile telephony or whatever’.”)

Telstra’s share price closed yesterday at $3.22 per share — 36% lower than when Trujillo was appointed.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed released in March 2010, featuring a chapter on Telstra and the riches lavished upon former CEO Sol Trujillo.