Telstra looking to head back to NBN negotiations as results flatten

Telstra is in discussions with NBN and the government on monetising 'certain NBN receipts' as the telco confirmed that the rollout will impact its EBITDA by AU$3 billion.

Telstra has announced that the National Broadband Network (NBN) will impact its earnings before interest, tax, depreciation, and amortisation (EBITDA) by around AU$3 billion due to NBN's connectivity virtual circuit (CVC) pricing.

While Telstra had previously said that the EBITDA impact would be between AU$2 billion and AU$3 billion, CEO Andy Penn has now confirmed that it will be at the upper end.

"Given the latest outlook of NBN CVC charges, which we estimate will more than double over the coming years, we now expect the impact is likely to be at least at the top end of this range, around AU$3 billion," Penn said during the company's FY17 financial results call.

The chief executive denied, however, that this was a comment on whether CVC charges should go.

As a result, Telstra said it is aiming to "monetise certain NBN receipts" in an effort to support a capital management program.

"If we were to proceed with these plans, it would involve approximately 40 percent of the total receipts that are expected, representing the already locked-in receipts for fibre and exchanges," Penn said.

"The scale of the proposed transaction is approximately AU$5-5.5 billion, with Telstra to retain some equity interest. Our intention would be to use the proceeds to reduce debt by around AU$1 billion, with the balance to support a capital management program to enhance shareholder returns, most likely through a series of on and off market buy-backs."

The proposed scheme is in discussions currently between Telstra and the government, NBN, and investors.

Telstra remains the leading NBN services provider, with a market share across all network technologies excluding satellite of 52 percent, or 1,176,000 connections, after adding 676,000 customers during FY17.

"A combination of attractive broadband packages, the inclusion of Telstra TV on many plans, and a local approach to marketing and service has helped maintain momentum," Telstra claimed.

Other NBN effects on Telstra's financial results meant Telstra Wholesale's income grew by 7.2 percent to AU$2.8 billion due to an increase in NBN ISA ownership receipts as the rollout gains pace; and Telstra Operations income growing by AU$1.2 billion due to an increase in NBN commercial works.

Telstra has also announced its intentions to attain AU$1.5 billion in productivity by FY2022, with the program to target all segments of its business.

"We are announcing an acceleration and an increase in our productivity program," Penn said on Thursday.

The program aims to reach AU$1 billion in productivity by 2020, and an additional AU$500 million by 2022, with CFO Warwick Bray saying it will target "all of our products" with a particular emphasis on improving unit costs and making sure the "legacy fixed business has to transition onto an efficient NBN resale business".

As part of its efforts to save costs, Telstra had in June announced that 1,400 jobs would be cut from Operations, Retail, GES, and Media and Marketing, mainly affecting Operations.

According to Penn, the jobs are going in a bid to reduce operational costs, improve customer service, and increase its capacity to compete, as well as being in response to the NBN rollout and overall "increased competitive pressures".

For the full year to June 30, Telstra announced a net profit of AU$3.9 billion, down 32.7 percent from AU$5.8 billion due to the AU$1.8 billion from the sale of Autohome shares included in the FY16 net profit. Excluding this, net profit was up by just 1.1 percent year on year.

EBITDA was AU$10.7 billion, up 2 percent from AU$10.5 billion, while revenue was AU$26 billion, down 2.7 percent from AU$26.7 billion a year earlier.

Capex was AU$5.3 billion, up 26.9 percent year on year.

"2017 has been a strong year," Penn said, amid "a highly competitive and dynamic market".

However, in the wake of the results announcement, shares were down by 10.4 percent in early trade on Thursday according to CommSec.

"We believe we have the right vision and strategy for the dynamic environment in which we operate ... our highest priority remains improving customer experience and we are pleased that our key customer measure, our Net Promoter Score, recovered strongly in the second half of the year," Telstra said.

"In an evolving market, we are seeing new entrants into the both mobile and fixed markets as well as pricing pressure in all sectors through price reductions, value enhancements, and increased data allowances.

"Digital disruption is continuing to accelerate, not just for us but also for our customers, and we are entering a significant point in the transformation of the telecommunications market with the NBN rollout reaching scale."

During the year, Telstra Retail made AU$16.5 billion in income; Global Enterprise and Services (GES) made AU$6.3 billion; Telstra Wholesale made AU$2.8 billion; and Telstra Operations made AU$1.2 billion.

Mobile revenue was down 3.2 percent to AU$10.1 billion, thanks to the MTAS decision. Telstra said it now has 7.6 million post-paid mobile retail customers, increasing by 169,000 since last year but offset by average revenue per user (ARPU) dropping from AU$69.45 to AU$67.70.

Prepaid mobile lost 116,000 users, but an increase in ARPU led to a growth in total prepaid revenue to just over AU$1 billion.

Fixed-line services made AU$6.4 billion, down 4.7 percent due to a decrease in ARPU, affected by the one-off costs of connecting customers to the NBN in addition to ongoing NBN costs.

Data and IP was down by 4.7 percent to AU$2.7 billion despite Telstra gaining and retaining customers, due to "a declining domestic market and increased competitive pricing pressure".

Global Connectivity was also down, bringing in AU$1.4 billion in revenue.

NAS, however, jumped up by 30.6 percent to AU$3.4 billion thanks to increased commercial works for NBN, as well as an expansion in professional services and hardware sales. Industry solutions revenue grew by 66 percent; cloud services increased by 50.2 percent; and unified communications increased by 8.8 percent.

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