NBN HFC pause will cost Telstra AU$600m in FY18 EBITDA

The decision by NBN to pause its HFC rollout while it repairs network issues will cost Telstra AU$600 million in EBITDA, AU$700 million in total income, AU$200 million in free cashflow, and AU$600 million in net one-off NBN receipts over FY18, the telco has said.
Written by Corinne Reichert, Contributor

Telstra has been forced to revise its guidance by billions of dollars for FY18 due to the National Broadband Network (NBN) decision to pause its hybrid fibre-coaxial (HFC) rollout, though it has said the long-term effect will be "modestly" positive.

According to Telstra, NBN's decision to cease sales on its HFC network for between six and nine months will affect Telstra's FY18 earnings before interest, tax, depreciation, and amortisation (EBITDA) by AU$600 million, its total income by AU$700 million, free cashflow by AU$200 million, and net one-off NBN receipts by AU$600 million.

As a result, EBITDA is expected to be between AU$10.1 billion and AU$10.6 billion rather than the previous guidance of AU$10.7 to AU$11.2 billion. This is due to a loss in one-off receipts under the definitive agreement (DA), as well as the recurring impacts from delayed revenue recognition of NBN commercial works sale of assets and Infrastructure Services Agreement (ISA) receipts.

Total income will be between AU$27.6 and AU$29.5 billion, instead of AU$28.3 billion and AU$30.2 billion, due to delays across one-off Per Subscriber Address Amount (PSAA) and ISA ownership receipts, recurring ISA receipts, hardware revenue, and income from NBN commercial works sale of assets.

Net one-off receipts under its NBN DAs will come in at between AU$1.4 billion and AU$1.9 billion instead of AU$2 billion to AU$2.5 billion thanks to delayed one-off PSAA and ISA ownership receipts, and net cost to connect in year savings.

Telstra said its free cashflow would be between AU$4.2 billon and AU$4.7 billion rather than AU$4.4 billion to AU$4.9 billion due to delayed one-off PSAA and ISA receipts.

There will be no impact on its FY18 capital expenditure, with Telstra affirming a total dividend of 22 cents per share for the financial year.

According to Telstra, the changes were not only due to the rollout pause, but also a result of NBN's updated Corporate Plan in August.

"This change reduced the number of brownfields ready-for-service premises and included a reduction of 200,000 brownfield activations in FY18 relative to the previous Corporate Plan, which has a negative impact on Telstra's expected FY18 PSAA and one-off ISA ownership receipts," Telstra explained.

"While this change impacted Telstra's financials, the impact did not result in Telstra's outlook falling outside of its guidance range. However, with the addition of the delays from the NBN cease sale of HFC announced earlier this week, Telstra's outlook is now outside of the guidance range."

On the other hand, Telstra listed benefits of the NBN rollout delay as being lower costs to connect, lower network payments to NBN, and retained wholesale EBITDA during the financial year.

"While the NBN rollout delay impacts Telstra's outlook for FY18, it is anticipated the delay will be modestly financially positive to Telstra over the full rollout due to the effects of a natural hedge," Telstra added.

"It is noted that NBN Co remains committed to completing the rollout by 2020."

Earlier this week, Telstra CEO Andy Penn had said that the HFC network is working well for existing Telstra and Foxtel services, and that the issues cropped up during NBN's works.

"There has been some pain with the HFC technology," Penn said.

"Can I say, to be clear, that is the same cable that currently provides internet services to Telstra's customers and also for Foxtel pay TV services, and for those services, it is absolutely fine, it's been a great experience.

"It's in the process of NBN taking it and making whatever technology changes they are making to it where they've had some issues."

During a market update call on Friday, Penn said both one-off and recurring receipts would be impacted, but that the end result financially for Telstra would still be similar.

"By far the biggest impact overall is in the one-off receipts ... NBN is paying us for access to our infrastructure, pits, ducts, exchanges, dark fibre, and ultimately we expect those payments ... to reach just under AU$1 billion and then to increase with inflation thereafter at the point the NBN is fully rolled out," he explained.

"But in the meantime, those payments, the recurring payments, increase in quantum roughly in line with how the NBN is rolled out because they're attached to access to the infrastructure, and of course NBN do not require access to certain infrastructure until such time as they arrive in all the various different service areas, and so therefore that's why not only does it have an impact on the one-off receipts, but it also has an impact on the rate and pace at which those infrastructure access payments increase over the period as well."

Penn added that Telstra is working with NBN to bring the freeze date -- currently set for December 11 -- closer, so that retailers are not still signing customers up for faulty HFC services prior to the pause.

"We're working with NBN right now to see if we can cease sale earlier than that, because we think that that's in the best interest of customers, and so we expect to be able to implement that over the next day or two," Penn said.

Telstra signed a AU$11 billion DA in December 2014 for NBN to take ownership of its legacy copper and HFC networks, and in April 2016 picked up a AU$1.6 billion contract to provide design and management services for NBN's HFC network.

"All design, program management, construction management, and scheduling activities will be undertaken by Telstra," Telstra said last year.

"Field construction activities will largely be performed by NBN's MIMA [Multi-technology Integrated Master Agreement] partners, while in-exchange construction activities and limited upstream in-field activities will be undertaken by Telstra."

Communications Minister Mitch Fifield described the HFC repairs as involving the taps connecting the cable in the street with the cable inside the home and an issue involving spectrum frequency causing network dropouts for some customers.

Shadow Communications Minister Michelle Rowland, however, claimed the government and NBN are "hiding something", and that the delay could cost NBN between AU$420 million and AU$790 million "based on analysis previously approved by the NBN board".

"We know now that NBN, that this government, that this prime minister is too scared to be rolling out HFC because it's not working," Rowland said on Monday.

"I know this government is hiding something ... there is a reason why this was announced today. We actually had a spillover Senate Estimates hearing late last week. This was not mentioned. You would have thought that this was something that was being contemplated for some time, that this was an important piece of information that NBN Co might want to share with the Senate, but no.

"Something very mysterious is being hidden from the Australian people here. There are more questions than answers."

With 3.1 million premises in the HFC footprint, NBN CEO Bill Morrow told ZDNet that 370,000 are already connected and an additional 50,000 are queued to be connected. All remaining premises slated to be connected by HFC will see delays of between six and nine months.

The delay will taper down over the next 18 months, he explained, and as a result "will not jeopardise the rollout being complete by 2020".

Previous Coverage

HFC was fine when Telstra had it: Penn

The HFC network works well in delivering Telstra broadband and Foxtel pay TV services, Andy Penn has said, with the issues cropping up once NBN began making technology changes to it.

HFC not as 'mature' as fibre: Fifield

Despite HFC being available from Telstra in Australia since last century, Communications Minister Mitch Fifield has claimed the technology is less mature than fibre.

NBN 'too scared' to roll out HFC: Rowland

The government is 'hiding something' in relation to NBN's announcement that it will delay the HFC network rollout, Michelle Rowland has said, arguing that it is too scared to activate users in Bennelong.

NBN delays HFC rollout until customer experience issues fixed

NBN CEO Bill Morrow has announced that NBN will be delaying its HFC network rollout until it can repair customer experience issues including dropouts.

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