NBN reports AU$1.2b loss for FY16 first half

NBN has grown its revenue by 152.3 percent, to AU$164 million, but with a net loss of AU$1.24 billion for the six-month period.
Written by Corinne Reichert, Contributor

The company rolling out Australia's National Broadband Network (NBN) has announced its results for the first half of the 2016 financial year, reporting a net loss of AU$1.24 billion on revenue of AU$164 million.

The loss was a 37.4 percent increase over last year's AU$902 million loss, with revenue growing by 152.3 percent from the AU$65 million reported during the same period last year.

Earnings before interest, tax, depreciation, and amortisation (EBITDA) for the six-month period ending December 2015 stood at negative AU$688 million, a 38 percent increase from the negative AU$497 million reported for the previous period.

Average revenue per user (ARPU) was AU$43, a 10 percent increase from the AU$39 reported for H1 FY15.

The number of active premises grew by 450,000 over the period, from 322,291 to 736,052, while premises ready for service grew from 826,824 to 1,670,972.

NBN reported 36,003 active end users on satellite, as of the end of December; 82,435 on fixed wireless; 6,636 on fibre to the node (FttN); and 610,978 on fibre to the premises (FttP).

Operating expenditure was reported as being AU$852 million in the first half of this financial year, while capital expenditure reached AU$11.1 billion over the life of NBN to date.

Cash and cash equivalents at the end of the period stood at AU$1 billion, a 103.9 percent increase over the AU$491 million reported for the same period in 2014.

NBN CEO Bill Morrow hailed the results as being positive as the rollout intensifies.

"Today's result solidifies 2015 as a year where we met or exceeded every target the board set for the company, and is a clear signal we will reach our fiscal year goals," Morrow said.

"There is accelerated growth across all areas of the network, while important milestones are continually achieved with customers, industry partners and the NBN workforce.

"The organisation is focused on delivering our full year commitments and on bringing the benefits of fast broadband to more and more communities across Australia."

Revenue by technology saw fixed wireless attain AU$12 million, satellite AU$5 million, CVC AU$51 million, FttP AU$91 million, and FttN nil. Total telecommunications revenue reached AU$159 million, a 148.4 percent increase from last year's AU$64 million.

Capex by technology saw AU$151 million spent on hybrid fibre-coaxial (HFC), AU$91 million on satellite, AU$180 million on fixed wireless, AU$599 million on FttN, and AU$669 million on FttP.

Cost per premises (CPP) for life to date has been AU$4,419 for FttP brownfields, AU$3,516 on fixed wireless, AU$2,770 on FttP greenfields, and AU$2,300 on FttN.

The Coalition's so-called multi-technology mix (MTM) NBN model aims to cover 20 percent of the Australian population with FttP; 38 percent with FttN, fibre to the building (FttB), or fibre to the distribution point (FttDP); 34 percent with HFC; 5 percent with fixed wireless; and 3 percent with satellite services.

Over the last six months, NBN has launched its FttN network and the first of its two AU$620 million Ka-band satellites, which is slated to begin offering commercial products in late April; and doubled the speeds attained across its fixed-wireless network, from 25Mbps to 50Mbps.

According to NBN's construction plan, HFC will be delivered to approximately 3 million premises and fixed wireless to more than 540,000 premises, while it expects around 200,000 to 250,000 premises to be connected by satellite services.

The company has so far refused to break down its FttN, FttB, FttP, and FttDP numbers within the specified 5.6 million premises to be connected via one of these technologies.

NBN's results for FY15 reported a AU$1.5 billion loss on revenue of AU$161 million. During the 12 months to June 30, the number of premises connected to the network and ready for service jumped to 1.2 million from 553,000, and the number of connected services moved from 210,000 to 486,000.

At the same time, NBN also revealed its three-year corporate plan, which showed peak funding for the project will reach between AU$46 billion and AU$56 billion, with a base case peak funding target of AU$49 billion.

EBITDA is predicted to continue falling, from the AU$1.5 billion loss announced for FY15 out to a AU$2.9 billion loss for FY18. Cash flow will also decline as capital spending ramps up, from the AU$4.8 billion loss reported for FY15, down to AU$9.7 billion forecast for FY18.

Average revenue per user (ARPU), however, will increase from AU$43 in H1 FY16 up to AU$44 by FY18, while operating expenditure is forecast to grow to AU$4.6 billion by FY18. Capital expenditure is predicted to increase to AU$5 billion by the end of FY18.

"Due to the long-term uncertainties, management is forecasting a range of possible outcomes. The corporate plan, together with an initial forecast of years beyond FY18, estimates a peak funding in the range of AU$46 billion to AU$56 billion," the company said on Monday.

"Management are targeting a base case peak funding of AU$49 billion, which includes a contingency of AU$4.6 billion for unforeseen risks inherent in a complex infrastructure build over multiple years. This contingency is intended to cover revenue, operating costs, and capex risks."

The risks taken into account by the company cover capability and capacity to deal with the scope, scale, and complexity of the rollout; implementation of the HFC deals with Optus and Telstra; rollout activations; reaching revenue targets; and unknowns.

The wide-scale rollout of HFC and FttN services had been approved by the Australian Competition and Consumer Commission (ACCC) in June, with a revised AU$11 billion deal allowing NBN to take ownership of Optus' HFC network and Telstra's HFC and copper assets.

Since then, however, leaked documents revealed that Optus' HFC network is "not fully fit for purpose", with 470,000 premises in the footprint needing to be overbuilt by either Telstra HFC or fibre services.

A leaked document, called HFC Plan B: Overbuilding Optus, dated November 2015, stated that the necessary work of overbuilding Optus' HFC network with FttN, FttB, or FttDP will lead to a peak funding increase of between AU$150 million and AU$375 million, with NBN to miss its FY17 ready-for-service target by 300,000 premises, and its FY18 target by 333,000.

"Overbuilding the Optus HFC network with either Telstra HFC or FttX could deliver higher probability of success given the current state of the network [and] significant operational simplicity," the document said.

"Optus' network is not fully fit for purpose. Optus nodes are oversubscribed compared with Telstra, and will require node splits. Existing Optus CMTS don't have sufficient capacity to support NBN services. Noise (ingress) [is] causing interference and degrading end users speeds."

This was followed in December by another leaked internal draft document divulging that the cost to replace or repair this legacy copper network will amount to AU$641 million.

"State of copper network considerably worse than expected, leading to extensive work beyond the node," the document, dated February 26, 2015, said.

NBN ranked this risk as "almost certain", with "major" consequences.

"Decision to minimise remediation during build could reduce speeds available, create additional burden on connect, and hamper timely migration."

With NBN building 24,544 nodes by FY19 -- with 178 premises connected per node -- at AU$26,115 per node, the cost for copper remediation totals AU$640.97 million.

This figure is a significant increase from the AU$2,685 per node estimated in the December 2013 Strategic Review, which would have totalled AU$90.4 million.

An NBN spokesperson pointed out that the document was an unendorsed draft from March with no bearing on the current state of the network, the cost of which was accounted for under its Corporate Plan.

"Based on our experience in the field, which for FttN now extends to more than 550,000 homes in construction and more than 40,000 homes ready for service, our cost per premises for FttN as outlined in the Corporate Plan in August is proving accurate," the spokesperson told ZDNet.

"Any costs related to the FttN network are accounted for in the corporate plan released in August, which included the increase in peak funding ... Risks and mitigation plans for the network are outlined in the Corporate Plan, and the revised peak funding figure takes these scenarios into account. We have produced a peak funding range and provided a contingency as prudent measures to manage a project of this size and complexity."

NBN had previously said that while copper lines between the node and the home will not need to be replaced, the company will need to add or replace copper between the node and the pillar where necessary in rolling out its FttN network.

"We have to put new copper in to run to the pillar that serves all of our homes from our node to that pillar. And that could range in distance between right next to each other ... it is a short section, but it is new copper that has to go in the ground that doesn't exist today," NBN CEO Bill Morrow told Senate Estimates in October.

According to Morrow, copper has to be used rather than fibre-optic cable in certain cases depending on the distances being covered. He added that defective cabling could also be replaced, with more copper also added where there is not enough to service homes.

"The other area to where we could be putting copper... is that if there are defective joints that are out there that have a trouble rate that's too high, we'll need to go ahead and make that investment to replace that joint as it stands," the chief executive said.

"And then in the other case that I mentioned, if it turns out that there's not enough pairs going down the street to be able to serve all the homes that are there, then we may actually have to add pairs in that path to be able to get to each one of the homes."

Morrow's comments came just a week after claims made by NBN that it has not had to replace any of the legacy copper between node and home in installing its FttN network, with end users able to achieve high speeds while relying on existing infrastructure.

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