Telstra blames NBN for H1 profit plummeting by AU$500 million

Telstra gained mobile customers, but lost revenue due to the migration of customers to the NBN.

Telstra's first-half financial results for FY19 left much to be desired for shareholders of Australia's largest telco, with revenue down by AU$223 million to AU$12.6 billion, total income down by AU$593 million to AU$13.8 billion, and profit dropping from AU$1.7 billion to AU$1.2 billion.

Earnings before interest, tax, depreciation, and amortisation (EBITDA) dropped by 16 percent, from AU$5.1 billion to AU$4.3 billion year on year, although CEO Andy Penn said EBITDA was up by 1.3 percent not including one-off and restructure costs.

Restructuring costs under Telstra's T22 strategy reached AU$0.3 billion for the six months to December 31.

Telstra blamed its drop in results to "very different" circumstances thanks to the National Broadband Network (NBN), with CFO Robyn Denholm calling the decreased earnings under the NBN "expected".

"The largest reason for the decline in our results is the NBN," Denholm, who will soon be leaving Telstra to begin her role as chair of Tesla, said during the financial results call on Thursday morning.

"Our continued focus on T22 is enabling us to compete strongly while setting us up for future success."

Telstra has absorbed to date AU$1.7 billion of the estimated AU$3 billion negative impact on its EBITDA to occur by the end of NBN rollout.

"We remain very positive about the future," Penn said.

Fixed revenue was down by 9.3 percent to AU$2.7 billion thanks to NBN migration as well as the continuing decline in legacy voice services.

Telstra had 2.254 million NBN customers as of the end of December after adding 308,000 during the half. Just 28 percent of its fixed data customer base is using the smart modem with 4G backup, but Telstra said the device is "providing a better experience on the NBN and improved churn outcomes".

There was a 77 percent drop in complaints from people using the smart modem, according to Penn, and incoming calls to the contact centre dropped by 4 million year on year.

Across its mobile business, on the other hand, revenue was up marginally by 2.4 percent to AU$5.3 billion thanks to growth across the Internet of Things (IoT), post-paid, hardware, and wholesale.

Retail mobile customers grew by 240,000 in the half to 18 million; 239,000 post-paid services were added, including 115,000 from Belong, for 8.1 million in total, but post-paid average revenue per user (ARPU) dropped from AU$57 to AU$55.62 per month.

Telstra had lost 60,000 prepaid customers during the half, and 170,000 across mobile broadband. However, IoT -- previously called machine to machine by Telstra -- revenue jumped by 35.6 percent to AU$99 million, with 261,000 customers added in the half "due to new solutions being implemented in verticals such as logistics, mining, utilities, agriculture, health, and financial services" while wholesale mobile services added 125,000 customers.

The global connectivity business also rose by 4.8 percent to AU$801 million in revenue, with Penn saying Telstra owns the largest submarine cable system in APAC and carries about one third of data traffic across the region.

Data and IP revenue was down by 6.2 percent to AU$1.2 billion; NAS was down by 4.1 percent to AU$1.6 billion; and media was down by 6.2 percent to AU$411 million due to Telstra's stake in Foxtel.

Foxtel lost 27,000 subscriptions over the year, Telstra said; however, the telco added 320,000 subs to its Telstra TV, up to a total of 1.4 million, while its Sports Live Pass users increased by over 1 million to reach 2.6 million across FFA, NRL, AFL, and Netball, with most of these part of customers' mobile subscriptions.

Income across consumer and small business was down by 1.5 percent to AU$7.2 billion; enterprise was up by 1.3 percent to almost AU$4 billion; and networks and IT fell by 15 percent to AU$34 million.

Revenue from Telstra's new business InfraCo -- which is made up of its network infrastructure assets across fibre, copper, hybrid fibre-coaxial (HFC), international subsea cables, datacentres, exchanges, poles, ducts, and pipes -- was up by 50 percent to AU$2.5 billion.

InfraCo will be fully operational by end of this year, Penn said, but the telco is continuing to look into a demerger.

"We continue to explore and implement structures to ensure we have the flexibility we need to create optionality for a demerger or entry of a strategic investor in a post-NBN rollout world," Telstra said in its H1 results report.

"In order to proceed with a demerger or separation of Telstra InfraCo, we would likely need approvals and to ensure that other key stakeholders are comfortable with any proposed transaction."

On the bright side, Penn pointed to "good progress" on Telstra's T22 strategy, a reduction in complaints, an improved mobile network -- having built 132 new mobile sites, upgraded 800 sites, and added more than 300 small cells, with mobile outage hours down by 69 percent -- and the launch of 5G.

The 5G launch

One of most significant things in first half was launching the 5G network, Penn said, which is "very much on the global forefront of 5G".

"In terms of the revenues and the opportunities ... there's a number of benefits from 5G. We will immediately get a capex benefit because it reduces the cost per gigabit of traffic travelled on the network; we'll get a benefit on our 4G network because it will increase capacity as we offload from there," Penn told ZDNet.

"We think that in the early stages of 5G, we'll see revenues across the industry start to increase ... so ultimately, it is going to be I think a great opportunity for the industry, but I can't forecast how much and what it will mean, but I think there's a lot of upside there."

Penn told ZDNet that Telstra will have 5G pricing "definitely when we put handsets in the hands of customers, and that's not very far away".

"We will have handsets in the hands of customers subject to those international equipment manufacturers," he said.

"We've got a number of agreements with some of the leading providers of mobile phones in the world to provide those exclusively to Telstra's customers first in Australia in the coming months, so we'll definitely have the pricing at that point."

The chief executive would not comment on whether Telstra's pricing would be similar to Optus' -- which is providing 5G Home Broadband for AU$70 per month with unlimited data at a 50Mbps minimum speed guarantee -- but noted that Optus' offering is fixed-wireless, not mobile.

However, he added that he is not ruling out fixed-wireless, with a service for "those who want it", but that the telco is focusing on a "real" 5G service with handsets.

It is "unequivocal" that 5G will be a game changer, Penn said.

Telstra's 5G network will launch commercially this financial year after Penn announced at CES last month that the telco had signed a swathe of agreements for Telstra customers in Australia to have first access to 5G smartphones.

Telstra exceeded its goal of switching on 200 5G sites in 2018, with Penn saying it reached 207 by the end of December, including across Canberra, Adelaide, Perththe Gold CoastToowoomba, Brisbane, Sydney, and Melbourne.

The telco has yet to disclose its goal for 2019.

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