Telstra financials slide in 'challenging' market

Telstra has provided a financial update for Q3 as CEO Andy Penn speaks in the US about the NBN- and 5G-related challenges facing the telecommunications industry.
Written by Corinne Reichert, Contributor

Telstra has used its Q3 market update to speak of the challenges facing the Australian telecommunications giant, including 5G, the National Broadband Network (NBN), and TPG entering the mobile market, providing a pessimistic view of FY19.

In a speech to be presented on Monday in Boston, Telstra CEO Andy Penn said the telco industry will need to figure out how to monetise 5G and upskill their workforces.

"We are in a transition to the next generation of technology as we move to software-defined networks, network function virtualisation, and 5G ... the crucial question for the sector is how the telcos capture a bigger share of the economic value that will be generated by 5G than we did with 4G," his speech says.

"Recognising this dynamic, we need to build new skills in new areas, and that is what we have been doing at Telstra."

NBN has also caused "challenging dynamics" in the telecommunications industry, with now more than 170 fixed-line resellers in the market, as well as the upcoming entrance of TPG as Australia's fourth mobile carrier and the growing number of MVNOs.

CFO Warwick Bray told ZDNet that Telstra is focusing on mitigating the risk of TPG entering the mobile market by improving its own offerings, decreasing business costs, and advancing its customer service initiatives.

"We're reinvesting in our networks, we're very pleased with that; we're making sure that we're being clear about the benefits of the network; we're continuing to improve our customer service; and we've also launched the five-band Belong; and we're also continuing to take costs out of our business; and we're focused on providing the best possible services for our customers," Bray told ZDNet on Monday morning.

Penn will also use his speech to say that Telstra is additionally leaning on its media offerings such as A-League, Foxtel Now, and the Telstra TV, as well as smart home offerings and guaranteeing 80 percent of maximum speeds on NBN services at all times, as differentiating factors.

Due to the challenges, and its post-paid mobile average revenue per user (ARPU) declining -- which was down by 3.6 percent to AU$65.35 per month for Q3 -- Telstra expects its full-year FY18 earnings before interest, tax, depreciation, and amortisation (EBITDA) to be at the bottom end of guidance, with "challenging trading conditions" to continue into FY19.

EBITDA is now expected to be at the bottom of the AU$10.1 billion to AU$10.6 billion guidance range; capex is expected to be in the mid to upper end of the AU$4.4 billion to AU$4.8 billion range; and income is expected around the middle of the AU$27.6 billion to AU$29.5 billion range.

Despite this, Telstra reported adding 60,000 net post-paid subscribers during Q3, and 36,000 net fixed-line subscribers.

"Demand for our core products and services has never been greater," Penn said.

"We are seeing data volumes increase 50 percent per annum across both fixed and mobile networks, and the range of services supported by our networks increase dramatically. Telecommunications is rapidly becoming the backbone of many industries."

Penn revealed that Telstra has deployed about half of the AU$3 billion in networks capex announced in 2016, which has been used on "mobile differentiation, coverage, speed, and resilience", as well as on building its Cat M1 and narrowband Internet of Things (NB-IoT) networks and upgrading its core.

Penn also lauded Telstra's new Next Generation OSS platform "which delivers real-time customer experience monitoring and impact assessment and recovery capability", and revealed that Telstra will be launching a new consumer and SMB tech stack.

"We have already gone live with our new integrated technology stack for the Enterprise business, enabling new product innovations such as the Telstra Programmable Network enabling customers to dynamically manage their network capacity and Liberate, our digitally enabled unified comms suite converging fixed and mobile for businesses," the Penn speech says.

"We are also well progressed with a completely new technology stack for mass market consumer and small business that will be launched in the second half of the calendar year."

Bray told ZDNet that the chief executive will be unveiling more detail on this new technology over the next few days.

The CFO also addressed the recent ZTE backlash, which saw Telstra ending the sale of ZTE white-labelled devices last week following ZTE being issued with an export ban last month by the US Department of Commerce -- although US President Donald Trump on Sunday tweeted that he has directed the department to allow ZTE to operate again.

"In terms of ZTE, look the first point is that we have very, very strong supplier governance policies, and so we expect high standards from our suppliers," Bray said.

"We note the press this morning, and of course investigation of that will be important."

The Q3 update followed Penn using the telco's half-year results in February to say Telstra would increase its "level of intensity".

For the first half of FY18, Telstra had reported EBITDA of AU$5.1 billion, down 2.5 percent from AU$5.2 billion a year ago.

Net profit was AU$1.7 billion, down from AU$1.8 billion; however, excluding the AU$273 million non-cash impairment announced earlier this year due to a write-down of its US-based IPTV business Ooyala to the value of zero, net profit was up by 9.5 percent to AU$2 billion.

"We are stepping up how we aggressively compete in the market, particularly leveraging our multi-brand strategy including Telstra, Belong, Boost, and Wholesale," Penn said during the Telstra half-year financial results call.

"We are absolutely increasing our focus on reducing costs, and while we announced increased targets in August, we will look to do even more."

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