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TPG quarterly profit drops 76 percent after Huawei ban

While the mobile network abandonment brought down TPG’s Q1 results, the telco also made less revenue thanks to the broadband market erosion caused by the NBN rollout.
Written by Corinne Reichert, Contributor

TPG has reported its net profit for the first quarter of FY19, just AU$47 million, a decrease of 76 percent year on year following the abandonment of its mobile network rollout.

Revenue was down by 1.5 percent to AU$1.2 billion, while earnings before interest, tax, depreciation, and amortisation (EBITDA) sat at AU$420 million for the quarter.

"It has been necessary to recognise an impairment expense of AU$227.4m in the 1H19 results, arising from the group's decision to cease the rollout of its Australian mobile network. The 1H19 reported results also include AU$4.4m of one-off transaction costs relating to the planned merger with Vodafone Hutchison Australia," TPG said.

Excluding these, TPG said its underlying profit was AU$225 million, up 3.2 percent, and EBITDA was AU$424 million.

Across declining revenues, however, TPG has blamed the National Broadband Network (NBN) rollout for market erosion and the resultant fall in consumer revenue from AU$881 million to AU$853 million.

Meanwhile, its revenue growth from AU$374 million to AU$383 million in the corporate business was thanks largely to its fibre contract with Vodafone Australia, "complemented by other on-net fibre sales".

As of the end of January, TPG had 1.9 million broadband subscribers: 988,000 NBN; 725,000 on-net ADSL; 112,000 on-net fibre-to-the-building (FttB), hybrid fibre-coaxial (HFC), and VDSL; 74,000 off-net ADSL; and 22,000 other off-net customers.

TPG is still waiting to hear from the regulator on whether it will be allowed to merge with Vodafone Australia, after being forced to halt its own mobile network rollout following the government's ban on using Huawei equipment for 5G.

"It is extremely disappointing that the clear strategy the company had to become a mobile network operator at the forefront of 5G has been undone by factors outside of TPG's control," TPG chief David Teoh said in January.

"Over the past two years, a huge amount of time and resource [sic] has been invested in creating and delivering on a strategy that would have positioned TPG very favourably to exploit the opportunities that the advent of 5G will present."

TPG late last month had flagged that it would cop an almost AU$230 million accounting hit due to its abandonment of the mobile network, with the largest cost being the reduction in value of its unused spectrum licences by AU$92 million.

"Having ceased its mobile network rollout, the group now has no business plan or strategy for using its spectrum licences on a stand-alone basis and, accordingly, the carrying value of these licences is required to be reassessed," the company said in February.

An approximate AU$76 million hit occurred as a result of the writing down of the capex associated with the construction of its mobile network, while a writedown of around AU$60 million was attributed to interest capitalisation on debt needed for spectrum purchases.

These accounting hits will be negated if a merger with Vodafone can be finalised, however.

In December, the Australian Competition and Consumer Commission (ACCC) said it needed more time and information to consider the merger, with the consumer watchdog saying it was unclear as yet whether it would substantially lessen competition in the telecommunications market.

Due to not receiving information from Vodafone and TPG on time, the ACCC has pushed out the date of its decision again.

Days prior to the Huawei ban, TPG and Vodafone in August had confirmed that they entered discussions to form a telecommunications giant, which they say would have an enterprise value of around AU$15 billion. They also announced plans to proceed with their merger a week later.

The new TPG, if the two telcos are allowed to merge, would see Vodafone Australia CEO Inaki Berroeta serve as CEO and Teoh as chair, and would produce revenue of AU$6 billion, EBITDA of AU$1.8 billion, and have an operating free cash flow of AU$900 million, the companies claimed.

Singapore mobile network on target

While TPG's Australian mobile network has been abandoned for now, it said its Singaporean mobile network is still progressing well, with 200,000 users now able to trial the service for free until commercial launch.

"The network has achieved a nationwide outdoor coverage performance result of over 99 percent, easily exceeding the 95 percent milestone it was required to meet by the end of 2018," TPG said.

"A service trial was launched in late December 2018, allowing customers to trial the network for free for 12 months while work continues to enhance network coverage, performance, and features."

Its existing trial users have provided positive feedback on network coverage and quality, TPG said, after using the network since December. TPG's indoor coverage is "already good and steadily expanding", the telco added, with MRT and tunnels coverage work now under way.

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