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NBN to leave Telstra with an earnings gap: Moody's

Ratings agency Moody's has said it expects Telstra to be unable to completely replace revenue lost due to the rollout of the National Broadband Network by 2020.
Written by Chris Duckett, Contributor

Telstra will be challenged to replace all earnings lost to the National Broadband Network (NBN) when the rollout of it is completed, according to credit ratings agency Moody's.

Moody's said Telstra will remain Australia's biggest telco but will need to find new revenue streams or reduce debt -- possibly funded by a cut to dividends -- if it is to maintain its current A2 credit rating once the NBN is active.

Telstra has estimated previously that the NBN will cut between AU$2 billion to AU$3 billion from its earnings annually.

On the other side of the ledger, under the terms of the revised definitive agremeent between Telstra and the company responsible for deploying the NBN around Australia, Australia's dominant telco is set to receive AU$11 billion to hand over ownership of its copper and hybrid fibre-coaxial networks, while also serving contracts worth hundreds of millions of dollars to perform maintenance on its legacy networks.

Moody's, in a research note released on Thursday, said the telco giant will face pressure from lost wholesale revenue, access fees it will have to pay NBN, and competition pressures that will crimp the premium it can charge for retail mobile services.

Moody's expects Telstra's earnings margin to remain around its 2015 level of 42 percent in the next one to two years as the NBN continues to roll out and Telstra receives payments as customers are disconnected from its wholesale network.

But after the rollout is completed -- due by 2020 -- Moody's expects Telstra's overall earnings margin to contract to the high thirties, while compensation for the loss of the wholesale business is not expected to cover lost earnings and the fees that Telstra will have to pay to NBN.

The ratings agency said that to permanently fill the earnings gap, Telstra must find new revenue streams and increase existing streams.

"We believe that Telstra will be able to fill this EBITDA (earnings before interest, tax, depreciation, and amortisation) gap to a certain extent, but will be challenged to do so fully," Moody's said in a research note on Thursday.

Moody's expects the mobile segment to remain Telstra's biggest contributor to earnings.

The telco is also expected to focus on areas that are growing rapidly but still generate a small proportion of revenue, such as network application services, and new businesses such as health and software.

"We believe it will be a stretch for the EBITDA from these businesses and growth in mobile revenues to fully offset the EBITDA gap by 2020," Moody's said.

Assuming there is an earnings gap in 2020, Telstra could maintain its credit metrics by reducing dividends and using the cash to cut debt, or by applying excess cash from sources such as NBN payments and the sale of non-core businesses.

Moody's said Telstra will remain the industry leader but its fixed retail voice and broadband market share is expected to decline, and the mobile market share to stagnate or fall in the face of strong competition.

Telstra said in May that it had a strategy in place to offset the impact of the NBN on its earnings once the rollout was complete, focused on growth in its core businesses, albeit at lower margins, building new businesses, and improved productivity.

In the latest round of Australian Telecommunications Industry Ombudsman consumer complaints statistics released today, Telstra's complaints rose once again to sit at 6.8 complaints per 10,000 services, 13 percent above the number of complaints at the same time last year and an increase of 6.25 on the prior quarter.

The telco's main competitors, Optus and Vodafone, saw complaints fall by 9 percent and 40 percent respectively compared to the same period in 2015.

Telstra has suffered a number of outages earlier this year. The first major incident occurring on February 9 took down 2G, 3G, and 4G services across the country for several hours and spawned the first of its free data days as a figleaf to its customers.

Not long after, the company was offering another free data day after it suffered an hours-long national mobile data and voice outage on March 17; and on March 22, Telstra was hit with a smaller voice outage.

The company had an NBN and ADSL outage in May that resulted in the telco having to send free modems to customers still affected several days later, and a mobile data services outage later that week.

A month later, a broadband outage hit 75,000 customers, before another outage took out enterprise and business customers across Victoria, including the National Australia Bank and Melbourne's public transport system myki.

The June 30 outage arrived a day after Telstra CEO Andy Penn announced the telco was investing AU$250 million in its network over the next six to 12 months in response to the outages.

Penn is also having to deal with an executive personnel reshuffle, with Telstra needing to find a new chief operating officer after Kate McKenzie announced her retirement after 12 years at the telco.

Brendon Riley, group executive global enterprises and services, is the interim COO until a permanent replacement is found.

In May, Telstra lost its chief technology officer Vish Nandlall amid speculation he had been sacked for plagiarism and falsifying his resume.

Despite these setbacks, analyst firm Kantar said on Thursday that Telstra had increased its market share to 42 percent of Australia's mobile market, with both prepaid and postpaid shares increasing by 2 percent to 42 and 45 percent of each market respectively.

With AAP

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