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Telstra announces AU$260m profit drop for the year

Telstra has revealed a net profit of AU$4.29 billion on revenues of AU$25.8 billion for the financial year, but is continuing to see growth in its mobile data, network applications and services, and IPTV businesses.
Written by Corinne Reichert, Contributor

Telstra has announced its full-year results (PDF) for the 2014-15 financial year, reporting a net profit after tax of AU$4.29 billion, down AU$260 million or 5.8 percent year on year from last year's AU$4.55 billion.

Earnings before interest, tax, depreciation, and amortisation (EBITDA) decreased by 3.5 percent, down from AU$11.1 billion to AU$10.7 billion.

While total income increased by 1.2 percent, from AU$26.3 billion to AU$26.6 billion, and sales revenue grew by 2.9 percent, from AU$25.1 billion to AU$25.8 billion, operating expenses also increased -- up 4.6 percent, from AU$15.2 billion to AU$15.9 billion.

Earnings per share increased by 0.3 percent, to 34.5 cents per share, while free cash flow plummeted by 65 percent, from AU$7.5 billion last financial year to AU$2.62 billion this year.

Australia's dominant telco attributed its loss in net profit to the sale of its Hong Kong mobile business, increased price competition from its rivals, and significant investment in its mobile 4G network.

"The 2015 financial year saw Telstra continue to perform strongly, growing revenues, adding fixed and mobile customer services and continuing to invest in our network advantage," CEO Andrew Penn said in a statement.

"This is our first full financial year operating without the CSL Hong Kong mobile business, which was sold in May 2014. As a result, our reported income and profit numbers are impacted on a comparative basis. However, excluding the profit from sale and operational impacts of CSL, our business continued to perform strongly."

Telstra's mobile revenue increased by 10.2 percent year over year, from AU$9.7 billion last year to AU$10.7 billion in FY14-15, adding 664,000 mobile retail customer services to bring the total number to 16.7 million.

The telco added 113,000 post-paid handheld retail customers in the year, bringing its total to 7.3 million customers, with revenue in this sector increasing by 7.7 percent to AU$5.4 billion. Average revenue per user (ARPU) increased by 5.5 percent, from AU$58.70 to AU$61.94.

Prepaid handheld revenue increased by 13.1 percent, to AU$994 million, while its machine-to-machine business grew by 11.9 percent, to AU$113 million.

Telstra noted that its national 4G network now provides coverage to 94 percent of the population, with the telco continuing its 4G network expansion in order to service 99 percent of Australians. As of the end of the financial year, Telstra has 7.7 million 4G devices on its network.

The telco noted that growth will increase next financial year thanks to the launch of its AU$100 million "Telstra Air" national Wi-Fi network in June. Last month, during his inaugural keynote address as new CEO of Telstra, Andrew Penn also committed to increasing the company's mobile network capex by investing AU$500 million into it over the next two years.

In regards to its fixed-line business though, total revenue fell by 1.9 percent, from AU$7.08 billion to AU$6.94 billion. Telstra's customers continued the trend over this financial year of shifting from voice to data usage, with fixed-line voice revenue decreasing by 7.1 percent to AU$3.7 billion, ARPU decreasing by 4.3 percent to AU$42.05, and 264,000 retail customers disconnecting their fixed-line voice services, bringing the total number down to 6 million. At the same time, fixed data revenue grew by 7.3 percent, to AU$2.4 billion, and 189,000 retail fixed broadband customers were added, bringing the total to 3.1 million subscribers.

As of June 30, Telstra has made 211,000 National Broadband Network (NBN) connections, categorised by 41,000 voice-only services and 9,000 data-only bundles.

Data and IP revenue decreased by 2.9 percent, from AU$2.99 billion to AU$2.88 billion, while its network applications and services (NAS) business saw a significant increase of 23.2 percent, from AU$1.96 billion up to AU$2.42 billion. The latter's growth was attributed to existing and new contracts, as well as acquisitions. International NAS grew by 41.4 percent, to AU$99 million, with the $697 million Pacnet acquisition contributing AU$14 million. Its acquisition of Bridge Point contributed to its 21.8 percent growth in managed network services revenue.

In regards to IPTV -- a category including the revenues from Foxtel, T-Box, BigPond Movies, and Presto -- its media services business saw a 3.4 percent increase in revenue, to AU$931 million, despite the launch of Netflix Australia. Foxtel alone increased by 9.4 percent, to AU$662 million in revenue for FY14-15 due to an increased number of subscribers after the bundle price reductions. Its T-Box sales declined by AU$33 million, however.

For the financial year ahead, the telco said it forecasts delivering mid single-digit growth for its income, and low single-digit EBITDA increases.

"Free cash flow is expected to be between AU$4.6 billion and AU$5.1 billion, and capital expenditure to be around 15 percent of sales to fund increased mobile network investment," the telco said on Thursday.

Telstra also hopes to net new customers with its announcement to offer 12-month subscriptions to Apple Music after shuttering its MOG music-streaming service in July.

"Finally, we will give Australian music fans a great music experience as the only telco in Australia to offer Apple Music," Penn said during the results call.

Last month, the Australian government released its draft Migration Assurance Policy detailing the process for customers to be migrated from Telstra's legacy copper network to the fixed-line NBN, calling for migration data and information to be shared between Telstra Wholesale, NBN, retail service providers (RSPs), and application service providers.

Communications Minister Malcolm Turnbull had confirmed in January that plans for a revised migration plan to be lodged with the Australian Competition and Consumer Commission (ACCC) had been finalised, with the plan to govern how customers will be migrated and how Telstra will disconnect its copper and hybrid fibre-coaxial (HFC) networks thereafter. In June, the ACCC approved the plan, seven months after Telstra and NBN had entered a revised AU$11 billion deal allowing NBN to take ownership of Telstra's copper and HFC network assets.

At the end of July, however, Telstra spoke out against a draft decision by the ACCC to cut the prices that Telstra can charge its wholesale customers for use of its legacy copper network by 9.6 percent, saying the price slash could impact the NBN customer migration, as retailers would "have a profit motive to keep their customers on the higher-margin copper network for as long as possible".

"This would make migration to the NBN even harder to achieve, and put important revenue to NBN Co at risk. In this way, a cut to prices on the legacy network poses a serious danger to the success of the NBN policy," Telstra warned in a blog post.

While the ACCC had originally planned to reduce prices across seven of its fixed-line wholesale services by 0.7 percent, its revised price cut was attributed to the decision not to force customers stuck on Telstra's legacy copper network to pay higher prices while waiting for an NBN connection.

Telstra equated the mandated 9.6 percent cut in wholesale prices to a loss of hundreds of millions of dollars over the course of the next few years, with the telco saying the reduced costs to be paid by retailers for use of its network would fall below the company's actual costs.

"There are ... a number of upcoming ACCC decisions that will potentially impact the wholesale prices in our FY16 reported results," Telstra CFO Warwick Bray said when announcing the results on Thursday morning.

"The ACCC is consulting on new access determinations, including a draft determination on fixed-line services. The draft fixed-lined services determination is of concern; we don't agree with the draft decision. We continue to make our position on this clear within the regulatory process. [If] the draft decision were implemented from October, the EBITDA reduction in FY16 would be up to AU$19 million."

In its own submission (PDF) on the matter, the Department of Communications mirrored Telstra's perspective, saying that the ACCC's decision should be amended to allow Telstra to recover its costs, and to prevent cost discrepancies from dissuading customers from migrating to the NBN.

In response, the Competitive Carriers Coalition (CCC) along with TPG and Optus, slammed the government for involving itself in an independent pricing review, particularly when recommending that customers be charged more.

"The Department of Communications' intervention in the ACCC's independent price-determination process to advance the interests of Telstra is extraordinary, unwelcome, unwarranted, and sets a dangerous precedent," the CCC -- made up of Vodafone, Macquarie Telecom, iiNet, Nextgen Networks, and MyNetFone -- said.

"For a government department to be calling for higher prices for ordinary consumers, and against the interests of competition, is surely a first at the federal level... For it to be doing so in the context of fixed-line communications services, where we Australia has (sic) the national disgrace of the highest prices in the developed world, beggars belief."

The CCC accused the government of wanting "to see millions of dollars transferred from the pockets of Australian consumers to Telstra, one of the most profitable telecommunications companies in the world".

Last week, Telstra announced that it is partnering with Pivotal for an enterprise software platform, and has subsequently become a member of the Cloud Foundry Foundation.

It also opened its Gurrowa Innovation Lab, which provides a co-creation space for Telstra and its associated enterprise customers, vendors, research institutes, and incubators to collaborate on projects via the Pivotal and Cloud Foundry Foundation-provided open-source platform-as-a-service cloud software.

At the end of last month, rival telco Vodafone Australia announced a net loss of AU$183.6 million for the first half, up 13.3 percent from the AU$158.6 million loss in the same period last year. The company reported total revenue of AU$1.77 billion, a year-on-year increase of 2.9 percent.

The Vodafone results (PDF) also revealed a slight increase in its post-paid customer base, which grew 3.3 percent year on year in the half ended June 2015 to 3.1 million. Prepaid customers grew marginally, up 0.1 percent to almost 1.7 million, while ARPU increased by 2 percent year on year to AU$51.32.

Telstra's primary competitor Optus has yet to report its H1 2015 results, but in May, it reported adding 42,000 net new customers in the first three months of the year.

Optus' customer numbers could soon be eclipsed, however, thanks to iiNet shareholders last month approving TPG's AU$1.5 billion takeover bid. The acquisition will result in TPG becoming Australia's second-largest telco after Telstra, increasing its customer base to 1.7 million.

In February, Telstra reported its half-year results for the second half of 2014, recording a net profit increase of 21.7 percent, to AU$2.1 billion. This was largely attributed to the iPhone 6 launch.

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