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Telstra cites 'intense competition' after profit drop to AU$1.8b

Telstra's half-yearly net profit was down by 11.8 percent due to two decisions by the regulator slashing wholesale pricing, despite the telco making gains across its NAS and media businesses.
Written by Corinne Reichert, Contributor

Telstra has announced its financial results for the first half of FY17, revealing earnings before interest, tax, depreciation, and amortisation (EBITDA) of AU$5.2 billion, down 1.6 percent year on year due to "intense competition", as well as the impacts of regulatory decisions.

Australia's largest telecommunications company saw a net profit of AU$1.8 billion, down 11.8 percent, on revenue of AU$12.8 billion, down 6.4 percent.

Capex and opex remained relatively flat, at AU$2.1 billion and AU$8.5 billion, respectively.

Despite the drops across revenue and earnings, Telstra CEO Andrew Penn pointed towards the company's gains in customers across mobile and fixed, as well as growth in its media business.

"It is significant that we were able to increase subscriber numbers in mobiles and retail fixed plans despite the increased competition," Penn said.

"Data volumes have increased, and intense competition on pricing across fixed, bundles, mobile, data, and IP has had an impact ... we have a clear strategy to differentiate our products through the speed, coverage, and reliability of our networks, innovative product design, and new customer experiences, including access to media content.

"We are also continuing to review our capital allocation strategy as announced in November last year, taking into consideration the long-term business and financial profile of Telstra. The review is looking at all aspects of our capital management framework and taking into account the specific nature of the payments associated with the NBN."

The Australian Competition and Consumer Commission (ACCC)'s decisions in 2015 on mobile terminating access service (MTAS) and final access determination (FAD) impacted Telstra's income by AU$400 million during the six-month period.

The MTAS reduced the rate that mobile network operators can charge each other and fixed-line network operators for calls from 3.6 cents per minute down to 1.7 cents, and regulated SMS pricing from 7.5 cents to 0.03 cents per SMS; while the FAD cut the prices that Telstra can charge wholesale customers for the use of its legacy copper network during the transition to the NBN by 9.4 percent. Telstra continues to argue against the ACCC's FAD decision in Federal Court.

Telstra also saw the effect of its seven outages over the first half of calendar 2016, with Penn revealing that Telstra's net promoter score (NPS) was down by eight points year on year due to "the impact of the network disruptions on our customers".

Telstra's mobile business recorded revenue of AU$5.04 billion during the half year, down from AU$5.52 billion in the same quarter last year due to the MTAS decision. Of this, post-paid made up AU$2.68 billion in revenue, down from AU$2.71 billion; prepaid contributed AU$502 million, up from AU$495 million due to a higher average revenue per user (ARPU); mobile broadband made AU$545 million, down from AU$638 million; machine-to-machine made AU$68 million, up from AU$60 million; and hardware sales made AU$1.07 billion, down from AU$1.12 billion due to fewer customers upgrading their handsets during the period.

Retail mobile customers totalled 17.4 million as of the end of the reporting period, making gains of 200,000, 79,000 of which were post-paid customers. Post-paid ARPU was AU$59.46, down from AU$61.38.

Telstra's fixed-line business recorded revenue of AU$3.26 million, down 4.7 percent year on year, with fixed voice contributing AU$1.61 billion of this, down 9.4 percent; and fixed data adding AU$1.27 billion, up 1.8 percent. Retail fixed voice customers numbered 5.5 million as of December 31, down from 5.9 million; fixed data customers numbered 3.5 million, up from 3.3 million; and fixed bundle customers stood at 2.8 million, up from 2.6 million. NBN customers increased by 292,000 over the six-month period for a total of 792,000, with Telstra holding 51 percent market share, excluding NBN's satellite service.

Penn also revealed that the company's Telstra Air Wi-Fi service has seen an almost tenfold increase in traffic, with activated customers also growing by more than 400,000 to a total of 1.79 million.

Telstra's data and IP business saw year-on-year revenue declines of 4.2 percent, down to AU$1.37 billion. This included AU$577 million, down 1 percent, from IP access; AU$279 million, down 10.6 percent, for ISDN; and AU$518 million, down 3.9 percent, for other data and calling products. Telstra said it lost across all areas of data and IP due to "a declining market amid competitive pricing pressures", as well as the migration of customers to NBN and NAS services.

As a result, Telstra's NAS business jumped in revenue by 18 percent, to a total of AU$1.48 billion in revenue. As part of this business segment, industry solutions made AU$562 million, up 56.1 percent; cloud services made AU$157 million, up 41.4 percent; integrated services made AU$79 million, down 10.2 percent; managed network services made AU$285 million, down 2.7 percent; and unified communications made AU$392 million, down 1.5 percent. Telstra said its cloud growth was "facilitated by consulting professional services and key acquisitions" including Readify and Kloud amid a bigger push into the global cloud market.

While Telstra's global NAS connectivity was up by 7 percent, to AU$92 million, this was offset by a decrease of 4.7 percent to AU$141 million in global fixed connectivity and a drop of 2.9 percent to AU$466 million in global data and IP, for a total revenue of AU$699 million for its global connectivity business. The overall drop in revenue was attributed to currency appreciation.

Telstra's 50 percent share of pay TV provider Foxtel produced AU$1.62 billion in revenue, down 2.2 percent due to a 62,000 decline in subscribers to 2.82 million in total, which was attributed to the closure of Presto and the wind-down of the T-Box in favour of the Telstra TV streaming device.

The Telstra TV is the "fastest-growing streaming device in Australia", according to Penn. There are now over 622,000 devices in the market, with the company having added 322,000 customers during the six-month period. Telstra will release a second iteration of the device during 2017 with updated specs.

"We plan to launch the next Telstra TV later in the year," Penn announced.

"Excitingly, it will have a built-in free-to-air tuner, and customers will no longer have to toggle between input sources and enjoy all of their viewing through Telstra TV. It will also have the ability to receive 4K content. The next generation of the Telstra TV device will deliver more content at higher quality while using less data. More importantly, this device will be exclusive to Telstra broadband customers."

Telstra's media business was up by 12.7 percent, bringing in revenue of AU$471 million.

Telstra made 66.2 percent more income, at AU$1.1 billion, from its commercial works for NBN -- AU$90 million from Commonwealth agreements and other government policy commitments; AU$212 million from recurring ISA from duct, rack, and backhaul; AU$79 million from the sale of assets; and AU$676 million from a one-off NBN definitive agreement.

Products and services revenue for NBN commercial works almost tripled, up 199 percent to AU$311 million including definitive agreements covering hybrid fibre-coaxial (HFC) delivery, copper sub-loop maintenance services agreement and operations and maintenance master agreement, and network planning and design.

On the hot-button issues of regional coverage, Penn reiterated Telstra's views on reform to the universal service obligation (USO), saying the most important thing is that regional Australians are provided with access to telco infrastructure, no matter who provides it. He also stated that Vodafone "didn't turn up" the last time USO service provision went to tender.

"We have no particular point of view that the services have to be provided by Telstra; we're very happy to go through tendering process for those [USO] services as the case may be -- but last time the government put it out to tender, basically we were the only people that showed up," he said.

"It's just really important that those customers in regional Australia get that basic telephony service, and if that needed to be re-tended in the future, we would be absolutely happy for it to be retendered and we're happy to go alongside anybody else that wants to provide the service."

On the wholesale mobile domestic roaming issue, whereby Vodafone -- the telecommunications carrier with the least network coverage across rural and remote Australia -- would be permitted to piggyback off Telstra's existing mobile infrastructure, Penn said a decision to declare roaming would result in less investment in regional areas.

"Telstra has invested heavily in regional Australia, and will continue to do so if the regulatory settings remain in place," he said.

"We are obviously concerned regarding the impact that declaration would have on operators' incentives to invest and the negative impact that this would have on customers in Australia, particularly in regional Australia."

Rival telco Optus last week similarly reported a quarterly net profit of AU$188 million, down 17.3 percent, on revenue of AU$2.21 billion, down 9.3 percent, due to "heightened competition" and the MTAS decision.

Telstra reported full-year FY16 net profit of AU$5.8 billion, up 36.6 percent, on revenue of AU$26.7 billion and EBITDA of AU$10.5 billion.

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