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​Telstra takes AU$5.8b net profit out of controversial year

Australia's incumbent telco has posted a 36.6 percent profit jump for the 2015-16 financial year, but CEO Andrew Penn is disappointed with the negative opinion mass-market customers held of Telstra's tumultuous 2016 performance.
Written by Asha Barbaschow, Contributor

Telstra has released its 2015-16 full-year results, reporting net profit after tax of AU$5.8 billion, a 36.6 percent jump from last year's AU$4.2 billion.

The telco giant saw AU$26.7 billion in revenue, an increase of AU$715 million year-on-year, while earnings before interest, tax, depreciation, and amortisation (EBITDA) decreased by 0.6 percent, down from AU$10.7 billion to AU$10.5 billion.

Earnings per share increased by 37.4 percent, to 47.4 cents per share, while free cash flow was AU$4.8 billion, up from AU$2.62 billion last year.

Despite posting record results, Telstra CEO Andrew Penn said Thursday morning that while its government and other large customers such as business and wholesale were generally happy with the telco, it needed to do more for its mass-market customers.

"The one thing I am disappointed about for the year is that despite our strong performance, our customer advocacy results fell four points," Penn said. "We did not deliver to the extent we should for our customers."

"It is clear that we have more to do to improve our systems and processes to ensure that we consistently deliver a great customer service experience."

Penn believes that customer expectations are changing and Telstra needs to do more to change and adapt to meet those needs.

"The reality is that whilst we have come a long way in terms of how we respond to customers when they have issues, we've got to do more to take out the root cause of what creates issues in the first place."

It comes as no surprise that Telstra customers are unhappy, with customers falling victim to seven network outages this year, with the most recent instance bringing down banks, hospitals, and an airline.

Telstra had a rough start to 2016, with customers subjected to three major outages over a period of six weeks: The first on February 22, which affected prepaid and post-paid mobile services and was caused by "embarrassing human error"; the second on March 17, which involved an hours-long national mobile data and voice outage; and the third on March 22, which was a smaller voice outage.

Telstra then experienced an NBN and ADSL outage in May that resulted in the telco having to send free modems to customers still affected several days later, a mobile data services outage later that week, and a broadband service outage in June.

On Thursday, Telstra confirmed the free data days it handed out as compensation was absorbed in its revenue.

"We have taken extensive and end-to-end reviews of the networks involving international experts and independent experts," Penn added on Thursday. "As a consequence of these reviews, we announced a AU$250 million program in June."

The investment will be made in three major areas: The previously announced AU$50 million to be spent on improving mobile network resiliency by creating better real-time monitoring and speeding up recovery time; AU$100 million on increasing the core fixed-line network's reliability and resiliency; and AU$100 million on upping its ADSL broadband capacity to cope with demand.

"I think the most disappointing thing about having network interruptions is obviously the impact on our customers and that's really what we care about most," Penn added. "There's no doubt our customers will feel that we let them down a bit and it's our job to respond to that and to fix it."

Some Telstra customers were also distressed recently by reports claiming the company had been forced by the Catholic Church to quieten its marriage equality campaign. Initially, Telstra responded to this by saying it still supported marriage equality, but would take a step back from vocalising this until Parliament had held a plebiscite on the matter.

During the year, Penn said the company upgraded more than 2,000 network sites to 4GX and achieved 98 percent population coverage with 4G.

"On average, our customers experienced a 25 percent increase in average download speeds on their 4G devices," Penn said.

"We should not lose sight of the fact that we continue to have the best networks in Australia with our mobile network providing the best coverage at the fastest speeds."

According to Telstra, on average, 55 million calls and 356 million data connections are made over its network each day, claiming also that 72 percent of the country's small and medium businesses are Telstra customers.

Telstra also added 560,000 net new mobile customers, 235,000 fixed broadband services, and had 322,000 customers taking up bundles.

As at 30 June 2016, Telstra held a total of 500,000 National Broadband Network (NBN) connections, comprised of 407,000 voice and data bundles, 34,000 data only, and 59,000 voice only services -- up by 289,000 connections year-on-year

The company noted that its NBN market share remains above its core broadband market share, signing new contracts with the NBN to the value of AU$1.6 billion over the next few years.

For the financial year, NBN definitive agreement related income came to AU$1.35 billion, up 66.5 percent, while revenue from commonwealth agreements increased 54 percent, sitting around AU$10-$15 million per annum.

Telstra said that as a consequence of the Australian government rolling out the NBN, it loses business that has previously pulled a hefty income. It said while it is receiving partial compensation from the government, it is still losing net AU$2-$3 billion worth of EBIDTA.

Telstra's Retail, Global Enterprises and Services, Wholesale, and Operations pulled in AU$27 billion in external income, with Retail remaining the most profitable segment this financial year, with income dropping slightly to AU$16.6 billion.

Telstra Wholesale income grew by 1.4 percent to AU$2.6 billion, which the company said was largely a result of an increase in Infrastructure Services Agreement ownership receipts and increased in line with the NBN rollout, offset by price reductions from the ACCC's fixed line service Final Access Determination.

On a product performance bases, mobile came up trumps with revenue coming in at AU$10.4 billion. Telstra reported 7.5 million post-paid handheld retail customer services as of June 30, 2016, an increase of 169,000 as its revenue totalled AU$5.4 billion.

Fixed voice revenue declined by 8.2 percent to AU$7 billion; while Data and IP revenue increased by 10.9 percent to AU$3.8 billion; and media product portfolio revenue also increased to AU$974 million.

Additionally, Foxtel revenue increased by 8.6 percent to AU$719 million.

Media 'On the Go' revenue declined by 11.4 percent to AU$70 million, with Telstra saying it was currently transitioning the service from a bespoke standalone suite of content to one that "differentiates the mobility portfolio and adds value to customers".

During the year, Telstra also renewed its partnerships with both the AFL and the NRL for 2016 and beyond, and inked a five-year partnership with Netball Australia.

The Telstra Air WiFi network now has over 500,000 hotspots nationally including over 4,500 public hotspots, and over 1.1 million customers activated to use the Telstra Air network, the company said.

Telstra ended the 2015-2016 financial year with a gross debt position of AU$16 billion, comprising borrowings of $17.3 billion and net derivative assets of AU$1.3 billion.

The AU$5.8 billion 2016 annual profit includes AU$1.8 billion from the 47.4 percent share sale in Chinese online car business Autohome to Chinese insurer Ping An Insurance Group in June.

At the time, Penn announced that the Autohome shares sale would fund a capital management program of AU$1.5 billion for the second half of calendar 2016.

Penn also announced the company would be returning AU$1.5 billion of capital to shareholders in the first half of the 2017 financial year, expected to be funded from Telstra's surplus.

Telstra noted that this was the first full year that Asian telecommunications company Pacnet was included in its operation, after spending AU$697 million on the acquisition in December 2014.

The company also invested $270 million in Silicon Valley-based video-streaming and analytics company Ooyala, taking control of the company in the process in August 2014, resulting in this year's results also being the first since the Ooyala AU$246 million "impairment".

Telstra clarified on Thursday that the impairment came as a result of agencies and enterprises taking the services offered by Ooyala in-house.

This year, three executives -- chief information officer Erez Yarkoni, chief operating officer Kate McKenzie, and chief technology officer Vish Nandlall -- all announced their departure from the company in quick succession.

Telstra announced on Thursday that former Accenture regional managing director, Jane Hemstritch, would be joining the company's board as a non-executive director. Hemstritch currently serves on the board of Tabcorp Holdings and Lend Lease, among others.

It emerged last week that Telstra was considering cutting another 204 jobs in its Global Finance Services business across business intelligence and analytics services, operational billing, credit services, and accounting.

"We constantly review the way we work to simplify our business and remove duplication. These proposed changes would consolidate some work because we are standardise [sic] our reporting and processes," a Telstra spokesperson said, adding that 35 current vacant Services Operations roles could also be removed entirely.

The announcement came less than a month after the telco confirmed that it would be cutting 326 jobs across its business, saying it would "remove duplication" in its customer service solution, and would "increase slightly the amount of work done by our partners overseas", with work types to be consolidated across Australia and the Philippines.

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