Following flat financials, Telstra pins hopes on NBN renegotiation

Fat dividends that investors love to be diluted, fibre backbone upgrade imminent

Expect more layoffs at Telstra, happening faster: in response to the changes wrought by the National Broadband Network on its business, Australia's colossal carrier has decided to bring forward its cost-cutting programs by a year.

The announcement, that Telstra's previously-announced productivity target of AU$1 billion would be brought forward by one year to 2020, and a total saving by 2022 predicted to be $1.5 billion.

The efficiency drive arrives after the company today announced annual profit of $3.87bn on revenue of $28.2bn. That's a dip from last year's near-$6 billion profit, an all-time record.

Fixed services other than connections to the National Broadband Network (NBN) continued their collapse, ditching $347 million; mobile was down by $65 million; the data and IP business revenue fell $166 million (dragged down both by falls in IP access, and in why-is-it-still-a-thing ISDN, which shed 10.4 per cent to $540 million).

That's all in spite of decent enough performance in nailing down retail customers:

  • Telstra added 218,000 mobile customers, and most of those (169,000) are in the preferred postpaid segment;
  • Telstra added 132,000 retail fixed broadband customers, along the way garnering 52 per cent of the NBN market with 676,000 new NBN connections (most of those existing customers churning as access connections churned from Telstra to nbn™ ownership);
  • Around 88 per cent of the fixed data customer base is on a bundle of some kind, after the company signed more than 224,000 customers to a bundle in 2016-2017;
  • Enterprise offerings provided a bright spot, with cloud services adding more than 50 per cent revenue to $374 million, industry solutions up 66 per cent to $1.25 billion, and integrated services growing 21 per cent to $301 million.

Nevertheless, CEO Andy Penn and CFO Warwick Bray are softening up the market for a low-margin future, by way of explaining the dry stuff of a new dividend policy.

When fatted calves were a dime a dozen, the carrier indulged shareholders by returning close to 100 per cent of profits as dividends. Those days are no longer, the Telstra bosses warn: it'll be more like 75 per cent, because Bray said the company has to maintain balance sheet settings “consistent with maintaining an A-band credit rating” in a world where “our business will change to a higher mix of lower-margin, lower capex services”.

Telstra's fat dividends have made the company's stock been a must-have for risk-averse investors. At 75 per cent of profits the company will still pay well, but will certainly get lots of fund managers thinking.

Avoiding truck rolls was highlighted as a productivity win already achieved, with both Penn and Bray saying there's been a big focus on first-call resolution of customer complaints.

In a world where network infrastructure is often painted as worthless compared to the bits that traverse the infrastructure, the “re-nationalisation” of network under the National Broadband Network is going to be a burden on Telstra's profitability.

In response, the carrier is putting a premium on services that don't include paying a cut to nbn™: 4G and 5G mobile, and associated Internet of Things machine-to-machine services for the future.

The 4G network is already factored into its balance sheet; Telstra isn't certain when 5G will be a serious chunk of its income; and while growing, the IoT business is small (three million square kilometres of coverage sounds impressive, but that merely piggybacks on existing mobile networks; the Cat M1 service added 250,000 services in the year, but doesn't get its own line in the financial statements yet).

In the meantime, other financial levers are needed: in addition to cost cutting and a rebalanced balance sheet, Telstra is pursuing yet-another-renegotiation of its financial deal with nbn™, to try to monetise its contracts sooner than is currently the case.

Telstra reckons payments from nbn™ will get close to a billion a year by the end of the migration to the new wholesale network and the one-off receipts less cost-to-connect will reach around $9 billion. That's not enough to fill up revenue Telstra will lose as customers churn and it winds back wholesaling and becomes a mere retailer of broadband services.

The company therefore hopes to bring forward 40 per cent of its potential long-term NBN receipts already locked in under existing deals.

Telstra hopes to realise upwards of $5 billion from such a deal, which except for a billion in debt reduction will be tipped into capex (4G and 5G, spectrum, backhaul upgrades, and a new operational support system, OSS, to create a self-repairing network).

None of this is realised yet: Penn said the transaction is subject to consents, approvals, and a new contract with NBN.

While it's going to lose the household-level customer access network, Telstra gets to retain its trunk-level fibre transmission network, and that's getting a slice of capex to bring it into the terabit age.

Penn said the fibre runs crossing the Bass Strait have already been upgraded to terabit-per-second links; the rest of the long-haul fibre network will shortly reach similar speeds, and Penn noted that the network will be made capable of 100 Tbps nationally.

Among the shiny-future products Telstra has in mind, it's no surprise that the company wants to become the video distributor of choice for Australia. Hence Telstra TV 2, the follow-up to its "million customer" Telstra TV, and which Penn said will let users "ubiquitously search free-to-air, catch-up services, Foxtel, Netflix, and Stan".

There's also a new modem coming, the Telstra Gateway Frontier, whose distinguishing feature will be automatic failover to mobile data if the fixed line fails - designed to cope with the kinds of migration outages that have plagued NBN migrations, and besmirched both Telstra and nbn™ for more than a year.

The impact of Telstra's entry into the healthcare market is buried in the fine print: the carrier's attempt to build a health juggernaut took a $77 million impairment to “goodwill and related assets” of the Telstra Health group.

Not that you'd know it from the earnings call, which heard from Penn that the “national cancer registry project is significantly well advanced, and we see significant efficiencies in the delivery of healthcare.” ®

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