Telstra FY18 earnings update: there’s a lot riding on 5G and IoT…
On 16th August 2018, Telstra announced its FY18 earnings. While subscriber growth remained strong, it was not strong enough to offset ARPU declines.
Telstra is betting its future on new initiatives (IoT) and network technologies (5G) to remain ahead in times of increasing competitive pressure in both fixed and mobile, however it faces competition from multiple other market participants.
Overall, Telstra’s FY18 revenue increased 3% to A$29,042mn, compared with A$28,205mn in FY17. Growth in NAS (8.6%) and M2M (13%) revenues partially helped to offset the weakness in both mobile and fixed (voice and broadband).
Telstra’s focus on 5G is indicative of its desire to maintain its dominance of the mobile market – this could lead to early success in 5G subscriber additions and put pressure on Optus and Vodafone’s 5G network rollouts.
With nbn pricing continuing to threaten broadband profitability, we expect Telstra will push hard on its 5G enabled fixed wireless service.
Telstra’s optimism on 5G boosting mobile ARPUs remains at risk given the expected competition from TPG.
Whilst Telstra focuses on being the market leader in IoT, this space will be hotly contested as non-cellular IoT players continue to build IoT coverage.
Telstra’s T22 strategy is underway, with the operation of InfraCo, new mobile plans and some staff cuts - however, we still see significant implementation risks ahead.
Telstra FY18 earnings update
On 16th August 2018, Tesltra announced its full FY18 financial results, just two months after its strategy day which outlined a new way forward for the nation’s largest telecommunications company. In a market of declining revenues and ARPUs, Telstra is banking on its future initiatives, emerging technologies and strategy reforms to offset this trend and remain the dominant telco in the country.
Some of the key highlights from the announcement included:
Revenue of A$29,042mn up 3% over FY17
Operating expenses totalled A$18,899mn, 7.6% increase in expenses compared to FY17
Net profit of A$3,529mn, down 8.9% compared with A$3,874mn in FY17
EBITDA and EBIT down 9.4% and 8.9%to A$10,121mn and A$5,651mn respectively
Earnings per share declined to 30 cents per share compared with 32.5 per share in FY17
Figure 1. FY18 Telstra key financials (A$mn)
SOURCE: Telstra FY18 earnings announcement and presentation
Mobile remains a strength of Telstra’s, with a 0.4% growth in revenue driven by M2M growth that offsets handset and mobile broadband decline.
Key highlights include
Total mobile services decline of 1.9% to A$7,807mn, with a 1.4% and 5.4% decline in postpaid and prepaid handheld revenues respectively
Postpaid decline due to lower out of bundle revenue, prepaid decline due to reduced unique users and migration to Belong
Retail mobile net additions of 342,000, including 304,00 postpaid services of which 67,000 came from Belong
Mobile broadband revenue decline of 10.3% to A$890mn. Users are substituting prepaid mobile broadband for fixed line and handset tethering.
M2M growth of 13% to A$165mn with 383,000 SIOs added. Growth also driven by MTData acquisition and implementation in vertical sectors such as logistics, health and financial services
ARPU continuing to decline due to competition and T22 initiatives (new plans, removal of excess data charges)
Strong media customer growth with 2.3mn customers on Sports Live Pass, up by almost 1mn from FY17
Fixed continues its decline, largely driven by continued nbn pricing pressure. However, Telstra is pushing towards greater market share with its nbn rollout. Smart modem and unlimited plans in H2 FY18 are driving new fixed products and services.
Highlights for the year include
Revenue declined 9.2% to A$5,812mn, impacted by an increased rate of nbn migration and competition. There was a partial offset by improved 2H18 retail bundling products
Fixed voice suffered a 15.4% decline to A$2,642mn due to lower out of bundling usage, while fixed data declined slightly by 0.2% to A$2,544mn
Retail fixed voice subscriber numbers fell 472,000, in line with the nbn rollout. There are now 4.9mn fixed voice customers, while fixed data customers totalled 3.6mn, with 88,000 net fixed data subscriber additions including 48,000 from Belong
Number of nbn connections rose 770,000 to 1,946,000 with a 51% market share (excluding satellite)
Bundling continues to be popular with 3.1mn customers now on a bundled plan, with 135,000 net subscriber additions
Smart modems (connects to mobile network if fixed unavailable) installed for 12% of fixed connections for more reliable performance
The enterprise division has suffered similar declines in mobile and Data & IP as its retail counterparts, with CEO Andy Penn stating there has been the more competitive pressure on its Premier Enterprise division than its Small Business and Consumer divisions.
Highlights for the year include
7% revenue growth to A$8.25bn
NAS grew 8.6% to A$3,646mn, offsetting ARPU declines in mobility, Data & IP and fixed voice. Second half margins of 13% were higher than first half margins at 10%. Small business experienced double-digit NAS growth, while Enterprise experienced high single digit growth
International income grew 5.4% mainly due to growth across NAS with the acquisition of Company85 in June 2017, and growth in fixed voice products
Launch of new cybersecurity centres in Sydney and Melbourne
New technology stack, with the goal of migrating all Consumer and Small Business customers and plans onto it by 30 June 2021
Largest ARPU decline in Premier Business due to reduction in international roaming
Telstra’s newly announced independent company InfraCo presented its pro forma results since 1 July 2018. Key highlights include:
A$11.1bn worth of fixed infrastructure assets and A$5.5bn of external income, both in line with internal estimates back in June when InfraCo was announced.
A$3.4bn of EBITDA, above previous estimates
1H19 results will include detailed segment reporting for InfraCo, including infrastructure assets, Telstra Wholesale results, and nbn commercial activities as part of Telstra Operations.
As announced in June, Telstra’s new T22 strategy underpins high level company decisions and operations, and it has already started making progress since the initial announcement. Highlights include:
Removal of excess data charges for select plans – ‘Peace of Mind Data’ plans
Establishment of InfraCo
Accelerated cost cutting, targeting A$1.5bn by 2020
Reduction in number of plans, reducing cost and improving digitisation
New management team effective 1 October 2018
Roadmap of cost reductions
Industry leading performance in key network performance surveys
Figure 2. Telstra 2022 strategy
SOURCE: Telstra FY18 results announcement
Challenging market dynamics has resulted in Telstra’s continued decline in key financials, though given the overall market state (predicted 2-3% decline in FY19) and Telstra’s forward-looking initiatives, these results can be viewed as indicative of the overall market and leaves Telstra in a positive position as the market transitions and adopts generational innovations such as 5G and IoT. It continues to gain market share in NBN connections – however given the margin pressure from NBN pricing we expect Telstra will push its Fixed Wireless Broadband services from 2019. Growth in M2M and NAS are helping to offset declining margins in traditional services such as fixed and voice. The market responded favourably to Telstra’s announcement, with Telstra’s share price increasing 6% in the hours after the announcements, reinforcing the relatively positive company outlook going forward.
Telstra’s 5G initiatives show its intentions and abilities to lead in the mobile space, especially in its first-to-market approach. This strategy affirms its position as the market leader and is necessary given constant competition. Telstra expects to have 200 5G ready sites across the country by the end of the calendar year and emphasised its 5G readiness one day after announcing the deployment of its first 5G ready sites on the Gold Coast.
Mobile ARPU have declined by about 4%. While Andy Penn believes that ARPUs will rebound with the arrival of 5G, we believe this is unlikely given TPG’s impending mobile entry, the expected timeframe for 5G going mainstream and 5G enabled handsets available in the market. Further, IoT will be contested by many players ranging from incumbent Telcos to start ups, forcing further competitive intensity.
Andy Penn has also emphasised and recognised the importance of Telstra’s media content, indicating that customers are greatly tied to these offerings. However, Mr Penn did not openly stated Telstra’s plans to launch its own streaming platform, but did confirm that it had a media investment strategy in place, including preparing to list Foxtel if needed in order to support its transition as a media business.
Domestically and globally the telco market has experienced flatline and even declining growth, but Andy Penn has continued to state that the huge demand for data and information services will mean new technologies that enable and provide data heavy services will be key to Telstra’s future, and remains optimistic that Telstra is well positioned to commercialise and monetise these opportunities. While we believe it is unlikely historical revenue figures can be obtained from traditional core product and service segments, Mr Penn’s presents a valid view, but achieving this would require careful management of new team structures, allocation of funds (e.g., to account for future expenditures such as spectrum), continuing innovation investment and significant expansion into vertical industries.