Telstra's Next G margins under threat

Stuart Corner
Wednesday, 17 September 2008 04:43

IT Industry - Strategy

Telecoms market research company, Telsyte, is forecasting significant ARPU declines for Telstra's mobile services as competitors Optus and Vodafone build out their 3G networks to more closely approach that of Next G.

Telstra's prices for Next G wireless services are significantly higher than those of its competitors, and according to Telsyte it is able to sustain these because users, especially business users, place more importance on coverage than price. Telsyte managing director, Mevan Jayatilleke, told iTWire: "The last end user survey conducted by Telsyte in June, of Australian businesses, the largest of its kind, revealed that business users, for the first time valued mobile service coverage more than price."

He said that Vodafone and Optus' decisions to use the 900MHz spectrum would enable them to provide coverage at similar capital costs to Telstra. "Telstra covers about 98 percent of the population with a geographical footprint equivalent to approximately 1.5 million square kilometres with about 5000 base stations and Vodafone [2G network] covers approximately 94 percent with a footprint of 750,000 square kilometres with about 2400 base stations. For Telstra's competitors to match its Next G [850MHz] coverage at 2100MHz would require in excess of 10,000 base stations."

Telsyte earlier this year made its first foray into equity research, publishing its forecasts for Telstra's 2007-2008 results and has now updated these. Jayatilleke said: "It was a logical extension to our core capabilities, and we have had some early successes selling it into investment banks and funds managers."

According to Telsyte, Telstra's share of the Australian mobile subscribers base has reduced from 43.2 percent in 2007 to 41.7 percent in 2008, and the emerging threat from Optus and Vodafone is just one of several it is facing. "The company is largely executing to the management plan, [but] it is likely to face some significant challenges in terms of revenue and earnings that will impact its ability to deliver on the forecast," Telsyte says.

Telsyte is particularly pessimistic about the prospects for Telstra's Business Services & Applications arm. "The group's stagnating performance will require immediate attention. Short of continuing to try to sell parts of the business, Telstra will require a significant capital injection in comparison to its current group turnover to revamp its legacy systems in order to make it more relevant in the landscape. This coupled with declining market share across KAZ and TBS will require significant restructuring to deliver a compelling market proposition."

According to Jayatilleke, Kaz and TBS are in desperate need of a major revamp, which requires significant investment, relative to the Business Solution Group's turnover. The investment needed is to upgrade its legacy systems. Both businesses also have been losing market share.

Telsyte is forecasting Telstra's revenues to rise from FY 2008 figure of $25.14bn, to $26.84b by FY 2012, but the increase coming primarily from its advertising and directories businesses and from mobiles. Business Services and Applications revenue is forecast to remain static.

Telsyte's first foray into financial forecasting appears to have been fairly successful It forecast for Telstra's FY2008 revenue was within 0.58 percent of the actual results of $25.14bn. Telsyte estimates a growth of 3.28 percent in FY09 and revenue to reach $26.84bn in FY12. Telsyte says it exactly forecast Telstra's EBITDA margins of 42.2 percent on total sales/operating revenue for FY08.