Tuesday, 16 October 2018 11:16

Telstra profits down as NBN, increased mobile competition impacts business Featured

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Telstra has taken a hit to its bottom line for the second year running, according to full-year 2018 results released today, revealing net profits fell by 8.9% to $3.5 billion despite a 3% increase in revenues to $29 billion.

And Australia’s biggest telco reported it added 342,000 retail mobile customers over the 12 months, 88,000 retail fixed broadband customers and 135,000 retail bundles.

Telstra attributes the drop in profits to the impact of the national broadband network on the company with wholesale prices rises – and increasing competition in the mobile market with the expected entrance of a fourth mobile network operator.

Telstra chairman John Mullen said the NBN had the single biggest impact on Telstra’s financials, and "the impact is profound" – with the NBN reducing the telco's net profit after tax by close to a half when fully rolled out.

"Not a few percent, half.  Having been privatised by the government in 1997, the government is now effectively renationalising half of the company again," Mullen said.

"To give some scale to that impact, what we are losing through this policy of half our business is approximately equivalent to a company the size of Qantas. This has also led to increased competition in mobiles and, in turn, the entrance of a fourth mobile operator in the form of TPG, now in a proposed merger with Vodafone.

"Our net profit is the principal driver of how much dividend a company can pay, so when a company loses up to half its net profit to such a government decision, the impact on its results, on its dividend, and on its share price is obvious."

The 2018 performance follows Telstra’s 2017 results when profits fell by 37% compared to the previous year on income of $28.2 billion – a drop of $1.46 billion, or nearly 5%, in the 2016 financial year.

Telstra also reported a reduction in earnings before interest, tax, depreciation and amortisation by 5.2%, to $10.1 billion for 2018.

Mullen told the AGM that Telstra, and the telecommunications industry globally, “is operating in times of enormous challenge and change”.

He said competition in the telecoms market had never been more intense, with market dynamics “shifting rapidly, and customer expectations changing”.

“On one hand, demand for our core products and services continues to grow. Telecommunications networks have become some of the most important pieces of infrastructure in the world today.

“These challenges are not unique to Australia or to Telstra. However, a unique challenge we do have is the NBN network.”

Mullen said the NBN was having an enormous impact Telstra’s business – “wholesale prices have risen, meaning we and other industry participants are facing a fixed-line market where reseller margins are rapidly reducing".

“At the same time, competition in the mobile market is increasing with the expected entrance of a fourth mobile network operator.

“These factors have influenced our performance this year and underpinned our decision to take bolder steps to transform the business through our new Telstra2022 (T22) strategy.

“On one hand, demand for our core products and services continues to grow. Telecommunications networks have become some of the most important pieces of infrastructure in the world today."

Mullen described the 2018 financial year as “dramatic” for Telstra.

“The company delivered solid financial performance in challenging conditions. Most importantly though, it was also a year where we took the decision to proactively and radically transform our company,” he said.

“We have chosen not just to try to adapt to the change and disruption happening around us, but to actually lead the transformation of the industry in Australia.   

“I am sure that we will make some mistakes and I am sure that despite our best efforts we will not hit 100% of our targets, but this is one of the boldest strategies adopted by a large, incumbent telco globally and we are determined to do everything we possibly can to transform Telstra from being the leader in the old world, to being the leader in the new world of telecommunications in Australia.”

Telstra chief executive Andy Penn said it was a critical time for Telstra – and for the whole of the telecommunications industry, both in Australia and globally.

“We sit at the cusp of the next evolution of telecommunications technology – 5G.  However, it’s not just 5G on its own, 5G is arriving at exactly the same time as other transformations in technology are accelerating – software-defined networks, IoT, machine learning and the cloud to mention just a few,” he said.

According to Penn, the future offers significant opportunities for Telstra, but to take advantage of them “and to be the telco of the future that we need to be” the company needed to build new skills and new capabilities.  

“That is exactly what we have been doing through our investments and changes in the company and we are well placed in this regard.  In fact I believe we are as well placed as any telco globally," he said.

“However, we equally face one of the most challenging times the company has ever experienced.

”As the chairman outlined, the NBN is having a profound effect on the industry and the company. As we have described many times, the financial impact alone is to reduce our EBITDA by at least $3 billion per annum and we have already had to absorb $1.4 billion of that.  

“The impact on the bottom line and therefore EPS from which we pay dividends is even greater – an up to 50% reduction net profit after tax." 

Penn pointed to the addition of 342,000 new retail mobile services for 2018, bringing total mobile services for Telstra to 17.7 million, including 304,000 in the “critically important post-paid hand held sector".   

“In fixed, we added 88,000 retail broadband services, including 48,000 from Belong, bringing our total fixed broadband services to more than 3.6 million.”

He said Telstra estimated fourth quarter performance represented approximately 70% market share in post-paid mobile handheld “and about the same in fixed”.

To listen to the AGM addresses by Mullen and Penn click here.

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Peter Dinham

Peter Dinham is a co-founder of iTWire and a 35-year veteran journalist and corporate communications consultant. He has worked as a journalist in all forms of media – newspapers/magazines, radio, television, press agency and now, online – including with the Canberra Times, The Examiner (Tasmania), the ABC and AAP-Reuters. As a freelance journalist he also had articles published in Australian and overseas magazines. He worked in the corporate communications/public relations sector, in-house with an airline, and as a senior executive in Australia of the world’s largest communications consultancy, Burson-Marsteller. He also ran his own communications consultancy and was a co-founder in Australia of the global photographic agency, the Image Bank (now Getty Images).

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