Has Telstra finally hit the limits of its growth?
The telco industry likes to call these customers ‘post-paid’. These are the ones who are mostly on contract; are big data users; pay their bills monthly and generally take it on the chin when price rises come around.
Mobile numbers can be volatile given the variety of handset deals regularly sweeping the market, but for Telstra the trend year-in and year-out has been one of growth. Until now.
Telstra’s post-paid mobile customers went backwards for the first time in more than a decade-and-a-half.
Added to this, 76,000 of Telstra’s less profitable — yet still important — pre-paid mobile customers also went missing over the past year.
In isolation, the loss of 132,000 customers isn’t going to shift the dial. It matters, however, because post-paid customers in particular, who collectively number more than 8.8 million, underpin Telstra’s massive profit engine. Even before Thursday’s numbers, there were three years of steadily slowing momentum in post-paid.
The dramatic change in momentum has again stoked fears the moment of terminal velocity has started to arrive. Could Telstra, which dominates every corner of the nation’s telco landscape, finally be hitting the limits of its growth?
Telstra chief executive Vicki Brady says a resounding no, don’t read too much into the raw numbers given the past year has been one of “dynamic” change.
This includes the switching off of the old 3G network. Internally, there’s been disruption as millions of customers were moved over to a new digital billing and customer management system. Some of this involved releasing customers from lower value legacy contracts, and they chose that moment to move elsewhere. Then there was an audit of active SIMS that saw duplicate accounts merged.
Brady dismisses suggestions the telco is pricing itself out of a more competitive market even after another annual rise was pushed through in May to head off inflation.
She points to Telstra generating better returns from existing mobile customers. The average revenue per post-paid handset is now running at the highest level in more than a decade, helped by a 2.5 per cent lift over the past year.
Still, the mobile worries were enough to take the shine off some big profit numbers from Telstra, which has emerged from years of restructuring to be a much leaner, focused telco machine.
Telstra’s closely-watched underlying earnings came in at $8.6bn, up 4.6 per cent. Underlying profit was up 1.8 per cent at $2.3bn. The telco is again showering its big shareholder base with cash, including a 5.6 per cent lift in full year dividends to 19c There was a surprise additional $1bn buyback, helping to soften the blow on the ordinary mobile numbers.
Telstra’s shares this month cracked the $5.00 mark for the first time in nearly a decade, but told a different story on Thursday. They fell almost 3 per cent.
More to come
Even with the three big carriers (Telstra, Optus and Vodafone) fighting it out in a saturated Australian mobile market, Brady is confident there is more growth come for Telstra.
For mobile, this fightback is a two-pronged plan. Much of it goes back to the five-year strategy Brady unveiled in May, where she called out the telco’s vast network as the selling point in the age of 6G and hefty data downloads. This involves a conscious step-up in network investment of some $800m over the next four years, with the promise of faster speeds and more reliability.
The second is around being smarter in the market to generate better returns beyond just a pricing tool. One model Telstra is eyeing is from US giant Verizon, which offers several tiers ranging from premium to basic in a world where data is increasingly a commodity.
Verizon’s premium package extends to automatic international coverage, guaranteed reliability and higher speeds from $US55 ($84) per month. Through both major digitisation programs, largely completed under two fundamental restructuring programs, Telstra has the ability to move quicker on mobile offerings.
Mobile devices are only going to get more integrated in our lives and their functions are going to become ever complex. To stay on top, the best telcos need to keep innovating and stay relevant for customers. Brady has already put out some ambitious growth targets, including growing earnings at mid-single digit rates by the end of the decade.
Telstra, however, doesn’t have the stage to itself. New Optus chief Steven Rue is more determined to make Optus deliver for its Singapore parent while making up for share losses following its cyber hack.
Third-largest player TPG/Vodafone has used the $5bn-plus windfall from the sale of its fixed fibre network to pay down debt, meaning it has more headroom to invest in its network from existing cashflows.
As always, the bigger threats are often from the unexpected. US tech giant Amazon is only getting started with its Project Kuiper, which involves broadband technology through a low earth orbit (LEO) satellite network. NBN has since signed on to Amazon to deliver broadband-quality services in regional Australia, but mobile offerings from the tech giant will be the next logical step. And it will be taking the fight right to Telstra’s doorstep.
Power shift
Veteran energy boss Frank Calabria concedes the ground is shifting over the renewables debate and that makes the Australia’s end of decade green energy targets “very, very challenging”.
“If we were having this conversation two-to-three years ago, everyone would be saying ‘just put it all in and, it’s just going to happen,” the Origin Energy chief executive says in an interview.
“I think it’s become better appreciated by the broader community, as well as investors, that the amount of enabling infrastructure that’s got to be built is significant. The cost of that infrastructure is higher, the time it takes, it’s just longer.”
There’s still ambition to get things done, but reality is sinking in around what needs to be done. The second issue is where it counts – among customers. Issues around affordability of energy and reliability have started to become top of mind for many households.
“Everyone’s wanting to see lower carbon emissions over time for the planet, but they’re also very attuned to the fact they’re trying to make ends meet”.
Combined, this means Australia’s efforts of generating 82 per cent of its electricity from green sources by the end of the decade is becoming a steeper challenge.
“I think we shouldn’t forget that 2030 was set an ambitious target in the context of mobilising and needing to push your shoulder against the wheel to get this moving,” he says.
Origin is further along the renewables path than its coal power generation rival AGL, but its targets for building out new capacity has a degree of caution. Origin is targeting a build between 4-5GW of renewables and storage capacity by 2030. AGL, Australia’s largest greenhouse gas emitter, this week upped its renewable targets to 6GW.
In coming months, Calabria expects to switch on the first of his big batteries at his Eraring site in NSW by the end of this year, with another to follow soon after. Combined they have 700MW capacity.
Overall, Origin has 3.2GW of projects underway including the recently acquired Yanco wind farm, and several more batteries in Victoria and Queensland. It has access right to the Yanco Delta Wind Farm for another 1.5GW, but this still has to go to a final decision.
Calabria’s comments came as Origin’s underlying earnings jumped 25 per cent to $1.49bn. Origin’s shares surged more than 6 per cent on Thursday, backed by better-than-expected energy markets earnings and signs that its capex spend had peaked for now. Origin shares closed at a ten year high of $12.59. This extends the premium over the Brookfield-led $9.39-a-share takeover offer that failed nearly two years ago.
Futures markers are currently pricing in flat wholesale electricity prices for the coming year, pointing to some relief for households.
johnstone@theaustralian.com.au
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