Telstra dives as earnings shrink and competition mounts

Telstra shares dived to a 6½-year low yesterday after the telco re­affirmed that its earnings were shrinking.

Telstra CEO Andrew Penn speaks to CFO Warwick Bray at the results announcement in Melbourne yesterday. Picture: Aaron Francis

Telstra shares dived to a 6½-year low yesterday after the telco re­affirmed that its earnings were shrinking in the face of increased mobile competition and the impact of the National Broadband Network.

The telco’s stock posted its steepest fall in nine months, slipping 5 per cent to $3.04 after it indicated that full-year 2018 earnings would be at the bottom end of the forecast range of $10.1 billion-$10.6bn.

With earnings slipping despite the growth in its overall customer base, analysts have warned Telstra shareholders to brace for more bad news.

New Street Research’s Ian Martin told The Australian that the telco may have used the update to prepare the market for a less than stellar guidance for the 2019 fiscal year.

“The earnings provided in the update are within guidance, so this could be about shaping expectations for the FY19 and the full-year guidance Telstra will deliver in August,” Mr Martin said.

“There is a positive on the subscription numbers and while that’s translating into a little bit of revenue, it’s not translating into ­EBITDA.”

Telstra warned the market that its earnings were coming under increased pressure as the average revenue per user (ARPU) on mobile and fixed line services shrank.  The drop in revenue generated means that while Telstra is adding plenty of new customers, the growth in subscribers is coming at a cost.

Telstra signed up 60,000 postpaid mobile subscriptions and 36,000 fixed-line customers in the three months to March 31.

However, its ARPU for postpaid mobiles slid 3.6 per cent year-on-year to $65.35 for the March quarter.

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With TPG Telecom edging closer to launching its mobile network, competition will intensify.

Telstra’s chief financial officer, Warwick Bray, said revenue contraction in the mobile market had accelerated.

“We are seeing intense competition (in premium business and enterprise) … we are seeing recontracting at a lower ARPU than years before,” he said.

Mr Bray said the trend was likely to continue over the next 12 to 16 months.

“We have had pleasing growth in subscriber numbers in both fixed and mobile and we continue to see increased demand for telecommunications services, despite the industry facing challenges and increased pressure on both fixed and mobile ARPU and margins,” he said.

“We would expect these challenging conditions in FY2018 to continue into FY2019.”

Telstra reaffirmed its overall FY18 guidance, with full-year income expected to land in the middle of the $27.6bn-$29.5bn range. Its capital expenditure for the ­period is set to be at the upper end of the $4.4bn-$4.8bn range.

It is also set to book a restructuring bill of $300 million as the telco continues to cut fixed costs. It expects FY18 underlying core fixed costs to decline about 7 per cent during the full year.

Mr Bray said Telstra’s focus on cutting costs and the billions being poured into its networks should help it sail through the short-term turbulence.

“We are seeing some good ­results from the strategic ­investments we have made,” Mr Bray said.

Telstra is set to update the market next month on what extra measures it may take to tackle the pressures on its books.

However, Elio D’Amato from Lincoln Indicators said that there was little Telstra could do to turn the story around in the short-term.

“Telstra is operating in a sector that has deflation, prices are going down in an incredibly competitive landscape, there’s a transformation program and a big capital expenditure bill coming,” Mr D’Amato said.

“If you are running a business with all those challenges then the odds are against you.”

Telstra CEO Andrew Penn, who is in the US at the moment, has consistently maintained that the loss of the wholesale monopoly created an additional burden.

While Telstra is being compensated by the government for its loss, the migration of customers to the NBN is expected to burn a $3bn hole in its earnings on an ongoing basis.

As Telstra becomes a reseller of fixed broadband services, it has to pay for wholesale access and absorb a large chunk of the price it pays NBN Co for capacity. Telstra’s retail prices are already at the top end of the market at a time when new players, such as Vodafone Hutchison Australia, are entering the market.

The mobile business, which accounts for almost 40 per cent Telstra’s revenue, has already undergone changes to stay competitive, with the telco launching a budget brand Belong and also pushing “unlimited” SIM-only data plans.

However, analysts have pointed out that while the measures help Telstra win more market share they won’t generate as much revenue.

While Telstra has committed to the 22c-a-share dividend for full-year 2018, Mr Bray said that whether it could maintain that in fiscal 2019 was yet to be determined.

“In terms of dividend we are committing to it in FY2018 and moving forward we will determine it along the lines of our long-term capital management plan,” he said.

New Street Research’s Ian Martin said retail shareholders should breathe easy on that front. “There’s certainly more pain in FY2019 but they can sustain the dividend because there’s the same outcome as shown in this update. There’s margin pressure but cash earnings are going up,” Mr Martin said.

“I also don’t think we are going to see much in terms of impact of cost-cutting on the financial results this year or next year. It’s really about repositioning the business for the post-NBN world.”