Telstra profit drops 7.6pc but telco shows signs of recovery from NBN woes

Telstra posts 7.6pc drop in first half profit amid signs it’s recovering from NBN impact, and pays a special dividend.

Telstra chief executive Andy Penn. Picture: Gary Ramage

Telstra boss Andrew Penn has vowed to keep fighting for lower wholesale prices charged by NBN Co, warning that the telco is making almost no money as a reseller of NBN broadband services.

“The prices are too high. They are more than twice what they were when we provided (wholesale) services.”

“We are making no margins on the NBN fixed services. Our focus is to make sure our custom great experience and we are committed to invest in the business and lead the market — that’s what we are doing through things like our smart modem and Telstra TV,” he told The Australian on Thursday.

Telstra posted a 7.6 per cent drop in net profit for the first half of fiscal 2020, with total revenue for the period slipping 2.8 per cent to $13.4bn.

Revenue from the fixed line business dived 11 per cent in the half to $2.3bn, despite Telstra adding 359,000 NBN customers during the period to take its overall customer base to 2.9 million.

With the NBN forcing Telstra to become a reseller of NBN services, the money the telco makes from each NBN connection is nowhere near what it made from customers on ADSL services.

It’s a problem for all telcos and New Street Research analyst Ian Martin said there was no reprieve in sight for Telstra on the NBN front. “Telstra’s fixed margin is not looking good. There are a lot of fixed costs in that business so for the next two years there’s not a lot that can be done.”

Mr Martin said the wholesale prices charged would remain a problem until all consumers are migrated from ADSL to the NBN.

“It’s what happens to prices after (all customers move to the NBN) that will be the real issue for Telstra.”

The pressure on the fixed line makes it critical for Telstra to maintain its lead in the mobile market. With the merger of TPG Telecom and Vodafone Hutchison Australia getting the tick in federal court on Thursday, the market is expecting a return to fiercer competition in mobiles.

Telstra shares, which originally jumped 2 per cent after the release of the results, fell sharply after the court’s delivered its verdict, ending Thursday’s session 1.6 per cent weaker at $3.76.

Mr Penn said Telstra’s early investment in 5G gave it a healthy buffer against any further uptick in competition.

“In the mobile market, we are focused on providing a premium network, customer experience and to be on the forefront of technology with 5G,” he said.

“That’s our point of difference in what’s already an intensely competitive environment, as we bring forward 5G we think there’s an opportunity to provide even more value to customers, value that they will pay for.”

The telco’s mobile revenue for the half was flat at $5.3bn despite it adding 159,000 mobile customers during the period, bringing the total to 18.5 million.

Post-paid handheld revenue decreased by 3.6 per cent to $2.5bn as the customer gains net were offset by 7.4 per cent decline in average revenue per user decline from $55.62 to $51.52 due to stronger competition in the market.

The results were in line with guidance and there are some signs that Telstra is slowly starting find its way out of the NBN quagmire.

The telco’s underlying earnings before interest, taxes, depreciation, and amortisation, excluding the impact of NBN, grew by approximately $90m for the period, the first time this figure has grown since fiscal 2016. Telstra expects this trend to continue in the second half. Another positive is the significant jump in it’s free cash flow from $627m to $1.52bn. It also managed to cut underlying fixed costs by $422m, or 12.1 per cent, during the half.

The numbers have allowed Telstra to keep its dividend intact at 8c, including a special dividend of 3c.