On February 24th Catherine Livingstone who, after eight years on the Telstra BoD, in 2009 took over the chairmanship of Telstra, resigned, to be replaced by Asciano CEO and Telstra BoD member John Mullen. On the same day the authoritative Australian Financial Review, which described Livingstone as one of the most impressive leaders in Australian corporate life, noted that due to previous controversial and combative management by U.S. businessman CEO Sol Trujillo (which had reached such a point that then-communications minister Stephen Conroy threatened to split the company in two through legislation or stop it from buying mobile spectrum), Telstra's board was leaky, its relationship with the government broken, its relations with shareholders equally fraught and its market valuation out of kilter with its earnings power. The AFR eulogy noted that as a result of Livingstone's calm and measured approach, curiosity about technology, personal effort in restoring the lines of communication with Canberra, textbook succession planning and ability to look over the horizon, Telstra was now sailing in relatively calm waters having also under her careful stewardship finally completed the long drawn out A$11.2 billion infrastructure negotiations with the Turnbull government and NBN Co.
The AFR added that although Livingstone's photographic memory, penchant for getting into the detail of everything and willingness to challenge management made her a tough colleague for Telstra CEO David Thodey, she had still been a good mentor to Thodey, who was over-consultative and slow to make decisions (as of May 2015 David Thodey was replaced by Andrew Penn, previously Telstra CFO).
However, the Sydney Morning Herald on the same day warned that Mullen was still taking over at a challenging time for Telstra, when NBN Co's construction would take away the telco's monopoly over fixed-line connections, reduce its profit margins and help rivals gain ground, and it was investing in newer, riskier and cash-consuming markets including technology start-ups and the Asian region.
Recent financial results
For the five years ending June 30th from 2015 to 2011, Telstra reported (A$ billions):
Revenue: 26.607; 26.296; 24.776; 25.503; 25.304.
EBITDA % margin: 40.38; 42.34; 41.04; 40.13; 40.12.
Profit: 4.305; 4.345; 3.791; 3.424; 3.250.
EPS: 34.5; 34.4; 30.1; 27.5; 26.1.
Capex: 3.589; 3.661; 3.792; 3.591; 3.410.
FCF: 2.619; 7.483; 5.024; 5.197; 5.477.
For H1 2015 and 2014 (and yr/yr change):
Revenue: 14.194; 13.014; 9.1%.
Telstra Retail: 8.657; 8.476; 2.1%.
Global Enterprise: 3.180; 2.623; 21.2%.
Telstra Wholesale: 1.310; 1.244; 5.3%.
Telstra Ops: 250; 182; 37.4%.
All other: 797; 489; 63.0%.
EBITDA % margin: 39.54; 41.80; (2.26 points).
Profit: 2.135; 2.118; 0.8%.
EPS: 17.2; 16.9; 1.8%.
Capex: 2.073; 1.728; 20.00%.
FCF 1.918; 0.262; 1.656.
Split by product for H1/FY2015 and H1/FY2014, Telstra reported fixed line revenue of A$3.584bn and A$3.620bn, down 1.5%. It noted it continues to build Australia’s largest WiFi network, Telstra Air, that allows customers to use their home broadband allowance over Telstra’s network of WiFi hotspots across Australia and overseas, with membership over 320,000 since it was launched in June 2015. Fixed voice revenue decreased by 7.6% to A$1,772 million, partially offset by an increase in fixed data revenue of 6.7% to A$1,254 million. Retail fixed voice line loss was 129,000 in the half, taking total retail fixed voice customers to 5.9 million.
It has 3.3 million retail fixed data subscribers,up 121,000 during the half. The total number of customers taking up a bundle increased in the six months to December 31, 2015 by 163,000, with 2.4 million customers on a bundled plan. It noted it aims to become Australia's leading provider of consumer and business services on the NBN. As at December 31, 2015, it had 329,000 NBN connections, made up of 259,000 voice and data bundles, 18,000 data only and 52,000 voice only services, up 118,000 over the last six months.
Mobile revenue for H1 2015 and 2014 was A5.526bn and A5.328bn, up 3.7%, with mobile service revenue up 0.5% and mobile hardware revenue up 18.5%. Retail customer services increased by 235,000 in the six months to December 31st 2015, bringing the total to 16.9 million. Its 4G network covers 96% of the Australian population with 8.9 million 4G devices on the network. Mobile broadband revenue declined by 1.5% to A$639 million with customer growth of 48,000 services offset by a reduction in ARPU. M2M revenue grew by 9.1% to A$60 million with strong subscriber growth, particularly in the utilities sector, and mobile hardware revenue grew by 18.5% to A$1,121 million.
Data and IP revenue for H1 2015 and 2014 was A$1.914bn and A$1.664bn, up 15.0, with data and IP revenue up as a result of revenue received from GES international customers. Within data and IP, other data and calling products, which include wholesale Internet and data, inbound calling products and other global
products and solutions, increased by 39.0% to $1,005 million, while IP access and ISDN revenue declined 0.7% and 8.2% respectively due to pricing pressures. Pacnet contributed $209 million to data and IP revenue.
Network apps and services revenue for H1 2015 and 2014 was A$1.336bn and A$1.007bn, up32.7%; Pacnet also contributed $35 million to NAS revenue. Industry solutions revenue growth was 44.2% led by NBN commercial works, managed network services revenue was up 28.9% driven by increased professional service and security activity, and revenue growth of 15.5% in unified communications was a result of increased IP telephony customer connections.
Media product portfolio revenue (which includes Foxtel from Telstra, T-Box device sales, Foxtel on T-Box, BigPond Movies, Presto and relationships with all free to air providers, increased 2.4% to $476 million. In October 2014, Telstra TV was launched. Since launch,43,000 customers have purchased a Telstra TV device, which includes access to all three Australian commercial streaming services. Cable revenue declined by 3.3% to $58 million.
CEO Andrew Penn defends half yearly results
Despite concerns by analysts (including Goldman Sachs, who described the results as soft), regarding the year on year rise in opex of 14.2% due to higher employee fees, NBN connection charges and the cost of subsidising smartphones, all having an effect on the bottom line, competitive pressures from the NBN and a drop in mobile margins to 39%, Telstra CEO Andy Penn defended rising costs and falling mobile ARPUs, telling shareholders that the company's short-term pains were needed for long-term gains. Specifically on the increase in investment, he said it was spending much of the increased capex on mobile to extend our 4G and 4GX networks to deliver more square kilometres of coverage, more reliable voice and data, fewer dropouts and faster download speeds.
Recent operational announcements
Ericsson and Telstra claim first 1 Gbit/s transmission with 4 band CA
On November 9th 2015 Ericsson and Telstra announced what they claimed to be the first test demonstration of 1 Gbit/s capability based on aggregating 100 MHz of spectrum across the 700 MHz, 1800 MHz, 2100 MHz and 2600 MHz (2 x 20 MHz) bands and delivered to a Cobham Aeroflex TM500 mobile device on a live end-to-end mobile network. More specifically, the release said that downlink speeds in excess of 950 Mbit/s had been achieved against a User Datagram Protocol speed test application whilst the demonstration had also been able to download speeds of over 843 Mbit/s via the Internet to the speedtest.net site. The demo followed similar tests which achieved 450 Mbit/s in February 2015 and 600 Mbit/s in September 2015. The release noted that reaching speeds of 1 Gbit/s was an original goal of the LTE Advanced standard.
Three new Telstra contracts in process with NBN Co
On December 21st Telstra announced it had been awarded two contracts by NBN Co which would be worth around A$80 million over the next 12 months, and was also negotiating a contract to help build out and speed up the conversion of Australia's cable TV networks. This would include a three year contract which Telstra said involved fixing faults on the copper network and undertaking a small number of new connections for services that are yet to transfer to the NBN and a second, four-year contract covering fixing faults and connecting new services on the NBN for the FTTN, FTTP, FTTB and HFC technologies in select areas once a customer has migrated to the NBN. The Sydney Morning Herald estimated that the two contracts could be worth over A$280 million for the four year period.
(NB: two other companies – Service Stream and BSA Limited – were also awarded operate and maintain contracts that sources say could be worth around A$160 million over four years.)
Telstra also said it had signed an MoU with NBN Co and was negotiating to finalise a contract covering the design, engineering, procurement and construction management of the NBN network in the HFC footprint covered by the existing Telstra HFC network, which it expected to be completed early in 2016.
The Sydney Morning Herald said that market sources had suggested the latter contract for Telstra to design/project manage, expand and upgrade its HFC networks (currently used mainly to serve CATV and cable internet customers but which the current government wanted to be used by NBN Co to eventually serve over 3.6 million homes with highspeed broadband ) could be worth in the range of A$1.5-A$1.8 billion to Telstra.