Business
  1. Home
  2. Business
UPDATED

Telstra posts surprise profit slump as fixed line, mobile revenue drops

Lucy Battersby

Fierce competition in the mobile phone market is sending customers into the arms of Telstra's competitors, carving a nasty hole in the telco giant's profits.

The slowing growth in customers is aggravating the pressure on the nation's biggest telecom provider, which has seen its traditional mainstay business crunched as Australians are abandoning the fixed-line phone, and is now forced to pay the government-owned NBN Network to access its customers.

Up Next

'Reshoring' US manufacturing jobs?

null
Video duration
01:56

More BusinessDay Videos

null
Video duration
01:20

Telstra posts profit slump
null
Video duration
01:56

'Reshoring' US manufacturing jobs?

null
Video duration
00:36

Aussie dollar surges past US77c
null
Video duration
01:21

Unemployment rate drops
null
Video duration
01:12

'They blackmail us': Domino's boss
null
Video duration
02:08

Did Scott Morrison announce a revolution?
More videos

Telstra posts profit slump

Increased competition in the mobile space is being blamed for Telstra's half-year profit slump.

Telstra's shares dived 4.5 per cent on Thursday after management admitted it was struggling to attract new customers. 

"There is no doubt the competitive intensity in the market has increased," chief executive Andrew Penn said as he delivered a surprise 12 per cent fall in first-half profit on Thursday.

Telstra added just 200,000 customers between July and December last year, compared to 235,000 in the same period in 2015. The figure looks even worse compared to 2013, when Telstra added 739,000 in the first half as Vodafone struggled with a poor network reputation.

But Mr Penn said it was "significant that we were able to continue to increase customer numbers in mobiles, retail fixed plans and data and IP despite the competitive pressures and make very solid progress on our cost reduction program to mitigate the impact of these economic headwinds". During the half, "data volumes have increased and intense competition on pricing across fixed, bundles, mobile, data and IP has had an impact".

Advertisement

Underlying profit for the six months to December 31 was $1.79 billion, lower than the company's own guidance for mid-to-high single-digit profit growth through the year. It missed analysts' expectations for an underlying profit of $2.04 billion.

Telstra's results were boosted by $400 million it received directly from NBN Co through a mix of one-off payments, construction contracts, and leasing space in Telstra exchanges and underground pipes.  

Unlike mobile and fixed products, Telstra network applications and services, which provide cloud services, increased revenue by 18 per cent to $225 million – the only product area to do so. The only overall division to increase revenue was Telstra Wholesale, up 1.8 per cent thanks to contracts for NBN Co to use Telstra's infrastructure.

Mr Penn warned that when construction of the government-owned national broadband network is completed, it would shave $2 billion to $3 billion a year off Telstra's operating earnings.

Lower customer satisfaction

As well as recording lower revenues, Telstra's measurement of how happy its customers are – the so-called net promoter score – dropped eight points due to a series of mobile network outages. Management may see reduced bonuses this year as a result, as this score is tied to incentive payments.

Telstra's earnings per share have dropped nearly 15 per cent to 14.8¢, but shareholders will receive an interim dividend of 15.5¢ per share, fully franked. 

Last year, Telstra's full-year income was $27.1 billion with free cash flow of $4.8 billion.  Management expects "mid to high-single-digit" income growth for this year to June, flagging though it would be "at the bottom end" of the range. This would generate free cash flow of between $3.5 billion and $4 billion.

Telstra's earnings from mobile products declined $191 million to $2.1 billion in the half. Mr Penn said this was due to a regulatory decision about mobile terminating rates, which reduced the amount of money Telstra gets as its network receives calls from the Vodafone and Optus networks.

There were also fewer people using Telstra dongles to access the internet, which reduced mobile broadband revenue from $639 million to $545 million. Mr Penn said more people were choosing to tether their laptops to the internet through mobile phones, which is recognised in 'handheld' revenue of $3.1 billion, down from $3.2 billion.  

Revenue from enterprise services, where Telstra provides large organisations with fundamental communications services, dropped 6 per cent to $2.2 billion in Australia but was flat for global contracts.

Regulatory uncertainty

Mr Penn noted the current regulatory review of domestic mobile roaming arrangements, which could force Telstra to give other companies access to its national mobile network at prices set by the Australian Competition and Consumer Commission.

He said Telstra would continue to spend money on its mobile network in regional Australia only "if the current regulatory settings remain in place".

He told analysts he is "optimistic that such a decision [by the regulator] would not be made" when the draft decision comes out by the end of April.  

Telstra's earnings also included results from pay TV monopoly Foxtel, which it jointly owns with Rupert Murdoch's News Corp.

Foxtel earnings were down 15.5 per cent at $234 million as the number of subscribers to its services, including Presto, decreased from 2.88 million to 2.82 million households. Telstra noted churn – the rate of customers cancelling their subscriptions – increased as more customers moved to non-fixed contracts.

Telstra did not receive a dividend from Foxtel, but recorded $51 million in revenue from Foxtel renting its hybrid-fibre coaxial cables to reach customers.

20 comments