At first glance, Optus’ full-year results to March 31 perfectly conform to the strategy that its former chief executive, Kevin Russell, set out for it. There was, however, a discordant note.
Russell, who quit the role earlier this year after less than two years in the job, prioritised quality over quantity.
The objective was not to chase new customers with discounting of plans and handsets but to generate bigger profits from existing customers by reducing churn. Improved customer service and a much lower cost base were two key metrics within the strategy.
For the full year, the results appear to be in line with the strategy. Earnings were 15 per cent higher despite a five per cent decline in revenue and 160,000 fewer customers.
Average revenue per user may have fallen slightly but data revenues, at 64 per cent of service revenues, were up 10 percentage points and the number of customers on Optus’ 4G network soared from 785,000 to 2.15 million.
Subscriber acquisition costs were 24.1 per cent lower, falling from $155 to $117, and Optus’ churn rate was down from 1.6 per cent to 1.3 per cent.
Those numbers fit with the objectives of shifting from a focus on growth to one of profitable growth on the basis of improved business fundamentals -- lower costs but improved customer satisfaction and 'stickiness'. Optus’ net promoter scores -- a measure of customer loyalty -- have been improving recently while its churn rate is at its lowest level in more than seven years.
The slightly sour note came towards the end of the year. In the fourth quarter, revenue was in line with the overall trend -- five per cent lower than the same quarter of the previous year -- but EBITDA was down 6 per cent and net profit fell by about 10 per cent, or $26m.
Optus blamed higher depreciation and amortisation charges flowing from heavy investment in its network, a cautious business environment and $25m of non-recurring revenue in the previous corresponding period for the quarterly outcome. There may also have been a different mix of handset plans that distorted the comparison with the March quarter last year.
There was, however, an increase in subscriber acquisition costs in the quarter -- particularly in the higher-value post-paids -- and a slight decline in average revenue per user despite subscriber numbers holding firm relative to the December quarter.
Telstra has been the obvious beneficiary of the implosion in Vodafone’s customer base in recent years -- Vodafone lost about 2.5m customers, or about a third of its customer base, in three years -- and would have also gained additional scale from Optus’ strategy.
Toward the end of last year however, Vodafone, having invested heavily in what had been a degraded network, appears to have turned its fortunes around and experienced its first net customer inflows in more than two years.
With a new and under-utilised network, Vodafone has focused on promoting itself on the basis of bigger data downloads rather than simply price, and that appears to have halted the haemorrhaging. Whether that was a factor in Optus’ final quarter experience will become clearer in time. Telstra, of course, remains a formidable and dominant competitor in mobile.
Optus under Russell cut heavily into its cost base and recently foreshadowed that another 350 jobs would go, so there is still some momentum on the cost side. The full impact of the restructuring of Optus’ retail network also probably has yet to be seen.
The challenge for its previous long-serving CEO Paul O’Sullivan (the CEO of SingTel’s consumer business who is currently acting as country head for Australia), and Russell’s eventual successor, will be to leverage the lower costs, lower churn rates and improving customer service into not just earnings growth but subscriber and revenue growth.
At a moment when all three of the mobile operators are showing pricing discipline -- they are competing on data allowances rather than handset subsidies, which is sensible given the enormous investments all have made and are still making in their networks -- it won’t necessarily be easy to wrest share off Telstra or shift the shrunken but stabilising core of Vodafone customers.
Russell’s strategy was to end up with higher-quality earnings and growth from a higher-quality and lower-cost business.
The full-year numbers are encouraging and if the strategy plays out as planned, the full benefits of the restructuring of the business will flow in future -- if the jarring note in the final quarter proves to be an aberration.