Telstra keeps the juggle act going

Within the continuing structural shifts occurring within Telstra's revenue and earnings mix there are encouraging signs that the group is making progress as it makes its protracted transition towards a post national broadband network future.

The headline numbers provide only a shallow insight into the substantial changes occurring in the composition of the group's business, albeit a positive one. Revenue, excluding the impact of the sale of Telstra Clear in New Zealand, was up 2.5 per cent, in line with previous guidance of low single-digit growth, but earnings were up 8.7 per cent and at the upper end of market expectation.

As has now been the case for quite some time, Telstra continues to manage the long-term decline in a fixed line business that will, regardless of the outcome of the federal election, be largely displaced over time by the NBN. It also has to cope with the continuing implosion and attempted reinvention of its Sensis directories business.

In the December half those business' revenue bases shrunk again, by a combined $220 million. By adding another 600,000-plus new domestic mobiles customers, however, Telstra grew that business – which now has about 1.2 million customers than it had a year ago – by $200 million.

Its network application services unit, for which David Thodey has big aspirations, grew 10.6 per cent, or $61 million, its international operations added $82 million of revenue and the first tranches of cash from Telstra's deal with the Gillard government and NBN Co are starting to flow, with $176 million of revenue from those agreements.

The intense focus Telstra has been applying to improving its productivity and customer service also continues to generate benefits, with gains of $381 million supporting its bottom line but also declining churn rates in its mobile business and a slowing of the rate of decline in the fixed line business as well as margin improvements in both businesses.

While Telstra is still sticking to its full-year guidance of low single digit growth in revenue and earnings before interest, tax, depreciation and amortisation it is now pushing expectations of its full-year EBITDA towards the top end of that guidance in a signal of the group's growing confidence that it is on the right track.

Thodey would be particularly pleased that, despite the continuing slide in public switched telephone network revenues, increases in fixed retail broadband revenues and average revenues per user, and in customer taking bundles of services, provides some protection from a change in government and a freezing of the NBN rollout while the new government devises and negotiates the detail of a fibre-to-the-node network.

While that would halt the flow of cash to Telstra as it cuts its copper lines and hands customers over to NBN Co Telstra would continue to generate cash and margin from the copper network. Thodey has referred to that fallback position in the past as a natural hedge within its NBN arrangements.

The result also reinforces how critical the decision to shift strategy in mobiles some time ago has turned out to be, with Thodey adding price-competitiveness to Telstra's network quality advantage and turbo-charging the growth in customer acquisitions. It was fortuitous that Vodafone's network disintegrated at about that time and that Optus has been more focused on protecting its margins than engaging in a price war.

Apart from the massive expansion of the customer base – Telstra has added more than 3.8 million customers since mid-2010 – EBITDA over the past 18 months has been growing at a compound rate of more than 20 per cent.

To protect its position Telstra is investing heavily in rolling out its 4G network – overall its capital expenditure was $1.9 billion in the half – and is on track to expand 4G coverage to two-thirds of the population by June.

While the decline in PSTN revenues has been a long-term structural trend, the confrontation of the Sensis business with the digital age was a more abrupt and dramatic challenge.

Sensis' numbers are complicated by the timing of the release of its physical directories but there was an 8 per cent fall in revenue from the White Pages and, adjusted for the timing of book distribution, a 22 per cent drop in Yellow Pages' revenue.

Thodey would, however, be encouraged that while the group is shedding revenue and margin within the old Sensis business model, digital revenue growth is starting to develop some momentum with an 11 per cent increase to $201 million in the half.

That won't stop the business and its margins shrinking – the digital business is lower margin – but it does suggest that Sensis could eventually emerge as a smaller but still material business.

With the growth in its cloud computing offering, which it is extending globally, and renewed focus on an international business that grew revenue by 11 per cent in the half, there are some longer-term prospective growth segments within Telstra beyond its mobile business and NBN income streams to give Telstra the foundation for a future growth story.