Telstra’s results are always more interesting for what is happening beneath the surface than for the headline numbers as it continues to wrestle with structural shifts within its traditional business and prepares for a post-national broadband future.
At face value the result it issued today was solid rather than spectacular, with revenue up a bare 1.1 per cent, earnings before interest, tax, depreciation and amortisation up 3.9 per cent and after-tax earnings up a rather more impressive 12.9 per cent.
The detail of the result, however, contains some rather more encouraging trends.
With or without the NBN Telstra has been facing structural challenges as its old copper network, the Public Switched Telephone Network, continues to shed customers and revenue and the physical version of its Sensis directories business continues to implode.
PSTN revenues were down 2.7 per cent and EBITDA 6.1 per cent, with the fixed voice revenues down 9.5 per cent or $459 million but fixed broadband revenue up 5 per cent, or $100 million. The EBITDA margin in the division actually edged up from 60 per cent to 63 and cent.
In the Sensis business revenue was down 11.7 per cent and EBITDA 21.7 per cent, with the legacy print business revenues falling 19.9 per cent while the lower margin digital business grew 11.3 per cent.
The continuing decline in those two legacy businesses meant that Telstra needed to find $400 million of new EBITDA just to stand still. In fact it found twice that amount, with group EBITDA rising from $10.2 billion to $10.6 billion.
The big driver of Telstra’s performance in recent years has been its mobile business, which has been powering along due to David Thodey’s decision to compete on price and the coincidence of that decision with the implosion in Vodafone’s customer base.
Mobile revenues were up 6 per cent to $9.2 billion as Telstra added another 1.3 million customers during the year and EBITDA was up 10.7 per cent to $3.5 billion. Margins increased and churn fell.
In fact, with the exception of Sensis, margins across the rest of Telstra’s portfolio were all up, helping the group to lift its overall EBITDA margin from 42 per cent to 44 per cent, with the trend strengthening through the year.
That’s not just a function of costs and productivity – operating costs were essentially flat, rising 0.5 per cent to $13.35 billion on the back of about $1 billion of productivity benefits – but also comes because of Thodey’s fierce focus on improving Telstra’s much-maligned customer service levels.
The growth in Telstra’s customer base, the lower churn rate in mobiles and a slowing of the rate of decline in the number of PSTN lines in service would suggest his efforts are gaining traction.
Thodey is also aware that whichever version of the NBN is built Telstra can’t rely solely on its mobile business to generate sufficient growth to offset the loss of margin and revenue the group faces once the NBN rollout reaches some level of scale.
The two areas of the group that Telstra is promoting as growth segments are its network applications and services business and its international operations.
Revenue within the NAS business was up 17.7 per cent to $1.5 billion and international revenues were up 13 per cent. EBITDA in the international operations was up 37.5 per cent to $385 million, with very strong performances from Telstra’s CSL mobiles business in Hong Kong, its global connectivity business and its China digital media assets.
Telstra’s Foxtel joint venture with News Corp also performed very strongly as the synergies from the Foxtel/Austar merger flowed through to growth in earnings before interest and tax of 40.7 per cent. Telstra received a distribution from Foxtel of $155 million, 43 per cent more than the $108 million it got from Foxtel in 2011-12, as well as a $120 million payment for access to its HFC cable.
Given Telstra’s continuing reliance on growth within its mobiles business to offset the inevitable continuing declines in the PSTN and Sensis the guidance Thodey provided for the 2013-14 year, essentially the same as for the 2012-13 year – low single-digit growth in revenue and EBITDA – is quite demanding.
Vodafone, having invested heavily in its network, will be more competitive and Optus is quite a long way through a repositioning to focus on the profitability of its customer base and growth.
In a market where growth has flattened, it won’t be easy for Telstra to sustain the kind of growth in customer numbers that it has been generating, although it continues to invest very heavily in its sector-leading 4G network rollout – which it says will reach 85 per cent of the population by year-end – and Thodey is pretty excited about the future of mobile data and applications.
Thodey describes Telstra’s position as one of continuing transition and transformation. For the moment, at least, Telstra does appear to be handling the significant drag on its performance created by the declines within the PSTN and Sensis’ print business quite effectively while creating some promising and offsetting new segments of growth.
