Telstra's new atones for the old

In yesterday's earnings report, Telstra's old technology-based assets continued their inexorable decline but its new technology businesses picked up the slack – and then some.

There are a lot of moving parts within Telstra, not all of them moving in the same direction. Given that, today’s Telstra full-year result was quite creditable.

In recent years the challenge for Telstra, separate to its relationship with governments and now the national broadband network, has been the inexorable decline in its copper core and, more recently, the implosion within its Sensis directories business.

That irreversible long-term loss of revenue and earnings from the public switched telephone network continued in 2011-12, with PSTN revenues down 10 per cent, or $600 million, offset slightly by a 2.9 per cent increase in fixed broadband revenues.

The traditional Sensis print directories business suffered a 22 per cent fall in revenue but revenues from its nascent digital marketing operations pulled the fall back to 16.1 per cent.

When the haemorrhaging of sales from its traditional core businesses is aggregated, Telstra had to find $736 million in sales from somewhere just to stand still. In the end, with total sales up 1.1 per cent, it found slightly more.

Most of those extra sales came from Telstra’s mobile business, which added 1.6 million customers last financial year and has now added about three million new customers from that moment last year when David Thodey decided the group had to be more competitive on price. That coincided nicely with a mass migration of Vodafone’s customer base because of its network quality issues.

The result was an 8.5 per cent increase in revenue from mobiles, a three percentage point increase in margin, to 36 per cent, and a $500 million increase in the business’s earnings before interest, tax, depreciation and amortisation.

Relatively recently, Telstra raised the pricing of its mobiles, which perhaps indicates a shift in tactics from volume gains to enhanced profitability.

Those tactics might not be confined to mobiles. A notable feature of the result was that all Telstra’s product groups improved their margins except for the PSTN, which held its EBITDA margin at a still-fabulous 60 per cent, and Sensis, where the margin fell from 56 per cent to 47 per cent.

The overall Telstra margin was steady over the year but with all of the product groups including Sensis lifting margins in the second half relative to the first – improved from 38.3 per cent in the December half to 42.8 per cent in the June half – it suggests a bigger emphasis on the bottom line than the top line.

While the performance of the mobiles business was the core reason why the group was able to offset the sales drains in the PSTN and Sensis, a 10.5 per cent rise in revenue from its network applications and services unit (to $1.3 billion), a 7 per cent improvement in its international operations’ sales (to $1.5 billion) and a solid performance from the 50 per cent owned Foxtel ahead of its Austar merger contributed.

The steady demise of the PSTN and the freefall in Sensis will continue, with Thodey saying he expected a further double-digit decline in Sensis’ revenue this year before the business stabilises.

Despite that, Telstra’s guidance for the 2012-13 year sees low single-digit growth in sales and earnings before interest and tax and says it expects the underlying momentum within the business to continue. There is a lot of productivity-enhancing re-engineering occurring within Telstra, which said 'Project New' delivered $1.1 billion of productivity benefits in the year to June.

There are also, of course, streams of payments to flow from NBN Co as it starts to accelerate the rollout of the NBN and the annuity streams from access to Telstra’s infrastructure and customer base start building.

Interestingly, Thodey said that there had been a 2 per cent increase in mobile-only households, to 14 per cent. With the US now having more than 22 per cent of its households without fixed lines the decision to, albeit reluctantly, accept the federal government’s invitation to be showered with taxpayer cash to exit its ageing and high-maintenance fixed line network is looking increasingly astute.

Given that mobiles and wireless broadband (where Telstra now has 3.1 million customers) are a key to its future it isn’t surprising that Telstra is planning to increase its spending on its network from $800 million last year to $1.2 billion to accelerate the expansion of its 4G network, where it has a significant first-mover advantage over Optus that it would be anxious to extend and leverage.

Thodey’s easy familiarity with the proportions of mobile-only households elsewhere in the world might also suggest that it isn’t only Optus and Vodafone that Telstra was considering when it decided to commit more capital into an acceleration of its 4G network rollout.

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