Telstra's post-NBN momentum

At face value the Telstra result wasn't much more than a steady-as-you-go sort of performance. Beneath the headline numbers, however, there are continuing signs that David Thodey's attempt to transition the group towards a post-national broadband network future is gaining momentum.

The broad numbers don't reflect that. Revenue up 1.2 per cent and earnings before interest, tax, depreciation and amortisation up 3.7 per cent signal incremental improvement and an adherence to the relatively modest guidance previously provided to the market rather than something that suggests the re-making of Telstra is gathering pace.

The result was, however, marred by the accelerating implosion of Telstra's Sensis directories business and the predictable continuing decline in its public switched telephony network revenues. Between them Sensis ($167 million) and the PSTN ($247 million) stripped $414 million from the half-year's revenues.

What would have encouraged Thodey is that Telstra was still able to grow its revenue base, albeit that the growth rate was meagre and, more particularly, that the growth came predominantly from its mobiles business.

The big shift in strategy last year, where Telstra decided to compete far more aggressively on price in the mobiles sector, is continuing to drive a surge in customer acquisitions and revenue that added $430 million to the business' revenue base – growth of almost 11 per cent – and more than offset the decline in the PSTN and Sensis.

Telstra added another 958,000 customers to the mobiles business while experiencing only a small (4.3 per cent) decline in average revenues per user. Encouragingly, it grew its mobile broadband revenue more than 9 per cent and its mobile broadband customer base by another 436,000.

As the NBN continues to be rolled out, that mobile customer base, and mobile broadband in particular, will become increasingly important to Telstra. Its relatively newfound competitiveness and the continuing improvement in its customer satisfaction levels, which is lowering churn rates, coupled with the quality of its Next G network, is producing increasing traction with consumers.

Thodey would also be pleased with the 5.8 per cent increase in revenues from the group's fixed broadband offering, the 19.4 per cent growth in its network applications and services business and very encouraging revenue growth of 19.8 per cent in its restructured international business.

The result was marred by the freefall being experienced by Sensis, where revenue was down an unexpectedly high 24.1 per cent and EBITDA 54.9 per cent. The extent of that decline was exaggerated by the timing of the release of the Perth Yellow Pages but even adjusted for that revenue would still have fallen 16.5 per cent and EBITDA 38.6 per cent.

Telstra was taken aback last year when, after defying the international directors' experience for some years, Sensis revenues abruptly started plummeting. While Telstra rolled out a new strategy that envisaged a controlled evolution of the business from a traditional directories business towards one providing leads for its small and medium-sized business clients, the speed at which the business is shrinking has clearly surprised the group.

Where it had envisaged revenues would fall by a mid-single-digit percentage and EBITDA by something in the high single digits as the business was repositioned over three years, the rate of decline has steepened dramatically.

An element of the decline in earnings would be related to the cost of the repositioning but it is obvious that the traditional high-margin business is disappearing at a faster rate – a rate that has shocked the group – than Telstra can roll-out and get customer acceptance for its new lower-margin offerings. Sensis is now bundled into a new digital media business.

Telstra is still waiting for the Australian Competition and Consumer Commission to rule on the revised structural separation undertakings it lodged with the commission late last year – a ruling expected before the end of this month.

If the ACCC accepts the undertakings, it will clear the way for the start of a massive stream of payments and from NBN Co and, to a lesser extent, concessions from the federal government, over the next several decades.

Those payments have been estimated to have a net present value of between about $11 billion and $12.8 billion and are materially front-end loaded.

Once they start flowing Telstra will have some capacity to reward its shareholders with either a special dividend or some form of capital management and will have something of an annuity income stream to oil its transition from a company dominated by its PSTN business and the regulatory morass around the copper network to a more nimble and customer-focused organisation.

Telstra will have networks but will progressively become far more of a retail business than it is today, which is why Thodey will be encouraged by the continuing positive trends within those businesses that are positioned within the most freely competitive environments.