Telstra net profit and earnings continue to suffer in the face of NBN

Expects FY20 will see the biggest NBN impact to the tune of $1 billion

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Telstra’s net profit has tumbled 39.6 per cent to $2.1 billion and earnings before tax also fell 21.7 per cent to $8 billion for FY19 ending 30 June, as it sounds a warning to brace for an even bigger financial impact in FY20.

The telco pointed out the decrease was mainly due to the impact of the national broadband network (NBN), as it absorbed about $600 million of negative recurring EBITDA headwind during the period and warned shareholders that FY20 will be the biggest in-year NBN headwind to date, anticipating an impact of $800 million to $1 billion.

In FY19, the telco has estimated the NBN has adversely impacted EBITDA by about $1.7 billion, and assumes it is about half way through the recurring financial impact.

Discounting the NBN headwinds, underlying EBITDA decreased about four per cent and the telco said it managed to reduce its underlying fixed costs by $456 million (six per cent).

“Our full year results for financial year 2019, which were in line with guidance and market expectations, showed strong progress against the T22 strategy,” Telstra CEO Andy Penn told shareholders.

“While we are making good progress on our T22 strategy, we continue to feel the significant impact of the roll out of the NBN on our earnings and profit, and competition in the mobile market remains high.

“Notwithstanding the intense competitive environment and the challenging structural dynamics of our industry, it is a year in which we believe we can start to see the turning point in the fortunes of the company from the changes we have embraced.”

Furthermore on its T22 strategy, Penn said it had identified about 75 per cent of the net 8,000 direct workforce role reductions, but it was also progressing with its target of creating 1,500 new roles in areas such as cyber security and software engineering through opening a innovation and capability centre in Bangalore. In the longer term, it hopes to develop these skills locally through establishing a partnership program with a small number of universities to develop these specific capabilities.

“The reality is that it is not possible for Telstra to continue to operate with the same number of employees after the NBN network is rolled out as it had been before NBN co-existed,” Penn explained. “To support our people through the change, we are investing up to $50 million in a transition program that provides a range of services to help people move into new roles.”

Furthermore, Penn said re-engineering how the telco works and does business, will remain a significant focus this year.

"While the majority of our major cross-company restructures and organisational design work is behind us, we will continue to see change in our workforce as part of our investments in digitisation, new technology and reduced activity within the business," he said. "All this will occur amid a continually challenging environment. NBN Co has also begun directly targeting the business sector as an infrastructure provider, which could also further impact our business.

"We will continue to advocate for a reduction in NBN wholesale prices to help ensure the long-term sustainability of the industry."

Within its Network Applications and Services business unit, Telstra saw revenue fall 4.1 per cent to $3.47 billion impacted by lower NBN commercial works and integrated services. EBITDA margin also further declined by 0.6 percentage points, to 10 per recent, reflecting a change in revenue mix including a decline in NBN commercial works revenues and contract timing impact, the telco said.

Specifically, integrated services revenue declined 22.3 per cent to $206 million that was put down to a decline in consulting and project management, as well as timing of project revenues.

Telstra InfraCo, which is now in its first year as a standalone business, saw income fall 6.3 per cent to $3.05 billion due to expected declines from Telstra Wholesale fixed legacy and NBN commercial works.

The unit controls assets worth around $11 billion such as datacentres and exchange buildings, fibre network, copper and HFC networks, international subsea cables, exchanges, poles, ducts and pipes.

The telco recently sold three of its international data centres in Europe and Asia to private equity firm, I-Squared Capital for about $160 million. The private equity firm also own Hutchison Global Communications. This was part of the T22 strategy, whereby the telco plans to monetise up to $2 billion of assets by the end of FY20, and hinted at "other opportunities which continue to be developed."

During FY19, the telco added 378,000 net retail postpaid mobile services, including 181,000 from its Belong unit, taking retail postpaid handheld services to 8.2 million. It also added more than 230,000 wholesale MVNO mobile prepaid and post paid services and about 107,000 net new fixed line retail bundle and data services, which included 51,000 from Belong.

The telco pointed out that its IoT business exceeded industry growth rates, experiencing revenue growth of 19.4 per cent.

On the back of this, Telstra said it was building out its 5G coverage in 10 cities nationally, with more locations to come.