The good news from Telstra’s bad result: Bartholomeusz

Telstra’s first half results were, as it foreshadowed last year, not pretty. That’s actually positive news because the deliberate decision to sacrifice profitability appears to be at least achieving its first set of objectives.

In fact there were two sets of broadly positive news for Telstra’s long-suffering shareholders. Not only has Telstra succeeded in arresting and indeed reversing the continuing declines in its key customer bases, albeit at a significant cost, but it has also finally agreed the terms of its $11 billion (in net present value term) deal with NBN Co and the federal government and will be able to put the proposal to shareholders by mid-year.

That deal, which will see Telstra exit fixed line telecommunications as the controversial $40 billion-plus national broadband network is rolled out, is probably of greater significance to Telstra shareholders than Telstra’s near term results.

Telstra’s ability to pull of the transformation in its competitiveness and customer service – and culture – that is weighing on this year’s profits, however, is critical to its post-NBN future.

So far, so good. Telstra experienced declines in sales and margins and consequently its profitability in the December half. The declines (0.5%, 5.8 percentage points and 35.6% respectively) were, however, more or less in line with those foreshadowed by Telstra last year when it committed $1 billion of extra spending to try to regain its competitiveness and accelerating the rate of internal change.

While it did sacrifice earnings to arrest the erosion of its market shares in its wireless and fixed broadband businesses, the addition of more than a million customers, mainly in mobiles, would suggest that the strategy is paying off. Total mobile revenues were up 10%.

A surge in pre-paid customers and in the take-up of smart phones by post-paid customers, and the increased subscriber acquisition costs created by the size of the subsidies for smart phones, hurt average revenues per user and margins but churn rates are falling and, if the game goes according to plan, will ultimately lead to future revenue growth and a recovery in ARPU and margins.

Mobiles, and mobile broadband in particular – where revenue grew almost 25% – will be pivotal in Telstra’s post-NBN future so Telstra’s ability to reverse the decline in its market shares at rates that accelerated through the half is encouraging despite the associated costs.

The not-so-good news was that, while Telstra slowed the rate of decline in its public switched telephony-related operations, revenues from the PSTN still fell 8.4% and overall fixed line revenues were down 4.9%. Another 109,000 fixed lines were lost during the half.

Telstra needs to maintain as much of its fixed line customer base as it can because that will maximise the payments it will receive from NBN Co as its hands those customers over to the new monopoly.

The other disconcerting aspect of the result was the 17% decline in income and 32% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) experienced by Sensis, although the revenue decline was “only” 6.8% and the EBITDA reduction 15.1% after an adjusting for a timing difference relating to revenue recognition for the Sydney Yellow Pages.

Lower levels of new business, higher levels of cancellation and declining yields were experienced as advertisers accelerated the shift from print to online. That’s to be expected, given the experience elsewhere, but the rate of decline within Sensis is disconcerting even though Sensis’ own digital business is growing rapidly. Sensis had previously done a remarkable job in holding back the digital tide.

It is instructive that despite the 10.7% increase in costs, mainly variable costs related to the $1 billion additional investment in competitiveness and business improvement program, Telstra still generated $2 billion of free cash flow, maintained its dividend and maintained the full-year guidance it outlined last August, which is broadly a continuation of the first-half themes albeit with improving margins and a smaller (high single digit) decline in EBITDA.

If it can deliver on that guidance amidst all the internal and external distractions and disruptions it is experiencing, it would be a very creditable achievement and a significant milestone on the path towards a sustainable post-NBN future.

This article first appeared on Business Spectator