MOODY'S: How the roll-out of the NBN will create a $2 billion gap in Telstra's earnings

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Earnings and margins at Telstra will suffer with the roll-out of the NBN as Australia’s biggest telco loses its dominant position as a wholesale telecommunications provider.

The new high speed internet access network will create an annual EBITDA (earnings before interest, taxes, depreciation and amortisation) gap of $2 billion to $3 billion, according to Moody’s Investors Service.

“While it will remain the industry leader once the NBN rollout is complete, we expect its fixed retail voice and broadband market share to decline and its mobile market share to stagnate or fall depending on the extent to which Telstra seeks to maintain the premium it has historically been able charge for mobile service,” Moody’s says.

Telstra now has the biggest share of fixed-line voice and broadband markets. It also currently gets the benefits from owning the copper network and the ability to spread its fixed costs over a large subscriber base as well as the ability to provide bundled services.

However, Moody’s estimates Telstra will drop nearly $700 million from the loss of its regulated wholesale business. The ratings agency also expects retail earnings to fall because Telstra must start paying NBN for access.

“Australia’s nationwide upgrade of its fixed-line phone and internet-network infrastructure will change Telstra Corporation Limited’s business model and eliminate a significant earnings stream,” says Moody’s.

Telstra has until about 2020 to fill the earnings gap or reduced debt to maintain its credit quality and ratings.

In that time, Telstra must gradually hand over ownership of its copper and cable local access networks to NBN.

“Telstra will therefore lose its role as Australia’s dominant wholesale telecommunications provider,” Moody’s says.

Telstra currently sells access on its network to other telecommunications companies, which then provide fixed-line voice and broadband service to their retail customers. This wholesale business was 9% of total revenue for the six months to December.

Moody’s expects Telstra’s EBITDA margin to fall from 42%-43% to a high 30%, broadly in line with the investment-grade telecommunications companies globally, when NBN is fully rolled out.

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