Telstra is facing a huge challenge in its core business

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  • Telstra’s latest trading update shows it is struggling to respond to increased sector competition.
  • Citi says declines in mobile revenue per user will exceed the gains from new subscriptions.
  • CEO Andy Penn said in a speech overnight that he was optimistic about the future but “concerned about the short-term”, with pressure on the industry from the NBN rollout.

Telstra released an earnings update to the market yesterday and the stock immediately came under more pressure, falling to a seven-year low.

The company said underlying earnings in the 2017 financial year would be at the lower end of its guidance range between $10.1 billion and $10.6 billion.

In a conference call following yesterday’s trading update, Telstra CFO Warwrick Bray said the challenging market conditions had continued from the March quarter into April.

“What we are seeing in consumer is the out-of-bundle revenue is in decline partly as a result of the more generous plans that are in the market,” Bray said.

And a number of analysts questioned Bray about the worrying negative trend in average revenue per user (ARPU) in mobile.

While mobile subscriber growth rose by 60,000, increasing price competition saw the average revenue per user decline by 3.6% — in excess of the 2.9% fall for the six months to December.

The company said it was focusing on costs in a challenging revenue environment, with underlying fixed costs forecast to decline by around 7% in the 2018 financial year.

One analyst — Sondal Benson from the Pendal Group — said that excluding one-off contributions from the NBN, Telstra’s latest numbers indicate a reduction in its core business of around $1 billion — significantly higher than the $380 million decline in the December half.

In response, Bray highlighted the pressures on mobile ARPUs and a drag from the NBN on fixed-line revenue growth.

Here’s the exchange between Benson and Bray:

BENSON: It still doesn’t reconcile how the gap from the second half ’17 to second half ’18 could be so large. There has to be something else going on within P&L for the gap to be so large. Either you’re not getting the costs out that you’re saying you’re getting, or there’s some other hole in the P&L somewhere.

BRAY: I have to go through your numbers on that one, Sondal, but the factors that I’ve described are the factors. It’s ARPU on mobile, ARPU on fixed lines, and it’s the impact of the NBN, are the main factors, and the costs are coming out as we’ve described.

What the latest results show is that while Telstra reported subscriber growth in both fixed-line and mobile products, there’s a broader challenge facing the company: a failure to adapt to the competitive threat posed by new entrants, such as billionaire David Teoh’s TPG Telecom which announced the rollout of a $1.9 billion mobile phone network in April last year.

Bell Potter strategist Richard Coppleson, who has recommended avoiding Telstra stock for some months now, said the results meant “the core business declines are accelerating”.

Speaking at a conference in Boston overnight, Telstra CEO Andy Penn said the company was now half way through a $3 billion capex initiative it commenced in 2016, to position itself as the demand for telecommunications products continues to expand.

“However, notwithstanding this progress and my optimism for the future I am in equal measure concerned about the short term,” Penn said.

He highlighted the challenges caused by the NBN roll-out along with the addition of a fourth competitor (TPG) into the market place.

In a research note yesterday, Citi analysts said Telstra’s current strategy wasn’t working.

They said ARPU declines in mobile would continue to exceed revenue from user growth, as Telstra tries to protect market share by competing on price.

Source: Citi

A good example of the recent price competition was the war the broke out between Telstra and Vodafone at the start of this month, with both providers offering unlimited mobile data plans.

“Telstra’s guidance downgrade highlights the acceleration of the decline in core earnings,” Citi said.

“In our view Telstra needs to be more aggressive with cost cutting, and could consider more drastic actions including asset sales, tower sharing agreements — even providing competitors access to core infrastructure in order to boost wholesale revenues.”

Citi said that on the current earnings trajectory, Telstra wouldn’t have the money to pay its forecast dividend of 22 cents per share next year.

Last August, Telstra shares got hammered after the company announced it would be cutting dividends by 30%.

The stock fell by more than 4% yesterday following the update, and has lost more ground today. A short time ago, it had fallen below $3 for the first time since May 2011.

And it’s unlikely to get any easier in the near-term.

“The challenging trading conditions in FY18 are expected to continue in FY19, including ongoing pressure on mobile and fixed average-revenue-per-user (ARPUs) and the accelerating impact of the NBN,” Telstra said in its trading update yesterday.

Telstra said it will provide an additional update to the market at the end of June, to discuss the strategies its adopting to navigate an increasingly challenging outlook.

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