Subscriber Growth Helps Telstra Meet Expectations

Telstra reported a fiscal 2013 result in line with Street expectations. The low single-digit earnings growth was driven by mobile and the network, applications and services (NAS) divisions. Mobile revenue increased 6% to AUD 9.2 billion, driven by strong subscriber growth and increase in market share. Increased demand for cloud services from corporates lifted NAS revenue by 17.7% to AUD 1.5 billion. Payment from the national broadband network (NBN) continues to flow through with AUD 399 million received. Strict cost management also delivered earnings before interest, tax, depreciation and amortisation (EBITDA) margin improvements across most products, with group margins increasing 100 basis points to 42%.

The second-half dividend of AUD 14 cents per share takes fiscal 2013 dividend to AUD 28 cents per share and is in line with our forecast. The capital management strategy was reaffirmed and no dividend guidance was given. Our forecasts are largely unchanged and we maintain our fiscal 2014 and fiscal 2015 dividend forecast of AUD 30 cents per share and AUD 31 cents per share respectively. This is supported by the NBN payment as the rollout of the fibre network accelerates.

Mobile was again the key highlight with subscriber growth coming in above our expectations. Telstra added 1.3 million mobile subscribers for the year, above our forecast of 1 million subscribers. Post-paid average revenue per user (ARPU) declined 2.7% to AUD 59 per month, but was in line with our forecast. Increased smartphone penetration from 60% to 70% of the customer base is a positive for data usage going forward. Better monetisation of data will be the key strategy to lift ARPU as mobile voice usage declines. Telstra has noted shared data plans for multiple devices are likely to be offered in the first half of fiscal 2015.

Competitors noted bolt on data packages on a month to month basis were having a positive effect on ARPU and we expect Telstra to rollout similar pricing plans. While some pricing strategies, such as shared data plans and usage updates, may lead to lower ARPU in the short term, this is offset by longer-term benefits in customer satisfaction and reduction in customer churn. Telecommunications companies are balancing a fine line between profitability and customer satisfaction. Investments in its 4G or long-term evolution will continue and we expect this to strengthen Telstra’s competitive advantage in mobile network quality. Rollout of the 4G network will proceed and we expect network efficiencies to improve as the new technology better utilities the use of spectrum.

The mobile substitution effect continues to weigh on public switched telephone network (PSTN) revenue as consumers disconnect their fixed lines. Revenue fell 9.5% to AUD 4.4 billion for the year on a 7% decline in ARPU and the number of access lines falling 3.5%. We expect further revenue decline with over-the-top services such as voice over internet protocol (VOIP) reducing usage. The number of local and long distance calls made fell 18% and 16% respectively. As expected, the media division struggled mainly due to Sensis. Growth in digital advertising was not enough to offset a 20% decline in print advertising. Sensis revenue fell 11% to AUD 415 million.


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