Telstra Delivers FY19 Results in Line With Expectations
The largest reason for the decline in EBITDA was the impact of the NBN, with Telstra absorbing around $600 million of negative recurring EBITDA headwind in the period. Underlying EBITDA decreased approximately 4 percent excluding the in-year NBN headwind. To date Telstra estimates the NBN has adversely impacted EBITDA by approximately $1.7 billion since FY16, and estimates it is around 50 percent of the way through the recurring financial impact of the NBN.
Strong momentum on T22 strategy
Telstra CEO Andrew Penn said the results reinforced the importance of the T22 strategy one year in and Telstra was making strong progress on its implementation.
“FY19 has been a pivotal year for Telstra. Notwithstanding the intense competitive environment and the challenging structural dynamics of our industry, it is a year in which I believe we can start to see the turning point in the fortunes of the company from the changes we have embraced,” Mr Penn said.
“We completed our strategic investment program announced in 2016 to digitise our business and create the networks for the future, delivering over $500 million of EBITDA benefits. We passed the halfway mark of customers migrating onto the NBN network. We launched 5G, the next generation of telco technology and the platform for future growth for us and our customers. And at the start of the year we commenced our T22 strategy, where we have made very significant progress.
“During the year we radically reduced the number of Consumer and Small Business (C+SB) fixed and mobile plans we have in market, moving from over 1800 plans to just 20. This simplification is good for our customers and it makes life easier for our people.
“We became the first major telco in Australia to introduce no lock-in plans across fixed and mobile, and customer pain points such as excess data charges in Australia are also now a thing of the past across all of our new mobile plans. Already more than 820,000 customers are enjoying the freedom and peace of mind this brings.
“We launched Telstra Plus, our loyalty program that rewards our customers for choosing to be with us. Already more than 770,000 customers are enrolled in the program.
“Our customers can now enjoy the benefits of our leading position in 5G. We are the only provider in Australia to have commercially launched 5G services. We are rolling out 5G in 10 cities around Australia. Over the next 12 months we expect our 5G coverage to increase in area almost five-fold and reach into at least 35 Australian cities. Through our strong partnership with manufacturers, we were able to offer Telstra customers some of the world’s first 5G devices.”
Mr Penn said good momentum had been achieved in reducing costs, with a $456 million reduction in underlying costs in the year.
“This means we have achieved $1.17 billion in reductions since FY16 and we are on track to achieve our $2.5 billion net cost reduction target by FY22,” Mr Penn said.
“Our cost out drivers have included simplification and digitisation and this has led to reductions in direct and indirect labour costs as well as non-labour related costs.
“Examples include 900,000 fewer truck rolls over the year enabling us to reduce our fleet vehicles by 14 percent, and we have also reduced our property footprint by 8 percent.”
In line with its T22 strategy to monetise up to $2 billion of assets by the end of FY20, Telstra yesterday reached an agreement to sell three international data centres in Europe and Asia to global private equity firm I-Squared Capital, the owners of Hutchison Global Communications. The three data centres predominantly provide services to Telstra’s International Enterprise customers. The agreement is subject to a number of conditions precedent and if these are satisfied, Telstra expects the transaction to be completed in first half of FY20, with estimated proceeds from sale of approximately $160 million.
Mr Penn said a critical part of delivering on Telstra’s T22 commitments was changing its structure and ways of working to allow its people to collaborate more quickly and easily to deliver better and faster outcomes for customers.
“We have made good progress on our commitment to remove hierarchies and silos and have redesigned our organisation from the ground up. We have already removed three management layers and are on track to reduce up to four management layers in the organisation,” Mr Penn said.
“Around 75 percent of the net 8,000 direct workforce role reductions we announced as part of our T22 strategy have now been identified. We have also made progress creating 1,500 new roles in areas like cyber security and software engineering.”
An important milestone for the year was the establishment of Telstra InfraCo and its operation as a standalone infrastructure business unit within Telstra. Its financial performance is separately provided to the market to give a greater understanding of the value of its assets and to drive better returns.
Telstra’s T22 strategy is built on the foundation provided by the strategic investment program announced in 2016 to create networks for the future and digitise the business. This investment program enabled the business to enhance the capacity, capability and reach of its networks while radically simplifying products, eliminating customer pain points and creating great digital experiences.
Mr Penn said Telstra’s digital experience now accounted for 16.8 percent of sales for its C+SB customers and more than half of service transactions, including account management, prepaid product and billing related enquiries.
“Simpler products and processes and more ways for customers to self-serve saw calls to our C+SB call centres drop significantly, with nearly 7.7 million (22 percent) fewer calls in FY19,” Mr Penn said.
Customer and services number growth
More than 378,000 net retail postpaid handheld mobile services were added during FY19, including 181,000 from Belong, taking retail mobile postpaid handheld services to 8.2 million.
Over 230,000 wholesale MVNO mobile prepaid and postpaid services were also added during FY19, bringing total wholesale services for the company to over 1.2 million.
Telstra also added 107,000 net new fixed-line retail bundle and data services, including 51,000 from Belong. This brought total retail bundle and data services to over 3.7 million. During the year Telstra added 659,000 new NBN connections with an estimated NBN market share (excluding satellite) of 49 percent.
Telstra’s Internet of Things (IoT) business exceeded industry growth rates, with revenue growth of 19.4 percent. On average 2,000 things are being connected to Telstra’s IoT network every day including vehicles, machines, infrastructure, smart meters and a wide array of other sensors.
Returns to shareholders
The Board resolved to pay a total fully franked final dividend of 8 cents per share, comprising a final ordinary dividend of 5 cents per share and a final special dividend of 3 cents per share. Combined with the total interim dividend paid in February 2019, shareholders will receive a total dividend of 16 cents per share for FY19, returning more than $1.9 billion to shareholders.
The ordinary dividend represents a 59 percent payout ratio on FY19 underlying earnings, while the special dividend represents a 63 percent payout ratio of FY19 net one-off NBN receipts. The FY19 ordinary dividend is below the payout ratio of 70 to 90 percent of underlying earnings, which is one of the principles in our capital management framework. In our updated Capital Management Framework underlying earnings now explicitly exclude guidance adjustments as well as net one-off NBN receipts. In determining the FY19 final ordinary dividend, the Board has taken into account a number of factors including the overall capital management framework objectives, including maintenance of financial strength and retaining financial flexibility.
Telstra released guidance for FY20, with Total Income1 in the range of $25.7 to $27.7 billion, underlying EBITDA in the range of $7.3 to $7.8 billion, restructuring costs of around $300 million, capital expenditure of $2.9 to $3.3 billion, and free cash flow after operating lease payments of $3.4 to $3.9 billion.
Telstra expects net one-off NBN DA receipts6 (less NBN net cost to connect (C2C)) of between $1.6 billion to $2.0 billion. Telstra also expects FY20 to be the biggest in-year NBN headwind to date, with between $800 million to $1 billion expected from the recurring impact of the NBN. The clearest view of future financial performance of the business is provided by looking at underlying EBITDA, excluding the recurring in-year headwind of the NBN, which in FY20 is expected to grow by up to $500 million.
Mr Penn said that although the reported financial trends in FY19 were challenging, underlying trends were expected to improve over the course of FY20.
“Returning our business to growth will take time. However, I have great confidence that our strategy can arrest the decline in our earnings and create opportunities for growth.
“Today we are already a very different, much simpler and more customer focussed organisation than we were a year ago and we are well positioned for the era in which we are about to head – the 2020s.
“I’d like to thank our employees who have made fantastic contributions during a very challenging period. Their efforts have made our progress against T22 possible,” Mr Penn said.
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