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Telstra's earnings at better end of guidance and transformation on target
Telstra today announced a profit after tax of $3.18 billion for the financial year ended 30 June 2006, a decrease of $1.13 billion or 26.2 per cent on the prior year. Earnings before interest and tax (EBIT) declined by 20.7 per cent or $1.44 billion to $5.50 billion, at the better end of the market guidance decline of 21 to 26 per cent. Telstra
Chief Executive Officer, Mr Sol Trujillo, said the company's financial performance had been shaped by new investments required by this year's commencement of a three to five year transformation of the company and provisions made during the year for future restructuring to improve long-term shareholder value.
"This result, delivered at the better end of our earnings guidance, reflects the fact that we are on or ahead of plan on virtually all fronts of our transformation. We are still taking the tough medicine but after our strong second half sales performance our competitors are having to take some tough medicine of their own, particularly in the broadband and mobiles markets," he said.
"We are executing our transformation with a sense of urgency; we have momentum; we are showing results; and the results are promising. We are attracting the high calorie customers that every business needs."
Total income (excluding finance income) grew by 2.9 per cent or $658 million to $23.10 billion due to increases in broadband, mobiles, Sensis, IP solutions, inter-carrier services and pay TV bundling, offset by a decline in revenues from PSTN, specialised data and ISDN products.
Sales revenue grew 3.9 per cent in the second half, more than double the first half growth rate, and 2.7 per cent for the year.
Total expenses (before finance costs and income tax) increased by 13.5 per cent or $2.10 billion to $17.60 billion, significantly impacted by the recognition of a redundancy and restructuring provision of $427 million, and other transformational costs including higher redundancy expense due to a significant reduction in workforce numbers, and increased depreciation and amortisation expense due to bringing forward the closure of the CDMA network and the transformation of the network and systems.
"As we have advised the market, the process of transforming the business will be costly in the short term. We are seeing the impact of this on our results for fiscal 2006 and our transformation spending will remain high over the next year. However, much of the cost increase is intended to provide long term benefits as we transform the business to provide improved operations and service, a new customer experience and enhanced shareholder value," Mr Trujillo said.
Internet and IP services revenue grew $530 million or 38.5 per cent to $1.91 billion, driven by retail broadband revenue growth of $267 million or 57.7 per cent and increased use of data services by business customers. The number of retail broadband subscribers continued strong growth to 1.48 million. Telstra added 303,000 retail broadband subscribers in the second half and 620,000 for the full year.
"Our broadband market share has increased again, to 44 per cent, and we've added retail customers at three times the rate of our nearest competitor. Our focus on meeting customers' needs and offering a superior value proposition, rather than simply competing on price, is delivering results," Mr Trujillo said.
Total mobile goods and services revenue growth was 6.1 per cent or $284 million to $4.97 billion. Mr Trujillo said that while value added services grew strongly and minutes of use expanded, continued intense competition and migration to capped plans saw the mobiles growth rate decrease.
Telstra added 261,000 mobile SIOs over the year for a total of 8.49 million, an increase of 3.2 per cent.
"Our second half saw strong mobiles revenue growth of 7.6 per cent as we improved our offerings using research based customer segmentation," Mr Trujillo said.
"3G will become increasingly important as the market evolves, and this is where our efforts are focussed. We are building towards market leadership, with subscribers increasing around 500 per cent in the second half, including wireless broadband. This 3G liftoff is important as ARPUs are $20 higher than for 2G customers."
Total subscriber numbers in the second half were distorted by a system change in fiscal 2005 which contributed to the deactivation of 1.1 million prepaid SIOs in fiscal 2006. Sensis revenue grew by 6.9 per cent or $118 million to $1.83 billion, reflecting a strong performance in Yellow Pages online and non-metropolitan books and Sensis' emerging businesses. Revenue grew 9 per cent in the second half compared with 5.3 per cent in the first.
"Sensis' online revenue grew strongly and has become the primary growth driver, exceeding print growth in dollar terms for the first time," Mr Trujillo said. PSTN products revenue was $7.48 billion, a decline of 6.7 per cent or $540 million for the year, with a decline of 7.6 per cent in the first half and 5.8 per cent in the second. There has been a general reduction in PSTN volumes and yield declines due to competitive pricing pressure and continuing customer migration to other products. Since June 2005, Telstra has lost 270,000 retail lines, while wholesale gained 90,000 lines.
"The shift in revenue from traditional higher margin products and services to new and emerging products and services with lower margins has continued. However, we are tackling this hard and have slowed the PSTN decline by integrating services, bundling initiatives and customer winback programs. The introduction of innovative value based subscription plans has also started to make a positive contribution," Mr Trujillo said.
"Importantly, we have also seen 46 per cent growth in our new wave revenues from products and services over next generation platforms."
Internationally, total offshore controlled entities revenue increased by 8.3 per cent or $134 million to $1.75 billion for the year. CSL New World revenues increased 13.1 per cent assisted by increased revenue from the merger between Hong Kong CSL and New World PCS. In New Zealand, TelstraClear revenues remained steady while revenue from other offshore controlled entities grew by 17.1 per cent.
Other key financial outcomes included:
- Excluding the redundancy and restructuring provision, EBIT declined 14.6 per cent to $5.92 billion, slightly better than the market guidance of a 15 to 20 per cent decline. After further excluding net transformation costs of $535 million, EBIT declined 6.9 per cent to $6.46 billion, also slightly better than the 7 to 10 per cent guidance range provided to the market.
- EBIT margin declined 7.1 percentage points to 24.2 per cent and EBITDA margin decreased 5.1 percentage points to 42.1 per cent. Without transformation costs, EBIT margin declined by 2.9 percentage points to 28.4 per cent and EBITDA margin by 2.7 percentage points to 44.5 per cent.
- Total cash capital expenditure increased 4.2 per cent to $4.30 billion, within our revised guidance range. Domestic transformation expenditure was $1.35 billion in the second half.
- Free cash flow declined 12.4 per cent to $4.55 billion, from $5.19 billion in the prior year, due to lower earnings, higher tax paid due to an instalment rate correction by the Australian Tax Office, higher capital expenditure due to transformation and lower asset sales.
Mr Trujillo said Telstra's customers and shareholders were already seeing the company's landmark transformation strategy start to deliver results.
"Our transformation is on track and the building blocks for long-term shareholder value are being put in place.
The "under construction" sign is up but the new Telstra is already emerging," he said.
He said key transformation achievements in the 2005/06 financial year included:
- Construction of the new 3G 850 network is ahead of schedule and more than three-quarters completed.
- Total workforce reduced by 3,859 full time equivalent staff, contractors and agency staff excluding the CSL New World merger (3,262 allowing for the merger).
- Securing cash capital expenditure savings of $500 million through tough negotiation with vendors and discontinuing projects that did not advance the transformation strategy.
- 52 platforms already capped or exited, placing Telstra ahead of December 2006 target.
- Data centre transition contract with IBM to deliver savings of $250 million over six years.
- Creation of seven consumer and five business segments, with 120 micro-segments, using Market Based Management research.
- Reducing unsatisfied demand ("held orders") for ADSL broadband by nearly two-thirds.
- Marked improvement in PSTN churn rates and a 42 per cent increase in the number of customers using three or more Telstra products.
- Creating a new business unit to serve the growing importance of digital services to customers in the small and medium-sized business sector.
- Telstra staff development, including the launch of a $210 million employee training package.
- Improved network reliability and service levels in the past year, with customer satisfaction results improving significantly in both connections and fault repair.
Mr Trujillo said it was disappointing that the substantial time, talent and resources Telstra had devoted to discussions with the ACCC had not secured regulation reform enabling Telstra to build a fibre-to-the-node (FTTN) broadband network.
"We sought an outcome that would assure our shareholders that their investment in the network would not be used to subsidise network access by Telstra's competitors. The negotiations have not produced this outcome.
The ACCC was unwilling to recognise the actual costs that Telstra incurs in providing its services and, especially, the costs incurred in providing services to rural, regional, and remote Australia. Until Telstra's actual costs are recognised and the ACCC's regulatory practices change, Telstra will not invest in a FTTN network," he said.
Mr Trujillo said the company had also devoted enormous effort to assisting the Government in preparations for the T3 sale, should the Government decide to go down that path. Commenting on the company's fiscal 2007 outlook, Mr Trujillo said that the company expects*:
- Revenue growth of 2.0 to 2.5 per cent;
- EBIT growth of 4.0 to 6.0 per cent;
- Underlying EBIT (excluding transformation costs) to be flat to minus 2.0 per cent;
- Cash Operating CAPEX spend of between $5.4 and $5.7 billion.
- The level of future dividends remains subject to key regulatory decisions and will be considered by the Board at the appropriate time.
The Telstra Board of Directors declared a final ordinary dividend of 14 cents per share, fully franked at a tax rate of 30 per cent. This brings the total ordinary dividend declared for the year to 28 cents per share, or a total of $3.48 billion.
The record date for the dividend will be 25 August 2006 with payment to be made on 22 September 2006. Telstra shares will commence trading excluding entitlement to the dividend on 21 August 2006.
* Guidance on reported numbers. Assumes no FTTN build, Band 2 $22 ULL price, FY2007 the largest transformational spend year and no additional redundancy and restructuring provisioning.
Reference Number: 147/2006
