TLS

[sharebattler]

From today's " The Austrakian "

Ziggy sees tough time for Telstra
Michael Sainsbury and Steve Lewis
July 01, 2005
DEPARTING Telstra chief executive Ziggy Switkowski has said the telecommunications giant is facing "tough times", in a warning that could hinder the Government's efforts to get a full price for its remaining $30billion Telstra stake.

On the eve of his departure today, Dr Switkowski predicted a slowdown in revenue growth for the industry from the present rates of 3 to 4 per cent.

The comments are likely to send a shiver through financial markets eagerly awaiting T3, one of the world's biggest share offerings.

The Government will receive advice today that it should consider lifting the limit on foreign ownership in Telstra from 35 per cent, to help its chances of getting a better price for its 51.8 per cent stake.

However, investment bank UBS, which has prepared a 1200-page report for the Government on the best options for the Telstra sale, believes the rest of the company can still be sold in a single, $30billion tranche late next year.

This is despite the first half of Telstra being sold to the public in two tranches over three years in the late 1990s. The Government will also be asking investors, who paid $7.40 a share in 1999, to invest again at a significantly lower price.

Recent budget papers have put Telstra's sale price at $5.25 a share -- well above last night's close of $5.06. But Finance Minister Nick Minchin backed away from the price, saying the Government wanted a "fair return" on the asset for taxpayers.

The study, prepared by UBS and boutique investment bank Caliburn, was being delivered overnight to Senator Minchin and will contain options on how the Government can proceed with the planned sale. Senior figures are optimistic that legislation can receive Senate blessing by Christmas.

Dr Switkowski, who leaves Telstra today after almost 6 1/2 years as chief executive, is less optimistic about the industry's future growth prospects.

He told media representatives on Wednesday night that industry growth was softening as price competition and the effects of new technologies continued to hit the market.

In the frank assessment, Dr Switkowski predicted "tough times" ahead for the telecoms sector and his successor -- American Sol Trujillo -- as more efficient technologies such as mobile phones, broadband and internet voice calls replaced Telstra's traditional high-margin businesses.

"We have the measure of our competitors at the moment, but I expect them to come back hard and Telstra will respond," he said.

Mr Trujillo has already promised a cost-reduction program and will undertake a three-month strategic review of the company.

The push to lift foreign investment -- to 49 per cent -- is being supported by some senior government figures who privately want the issue examined as the Coalition moves to prepare Telstra for the massive share offer.

But it will provoke a strong backlash from Nationals MPs, who campaigned during the earlier tranches on the basis Telstra would still be two-thirds owned by Australians.

The foreign ownership issue is just one of a raft of complex political and regulatory issues with which the Government is grappling, ahead of introducing legislation for the sale process.

Already, the Nationals are demanding up to $5billion from the sale proceeds be used for a regional trust fund to help "future proof" the bush from inferior phone services.

Senior government sources last night stressed that Telstra would always remain majority Australian-owned.

Senator Minchin has previously said that he expected the Government's advisers to recommend a higher level of foreign investment in Telstra.

Ian Smith, chief executive of consultancy group Gavin Anderson, would not comment on specific recommendations in the UBS report. He said the study team had asked to "look at all options. It has done so".

Dr Switkowski did not rule out a return to a major corporate executive posit

[Andrew]

Good Riddance Ziggy,

Has to make it hard for the next guy and shareholders left behind, by criticising the future of the company. Thats why they got rid of him, mean spirited and basic individual. Didnt want to work too hard either.

[homermcc]

1 year on - check the share price - no change $5.03 - thanks ZIGGY - suspect he can't even play guitar!!!!!!!!!!!![}:)]

Hope the new boy can at least relate to the throng of mums and dads who just want to get out of this mess - some where around $7.85+++++

Ziggy who?????

T3 what???????????? No way!!!!!!!!!!!!!

[yogi-in-oz]

:)

Hi folks,

TLS ... it looks like, the fun has only just started ... !~!

TLS approaching a time of HUGE change, conflict
and turmoil this month, particularly around
14-19092005 ..... :)

This should bring some really BIG news ..... !~!

happy days

yogi

:)

[BRICKS]

TLS is the game today,, so who going to BUY and save the PM.. [8D]

[yogi-in-oz]

:)

Hi folks,

TLS ..... posted in this thread 07092005:

"TLS ..... approaching a time of HUGE change,
conflict and turmoil this month, particularly
around 14-19092005 ..... icon_smile.gif

This should bring some BIG news ..... !~! "

---

..... and it does not get much bigger than the
biggest shareholder selling out ..... !~!

happy days

yogi

:)

[BRICKS]

TLS is in free fall today to $4.00 low $3.99 just like AIR when is the time to BUY.. [8D]

Bricks 10cents

[Lizard]

Or buy the next tier telecoms for 10cps and see if they can make some money out of TLS misfortune...is there some upside in this for MAQ?

[trackers]

TLS is at least a 10 year low on the ASX, its just getting hammered (particularly in 2010 which is interesting).

With the Labour govt promising ultra fast broadband and TLS the likely recipient of the dosh, is a rerate coming?

Dividend already gone for the year unfortunately :D

You can see the chart at the bottom of this page ... I'm being lazy

[sharer]

TLS is at least a 10 year low on the ASX, its just getting hammered (particularly in 2010 which is interesting).

With the Labour govt promising ultra fast broadband and TLS the likely recipient of the dosh, is a rerate coming?

Dividend already gone for the year unfortunately :D

You can see the chart at the bottom of this page ... I'm being lazy

As Tracker's chart failed to appear, i'm offering a slightly different one, which might not inspire anyone with dreams of gold from either TLS or TEL :

2953

By the way, the recent dumping of a huge parcel of TLS by one of the big Oz Funds must have something to do with the sharp decline in TLS price over past few weeks.

[upside_umop]

It is envitable that the telco's in their current form will underperform. I have really only two things to say about telco's such as tel and tls...:
1) They should never have been listed, and;
2) The lines network they hold should be sold back to the government.

[trackers]

Sounds good guys, cheers. I wouldn't touch TEL with a barge pole but thought maybe TLS was a different story with broadband rollout etc.

Phone lines won't exist soon enough (we've just ditched ours for naked dsl + voip and are receiving the same service minus the $50 a month line fee), and I guess the mobile and broadband markets are fairly fragmented...

[lissica]

Avoid like the plague. Internally Telstra is a complete mess, let alone external influences.

Agreed, I don't hold too much optimism for it's future in the very long term. From memory it used to be the biggest stock on the ASX?

But then, so many people are bearish on TLS right now that I have it on my watchlist as a contrarian thing.

[lissica]

lissica, sometimes a dog is just a dog :-)



What if it's a really really cute one with puppy dog eyes?

Aww.....

^_^

[Snoopy]

What is Telstra and what are their chosen markets?

The name "Telstra" is derived from the words 'Telecom' and 'Australia' (TEL from Telecom and STRA from Australia). Telstra traces its roots back to 1901 at the time of Australian Federation. The Postmaster General's Department of the time was established by the Federal Australian Government to manage all domestic telephone, telegraph and postal services. Subsequently it merged with the Overseas Telecommunications Commission formed in 1946 to manage international telecommunications services.

Telstra first became a publicly listed company in November 1997. Telstra was progressively privatised (33.3% 1997, 16.6% 1999, 33.3% 2006, with 17% transferred to the 'Future Fund'. Today Telstra is still Australia's leading telecommunications company, serving a diverse range of customers: small business. large enterprise, government organisations and -of course- ordinary consumers. The 'product ranges' covered by Telstra include:

i/ Mobile: Prepaid and postpaid mobile services, handset sales, mobile broadband, internet of things (IoT), and wholesale services providing Mobile Virtual Network Operations (MVNO) to third party mobile market players.

ii/ Fixed (Consumer & Small Business): Telstra is in a process, (close to completion) of handing control of their legacy copper network, and some early technology fibre, over to 'the nbn', a state owned and controlled 'National Broadband Network'. In instances where the former Telstra fixed network overlaps the nbn fibre network, the older network may be retired or alternatively integrated into the new nbn 'parent network'. Meanwhile the fixed network contains legacy voice and broadband. But it also includes income from online business apps and services, gaming services (exclusive Australian access to the Xbox All Access on line gaming platform), pay television (Foxtel subscriptions- including Kayo sport) and SVOD (subscription video on demand- including Kayo 'one off' Sporting Events).

iii/ Fixed Enterprise: Data and connectivity and traditional calling applications are the base products. In addition Network Added Services (NAS) for these larger business and government customers are available. NAS includes cloud applications, equipment sales, professional services (including infrastructure builds and digital transformation projects) and managed services. Security services, as an over-layer above other applications, are a 'growth area'.

iv/ Fixed - Active Wholesale: Largely data and connectivity to third party retail players on the legacy Telstra network, prior to that part of the network transitioning to nbn.

v/ International: Providing international services (including legacy international toll calls) with international assets, and now including Digicell's South Pacific business (Acquired July 2022). Digicell Pacific is a leading provider of communications services across Papua New Guinea (PNG), Fiji, Nauru, Samoa, Tonga, and Vanuatu. The international division also owns Telstra's share of the different sub-sea intercontinental telecommunications cables that connect Telstra to the rest of the world.

vi/ InfraCo fixed: This business unit involves the design, construction, operation, maintenance, and the relocating and rationalising/decommissioning of passive infrastructure assets: Legacy copper line assets (but with some HFC (Hybrid Fibre Co-axial) older technology fibre thrown in too), ducts, pits tunnels, poles and certain fixed network sites (including data-centres). It also contains ongoing income related to the 'DA' ('Definitive Agreement' with nbn). One off DA income includes receipts for disconnecting customers from the legacy Telstra network, and one off receipts from customers connecting to the nbn network. To counter that reducing income stream, recurring DA income from nbn includes payment to access Telstra owned ducts, racks and fibre. One important category of infrastructure hardware -not under the wing of InfraCo- are the mobile network towers.

vii/ Amplitel: This is a special purpose infrastructure vehicle, now only 51% owned by Telstra, that constructs, maintains and upgrades for new services (like 5G) -what was formerly the 'fully owned in house'- Telstra mobile tower network.

viii/ Other: This includes 'Telstra Health' (digital health infrastructure for health providers, and software solutions for the same), 'Telstra Energy' (a retailer of electricity bought from third parties, in what looks like a mechanism to offer 'one party utility billing' for customers who want that) and 'Telstra Purple' (offering adjacent technology for existing Telstra network capability). One product from 'Telstra Purple' called "Branch Offload" will use a range of technologies, including Telstra’s 5G and fixed connectivity, Microsoft Azure (a cloud computing platform) Stack Edge (Microsoft Azures cloud storage gateway) for edge computing (Note 'edge computing' is a term used for processing time sensitive data), Secure Edge (provides users with consistent and secure access), SD-WAN (Software Defined Wide Area Network) and service orchestration. And all of this is delivered as a managed service from 'Telstra Purple'.

ix/ Equity Investment Telstra is joint owner (35%), together with Newscorp (65%) of NXE Australia, trading as Foxtel, a pay TV operator. Foxtel operates using cable television, satellite television, and IPTV (Internet television) operator. What does the name mean? "Fox" represents News Corporation's 'Fox Network Television' and "Tel" representing Telstra. Foxtel transmits its cable service via Telstra hybrid fibre-coaxial (HFC) cable into the Brisbane, Sydney, Melbourne, Adelaide and Perth metropolitan areas, along with the Gold Coast. Foxtel's satellite service covers the rest of Australia. Foxtel on Mobile launched on Telstra's Next G Network in late 2006. Netflix is the market leader in pay TV in Australia (December 2019 figures, Roy Morgan) with 11.9 million subscribers. At the same date Foxtel had 5.5million subscribers. Third in this market is Australian-owned Subscription TV service Stan, which is now accessible by more than 3.3 million Australians. Stan is a fully owned subsidiary of the Nine Entertainment company.

SNOOPY

[Snoopy]

Who are Telstra's competitors in their chosen markets?

1/ Optus

In 1991 Optus became Australia's second general communications carrier. Optus is now a wholly owned subsidiary of Singaporean telecommunications company 'Singtel'. Optus has wholly owned subsidiaries, such as Uecomm in the network services market and Alphawest in the ICT services sector. Through its Optus 'Yes' brand, it provides broadband, and wireless internet services. Wholesale services include Satellite and 4G Mobile.

Optus was briefly listed on the ASX between late 1998 and 2001, at which point Singtel bought out minority shareholders.

Optus is divided into four major business areas –

i/ Mobile: Covers 98.5% of Australia's population, and includes speed leadership in 5G. Yet Optus still see themselves as a 'challenger brand' . Optus was allocated, over FY2022, new licences for the 26GHz spectrum band and the low band 900MHz spectrum through two separate auctions.
ii/ Business
iii/ Wholesale Mobile Virtual Network Operation (MVNO) for downstream mobile retailers, piggy backing on the Optus network..
iv/ Consumer & Multimedia: including 'Optus Sport' (principally mens and women's international soccer, including the upcoming world cup in NZ) , SubHub to consolidate 'customer streaming subscriptions' (and incorporating discounted bundling), and 'Smart Spaces' which enables WiFi connected stereos (as an example) and allows WiFi activated home lighting and even digital doorbells linked to security cameras.

2/ TPG Telecom

TPG Telecom Limited, a renamed 'Vodafone Hutchison Australia' (VHA), after these two players merged in 2009. The company was rebranded again following another merger with TPG - formerly Total Peripherals Group- (TPG merger granted in 2020). TPG Telecom is one of three nationwide Australian telecommunications network owners. TPG were also the purchasers of our own Telcom NZ's failed foray into Australia, AAPT, in December 2013.

TPG Telecom was listed on the ASX in its most current incarnation (was formerly listed under ticker VHA) in June 2020. TPG Telecom operate a number of leading mobile and internet brands including Vodafone, TPG, iiNet, AAPT, Internode and Lebara.

TPG Telecom Limited has four major business units:

i/ Personal : First major telco in Australia to offer G.Fast (faster speeds from a high frequency signal) technology across fibre-to-the-building (FTTB) and fibre to the node (FTTN) technologies.
ii/ Small Office: Mobile voice, fibre internet, nbn Enterprise Ethernet (symmetrical upload/download performance at high speed) and traffic prioritisation.
iii/ Business & Enterprise : Total customer packages. High bandwidth allows 'work from home.'
iv/ Wholesale: 'Vision Network' fixed wireless wholesale broadband business

-------------------------

There are only three independently owned nationwide wholesale mobile network suppliers in Australia. So 'by lack of competition' Telstra is automatically in the top three. The reality is even more clear cut than that. Look at the comparative financials table below and you will see that Telstra is clearly the leading market player, in terms of revenue, in the wider 'build and operate your own telecommunications network space in Australia.



Comparative Data
TelstraOptus (1)
TPG Telecom (2)Spark (3)


Turnover FY2022
$A22,045m
$A6,686m
$A5,415m
$NZ3,720m


Operating Free Cashflow FY2022
$A3,854m
$A776m
$A1,251m
$NZ841m


EBITDA FY2022
$A7,256m
$A1,950m
$A1,733m
$NZ1,150m


EBITDA Margin FY2022
32.9%
29.2%
32.0%
30.9%


EBIT FY2022
$A2,898m
$A287m
$A344m
$NZ630m


EBIT Margin FY2022
13.1%
4.29%
6.35%
16.9%



Notes

1/ Reference for Optus results: https://www.optus.com.au/content/dam/optus/documents/about-us/media-centre/annual-reports/2022/Singtel-Annual-Report-2022.pdf
Conversion rate For Optus results $S1 = $A1.012.

2/ Reference for TPG Telecom Results https://www.tpgtelecom.com.au/sites/default/files/asx-announcements/TPG_Telecom-Annual_Report_2022.pdf
Actual declared EDITDA was $A2,135m and EBIT was $A746m. But these figures both include a $402m one off gain on the sale of mobile tower assets (AR2022 p95), which I have removed.

3/ Spark is comparable in structure and function but operates in a different country - New Zealand. I have included the figures here for trans-tasman comparative interest only.


Conclusion: Pass test

SNOOPY

[Snoopy]

FY2022: [$1,814m - 0.7($165m - $61.6m + $80m + $47m - $125m - $58m + $233m - $71m + $32m)] / 11,554m =

FY2021: [$1,902m - 0.7($275m + $802m - $180m - $211m - $103m) ] / 11,893m =

FY2020: [$1,839m - 0.7($420m + $1,536m - $36m -$44m - $50m - $308m - $259m - $133m) ] / 11,893m =

FY2019: [$2,149m - 0.7($687m - $493m - $1,613m - $801m) / 11,893m =

FY2018: [$3,557m - 0.7($930m - $273m + $1,779m + $299m) / 11,893m =


The following is an exercise in normalised earnings. The starting point is the NPAT quoted in the income statement. The columnar corrections are then cross referenced by table header to the individual notes below. Lastly the corrected normalised NPAT is divided by the number of shares on issue at the end of the financial year to get 'earnings per share'.



Note Number

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
No. Shares
eps


FY2022:[$1,814m-0.7($165m-$61.6m+$80m+$47m-$125m-$58m+$233m-$71m+$32m)]
/11,554m=
14.2cps

FY2021:[$1,902m-0.7($275m

+$802m
-$180m-$211m-$103m)]/11,893m=
12.6cps


FY2020:
[$1,839m-0.7(
$420m

+$1,536m -$36m-$94m-$308m
-$259m

-$133m)]/11,893m=
8.8cps

current
FY2019:[$2,149m]-0.7($687m
-$493m+$1,613m
-$801m)]

/11,893m=
12.1cps


FY2018:[$3,557m-0.7($930m-$273m
+$1,779m

+$299m)]
/11,893m=
13.8cps





Notes

1/ Asset Sales & Sale and Leaseback Consequences
Gains in profits from a combination of:
i/ Net gain on disposal of Property Plant and Equipment and Intangible Assets.
ii/ Disposal of businesses and investments.
iii/ Gain on sale of leasehold transactions (sale and leaseback of exchange property)
....have been removed from the respective profits as follows: $165m (FY2022), $275m (FY2021), $420m (FY2020), $687m (FY2019) and $930m (FY2018). (See respective annual reports, note 2.2)

For FY2021, 'leasehold transactions' including the sale and leaseback (for a 10 year period) of the 16 story Pitt Street Telephone exchange building in downtown Sydney . The company received $262m for the sale of this building, which equated to a $102m net gain once the sale and leaseback arrangement was agreed to (AR2021 p113). Businesses disposed of over FY2021 include 'Telstra Velocity' (a regional high speed broadband provider), for a $60m gain after sale and leaseback, an e-commerce platform for $45m profit, and Telstra's minority interest in Sensis (owns White pages and Yellow pages and is responsible for Telstra directory service call centres) for a net gain of $1m, after accounting for a $34m impairment loss write down.

2/ Impairments in Income Statement
Telstra annually identifies 'impairment expenses' that form part of 'other expenses' in the income statement. While a company the size of Telstra can expect some impairments in normal business operations, some extra large impairments are highlighted. So I am adding these extra large detailed impairments back into each result, where appropriate, but not 'deferred contract costs' which unfortunately seem to be an ongoing cost of doing business. The specific information referred to below may be found in section 2.3 of the respective annual reports.

For FY2022 the impairment was $144m, (including $107m of deferred contract costs) - no adjustment made. For FY2021 the impairment was $162m (including $113m of deferred contract costs added back, but not including the $34m of impairment on the sold 'Project Sunshine holding' (Sensis stake) that I have already accounted for under note 1/.) - no separate adjustment made. Over FY2020 total impairment losses of $129m, include $124m of deferred contract costs - no adjustment made.

But over FY2019, as well as impairing $100m in deferred contract costs, Telstra impaired their legacy IT assets as a result of "making good progress in standing up our new IT platforms" (AR2019 p23) to the extent of $493m (AR2019 p29). I was concerned that I might be 'double counting' this IT platform restructure, given the very large T22 (for plan 'Telstra 2022') restructuring costs already declared under note 12. However if I go to p9 in AR2019:
"We are ahead of plan in our direct workforce reductions. The decision to accelerate these changes was made by carefully and deliberately to, in part, provide our people with certainty about their future. This resulted in an increase in Telstra's forecasted total restructuring costs from around $600m to approximately $800m."
If the IT asset costs were included in the $801m figure, that would mean labour restructuring costs over FY2019 were: $801m-$493m= $308m. Over FY2020 the comparable labour restructuring cost was $253m, but this was over a 8 month period. (From AR2020 p5: "In March we put all job reductions on hold for six months to give our people certainty over this difficult (pandemic) time.")

This means that if the FY2019 $801m transition charge, over the largest restructuring year, did include an IT equipment write off, then the labour cost on a 'per month basis' would have been less than the subsequent lesser restructuring year. From this I conclude the $801m 'extraordinary restructuring' charge was labour only, and the $493m IT write off was a separate charge. This $493m hardware/software impairment I have reversed.

From AR2018 p67 "During the period, there was a total impairment loss of $327 million related to goodwill and other non-current assets, of which $273 million related to Ooyala Holdings Group."
Over FY2018 Telstra wrote off $273m of their remaining goodwill from their investment in Ooyala Holdings Group, a video streaming platform, when it was sold back to the founders. I have reversed this one off write off.

3/ Retail Chain brought 'in house'
Goodwill write off over five years, starting from FY2022, through integrating independently owned Telstra Retail stores added back as a wholly owned Telstra business unit: [$92m + $216m]/5= $61.6m/year (AR2022 p148).

4/ Bond rate change on short term employee liabilities
$80m is listed as EBITDA from the positive impact of bond rate changes on employee liabilities (AR2022 p25). The same section in the previous annual report identified an "impact of bond rate movements on leave provisions," that was unquantified (AR2021 p23). I had originally thought the $80m was a superannuation scheme adjustment. But the superannuation scheme adjustment for FY2022 was $149m and not recorded in the income statement (AR2022 p77). Instead this $149m change was recorded in the 'statement of comprehensive income' (AR2022 p78). I therefore believe the $80m does not relate to superannuation provisions. Therefore I have removed the $80m bond rate adjustment as a rare one off effect.

5/ Catch up revenue from previous years
$47m of 'catch up adjustments to revenue' have been removed from EBITDA for FY2022 (AR2022 p29 & p25)

6/ Amplitel (Tower Company) sell off costs
$125m of costs related to the partial spin off of Amplitel have been written back
over FY2022 (AR2022 p25), including $76m of stamp duty (AR2022 p29)

7/ Acquisition Integration costs
$58m of integration costs related to the acquisition of 'MedicalDirector' and 'Powerhealth' expensed over FY2022 have been written back (AR2022 p25, p147).

8/ nbn transformation payments (net)
The federal government via nbn has been, year by year, 'buying out' the existing Telstra owned largely copper network via annual payments. The rolling network buyout payments have been recorded in the income statement as part of the total under 'other income'. This buyout process is now winding down. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these payments should be removed from 'normalised income'. One off NBN income that I have removed from my 'normalised results' amounts to: $233m (FY2022), $802m (FY2021), $1,536m (FY2020), $1,613m (FY2019), $1,779m (FY2018) (Refer post 20 for supporting calculations).

9/ Covid-19 one off adjustments
Over FY2021 Telstra encountered $180m of Covid-19 headwinds (AR2021 p9) that may have included labour outsourcing and onerous rental leases. They then seemingly contradicted that by saying "Underlying EBITDA includes an estimated $380m million impact from Covid-19 (AR2021 p19). I have reconciled the two figures by noting that under the comment on mobile revenue (AR2021 p22) there was a decline in $200m from international roaming revenue: $180m+ $200m = $380m. Because Australia's borders were closed and hugely restricted over Covid-19 times, this reconciliation makes sense to me. However there were other operational effects of Covid-19, including greater use of working at home and video conferencing that equated to higher broadband usage. These change in use effects would somewhat offset the loss of income from international roaming. For this reason I believe the best measure of numerising the Covid-19 impact on Telstra is to use the $180m figure to adjust for non-recurring Covid-19 effects over FY2021.

Over FY2020 Telstra added a special one off Covid-19 bad debt calculations allowance of $36m (AR2020 p29)

I have reversed both the FY2020 and FY2021 Covid-19 adjustments.

10/ Bush Fire relief and bad retail practice compensation][
Over FY2020 Telstra set aside $44m to contribute to bush fire relief and $50m to cover mis-selling by third party agents, inappropriate mobile contracts to indigenous people. I have reversed both of these making a total adjustment of $44m.

11/ Equity accounted NXE write off
Over FY2020 Telstra wrote off $308m of the value in their equity accounted investment in NXE Australia, which trades as Foxtel (AR2020 p166). This one off capital adjustment does not affect operating performance, so I have added it back.

12/ Strategic Focus T22 Program
On 29th June 2018, Telstra announced their T22 strategy: to simplify both operations and the company's product set, improve customer experience and reduce the company cost base. These changes are well over and above what would be considered as 'run of the mill' restructuring. Costs incurred are in excess of 'business as usual' redundancies for the period and are recorded as follows: FY2019 $801m, FY2020 $259m, FY2021 $211m and FY2022 $71m.

13/ Equity accounted NXE write back
Over FY2018 the Telstra stake in Foxtel was brought back into the company accounts as outlined in AR2017, p127. This relatively complex process unfolded as follows:

i/ As of 01/07/2017 (the beginning of the FY2018 financial year), 'Foxtel' was valued at nil on the Telstra books due to Telstra's cumulative share of equity accounted losses exceeding the carrying value on the books.
ii/ On 28/09/2017 Telstra's outstanding loan balance to 'Foxtel' was converted into equity, resulting in a $38m value gain being recognised under 'other income'.
iii/ On 03/04/2018 'Foxtel' merged with 'Fox Sports Australia' (externally owned by Newscorp), to form a new entity 'NXE Australia', with Telstra becoming a 35% shareholder in this new merged venture. Telstra's share of 'NXE Australia' resulted in the recognition of a $261m profit gain recognised in 'other income'.
iv/ As a result of ii/ and iii/, I have removed a total of: $38m + $261m = $299m of before tax profit from the FY2018 result.

14/ Lease accounting policy adjustment
IFRS16, called AASB16 in Australia, requires that leases become capitalised 'right to occupy' assets that are then depreciated over time. This reporting rule change was brought in for FY2020 and onwards reporting. I have reversed out this reporting change so that profits from FY2020 onwards are more comparable with previous years. This change has resulted in NPBT decreasing by $133m (FY2020) and $103m (FY2021) but increasing by $32m over FY2022 (for detailed calculations refer post 26).

-----------------

Conclusion: Two years down, but only one allowed. FAIL TEST

SNOOPY

[Snoopy]

I am still painstakingly going through the Telstra accounts. On my second pass through FY2022 something stood out.

"Underlying eps was up 48.5% to 14.4cps" (AR2022 p20)
"The Telstra board resolved to pay a fully franked dividend of 8.5cps, bringing the total dividend for the year to 16.5cps" (AR2022 p21)

I realise that Telstra have been in a special situation over the last few years. Unlike New Zealand where the old Telecom NZ split into the 'network' Chorus and 'retail' Spark business, Telstra has gone down a different path. Telstra has entered a long term agreement, "the DA" (definitive agreement), to sell over many years their own legacy copper network, and some older tech fibre, to 'nbn', the state owned national broadband network in Australia. These network asset sales are being booked as 'other' profit, with most of the proceeds being paid out to shareholders as dividends as the 'profits' come through.
"our commitment to return in the order of 75% of the net one off nbn receipts to shareholders via fully franked special dividends to the end of FY2022." (AR2022 p21)

However this process has come to an end.
"The FY22 special dividend will be the final special dividend linked to one off nbn receipts." (AR2022 p21)

It seems incredulous to me that the Telstra board are raising dividends well in excess of underlying earnings, yet are somehow able to keep the dividend fully franked. I should note that Spark in New Zealand seem to be doing the same thing, paying out more in fully imputed dividends than they earn. Maybe there is some internationally recognised telecommunications industry accounting trick that I am missing which allows this to happen? But taking the underlying earnings and dividend numbers at face value, it looks like Telstra (and Spark) shareholders will both be looking at sharp cuts to their dividends in the near future.
"The final dividend represents a 115 percent payout ratio on FY2022 reported earnings and is well supported by free cashflow." (AR2022 p21)

As far as I am aware, 'free cashflow' above earnings does not deliver franking credits. So 'cashflow' cannot explain why the dividend can remain fully franked. What am I missing?

At least in the case of Telstra they said this FY2002 paid dividend included an increase in the ordinary dividend to 13.5cps. I read that as saying that 16.5cps - 13.5cps = 3cps of annual dividend will go sooner rather than later (AR2022 p21).

SNOOPY

[Snoopy]

The federal government via nbn has been, year by year, 'buying out' the existing Telstra owned largely copper network via annual payments. The rolling network buyout payments have been recorded in the income statement as part of the total under 'other income'. This buyout process is now winding down. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these payments should be removed from 'normalised income'.


1/ Line Migration Revenue Part 1: Network disposal compensation to Telstra

Telstra has been receiving money, -in effect from the federal government-, to dispose of their legacy fixed line network to the federal government owned nbn (National Broadband Network). This money is classified as an IOP or 'Infrastructure Ownership Payment', and is made under the ISA or 'Infrastructure Services Agreement' with nbn (the National Broadband Network). These IOP payments (5) are classified as part of 'other income' in the Telstra income statement. This 'annual IOP (payment)' is itemized in note 2.2 of each of the last few years of annual reports under "disconnection fees".

2/ Line Migration Revenue Part 2: End line customers billed by Telstra to move to nbn

However, on top of the 'network disposal money' received, Telstra charges their customers to move from their existing network arrangements to 'nbn', under the description 'one-off income we receive from customers to connect to nbn' (e,g. AR2022 p25). These customer 'disconnection from legacy and connection to nbn' fees (column 1 in the table below) are not distinctly disclosed. However it is possible to work them out by subtraction, taking the 'total nbn income' (table column 3) and subtracting from that, the component paid by nbn (table column 2).

The 'total nbn income' may be found at the front of the respective annual reports in the "Full year results and operations review.", in the 'Product Income' table (AR2021 onwards). (I cannot find this information directly in earlier reports. However, it can be calculated by adding columns 4 and 5 in the table below).

End of the line migration process

Both of the above two income streams are set to become less important over time.
From the FY2019 annual result presentation, slide 5
"We expect one off nbn DA (for Definitive Agreement revenue) and nbn 'costs to connect' to reduce to zero over time as migration to nbn completes."

Normalising Telstra Revenue

Since these income streams are non-recurring for each customer, I need to take the total nbn migration revenues off the total revenue, to normalise the revenue (and hence income) figures.
If we are to remove a stream of income, it follows that we should also remove any expenses that are specifically incurred in earning that income stream. Thus we have the latter two columns of the table. There is no depreciation, amortisation or interest charges set off against these payments. So in this instance 'Change in EBITDA' = 'Change in NPBT'. This so called 'Removed EBITDA' may be found in the Reference Tables towards the end of each respective report (back to AR2020) in the 'Underlying EBITDA' calculation table. It is described as 'Net one off nbn receipts'.



nbn transition Telstra income & expenses
Customer Connect fee to nbn (calculated)www
plus DA agreement (1) payments from nbn
equals Total nbn Income
less One off DA (1) & nbn Cost to Connect (C2C)
equals Removed EBITDA (2)


FY2022$49m$329m
$378m$145m$233mswitchover


FY2021$28m$1,022m
$1,050m$248m$802m


FY2020$283m$1,721m
$2,004m$468m
$1,536m


FY2019$505m$1,611m
$2,116m$503m
$1,613mwww

Net
FY2018?$1,779m
use $2,297m$518muse $1,779m (4)



Notes

1/ "DA agreement" is the so called 'Definitive Agreement' that outlines how Telstra will transition from their "in-house legacy network" to the government owned nbn or 'national broadband network.' Otherwise known as 'nbn disconnection fees', they are listed under 'other income' in AR section 2.2. There is a cost incurred to Telstra in facilitating this transition (fourth column in table above). These costs may be found in the breakdown of 'operating expenses' in the "Full year results and operations review" section at the front of each report.

2/ The 'Removed EBITDA' figure is from the underlying EBITDA calculation found in the 'Reference tables' at the back of each annual report. The figure I have used is 'Net One off NBN Receipts' which is more finely defined as 'net nbn one off Definitive Agreement receipts, consisting of Per Subscriber Address Amount' (PSAA) and Infrastructure payments, offset by the nbn cost to connect expenses.

3/ Telstra use the term 'nbn headwind'. This is the net negative recurring EBITDA effect on the business ($650m over FY2021). By 'net' Telstra are offsetting the recurring revenue from nbn under the DA for access to Telstra facilities, against the wholesale supply money that Telstra must pay to access the nbn network. The full equation for FY2022 is:



FY2022


Recurring nbn DA$20m


add Reduction in legacy (Telstra owned) asset access costs$50m


less Network Payments to nbn($110m)


less Wholesale earnings legacy decline($120m)


less Retail decline attributable to nbn across Fixed, C&SB and Fixed Enterprise($180m)


equals Total($340m)



4/ I have been listening to the 2019 investor day presentation which may be found here.
https://liunanedu.com/investor-presentations.html
https://www.telstrawswitchoverww.com.au/aboutus/investors/financial-information/investor-presentations. The discussion Q&A sessions lead by CEO Andrew Penn has given me a solution to filling in the missing FY2018 information from the table above.

I had been puzzling why the 'customer connection fee' bore little relation to the amount of business in dollars transferred. CEO Andrew Penn explained that as nbn rolled out along each road, it was the retail homeowner customers that tended to connect first. Why was that? I believe it was because business customers were more likely to buy 'upskill packages' connected to their fixed line telecommunications account. A business typically does not just unplug a copper port and connect to a fibre one. Rather, a business has to integrate security protocols, perhaps a connection to an offsite data centre, specify the bandwidth of their fibre connection at peak load times etc. etc .... This is all complicated by the fact that in certain urban centres, Telstra already have their own fibre cable matrix, operating independently (albeit locally) of nbn. It could be that some businesses (Westpac was mentioned) prefer a 'hybrid connection model'. That means putting their most secure information on their own private data-centre network (owned and run by Telstra), while using nbn to traffic less critical data at a lower price point. That means the transition to nbn for a business can be much more time consuming and costly.

Over FY2022, the 'customer connection fee' was $49m / $329m = 14.9% of the value of business in dollars transferred. But over FY2021 (the last year of significant transfer for retail homeowners) the customer connection fee was only $28m / $1,022m = 2.7% of the total. I was becoming more and more frustrated, not being able to find customer connection fee information for FY2018. But then I had a sudden revelation that I was seeking information from my present viewpoint in 2023. I imagined myself back in 2018 looking for the same information and unable to find it, and then the reason for Telstra 'hiding' the information became clear. Telstra were not hiding the information. They did not report it because 'back then' such information was not important, and maybe not even recorded separately. If you look at FY2019, the first year all the information that I was after was available (albeit retrospectively from the FY2020 report), you will see that the 'Cost to Connect Fee' ($505m) and the actual costs incurred making the connection ($503m) were almost the same. I expect the situation was similar over FY2018. As long as income is only just covering costs, it makes no difference to the overall profitability picture of the company. And furthermore, in the early days of the nbn fibre roll out, there would be no reason to think that a 'network switchover' was a 'profit opportunity going begging'. If the customer connection fee and the background costs to do the job are roughly equal, that means the DA nbn payment received will be a close approximation to the EBITDA (and in this instance NPBT) lost. So although unlikely accurate to the last dollar, $1,779m will be close enough to the real undeclared NPBT lost.

5/ These IOP payments are not to be confused with IAP 'Infrastructure Access Payments', classified as sales revenue. IAP payments are part of a future ongoing income stream to Telstra, as nbn pays Telstra for access to Telstra owned ducts and pits.

SNOOPY

[Snoopy]

Telstra has entered a long term agreement, "the DA" (definitive agreement), to sell over many years their own legacy copper network, and some older tech fibre, to 'nbn', the state owned national broadband network in Australia. These network asset sales are being booked as 'other' profit, with most of the proceeds being paid out to shareholders as dividends as the 'profits' come through.
"our commitment to return in the order of 75% of the net one off nbn receipts to shareholders via fully franked special dividends to the end of FY2022." (AR2022 p21)

However this process has come to an end.
"The FY22 special dividend will be the final special dividend linked to one off nbn receipts." (AR2022 p21)

It seems incredulous to me that the Telstra board are raising dividends well in excess of underlying earnings, yet are somehow able to keep the dividend fully franked.


I am going on the snoop to see if I can understand where all of Telstra's franking credits came from.





Net Profit Before Tax {A}
Tax {B}
Calculated Tax Rate {B}/{A}
Tax (Under)/Over Provision in prior years {C}
Calculated Tax Rate {B-C}/{A}


FY2018$5,102$1,573m
30.8%
($3m)
30.9%


FY2019$3,072m$923m30.0%
$10m29.7%


FY2020$2,796m$957m34.2%
$7m34.0%


FY2021$2,441m$539m22.1%
($12m)22.6%


FY2022$2,481m$867m34.9%
$7m34.7%



The statutory company tax rate in Australia is 30%. Telstra does have some outside of Australia business interests, as equity investments (AR2022 p154). These are largely joint venture intercontinental cable connection companies, often domiciled on tax havens: Reach Limited (Bermuuda), Australia-Japan Cable Holdings Limited (Bermuda), Dacom Crossing Corporation (Korea), Pacific Carriage Holdings Limited Inc. (United States), and Southern Cross Cable Holdings Limited (Bermuda). Over the years these have generally been very poor investments, which in the case of Reach and Australia Japan cable no longer even meet the profitability criteria to require equity accounting. The loss in total comprehensive income for those residual accountable entities over FY2022 was $203m (AR2022 p166), around 10% of Telstra NPAT. If anything these overseas operations should be decreasing the average tax paid across the company.

The tax rate figure that immediately stands out is from FY2021 with a tax rate of only 22.1%. The tax notes on p101 of AR2021 has an explanation.

i/ There is a "non-assessable $200m gain and a $101m net deferred tax asset recognised on property disposals."
ii/ "derecognition of $27m of deferred tax liability on the disposal of Sunshine NewCo Pty Ltd."

I don't understand how you could have a 'deferred tax asset' on property you have sold for a profit. I would have thought that once the property was sold, any accompanying tax bill would be immediately incurred in that year of disposal. However, what that note i/ seems to be saying is that $101m in tax liability has been 'recognised' in the future, even though the sale of the building was tax free? Baffling!

A 'tax asset' is a tax bill paid in advance. A 'deferred tax asset' represents a tax bill that is paid in advance - but- because the real tax bill is not yet due (probably due to timing differences between the company tax year and the inland revenue department tax year), is money set aside for a tax bill not yet incurred. (I hope my definitions are right there - please someone correct me if I have screwed up).

So taking these corrections into account, the underlying tax rate for FY2021 was: ($539m+$101m -$27m) / ($2,441m - $200m) = 27.4%

That is closer to the statutory tax rate of 30% that I would expect.

The net result of this exercise over the five years I looked at, is that Telstra are paying more tax than I would have expected (an average of 31.3% over five years). That explains why they have been able to pay fully franked dividends from what I had seen as a series of 'one off profits'. Those 'one off taxable profits' must include, and are largely composed of, the payments received from nbn to gradually 'hand over' Telstra's own legacy fixed network to nbn. From handover, much of the legacy network is being shut down, as fibre replaces copper. I have trouble conceptualising that as a 'value adding' transaction that should be taxable. I think of it more as a compensatory payment to Telstra for losing what was once their biggest asset - their fixed network. Nevertheless, I must surmise that the Australian government has deemed such compensation taxable, even if I think that is an odd way of looking at the situation.

SNOOPY

[Snoopy]

Not being a super internet tech, I found the following article of NBN (the Australian equivalent of Chorus) very useful.

https://infinititelecommunications.com.au/nbn-business-pricing/

It explains how some internet providers can charge less for what is ostensibly the same service (when in fact it isn't). It is useful to know how a third party ISP has to pay both Access Charges on each customer line (the AVC or 'Access Virtual Circuit' charge), but also a 'maximum bandwidth for all customers' charge (the 'CVC' or 'Connectivity Virtual Circuit ' charge). Personally I have only ever bought internet from a 'retail customer perspective', where AVC and CVC are non-negotiable. But I did find the article an interesting insight as to how ISP pricing works. Old hat to some of the techies here I guess, but I found it a worthwhile read nevertheless.

The article is specifically relating to NBN, the wholesale Australian fibre network. But I guess the same principles apply to the Chorus business in New Zealand. Anyone know for sure?

SNOOPY

[peat]

I bought TLS.NZ in 2016 and watched it fall precipitously for two years, paying good dividends initially but then not so much. It has been a very poor investment - probably total returns are now back to about break even - but considering opportunity cost during that period, disastrous. They converted to TLS.AU a couple of years ago and I've continued to build the Australian porfolio since then. Ironically they sit in a good profit in the Oz portfolio because of the (paper ) loss doing the transaction to convert them.

Back at the time of purchase I thought they were doing a great deal with NBN but the market clearly thought differently. They've been working the business reasonably well in the last few years I believe trying to get the big ship moving and I think their big trick now is to sell part of the towers out or at least get others to invest in those towers which is kind of like selling to lease as I see it, and looks good in the short term.

Its now become a core portfolio stock for me - or a bottom drawer if you like ;+) - but I stopped taking shares as dividends and sold those I'd received as to reduce my exposure somewhat.
From a charting perspective would appear to be recovering from a double bottom over 2018 and 2020

[Snoopy]

I bought TLS.NZ in 2016 and watched it fall precipitously for two years, paying good dividends initially but then not so much. It has been a very poor investment - probably total returns are now back to about break even - but considering opportunity cost during that period, disastrous. They converted to TLS.AU a couple of years ago and I've continued to build the Australian portfolio since then. Ironically they sit in a good profit in the Oz portfolio because of the (paper ) loss doing the transaction to convert them.


My own 'love affair' with Telstra has been just as sad and longer. I have been there since right at the beginning, (the first float) when I bought a few what were then 'installment receipts' in November 1997 for $A2.75. I remember at he time thinking how very sophisticated I was buying into these 'Australian' shares (albeit via the NZX in the day). The installment receipt was sold as a yield story. Putting only a down-payment on the capital, while taking the full dividend made the yield look good. The second installment in October 1998 cost $A1.40 per share. That means the total price I paid for those original shares was $A4.15, twenty five years ago!

I was a 'sucker for punishment' and latched onto the second installment receipt offer, dubbed 'T2' in in October 1999. Paid $A4.75 for the installment receipt, and another $A3.05 to covert those to head shares in October 2020. Total cost of those shares: $A7.80. While this was playing out, I must have been dismayed at how far my T2 installment receipts had fallen. So I bought a few more on market at $A2.77, which added up to a package top up price of $A5.82 once the second installment was paid up on those.

Not satisfied with this, I was into the 'T3' installment receipt offer too in November 2006, and bought in at $A2.10. The second installment payment was in June 2008 at $A1.60 per share. So total price paid for those was $A3.70, which lowered my average buy in price at least.

I briefly joined the DRP in September 2007 (bought shares at $4.33) and March 2008 (bought shares at $4.27). IIRC this was the time one could 'save tax' by getting into the DRP, With hindsight I would have been better off paying the tax and investing the net proceeds elsewhere.

My final bite at the cherry was in August 2011, when I bought some shares on market at $A3.00. Not long after that the rumbles about 'splitting off the monopoly network assets' started.

My bites at the Telstra cherry were not equal in size. Dollar cost averaging my purchases and my average share purchase price comes out at $A4.36. The shares closed on the ASX at $A4.33 on Friday, so I have lost capital :(.

I am struggling to remember what my strategy was. That early 2000s time was the dot.com bubble. I didn't buy into that dot,com madness directly (thank goodness). But I think that my thoughts were that I would benefit indirectly by shifting some capital into telecommunications shares, TLS and TEL (as it was at the time), as internet traffic went crazy. Looking back -with hindsight- at how stupid I was, I guess I am lucky to come out with my telecommunications capital (mostly) intact (let's not mention inflation shall we!?!). And I have had a few good Telstra dividends along the way, it must be said.

SNOOPY

[Snoopy]

Back at the time of purchase I thought they were doing a great deal with NBN but the market clearly thought differently. They've been working the business reasonably well in the last few years I believe trying to get the big ship moving and I think their big trick now is to sell part of the towers out or at least get others to invest in those towers which is kind of like selling to lease as I see it, and looks good in the short term.

Its now become a core portfolio stock for me - or a bottom drawer if you like ;+)


My own thoughts on the NBN 'roll out / transfer' was that it was just too complex for me to understand the risks and, being in Oz, too far away to get that 'on the ground' knowledge of what the end result was going to be. That is why my own TLS shares went 'in the bottom drawer' for ten years. TLS was never one of my bigger investments and I didn't think Telstra was at risk of going broke. So best to 'let it be' and invest my 'investment analyst time' elsewhere.

So why am I suddenly taking an interest in TLS again, after all this time? The main reason is that I see Telstra as a 'reference share', with which I can compare my Spark investment (one of my larger holdings). Now that the NBN roll out is effectively complete (from a Telstra perspective anyway), Spark and Telstra are closely comparable again. I am not anticipating ramping up my investment in Telstra, although to be fair my detailed financial catch up on Telstra is far from complete. But I feel that by better understanding Telstra, this will give me a new perspective on understanding Spark.

If anyone out there thinks I am a 'telecommunications guru' that is about to recommend piling into Telstra then I am sad to report I am not and have no immediate investment intent to acquire any more Telstra shares myself. But stay tuned, and we will see what comes out 'in the wash' (my post 18 on this thread that I am gradually updating; Added finally finished on 1st June).

SNOOPY

P.S. Peat for your information those Telstra mobile towers have been 49% sold off as of 1st September 2021 to pension funds. From AR2022 p2
"The sale of a non-controlling interest in the Amplitel tower business (raised) $A2.8billion."

So the sale and lease back you talk about has already happened.

[Snoopy]

Telstra adopted AASB16 for the FY2020 accounting year. Telstra have chosen to use the 'modified retrospective adoption approach' (AR2020 p88). This means the comparative results for FY2019 have not been restated, Instead the balance sheet was adjusted, in terms of listing the quantum of retained earnings as at 01/07/2019 (the start of FY2020) to mirror the cumulative effect of historically applying this standard. To compare the results from FY2018 and FY2019 with newer results, we can adjust the newer results to reflect what would have been reported if AASB16 had never been adopted as the reporting rule going forwards.

At this point I need to remind readers that the total profit over the years, booked by Telstra from utilising a leased asset (like a rental premises) is not changed by accounting reporting rules. Instead the effect of AASB16 is to shift profitability between reporting years, not to change the 'all of contract' leasing profitability picture.

An increase in expenses from adopting AASB16 for a selected year, will result in a decrease in profit for that year.




Expense
FY2020FY2021FY2022
Reference


Post AASB16
Depreciation of right-of-use assets
$1,017m
$726m
$587m

(AR Note 2.3 'Expenses')



add Interest on lease liabilities
$109m
$83m
$78m

(AR Note 2.3 'Expenses')




$1,126m
$809m
$665m

(Total)


Pre AASB16 (based on Cashflow)
less Lease Finance Payments (principal portion)
($993m)
($706m)
($697m)

(AR 'Statement of Cashflows')



NPBT Profit Increment on adopting AASB16
($133m)
($103m)
$32m


(Total)



SNOOPY

[peat]

P.S. Peat for your information those Telstra mobile towers have been 49% sold off as of 1st September 2021 to pension funds. From AR2022 p2
"The sale of a non-controlling interest in the Amplitel tower business (raised) $A2.8billion."

So the sale and lease back you talk about has already happened.

Thanks for the update Snoopy
I dont really manage to keep up with things so well, now that I am working again.

[Snoopy]

The following ROE analysis was done using equity on the books at the end of the respective financial year. This will reflect the fact that 'network assets' signed over to nbn in that year will have been removed from the balance sheet. My profit normalisation process has removed any profits from the handover of these assets. That means using an 'equity asset base' without the removed assets on the books is, in my view, the most appropriate way to handle this calculation.


FY2022: $1,643m / $16,837m= 9.76%

FY2021: $1,445m / $15,275m= 9.46%

FY2020: $1,050m / $15,147m = 6.93%

FY2019: $1,494m / $14,530m = 10.3%

FY2018: $1,645m / $15,014m = 11.0%

Conclusion: Our return on equity hurdle was never cleared! FAIL TEST

SNOOPY

[Snoopy]

With Australia's inflation surging to 6.1% in the June 2022 year, this particular test has taken on a new poignancy.

I have removed the profit resulting from the sale/transfer of assets to nbn. It follows then, that I should also remove the revenue from these transactions as well. See post 20 for the calculation of revenues involved in these transactions.


FY2022: $1,643m / ($22,045m - $378m) = 7.58%

FY2021: $1,445m / ($23,132m - $1,050m) = 6.54%

FY2020: $1,050m / ($23,710m - $2,004m) = 4.84%

FY2019: $1,494m / ($25,259m- $2,116m) = 6.46%

FY2018: $1,645m / ($25,848m - $2,297m)= 6.98%

Conclusion: Despite the noticeable fall in profit margins over the FY2018 to FY2020 period, the profit margins have subsequently bounced back. That shows growth in profit margins is possible in this tough and competitive telecommunications market. PASS TEST

SNOOPY

P.S. Note that a margin increasing by more than 6.1% from FY2021, would require the margin in the subsequent year to rise to: 6.54%x1.061=6.94%. The actual margin over FY2022 was 7.58%, which beats the 6.94% hurdle.

[Snoopy]

Often the exercise of 'normalising profits' consists of adding a tweak here and there. Some may question if the extra time spent doing that is worthwhile, and rightly so. However in the case of Telstra, of which it must be said the 'normalising process' took an inordinate amount of extra reading and time to adjust, the normalising of profits produced changes in results that were particularly striking. The details of the normalising calculations may be found in post 18.
.


YearDeclared ProfitNormalised Profit


FY2022$1,814m$1,643m


FY2021$1,902m$1,445m


FY2020$1,839m$1,050m
overall

FY2019$2,149m$1,494m


FY2018$3,557m$1,645m
overall


The declared profit shows, with one exception a straight line down. The normalised profit shows something quite different - a dip and a bounce back. Likewise the Return on Equity picture, a measure of how efficiently the company is using shareholder funds, changes somewhat as profits are normalised.




YearDeclared ROENormalised ROE


FY2022$1,814m/$16,837m=10.8%10.9%


FY2021$1,902m/$15,275m=12.5%9.94%


FY2020$1,839m/$15,147m=12.1%6.93%


FY2019$2,149m/$14,530m=14.8%9.78%


FY2018$3,557m/$15,014m=23.7%9.77%



The declared picture shows the ROE plummeting from a figure that looks very healthy to something quite ordinary as it gets worse, The normalised figure, while lower overall, is projecting a much steadier picture, albeit locked in an overall lower ROE band.

While some here tout the benefits of sophisticated robotic harvesting of results for fast and wide high tech result processing, I think there is still a space for the old fashioned 'line by line' reading of how those headline profit figures are actually derived.

SNOOPY

[Snoopy]

The last few years have seen Telstra dividends 'beefed up' by federal government payments as Telstra's long standing legacy nationwide network is 'signed over' to new management in the Federal Government controlled 'National Broadband Network'. Management have been quite up front about doing this, even splitting their dividend into 'ordinary' (from normal operations) and 'special' (as a result of nbn payments) parts. However the nbn party for dividend hounds has now come to an end. This is why this dividend analysis has been 'adjusted' to take out the special (nbn funded) components of historical dividend record.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate is 30%.



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20197.5c + 5.0c10.71c + 7.14c17.85c


FY20205.0c + 5.0c7.14c + 7.14c14.28c


FY20215.0c + 5.0c7.14c + 7.14c14.28c


FY20225.0c + 6.0c7.14c + 8.57c15.71c


FY20237.5c + 8.5c10.71c + 12.14c22.85c


Total84.97c



Now we have to select a representative capitalisation rate. For Spark I have decided a rate of 6.5% is appropriate. Telstra is now a very similar company to Spark (both are incumbant operators that have had their former fixed line monopoly networks de-merged). But Australian interest rates have traditionally been a little lower than ours. So I would judge a gross return rate target of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 84.97/5 = 17.0c

Using an interest capitalisation rate of 5.5%, this equates to a Telstra share price of: 17.0 / 0.055 = $3.09. Telstra shares are trading today at price of $4.34. On that basis, Telstra shares are currently significantly over-valued, by about 40%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

22.85/ 0.055 = $4.15

My interpretation of this is that Mr Market is telling us the recently elevated level of dividend is not only sustainable, but might be expected to grow a little. But is that true? Of will earnings 'revert to the mean'? Know the answer to those questions, and you will know if TLS is currently trading at a fair market value, given its business outlook.

SNOOPY

[Snoopy]

Since I have determined that the share price of Telstra today is pricing in growth, where will this growth come from? The best people to answer this are the senior executive team. Here is what they said about the future of Telstra when reporting on the half year. My notes are from the Q&A session after the 'official result presentation'.

https://www.telstra.com.au/aboutus/investors/financial-information/financial-results

-------------------------

Vicky Brady CEO

Cost Out

$500m more cost out will be taken out by 2025, as part of the T25 'cost out' strategy. This target was set when inflation was 3% (not 7%), but Telstra are determined to maintain their savings goal. The strategy is to get legacy costs out (including the legacy fixed infrastructure - decommissioning is increasingly important across the business), and go for more automation in customer interactions.

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses. Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach. Tens of thousands of customers were affected both ways, but the net result is growth. The 12 month CPI figure to the end of March each year is the basis for price reset consideration. But there are many considerations, and the current cost of living crisis is to the fore. Some customers will move to other brands, some will move to prepaid but it is all within expectations. A one off $42m charge was taken in the half year against migrating customers from a whole range of old products, across to new simplified plans.

Growth at the lower end of expectations

Mobile hardware sales have increased relative to the PCP (+12%), but not at the rate anticipated. Taken over all customers, average renewal time for phones is three years. Meanwhile fixed business across C&SB (Customer and Small Business) and data and connectivity are not at the levels anticipated. These are the two principal reasons Telstra has suggested the FY2023 full year result will be towards the lower end of the guidance range. Hardware sales being lower builds up customer deferred debt.

Optimising nbn connections

Only 10% of Telstra nbn customers are on a 'fibre connect' 100MB plus plan (the fastest nbn option). Telstra is behind the overall market on this. So there is opportunity to upsell to customers the higher speed plans, and so increase margin, even as the nbn cost base increases. The wi-fi guarantee is important on the revenue side. Increased demand is driven by ARPU lift. 'Belong' (Telstra's budget brand) SIO (services in operation) did slow as a result of price increases. A reasonable return goal for nbn margin is 'mid teens' by 2025. Given the pressure on finances, Telstra advocates that in the overall nbn product mix, there should be no further wholesale price increases on the family friendly 50/20 (download speeds of 50MBps, upload speed of 20MB/s) plan.

Future growth horizons

Telstra Heath is destined to be a $500m per year revenue business by 2025. Although the organic business is growing, Telstra is prepared to make acquisitions to get there (e.g. bought on 06/08/2021, for $350m, 'Medical Doctor', a leading general practice clinical and practice managment software company), but Telstra Health are currently still in the investment phase. EBITDA benefits will come in the medium term.

Asset Sales

No decision has been made on the monetization of 'InfraCo Fixed'. Sale of 49% of this could bring in $A7-8 billion.



David Burns (Group executive 'Enterprise')

Business Customers

A key goal is to retain Telstra's DAC (Data and Connectivity) customers. Retention of large business customers on fibre is Telstra Enterprise's number one focus. Some historical Telstra packages in the market are at above market rates. Telstra are pro-actively going out to retain these customers on new deals. Telstra is aligning offerings to certain industries and segments. The goal is to offer unique products to specialist segments.

Connection bundles are being promoted pro-actively to mid size business customers, before the normal three year right of renewal comes up. Three quarters of ARPU (Average Revenue Per User) compression, owing to proactively meeting the market on pricing, are still to be worked through in the NAS (Network Added Service), or 'Telstra Purple' business, (as Telstra brand it to their customers).

Data centres

International data centre player AWS (Amazon Web Services) have announced two of their local data centre zones: Perth and Brisbane with Adelaide likely following on. Telstra partners closely with the two largest players, Microsoft Azure and Amazon AWS, in data centre roll outs. Telstra's 'inter city fibre' startegic investment integrates with AWS and Azure to allow them to utilise their data centre capacity. Integrating with data centres is a key Telstra's strategy, as is partnering towards certain industries (like Mining,/Construction/Energy, a very focussed cross industry cluster for Telstra). Telstra is driving value up the stack through acquisitions in IoT (Aquara) and industrial automation (Alliance Automation) and Epicon (that can bring all the data into decision making processes faster). Hyper-scale data centres built by others are investments Telstra welcomes.



Michael Ackland CFO

Cashflow crunch in HY2023

Working capital has been deployed to increase the stock inside Telstra's now in house owned stores, and as a result. growth in device sales is expected in the second half. Bad debts are not an issue. In fact, the quality of receivables is improving. Corporate reconstruction relief has been applied for in relation to stamp duty. NAS is expected to have a stronger second half as it is seasonally and milestone driven.

$110m increase in fixed cost core due to labour and non-labour inflation flowing through (flow on costs of in sourcing stores and on shoring call centres. Cost out on the rest of the business is on track.

Fixed wireless as a substitute for fibre

Telstra will focus on home wireless fixed when it makes sense for customers.

--------------------

SNOOPY

[Valuegrowth]

https://markets.businessinsider.com/news/stocks/warren-buffett-elon-musk-berkshire-hathaway-sells-byd-stock-electric-2023-5

[Snoopy]

https://markets.businessinsider.com/news/stocks/warren-buffett-elon-musk-berkshire-hathaway-sells-byd-stock-electric-2023-5


Interesting, but I think the referenced article relates to Tesla, not Telstra!

SNOOPY

[Snoopy]

Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach.


Here is some detail about what happened in the Optus security leak

https://www.abc.net.au/news/2022-10-01/optus-data-hack-australians-waiting/101486874

Things to look out for....

Phishing scams: e-mails texts or calls that looks like a company you know but isn't. What these messages have in common is that they will ask you to follow a link to fix a problem: Don't! If you are concerned, contact the organization yourself to see if the problem is legitimate.

ID Theft: You may get a call from a bank saying they have missed a payment for a loan you did not know you had. Sign up for credit monitoring or a temporary credit ban.

SIM Porting: This is where a fraudster will take your ID and set up a new account with a new Telco under your name, and move your phone number over to that provider. When they do that they have access to everything you do that requires two factor ID verification. Have a PIN and two factor identification attached to any mobile account.

"Optus has struggled to explain to customers who is affected and how."

"With up to 9.4 million records of Australians' sensitive personal data potentially compromised, services we've taken for granted, such as applying for credit or proving our identity online, might be slowed down or stopped."
"Licensing authorities and the passport office — which had already been facing huge delays — will be jammed with replacement requests."
"The 100-point identification system — the mainstay of applying for anything from a rental to a credit card to a police check — has been undermined."

"Cyber security expert Jeffrey Foster says it is what's been stolen that makes the impact so huge, with scammers potentially not needing anything else from victims to strike."
"It's an extremely low bar, meaning [the hackers] don't even have to tie any additional information to you from previous leaks or go trawling through your social media to find information about you."

"Consumer data advocate Kate Bower from CHOICE says this has created a big problem for banks and financial institutions — in fact, anyone with payment systems."
" "It's going to be a much, much stronger burden on them to be able to identify potential fraud, potential identity theft on their systems," Bower says."

"When you call your bank, the amount of everyday value that it's going to cost that bank is around $40 for every phone call they get," he says."

Now Optus are facing a Slater and Gordon lawsuit.

https://www.abc.net.au/news/2023-04-21/optus-hack-class-action-customer-privacy-breach-data-leaked/102247638

"Law firm Slater and Gordon has lodged the class action in the Federal Court on behalf of more than 100,000 registered participants."

The lawsuit claims Optus breached consumer and telecommunications law and failed in its duty of care to protect users from harm.
" "We have people who work in frontline occupations — police officers — very, very concerned that criminals will find out where they live," the firm's Ben Hardwick said."

"Mr Hardwick said the lawsuit would be seeking a "substantial" compensation sum on behalf of those current and former customers."

"Former customer Kate— who is part of the class action and asked not to be identified — said she had experienced domestic violence in the past."
" "The release of this data has potentially breached the safety of me and my children," she said."
" "I've spent every day basically anxious, just wondering if my details were going to fall into the wrong hands." "

"Optus apologised for the breach and set aside $140 million to help customers renew ID documents and commission an independent report into the breach."

SNOOPY

[Snoopy]

Future growth horizons

Telstra Heath is destined to be a $500m per year revenue business by 2025. Although the organic business is growing, Telstra is prepared to make acquisitions to get there (e.g. bought on 06/08/2021, for $350m, 'MedicalDirector', a leading general practice clinical and practice management software company), but Telstra Health are currently still in the investment phase. EBITDA benefits will come in the medium term.


'Health' has been earmarked as a great 'growth space'. From AR2016 p15: "Since 2013 we have invested more than $235m to acquire, invest or partner with 18 health related companies., including acquiring hospital resource optimisation designer "Health ID" and software product "ComCare" in FY2016, which will transform and improve the efficiency of the healthcare sector."

Telstra Health turned over $243m over FY2022, up 51% after including the 'MedicalDirector' and 'Powerhealth' acquisitions. The ambition is to see turnover hit $500m by 2025 (refer analyst briefing HY2023) . So what is Telstra Health doing in the health space?

Telstra Health

TelstraHealth is overall, billed as a 'software developer', and has 1400 employees across 15 locations.

https://www.telstrahealth.com/

The link above takes us to a range of Telstra Health solutions

Hospitals

a/ 'Kyra' A digital health platform, with many sub-parts: 'Kyra Clinical' for care co-ordination, , 'Kyra Flow' for workforce optimisation and task management, 'Kyra Connect' for e-referrals and secure messaging, 'KyraIQ' for real time analysis and reporting, 'Kyra medications' for inpatient and discharge medications and reconciliation.

b/ 'Clinical Content by Telstra Health' Aggregated clinical content solutions and innovative access and discovery technologies. coupled with data insights designed to enhance decision support at the point of care and enable better health outcomes.

c/ 'AusDI' (Operated by 'MedicalDirector'- see below) Australia’s most holistic and accurate medicines information resource

d/ PowerHealth' (Bought a 70% stake for a $95m in Q1 FY2022) PowerHealth help healthcare organisations deliver the highest quality medical care at the lowest operational costs. PowerHealth specialise in activity-based costing, hospital billing, healthcare budgeting, AR-DRG classification and digital wayfinding solutions. Australian Refined Diagnosis Related Groups (AR-DRGs) is an Australian admitted patient classification system which provides a clinically meaningful way of relating the number and type of patients treated in a hospital (known as hospital case-mix) to the resources required by the hospital.

e/ 'Health Virtual Care' Virtual Health Monitoring is an innovative software solution from Telstra Health that connects clinicians with patients via a mobile device so they can remotely monitor and manage a patient’s illness, recovery, chronic disease and other conditions.

Primary and Community Care

a/ Health Virtual Care (as above)

b/ MedicalDirector (Bought for an EV of $350m in Q1 FY2022) Practice management in one seamless tool, from 'the numbers' to medicines with cyber security.

c/ Communicare Australia's leading fully integrated patient information service, which can provide a 'patient centric view' of a patients journey through the health system.

Aged & Disability Care Providers

Enabling a holistic view of medications, assessments, care plans, admissions and business processes, to ensure compliance, manage funding streams, improve efficiencies, communicate with families, and enhance the overall quality of care for residential aged care providers.

Pharmacy

a/ FredIT Pharmacy Solutions including Fred NXT, Fred Dispense, Fred Mobility, Fred Office, and Fred POS.

b/ eRx Script Exchange Australia’s largest prescription exchange service for GPs, pharmacists, and patients.

c/ MedView is the national cloud based platform that hosts a range of eHealth applications that help Australian healthcare professionals make medication use safer for their patients. MedView is powered by the eRx Script.

Population Health

With the objective of improving lives through connected healthcare, Telstra Health is working with health organisations and funders to integrate clinical information around a patient to support a more patient-focused health system. Clinicians get a more complete view of their patient’s health information, supporting improved quality and safety of care. This includes preventive health, chronic disease management and population health screening programs.

There are more than 16 million patient records worldwide securely managed through TelstraHealth's population health platform. MedicalDirector UK’s innovative Helix VaxApp (a cloud based solution) has on 29th March 2023 received approval from NHS England to be used across the health service’s COVID and flu vaccination programme. Meanwhile in the United States, Telstra's 'Cloudhealth' product helps integrate multiple cloud resources that might be built by the likes of Amazon and Microsoft. As cloud footprints increase, they became more complicated, causing a large organisation to lose visibility on the infrastructure of its cloud stack. 'Cloudhealth's centralised data analytics platform provides analysis, trend reporting and recommendations on the cost, usage and performance of all its cloud services in one place.

SNOOPY

[peat]

Australia’s largest telco unveiled a number of bill increases on Monday



Since I have determined that the share price of Telstra today is pricing in growth, where will this growth come from?

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses.

[Snoopy]

Australia’s largest telco unveiled a number of bill increases on Monday

Thanks for the notification. Here is what is happening to Telstra mobile plans.



Telstra MobileTelstra Upfront Mobile Plan BasicTelstra Upfront Mobile Plan EssentialTelstra Upfront Mobile Plan Premium


Download Speed max250MbpsNo restrictionNo restriction


Australian fixed lines & mobile linesUnlimited calls & textsUnlimited calls & textsUnlimited calls & texts


data cap before 04/07/202340GB180GB300GB


data cap after 04/07/202350GB180GB300GB


plan price/month before 04/07/2023$58$68$89


plan price/month after 04/07/2023$62 (+6.9%)$72 (+5.9%)$95 (+6.7%)



The equivalent Optus plan pricing is here. Downloads can be reduced to the quoted speeds at peak hours.:




Optus Mobile
Small Optus Choice Plus Plan
Medium Optus Choice Plus Plan
Large Optus Choice Plus Plan
Extra Large Optus Choice Plus Plan


Download Speed max1.536Mbps1.536Mbps
1.536Mbps1.536Mbps


Australian fixed lines & mobile linesUnlimited calls & textsUnlimited calls & texts
Unlimited calls & textsUnlimited calls & texts


data cap
30GB
100GB
220GB
360GB


plan price/month
$49
$59
$69
$89



Finally here are the monthly Vodafone deals.




Vodafone Mobile
Small SIM Only Plan
Medium SIM Only Plan
Large SIM Only Plan


Download Speed maxHeavy users restricted
Heavy users restrictedHeavy Users Restricted


Australian fixed lines & mobile linesUnlimited calls & texts
Unlimited calls & textsUnlimited calls & texts


data cap
40GB
150GB
300GB


plan price/month
$45
$53
$65



It will be interesting to see the monthly customer churn from these new Telstra rates. I guess people affected by the Optus data breach may never go back at any price. It looks like a few dollars will be saved by going with Vodafone though.

SNOOPY

[Snoopy]

Mobile

Telstra had been transparent with their new mobile plans that there will be annual price reviews, and at the same time customers will not be 'locked in' to contracts. There have been mobile post paid price increases in the first quarter for consumers and small businesses. Negative effects of that have been cushioned by customers coming across to Telstra, as a result of their competitor Optus's second quarter security breach. Tens of thousands of customers were affected both ways, but the net result is growth. The 12 month CPI figure to the end of March each year is the basis for price reset consideration. But there are many considerations, and the current cost of living crisis is to the fore. Some customers will move to other brands, some will move to prepaid but it is all within expectations. A one off $42m charge was taken in the half year against migrating customers from a whole range of old products, across to new simplified plans.


The Australian CPI for the twelve months to 31st March was 7.0%. Telstra said all the right things in their half year announcement. But the response in their mobile pricing looks a bit tone deaf. They have pushed their plan pricing 'to the max', and, rounding to the nearest dollar, 'have gone the full inflation adjusted hog'. Despite the fringe growth product streams in other categories, mobile does look like the primary growth driver for Telstra. I am frankly surprised at how generous the terms of all the existing mobile plans are, in terms of data and minutes (post 38). I am obviously completely out of touch with with the data requirements of the user generation driving these plans. Are they plugged into Spotify all day? Are they catching up on the soaps they missed sitting in traffic jams in their cars (yes I realise Australian traffic jams are worse than NZ)?

I do agree that if you are going to chase mobile margin, striking while your largest competitor is weakest is the time to do it. But if there really is a cost of living crisis in Australia, and I don't doubt there is, wouldn't you as a user be tempted to save a few bucks on your monthly phone bill ($17 a month if you went to Vodafone) with no loss of data or minutes by switching? How much 'premium value' exists within the Telstra brand? I guess we Telstra shareholders are about to find out!

SNOOPY

[Snoopy]

'Health' has been earmarked as a great 'growth space'. Telstra Health turned over $243m over FY2022, up 51% after including the 'MedicalDirector' and 'Powerhealth' acquisitions.

Telstra Health

TelstraHealth is overall, billed as a 'software developer', and has 1400 employees across 15 locations.

https://www.telstrahealth.com/


Page 25 in AR2022 gives an 'income' break down of 'Other' of $755m. For income we are not talking about NPAT or even EBITDA, but more generally 'revenue'. Looking at the segmented results table, AR2022 p88, and we can see that this $755m Telstra 'other' revenue contained inter-divisional sales of $291m. Take those out and the sales to external customers were $464m. Using this figure combined with information in post 18 that I compiled on normalised earnings, I think the revenue picture for 'Other' over FY2022 looks like this:



'FY2022 Other Revenue'


Telstra Health$243m


Bond rate changes effect on employee liabilities$80m


Cumulative Catch Up Adjustments to Revenue$47m


Integration costs for 'MedicalDirector' and 'Powerhealth'($58m)


Net gain in Property Plant & Equipment and intangibles of $158m and Business Unit sales of $7m$165m


Adjustment Expense($13m)


equals Total$464m



The EBITDA contribution margin for the total 'Other' earnings for FY2022 (AR2022 p23) was 6.3%, where the:
"Contribution Margin Percentage = (Total Sales Revenue – Total Variable Costs) / Total Sales Revenue

For all entries in the table except Telstra Health, the net revenue from the sum of these, $221m is the EBITDA contribution. That $221m has a contribution margin percentage of 100%, (because all those figures are net of costs). Weighting this sum against the Revenue from Telstra Health at at unknown contribution margin 'C', the following equation must hold:

C x $243m + 1.0 x $221m = 0.06 x $464m => C = -0.79

This means the TelstraHealth EBITDA loss for the FY2022 year was: -0.79 x $243m = -$193m.

The HY2023 investor update (post 32), tells us that the medium term goal is to get TelstraHealth to $500m in revenue by FY2025. That kind of revenue would likely wipe out any loss and bring TelstraHealth into a positive EBITDA position. To me this looks a few years away. So as promising as this TelstraHealth business unit sounds, the profit growth is not meaningful in light of an overall Telstra business that, over FY2022, had an EBITDA of $7.256billion. Scratch TelstraHealth as a growth engine for now!

SNOOPY

[Snoopy]

P.S. Peat for your information those Telstra mobile towers have been 49% sold off as of 1st September 2021 to pension funds. From AR2022 p2
"The sale of a non-controlling interest in the Amplitel tower business (raised) $A2.8billion."


I want an answer to the question, "What was the overall benefit to Telstra shareholders from the Amplitel transaction?" But first, let's detail what the transaction was.

From AR2022 p149. "On 30 June 2021 we announced that a consortium comprising the Future Fund, Commonwealth Superannuation Corporation and Sunsuper agreed to acquire a 49% interest and become a strategic partner in Telstra's tower business (Amplitel)."
"The sale of the 49% interest in Amplitel to the consortium was completed on 1st September 2021 and resulted in $2,883m net cash proceeds."
"As at 1st September we recognised $798m non-controlling interests" (in Amplitel, representing the value of the 49% non-controlling interest held by Telstra, on the day before the 49% stake was sold))"

This means the total value of the Towers on the Telstra books immediately before the sale was: $798m/0.49 = $1,629m
By contrast, the total value of the Towers immediately after the sale was: $2,883m/0.49 = $5,884m, with 51% of that value still owned by Telstra and 49% of that value now in the hands of the pension fund conglomerate.

The gross profit on the sale deal for Telstra shareholders was therefore: $2,883m - $798m = $2,085m. But of course this was only for the 49% stake sold. The 51% stake retained also increased in value by: $2,085m x (51/49) = $2,170m. This is recognition of Telstra's remaining controlling stake being recognised at a new enhanced value, courtesy of Telstra selling off the 49% minority stake of the towers at a good price, and so defining the Amplitel deal. The total gain to Telstra from this deal was therefore: $2,085m + $2,170m = $4,255m.

On p158 of AR2022, we learn that: "Telstra Entity recognised a $4,058m net gain on the sale of the towers business." So the cost to Telstra of selling the 49% minority stake in the tower business must have been: $4,255m - $4,058m = $197m. $197m is higher than the $125m referred to as transaction costs in AR2022 p25. I am not sure why there is an inconsistency between those two figures. Maybe there were some capitalised legal expenses setting up the 'Towers Business Operating Trust' as the legal owner of the towers, where the company we think of as the tower's owner -Amplitel- is the trustee? IOW, setting up the 'Towers Business Operating Trust' was treated as a 'capitalised investment', rather than an 'expense'? (All pure speculation, I really don't know the answer.)

One thing that really amazes me about this Amplitel deal is the difference between the 'before' and 'after' sale situation.

Before: 100% of Amplitel was valued on the Telstra books at: $798m + (51/49)$798m = $1,629m
After: 51% of Amplitel is then valued on the Telstra books at: (51/49)$798m + $2,170m - $197m = $2,804m

So despite Telstra selling that 49% Amplitel stake, the value of Amplitel still on the Telstra books has increased by nearly $1.2billion! "Money for nothing, that's the way to do it!" (quote from Mark Knophler, financial adviser).

SNOOPY

[peat]

kind of amazed you can figure out the EBITDA of Telstra Health, but not surprised its running at a loss. I was thinking when I read your post about how good Telstra Management would be at choosing buying and managing these health companies. But who knows eh, could be something in a few years.

Re mobile pricing, I've never been one to change for the sake of a few bucks, and I dont know if its like that in Australia or not, but it has always seemed to me the incumbent has some technical advantage over the competitors and the retailers who bundle and re-sell. Possibly less and less as time goes on but essentially, to me , there is some premium in the Telecom, now Spark, or the Telstra brand. So given the obvious price differences it will be interesting to see if users migrate to Opt or VF.

[Snoopy]

Information on Telstra's borrowings may be found under note 4.4.1 in the annual report. The borrowings are split between unsecured notes, unsecured bank and other loans and unsecured commercial paper. There is no detail given as to who these loans are with, nor any specifics about loan maturity dates (apart from a current and non-current disclosure). That the detail reporting is so sparse, compared to the likes of the Spark annual report where all loans are laid out in great detail as regards size and maturity, I find odd. Different accounting disclosure requirements on each side of the Tasman? No matter. The information I need is there (supplemented by information from the half year report).





FY2022
HY2022
FY2021



Current Liabilities
$2,690m
$4,129m
$3,631m


Non Current Liabilities
$8,292m
$8,003m
$10,505m


Total
$10,982m
$12.132m
$14,136m



By averaging the three totals, I get a triangulated approximation to the average loan balance during the year.

($10.982m+$12,132m+$14,136m) / 3 = $12,417m

The total loan interest bill for the year was $444m (AR2022 p100)

This gives an implied average interest rate over all borrowings for year FY2022 of: $444m / $12,417m = 3.58%

SNOOPY

[Snoopy]

That 'housing market scenario' in the post title sounds a little odd. Yet if we stand back and look at the Amplitel sales transaction, it is a fairly good analogy as to what happened. Telstra set up a special company - Amplitel - to own its cellphone mobile service towers. It then got in a new half owner of the assets, from which it took just under half of a full asset valuation, in compensation for letting go a 49% stake. But Telstra cannily retained a 51% controlling stake, to make sure they retained governance rights, and could say exactly what they wanted to do with those towers - indefinitely. So a nice deal stitched up by Telstra!

In AR2022 p152, there is a 'Table A' titled "Amplitel Business". The introductory paragraph says " summarises financial information of the entities which have material non-controlling interests, i.e. the Trust and Amplitel (Amplitel business), amalgamated for the year ended and as at 30 June 2022."

'Non-controlling interests' suggests the coalition of pension funds that hold the 49% minority stake. My reading of this is that this table represents that 49% minority stake only. That means if you want to find out the figures for the whole Amplitel company, you have to divide every figure in that table by 0.49. However, rather confusingly, the 'Statement of Comprehensive income' which I reproduce below, refers to some table figures specifically as 'minority interest figures', which almost implies that the figures not qualified with that tag are not:

Apritel FY2022: Statement of Comprehensive Income



Revenue$141m


Loss/Total Comprehensive Income for the period($157m)


Profit allocated to non-controlling interests$83m


Distributions paid/payable to non-controlling interests$87m



Quite frankly, I find the above statement baffling. First we are told that Amplitel made a Comprehensive Income loss for the year. Then on the next line we are told that 'Profit allocated to non-controlling interests' (an odd thing to say if the whole table only relates to non-controlling interests) was a positive number! (I further note that 49% of $157m is NOT $83m). Then, to top it off, the dividend paid, to the non-controlling interest was 105% of profit. Why and how would a real estate company (for that's what Amplitel is- towers are really just real estate) pay out more than the rent received in dividends?

There are other things that don't add up too. If $149m represents the revenue earned from a 49% interest in those towers, and we know the market value of that 49% tower stake is $2,883m (see post 41), that means the underlying gross earnings yield on this investment is not that attractive:
$149m / $2,883m = 5.2%

Meanwhile the gross dividend yield (apparently unsustainable) is significantly worse:
$87m / $2,883m = 3.0%

A 3.0% dividend yield seems very low for a utility type asset. Given this, my feeling is that the 'coalition of pension funds' look to have paid too much for their stake in Amplitel, notwithstanding the fact that this dividend was pulled out of a business unit that was making an underlying loss (how does that work?). I would appreciate readers opinions as to exactly what this 'Amplitel Comprehensive Income' table is showing, as I remain baffled.

Not being able to figure out what is going on here, I am forced to revert to a more simplistic overarching argument. I am not sure that I know what the overall revenue stream delivered by Ampritel is. But do I need to know this? No matter what Ampritel charge for the use of their towers, the 49% of dividend that will flow out the door to third party minority interests, will be equally matched by the 51% of the dividend paid back to Telstra as a 51% Amplitel shareholder. The 49% dividend out will always be matched and cancelled out on a cashflow basis by the 49% + 2% of dividend retained. That means from a 'Telstra cashflow perspective', there is no need to know what the Amplitel dividend is. Have I got that right?

SNOOPY

[Snoopy]

There were two main benefits.

1/ From AR2022 p2, p28: "$1.35 billion was also returned to shareholders via an on-market share buy-back following the sale of a non-controlling interest in our Amplitel towers business for $2.8 billion."
From AR2022 p122 "The buy-back was conducted in the ordinary course of trading at an average price per share of $3.98. The shares bought back were subsequently cancelled."

This means $1,350m/ $3.98 per share = 339.2m shares were bought back.
The reduced number of Telstra shares on issue after the buyback was: 11,893.3m - 339.2m = 11,554
This means 'earnings per share' will subsequently increase indefinitely by a multiplier of: 11,893/11,554 = 1.0293 or 2.93%

2/ From AR2022 p149: "The $2,085 million difference between the amount recognised as non-controlling interest and the consideration received was recognised in general reserve within equity attributable to the Telstra Group." "General reserve" or 'Reserves" refers here to a sub category of equity that may be found in the balance sheet. We already know that $1.35m of this profit was spent on a share buyback. That means the rest of the cash payment, now that 49% of Amplitel has been sold off, can be used to reduce debt. So debt can be reduced by: $2,883m - $1,350m = $1,533m. From post 43, the indicative interest rate on this Telstra debt is 3.58%. So the annual interest saving as a result of this debt reduction amounts to: $1,553m x 0.0358 = $56m. Since interest is a tax deductible expense, at the Australian corporate 30% tax rate, this means after tax profit at Telstra will increase by 0.7x $56m = $39m on an annualised basis.

As a percentage of the annual normalised profit for FY2022, this amounts to an incremental $39m/$1,645m = 2.37%

There is a third factor in this equation. Namely Telstra will have to pay 'rent' to the entity Amplitel, before claiming their share of 51% of any 'profit' made by Amplitel back. Post 44 explores this issue. For now, it looks to me as though the rent paid to Amplitel is a non-issue for reasons discussed in that post.

We can now use these bullet points 1/ and 2/ to obtain our answer, by multiplying (not adding) the two effects together:

Incremental earnings gain multiple from Amplitel transaction = 1.0293 x 1.0237 = 1.0537

Let's go back to round numbers. The benefit for the Telstra shareholder for selling the 49% Amplitel stake has resulted in underlying earnings per share rising by 5%. (Not insignificant)

But what was the resulting balance sheet effect of these transactions?

SNOOPY

[JeffW]

That 'housing market scenario' in the post title sounds a little odd. Yet if we stand back and look at the Amplitel sales transaction, it is a fairly good analogy as to what happened. Telstra set up a special company - Amplitel - to own its cellphone mobile service towers. It then got in a new half owner of the assets, from which it took just under half of a full asset valuation, in compensation for letting go a 49% stake. But Telstra cannily retained a 51% controlling stake, to make sure they retained governance rights, and could say exactly what they wanted to do with those towers - indefinitely. So a nice deal stitched up by Telstra!

In AR2022 p152, there is a 'Table A' titled "Amplitel Business". The introductory paragraph says " summarises financial information of the entities which have material non-controlling interests, i.e. the Trust and Amplitel (Amplitel business), amalgamated for the year ended and as at 30 June 2022."

'Non-controlling interests' suggests the coalition of pension funds that hold the 49% minority stake. My reading of this is that this table represents that 49% minority stake only. That means if you want to find out the figures for the whole Amplitel company, you have to divide every figure in that table by 0.49. However, rather confusingly, the 'Statement of Comprehensive income' which I reproduce below, refers to some table figures specifically as 'minority interest figures', which almost implies that the figures not qualified with that tag are not:

Apritel FY2022: Statement of Comprehensive Income



Revenue
$141m


Loss/Total Comprehensive Income for the period
($157m)


Profit allocated to non-controlling interests
$83m


Distributions paid/payable to non-controlling interests
$87m



Quite frankly, I find the above statement baffling. First we are told that Amplitel made a Comprehensive Income loss for the year. Then on the next line we are told that 'Profit allocated to non-controlling interests' (an odd thing to say if the whole table only relates to non-controlling interests) was a positive number! (I further note that 49% of $157m is NOT $83m). Then, to top it off, the dividend paid, to the non-controlling interest was 105% of profit. Why and how would a real estate company (for that's what Amplitel is- towers are really just real estate) pay out more than the rent received in dividends?

There are other things that don't add up too. If $149m represents the revenue earned from a 49% interest in those towers, and we know the market value of that 49% tower stake is $2,883m (see post 41), that means the underlying gross earnings yield on this investment is not that attractive:
$149m / $2,883m = 5.2%

Meanwhile the gross dividend yield (apparently unsustainable) is significantly worse:
$87m / $2,883m = 3.0%

A 3.0% dividend yield seems very low for a utility type asset. Given this, my feeling is that the 'coalition of pension funds' look to have paid too much for their stake in Amplitel, notwithstanding the fact that this dividend was pulled out of a business unit that was making an underlying loss (how does that work?). I would appreciate readers opinions as to exactly what this 'Amplitel Comprehensive Income' table is showing, as I remain baffled.

Not being able to figure out what is going on here, I am forced to revert to a more simplistic overarching argument. I am not sure that I know what the overall revenue stream delivered by Ampritel is. But do I need to know this? No matter what Ampritel charge for the use of their towers, the 49% of dividend that will flow out the door to third party minority interests, will be equally matched by the 51% of the dividend paid back to Telstra as a 51% Amplitel shareholder. The 49% dividend out will always be matched and cancelled out on a cashflow basis by the 49% + 2% of dividend retained. That means from a 'Telstra cashflow perspective', there is no need to know what the Amplitel dividend is. Have I got that right?

SNOOPY

Hi Snoopy - good analysis. I do not know in this instance, but the fact that there is a loss incurred but a dividend paid is quite possibly because the loss is a result of depreciation and/or amortisation, resulting in an accounting loss, but a cash profit. Certainly, that is sometimes the case with REITs

[Snoopy]

There were two main benefits.

1/ From AR2022 p2, p28: "$1.35 billion was also returned to shareholders via an on-market share buy-back following the sale of a non-controlling interest in our Amplitel towers business for $2.8 billion."

2/ From AR2022 p149: "The $2,085 million difference between the amount recognised as non-controlling interest and the consideration received was recognised in general reserve within equity attributable to the Telstra Group

But what was the resulting balance sheet effect of these transactions?


If you look at the "Statement of Changes in Equity" for FY2022 (AR2022 p82), then both of the 'capital adjustments' referred to in the quoted post above '1/' and '2/' are prominent. The $1,350m buyback is shown as removing that amount from share capital, while $2,084m in profit (I presume the reduction from $2,085m is a rounding error) is shown as being added to reserves. But a quote from the annual report is bothering me.

From AR2022 p158. under a section titled "Strategic partner in Telstra's tower business"
(Talking about the Amplitel transaction) "As a result the Telstra Entity recognised a $4,058m net gain on the sale of the towers business"

It looks like close to $2billion ($4,058m - $2,084m = $1,974m) has 'gone missing' between being 'recognised' and 'showing up in the balance sheet'. Could a search down the back of the couch at Telstra head office be in order?

Now, I feel it is fair to disclose at this point that I am not an accountant (apart from my C+ pass in an ACCY101 paper back in year 19mumble mumble). But my reading of the accounts is that:

a/ Because: the equity holding of Telstra in Amplitel is more than a controlling stake (51% in this instance), THEN
b/ Amplitel is treated as a subsidiary of Telstra for accounting purposes, and is fully consolidated in the Telstra accounts.
c/ Thus the 'equity accounting rule' where the 'fluctuation in the value' of that investment is required to be recorded in the accounts annually - i.e. 'marked to market'- does not apply. (It may not have applied anyway because apart from the acquisition transaction, the shareholding of Amplitel is expected to remain stable as the shares are privately held. I.e. there is no 'ready market' from which an annual valuation price can be recorded.)
d/ However in future years, any dividend that Telstra receives from Amplitel is deducted from the Telstra equity 'Reserves' on the balance sheet (standard accounting practice I believe, doesn't really make sense to me, but I will go with it nevertheless).

AR2022 p149 more or less confirms this: "We retain control of the Trust and Amplitel and thus we continue to consolidate these entities."

The question now is, if my interpretation of the accounting rule representation of the 51% owned Amplitel subsidiary is correct, what happened to the missing $1,974m? Any budding Sherlock Holmes out there care to comment?

Below is a reminder of where the *four* billion dollar gain resulting from the sale of the 49% of Amplitel stake came from.



The gross profit on the sale deal for Telstra shareholders was therefore: $2,883m - $798m = $2,085m. But of course this was only for the 49% stake sold. The 51% stake retained also increased in value by: $2,085m x (51/49) = $2,170m. This is recognition of Telstra's remaining controlling stake being recognised at a new enhanced value, courtesy of Telstra selling off the 49% minority stake of the towers at a good price, and so defining the Amplitel deal. The total gain to Telstra from this deal was therefore: $2,085m + $2,170m = $4,255m.

On p158 of AR2022, we learn that: "Telstra Entity recognised a $4,058m net gain on the sale of the towers business." So the cost to Telstra of selling the 49% minority stake in the tower business must have been: $4,255m - $4,058m = $197m.


SNOOPY

[Snoopy]

Hi Snoopy - good analysis. I do not know in this instance, but the fact that there is a loss incurred but a dividend paid is quite possibly because the loss is a result of depreciation and/or amortisation, resulting in an accounting loss, but a cash profit. Certainly, that is sometimes the case with REITs


Thanks for the suggestion JeffW. I see on 108 of AR2022 the depreciation life of 'buildings' is listed as 30 years, while the corresponding figure for 'communications assets' is 25 years. I am not sure where cell phone towers fit into that picture. But if I go with towers as 'buildings' and,

1/ We know the superannuation conglomerate spent $2,883m acquiring their 49% share AND
2/ We assume the towers are half way through their accounting depreciation life (a 'fact' I just made up)

Then if we expect the depreciation and any associated goodwill to expire in 15 years, that means the D&A written off each year will be: $2,883m/15= $192m per year. If we return to the Amplitel business disclosures in AR2022 p152, that shows profit allocated to non-controlling interests of $83m. But take off a D&A charge of $192m and it turns into a loss. Looks like you might be into something. Thanks.

SNOOPY

[Snoopy]

kind of amazed you can figure out the EBITDA of Telstra Health, but not surprised its running at a loss. I was thinking when I read your post about how good Telstra Management would be at choosing buying and managing these health companies. But who knows eh, could be something in a few years.


I find it often a realistic assumption to make that if a company is coy about telling you the profitability of an 'exciting new division', then there is a very good chance that division is loss making ;-) This is not at all unusual amongst the latest generation of 'software as a service' providers that beaver away for years building up sales to meet their cost base, at which point profitability can suddenly explode. However, it is a high risk game and you never really know if a competitor, be they in Israel, or down the road in Dunedin have a superior product that will suddenly 'take over the world' and render your own software product a backwater dead end. It won't be a surprise to readers, to learn that I do not invest in such companies, no matter how good their presentations look. However, I won't sell out of Telstra, because they see a future for software company TelstraHealth. In this instance, I see 'TelstraHealth' as a 'free option' on a business unit that has a reasonable chance of success. I wouldn't have a clue how TelstraHealth stacks up against other multi-national options out there. So I have to assume Telstra management know that they are doing. And as long as Telstra itself will not fall over, even if TelstraHealth does, then I am prepared to back Telstra management risking some of my Telstra capital on this venture.

As for calculating that TelstraHealth lost $193m over FY2022, that is very likely a 'worst case' scenario. I am not saying my calculation is wrong. I am saying that if I make slightly different assumptions I can get a different answer. For example, in my calculation below, if I had decided that the gain on property plant and equipment represented a 10% not a 100% gain, (although conceptually that might require me to declare the gross sales proceeds as revenue, not just the profit - but let's just put this point aside for now), then my calculation on margin for TelstraHealth changes. (Quoted old calculation is followed by new calculation).



Page 25 in AR2022 gives an 'income' break down of 'Other' of $755m. For income we are not talking about NPAT or even EBITDA, but more generally 'revenue'. Looking at the segmented results table, AR2022 p88, and we can see that his $755m Telstra contained inter-divisional sales. Take those out and the sales to external customers were $464m.

The EBITDA contribution margin for the total 'Other' earnings for FY2022 (AR2022 p23) was 6.3%, where the:
"Contribution Margin Percentage = (Total Sales Revenue – Total Variable Costs) / Total Sales Revenue

For all entries in the table except Telstra Health, the net revenue from the sum of these, $221m is the EBITDA contribution. That $221m has a contribution margin percentage of 100%, (because all those figures are net of costs). Weighting this sum against the Revenue from Telstra Health at at unknown contribution margin 'C', the following equation must hold:

C x $243m + 1.0 x $221m = 0.06 x $464m => C = -0.79

This means the TelstraHealth EBITDA loss for the FY2022 year was: -0.79 x $243m = -$193m.


C x $243m + 0.1 x $165m + 1.0 x $56m = 0.06 x $755m => C = -0.11

This means the TelstraHealth EBITDA loss for the FY2022 year was: -0.11 x $243m = -$27m.

Such is the kind of drastic change in profit margin, when the word 'revenue' is used interchangeably with the word 'profit', as Telstra seems to do when assessing 'other' segment performance. The problem I have is that 'other' is used as a 'catch all basket' for any sources of revenue (or is that profit?) which Telstra has that don't fit neatly into other baskets. So defining what profit margin really means can become a problem in itself.

Let's now approach the profitability of TelstraHealth from a totally different angle. A rule of thumb I use when looking at traditional service industry costs is that if you take your employees average salary and then you should double that, to allow for the costs of renting a space for your employee to work in, providing the equipment they need to do the work , and then add in secretarial and billing support, transport and accommodation away. IT people tend to be highly paid all through an organisation. So I would reduce my 'fudge factor multiplier' down from 2.0 to 1.5.

We know TelstraHealth now has 1,400 staff across 15 locations. So if we take an average pay rate across all employees to be $100k that adds up to an annual 'cash cost' of running the TelstraHealth business of:

1,400 x $100k x 1.5 = $210m

I guess there would be plenty of high tech hardware at the office that might depreciate rapidly that might add abnormally to costs too! So if revenue was $243m but the loss for the year was ($193m), that means the cost of running the business must have been $243m + $193m = $436m. That is quite a bit higher than my estimate of $210m. That could mean my formula of estimating the cost of running the business gives a result that is too low, or my estimate of business losses is somehow too high. Then there is always the third option which comes down to me having no idea what I am talking about. I am willing to hear other's views. Otherwise it might be time to bring out the monkey and the dartboard for estimating the profitability of TelstraHealth.

SNOOPY

[Snoopy]

There were two main benefits.

1/ From AR2022 p2, p28: "$1.35 billion was also returned to shareholders via an on-market share buy-back following the sale of a non-controlling interest in our Amplitel towers business for $2.8 billion."

'earnings per share' will subsequently increase indefinitely by a multiplier of: 11,893/11,554 = 1.0293 or 2.93%

2/ We already know that $1.35m of this profit was spent on a share buyback. That means the rest of the cash payment, now that 49% of Amplitel has been sold off, can be used to reduce debt. So debt can be reduced by: $2,883m - $1,350m = $1,533m.

As a percentage of the annual normalised profit for FY2022, this amounts to an incremental $39m/$1,645m = 2.37%


We can now use these bullet points 1/ and 2/ to obtain our answer, by multiplying (not adding) the two effects together:
Incremental earnings gain multiple from Amplitel transaction = 1.0293 x 1.0237 = 1.0537


Some of you may be wondering why I have been spending so much time on what is now an historic event - the selling off of a 49% stake in Cellphone tower company Amplitel.
The following question from Eric Choi from Barrenjoey, made at the HY2023 shareholder meeting should enlighten you as to why.

https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-h/transcript.pdf

"I’ve got to ask on InfraCo. I think previously we’ve centred our questions to you around whether you would do a transaction, and when. This time, I wanted to ask, how much? And my thinking is, most of us, I guess, value InfraCo Fixed probably $15 billion plus. And if you guys sold, let’s say a little bit less than half of that, you’d get $7 to $8 billion or more of proceeds. And I’m just wondering, besides buybacks, are there enough options to deploy that capital? And if not, does that influence how big of a transaction you’d want to do?"

What Eric Choi is hinting at here is that Amplitel was only the entrée. The 'main course', assets currently on the books valued at at least twice that amount are yet to go on the block. I do note these numbers come from an analyst, not Telstra itself. But the head shebangs at Telstra, when addressing the question, made no suggestion that Eric was wide of the mark with his valuation. So where did Eric get his numbers?

I went straight to the Property Plant and Equipment section of AR2022 (p106). There we can find 'communication assets' listed at $19,684m on the balance sheet. Now because Amplitel is a consolidated subsidiary, the full Amplitel assets should be included in that figure (despite the fact that Telstra only owns 51% of them), If, by years end, those Amplitel assets have depreciated down to a value of $5billion, that leaves about $15billion in book value to cover all other communication assets.

We know that 'mobile' is the premier growth area for Telstra. So it is unlikely that the same kind of premium ($800m of book value assets went for $2,800m) will be obtained on these other InfraCo balance sheet items, should Telstra decide to sell. It is also not certain whether Telstra would sell all of InfraCo. They may decide, as an example, that their recently rolled out super fibre highway between main cities (to support third party hyper-datacentres) is best to stay 100% in house. But even considering all of that, and assuming these assets were sold at a 50% premium to book value (verses 200%+ for Amplitel), I think that $7-8billion that Eric is talking about is a conservative figure.

Telstra are being very coy about when, or even if, such a transaction might take place. But my feeling is that such a transaction will very much benefit shareholders and Telstra will 'do the deal'. If the $7-8billion of receipts (I will stick to Eric's value range) is redeployed in a similar way to the Amplitel proceeds, with both a buyback and an interest saved on debt component, then I believe that we could see the eps of Telstra jump by 10-12%. "Money for nothing?" It depends how much of this potential buyback is already built into the share price. And there are analysts out there who think it isn't at all.

SNOOPY

[Snoopy]

This post is bringing together the results of the four Buffett Tests that I have detailed in posts 16,17,18,28 and 29 on this thread. Telstra:

BT1/ PASSes the significant size and market position test,
BT2/ FAILs the increasing normalised earnings test over five years,
BT3/ FAILs the return on shareholder equity test (never comes close to the required return on equity hurdle of 15%) and
BT4/ PASSes the ability to raise profit margin test.

If Telstra manages to increase their normalised profits for FY2023, then the 'fail ' grade of test BT2 will turn into a pass.

However, I am of the opinion that Telstra is unlikely to ever earn the hurdle return on shareholder equity that Buffett requires in BT3/ (15%). My reasons for this may be found on the TEL vs TLS thread on the NZX forum, but are particularly highlighted in this post.

https://www.sharetrader.co.nz/showthread.php?1783-TEL-v-TLS&p=1008165&viewfull=1#post1008165

The summary: Telstra has an inherently higher cost asset base, even adjusted for the respective population difference between Telstra in Australia and the equivalent incumbent Spark in New Zealand. (In contrast to Telstra, Spark clears the 15% return on equity criterion that Buffett sets every year for the last five years easily). If Telstra is unlikely to ever fulfill all of the four qualification hurdles to be a Warren Buffett style investment, does that mean Telstra is un-investible? Of course not. It just means we need to look at alternative investment models to justify an investment in Telstra.

A starting point is the 'capitalised dividend valuation model' (link to post 31 below):
https://www.sharetrader.co.nz/showthread.php?2476-TLS&p=1003252&viewfull=1#post1003252

This is showing a fair value share price of $3.09. This valuation is driven by dividend rates of recent years being lower than dividend rates today. But the capitalised dividend valuation model is also a zero growth valuation technique. If Telstra is genuinely growing their earnings, then a 'capitalised dividend fair value' price will undervalue the company. So does a credible earnings growth plan for Telstra exist? The two most trumpeted potential 'growth candidates' are 'Telstrahealth' and 'Mobile'.

I address the initiative of Telstrahealth (post 40) and conclude that in the medium term, this is likely to continue to be loss making. Nevertheless Telstrahealth may reduce my estimate of its annual loss from an EBITDA of -$193m to zero by 2025. In relation to FY2022 profit, this may increase EBITDA earnings by: $193m/$1,645m= 11.7% over 3 years (or $193m/3= $64m/year).

Inflation adjusting mobile phone price plans, upping prices by 7% - but with half of that increased reflecting higher Telstra costs-, going through, without significant customer churn (post 39) looks do-able. This could increase profits by: 0.5x0.07x $9,470m= $331m per year.

So both of these growth initiatives together might increase FY2024 EBITDA (or in this particular case NPAT, which is much the same thing) by: 0.7x(2x$64m+$331m) / $1,645m = 20% over FY2022 levels. Such a level of profit growth should be directly reflected in share price growth. We can modify our capitalised dividend valuation model price target to reflect that:

$3.09 x 1.2 = $3.71

Yet that price does not reflect the benefits of the Amplitel sell off (a 5% eps lift, see post 45), nor a potential sell off of InfraCo assets (an 11% eps lift, see post 50). Adjusting for those gives a new fair value share price of:

$3.71 x 1.05 x 1.11 = $4.32

As it happens $4.32 is the exact share price that Telstra closed at, as of the close of business on Friday 24th June 2023 last week on the ASX! That I should come up with a market valuation on a share as well and widely researched as Telstra in accordance with 'Mr. Market' is no great surprise. But 'getting the price more or less right' is much less important than understanding the drivers of that price. In this instance it looks like the forecast profitability increases from the company's identified growth engines of Mobile and TelstraHealth are already priced in, as is the beneficial eps effect and consequential debt reduction on the sale of a minority interest in Amplitel and in the near future certain InfaCo assets. Given that there is 'execution risk' associated with all of these potential events, this indicates to me that Telstra is fully priced at $4.32. As a new investor today, I would be looking to get a bit of a share price discount reflecting these 'yet to be baked in 'earnings per share' profit rises, (as reflected in that $4.32 share price). That means looking for an entry price of less than $4. Taking another perspective, should positive announcements drive the Telstra share price 10% higher than my fair value, to say $4.75, that might be a good target price for trimming your holding.

SNOOPY

[peat]

As it happens $4.32 is the exact share price that Telstra closed at, as of the close of business on Friday 24th June 2023 last week on the ASX!........


I think that's awesome



... should positive announcements drive the Telstra share price 10% higher than my fair value, to say $4.75, that might be a good target price for trimming your holding.

SNOOPY
Yes I've thought about selling in the mid-high $4.00's but it hasnt really got there

and looking at that recent peak of $4.42 and subsequent sell off I dont think it will for a while.

[peat]

Not selling the cell towers

https://www.theage.com.au/business/companies/telstra-boss-rogue-move-could-define-her-legacy-at-the-telco-20230817-p5dxay.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+18+A ugust+2023

[Snoopy]

Not selling the cell towers

https://www.theage.com.au/business/companies/telstra-boss-rogue-move-could-define-her-legacy-at-the-telco-20230817-p5dxay.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+18+A ugust+2023



No, you have misinterpreted the Age article Peat.

The article says the sale of 'Infraco' (which houses Telstra’s ducts, fibre, data centres and exchanges) has been put on ice. The cell towers are in a different entity 'Amplitel', and Telstra has already flogged off 49% of that. (IOW the cell towers have already been sold, albeit not down to the same level that Spark in NZ has done.)

Telstra seems content with the Amplitel strategy. From p5 of the full financial year 2023 results address:

"Finally, we continue to demonstrate the growth potential of our infrastructure through Amplitel. It grew EBITDAaL by 9.2% from increasing tenancy on new towers and strong demand from new tenants for existing towers."

"With over $2 billion in long-term contracts signed, we are excited about the future of this business. Given this performance, we see Amplitel EBITDAaL CAGR increasing from low-to-mid single digit to mid-to-high single digit to FY25."

There was talk that Telstra might sell some of their other Infrastructure assets in a similar deal to the Amplitel one. It is this transaction that has been put on ice - nothing top do with cell towers. I expect the freezing of any sale of shares in Infraco will be a short term negative for the Telstra share price. Sharemarket punters will not be getting the sugar hit of an extra capital injection (and hence special dividend?) that they expected.

However, it is probably positive news for longer term investors. From that Age reference you gave:
"Five years on and the booming movement to the cloud and hyper-demand for the next generation of AI drives the use of InfraCo’s infrastructure assets. This business began to look less like a low-growth utility and more like a business with stronger growth prospects."

"Already Brady has begun investing in the network through the development of intercity fibre and has plans for more data centres and edge computing infrastructure to increase capacity and improve latency. In other words, make it fit for purpose to accommodate the changing needs of customers."

"Brady hasn’t ruled out the possibility of selling it down the track, but she sees better value in renovating it first and quite possibly a fatter sale price as well."

SNOOPY

[peat]

ok thanks for the correction Snoopy.

[Snoopy]

Information on Telstra's borrowings may be found under note 4.4.1 in the annual report. The borrowings are split between unsecured notes, unsecured bank and other loans and unsecured commercial paper. There is no detail given as to who these loans are with, nor any specifics about loan maturity dates (apart from a current and non-current disclosure). That the detail reporting is so sparse, compared to the likes of the Spark annual report where all loans are laid out in great detail as regards size and maturity, I find odd. Different accounting disclosure requirements on each side of the Tasman? No matter. The information I need is there (supplemented by information from the half year report).




FY2022
HY2022
FY2021


Current Liabilities
$2,690m
$4,129m
$3,631m


Non Current Liabilities
$8,292m
$8,003m
$10,505m


Total
$10,982m
$12.132m
$14,136m



By averaging the three totals, I get a triangulated approximation to the average loan balance during the year.

($10.982m+$12,132m+$14,136m) / 3 = $12,417m

The total loan interest bill for the year was $444m (AR2022 p100)

This gives an implied average interest rate over all borrowings for year FY2022 of: $444m / $12,417m = 3.58%



They say the more secure your revenue base, the greater debt burden your company can support. Utility companies, like Telstra, fall into this category. But that still doesn't exempt utility companies' cost of borrowed funds rising a lot more than predicted. What effect did rising interest rates have at Telstra over FY2023? The answer is under the header 'net finance costs' on p27 in AR2023.

"The average gross borrowing rate increased from 3.7% to 4.6%."

I found that quite encouraging in the sense that my linear 3 point approximation that I used to calculate the approximation to this figure (see quoted text) was not far out, at 3.58%. So how close did my linear approximation technique come to estimating the overall debt borrowing rate over FY2023?




FY2023
HY2023
FY2022


Current Liabilities
$2,662m
$3,988m
$2,690m


Non Current Liabilities
$10,013m
$8,894m
$8,292m


Total
$12.675m
$12,882m
$10,982m



By averaging the three totals, I get a triangulated approximation to the average loan balance during the year.

($12,675m+$12,882m$10.982m) / 3 = $12,180m

The total loan interest bill for the year was $570m (AR2023 p110)

This gives an implied average interest rate over all borrowings for year FY2022 of: $570m / $12,180m = 4.68%

That is close to the 4.6% rate quoted by Telstra itself, so a good approximation. Particularly in the context of that one off Amplitel sale money moving into the company Large one off payments have the potential to disrupt linear averages like the one I calculated.

SNOOPY

[Snoopy]

The Australian federal government via nbn (the National Broadband Network), the vehicle set up to develop broadband across the Australian nation, has been, -year by year-, 'buying out' the existing Telstra owned largely copper telecommunications network via annual payments. The rolling network buyout payments have been recorded in the income statement of Telstra as part of the total income under 'other income'. This buyout process is now winding down to completion. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these payments should be removed from 'normalised income'. This post is an exercise to show how that is done.

1/ Line Migration Revenue Part 1: Network disposal compensation to Telstra

Telstra has been receiving money, -in effect from the federal government-, to dispose of their legacy fixed line network to the federal government owned nbn (National Broadband Network). This money is classified as an IOP or 'Infrastructure Ownership Payment', and is made under the ISA or 'Infrastructure Services Agreement' between Telstra and nbn. These IOP payments are classified as part of 'other income' in the Telstra income statement. This 'annual IOP (payment)' is itemized in note 2.2 of each of the last few years of annual reports under "disconnection fees". Subsequently Telstra becomes a retail provider selling broadband on behalf of the nbn, the network owner and wholesaler.

(Special note: These IOP payments are not to be confused with IAP 'Infrastructure Access Payments', classified as sales revenue. IAP payments are part of a future ongoing income stream to Telstra, as nbn pays Telstra for access to Telstra owned ducts and pits.)

2/ Line Migration Revenue Part 2: End line customers billed by Telstra to move to nbn

On top of the 'network disposal money' received, Telstra charges their customers to move from their existing network arrangements to 'nbn', under the description 'one-off income we receive from customers to connect to nbn'. These customer 'disconnection from legacy and connection to nbn' fees (column 1 in the table below) are not distinctly disclosed. However it is possible to work them out by subtraction.

a/ Take the 'total nbn income' (e,g. for FY2022 from AR2022 p25: $376m) (figure transferred to table column 3 below)
b/ Subtract from that, the component paid by nbn (e.g. for FY2022 from AR2022 p90: $329m) (figure transferred to table column 2).
c/ The Telstra charged 'connection fee' to nbn is your answer

The 'total nbn income' may also be found at the front of the respective annual reports in the "Full year results and operations review.", in the 'Product Income' table, as part of the 'Product Performance' graphic (AR2021 onwards). (I cannot find this information directly in earlier reports. However, it can be calculated by adding columns 4 and 5 in the table below).

End of the line migration process

Both of the above two line migration income streams are set to become less important over time.
From the FY2019 annual result presentation, slide 5:
"We expect one off nbn DA (for Definitive Agreement revenue) and nbn 'costs to connect' to reduce to zero over time as migration to nbn completes."

Normalising Telstra Revenue

Since these income streams are non-recurring for each customer, I need to take the total tabulated nbn migration revenues off the total declared Telstra revenue. This will normalise the revenue (and hence income in this instance as well, as explained below) figures.

If we are to remove a stream of income, it follows that we should also remove any expenses that are specifically incurred in earning that income stream. Thus we have the latter two columns of the table. IMPORTANT CONCEPTUAL POINT: There is no depreciation, amortisation or interest charges set off against these nbn revenue payments. So in this instance 'Change in EBITDA' = 'Change in NPBT'. This so called 'Removed EBITDA' may be found in the 'Reference Tables' towards the end of each respective report (back to AR2020) in the 'Underlying EBITDA' calculation table (e.g. AR2022 p170). It is described as 'Net one off nbn receipts'. I have put these numbers in column 5 of the table below.



nbn transition Telstra income & expenses
Customer Connect fee to nbn (calculated)
plus DA agreement (1) payments from nbn
equals Total nbn Income
less One off DA (1) & nbn Cost to Connect (C2C)
equals Removed EBITDA (2)



FY2023$3m$69m
$72m$35m$37m



FY2022$49m$329m
$378m$145m$233m



FY2021$28m$1,022m
$1,050m$248m$802m


FY2020$283m$1,721m
$2,004m$468m
$1,536m


FY2019$505m$1,611m
$2,116m$503m
$1,613m


FY2018?$1,779m
use $2,297m$518muse $1,779m (3)



Notes

1/ "DA agreement" is the so called 'Definitive Agreement' that outlines how Telstra will transition from their "in-house legacy network" to the government owned nbn or 'national broadband network.' Otherwise known as 'nbn disconnection fees', they are listed under 'other income' in AR section 2.2. There is a cost incurred to Telstra in facilitating this transition (fourth column in table above). These costs may be found in the breakdown of 'operating expenses' in the "Full year results and operations review" section in the "operating expenses table" at at the front of each report (e.g. AR2022 p26).

2/ The 'Removed EBITDA' figure is from the underlying EBITDA calculation found in the 'Reference tables' at the back of each annual report. The figure I have used is 'Net One off NBN Receipts' which is more finely defined as 'net nbn one off Definitive Agreement receipts, consisting of Per Subscriber Address Amount' (PSAA) and Infrastructure payments, offset by the nbn cost to connect expenses. In this instance the removed EBITDA is the same as the removed NPBT.

3/ Why have I tabled estimated figures for FY2018? There was no total 'nbn income' figure offered up in AR2018. But If you look at FY2019, the first year all the information that I was after was available (albeit retrospectively from the FY2020 report), you will see that the 'Cost to Connect Fee' ($505m) and the actual costs incurred making the connection ($503m) were almost the same. I expect the situation was similar over FY2018 Little difference between the two analagous comparative figures). As long as income is only just covering costs, it makes no difference to the overall profitability picture of the company. And furthermore, in the early days of the nbn fibre roll out, there would be no reason to think that a 'network switchover' was a 'profit opportunity going begging'.

If the 'customer connection fee' and the 'background costs to do the job' are roughly equal, that means the Definitive Agreement nbn payment received will be a close approximation to the EBITDA (and in this instance NPBT) lost. So although unlikely accurate to the last dollar, $1,779m will be close enough to the real undeclared NPBT lost.

SNOOPY

[Snoopy]

The purpose of this post is to provide an input to allow us to normalise earnings across a period where there was a significant accounting rule change (the adoption of AASB16, the Australian equivalent of NZIFRS16).

Telstra adopted AASB16 for the FY2020 accounting year. Telstra have chosen to use the 'modified retrospective adoption approach' (AR2020 p88). This means the comparative results for FY2019 have not been restated, Instead the balance sheet was adjusted, in terms of listing the quantum of retained earnings as at 01/07/2019 (the start of FY2020) to mirror the cumulative effect of historically applying this standard. To compare the results from FY2018 and FY2019 with newer results, we can adjust the newer results to reflect what would have been reported if AASB16 had never been adopted as the reporting rule going forwards.

At this point I need to remind readers that the total profit over the years, booked by Telstra from utilising a leased asset (like a rental premises) is not changed by accounting reporting rules. Instead the effect of AASB16 is to shift profitability between reporting years, not to change the 'all of contract' leasing profitability picture.

An increase/decrease in expenses from adopting AASB16 for a selected year, will result in a decrease/increase in profit for that year.


Click

Expense
FY2020FY2021FY2022FY2023
Reference


Using Post AASB16 rules
Depreciation of right-of-use assets
$1,017m
$726m
$587m
$574m
(AR Note 2.3 'Expenses')


Click
add Interest on lease liabilities
$109m
$83m
$78m
$99m
(AR Note 2.3 'Expenses')




$1,126m
$809m
$665mClick
$673m
(Total)Click


Using Pre AASB16 rules (based on Cashflow)
less Lease Finance Payments (principal portion)
($993m)
($706m)
($697m)
($675m)
(AR 'Statement of Cashflows')



equals NPBT Profit Increment on adopting AASB16
($133m)
($103m)
$32m
($2m)
(Total)



SNOOPY

[Snoopy]

The last few years have seen Telstra dividends 'beefed up' by federal government payments as Telstra's long standing legacy nationwide network is 'signed over' to new management in the Federal Government controlled 'National Broadband Network'. Management have been quite up front about doing this, even splitting their dividend into 'ordinary' (from normal operations) and 'special' (as a result of nbn payments) parts. However the nbn party for dividend hounds has now come to an end. This is why this dividend analysis has been 'adjusted' to take out the special (nbn funded) components of historical dividend record.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax). As New Zealand residents and Telstra shareholders, we kiwis are not entitled to claim these franking credits as 'tax paid' in New Zealand. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an 'Australian perspective', and that means I assume franking credits are claimable. We kiwi shareholders may not get the franking credit value from our dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate is 30%.



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20197.5c + 5.0c10.71c + 7.14c17.85c


FY20205.0c + 5.0c7.14c + 7.14c14.28c


FY20215.0c + 5.0c7.14c + 7.14c14.28c


FY20225.0c + 6.0c7.14c + 8.57c15.71c


FY20237.5c + 8.5c10.71c + 12.14c22.85c


Total84.97c



Now we have to select a representative capitalisation rate. For Spark I have decided a rate of 6.5% is appropriate. Telstra is now a very similar company to Spark (both are incumbant operators that have had their former fixed line monopoly networks de-merged). But Australian interest rates have traditionally been a little lower than ours. So I would judge a gross return rate target of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 84.97/5 = 17.0c

Using an interest capitalisation rate of 5.5%, this equates to a Telstra share price of: 17.0 / 0.055 = $3.09. Telstra shares are trading today at price of $4.34. On that basis, Telstra shares are currently significantly over-valued, by about 40%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

22.85/ 0.055 = $4.15

My interpretation of this is that Mr Market is telling us the recently elevated level of dividend is not only sustainable, but might be expected to grow a little. But is that true? Of will earnings 'revert to the mean'? Know the answer to those questions, and you will know if TLS is currently trading at a fair market value, given its business outlook.


Once again I have historically adjusted out dividend payments to remove 'special dividends' that were funded by one off nbn (National Broadband Network) compensation payments. These were made to Telstra for handing over their existing largely copper network to nbn, a process that is now largely complete. It was important to remove these special dividends from this forecasting tool, because they are entirely historical, and do not reflect future dividend potential from Telstra.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax - which Telstra does). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our Australian dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate, which I have used for grossing up dividends, is 30%.



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20197.5c + 5.0c10.71c + 7.14c7.14c


FY20205.0c + 5.0c7.14c + 7.14c14.28c


FY20215.0c + 5.0c7.14c + 7.14c14.28c


FY20225.0c + 6.0c7.14c + 8.57c15.71c


FY20237.5c + 8.5c10.71c + 12.14c22.85c


FY20248.5c + ?c12.14c + ?c12.14c


Total86.4c



Now we have to select a representative capitalisation rate. For Spark (the nearest NZ equivalent company both are incumbant operators that have had their former fixed line monopoly networks de-merged), I have decided a rate of 6.5% is appropriate. But Australian interest rates have traditionally been a little lower than ours. One way to pick an acceptable equity return rate is to look at the market trading interest rate of any listed company bonds and pick something a bit higher, to account for 'equity risk'

Telstra have the following company bonds listed on the ASX market:
TL1HAA €500m 1.00% Notes maturing 23 April 2030;
TL1HZ: €600m 1.375% Notes maturing 26 March 2029; and
TL1HY: €750m 1.125% Notes maturing 14 April 2026.

When I put these tickers into 'Stocknessmonster', I get a complete blank on both the buy and sell side. So there is no indication as to what market rate (which I suspect will be above the coupon rate) these bonds are trading at!

Never Mind. I would judge a 'gross return rate target' of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 86.4/5 = 17.3c

Using an 'interest capitalisation rate of 5.5%', this equates to a Telstra share price of: 17.3 / 0.055 = $3.15. Telstra shares are trading today at price of $3.87. On that basis, Telstra shares are currently significantly over-valued, by about 23%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year. Any overvaluation might be better considered as a 'deserved growth premium'.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

24.28c/ 0.055 = $4.41

I think the market discount to that $4.41 price (a turnaround on the premium the market was offering to my historical yield of 6 months ago) might be a reflection of the cancelled InfraCo sell-down, from which salivating investors were expecting a quick capital injection. But even so, trading at $3.87, I believe there is a modest growth path priced into the Telstra share price. And with the purchase of 'Versant' announced today, a cloud technology NAS (Network Application and Services) business, we have another 'clip on' should add to that 'growth potential'. This latest Versant acquisition builds on previous acquisitions, most recently of Alliance Automation and Aqura Technologies, which are bolstering subsidiary Telstra Purple’s capabilities to support the end-to-end needs of industry covering network, security, cloud, collaboration, mobility, software development and design, data and AI.

In summary, from a yield perspective alone, Telstra is not cheap, but nor is it obviously overvalued. Whether that growth potential is enough to tick the value investor box at $3.87 is a decision that will require some more work.

SNOOPY

[Snoopy]

In summary, from a yield perspective alone, Telstra is not cheap, but nor is it obviously overvalued. Whether that growth potential is enough to tick the value investor box at $3.87 is a decision that will require some more work.


Someone else is interested in how Telstra will grow in the medium to longer term. Analyst Scott Ryan at the FY2023 results presentation asked:
"I was wondering if you could tell us, just as you look around the globe and your travel, on a three to five year time-frame, are there any specific geographies or players with really interesting services that you seek to emulate for the medium term, please?"

And Telstra CEO Vicki Brady answered as follows:
"What a great question; taking the longer run view actually. That’s part of the work we’re doing at the moment, looking out that five year, and even 10 years out: what are some of the trends that are going to underpin and are going to be important for that long run sustainable growth in our business? Look, we talk to and engage with lots of our peers around the world, as well as other technology companies around the world. And there’s not a specific service I would call out that I’ve seen out there. But absolutely, I think the thing that everyone is talking about – and certainly in conversations I’m in with business leaders here in Australia at the moment – everyone can see this incredible potential with this next stage of what AI will deliver. I think generative AI has certainly opened up AI now as very, very mainstream, not something that is sitting in the background. So that’s why, for us, things like our venture with Quantium (1), making sure we’re at the forefront of how we adopt these technologies in our business, but also work with our customers to help enable them on the technology front."

"And I think it’s important to remember as all of that demand for that technology is out there, it needs really great connectivity. So that foundational piece of all of the infrastructure and network that needs to be there, which goes hand in hand with the views and what I’ve talked about with InfraCo Fixed; it’s such foundational infrastructure for the country where we really do see where technology and services are evolving to. It’s only going to generate more demand for that infrastructure, which we already have strong demand for today. So they would be some of the areas I would point to. And obviously, we engage and keep at the forefront of understanding what’s happening around the world, so we can bring those things to Australia as soon as we can and have Australians getting access to that technology right amongst the first few countries in the world, as we did with 5G. So thanks for your question, Scott."

(1) Telstra and Quantium arrangement: https://quantium.com/quantium-telstra-media-release/ Quantium is is a trans-continental data analytics company with offices in Australasia, the United States, India, Great Britain and South Africa

------------------------

My own view is that tech companies like to talk, but the actual future is likely to be more prosaic. Apart from the press release I saw no mention of Artificial Intelligence per se as a future profit engine on the Quantium website. Talk can pump the NVIDIA share price up to a PE of 112. But making the profits to justify that heady value is another matter. NVIDIA fans paint a picture of global domination of this technology by NVIDIA, with all the downstream applications surfing on their patents and first mover advantage. If you believe that, Telstra will be battling to lap up AI market share from discarded droplets of the downstream wake of NVIDIA. That doesn't sound like a big contribution to the Telstra profit puddle going forwards to me.

SNOOPY

[Snoopy]

What is Telstra and what are their chosen markets?

The name "Telstra" is derived from the words 'Telecom' and 'Australia' (TEL from Telecom and STRA from Australia). Telstra traces its roots back to 1901 at the time of Australian Federation. The Postmaster General's Department of the time was established by the Federal Australian Government to manage all domestic telephone, telegraph and postal services. Subsequently it merged with the Overseas Telecommunications Commission formed in 1946 to manage international telecommunications services.

Telstra first became a publicly listed company in November 1997. Telstra was progressively privatised (33.3% 1997, 16.6% 1999, 33.3% 2006, with 17% transferred to the 'Future Fund'. Today Telstra is still Australia's leading telecommunications company, serving a diverse range of customers: small business. large enterprise, government organisations and -of course- ordinary consumers. The 'product ranges' covered by Telstra include:

i/ Mobile: Prepaid and postpaid mobile services, handset sales, mobile broadband, internet of things (IoT), and wholesale services providing Mobile Virtual Network Operations (MVNO) to third party mobile market players.

ii/ Fixed (Consumer & Small Business): Telstra is in a process, (close to completion) of handing control of their legacy copper network, and some early technology fibre, over to 'the nbn', a state owned and controlled 'National Broadband Network'. In instances where the former Telstra fixed network overlaps the nbn fibre network, the older network may be retired or alternatively integrated into the new nbn 'parent network'. Meanwhile the fixed network contains legacy voice and broadband. But it also includes income from online business apps and services, gaming services (exclusive Australian access to the Xbox All Access on line gaming platform), pay television (Foxtel subscriptions- including Kayo sport) and SVOD (subscription video on demand- including Kayo 'one off' Sporting Events).

iii/ Fixed Enterprise: Data and connectivity and traditional calling applications are the base products. In addition Network Added Services (NAS) for these larger business and government customers are available. NAS includes cloud applications, equipment sales, professional services (including infrastructure builds and digital transformation projects) and managed services. Security services, as an over-layer above other applications, are a 'growth area'.

iv/ Fixed - Active Wholesale: Largely data and connectivity to third party retail players on the legacy Telstra network, prior to that part of the network transitioning to nbn.

v/ International: Providing international services (including legacy international toll calls) with international assets, and now including Digicell's South Pacific business (Acquired July 2022). Digicell Pacific is a leading provider of communications services across Papua New Guinea (PNG), Fiji, Nauru, Samoa, Tonga, and Vanuatu. The international division also owns Telstra's share of the different sub-sea intercontinental telecommunications cables that connect Telstra to the rest of the world.

vi/ InfraCo fixed: This business unit involves the design, construction, operation, maintenance, and the relocating and rationalising/decommissioning of passive infrastructure assets: Legacy copper line assets (but with some HFC (Hybrid Fibre Co-axial) older technology fibre thrown in too), ducts, pits tunnels, poles and certain fixed network sites (including data-centres). It also contains ongoing income related to the 'DA' ('Definitive Agreement' with nbn). One off DA income includes receipts for disconnecting customers from the legacy Telstra network, and one off receipts from customers connecting to the nbn network. To counter that reducing income stream, recurring DA income from nbn includes payment to access Telstra owned ducts, racks and fibre. One important category of infrastructure hardware -not under the wing of InfraCo- are the mobile network towers.

vii/ Amplitel: This is a special purpose infrastructure vehicle, now only 51% owned by Telstra, that constructs, maintains and upgrades for new services (like 5G) -what was formerly the 'fully owned in house'- Telstra mobile tower network.

viii/ Other: This includes 'Telstra Health' (digital health infrastructure for health providers, and software solutions for the same), 'Telstra Energy' (a retailer of electricity bought from third parties, in what looks like a mechanism to offer 'one party utility billing' for customers who want that) and 'Telstra Purple' (offering adjacent technology for existing Telstra network capability). One product from 'Telstra Purple' called "Branch Offload" will use a range of technologies, including Telstra’s 5G and fixed connectivity, Microsoft Azure (a cloud computing platform) Stack Edge (Microsoft Azures cloud storage gateway) for edge computing (Note 'edge computing' is a term used for processing time sensitive data), Secure Edge (provides users with consistent and secure access), SD-WAN (Software Defined Wide Area Network) and service orchestration. And all of this is delivered as a managed service from 'Telstra Purple'.

ix/ Equity Investment Telstra is joint owner (35%), together with Newscorp (65%) of NXE Australia, trading as Foxtel, a pay TV operator. Foxtel operates using cable television, satellite television, and IPTV (Internet television) operator. What does the name mean? "Fox" represents News Corporation's 'Fox Network Television' and "Tel" representing Telstra. Foxtel transmits its cable service via Telstra hybrid fibre-coaxial (HFC) cable into the Brisbane, Sydney, Melbourne, Adelaide and Perth metropolitan areas, along with the Gold Coast. Foxtel's satellite service covers the rest of Australia. Foxtel on Mobile launched on Telstra's Next G Network in late 2006. Netflix is the market leader in pay TV in Australia (December 2019 figures, Roy Morgan) with 11.9 million subscribers. At the same date Foxtel had 5.5million subscribers. Third in this market is Australian-owned Subscription TV service Stan, which is now accessible by more than 3.3 million Australians. Stan is a fully owned subsidiary of the Nine Entertainment company.


Although not drastically changed from a year ago, (apart from adding 'Digicel Pacific' to the Telstra family), I feel a slightly more colourful descriptive picture, one that captures where Telstra is heading rather than dwelling on where Telstra has come from (see quoted text above) is required for FY2023.

The heart of Telstra's business today is mobile. Telstra offer Australia's largest mobile network, with a range covering 1million more square kilometres than their nearest competitor (PR2023 slide 29). By EOFY2023, mobile coverage was more than 2.72 million square kilometres, an 80,000sq km increase over the last two years. Telstra are committed to delivering an additional 100,000sq km of of mobile coverage by EOFY2025.

Mobile remains central to growth and continues to perform strongly (note that Digicel Pacific, detailed below, and also a mobile business is reported on in the international arm of Telstra, which is not part of the 'mobile' product revenue category being discussed here) . Over FY2023, mobile was the highest earning product range in terms of 'dollar sales' ($10.258b, AR2023 p23). Equally importantly, it had the highest product category growth rate (+8.3%). This included growth from the IoT (Internet of Things) in particular and other value added applications. A key focus for Telstra is the quality, scale, speed and resilience of their mobile network. Telstra were early to the 5G party, and achieved their population target coverage to meet 86% of Australians over FY2023. 41% of Telstra's total mobile traffic is now on 5G. '5G standalone technology' has been enabled. This innovation allows for software defined features like 'network slicing'. 'Network slicing' allows the network to be carved up into separate secure slices, and support lower latency for customers with different requirements,
Furthermore 5G 'edge-computing' (allows cloud data storage closer to the source of the data, and so saving bandwidth elsewhere in the network) supports data being put into hardware at the 'edge' of the Telstra network, closer to the customer. Wholesale mobile revenue was up markedly (+14.6%), driven both by an increase in average revenue per user (ARPU) but also by Mobile Virtual Network Operators (MVNOs). MVNOs refers to a mobile retailer selling a mobile phone product under their own brand name, while all the operational functions are carried out by Telstra, silently in the background. The benefit to Telstra from this kind of arrangement is being able to attract customers from an alternative retail front, where Telstra themselves do not have a strong presence.

Telstra also announced agreements with LEO (Low Earth Orbit) satellite providers:
a/ 'Oneweb' to shift to satellite-based backhaul for Telstra's remote mobile base stations AND
b/ 'Starlink', to enhance services to consumer customers in regional and remote Australia.

The 'National Broadband Network' (nbn) is the default wholesale fibre network operator in Australia (nbn have a legislated monopoly in supplying fibre to the home and fibre to the cabinet, much like Chorus does in NZ). Yet Telstra own 250,000km of optical fibre cable of their own (mainly deployed in back-haul duties) in Australia. Good progress is being made over upgrading the back-haul connections between major centres. Telstra have begun laying ultra high capacity low latency cable - for marketing to hyper-scale customers. Such prospects need reliable 'ultra high bandwidth' between capital cities, and connections to international submarine cables. Customers like Amazon with their AWS data centres, and Microsoft with their Azure data-centres spring to mind. Telstra acknowledges that partnering with these hyper-scalers, rather than directly competing with them, could mean that Telstra becomes dis-intermediated from the final end line customer (an investment risk for shareholders). Nevertheless the rise in Cloud applications revenue (a sub section of the Fixed-Enterprise product mix) of 11.5% was driven by partner cloud associated products.

Digicel Pacific, acquired in FY2023 for $2.621b, is Telstra's largest ever acquisition. Revenue booked from Digicel was $718m over FY2023. The Digicel acquisition was completed on 13th July 2022, barely two weeks into the FY2023 financial year. Digicel Pacific is the biggest mobile operator in the South Pacific spanning six countries - Papua New Guinea, Fiji, Samoa, Tonga, Vanuatu and Nauru. However, despite the touted scale of the Digicel acquisition, total Telstra operating revenue for the year of $23.245b (Digicel makes up just 3.1% of that) puts the acquisition into perspective.

The separation of the Telstra infrastructure into a separate division (InfraCo) and the partial; sell down (51% stake maintained) of the mobile tower business (Amplitel), have highlighted the earning potential of what was formerly thought of as just a 'cost centre' within the company. Contracts from external users are being sought and signed. Today, it is InfraCo that operates the Amplitel assets.

Information of Telstra's competitors , which I have chosen not to update from last year may be found in the linked post below
https://www.sharetrader.co.nz/showthread.php?2476-TLS&p=999995&viewfull=1#post999995

General summary: Telstra is the former default telecommunications operator in Australia. They have retained strong positions in all the retail markets they contest.

Conclusion: PASS TEST

SNOOPY

[Snoopy]

The following is an exercise in normalised earnings. The starting point is the NPAT quoted in the income statement. The columnar corrections are then cross referenced by table header to the individual notes below. Lastly the corrected normalised NPAT is divided by the number of shares on issue at the end of the financial year to get 'earnings per share'.



Note Number

(1)
(2)
(3)
(4)

(5)

(6)
(7)


(8)

(9)
No. Shares
eps

These
FY2022:[$1,814m-0.7($165m-$61.6m+$127m-$183m+$233m-$71m]+$32m)]
/11,554m=
14.2cps

FY2021:[$1,902m-0.7($275m


+$802m
-$180m
-$211m
-$103m)]
/11,893m=
12.6cps


FY2020:
[$1,839m-0.7(
$420m

-$308m
+$1,536m -$130m
-$259m

-$133m)]/11,893m=
8.8cps



FY2019:[$2,149m]-0.7($687m
-$493m
+$1,613m


-$801m)]


/11,893m=
12.1cps


FY2018:[$3,557m-0.7($930m-$273m
+$299m+$1,779m]





/11,893m=
13.8cps





Notes

1/ Asset Sales & Sale and Leaseback Consequences
Gains in profits from a combination of:
i/ Net gain on disposal of Property Plant and Equipment and Intangible Assets.
ii/ Disposal of businesses and investments.
iii/ Gain on sale of leasehold transactions (sale and leaseback of exchange property)
....have been removed from the respective profits as follows: $165m (FY2022), $275m (FY2021), $420m (FY2020), $687m (FY2019) and $930m (FY2018). (See respective annual reports, note 2.2)

For FY2021, 'leasehold transactions' including the sale and leaseback (for a 10 year period) of the 16 story Pitt Street Telephone exchange building in downtown Sydney . The company received $262m for the sale of this building, which equated to a $102m net gain once the sale and leaseback arrangement was agreed to (AR2021 p113). Businesses disposed of over FY2021 include 'Telstra Velocity' (a regional high speed broadband provider), for a $60m gain after sale and leaseback, an e-commerce platform for $45m profit, and Telstra's minority interest in Sensis (owns White pages and Yellow pages and is responsible for Telstra directory service call centres) for a net gain of $1m, after accounting for a $34m impairment loss write down.

2/ Impairments in Income Statement
Telstra annually identifies 'impairment expenses' that form part of 'other expenses' in the income statement. While a company the size of Telstra can expect some impairments in normal business operations, some extra large impairments are highlighted. So I am adding these extra large detailed impairments back into each result, where appropriate, but not 'deferred contract costs' which unfortunately seem to be an ongoing cost of doing business. The specific information referred to below may be found in section 2.3 of the respective annual reports.

For FY2022 the impairment was $144m, (including $107m of deferred contract costs) - no adjustment made. For FY2021 the impairment was $162m (including $113m of deferred contract costs added back, but not including the $34m of impairment on the sold 'Project Sunshine holding' (Sensis stake) that I have already accounted for under note 1/.) - no separate adjustment made. Over FY2020 total impairment losses of $129m, include $124m of deferred contract costs - no adjustment made.

But over FY2019, as well as impairing $100m in deferred contract costs, Telstra impaired their legacy IT assets as a result of "making good progress in standing up our new IT platforms" (AR2019 p23) to the extent of $493m (AR2019 p29). I was concerned that I might be 'double counting' this IT platform restructure, given the very large T22 (for plan 'Telstra 2022') restructuring costs already declared under note 12. However if I go to p9 in AR2019:
"We are ahead of plan in our direct workforce reductions. The decision to accelerate these changes was made by carefully and deliberately to, in part, provide our people with certainty about their future. This resulted in an increase in Telstra's forecasted total restructuring costs from around $600m to approximately $800m."
If the IT asset costs were included in the $801m figure, that would mean labour restructuring costs over FY2019 were: $801m-$493m= $308m. Over FY2020 the comparable labour restructuring cost was $253m, but this was over a 8 month period. (From AR2020 p5: "In March we put all job reductions on hold for six months to give our people certainty over this difficult (pandemic) time.")

This means that if the FY2019 $801m transition charge, over the largest restructuring year, did include an IT equipment write off, then the labour cost on a 'per month basis' would have been less than the subsequent lesser restructuring year. From this I conclude the $801m 'extraordinary restructuring' charge was labour only, and the $493m IT write off was a separate charge. This $493m hardware/software impairment I have reversed.

From AR2018 p67 "During the period, there was a total impairment loss of $327 million related to goodwill and other non-current assets, of which $273 million related to Ooyala Holdings Group."
Over FY2018 Telstra wrote off $273m of their remaining goodwill from their investment in Ooyala Holdings Group, a video streaming platform, when it was sold back to the founders. I have reversed this one off write off.

3/ Retail Chain brought 'in house'
Goodwill write off over five years, starting from FY2022, through integrating independently owned Telstra Retail stores added back as a wholly owned Telstra business unit: [$92m + $216m]/5= $61.6m/year (AR2022 p148).

4/ Inter-year Financial Adjustments

Bond rate change on short term employee liabilities
$80m is listed as EBITDA from the positive impact of bond rate changes on employee liabilities (AR2022 p25). The same section in the previous annual report identified an "impact of bond rate movements on leave provisions," that was unquantified (AR2021 p23). I had originally thought the $80m was a superannuation scheme adjustment. But the superannuation scheme adjustment for FY2022 was $149m and not recorded in the income statement (AR2022 p77). Instead this $149m change was recorded in the 'statement of comprehensive income' (AR2022 p78). I therefore believe the $80m does not relate to superannuation provisions. Therefore I have removed the $80m bond rate adjustment as a rare one off effect.

Catch up revenue from previous years
$47m of 'catch up adjustments to revenue' have been removed from EBITDA for FY2022 (AR2022 p29 & p25)

These two effects sum to a total of $127m

5/ Ownership Adjustments for Subsidiaries & Investmnents

Amplitel (Tower Company) sell off costs
$125m of costs related to the partial spin off of Amplitel have been written back
over FY2022 (AR2022 p25), including $76m of stamp duty (AR2022 p29)

Acquisition Integration costs
$58m of integration costs related to the acquisition of 'MedicalDirector' and 'Powerhealth' expensed over FY2022 have been written back (AR2022 p25, p147).

Total adjustments for the equity sell downs and acquisitions made over FY2022 adds to $183m

Equity accounted NXE write off
Over FY2020 Telstra wrote off $308m of the value in their equity accounted investment in NXE Australia, which trades as Foxtel (AR2020 p166). This one off capital adjustment does not affect operating performance, so I have added it back.

Equity accounted NXE write back
Over FY2018 the Telstra stake in Foxtel was brought back into the company accounts as outlined in AR2017, p127. This relatively complex process unfolded as follows:

i/ As of 01/07/2017 (the beginning of the FY2018 financial year), 'Foxtel' was valued at nil on the Telstra books due to Telstra's cumulative share of equity accounted losses exceeding the carrying value on the books.
ii/ On 28/09/2017 Telstra's outstanding loan balance to 'Foxtel' was converted into equity, resulting in a $38m value gain being recognised under 'other income'.
iii/ On 03/04/2018 'Foxtel' merged with 'Fox Sports Australia' (externally owned by Newscorp), to form a new entity 'NXE Australia', with Telstra becoming a 35% shareholder in this new merged venture. Telstra's share of 'NXE Australia' resulted in the recognition of a $261m profit gain recognised in 'other income'.
iv/ As a result of ii/ and iii/, I have removed a total of: $38m + $261m = $299m of before tax profit from the FY2018 result.



6/ nbn transformation payments (net)
The federal government via nbn has been, year by year, 'buying out' the existing Telstra owned largely copper network via annual payments. The rolling network buyout payments have been recorded in the income statement as part of the total under 'other income'. This buyout process is now winding down. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these payments should be removed from 'normalised income'. One off NBN income that I have removed from my 'normalised results' amounts to: $233m (FY2022), $802m (FY2021), $1,536m (FY2020), $1,613m (FY2019), $1,779m (FY2018) (Refer post 20 for supporting calculations).

7/ 'Hand of God' External Events

Covid-19 one off adjustments
Over FY2021 Telstra encountered $180m of Covid-19 headwinds (AR2021 p9) that may have included labour outsourcing and onerous rental leases. They then seemingly contradicted that by saying "Underlying EBITDA includes an estimated $380m million impact from Covid-19 (AR2021 p19). I have reconciled the two figures by noting that under the comment on mobile revenue (AR2021 p22) there was a decline in $200m from international roaming revenue: $180m+ $200m = $380m. Because Australia's borders were closed and hugely restricted over Covid-19 times, this reconciliation makes sense to me. However there were other operational effects of Covid-19, including greater use of working at home and video conferencing that equated to higher broadband usage. These change in use effects would somewhat offset the loss of income from international roaming. For this reason I believe the best measure of numerising the Covid-19 impact on Telstra is to use the $180m figure to adjust for non-recurring Covid-19 effects over FY2021.

Over FY2020 Telstra added a special one off Covid-19 bad debt calculations allowance of $36m (AR2020 p29)

I have reversed both thsoftwaree FY2020 and FY2021 Covid-19 adjustments.

Bush Fire relief and bad retail practice compensation][
Over FY2020 Telstra set aside $44m to contribute to bush fire relief and $50m to cover mis-selling by third party agents, inappropriate mobile contracts to indigenous people. I have reversed both of these making a total adjustment of $94m. Add to this figure the Covid-19 adjustment for FY2020 of $36m and the total category adjustment amounts to $130m for FY2020.

8/ Strategic Focus T22 Program
On 29th June 2018, Telstra announced their T22 strategy: to simplify both operations and the company's product set, improve customer experience and reduce the company cost base. These changes are well over and above what would be considered as 'run of the mill' restructuring. Costs incurred are in excess of 'business as usual' redundancies for the period and are recorded as follows: FY2019 $801m, FY2020 $259m, FY2021 $211m and FY2022 $71m.

9/ Lease accounting policy adjustment
IFRS16, called AASB16 in Australia, requires that leases become capitalised 'right to occupy' assets that are then depreciated over time. This reporting rule change was brought in for FY2020 and onwards reporting. I have reversed out this reporting change so that profits from FY2020 onwards are more comparable with previous years. This change has resulted in NPBT decreasing by $133m (FY2020) and $103m (FY2021) but increasing by $32m over FY2022 (for detailed calculations refer post 26).

-----------------

Conclusion: Two years down, but only one allowed. FAIL TEST





The following is an exercise in normalised earnings. The starting point is the NPAT quoted in the income statement. The columnar corrections are then cross referenced by table header to the individual notes below. Lastly the corrected normalised NPAT is divided by the number of shares on issue at the end of the financial year to get 'earnings per share'.



Note Number

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
No. Shares
eps



FY2023:[$2,051m-0.7($198m-$175m-$61.6m-$16m+$37m-$91m]-$2m)]
/11,554m=
18.4cps


FY2022:[$1,814m-0.7($165m-$61.6m+$127m-$183m+$233m-$71m]+$32m)]
/11,554m=
14.2cps


FY2021:[$1,902m-0.7($275m

+$802m
-$180m
-$211m
-$103m)]
/11,893m=
12.6cps


FY2020:
[$1,839m-0.7(
$420m

-$308m
+$1,536m -$130m
-$259m
-$133m)]/11,893m=
8.8cps


FY2019:[$2,149m]-0.7($687m
-$493m
+$1,613m
-$801m)]

/11,893m=
12.1cps





Notes

1/ Asset Sales & Sale and Leaseback Consequences
Gains in profits from a combination of:
i/ Net gain on disposal of Property Plant and Equipment and Intangible Assets.
ii/ Disposal of businesses and investments.
iii/ Gain on sale of leasehold transactions (sale and leaseback of exchange property)
....have been removed from the respective profits as follows: $198m (FY2023), $165m (FY2022), $275m (FY2021), $420m (FY2020), and $687m (FY2019). (See respective annual reports, note 2.2)

For FY2021, 'leasehold transactions' including the sale and leaseback (for a 10 year period) of the 16 story Pitt Street Telephone exchange building in downtown Sydney . The company received $262m for the sale of this building, which equated to a $102m net gain once the sale and leaseback arrangement was agreed to (AR2021 p113). Businesses disposed of over FY2021 include 'Telstra Velocity' (a regional high speed broadband provider), for a $60m gain after sale and leaseback, an e-commerce platform for $45m profit, and Telstra's minority interest in Sensis (owns White pages and Yellow pages and is responsible for Telstra directory service call centres) for a net gain of $1m, after accounting for a $34m impairment loss write down.

2/ Impairments in Income Statement
Telstra annually identifies 'impairment expenses' that form part of 'other expenses' in the income statement. While a company the size of Telstra can expect some impairments in normal business operations, some extra large impairments are highlighted. So I am adding these extra large detailed impairments back into each result, where appropriate, but not 'deferred contract costs' which unfortunately seem to be an ongoing cost of doing business. The specific information referred to below may be found in section 2.3 of the respective annual reports.

For FY2023 there was incremental amortisation of legacy software to the value of $175m (AR2023 p117), but this was not listed as an impairment. Nevertheless I judged it significant, so I have included it.

For FY2023 the impairment listed was $129m, including $95m of deferred contract costs - I did not adjust for this in the normalised results.
For FY2022 the impairment was $144m, (including $107m of deferred contract costs) - no adjustment made. For FY2021 the impairment was $162m (including $113m of deferred contract costs added back, but not including the $34m of impairment on the sold 'Project Sunshine holding' (Sensis stake) that I have already accounted for under note 1/.) - no separate adjustment made. Over FY2020 total impairment losses of $129m, include $124m of deferred contract costs - no adjustment made.

But over FY2019, as well as impairing $100m in deferred contract costs, Telstra impaired their legacy IT assets as a result of "making good progress in standing up our new IT platforms" (AR2019 p23) to the extent of $493m (AR2019 p29). I was concerned that I might be 'double counting' this IT platform restructure, given the very large T22 (for plan 'Telstra 2022') restructuring costs already declared under note 12. However if I go to p9 in AR2019:
"We are ahead of plan in our direct workforce reductions. The decision to accelerate these changes was made by carefully and deliberately to, in part, provide our people with certainty about their future. This resulted in an increase in Telstra's forecasted total restructuring costs from around $600m to approximately $800m."
If the IT asset costs were included in the $801m figure, that would mean labour restructuring costs over FY2019 were: $801m-$493m= $308m. Over FY2020 the comparable labour restructuring cos]t was $253m, but this was over a 8 month period. (From AR2020 p5: "In March we put all job reductions on hold for six months to give our people certainty over this difficult (pandemic) time.")

This means that if the FY2019 $801m transition charge, over the largest restructuring year, did include an IT equipment write off, then the labour cost on a 'per month basis' would have been less than the subsequent lesser restructuring year. From this I conclude the $801m 'extraordinary restructuring' charge was labour only, and the $493m IT write off was a separate charge. This $493m hardware/software impairment I have reversed.

From AR2018 p67 "During the period, there was a total impairment loss of $327 million related to goodwill and other non-current assets, of which $273 million related to Ooyala Holdings Group."
Over FY2018 Telstra wrote off $273m of their remaining goodwill from their investment in Ooyala Holdings Group, a video streaming platform, when it was sold back to the founders. I have reversed this one off write off.

3/ Retail Chain brought 'in house'
Goodwill write off over five years, starting from FY2022, through integrating independently owned Telstra Retail stores added back as a wholly owned Telstra business unit: [$92m + $216m]/5= $61.6m/year (AR2022 p148). I have continued this goodwill write off adjustment into FY2023.

4/ Inter-year Financial Adjustments

Gains on 'energy firming derivatives' is listed as an income stream over FY2023 (AR2023 p25), connected I believe to the 'clip the ticket' offering to existing telecommunications customers, where Telstra supplies third party sourced power to them as well. However because the derivative contribution to income is never quantified, I can't remove it.

Bond rate change on short term employee liabilities
$80m is listed as EBITDA from the positive impact of bond rate changes on employee liabilities ('Other' AR2022 p25). The same section in the previous annual report identified an "impact of bond rate movements on leave provisions," that was unquantified (AR2021 p23). I had originally thought the $80m was a superannuation scheme adjustment. But the superannuation scheme adjustment for FY2022 was $149m and not recorded in the income statement (AR2022 p77). Instead this $149m change was recorded in the 'statement of comprehensive income' (AR2022 p78). I therefore believe the $80m does not relate to superannuation provisions, and may instead remove to leave provisions as reported in FY2021. Therefore I have removed the $80m bond rate adjustment as a rare one off effect.

Catch up revenue from previous years
$47m of 'catch up adjustments to revenue' have been removed from EBITDA for FY2022 (AR2022 p29 & p25)

For FY2022, these two effects sum to a total of $127m

5/ Ownership Adjustments for Subsidiaries & Investmnents

Digicel Pacific and FetchnTV
The two above headlined acquisitions over FY2023 incurred acquisition costs of $15m and $1m respectively. I have added back the total $16m into the FY2023 normalised profit figure.

Amplitel (Tower Company) sell off costs
Over FY2022 $125m of costs related to the partial spin off of Amplitel have been written back
over FY2022 (AR2022 p25), including $76m of stamp duty (AR2022 p29)

Acquisition Integration costs
Also over FY2022, $58m of integration costs related to the acquisition of 'MedicalDirector' and 'Powerhealth' expensed over FY2022 have been written back (AR2022 p25, p147).

Total adjustments for the equity sell downs and acquisitions made over FY2022 adds to $183m

Equity accounted NXE write off
Over FY2020 Telstra wrote off $308m of the value in their equity accounted investment in NXE Australia, which trades as Foxtel (AR2020 p166). This one off capital adjustment does not affect operating performance, so I have added it back.



6/ nbn transformation payments (net)
The federal government via nbn has been, year by year, 'buying out' the existing Telstra owned largely copper network via annual payments. The rolling network buyout payments have been recorded in the income statement as part of the total under 'other income'. This buyout process is now winding down. These payments were legitimate income 'in the day'. But it is my belief that to give an informed comparative picture of the business going forwards, these income payments (refer post 57) should be removed from 'normalised income'. One off NBN income that I have removed from my 'normalised results' amounts to: $37m (FY2023), $233m (FY2022), $802m (FY2021), $1,536m (FY2020), $1,613m (FY2019), $1,779m (FY2018) (Refer post 57 for supporting calculations).

7/ 'Hand of God' External Events

Covid-19 one off adjustments
Over FY2021 Telstra encountered $180m of Covid-19 headwinds (AR2021 p9) that may have included labour outsourcing and onerous rental leases. They then seemingly contradicted that by saying "Underlying EBITDA includes an estimated $380m million impact from Covid-19 (AR2021 p19). I have reconciled the two figures by noting that under the comment on mobile revenue (AR2021 p22) there was a decline in $200m from international roaming revenue: $180m+ $200m = $380m. Because Australia's borders were closed and hugely restricted over Covid-19 times, this reconciliation makes sense to me. However there were other operational effects of Covid-19, including greater use of working at home and video conferencing that equated to higher broadband usage. These change in use effects would somewhat offset the loss of income from international roaming. For this reason I believe the best measure of numerising the Covid-19 impact on Telstra is to use the $180m figure to adjust for non-recurring Covid-19 effects over FY2021.

Over FY2020 Telstra added a special one off Covid-19 bad debt calculations allowance of $36m (AR2020 p29)

I have reversed both the FY2020 and FY2021 Covid-19 adjustments.

Bush Fire relief and bad retail practice compensation][
Over FY2020 Telstra set aside $44m to contribute to bush fire relief and $50m to cover mis-selling by third party agents, inappropriate mobile contracts to indigenous people. I have reversed both of these making a total adjustment of $94m. Add to this figure the Covid-19 adjustment for FY2020 of $36m and the total category adjustment amounts to: $94m+$36m=$130m for FY2020.

8/ Strategic Focus T22 Program
On 29th June 2018, Telstra announced their T22 strategy: to simplify both operations and the company's product set, improve customer experience and reduce the company cost base. These changes are well over and above what would be considered as 'run of the mill' restructuring. Costs incurred and recorded as 'restructuring' (see tabulated expense table in the 'Full year Results and Overview' section of each respective Annual Report) are in excess of 'business as usual' redundancies for the period and are recorded as follows: FY2019 $801m, FY2020 $259m, FY2021 $211m and FY2022 $71m.

Over FY2023, a corporate restructure at the highest level resulted in a one off $91m charge (AR2023 p183)

9/ Lease accounting policy adjustment
IFRS16, called AASB16 in Australia, requires that leases become capitalised 'right to occupy' assets that are then depreciated over time. This reporting rule change was brought in for FY2020 and onwards reporting. I have reversed out this reporting change so that profits from FY2020 onwards are more comparable with previous years. This change has resulted in NPBT decreasing by $133m (FY2020) and $103m (FY2021) and $2m (FY2023), but increasing by $32m over FY2022 (for detailed calculations refer post 58).

-----------------

Conclusion: Only one year of eps decline => PASS TEST

SNOOPY

[kiora]

"Why Telstra isn't selling InfraCo (and its growth plans for the future)"
https://www.livewiremarkets.com/wires/why-telstra-isn-t-selling-infraco-and-its-growth-plans-for-the-future?utm_medium=email&utm_campaign=Trending%20on%20Livewire%20-%20Saturday%20October%2014%202023&utm_content=Trending%20on%20Livewire%20-%20Saturday%20October%2014%202023+CID_95540c898648 6782c9188e878c2e70ff&utm_source=campaign%20monitor&utm_term=ACCESS%20THE%20INSIGHTS

[Snoopy]

The following ROE analysis was done using equity on the books at the end of the respective financial year. This will reflect the fact that 'network assets' signed over to nbn in that year will have been removed from the balance sheet. My profit normalisation process has removed any profits from the handover of these assets. That means using an 'equity asset base' without the removed assets on the books is, in my view, the most appropriate way to handle this calculation.


FY2022: $1,643m / $16,837m= 9.76%

FY2021: $1,445m / $15,275m= 9.46%

FY2020: $1,050m / $15,147m = 6.93%

FY2019: $1,494m / $14,530m = 10.3%

FY2018: $1,645m / $15,014m = 11.0%

Conclusion: Our return on equity hurdle was never cleared! FAIL TEST


The following ROE analysis was done using equity on the books at the end of the respective financial year. This will reflect the fact that 'network assets' signed over to nbn in that year will have been removed from the balance sheet. My profit normalisation process has removed any profits from the handover of these assets. That means using an end of year 'equity asset base' without the removed assets on the books (IOW the reported balance sheet position at the end of the year) is, in my view, the most appropriate way to handle this calculation.

FY2023: $2,128m / $17,816m = 11.9%

FY2022: $1,643m / $16,837m= 9.76%

FY2021: $1,445m / $15,275m= 9.46%

FY2020: $1,050m / $15,147m = 6.93%

FY2019: $1,494m / $14,530m = 10.3%


Conclusion: Our return on equity hurdle was never cleared! FAIL TEST

SNOOPY

[Snoopy]

With Australia's inflation surging to 6.1% in the June 2022 year, this particular test has taken on a new poignancy.

I have removed the profit resulting from the sale/transfer of assets to nbn. It follows then, that I should also remove the revenue from these transactions as well. See post 20 for the calculation of revenues involved in these transactions.


FY2022: $1,643m / ($22,045m - $378m) = 7.58%

FY2021: $1,445m / ($23,132m - $1,050m) = 6.54%

FY2020: $1,050m / ($23,710m - $2,004m) = 4.84%

FY2019: $1,494m / ($25,259m- $2,116m) = 6.46%

FY2018: $1,645m / ($25,848m - $2,297m)= 6.98%

Conclusion: Despite the noticeable fall in profit margins over the FY2018 to FY2020 period, the profit margins have subsequently bounced back. That shows growth in profit margins is possible in this tough and competitive telecommunications market. PASS TEST

SNOOPY

P.S. Note that a margin increasing by more than 6.1% from FY2021, would require the margin in the subsequent year to rise to: 6.54%x1.061=6.94%. The actual margin over FY2022 was 7.58%, which beats the 6.94% hurdle.



With Australia's inflation at stubborn 6.0% in the June 2023 year, this particular test retains its poignancy from FY2022.

I have removed the profit resulting from the sale/transfer of assets to nbn. It follows then, that I should also remove the revenue from these transactions as well. See post 20 for the calculation of revenues involved in these transactions.

FY2023: $2,128m / ($23,245m - $72m) = 9.18%

FY2022: $1,643m / ($22,045m - $378m) = 7.58%

FY2021: $1,445m / ($23,132m - $1,050m) = 6.54%

FY2020: $1,050m / ($23,710m - $2,004m) = 4.84%

FY2019: $1,494m / ($25,259m- $2,116m) = 6.46%



Conclusion: Despite the dip in profit margins over the FY2020 period, the profit margins have subsequently bounced back, going higher for the third year in a row. That shows growth in profit margins is possible in this tough and competitive telecommunications market. PASS TEST

SNOOPY

P.S. Note that a margin increasing by more than 6.0% from FY2022, would require the margin in the subsequent year to rise to: 7.58%x1.06=8.03%. The actual margin over FY2023 was 9.18%, which beats the 8.03% hurdle.

[Snoopy]

"Why Telstra isn't selling InfraCo (and its growth plans for the future)"
https://www.livewiremarkets.com/wires/why-telstra-isn-t-selling-infraco-and-its-growth-plans-for-the-future?utm_medium=email&utm_campaign=Trending%20on%20Livewire%20-%20Saturday%20October%2014%202023&utm_content=Trending%20on%20Livewire%20-%20Saturday%20October%2014%202023+CID_95540c898648 6782c9188e878c2e70ff&utm_source=campaign%20monitor&utm_term=ACCESS%20THE%20INSIGHTS

Interesting little chat with the Telstra CFO. He didn't seem to have heard of the word 'diworsification' when quizzed about where Telstra is pouring their capex!

'Mobile' is number one for receipt of the proceeds of the capex shovel. Telstra seem very on the ball with 5G, and extracting new opportunities from that. This is the area of investment best understood by the public, as potential shareholders, and the rebound of revenue and EBITDA trends for mobile over the last five years tells a story.




FY2019FY2020FY2021FY2022FY2023


Telstra Mobile Revenue$10,084m$10,130m$9,310m$9,470m$10,258m


Telstra Mobile EBITDA margin34%34.7%39.2%42.2%44.9%




The decline in profits over FY2021 was largely due to lower hardware sales and reduced international roaming revenue. Despite this 'mobile services revenue', the key driver of mobile profitability, increased by 3.7% (or 5.2% excluding international roaming) over 2HY2021.

Tom Beadle from Jarden asked this very pertinent question at the FY2023 results announcement;:
"With the players across the industry targeting ROIC (a previous questioner Eric Choi talked about the mobile industry as a whole having collective ROIC targets on mobile investment for the first time) , what do you think is a sustainable mid cycle ROIC?"

CEO Vicki Brady responded as follows:
"It’s pleasing to see ROIC, our underlying ROIC, get to the 8.1% in FY23, and we’re seeking to grow it out to FY25. We haven’t put any ambition out there beyond that. The thing I would say, as we all know, watching the industry closely, the industry overall has been sitting with ROICs below cost of capital. So there has obviously been a need across industry to make sure we’re delivering returns that allow us to sustain the sort of investment and deliver the high quality networks and experiences for our customers."

I did a double take when I read Vicki's reply. It sounds like that after years of undercutting each other in the mobile space, there is now a 'cartel arrangement' whereby mobile operators agree not to drop their prices below a certain level. I have a feeling that if this was NZ, the commerce commission might have something to say about that. But this is Oz......, and it looks like 'the industry' is making it stick. It does sound good for NZ based Telstra shareholders, I must admit!

Number two on the investment list is the vast inter capital ultra fast (400Gbps) fibre super highway that Telstra is building between Adelaide, Melbourne, Canberra, Sydney and Brisbane. Apparently customers 'Amazon AWS' and 'Microsoft Azure' hyper data providers are excited. Telstra seems excited, as this is apparently the first such upgrade for twenty years. But do you forgive me as a Telstra shareholder for being less than excited? Somehow I can't see Amazon or Microsoft bubbling over to pay Telstra a great return on this investment we are making. Nevertheless I believe that connecting those capital cities in this way and reaping the rewards, whatever they may be, was a prime reason why InfrCo was retained within Telstra, and not sold off. Growth is not expected from this investment until FY2026, when the whole upgraded capital city inter-connectedness comes on line.

How much is this inter-capital super cyber highway going to cost? PR2023 p7 suggests an annual spend of $300m will cover the build out of intercity fibre and Viasat development projects (Viasat spending from a Telstra perspective represents the 'Australian based ground stations' for an Asia Pacific satellite constellation - Telstra has no equity interest in the Viasat satellites themselves). Let's assume 90% of this budgeted spend over 3 years is towards the UFB FSH. That comes out as an investment of: 0.9 x 3 x $300m = $810m. The InfraCo EBITDA margin was listed at 66.1% over FY2023 (AR2023 p23). That would imply an annual EBITDA contribution of: $810m x 0.661 = $535m from this investment. Let's say half of that in reality - $220m - as I am sure those US based big boys will screw Telstra down on price. Total Telstra EBITDA for FY2023 was $7,862m. So we are looking at a $220m/$7,862m= a 2.8% rise in EBITDA. Useful. But I can't get too excited about that,

Number three of the growth initiatives being pushed heavily is the 'Network Applications and Services' or NAS business. The language around NAS is a bit fluffy
"Network Applications and Services (NAS) products such as unified communications, cloud, security, industry solutions and integrated services. "
At the 'product level' I am not sure what that means, and where the competition is. This in turn makes it hard to assess the real growth prospects. On a reporting basis, NAS is subsumed inside the wider 'Enterprise' grouping. That makes tracking the progress of NAS not straightforward. But most of the growth seems to be coming from within the 'Telstra Purple' envelope.



FY2019FY2020FY2021FY2022FY2023


NAS Revenue Growth-4.1%-2.8%-10.0%+5.8%+2.2%


NAS Revenue$3,477m$3,379m$2,621m$2,773m$2,834m


NAS EBITDA margin (1)10%17.5%6.2%11.5%8.6%



Note

1/ EBITDA margin figures from FY2021 onwards obtained from CFO briefing materials for that year

The problem I see with the outlook for NAS is that the new growth is being made against a headwind of declining demand of legacy applications and the winding down of the nbn DA agreement.
"Industry solutions revenue decreased by $11.6% to $1,047m largely due to an expected decline in revenue from contracts outside of the nbn DAs in line with the maturity of the nbn roll out. (AR2020 p27)"

nbn commercial works are tied in with NAS in a way I do not fully understand. But I do know that whatever growth initiatives that are showing 'green shoots' look to be being strangled by the death of the 'old guard' applications (e.g. calling applications due to ISDN planned exit and market shift from traditional voice calling applications to integrated video solutions).

SNOOPY

[Snoopy]

Number three of the growth initiatives being pushed heavily is the 'Network Applications and Services' or NAS business. The language around NAS is a bit fluffy
"Network Applications and Services (NAS) products such as unified communications, cloud, security, industry solutions and integrated services. "
At the 'product level' I am not sure what that means, and where the competition is. This in turn makes it hard to assess the real growth prospects. On a reporting basis, NAS is subsumed inside the wider 'Enterprise' grouping. That makes tracking the progress of NAS not straightforward. But most of the growth seems to be coming from within the 'Telstra Purple' envelope.



FY2019FY2020FY2021FY2022FY2023


NAS Revenue Growth-4.1%-2.8%-10.0%+5.8%+2.2%



NAS Revenue$3,477m$3,379m$2,621m$2,773m$2,834m



NAS EBITDA margin (1)10%17.5%6.2%11.5%8.6%



Note

1/ EBITDA margin figures from FY2021 onwards obtained from CFO briefing materials for that year



NAS is meant to be one of the big growth hopes for Telstra going forwards. So I think it is worthwhile looking 'under the hood' of this 'growth engine' to understand the nuts and bolts profitability of this so called 'growth machine'. The figures I have unpicked in the table below are from the CFO briefing materials (the 'Total Income' breakdown) and are generally not to be found in the annual report

Network and Application Services (NAS) Revenue break down: Five year trend



FY2019FY2020FY2021FY2022FY2023


Calling Applications$946m$828m$708m$637m$480m


Managed Services and Maintenance$636m$634m$671m$738m$772m


Professional Services$493m$427m$376m$439m$542m


Cloud Applications$205m$246m$257m$279m$311m


Equipment Sales$582m$500m$343m$397m$412m


Other$262m$278m$266m$283m$318m


NAS Total Revenue$3,477m$3,379m$2,621m$2,773m$2,834m




Studying the above table reveals the 'problem' of studying the trend in NAS revenue with some clarity.
a/ The top row is the generally high margin earnings from the old ISDN phone network, (those analogue 'toll calls' that are now being replaced with digital 'video calls' if you want an example). The decline in this revenue sub-category, once the lynch pin of NAS, is 'relentless' and 'severe'.
b/ Equipment sales' are also generally lower. I suspect that might be part of the global trend of more powerful electronic machinery becoming less costly.
c/ The big mover in this revenue picture is 'cloud applications', where revenue over five years has jumped by 50%, albeit from the lowest base sales of all the categories. Note that I believe this refers to applications designed to use the cloud. Not the cloud data itself.
d/ Is 'Managed services' the digital replacement category for 'Calling Applications'? It does seem to be going up as 'Calling Applications' decline. I am unsure what proportion of managed services are 'bolt on acquisitions'.
e/ 'Professional services' are going up. But I am not clear if this is organic growth, or whether this growth is the result of bolt on acquisitions brought into the Telstra fold at significant cost.

I have no problem going on a data mining exercise, such as compiling the above table. But as someone who has never worked in the telecommunications industry, my difficulty is in interpreting what it all means. My 'gut feeling' is that old high margin legacy technology is being replaced by new lower margin digital technology. On a 'like use for like use' basis, this is good for the consumer. They get the same service they used to buy for less cost. But that is 'less good' for the technology suppliers like Telstra!

OTOH digital technology also opens up new streams of products to sell, and technology uses that were not dreamed of by 'old fart' users. Some services, like security protection, are what you might call 'reluctant sells', but necessary in this age of cyber-piracy. Others are, well I don't know because I probably fall into the category of being an 'old fart' user myself these days. But the real question here is whether the 'earnings from the new stuff' can grow faster than the decline of 'earnings from the old stuff'. My - ignorant? - viewpoint is that this isn't happening, and won't happen for a few years yet. Those declining legacy uses appear to have a long tail. My overall take on this? NAS at 'corporate reporting level' looks like a 'cool to talk about' money sink where overall profits are not growing. Have I got that right? Or am I way off beam in my disconnected interpretation of what is going on in the NAS market out there?

SNOOPY

[Snoopy]

Page 25 in AR2022 gives an 'income' break down of 'Other' of $755m. For income we are not talking about NPAT or even EBITDA, but more generally 'revenue'. Looking at the segmented results table, AR2022 p88, and we can see that this $755m Telstra 'other' revenue contained inter-divisional sales of $291m. Take those out and the sales to external customers were $464m. Using this figure combined with information in post 18 that I compiled on normalised earnings, I think the revenue picture for 'Other' over FY2022 looks like this:



'FY2022 Other Revenue'


Telstra Health$243m


Bond rate changes effect on employee liabilities$80m


Cumulative Catch Up Adjustments to Revenue$47m


Integration costs for 'MedicalDirector' and 'Powerhealth'($58m)


Net gain in Property Plant & Equipment and intangibles of $158m and Business Unit sales of $7m$165m


Adjustment Expense($13m)


equals Total$464m



The EBITDA contribution margin for the total 'Other' earnings for FY2022 (AR2022 p23) was 6.3%, where the:
"Contribution Margin Percentage = (Total Sales Revenue – Total Variable Costs) / Total Sales Revenue

For all entries in the table except Telstra Health, the net revenue from the sum of these, $221m is the EBITDA contribution. That $221m has a contribution margin percentage of 100%, (because all those figures are net of costs). Weighting this sum against the Revenue from Telstra Health at an unknown contribution margin 'C', the following equation must hold:

C x $243m + 1.0 x $221m = 0.06 x $464m => C = -0.79

This means the TelstraHealth EBITDA loss for the FY2022 year was: -0.79 x $243m = -$193m.

The HY2023 investor update (post 32), tells us that the medium term goal is to get TelstraHealth to $500m in revenue by FY2025. That kind of revenue would likely wipe out any loss and bring TelstraHealth into a positive EBITDA position. To me this looks a few years away. So as promising as this TelstraHealth business unit sounds, the profit growth is not meaningful in light of an overall Telstra business that, over FY2022, had an EBITDA of $7.256billion. Scratch TelstraHealth as a growth engine for now!


Page 26 in AR2023 gives an 'income' break down of 'Other' of $1,076m. For income we are not talking about NPAT or even EBITDA, but more generally 'revenue'. Looking at the segmented results table, AR2023 p98, and we can see that this $1,076m Telstra 'other' revenue contained inter-divisional sales of $528m. Take those out and the sales to external customers were $548m. Using this figure combined with information in post 62 that I compiled on normalised earnings, I think the revenue picture for 'Other' over FY2023 looks like this:



'FY2023 Other Revenue'


Telstra Health$305m



Telstra Energy$a+$47m


Net gain in Property Plant & Equipment and intangibles of $178m and Business Unit sales of $6m$184m


Unspecified Profit Adjustment$12m


equals Total$548m



The EBITDA contribution margin for the total 'Other' earnings for FY2023 (AR2023 p23) was -0.8%, where the:
"Contribution Margin Percentage = (Total Sales Revenue – Total Variable Costs) / Total Sales Revenue

We are only told the incremental income from Telstra Energy ($47m), not the total. We actually know very little about Telstra Energy, except Telstra had 10,000 customers interested in signing up before growth was 'paused'. I am guessing the trial customer base number was less than 1,000, and maybe only a few hundred. There would have been some establishment costs that may not have been covered by the power bills those pioneer customers paid.
The diminutive size of Telstra Energy's retail market base, the problems for retailers in the Australian power market (see post 69), and the fact that Telstra had renewable power agreements already signed suggests to me that almost all Telstra Energy's profits came from trading power market derivatives, on selling contracted power they did not need. Consequently, I am taking a first approximation of assuming that the base level of Telstra Eneregy's earnings, a number I have designated as $a, but is a number we are not told, is $0m.

For all entries in the table except Telstra Health, the net revenue from the sum of these, $243m and is an EBITDA contribution. That $243m has a contribution margin percentage of 100%, (because all those figures are net of costs). Weighting this sum against the Revenue from Telstra Health at an unknown contribution margin 'C', the following equation must hold:

C x $305m + 1.0 x $243m = -0.008 x $548m => C = -0.81

This means the TelstraHealth EBITDA loss for the FY2023 year was: -0.81 x $305m = -$247m.

The HY2023 investor update (post 32), tells us that the medium term goal is to get TelstraHealth to $500m in revenue by FY2025. But that goal was been pushed further into the future by the time full year resuyts were reported
"While we remain positive about the future of Telstra Health, we now expect to reach our ambition of $500 million in revenue beyond the T25 period."

The bolt on acquisitions of 'Medical Director' and 'Powerhealth' have increased revenues from FY2022 but have also accelerated EBITDA losses. I don't think Telstra senior management will be happy about that. But what can you do with these development projects apart from 'give them a bit more rope'?

TelstraHealth may eventually be the long term money spinner that management touts it as. But right now, and probably over the next few years, Telstra Health will not be contributing to growing Telstra profits.

All this means that both growth engine 2 and growth engine 3 (see post 66) are 'gunna' projects. They are sure 'gunna' fire up profits 'when they come on stream'. Rah ! rah! rah!

But in the meantime all of Telstra's profit growth is going to come from the 'mobile' division.

SNOOPY

[Snoopy]

What is Telstra and what are their chosen markets?

viii/ Other: This includes 'Telstra Energy' (a retailer of electricity bought from third parties, in what looks like a mechanism to offer 'one party utility billing' for customers who want that)


NZers will be familiar with utility packages operated by what used to be considered 'power retailers', where a mobile phone and internet package is offered to be incorporated within the envelope of what used to be thought of as a 'power bill'. So far in NZ we haven't seen the reverse, where telco companies like Spark are offering retail power on the side. By contrast, in Australia, Telstra jumped at the opportunity to get into power retailing. But something has gone wrong. From Vicki Brady at the FY2023 results presentation:

"We built the capability to be able to do energy retailing."
(Apparently 10,000 existing Telstra telecommunications customers responded to a request for expressions of interest.)
"We continue to focus on where we can make the biggest difference for customers, and as a result, we have made decisions to re-prioritise and accelerate in some areas. For example, we will not scale our retail energy business in FY24."

Little more than that has been said in the Telstra press releases. But a web search dredged up this AFR article from December 2022.
https://www.afr.com/companies/telecommunications/spooked-telstra-puts-retail-energy-business-on-hold-20221130-p5c2kd

"Vicki Brady said it did not make sense to scale up with the “dislocation” between wholesale and retail prices crunching margins and squeezing smaller operators out."
"A final decision on the rollout of Telstra Energy is due “around the end of the financial year” in June, Ms Brady added."

That 'final decision' date of June 2023 has passed, and Telstra still seems less than keen to progress, even if they haven't put the bullet through their existing power contacts with their pioneering power customers quite yet.

"As wholesale prices jumped, Bell Potter and Macquarie restricted clearing services for energy futures in October, thereby limiting the ability of some retailers to properly hedge against these shocks. The volatility led to the collapse of several smaller retailers, most notably ReAmped Energy, Discover Energy and ASX-listed Local Planning Energy."

Vicki Brady again: "With wholesale prices higher than retail prices, we made the decision not to scale up this year”.

Too right! Entering a market where you cannot hedge future power price purchases and are therefore forced to sell power to your retail customers below cost would be commercial suicide, as some of those failed small retailers referenced have found out to their cost! If I had set up a challenger power retailer, I would be more than a little annoyed when I found the market for providing certainty to my future cost structure had collapsed.

The other issue with Telstra selling power relates to their goal of becoming 100% carbon neutral by 2025. If Telstra were to purchase power for resale, then that power purchase would come under scrutiny as a 'Scope 3' emission within the Telstra umbrella. So if Telstra's purchased power was not carbon neutral, the emissions from generating that power would flow onto Telstra's carbon balance sheet. And that in turn might threaten Telstra's clean green energy goal.

The real question that I would like an answer to is where 'Telstra Energy' sits in the much bigger Telstra picture as of today.

We get a tantalizing teaser in AR2023 p23 that:
"Telstra Energy income increased by $47m from energy generation revenue and fair value gains on energy firming derivatives."

I find that comment rather cryptic. I don't believe Telstra own any power stations. Telstra have certainly supported the construction of renewable power stations, by entering long term contracts to buy power from such stations before they are built. So I think the $47m from 'energy generation revenue' comment relates to purchases under these contracts at earlier agreed prices. If wholesale power market prices have since sky-rocketed, and Telstra were buying more power from that local node than they could use operationally (because the planned for Telstra Energy roll out to the public was put on ice), then maybe Telstra were in a position to make 'windfall power profits' on the secondary trading markets?
We are not told from what 'base value' that $47m in 'income', (which I think means revenue in this context) came from. But I guess if the cost base is steady, then even if we are starting from a loss making position, that $47m is the result that has flowed straight through to the bottom line on an incremental profit basis (IOW wiping out a loss from the previous year has the same net effect of increasing the profit on a subsidiary that is making a profit by the same amount)?

SNOOPY

[Snoopy]

Number three of the growth initiatives being pushed heavily is the 'Network Applications and Services' or NAS business. The language around NAS is a bit fluffy
"Network Applications and Services (NAS) products such as unified communications, cloud, security, industry solutions and integrated services. "
At the 'product level' I am not sure what that means, and where the competition is. This in turn makes it hard to assess the real growth prospects. On a reporting basis, NAS is subsumed inside the wider 'Enterprise' grouping. That makes tracking the progress of NAS not straightforward. But most of the growth seems to be coming from within the 'Telstra Purple' envelope.



FY2019FY2020FY2021FY2022FY2023


NAS Revenue Growth-4.1%-2.8%-10.0%+5.8%+2.2%


NAS Revenue$3,477m$3,379m$2,621m$2,773m$2,834m


NAS EBITDA margin (1)10%17.5%6.2%11.5%8.6%



Note

1/ EBITDA margin figures from FY2021 onwards obtained from CFO briefing materials for that year

The problem I see with the outlook for NAS is that the new growth is being made against a headwind of declining demand of legacy applications and the winding down of the nbn DA agreement.
"Industry solutions revenue decreased by $11.6% to $1,047m largely due to an expected decline in revenue from contracts outside of the nbn DAs in line with the maturity of the nbn roll out. (AR2020 p27)"

nbn commercial works are tied in with NAS in a way I do not fully understand. But I do know that whatever growth initiatives that are showing 'green shoots' look to be being strangled by the death of the 'old guard' applications (e.g. calling applications due to ISDN planned exit and market shift from traditional voice calling applications to integrated video solutions).


One of the Telstra growth engines has run into trouble.

-------------------------

From the CFOs HY2024 Commentary

Looking at NAS revenue:
• Calling revenue, which is higher margin, declined approximately 18%, as it continues to be impacted by a shift from traditional voice to cloud applications. This was as expected, and the headwind continues to get smaller.
• Professional services was impacted by lower business confidence and a slower trading environment with customers holding off on projects and lower levels of pull through on other product sales. We also saw a wind down of a number of large infrastructure contracts. Professional services revenue fell 18% sequentially and contrasts to the 33% growth seen in FY23, or 8% excluding acquired businesses. Such a rapid change in trajectory made it difficult to adequately adjust our cost-base which was set up for more growth.
• Finally, revenue from cloud resale and equipment grew. These resale businesses are low margin and high variable cost, and margins were lower in the half. These revenue, cost overhang and margin factors all contributed to lower NAS EBITDA. Given our pipeline continues to show the impact of the slower trading environment, we have not assumed the typical second half uptick in NAS in FY24.

-----------------------

Following this, the analysts got 'stuck in' at the Q&A session:

Q/ Eric Choi: "On NAS professional services, which has flipped from 8% underlying growth to 18% decline. I’m just interested in your view on how much of this is cyclical. At the Investor Day last year, you guys were talking to businesses reducing the number of licences, which is mostly a macro thing, which might reverse, especially if we get interest rate cuts, or how much of that is actually structural, i.e. some of your customers unbundling your services and going with other competitors? "

"A second question just on the trajectory of NAS. You’ve guided to none of the usual second half improvement. So I’m just thinking if there’s the potential for revenues to be flat, second half versus first half, the second half costs are usually higher as well. So I’m just wondering, is it possible for that NAS EBITDA to turn negative in the second half, especially since you’ve kind of guided to your cost out being FY25 weighted?"


A/ Vicky Brady (CEO): "On NAS professional services, as you point out, the decline we saw late in the year, late in the calendar year last year, it really did accelerate down quickly. And it was, in terms of what we saw, it was our sales pipeline. So what we’re seeing customers do is absolutely push out opportunities."

"We’re not seeing indications that that is unbundling and it going to competitors at this stage. Our read of what we’re seeing and the feedback we’re hearing from our customers, is absolutely a bit of a pullback on professional services. So focused on doing the things that are essential. So you would see our cloud resale business performed well, so customers are still demanding those services. However, where there was transformation activity or discretionary spend involved, we’ve certainly seen that pull back, particularly over the latter part of the calendar year last year."

"And so our assessment is that it is cyclical, certainly, in the professional services business. As you know, in our domestic Enterprise business, there have been structural changes underway in terms of DAC (Data and Connectivity) and calling, but this professional services decline we’ve seen does appear to be cyclical. And so I would read that as being very much linked to macro environment and business confidence, currently."

"In terms of the trajectory in NAS, as we called out, we have not assumed the usual uptick in the NAS business in the second half. And that’s why we did tighten the guidance range on Underlying EBITDA. I think the good thing is, obviously, it’s really important we address this immediately, which we are, with significant action underway. But importantly, NAS obviously sits inside the bigger Telstra business. And so we have mobile performing well, we have Infrastructure performing well, we have obviously Consumer & Small Business - Fixed, you can see the growth there in EBITDA as we really focus on productivity and getting our nbn resale margins at the level we need."

"So as to when we see that confidence return, I mean, I do think it is linked to the macro environment. And so we’re not assuming that uptick in the second half."

A/ Michael Ackland (CFO) / "I think the other point that I would pick up on, on NAS, is that we have seen growth this year in this half actually in our resale revenue. And while that’s not particularly helpful for margin, as we pointed out, it does mean that we’re continuing to sell into and expand our customer base around reselling, particularly security and cloud resell, that I think is positive for the future, as business confidence returns and professional services off the back of those security and cloud purchases become something that customers will look to as they get more confident."

"The other one is we also have traditionally in our professional services businesses had larger deals, and larger like infrastructure-led deals that
we’ve talked about in the past. I mean, particularly an example would be the TasGRN project (Tasmanian Government Radio Network, migrating eight different emergency response organisations onto a single digital network). And I think on a cyclical basis we are seeing a lull in those, which is also something that we feel very confident we are well positioned to deliver for customers in that space. So we would expect to see that coming back. When that comes back, I think, is going to be largely around what happens in the macro environment."




Q/ Entcho Raykovski/ "Are you able to give us any sort of a sense of what proportion of the cost out initiatives relate to NAS, as opposed to the other elements that you’ve outlined? You’ve got some enterprise agreements which are due to expire at the end of September. How contingent is the outcome of what you can do on the cost-out side? How contingent is it on the outcome from those enterprise agreements as well?"

A/ Vicki Brady (CEO) / "In terms of the productivity initiatives, we’re absolutely committed to achieving the large majority of that cost-out ambition that we have under T25 (the cost out plan). We have very immediate action underway, particularly looking at the NAS business, just given what we’ve seen in the first half of the year. And so that focus is on making sure we’ve got the NAS business absolutely set up for success."

"We are reviewing all of the elements of the cost structure there including, not just what sits inside the direct Enterprise and Telstra Purple business, but the function for that to support our NAS business across Telstra. So making sure we’ve got that set up for success. So that’s where our immediate focus is, along with looking more broadly at the initiatives and actions we need to take in terms of the broader cost out. We’re not giving any breakdown between how much of that relates to NAS in terms of cost out versus the overall ambition. But as you can see from the result, it has given us cause to reflect and look, and make sure we get the NAS business absolutely set up for success both on the costs side and the revenue side."

"In terms of the EAs as you spoke about, our enterprise agreements are due to expire end of September this year. We will commence obviously good faith discussions with our people and the unions over the coming period and we look forward to those discussions. We know we need to get the cost out and it needs to be delivered irrespective of where we land in terms of our EA negotiations and outcomes on wages."



Q Roger Samuel / "On NAS. I appreciate that you guys are trying to address the issue at NAS. But do you think that Telstra has a point of difference in professional services, or do you think that you’re better off outsourcing the professional services piece to the specialists?"

A/ Vicky Brady/ "I think we do have a differentiator when it comes to professional services, particularly in those professional services that sit very close to the connectivity we’re providing to customers. So some of the areas where we’re successful is in the security space, it is in that cloud space. And our
acquisition of Versent was all about really setting us up even more strongly, because we are a big provider and reseller of cloud services."

"So having Versent who are strong on the ability to do the install and the run components of those cloud transformations, that’s a great example where I think they sit together well. And we’re certainly seeing in the current geopolitical climate that customers are concerned about sovereign capabilities and they do want to make sure from a security point of view they’ve absolutely got peace of mind."

"So I think there are some elements there. That is part of our review, however, of the NAS business is to make sure we really stress test each of the products and services we’re producing in that portfolio and exactly to your point, being very clear on where we have an advantage of where we’re bringing things to customers that is highly valuable. So that is part of the work, as I said, on the revenue side as well as the cost side."




Q/ Brian Han / "In NAS, is it plausible that calling application revenues go to almost zero in three years’ time, and whatever little revenue is left is
reclassified as something else later on?"

A/ Vicki Brady/ "In terms of NAS and calling there is a real transition underway, which has been underway for some time now, and we’ve seen that accelerate through COVID and post-COVID. So if you think about what sits in that portfolio, some of the legacy stuff that sits there is some of what we would consider now a little bit old world. Voice solutions for in the office, whereas people are obviously transitioning to things like Teams ('Microsoft Teams' software package, incorporating office workspace chat and video conferencing) and those types of products."

"So there is ongoing revenue there, and that’s what we’re busy working on is transitioning and supporting our customers into that newer and more modern technology to support their calling and phone needs. In terms of reclassifying over time that would be more a broader question of whether we thought it made sense. Obviously we try not to move around our disclosures too much, because we know that creates more work for people trying to understand what sits in our portfolio and what are the trends period on period."




Q/ Nick Basile/ "On NAS, I’m just trying to understand whether you need to do the restructure, given the size of the business and its extent for Enterprise in general. And I know others have sort of asked around this, but what gives you confidence in improved contribution at that area in the future, and how should we be thinking about the phasing of a recovery in earnings? Or should we sort of expect that to fall to zero before we expect an improvement in that group?"

A/ Vicki Brady/ "We’ve got immediate actions making sure we’ve absolutely got the portfolio set up for future success. As I mentioned earlier, there’s definitely a cyclical impact at the moment and you can see that in professional services for us. I am absolutely of the view that in that part of our business and our overall domestic Enterprise business as we look medium to longer run, there is a lot of opportunity there as businesses digitise and make the most of technology that relies heavily on connectivity."

"So, as I said, I think there are areas there for us where we do have a successful business today. We’re feeling some cyclical impacts right now in professional services, and our focus is absolutely in making sure we’re taking the actions we need to take to have the cost base and revenue side of that business absolutely set up to be able to deliver at the level needed by our Enterprise customers."

"So, in terms of the phasing, as we talked about earlier, I do think the professional services decline we’ve seen is heavily linked to business confidence and the more macro environment. So, it is a difficult one to predict, and as we said, we haven’t assumed an uptick, the normal tick we would see in the second half of this financial year. So that phasing, I think, will be very much dependent on some of the business confidence and the more macro environment."



Q/ Jenny Wiggins/ "With regard to the NAS business, I was just wondering why are you only calling this out in a significant way now if the business has
been declining for some time? You did discuss the sort of drop in professional services revenue. I mean, did that fall off a cliff in the last six months? Was the decline, the weaker economy really the key reason why that has been falling?"

A/ Vicky Brady/ "Actually at our Investor Day in November last year, we did call out that we were seeing weakness in our professional and managed services business, and so we did adjust our outlook on that business at that time. Frankly then what we saw in the last part of last calendar year was a very significant drop-off, so the decline did accelerate very, very quickly. It was surprising, in fact, to see how quickly our sales pipeline dropped, and some of those opportunities moved out."

"So we did call it out in November, but to be fair, the acceleration in the decline post that did surprise us, and that’s why we’ve called out today very clearly in our first half results that that business is not where it needs to be, and we are taking immediate actions both on the revenue and the cost side of that business, although we remain confident that this business, medium to longer run, is a good business. But there is definitely some cyclical impact, is our assessment at the moment, particularly related to business confidence and the macro environment."




Q/ Grahame Lynch/ "I wanted to ask about AI, and specifically you’ve mentioned your progress in skilling and adopting AI internally. But it strikes me
that you’re way ahead of the general economy there. So have you got plans to perhaps productise and monetise some of those internal systems and processes that you’ve developed, into offerings that you could get revenue from by selling them to Enterprise customers, for example?

A/ Vicki Brady/ "Where we are focused, and to your point, where are the revenue opportunities lie, is how can we help our customers unlock further benefits from digitising their businesses, including from AI. We have a number of areas there we’re excited about. So, inside our NAS business, we do have professional services where we do help our customers around digitisation and AI."



Q/ Derek Rose/ "I’m just wondering about the cost reductions with NAS. Is that going to include layoffs, and do you have any visibility on what specifics on that?"

A/ Vicki Brady/ "The work’s underway right now in terms of what are the things we need to do to really get the cost base of our NAS business in the
right shape, to be able to make sure we’re delivering really efficiently for our customers end-to-end across the company. Right at the moment, that work is underway, so I’m not at a stage of being able to announce exactly what those impacts look like and what they will mean."

"Obviously, as we work through these things, our first priority is making sure any costs that sit in that business that aren’t people related, we’re absolutely optimising those. And then we will be obviously having to consider, how do we deliver efficiently end-to-end for our customers in our NAS business. And when we make those decisions, obviously the first priority will be communicating any change to our team members internally. "


---------------------------

SNOOPY

[Snoopy]

I need to make a formal apology. That post I made yesterday above on this Telstra thread? I think it was one of the worst posts I have ever read on Sharetrader. It was long rambling, boring and repetitive. I couldn't even read it through straight myself without taking a break in the middle. And I am the author! My only excuse is that it was basically a text dump from analyst question time. So I do put a little blame on the analysts for being so repetitive and unimaginative with their questions. Here is my summary for those that didn't read the referred to post (which I guess is almost all of you).

-------------------------

Network, Application & Services Business Unit

A sub section of the 'Fixed -Enterprise' i.e. government and business, market 'NAS' has suffered a notable fall in profitability. But we have to remember that total Telstra revenue for FY2023 was $23.245 billion while total NAS revenue at $2.834billion represented only just over 12% of that total. Part of the problem is that 'legacy voice revenue' has been thrown into the NAS total. As legacy voice revenue is in perpetual decline, it kind of tarnishes the NAS 'bucket' with a negative vibe as each year starts.

But smart software applications supplied my Telstra do have a future, in particular around the core functions of 'security' and functionality and integration 'with the cloud', and even help integrating AI where Telstra has some internal experience. Big projects have really stalled. But this is a response to macroeconomic headwinds and is not a signal that Telstra should leave that business space, or that competitors are taking market share. Not all growth will be organic. Some will be by acquisition e.g Versent, a Melbourne based company that provides expertise across cloud, security, data, digital, and identity and access management. The acquisition also includes Versent subsidiary Stax, which provides an AWS cloud self-management platform.

Telstra is committed to NAS cost cutting but it would be bad faith with the workforce right now to spell that out in job cuts. Yet if there are not enough sackings, and there will be an adjustment on the work capability side, there will certainly be slashings in other budget areas to meet those cost cutting targets.

Don't fret about NAS. We are coming back!

------------------------

SNOOPY

[Snoopy]

Number two on the investment list is the vast inter capital ultra fast (400Gbps) fibre super highway that Telstra is building between Adelaide, Melbourne, Canberra, Sydney and Brisbane. Apparently customers 'Amazon AWS' and 'Microsoft Azure' hyper data providers are excited. Telstra seems excited, as this is apparently the first such upgrade for twenty years. But do you forgive me as a Telstra shareholder for being less than excited? Somehow I can't see Amazon or Microsoft bubbling over to pay Telstra a great return on this investment we are making. Nevertheless I believe that connecting those capital cities in this way and reaping the rewards, whatever they may be, was a prime reason why InfrCo was retained within Telstra, and not sold off. Growth is not expected from this investment until FY2026, when the whole upgraded capital city inter-connectedness comes on line.

How much is this inter-capital super cyber highway going to cost? PR2023 p7 suggests an annual spend of $300m will cover the build out of intercity fibre and Viasat development projects (Viasat spending from a Telstra perspective represents the 'Australian based ground stations' for an Asia Pacific satellite constellation - Telstra has no equity interest in the Viasat satellites themselves). Let's assume 90% of this budgeted spend over 3 years is towards the UFB FSH. That comes out as an investment of: 0.9 x 3 x $300m = $810m. The InfraCo EBITDA margin was listed at 66.1% over FY2023 (AR2023 p23). That would imply an annual EBITDA contribution of: $810m x 0.661 = $535m from this investment. Let's say half of that in reality - $220m - as I am sure those US based big boys will screw Telstra down on price. Total Telstra EBITDA for FY2023 was $7,862m. So we are looking at a $220m/$7,862m= a 2.8% rise in EBITDA. Useful. But I can't get too excited about that,


Questions answered on this topic from the analyst HY2024 conference call:


--------------------------

Q1/ Roger Samuel/ There has been a lot of press around new investment in subsea cable systems. The first part of the question is can you tell us what sort of rate of return do you expect from these investments? And whether you need to upgrade the older cable systems that you’ve got? And you may require some more strategic capex investments on top of your intercity fibre network?

A1a/ Vicki Brady (CEO)/ In capex, and you mentioned undersea cable investments. I mean, it's a little bit like what we’re seeing here in Australia in terms of the build-out of our intercity fibre, as we look at demand and future demand there is a lot of demand for capacity on undersea cable. And as I spoke to, we’re a significant player in APAC (Asia Pacific) when it comes to our undersea cable business.

So we assess any of those investments and have hurdle rates in place that those investments have to reach. Michael may want to comment a little bit more on that. And at the moment we’re managing that obviously inside our capex envelopes. As we look at next year and beyond, that’s one of the things we’ll work through. Because if we see good opportunities to invest where there can be good returns, as we did with intercity fibre, in that case we could see the benefit. We could see the benefit in moving quickly to build that capacity, to set the country up for the next couple of decades.

So in terms of undersea cable there are some similar structural trends there in terms of that growth in demand. And as you’ve seen, we do partner and we do look at different arrangements to be able to make sure we can meet the needs of our customers. Just in terms of our older subsea cable systems, we have every year an amount of maintenance and upgrade spend for those systems just like you would do on a fixed infrastructure. In terms of fibre you do 'do maintenance', you do 'do upgrades' to electronics to make sure you’ve got capacity growing to be able to meet the needs of our customers. So that’s the ordinary course and that sits inside our business-as-usual capex.

A1b/ Michael Ackland (CFO)/ "I think just on the subsea business, those same trends that are driving the demand for intercity fibre are driving demand in subsea. And as we talked about earlier this year, we have invested in an additional around $100 million in new growth investment as part of our BAU (Business as Usual) capex, as Vicki pointed out. One of those is a new Singapore/US route, which will come online in Q3 this year for customers ready for service, and a Taiwan/Korea route that’ll come online into Q4. And in terms of how we think about those investments, we do look at them in a similar way as we would with intercity fibre."

"We’ve always talked about cash and IRRs, and hurdle rates. And we’ll have a risk adjusted view of that, which will be different risks for different routes, and in the same way as we look at intercity fibre. So we think there is a lot of opportunity there, and we are incredibly well positioned in very specific routes, particularly intra-Asia for us, and trans-Pacific."



Q2/ Ware Kuo/ "In relation to InfraCo and intercity fibre, and you’ve called out increased confidence around the IRRs from the project. Is there any risk of potential fibre overbuild for long haul that we see in residential, and if there is, how do you mitigate against that risk?"

A2/ Brendon Riley (CEO, Telstra InfraCo) / "I was in the US just a few weeks ago at the PTC (Pacific Telecom's Council conference), which is probably the biggest digital infrastructure event in the world. And coming out of that, one can only be very excited about what’s happening in the world of digital infrastructure, the investment, data centres, satellites, terrestrial undersea fibre. If you look at it all, then it just instills a huge amount of confidence in the project. And I think we came away from that with a great deal of renewed interest in the wonderful intercity fibre that we’re laying."

"If we look at the Australian market, I would describe it as that backhaul and the access market. The backhaul market is essentially what inner-city fibre is, it’s those big links between capital cities, between data centres, between major nbn POIs. And access fibre is obviously what connects to our homes and our businesses (includes mostly fibre run by nbn)."

"There’s definitely a lot more activity in access fibre, in terms of numbers of operators and builders. We still see very good demand for our access fibre, not only from Telstra but the rest of the industry. But there’s probably more action in that access fibre space than there is in the backhaul space which is where we’re building intercity fibre."

-----------------------------



I note from the HY2024 results presentation that 'core access' revenue to 'InfraCo Fixed' was up 8.2% on the corresponding previous half year period HY2023, while 'InfraCo Fixed' expenses rose 17.1% over that same period. This is one sign of InfraCo being in an 'investment phase'. Another being EBITDA only rising 3.3% concomitantly. InfraCo is the infrastructure owning arm of Telstra that doesn't own the cellphone towers (that is a separate business, Amplitel). InfraCo assets are wholesale back-haul assets like the inter city fibre highway being discussed. But also more prosaically, ducts (many rented on long term 24 year contracts to nbn, the national broadband network), and racks for housing hardware and software for others. Much of this income is long term rental contracts that have an inflation linked element. Infrastructure investment like this involves dollars up front before the income streams really kick in. So I think the best is yet too come for InfraCo which may be why, unlike what happened to Amplitel, Telstra has no immediate plans to sell down their 100% InfraCo holding.

One growth area of Infraco between reporting periods is the disposal of legacy copper assets as the old Telstra owned copper network is recycled, as the national asset restructuring plan transition to nbn fibre rolls through. Nevertheless despite a fall of 2.5% against the prior reference period, EBITDAaL (Earnings before interest, tax, depreciation and amortisation and after leases) margin for InfraCo fixed remains healthy at 60.2%. In my view, this part of the Telstra growth engine is still in the building phase and has yet to show its potential. But the outlook remains very promising.

SNOOPY

[Snoopy]

'Mobile' is number one for receipt of the proceeds of the capex shovel. Telstra seem very on the ball with 5G, and extracting new opportunities from that. This is the area of investment best understood by the public, as potential shareholders, and the rebound of revenue and EBITDA trends for mobile over the last five years tells a story.




FY2019FY2020FY2021FY2022FY2023


Telstra Mobile Revenue$10,084m$10,130m$9,310m$9,470m$10,258m


Telstra Mobile EBITDA margin34%34.7%39.2%42.2%44.9%




The decline in profits over FY2021 was largely due to lower hardware sales and reduced international roaming revenue. Despite this 'mobile services revenue', the key driver of mobile profitability, increased by 3.7% (or 5.2% excluding international roaming) over 2HY2021.

Tom Beadle from Jarden asked this very pertinent question at the FY2023 results announcement;:
"With the players across the industry targeting ROIC (a previous questioner Eric Choi talked about the mobile industry as a whole having collective ROIC targets on mobile investment for the first time) , what do you think is a sustainable mid cycle ROIC?"

CEO Vicki Brady responded as follows:
"It’s pleasing to see ROIC, our underlying ROIC, get to the 8.1% in FY23, and we’re seeking to grow it out to FY25. We haven’t put any ambition out there beyond that. The thing I would say, as we all know, watching the industry closely, the industry overall has been sitting with ROICs below cost of capital. So there has obviously been a need across industry to make sure we’re delivering returns that allow us to sustain the sort of investment and deliver the high quality networks and experiences for our customers."

I did a double take when I read Vicki's reply. It sounds like that after years of undercutting each other in the mobile space, there is now a 'cartel arrangement' whereby mobile operators agree not to drop their prices below a certain level. I have a feeling that if this was NZ, the commerce commission might have something to say about that. But this is Oz......, and it looks like 'the industry' is making it stick. It does sound good for NZ based Telstra shareholders, I must admit!


The following questions relating to mobile were answered at the HYR2024 analyst question session.

---------------------------

Q1/ Entcho Raykovski: / "I’ve got a question on mobile. I mean, obviously it continues to be a very good performer. I’m interested in how much of the 63,000 benefitting postpaid SIOs (Services in Operation i.e. active users) was due to the Optus outage? I don’t know if you can quantify that, but it would be helpful. And whether you’ve seen that benefit continue into the second half or whether it’s a one off? And now that you’ve had the opportunity to digest the impact, how do you see the outage as impacting the competitive dynamics in mobile? I think that’s an area that people have been thinking about when it comes to the mobile market."

A1/ Vicki Brady (CEO) / "In terms of mobile, as you point out it was a good half in terms of postpaid handheld net adds at 63,000. In terms of the impact of the Optus outage I would characterise its impact as similar to the prior event."

"So we’ve seen net SIO impact we would estimate maybe in the tens of thousands. To be honest we had a very good particularly December quarter in terms of postpaid handheld net adds, and I’m sure Brad will offer some good colour to what’s been going on there."

"In terms of the competitive dynamic, the thing I think it’s really triggered for customers is it’s brought front of mind for them it’s about real resilience and reliability. So we know we’re all reliant on connectivity, whether it’s in our personal lives or in our businesses. But I think that’s definitely brought it front of mind and that’s really opened up that conversation with customers. And as you can see, very good overall mobile customer growth right across postpaid, prepaid and our MVNO (Mobile Virtual Network Operator) wholesale business as well in the half."

A2/ Brad Whitcombe (Group Executive, Consumer and Small Business) / "I might put the subscriber numbers and the Optus impact in a broader context. So as a reminder, back in May we had communicated to our postpaid handheld customers that we were making some price changes, those changes going into effect in July. And as expected we did see a small uptick in churn at that point. We also saw a suppression in acquisitions as customers were looking at, “what does that mean to us?”

"And also during that May to July time-frame we did do dual quoting, so very transparent with potential new customers to say, “This is what you’d be paying now, but it would be changing around the July time-frame.” Given that that was the second time that we had executed that annual review, I’d say our customer communications were even better. The execution of front line was very, very strong. In particular, communicating with customers what it meant to them and potentially other plans they could move to or other products, et cetera. And we did then see the acquisition engine spin back up."

"We saw the churn normalise. In fact, if you look over the first half of the year I think we came in at less than 1% per month churn, around 11.5% annualised. And we took a lot of comfort in that, that the value proposition that we’re bringing to our customers is the right one. And that’s really built off of an exceptional network and a very reliable network, the cyber security benefits that we provide to our customers, having an onshore contact centre when people need support, and importantly also having retail stores, which we own and control. They’re our employees, and that’s a great point for service differentiation."

"If we look at the Optus outage specifically, you would have seen in the press the day of, obviously there was quite a lot of foot traffic in store as people were trying to get connected on the day. We did see that, as Vicki mentioned, the conversation around the importance of reliability play out both with existing customers and potential new customers. So again, that would have helped with our acquisition during that period of time. But it gets hard to unpick, because shortly after that we had what I think was a really, really impressive “Hello, Christmas” campaign, which was fully integrated both at the top line branding and also directly into the stores. "

"So if I were to ask the store teams they would say that ongoing strength of performance has much more to do with our value proposition and the way it was communicated in that campaign than, as Vicki said, a minor uptick from the Optus outage."




Q2/ Darren Leung / "On the conversation of mobile I just wanted to follow on that point. There’s a lot of adds (this means added subscribers) in wholesale and prepaid SIOs. Has there been an element of this that has been driven by the Optus outage? And has any of that churned off over the last few months, or do you expect it to be quite sticky?"

"In relation to postpaid churn, and I know there’s a lot of moving parts in this half. But it looks particularly low in the context of a price increase when one of your major peers did not. So I guess my question is, is it low enough at a level that you feel confident to start lifting price even if your peers do not?"

A2a/ Vicki Brady / "In terms of the overall net subscriber growth that you can see in the half; so when you put postpaid, prepaid, wholesale together, a little over 340,000 net additions. Look, I would put quite a bit of that down to, particularly prepaid and wholesale."

"We’ve seen growth in population and there’s no doubt our multi brand approach gives customers real choice around what’s the right service and proposition for them. And so I think we’ve seen the benefit of our multi-brand approach really giving customers choice."

A2b/ Brendon Riley (CEO Telstra InfraCo) / "On wholesale prepaid following the Optus outage we did see a healthy spike. There was some rollback, probably 30% to 40% rolled back. But it was definitely accretive to the prepaid business. And I think in line with comments that Vicki made, it’s not massive, but it was definitely accretive and helpful."

A2c/ Brad Whitcombe (Group executive, Consumer and Small Business) / "If I pick up on the churn point. Obviously we’d like churn to be lower, but 11.5% is normalised if you take out exceptionally low churn during the COVID period. So we are comfortable with that level of churn, although always trying to bring it down. I think on the multi-brand strategy too, if you look across our entire portfolio, so whether that’s retail, wholesale, whether you look at it from postpaid, prepaid, whether you look at it from name brand or all of our other sub-brands, during the half we were able to increase net subscribers and also increase ARPU during that time."

"So I think that shows the power of the multi-brand strategy. In terms of our competitive position, I think the focus on our value proposition, what we’re delivering to customers, which I talked about. The network, the on shore customer support, et cetera. It feels like that’s really resonating, and that’s something that we’re going to continue to invest in."




Q3/ Lucy Huang / "Subs in mobiles. Just putting all the comments together can I just confirm that it sounds like that run rate in net adds has still roughly continued in the first part of third quarter this year? "

A3/ Vicki Brady / "So as Brad spoke to in quite a bit of detail, we saw a really pleasing period, particularly that December quarter. Obviously mobile subs is cyclical and the Christmas period is usually a good period for us. I think my comment would be we remain pleased with what we’re seeing currently. But again, I would just call out it is always cyclical in terms of our mobile business and subscriber acquisition. But as Brad talked about, I think some great execution from the teams really pulling through our brand and our marketing through to our stores and it’s been good to see that."




Q4/ Tom Beadle / "Mobile momentum is quite good and postpaid ARPU is growing. So is there anything incremental to think about here on postpaid ARPU or should it be fairly flat, half on half?"

"The external environment is putting pressure on consumers. I guess the question is how much might this be impacting the relative performance of prepaid and wholesale just given their obvious price points? And have you seen any evidence of customers spinning down from postpaid? And is it fair to say that maybe that Optus outage could have helped prop up postpaid growth in that context?"

A4/ Vicki Brady / "Just on prepaid, wholesale, is what we’re seeing. As I mentioned earlier, I think as we see population growth at high levels and people entering the country, ordinarily we would expect to see people choose and go to prepaid, and maybe some of those MVNO wholesale prepaid offerings as well. So I think that’s absolutely helping us in terms of overall prepaid momentum in the market, just with population growth. In terms of what we’re seeing with consumers it’s important to recognise that for our consumers under our Telstra brand we don’t have contracts on their service. So they do have that ability to move and make choice. "

"And obviously we do have the choice of prepaid, of our various sub-brands like 'Belong' (Telstras low cost value brand), and then obviously there’s the wholesale offerings in market as well from those providers. I would say we’re still seeing from our consumers undoubtedly the importance of being connected is front of mind, and that flexibility and choice is incredibly helpful to have there. And I think we’re seeing that play out. As we spoke about, the multi-brand strategy gives us a way to address the different parts of the market. And as customers’ needs change, as their circumstances change, they have choice."





Q5/ Tom Beadle / "On mobile handsets. I realise it’s not a big area of focus, but I guess we’ve had some feedback from the retailers, like, JB Hi-Fi that Apple has been offering incentives to help shift stock. So I’d assume that you typically probably make no margin on handsets, on sales. But can you confirm if you’ve received any incentives from Apple or other manufacturers, which might have helped incrementally?"

A5/ Brad Whitcomb (Group Executive Consumer and Small Business) / "I’d say a couple of things there. One, just in terms of the sentiment. We’ve got probably stronger foot traffic in stores and we’ve seen that continue to grow. If we look at the stress of customers our bad debt percentage has actually stayed quite stable and low during that period of time. For handsets in particular though we do see a general slowdown in the volume of handsets that are being shipped in the market and we’ve also seen a slight shift away from carrier sales and straight into retailers directly."

"So what that’s resulted in Telstra is that we’ve got fewer handset sales, but at a higher value. So we’re seeing the premium end of the market moving quite well. Now, the last thing I’d add is within our numbers we’ve also got accessories and wearables, and that business is performing quite strongly as well."




Q6/ Brian Han / "On 5G can you please give us some indication as to the percentage of your mobile subs that’s now on 5G? And anything you can share in terms of differentials versus 4G in metric such as ARPU, cost per megabyte delivered and energy consumption?"

A6a/ Vicki Brady / "Just in terms of 5G, I don’t think we’ve disclosed actually a percentage of customers on 5G. But Michael might correct me on that if I’ve got that wrong. Look, the thing we are seeing as customers move and as you would be aware, when you go and buy a new phone today, a new mobile phone, the large majority are 5G capable. And so as people move to 5G, we certainly see in terms of experience you do enjoy the benefits of faster speeds, lower latency. But, I mean, ultimately what does a customer think about? I think they just think about how quickly does it work? Is it responsive? Is the capacity there? Can I use the things I want to use? And that’s what’s important about the upgrade and moving into 5G for the majority of our customers."

"And certainly as we’ve said, with each new generation of mobile technology it does get more efficient. And so for us to be able to meet the needs with data growing on the network at 30% per annum, without investing in 5G and rolling that out the costs in terms of capex and opex we would have had to spend. "

"So 5G on its own just as a business case, I know everyone looks to where are the revenue streams that are going to come on top of 5G. But actually the case for 5G was fundamentally about how do we actually serve the demand on our network in the most cost-effective way. And as I said, newer technology, each generation gets more efficient in being able to deliver that."

A6b/ Michael Ackland (CFO) / "I think we’re about 48% of traffic on 5G, which is not giving you an answer on the number of customers, but the traffic is really the driver of investment and costs, so 48%."




Q7/ Nick Basile / " On mobile EBITDA. I’m just trying to get a better understanding of the moving parts to the EBITDA growth. I think there were some comments about mobile services revenue growth versus the hardware margin being lower. I’m just interested to what extent that the postpaid revenue growth versus prepaid is also helping deliver better results in that area."

A7/ Michael Ackland / "On mobile EBITDA, if I just start with mobile service revenue growth. We’ve split out mobile service revenue growth between postpaid handheld, prepaid mobile broadband, internet of things, and wholesale. Apart from mobile broadband, we’re seeing growth across all areas. The biggest absolute growth is in postpaid handheld service revenue growth. And we did see a drop of about 3% in hardware and other income."

"But from a mobile hardware margin point of view, mobile hardware margin including Telstra Plus, that margin in absolute dollars increased. And so when we think about mobile EBITDA, it was largely driven by service revenue growth, but a significant part of it was driven by cost reduction both from hardware but also from our underlying cost-to-serve and cost-to-connect."



Q8/ Jenny Wiggins/ "Are you planning to put up prices of mobile phone plans again mid-year?"

A8/ Vicki Brady / "In terms of mobile, I mean, the business has performed well. It’s obviously not appropriate for me to talk about future pricing decisions in mobile. We’re very pleased with the business, and we’re really pleased to see more customers choosing Telstra. And you would see in the period, actually when you look at postpaid, prepaid and our wholesale business, we’ve added more than 340,000 services in the period. And I think it really reflects years of investment in making sure we have a leading mobile network. Whether it’s rolling out 5G, now at almost 87% population coverage. Whether it be the transition away from 3G onto 4G across the country. The investment in resilience, security, we can see that that is absolutely top of mind for customers, and we can see them making the choice to choose Telstra more."




Q9/ David Swan / "I wanted to ask secondly just about the Optus outage, if you’re expecting any more likely regulations as a result of the outage and the sort of fallout from that, or will you be recommending any? And are there any lessons for the sector from that outage?"

A9/ Vicki Brady / "Around the Optus outage. There are obviously a number of reviews running at the moment, and I think that’s incredibly important. Whenever there is an outage of that magnitude, it is so important that we all lean in and understand the lessons out of those. Our approach is, whenever there is an outage around the world, a significant outage impacting another operator, we always work very closely to understand with our vendors and with those companies what’s happened, and take any of those lessons into what we can do differently."

"And so our focus at the moment is absolutely being involved in those reviews, where required. And I think the thing that’s most important for us is really that those key lessons are taken and we can all adopt those into our various strategies and networks."





Q10/ Stuart Condie / "Given your comments on the number of users attracted from Optus as a result of the outage and the resultant share gain that you’ve presumably enjoyed, can you just give us your thoughts on the outlook for revenue from handsets and other hardware? Particularly given that there are tax cuts and possibly lower interest rates in the offing."

A10/ Vicki Brady / "If you look at our first half year results you’ll see when you look across postpaid, prepaid, and our wholesale mobile business, we’ve added a little over 340,000 customers in the half. Now, what I would call out is we’re seeing population growth in the country and I think that’s been a significant driver of the growth in customers in the half."

"In terms of the Optus outage, as I spoke to earlier this morning, it is difficult to estimate the impact of that. But our best estimate was that that was in the low tens of thousands of services that we were likely to acquire, have acquired in the half. So really I think that growth that you’re seeing in services and in customers choosing Telstra, that is driven – population growth is playing a part, and I think what’s top of mind for customers, is just how important it is to be connected. And so that reliability, resilience is top of mind, and we’ve invested over a lot of years to make sure we have the leading mobile network in the country, including with our 5G rollout where we’re now at around 87% population coverage."

"On the handset front, what we actually saw in the half was we actually saw a decline in handset revenue. And that was really driven by less volume, although the handsets we did sell were of a higher retail value. So we’re certainly seeing that premium end of the market, high-end handsets, people gravitating there."

"Look, our main focus obviously having a mobile phone is incredibly important to enjoy our service, so we give customers the option, they can buy outright from us, they can buy and pay for their device over 24 or 36 months with us. Customers also look to source their devices from other players in the market, like JB Hi-Fi or directly from someone like Apple."

"We’re really pleased overall with the performance of the mobile business. And I think it really reflects customers seeing the benefit of what we’re doing in terms of our investment in network technology and into the service we provide through our contact centres onshore, and the ownership of our retail stores."

"On tax cuts and possibly lower interest rates in the offing, those things will obviously come into play in the macro environment. And it’s certainly front of mind for us that customers are feeling cost of living pressures. And I think we’ve probably seen a little bit of that in
terms of mobile handset sales. But overall we know just how important it is for our customers to be connected."

"I think the macro environment, undoubtedly an improvement in that, and an improvement in confidence, I would expect over time. Yes, people will hold off upgrading their mobile phone, I think, when they’re in an environment where they’re under pressure on cost of living. And no doubt, are more willing to consider that when things ease a little bit."





Q11/ Joseph Lam / "About direct-to-handset satellites. There was a mention of a deal with Lynk Global. Can you provide some more information around what that deal consists of, and when customers will be able to utilise those services? And also whether satellite connectivity keeps people connected during a natural disaster or some sort of outage?"

A11/ Vicki Brady / " Direct-to-handset satellite technology: Obviously there’s a lot of innovation happening in the LEO (Low Earth Orbit) satellite environment at the moment, and it’s exciting to see. So, we’re working with a range of satellite providers. In fact, we’ve got a deal with OneWeb, where we recently did our first call over a remote mobile site that’s using OneWeb LEO satellite backhaul to the site."

"We did recently sign a deal with Lynk Global, and that’s really about being able to experiment and test with them direct-to-handset satellite technology. Because we believe, for our customers, what’s happening in that space is important, and the ability to further expand our mobile coverage as this technology matures, we see as an area we should be in, we should be at the forefront of with partners bringing those options and choices."

"The timelines on those things, it’s fair to say the technology is still evolving. And so there’s no definitive timelines yet, but I think incredibly important we’re in that space, we’re working with OneWeb, we’re working with Starlink when it comes to our broadband services, and we’ve got an Enterprise product in market, we expect to have in March a world first with Starlink with broadband and voice service to our consumer customers."

"And then yes, we’ve signed the deal with Lynk Global to be able to experiment and make sure we’re at the forefront with them of looking at direct-to-handset technologies via satellite."




Q12/ Joseph Lam / "On international roaming and population growth and growth in services. Would Telstra look to ink more deals with international providers to increase international roaming? There were some comments there about international roaming being the norm, and that growth there."

A12/ Vicki Brady / "We did see an increase in international roaming in the half, and look, we would say international roaming from our point of view has probably come back to normal levels now, post-COVID. And so that increase is that starting to normalise post a period of us obviously not being able to travel through the COVID period. We have extensive deals in place with other operators around the world to enable our customers to be able to roam internationally. And I think we’re in a good place on that and offering a good range of options for our customers as they travel globally."

---------------------------------------

SNOOPY

[Snoopy]

The above is a very long post that covered a lot of ground. But what does it mean for mobile growth going forwards from here? Many of the questions centered around competitor Optus's September 2022 security breach (part of HY2023 for Telstra), more details of which are referenced here.

https://www.sharetrader.co.nz/showthread.php?2476-TLS&p=1003520&viewfull=1#post1003520

At the time of the Optus hack, this seemed to kick start a somewhat moribund TLS share price at around $3.80 to rise to $4.30 or so by May 2023. In fairness probably a large part of that rise was also in anticipation of an analyst proposed sell down of InfraCo, which did not happen. But with the TLS share price closing at $3.45 on Friday 24/05/2024, well below what it was before the Optus hack and the speculation of the InfraCo sell down started, it is clear that any favourable glow on Telstra from Optus's misfortune has well and truly faded.

Yet in terms of revenue received, the uptrend for mobile is intact into FY2024. Although we should note that the four year full year annual revenue growth trend from EOFY2019 to EOFY2023 was:

$10,084m(1+g)^4 = $10,258m => g=0.43% per year

That growth figure looks across the Covid-19 low dip, although it doesn't consider the rise in EBITDA margin from 34% to 44.9% across five reporting periods. Using EBITDA as a measure for a technology company which requires ongoing spend to upgrade to new generation mobile technology while the older generation technology takes a significant depreciation hit? Perhaps EBIT margin would be a better figure to use in this instance?

Telstra's CEO Vicki Brady is cautious in her outlook from here, noting that the roaming revenue recovery from Covid travel restrictions has been achieved and a 'market marking event', while it worked in Telstra's favour with the Optus hack, could go the other way next time - they are generally cyclical. I also thought it noteworthy that customer churn of around 11.5% (around 1% per month) is considered 'Business As Usual', unavoidable and part of the normal ebb and flow of the mobile market.

One thing I had not appreciated before is that as mobile phone operating system generational changes advance, it becomes cheaper for the network operator to run. I am not sure if that means 'absolutely cheaper in dollar terms' or 'cheaper for the same amount of data on the network'. I suspect the latter.

"So 5G on its own just as a business case, I know everyone looks to where are the revenue streams that are going to come on top of 5G. But actually the case for 5G was fundamentally about how do we actually serve the demand on our network in the most cost-effective way."

This statement was the most important thing I learned from the presentation. I was fretting about what applications were suddenly going to require this big spend infrastructure 5G roll out to operate. Instead it seems that Telstra is not concerned about this. Whatever - the coming application(s), demand for data is exploding. So it really is a case of 'build the 5G roll out and they will come'. Admittedly that is a dodgy strategy on which to run a business, in my opinion. But with data demand expanding so fast everywhere, at 30% per year in total, it seems to be a strategy that is working, as mobile network operators move through their ever higher traffic able generations of mobile phone networks.

The reminder that mobile contract growth was linked very much to the number of immigrants arriving was timely (the Australian population growth has been 1% per year for each of the last four years to 2024 c.f. New Zealand which has been growing at 0.8% for the last two years) . But most customers just see the benefits of faster speeds, and lower latency. Whether such changes are 'badged' as 5G or not is of little relevance to them. I also found it heartening (Answer A7) that the largest EBITDA growth was in the flagship offering 'postpaid service revenue growth'. This is surely the DNA Telstra at its heart is ideally all about: Supplying a core service that is reliable, resistant to hacking, and having real Aussies on the ground in the help centres to assist when things 'do go wrong'. .

Yet will Telstra's mobile division continue to provide the revenue and profit growth we have seen for the last three years in the next year or two? My reading of the comments as an investor is that it would be foolish to plan on that.

SNOOPY

[Snoopy]

The following questions are relating to financial targets as discussed at the HYR2024 analyst briefing

-----------------------------------

Q1/ Eric Choi / "It does matter, I guess, for EPS and DPS coverage. Since you’ve stuck with your T25 targets of mid-single digit Underlying EBITDA growth and high teens EPS, I think you’re still mathematically suggesting an $8.5 billion EBITDA (EBITDA for FY2023 was $7.862b) , and maybe an 18.5 to 19 cents EPS at the bottom end? Michael, if you could confirm that, that would be fantastic."

A1a/ Vicki Brady (CEO) / "We’ve got our T25 ambitions out there, which you referred to. And we remain confident in achieving those growth rates on Underlying EBITDA, and Underlying Earnings Per Share."

A1b / "Eric, we’re committed to those mid-single digit EBITDA and high teens EPS growth outcomes, and we think they’re ambitious growth objectives. And we’re absolutely committed to those into FY25."





Q2/ Entcho Raykovski / "The market has dividends per share growing to 19 cents per share in FY25. I know you’re not going to give us guidance, but can you comment on what needs to go right for you to be able to deliver that number, given you’re now at the bottom half of the prior EBITDA guidance for 2024? Is it mainly mobile growth that’s the key driver or is it other factors?"

A2/ Vicki Brady/ "What needs to go right in terms of driving that growth in dividend per share? Obviously it is continuing to execute well across the key parts of our business, with a real focus now on making sure we’ve also got our Enterprise business set up for success (Snoopy note: Enterprise delivers services to governments and large enterprise and business customers. It includes DAC, Data & Comnnectivity and NAS, Network Applications and Services). As we talked about, some structural change going on in Enterprise that we’ve seen for a little while now in DAC and calling. And we’ve got a cyclical effect at the moment in NAS. And so making sure we’ve absolutely got that business performing well is also important as we look. And really as management our focus is on driving underlying earnings growth, because we know ultimately that’s the thing that’s going to count to get the outcomes for our shareholders."




Q3/ Darren Leung / "On DAC (Data and Connectivity). I recalled the last result we were talking about pricing, practically pricing customers lower to defend market share. Can you remind me how progressed we are on that, please, just in the context of the ARPU that’s stayed pretty resilient?"

A3/ Michael Ackland/ "On DAC we have seen that ARPU compression and revenue compression continue to slow. So we declined 16% in FY23. Revenue decline for the first half was around 10%. We’re doing a good job at retaining our fibre SIOs and we’re seeing growth in nbn EE as well, which is helpful. We would expect by the end of FY25 to have migrated the vast majority of our DAC customers onto in market plans. So we’re well through it. We expect to see that rate of decline continue to reduce as we go through FY24 and FY25."




Q4/ Lucy Huang / "I just noticed with InfraCo margins a slight dip in this half. But just wondering what further efficiencies can drive in InfraCo Fixed in the near term?"

A4/ Brendon Riley (CEO Telstra InfraCo) "We’ve got an awful lot on the go in relation to the operating efficiency side of things. Firstly, in terms of really most of the work we do in the asset life cycle and maintenance space. We’ve got a major tender underway, out to market to that to go and have a look at what we can do to drive further efficiencies there. We stood up a network operations centre and that helps us better coordinate not only across all of our assets, but activity with Telstra and other customers. That’s a really, really important driver of operating efficiency just in terms of scheduling work and maintenance activities."

"We’ve introduced a lot more automation, particularly into the facilities. As Michael has indicated, a lot is happening on energy. So lighting, HVAC and battery replacement programs, which drive energy efficiencies. We’ve got our copper recovery program underway where we extracted over 9,000 tons in the first half. And we’ve got our asset divestment program underway, and we’ve probably got more happening in the second half there. And obviously that not only drives one-off material gains in terms of EBITDA proceeds, but it also helps a lot with operating efficiency. We just have a lot less sites that we need to look after. So there’s an awful lot happening in that space and that’ll continue to be a major priority for me and the team."





Q5/ Kane Hannan/ "The free cashflow guidance. You pulled down EBITDA a little bit at the midpoint, but no changes to free cashflow. Is
there some positive offsets coming through we should be thinking about?"

A5/ Vicki Brady / " As is often the case our free cashflow can be a little bit second half-weighted, and obviously in free cashflow versus Underlying EBITDA there’s more timing and things going on in there. So yes, no change in free cashflow guidance. We remain confident in that guidance. So no change there despite tightening the Underlying EBITDA guidance range."




Q6/ "Gain on InfraCo Fixed. I think you were calling that improved growth in the second half back at the Investor Day, but the nbn revenue growth is going to slow. So is this all the efficiency that you were just talking to, Brendon, or is it asset sales and some of the lumpiness there really what’s driving that improved second half?"

A6/ Brendon Riley / "The second half, definitely a stronger half from an asset sale perspective. Copper recovery also, we’re expecting another good half there. We’re seeing definitely a pickup in some of our commercial works projects and some new orders coming through from satellite providers. And the last would be dark fibre. So dark fibre tends to be a lot of smaller sales until we get the intercity fibre project up and going, but very, very happy with how they are ticking over. So all of those things added together puts us on track to have a good second half."




Q7/ Kane Hannan / "The 'other earnings'. It was a big drag this half despite that one-off gain coming through. So if you just help us understand how we think about that going forward. Is that corporate re-segmentation going to continue to impact that line for the rest of the year and beyond, or is it all one-off noise coming through?"

A7a/ Vicki Brady / "There is a bunch of stuff as you call out in the Other category. There’s always plusses and minuses in there.
Things like revaluing employee entitlements with bond rate moving and various other things."

A7b/ Michael Ackland / "Think Vicki probably covered it on the Other earnings, some corporate restructuring and things. There was also some movements on the valuation of our employee liabilities with bond rate movements just late in the half, and the gain on the towers. So I don’t think there’s anything particularly unusual in there, but I’d probably just leave it at that."





Q8/ Brain Han / "In the cashflow, the other line in the cashflow, Michael, can you talk a little about the decline from [$]189 [million] to [$]61 [million] in the half, and whether you’re expecting any asset sales in the second half to boost that line.

A8/ Michael Ackland / "You will note in the other on free cashflow, the PCP was [$]189 [million], and in this period it was $61 million, which is a big change. That was largely due to some term deposit payments and financing payments that occurred in the prior period. So, we’re still comfortable with our second half outlook and reaffirming guidance on free cashflow. "




Q9/ Joseph Lam / "About earnings per share. So, earnings per share was 8.4 cents but the dividend was 9 cents per share. How are you paying for that, and is this a trend we can expect to continue? "

A9/ Vicki Brady / "Yes, our earnings per share was at 8.4 cents and as you call out, we paid a dividend of – we will pay a dividend at 9 cents per share. The important thing is, as the Board made its decision on the 9 cent dividend, we have a very strong balance sheet, we have strong free cashflow able to support that dividend. And under our capital management framework, we have a policy that is to maximise our fully franked dividend and seek to grow it over time. And so, really those factors come into account and the strength of the balance sheet and free cashflow puts us in a position to be able to support that 9 cent interim dividend to our shareholder."


-------------------------


SNOOPY

[Snoopy]

Once again I have historically adjusted out dividend payments to remove 'special dividends' that were funded by one off nbn (National Broadband Network) compensation payments. These were made to Telstra for handing over their existing largely copper network to nbn, a process that is now largely complete. It was important to remove these special dividends from this forecasting tool, because they are entirely historical, and do not reflect future dividend potential from Telstra.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax - which Telstra does). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our Australian dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate, which I have used for grossing up dividends, is 30%.



Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY20197.5c + 5.0c10.71c + 7.14c7.14c


FY20205.0c + 5.0c7.14c + 7.14c14.28c


FY20215.0c + 5.0c7.14c + 7.14c14.28c


FY20225.0c + 6.0c7.14c + 8.57c15.71c


FY20237.5c + 8.5c10.71c + 12.14c22.85c


FY20248.5c + ?c12.14c + ?c12.14c


Total86.4c



Now we have to select a representative capitalisation rate. For Spark (the nearest NZ equivalent company both are incumbant operators that have had their former fixed line monopoly networks de-merged), I have decided a rate of 6.5% is appropriate. But Australian interest rates have traditionally been a little lower than ours. One way to pick an acceptable equity return rate is to look at the market trading interest rate of any listed company bonds and pick something a bit higher, to account for 'equity risk'

Telstra have the following company bonds listed on the ASX market:
TL1HAA €500m 1.00% Notes maturing 23 April 2030;
TL1HZ: €600m 1.375% Notes maturing 26 March 2029; and
TL1HY: €750m 1.125% Notes maturing 14 April 2026.

When I put these tickers into 'Stocknessmonster', I get a complete blank on both the buy and sell side. So there is no indication as to what market rate (which I suspect will be above the coupon rate) these bonds are trading at!

Never Mind. I would judge a 'gross return rate target' of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 86.4/5 = 17.3c

Using an 'interest capitalisation rate of 5.5%', this equates to a Telstra share price of: 17.3 / 0.055 = $3.15. Telstra shares are trading today at price of $3.87. On that basis, Telstra shares are currently significantly over-valued, by about 23%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown significantly over the current year. Any overvaluation might be better considered as a 'deserved growth premium'.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

24.28c/ 0.055 = $4.41

I think the market discount to that $4.41 price (a turnaround on the premium the market was offering to my historical yield of 6 months ago) might be a reflection of the cancelled InfraCo sell-down, from which salivating investors were expecting a quick capital injection. But even so, trading at $3.87, I believe there is a modest growth path priced into the Telstra share price. And with the purchase of 'Versant' announced today, a cloud technology NAS (Network Application and Services) business, we have another 'clip on' should add to that 'growth potential'. This latest Versant acquisition builds on previous acquisitions, most recently of Alliance Automation and Aqura Technologies, which are bolstering subsidiary Telstra Purple’s capabilities to support the end-to-end needs of industry covering network, security, cloud, collaboration, mobility, software development and design, data and AI.

In summary, from a yield perspective alone, Telstra is not cheap, but nor is it obviously overvalued. Whether that growth potential is enough to tick the value investor box at $3.87 is a decision that will require some more work.


Once again I have historically adjusted out dividend payments to remove 'special dividends' that were funded by one off nbn (National Broadband Network) compensation payments. These were made to Telstra for handing over their existing largely copper network to nbn, a process that is now largely complete. It was important to remove these special dividends from this forecasting tool, because they are entirely historical, and do not reflect future dividend potential from Telstra.

Gross dividends in Australia are made up of a net payment plus a franking credit (if the said company we are looking at is paying Australian tax - which Telstra does). As New Zealand residents, we kiwis are not entitled to claim these franking credits as 'tax paid'. However the vast majority of Telstra shareholders are Australian, and it is clearly Australian interests that are driving the TLS share price. For this reason I am doing this analysis from an Australian perspective. We kiwi shareholders may not get the franking credit value from our Australian dividends. But if we kiwi shareholders want to sell, it will be Australian interests that determine what a fair share price will be.

Note that the Australian company tax rate, which I have used for grossing up dividends, is 30%.



Year
Dividends as DeclaredGross DividendsGross Dividend Total





FY20205.0c + 5.0c7.14c + 7.14c14.28c


FY20215.0c + 5.0c7.14c + 7.14c14.28c


FY20225.0c + 6.0c7.14c + 8.57c15.71c


FY20237.5c + 8.5c10.71c + 12.14c22.85c


FY20248.5c + 9.0c12.14c + 12.86c25.00c


Total92.12c



Now we have to select a representative capitalisation rate. For Spark (the nearest NZ equivalent company both are incumbant operators that have had their former fixed line monopoly networks de-merged), I have decided a rate of 6.5% is appropriate. But Australian interest rates have traditionally been a little lower than ours. One way to pick an acceptable equity return rate is to look at the market trading interest rate of any listed company bonds and pick something a bit higher, to account for 'equity risk'

Telstra have the following company bonds listed on the ASX market:
TL1HAA €500m 1.00% Notes maturing 23 April 2030;
TL1HZ: €600m 1.375% Notes maturing 26 March 2029; and
TL1HY: €750m 1.125% Notes maturing 14 April 2026.

When I put these tickers into 'Stocknessmonster', I get a complete blank on both the buy and sell side. So there is no indication as to what market rate (which I suspect will be above the coupon rate) these bonds are trading at!

Never Mind. I would judge a 'gross return rate target' of 5.5% to be more applicable for Telstra shareholders in the so called West Island.

The five year average historical gross income rate for Telstra is: 92.12/5 = 18.4c

Using an 'interest capitalisation rate of 5.5%', this equates to a Telstra share price of: 18.4 / 0.055 = $3.35. Telstra shares are trading today at price of $3.45. On that basis, Telstra shares are currently slightly over-valued, by about 3%. But what readers have to remember is that 'capitalised dividend value' is a 'no growth' method of valuation. Underlying earnings at Telstra have grown over the current year. Any overvaluation might be better considered as a 'deserved growth premium'. And a capitalised value of such a growth program at 3% of the share's capital value is 'not much'.

If instead we just use the last twelve months of dividends to look back on, then the capitalised dividend valuation changes:

25.00c/ 0.055 = $4.55

I think the continued market discount to around that $4.55 price, a target touted as achievable by some market commentators, might be a reflection of:

a/ The cancelled InfraCo sell-down, from which salivating investors were expecting a quick capital injection AND
b/ The recessionary climate in Australia where, just like New Zealand, much of the expected corporate upgrade NAS revenue has been put on the back burner.

One way of looking at it is to say the near term growth premium has been eliminated. The longer term view is that the share price has reverted to a previous medium term yield rate signifying no long term growth. For a company paying out more than 100% of earnings as dividends, this view makes some sense. It is difficult to meaningfully grow if you cannot retain your capital base.

In summary, from a yield perspective alone, Telstra at $3.45 looks priced about right. But as a value investor, I look to buy at a discount to fair value. At this price TLS shares are giving investors their future growth pans 'for free'. IOW the growth premium not built into the share price becomes your dscount. Depending on your judgement on how profit positive those growth plans turn out to be, will determine if TLS today at $3.45 is a good buy or not.

SNOOPY

[Snoopy]

This post is bringing together the results of the four Buffett Tests that I have detailed in posts 16,17,18,28 and 29 on this thread. Telstra:

BT1/ PASSes the significant size and market position test,
BT2/ FAILs the increasing normalised earnings test over five years,
BT3/ FAILs the return on shareholder equity test (never comes close to the required return on equity hurdle of 15%) and
BT4/ PASSes the ability to raise profit margin test.

If Telstra manages to increase their normalised profits for FY2023, then the 'fail ' grade of test BT2 will turn into a pass.

However, I am of the opinion that Telstra is unlikely to ever earn the hurdle return on shareholder equity that Buffett requires in BT3/ (15%). My reasons for this may be found on the TEL vs TLS thread on the NZX forum, but are particularly highlighted in this post.

https://www.sharetrader.co.nz/showthread.php?1783-TEL-v-TLS&p=1008165&viewfull=1#post1008165

The summary: Telstra has an inherently higher cost asset base, even adjusted for the respective population difference between Telstra in Australia and the equivalent incumbent Spark in New Zealand. (In contrast to Telstra, Spark clears the 15% return on equity criterion that Buffett sets every year for the last five years easily). If Telstra is unlikely to ever fulfill all of the four qualification hurdles to be a Warren Buffett style investment, does that mean Telstra is un-investible? Of course not. It just means we need to look at alternative investment models to justify an investment in Telstra.

A starting point is the 'capitalised dividend valuation model' (link to post 31 below):
https://www.sharetrader.co.nz/showthread.php?2476-TLS&p=1003252&viewfull=1#post1003252

This is showing a fair value share price of $3.09. This valuation is driven by dividend rates of recent years being lower than dividend rates today. But the capitalised dividend valuation model is also a zero growth valuation technique. If Telstra is genuinely growing their earnings, then a 'capitalised dividend fair value' price will undervalue the company. So does a credible earnings growth plan for Telstra exist? The two most trumpeted potential 'growth candidates' are 'Telstrahealth' and 'Mobile'.

I address the initiative of Telstrahealth (post 40) and conclude that in the medium term, this is likely to continue to be loss making. Nevertheless Telstrahealth may reduce my estimate of its annual loss from an EBITDA of -$193m to zero by 2025. In relation to FY2022 profit, this may increase EBITDA earnings by: $193m/$1,645m= 11.7% over 3 years (or $193m/3= $64m/year).

Inflation adjusting mobile phone price plans, upping prices by 7% - but with half of that increased reflecting higher Telstra costs-, going through, without significant customer churn (post 39) looks do-able. This could increase profits by: 0.5x0.07x $9,470m= $331m per year.

So both of these growth initiatives together might increase FY2024 EBITDA (or in this particular case NPAT, which is much the same thing) by: 0.7x(2x$64m+$331m) / $1,645m = 20% over FY2022 levels. Such a level of profit growth should be directly reflected in share price growth. We can modify our capitalised dividend valuation model price target to reflect that:

$3.09 x 1.2 = $3.71

Yet that price does not reflect the benefits of the Amplitel sell off (a 5% eps lift, see post 45), nor a potential sell off of InfraCo assets (an 11% eps lift, see post 50). Adjusting for those gives a new fair value share price of:

$3.71 x 1.05 x 1.11 = $4.32

As it happens $4.32 is the exact share price that Telstra closed at, as of the close of business on Friday 24th June 2023 last week on the ASX! That I should come up with a market valuation on a share as well and widely researched as Telstra in accordance with 'Mr. Market' is no great surprise. But 'getting the price more or less right' is much less important than understanding the drivers of that price. In this instance it looks like the forecast profitability increases from the company's identified growth engines of Mobile and TelstraHealth are already priced in, as is the beneficial eps effect and consequential debt reduction on the sale of a minority interest in Amplitel and in the near future certain InfaCo assets. Given that there is 'execution risk' associated with all of these potential events, this indicates to me that Telstra is fully priced at $4.32. As a new investor today, I would be looking to get a bit of a share price discount reflecting these 'yet to be baked in 'earnings per share' profit rises, (as reflected in that $4.32 share price). That means looking for an entry price of less than $4. Taking another perspective, should positive announcements drive the Telstra share price 10% higher than my fair value, to say $4.75, that might be a good target price for trimming your holding.


This post is bringing together the results of the four Buffett Tests that I have detailed in posts 61,62,64 and 65 on this thread. Telstra:

BT1/ as Australia's and with the addition of Digicel, the wider Pacific island's largest Telco PASSes the significant size and market position test,
BT2/ with only one year of earnings decline out of five, PASSes the increasing normalised earnings test,
BT3/ FAILs the return on shareholder equity test (never comes close to the required return on equity hurdle of 15%) despite ROE improving every year for four years.
BT4/ PASSes the ability to raise profit margin test, with net profit margin rising for the fourth year in a row - impressive.

As regular readers will know, to apply the Buffett valuation model, all four of these individual Buffett tests must be passed. Three out of four does not cut it. However, I am of the opinion that Telstra is unlikely to ever earn the hurdle return on shareholder equity that Buffett requires of BT3/ (15%). My reasons for this may be found on the TEL vs TLS thread on the NZX forum, but are particularly highlighted in this post.

https://www.sharetrader.co.nz/showthread.php?1783-TEL-v-TLS&p=1008165&viewfull=1#post1008165

The summary: Telstra has an inherently higher cost asset base, even adjusted for the respective population difference between Telstra in Australia and the equivalent incumbent Spark in New Zealand. (In contrast to Telstra, Spark clears the 15% return on equity criterion that Buffett sets every year for the last five years easily). If Telstra is unlikely to ever fulfill all of the four qualification hurdles to be a Warren Buffett style investment, does that mean Telstra is un-investible? Of course not. It just means we need to look at alternative investment models to justify an investment in Telstra.

A starting point is the 'capitalised dividend valuation model' (link to post 76 below):
https://www.sharetrader.co.nz/showthread.php?2476-TLS&p=1053897&viewfull=1#post1053897

This is showing a fair value share price of $3.35. This valuation is driven by dividend rates of recent years being lower than dividend rates today. But the capitalised dividend valuation model is also a zero growth valuation technique. If Telstra is genuinely growing their earnings, then a 'capitalised dividend fair value' price will undervalue the company. So does a credible earnings growth plan for Telstra exist? The two most trumpeted potential 'growth candidates' are 'Telstrahealth' and 'Mobile'.

I address the initiative of Telstrahealth (post 68) and conclude that in the medium term, this is likely to continue to be loss making.
From the 21st May 2024 update
"We still we remain confident in Telstra Health. We think the set of assets that we have in Telstra Health fit together, and represent a real value proposition to the healthcare sector. Clearly things are uncertain in the healthcare sector at the moment. I don’t think that’s any surprise to anyone, as many of the different healthcare providers and government departments and government healthcare providers come out of COVID and go through that transition. But the need for digital health and connectivity across pharmaceutical scripts, GPs, hospitals, agedcare, disease registries, all of those assets that we’ve got put together, that value proposition remains incredibly strong."

Nevertheless Telstrahealth may reduce my estimate of its annual loss from an EBITDA of -$247m as Telstra approaches their 2025 cost out target. And reducing EBITDA losses has the effect of increasing overall company EBITDA profits in the big picture.

A widely communicated inflation adjustment to mobile phone price plans took place in July 2023, upping prices by 7% - but with half of that increase reflecting higher Telstra costs. With no net customer churn I forecast this could increase profits by: 0.5x0.07x $9,470m= $331m per year or 3.5%. Actual increases in mobile income was 3.8% with EBITDA margin rising from 43.2% to 47.1% over the HY2023 and HY2024 comparative periods. This is encouraging, and gives substance to CEO Vicky Brady's HY2024 proclamations about how pleased Telstra management is with the progression in mobile division earnings.

However the 21st May 2024 market update has indicated the inflation linked aspect of postpaid price increases will not proceed in July 2024:
"Today we announced that we will be updating the customer terms for our postpaid mobile plans to remove the CPI link annual price review. This change simplifies our pricing strategy by bringing the approach to postpaid mobile plans into line with other products. This approach reflects there are a range of factors that go into any pricing decision, and will provide greater flexibility to adjust prices at different times and across different plans based on their value proposition and customer needs."

This suggests to me that any mobile revenue increases will likely track population growth in FY2025/FY2026 and mobile revenue growth will be no greater than that. That doesn't mean mobile network profit increases will be limited to that though, as there will be the cost savings from shutting down the 3G network.

I review the prospects of the three growth engines of this company going into FY2025.

1/ The mobile growth engine is possibly stalling.
2/ The cash benefit of the fibre superhighway is only starting to build AND
3/ Massive restructuring at Network Assets and Services is underway.

The prospect of any real growth in FY2025 is not looking great. Any forecast profitability increases from the company's historical growth engines being Mobile and TelstraHealth (being priced for recovery) are likely already priced in.

Given that there is 'execution risk' associated with all of the restructuring events, this indicates to me that Telstra is likely to be accurately priced at $3.45 given the FY2025 outlook. But those that can look through FY2025 can maybe seeing more value.

SNOOPY

[Snoopy]

In the HY2024 CEO address, CEO Vicki Brady said this:

"On digital leadership, we continue to invest in our digital capabilities to help improve customer experience, uplift our productivity, and help industries and businesses to digitise. Our ambition is to become an AI-fuelled organisation, helping us unlock better outcomes for our customers, our people, and our organisation."

"To underpin this, we are simplifying and modernising our tech and data landscape, and building reusable AI products for the whole organisation to accelerate time to value. Within Telstra, we are now using AI to improve half of our key processes, including to automatically detect and resolve fixed services faults, and to solve customer issues faster."

"For example, in the half, we piloted new AI applications, including Ask Telstra, an Open AI-based solution with Microsoft, to help our frontline teams find the information they need for better and more quickly serving our customers. We’re also investing in our people, including through our Data & AI Academy, to upskill them in AI and help them understand how they can use it in their roles."

AI is expected to be one of the drivers of demand for the interstate-capital 'data superhighway' for Telstras customers. Given this what revealing questions on AI were answered at the half year analyst question session?

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Q1/ Jenny Wiggins / "Can you tell me how much money you’re investing in AI?"

A1/ Vicki Brady (CEO) / "AI, it is such a great topic, isn’t it? It sort of seems to be top of the list of things to be talking about at the moment through results season. Look, we are very much focused on AI. Our ambition is to be an AI-fuelled business. So already to date we’ve improved 50% of our key processes across the business using AI, so using it very deeply in our business."

"Everyone wants to talk about generative AI, obviously the latest and greatest, and we’re also rolling that out and using it across our business. A great example of that is helping our frontline teams be able to get answers and serve our customers even better. And we’re seeing that with a couple of things we’re doing, in 'Ask Telstra' for frontline and a one-sentence summary which is delivering some great results for the teams that have piloted that, and then we’re rolling it out further."

"We haven’t put a specific dollar value on the investment. But frankly, AI has been a big component of how we think about our investment in IT and our network. Even for example, how we do our Cleaner Pipes initiative, keeping customers safe from scams. That’s using a whole lot of AI in the background running. But no dollar value on it."




Q2/ Grahame Lynch / "I wanted to ask about AI, and specifically you’ve mentioned your progress in skilling and adopting AI internally. But it strikes me that you’re way ahead of the general economy there. So have you got plans to perhaps productise and monetise some of those internal systems and processes that you’ve developed, into offerings that you could get revenue from by selling them to Enterprise customers, for example?"
"And on that note, well, more generally, where’s the revenue opportunity for Telstra in AI, aside from I’ve just asked in that question? Do you expect there to be a big increase in traffic, for example, that will result in increased revenues in the medium term?"

A2/ Vicki Brady / "AI, I mean, it is such a fast moving and an exciting place. And our approach is that we think every one of our team members needs to have a good understanding of data and AI. So we will have deeply technical teams, that obviously they need those very specific technical skills. But we’re approaching it that every person across our organisation needs to have an understanding and be thinking about how they can leverage it and make their jobs easier, more efficient and more effective in getting outcomes for customers. So, we are rolling out a Data and AI academy which is about really lifting skills and developing skills right across our teams. It is exciting to be in the thick of that. I think our focus on it at the moment is absolutely for our teams."

"Where we are focused, and to your point, where are the revenue opportunities, how can we help our customers unlock further benefits from digitising their businesses, including from AI? We have a number of areas there we’re excited about. So, inside our NAS business, we do have professional services where we do help our customers around digitisation and AI."

"We also entered the joint venture with Quantium, and that’s an exciting joint venture where we’re bringing the power of Telstra and Quantium together, yes, to help us in how we apply AI and data analytics into our business. But importantly, in how we can work with Enterprise customers to unlock those benefits. And the Scam Indicator product that we developed with the Commonwealth Bank is a good example of that, where the Quantium Telstra joint venture was in the thick of that, helping us bring our information and data together, applying AI and putting us into the position to be able to have the Scam Indicator product in market."

"The other point you raise, which is about capacity. At the end of the day, AI, all of these things sitting in the cloud that we want to leverage and get benefits from, they do need to be connected. And we’re seeing obviously an explosion in data centre investment and growth there, they absolutely need to be connected, and our intercity fibre investment is a good example, as we see demand already. And where we’re at as a country in terms of capacity on those big intercity fibre networks that were built more than 25 years ago now, we know that demand is there, and we see that demand just continuing to grow. So data demand at low latency that can really support those sophisticated applications and unlock those benefits from technologies like AI, we definitely see those as structural tailwinds behind various elements of the business."

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SNOOPY