TLS

[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/showth...l=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

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/wire...THE%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 'equity asset base' without the removed assets on the books 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/wire...THE%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.

	FY2019	FY2020	FY2021	FY2022	FY2023
Telstra Mobile Revenue	$10,084m	$10,130m	$9,310m	$9,470m	$10,258m
Telstra Mobile EBITDA margin	34%	34.7%	39.2%	42.2%	44.9%

The decline in profitability 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.

	FY2019	FY2020	FY2021	FY2022	FY2023
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.

	FY2019	FY2020	FY2021	FY2022	FY2023
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

	FY2019	FY2020	FY2021	FY2022	FY2023
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/teleco...0221130-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