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[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	$518m	use $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