Telstra focuses on cutting costs as NBN rollout ramps up

Telstra focuses on cutting costs as NBN rollout ramps up

Telstra has revealed a 5.8 per cent decrease in net profit after-tax (NPAT) to $1.7 billion for the half year

Telstra CEO Andrew Penn

Telstra CEO Andrew Penn

Telstra (ASX:TLS) plans to double down on its efforts to reduce costs via is ongoing productivity program as it works to minimise the financial impact caused by the accelerated rollout of the National Broadband Network (NBN).

Australia’s largest telco released its financials for the six months ending 31 December 2017, revealing a 2.5 per cent year-on-year fall in pre-tax earnings for the period, to $5.1 billion and a 5.8 per cent decrease in net profit after-tax (NPAT), to $1.7 billion.

“We are in one of the most dynamic periods the company has faced and need to increase our level of intensity,” Telstra CEO, Andrew Penn, told shareholders. “We are stepping up how we aggressively compete in the market, particularly leveraging our multi-brand strategy including Telstra, Belong, Boost and Telstra Wholesale.

“Our productivity program has delivered a 7.2 per cent reduction in core fixed costs for the half, more than offsetting inflation, higher power costs and reinvestment. While we announced increased targets in August, we will look to do even more, again increasing our focus on reducing costs.

“This is critical against the background of the acceleration in the rollout of the NBN, which is having a material economic impact on Telstra,” he said.

According to Penn, of the estimated $3 billion annual impact set to arise from the rollout of the NBN, Telstra has, to date, cumulatively absorbed approximately $870 million of the negative impact to EBITDA (earnings before interest, tax, depreciation and amortisation) from the national network, including $370 million in the latest six month period.

In February, Telstra warned shareholders that it expected its results to be hit by a $273 million impairment charge after the decision to write down the value of its intelligent video business, Ooyala, to zero.

In addition to the impact felt by the Ooyala write-down, Penn said that Telstra was operating within a significant period of change, including migration to the NBN, competitive challenges, accelerating pace of technological change and preparation for the transition to 5G.

“Within that environment, we are pleased to have delivered a solid result in line with guidance for this half,” he said.

“The impact of the NBN, along with increased competition, highlights the importance of the up to $3 billion strategic investment program, and we are on track to deliver economic benefits from this of more than $500 million of EBITDA by FY21.

“We will accelerate these investments to lay the foundation for future success, scrutinising every aspect of our capital spending to ensure our investments are driving the greatest results,” he said.

In June last year, the company flagged a range of cost-cutting measures, revealing that around 1400 job cuts would affect roles right across the company’s entire business, as it launched itself headlong into an overarching transformation strategy.

Telstra confirmed on 14 June that it planned to cut the jobs from its ranks in a fresh round of redundancies. Now, in a message sent to Telstra employees, Penn has revealed that the cuts will come from most parts of the business across much of the country.

“We are consulting with our people on proposed changes that would ultimately result in up to 1400 roles no longer being required over the next six months,” he said. “This impacts positions from most parts of the business, at all levels of seniority and from all states and territories and, in some cases, internationally.”

In its latest financial report, Telstra said that, during the period, total labour expenses decreased by 0.8 per cent or $21 million to $2.7 billion. At the same time, however, redundancy costs decreased by around 30 per cent year-on-year, due mostly to higher restructuring-related costs in the corresponding period last year.

Telstra said that total full-time staff and equivalents decreased by 1.7 per cent, or 569 positions, to 31,982.

While the telco is eyeing up the impact set to result from the NBN rollout, it is also stepping up its efforts as a reseller for the services provided via the national network.

The company said it recently increased its NBN service capacity further to deliver 80 per cent of the maximum speed during peak times, ahead of the official guidelines laid out by the Australian Competition and Consumer Commission (ACCC).

“For the past three months our network has delivered an average of more than 85 per cent of the maximum speed during peak times,” Penn said. “On affordability, we are pleased NBN has recently introduced discounts on its 50/20 plans, which is a step in the right direction as it flows through to retail offers.

“We have responded by upgrading the NBN speeds offered on our most popular bundles and I am pleased to announce that we are in the process of bestowing 50/20 speeds to the majority of our NBN customers,” he said.

In December, NBN Co announced several pricing changes, including the introduction of a number of new products, including a new NBN 50 wholesale bundle charged at $45 a month with 2Mbps of bandwidth included and a NBN 100 wholesale bundle at $65 a month with 2.5Mbps capacity included.

The move was made to encourage the network’s resellers to provision more bandwidth capacity for customers and drive the uptake of high value services among end users.

Looking ahead, Telstra said it expects FY18 income of $27.6 − $29.5 billion and EBITDA of $10.1 − $10.6 billion. Guidance for EBITDA is after absorbing incremental restructuring costs of $200 – $300 million to support its increased productivity.

Additionally, the telco said that $1.4 − $1.9 billion of EBITDA is expected to come from net one-off NBN Definitive Agreement receipts, minus NBN net cost to connect.

At the same time, capital expenditure is expected to be between $4.4 − $4.8 billion or approximately 18 per cent capex to sales and free cashflow is expected to be in the range of $4.2 − $4.7 billion.

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