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“Intense” competition impacts Telstra’s financials

“Intense” competition impacts Telstra’s financials

The telco reports year-on-year profit drop for the six months ending December 2016

Telstra CEO Andrew Penn

Telstra CEO Andrew Penn

Telstra’s chief, Andy Penn, has warned the telco’s shareholders that “intense” competition on price-point in the local market has impacted the company’s financials, with the latest results revealing a profit hit.

In its latest financial report, released on 16 February, Telstra (ASX:TLS) reported a profit of $1.8 billion for the six months ending December 2016, representing a 14.4 per cent fall from the prior year’s figures for the same period.

At the same time, the company recorded a 3.6 per cent fall in total revenue for the period compared to the previous year, to $12.8 billion, and a 0.7 per cent fall in total income to $13.7 billion. Meanwhile, its pre-tax earnings (EBIT) fell by 9.3 per cent, to $2.9 billion.

“Data volumes have increased and intense competition on pricing across fixed, bundles, mobile, data and IP has had an impact,” Telstra CEO, Andy Penn told shareholders in a statement.

At the same time, Penn reiterated the impact Telstra expects to see from the rollout of the National Broadband Network (NBN), saying that the company’s stiff competition in the market is running in parallel with, “the acceleration of the rollout of NBN which, over the longer term, will have a negative impact on EBITDA of $2-3 billion”.

While Penn pointed to pricing competition and the accelerated NBN rollout as factors impacting Telstra's performance, the company also placed much of the blame for its income downturn on the Australian competition watchdog’s decision to reduce mobile call and SMS termination rates last year, as well as its move to reduce backhaul prices.

“Regulatory decisions impacted reported first-half 2017 income by $400 million and EBITDA by $38 million for the Mobile Terminating Access Service (MTAS) and the Fixed Line Services and Domestic Transmission Capacity Services Final Access Determinations (FAD),” the company told investors.

Telstra also said that “net profit after tax reduced to $1.8 billion due to planned restructuring costs and increased amortisation associated with shorter asset life for business software”.

In the face of these challenges, Penn said the company had a “clear strategy” to differentiate its products through the speed, coverage and reliability of its networks, product design, and new customer experiences.

He also reiterated the company’s move to invest up to $3 billion of incremental capital expenditure into its networks and digitisation of the business.

“Work has commenced on these projects, which will position us to deliver significant customer benefits, reinforce our market differentiation over the longer term, and deliver business benefits, such as capital efficiency, reduced operating costs, and increased revenue,” he said.

The decision to plug billions into its networks and digitisation projects followed a pledge by Penn in June last year to invest $250 million on network improvements after the company was hit by a series of far-reaching network outages.

The company also revealed that it added new retail mobile services and retail fixed broadband customers in the first half of the financial year ending 2017, reporting total income up 2.2 per cent and pre-tax earnings (EBITDA) up 2.4 per cent (on a guidance basis).

“It is significant that we were able to increase subscriber numbers in mobiles and retail fixed plans despite the increased competition,” Penn told shareholders.

The company’s latest financials also reveal continued growth in machine to machine (M2M) with revenue growing by 13.3 per cent and 130,000 M2M services added during the half as the result of new IoT solutions being implemented.

Meanwhile, Telstra saw a 39 per cent increase in traffic over its mobile network during the six-month period. At the same time, the company’s fixed network, including NBN, grew by 51 per cent and traffic on the Telstra Air network increased by a factor of almost 10.

At the time of writing, Telstra's shares were trading at $4.97.

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