Telstra delivers on promises, pressures Optus

Melbourne, August 11, 2011. According to Ovum, Telstra has delivered what it promised twelve months ago – improved revenue performance based on a larger customer base, and improved efficiency of operation going forward. Telstra achieved sales growth in all major customer segments (apart from wholesale), and delivered A$622 million in savings from its operational efficiency programs.

For mobile, Telstra has strengthened its lead as Australia’s leading mobile operator, with its connection market share increasing from 39.6% in FY10 to 43% in FY11 and 1.7 million net additions. In contrast, Optus and Vodafone lost market share in the year.  Optus’ market share fell almost 1% to 31.8% (408,000 net adds), while Vodafone’s share plummeted 2.6% to 25.2% as it lost 233,000 connections.

“Australia has a clear No.1 mobile market operator – Telstra,” says Nicole McCormick, senior analyst for Telco strategy at Ovum.  In FY11, Telstra’s mobile revenue grew 11% year-on-year, with EBITDA margins rebounding to 35% from 29% in December 2010 as first half subscriber gains filtered through.

“The gains have come at a price – A$670 million in mobile OPEX in FY11 and 35% higher subscriber acquisition and retention costs,” adds McCormick. “However, we believe Telstra’s mobile business should be shielded the most from any further worsening in consumer confidence given its high ARPU and post-paid mix.”

Meanwhile, key mobile indicators for Optus took a hit due to fierce competition in the market, with mobile EBITDA margins falling from 30% in 1Q11 to 25% in 2Q11.  Mobile EBITDA also fell 17% quarter on quarter on flat operating revenue and 16% higher subscriber acquisition costs.

“Globally, mobile operators are struggling to find new revenue sources amid pricing and cost pressures – and today’s results demonstrate that Australian operators are no exception.  We continue to urge operators to play to their strengths and be honest in accepting what those strengths really are.  In the case of Optus, it doesn’t have the same war chest as Telstra and it is sensibly playing a safe number two position in the market”, said McCormick.

There are also signs of improved performance on the fixed side too. While PSTN continued its inexorable decline, fixed broadband posed a modest increase in revenue. In addition, the T-box and T-hub devices are now a clear success, and their collective penetration of the fixed broadband base has passed 15%. “This will help to keep fixed customers with Telstra”, said David Kennedy, Research Director.

In terms of costs, the achievement of A$622 million in productivity savings over the year shows that Telstra’s Project New delivered results in the second half. “This is what was promised, so it is encouraging to see that the program is on track. There are still nearly two years to run, and it will be important for efficiency gains to continue”, said Kennedy.

“Profitability was dragged down by Telstra’s big one-off spend on customer acquisition in the first half, which has now wound down. Provided they can maintain the current settings into 2012, a return to single-digit revenue and margin growth will follow. The only thing that might disrupt this picture is the general economic situation, but we think that Telstra is better placed to weather the storm than its competitors”, concludes Kennedy.