The shadow of David Teoh’s TPG Telecom is already casting over Australia’s telecommunications sector months before the launch of ultra-cheap mobile plans which fund managers believe will reshape pricing across the market.
On Monday morning, Telstra warned its earnings before interest, tax, depreciation and amortisation would come in at the bottom end of its guidance of between $10.1 billion and $10.6 billion, while free cashflow would be at the top end or above its guidance of $4.2 billion to $4.7 billion.
Telstra shares were down 4.1 per cent to $3.07 in morning trade on Monday.
Telstra chief financial officer Warwick Bray said pressure on mobile and fixed revenue, as well as the ongoing impact of the National Broadband Network were the core reasons for the disappointing trading update. Those pressures are expected to continue into the 2018-19 financial year.
On mobiles, Mr Bray noted three of its four segments in mobile are facing pressure; premium business, enterprise and consumer.
“We are seeing intense competition [in premium business and enterprise], whilst we always aim to sell more for more, but we are seeing recontracting at a lower ARPU than years before,” Mr Bray said.
“Minimum monthly commitment in consumer remains the healthiest I’ve seen…what we are seeing is the out of bundle revenue is in decline, partly because of the more generous plans in the market.”
An uphill battle
In recent weeks, Telstra and Vodafone Hutchison Australia have launched unlimited mobile plans, with much more generous data offerings, and Optus has trialled plans in the area.
Me Teoh’s TPG, which is expected to launch mobile services in the first half of calendar 2018, has begun taking expressions of interest of unlimited data plans on mobile for $0 for the first six months, and $9.99 per month after that.
Watermark Funds Management investment analyst Delian Entchev said TPG has an uphill battle in terms of network quality, where Telstra has an advantage, but six months free is a very difficult proposition to turn down.
“It’s going to completely reprice the whole market in my view, even if TPG aren’t as successful as they’re hoping,” Mr Entchev said.
“The incumbent carriers should have anticipated this type of mobile market 12 months ago. Telstra are just starting to move…they’ve been too slow to react.”
Despite continuing to grow its mobile and fixed subscriber base, Telstra, and the rest of the telco sector, are still facing the squeeze on margins and average revenue per user.
Need a ‘complete’ rethink
Telstra added 60,000 postpaid mobile subs in the three months to March 31 and 36,000 fixed data customers in the same time. However, postpaid ARPU fell 3.6 per cent, compared with the same time last year to $65.35 per user.
“Telstra is telling us they’re going to fill the gap with growth in mobile, which will not come through…secondly cost out, Telstra are on their second or third iteration of cost out,” Mr Enchev said.
“The onus to trim all that fat is difficult, particularly under the current stewardship. It requires a complete rethinking of how you do business.”
Mr Bray said more than $3 billion in additional investment it its core networks to help multiple capacity by five times will be the backbone of Telstra’s strategies to mitigate the current pressures. However, the company would not outline those additional strategies and said it would update investors in the second half of June.
“We’re reinvesting in our network, we’re making sure we’re being clear about the quality of the network, we’re continuing to improve our customer services, we’ve also launched Belong and we’re also taking costs out of the business,” he said.