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Telstra Wobbles As Spin Doctors Engage In Gimmicks

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Telstra shares have nosedived, and problems are appearing in both their broadband and mobile networks at the same time their competitors, Vodafone, Optus and TPG are starting to strip profits out of the big Telco.

The future for Telstra looks grim and the market agrees, with their shares falling to a 6 year low yesterday, after the Company finally admitted that their earnings are shrinking and that the NBN which has created a more level playing field for competitors resulting in Telstra hurting Telstra more so than their competitors.

There is also the issue of the migration of customers to the NBN, this is expected to burn a $3bn hole in its earnings on an ongoing basis.

One of the core problems is that as Telstra becomes a reseller of fixed broadband services, it must pay for wholesale access and absorb a large chunk of the price it pays NBN Co for capacity.

Telstra’s retail prices are already at the top end of the market at a time when new players, such as Vodafone, are entering the market with more attractive deals than what Telstra is offering.
Also, under pressure is the role of Telstra chief executive Andy Penn who is not only struggling to hold onto staff, he is also struggling to deliver a product and marketing that differentiates Telstra from their competition.

Claims that the Telstra’s 4G Network along with their broadband offering is superior is well off the mark.

Faith in Mr Penn’s strategy to deliver a bright future for the carrier are waning and his spin doctors who are constantly being churned are now struggling to find a gimmick such as 5G gaming in a lab to take the attention away from their bosses’ tenuous position.

Yesterday 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.

The problem for Telstra is that they are now having to compete in a race where their competitors have an advantage because they have better control of their costs. In the mobile market where they currently hold 40% of the market, players such as Vodafone and Optus have moved to offer more generous data offerings, which is cutting into the telco’s revenue.

They are also trying to take out the likes of Kogan, Aldi and Woolworths some who operate on the Telstra network, to do this Telstra has launched a budget brand Belong who are pushing “unlimited” SIM-only data plans.

Arch rival TPG is also set to enter the market with their own mobile network that delivers for metro consumers unlimited data plans. The cost is $0 for the first six months, and $9.99 per month after that. At this stage no one knows whether the marketing plan is sustainable but in the key metro markets of Sydney Melbourne and Brisbane it is set to be disruptive and that will hurt Telstra.

Shareholders are upset and are demanding that the telco release more detail on the impact on earnings from mobile competition and weaker NBN related earnings.

Average revenue per user (ARPU) fell 3.6 per cent in the third quarter.

New Street Research’s Ian Martin told The Australian that the telco may have used the update to prepare the market for a less than stellar guidance for the 2019 fiscal year.

“The earnings provided in the update are within guidance, so this could be about shaping expectations for the FY19 and the full-year guidance Telstra will deliver in August,” Mr Martin said.

Telstra’s chief financial officer, Warwick Bray, said “We are seeing intense competition (in premium business and enterprise) … we are seeing recontracting at a lower ARPU than years before,” he said.

Mr Bray said the trend was likely to continue over the next 12 to 16 months.

The Telco is also set to book a restructuring bill of $300 million as the telco continues to cut fixed costs.

Telstra is set to update the market next month on what extra measures it may take to tackle the pressures on its books.

Elio D’Amato from Lincoln Indicators said, “Telstra is operating in a sector that has deflation, prices are going down in an incredibly competitive landscape, there’s a transformation program and a big capital expenditure bill coming,” Mr D’Amato said.

“If you are running a business with all those challenges then the odds are against you.”

Citi analyst David Kaynes claims that Telstra needs to consider asset sales.

According to Kaynes, the recent guidance update shows that Telstra’s core earnings are shrinking at a much faster rate and it’s time for the telco’s management to make some tough decisions.

“We see limited scope for revenue growth in core businesses and Telstra could instead consider more aggressive cost-cutting and asset sales,” he told clients in a note.

“The acceleration in the core business decline means that we no longer believe Telstra can generate sufficient earnings to maintain a 22c dividend in both FY19 & FY20 without breaching the upper limits of the payout ratios in its capital management framework.”

Citi has cut Telstra’s target price by 13 per cent to $2.70 a share and net profit after tax (NPAT) forecasts by -5-6 per cent.

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