Friday, February 11, 2011

Telstra war chest spent, good news for Optus

David Kennedy, research director and Nicole McCormick, senior analyst, Ovum

AUSTRALIA: From a segment perspective, Telstra Consumer revenue grew sluggishly, while EBIT contribution fell significantly due to subsidy costs. In contrast, Telstra Business and Telstra Enterprise & Government posted sluggish growth in both revenue and EBIT. This reflects a steady-as-she goes strategy in the Business/Enterprise segments.

Turning to key product lines, the mobile arm remains the bright spot in Telstra’s business. First-half connections reported their fastest growth in over a decade. However, this growth has come at a price: higher costs and lower margins due to heavy subsidization of smartphone handsets. We can expect more of a “normal” second half for this business unit in the second half as Telstra pulls back on subsidies and competition from MVNOs intensifies.

The fact that Telstra won’t spend as heavily in the second half is good news for Optus, whose mobile net additions were only one-third of Telstra’s in the 1H. Optus’ mobile service revenue was up 6.9 percent in the December quarter, while EBITDA margins showed only a slight dip despite intensifying competition.

Telstra saw retail PSTN connections fall by nearly quarter of a million compared to the same time last year, and revenue declined 3.3% in line with long-term trends. Sales of T-Hub and T-Box devices for the home have been healthy, with over 200 thousand shipped in the first half, and this slowed PSTN decline somewhat as T-Hub customers stuck with their PSTN line. More importantly, discount offers are encouraging existing Telstra subscribers to bundle PSTN and broadband. The upside is lower churn, and the opportunity to upsell products like the new T-Box Foxtel service.

The downside is falling margins. Fixed broadband margins have fallen significantly, even as connections have grown healthily. The fall in fixed broadband margins is coming from growth in bundled products, where broadband price is discounted. In contrast to the mobile margin decline, this decline in fixed broadband margins is probably permanent. It will have to made up (if at all) through sales of value-added services like Foxtel and other interactive services Telstra may launch in the future.

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