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Pressure mounting on Telstra and Andy Penn as mobiles and NBN pinch profits

Telstra chief executive Andy Penn is under growing pressure to more aggressively tackle a squeeze on earnings from intensifying mobile competition and shrinking margins on the National Broadband Network.

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.

Faith in Mr Penn's strategy plumbed a new low as the telco's share price slumped 5 per cent to a near seven-year low of $3.04 on Monday, as the company warned investors they would have to wait until the second half of June for a clearer strategy to offset well-flagged margin pressures. The stock traded above $6 just three years ago.

Telstra is under assault as its competitors ramp up the war for mobile market share with more generous data offerings, which is cutting into the telco's revenue. In recent weeks, Telstra and Vodafone Hutchison Australia have launched unlimited mobile plans, and Optus has trialled plans in the area.

TPG has begun taking expressions of interest of unlimited data plans on mobile.
TPG has begun taking expressions of interest of unlimited data plans on mobile. Rob Homer

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.

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'A political beast'

Telstra shareholder, Allan Gray managing director Simon Mawhinney demanded 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.

"The big concerns for us is what happens with ARPU on mobile going forward and how profitable or unprofitable is NBN reselling – the rest doesn't matter that much in Telstra's world. Something needs to change in that NBN world, somehow, somewhere. It's a very political beast," he said.

"It's one of those things that has a huge amount of uncertainty, and the stock market hates uncertainty."

Simon Mawhinney demanded the telco release more detail on the impact on earnings from mobile competition and weaker NBN ...
Simon Mawhinney demanded the telco release more detail on the impact on earnings from mobile competition and weaker NBN related earnings. Brook Mitchell

Telstra has been investing billions in its mobile networks, systems and alternative businesses to offset its earnings crunch. Telecommunications is a highly capital intensive business and Telstra needs to find earnings in new areas, while also reinvesting in its network, its greatest selling point.

With $15 billion earmarked over the next three years for investing, largely in networks, Telstra is aiming to be the backbone for a range of new applications and services it builds for retail and enterprise customers. The telco appears to be struggling with the rapid change in the competitive environment.

Telstra chief financial officer Warwick Bray said more than $3 billion in additional investment in its core networks to increase capacity by five times is at the heart of Telstra's strategies to mitigate the current pressures. However, the company will not outline the additional strategies until 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.

Telstra CFO Warwick Bray said pressure on mobile and fixed revenue, as well as the ongoing impact of the NBN were the ...
Telstra CFO Warwick Bray said pressure on mobile and fixed revenue, as well as the ongoing impact of the NBN were the core reasons for the disappointing trading update. Jessica Hromas

Disappointing trading update

Mr Bray said pressure on mobile and fixed revenue, as well as the ongoing impact of the NBN 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."

Some fund managers are pushing for a complete rethink on Telstra's business model and question whether current management are the ones to deliver it. The NBN ripped out $3 billion of Telstra's EBITDA, as the telco has been transformed from the near-monopoly wholesaler of internet services into just another re-seller of NBN services.

"Telstra is telling us they're going to fill the gap with growth in mobile, which will not come through. Secondly, [on] cost out, Telstra are on their second or third iteration of cost out," Watermark Funds Management investment analyst Delian Entchev.

"The onus to trim all that fat is difficult, particularly under the current stewardship. It requires a complete rethinking of how you do business."

With the government, thus far, not budging on a write-down on its investment on the NBN and TPG Telecom's looming entry into the mobile phone market, profitability in the near-term across the mobile sector is looking tough.

A tricky one

Telstra has actually been improving in terms of customer acquisition. Telstra added 60,000 postpaid mobile subs in the three months to March 31 and 36,000 fixed data customers in the same time.

"It's definitely a tricky one where there is some clear value in the dividend yield, it's got a reasonably strong balance sheet with the NBN payments coming through, but obviously the industry is becoming increasingly competitive," Tribeca Investment Partners portfolio manager Sean Fenton said.

Mr Fenton said it is hard for Telstra to control the competitive environment, but the telco needs to do a better job on cutting costs.

"At the end of the day, they've got some legacy businesses there, their historical profitability is under pressure. A few years ago other players in the market had under-invested in the market and they enjoyed a clear market quality gap, but that's shortened," he said.

Mr 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."

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