So the main things that stood out with this webcast, above the minutia, were again the fixed segment NBN issues. The tapering of mobile margins have occurred in the outer years of introduction of all previous new generation networks. I am fairly bullish that 5G will be no different to the previous rollouts and will lead to fairly similar improvements in mobile margins. Just look at the bounce from June 11 to June 17 (below), mobile margins moved from 33% to 43%, a 10 percent bounce across the cycle with margins tapering off into an expected 36% margin at FY19 (so we even start from a higher level than 2011). The other good thing to note with 5G, is the statement that the elevated CAPEX to construct the 5G network will be complete by FY19. So 5G should simply move in line with previous network roll-outs. The minor segments look like they are generally improving.
The fixed segment is my biggest concern and there does not even seem to be consistency in what they are saying. So at FY19 TLS is expected to have 866m EBITDA from fixedand has absorbed 1.7b in fixed EBITDA decline since FY15 and full decline is expectedto be 3b by 2022. If remaining fixed EBITDA at FY19 is 866m, how do we get another1.3b decline by 2022 without fixed EBITDA becoming -450m at 2022 and the fixed segment running at a half billion dollar loss. This projectionis even worse than the declaration of a zero margin on NBN fixed connections, Robynthen says that margins are trending to zero so clearly that suggests a full 3bhole would not eventuate it would actually be closer to 2.5b and this would suggest that most of the pain has already ocurred.
So which is it; zero margin on NBN, EBITDA trendingto zero and 2.5b in total NBN impact OR 3b in total NBN impact and an annual fixedsegment EBITDA loss of 450m per year by 2022? That is a half billion dollar difference.
Broadband pricing does seem to be fairly sticky at around $60 - $90 but I have already said that if TPM can make a decent margin on reselling NBN then why would the NBN reduce wholesale prices. It was also prettyworrying how dismissive Penn was about the Optus fixed wireless, "we are the only oneoffering a proper mobile service to 5G customers”. Do we even know what the cost differential is between providing fixed data over NBN and providing a fixed wireless connection?
Maybe this is where Belong needs to investigate the market by offering such services, or maybe Telstra could move into Spintel or Exetel just to get visual on the emergent market. I get the impression that the fixed segment is going to become less economic as customers start to move to wireless only access and data sharing between devices on accounts really starts to take off.
And lastly, why does Penn always talk up the NBN symbiosis story even though the network has caused such wealth destruction on the sector. Pennshould be talking down the economics of the NBN vs 5G given his concern atwholesale data prices and in the process push them to reduce costs less an onslaught of users move to wireless. Rather he continually talks up the symbiosis of the NBNwith 5G even though it offers zero (or a half billion dollar loss) EBITDA in the medium term for Telstra.
As you said, 5G would have likely taken care of itself regardless of Penn given an specific proportion of CAPEX but these issues with profitability on the NBN and an emergent risk that competitors will find a clear path around the NBN are very frustrating. I am just not seeing where Penn has produced any value from the deals with NBN.
TLS Price at posting:
$3.20 Sentiment: Hold Disclosure: Held
(20min delay)