Our largest telco is trying to put on a brave face as it presented investors with its 5G mobile update today even as the Telstra Corporation Ltd (ASX: TLS) share price tumbled lower.
The TLS share price fell 1.2% to $2.98 in late afternoon trade while TPG Telecom Ltd's (ASX: TPM) share price was flat at $7.35 and the Vocus Group Ltd (ASX: VOC) share price fell 1% to $3.46.
In contrast the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.9% no thanks to a sell-off on Wall Street, although the fall isn't so bad given that US equities tumbled by more than 3% and the ASX 200 is clawing back half of its morning losses.
Telstra is trying to give shareholders something to get excited about as it gave an update on the next-generation mobile data technology that will help plug its earnings hole that was created by the NBN and competition for mobile subscribers.
Here are three key takeaways from today's presentation.
- First half cash flow warning: Management is urging investors not to be alarmed by the expected fall in free cashflow when the company reports its first half profits in February. Telstra typically records an interim free cashflow that is around a third of the full year's total but the proportion will be smaller in 2019 due to higher capital expenditure and an increase in inventories. The more important question is whether this could impact on dividends. I don't think so as management is sticking to its full year FY19 guidance that it issued in September – whew!
- Mobile subscriber growth: There's another piece of good news. Telstra continues to see growth momentum for post-paid mobile subscribers carry through from the last quarter of FY18. With cut-price competition heating up for mobile subscribers, this will be welcomed news for shareholders given that mobile is regarded as the engine room of Telstra. Telstra had to also drop prices on its plans and/or increase data allowances to win customers but some of that margin squeeze will be offset by its cost cutting initiatives.
- Counting on 5G to save the day: Investors should be excited about 5G as the new mobile data technology could give Telstra an earnings boost that is so desperately needs. But if you are hoping for a repeat in growth rates that came with 3G/4G, I think investors might be disappointed as I suspect Telstra won't get as big a bump-up in revenue. Subscribers will be less willing to pay for faster speeds this time round as the market has reached a point of diminishing returns. Everyone wants faster speeds but our willingness to pay a premium for it has fallen. Telstra will need to bank on businesses to pay the premium to access the shorter network latency and faster data throughputs as these qualities will be best appreciated by augmented reality, artificial intelligence and mobile health applications. Further, we will have to wait till late 2019 for the launch of the first iteration of 5G devices before the second faster 5G devices make it to market in 2020.
