The Telstra Corporation Ltd (ASX: TLS) share price finished the day down 2% in reaction to its FY19 result.
In my opinion the numbers weren't pretty. Total income decreased by 3.6% to $27.8 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 21.7% to $8 billion and net profit after tax (NPAT) declined 39.6% to $2.1 billion.
Those are some shocking numbers from what's meant to be a fairly stable blue chip business.
As I'm sure most readers know, it's the NBN that's to blame. Telstra said it had absorbed around $600 million of negative recurring EBITDA during the year. Without the NBN problems, the underlying EBITDA would only have decreased by around 4% according to management. In-fact, Telstra estimated that the NBN has hurt EBITDA by approximately $1.7 billion since FY16 and it's only halfway through the recurring financial impact of the NBN changes. Oh dear.
I find it hard to get excited by a business that is predicting its profit is going to be hit more by hundreds of millions of dollars in the short-to-medium-term.
However, on the costs side of things Telstra is making a lot of progress. It has achieved $1.17 billion of cost reductions since FY16 and is on track for $2.5 billion of net cost reductions by FY22.
One of the examples that the company gave was 900,000 fewer truck rolls over the year, allowing Telstra to reduce its fleet vehicle size by 14%, and also reducing its property footprint by 8%.
It also seems like a smart move of Telstra to extract value from some of its non-core assets. It has agreed to sell three international data centres in Europe and Asia to global provide equity firm I-Squared Capital for approximately $160 million, if the transaction goes ahead.
Even after all this pain in FY19, FY20 is likely to see further revenue declines and EBITDA is going to be flat at best. I feel sorry for the people losing their jobs and Telstra's return to growth will still take some time according to CEO Andy Penn.
There are only so many costs you can cut before the performance of the business is hurt, hopefully all of the things Telstra is doing will indeed improve efficiencies and help the bottom line, rather than damage it over the long-term.
Foolish takeaway
Telstra is trading at 21s FY19's earnings, which certainly isn't cheap for a company going backwards. 5G is critical for the future of Telstra's earnings and shareholder returns. We still don't know what the economics of 5G will look like – how will Telstra generate new revenue? I'm not interested in Telstra shares until we learn if and how Telstra will develop new earnings streams.
