While most readers will have seen the Telstra Corporation Ltd (ASX: TLS) full year result for FY 2020 last week, not everyone will have had chance to listen to its analyst call.
In light of this, I thought I would highlight a few key questions and answers from the call that may help you with an investment decision.
What was discussed on the Telstra analyst call?
Telstra's CEO, Andy Penn, was asked about NBN profitability. Once again, the chief executive voiced his concerns over NBN wholesale pricing.
He said: "In terms of NBN profitability, if you look at our reported ARPU on fixed broadband, I think it's around $71, $75 or something like that, it's probably slightly lower in relation to NBN as we are still partway through the migration to that, and we've got input costs there of around $45, $46 already that we pay to the NBN."
"… the fundamental problem is, is that if your wholesale price is two thirds of the retail price, which essentially it is, that's what makes it incredibly challenging, when as a retailer you've got to distribute and market the product, you've got to service it, you've got to manage billing, you've got to put in modems, deal with a lot of the complexities of the administration and the management and the service of NBN," he added.
And while Telstra is aiming to improve the efficiency and profitability of its NBN service, Mr Penn stressed that "there's a bigger structural problem there as well just given where wholesale prices are today, and where NBN's ARPUs are intended to get to."
The dividend.
There's been a lot of talk about the sustainability of its dividend. This stems from Telstra's dividend policy which aims to pay out 70% to 90% of accounting earnings. However, these earnings are generally lower than its cash earnings.
This has led to many analysts suggesting Telstra should change its focus to a free cash flow-based dividend policy.
Mr Penn commented: "On the point about dividend, there hasn't been a change of policy, but there is a bit of a structural shift happening for us, which we expect to sustain over a longer period of time between our cash earnings and our accounting earnings, where our cash earnings will be quite a bit lower – sorry, our cash earnings will be higher than our accounting earnings, and our DN&A will be [higher] than our cash CapEx, and so that actually assists us in that regard."
Competition.
This year a third major telco player was created with the merger of TPG Telecom Ltd (ASX: TPG) and Vodafone Australia. Telstra's executives were quizzed on recent price increases and whether they expect them to hold if the competition doesn't follow.
CFO, Vicki Brady, commented: "At this point we're really pleased with how customers have reacted to that. As we've said before, we think this is an important point as 5G scales up, and we think it's really important, and customers know it's important, they really balance value, quality and price. And with our leadership position in 5G and our extending network differentiation, that's what we're really focused on and committed to, and our competitors will choose to react as they see fit."
COVID-19 impact.
Telstra was also asked about the $600 million COVID-19 impact that it is facing over FY 2020 and FY 2021. Analysts were curious about whether any of these lost earnings would return.
Brady responded: "Just to talk a little bit more about the COVID impact. So if I focus on 2021 and our estimated $400 million, as you as you said, the roaming piece is uncertain, and it is $200 million of that impact in 2021. Obviously I think we all hope to get back to international travel at some stage, but it is unclear when that will be, and until that happens obviously international roaming continues to be impacted."
"On the $100 million of productivity impact from the delays in our T22 productivity job reductions, that is timing. Clearly that's something we will come back to in February 2021, and so that productivity is not a permanent change, that is just a timing change."
"In terms of the customer related support packages and the impacts on our NAS professional services, again timing is uncertain, but we would certainly hope that they are temporary impacts, not permanent impacts," she added.
Conclusion.
At the end of the call, Mr Penn spoke positively about the future.
He concluded: "We've met guidance, we've delivered our dividend. We're providing guidance for FY21. There's a few economic implications of COVID in the current situation for us, but we think we're balancing making the right decisions of being responsible, supporting our customers and our people and delivering returns for our shareholders. But more importantly setting us up for growth as we come out of COVID with the investment in digital that we've made, but also the acceleration of the rollout to 5G."
