Monday, October 2, 2017

Update on Australia's Mobile Market

by James E. Carroll

Telstra faces scrutiny as it prepares for further transformation

The headline from Saturday’s The Sydney Morning Herald on 19-August-2017 reads “End of the line: Telstra’s day of reckoning has arrived.” At issue is shareholder discontent following a disappointing fiscal year, shrinking dividends, and rising competition. Earlier in the week Telstra’s CEO Andy Penn announced that starting next year the company will trim its dividend 30%, marking the first time in 19 years that the company cuts its dividend. Shares in the company (ASX:TLS) closed on Friday at A$3.90, down roughly 10% from two days earlier.

Last week, Telstra outlined two other financial maneuvers that drew scrutiny from investors and the media. First, Fox Sports Australia will be merged into Foxtel, giving the media company more valuable content, but also reducing Telstra’s stake in the venture. Eventually, Foxtel may pursue an IPO, which may benefit Telstra but move it further away from being a media company in its own right. Unlike many global operators who are rushing to become integrated network + content players, this arrangement appears to take Telstra in the other direction.

Second, in a move to satisfy bond holders, Telstra may bundle up all future receipts from NBN into a separate security. While this would reduce debt, it also seems to take away more of the historical base of the company. What will be left? The judgement from The Sydney Morning Herald was harsh: “This week's developments offer striking evidence of how Telstra has utterly failed to transform itself from its monopoly past.”

Rising competition
To be fair, Telstra is facing new competition in both the fixed-line market and mobile services. Australia’s National Broadband Network constrains what could be done in terms of fixed-line residential services, where Telstra is moving from being the primary fixed network operator to one of many retailers competing in a lower-margin environment.

In mobile, Telstra has built a world-class network that routinely is first to deploy the latest and greatest technical innovations. Peak download speeds of up to 1 Gbps over the Telstra 4.5 G network are now possible in some cities across the country. Management is quite aware of the digital transformation occurring across markets and knows that to stay ahead it will have to invest heavily in its network. The 5G rollout is just over the horizon.

To keep up, Telstra argues that it must accelerate its transformation, even at the expense of generous dividends. The company has previously stated its intention to invest up to A$3 billion in additional capital expenditure over the next three years, an amount that is in addition to its usual capital spend.
This takes the expected total capital investment, including spectrum, over the three years to FY19 to more than $15 billion. Since November 2016, Telstra has invested around $750 million in its network, while reducing underlying fixed costs by $244 million. These cost reductions will now be accelerated, bringing forward a $1 billion net productivity target by one year to FY20.

The FY 2017 Results

The just-published financial results show that Telstra remains a profitable company, although less so than before, with many possibilities to grow, even with Australia’s GDP expanding by an anemic 0.3% in Q1 2017 and possibly remaining flat for the year as a whole. In most of its product categories, Telstra’s fiscal 2017 revenue shrank, but so did its costs as it gains efficiency.
On a reported basis from continuing operations, Telstra’s total income1 increased 4.3 per cent to $28.2 billion. EBITDA increased 2.0 per cent to $10.7 billion and basic earnings per share increased 2.8 per cent to 32.5 cents. nbn connections grew by 676,000 to 1,176,000 bringing total market share (excluding satellite) to 52 per cent

“It is against the backdrop of these market dynamics that we announced during the year our intention to invest up to $3 billion over the next three years to achieve a further step change in our strategic positioning to deliver economic benefits of more than $500 million of EBITDA by 2021,” stated Telstra CEO Andrew Penn.

Here are some top-line results

Some Telstra highlights for 2017

Telstra Retail income, comprised of Telstra Consumer and Telstra Business, was largely flat excluding the impact from the Mobile Terminating Access Service (MTAS) regulatory decision, down 0.2 per cent. O
Telstra now has 17.5 million mobile customers, including 7.6 million postpaid handheld retail customers
Postpaid handheld revenue ended the period flat at $5,448 million, but importantly, it was 0.8 per cent higher in 2H17 compared with the previous corresponding period and 0.9 per cent higher compared with 1H17. While postpaid handheld ARPU declined by 2.5 per cent from $69.45 to $67.70 (excluding the impact of mobile repayment options), there was continued growth in minimum monthly commitments offset by the impact of factors such as unlimited calls, larger data allowances, lower cost of excess data, and a higher mix of bring your own (BYO) device plans.
Telstra's 4G network now reaches 99 per cent of the Australian population
Telstra is now deploying 577 new 3G/4G base stations and up to 250 small cells under the Federal Government’s Mobile Black Spot Program
Telstra's mobile network now has more than 100 sites across five capital city CBDs capable of delivering peak speeds of 1Gbps (typically 5Mbps-300Mbps)
In ADSL, more than 80 per cent of Telstra customers now have speeds that support a quality video experience
The company says it is on track for its first 5G trials early next year on the Gold Coast
In 2016, Telstra conducted 5G radio testing in Melbourne, delivering peak download speeds of greater than 20Gbps
This year, Telstra decommissioned its 2G mobile network, which was first launched in 1993.
The Telstra Live Pass, which lets customers watch every AFL, NRL and National Netball game live, fast and data-free, now has 1.45 million subscribers
Telstra TV now has with 827,000 devices in market and a growing number of apps including Netflix, BigPond Movies, Stan, Foxtel Now and Yupp TV
Fixed revenue declined by 4.7 per cent to $6,407 million. Fixed voice revenue decreased by 9.1 per cent to $3,125 million while fixed data revenue grew by 1.6 per cent to $2,553 million.
The company says the Telstra Programmable Network is helping enterprise customers with digital transformation by transforming the way they interact with the network. The Telstra Programmable Network uses SDN and NFV to provide flexible bandwidth across Asia Pac. Telstra owns and operates the largest subsea cable network in the Asia Pacific region. This year Telstra plans to introduced assured availability across the busy Hong Kong, Singapore and Japan triangle. This utilises the scale and diversity of the network to reroute and maintain connectivity in the event of a cable cut or damage due to a natural disaster.
Telstra has entered into an agreement with Anent, Google, Indosat Ooredoo, Singtel and SubPartners to build a new international subsea cable to connect Singapore, Indonesia and Australia.
During the year, Telstra was awarded a $243 million 10-year deal with Australia's Department of Foreign Affairs and Trade to provide a global WAN across 157 sites.
In China, Telstra sold the remaining 6.5 per cent interest in Chinese online business Auto home to Ping An Insurance Group for US$217 million (A$283 million)
During the year, Telstra made several strategic investments, including in VeloCloud Networks (SD-WAN) and Crowdstrike (cloud-delivered endpoint protection).
In FY17, the number of first stage (Level 1) complaints made about Telstra to the Telecommunications Industry Ombudsman increased, with nbn-related issues being a key driver.
During the year, the company activated its one millionth Telstra Air hotspot - Australia’s largest Wi-Fi network.
Telstra currently has 32,000 employees in over 20 countries
In FY18, Telstra expects Income in the range of $28.3 to $30.2 billion and EBITDA of $10.7 to $11.2 billion.  CAPEX is expected to be between $4.4 - $4.8 billion or approximately 18 per cent capex to sales and free cashflow is expected to be in the range of $4.4 - $4.9 billion.
Telstra expects total dividends in respect of FY18 to be 22 cents per share fully-franked, including both ordinary and special dividends.
Telstra’s objective is to have at least four women on the Board, representing a female gender representation among non-executive Directors of at least 40 per cent.
In June, Telstra announced that it has acquired Company85, a UK-based technology services business headquartered in London that offers data centre, workspace, cloud, security and network services. Established in 2010 and based in London, Company85 has approximately 75 employees and focuses on providing services to major UK-based business and government customers including the BBC, NHS, Royal Mail and London City Airport, as well as multinational corporations including AstraZeneca, J.P. Morgan and Roche.

On the mobile side, Telstra has built a world-class network that often leads globally in new technology rollout. However, the market is saturated with competitors, causing growth to slow and ARPU likely to decline.Commentary from Telstra executives in its recent financial report speculate that a fourth mobile network operator is a possibility from the government’s perspective. Mobile market share in Australia as of June 2017 is roughly as follows, according to Kantar, the market research firm:

Telstra – 39%, down from 41% a year earlier
Optus – 24.2%, up from 21.8% a year earlier
Vodafone – 14.4% down from 15.2% a year earlier.

The remaining percentages are attributed to at least 5 mobile virtual network operators (MVNOs) using infrastructure from these top players.

Update on SingTel’s Optus

Optus, which is a wholly-owned division of SingTel, recently announced its intention to spend A$1 billion to strengthen and expand its mobile network in regional Australia by the end of June 2018.  The initiative will see the construction of 500 new mobile sites across regional and remote parts of Australia, including 114 sites under the Federal Government’s Mobile Blackspots Program. Optus will complete its 4G program by upgrading more than 1,800 sites from 3G to 4G. Optus will also add additional 4G capacity to more than 200 sites and continue to roll out satellite small cells, which provide mobile voice and data services to remote areas of Australia. Currently, Optus has 30 small cell sites across regional Western Australia, South Australia and the Northern Territory. Some of this budget may also go to spectrum licences in regional areas.

Optus spectrum holdings include

700 MHz – 2 x10 MHz nationally
900 MHz – 2 x 8.4 MHz nationally
1800 MHz – 2 x 15 MHz in Sydney, Melbourne, Brisbane, Perth and Adelaide
1800 MHz regional – between 2 x 20 and 2 x 25 MHz in regional areas
2.1 GHz – 2 x 20 MHz in all 8 Australian capitals and 5 MHz in regional areas
2.1 GHz apparatus – up to 2 x 10 MHz in regional and remote areas
2.3 GHz – 98 MHz in Brisbane, Adelaide and Perth; 91 MHz in Sydney and Melbourne; 70 MHz in Canberra
2.6 MHz – 2 x 20 MHz nationally
3.5 GHz – 100 MHz in Melbourne; 96.5 MHz in Sydney; 65 MHz in Brisbane, Perth, Adelaide and Canberra

On August 1st, Optus officially deactivated its 2G network, which was first turned on in 1993. All traffic has been moved to the 3G and 4G networks.  The migration also impacted Virgin Mobile, which operates as an MVNO on the Optus infrastructure. 4G customers now account for 60% of Optus’ total mobile customer base.

Additional spectrum bands could be coming

The ACMA has several proceeding underway to open further spectrum bands for new services. Specifically, the 1.5 GHz and 3.6 GHz bands have progressed from an initial investigation to a preliminary replanning stage for mobile broadband reuse. The 3.6 GHz is being given a higher priority of 1.5 GHz planning in order to give certainty to incumbent services currently using the band.

Optus 5G trials with Huawei

Earlier this year, Optus completed a pre-5G field trial of Huawei’s Massive MIMO AAU solution, which has 16 beamforming streams in a 128T128R configuration. Optus reported aggregate cell throughput of 665Mbps over a single frequency channel of 20MHz on Optus’ 2300MHz frequency band, shared by 16 devices.

Since February, Optus has been running 4.5G network services across the suburb of Macquarie Park, Sydney’s hi-tech innovation district, north-west of the city. Peak speeds of 1.03 Gbps have been reported in the downlink. Optus says it will have similar capabilities working in selected capital cities. By February 2018, the goal is to reach over 70% of the Optus network in Sydney, Melbourne, Brisbane, Perth and Adelaide. Here again, Huawei is the lead supplier. The Optus technology trials and rollouts builds on a strategic alliance focused on joint R&D that parent telco Singtel signed with Huawei in 2014.

However, SingTel has also conducted pre-5G trials with ZTE in Singapore, and earlier this month, Singtel stated that it will team with Ericsson, Huawei and ZTE to deploy massive MIMO technology at the Marina Bay area. The additional capacity was desired for Singapore’s National Day celebrations, with further deployments planned for the Singapore F1 Night Race and the New Year countdown event.

Optus Financial Trends

Optus recently reported a strong Q2 with operating revenue increasing 4.8 per cent to A$2,095 million due to higher Mobile and NBN revenues, partially offset by decline in Wholesale Fixed revenues.  Some highlights:
EBITDA increased 2.6 per cent to A$662 million underpinned by growth in mobile and fixed businesses.
Net Profit was stable at $171 million following an increase in depreciation and amortisation from network investments and net finance expenses.
Free cash flow for the quarter was A$120 million, up from $99 million (YoY).
With an increased focus on postpaid customers, Optus added over 54,000 postpaid subscribers.
Postpaid handset ARPU improved 1.8 per cent excluding Device Repayment Plan (DRP) credits.
The number of 4G mobile customers increased by 85,000 this quarter, resulting in the total 4G customer base increasing to 5.88 million as at 30 June 2017.
Optus continued to invest in its mobile network, reaching 96.4% of 4G population coverage.
In Consumer Mass Market Fixed, operating revenue grew 13.2% mainly on higher NBN migration and NBN customer growth of 143,000 from a year ago.
Excluding NBN migration and preparation fees, Mass Market Fixed revenue grew 4.4%.
Optus now has 279,000 NBN broadband customers.

Update on Vodafone Hutchison Australia (VHA)

As of 30 June 2017, VHA’s customer base was approximately 5.7 million. Vodafone Hutchison Australia (VHA) was created through the 2009 merger between Vodafone Australia and Hutchison 3G Australia. The old Three brand was phased out in 2011. More recently, the legacy 2G network has been deactivated and efforts are focused on upgrading the network and migrating subscribers to 4G plans. The company projects an almost $2 billion spend in 2017 on its mobile network and technology to increase coverage, capacity, performance and competition. New construction or upgrades are underway in approximately 450 sites across the country.

Key VHA H1 performance highlights as of 30-June-2017:

• Total customer base grew by approximately 190,000 customers to 5.7 million, 3.5% increase YoY
• EBITDA increased 15.9% YoY to $477.3 million
• Total revenue increased 3.0% YoY to $1,651 million
• ARPU for the six months to 30 June 2017 grew 2.0% to $45.89 on a gross basis
• Roaming revenue increased 19.7% YoY
• Loss decreased 50.3% YoY to $81.5 million
• Net Promoter Score increased 9 points between June 2016 and June 2017
VHA has just rolled out simplified mobile service plans that eliminate two-year lock in consumer contracts. VHA is interest-free device plans on 12, 24 or 36 monthly instalments, separating mobile services (voice, text and data) and handset repayments. Mobile data allowances range from 3 GB to 50 GB per month depending on the plan.

Earlier this year, VHA secured 2 x 5MHz of spectrum in Australia’s 700MHz band auction for the reserve price of $286 million, or roughly $1.25 per MHz per head of population covered by the footprint. In addition, VHA renewed the lease on its 2100 MHz spectrum for $544 million, including 2 x 25 MHz in Sydney and Melbourne. In metropolitan areas, VHA now claims the second largest metropolitan low-band spectrum holding, and the largest holdings in the 1800 MHz and 2100 MHz bands.

VHA’s spectrum holdings:
700MHz: 2 x 5MHz
850MHz: 2 x 10 MHz in metropolitan areas, 2 x 5 MHz in regional areas
900 MHz: 2 x 8.2 MHz nationally
1800 MHz: 2 x 30 MHz in SYD/MEL, 2 x 25 MHz in BNE/ADL/PER/CBR, 2 x 5 MHz to 2 x 10 MHz in other areas
2100 MHz: 2 x 25 MHz in SYD/MEL, 2 x 20 MHz in BNE/ADL/PER, 2 x 10 MHz in CBR/HOB/DRW, 2 x 5 MHz in other areas

“Already, the VHA network reaches more than 22 million Australians, and is recognised as the top-performing network in cities with populations above 100,000. And we’re only going to build on that into the future. In 2017, we are putting close to $2 billion into mobile technology, including almost 1,800 new and upgraded sites, spectrum licence payments, and our continued fibre transmission rollout. Our customers know how good our network is, and this positive customer sentiment is reflected through our Net Promoter Score. We are committed to giving customers an even better experience in more places, and offering them even more great value,” stated James Marsh, VHA’s Chief Financial Officer.

 “Preparations for our fixed broadband launch are also ramping up, and we know that many Australians are currently unhappy with their current internet service provider. Again, we plan to change the game by offering a service that is simple to understand and gives customers what they are paying for.”

Signing up for nbn’s Cell Site Access Service

In February 2017, Australia's nbn co signed its first agreement for its Cell Site Access Service (CSAS) wholesale product with Vodafone. Hutchison Australia (VHA). The nbn CSAS could be used by mobile operators to expand mobile coverage quickly and cost effectively. Through the CSAS agreement with VHA, the mobile carrier will shortly extend its network coverage in Molong, New South Wales utilising tower sharing and fibre services supplied by the nbn network.
Entering Australia’s fixed broadband market

Vodafone has just announced its entrance into Australia’s fixed broadband market using the nbn infrastructure. One feature of the service is a 4G backup capability that could be activated in the event on an nbn fault.  Vodafone’s service will initially launch in Sydney, Canberra, Melbourne, Geelong, Newcastle and Wollongong.

Cisco + Ericsson transformation project

It should also be noted that Vodafone Hutchison Australia is a marquee customer for the Cisco + Ericsson alliance. In January 2017, Ericsson and Cisco Systems confirmed their selection to transform and virtualise VHA’s networks to better prepare for new emerging services. The upgrade uses Ericsson Hyperscale Datacenter System and software components such as Ericsson Cloud Execution Environment, Ericsson Cloud Manager, Cloud SDN controller; together with Cisco WAN Automation Engine, Cisco Network Services Orchestrator (NSO), Cisco IP Network VNFs including IOS XR 9000v and Cloud Services Router 1000v, and both virtualized and physical security technologies such as the Adaptive Security Appliance and Cisco Firepower security gateway, along with services and support. Three years earlier, in 2014, VHA had selected Ericsson to replace and upgrade its earlier core network, including virtual EPC and virtual IMS/ Voice over LTE.