Introduction
A Quick Background on the Australian Market
Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.
Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.
Telstra: doing pretty well
Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.
Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
Source: STL Partners, Telstra filings
Looking at Telstra’s major operating segments, we see a familiar pattern. Fixed voice is sliding, while the mobile business has taken over as the core business. Fixed data is growing slowly, as is the global carrier operation, while enterprise fixed is declining slowly as the traditional voice element and older TDM services shrink. On the other hand, “Network Applications & Services” – Telstra’s strategic services group capturing new-wave enterprise products and the cloud – is growing strongly, and we believe that success in Unified Communications and Microsoft Office 365 underpins that growth in particular. A one-off decrease since 2009 is that CSL New World, a mobile network operator in Hong Kong, was sold at the end of 2014.
Figure 2: Mobile and cloud lead the way
Source: STL Partners, Telstra filings
Telstra is growing some new Telco 2.0 revenue streams
Another way of looking at this is to consider the segments in terms of their size, and growth. In Figure 2, we plot these together and also isolate the ‘Telco 2.0’ elements of Telstra from the rest. We include the enterprise IP access, Network Applications & Services, Pay-TV, IPTV, and M2M revenue lines in Telco 2.0 here, following the Telco 2.0 Transformation Index categorisations.
Figure 3: Telco 2.0 is a growing force within Telstra
Source: STL Partners, Telstra filings
The surge of mobile and the decline of fixed voice are evident. So is the decline of the non-Telco 2.0 media businesses – essentially directories. This stands out even more so in the context of the media business unit.
Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
Source: STL Partners, Telstra filings
“Content” here refers to “classified and advertising”, aka the directory and White Pages business. The Telco 2.0 businesses, by contrast, are both the strongest growth area and a very significant segment in terms of revenue – the second biggest after mobile, bigger even than fixed voice, as we can see in Figure 5.
Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
Source: STL Partners, Telstra filings
To reiterate what is in the Telco 2.0 box, we identified 5 sources of Telco 2.0 revenue at Telstra – pay-TV, IPTV, M2M, business IP access, and the cloud-focused Network Applications & Services (NA&S) sub-segment. Their performance is shown in Figure 6. NA&S is both the biggest and by far the fastest growing.
- Executive Summary
- Introduction
- A quick background on the Australian Market
- Telstra: doing pretty well
- Telstra is growing some new Telco 2.0 revenue streams
- Cloud and Enterprise ICT are key parts of Telstra’s story
- Mobile is getting more competitive
- Understanding Australia’s Cloud Market
- Australia is a relatively advanced market
- Although it has some unique distinguishing features
- The Australian Cloud Price Disruption Target
- The Healthcare Investments: A Big Ask
- Conclusions and Recommendations
- Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
- Figure 2: Mobile and cloud lead the way
- Figure 3: Telco 2.0 is a growing force within Telstra
- Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
- Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
- Figure 6: Cloud is the key element in Telstra’s Telco 2.0 strategy
- Figure 7: NA&S is by far the strongest enterprise business at Telstra
- Figure 8: Enterprise fixed is under real competitive pressure
- Figure 9: Telstra Mobile subscriber KPIs
- Figure 10: Telstra Mobile is strong all round, but M2M ARPU is a problem, just as it is for everyone
- Figure 11: Australia is a high-penetration digital market
- Figure 12: Australia is a long way from most places, and links to the Asia Pacific Cable Network (APCN) could still be better
- Figure 13: The key Asia Pacific Cable Network (APCN) cables
- Figure 14: Telstra expects rapid growth in intra-Asian trade in cloud services
- Figure 15: How much?
- Figure 16: A relationship, but a weak one – don’t count on data sovereignty
