TLS: Increased Flexibility for Adjusting Rates

Approximately 54% of its revenue comes from telecommunications services aimed at consumers and small businesses (C&SB). This segment provides fixed-line, mobile, broadband services, as well as media and digital content products and services to Australian consumers and small business customers. It also operates call centers, Telstra stores, and the Telstra dealer network.

33% of its revenue is derived from telecommunications services for enterprises (Enterprise), and 10% from telecommunications network construction (InfraCo). The C&SB segment saw a year-on-year revenue growth of 1.1%, while the Enterprise segment experienced a 1.2% year-on-year increase, maintaining stability overall.

Telstra is the largest telecommunications company in Australia with a long history and a solid market foundation. As a former state-owned enterprise, it has long held a dominant position in the Australian telecommunications market, particularly in the fixed-line sector where it has almost monopolistic control. Despite facing increasing competition from other operators like Optus and Vodafone Australia, which are enhancing their services and network infrastructure, Telstra still maintains a leading position.

Telstra’s public-private partnership model and its government shareholding background mean that its operations and development strategies are not only market-driven but also closely tied to government policies. The gradual sale of government shares in Telstra signifies a shift towards more market-oriented operations, potentially impacting its long-term strategic planning and capital structure.

In terms of revenue, the second half of 2023 saw a slight increase, thanks to its diverse product and service portfolio. Telstra’s expansion into media, content, and connectivity options, as well as the introduction of innovative products and services in global connectivity and enterprise services, provided additional revenue streams. Moreover, Telstra's ongoing digital transformation in the telecommunications market helps meet the strong demand for mobile and data services amid a surge in network traffic.

In May 2024, Telstra's management plans to remove the annual price review tied to the consumer price index (CPI) for postpaid mobile plans. This move aims to enhance pricing flexibility to better respond to market dynamics. Although there might be limited room for price increases in the short term due to competitors not adjusting their prices, management noted that the business is performing strongly, with user growth in the first four months of this year consistent with the first half of FY2024. This means: 1) Postpaid users are expected to reach at least 8.952 million by the end of the period; 2) The company is confident in raising customer prices this year, indicating some potential for price increases this year.

The fixed enterprise segment will undergo structural adjustments, with up to 2,800 job cuts expected (most by the end of 2024) to achieve a total cost savings target of AUD 350 million by June 2025. This is below the company's initial target of AUD 500 million but aligns with recent company expectations. Management is seeking to increase the profit margin to around 15% through the cost-cutting plan.

Telstra holds a leading position in the Australian mobile market. Although its recent business growth momentum has been limited, efforts in cost reduction and adapting to market price changes have successfully protected its operating profit margins. Management is seeking to improve profit margins through cost-cutting plans. Additionally, Telstra offers a relatively high dividend yield (4.89%). With potential price increases and cost reductions, profits are expected to be released.

Risk Factors: Intense price competition, market share loss, and pricing pressure from competitors such as Superloop and More Telecom could continue to suppress industry profit margins.