Telstra hitting ‘crunch time’ for financial goals

By Ashley Clark on Aug 14, 2008 3:28PM

Analyst firm Ovum says the next two years are financially critical for Telstra if the telco giant hopes to meet its proposed profitability targets.

Telstra’s current earnings before interest, taxes, depreciation and amortisation (EBITDA) are at 42 percent, and it has projected that margin to grow to 46 percent by the end of 2010.

Despite the fact that Telstra’s recently-released full year financial reports yielded strong results, including 4.7 percent retail sales growth, Ovum contests it still has a long way to go in order to reach its long term goals.

“Telstra has had a quite dramatic turnaround in fortune since 2005 with significant investments in their IP and mobile networks,” said Ovum research director David Kennedy.

“It’s going to need all of this revenue growth and all of the projected cost savings in order to hit its profitability targets. “

“In order to reach those margins, it also needs to maintain the revenue rates it’s seen and improve the wholesale situation, and take a lot of cost out of its base.”

Kennedy believes the next 12 months is really ‘crunch time’ for Telstra to reach its expected margins, because its growth in the next two years relies heavily on what it can achieve in 2009.

“All the transformation benefits really need to start showing up in their account in 2009, or else there’s going to be a lot of scepticism around whether or not they can reach this target,” he said.

If Telstra does win the bid for the national broadband network (NBN), Kennedy believes it could yield a major long term benefit, but probably not enough to fuel EBITDA margins in the near future.

“The fibre to the node will push up EBITDA margins perhaps a percent or so, but it certainly won’t be enough to deliver the numbers Telstra says it will achieve,” he said.

“And keep in mind as well that the build wouldn’t really start until 2009, and wouldn’t be seriously underway until financial year 2010, so it’s not going to help them that much by 2010.”

Kennedy projects that a more realistic 2010 EBITDA figure lies in more in the range of 44 percent, and expects those figures to fall between 2010 and 2020 due to higher competition in the market.