Competitor Insight 03.2008

Safe Haven: Telstra Remains Resistant from Economic Downturns in Australias Telecommunications Sector

Publication Date	September 2008
Publisher	IE Market Research
Product Type	Report
Pages	21
ISBN Number	not applicable
Product Code	IEM00551

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Summary

In this Competitor Insight report on Telstra Corp., we provide five reasons why we think Telstra will be resistant to an economic slowdown: 1) Telco services are relatively defensive - even the newer services (broadband & mobile) are considered essential in personal and business life; 2) Telstra is financially strong and can weather a slowdown, arguably better than its competitors; 3) Secular trends continue to dominate but as the industry matures the ability of secular trends to overwhelm cyclical issues is declining; 4) Although we are beginning to see the first clear instances of the economic impacts in other markets - broadband in particular in both the US and some European markets - Australia is different; and 5) In Telstras case, Pay TV and broadband would be the first segments to see a contraction in growth if the Australian economy slows down. That is, Telstras core revenues from PSTN & Fixed line and Mobile will not be affected as much.

Content

Executive Summary
We are forecasting 3.5% revenue growth for FY09 given that Telstras revenue growth will still be resilient if economy slows
Telstras PSTN & fixed-line, mobile, and business services & Sensis revenues and cashflows are particularly solid
Euro & US operators are showing poor performances; cyclical factors are emerging in the telecommunications sector
Telstra with few credit market issues is one of the best defensive prospects in volatile markets
Telcos are defensive because of the near essential, utility nature of their services
Economic indicators for Telstra to watch; consumer confidence and business confidence lead to high demand for internet and for data/business services
- Telstra group revenues are tied to the health of the broader Australian economy; an annual GDP decline of over 0.5% would be needed to cause Telstra revenues to go into reverse, a scenario that has not occurred in Australia since 1991
- Home phone lines contribute the majority of Telstra access lines in service and remain pervasive despite the potential of the mobile only home
- Post-paid mobile market is affected by the overall economy; 65% of Telstras subs are post-paid, generating 89% of total services revenue
- Unlike in the US and Europe, internet/broadband growth in Australia is not influenced by economic conditions
- What the Yellow directory tells us: Little correlation between Sensis revenue performance and business confidence
- No correlation between economic indicators and data and business services revenue because these services must be maintained even during economic downturns
- Pay TV is the most discretionary of the portfolio of products sold by Telstra and it is susceptible to economic slowdown, but only 2% of Telstras revenue comes from Pay TV
Other risks that Telstra faces in an economic slowdown: Failure of Bill Express and consolidation of Telstras suppliers
Telstra managements comments on economic impacts
- Sol Trujillo: Telstra Groups customer-centric and value-differentiated approach combats macroeconomic environments
- John Stanhope: We expect double-digit revenue growth in mobile services in 2009
Competitors outlook on economic conditions
- Optus may be more susceptible to economic conditions than Telstra due to its higher proportion of pre-paid subscribers
- Unlike in its home market of New Zealand, AAPT (TCNZ)s business in Australia is resilient from an economic standpoint
- With 70% of its revenue from the resource states of WA & QLD, iiNet remains resilient from macroeconomic factors
- Hutchisons has one of the most defensive profiles in the mobile segment because over 90% of the customer base is on post-paid services
Charts:
- Chart 1: Telstras revenue composition, FY08
- Chart 2: Growth in Telstras Sales vs. GDP growth
- Chart 3: New home starts impact on residential access lines
- Chart 4: Market post-paid subscribers vs. total workforce
- Chart 5: Quarterly change in post-paid subscribers & workforce
- Chart 6: Broadband Connections (millions)
- Chart 7: Broadband growth has tracked the S-curve
- Chart 8: Sensis' domestic revenue growth remains steady even in poor business conditions
- Chart 9: Business solutions revenue growth follows new service launches
- Chart 10: Pay TV net adds have started to slow as confidence levels dropped
Tables:
- Table 1: Assessment of relative exposure by product line