Telstra : Transcript - Telstra network sharing agreement briefing

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22 February 2022

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Telstra network sharing agreement, 21 February 2022 - Transcript

In accordance with the Listing Rules, I attach a market release, for release to the market.

Authorised for lodgement by:

Sue Laver

Company Secretary

Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556

Telstra network sharing agreement, 21 February 2022 - Transcript

Nathan Burley:

onlyuseAndrew Penn: personalFor

Good morning everyone. Welcome to this Telstra call to discuss the landmark Network Share Agreement we've signed with TPG Telecom. My name's Nathan Burley, Head of Investor Relations. Now I respectfully acknowledge that I am joining today from the lands of the Kulin nation, and on behalf of Telstra I would like to acknowledge and pay my respects to the traditional custodians of Country throughout Australia, and recognise their continued connection to land, waters and cultures. We pay our respects to their Elders past, present and emerging.

Now on the call today are Telstra's CEO Andy Penn, CFO Vicki Brady, and Group Executive Networks and IT Nikos Katinakis. Our CEO Andy Penn will take you through today's announcement and then we will be taking questions from analysts and investors and then media. I'll hand over to Andy. Andy.

Thanks very much, Nathan, and welcome everybody. Thank you for joining us, particularly at short notice on a Monday morning. But, as Nathan said, it's a pretty exciting day with a very significant ground breaking network deal that we're announcing this morning with TPG, which will deliver between $1.6 and $1.8 billion of revenue to Telstra over the next 10 years, as well as a significant enhancement to our spectrum position and our mobile and fixed wireless service offering in regional and rural Australia.

In an industry which is subject to regulation such as telecommunications and where so many of the decisions and outcomes on technology and spectrum are crucial, while short term tactical decisions are important, it's really the long term strategic ones like this, and innovative industry arrangements, that ultimately drive the long term capital efficiency and long term value for the operators and for customers; and that's exactly what we're doing today.

The deal itself comprises a 10-year regional Multi-Operator Core Network - or MOCN commercial arrangement as we describe it - which provides TPG Telecom's group with - their subscribers with 4G and 5G services within a defined coverage zone - which I'll come to in a second - across what we would describe as regional and sort of the urban fringe areas. The defined coverage zone covers a ring around core metro and inner regional populations that, in a ring if you like, is about 80 percent population coverage, and it covers that area from 80 percent population coverage to around just over 98 percent population coverage.

Under the deal, TPG Telecom will access around 3,700 of our Telstra network assets, increasing their current 4G coverage from about 96 percent where they are currently - they're about 96 percent - to more than 98 percent of the population. And this is essentially the same network that we provide regionally today for our MVNOs and Belong.

So maybe if I just go through this in a little bit more detail in terms of if you think about our mobile coverage today - just to get the various zones clear in your minds - our various coverage today, it can broadly be broken down into three zones. The first zone where more than 80 percent of metro and inner regional Australians reside today. In this zone, both Telstra and TPG will

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Telstra network sharing agreement, 21 February 2022 - Transcript

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continue to maintain their own network assets operating completely independently.

The second zone is what we're describing as the 'defined coverage zone' - and that's the one that is subject to the agreement we've announced today - is for services that cover from 80 percent of the population to 98 percent of the population. And as I mentioned, within this zone TPG already have infrastructure and they already have coverage to 96 percent of the population with 4G. They also had a 3G agreement with Optus which I believe provides them with 3G coverage additional to the 96 percent; so they already have a lot of coverage in this area. And it's this zone that we're offering the MOCN services to TPG, and that will mean that TPG will decommission its existing infrastructure within this zone. And as I mentioned, Belong and our MVNOs have already been operating in this zone for a good number of years.

The third zone is where the last couple of percent of the population of Australia live, and it covers an additional one million square kilometres of landmass, and this is where Telstra will continue to maintain its network in differentiation in this zone, and will continue to be the only operator to provide services in this particular area.

So we'll also, through this arrangement, gain access to TPG's spectrum across 4G and 5G, which will allow us to grow our network and increase capacity to offer high quality, innovative wireless services as data-driven demand continues to escalate. This spectrum will also deliver capital investment savings and these will more than offset any additional capex to accommodate the TPG customers.

Over the last three years we have seen major spectrum auctions that determine the holdings of important 5G spectrum in low band, mid band and high bands; and you will all remember the 3.6 gigahertz spectrum auction two or three years ago, the low band spectrum auction at the end of last year and then the high band spectrum auction I think was probably about a year ago now. The important thing to remember with spectrum is those licences - once those auctions are determined - are basically set for a long period of time; at least the next decade. And it is only through arrangements like this that we can actually further enhance our spectrum position which is available for our customers in this critical technology.

So what it means, the spectrum element of this is very, very significant for Telstra and it will mean that all customers will continue to experience Australia's best and fastest network across the country in combined 4[G] and 5G speeds.

In particular the spectrum agreement will ensure that regional and rural customers will now experience faster speeds in more locations on their mobiles, and it will give us the potential to offer more fixed wireless services across regional rural Australia. And with more people moving to regional areas as a result of COVID, congestion in some areas has increased in recent times, and so this additional spectrum will also ensure that customers experience significantly reduced congestion at busy times.

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Telstra network sharing agreement, 21 February 2022 - Transcript

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Under the MOCN arrangement, Telstra will share our RAN network - our radio access network - for 4G and subsequently 5G services. For the 5G services, subject to an incremental commercial aspect over and above that for 4G, and 5G will only be available after six months of it being rolled out in the defined coverage zone.

However, to be clear, both carriers will continue to operate their core network technology; so in other words - just to clarify this - in other words, where we're providing network there's the radios - effectively the antennas which are distributed across mobile towers, and that is what we're providing access to - but then there's actually the core - what we call the core operating system of the network which is where you register services and where a lot of the differentiating functionality - things like network slicing and quality of service functionality reside. Both TPG and Telstra will maintain their own cores, and this will just be them sharing our radios in the defined zone that I've already described.

We, in addition, will also get access to deploy infrastructure on up to 169 TPG Telecom existing mobile sites, improving coverage to TPG and Telstra customers in the zone. And the non-exclusive agreement includes an option for TPG Telecom to request two contract extensions of five years each.

From our point of view, the deal provides significant value to shareholders and customers, and it's a continuation of our strategy to maximise the utilisation and monetisation of our assets, similar to monetising our passive infrastructure; it allows Telstra to have an innovative way of monetising some of our active infrastructure in areas where population coverage is much smaller and more challenging in terms of returns and further investment where there are already many competitors.

Our network has been, and always will continue to be, the best network in the country; we're committed to that. And the structure of this deal ensures that we continue to differentiate in network leadership for our customers in coverage and service. We can do that because we will maintain our one million square kilometre competitor advantage in mobile coverage where no other operators have invested.

Mobile coverage is often talked about in population coverage as we have today, however many of us know that it's also the square kilometres of coverage when you travel between towns and cities that also matters; and that's the fabric of our network. It's critical for customers living and working in those areas; it provides security and safety when travelling long distances on major roads and it's only available for our customers travelling through or working or living in those areas.

In fact, the RTIRC review - which was the regional telecommunications review, which is a triennial review which was recently completed - and indeed previous versions of this review continue to highlight the criticality of connectivity in regional Australia, and the importance of finding ways the industry to better leverage infrastructure for support, increased coverage and capacity for customers.

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Telstra network sharing agreement, 21 February 2022 - Transcript

onlyuseNathan Burley:

Eric Choi:

personalAndrew Penn: For

In addition therefore to the significant financial benefits and enhanced spectrum position for Telstra, this deal also represents an innovative way to respond to this while maintaining our network differentiation.

The deal which is subject to ACCC approval will realise more value from Telstra's network infrastructure for shareholders, while making a very significant contribution to Telstra's wholesale mobile revenues. With that, thank you for indulging me - for letting me take you through it, because it's quite a complex deal and there's a lot in there, and a lot of economic drivers in there for Telstra, and great access to some really interesting spectrum and a number of different other benefits. But with that, let me now open for questions. And as Nathan said, we've got Vicki, who you all know well, who's with us and then Nikos Katinakis, who is the Head of Networks and IT, who can help with the technical aspects of the deal. So with that, Nathan, I will hand back to you.

Thanks, Andy. So just a reminder, if you want to ask a question it's star one, or star two to cancel. So we will go to our first question now which is from Eric Choi from Barronjoey. Go ahead, Eric.

Morning team. Three from me. First one, I guess the natural reaction is are you guys giving TPG a leg up? So my first question is how many more subs do you think TPG wins as a result of this deal versus the counterfactual where they did a deal with Optus instead? Second question, on the $1.6 to $1.8 billion of revenues, is all of this new, and if it is all new and at high margin, should we be thinking that's a sort of one cent uplift to EPS; and if that's the case, why haven't we reconsidered our T25 targets? And then third question on industry pricing, I guess your population coverage will remain at 99.4 [percent] but Vodafone goes up to Optus at 98.8 [percent]; I'd be interested if you thought this gives Vodafone a justification to up their prices? But if you don't want to comment, if you can just comment on whether you think you can hold your own pricing premium. Thanks very much.

Yes, look, thanks very much, Eric. I'll make a few comments and then see if Vicki has anything to add. And obviously it's not really appropriate - and I know you're not really asking me to - to comment on Voda or Optus' plans, so I'll try and sort of step through some comments and be as helpful as I possibly can be. From our point of view, as you know we've been consistently adding new customers for years - even though the last two years when COVID has meant population growth has stalled - and also the other dynamic is TPG already has quite comprehensive coverage - quite a lot of coverage in this area - up to 96 percent of the population - so this gets them to 98.8 [percent]. And they also have an arrangement with Optus, as I understand, on 3G which gives them coverage beyond the 96 percent as well.

The other point as I've highlighted is there are already many competitors in this area, so our MVNOs have operated in this area, Belong operates in this area, I believe Optus' MVNOs operate in this area as well. And I think the other consideration is that we already have very considerable ground presence across the region; we have stores, we have field techs, we have Telstra business centres, regional advisers etc, so there's a lot more than just purely the network. So it's hard to comment on exactly what the industry dynamic will be, but we think this

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