The fixed-line business delivered revenue of $2.681 billion, 21 per cent of its total revenue. That was 9.1 per cent down from the first half of 2018.

Mobile revenue, meanwhile, grew 2.4 per cent to $5.291 billion. Although Telstra added 240,000 mobile customers in the period, the declining ARPU, caused by an explosion in competition, offset some of the potential revenue gains.

“As the [NBN] roll-out completes and as the number of [NBN] services that we provide increases and becomes close to 100 per cent, our margins effectively on that business line will be zero,” Mr Penn said.

“And the closer we get to that, I think we will have to think about increasing prices for customers.”

He said the only alternative to higher prices would be to reduce the NBN’s wholesale price, which NBN Co has said it does not plan to do.

The roll-out of the NBN is due to finish next year, while the last one-off payment Telstra will receive from the NBN is due in about 2021 or 2022. One-off NBN payments were $800 million for the half, and are expected to be $1.5 billion to $1.7 billion for the full year.

Telstra announced an interim dividend of 8¢ per share, down from 11¢ per share last year. Telstra’s share price closed down 2.18 per cent at $3.14, down from a 12-month high of $3.46.

Ian Martin, a telco analyst with New Street Research, said the results were “a bit worse” than expected, and expressed concern about the two key headwinds.

“It’s a big question how reliable the dividend is, given they are underpaying. It suggests to me they are keeping something in reserve – because there is a lot of uncertainty in those two areas [of low NBN resale margins and intense mobile competition].

“Something does have to change. Obviously if Telstra is looking at a zero margin, other [retail service providers] must be in negative territory, and at some point they will have to raise retail prices, otherwise customers will leave for fixed mobile plans.”

The alternative would be for the NBN to drop its wholesale price — something Mr Penn has called for. But that would require the government to intervene and would result in a write-down of the NBN. The government has ruled this out, but Labor has not.

Telstra’s biggest rival, Optus, has responded to the lack of margin in the NBN retail market by launching fixed wireless plans that use 4G and 5G radio spectrum to deliver home broadband in direct competition with the NBN. Optus chief executive Allen Lew said this provided more margin than reselling NBN. Vodafone and Vocus have signalled they intend to do the same.

But Mr Penn said Telstra had no plans to use its 5G spectrum holdings to do the same thing. “Fixed wireless will be there for customers that want it,” he said, but he insisted fixed-line would continue to dominate the home broadband market.

Mr Penn said 5G would primarily be a mobile technology, and said he was confident it would boost ARPU. However he admitted it was not clear how Telstra would make money out of the nascent technology.

“There’s no doubt 5G will be critically important globally — it will take off as a technology — but the exact rate and pace at which it takes off I can’t comment,” he said.

He would not be drawn on the pricing structure of Telstra’s first 5G mobile plans, due to be launched before July.

Mr Penn said after the roll-out of the NBN, Telstra’s earnings before interest, taxation, depreciation and amortisation would need to be $7 billion to $8 billion to pay a dividend of about 16¢, between 70 per cent to 90 per cent of earnings. Before the NBN arrived Telstra was paying about 30¢, or 100 per cent of earnings.

“I do understand and appreciate what a lower dividend means for shareholders. But we have to accept the NBN and what it means. Our historic practice of paying 100 per cent of earnings is unsustainable,” Mr Penn said.

T22 ‘on track’

Mr Penn said Telstra’s T22 cost-cutting project, which will see 8000 jobs and several layers of management disappear by 2022 and save $2.5 billion a year, was on track.

Telstra said it was on track to meet guidance delivered in September last year of EBITDA (excluding restructuring costs) of between $8.7 billion and $9.4 billion, and total income in the range of $26.2 billion to $28.1 billion.

Graeme Ferguson, telco analyst at S&P Global Ratings, said Thursday’s results showed Telstra faced a hard slog over many years. “We shouldn’t expect easy wins in the current competitive landscape,” he said.

“That said, we view Telstra’s T22 as the right strategy, given its focus on operating efficiency and investment in network and digitisation. It is not particularly glamorous work, but the slow and methodical execution of this strategy is key to Telstra securing its long-term competitive advantage.

“From a ratings perspective, fiscal 2019 was always going to disappoint and our A-/Stable rating includes some wiggle room through this period of transition.”

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