Following the completion of the sale of a 47.4 per cent stake in online business Autohome on 23 June 2016, the numbers and commentary in the segment, product and expense sections have been prepared on a continuing operations basis and align with the statutory financial statements.
That is, they exclude the trading results and sale of Autohome shares. We continue to hold a 6.5 per cent stake in Autohome. The financial position section has been prepared on a continuing and discontinued operations basis (that is, they include the trading results and sale of Autohome shares), unless otherwise noted.
On 11 August 2016, the Directors of Telstra resolved to pay a fully franked final dividend of 15.5 cents per share. Shares will trade excluding entitlement to the dividend on 24 August 2016 with payment on 23 September 2016.
Summary Financial Results
Total income (excluding finance income)
Share of net profit from joint ventures and associated entities
Depreciation and amortisation
Net finance costs
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year from continuing and discontinued operations
Free cashflow from continuing and discontinued operations2
Earnings per share from continuing operations (cents)
 Capex is defined as additions to property, equipment and intangible assets including capital lease additions, excluding expenditure on spectrum, measured on an accrued basis. Excludes externally funded capex.  Includes proceeds from the sale of Autohome of $1,323 million.
n/m = not meaningful
This guidance assumed wholesale product price stability from the beginning of the financial year and no impairments to investments, and excluded any proceeds on the sale of businesses, mergers and acquisitions and purchase of spectrum. Capex to sales guidance excluded externally funded capex.
 Please refer above for details of the guidance adjustments and guidance versus reported results reconciliation on pages 164 and 165 of the financial statements for further information. This reconciliation has been reviewed by our auditors.  Excludes finance income.
We present our reportable segments and measure our segment results on the same basis as our internal management reporting structure.
Our reportable segments represent the respective business units which offer our main products and services in the market. Further information on each reportable segment can be found in Note 2.1 of the Annual Report.
Segment information from continuing operations
Total external income
Global Enterprise and Services
Total Telstra segments
Telstra Retail income declined by 1.5 per cent to $16,656 million while EBITDA declined by 3.9 per cent to $9,220 million. The decline in EBITDA is largely a result of the decline in fixed voice margins and the impact of the migration to the nbnTM network. Telstra Retail comprises our Consumer and Business business units.
Income in our Consumer business unit declined by 1.2 per cent. Excluding the impact of the Mobile Termination Access Service (MTAS) decision, on a like-for-like basis, income grew by 1.0 per cent. The MTAS decision relates to regulatory changes to voice and SMS terminating rates which became effective from 1 January 2016. While there was subscriber growth in mobiles and fixed data, lower average revenue per user (ARPU) impacted overall revenue growth. An increase in the take up of bundles and nbnTM plans saw fixed data revenue grow by 6.2 per cent. The rate of consumer fixed voice revenue decline was broadly stable at 7.7 per cent. During the year we adjusted mobile data and international roaming rates which impacted revenues in the mobile business. ARPU (excluding the impact of mobile repayment options) decreased as a result, however minimum monthly commitment grew over the period for post-paid handheld.
Pre-paid also experienced lower ARPU’s however there was growth in unique users of 2.3 per cent.
In Telstra Business, income declined by 2.4 per cent with mobile services revenue falling by 5.8 per cent as a result of lower excess data and international roaming. On a like-for-like basis, income declined by 1.0 per cent, excluding the MTAS impact. The Network Applications and Services (NAS) portfolio in Telstra Business, in particular managed network services, cloud and unified communications, continued to see good momentum, increasing by 18.3 per cent.
Global Enterprise and Services (GES)
Income for GES increased by 11.5 per cent to $6,262 million. GES International income grew by 55.5 per cent with contributions resulting from our Pacnet acquisition last financial year. Excluding Pacnet, GES International income increased by 18.2 per cent. GES Domestic income increased by 1.1 per cent due to strong growth in NAS and enterprise mobility, in particular in post-paid and machine to machine (M2M). This growth was partially offset by a revenue decline in Data and IP products.
Other acquisitions including Bridge Point and O2 also continue to contribute to growth. GES EBITDA was stable at $2,456 million.
Telstra Wholesale income grew by 1.4 per cent to $2,622 million. This was largely a result of an increase in Infrastructure Services Agreement ownership receipts which have increased in line with the nbnTM rollout, offset by price reductions from the ACCC’s fixed line service Final Access Determination (FAD) which became effective on 1 November 2015. EBITDA contribution increased by 1.4 per cent to $2,426 million.
Telstra Operations is primarily a service delivery centre supporting the revenue generating activities of other segments. It also has nbnTM and property sale revenue. The EBITDA contribution improved by 3.0 per cent with increases in nbnTM and property sale revenue, partially offset by higher maintenance costs to support nbnTM related works.
Certain items of income and expense relating to multiple reportable segments are recorded by our corporate areas and included in the All Other category. This category also includes Telstra Innovation and Strategy (including the Telstra Software Group), International and New Business (including the Telstra Ventures Group and Telstra Health®) and Media & Marketing.
 The data in this table includes minor adjustments to historic numbers to reflect changes in product hierarchy.  Margins include nbn™ voice and data products.
Fixed revenue declined by 2.2 per cent to $7,029 million with fixed voice revenue decreasing by 8.2 per cent to $3,437 million. Excluding the adverse impact of the ACCC Final Access Determination (FAD) decision of $64 million, on a like-for-like basis, fixed revenue declined by 1.3 per cent. The FAD relates to pricing for fixed services, set by the ACCC, which became effective 1 November 2015.
Retail fixed voice line loss in the year was 271,000, a rate consistent with the prior year, taking total retail fixed voice customers to 5.7 million. The decline in fixed voice revenue was partially offset by the growth in fixed data revenue of 5.6 per cent to $2,513 million as a result of growth in subscribers.
We now have 3.4 million fixed retail data customers, an increase of 235,000 for the year, the highest rate of net adds in over five years. This solid result has been driven by the continued focus on customer retention and momentum from bundling. Our challenger brand Belong® also contributed to the subscriber and revenue growth.
Our bundled products, including our “best value bundle ever”, launched in March 2016, and the Telstra BizEssentials Bundles® for our small business customers are both performing well.
The total number of retail customers on a bundle increased by 322,000 and there are now 2.7 million retail customers on a bundled plan, or 83 per cent of the retail fixed data customer base.
Demand for our nbnTM services continues. As at 30 June 2016, we have a total of 500,000 nbnTM connections, made up of 407,000 voice and data bundles, 34,000 data only and 59,000 voice only services. This is an increase of 289,000 over the last year.
Other fixed revenue increased by 1.5 per cent to $1,079 million with an increase in global connectivity and inter-carrier access services revenue offset by lower customer premise equipment and other fixed telephony revenue.
The upfront costs of connecting our nbnTM customers, and increased operational access costs, principally Access Virtual Circuit (AVC) and Connectivity Virtual Circuit (CVC) payments to nbn co, had an impact on our fixed data and fixed voice EBITDA margins. The fixed data EBITDA margin was steady at 41 per cent as these costs were largely offset by the increase in fixed data revenue. Fixed voice EBITDA margins declined by 4 percentage points to 51 per cent as a result of these costs, in addition to a decline in fixed voice revenue.
Revenue in our mobile portfolio decreased by 2.0 per cent to $10,441 million for the 2016 financial year. Excluding the impact of the MTAS decision (re-pricing of mobile terminating rates) which became effective from 1 January 2016 of $356 million, on a like-for-like basis, mobile revenue grew by 1.3 per cent.
Retail customer services increased by 560,000, bringing the total number to 17.2 million. We now have 7.5 million post-paid handheld retail customer services, an increase of 169,000. Post-paid handheld revenue was broadly flat at $5,385 million. The subscriber growth was offset by a reduction in ARPU of 1.6 per cent, from $69.51 to $68.40 (excluding the impact of mobile repayment options).
ARPU continues to be impacted by lower excess data charges but we have seen growth in minimum monthly commitments.
Pre-paid unique user growth was strong with 83,000 unique users added during the year. With higher voice and data inclusions, recharge frequency declined and pre-paid handheld ARPU declined by 4.3 per cent to $20.40. As a result, pre-paid handheld revenue declined by 3.5 per cent to $959 million.
While M2M revenue grew by 16.8 per cent to $132 million with strong subscriber growth, mobile broadband revenue declined by 4.7 per cent to $1,230 million. This was a result of pre-paid mobile broadband which experienced lower ARPU and a decline in unique users.
Mobile hardware revenue continues to grow, increasing by 10.1 per cent to $2,076 million as a result of higher average recommended retail prices on high end smartphones.
While mobile churn increased slightly in the second half it still remains at world-leading lows. Mobile EBITDA margin increased by 2 percentage points to 42 per cent.
Data and IP
Data and IP revenue increased by 10.9 per cent to $3,789 million largely as a result of revenue received from our GES International customers following the acquisition of Pacnet. The acquisition has opened up significant opportunities for Telstra, positioning us as a leader in international connectivity and elevating our brand globally as a significant Asia centric operator.
Within Data and IP, other data and calling products, which include wholesale internet and data, inbound calling products and other global products and solutions, increased by 30.1 per cent to $2,017 million.
This growth is largely a result of the Pacnet acquisition.
IP Access revenue declined by 3.0 per cent to $1,169 million due to increased competitive pressures offsetting the growth in IP customer connections. ISDN revenue declined by 8.9 per cent to $603 million as customers continue to migrate from legacy to next generation products, including unified communications within our NAS portfolio.
EBITDA margins were impacted by yield trends in the IP market and domestic revenue decline, decreasing 2 percentage points to 62 per cent.
Network Applications and Services (NAS)
NAS revenue grew by 14.3 per cent to $2,763 million with strong growth in both our domestic and international segments across all NAS portfolios. As highlighted at the first half 2016 results, the growth in NAS revenue in the second half was slower than the first due to the timing of contract milestones.
Within the NAS portfolio, managed network services revenue grew by 6.4 per cent through the expansion of security services. Revenue growth of 7.9 per cent in unified communications was a result of innovative cloud collaboration and contact centre solutions.
Industry solutions revenue growth of 19.0 per cent was led by nbn commercial works and monitoring services acquisitions. Progress at our telkomtelstra joint venture in Indonesia also contributed to revenue growth.
EBITDA margins improved by 3 percentage points through ongoing operational leverage, scalable standardised offerings, and a lower cost global delivery model.
Media product portfolio revenue increased by 4.6 per cent to $974 million. Telstra Media delivers content experiences, to differentiate and add value to our core access products.
Media ‘In the Home’ includes Foxtel** from Telstra, Telstra TV® device sales, Foxtel on T-Box®, BigPond Movies®, Presto^^, and relationships with all free to air providers. Foxtel from Telstra revenue increased by 8.6 per cent to $719 million. We continued our strategy to bundle these products with our core fixed products with a 20.5 per cent growth in Foxtel from Telstra subscribers. There are now 300,000 Telstra TV devices in market since the launch in October 2015
Media ‘On the Go’ revenue declined by 11.4 per cent to $70 million. The On the Go business is transitioning from a bespoke standalone suite of content to one that differentiates the mobility portfolio and adds value to customers.
During the year, we renewed our partnerships with both the AFL and NRL for 2016 and beyond. In May 2016, we also announced a new five-year partnership with Netball Australia, giving all fans the ability to watch every game live on their mobile from 2017.
Cable revenue declined by 6.8 per cent to $110 million due to a reduction in the contracted cable access rate starting from January 2016.
Other sales revenue includes revenue related to nbnTM access to our infrastructure. It also includes revenue from Telstra Health and Telstra Software. Other income includes gains and losses on asset and investment sales (including assets transferred under the nbnTM Definitive Agreements), income from government grants under the Telstra Universal Service Obligation Performance Agreement (TUSOPA), income from nbnTM disconnection fees (Per Subscriber Address Amount (PSAA)), subsidies and other miscellaneous items.
The increase in other income of 95.0 per cent during the period is largely a result of an increase in one-off PSAA and Infrastructure Services Agreement receipts in line with the progress of the nbnTM rollout.
Total operating expenses increased by 6.4 per cent to $16,600 million. This is a result of an increase in our core sales costs of 5.1 per cent and new business costs of 66.7 per cent. Core sales costs are direct costs associated with revenue and customer growth. The increase in new business costs supported growth in the Telstra Health and Telstra Software Group as well as Telstra Ventures. Growth in these costs is an investment decision and we are continuing to invest in our new businesses to allow them to grow. Core fixed costs (excluding significant transactions and events) declined by 0.6 per cent. Significant transactions and events that had an impact on fixed costs included increased nbnTM commercial works and Definitive Agreement costs, and increased NAS labour costs on large, new contracts.
The following commentary relates to movements in our reported expenses of labour, goods and services purchased, and other expenses.
Goods and services purchased
Total operating expenses
Total labour expenses increased by 5.4 per cent or $259 million to $5,041 million. Total full time staff and equivalents (FTE) decreased by 197 to 33,482. The movement in FTE includes the acquisition of Readify completed on 30 June 2016 (193 FTE). There were also FTE increases in Telstra Health (204 FTE) and Telstra Business (37 FTE). Offsetting these increases were reductions in FTE in the core business, in line with restructuring activity conducted throughout the year.
Salary and associated costs increased by 4.0 per cent or $141 million to $3,690 million, largely a result of increased costs in relation to our new business growth of $98 million. This reflects a full 12 months of ownership of acquisitions, in particular Pacnet, which was acquired in April 2015. Salary and associated costs also incorporated a 0.5 per cent increase in fixed remuneration for all employees (except the Telstra Executive Team) to enable superannuation contributions to be increased from 9.5 per cent to 10 per cent without a reduction in take-home pay.
Labour substitution costs increased by 8.1 per cent or $66 million to $882 million. This increase was largely a result of increased outsourcing of field technicians and the establishment of global operations to support the expansion of our NAS business.
Redundancy costs increased by 46.9 per cent or $53 million to $166 million as a result of an increased focus on accelerating restructuring activity throughout the year.
Goods and services purchased
Goods and services purchased increased by 5.9 per cent or $402 million to $7,247 million. Cost of goods sold (COGS) (which includes directly variable costs, including mobile handsets, tablets, dongles and broadband modems) increased by 5.0 per cent or $154 million to $3,204 million impacted by increased mobile handset unit costs (largely a result of a weaker Australian dollar) and increased NAS COGS.
Network payments decreased by 4.3 per cent or $75 million to $1,650 million largely a result of regulatory changes to mobile terminating rates as part of the ACCC’s final decision in the Mobile Terminating Access Service FAD process, and lower mobile roaming charges.
These were partially offset by increased nbnTM access payments as we move customers to the nbnTM and higher offshore network payments within our GES business.
Other goods and services increased by 15.6 per cent or $323 million to $2,393 million. Within other goods and services purchased, managed services cost of sales increased by $140 million. These are costs to connect, migrate, activate and maintain services of Telstra supplied NAS equipment and increased during the period to support domestic NAS revenue growth within our GES and Telstra Business segments. There were also increases in usage commissions ($52 million), service fees ($93 million), in line with the increase in Foxtel from Telstra subscribers, and dealer performance commissions ($17 million).
Total other expenses increased by 8.6 per cent or $341 million to $4,312 million as a result of increased accommodation costs and impairment expenses, partially offset by decreases in promotion and advertising.
Accommodation costs increased by $85 million, largely a result of new business and M&A activity in our GES and Health businesses. Promotion and advertising costs decreased by $13 million as more retail campaigns were undertaken in the previous period. Impairment expenses increased by $253 million as a result of the impairment of goodwill in the Ooyala Holdings Group cash generating unit of $246 million.
Foreign currency impacts
For the purposes of reporting our consolidated results, the translation of foreign operations denominated in foreign currency to Australian dollars increased our expenses by $184 million on the prior period, across labour, goods and services purchased, and other expenses. This foreign exchange impact has been offset by a benefit to sales revenue, resulting in a favourable EBITDA contribution of $20 million.
Net finance costs
Net finance costs increased by 1.6 per cent or $11 million to $710 million primarily due to lower finance income of $61 million offset by a reduction in finance costs of $50 million.
The reduction in finance income of $61 million was due in part to a reduction in interest earned on cash and liquid investments from holding lower average cash balances compared to the prior period. We also recorded a $42 million accounting adjustment to recognise a reduction in interest rate applied to our Foxtel loan.
Gross borrowing costs increased by $9 million as a result of higher average gross debt largely offset by the refinancing of debt at lower prevailing interest rates. Average physical debt was $15.9 billion (2015: $14.9 billion). This increase reflects in part the issuance of term debt during the period of $2.0 billion ahead of maturities occurring in the first half of FY17.
Our average borrowing costs on gross debt for the period was 5.6 per cent compared to 5.8 per cent in financial year 2015. This reflects refinancing at rates below our current cost of funds and a reduction in short term market rates impacting our variable rate debt.
We will continue to see the favourable impact of refinancing as debt with higher cost of funds mature.
We continue to see the benefit of the early adoption of AASB 9 (2013) in relation to our hedged borrowings portfolio with favourable re-measurements period on period of $49 million. This is driven both by accounting adjustments resulting from a transition to the new methodology as well as residual volatility associated with market movements remaining low as a result of deferral of hedging costs in equity.
Capitalised interest increased by $9 million compared to the prior period due to lower average interest rates, which are derived from our cost of borrowing, being more than offset by higher capital expenditure.
Summary Statement of Cash Flows
Net cash provided by operating activities
Total capital expenditure (including investments)
Sale of business and shares in controlled entities (net of cash disposed)
Other investing cash flows
Net cash used in investing activities
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the year
Capital expenditure and free cashflow
Our operating capital expenditure for the year was 15.2 per cent of sales revenue or $4,045 million, in line with our financial year 2016 guidance of around 15 per cent of sales. Compared to the previous year spend of $3,589 million, we are spending much of the increased capital expenditure on mobile, in particular to extend our 4G and 4GXTM services to deliver more square kilometres of coverage, more reliable voice and data, fewer dropouts and faster download speeds.
Reported free cashflow was $5,926 million, representing an increase of $3,307 million on the prior period. On a guidance basis, free cashflow was $4,796 million. Guidance has been adjusted in the current period for free cashflow associated with the sale of Autohome ($1,323 million) and mergers and acquisitions (M&A) activity of $126 million.
Funding and net debt
Our gross debt position as at 30 June 2016 was $16,009 million, comprising borrowings of $17,302 million and net derivative assets of $1,293 million. The increase of $1,047 million compared to 30 June 2015 reflects $1,581 million debt maturities offset by a $2,628 million increase in debt. The increase in debt can be seen in the following table.
 During the period we also drew down, and subsequently repaid, a further $1,850 million under our bank facilities. This is shown on a gross basis in our Statement of Cash Flows.  Includes loans from associated entities of $35 million.
During the year we raised $1,631 million of new capital markets financing through two new debt issuances, including a $498 million ($500 million face value) domestic bond in September 2015, and a ten year €750 million Euro bond (Australian dollar equivalent $1,133 million) in April 2016.
Debt maturities included $1,415 million of term debt, $36 million loans from associated entities and $101 million finance lease repayments. The remainder of $29 million is due to non-cash revaluation impacts such as unrealised movements on our derivatives.
Net debt decreased by $1,107 million to $12,459 million as a result of an increase in cash and cash equivalents of $2,154 million offsetting the increase in gross debt. This is driven by reported free cashflow of $5.9 billion, more than offsetting outflows from interest, dividends, and other financing flows of approximately $4.7 billion, as well as non-cash movements such as foreign exchange of $0.1 billion.
At 30 June 2016, liquidity was $3,550 million which includes receipt of proceeds from our sale of 47.4 per cent of total issued shares in Autohome. This liquidity will be used to fund our capital management program in FY17.
 Debt servicing ratio equals net debt to EBITDA.  Gearing ratio equals net debt to net debt plus total equity.  Interest cover equals EBITDA to net interest.
We remain at the conservative end of our comfort zones for our credit metrics. Our gearing ratio is 43.9 per cent following the sale of our Autohome stake, down from 48.3 per cent at 30 June 2015. Debt servicing (net debt/EBITDA) was 1.2 times. We also monitor interest cover, which is a measure of the cash flows we generate compared with the net interest cost of servicing our borrowings. Interest cover was 13.0 times. Our comfort zone for interest cover is in excess of 7.0 times.
Statement of Financial Position
Our balance sheet remains in a strong position with net assets of $15,907 million.
Current assets increased by 34.0 per cent or $2,370 million to $9,340 million largely a result of an increase in cash and cash equivalents of $2,154 million. This increase is predominantly due to the gross cash proceeds of approximately $2.1 billion from the sale of 47.4 per cent of the total issued shares in Autohome.
Non current assets increased by 1.4 per cent or $471 million to $33,946 million. An increase of $390 million in derivative financial assets was driven by foreign currency movements and other valuation impacts arising from measuring to fair value. As our derivatives are used to hedge foreign currency and interest rate exposures, the movement in derivative position is largely offset by corresponding movements in borrowings and reserves (equity). Investments – other also increased by $257 million largely a result of the recognition of our residual 6.5 per cent interest in Autohome. Autohome was previously recorded as a controlled entity. These movements were offset by a decrease in intangible assets, mainly due to the Ooyala impairment of $246 million, and a reduction in defined benefit asset of $281 million due to an actuarial loss on our defined benefit plan assets with the discount rate falling from 4.3 per cent at 30 June 2015 to 3.3 per cent at 30 June 2016.
Current liabilities increased by 13.0 per cent or $1,059 million to $9,188 million. Current borrowings increased by $1,159 million primarily due to a reclassification of debt due to mature within the next 12 months, including a Euro bond of face value €1 billion more than offsetting maturities during the year. Short term commercial paper, which is held principally to support working capital and liquidity requirements, also increased. The movement in current borrowings was partially offset by a reduction in current tax payables of $115 million due to an increase in PAYG instalments paid during the year.
Non current liabilities increased by 2.2 per cent or $385 million to $18,191 million. Borrowings increased by $509 million primarily as a result of long term debt issuance, offset by the reclassification of debt due to mature within 12 months to current borrowings. Also driving the increase were unfavourable exchange rate movements impacting our offshore borrowings. As we hedge all foreign currency risk arising from offshore borrowings, this movement is fully offset by the increase in our net derivative asset position.
The decrease in non current derivative financial liabilities of $248 million was driven by foreign currency movements and other valuation impacts arising from measuring to fair value.