The weak results and write-offs at Telstra and Optus’ enterprise units raise questions about the health of Australia’s B2B market and the opportunity for the sector to aid overall growth as their mobile businesses slow.

Telstra last week revealed plans to cut 2,800 positions, or 9 per cent of its total workforce, as it reorganises its enterprise business, citing challenging market conditions. It is reducing the number of products in its enterprise network and services unit (NAS) by nearly two-thirds, and simplifying its customer sales and service model, it explained in a statement.

On a call to announce the restructuring, CEO Vicki Brady said the company is at the start of a detailed review of its enterprise business, which is still ongoing. “It will take some time to progress all of those actions to set it up for success.”

The operator forecast one-off restructuring costs of AUD200 million ($133.4 million) to AUD250 million in fiscal 2024 (ending 30 June) and 2025.

Meanwhile, revenue from Optus’ wholesale, fleet and enterprise unit in fiscal H2 2024 (ending 31 March) dropped 15.7 per cent year-on-year to AUD612 million, largely due to Optus Enterprise reporting declines in fixed carriage revenue attributed to churn and price erosion. The operator also pointed to National Broadband Network-driven profitability and margin pressure in fixed data.  

Weakness in the fixed enterprise business contributed to a 1.1 per cent drop in overall operating revenue to AUD4 billion.

One-off charges
Optus recorded non-cash impairment charges of AUD551 million on its enterprise network assets, forcing parent Singtel to book a large impairment charge. 

As part of Optus Enterprise’s refresh strategy in the face of macro-economic headwinds, it is also cutting its product category from more than 250 to less than 100 and reducing the number of vendors from more than 100 to 16. Given the structural decline in fixed voice, the operator said it is shifting to systems-as-a-service (SaaS) offerings, exiting unprofitable businesses and taking a mobile-first strategy.

Adding to its woes, Optus is recovering from a network outage in November 2023 affecting 10 million customers and denting their trust, leading to the resignation of CEO Kelly Bayer Rosmarin. She was replaced by board member Michael Venter as interim CEO, with Stephen Rue, head of Australia’s NBN Co, to take the role in November.

Optus also faces a case filed by the Australian Communications and Media Authority for failing to protect customer data following a cyberattack in September 2022.

Improved outlook
GSMA Intelligence director of research and commercial content Pablo Iacopino noted Australia is a promising B2B market opportunity for mobile, fixed and value-added services, suggesting Telstra’s restructure was driven by a short-term imbalance between fixed and variable costs. 

The country’s enterprise network services market increased 4.6 per cent in 2023 to $790 million after declining in 2022, data from Statista Market Insights showed. The company expects revenue growth to hit 7.1 per cent per annum from 2024 to 2028, topping $1 billion in 2027.

Iacopino said Telstra’s high margin calling service was hit by an ongoing shift from traditional voice to cloud applications, impacting overall EBITDA. An unexpected decline in professional services was triggered by fewer new client projects following a previous period of strong growth. 

While overall fixed B2B revenue growth was affected, he said the real challenge is on profitability, as some of the costs are fixed, with significant set-up expenditure based on higher growth projections making it difficult to adjust based on what is in the pipeline.

He noted Telstra recently confirmed the medium-term outlook for the fixed B2B segment is positive, with cloud revenue and equipment sales continuing double-digit growth, while other services face challenges.  

Profit pressure
Omdia senior principal analyst Adam Etherington told Mobile World Live most operators globally are under EBIDTA pressure as the cost to deliver connectivity and bandwidth rises, while ARPU declines due to OTT demand and digitalisation across organisations.

While a turnaround in enterprise will take time, investors were reassured by Brady reaffirming Telstra’s underlying EBITDA guidance for fiscal 2024 at AUD8.2 billion to AUD8.3 billion and setting the target for fiscal 2025 at AUD8.4 billion to AUD8.7 billion, compared with AUD8 billion in fiscal 2023. 

Optus’ EBITDA in fiscal H2 rose 4.8 per cent to AUD1.1 billion, but for the full year it was flat. It did not provide guidance for the current fiscal year.

Brady added on the call “there is real strength and opportunity” in enterprise in the medium- to long-term, pointing to AI fuelling the need for processing capacity, which requires connectivity across networks.

She estimates the transition will likely take two-to-three-years. “It’s going to take real planning” and work with customers. “You don’t just automatically make the decision today to simplify the portfolio and it happens the next day.”

Etherington pointed out Telstra’s share price took a beating after the restructure announcement, even though cutting costs is “an unenviable but necessary way to regain profitability in the short term”.

“My concern is whether Telstra is investing in the people, expertise and capabilities necessary to win in the NAS market,” he said, adding its tech services business Telstra Purple assembled solid capability and, with its legacy network assets, should be in a position to seize growth in B2B IoT, edge, cloud, AI and security.