Optus FY23 – A Tale of Two Halves

TLDR version: Optus reported its FY23 results on 25 May 2023. At a headline level, operating revenue grew +2.8% YoY and operating expenses were up +3.4% YoY. Stripping out the effect of nbn migration payments, which have now ended, EBITDA was +4.5% for the year. We believe Optus’ return to mobile subscriber growth post its security breach is a positive sign for the industry, not just Optus.

Minimal gains in fixed wireless access (FWA) by Optus do not mean the substitution threat to nbn has eased. TPG’s growth in this space will likely see it overtake Optus to become the greater competitive challenge to nbn.

Mobile subscriber growth is recovering post the security incident

The September 2022 cyberattack on Optus was a headline making event that saw data security and privacy become a front of mind issue for millions of Australians. It saw Optus’ brand value fall six places in Brand Finance’s 2023 rankings, and was a contributing factor in the telco sector being declared Australia’s most distrusted industry. The company made a $140m provision to cover the cost of the incident and is facing a class action lawsuit from disgruntled customers.

But how much of an impact did the incident have on Optus’ subscriber trajectory and how is the recovery going?

In its media release, Optus pointed to the strong growth in mobile subscribers (+425k in FY23) as “demonstrating a good recovery from the cyberattack.”

The reality is more nuanced. Over 70% of the FY23 growth was during H1 (April-September 2022), where Optus added a net +304k subscribers. A half-on-half comparison of subscriber growth may not be appropriate given we believe H1 was boosted by the end of travel restrictions and a resumption of pre-COVID behaviours. This makes the post-paid churn data a more interesting guide as to how Optus has been impacted versus a ‘no-hack’ base case.

The postpaid churn rate for H2 rose to 1.5%, versus an average of 1.2% for the preceding 4 halves. Absent this incident, Optus may have been on track for its strongest half of postpaid subscriber growth post the pandemic. The better news for Optus is its reported return to customer growth, noting in its investor presentation that it has seen  “sustained positive net add momentum since Dec-22”.

Why does this matter?The Optus data breach impacted consumer trust in the sector and damaged the Optus brand. Both will take time to repair. The $140m provision for the incident and upcoming lawsuit are costs that a smaller telco may not have survived. None the less, the return to subscriber growth suggests such incidents can be recovered from. Optus’ experience has provided lessons for the other in the industry, and one of those lessons may be that recovery is possible.

Wireless substitution: small gains for Optus FWA broadband

One of the key questions for the broadband sector is the extent to which fixed wireless, especially 5G services, will become a substitute for the nbn.

Optus was an early leader in 5G fixed wireless, launching in the March 2019 quarter. At the time, it aligned its 5G wireless price to that of its hero nbn plan but differentiated it through higher speeds. This has evolved into Optus offering a suite of plans tiered by speed, and priced at a relative discount versus nbn plans with similar advertised speeds.

Despite its early head start in 5G FWA and pricing that aims to be more attractive than its nbn plans, Optus’ subscriber growth has been modest since it began disclosing its FWA metrics. FWA services appear to have peaked in the June 2021 quarter and Optus finished FY23 (March-23) at 208k FWA services. Optus added +3k FWA services for the year. Gains in nbn (+6k) were cancelled out by the final migration of legacy HFC and ULL customers (-6k), making FWA the driver of broadband subscriber growth, albeit small.

By contrast, the numbers coming out of TPG suggest a more aggressive period of substitution, though one coming from a lower base of wireless customers. TPG added a net +91k FWA customers during the 2022 calendar year, just four thousand services short of offsetting its combined losses in nbn services and the ‘ADSL/Other’ category.

If the current FWA growth trajectories of the two operators are maintained, TPG’s FWA subscriber base is likely to overtake Optus by the June-23 reporting round.

Why does this matter?

Optus’ minimal gains in wireless broadband are in stark contrast to TPG’s rapid growth. FWA is not the only form of substitution gnawing at nbn’s customer base. Mobile only households and mobile broadband are part of the challenge too. But FWA arguably offers the most like-for-like alternative for customers and so bears watching closely.

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