23 September 2015
by David Ramli
TPG founder David Teoh has warned he will keep building his NBN rival network
The company makes more money off its fibre to the basement and ADSL services than the NBN.
Newly crowned as Australia's second-largest internet service provider TPG Telecom will plough on with construction of its rival to the federal government's $56 billion national broadband network and may even start offering access through its booming retail brands.
TPG executive chair David Teoh has vowed to keep building his company's own fibre-to-the-basement network to deliver broadband services that can match or exceed those offered by NBN.
NBN strongly opposes it because TPG's plan takes away lucrative apartment dwelling customers it needs to pay for building broadband in the bush. The federal government last year imposed tough regulations on it in line with NBN's demands, which force it to functionally separate of the wholesale and retail divisions – making it less profitable.
TPG executive chair David Teoh outside his Sydney home.
But speaking to Fairfax Media after announcing a 31 per cent increase in net profits for the year ending July 31 2015, Mr Teoh said the service would continue expanding his service across the nation and that TPG was investigating ways for its retail brands to sell it.
"It's still progressing and we will keep going on," he said.
"With iiNet coming in, our base is bigger now so we have to look at the whole thing – we spent a lot of money extending fibre into buildings so we're working on how to capitalise on what we have. It was a government regulation so we had to comply but we're still reviewing the options."
Mr Teoh said any attempt to use the iiNet and TPG brands to sell fibre to the basement would require them to launch separate entities with different reporting structures – an option that the telco was reviewing.
Washington H. Soul Pattinson is one of TPG's biggest shareholders. Its chairman Robert Millner also sits on TPG's board and described the company's results as "excellent".
Mr Millner said he was pleased by the prospects of getting iiNet's subscribers onto TPG's own fibre-based network and that it could be a strong source of revenue going forward.
Large numbers onto competitor network
"We've bought a [large] number of customers and now they're going to get onto our network," he said.
TPG became Australia's second-biggest broadband supplier with 1.8 million accounts after it bought iiNet for $1.56 billion in July. It is second only to Telstra, with more fixed-line internet subscribers than Optus and M2 Group combined.
The telco has experienced a rapid rise up the rankings of Australia's biggest companies. Where it was worth about $1 billion in 2012, it now has a market capitalisation of around $8 billion.
But Mr Teoh was adamant that this would not change the way he did business.
"We're trying to keep the company simple, the decision processes very simple, the operations very simple and we're all very hands on," he said. "So it does not change from five years ago or two years ago or going forward.
"We have a very successful business model and we intend to keep it that way."
He said his top two priorities for the year ahead would be to complete the integration of iiNet and TPG to boost the savings created by the takeover and picking the right management team that could take the service forward.
Macquarie Wealth Management believes TPG can get $70 million in synergies over the next three years.
"We have solid brands so we're excited by our prospects," he said. "We have a market cap of more than $8 billion now so we have to enhance our management side to get the right people."
iiNet, Internode and Westnet will survive as brands but smaller subsidiaries including Netspace, TransAct and Adam Internet will all be phased out to reduce the level of distraction for TPG's management team.
iiNet is also using TPG's internet capacity, known as backhaul, to offer new broadband plans with ramped up download limits such as the Naked DSL plan with a 1000 gigabyte limit for $69.99 a month.
IT, billing integration
The 2700 staff who work at iiNet call centres around the world will keep their jobs but other parts of the business are up for consolidation with the government and enterprise sales teams being shifted inside TPG.
One of Mr Teoh's biggest tasks will be to integrate the IT and billing systems of all the brands while migrating the customers onto one software platform – a mammoth task that iiNet's last chief executive David Buckingham was in the process of completing.
But TPG won't put a deadline on the project.
The company makes more money off its fibre to the basement and ADSL services than the NBN, thanks to the installation of its own equipment in telephone exchanges around the country.
Mr Teoh said that squeezing out profits from its ADSL services would make sense "in a perfect environment" but it had to be balanced out with customer demands to prevent them quitting TPG to use the NBN.
iiNet signed a major broadband supply contract with TPG competitor NextGen just before it was approached by TPG about the acquisition. Mr Teoh said it described this as "unfortunate" because "there's a lot of money involved".
"[In terms of overall savings] there's backhaul, peering, voice and interconnect so it'll come in at different stages [over the next three years]," he said. "If there are other [merger and acquisition] opportunities that come along we'll have a look but we must make sure we're comfortable with what we have and what we can do."
TPG's share price fell 48¢ to $10 a share despite it reporting that revenues for financial year 2015 had hit $1.27 billion, which was 31 per cent higher compared to the year before. Earnings before interest, taxation, depreciation and amortisation rose in line with expectations, growing by 33 per cent to reach $484.5 million.