TPG Telecom Limited (TPG) Earnings Call Transcript & Summary

Good morning, everyone. This is Paul Hutton Speaking from TPG Telecom's Investor Relations team. Thank you for joining us for the presentation of our 2025 full year results. We acknowledge the traditional custodians of country throughout Australia and the lands on which we and our communities live, work and connect. We pay our respects to the elders past and present. Our CEO, Inaki, will present our results highlights and strategy update. Our CFO, John will then present a detailed review of our financial performance and Inaki will then discuss our outlook before we open for Q&A.

Thanks, Paul, and good morning, everyone. 2025 was a milestone year of transformation simplification and most importantly, the delivery of our best-ever network for customers. We launched the regional network sharing arrangement with great success. We completed the sale of fiber infrastructure and EGW fixed operations, and we used the proceeds to execute capital management initiatives, delivering a stronger and much lower risk financial position. It was a year of market-leading trading performance in our core mobile business despite a significant slowdown in the broader market. Our subscriber growth accounted for the majority of the net adds in the industry as we increase our market share, led by our digital first subscription brands. On top of this, we are delivering cash flow and ROIC improvements. This is driven by more infrastructure sharing and efficient asset utilization by the cost benefits of continuous business simplification and the conclusion of the transformational investment cycle of recent years. Customer well-being is our priority. Every day, our networks are essential to how Australians live, work and connect. We are committed to investing to ensure we are there when our customers need them. Our industry needs regulatory policy that incentivizes that investment not the stiffest. Finally, we are providing guidance for 2026 for continued EBITDA growth driven by mobile service revenue growth and operating cost discipline. We are positioned strongly to deliver shareholder value in 2026 and the years ahead as more streamlined and focused business. Our strategy has 4 pillars: to run networks smarter, invigorate brands and services, make it easier for customers and become faster, simpler and stronger. As a result, customer and network experience is thriving and customers are responding positively to our more distinct, simpler range of brands and plans. We are delivering growth with a more controllable, predictable and derisked cost base. We are confident these trends will continue in 2026. It has been a journey of material investment to transform our network, platforms and capabilities, delivering a simpler, more dynamic business. We are seeing the results, and we expect to see ongoing improvement in the years to come. Nobody's transformation more apparent than in customers' network experience. Let's start with the physical changes we have made. The regional mobile expansion doubled the area we cover, increased our national size by 35% and lifted our population coverage to 98.5%. In addition, 81% of the sites in the TPG owned network are now converted to covering 91% of the population. Third-party research tells you there is increasingly little difference between networks in Australia. TPG Telecom delivers ours with a significantly lower cost structure. Network consideration among noncustomers is also rising and importantly, churn is down for both consumer and business customers. This churn reduction was one of the main objectives of the regional sharing arrangement, and we are achieving it. Consistent delivery of network and customer experience means consistent delivery of financial results. Simply, we are winning a growing share of the mobile customers available at higher ARPU so we are growing mobile service revenue consistently. Leveraging our lean cost base, we can then grow profit, offsetting the impact of initiating the original sharing arrangement in the year. And the way we are managing our assets and our capital is delivering a growing cash yield for our shareholders from a transformed financial position. This year, we returned more than $3.3 billion to shareholders, including our ordinary dividend and derisk future profit by paying down $2.7 billion of debt. Dividends now franked at 30% are targeted to grow from here in line with sustainable growth in profit and cash flow. We will move toward increased dividend franking over time. Let's now look at mobile performance in more detail. This was a very strong result as we consistently increased our share by providing the products that customers want across a deliberately differentiated multi-brand portfolio. Our expanded regional network has unlocked competition and choice in parts of the market that were previously under served. That impact is clearest in our digital first subscription brands, where latent demand for simple, value-led plans has translated into a strong subscriber growth. Mobile service revenue was up 4.2% to $2.43 billion with gross margin up 1.7% to $2.02 billion. Excluding the cost of regional sharing arrangement, which we expect to more than make up through revenue in the future years, gross margin was up 3.6%. Growth accelerated in the second half, reflecting the timing of planned refreshes and the strong momentum in our digital first subscription brands. We always said 2025 will be about focusing on market share growth of the back of the expanded network, but we still delivered solid growth in ARPU. The greatest growth at 10.7% was in the digital first subscription brands. felix, where we see customer upgrade to higher tier plans using the app and TPG and iiNet, where we saw the flow-through benefit of planned refreshes from late 2024. We recently undertook a tranche of price increases on some back book plans in Vodafone postpaid as well as in TPG and felix Mobile. The digital first subscription segment also led our subscriber growth with 113,000 net adds, while there was also solid growth in traditional prepaid segment. Our total subscriber growth of 228,000 customers or 4.1% was approximately 3x Australian population growth in 2025 and higher than the other 2 MNOs combined. We are winning a record share of customers relative to our competitors, and that's against a reduction in international migration where we are historically strong. Vodafone continues to play a critical role as our full service brand, anchored by handset offers, international roaming and exclusive offers and partnerships like Live Nation. At the same time, our digital first subscription brands are capturing growth where the market is expanding fastest. This portfolio approach allows us to grow share, protect margins and follow customer demand and is working. Now turning to home broadband. Gross margin and ample increase in fiscal year '25, supported by mix shift to on-net fixed wireless and higher-tier NBN plants. The market remains structurally challenged, but our 5G stand-alone launch should expand our fixed wireless addressable market by at least 15%. That will support base growth in fiscal year 2016. Our subscriber numbers in NBN were again down year-on-year, reflecting the ongoing impact of non-telco players and aggressive volume-driven resellers. This decline slowed in the second half. There has been considerable fragmentation in the NBN market but recent industry deals suggest signs of maturation. Our role in that will be to remain disciplined, offering simple great value plans, focusing on the convergence value of NBN while continuing to grow fixed wireless. Our customer will be in a strategy is integral to our success and how we build long-term trust with customers. We have an industry-leading approach in areas like domestic and family violence, First Nations support accessibility, financial hardship and responsible selling. We are also leading the industry with the introduction of customer will be in specialists across our stores and in our main contact center in Hobart. These specialists are trained to support more vulnerable customers, helping ensure the right outcomes for them and for our people and we are extremely proud of the work they are doing. I will close on the regulatory environment before handing to John. We support policy settings that sustain network investment and competition. For the spectrum renewals, we are advocating efficient revenue-linked structures and renewal timing aligned to license dates rather than the large upfront payments that can divert capital from network investments and improving customer experiences. I will now hand to John.

Thank you, Inaki, and good morning, everyone. FY '25 marked a year of structural change with a simpler asset base, materially stronger cash generation and a significantly strengthened balance sheet. My first slide shows a positive trend across our key financial metrics. I will be talking about continuing operations, unless I say otherwise. When I talk about pro forma, that's as if the new commercial agreements with focus were in place for the whole year, which provides the most relevant baseline for FY '26. Service revenue continues to grow despite slow industry growth and was up 2.2% to $4.179 billion. This comes off the back of strong mobile subscriber growth across the consumer, business and wholesale segments and ARPU growth. Gross margin and EBITDA were both up despite the first year cost for the expansion of our regional mobile network. As we noted when we gave guidance for the year, those costs came ahead of the additional revenue growth we are seeing from the bigger network. Adjusting for those costs, pro forma gross margin would have been up 3.6% with growth of 4.2% in the second half. EBITDA on our guidance basis which is pro forma, and excluding material one-offs, was up 2% to $1.637 billion, above the midpoint of our guidance range. That would have been 5.7% and without the regional expansion costs, and again, this was stronger in the second half at 6.8%. Our EBITDA performance also highlights discipline in operating costs, which were flat excluding one-offs associated with capital management and restructuring. Underlying NPATA and EPS, which are pro forma and exclude material one-offs and customer base amortization, were $69 million and $0.037, respectively. Turning to dividends. This slide shows ordinary dividends declared of $0.18 per share for the year. and that's now franked to 30% for the final dividend. We declared $0.27 per share in the year, including the special dividend. ROIC was up a solid 0.66 percentage points to 5.42% on a pro forma basis, primarily driven by greater capital efficiency. Through the Vocus transaction, we sold highly depreciated assets with very little growth. As a result, we expect strong growth in ROIC because we retained our higher-growth business just after the high point in its investment cycle. Cash flow outcomes in the year were extremely strong. This reflects proceeds from the Vocus transaction and the new handset receivables financing program as well as lower CapEx, spectrum and borrowing costs. My next slide is a profit summary. A quick note on hardware revenue, which is up 5.6% while we maintained overall hardware margin. That's consistent with our objective to retain our natural share of handset customers and is positive for the lifetime value of our postpaid base. I also draw your attention to operating costs halfway down the table which is at $1.031 billion were up just 0.5%. That's a strong outcome against our objective to keep OpEx below inflation in FY '25, given the average trimmed mean CPI was 3.3%. We are on track to deliver our target of $100 million of real terms cost savings in the 4 years to FY '29. Savings reflected the benefit of lower network and maintenance and support costs, a lower FTE base as we deliver continuous business simplification and IT modernization. This was with a very deliberate increase in marketing cost. I am very pleased with our track record in operating cost discipline. Turning to depreciation and amortization. The modest pro forma growth results from an increase in the depreciable asset base due to peak CapEx reached in 2024. We expect similar D&A growth in FY '26 on a pro forma basis. Now turning to EBIT and financing costs where it's important to understand the difference between statutory continuing operations and pro forma. Pro forma shows the impacts in both direct costs and lease depreciation and interest of the new commercial arrangements with Vocus as if they've been there all the time. Continuing operation includes the impact for only 5 months in FY '25 and with obviously no such impact in FY '24. The FY '25 pro forma EBIT growth was 3.8%, with total net financing costs down 0.9%. The financing cost run rate for FY '26 will, of course, be much lower. That's firstly because bank borrowings are now materially low. It's also because of the new handset receivables program on which financing costs for the back book sale were recognized upfront in October, whereas we only got one quarter of savings in FY '25 from the bank borrowings we repaid. It's also important to note there were income tax credits in FY '25, arising from R&D tax credits and previously unrecognized tax losses. Now turning to cash flow where momentum is very positive. This slide includes both continuing and discontinued operations as that cash that was available to shareholders. Growth of 25.5% in cash flow from operating activities reflected the proceeds in working capital of $687 million of the new handset receivable financing. This more than offset the loss of earnings from the asset sold from August onwards and the commencement of payment of cash tax. Operating free cash flow almost doubled to $1.91 billion, reflecting the additional benefit of lower CapEx. Free cash flow to equity was $5.751 billion enabling the extensive bank borrowings repayment and capital return in the period. Please note the subordinated note component of the handset receivables financing, which is the part that stays on our balance sheet come through investing cash flow. So in net terms, the impact on our free cash flow to equity of that program was $594 million. From here, the year-to-year impact of the handset receivables financing program should not be material. Of course, this all depends on the overall handset market and supply chain conditions. In summary, while this year's one-off Vocus transaction and handset proceeds are not recurring, the underlying business is now generating materially higher recurring cash from a smaller asset base. Momentum is projected to be strong from expected growth in service revenue, continued tight cost control, lower CapEx and much lower borrowing costs. The balance sheet changed a lot in 2025, delivering an efficient asset profile on which we expect to grow returns over time. The highlight, of course, was the material reduction in our bank borrowings from $4.1 billion to just $1.361 billion, significantly reducing our financial risk. Trade and other receivables were down as a result of the handset receivable financing program. PPE and intangibles were down almost $4.4 billion on aggregate, reflecting the transfer of assets to Vocus or derecognition of noncash intangibles such as goodwill. The increase in deferred tax assets in the period may seem counterintuitive as we utilized historical revenue losses against the gain on sale for the Vocus transaction. However, outside of normal movements, we disposed of a net deferred tax liability and recognized a new net deferred tax asset associated with the new fiber access agreement with Vocus. This was also reflected in the right-of-use assets and lease liabilities. I will now cover cost management. This is about structural cost removal, not short-term restraint or deferral, supporting operating leverage as the business grows. Direct telco costs have increased because of the regional mobile network sharing with Optus and the nonlease component of the fiber network access with Vocus. But these make up less than 10% of the run rate of our direct telco costs, and they are nonvolumetric. They won't increase as we add customers or data volume. So we have operating leverage as we grow, and we avoid OpEx and CapEx over time. The majority of our direct costs remain NBN costs, which we manage tightly. OpEx is a very positive story as I have already covered, and we have good momentum to remove $100 million in costs in real terms by FY '29. Inflation has, of course, been running ahead of the RBA's target of 2% to 3%. So if that persists, our OpEx may still go up in nominal terms. Turning to CapEx. The pro forma outcome in addition terms was $771 million, and we expect that to be about $750 million this year. Our targeted CapEx range remains $550 million to $650 million from FY '27 onwards, although we expect to be at the upper end of that range in FY '27 itself. That's because the IT transformation will be largely complete after this year, but we still have about 1,000 Huawei sites to change out. Additional mobile network infrastructure sharing would result in even greater CapEx efficiency, benefiting customers across the industry. My next slide covers financing costs, where the change reflects the strengthening of our financial position. Net bank borrowing costs were down 37.8% in FY '25 and due to debt repayment and holding cash prior to the capital return and will be materially lower again in FY '26. If you assume a cost of borrowing of 5.5% to 6%, you would forecast FY '26 bank financing expense of about $80 million used in our net bank debt today as the base. Also note, we are 66% hedged. Financing costs from the handset receivable program were $95 million in FY '25, on about $900 million face value sold due to the size of the back book. The average of the 2 quarterly sales seats would suggest annual sales of about $600 million base value in FY '26. So annual financing costs of this program will not be as high in FY '26. As noted earlier, this will depend on overall handset trading and supply chain conditions. On a pro forma basis, lease financing costs would have been $175 million in FY '25, and we expect those to be broadly flat year-on-year in FY '26. All of the above, of course, is subject to interest rate movements. But our current expectation is that financing costs will be roughly $100 million lower in FY '26 than the FY '25 pro forma total of $426 million. My final slide covers our medium-term outlook for cash flow and leverage. The trajectory was positive in FY '25, and we expect momentum to continue to build. The left-hand chart shows our free cash flow to equity, excluding the $4.7 billion in proceeds from the Vocus sale. We have also shaded out the $594 million benefit from the handsets program as the back book sale was nonrecurring. After these normalizations and excluding separation costs, the total would have been $396 million, which reflects solid growth on $247 million in FY '24. In FY '26, we expect to make up mostly through EBITDA growth and lower bank borrowing costs for not having 7 months of cash flow from discontinued operations and for having a full year of the new Vocus arrangements. Again, that is excluding separation costs. We expect FY '26 cash CapEx to be broadly the same as FY '25. Into FY '27 and '28, earnings growth and lower CapEx should translate to higher cash conversion, and the lower borrowings base has derisked our exposure to interest rates. We don't believe the ACMA's latest proposals regarding spectrum license renewal payments are a good idea. But even if they remain, we would not expect to have to fund renewals until later in FY '27, which is very manageable. Rating agencies understand that the inherently lumpy nature of spectrum funding may cause short-term spikes in leverage. But we have momentum with leverage reduction dropping below the upper end of our S&P net debt-to-EBITDA target range of 2 to 3x at the end of last year. We expect to reduce leverage further in coming years. We plan to derisk our financial position again this year by refinancing the $1.67 billion of bank debt we have maturing in July 2028. Thank you. I will now hand back to Inaki.

Thanks, John. This slide sets out the drivers of shareholder value in our business and shows how we are tracking against the key metrics we have committed to grow. Across these metrics, progress was strong in fiscal year '25, and we are confident of delivering further progress in fiscal year '26 and beyond. Our stronger network and enhanced customer propositions are driving continued mobile service revenue growth. We expect that to translate to continued operational leverage and higher margins and return on capital as we execute cost discipline and capital efficiency. The outlook for cash flow and dividends is positive. My final slide covers out our formal guidance for the year. We expect EBITDA to be between $1.665 billion and $1.735 billion, which is growth of just under 4% on a pro forma basis at the midpoint of $1.7 billion. We are guiding for CapEx on an additions basis of $750 million, with significant CapEx reductions to come in fiscal year '27 and beyond. Thank you. We will now take questions.

Thanks, Inaki. [Operator Instructions] Joining Inaki and John for our questions today are members of the TPG leadership team. Our first question comes from Eric Choi from Barrenjoey.

I had a few questions. Do you want me to ask them all at once, Paul, or just one by one?

Yes, go run through them first, please.

All of them, okay. First one just on FY '27 capital management thinking. And obviously, there's been changes to spectrum and the CapEx outlook since we last spoke. So I just wanted to confirm if maybe $600 million of free cash flow a touch under FY '27 is still a fair estimate. And obviously, you just did under $400 million this year, and you're going to see EBITDA growth and CapEx reduction. So that feels fair. And so if you did the $600 million that would put you free cash flow yield. And then I'm just wondering how much of that free cash flow yield do you return to shareholders versus how much do you keep in case spectrum needs to be paid in lump sums. Are you sure you want the 2 and 3?

We'll go through that one first. That's actual detail.

Eric, why don't I take that one. Firstly, your first question regarding calendar year '27 free cash flow to equity. I'd like to start with how we look at '26 free cash flow to equity. And if you just take the numbers we've provided is -- and that does get you to broadly around $400 million. If you take the midpoint of EBITDA guidance at $1,700 million take off cash CapEx and same as '25, that's assumed for our working capital is neutral. And that's also to tax -- cash tax in '26 is similar to '25. Lease costs, of course, will be slightly up because you've got the full 12 months of the tote. And we've already commented on how borrowing costs come down. That gets you to around that $400 million to $430 million mark. If you then add to that, the reduction in our CapEx, which we've already noted we expect on additions basis to be $650 million in '27, plus you add whatever you assume on mobile services revenue growth at all. You can absolutely get to that sort of $600 million mark that I think you're sort of provocating. So that's the first question. On the second one, we've been really consistent over last year, driving the strengthening of our balance sheet position, including the significant reduction in bank debt. And as a result of that, and the growth in cash flows that I've just stepped through, we've stated unequivocally we expect to grow profits and cash flow. And with that, we expect to grow the dividend, and that still holds 100% and not in our strong balance sheet position. And as noted, we will go through the slides, we're absolutely comfortable and been able to absorb whatever spectrum outcomes will be finalized with the ACMA.

Got you. A quick follow-up and no jacket, by the way, John, in the prezzo. I want to comment on that. Number two, just on mobile subs. At an aggregate level, that actually accelerated this half versus last half. And when last time you guys gave an update you told us it would slow down. So I'm just wondering if you're seeing the same trend into early CY '26, especially on that MVNO result? Like we just want to confirm there's no one-offs in that MVNO acceleration, and it's literally all on better distribution and organic performance.

Thank you, Eric. I'll take that one. I mean to your question on MVNO, there hasn't been any one-offs. So they saw organic growth and like you pointed, it has to do with improvements on distribution, the weight of online, I think, is also playing well in this segment, and we see that ramps that are moving more and more activity to online and to perform better than the ones that are relying a bit more on physical channels. So I think that, that has helped the MVNO performance. And yes, I think that the performance overall on the on the second half was good, not just on MVNO, but also our digital first brands have continued to perform a strong and looking at the beginning of the year, we think that the trend continues.

Just the last one. Just on your mobile ARPUs. If you look at your digital first ARPU, it was up 11%. So my question is, do you have plans or drivers in the next 2 to 3 years to continue to lift that DFS ARPU faster than paid because if you combine that with that, that the lower cost to serve on DFS, do the economics of DFS and postpaid gradually become more similar?

Yes. I mean, that is the -- the idea is for two-folds. I mean, if you look a little bit into felix, which is one of the digital transplants that we have on last year, we didn't really do any kind of movement in pricing. However, we did have a significant increase on the ARPU and that is on the back of customers using the app incremental value plans. That is a model that works very well. That is a model like you say, it's very low cost. And we think that, that is the model that will continue to help improve the overall ARPU of the business. And on a year like '25, we did go for customer growth, and we did get customer growth, we still obtain significant ARPU gains across the brand. So I think that that's something that we'll continue to do. And definitely, when you look at the discount, the digital brands which have subscription brands and some of our competitors will report that under postpaid. So it's getting a bit more difficult to really do comparative analysis in the market. But this segment is a very interesting segment because it has huge growth. we still think that postpaid is the performance of postpaid when you look at when we report postpaid, which is the premium brand, Vodafone comparatively, again, has done really well on customers in ARPU. So I think that this model of being able to address the different segments to different solutions is really working very well for us.

Our next question comes from [ Lucy Huang ] at UBS.

I've got 3 questions so I might ask them one by one. Just to follow on from Eric's question on prepaid. Are you able to talk through churn trends in that part of the business because proven some good churn reduction of [indiscernible] deal, just wondering if you're seeing similar trends coming through on the prepaid part as well.

Thank you, Lucy. Look, the trends on churn are consistent across the brands also across prepaid and postpaid and also across consumer and enterprise customers. On prepaid, we have the benefit of the more and the improved network performance, not just coverage. And also, as we are moving more commercial activity into digital channels that also improve churn. Traditionally, the physical channels have been higher on churn. So we see prepaid churn also trending in a very favorable way.

Yes. Understood. And then just with postpaid mobile ARPU growth there was probably a slight dilution in relation to the price increase you've put through for any color whether there's been a little bit of trading down or whether there was a bit of a drag from enterprises coming through mobile postpaid ARPUs?

So it is it is true to say the mix shift between business and consumer dilutes the overall. That is true. But the -- so that practically means the consumer postpaid ARPU improved higher than the average that you saw on our slide today. So it's a mix shift overall from -- between segments dilute slightly. I hope that answers the question.

Yes. No that makes sense. And can I just confirm in terms of mobile growth pad sites, how about our enterprise, it feels like that's growing a bit relative to consumer?

Jonathan maybe -- do you want to take that one?

Yes. So I think it was a strong performance. I think 2 things I'd call out. One is clearly, you saw the benefits of [ MOCN ] on churn, and I think we put that number upfront, 12.5%. So it's really pleasing performance on churn. And I think that has been very strong, surprisingly strong across enterprise, government and small business. And I think we see the benefits continuing into 2026.

Wonderful. And just my last question on the spectrum, [ ACMA ] obviously put out the proposal in December. Have you guys come up with an estimate of how much have been to pay. I think we're thinking like $1 billion to $1.5 billion. Is that roughly the right number of about the kind of 3 to 5 period?

Yes. It is more than that, but significantly lower than what we've historically paid, but it's over a longer period of time.

Our next question comes from Entcho Raykovski from Evans & Partners.

My first question is just around the recent back book price increases in postpaid, which Inaki referenced. I wonder if you're able to quantify how much of a contribution you expect those back book price increases add to postpaid ARPU growth in FY '26?

Thanks for your question. This is probably a bit premature to say that also, I think that we've done on some cohorts of customers. So that does not include all our strategy for the a bit premature to say anything to that aspect.

Are you able to -- I suppose looking at the guidance, maybe to commission in a slightly different way, your EBITDA growth guidance. Can you talk to some of the broad assumptions which unto the mobile service revenue growth that you expect, particularly on subs and ARPU?

Yes. So no doubt, the EBITDA growth as it has been for the last few years, is supported by and relies on growth in mobile services revenue growth point 1, point 2. We maintain cost discipline as we've shown over the last couple of years, again, and we're very pleased with our outcomes on cost discipline and the combination of those 2 things largely drive to EBITDA sort of growth in client in the midpoint.

Okay. Great. Sounds like you don't really want to go into specific assumptions around subs at ARPU, et cetera?

No. I mean we've always said that and you've seen in the material of today, the customers have responded well to our multi-brand strategy and our expanded network. So that will continue and is our plan to continue. And of ours, you've seen as shown, the importance of ARPU growth, and that still remains.

Got it. Okay. And then my next question, just looking at the postpaid consumer and enterprise churn. I mean you've been very clear that's down net adds in postpaid were flattish over the year. I guess I'm just curious whether that reflects a smaller addressable market and what it means about the no ability to put through price increases in that segment given the growth is coming at the prepaid end of the market. I guess, do you still think there's pricing power within the postpaid market?

Maybe I ask James to answer that one. In general, I think that we see a market in postpaid that is it's been, again, classified as the premium brands. So when you look at Telstra, Optus and Vodafone will have performed well, but it is a market that has declined in the last year.

Thanks, Inaki. I think the thing for us is that we've improved our net adds year-on-year very significantly on the back of my year-on-year to 96,000 improvement in our postpaid performance. So we've seen a significant turnaround. And we have improved our ARPU at the same time. The biggest switching pool within the market is still within the Tier 1s and the brand postpaid businesses. So there's opportunity for us to continue to attack that market, but the primary market growth opportunity we see is in our digital subscription brands. So that's where we're focused on subscriber growth as Inaki and John talked about.

Maybe if I just add for business, I think, don't forget, there's 14 million people employed in the economy across part-time and full-time roles. Most of those are what you would consider postpaid opportunities, typically how a company provides a mobile service. I think a really strong opportunity to grow share in the business segment.

Okay. Great. And just a very final one for me. You've referenced a highly aggressive NBN market. I'm curious what sort of impact you've seen on the fixed market from the introduction of the Internet-only plants in November. I don't know if it's too early to comment on what you expect the impact going to be I mean, firstly, on the market and then secondly, on your operations?

Yes, it's James here again. We haven't seen a material impact from the Telstra changes. We see that the big drivers in that competitive market is in the players that sometimes sit outside traditional telco category in terms of energy and banking converged players but also the likes of Superloop and Aussie who are growing strongly in that space. So we haven't seen an impact from Telstra directly at this point.

Our next question comes from Bob Chen at JPMorgan.

A couple of questions for me. And maybe just focusing on that really strong ARPU print in digital first. Like can you talk through sort of the key levers you have to sustain that ARPU growth in that segment?

Thank you, Bob. Look, it is really delivered is to have a very simple pricing structure, plan structure. Also a very simple way for customers to choose between these alternatives. And the outcome that we are getting is that even though a lot of customers come to these brands on lower price points, ultimately through the app looking at the value that they are getting, they are on their own choosing higher tier plans, and that is really the key to that ARPU growth.

Okay. So more sort of mix there. Okay, that makes sense. And then just given there's a fair bit of noise around what handset volumes might look like this year given the increase in prices or shortages of DRAM. Like how does that play into or potentially impact your mobile business?

Look, I think that, that's an uncertainty in the market, and we're monitoring closely. You see how in '25, the overall handset market has gone, down and that probably has to do a bit on the different performance of premium brands or brands that are attached to handset. But ultimately, when you look at our premium brand, we still do most of our connections are without handset. So it is an area that may affect the market somehow but we don't think there is going to be a massive impact at this stage, even though we may see some sockets on some models during the year.

Okay. Great. And maybe just a final one on the broadband business. Like how should we think about the mix of that business going longer term? Like is it more about sort of defending NBN and really just growing that fixed wireless to grow gross margin and defend your share there?

The way we look at that business, I mean for us, that is a very good complementary business to our mobile business. We have invested significantly in the capabilities to really leverage on that opportunity to cross-sell and upsell inside our customer base. And also when we look at our different brands where we've been better in terms of the cross-selling have performed better than the others. And I think these are capabilities that during this year, we are introducing significantly. And then on the profitability side, I mean, we'll continue to look at the profitability of this business. Fixed wireless is a big part of this. And that's why we are now introducing further innovation with the 5G stand-alone capabilities, and that will enhance our overall footprint on fixed wireless. So our aim is to continue working on that. and then monitoring a bit of the trends on NBN play. But I think last year, we still were negative, even though we had a much better second half. So things are getting better on the MBS side. And as I said, with the new capabilities around convergency, we think that, that will continue to improve in '26.

Our next question is from Liam Robertson at Jarden.

Just first one on me, just around the Makin revenue payback. I think you've absorbed close to 50 -- or $60 million in the first year. I'm conscious in the accounts you're calling out more than offsetting revenue benefits in future years. Can you just tell us how you're thinking about the phasing of that benefit trajectory moving forward?

We're already offsetting it. It would be 0.1, and that's important to note. We just acknowledged in the earlier that the growth ex market in half 2 was greater than half 1. And that seems because you incur the cost ahead of the revenue benefits come in. So that would be point one. Point two, I'll point to, and I think we have discussed this on other calls more broadly. I think depending upon -- and most analysts have sort of said to breakeven, you got to get about 100,000 to 200,000 net incremental subs to break even. And breakeven is definitely not our aspiration. It's definitely higher than that. And you've seen this up growth in year 1, which was very strong.

Yes, makes sense. And then just secondly, on the FY '26 EBITDA range. I was trying to dig into some of the moving parts there? I mean $70 million range is probably wider than you historically guided to. Can you maybe just talk to some of the more discretionary components. I mean, for example, I think your advertising and promo spend was up $40 million in FY '25, a lot of that relating to the launch of MOCN. And so can you just talk to what's actually in your control? I mean, ultimately, it all is for just conscious, you're saying too early to talk to some of the ARPU and subtrends. So what are some of the key swing factors from the bottom end to the top end of the range?

Yes. So firstly, the range is lower than prior period. So it is a smaller range. Secondly, we would expect, as I said, mobile services revenue grade through ARPU and subs to do most of the heavy lift in. We continue to grow sub space, and that is highly profitable relative to -- or more profitable than NBN. So that would be another factor. Thirdly, you've seen our results that we grew handset revenue and slightly grew handset margin year-on-year. So not a big impact, but it's important that you drive handset value profitably. And then three, and I think you've seen this now in our track it. But I'm really pleased with the performance that we're delivering on operating costs. And we've been really clear on how we see the outlook for that and that trend continuing. And I think it's really the combination of those things at EBITDA I've already spoken about how bank borrowing costs reduced, et cetera, et cetera, that further supports NPAT.

I mean the other thing is that, traditionally, we've been at the midpoint of this guidance. And then, of course, we look for some risks. But at the same time, we also have visibility of some opportunities. So that's why the guidance has that range.

Our next question comes from Andrew Gillies at Macquarie.

Just digging into that OpEx performance, John, if I may. On the cost out of $100 million and kind of the prior commentary you've made around broadly flat sort of operating costs through '29. There's been a lot of news flow in the market on redundancies from AI. The commentary that, that kind of excludes that. would that present an upside to this number? Are there anything that you're looking at that may potentially present sort of further upside to that operating cost flat or even out?

Yes. We don't really think about AI like that. We see AI as complementary to our business. And a great example of that might be how we monitor our network at a greater scale that complements the humans, the people that every day run our network so well. So that's how we think about it. And that's sort of our approach to it. But more broadly on OpEx, why we sort of -- why have we given that full year outlook is one because we're well through our IT modernization and business simplification. We see benefits being driven by it. We are now a simpler business post the sale to Vocus. We continue to deliver normal productivity and I'm not referencing AI in that through our employee base. Can we do a really good job of how we approach third-party spend with our partners. And what I mean by that is how we commercially work through rate, manage demand, and also scope with third-party spend. And it's really the combination of all those factors that has delivered to date that strong performance in OpEx, and we'll continue to deliver in the outlook we've given.

Perfect. And then just one quick follow-up as well. On sort of triple 0 outages post that sort of event in the market, lower can prices among MVNOs are increasing. I appreciate you probably won't talk to wholesale agreements. But how is your competitive position sort of in the MVNO space at the moment?

Yes, maybe you take that, Jonathan.

Yes. The competitive position on MVNO in the comparison to wholesale. Probably the way we think of it is it accesses a portion of the market that we wouldn't reach directly through our own brands. Toto to consider: one, some of the brands we work with were already in market with competitive carriers. They're now on the Vodafone network, which is great for us. And then secondly, they typically access either different segments of the market or different distribution routes that wouldn't naturally be in our portfolio. So I think we view it as complementary and we view it as a clear growth opportunity.

Our next question comes from Nick Harris at Morgans.

I think like everyone, I'm just trying to unpack the mobile momentum. There's obviously a lot of capacity there, but it was a great result and obviously a stronger result in the second half than the first. So you got lower churn, coverage expansion, digital brands accelerating and obviously, some extra own goals from some of -- one of your competitors. So can you just help us unpack roughly where the bulk of the subscriber growth is coming from? Specifically, are you seeing metro market share expansion for customers staying in metro? Or are you seeing some really healthy expansion as a result of MOCN and those regional coverage gains, which was obviously what you're talking about? And I appreciate you've given us some of the cost of the tax alone. But just from your perspective, that would be helpful.

Thank you, Nick. Look, I think the -- so first, to talk about the effect on MOCN in terms of the market growth by region. This has been something that we've been following really closely. And what I can tell you is that the growth has been across metro and region. In Metro, our best performance have been Melbourne, [indiscernible] and Brisbane. That is also related to the fact that in the past, we probably had a lower market share than what having other metro area. So those have performed really well. And then when you look into more regional towns, and we've been following that also very closely busing growth across the board on every single one of them. There are some like Hobart or Sunshine Coast have been a bit outliers. But in general, what we see is the growth volume base has been greater in Metro in terms of percentage related to our existing customer base there has been much greater in regional, very good, good performance across the board.

Inaki, just to make sure I heard that correctly. You said greater volume growth in regional, but strong growth in metros as well, yes?

Yes. Well, in terms of customer numbers, there is 6 million people even in Melbourne. So if you get any incremental there is a lot of customers, but then percentage wise those more regional centers where our market share was sometimes single-digit or low teens is what we've seen percent a bigger increase.

Our next question comes from Roger Samuel with Jefferies.

I've got a couple of questions. Firstly, can I just double check on my calculation for your net financing costs going into FY '26. So if your bank interest is going down to 80, your lease expense or this cost is roughly the same. So $175 million and the handset receivables financing is about 95%. So I get to a total of $350 million. Is that roughly the right number?

Yes. So our reported as disclosed was, I think, $393 million and what we've said is bank interest go through about 160 to 180, this is on a reported basis, Roger, and lease interest will go up because you've got a full 12 months, and we see handset financing costs will come down simply because the size of the forward book will be lower than the back book sold 25. So that gets you some of those maps and I appreciate it's busy below the EBITDA line. gets you about an $80 million reduction on a reported basis. But on a pro forma basis, it's obviously higher than that. It's about $100 million. Does that make it -- is that helpful?

Yes. Yes. That's helpful. And then secondly, just on fixed broadband. It looks like the decline in NBN subscribers has moderated in the second half but you also sold some of -- yes, but you also saw the EGW business to focus as well. How much of that customer actually moved across to Vocus as part of that transaction?

Well, we saw a lot of customers moved but in the half, there was another 9,000 that moved. But obviously, the transaction completed with a whole bunch of customers moving much larger than 9,000. So when you look at the half 1 versus half 2, in half 2, it was a transfer of about 9,000. So you're right, we materially reduced and improved our performance. in half 2 on NBN than half 1.

Yes. okay. And just lastly, on your KPIs. You've got you've made good progress in there. I'm just wondering, but with the number of IT applications down to 485 versus 470 what's the reason behind that? And just wondering maybe with AI, you could accelerate the reduction in the number of IT applications going forward?

Yes. Thanks, Roger. This is Giovanni. So you can appreciate the fact that also our IT transformation had to pivot. So the plan that was initially designed was not considering the Vocus transaction. And suddenly, we had in 2025, devoted and definitely go for a huge separation. So in some way, now the number of systems is also counting some duplications because we had to close a few systems in order to separate the business. will be normalized across 2026. So I would say it's a small deviation from the plan. But in the long term, the plan is absolutely the same. I would not be worried about that.

Our final question comes from at the moment comes from Nick Basile from CLSA. [Operator Instructions]

I've just got a couple of questions. The first one on the mobile business, I think and Ark talked about the strong overall subscriber net adds. And you talked about, I guess, the improving postpaid churn. Just interested, I guess, in the context of the increase in marketing spend how you think about sort of the phasing of benefits or any updated thoughts on the phasing of benefits from network sharing and the outlook for churn over the next few years? And I'll ask my second question, I guess, later.

Thank you, Nick. Well, first, in terms of our marketing spend this year has been good in the sense of being able to have a good return on that expenditure. It was also an incremental expenditure that we did virtually maintaining a flat OpEx. So I think that, that's also part of our discipline. In terms of the churn improvements, we don't really associate churn improvements to marketing spend that has a lot more to do with the quality of the service and more specifically with the quality of the network. So for that reason, we are optimistic around our churn trends. and we are also optimistic around the quality of our marketing spend as well.

Okay. Yes, that's fair. And the second question, somewhat of a follow-up to Andrew's on AI. I just got kind of interested to take that from a different angle. Can you any ways you might be benefiting now or able to benefit on the revenue side or customer experience onboarding, et cetera. And specifically, I guess, given you've kind of called it out the digital strategy. Yes, just trying to sort of think about how AI might be of a benefit going forward versus what you've sort of done to date.

Thank you, Nick. Look, I think we'll probably discuss more around AI on a different location when we do an Investor Day. But I think that to give you a bit where we are we look at AI in 3 phases. One of them is around building capabilities, a lot of the system simplification and upgrades, also the investment with them on structuring our data model are basic pillars for ore. So that's something that has been a big part of our transformation program as well as building capabilities on the people in the company around AI. The things that we are working, like we said before, are twofold. One of them is around network automation, operations, but also the way to -- we are able to monitor in a much more individual way the performance of our network per customer is something that we are investing and working on. And this is something that we think AI will bring greater benefits. And the other part where we are also working is around improving our customer experience. and that goes, things that have to do with just a better way to handle the calls, better way to serve the customers, the way to assist our call center agents in the way that we do that to reduce the times that customers had to call us to be able to be better in the teen challenges on our service and being able to provide a better service. And that's also something that is work in progress. We are investing on that, and we are also quite optimistic around where that goes. And probably the part that you were mentioning, which is more around the revenues, I do think that the industry will play a significant role in enabling AI to our customers, and that's probably more of a third phase of our strategy.

We have a follow-up call from Entcho at Evans & Partners.

So just -- this will hopefully be a quick one, but it's on ROIC and how it can be driven over time by growing pricing or ARPU? I mean I'm conscious that pro forma ARPU was 5.4% in FY '25. Correct me if I'm wrong, but you should see an incremental 70 basis point increase into '26 from the handset refi restructure, which gets you to just over 6%. I suppose then the question is where do you see ROIC going longer term? I think John referenced some growth over time. And then within that growth, how important is ARPU growth in mobile for that ROIC improvement? Do you expect that will be the key plan? Or do you see -- are there elements like subs growth and perhaps cost reductions as being more important

Yes. So firstly, the way you described the impact of ROIC year-on-year from the handset receivable sale program is correct simply because you get the full annualized benefit in 206 in the denominator of ROIC, which I think is what you're referring to. So that -- I agree with that point. Look, I always name is a line between the numerator and the denominator of ROIC. The numerator is reliant on growth in service revenue, driven by both ARPU and subscribers. And I think we've been demonstrating that well over the last few years and our track record there. It also relies on the continued discipline and against our operating costs, which our track record, I think is very strong. It also relies on continuing to manage fixed profitability overall across all our fixed products. And then on the denominator of ROIC continue that capital efficiency. CapEx is coming down. We've made clear reference to that today in our outlook. So really those factors that drive our outlook in ROIC we are confident we'll continue to grow.

And you don't have a longer-term target you can share with us?

Look, I mean, we want to continue to grow ROIC above WACC. I mean that's definitely our base case as we think about it. I mean that's just good economic practice. And you can see the trend on that is very strong. And then, of course, we want to grow above that.

And we have another follow-up question from Liam at Jarden.

Just really quickly on mobile ARPU. I'm just conscious that the first half, you made a comment around pricing being aligned across front book and back book following the pricing refreshes. So we would have seen that flow through in the second half. Just conscious and John, to your comments on ARPU growth, am I right in thinking that, that will have to be predicated on front book price increases moving forward?

Yes. I'm not going to make any comment on future price plan refreshes. So I just -- we just won't do that.

If you can confirm that pricing across the front and back book are now more broadly aligned?

Well, we've been -- over the last couple of years, given our actions, that is true, absolutely true.

We have no more calls at the moment. So that will conclude the call for today. Thank you very much for joining. Speak to you soon.