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Post #67 – The Bonus Year: Thin Earnings, Thick Optics

There’s a pattern that plays out with ASX-listed companies when governance cracks start appearing in the financials. The Board doesn’t see it – or doesn’t want to. Management keeps presenting the narrative. The numbers get dressed up. The bonuses get paid. And then one day, the music stops.

TPG Telecom’s FY25 was a roughly $7 million underlying earnings year. It was also a $250,000 discretionary CEO bonus year. The Board looked at both numbers and decided the second was justified by the first.

Qantas went through it. The years of “underlying” profit magic, the executive excess, the customer harm – all while the Board nodded along until public pressure made it impossible to continue. The parallels with what’s unfolding at TPG Telecom are hard to ignore.

The $7 Million Reality

TPG reported roughly $4.2 billion in revenue for FY25. Adjusting for the tax benefit embedded in statutory earnings, the underlying pre-tax earnings base was about $7 million – a margin of roughly 0.17%.

Return on invested capital was 5.42% – below any reasonable estimate of the company’s weighted average cost of capital.

On the most fundamental measure of whether a business creates or destroys value, TPG is destroying it. Every dollar of capital retained in the business earns less than the cost of keeping it there.

Against that earnings base, the Board approved the following executive remuneration:

  • CEO total remuneration: Fixed pay, short-term incentive, long-term incentive, and a $250,000 discretionary bonus for “outstanding leadership through such a transformative year”
  • Two additional executives received discretionary bonuses of $100,000 and $85,000 respectively
  • Total discretionary bonuses alone: $435,000 – over 6% of the company’s roughly $7 million underlying earnings base, paid as discretionary top-ups to three individuals.

The discretionary component is worth isolating because it reflects pure Board judgment. The STI has at least a formulaic structure tied to KPIs. The discretionary bonus is the Board looking at a year with roughly a $7 million underlying earnings base, two customer deaths, surging complaints, an ACMA investigation, and flat postpaid growth – and deciding that warrants an additional $435,000 in executive rewards beyond what the scorecard already delivered.

Total key management personnel remuneration – across all executives and directors – should be read against the company’s roughly ~$7 million underlying earnings base, after adjusting for the ~$45 million tax benefit embedded in statutory profit. If total KMP compensation exceeds the ~$7 million underlying earnings base (readers can verify this in the remuneration report), it means the company paid its leadership more than the business generated in underlying earnings.

That is a ratio that speaks for itself.

The CEO Equity Grant: December 2025

The Board approved an equity grant to the CEO in December 2025 – three months ago – while the ACMA investigation was active, TIO complaints were surging, the compliance uplift program was underway, and the whistleblower investigation (discussed below) had commenced.

The critical question for shareholders is what performance hurdles are attached to the vesting conditions. If the hurdles are based on EBITDA rather than ROIC or TSR, the grant is incentivising a metric that can improve while the business continues to destroy value.

EBITDA growth through cost-cutting on a sub-WACC return base is not value creation – it is a more efficiently managed value-destroying business.

The choice of vesting metric tells investors what the Board actually rewards.

Shareholders should examine the grant details in the remuneration report and ask:

at 5.42% ROIC, should equity be granted at all?

In a quality-focused governance framework, equity grants below cost of capital reward management for retaining capital that would generate better returns if returned to shareholders.

The Risk Gateway That Gates Nothing

The Board stated that all risk gateways were passed for FY25 STI purposes.

Consider what occurred during the gating period:

All risk gateways passed.

The question this raises is not whether the gateways were technically satisfied under whatever definitions the Board adopted. The question is what would actually trigger a gateway failure. If customer deaths during service failures, active regulatory investigations, surging complaints, and an external whistleblower investigation don’t constitute a risk gateway event – what does? What is the gateway actually there for?

At Qantas, the remuneration committee similarly maintained that performance hurdles were met even as customer experience deteriorated, staff were underpaid, and governance failures accumulated. The gateways existed on paper. They never operated in practice. They were theatre designed to create the appearance of accountability without its substance.

If TPG’s risk gateways can accommodate everything that occurred in FY25, they are not controls. They are decoration.

What Happened on the CEO’s Watch

This was the “transformative year” the Board chose to reward:

Two Triple Zero deaths. Two people could not connect to emergency services through TPG’s network. They died. The company has since disclosed a Triple Zero remediation program including compliance uplift, free handset replacements for affected customers, and ongoing monitoring – costs that are real but have not been separately quantified in the accounts. In any other context, customer deaths during a service failure would prompt serious questions about executive accountability.

At TPG, it prompted a bonus.

Vodafone complaints surged. TIO complaints for the Vodafone brand rose approximately 15% year-on-year and 24% quarter-on-quarter – while complaints at Telstra and Optus trended in the opposite direction. TPG wasn’t caught in an industry-wide cycle. It was underperforming its peers on the most basic measure of customer experience.

An ACMA investigation was disclosed. Buried in the FY25 results was the revelation of an active ACMA investigation – a regulatory matter serious enough to warrant disclosure but apparently not serious enough to affect bonus calculations.

Zero Vodafone postpaid growth. The entire MOCN investment thesis – sharing Optus infrastructure to expand coverage and win premium customers – delivered precisely zero net postpaid additions. 2,846k at FY24. 2,846k at FY25. The most expensive strategic bet in TPG’s recent history produced nothing on the metric that matters most.

MOCN economics underwater. Covered in detail below.

Broker EPS downgrades. Following the results, Macquarie cut FY26-29 EPS estimates by 73%, 62%, 58%, and 55% respectively. Morgan Stanley sits at Underweight with a $3.50 target. UBS forecasts negative free cash flow in FY27.

The professional analyst community’s response to the “transformative year” was to slash their earnings forecasts.

The Board’s response to all of this? Add TIO complaints to the executive scorecard – for FY26. The complaints metric was bolted on after the bonuses were already paid for the year in which complaints surged. Accountability, but only prospectively. Never retrospectively.

The MOCN: A Cost Creation Dressed as a Cost Saving

The MOCN arrangement with Optus commits TPG to approximately $1.57 billion over 11 years – roughly $143 million annually once fully ramped. Management’s framing is that this represents around one-third of the cost of building and maintaining a regional network independently.

That framing only holds if TPG was actually going to build the network. It wasn’t.

After the original Telstra MOCN was rejected by the ACCC, TPG provisioned approximately $50 million for upgrading roughly 250 sites in what was known as the regional coverage zone. Some sites appear to have been upgraded in anticipation of boundary gaps between their native network and the eventual MOCN zone. But the full cost of an independent regional build was never provisioned, never budgeted, and never contained within ordinary CAPEX guidance.

The MOCN didn’t replace a committed investment program – it created an entirely new fixed cost obligation that didn’t previously exist.

And unlike CAPEX, which can be flexed with demand, the MOCN is a long-dated fixed commitment that does not adjust with subscriber volumes. Whether TPG adds 200,000 postpaid customers or zero, the annualised cost is the same. That is a fundamentally different risk profile from discretionary capital investment.

What the first twelve months have delivered:

  • Postpaid net adds: Zero. 2,846k at both year ends.
  • Consumer postpaid churn improvement: 0.7 percentage points
  • Enterprise mobile churn improvement: 1.9 percentage points
  • Estimated retained revenue from churn: ~$17-19 million annually
  • Mobile gross margin uplift (ex-MOCN costs): $34 million – accounting for the loss of ~15,000 postpaid customers in 2H25 (for a flat overall FY25), trade-down effects from premium to digital-first, partially offset by growth in digital-first and traditional prepaid subscribers. This is estimated to be predominantly metro driven, not within the MOCN.

On the most bullish interpretation – attributing all churn improvement and all gross margin uplift to the MOCN – the total identifiable benefit is approximately $50 million.

Against that:

  • MOCN access costs (ramping toward $143m): ~$82 million in the initial period, escalating as Optus’s 5G rollout increases the cost base
  • MOCN launch marketing: ~$40 million in FY25
  • Total first-year cost: ~$122 million minimum

The gap: at least ~$72 million in the first year on a standalone basis, and that is being generous.

The MOCN is not paying for itself. It is not close to paying for itself.

And the outlook is not improving. The churn improvement is an early-term benefit – the customers who were going to leave because of poor regional coverage have now been retained, but that pool is finite and the incremental value diminishes with each passing quarter as the easy wins are captured. Meanwhile, the fixed cost obligation continues escalating.

If the current trends on postpaid stagnation and trade-down continue, the MOCN payback period blows out materially – unless premium postpaid adds arrive at a scale that twelve months of evidence suggests is not forthcoming.

There is also the question of what ongoing spend is required to sustain even the current level of demand. Marketing costs, promotional pricing, margin compression from competitive offers, and trade-down from postpaid to digital-first all represent recurring drags that sit on top of the fixed MOCN commitment. None of these are one-offs.

The accounting treatment deserves scrutiny too. There is flexibility in how MOCN-related costs are classified – what gets capitalised versus expensed, how access fees are phased against network utilisation, and how marketing costs are allocated between MOCN-specific and general brand spend. Shareholders should track whether the classification choices shift between reporting periods, and whether any changes in treatment coincidentally improve the metrics management is measured against.

Management describes the MOCN as “transformational.” The cash flow statement suggests it is an escalating fixed cost obligation that has not yet produced the subscriber economics required to justify it, attached to a business with an underlying earnings base of roughly $7 million and facing a $2 billion spectrum bill.

The Spectrum Wall Meets the Tax Cliff

As detailed in Post #66, UBS estimates TPG’s spectrum renewal costs at approximately $2 billion for FY27-30 and is forecasting negative free cash flow in FY27 as a direct result.

Even if ACMA grants payment phasing – allowing operators to spread costs over the licence term rather than in upfront lump sums – the annual cash outflow remains significant. On a 10-year phasing arrangement, TPG would face $200 million annually in spectrum payments alone. On a less favourable 4-year phasing aligned with the FY27-30 window, payments of $500-670 million per year would overwhelm operating cash flow entirely.

The timing creates a compounding problem. TPG currently pays minimal cash tax, shielded by accumulated tax losses from the VHA merger era. Those losses are finite and depleting. When they run out – likely around FY28-FY29 – TPG transitions from a non-taxpaying entity to a full 30% corporate taxpayer. On $300 million of hypothetical future pre-tax profit, that would introduce a $90 million annual cash tax bill that does not currently exist.

The spectrum wall and the tax cliff arrive in the same window. A business that currently generates $396 million in normalised free cash flow faces the simultaneous emergence of $200-670 million in annual spectrum payments and $90 million in new cash tax obligations. The maths requires either substantial EBITDA growth, further CAPEX cuts (which risk network quality precisely when competitors are investing heavily), or re-leveraging the balance sheet that was just de-leveraged using Vocus proceeds.

For a Board awarding discretionary bonuses on a $7 million earnings base while these obligations approach, the question of capital allocation prudence is not abstract. It is immediate.

The Provisions: Following the Money

Here’s where it gets interesting for anyone who remembers how the Qantas accounting story unfolded.

TPG’s “other provisions” moved from approximately $2 million to $115 million during FY25, with $118 million adjusted during the year. The accounting mechanics matter: if $118 million was created and the closing balance is $115 million, approximately $3 million was actually utilised during the year. That means roughly $112 million in future cash outflows are sitting on the balance sheet, expensed but not yet paid.

The company attributes this broadly to Vocus separation obligations. At 2.5% of a $4.7 billion deal value, the quantum is within a normal range for a complex carve-out involving IT system cloning, transitional service agreements, and infrastructure unwinding. That’s plausible.

But it’s a single line item with no detailed breakdown. There is no schedule of expected utilisation timing. There is no sub-categorisation by type. External analysts cannot independently verify whether $115 million attributed to “Vocus separation” includes any component related to compliance remediation, Triple Zero response costs (including the free handset program and monitoring), regulatory response costs, investigation expenses, or other matters that accumulated during FY25.

Separately, other provisions of approximately $47 million sit on the balance sheet. If this is additional to the $115 million, total provisions of $162 million sit against an underlying earnings base of roughly $7 million – a ratio of 23 times earnings. Even if the $47 million is a sub-component of the $115 million, the overall provisions position dwarfs the underlying earnings capacity of the business.

The contingent liabilities note states that no matters are expected to have a material effect on financial position. This is despite:

The Board and auditor have assessed all of these as immaterial. Against an underlying earnings base of roughly $7 million, the threshold for materiality is extraordinarily low. A $700,000 provision – roughly 10% of that earnings base – would be material by any reasonable definition. The question is not whether these matters will generate costs. It is whether those costs have been adequately reflected in the accounts.

When a $115 million provision is described only “broadly”, shareholders are entitled to ask what sits inside that number, when the cash outflows are expected, and how those judgments interact with the contingent liabilities disclosure elsewhere in the accounts.

Quantifying the Costs That Are Building

The investigation and compliance costs accumulating across FY25 and into 1H26 can be estimated within reasonable ranges.

Whistleblower investigation: A Band 1 partner at a top-tier Sydney firm bills at approximately ~$800-$1,200+ per hour. A near four-month investigation involving witness interviews, document review, and formal reporting could plausibly generate several hundred thousand dollars in professional fees. Add TPG’s own external legal advisory costs for managing the process – lawyers advising the company on its response – and the combined cost is likely in the range of $500,000-$1.5 million.

ACMA investigation response: Responding to a formal ACMA investigation requires dedicated internal resources, external legal counsel, technical evidence gathering, and formal submissions. Industry benchmarks for regulatory investigation responses of this nature often run into hundreds of thousands to low millions depending on scope.

Triple Zero remediation program: The free handset replacement program, compliance monitoring, system upgrades, and ongoing customer communication carry direct costs. Handset programs alone – depending on the number of affected customers, devices supplied, handling costs, and staff labour – could run $1-3 million. Add process redesign, testing, and monitoring and the total remediation package is likely $2-5 million, depending on take up of handsets and the scale of affected customers.

TIO complaint handling: With Vodafone complaints up 15% year-on-year, along with TPG Group and iiNet complaints also up QoQ, the incremental TIO fee exposure alone is estimated at $76,000 – $150,000 annually above baseline, as modelled in Post #64. The fully loaded internal cost of handling these complaints – staff time, systems, escalation processes, and remediation – is likely a multiple of the fee component, though difficult to quantify precisely from outside the business.

Compliance uplift program: The multi-year program disclosed in the annual report involves process redesign, system changes, training, and ongoing monitoring. Programs of this nature typically cost $2-5 million in the first year of implementation, with some estimates running up to $10 million across the program.

Combined estimated range: $5.5-$14.5 million in investigation, legal, regulatory, remediation, and compliance costs across FY25-1H26.

Against an underlying earnings base of roughly $7 million, the midpoint of that range – approximately $10 million – would exceed the entire earnings base. The upper end would represent more than double the company’s underlying earnings. Even the lower end consumes nearly 80% of earnings.

These are not abstract numbers. Every item on this list corresponds to a matter that TPG has either disclosed or that has been independently reported. The costs are real. The question is where and when they appear in the accounts – and whether the current presentation adequately reflects their impact on a business that earns almost nothing.

The Dividend Connection

The Board approved $335 million in dividends during a year when the underlying earnings base was roughly $7 million. It also approved $435,000 in discretionary bonuses. Both decisions were within the Board’s discretion. Both signal confidence in the underlying business.

The dividend is funded from the cash flow surplus created by depreciation exceeding capital expenditure – not from earnings.

This is mechanically sustainable as long as the asset base doesn’t need replacing at the rate it’s being depreciated. But it creates an optics problem:

a company that can’t cover its dividend from profit, can’t cover its bonuses from profit, faces a $2 billion spectrum bill, an approaching tax cliff, an escalating MOCN commitment running at a $72 million annual loss, and is absorbing millions in investigation and compliance costs is simultaneously telling the market that everything is under control.

If any of these cost items – investigation expenses, regulatory penalties, compliance remediation, Triple Zero response costs – ultimately prove material enough to require restatement or reclassification, both the dividend and bonus decisions come into question simultaneously. The Board’s judgment on one is inseparable from its judgment on the other.

The Odour of Transformation

Let’s just inventory what the Board of TPG Telecom looked at in FY25 and concluded warranted discretionary bonuses.

Underlying earnings: roughly $7 million – or about what a mid-tier Sydney law firm might bill in a quiet fortnight. Two customers dead from Triple Zero failures. An ACMA investigation active and disclosed. TIO complaints for Vodafone surging 15% year-on-year while both major competitors trended down. A $1.57 billion MOCN commitment that lost at least $72 million in its first year of operation. Zero – not disappointing, not below expectations, zero – net postpaid additions on the premium brand. And a whistleblower investigation running with a Band 1 external investigator that has not, to date, been the subject of a standalone market announcement.

Risk gateways? All passed. Bonuses? Approved in full, with a $250,000 cherry on top for the CEO and smaller parcels for two executives. Equity grant? Signed off in December while the investigations were live.

What, precisely, would a bad year look like?

This is not a company that has lost its way. Companies that lose their way tend to notice eventually. This is a company whose Board has constructed an incentive framework so accommodating that it cannot distinguish between a year of genuine achievement and a year in which people died using its network, regulators commenced investigations, the premium brand flatlined, and the single largest strategic investment operated at a $72 million annual loss – because both years produce the same outcome: bonuses get paid.

At Qantas, Joe Aston spent years documenting exactly this dynamic. The exclusions started small. The “underlying” adjustments grew. The Board kept nodding. The CEO kept collecting. The customers kept suffering. And the gap between the presented narrative and the lived reality widened until it became a national scandal.

TPG isn’t Qantas. In one specific sense, the risk profile is more acute.

Qantas could survive years of governance theatre because the underlying business generated billions in cash flow. TPG generates roughly $7 million in underlying earnings. The margin for error isn’t thin. It doesn’t exist. When the combined costs of a single whistleblower investigation, an ACMA inquiry, a Triple Zero remediation program, a compliance uplift, and surging TIO complaint volumes can collectively exceed your entire annual earnings base – every governance decision carries outsized consequences.

Audit literature recognises situations where management narratives drift away from operating reality – where a sustained gap emerges between what is presented and what is occurring. It does not require fraud. It does not require intent. It requires only that the gap persist long enough for the accounts to begin reflecting the narrative rather than the underlying business.

The key ratios that should concern shareholders:

  • Discretionary bonuses ($435k) as % of underlying earnings (~$7m): 6.2%
  • Provisions ($115m) as multiple of the ~$7m underlying earnings base: 16.4x
  • Estimated investigation/compliance/remediation costs ($5.5–14.5m) as % of the ~$7m underlying earnings base: 79–207%
  • Estimated MOCN first-year net cost (~$72m gap) as multiple of the ~$7m underlying earnings base: 10.3x
  • Dividend ($335m) as % of statutory NPAT ($52m): 644%
  • Spectrum obligation (~$2bn) as multiple of the ~$7m underlying earnings base: 285x
  • CEO equity grant approved while ROIC (5.42%) sits below estimated cost of capital

In other words:

On an estimated roughly $7 million underlying earnings base, the board awarded $435,000 in discretionary bonuses – roughly one dollar in every sixteen dollars the business earned. The discretionary bonus pool alone equates to about three weeks of the company’s entire annual profit.

The 1H26 accounts will be instructive. Watch the provisions line. Watch the contingent liabilities note. Watch whether the costs that have been building in the background finally surface in the reported numbers. Watch whether the MOCN classification choices shift. And watch whether the spectrum and tax cliff appear in the forward guidance or remain conspicuously absent.

And ask yourself: if TPG had reported these costs transparently in FY25, would the Board still have approved those bonuses?

I suspect we all know the answer.

📩 Right of Reply:

TPG Telecom Limited and any executives or representatives referenced in this article are invited to provide clarification, correction, or additional context. Verified responses will be published in full and in context.

⚖️ Disclaimer:

This article represents independent commentary and analysis based on publicly available financial statements, regulatory data, and disclosed information. All views expressed are opinions, not statements of proven fact. Cost estimates for investigation, compliance, and remediation matters are analytical approximations based on industry benchmarks and publicly known facts – they are not assertions about actual expenditure. MOCN economic analysis is based on disclosed financial data and reasonable assumptions as noted; actual internal economics may differ from external estimates depending on management’s accounting treatment, including classification choices between capitalisation and expensing, cost allocation methodology, and the timing of recognition. References to the whistleblower investigation are based on matters known to the author and are presented as opinion and commentary unless independently verified in public disclosures under the Corporations Act 2001.

This does not constitute legal, financial, or investment advice. Readers should seek independent professional advice before making any decisions. All entities and individuals referenced retain the presumption of lawful conduct unless determined otherwise by a competent authority.

Nothing in this article alleges or implies that TPG Telecom paid bonuses in connection with, or as a consequence of, customer deaths, or that the deaths were caused by the conduct of the CEO, management, or the Board. The juxtaposition of remuneration decisions and operational outcomes reflects publicly disclosed facts presented for governance analysis purposes.

The author has an active dispute with TPG Telecom and has made protected disclosures under the Corporations Act 2001. The author holds a very immaterial shareholding in TPG Telecom Limited (ASX: TPG). These matters should be considered when evaluating the analysis presented.

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