No Growth In New Telstra

By Glenn Dyer | More Articles by Glenn Dyer

Telstra shares fell heavily yesterday as the company revealed its latest ideas for revamping itself.

The telco’s shares closed at $2.77, down about 4.8% after falling nearly 8% to $2.695 in early trading – a new seven year low in reaction to the investor day briefing statement that was issued before the market opened.

The biggest news was the cutting of 8,000 jobs (around 25% of its staff) and changes to the business structure ahead of what looks lie a structural separation over the next 18 months.

Telstra said the cost of the sackings and other changes could be around $600 million and will be taken in the June 30, annual 2018 results.

For the year ending June 30, the 22 cents a share dividend is safe but not for 2018-19 with Telstra saying the payout level will depend on profits and will be revisited by the board.

Telstra CEO Andy Penn revealed a new strategy called Telstra 2022, saying it was aimed at boosting its cost cutting target from $1 billion to $2.5 billion over the next four years.

Between two and four layers of middle management layers would be eliminated, it said.

Telstra said it intends to monetise assets of up to $2 billion over the next two years to strengthen the balance sheet. Will 35% of Foxtel/Fox Sports be in that for sale basket?

Telstra also said it would set up a new infrastructure unit, dubbed InfraCo, to house its network assets, data centres international subsea cables, exchanges, poles, ducts and pipes.

InfraCo will have a book value of about $11 billion with annual revenue and earnings before interest, tax, depreciation and amortisation of $5.5 billion and $3 billion respectively. It will have a workforce of about 3000.

Telstra hinted that the unit could be sold once the NBN rollout is finished.

Mr Penn declined to identify which businesses could be sold as part of plans to raise $2 billion, citing competition issues, at the group’s strategy presentation in Sydney.

“InfraCo will provide significant optionality for Telstra in the future for a potential demerger or the entry of a strategic investor once the nbn rollout concludes,” it said in the release yesterday to the sharemarket.

“The rate and pace of change in our industry is increasingly driven by technological innovation and competition. In this environment traditional companies that do not respond are most at risk," Mr Penn said in a statement to the ASX.

"We have worked hard preparing Telstra for this market dynamic while ensuring we did not act precipitously. However, we are now at a tipping point where we must act more boldly if we are to continue to be the nation’s leading telecommunications company.”

"We understand the impact this will have on our employees and once we make decisions on specific changes, we are committed to talking to impacted staff first and ensuring we support them through this period," Mr Penn said.

But there’s more. The company said it would simplify and reduce the number of plans for consumers and business from around 1,800 to just 20 and data caps would be abolished.

The company said moves such as this could cost up to $500 million of revenue forgone, but it sees this and other measures creating a competitive advantage.

Telstra will slash the number of plans it offers to consumers and small businesses from the current 1,800 plans to a core of 20, in order to simplify its offering and work towards cutting customer-service calls by two-thirds by 2022.

Telstra is also looking to create 1,500 new roles to support software engineering and cyber security.

In addition to InfraCo, Telstra will create another group, Global Business Services, to deal with big scale “back of house” processes and functions using technology to cut costs. Telstra reconfirmed its 2017-18 guidance:

"Against that background, we announced in May that FY18 earnings will be at or around the bottom end of guidance. We expect the trends to continue in to FY19. In our guidance for FY19 we have assumed the market will decline 2 to 3 per cent in mobile and fixed revenue."

And it also provided its 2018-19 guidance. The company is expecting income of between $26.6 billion and $28.5 billion, its EBITDA to be between $8.7 billion and $9.4 billion and its capex to be between $3.8 billion and $4.4 billion.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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