Bold ambition is Telstra chief's calling card

It is apparent from the flurry of interviews David Thodey gave this week to mark five years behind the chief executive’s desk at Telstra that he sees the landmark as something of a punctuation point in the group’s history.

As he said in his KGB Interview, the last five years have been about dealing with the core issues he inherited: its relationship with government after the Trujillo years; its role in the NBN; its appalling customer service; its unsustainable cost base and the imperative of becoming more innovative.

While the change of government means Telstra’s agreements with the federal government and NBN Co are being renegotiated, most of the issues he identified have shown significant improvement over the five years. Telstra is, in financial terms at least, about to move onto a different plane.

Cash is starting to flow from its existing arrangements with NBN Co and the government. It is generating increasing cash flows even as its maintenance capital expenditures begin a long-term decline as its presence in fixed line is progressively transferred to NBN Co. It also has a big lump of cash coming from its sales of its CSL wireless business in Hong Kong and most of its interest in the Sensis directories business.

My colleague Robert Gottliebsen correctly identified the tensions that will now develop between Telstra’s shareholders’ desire to get their hands on that cash and Telstra’s own growth ambitions (or, in his terms: the choice between being an income stock or a growth stock).

Thodey is acutely aware that his shareholders expect him to return cash to them, either through increased dividends or capital management. However, he makes the point that given growing and high-quality free cash flows and its strong balance sheet, the company can both meet reasonable shareholder expectations and fund its growth aspirations.

Those aspirations are ambitious. If Telstra is to be something other than a conduit for channelling the massive annuity income streams it will receive from NBN Co over the next several decades, it is going to have to invest to develop new revenue streams. While its domestic franchises will remain its core for the foreseeable future, if it is pursuing growth that makes a material difference to its bottom line, that will have to come from outside Australia.

The obvious initial region of interest is Asia, where Telstra has one of the most extensive networks in the region, having bought out its partner in the Reach cable joint venture. It has a platform from which it can launch (and has launched) its managed networks and cloud-based services products. As Thodey said, he has re-stocked that business with executives with Asian experience.

The Thodey ambition, however, goes beyond Asia.

He talks about Telstra needing to evolve into a global technology company, with a far greater emphasis on software and enterprise solutions than infrastructure and with a particular focus on e-health and education.

He wants Telstra to be an “enabler” of technology and to create a big presence in applications and software.

The beauty of applications and software, of course, is that there aren’t the geographic constraints or the capital intensity of physical networks. This explains why Thodey sees the longer-term future as global rather than just regional, even though the realistic near-term growth aspirations are likely to be focused on Asia.

It isn’t going to take long to assess whether Telstra’s ambitions out-strip its capabilities. Thodey says the growth strategy has to have a significant impact within five years and talks about generating a third of the group’s earnings and revenues from outside Australia within that period. That is ambitious and to achieve that kind of growth may require some acquisitions, which might unsettle shareholders.

Thodey believes his shareholders wouldn’t have allowed him to chase growth over the past five years. However, with the legacy issues under control, he is optimistic that his board and management team have built sufficient credibility that shareholders will accept that Telstra has to invest and grow offshore to escape the confines of a relatively small domestic and leverage its returns to them. But they need to get the delicate balance between near-term shareholder returns and investment in future growth right.

It remains to be seen whether Telstra’s income-fixated shareholders will accept any significant diversion of cash and capital into Telstra’s offshore growth strategies. However, there is no question that for Telstra to be something other than a low-growth cash cow in a post-NBN future, it will have to become a very different company. It will have to be more nimble, entrepreneurial and innovative.

For the past five years, much of what Thodey and Telstra have grappled with has been defensive and introspective. Over the next five years, if Thodey can convince his shareholders to give him a mandate for growth, Telstra may be able to lift its gaze.