Cashed up Telstra fast-forwards to the future

David Thodey has just provided a directional answer to the question increasingly being posed about Telstra’s future. What’s it going to do with the cash?

Today’s announcement that Telstra will pay $US270 million to increase its stake in US video streaming and analytics company, Ooyala, to 98 per cent doesn’t comprehensively answer that question, but it does provide a live illustration of Thodey’s strategic thought.

Telstra had previously (over the past two years) invested $US61m for a 23 per cent stake in Ooyala, which has developed software that enables broadcasters, operators and media businesses to stream digital television and video content across multiple digital devices. Even for Telstra, a $350m-plus investment is a meaningful play.

Thodey has recently begun articulating his broad vision for Telstra, which is sitting on a big lump of cash from its sale of its CSL wireless business in Hong Kong and most of its interest in the troubled Sensis directories business.

It is also, of course, starting to receive what will be a flood of cash over the next several decades from its arrangements with NBN Co and the federal government. While the detail of those deals is currently being renegotiated to reflect Malcolm Turnbull’s multi-technology vision for the rollout, Telstra is guaranteed payments with a net present value of at least $11bn as the NBN displaces its copper network over the next 20 to 30 years.

While mindful of his shareholders’ appetite for increased dividends and capital management programs, Thodey has made it clear that he believes he needs to invest his burgeoning cash flows in future growth and is looking for opportunities that will make a material difference to Telstra’s bottom line in the future.

One plank of that strategy is to build on the extensive cable infrastructure and points of presence Telstra has throughout Asia with its Reach network, which provides a platform to offer managed network and cloud-based services. His chief financial officer and head of the Asia businesses, Andy Penn, has invested heavily in staffing the business ahead of the growth.

Telstra has also made it clear it is looking to export its wireless expertise into the region, probably via joint ventures but possibly including acquisitions.

The most ambitious leg of the strategy, however, is to transform Telstra into a global technology company with an emphasis on software and applications and enterprise solutions, leveraging expertise it has or will develop or acquire into global niche markets.

As Thodey said today, the acquisition is the first investment for Telstra’s Global Applications and Platforms group, which has a mandate to establish global growth vehicles in markets adjacent to Telstra’s core businesses "where software disrupts traditional business models".

Particular segments of interest are e-health and e-education, where Telstra has portfolios of investments in entrepreneurial ventures.

Telstra also has, however, considerable experience and assets in the digital media space and sees Ooyala as a delivery platform for the next generation of television and video that it can leverage globally. It described Ooyala today as one of the industry’s fastest-growing personalised video platform companies.

Ooyala already has a global presence – 135 million unique users in nearly 240 countries -- and Telstra believes it can bring its expertise, capital and business relationships next to the business to build it further.

Thodey’s ambition is to have new revenue and profit streams that are material in the context of Telstra’s results -- which, within five years, contribute about a third of its overall revenues and earnings.

It is improbable that Ooyala by itself will significantly move Telstra’s dials in the near term; it has forecast revenues of a modest $US65m for 2014. However, it is indicative of what Thodey is trying to do in the software and platforms space and of the way acquisitions could play a role in developing global niche presences.

The acquisition also illustrates a point Thodey made earlier this year as he marked five years as Telstra’s chief executive.

Those five years were dominated by his dealings with the federal government and NBN Co, with subsidiary themes a continuing attack on an over-blown cost base, a massive effort to improve its dreadful customer service levels and with cleansing Telstra portfolio of under-performing and non-strategic assets.

Having addressed most of those issues and achieved surprisingly strong improvements and results, Telstra is in a position to shift to a more aggressive and less introspective posture.

Indeed, given that whatever the detail of the new NBN agreement, Telstra still faces a future where its high-margin and strongly cash generative copper network is gradually de-commissioned. It faces the necessity of adopting a more aggressive and acquisitive stance if it isn’t to progressively shrink itself.

Thodey believes Telstra’s achievements and improvements over the past five years and the long-term cash flows that are now locked in will not only give him the ability to satisfy expectations for improved shareholder cash returns but a licence from those shareholders to invest in future growth.

If he’s right -- if he has that ability and that licence -- there will be a lot more acquisitions like the Ooyala deal over the next few years.