KGB Interview: David Thodey

Telstra chief executive David Thodey maps out the company's increasingly global trajectory and details the role its communications systems could play in transforming Australia's health system.

Telstra chief executive David Thodey tells Robert Gottliebsen and Stephen Bartholomeusz:

--- How Telstra's integrated vertical division will drive growth and service enterprise customers in Asia and internationally

--- Becoming a more global company will be the only way to lever returns to shareholders

--- The Australian business will see exponential growth in video conferencing and media consumption in the next five years

--- The Vertigan committee must clarify the government’s stance on NBN Co’s monopoly of wholesale fixed-line infrastructure

--- Improved communications systems can revolutionise Australian healthcare and costs

--- There are no divestment or acquisition plans in the short term

Stephen Bartholomeusz: David, thank you for joining us. This week marked five years at the helm for you as CEO of Telstra. When you took on that job after Sol Trujillo departed abruptly, what did you think the key challenges for Telstra would be, and how would you rate the way you’ve dealt with them?

David Thodey: When I took over there were a number of different challenges. Firstly, our relationship with the government wasn’t at an all-time high. Secondly, we were just being made aware about our failure in participating in the NBN rollout. I think our culture around focussing on customers was not as strong as it had been, and we had a cost base that was not sustainable based on where the business was at. Lastly, we probably needed to get more innovative products into the market. They were the five things that I can remember at the time that were really preoccupying me.

I do remember that moment at the press interview when someone said to me, “Mr Thodey, Mr Trujillo was an agent of change. What will you stand for?” And I said, “Well, I’m going to be an agent for the customer.” That’s really been a lot of my focus in terms of the business over the five years. 

So, how have I gone? Or how has the business gone, which I think is more the point? Look, I think that the report card shows we’ve made good progress, but there's still a long way to go. Customers -- we’re sorted. We’ve got a more even relationship with government. We got through the first round of negotiations with the government on NBN. We’ve got some more work to do there. 

I think we’ve continued to push product innovation with the wireless networks, IPTV and this Wi-Fi product we put into the market. I think that the culture change is one of those things that take a long time. Thankfully, there’s a culture in Telstra that’s very oriented to the customer, but we needed to make that more prevalent. 

We’ve done a lot in terms of getting our costs under control by simplifying the business and really changing the way we run the business, rather than just cutting. So, a fair report card, Stephen, but still a long way to go.

Robert Gottliebsen: David, I think I’ll be a bit tougher on you than that. 

DT: Okay.

RG: First of all, with those challenges that you set out there, I agree that you did fine on all those things. I would add a further challenge, which perhaps you didn’t think of: you had to convert that investment in mobiles into something really powerful in the market that Telstra made. You did that too -- and you did that brilliantly.  There’s no problem there at all. 

DT: Yes.

RG: I think history won’t judge you as well as you might have judged yourself.

DT: You’re a tough marker, Robert.

RG: You’ve turned this company into an income stock .This is a growth company that has a large number of growth opportunities in medical areas, in due applications for businesses, in media. You’re paying out all the profits in dividend, near enough. Let’s not get caught up in the detail, but basically all the profits and dividend and all the cash goes out. No, no, no -- wrong way, go back.

If you’re in a growth position, you should be selling your growth prospects to your shareholders. Wi-Fi was an interesting exercise. It was small. And you or your successor is saddled with this enormous problem of being an income stock because you have not sold the growth potential.

DT: Robert, I agree with you that the challenge of the company is to find new growth portfolios going forward. I’ll come back and talk to you about what we have set as the foundations for future growth because we have done a lot in that area. However, in terms of the priorities for the business when I inherited it, they were unfortunately against getting the core sorted out because there’s so much value in the core. So, it’s one of error and time.

I agree that now, with some greater certainty on cash flows and a very strong balance sheet, does Telstra need to look for future growth opportunities? Absolutely right. However, I’ve got to say that I don’t think that our shareholders and investors would have allowed us to do too much three years ago.

RG: Do you think they will in the future?

DT: I think we’ve earned the right to go and invest in new opportunities, but it will be a balanced portfolio approach. But let me talk about what we have done, which sometimes gets lost because it’s such a big company. 

If you look over the period of some of the key decisions we’ve made -- one was made nearly three years ago -- we made a decision that Asia was going to be very important. We must own all our infrastructure assets in Asia. We bought Reach back into the business, which is the old Overseas Telecommunications Commission. 

Since then, we’ve set up for the first time in Telstra’s history an integrated vertical division to serve enterprise customers right throughout Asia and internationally, and we’ve hired a completely different set of executives who have worked in Asia. Now we are trying to drive that business on a pan-Asian international basis. That’s been a significant change. That’s number one. 

Number two: we have also said that digital media is a very important part of our business going forward. Remember, we worked with Foxtel to buy Austar to make it the only pay-TV company in the business. We’ve also rolled out IPTV, which now has over 600,000 users in Australia and we think it’s a great opportunity going forward. We’ve done a number of other content deals. 

Thirdly, we’ve set up a new health business unit which is still only 13, 14-months old, but we think there’s enormous opportunity in health information solutions and we will continue to drive that going forward. Then we have also taken the assets that were in China. We sold one, which was online real estate. We had to get out of that one because of the contract. But we’ve done an IPO on Autohome, which is an online car sales site. We’ve invested a few hundred million dollars trading now at $3.5bn. We are now looking at leveraging that further. So, we have set some foundation blocks that I think will be very important for us going forward. 

Lastly, we started a new ventures group to look at new innovative technologies that will provide us with good growth opportunities going forward. These have been very deliberate strategies really over the last two and a half years. Now, have they seen the light of day? Are they mega transactions? No. No. But they are very important, so that’s why I agree with you. Telstra must find new growth opportunities going forward, as well as continuing to manage our core business as effectively as we can.

RG: But will you say to your shareholders, “Look, I have these growth opportunities. Instead of distributing all the profits, I want to distribute a lesser percentage than all of them.” We won’t get specific about the percentages.

DT: Robert, I think that Telstra is in a unique position because we both have two things. One is we have very strong cash flows and secondly, we have a very strong balance sheet, so we have two levers to pull. 

Now, in any transition we have a very broad shareholder base -- 1.4 million retail shareholders -- that probably means that we impact half to 60 per cent of all homes in Australia that rely on a strong dividend flow. 

I have to live with that reality and the board is very conscious of that. But we also know we’ve got to invest in the future -- that the world’s changing quickly, that our revenue stream is going to change by 2020 significantly -- so I can assure you that there is a lot of energy and work going on around all these growth sectors that just takes time. 

SB: David, as you’ve just detailed, you’ve been effectively planting some seeds for future growth across a number of areas. You’ve said in the past that you would like to see Telstra evolve into a global technology company. If what you were doing today were to be fully matured, what would Telstra look like if it were a global technology company?

DT: We’d still have a strong domestic business, which would be in connectivity, but more around the value creation opportunities around how we’d be playing in the health industry, playing in education, really enabling the use of technology in all those sectors.

That would mean that we’re far stronger in software because software is sort of the energy that enables people to do things differently. Hopefully those businesses would be both very strong in Australia and globally.

We will continue to invest in companies and mobile companies in Asia if the opportunities present themselves in terms of being an attractive investment, but we’re not going to just do it because they are there. We would be hopefully a global company with a strong base in Australia, strong in software across industry solutions, working around the world. That would be where we see it.

SB: But is this a five-year vision, a 10-year vision or a 20-year vision, David?

DT: It’s got to be significant within five years and continue to grow out over 10 and 20. Telstra has got to become a global company to be able to lever returns to our shareholders. The domestic market is not big enough for us and we’ve got to go where there will be greater growth. 

RG: What do you think the Australian business at the moment will it look like in five years’ time? How does it change? What sort of different services will people want? How will the industry be changing? What will we do differently in the homes? What’s your operating map in terms of what’s likely to happen?

DT: The only way you can do that, Robert, is you’ve got to go and look at how we’ll be using technology and in five years’ time. It’s very hard to predict because look at the incredible change that’s taken place around Google, Facebook, innovative companies like that. But one thing we are very sure about is that our ability to consume content and information will continue to grow exponentially. 

We’ll see greater use of video in the home, in the business. Video conferencing and consumption of media content will just continue to grow exponentially. The other critical thing is that the way we communicate will continue to evolve with new innovative ways to interact with information, the strength in terms of neurotechnology, the strength in terms of artificial intelligence. Technology will continue to disrupt industries and the way traditional services and traditional business models are being done today. 

If you go anywhere in the world in the technology space, be it financial services, be it insurance services, be it in health services or education, we need things to be simpler. We need to have better interfaces into technology so that it’s more intuitive, simpler and less complex. 

When you lay out that future and you think about your personal life, your home or a business or a government, there are enormous opportunities in which to apply technology to those opportunities and that’s what this company will look like. It’ll be about being a technology enabler, about creating value from deploying innovative connectivity and technology into these businesses and homes in individual situations that really change the way we live, work and learn. That’s what we’re about. 

The other critical thing that’s going to happen is that it will be a world that is connected. Think of the number of digital devices you have in your home: every one of those will be connected to the internet and it needs to be done in a simple and easy way. All our development and work in Australia in our research labs continues to be about how to create that.

I see a very rich future in terms of what that business opportunity is. To do that, the business will still be running infrastructure, but will be far more at the front end as technology enablers.

SB: David, in relation to that connectivity in this market as opposed to outside the country, going forward you’ll have the wireless business and you’ll have these legacy cash flows off the fixed-line business, but you won’t actually control the fixed network. Does that impact your ability to be innovative and creative in connecting customers?

DT: No, not at all. It’s a different type of innovation, Stephen, because it’s about applying technology. If you look at anyone in Silicon Valley, they don’t own the network and they’re very innovative. So that’s why we’ve got to re-equip and reorient ourselves to be an enabler of the use of technology and really driving into applications and software. That comes back to my original point, and the wonderful thing about software is the global industry -- you’re not bound by physical infrastructure. That’s why it’s so important we innovate. That’s why we’re building our digital media business. That’s why we’re building our health solutions business. That’s why we continue to invest in our emergency services network and all these new areas that we’ve been investing in over the last two to three years.

RG: One of the things you’ve been fortunate in is that both Optus and Vodafone, for their own separate situations, didn’t go ahead as they’d have hoped to have gone ahead. I get the impression that perhaps Vodafone’s going to have another go. Would you agree with that? And is there a possibility we might have a Qantas-Virgin exercise where you actually get challenged?

DT: I don’t always like defining our success in terms of other people’s failures.

RG: No, no -- but it’s part of it, that’s all.

DT: But it’s a combination of all. We’ve always been very clear about what we stand for. We’ve always said that we believe that networks make a difference. We’ve always invested in having some of the best wireless technology in the world. We were first in rolling out 3G, one of the first rolling out LTE. We’ve been the first to run an LTE network at 450 Mbps. So we’re going to continue to build for innovation and differentiate on customer service. Now, customers -- they had to make their own decisions about that. We need to remain competitive, and when I say competitive, as a fair value premium, and I think that for everyone in the industry we want a healthy industry. Will it be competitive? Yes. But I think it’s been a competitive industry for the last 10 years, as far as I know.

RG: Is Vodafone going to start to invest again?

DT: Yeah, and I think that’s good. I think that’s what I like about the market. But I just want to remind you that our network is 2.3 million square kilometres and I think the nearest network is probably less than half of it. So I think because we have invested in technology, because we have been willing to put our capital at risk -- our shareholders’ money at risk -- and we’ve got a good return, I think that has put us in a very strong position.

RG: Do you think you’re too far ahead?

DT: I’m saying that because we have made that calculated investment I think it has given us a strong position in the market.

SB: David, you’re deep into negotiations with the government and NBN Co about the new set of arrangements for the new NBN. The Vertigan committee hasn’t reported yet, but do you think it’s conceivable that you will actually be allowed to own fixed infrastructure? For instance, use the HFC for the full range of communications?

DT: I think it’s very important for the government to be very clear on this point: the fundamental assumption of the build of the NBN, that it would be the only wholesale network in Australia. That was the assumption. If they want to change that assumption, they must maintain a level playing field where anyone can go and invest in competing infrastructure. If that’s what they decide to do, I’m more than happy to play by those rules. Or, alternatively, if they decide not to, we’ll play by those rules. But we need clarity and that’s what I think the Vertigan review needs to do and I think therefore the government. But the assumption was very clear in the build of the NBN that it would be the only fixed-line infrastructure in Australia and it would be wholesale only.

SB: TPG is challenging that assumption.

DT: TPG is challenging that assumption, as we have in terms of we can put fibre to the basement anytime we like, and we have that going as well. However, it is a loophole and I think the government needs to move to be clear about what they want to do. I’m happy to live in either world, but it is very unclear at the moment.

RG: David, if I could take you to a different area, you mentioned health several times.

DT: Yes.

RG: You probably didn’t read the piece I wrote a day or so back showing that the Barwon model is capable of substantially reducing our health costs with little capital outlay. There could be other models too; I’m not wedded to any particular model. Do you believe there is an opportunity to substantially reduce health costs via better communication?

DT: Absolutely. There are just so many use cases, Robert, in terms of how better use of remote health management, healthcare in the home and better information flows can substantially reduce the number of consultations, the number of bed days in hospital, the way services deliver, the way prescriptions are both administered and prescribed -- the list is just enormous.

RG: What held it up, David? This has been around for a while. I’m not blaming you, but --

DT: I think there are a number of reasons. One is it’s a very complicated industry. You’re dealing with people’s livelihoods and therefore the appetite for change is low. It’s a very highly regulated industry. But it is absolutely ready to change and it must change and we can get better health service outcomes as well as for lower cost, and I think every country in the world is trying to work through this. I think that they are the impediments and it is just not an industry that changes quickly -- and rightly so because you’re dealing with people’s health and wellbeing.

RG: Have a look at the Barwon model when you get a chance -- it’s working.

DT: Okay, I will.

SB: David, with the CSL and Sensis deals and the restructure of some of your Chinese investments, you’ve got a big lump of cash coming and you’ve simplified the portfolio. Is there any more of that kind of rationalisation to come? And given that you also will be generating substantial free cash flows this year, when are you going to tell your shareholders what you’re going to do with that balance of capacity?

DT: Right. So in terms of letting shareholders know, as you know, Stephen, it’s the board’s decision, but I can assure you that our capital management plans are well discussed at every board meeting and we are very conscious of our retail shareholder base, but also for the need to grow. So it will be a balanced approach as we go forward, but that is a board decision.

SB: But is it likely that the shareholders will be given some insight before the end of this year?

DT: I think that we’ve got to see the year out and I think that that would be the appropriate time for when we next update the market. But in terms of what we’re going to do with the cash, as you rightly say, is there anything more to happen in terms of the portfolio management? Look, we continue to look at the portfolio all the time, both from divestment and investment, and trying to maximise the return for shareholders, sometimes better than others, Stephen. But I think that we’ve done some big transactions this year and I think that there isn’t anything on the short-term horizon, but we’ll continue to look at options that come our way.

SB: Last one, Bob?

RG: No, I’m right.

SB: Yeah, David, we’ve taken a lot of your time. We very much appreciate your making yourself available and I hope the next five years will be as good as the last.

DT: Thank you, Stephen. I look forward to having a fruitful and open relationship with you going forward.