Telstra hangs up on old technology
The aim is not to shrink the company to greatness - that never works - but to control costs at the group level by redirecting spending from low-growth businesses to high-growth ones.
The cuts were first flagged in May when Telstra's chief operations officer, Brendon Riley, told staff that the telco would reorganise operationally into five groups.
Three of them - IT Solutions, Networks and Customer Service Delivery - were new, and Riley said there would be common support functions for them, for national broadband network-related activity and Telstra's Network Applications and Services business, an end-to-end corporate communications offer that is one of its best growth prospects.
Telstra's two-sided task as it adapts to new market conditions is to make its fixed-line business more profitable as revenue declines, and also invest in new businesses to maintain revenue and earnings growth.
Jobs tied to the old assets go, and jobs tied to the new ones are created as this occurs. The cuts that Telstra has just announced will, for example, be partially offset by more than 500 new jobs, as it resources its new Defence communications contract, does work that dovetails with the NBN rollout, and expands businesses such as Network Applications and Services (NAS).
The jobs that are going are all local, however, and not all the jobs being created are. NAS, for example, is not only being expanded in Australia but in Asia, a much larger and, from Telstra's perspective, potentially more resource-hungry market.
The way Telstra reshapes itself is also being influenced by the fact that wholesale and retail investors see it mainly as a yield investment.
The telco has paid a steady 28¢ a share a year in regular dividends since 2005, with occasional special dividends thrown in. At its closing price of $4.93 on Wednesday, its shares were up 13 per cent this year, 27 per cent in two years and 64 per cent in three years, but were still yielding 5.7 per cent before dividend franking credits and 8.1 per cent after them.
The market expectation is that payments will rise in the next few years as income from Telstra's deal to co-operate with the rollout of the new national broadband network starts pouring in.
The NBN co-operation deal was given a net present value of $11 billion by Telstra in 2011 when it was struck. It has to be renegotiated now that the Coalition is in government and moving the NBN from a fibre-to-the-home skeleton to a fibre-to-the-node one.
But ahead of the election, Tony Abbott said Telstra and its shareholders would be kept whole, and Telstra chief executive David Thodey is taking that to mean that the NBN shake-up will be value-neutral, at least. It could actually be value-positive if Telstra takes on an elevated role as an NBN network construction contractor, and that is possible.
So Telstra's reputation as a yield play has survived the Coalition's arrival, and may even be enhanced: and as long as that is the case, its options for funding expansion are limited. Cutting the dividend to fund growth would totally alienate the investor base. Raising debt to do so would also be a volte-face. Cross-subsidising expansion with cuts elsewhere becomes almost a fait accompli, particularly when the areas being cut are in decline.
Telstra gave details of about half the 1100 jobs it aims to cut by June next year. Most will come from the replacement of four regional operations that install and maintain services around Australia with two national groups, one delivering and maintaining copper wire, fibre and cable services, and another delivering specialist and contract services.
The scalpel has to be wielded very carefully. Thodey has made better customer service his mantra. Riley will therefore actually create about 200 new customer-facing jobs around the nation, drawing down some of the cuts he creates in back-room areas, including scheduling, human resources, administration and finance, with his merger of the four big regional units.
There are also cuts in technician numbers in NSW, ACT, Victoria, Tasmania and Queensland. They are being described as an inevitable response to the retreat of the old copper network, as is the decision to end separate technical support for Telstra media services, including design and testing of systems and gear, and hand it to the support team that sits behind the fixed and mobile businesses.
Thodey is right to put service levels front and centre inside Telstra.
These cuts will fail and heads will roll if service levels drop because of them. But as long as the telco is a dividend fountain, cuts in one place to fund investment in another are going to be on the cards.
The Maiden family owns Telstra shares.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Telstra said the 1,100 job cuts are part of a shift away from lower‑growth, traditional areas such as fixed‑line telephony toward higher‑growth opportunities. The aim is to control costs at group level by redirecting spending from declining businesses to new growth prospects like Network Applications and Services (NAS) and work tied to the national broadband network (NBN).
Telstra expects the cuts to be partially offset by more than 500 new roles tied to a Defence communications contract, NBN‑related work and expansion of businesses such as NAS. However, the jobs being cut are largely local while some of the new NAS roles will be created in Asia as well as Australia. The company also plans about 200 new customer‑facing jobs domestically.
Telstra is reorganising operationally into five groups, with three new groups named IT Solutions, Networks and Customer Service Delivery. It will create common support functions for NBN activity and NAS, and replace four regional operations that install and maintain services with two national groups: one for delivering and maintaining copper, fibre and cable services, and another for specialist and contract services.
The company has signalled technician cuts in NSW, ACT, Victoria, Tasmania and Queensland, describing them as an inevitable response to the retreat of the old copper network. Telstra is also ending separate technical support for media services and folding that work into the support team behind the fixed and mobile businesses.
Telstra previously valued its NBN co‑operation agreement at a net present value of $11 billion (in 2011). The market expects NBN‑related payments to start boosting income and dividends in coming years, though the deal must be renegotiated after the policy shift from fibre‑to‑the‑home to fibre‑to‑the‑node. Telstra’s CEO sees the NBN shake‑up as likely value‑neutral and possibly value‑positive if Telstra takes a larger construction role.
According to the article, Telstra is widely viewed as a yield investment and has paid a steady 28c per share annually since 2005. Cutting the dividend would risk alienating its investor base, and raising large amounts of debt would also be a major change. As a result, funding expansion is more likely to come from cost savings and reallocating resources rather than cutting the regular dividend.
At the time of the article Telstra closed at $4.93. Shares were up 13% year‑to‑date, 27% over two years and 64% over three years. The company was yielding about 5.7% before dividend franking credits and about 8.1% after franking, based on the 28c annual ordinary dividend.
Investors should watch execution risks such as potential drops in customer service levels from the cuts—management warned that service declines would undermine the plan. Other risks include the outcome of NBN renegotiations, whether NBN income meets expectations, and how well Telstra balances preserving its dividend reputation while funding growth.
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