Telstra's iron man connects with growth

After turning copper to gold, David Thodey has set his sights on new areas such as customer service, writes Malcolm Maiden.

After turning copper to gold, David Thodey has set his sights on new areas such as customer service, writes Malcolm Maiden.

Pressed to comment about how a Coalition government's scaled-back national broadband network rollout might affect Telstra, the famously contained David Thodey eventually leans forward in his chair and shows just a hint of impatience.

"Look, the technology isn't relevant to me," Telstra's chief executive says. "I think you have got to understand that in this NBN process, Telstra and its shareholders have agreed to be structurally separated and to be compensated for that. We have moved on, and our focus is on different areas. We do not want to go back and revisit the past ... whatever technology the government decides to deploy is really their business." One focus area is growth that will replace Telstra's copper wire network as it winds down. The group is stepping up expansion in Asia, for example, and in the domestic market it agreed this week to pay the government $1.3 billion, which will underwrite the expansion of its new 4G mobile network.

Another is what Thodey says has been his key mission since he took over as chief executive in May 2009: turning Telstra into a much more heavily customer-focused organisation. His direct reports say he is relentless about it. Thodey himself likens the task to an Ironman race, saying he is only halfway through the initial swim leg.

Quizzed about a potential change of government, he says his starting point is to believe the Coalition when it says shareholders will be "kept whole - I am very pleased to see that they have said they will look after our shareholders, should there be a change of government, and should they decide to change it [the national broadband network]." The term "kept whole" was coined by Opposition Leader Tony Abbott when he stood beside Malcolm Turnbull last month to announce that a Coalition government would replace Labor's fibre-to-the-home network with one that that was slower but not fatally so, capable of being upgraded on a "user pays" basis, and cheaper and easier to build because 71 per cent of the network would halt at neighbourhood junction boxes, or nodes.

Asked what he thinks "kept whole" means, Thodey says he hasn't inquired directly, "but I would say it's apples to apples".

Apples for apples in terms of the $11 billion net present value that Telstra places on its existing deal? "Without going into the specifics, our shareholders signed off on a proposal with the government of the day about whether to proceed with this transaction, and that's what I would expect any future deal to cover off."

Under Telstra's deal with NBN Co and the Labor government, it will be paid for giving the network access to the ducts, pipes and other copper infrastructure. It values that at $5 billion, and has a contract stipulating that payments run for 35 years, wherever the infrastructure is used.

It separately values payments for the progressive disconnection of its copper network, as NBN fibre overruns it, at $4 billion. Payments are influenced by the pace and scope of the fibre rollout, but Telstra retains ownership of its copper wire, and will be able to continue to operate it and sell wholesale access wherever it is not disconnected. Thodey's declaration that the ultimate shape of the NBN is irrelevant draws heavily on those contracts, and the inescapable conclusion is that Telstra will test their legal strength if negotiations with the Coalition undermine them.

It should not come to that, however: Telstra will negotiate, and independent advisory group Grant Samuel's conclusion - after it looked at the contracts in 2011 before the shareholder vote to approve the deal - was that early termination or cutting back on the NBN might actually be to Telstra's financial advantage.

It took the market a while to work out what Thodey had achieved with the NBN negotiations. He took over from Sol Trujillo in May 2009, immediately began searching for a deal with the government that Telstra could live with, and in June 2011 announced the $11 billion definitive agreement.

The group's shares were trading at $3.23 when he took over, down from a high of $8.72 in November 1999. They hit a record low of $2.56 in November 2010, and were at $2.96 six months later when the NBN deal was confirmed. The shares got to $2.81 in August before sentiment turned, and are now 80 per cent higher. The S&P/ASX 200 index has risen by 30 per cent over the same time.

Telstra's recovery caught some fund managers out. One who has seen his returns hurt by underweight exposure to the telco says Thodey has calmed Telstra's internal and external environment, but also benefited from Vodafone's near-implosion in this market and an early march into 4G services that mask slowing revenue momentum and tighter margins for mobiles in all developed countries. The group's long-term challenge is to grow in the face of the structural headwinds, he says.

Telstra and the banks are the big beneficiaries of investor hunger for yield as fixed interest yields decline, and the sense of calm that Thodey has brought to Telstra has created a positive loop.

The group guaranteed a 28¢ a share dividend in 2011-12 and 2012-13 while it negotiated its NBN deal, and probably needed to, given how important the negotiations were to its future.

Its shares have risen 24 per cent since October last year when chairman Catherine Livingstone said the dividend commitment would not be extended beyond the current year to June 30, however, because the NBN deal anchored its guidance for low single-digit revenue and gross profit growth this financial year, and opened the way for future dividend increases.

Thodey is quick to dismiss speculation about major acquisitions that could change the growth trajectory. Capital management is a board matter, he says, but the company has predicted that cash receipts will rise over the next four or five years as the NBN deal kicks in, and is "very attuned" to the fact that Telstra has a very large retail shareholder base. "I am sure they will take that into consideration in any capital management decisions," he says, adding that while Telstra will invest in growth in Australia and Asia, "let me assure you we will be as boring and predictable as we possibly can ... we are not about to surprise ourselves, or anybody else."

Some Australian companies are pursuing expansion strategies in Asia that rely on serving Australian customers moving into the region and Asian customers moving into Australia, while others aim to directly serve the Asian markets.

Thodey says Telstra sits somewhere in the middle. "There's no question that Asia is a part of our growth strategy. I have said that really from day one," he says.

"But if you look at the last four years, it has been more about sorting out the portfolio in Asia and finding the sources of value that we can grow."

Thodey says Telstra's decision last year to regain control of its submarine cable and satellite joint venture with Hong Kong's PCCW was made because it was a strategic long-term asset that would benefit from expanding demand for bandwidth in Asia. The group's decision to build cloud computing centres in Hong Kong and Singapore was another strategic call on the region's growth.

Telstra was required by the terms of its initial acquisition of a stake in successful Chinese online real estate business SouFun to take a profit in 2010 by selling into SouFun's float, Thodey says.

But he adds the group's 66 per cent-owned Chinese car auction site, Autohome, "is continuing to trade very well. It has been pretty much based in the Beijing-Shanghai area, but it's spreading its wings and we see a good future for it - we like the business."

On reports of a $US1 billion float for Autohome on the Nasdaq exchange, Thodey says: "We will always look at what will realise value for the company and yes, that has been looked at - but look, there's no announced plans."

Meanwhile, he is getting on with business. This week, Telstra agreed to pay the government $1.3 billion for spectrum made available by free-to-air television's shift from analogue to digital transmission. It bought twice as much (and paid twice as much) as its closest rival, Optus, and will begin rolling out 4G services on the new spectrum when it becomes available in 2015.

The 4G rollout and the LTE (long-term evolution) technology that underpins it is a multi-pronged play for the telcos. It offers faster download speeds for users and is expected to result in heavier broadband usage, driving mobile revenues higher, and it also roughly halves the cost of moving data on networks. Telstra already has a little more than 2 million 4G subscribers on the existing spectrum but that is just 14 per cent of its total mobile customer base. So the potential, as it prepares to expand into the new 700 megahertz spectrum, is significant.

"We have already kicked off discussions with leading overseas industry bodies, operators and manufacturers to ensure that come 2015 we will be ready go with devices that work in that range," Thodey says.

Telstra's workforce will "rebalance" as the fixed copper network winds down, other domestic businesses including mobiles and network services expand, and incremental overseas expansion continues.

"We are no different to any other large business," he says. "We have businesses in decline and businesses in growth, and we are continuously rebalancing - people should expect a pretty dynamic workforce within Telstra over the next 10 and 20 years."

So how does he rate the Thodey era? He recalls being asked at his first news conference as CEO what he would stand for.

"I said I would be an agent for the customer and that, more than anything else, is what I have focused on," he says.

The group has dragged the net promoter score, which rates its popularity with customers, into positive territory overall (it rates highest with big customers including governments, but is weaker in its retail markets). Thodey says the main thing is that Telstra's overall score is improving, but adds that the group has a long way to go, "and a lot of opportunity".

He says he knows "this can't just be done through emotional energy. You have to re-engineer processes, you have to rework technology, and it's a cultural change as well. I take heart from the CBA [Commonwealth Bank] experience. It was seven years before they climbed to be No.1, and we are what, two or three years into our journey."

Telstra consulted CBA as it drew up its plans to re-engage with its customers. The bank transformed its customer satisfaction ratings under the leadership of former chief executive Ralph Norris, and Thodey says CBA "has got a lot of parallels, having been government-owned. They went through that process of privatisation before us, so they are a great bellwether for us, and we really appreciate the help they give us."

Being guided by another company's experience does not amount to copying its blueprints, however, and one difference between the strategies CBA and Telstra have deployed is that the bank has not sent processing and call centre jobs offshore. Telstra runs local call centres, but also has a significant call centre operation in the Philippines. Norris's successor, Ian Narev, said this year that CBA believed the labour cost savings were outweighed in the long term because the local workforce better understood the bank, the market it operated in, and the customers it served. The third Australian mobile network operator, Vodafone, has also decided to base its call centres locally as it looks to rebuild its customer base.

Thodey says the number of calls to Telstra centres has fallen 30 per cent from its peak, partly because the group is fielding fewer complaints as his customer service strategy gains traction, but also because customers are turning to online assistance and digital apps.

"We think it is the future of how our customers want to interact with us, because it's seven days a week, 24 hours a day," he says.

Telstra will still need and operate call centres, he says. He acknowledges that some customers are more comfortable when they hear an Australian accent on the other end of the line. "My first priority in contact centres is, however, to give a great customer experience, irrespective of where that contact centre is," he says, adding that Telstra is not just an Australia-focused group, but a regionally focused one, with people from many cultures employed.

"Cost comes into it - I'm a businessman," he says. "But we honestly start with an improved service outcome. Even if the cost per call is very low, if the customer has to ring back, all the economies go out the door."

The Maiden family owns shares in Telstra.


Sales revenue - $25.2 billion

Dividend per share - 28 cents

Domestic mobile customers - 13.8 million

Retail fixed broadband customers - 2.6 million

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