Thodey has to keep the wheels turning

Telstra chief executive David Thodey is running several strategies to create a future for the group that is more exciting than the default scenario of sluggish revenue, declining profitability and dependable but ultimately dwindling dividends for investors.

He needs to find new businesses to replace ones that are internet roadkill - Telstra's old fixed line telephony service and its Sensis directories business, notably. He has some candidates, but they can't fill the gap yet.

He must therefore also make Telstra's established businesses more profitable: he has succeeded so far, and the good news for Telstra investors is that he can keep on doing so for at least two years.

Telstra's fixed line network and Sensis both have digital arms these days: online directories at Sensis, and fixed line broadband services in the case of the fixed line network. In both businesses however, non-digital revenue is falling faster than digital revenue is growing.

Thodey is responding by expanding Telstra's business telecommunications services in Australia and Asia, but he also runs a company that has been a hiding place for yield-hungry investors since the global crisis. There's no appetite on the register for Telstra to cut its 28¢ a share dividend to fund expansion, a positive desire in fact for the dividend to be supplemented by special payments sourced from Telstra's $11 billion deal to co-operate with the closure of its copper wire network and the rollout of the national broadband network.

Thodey was mum about special payments when he handed down Telstra's June year profit result on Thursday, but the telco is aiming at paying 28¢ a share again this financial year, and it is a hefty commitment. The 28¢ payout in the year to June was 91.2 per cent of earnings per share.

The growth deficit that Thodey is trying to fill is manageable so far. Fixed line earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 6.1 per cent or $177 million to $2.7 billion as fixed voice revenue slipped by 9.5 per cent. At Sensis, a 19.9 per cent, $193 million slide in print revenue to $778 million overwhelmed a $42 million rise in digital directory revenue, and EBITDA fell by $158 million to $571 million.

The $335 million combined EBITDA reduction was covered by just one business, mobiles. It lifted EBITDA by 10.7 per cent, or $338 million, to $3.5 billion. Mobile customer numbers rose by 1.3 million to 15.1 million during the year, and EBITDA as a percentage of sales rose from by two percentage points to 38 per cent.

Telstra has stepped up capital expenditure on its 4G mobile rollout, where it is the industry leader, and Thodey says that even though there are now more mobiles than people in Australia, there is still room for system-wide growth. Australia's mobile penetration rate of 135 per cent compares with rates of 200 per cent in Hong Kong and 180 per cent in Singapore, he says, and penetration rates will rise as mobile phone users add iPads and other mobile devices.

Telstra has, however, been the main beneficiary of Vodafone's market share implosion in this country, and windfall gains from that quarter are ending as Vodafone's Australian boss, Bill Morrow, resurrects Vodafone's Australian franchise. The earnings holes inside the fixed line business and Sensis are meanwhile still expanding.

Thodey's getting traction with his business services expansion. International revenue was up 16.2 per cent or $243 million during the year, and the group's network applications services (NAS) offer to businesses in the region lifted revenue by 9.4 per cent to $566 million. Counting Australia, NAS increased revenue by 17.7 per cent to $1.5 billion.

These businesses won't be big enough to plug Telstra's earnings gap for several years, however, so Thodey has to continue making Telstra's existing operations more profitable, pound-for-pound. The circular logic is that it is the only way he can keep dividends high, balance-sheet gearing low, and still invest enough to generate new business that fills the earnings gap and keeps Telstra growing.

So far however, the balancing act is succeeding. Telstra booked $800 million of productivity savings in the year to June, twice as much as EBITDA profit growth, the group reported.

Savings were down from $1.1 billion in the previous year - but the internal target is for Telstra to book savings of about $1 billion a year for at least the next two years, and maybe longer.

The Maiden family owns Telstra shares.

mmaiden@fairfaxmedia.com.au