Trujillo's last mile
Telstra may have abandoned the 2010 guidance set under Sol Trujillo, but the last batch of results from the former chief show it remains on track to achieving the transformation he started.
The abandonment of the Sol Trujillo regime's 2010 guidance will be interpreted as his failure. With a year to go in Trujillo's original five-year transformation plan, however, the last of his results showed that the group is pretty much on the trajectory that he set.
New chief executive David Thodey did the sensible thing as an incoming CEO, particularly one operating in uncertain economic circumstances and confronted with the twin threats of draconian regulatory reforms and the proposed national broadband network.
He lowered expectations for revenue and profit growth and, most notably, abandoned the overly-ambitious – some would say impossible – target of generating earnings before interest, tax, depreciation and amortisation (EBITDA) margins of between 46 per cent and 48 per cent.
Telstra did, however, grow revenue by about three per cent, despite a 4.9 per cent decline in its core legacy copper network revenues. Expense growth was kept to 0.6 per cent. EBITDA grew 5.1 per cent and the EBITDA margin edged up from 42.2 per cent to 43.2 per cent – the level targeted by Thodey for 2010, albeit one that he conceded was conservative. Thodey's favourite expression today was "considered", a term he uses as a synonym for caution.
The broad drivers of the result – revenue growth to offset the decline of the copper network, which would be driven by the new networks built during the Trujillo era, along with far more sophisticated customer-driven marketing and flow over a cost base reconfigured by the massive, and massively expensive, $20 billion transformation program – were broadly on track.
Most importantly, capital expenditure, which peaked at almost $6 billion, would tail off as the transformation program wound down, allowing free cash flows to surge. Last year Telstra spent about $4.6 billion, modestly lower than the $4.9 billion outlaid in 2008.
Next year Thodey expects to spend less than $3.8 billion and free cash flow is expected to grow from $4.4 billion to $6 billion. Where once the questioning focused on Telstra's ability to maintain dividends that were greater than its cash flows, now Thodey is being asked what he's going to do with all his spare cash.
On that basis, while Trujillo could be criticised, as he has been, for the consequences of the severe deterioration in Telstra's relationship with its regulator and government, his operational record in delivering the larger part of the operational transformation is actually pretty good. Thodey said he had never seen a transformation program delivered as well.
There is still a big bit to come. The massive IT slab of the program is behind schedule and $200 million over budget, and Thodey has slowed the pace of execution of the remaining – and very significant – elements of the program, which means pushing the anticipated and sizeable cost and revenue benefits out into the future. That's a cross against the Trujillo regime, but one that could have been expected given the history of such ambitious IT projects.
Apart from lowering expectations for 2010, the big difference between Thodey and Trujillo was a much lower-key, less flashy, presentation style and a willingness to contemplate an engagement with government.
Despite the less confrontational stance, however, it was notable that Thodey tied all the discussion of Telstra's attitude towards having an involvement in the national broadband network and towards regulatory reform to its shareholders' interests.
At the moment, he is presenting a warm and interested face to government. If he isn't convinced the NBN or proposed regulatory changes are, all things considered, in shareholders' interests, it will be interesting to see if the differences between Thodey and his predecessor are more about style and tactics than conviction.
New chief executive David Thodey did the sensible thing as an incoming CEO, particularly one operating in uncertain economic circumstances and confronted with the twin threats of draconian regulatory reforms and the proposed national broadband network.
He lowered expectations for revenue and profit growth and, most notably, abandoned the overly-ambitious – some would say impossible – target of generating earnings before interest, tax, depreciation and amortisation (EBITDA) margins of between 46 per cent and 48 per cent.
Telstra did, however, grow revenue by about three per cent, despite a 4.9 per cent decline in its core legacy copper network revenues. Expense growth was kept to 0.6 per cent. EBITDA grew 5.1 per cent and the EBITDA margin edged up from 42.2 per cent to 43.2 per cent – the level targeted by Thodey for 2010, albeit one that he conceded was conservative. Thodey's favourite expression today was "considered", a term he uses as a synonym for caution.
The broad drivers of the result – revenue growth to offset the decline of the copper network, which would be driven by the new networks built during the Trujillo era, along with far more sophisticated customer-driven marketing and flow over a cost base reconfigured by the massive, and massively expensive, $20 billion transformation program – were broadly on track.
Most importantly, capital expenditure, which peaked at almost $6 billion, would tail off as the transformation program wound down, allowing free cash flows to surge. Last year Telstra spent about $4.6 billion, modestly lower than the $4.9 billion outlaid in 2008.
Next year Thodey expects to spend less than $3.8 billion and free cash flow is expected to grow from $4.4 billion to $6 billion. Where once the questioning focused on Telstra's ability to maintain dividends that were greater than its cash flows, now Thodey is being asked what he's going to do with all his spare cash.
On that basis, while Trujillo could be criticised, as he has been, for the consequences of the severe deterioration in Telstra's relationship with its regulator and government, his operational record in delivering the larger part of the operational transformation is actually pretty good. Thodey said he had never seen a transformation program delivered as well.
There is still a big bit to come. The massive IT slab of the program is behind schedule and $200 million over budget, and Thodey has slowed the pace of execution of the remaining – and very significant – elements of the program, which means pushing the anticipated and sizeable cost and revenue benefits out into the future. That's a cross against the Trujillo regime, but one that could have been expected given the history of such ambitious IT projects.
Apart from lowering expectations for 2010, the big difference between Thodey and Trujillo was a much lower-key, less flashy, presentation style and a willingness to contemplate an engagement with government.
Despite the less confrontational stance, however, it was notable that Thodey tied all the discussion of Telstra's attitude towards having an involvement in the national broadband network and towards regulatory reform to its shareholders' interests.
At the moment, he is presenting a warm and interested face to government. If he isn't convinced the NBN or proposed regulatory changes are, all things considered, in shareholders' interests, it will be interesting to see if the differences between Thodey and his predecessor are more about style and tactics than conviction.
Share this article and show your support
Call 1300 880 160
Start a chat
Schedule a call
