Telstra (TLS) will slash costs by $1 billion over the next five years at a time when it is investing as much as $15 billion in its networks over the next three years to fight intense competition.
At Telstra’s investor day yesterday, the company hinted at more capital management moves to reward shareholders, the top to bottom revamp of its technologies, especially in mobile, and announced a cost-cutting target of at least $1 billion over the next five years.
CEO Andy Penn said the targets would enable the business to respond to increasing competition.
“The changes to our strategy are not major, however they are an important signal to shareholders, employees and our customers that we will be relentless in delivering customer experience improvements and disciplined in how we invest in our networks, services and growth businesses,” Mr Penn said in a statement to the ASX.
The cost cuts though are pretty small when you consider that the company could generate revenue of more than $130 billion over the next five years (it had revenue of $27 billion in the year to June).
Its cost of doing business in the year to June was $16.6 billion, so it will have total costs in the next five years of more than $90 billion, meaning the $1 billion in cuts ($200 million a year), won’t make much difference at all. Not when it could be spending $15 billion on its networks in the next three years and $25 billion or more over five years.
As well, Telstra has to balance the cost cuts against the PR problems of possible problem and pressure on existing services.
Intense cost cutting and badly directed investment is widely blamed for the major service problems the company encountered earlier this year and forced it to reveal a $3 billion spend on its core networks over the next three years, in addition to normal investment.
Telstra shares rose 2.5% to $4.84, off the recent two-year lows as investors continue to wonder if the tide of competition from other services and the NBN might be too much.
Much of the basis for the suggested better returns for shareholders will come from the more than $10 billion it will get from the government-owned company rolling out the national broadband network.
Telstra also revealed an internal program called Network 2020 that will modernise Telstra’s infrastructure and shut down old technology, such as the 3G mobile network. But the big deal so far as Telstra is concerned in winning back shareholder affection is the review of its capital allocation strategy taking into consideration the long term business and financial profile of Telstra.
And the key to that will be the what Mr Penn said would be the last one-off payments that will generate post-tax free cash flow of $5 billion over the next four to five years. Mr Penn said access payments would add a further $1 billion annually, a value that increases with inflation.
He said the overarching objectives of the capital management framework would remain unchanged, namely to “maximise returns for shareholders, maintain financial strength and retain financial flexibility”.
“However we are considering the best use of nbn payments, both one-off PSAA payments and recurring payments under the ISA and the most effective way of maximising long term shareholder value from these cashflows,” Mr Penn said.
"The review will also cover long term capex post nbn, and investment decisions including M&A criteria and take into consideration shareholder returns including dividends, buy-backs and other forms of return. Importantly we remain committed to maintaining balance sheet settings consistent with the single A credit rating band.”
Telstra said it expects to provide the market with an update on the review at the company’s half year results in February 2017 and the company will be engaging with both debt and equity stakeholders to gain feedback.
Telstra also reconfirmed its FY17 earnings guidance today as part of the Investor Day presentation.
Telstra’s chief operations officer Brendon Riley said Network 2020 would include providing 1 Gigabit per second mobile signals in key central business districts by 2019, rolling out 5G mobile, and shutting down old technology. Network 2020 also includes plans to accommodate five times growth in data consumption in the next four years.
He said Telstra’s 2G network will be shut down in coming weeks, and it revealed on Thursday it would start shutting down the 3G network from 2020 onwards.
