Telstra has unveiled a new strategy — dubbed Telstra2022 — that will see net job losses of 8000, including both employees and contractors, and create a new infrastructure business unit that could potentially be spun out into an independent company.
The telco revealed the plans this morning ahead of an investor information briefing.
Telstra said the new strategy has four key pillars: Streamlining product offerings, setting up InfraCo, simplifying its structure, and further cutting costs.
The new Telstra InfraCo business unit will launch on 1 July and have its own CEO who will report to Telstra CEO Andy Penn.
The business will control Telstra’s fixed-network infrastructure, including data centres, non-mobile related fibre (including international subsea cables), the telco’s copper network and hybrid fibre-coaxial (HFC) assets, exchanges, poles, ducts and pipes.
It will sell services to Telstra, wholesale customers and NBN.
InfraCo will have a workforce of around 3000, absorbing Telstra Wholesale and Telstra’s NBN commercial works.
The business unit will have assets with a book value of around $11 billion, Telstra said, with revenue of $5.5 billion and EBITDA of $3 billion.
“As technology innovation is increasingly relying on connectivity, the role of telecommunications infrastructure is becoming more important,” Penn said in a statement.
“There is virtually no technological innovation happening today that does not rely on a high quality, reliable, safe and secure telecommunications network. In this world our infrastructure assets are becoming more valuable. By creating a new infrastructure focused business unit we will better optimise and manage these assets.”
InfraCo will not control Telstra’s mobile infrastructure.
The creation of the new business will allow Telstra to potentially demerge its infrastructure business in the future. Such an independent company could be a potential buyer of a privatised NBN — which already relies on a range of the assets that will be controlled by InfraCo for the National Broadband Network rollout.
Telstra will also create a new Telstra Global Business Services group that will report to Penn, consolidating back of house processes.
Telstra said that the creation of the group combined with a push to simplify internal processes and the simplification of products (including ditching more than 1800 consumer and small business plans for 20 core plans) would help cut labour costs by around 30 per cent.
The telco will cut 8000 employees and contractors over three years, with an initial focus on executive and management roles. The company will create 1500 new roles, many of them in areas such as software engineering and cyber security.
Telstra said that Telstra2022 strategy will see it boost its productivity program by an additional $1 billion to $2.5 billion by FY22.
Telstra has previously warned that it expects the NBN rollout to have a negative ongoing effect on EBITDA of $3 billion.
“The Australian telco market is entering an extremely challenging period driven by a number of factors including the NBN transition and increased mobile competition,” Penn said.
“We are seeing this play out in our financial performance and therefore the impact on the economics of the company are very significant. Against that background, we announced in May that FY18 earnings will be at or around the bottom end of guidance. We expect the trends to continue in to FY19. In our guidance for FY19 we have assumed the market will decline 2 to 3 per cent in mobile and fixed revenue.”
Comments by telecommunications analyst Paul Budde:
This was basically the only option out for Telstra in its current difficult situation.
Over the last 30 years it has tried a lot of different things. I was at the launch of their Asia campaign in Geneva in 1992 where they claimed that by 2000 25 per cent of revenues would come from Asia. Obviously that never eventuated. They have also invested billions of dollars in dozens of IT companies trying to turn themselves into tech company, again with very little to show for.
Under [former CEO David] Thodey a renewed IT approach was launched, especially aimed at e-health, while they have made good progress, overall it hasn’t contributed that much to its revenue/value.
Under [current CEO Andy] Penn it was more or less back to basics, back to the core business, but thanks to a floundering NBN the company is again unable to build a value added business big enough to compensate for a decline in the traditional (core) business.
What we now also see is very aggressive competition in the mobile market (e.g. TPG, but also others). So without significant new revenue streams and further pressure on the core business the future looks bleak.
However, the company is a survivor and is not under threat as such, but its value will most likely further diminish.
Things could change if decisions are made about the future of the NBN. Will Telstra be able to buy all of some of the business and under what conditions. It might strengthen their core business but it is doubtful how much they can improve the overall value of the company. On the other hand, further and more competition could also be the outcome.
So yes — what to do. It looks like that after 30 years of trying new money from either Asia or technology will be very hard to achieve. Hanging on to its core business and cut costs and stay efficient and is now the best scenario that will work for the company.