Analysts were sceptical on Tuesday that Telstra would be able to deliver the revenue growth and margins outlined by Sol Trujillo, chief executive, as part of the company’s “transformational” five-year strategic plan.
Australia’s dominant telecoms carrier said it would shed up to a fifth of its workforce and spend A$10bn (US$7.8bn) over five years on new technology to boost revenues and help face mounting competition.
Telstra is to cut its 330 different network platforms and 1,200 different business and operational support systems, which Mr Trujillo said were responsible for a “bad experience for customers”.
The company will invest in fibre-optic cables and wireless, broadband and third-generation technology for the majority of its customers, and has struck a number of joint venture deals with companies such as Sony and Hutchison to “improve the customer experience”.
Telstra also surprised the markets with its second profits warning within two months. In September, it said earnings could fall by 10 per cent because of regulatory proposals. The shares fell 5 per cent.
On Tuesday, Mr Trujillo predicted a fall in earnings in the year to June 2006 of 19-24 per cent, due to asset decommissioning costs associated with the revamped strategy.
The decline would be 25-30 per cent “if Telstra raised a provision for redundancy”. Worryingly for investors, even those numbers are based on a “reasonable regulatory outcome”.
However, Telstra predicted that underlying revenues would rise by 2-2.5 per cent every year until 2010. It will also interview more than 100,000 customers to find out what their needs are.
Telstra is pinning its hopes on customers spending more on services once service and technology is improved. It is hoping to maintain its margins, which are among the highest in the developed world.
Domestic long-distance fixed-line calls deliver an 88 per cent profit margin, more than double the 42 per cent margin on mobile calls.
Analysts believe Telstra is being optimistic in believing margins will remain resilient.
Andrew Hines of Morgan Stanley congratulated Telstra on its vision but said he was “sceptical about the financials”. Tim Smeallie of Citigroup questioned the investments planned given the regulatory uncertainty.
Telstra is embroiled in a public slanging match with the Australian Competition and Consumer Commission and is waiting to find out what regulations it will face when it operates as a fully privatised company late next year.
Telstra claims that current ACCC proposals would cost it up to A$850m a year in lost revenues because they would force sharp cuts in access fees charged to rivals using Telstra’s traditional copper lines.
ACCC chairman Graeme Samuel has accused the company of “confusing, if not misleading the public” and has signalled his preference for rules that promote fierce competition.
Mr Trujillo warned: “If excessive regulation doesn’t get in the way, we can hit the plan we have laid out today. If it does, it has the potential to be harmful to our core.”
Mr Trujillo assured analysts that Telstra would focus on organic growth. “I have told the board that M&A is not at the forefront of our agenda. We need to concentrate on our core competencies, which can then be exported. M&A activity means paying premiums and worrying about achieving returns.”
● Alcatel, the French telecoms equipment supplier, on Tuesday saw its shares rise 4.5 per cent after it was chosen to carry out an estimated €2.18bn ($2.5bn) upgrade of Telstra’s network. It described the agreement, currently just a memorandum of understanding, as the biggest in its history, beating a $1.7bn project agreed with SBC in 2004. It will also maintain the new system.
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