Michael Sainsbury | September 16, 2008
COST overruns and delays in Telstra's $12 billion upgrade of its networks, information technology platforms and marketing programs will wipe out gains made in revenue growth, leaving shareholders no better off than they were when Sol Trujillo started his program.
Telstra boss Sol Trujillo's program is now behind time and over budget
That is the clear message that comes from a detailed analysis of the company released last week by analysts Laurent Horrut and Colin Morawski in a report bleakly titled, "Transformation - the Point of No Return".
Telstra's failure to intimidate the competition watchdog or the federal Government, at least so far, has been well documented.
But this latest report underscores a more fundamental truth about former monopolies such as Telstra that still bank near-monopoly profits - that is, a steady decline is inevitable.
While Telstra excitedly pointed to its improved revenue growth and the raised top-line guidance, there was another change to its guidance that has disturbed the market's more perceptive analysts. The change was the raising of the prospective amount of capital that the company will spend in years to come.
Put simply, this is the amount of money that Telstra needs to invest in networks, IT, property and other assets to increase its revenues and profits. Clearly the more capital (capex) that is spent, the bigger the level of depreciation and amortisation on assets, which crimps profits and therefore the ability of the company to return capital to its shareholders and ultimately hits the value the market puts on Telstra stock.
The idea behind Trujillo's transformation was relatively simple and sound - if he could pull it off. Convince the board to spend a lazy $12 billion-or-so on his transformation plan and he would increase revenue growth, hold earnings margins longer term after bringing them down over the short-term via the big spending program and, most critically from a sustained improvement perspective, bring down the amount of capital that would be required to get more revenue.
"With the downgrade of the 2010 capex target at the FY08 result from 10-12 per cent to 14 per cent capex to sales ratio, both the 'new telco' long-term capex reduction story and the Transformation plan's overall value accretion claim vanished in our view," JPMorgan said.
It started well enough, with the fast-tracked building of the Next G mobile phone network wrong-footed the rivals, particularly mobile NO2, Optus. But its IT project has run over budget and is not delivering the functions required to take sufficient cost out of the business.
More problematic still is that the national broadband network project now under way could put a bigger dent in the group's share-market returns. Telstra wants an 18 per cent return on its invested capital, if it is to build the NBN. Trujillo has re-stated this objective on his latest swing around the world.
Many of Telstra's rivals believe the company has never had any intention of building a new network with the sort of open access that would reduce price for end users and therefore reduce Telstra's profits. They believe the fights with regulators and the Government were part of a perennial tactic to protect profits.
JPMorgan says the likelihood of the allowed rate of return on a Telstra-built NBN improving to Telstra's current return on invested capital (ROIC) of 23 per cent is "extremely remote". It would be politically unsustainable.
JPMorgan notes that Telstra's ROIC declined by 5 per cent over the past three years, and says "we expect Telstra's returns beyond 2010 to remain firmly on their current downward trajectory".
There are other views, of course, but the fact is, Trujillo's program is now behind time and over budget. The ultimate arbiter of such things, the stock market, remains convinced of that despite the safe haven that utilities like Telstra, with plenty of market power, offer investors.
It's worth remembering that shares are priced on future earnings and returns that markets expect companies can deliver.
Yesterday, Telstra shares closed at $4.25 - well short of the $5.06 they were trading at on July 1, 2005 when Trujillo took over. Even adding in the 86c in dividends attributable to Trujillo, investors have stood still and forgone the opportunity cost of investing their funds elsewhere for better returns.
To put it simply: Trujillo has been peddling very, very fast simply to stand still. For sure, there has been a plenty of noise, smoke and mirrors. But if he can't pick up his game very soon, it will all have been to little or no effect.
The Wizard of Oz, indeed.
Your Comments:
18 Comment(s)
I would like to know what it is that Michael Sainsbury has said that is wrong Mr Lawrence & Mr Roukakis. You make a point of picking that Michael's commentary is blatantly anti-Telstra. If it had been me Lawrence, I would have been somewhat less gentle on the poisonous individual you call a great man. He's not doing anything for Oz, never has & never will. When they finally began putting up the possibility of ADSL2 just recently it was only because they're frightened the other lot are going to succeed. Then their monopoly is gone. That is the obvious truth Lawrence.
Peter from Surface Paradis is 100% correct. Nepotism is the word!
Telstra is a hotbed of incompetence. Full of middle managers lacking qualifications to support their job role. The company is also mired in nepotism - jobs for the boys and girls. If it didn't have the infrastructure monopoly the company would sink. It really is pathetic. Sol will be gone next year - and the company desperately needs to be carved up into manageable units and getting rid of half its lazy workforce.
Sol was brought here, by Mr McGauchie and the board to have a positive and profitable impact on Telstra for the benefit of shareholders. All that he has done so far is to alienate the ACCC, the ACMA, the government, the employees and a substantial number of customers. Sol's "changes" have seen the share price drop to record lows, thousands of jobs outsourced off shore, his "transformation" of the company is over budget and the new IT system is time consuming and does not have the functionality to support all Telstra's billing and service requirements.
If, in your opinion Michael Sainsbury sounds repetitive, boring, lacking in value or like scorned x wife, you need to get a life as you obviously have NO clue as to what life is like in Telstra.
Michael, you're spot on yet again, congratulations and keep up the good work.
Anti Michaels haven't addressed the real spirit of the article. That Telstra's inefficiency beyond Next G has caused deterioration in ROIC. Stay on topic.
Good Journalism as I understand it, is to canvass as diverse a set of qualified opinions as possible. While the overwhelming herd heads one way, questions stimulate informed debate. This keeps society robust. We don't all want to head downhill without questions do we?
Blah, Blah, Blah or is it Blame, Blame and more Blame. I have some knowledge of Telstra's business.
The difference in getting things done and making them happen in a company like Telstra, has nothing to do with the past or the so called ex government attitude.
Reinforcing the obvious, why is Telstra with all its positives and limitations, is expected to be different to any other company?
If you need to get things done, it always comes down to a individual, and their style and ability to engage and influence others, regardless of the hierarchy, seems like Daniel of Melbourne has limited knowledge and influenceing skills.
With attitudes like Daniel, sound like Telstra is better off without him!
Michael, You really are boring read, every time I read a report by you it is the same blah blah blah every time, Telstra are crap, Sol is "peddling" blah blah blah. Telstra has one of the Best Mobile networks in the world and it keeps getting better, the other networks are trying to upgrade there networks to compete with the Next G network and they have chosen the wrong frequency and the wrong provider and there network keeps falling over when ever they implement network upgrades and when these networks are implemented they will still be 2 steps behind. Were you refused a Job a Telstra or something?? You write like a scorned x wife Michael, you really are boring.
i worked in Transformation.. thankfully I left before TR2 failed.. the entire Program is run by middle management who have little idea of what is going on.. people who have been in a government company for too long, with no ability to understand how to work in a private company.. all the PMs in Service Management are there to milk the titan for all it has before Sol runs off to the US with McCain - the guy he bank rolled in the last election.. It's all smoke and mirrors.. and only a show to repair Sol's reputation.. and keep the middle management dinosaurs employed because paying them out is more expensive.. This Article is SPOT ON!!!
Michael Sainsbury is so predictable. Has he ever said anything positive about Telstra. Why does the Australian keep publishing his extremely biased articles? Did Telstra disconnect his phone when he was a little boy and he has never forgiven them? How about a few balanced articles.
Well done to all the Telstra employees sticking up for the big guy. Telstra is betting quite substantially that it will get the goose that laid the golden egg (NBN).
Costs are being cut in order to have the capital ready for the big push. The old network is being patched up while waiting for our fine feathered friend.
What if the day doesn't arrive what shape will the existing network be in, and what effect will this have on the all impotant shareholder value. History will be the judge of this single minded stratergy. You can bet if it goes pair shaped Sol and his amigo's will leave our sunburnt land for greener pastures. PS SL of Manly if Telstra says it's so that don't make it so.
Of cause it will over-run. I used to work in Telstra. They have many incompetent and irresponsible managers wasting company's money. I remember when I was there, I was asked to develop a solutions for another business group. I was asked to revise the solution 3 times just to satisfy the company who will manage the solution when it is implemented (a large IT vendor). It was rejected finally and was told that the IT Vendor will develop the solution instead. Guess what ? The IT vendor used my first solution (exactly the same solution) but the cost is AUD 1 million more that what I proposed. (Mine was AUD 850K). Good luck to the invester.
If I was an editor in The Australian I'd be very concerned to see my writers/ journalists in growth.
That would mean Id have a talent pool that is self developing and increasingly useful to its readership.
Michale Sainsbury is becoming so mannered in his observations of Telstra that he's kind of like the journalistic version of Sylvester Stallone. He's said the same thing so many times, and produced so little change - that everyone has even stopped thinking that he might contribute any sense of value.
There is just a sameness that is now predictable, able to be anticipated and shows all growth has ceased.
Is this where journalism seeks to end up ? A scratched record, a limited vocabulary and perhaps even a remembered view of what things were once like. That dream - nurtured at cadet stage when covering the friday night greyhound races somewhere nowhere special has well disappeared.
The execution of craft has come to a few miserable lines about a company he thinks unfavourably of, and those lines get trotted out with such frequentcy the pieces dont need to be read any more.
He's kind of produced himself out of relevance and in doing so diminishes the quality and standing of his profession.
All those mischief makers love to read the static - the white noise he creates.
The rest of us wonder at the waste of the wood pulp and kilobits - and observe the absence of outcome or change.
A clever pun there! Trujillo has been "peddling" very, very fast simply to stand still, as well as pedalling very, very fast.
Michael Sainsbury has over time amassed a rhetoric which is essentially a folio of poorly crafted cliche.
Any semblence of intelligent fact based and objective and interpretive reporting has been replaced over time by mannered imitation (at best) and subjective unstructured dribble (at worst).
Instead of providing contrasting opinion and challenging readers to think - he crudely rakes up those pre-existing opinions which serve his own intent and uses them as proof of what he has constructed.
His writing is narcissistic and indulgent - and one can sense the pleasure he provides himself as he produces. Some mothers used to advise their sons to 'stop it or you will go blind'..his sight must be awfully dim from your overuse of the same old, same old posturing. You dont like Telstra and you never will.
Reading Sainsbury reminds me of the fool in Dylans "Licence to Kill" now he worships at an alter by a stagnant pool, when he sees his reflection he is fulfilled.
What a counter productive and intellectually diminshed little stunt.
Michael, is it not the case that the other telcos you always support in your articles are the ones benefeting from the NBN not being built. You are an amazing inverter of the truth!
His job was to prepare it for sale to a US company or similiar . did they want it to be performing well or just stumbling along for a quick buy
You mention that Telstra wants an 18 per cent return on its invested capital just to stay above water yet optus can manage with only 12 per cent return ! You also fail to mention that free cashflow will also be invested in other telecommunication ventures to bring growth your view and that of JPMorgans Laurent Horrut and Colin Morawski are to say the least very simplistic Telstra had to transform its self to create new businesses but future investments by Telstra will be the key to bottom line growth while the utility dollars cover the ongoing costs.
Strange Michael that with all the turmoil in the financial world that will preclude other than Telstra from the NBN build you nitpick on Telstra. Advisers are recommending Telstra as a buy, in this market a pretty big wrap. Your anti Telstra rant is obvious Michael.
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