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Telstra's big investment

Stephen Bartholomeusz

Published 11:41 AM, 13 Aug 2008



There are two metrics that frame Sol Trujillo’s ambitious five-year transformation program and against which his success or otherwise, can be judged. On today’s results he gets a big tick against both of them.

The easy option for Telstra would have been to shrink the group to greatness by milking its legacy cash flows. Trujillo chose the riskier and more complex strategy of attempting to control and slow the rate of decline in the legacy businesses while investing heavily in re-engineering Telstra’s multiple platforms and the next generation of telecommunication technologies.

The success of the strategy was always going to be defined by Telstra’s ability to grow and by the profitability and cash that growth generated. This year, as the massive capital expenditures associated with Trujillo’s program peaked, was a critical moment and a critical test of the effectiveness of the program.

Revenue growth of 4.7 per cent, or more than $1 billion, and free cash flow that soared 33 per cent, or just under $1 billion to $3.9 billion, is evidence that program is delivering precisely what Trujillo promised. For the first time since Telstra embarked on its radical reinvention its free cash flow will cover its dividend payout.

So confident and comfortable is Telstra now with its performance that it has been able to again lift its longer term guidance, with the new forecasts built on an expectation of higher revenues and lower costs with a continuing high level of investment in the business.

Telstra’s chief financial officer, John Stanhope, put the achievements into perspective. Since the program started in 2004-05 Telstra has added $2.5 billion in revenue despite a losing $1.1 billion from its fixed line businesses. Mobiles, internet and the Sensis directories businesses have grown their revenue bases by $3.8 billion.

In the most competitive segments of the telecommunications market Telstra has been able to grow significantly faster than its competitors and continues to increase its market shares.

The most ominous note for those competitors in Telstra’s presentation was the upgrading of the amount of capital Telstra plans to spend over the next two years relative to sales – from its original target of between 10 and 12 per cent of sales to about 14 per cent of sales in 2010. For an organisation with about $25 billion a year of revenue, that may mean more than $1 billion of extra spending.

In a relatively low growth market, that signals it believes there are high margins to be had and profitable share to be gained – Telstra is backing its ability to continue winning a disproportionate share of the growth in the sector with the planned increase in spending.

Trujillo is sometimes sneered at for constantly talking about Telstra’s "world class" performance. Its willingness to invest heavily, however, has produced revenue and market share growth that is remarkable in a sector where the incumbents are generally battling just to maintain their revenues.



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