Telstra cuts a path to the future

Telstra needs to ‘sweat’ traditional assets and free up resources for expansion elsewhere. Photo: James DaviesTelstra axes 1100 jobs in restructureTelstra key top stop NBN wobbles
Nanjing Night Net

The 1100 job cuts that Telstra unveiled today are the result of a restructuring of the group’s operations, which in turn flows from an absolutely essential re-weighting of the group’s resources.

The telco is moving away from its traditional businesses including fixed line telephony and towards new and hoped for growth engines.

The aim is not to shrink the company to greatness – that never works – but to control costs by redirecting spending to the growth areas rather than expanding the existing budget to resource them.

The strategy does however create a vice for jobs in the traditional Australian-based businesses, and it is being turned tighter as Telstra also sends administrative work offshore to lock in lower labour costs.

The cuts announced today were flagged in May when Telstra’s chief operations officer, Brendon Riley, told staff that the telco intended to reorganise operationally into five groups.

Three of them – IT Solutions, Networks and Customer Service Delivery – were newly created.

Riley said there would be common support functions for them, and for existing Telstra operations covering the national broadband network and Network Applications and Services (NAS), an end-to-end business communications offer that Telstra sees as one of its new growth engines in Australia.

Telstra chief executive David Thodey doesn’t have a viable alternative, however.

As its old fixed line telephony business shrinks, it must invest in new businesses to maintain revenue and earnings growth.

It must also ‘‘sweat’’ its older assets to make them more profitable as their revenue declines, however, and it also knows that its support in the sharemarket among both wholesale and retail investors draws on the fact that it is a classic investment yield play.

The telco has paid a steady 28 cents a share in regular dividends since 2005, with occasional special dividends thrown in.

At around $4.93 this afternoon, its shares were up 13 per cent this year, 27 per cent in two years and 64 per cent in three years, but were still yielding 5.7 per cent before tax credits and 8.1 per cent after them.

The expectation is that payments will if anything rise in the next few years as income from its deal to co-operate with the roll-out of the new national broadband network starts pouring in.

The NBN co-operation deal was given a net present value of $11 billion by Telstra in 2011 when it was struck.

It has to be renegotiated now that the Coalition is in government and moving to restructure the roll-out from a fibre-to-the-home model to a fibre-to-the-node one.

But ahead of the election Tony Abbott said that Telstra and its shareholders would be kept whole, and Thodey is taking that to mean that the NBN shake-up will be value-neutral at least.

It could in fact be value positive, if the new government decided that after missing roll-out targets the NBN Co needs Telstra’s help in constructing the network.

The expectation that Telstra dividends will stay strong and probably rise is therefore not materially shaken by the change in power in Canberra, and as long as the expectation that Telstra will be a yield play is alive in its share price, its options for funding expansion are limited.

Decisions to cut costs including jobs to both sweat traditional assets and free up resources for expansion elsewhere become almost a fait accompli.

The Maiden family owns Telstra shares.

This story Administrator ready to work first appeared on Nanjing Night Net.

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