Analysts: Thodey has major work ahead to turn Telstra around

Telco needs to up its game to turn around a poor showing in its most recent financial results

Following the release of Telstra’s half year results analysts agree the telco's CEO David Thodey has some major work to do to turn the ailing company around.

Foremost among these issues are the massive decline in PSTN revenues, a falling market share in fixed and mobile broadband, and the need to reap tangible returns from the telco’s massive investment its IT modernisation program.

According to David Kennedy, research director at Ovum, addressing the rapid deterioration in Telstra’s revenue guidance, which in the space of only three months had fallen from single digit growth, to ‘flattish’, to single digit declines, was of paramount importance.

“This is a consequence of the acceleration in PSTN decline, and demonstrates the sensitivity of Telstra’s performance to its PSTN business,” he said. “Telstra’s PSTN performance has been good by global standards, but its recent deterioration seems to have caught Telstra by surprise."

This also underlined the importance of the NBN negotiations for Telstra, which had the potential to disrupt its entire fixed-line business, Kennedy said.

Commenting on the results, Warren Chaisatien, director at Telsyte said Telstra’s broadband revenues were being hampered by both smaller, more competitive ISPs such as iiNet and TPG, and through cannabalisation via Telstra’s mobile broadband offerings.

“When it comes to wireless broadband, Telstra is not only canabalising its fixed line broadband revenues but is also losing share to players such as VHA,” he said. “Last Christmas also saw pre-paid wireless broadband dongles come in to play which is attractive for casual broadband users. Smartphones, such as the iPhone, are also being used as wireless modems.”

Another issue, Chaisatien said, was the extent to which Telstra had been able to manage its $13.5 billion IT transformation project.

“My reading is that the transformation project has lost focus,” he said. “It was essentially Sol’s baby [former CEO Sol Trujillo], and at the time it was announced he had grand objectives, but in reality the integration is much more challenging that anticipated.

“Despite what Telstra says about the integration, when you look at their financial results, they still report in silos – by product division – and that reflects the thinking of the organisation itself. It will take a while to fully integrate and get to that ‘one bill, one click’ approach.”

Following Thodey’s comments that a deal with the Federal Government around the separation of the company could be months off, Chaisatien agreed that a deal could be at least six months away.

Concurring that the complex negotiations behind the deal would take a number of months more, Ovum’s Kennedy said that uncertainty around the separation of Telstra was effectively becoming the new normal.

“We’ve almost gotten to the point where uncertainty around Telstra has become the ‘business-as-usual’, uncertainty around the NBN,” he said. “However, if you look at the number of ULL lines that ISPs are renting from Telstra, we’re not really seeing any decline at all. Ericsson is also saying their sales are quite healthy… so the market isn’t seeing the uncertainty around Telstra as a reason to stop investing.”

Looking to the positives in the results, Kennedy said healthy cost savings from the IT transformation, such as a reduction in the need for labour, going directly to the bottom line was a good sign.

“If this continues as expected in the second half, it will underpin consistent profitability and cash flow performance,” he said. “Other good news was that fixed broadband and mobile revenues were resilient. In particular, fixed broadband revenue performance recovered in late 2009, despite its long-term decline in retail broadband market share.”

However, Telstra’s difficulty in differentiating itself in the consumer market would be an ongoing weakness in the medium term, Kennedy said.

“In addition, ongoing profitability performance will depend on Telstra’s ability to keep the cost base moving downwards and using its transformed capabilities to get new customers and higher revenue yield in its major markets.”

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