Telstra to axe 8000 jobs, intensify cost cutting as it reaches ‘tipping point’

Telstra shares have swooned after it unveiled plans to slash about a quarter of its workforce, as union leaders decry cuts.

A Telstra logo is seen as pedestrians walk outside the Telstra Melbourne headquarters in Melbourne: Picture: Getty

Telstra shares have slumped to a seven-year low after it announced plans to shed over 8000 jobs over the next three years and split its infrastructure and mobile business, as it moves to slash an additional $1 billion of costs by 2022.

The flagged job cuts will make an appreciable dent in Telstra’s total workforce of 32,000, with executive and management roles to bear the brunt of the move.

Telstra shares have dived as much as 7 per cent in mid-morning trade to $2.695, as traders reacting negatively to its strategy update, which included news that the telco would:

• Split infrastructure business from mobile business (with an eye for demergers)
• Radically simplify its mobile offerings and automation
• Target more than $2 billion in asset sales
• Expect a fall in FY19 earnings to between $8.7bn and $9.4bn
• Pay a 22c per share dividend for FY18, but was non-committal on the dividend outlook for FY19

“We are creating a new Telstra that is able to continue to lead the market,” Mr Penn said.

“In the future our workforce will be a smaller, knowledge-based one with a structure and way of working that is agile enough to deal with rapid change. This means that some roles will no longer be required, some will change and there will also be new ones created.”

The reduction in workforce will come as Telstra consolidates all of its back office processes into the Telstra Global Business Services group. According to Telstra the restructure should deliver an overall reduction in labour costs of around 30 per cent and the telco has announced two new programs to assist affected employees.

A ‘Transitions Program’ will provide outplacement support for employees let go, as well as providing support for existing workers to upskill and adjust to a leaner and more agile organisational structure.

The telco has slated initial funding of up to $50m for the programs.

The Communications Workers Union said the drastic job cuts would devastate thousands of families and showed Telstra was putting short-term profits above long-term services for the community.

Communications Workers Union national president Shane Murphy called on Telstra chief executive Andy Penn to reconsider the cuts.

“In an industry which is booming, Telstra has clearly chosen to prioritise short term profits to keep shareholders happy, instead of investing in the future of Australia’s network,’’ he said.

Mr Murphy said the plan to hive off Telstra’s network of infrastructure “seems a first step to selling it off altogether”.

“This is a recipe for reduced services, with Telstra’s highly skilled workforce of employees and contractors replaced by casuals and pieceworkers,’’ he said.

“These cuts will directly impact on Telstra’s ability to service existing clients, particularly those who in regional areas rely on the network for business and essential services.

“Today’s jobs purge is the low-point of 20 years of privatisation, which has consistently taken the low road of cutting jobs rather than investing in vital community infrastructure.”

Communications minister Mitch Fifield acknowledged on Friday that the announcements was a difficult one to swallow for the telco’s workforce.

“I have spoken to Telstra CEO Andy Penn who has assured me that the workforce reduction will occur over a number of years,” he said.

He also pointed to Telstra’s establishment of a $50m fund to assist affected staff during this transition, as a worthwhile step.

The focus on a leaner organisational structure is linked to Telstra accelerating its existing cost cutting initiatives, with the telco on Wednesday increasing its productivity target by a further $1bn to reduce underlying core fixed costs by $2.5bn by FY22.

As part of today’s comprehensive set of measures to reposition itself in the market, Telstra is also splitting its infrastructure and mobile business.

The Telstra InfraCo unit will comprise Telstra’s (TLS) nbn co commercial works activities and Telstra Wholesale, with a total workforce of approximately 3000.

Controlling assets with a book value of about $11 billion, the unit will have annual revenues and EBITDA of about $5.5bn and $3bn respectively.

“As technology innovation is increasingly relying on connectivity, the role of telecommunications infrastructure is becoming more important,” Mr Penn said in a statement lodged at the ASX prior to its investor day.

“By creating a new infrastructure focused business unit we will better optimise and manage these assets,” Mr Penn said.

InfraCo will not include the mobile network assets including spectrum, radio access equipment, towers and some elements of backhaul fibre. These assets will be part of Telstra retail business.

The measures outlined by Telstra are in response to the ongoing erosion in its overall earnings. The hollowing out of its fixed line margins, courtesy of the NBN, and the fierce competition in the mobile market has put Telstra in a place it’s unaccustomed to.

Mr Penn said that the bold measures were required if Telstra was to stay relevant in the telecommunications environment, which has changed significantly.

“In this environment traditional companies that do not respond are most at risk,” he said.

“We have worked hard preparing Telstra for this market dynamic while ensuring we did not act precipitously, however, we are now at a tipping point where we must act more boldly if we are to continue to be the nation’s leading telecommunications company.”

Mr Penn said that the Telstra 2022 program was a direct response to the changing market dynamics.

“The Australian telco market is entering an extremely challenging period driven by a number of factors including the NBN transition and increased mobile competition. We are seeing this play out in our financial performance and therefore the impact on the economics of the company are very significant,” he said in a statement.

The company is ceding its position as the wholesaler of capacity in the fixed line market to the NBN, exposing its business to the high wholesale prices charged by NBN Co.

Meanwhile, maintaining the strength of its mobile network and adding more customers requires Telstra to invest significant capital.

Telstra shares hit a six-and-a-half year low in May after it warned investors that its full year 2018 earnings will land in the bottom end of the forecast range of $10.1bn to $10.6bn.

Having already reduced the payout ratio for its dividend, analysts and a legion of Telstra’s retail shareholders have been worried that the telco can’t hold the line on its 22 cents a share full year dividend.

Telstra has reconfirmed that the total dividend for FY18 will be 22 cents per share but did not provide any guidance for FY19.

Mr Penn said he was confident the strategy would set Telstra up well for the future.

“Customers will have more choice than ever in a post-NBN world with increasing mobile competition. We are committed to leading the market in a period of transition and positioning ourselves to create a strong platform for growth.”

“At its core, this strategy is about placing customers at the centre of everything we do and delivering simpler, more flexible products with a beautiful digital service experience,” he said.

The last major cut to Telstra’s overall workforce came in June 2017 when it cut 1400 jobs.

At 11.37am (AEST) Telstra shares were down 14 cents, or 4.81 per cent, at $2.77.