Andy Penn pins hopes on radical Telstra revamp

Andy Penn can stay in charge at Telstra as long as he follows through with today’s overhaul and the slashing of 8000 jobs.

Telstra CEO Andy Penn arrives to speak to the media at the Telstra Customer Insights Centre in Sydney earlier today. Picture: AAP

The question heading into today’s strategy briefing was whether it will be enough to save Andy Penn’s job at the helm of the company and the short answer is yes, provided he can execute the plan over the next 12 months.

The trick is to rebase earnings around what is expected to be a low point next financial year and then, with the worst of the NBN rollout over and 5G wireless available, earnings should increase going forward.

They need to when you consider back in 1999 the company was producing $3.8 billion in net profit the same as it will this year on $8.8bn more in revenue of around $27bn.

The difference of course is in part explained by the NBN which has robbed Telstra of its fixed wire rivers of gold but industry growth has slowed and for the 2019 financial year Penn is forecasting a 2.2 per cent decline in industry revenues.

Telstra earnings before interest, tax, depreciation and amortisation are expected to fall from $10.3bn to as little as $8.7bn over the period.

The good news for shareholders short term is that dividends, according to New Street’s Iain Martin, will stay at around the 22-cents-a-share mark.

The company reaffirmed this year’s dividends at 22-cents-a -share this year but made no comment on 2019 dividends which will be set in August when the company releases its full year numbers.

The big strategic change today was the plan to cut the number of mobile plans from around 1800 to just 20 core packages, which is a massive change along with the decision to scrap excess data charges which will cost the company another $500m in revenue.

Penn has declared customers have had enough with complexity and want service and simplicity.

Telstra of course has been down this path before back in the days of Sol Trujillo’s “one-click service” and in the telco world these kinds of changes are easier to say than implement.

All this simplicity means less staff and Penn is wielding a massive axe chopping 25 per cent of the workforce, or 8,000 people, down to 24,000, which is less than half the numbers back when Telstra was floated in 1999 when it employed 52,000 people.

He also plans $2bn in asset sales and to split in the company’s old network assets into a separate company which, in essence, will be the vehicle which collects some of the $98bn in taxpayer subsidies Credit Suisse figures the company will collect over the life of the NBN rollout.

One of the smartest things Telstra did in the NBN negotiations was demand to keep control of the ducts which house the copper wires which meant an ongoing stream of rental payments after the rollout is complete in 2020.

The new network company, which will also own the HFC fibre, is the perfect vehicle to own the NBN when the government inevitably tries to sell it.

The law says Telstra can’t buy it back but if it owns say 25 per cent of the new infrastructure vehicle with, say, Macquarie Bank, then what’s to stop that vehicle buying the NBN?

Some 90 per cent of the population has a mobile phone and only 70 per cent have fixed line access, which is necessary if we want to watch a lot of movies or consume other data on the internet.

But with 5G making wireless becoming more appealing, that door also opens for Telstra in a network it controls.

There are options for Penn and he has laid the ground today for a radical revamp.

Just whether he gets to execute the plan long term will depend on the way he rolls through this year.

The market was disappointed with the weak profit outlook and Telstra’s stock was down by about 5 per cent during midday trade at $2.75 a share.

That won’t worry Penn so much because he is painting 2019 as a re-based year and 2020 as the restart of Telstra the growth stock.

Plenty will hope he has that part right because its known in the trade as a parking lot stock, something you leave in your in the drawer and forget about.