telstra mindless frenzy , page-3

Duff here it is:


IT seems we have a new pyschosis gripping the nation: Telstra derangement syndrome. Or TDS for future historians.

Its twin characteristics are hyperventilation and an intense and completely uninformed interest in meaningless Telstra minutia. In many cases, especially among opposition politicians and political journalists it leads to babbling inanities.
Even the head of ASIC Jeff Lucy has fallen victim, unveiling a completely pointless investigation into a non-existent issue - Telstra's recent profit downgrade.

In his case the cause of the syndrome is fairly clear. He's been weakened by PVT - post Vizard tension, brought on by the accusation that he had "gone soft" on Steve Vizard.

When in Lucy's case, TDS collided with PVT, the outcome was inevitable. You could almost smell an inquiry coming on.

Going soft on a funny man who'd lost his cheesy grin was one thing.


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But to allow yourself to be accused of abandoning 1.8 million mums and dads and future generations even, of small shareholders, to the merciless machinations of rent-seekers and profiteers!
That would be an altogether more serious matter.

So what exactly is the purported problem with Telstra's profit statements? Indeed, of the profits themselves?

On August 11, when announcing a thumping record $10.6 billion gross operating profit, new CEO Sol Trujillo said this about the outlook.

"Earnings will likely decline in 2005-2006 at the EBITDA and EBIT lines." That's profit before interest, tax, depreciation and amortisation; and before interest and tax.

Decline? What does that mean? I'd suggest something more than 1 per cent and something less than 10 per cent.

It was a "prediction" based on an overall appreciation of a wide range of factors - what was happening inside Telstra, the competitive environment, regulation, state of the economy and so on. Plus "guidance" from the first month's trading.

Then we come to last Monday's profit downgrade, based on a review of two months trading - more than double the information from one month, as obviously the second month is a better guide to what lies ahead. Plus more information about both the CEO's strategic review and what regulatory changes Telstra may face.

Leading to this "revision": 2005-06 EBIT was expected to "decline by 7-10 per cent".

So, we've had a change from somewhere within a 1-9 per cent decline to a 7-10 per cent decline. That's marginal to the point of nothing, although it nails it more specifically.

But crucially, let's not forget, this is a forecast based on two months trading. The actual outcome will turn on what happens over the next 10 months.

There was absolutely - not just, "arguably" - no obligation on Telstra to make that second statement. The change in outlook was not sufficient to oblige disclosure.

That said, I welcome any company that over-informs its shareholders. There's equally no obligation on a company not to make marginal adjustments to its published outlook.

Also note that it came on Monday morning September 5, so it was effectively prepared on Friday September 2 - on information for a month that ended two days earlier.

You can't get more timely than that. So what is ASIC going to investigate?

This also goes to the frenzy over Telstra's supposed secret disclosure that it was going to hell in a handbasket. That "worst-case" 10 per cent drop would still leave Telstra with a $6.3 billion EBIT profit this year.

Yes, it may be paying dividends from retained profits. But that's an exercise in balance sheet management - there's no point letting money pile up in the accounting equivalent of under the bed.

And it's still committing $4 billion this year to capital expenditure on its network, up from $3.6 billion in 2004-05.

None of this has been a secret. Indeed, one of those frothing at the mouth from TDS this week, Labor's Lindsay Tanner, had this to say about that very strategy when it was publicly announced by Telstra a year ago.

"Telstra gets it right." Labor welcomed that Telstra would focus on its existing businesses and "return money to shareholders".

It'll be interesting to see w