If we are going to have a debate about Telstra looking very sick, and being reminded about who posted what, then I also think that it is appropriate for me to re-post some of my earlier observations on Telstra (dating back to 2001).
For some of the more recent members to HC, you will find some very detailed observations, of a forward looking nature, in relation to Telstra.
In due course, these observations will need to be updated, but for now, it it time for the information to be re-circulated, and for this debate to be concluded.
Included in amongst this collection are some pricing observations (note, for instance the $4.70 - $4.80 range reference, at the time, since modified in early May to the lower $4.00 region.
Member Grant62 Email Address withheld Member Since 3-Dec-00 No. Connections 1033 No. Posts 252
The results are now in, and many within the investment community have re-crunched their numbers, and re-considered their outlooks, in determining new strategy positions for Telstra. Whilst some have rated Telstra a Buy on the basis of Q1/02 results, others have downgraded Telstra to a Hold. None, however, have rated Telstra as a Sell, even though there will invariably be moments of price weakness in the days, weeks, and months ahead.
Much, therefore, can be made of the numbers, the initiatives, the people, and the political climate in charting an appropriate destiny for Telstra.
For some, the belief is that Telstra has run its course, and is now having to rely on cost reduction management, or new fangled management concepts (such as Six Sigma) in order to drive the business forward.
For others, the belief is that Telstra will shortly resume its mantle as the natural monopolist, whilst all other telcos within Australia whither and crinkle under the formidable weight of Telstra's unassailable market lead.
For others again, the political process may well offer relief, in the form of an opportunity to invest, divest, or to manipulate a desired outcome.
For others again, the economic climate will present them with opportunities, as well as hurdles, whilst questions will remain regarding the capacity, depth and enduring ability of Telstra management to handle all that is still to come before them.
However, to all who are concerned about the future destiny of Telstra, reality will have it that a more cohesive, and efficient business structure will eventually evolve from out of the Six Sigma process, the current machinations of management, the future revolution of the current economic cycle and the gazed stares of Canberra's politicians.
The future destiny of Telstra will, therefore, take its lead from Six Sigma, but in doing so it will also present wide-ranging opportunities to many of the other participants in the telecommunications sector.
SIX SIGMA:
Whilst to some, Six Sigma is all about cost reduction management, to others it is all about driving future business efficiency.
In its most holistic form, Six Sigma is a formidable business process that is designed to produce profitable outcomes through: 1) streamlining a company's business operations; 2) improving quality; and 3) eliminating defects or mistakes in everything that a company does.
It is within the context of factor 3) that Six Sigma is in its most potent form. In particular, it is designed to eliminate the occurrence of defects altogether through re-creating the processes of business (ie: so that the defects are not produced in the first place). In other words, excusable conduct is a foreign concept in the context of Six Sigma.
Conversely, with most other quality systems, the root causes of a defect are never examined. Under such systems, the occurrence of a defect can be identified and corrected, but usually not in the same way as to prevent a repeat occurrence at some time in the future.
Taken, therefore, to its extreme form, Six Sigma will build the optimal corporation. But, it will also build a corporation based on an inherent core, coupled with strong and effective alliance management. Within a Six Sigma context, the concept of being in many and varied fields of endeavour will evaporate, leaving in its place the inner core of the business. To this, however, will be added an inherent strengthening of alliances across wide-ranging business disciplines, including with competitors, in order to secure an optimal business environment. In other words, Six Sigma will provide Telstra with the opportunity of extending its reach through: 1) having and maintaining an inner core business; and 2) putting in place effective alliances to match the intensity of its inner core business.
As a result of this approach, Six Sigma is likely to see some of Telstra's businesses being jettisoned in the future, as they give way to the strengthening of the inner core.
Six Sigma, therefore, is likely to result in Telstra re-inventing itself, by way of re-defining its role in telecommunications, and streamlining the wide variety of customer offferings that it currently has in place across most telecommunications' disciplines.
WHY IS THIS NECESSARY?:
In answer to this, one must look at what Telstra is really comprised of, and how it defines its continuing relevance in the Australian marketplace.
To most of us, Telstra comes across as a single-purpose telecommunications company which provides a telephone service in the home, or to your mobile.
To others, however, Telstra takes on many of the noodles of Knowledge Nation, a mightily complicated, confused, and utterly tangled beast of burden, which is struggling to find its true role in telecommunications, in a post-deregulated environment.
It's competitors are many and varied, and cover the length and breadth of telecommunications activity in Australia, today (as well as elsewhere).
Whilst many of Telstra's competitors are carving out a niche presence for themselves, Telstra seems to be into everything, even to the extent of having duplicated offerings in place for many of its telecommunications' alternatives. Take the following examples, for instance.
TELSTRA CUSTOMER OFFERINGS AND ITS CAPEX COMMITMENT:
For one of our largest corporations, Telstra really comes across as a rather confusing, and somewhat tired, offering.
For starters, Telstra operates in an inordinate number of different business and /or technology dependent areas.
In the area of MOBILE TELEPHONY, for instance, Telstra has 2G, and 2.5G (ie: GPRS) in place, and has previously boasted that it will be first to market in 3G, even though it has not yet released any tenders for this, nor has it made any vendor selection, etc. It has CDMA and WAP and has only recently let go of AMPS.
Conversely, both SGT (through Optus) and HTA have already made firm commitments to 3G, but not Telstra.
In CDMA, Telstra competes with HTA, whilst in GSM it competes with Optus, Vodafone, and HTA (on a re-sale basis).
In 3G, Telstra may well end up competing with HTA, Optus, Vodafone, and (if market opportunities abound) Unwired (Steve Cosser's band) and Qualcomm. But, most of all, Telstra will end up competing with itself internally for CAPEX and the commitment to business execution on an orderly, constructive, basis. Six Sigma, for instance, will not permit a business to run 3 or 4 competing technologies, all spruiking for essentially the same class of customer (ie: wirefree). Whilst some significant degrees of differentiation will exist between GSM, WAP, GPRS and 3G, the reality will have it that you cannot simultaneously compete for all 3 or 4 classes of technology. This is made altogether more difficult by the fact that each competing technology will require significant commitments to CAPEX on an ongoing business.
Most recently, Lucent found out to its absolute dismay that many of its marketed technologies were actually more in competition with themselves (ie: internal competition for CAPEX, marketing resources, etc), than with external competitors. In applying Six Sigma logic to Lucent earlier this year, many of these competing technology streams were closed down and conditions streamlined to create a much more efficient business, going forward.
The same too, for Telstra. In a CAPEX related commentary today (29/10), JB Were noted that "Telstra's core business is currently experiencing very tough operating conditions. If Telstra was able to achieve improved capital deployment over the medium term, it would certainly be positive for the stock. We are unlikely (however) to have definitive direction on this issue from the Company for some months".
As for what all this meant as a statement, JB Were noted that recent comments by some of the US based telcos regarding significant CAPEX reductions in the forthcoming 12 months, meant that CAPEX on a "year on year" basis was likely to fall by upwards of 20%. Translated through to Telstra, this could potentially lead to a CAPEX reduction of some $300m or more over the course of the next 12 months.
Analysed further, JB Were noted that in 2000 "domestic" business CAPEX was $4.6B, reducing to $4.0B in 2001, and further down to $3.8B in 2002.
With Six Sigma designed, in part, "to drive improved returns from capital deployed to maintain efficient internal processes" (according to JB Were), the risk to Telstra is that it will (quite simply) not have sufficient CAPEX in place to fund its myriad of technology platforms. And, this is so, just from a wireline perspective.
When progressed forward to other areas of the Telstra business, one finds that in the area of broadband, Telsra has no less than 5 competing technologies, comprising variously HFC, DSL, Satellite, and fibre access on both an inter-city, and an intra-city basis. Contrasting this, Optus has all this, and more, including LMDS, whilst companies such as AAPT have only DSL and LMDS, Macquarie Telecommunications, only DSL, Powertel, only DSL and intra and inter-city fibre access, Amcomm, only intra-city fibre access (and soon to be, inter-city fibre access on an East-West meridian), Uecomm, only intra-city fibre access, Austar, only satellite and MMDS access, and so on.
In other words, Telstra has the whole banquet, whilst everybody else has specialised into one or more sub-sets of the banquet.
Beyond this, Telstra, like all of the other main telco players in Australia, has data switches in place.
And, then, if that were not enough for one company to handle, you get to wireline, where (again in competition with one or more of the other telcos mentioned above) Telstra has IDD, local loop, and the internet (both broadband and wireline). And then, in Pay TV, Telstra has cable and satellite as immediate alternatives, as well as DirectPC (powered by satellite).
Taken altogether, that amounts to one mighty big grouping for Telstra to fund on a clearly focused, harmonious way, going into the future. No wonder, it appears to be losing some of its way, forward.
And, bear in mind, these offerings are all within the domestic environment only, and take no account of Telstra's undersea cabling, nor of its operations in New Zealand (where it has a direct presence, as well as the Telstra Saturn JV, and has today (29/10) made a bold grab for Clear Communications through its telstra Saturn JV).
And, then, you go to Hong Kong, where Telstra has all of its Asian investments in place with PCCW, including its 3G bid in Hong Kong. Then, elsewhere in Asia, it has such local country offerings as TDMA (ie: D-AMPS) in Sri Lanka (but not rolled out in Australia), and so one.
Many countries, many technology platforms, many competing choices, and alternatives, without even embracing the competition. No wonder the signs of a confusing beast seem to be stirring somewhat from within.
And yet, when challenged on any of this, Telstra's bold response is generally to say that it will be first to market in this or that (ie: in 3G, even though nothing has yet been announced on this). And so, we hark back to the fact that previously, Telstra was most often first to market in AMPS (as a monopoly), in GSM (as a near monopoly), in CDMA (as a regional and rural alternative to AMPS), and hence, tends to rally to the catchcry: "because in the past, we have always been first". Such a catch-cry, however, is full of both arrogance, as well as defects, and will soon be caught out by Six Sigma.
ELECTION FEVER
In saying this, however, I am not saying that Telstra is doing everything wrong, but merely seeking to point out that when faced with a myriad of choices, some of those choices will eventually have to miss out. Or, alternatively, a radical overhauling of the business in some way or another will be required.
Going forward, therefore, the easiest outcome would be for Telstra to become fully privatised, but such is the nature of that debate, that a full and final privatisation of Telstra may still be one or more terms of Government away from reality. If that is the case, then Kim Beazely may well get his social justice dividend (ie: by keeping Telstra half owned publicly), but he will lose enormously on the Knowledge Nation front. An educated nation is a technologically advanced and adept nation, one which accesses,a s well as embraces, technology. Half hearted approaches to achieving this are singularly unwelcome, and yet with the way in which the Telstra business is both structured, and owned, such an outcome in the forthcoming years is altogether liekyl, if Labor finds its way into power (or even if the Coalition retains power, but only be a slender margin, but does not control the Senate).
In other words, a hobbled together, and much split organisation of the future will see Telstra's existing market share in many of the areas in which it currently competes steadily erode, because of Telstra's increasing future reliance on cash, as opposed to o effective debt management, or the use of share capital. As a result of this, companies such as Amcomm and Powertel may well take market share from Telstra in the area of broadband, whilst Austar and Optus may well make gains on Foxtel in the PayTV arena (remember there, for instance, the current argument over the need to invest $500m in upfgrading the Foxtel service to digital). Similarly, in the area of traditional wirefree telephony, both Optus and Vodafone (assuming that Vodafone stays as a separate telco) will steadily gain share at Telstra's expense. Whilst, in the area of 3G, HTA will quickly get the jump on Telstra, and the other wirefree rivals in Australia.
In other words, a highly competitive marketplace, with a shackled ownership structure, many competing technologies in place (internal, as well as externally) and the need to drive capital efficiencies throughout the organisation means that it is Telstra that will now become the encumbered telco, rather than the unecumbered predator.
ANALYSTS' COMMENTS
As for the analysts, last week they reviewed the Q1 briefings presented to them by Telstra. Many were surprised by what they heard, with future growth down, but mobile revenues up.
CSFB for instance, noted that Telstra was well positioned (low gearing, strong cash-flows, local access near monopoly) and was improving control of costs and CAPEX, but cautioned that its key growth drivers (ie: data and mobile) were under presure. MNP was regarded as a real risk to Telstra, particularly in ARPUs, even if the early experiences to date had not yet materialised in this way.
As a result of this, CSFB forecast lower future revenues, whilst noting that Telstra's legacy data revenues will continue to be cannablised by the appearance of more cost effective products.
In rating Telstra as a HOLD with a 12m price target of $5.00, CSFB also noted that Telstra's "strength in mobile will be short-lived as SME customers roll off contract and are chased aggressively by SingTel (Optus), Vodafone and Hutchison. This will put pressure on Telstra's premium ARPU levels".
Conversely, DEUTSCHE regarded Telstra as a BUY, with a $6.00 target. On Mobiles, Deutsche suggested that Telstra's current gains "may prove difficult to hold over the year". Deutsche also argued that the battle over MNP would be fought on the yield arena, rather than in the fields of market share.
JP MORGAN criticised Telstra's pullback on CAPEX, but applauded its decision to drop subsidising handset costs believing that "this was the type of announcement that could deliver a dividend from reducing levels of competition".
Conversely, MERRILL LYNCH was of the view that any reduction of future handset subsidies (ie: GPRS and 3G) would be shortlived. According to ML, "a big risk here is that Hutchison will enter the 3G market in late 2002 with heavily subsidised handsets in order to gain market share quickly, which may force the incumbent operators to re-think their tactics".
On CAPEX, ML considered that there was a very real risk that this could quickly fall to as low as $3B going forward which would almost certainly see some of Telstra's currently deployed technologies being mothballed, or newly emergent technologies, such as 3G, being further delayed, again to the eventual potential benefit of both HTA and to Optus (whose 3G contract was awarded to Nokia back in April).
On a ratings basis, ML remained NEUTRAL /ACCUMULATE, but did not express a price target.
MACQUARIE took a similar view to all this, noting especially that CAPEX reductions would be cashflow positive for Telstra, but quite possibly at the expense of future revenue growth. MACQUARIE still viewed MNP as a looming threat to Telstra in the area of mobile retention and yield, whilst the reduction in handset subsidies would most likely hold back growth in data.
UBS WARBURG was supportive of the Q1 market briefing, re-iterating its BUY for Telstra, with a price target of $6.20 whilst believing that Telstra will retain its growth rate in mobiles, whilst losing out somewhat in data.
JB WERE's (HOLD) concerns revolved around Telstra's revenue growth performance "and the obvious lack of visibility on two of the business lines (that Telstra) regard as (its) growth engines, namely data and wholesale revenues". In data, JB Were considered that Telstra "was experiencing an acceleration in the deterioration of industry structure in this business segment. Two things are happening of primary significance: 1) Telstra is suffering a migration of customers from monopoly business lines (ISDN) to contestable business lines where they enjoy only around 50% market share; and 2) competitors are winning market share in these contestable business lines primarily with aggressive price discounting. These are big, well capitalised operators (SGT, TEL, MCI) as well as the smaller players (MAQ, PWT). Hence revenues initially generated from these new products are lower yielding than the monopoly business lines suffering this product migration".
JB Were went on to then say: "This begs the question - will Telstra's data revenues rebound in the medium term? We believe it will, but only modestly".
Contrasting this, JB Were noted that significant capital efficiencies could be derived by Telstra from out of CAPEX rationalisation, etc.
JB Were also noted that the removal of the handset subsidies was likely to lead to further industry deterioration, with the prospect of operators, such as HTA, taking further market share from Telstra, especially in 2003 and beyond (ie: once 3G was up and running).
THE FUTURE
Taken altogether, Telstra's future remains handicapped, in a bubble of legacy, and leading edge product offerings, set against a hybrid Government ownership, with more social obligations imposed on it than on any other telco operator in Australia. Telstra's ability to withstand all these challenges, therefore, has much to do with whether competition is truly alive in the Australian telecommunications environment. If, it is, then Telstra's market share in many different product categories will continue to be eaten away at, whether by the larger placed SGT and Vodafone's, the mid-placed HTA 3G specialisation, or the smaller placed data service providers, such as PWT, AMM and MAQ.
The future, therefore, for Telstra can be described in just two words, SOMEWHAT CHALLENGING.
Best Regards, Grant
SECOND POST, FROM 24 NOVEMBER 2001 (WITH 6 MONTHS FORWARD LOOKING PRICING PROJECTIONS, THROUGH TO 24 MAY 2002):
Reply by Grant62 to CarbonFibre (2 of 9)
Message TLS , Telcos, force their PEGs ..Mimic the Banks. (read 482 times; 1 reply) Conference ASX Posted Sat 24-Nov-01 21:43
Member Grant62 Email Address withheld Member Since 3-Dec-00 No. Connections 1033 No. Posts 252
Carbonfibre,
With much, much more to worry about than raising its flag call charges, Telstra is in a position where it rapidly has to now make a number of choices: * technology choices; * people choices; * market choices; * business choices.
If not, then I fear that Telstra will drop further back in terms of scale, presence and relevance.
Within the Australian marketplace, Telstra (as the former incumbent monopoly PTT) is (and currently remains) a giant. Beyond Australia, however, it is a minnow.
Its reach (geographical grasp, not its regional IP backbone company) is essentially in Australia and (through Telstra Saturn, cum Clear) in New Zealand. Along with PCCW, it has a bit presence in Hong Kong and in several other parts of Asia.
But beyond this limited scope, Telstra's presence elsewhere is restricted to having localised switching points in foreign countries (ie: in the UK and USA) to switch Telstra originating or terminating traffic.
Its revenue profile is heavily skewed towards Australia and New Zealand (>85%) and its competition battlefronts in Australia are growing, rather than diminishing in size, scale, commitment, and CAPEX requirements.
In the area of technology presence, it also has over 800 different technology platforms in place, all of which are (and remain) capital hungry.
In the future, however, Telstra will no longer be able to keep many of these platforms in place. The cost of doing so will (quite simply) be far too prohibitive for the type of returns that it is currently capable of generating.
Even with a current CAPEX commitment of >$4.0B, Telstra is facing intense pressure to wind-down these commitments to a much less sustainable level. In doing so, however, Telstra will increasingly place at risk its future (ie: to keep up to date, as well as to fend off its competitors).
However, when measured against this prospect, Telstra management are apparently not listening. Superficially, they already know that by reducing CAPEX, short-term profits can be drastically improved, given the almost $ for $ exchange that generally occurs in reducing CAPEX (vs OPEX).
That is why, in adidition to the current OPEX reduction programme, Telstra management have seen to it that (going forward) their estimates of future CAPEX are dramatically reduced from near current (ie: FY00) levels.
By next year, Telstra CAPEX will be tracking in the range of $3.5B to $3.8B (at least, according to Merrill Lynch and JB Were), vs a FY00 outcome of $4.8B.
Even on the more optimistic ABN Amro reviews, next year's CAPEX will track $4.0B (excluding capitalised interest), down over $800m in a little over 18m.
However, excluding its Reach investments, FY02 CAPEX will approximate $3.85B (according to ABN Amro).
And, of this CAPEX, just how much of it goes into building the businesses of the future? Little, I would suspect.
On current ABN Amro estimates, for instance Telstra's FY02 CAPEX will generally be distributed along the following lines: Switching (17%); Transmission (14%); Consumer access (19%); Mobile networks (14%); Broadband (5%); International infrastructure (0.3%); Capitalised software (16%); Regional Wireless Company (3.5%); and Miscellaneous, etc (11.2%).
Broadly split, 50% of Telstra's FY02 prospective CAPEX will go into wireline and its existing network (ie: maintenance, upkeep, etc).
But, less than 20% will go into new-edge businesses, such as mobile networks, broadband, etc.
A further 16% will go into capitalised software, whilst ~10% will be allocated to a wide pot pourri of CAPEX commitments, including presumably Pay TV, satellite services, buildings, R&D, applications development, JORN defence commitments, USO obligations, etc.
And finally, <5% will go into its international businesses.
In other words, far from Telstra's recent pronouncements regarding new revenue platforms, covering variously data, broadband, Pay TV, international, etc, much of Telstra's future CAPEX commitments will steer well clear of these areas.
For expediency and other reasons, Telstra's recent $1.0b commitment to broadband appears somewhat hollow, or premature, given that it is likely to spend this commitment over a number of years, as opposed to immediately.
Similarly, Telstra's commitment to digitising the FoxTel Pay TV service (rumoured at >$500m) appears to have become so stalled as to have now essentially missed its mark. Pressure points, therefore, now abound in trying to secure a lasting solution to this rapidly growing crisis.
Conversely, both Optus and Austar Pay TV networks already boast interactive TV, and digitised platforms.
And, internationally, Telstra's revised (ie: deeper) commitment to Telstra Saturn and Clear Communications in NZ is likely to suck out Australian originating CAPEX in the future.
Elsewhere, therefore, little or no discretionary CAPEX remains for Telstra to invest in expanding its CDMA network, or in rolling out 3G in the foreseeable future.
As a consequence of this, Teltra has virtually yielded the "first mover" advantage to Hutchison (something which Hutchison Whampoa is very, very skilled at capitalising on everywhere it operates in the world, whether in telecommunications, or anything else).
Add in to this equation, the funding, operating /marketing crisis faced by Vodafone, and Optus' mute approach towards 3G (since announcing the award of its 3G contract to Nokia back in April), and virtually all the incumbents are allowing for Hutchison to become both: * the primary 3G player in Australia; and * an entrenched future participant in the industry.
Telstra's ability to play catch-up in these circumstances, therefore, is quite difficult (ie: at least without losing considerable marketshare elsewhere).
In consequence of all this, Telstra is now facing the dilemma of having to reduce both CAPEX and OPEX (already, all discretionary travel, even for business related purposes has been banned, as Telstra's wrestles with controlling its costs profile).
And, in the last few days, it has resorted to price hikes, and trimming of packaged benefits (ie: less value for same $), as a way of shoring up its profitability.
Soon, however, it will have to look at cutting even deeper into its workforce, as has been recently rumoured on a number of different fronts.
Beyond this, Telstra will also have to look at slimming down against many of its 800 different technology platforms and, perhaps, consider exiting altogether from some business areas.
Even further than this, however, Telstra is likely to try and spin-off some of its businesses in order to release locked up value (already, it has tried to do so with NDC, albeit without success). Expect, however, for Telstra to soon try and do this again with its Pacific Access directories business, its international investments, IBN-GSA, FoxTel, and perhaps with its core switching network business.
And, if all this was not enough, also expect for Telstra to exit from some of its market investments, including Keycorp, and its Commander Communications business.
Beyond this, Telstra will be lobbying furiously for full privatisation during the 3rd Howard term, so that it can stop using internal cash to finance CAPEX and acquisitions.
Bringing all this together, suggests to me a business under growing stress, and embracing a siege mentality, rather than a business building for tomorrow.
That, therefore, is why the current share price movements are reflecting a short-term uptick prior to further erosion in future value.
My prediction on Telstra's 6m forward looking share price: * a small high of $5.70 -$5.80, * near term lows reverting to the $4.70 -$4.80 range, and * an average share price of $5.10 to $5.30.
In order to beat any of these estimates though Telstra will have to prudently deliver against all of the choices outlined at the beginning of this note. This, however, is something that I doubt that they can achieve, particularly given the current management and ownership arrangements.
Best Regards, Grant
THIRD POST, 25 NOVEMBER 2002:
Reply by Grant62 to FallGuy (9 of 9)
Message Has TLS turned the corner? (read 396 times; 1 reply) Conference ASX Posted Sun 25-Nov-01 16:31
Member Grant62 Email Address withheld Member Since 3-Dec-00 No. Connections 1033 No. Posts 252
Hi FallGuy,
Telstra generating $100b in revenue by 2010, I would like to see that!!!
To get to that sort of figure will require 20% compound growth for the balance of the noughties (ie: now through to 2010).
Last financial year, Telstra grew by 12.5%, and this financial year, Ziggy and co are already on the record as saying either "high single digits, or low teens".
I agree, however, that in order for Telstra to grow, it must move offshore. But, in order to generate real revenue growth, Telstra will have to either: 1) beat off allcomers and conquer once and for all, the Australian domestic market (ie: assuming that ACCC and the politicians are impotent to do anything about it); 2) grow through investment (ie: pick out particular markets, and develop a business from scratch); 3) grow organically (ie: by growing the value of their business in those markets where the Company is already active, such as NZ, and in Hong Kong); 4) grow by association (ie: through growing the business of its associated comapnies such as Telstra Saturn, cum Clear in NZ, and Reach, in association with PCCW in Hong Kong); or 5) grow by acquisition (ie: by taking over other businesses /telcos in the near Asian region).
No matter which of these choices are made by Telstra, the following is clear:
1) None of this growth will eventuate without the support of a massive increase in annualised CAPEX.
2) To achieve this, Telstra will have to cut down on its annual dividend payouts (ie: Normandy re-visited) thereby converting Telstra into a future growth stock.
3) Telstra will also have to ditch many of its myriad of techologies (ie: >800 different technology platforms in place, at least count) in order to concentrate on those platforms which will deliver Telstra its future revenue growth pattern (ie: as suggested by your note).
4) Telstra will also have to find some way in which to alleviate the need to use cash. Equity is better, but can only be applied once the Company has been fully privatised.
This, however, will not occur until late 2003 at the earliest, or perhaps until 2005 (ie: near, at or after the time of the next Federal election).
5) Once fully privatised, Telstra will have to issue equity in order to secure its future acquisitive profile (ie: by buying out competing companies in the region, etc).
However, by the time that Telstra is freed up to do this (ie: 2005), many of the prospective choices for acquisition will have already have been acquired by others (ie: by Hutchison Whampoa, by NTT DoCoMo, or by SingTel - assuming of course that a grand alliance between these 3 Asian giants doesn't occur beforehand).
As such, in order to compete, Telstra will have to move to a much higher acquisition price which, in turn, will risk its future growth profile.
6) Telstra will also have to ensure that it does not cede "first mover advantage" status to the likes of Hutchison in the Australian market place, particularly when it comes to 3G, or to SingTel, when it comes to switching Asian data traffic.
If, however, Telstra does not grow by acquisition, or by merger, then Telstra will have to rely on its alliances /JVs in order to grow internationally. This is already occurring with Telstra Saturn in NZ, and with PCCW in relation to Reach. But, relying on alliances in order to grow also requires revenues to be shared. This, therefore, will mean that Telstra's $100b target will fall way short of its mark.
According to ABN Amro, Telstra's prospective growth forecasts will get it to ~$24b in revenue by 2004. On a 20% compound growth path, however, Telstra's 2004 revenue will need to be close to $40b in order to reach its $100b target by 2010.
Quite simply put, Telstra (in order to be freed up from the shackles of public ownership) is likely to split itself into 2 or more companies within the next few years, one of which will provide basic telecommunications' services (and may well stay publicly owned).
The other 2 or more companies will variously concentrate on mobiles, data, entertainment or Pay TV, and on international.
In this way, Telstra will clearly grow in the future, but still not to the sorts of levels that will ultimately command a $100b annualised turnover by 2010. Best Regards, Grant
FOURTH POST, 28 JANUARY 2002 (WITH PRICING FORECASTS REPEATED):
TLS-Telstra to slice $1bn off spending. (read 316 times; 1 reply) Conference ASX Posted Mon 28-Jan-02 19:01
Member Grant62 Email Address withheld Member Since 3-Dec-00 No. Connections 1033 No. Posts 252
MarxBrothers,
I agree with you. Reduction in CAPEX does only one of 2 things: 1) reduce overcommitment on capital expenditure in times of low intensity competition (ie: the near virtual monopoly, or in response to a total collapse in demand); or 2) as a shortsighted, one off boost to the share price (ie: almost a direct 1 for 1 correlation here - extent to which CAPEX falls translates into the extent to which the share price will often rise).
Far from facing falling competition, Telstra's competitors are just getting started, whether it be in broadband, 3G, "last mile" exchange access, PayTv, international expansion, or in the myriad of IS /IT fields of activity.
Telstra can well reduce some CAPEX through rationalising its >800 separate operating platforms. If so, then its approach should be welcomed by all concerned. If, however, the approach being taken is a lopsided cut to CAPEX, then Telstra is mortgaging its future for near term shareprice protection.
In a detailed note posted to HC on 30 October 2001, I observed that:
"In other words, (with) a highly competitive marketplace, ... a shackled ownership structure, many competing technologies in place (internal, as well as externally) and the need to drive capital efficiencies throughout the organisation .... it is Telstra that will now become the encumbered telco, rather than the unencumbered predator".
As part of that note, I commented in detailed on Telstra's CAPEX dilemma. For ease of reference, I have repeated that extract, below.
That said, I also argued in a separate note (25th November) that Telstra's share price would continue to flucuate (within the next 6 months, to end April 2002), along the following lines: * a small high of $5.70 -$5.80, * near term lows reverting to the $4.70 -$4.80 range, and * an average share price of $5.10 to $5.30.
Since then, Telstra's share price is struggling to stay above the $5.50+ mark.
However, what of T3? When that comes along, Telstra will be having to rethink its CAPEX strategy, at just about the same time as the Government will be extracting either $$$, or "society" commitments from Telstra.
In other words, far from having an easy ride going forward, Telstra is heading straight into "the Perfect Storm" (ie: competing pressures from the markets, competitors, the politicians, analysts, and, of course, its customers).
Any wrong move on CAPEX, going forward will, therefore, cripple Telstra's ongoing status as a "cash cow cum growth stock". At this time, the jury is out, but Telstra seems to still be knee jerk reacting to market /analyst concerns.
------------------------------------------------------------------------------------------ COMMENTS ON TELSTRA CAPEX, EXTRACTED FROM MY HC POSTING OF 30 OCTOBER 2001: ------------------------------------------------------------------------------------------
TELSTRA CUSTOMER OFFERINGS AND ITS CAPEX COMMITMENT:
For one of our largest corporations, Telstra really comes across as a rather confusing, and somewhat tired, offering.
For starters, Telstra operates in an inordinate number of different business and /or technology dependent areas.
In the area of MOBILE TELEPHONY, for instance, Telstra has 2G, and 2.5G (ie: GPRS) in place, and has previously boasted that it will be first to market in 3G, even though it has not yet released any tenders for this, nor has it made any vendor selection, etc. It has CDMA and WAP and has only recently let go of AMPS.
Conversely, both SGT (through Optus) and HTA have already made firm commitments to 3G, but not Telstra.
In CDMA, Telstra competes with HTA, whilst in GSM it competes with Optus, Vodafone, and HTA (on a re-sale basis).
In 3G, Telstra may well end up competing with HTA, Optus, Vodafone, and (if market opportunities abound) Unwired (Steve Cosser's band) and Qualcomm. But, most of all, Telstra will end up competing with itself internally for CAPEX and the commitment to business execution on an orderly, constructive, basis. Six Sigma, for instance, will not permit a business to run 3 or 4 competing technologies, all spruiking for essentially the same class of customer (ie: wirefree). Whilst some significant degrees of differentiation will exist between GSM, WAP, GPRS and 3G, the reality will have it that you cannot simultaneously compete for all 3 or 4 classes of technology. This is made altogether more difficult by the fact that each competing technology will require significant commitments to CAPEX on an ongoing business.
Most recently, Lucent found out to its absolute dismay that many of its marketed technologies were actually more in competition with themselves (ie: internal competition for CAPEX, marketing resources, etc), than with external competitors. In applying Six Sigma logic to Lucent earlier this year, many of these competing technology streams were closed down and conditions streamlined to create a much more efficient business, going forward.
The same too, for Telstra. In a CAPEX related commentary today (29/10), JB Were noted that "Telstra's core business is currently experiencing very tough operating conditions. If Telstra was able to achieve improved capital deployment over the medium term, it would certainly be positive for the stock. We are unlikely (however) to have definitive direction on this issue from the Company for some months".
As for what all this meant as a statement, JB Were noted that recent comments by some of the US based telcos regarding significant CAPEX reductions in the forthcoming 12 months, meant that CAPEX on a "year on year" basis was likely to fall by upwards of 20%. Translated through to Telstra, this could potentially lead to a CAPEX reduction of some $300m or more over the course of the next 12 months.
Analysed further, JB Were noted that in 2000 "domestic" business CAPEX was $4.6B, reducing to $4.0B in 2001, and further down to $3.8B in 2002.
With Six Sigma designed, in part, "to drive improved returns from capital deployed to maintain efficient internal processes" (according to JB Were), the risk to Telstra is that it will (quite simply) not have sufficient CAPEX in place to fund its myriad of technology platforms. And, this is so, just from a wireline perspective.
When progressed forward to other areas of the Telstra business, one finds that in the area of broadband, Telsra has no less than 5 competing technologies, comprising variously HFC, DSL, Satellite, and fibre access on both an inter-city, and an intra-city basis. Contrasting this, Optus has all this, and more, including LMDS, whilst companies such as AAPT have only DSL and LMDS, Macquarie Telecommunications, only DSL, Powertel, only DSL and intra and inter-city fibre access, Amcomm, only intra-city fibre access (and soon to be, inter-city fibre access on an East-West meridian), Uecomm, only intra-city fibre access, Austar, only satellite and MMDS access, and so on.
In other words, Telstra has the whole banquet, whilst everybody else has specialised into one or more sub-sets of the banquet.
Beyond this, Telstra, like all of the other main telco players in Australia, has data switches in place.
And, then, if that were not enough for one company to handle, you get to wireline, where (again in competition with one or more of the other telcos mentioned above) Telstra has IDD, local loop, and the internet (both broadband and wireline). And then, in Pay TV, Telstra has cable and satellite as immediate alternatives, as well as DirectPC (powered by satellite).
Taken altogether, that amounts to one mighty big grouping for Telstra to fund on a clearly focused, harmonious way, going into the future. No wonder, it appears to be losing some of its way, forward.
And, bear in mind, these offerings are all within the domestic environment only, and take no account of Telstra's undersea cabling, nor of its operations in New Zealand (where it has a direct presence, as well as the Telstra Saturn JV, and has today (29/10) made a bold grab for Clear Communications through its telstra Saturn JV).
And, then, you go to Hong Kong, where Telstra has all of its Asian investments in place with PCCW, including its 3G bid in Hong Kong. Then, elsewhere in Asia, it has such local country offerings as TDMA (ie: D-AMPS) in Sri Lanka (but not rolled out in Australia), and so one.
Many countries, many technology platforms, many competing choices, and alternatives, without even embracing the competition. No wonder the signs of a confusing beast seem to be stirring somewhat from within.
And yet, when challenged on any of this, Telstra's bold response is generally to say that it will be first to market in this or that (ie: in 3G, even though nothing has yet been announced on this). And so, we hark back to the fact that previously, Telstra was most often first to market in AMPS (as a monopoly), in GSM (as a near monopoly), in CDMA (as a regional and rural alternative to AMPS), and hence, tends to rally to the catchcry: "because in the past, we have always been first". Such a catch-cry, however, is full of both arrogance, as well as defects, and will soon be caught out by Six Sigma. Best Regards, Grant
TLS Price at posting:
0.0¢ Sentiment: None Disclosure: Held
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