telstra will come under pressure, page-4

Hi Plushtek,

I have been arguing this line for some time.

In a Telstra post on 28/8/02, I commented that "Telstra's domestic profit in 12 months time will be down more than what it is today, and its EBITDA and EBIT margins will be down....More worrying for Telstra, however, was the following:
1)
local /national minutes in use (23.3m MIU in FY01, vs 23.45m MIU in FY02, up 0.5% YOY);
2)
15% churn amongst its mobile customers (down from17% in FY01), but higher than is now being experienced amongst its mobile competitors);
3)
mobile ARPU down to $48.60, vs $52.5 12 months ago (despite the popularity of SMS messaging, and increased call rates, etc)".

I then went on to argue that "Telstra's challenges in the year ahead will be:
1)
to shore up and protect its domestic franchise;
2)
re-ignite growth in its domestic franchise;
3)
manage OPEX within a very tight operating environment (ie: from a cost containment perspective); and
4)
make its international operations work for the money (ie: improving profitability)".

Then, on 12/11/02, I noted that "the 3rd and 4th concerns eminate from:
1)
flat-lining in NZ (which in the space of 2 months has moved from growth, to stable, to under strain); and
2)
revnue /margin compression in Hong Kong".

I then went on to argue that "(a)t the moment, Telstra's overseas growth strategy is under risk".

Then, on the question of broadband, I argued that "Telstra's 2nd growth strategy, concerning Broadband is faltering due to a mis-matching on the pricing to value paradigm. The smaller tier broadband telcos are also finally completing their network rollouts, identifying their preferred markets, and operating in niche areas in order to chip away at Telstra's customer base (corporate, business or Government)".

Then, on 30/12/02, in response to FallGuy, I argued the proposition that "Telstra is increasingly becoming trapped as a dominant domestic carrier, and a niche regional player. Even its 3G prospects are half-hearted (for the time being), as 1xRTT is not a real 3G solution by any credible definition of the concept. Outside of Australia, Telstra's only other 3G prospects exist in Hong Kong".

From there, I went on to press the point that "Telstra's profits have also peaked which is why many of the analysts have started to downgrade their future profit estimates."

Simply put, Telstra is under, and remains under, stress. Its choice of 1xRTT was designed as a quick grab at the market which has failed to date. Telstra is now faced with the prospect of having to engineer additional OPEX reductions because the top line is not sufficiently elastic to allow for revenue growth.

Sigma 6 has achieved about as much as it can achieve through process improvement, elimination of broad-based duplication, etc.

In 2003, however, the hard issues must be tackled. Just what does Telstra stand for, and how will it achieve this?

Most other progressive telcos (whether in Australia or overseas) are either pursuing or implementing outsourcing of their networks to third party suppliers. Already this has been done for several networks in Australia. And, more will occur in this regard during 2003 (locally and globally). The question, however, is whether Telstra will embrace such a philosophy for, if they do, profit growth will return. But, if not, then flat-lining to negative growth (at leats in profit terms) is what Telstra faces in the near to medium term.

A growth stock, no.

A utility stock, yes.

A high dividend yielding stock, maybe, but really that will depend upon the extent to which Telstra's share price falls during the interim.

Negative H1 results, and /or negative market outlook guidance for 2003 will see Telstra's share price fall off by a factor of 10 -15% (back to the low $4s).

A passive result and /or outlook will merely mark the status quo, or send the stock 5% lower.

But going back above $5.00. For a while now, I have said that this will not occur. Nor, do I see it occurring during 2003 (unless a profit /outlook surprise occurs).

For my part, I no longer hold.