Cornered! is a blog devoted, most of the time anyway, to telecommunications: local and global issues, technology, people and trends from the perspective of someone who's been reporting, analysing and commenting on the industry since the dark ages (BC - before competition). Sometimes serious, sometimes flippant, sometimes frivolous. Controversial, analytical, informative, amusing, but never boring; a vehicle for examinations of important issues and observations on my encounters and experiences in an industry where polarised views and hyperbole are the norm.
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Cornered! Telstra hits back at pessimistic analysts
Cornered! Telstra hits back at pessimistic analysts | Telstra hits back at pessimistic analysts |
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| by Stuart Corner | |
| Wednesday, 17 September 2008 | |
  
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What upset Stanhope was a piece in The Australian by Michael Sainsbury based on a research report from JPMorgan analysts Laurent Horrut and Colin Morawski with the depressing title: "Transformation - the Point of No Return". When Telstra CEO Sol Trujillo launched his $12 billion transformation programme in late 2005 the claim was that, by upgrading network infrastructure and by revamping and rationalising IT systems,Telstra would ultimately be able to maintain or increase revenue growth and margins with less capital expenditure down the track. However, in its results for 2008 Telstra revealed that the ratio of capital expenditure to sales was not going to decrease anytime soon as a result of cost overruns on the transformation project. As Horrut and Morawski put it (as quoted in The Australian) "With the downgrade of the 2010 capex target at the FY08 result from 10-12 percent to 14 percfent capex to sales ratio, both the 'new telco' long-term capex reduction story and the transformation plan's overall value accretion claim vanished in our view." The JPMorgan report identified another problem: Telstra's return on invested capital is presently 23 percent, five percentage points less than it was three years earlier. Telstra is bidding for the multibillion dollar national broadband network saying it wants an 18 percent return on its invested capital - five percent less than it is getting today. For it to get 23 percent, prices for access to the network (which will be government regulated) will have to be higher. According to The Australian, the JPMorgan analysts says the likelihood of the allowed rate of return on a Telstra-built NBN improving to Telstra's current return on invested capital of 23 percent is "extremely remote". The Australian summarises the JPMorgan analysts research by saying: "Cost overruns and delays in Telstra's $12 billion upgrade of its networks, information technology platforms and marketing programs will wipe out gains made in revenue growth, leaving shareholders no better off than they were when Sol Trujillo started his program." The transformation was certainly a high risk, high stakes strategy, and whether it will ultimately pay off still remains to be seen. However Stanhope does not specifically address transformation cost overruns, deteriorating capex to sales ratios and expected rates or return on invested capital, in his letter. He says it would be unrealistic to expect that Telstra would have maintained the annual growth rates forecast in 2005, and unfair to use these as a basis for comparison with the effectiveness of the transformation project. "Yes, 2.2 percent was Telstra's three-year growth rate pre-transformation. But no analyst back in 2005 forecast that the 2.2 per cent growth rate would continue. At the time, the consensus growth rate from 2005 to 2010 was just over one percent." He points out that "These small percentage differences are crucial. A one percent difference in annual growth equates to more than $1bn in revenue in 2010 and nearly $3b in 2015." |
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