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Telstra sets new strategy to improve customer experience, simplify structure and cut costs
- Creation of a new wholly owned infrastructure business unit, 'InfraCo' to drive performance and provide future optionality for a demerger or the entry of a strategic investor in a post-nbn rollout world
- Radical transformation of customer plans and pricing to deliver improved customer experience
- Increase of our productivity program by a further $1 billion to $2.5 billion cost out by FY22
- 8,000 net reduction in employees and contractors and reduction in 2-4 layers of management
- Monetisation of up to $2 billion in assets over the next two years to strengthen the balance sheet
- Telstra to remain premium brand and lead and win in 5G
- FY19 EBITDA guidance1 of $8.7 - $9.4 billion expected excluding restructuring costs of approximately $600 million
Wednesday 20 June 2018
Telstra today announced a new strategy to lead the Australian market by
simplifying its operations and product set, improving customer experience and reducing its cost base.
The strategy, named Telstra2022, has four key pillars:
Telstra CEO Andrew Penn said the strategy would fundamentally change the nature of
telecommunication products and services in Australia by eliminating many pain points for customers.
"We will take a bolder stance and use the disruption in the telecommunications industry to lead the
market for the benefit of our customers, employees and shareholders," Mr Penn said.
"The rate and pace of change in our industry is increasingly driven by technological innovation and
competition. In this environment traditional companies that do not respond are most at risk. We have
worked hard preparing Telstra for this market dynamic while ensuring we did not act precipitously.
However, we are now at a tipping point where we must act more boldly if we are to continue to be the
nation's leading telecommunications company."
A consequence of the plan is an expected net reduction in employee and contractor numbers of 8,000,
including removing one in four executive and middle management roles to flatten the structure.
"We are creating a new Telstra that is able to continue to lead the market. In the future our workforce
will be a smaller, knowledge-based one with a structure and way of working that is agile enough to deal
with rapid change. This means that some roles will no longer be required, some will change and there
will also be new ones created," Mr Penn said.
"We understand the impact this will have on our employees and once we make decisions on specific
changes, we are committed to talking to impacted staff first and ensuring we support them through this
period."
Telstra2022 pillars
The strategy leverages the significant capabilities already being built through Telstra's up to $3 billion
strategic investment announced in August 2016 in creating the Networks for the Future and digitising
the business.
"The network investments have been critical as Telstra builds capability in software defined networking
and prepares to lead the market and win in 5G. We will be network ready in the first half of FY19 with
full rollout to capital cities, regional centres and other high demand areas by FY20," Mr Penn said.
The Telstra2022 strategy will therefore be underpinned by the largest, fastest, safest, smartest and
most reliable next generation network. The digitisation program is delivering completely new technology
stacks for Consumer and Small Business and Enterprise customer segments which will be the platform
for the new products we are launching."
The four pillars of the program are:
Pillar 1:
Radically simplify our product offerings, eliminate customer pain points and create all digital
experiences
Telstra has announced it will transform the experience of its Consumer and Small Business customers.
This will be different to anything currently in the market, addressing the need to increase the simplicity,
transparency and satisfaction that customers experience with telco products today. This will see a
fundamental change to the way Telstra designs products, sells services and provides customers with
support. Leveraging its investment in digitisation, Telstra will simplify its products by retiring all of its
more than 1,800 consumer and small business plans and instead introducing 20 core plans backed up
by an effortless digital service that removes complexity and provides cost certainty - addressing key
pain points for customers.
Customers will start to benefit from this simplified approach in July when Telstra launches peace of
mind data across a range of new post-paid plans, making excess data charges a thing of the past. Four
more major product and service experiences will be progressively announced in the lead up to June
2019, the details of which will remain confidential at present for competitive reasons.
By June 2019 Telstra customers will experience a radically simplified experience made possible by new
intuitive digital platforms, with all customers being moved to the new product range by 30 June 2021.
For Enterprise customers, Telstra already offers some of the best digital solutions in the market. Telstra
will continue to be the best one-stop shop for all B2B technology needs, offering customers a modular,
curated, self-service and simplified product portfolio. The program to remove complexity will be
accelerated to reduce the existing product portfolio by more than half within three years. The approach
will also include greater emphasis on a digital-first model, supported by software-based platforms and
Internet of Things. It is expected this will bolster Telstra's historical strength with large customers and
enable it to push firmly into the mid-market and increase market share.
Over the past year, Telstra has built a completely new technology stack for mid-market and Enterprise
customers, which will enable these changes. Telstra will use the natural momentum in the business to
migrate customers to the new product suite enabling it to stop the development of products on legacy
systems, and aggressively rationalise old applications and services.
Pillar 2:
Establish a standalone infrastructure business to drive performance and set up optionality post
the nbn rollout
Effective from 1 July, Telstra will create a wholly owned standalone infrastructure business unit. It will
have its own CEO reporting to Mr Penn. The business unit, called Telstra InfraCo will comprise Telstra's
high quality fixed network infrastructure including data centres, non-mobiles related domestic fibre,
copper, HFC, international subsea cables, exchanges, poles, ducts and pipes. Its services will be sold
to Telstra, wholesale customers and nbn co.
Telstra InfraCo will also comprise Telstra's nbn co commercial works activities and Telstra Wholesale,
with a total workforce of approximately 3,000. It is expected this new Business Unit will control assets
with a book value of about $11 billion and have annual revenues and EBITDA of about $5.5 billion and
$3 billion respectively.
"As technology innovation is increasingly relying on connectivity, the role of telecommunications
infrastructure is becoming more important. There is virtually no technological innovation happening
today that does not rely on a high quality, reliable, safe and secure telecommunications network. In this
world our infrastructure assets are becoming more valuable. By creating a new infrastructure focused
business unit we will better optimise and manage these assets," Mr Penn said.
The new business unit will not include the mobile network assets including spectrum, radio access
equipment, towers and some elements of backhaul fibre, which will remain integrated with Telstra's core
customer segment focused business to support the company's network differentiation. This is
particularly important for Telstra's mobiles business as it executes its 5G strategy.
The new infrastructure business unit will provide more flexibility and transparency in the management of
Telstra's underlying infrastructure. Amongst other things, the arrangements will reinforce the discipline
with which capital allocation occurs across the group.
Importantly, Telstra InfraCo will provide significant optionality for Telstra in the future for a potential
demerger or the entry of a strategic investor once the nbn rollout concludes.
Telstra's H1 FY19 financial statements will contain detailed segment reporting for Telstra InfraCo.
Pillar 3:
Greatly simplify our structure and ways of working to empower our people and serve our
customers
Telstra will implement a new streamlined operating model and organisational structure to be announced
in July. Ways of working are being simplified and re-aligned to increase the focus on best serving
customers, increasing the focus on product leadership, breaking down silos and enabling the sizeable
transformation to which Telstra is committing today.
In addition to Telstra InfraCo, one of the first changes to come into effect will be the creation of the
Telstra Global Business Services group, also reporting to Mr Penn. This group will be a point of
consolidation for all large scale "back of house" processes and functions using technology to reduce
costs for large repeatable functions.
Telstra also intends to elevate its focus and capabilities in product development and management
across the company increasing the leverage and sharing of technical efforts across all customer
segments.
The implementation of Telstra Global Business Services combined with accelerated simplification of
processes, moving to more agile ways of working and product simplification is expected to lead to an
overall reduction in labour costs of around 30 per cent. This will result in a net reduction of 8,000
employees and contractors over the next three years. The initial focus will be on the reduction of
executive and management roles and minimising any impact on customer facing teams. Telstra will
also invest in approximately 1,500 new roles to build new capabilities required for the future, in
particular the shift to new engineering capabilities including software engineering and information and
cyber-security.
Recognising the significant impact these changes will have on employees, Telstra also announced two
new programs. A Transitions Program for those leaving Telstra will provide enhanced outplacement
support. For those remaining, Telstra will provide support to upskill and transition to new ways of
working in a leaner and more agile organisation. To support the programs Telstra intends to make
available initial funding of up to $50 million.
Pillar 4:
Industry leading cost reduction programme and portfolio management
Two years ago, Telstra narrowed its strategy to ensure all new growth investments were more closely
focused on products and services close to the core of the business. Since then decisions have been
made not to pursue international consumer opportunities such as in the Philippines, to sell the
investment in Autohome for $2.4 billion, to restructure the investment in Foxtel and to streamline the
health business and Ooyala.
Telstra intends to monetise assets of up to $2 billion over the next two years to strengthen the balance
sheet. It is also increasing its target for its productivity program by a further $1 billion to reduce
underlying core fixed costs by $2.5 billion by FY22. We expect Telstra's total costs will remain flat or
reduce despite absorbing more than $1.5 billion of increased nbn AVC/CVC costs that will be incurred
as we migrate to the nbn.
The key drivers of the increased productivity targets include simplifying the product set, phasing out
legacy products and systems and migrating customers to new products. Other drivers include further
digitising sales and service channels and continuing to improve procurement practices.
Benefits
The Telstra2022 strategy will deliver benefits for all stakeholders - customers, shareholders and
employees and will ensure that Telstra remains Australia's premium and most trusted brand in
telecommunications.
It has six specific goals with tangible and clear milestones covering customer experience, simplifying the
business, network superiority, people, cost improvements and strengthening the balance sheet. Details
include:
The cost out target adds a further $1 billion in productivity to Telstra's current announced target of $1.5
billion taking core non DVCs from $7 billion in 2017 to $4.5 billion by 2022. Telstra expects to incur
additional restructuring costs of approximately $600 million in FY19 and further restructuring costs
across the remaining years of the program including the potential acceleration of depreciation and
amortisation from the early shutdown of legacy systems.
Telstra is committed to the previously announced more than $500 million of incremental benefits from its
strategic investment program. Telstra2022 would not have been possible without these investments.
Telstra confirms there is no change to its capital management framework and expects its capex to sales
ratio to be 16 to 18 per cent in FY19. 2 3 Capex to sales over the medium term is expected to be 14 per
cent.
Mr Penn said Telstra2022 was developed in response to anticipated changing market dynamics, which
initiated the investments announced in 2016.
"The Australian telco market is entering an extremely challenging period driven by a number of factors
including the nbn transition and increased mobile competition. We are seeing this play out in our
financial performance and therefore the impact on the economics of the company are very significant.
Against that background, we announced in May that FY18 earnings will be at or around the bottom end
of guidance. We expect the trends to continue in to FY19. In our guidance for FY19 we have assumed
the market will decline 2 to 3 per cent in mobile and fixed revenue," he said.
Telstra advised the transition under the program is also likely to eliminate up to $500 million in revenues
for its services over the next three years, with excess data charges being the first example. However,
over the longer term Telstra believes these moves are in the best interests of customers as they
accelerate a trajectory already underway and will drive long-term value. They are expected to be more
than offset by more services per customer and lower costs from simplicity and leadership shown by
Telstra translating into new sources of growth.
"These trends are not dissimilar to that which we have seen in global telecommunications markets,
including the US and Europe particularly after the entrance of new mobile operators," said Mr Penn.
Telstra also provided the following financial guidance for FY194.
Mr Penn said he was confident the strategy would set Telstra up well for the future.
"Customers will have more choice than ever in a post-nbn world with increasing mobile competition. We
are committed to leading the market in a period of transition and positioning ourselves to create a strong
platform for growth. At its core, this strategy is about placing customers at the centre of everything we
do and delivering simpler, more flexible products with a beautiful digital service experience," he said.
1 See Footnote 4
New organisational structure and leadership team for Telstra
The changes form a three-year plan building on the strategic investments Telstra announced in 2016.
Telstra's dividend policy is set out in its capital management framework and is to pay a fully franked
ordinary dividend of 70 to 90 per cent of underlying earnings5 6and return in the order of 75 per cent of
net one-off nbn receipts over time via fully franked special dividends. 7 5
While Telstra does not provide forward guidance on the dividend, it is reconfirming today that the total
dividend for FY18 will be 22 cents per share6. Dividend decisions for FY19 will be announced in FY19.
2 Capex is measured on an accrued basis and excludes expenditure on spectrum and externally funded capex.
3 The guidance assumes the nbnT rollout and migration in FY19 is broadly in accordance with management's current best
estimates and may be updated for any material changes, including after taking account of the nbn Corporate Plan 2019 when it is
published.
4 This guidance also assumes wholesale product price stability and no impairments to investments, and excludes any proceeds
on the sale of businesses, mergers and acquisitions and purchase of spectrum. The guidance also assumes the nbnT rollout and
migration in FY19 is broadly in accordance with management's current best estimates and may be updated for any material
changes, including after taking account of the nbn Corporate Plan 2019 when it is published. The guidance is provided on a
consistent basis with FY18 accounting standards. Guidance will be updated during FY19 to be consistent with IFRS15 under
which we will report FY19 results. Capex is measured on an accrued basis and excludes expenditure on spectrum and externally
funded capex.
5 Underlying earnings is defined as NPAT from continuing operations excluding net one-off nbn receipts (as defined in footnote 6.
6 Return subject to no unexpected material events, assumes the nbn rollout and migration is broadly in accordance with
management's current best estimates, and is subject to Board discretion having regard to financial market conditions, business
needs and maintenance of financial strength and flexibility consistent with Telstra's capital management framework.
7 "net one-off nbnT receipts" is defined as net nbn one off Definitive Agreement receipts (consisting of PSAA, Infrastructure
Ownership and Retraining) less nbn net cost connect less tax.
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