And the Winner Is! David Thodey for Telstra.

By Kenneth Robson on January 24, 2014 • ( 0 )

Writing in the Personal Computing Magazine APC 15 February 2010, Renai LeMay titled her profile of the new Telstra Chief “Will nice guy Thodey finish last”.

She asked:

Nobody wants the pugnacious Sol (Solomon) Trujillo back, but is Telstra’s charming new CEO David Thodey too much of soft touch to rescue Telstra from steady decline.

She pointed to declining revenues and earnings, limited growth opportunities in a market that is rapidly being commoditised and subject to huge levels of government intervention, an inevitable separation of its wholesaler and retail operations looming and a need to plough its growing cash pile into investment, Telstra is currently facing a raft of challenges the like it has never known.

Four years later the stars would seem to be aligning for Telstra, and David Thodey is looking a winner.

http://apcmag.com/Content.aspx?id=5209

Telstra’s David Thodey riding crest of telco wave he created

December 21, 2013

Adele Ferguson

Between Telstra’s float of a majority-owned Chinese car sales website Autohome last week and the $2 billion cash sale of its Hong Kong-based mobile phone business on Friday, the telco has built up a tidy kitty to retire debt, make an acquisition, or issue a special dividend or share buyback.

Exiting a business in one of the world’s most cut-throat and mature mobile phone markets and booking a profit was welcomed by investors, particularly as it will translate into a $500 million upgrade to its free cash flow guidance to $5.1 billion.

To put it into financial context, assuming no hitches to the deal going through, by 2015 Telstra will have excess cash flow of more than $4 billion, if the NBN payments don’t slow down too much, which provides it with some serious options.

The sale of the CSL mobile phone business also marks the end of a flawed strategy that Telstra embarked on in 2000 when it joined forces with Richard Li and PCCW to crack the Asian market. The hope was that the Li dynasty would give it preferred access to China and other parts of the region.

The deal was structured at the height of the dotcom boom and the cultures were too different to ever fly. It was a complex deal that included CSL, a mobile phone business in Hong Kong that has done well in the past three years, despite it being in a small and crowded market of five operators.

But when David Thodey took the top job at Telstra in May 2009, the Hong Kong business was never going to be part of his grand plan. To that end he has been looking for a sensible exit plan that would allow him to refocus on other parts of the business and tinker with its Asian strategy in different ways.

It comes at a time when telcos are making big decisions about their growth path: do they remain a utility or move into the exploding $1.4 trillion-plus enterprise market, which provides equipment and communications technology services to corporate and business clients well beyond legacy connectivity services.

Thodey knows the high profit margins that come from the value-added enterprise market, specifically the information communication technology sector, and to this end he is building networks to accommodate the next big thing in telecommunications. This was no better demonstrated than earlier this year when Telstra announced a $1.1 billion contract with the Department of Defence, which was described at the time by Thodey as the ”largest customer undertaking in the company’s history”.

The aim was to deliver technology ”that can become the backbone of Australian Defence for the next decade and beyond”. The contract involves hiring 350 staff, supporting unified communications, advanced video-conferencing as well as tablet and smartphone usage to support military operations at home and abroad.

It is a big leap for companies and government departments to outsource much of their business, but it is increasingly happening. Some companies are building their own networks on the cloud, while others are outsourcing them as communications change the way business is being conducted.

Electricity companies are rolling out smart meters to create smart grids, and health sectors are moving towards third parties managing their business. It is an area that Amazon and Google have entered with aplomb and which numerous telcos are clamouring to put their stamp on, offering end-to-end services to corporations and government departments.

It is a high stakes game that has prompted some key players to reposition themselves to get a piece of the action. For instance, Chinese telco Huawei decided to expand into the handset business to raise its profile. As Chen Lifang, also known as Madam Chen, a global director, member of the company’s Australian board and corporate senior vice-president, told BusinessDay earlier this year: ”We have beautifully designed mobile phones, but no one heard of us before”.

This dramatic strategic decision, which includes becoming the No.1 handset provider in the world, isn’t just about selling more devices, but building confidence so that Huawei can better crack the lucrative enterprise market. It is no coincidence that Huawei decided to diversify from its core carrier business into branded devices at the same time it moved into the enterprise market.

Telstra is well placed in Australia to move deeper into this market as it has a big brand. Whether that means taking it globally is another question.

Thodey said on Friday Telstra was committed to growing its footprint in Asia, despite the sale of CSL. He said Telstra had opened a new data centre in Singapore, 18 points of presence across the region and two new cable investments in the past 18 months. It has invested ”billions of dollars” in infrastructure in Asia, according to Thodey.

But its presence in Asia is little more than dabbling, with revenues generated out of the region totalling $1.7 billion in 2013, with $1 billion of that flowing from CSL. After the CSL sale, Telstra will be generating $700 million of revenue from Asia, which hardly makes a dent on its overall group revenue of $25.9 billion.

Telecoms consultant Paul Budde at BuddeComm says he recalls a conference in 1996 in Geneva when the then Telstra boss said by 2000 more than 25 per cent of revenue would be coming out of Asia.

”Throughout the past 15 years it is very clear they have enough on their plate in Australia, for the rest it is nibbling,” he said.

For shareholders, it has been the mother lode of rich dividends that has made Telstra a retail investor darling. Its share-price rise over the past three years has been nothing short of spectacular. But with skinny franking credits, questions are being raised about whether the carrier will choose to make acquisitions or pursue organic growth rather than hand some of the spoils back to investors through a special dividend.

Thodey isn’t saying, but whatever the case, under his management, the telco has found itself in a sweet spot, with a strong balance sheet and solid investor support at a time of massive change in global communications. It is in sharp contrast to a few years ago when investors almost used pitchforks to oust the former management crew.

Technical analysis of a monthly chart of Telstra since being floated in October 1998

In retrospect the float of the government-owned telecommunications giant Telstra was a brilliant decision by Howard and Costello, shoring up government finances. With the mining boom, it paved the way for successive years of budgetary surpluses.

For the many retail investors it has been an absolute “dog”,

On the up and up now?

Observations

From this chart,

a High price of $9.20 was reached in November 1999
a steep down trend petered out in March 2003 at $3.93.
the share price continued to languish, forming a double bottom at $2.55 November 2010 and in March 2011 after David Thodey became CEO.
since then there has been a steady and sustained impulsive move higher to penetrate the long-standing support/ resistance level of $5.
extrapolation of the present trend line suggests a possible target of $6 could be attained by the end of 2014.

Conclusion

With Thodey at the helm Telstra adopted a more conciliatory attitude to Labor’s plan for a National Broadband Network.

Now under a Liberal coalition party administration, Telstra is looking to play a more active part in rolling out the NBN Co structures.

Revenues are increasing with increasing dependence on mobile telecommunications, and the internet for entertainment, news and information, commerce, and advertising.

Company operations have been re-structured to reduce debt, increase cash reserves and improve profitability.

With the half-yearly reporting season upon us, the expectation is for an excellent result for Telstra, making Thodey a winner.

Disclaimer

This post should not be relied upon for making investment decisions.

Rather professional investment advice should be sought specific for your needs.