Penn under the gun as Telstra's earnings hangover gets worse

As the reality sinks in that Telstra earnings have fallen off a cliff, so the chatter about the need for a management overhaul is re-emerging. Whether chief executive Andrew Penn can escape this time remains to be seen.

There was something of a push a year or two ago by shareholders for new leadership, to which Telstra responded in two ways. Direct operational reports like Kevin Russell, who was in charge of retail, were replaced. In addition, Telstra beefed up its technology credentials, importing former Nokia and Microsoft executive Stephen Elop to the newly created position of group executive, technology, innovation and strategy, as well as Tesla director and former Juniper Networks senior executive Robyn Denholm.

Telstra CEO Andy Penn is guilty of a couple of things.

It’s great to have those big names looking at longer-term strategy but it’s the here and now that Telstra is having problems with.

The share price has fallen from over $3.70 at the start of the year to $2.92 - about 8 per cent over the past two days. This has nothing to do with the fact that Telstra doesn’t look like an international technology company.

It's because the market, until two days ago, had underestimated the damage that the national broadband network (NBN) had wrought on Telstra’s earnings. They knew the earnings would fall off a cliff. They didn’t previously understand the size of the cliff.

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That $3 billion impact that the NBN would have on Telstra’s earnings is now certainly going to be larger. We don’t know how much larger and that makes markets nervous.

Penn is guilty of a couple of things. The first is a suggestion that Telstra could emerge post-NBN as a technology company with products and services that could restore its earnings to the good old days when it had a monopoly terrestrial network.

He could also take some blame for not having Telstra in sufficiently good shape on costs or customer service to be match fit for the onslaught of competition in mobiles and broadband.

Sure, the emergence of TPG as a new competitor in mobiles was a blow, but it shouldn’t have been a surprise that a new entrant would come in.

Penn also seems to have underestimated the downside of the NBN.

There will now be howls from investors to get costs out faster and run the legacy businesses more productively. That is a fair call.

Sure, the emergence of TPG as a new competitor in mobiles was a blow, but it shouldn’t have been a surprise.

Photo: Rob Homer

And there will be questions about whether the $3 billion capital being spent on the networks, which Telstra announced back in 2016, will provide an economic return. (To be fair we will never probably know the answer to that question because without that investment the situation could have been worse.)

Citi’s research team laid this bare in a note to investors on Tuesday.

"Telstra’s current strategy isn’t working. Mobile, fixed line and data and IP are in decline and being commoditised. Core earnings before interest, tax, depreciation and amortisation growth was -12 per cent in 1H18 and we estimate this has accelerated to -14 per cent in 2H18. In our view, Telstra’s market share, ARPUs and earnings are all unsustainably high across mobile, fixed line and data and IP. In our view, Telstra needs to be more aggressive with cost cutting, and could consider more drastic actions including asset sales, tower sharing agreements and even providing competitors with access to core infrastructure in order to boost wholesale revenues."

Other investment bank analysts roughly echoed these sentiments - albeit a little more delicately.

Citi says the recent introduction of unlimited mobile plans may lead to customers cancelling fixed broadband services and switching to unlimited mobile - ie paying for one mobile service rather than the current trend of fixed broadband and mobile - a move made more possible in a 5G era. (There are plenty of experts that say even 5G won’t provide enough bandwidth to watch Netflix during peak periods).

If Tesla's Elon Musk were running Telstra, he would have received the same order from shareholders.

Photo: AP

But unlimited mobile data, which many providers are now offering, will undoubtedly lead to some cannibalisation between fixed and wireless broadband.

As far as transforming Telstra into a global technology player, Penn and this board were never the people to do this.

Penn was not given a mandate to deal with the NBN receipts in any way other than to pop the money in Telstra’s safe and then hand it back to shareholders. If Tesla's Elon Musk were running Telstra, he would have received the same order from shareholders.

But there are large, shell-shocked shareholders who are very unhappy with the recent turn of events and, as with any company, the buck stops at the top.

Elizabeth Knight comments on companies, markets and the economy.

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