Thodey ahead in 4G race

‘The beefed-up 4G push could now entrench Telstra’s gains.’TELSTRA chief executive David Thodey unveiled an important tactical move when he announced the group’s 5.4 per cent rise in June-year profit to $3.4 billion yesterday. He is going to divert $400 million that would have fallen to this year’s profit line and invest it in growth.
Nanjing Night Net

Risk-shy investors who have piled into Telstra’s high-yielding shares and helped push them from $2.61 in March last year to a high of $4.07 on Monday sold yesterday as Thodey redeployed Telstra cash and held off on dividend increases and capital returns. The shares closed 9¢ or 2.3 per cent lower, at $3.88. This is the second time Thodey has forsaken short-term profits in pursuit of a big reward since he took over in 2009, however, and the latest move should succeed.

Telstra’s capital expenditure increased by 5.3 per cent to $3.6 million in the year to June, and included $800 million of mobile network spending. The rollout of Telstra’s high-speed 4G mobile service was a new ingredient in the mobile budget. Telstra was the first Australian

telco to launch 4G in September last year, and already has 40 per cent of Australia’s population covered. Earlier this week, Thodey won the board’s backing to put his foot on the 4G accelerator and, potentially, on his competitors’ necks.

The plan he successfully presented to the board calls for Telstra to boost mobile network spending this year by another $400 million to $1.2 billion and to use the funds to ramp up the 4G rollout.

Thodey said yesterday that he wanted to maintain Telstra’s ”network advantage” but that’s just a polite description of a much more brutal strategy.

Telstra has installed more than 1000 4G base stations and from a flat start last September has signed up 375,000 customers on 4G mobile and wireless broadband packages. The take-up is greater than Thodey and his executives predicted and it is accelerating: subscriber numbers have doubled since May.

Thodey’s pitch to the board was that the group had an opportunity to turn its first-mover advantage in a service that will become ubiquitous into something much more formidable.

The board agreed with the chief executive and it’s a very important tactical call, in two ways. Firstly, it could be the kind of game changer for Telstra that the construction of the NextG network by Thodey’s predecessor, Sol Trujillo was. Secondly, it underlines that while Telstra is a high-cash-flow, high-dividend-yield venue for investors, under Thodey it will also allocate funds to growth gopportunities: budgets can and are being significantly adjusted when opportunity knocks.

The NextG network that Trujillo built is the most efficient and ubiquitous 3G network in this market and after Thodey harvested $1 billion of potential gross earnings and used it to structurally lower Telstra’s mobile plan prices in the second half of 2010, its latent power was unleashed. The telco signed up 1.6 million new mobile customers in the year to June, and has secured more than 3 million customers in the past two years.

Mobile services revenue rose by 8.5 per cent or $679 million to $8.7 billion in the year to June just completed, and mobile profit margins actually widened, from 33¢ of earnings before interest, tax, depreciation and amortisation per dollar of sales to 36¢.

Mobile services are sold by several of Telstra’s business units, and mobile profits are not separately detailed. The margin and sales expansion points to an outstanding 21 per cent rise in mobile-related EBITDA in the June year, however, from $2.6 billion to $3.1 billion. That’s almost a third of Telstra’s earnings.

Vodafone’s well-documented coverage debacle and market share losses in this country helped, but Telstra’s mobiles momentum is mainly attributable to the strength of the network that Thodey inherited, and his decision to invest $1 billion in lower mobile prices.

The beefed-up 4G push could now entrench Telstra’s gains. Smartphone and mobile broadband users are going to progressively convert to the faster 4G service, and the share of smartphones in the mobile market will also inexorably rise, from the current level of about 50 per cent.

Thodey is being cautious because early adopters of new technology also tend to be the heaviest users, but he is moving to recreate leadership in a market that is inherently more profitable than the 3G one it is overtaking: 4G’s forte is download speed, and it drives revenue per user higher.

The move makes Telstra a slightly riskier conveyance: Telstra will, for example, temporarily go about 1 percentage point above its capex-to-sales target of 14 per cent while the extra money is spent.

It is still a strong yield play with its 28¢ a share annual payout, however, and the odds are good that Thodey’s accelerated spending will open up a 4G lead that is unassailable.

Telstra’s competitors will get a healthy 4G market share too, but Telstra’s lead in the 3G market is on course to be successfully transferred and, perhaps, expanded.

The Maiden family owns Telstra shares.

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