Those of us old enough to remember Telecom Australia will recall that it was synonymous with poor service and issues with its copper network. In some respects not much has changed since Telecom Australia became Telstra (ASX:TLS) on 1 July 1995.
But to be fair, the last 21 years haven’t all been a disaster. Telstra has benefited from the digital era. The company has long been considered the leader in both fixed and mobile network quality, whether measured by speed, reliability or geographic coverage. This gave Telstra an important competitive advantage over its rivals and enabled it charge more.
However, Telstra’s reputation for network quality might be coming to an end. There have been outages across both its fixed and mobile networks, including seven since February this year. One can only speculate as to what has gone wrong and who knows whether management is on top things yet. But what makes this change in reliability so surprising is that Telstra still spends so much money on its network.
At its annual result this Thursday, Telstra is expected to announce that it has forked out approximately $4.2 billion in capital expenditure, or capex. This equates to around 15% of sales, which is above the global average for a telecommunications company. If Telstra’s capex as a percentage of sales was in-line with global peers it would generate an additional $500 million of cash.
What’s even more surprising is that this year’s capex represents a step-up from what it used to spend. For years, Telstra’s capex was remarkably consistent at 14% of sales. It even dipped slightly below this in 2014. Go back five years and many shareholders would have hoped that Telstra’s capex would be a lot lower by now. Why? Because as the National Broadband Network (NBN) is rolled out, much of the capex required to maintain the new fixed network is taken out of Telstra’s hands.
There could be a number of reasons why Telstra spends more capex per dollar of sales than its global peers. Perhaps it’s attributable to Australia’s vast geographic size and sparse population. Perhaps Telstra’s network is older and needs more maintenance. Whatever the reason, high capex surprisingly hasn’t translated into a reliable network over the last few years. Should this continue, Telstra’s key competitive advantage will be lost and its pricing power will likely disappear with it.
I think its hard to shy way from holding the Telstra management and Board responsible for the high capex yet dismal network ‘breakdown’ record whatever the specific reasons. They are paid well to identify and resolve the issues.
Telstra’s poor customer service reputation is well deserved, and that’s been on the public record for at least two decades.
I recall Buffett’s observation (and presumably resultant investment) about Haynes when he saw how many people were wearing their T-Shirts – it’s a pretty basic but fundamentally obvious insight. I think Telstra could take a few cues from that. Share price and analysts comments and economic trends and management’s reputation may all be ‘well and good’, but if there are some fundamental weaknesses (or strengths) at the basic business level that are observable to even the drovers dog then it is time to take note.
At Telstra I would start with a possibly bloated and lazy management and Board, with Woolworths providing a warning light on the consequences of that.
As a segue, I would think that one of the obvious reasons many in management and on the board of these large public companies ‘fail’ in their work is that they are paid too well (usually ‘under the table’ – metaphorically speaking – by way of options, which often escape the public’s attention and ire). There pay should be what they receive in cash like any other employee with no hidden inducements based on performance. Can you imagine a pilot being paid a bonus on top of their salary for landing a plane safely, or a shearer a bonus for not cutting the sheep, or a tenant given an equity in the house they are renting if they don’t do too much damage. We have let these corporate ‘raiders’ (read managers, boards and corporate professional advisers – rent seekers) legally pilfer these companies for their own benefit.
Daniel,
Your commentary / analysis confuses me (easily done these days!) when you refer to Capital Expenditure (Capex) of $4.2B.
Can you please
(1) define what you / Telstra mean by Capex
(2) tell us if Telstra spends any $ on equipment/ infrastructure breakdown repair / preventative maintenance that is classified in their accounts as Operating Expenditure – Opex.
(3) compare Opex and Capex spend amounts / trends
In my day as a factory manager, our company accountants – working on ATO rules- dictated that money spent on repairing breakdowns or replacing worn parts in order to prevent breakdowns was coded as Operating Expenditure (Opex).
Capital Expenditure (Capex) was money spent on new installations to increase capacity or replacing existing equipment with new material that was of a superior nature to the original installation – even if the reason for spending the money was not to increase capacity but to replace equipment that was likely to breakdown and so reduce Opex costs!
Opex was recognised as a reasonably predictable amount that was quantified in the annual budget submission and once that budget was approved the Plant Manager could approve expenses against each budget code on his / her own authority.
Capital Expenditure was NOT part of the Annual Budget! We would submit a 5/10/15 year budget estimate, but each capital project required a separate submission and Board Approval. Once approved the PM could then approve expenditure.
Your use of the word “Capex” and your analysis does not help me understand whether Telstra is spending engineering / technical money on:
1 – building new capacity &/or capability,
2 – upgrading existing capacity with new gear in order to prevent breakdowns, or
3 – patching up the cracks
thanks for any response to help me understand current / your use of the terminology.
cheers
Doug
Actually I think Telstra problems are long in the making.
Further, I disagree with the assertion that Telecom was known for poor service. Time once was that you could call Telecom about a fault, and have somebody out to fix it within a couple of days. These days faults generally weeks to fix after all the telcos have dithered about who is responsible (quick patch… maybe in a week, proper fixes takes months). There were some notable high profile grumblers about Telecom who everyone remembers but its very hard to know if these were ever genuine cases or not. Publicity != genuine problems.
Anyhow… it’s interesting to take a walk around the ‘burbs. Once upon a time the telstra network came out of the ground and the various metal covers and duct access points were all carefully maintained (millions of em), attached, screwed onto poles and so on. Walk around now, look around you in the streets – duct covers off, wires hanging out, things smashed up or smashed around. And this sits that way for years because there is no workforce anymore and nobody cares. (Why do anything when the NBN will obsolete it anyhow?).
Then, back when Sol was king, Telstra Research Labs were not just shut down (making the entire staff redundant); but it was all shut down and the buildings in Melbourne were bulldozed.
Time was (talk to an older Telstra tech) there were people who knew how to maintain and program the switches in the exchanges. But hey we don’t need that… they are all redundant and moved on to other things. So when things turn to poo, there are no uber tech boffins to call in, and all the local guys who knew the ins and outs of the equipment are all gone too.
No doubt there are a few specialist consultants left who can charge an arm and a leg, but like so much of Australian business (as run by accountants), there are few people IN THE BUSINESS who really REALLY know the technology and who can plan, expand, and manage crises. [Those people are the ones you rely on to get your business out of poo, every business needs them, and they are usually turfed out by bean counters who can’t see the ongoing value and omit the value in a crisis.]
Getting Telstra to this point took a lot of years of management making all the tech people redundant and polishing the accounting figures. Gosh, good for them. But eventually this lack of a deep knowledge does come back to bite. Now if the NBN truly does make it all redundant, perhaps that expertise is not needed. However the NBN seems to be creaking along very slowly due to endless political interference, and in the meantime that old network with no knowledgeable staff and no maintenance is beginning to crack.
And as us technical people would say: Der!!!!!!!!!