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Telstra Ahead of T222 Schedule: Telstra Increases Restructuring Costs by $200 Million

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Telstra Ahead of T222 Schedule

The 29th of May saw telecommunications giant, Telstra Corporation Ltd, announced that the restructuring costs for the 2019 financial year have increased by around $200 million, as a result of bringing forward its T22 strategy. The extra costs came from a reduction in employee and contractor, which was brought forward six months earlier than previously stated. Telstra Chief Executive Officer Andrew Penn highlighted that the redundancies were a priority as he wanted to “move forward into the future with a greater degree of certainty for our people, rather than be in a state of perpetual change.”

Telstra2022 (T22)

T22 is a new strategy proposed by Telstra last June to simplify the operations in order to improve customer experience and reduce cost. The strategic restructure has four key pillars; improve customer experience, achieve better performance, simplify structure and operation and implement cost reduction program. The strategy will help alleviate additional operational expenditure which Mr Penn blamed it on adverse currency exchange movements and rising handset costs.

Telstra announced that the benefits of T22 will affect all stakeholders. In particular, T22 will reduce the number of plans from 1800 to 20, migrate most of its products and plans to new technology stacks, establish independent unit to drive performance, flatten management structure to achieve cost savings, increase productivity program to $2.5 billion by 2022, and monetise up to $2 billion assets to strengthen the balance sheet.

Consequences of T22

A consequence of the plan will see 9500 occupations being removed over the next three years, including executive and middle management roles. One of the factors of the lay-off decision is the declining NBN and call volumes. The affected employees will remain with the organisation until the latter part of this year. Following the announcement, the employer’s refusal to honour the demands for annual pay increases sparked an all-out strike from 5000 of Telstra’s employees. The strike affected maintenance services.

The company announced that approximately 6000 jobs will be cut by the end of this financial year, which will put Telstra on track to achieve its reducing underlying core fixed costs by $2.5 billion by 2022. Telstra had announced in its half-year results that 3200 workers had already left and had since reduced another 1471 staffs. The figures will mean that there are 1329 left still to be cut by the end of next month.

On the upside, the company stated that it will invest up to $50 million to create around 1500 new roles. The new jobs will support the shift to “new engineering capabilities including software engineering and information and cyber-security.” The addition will bring net job losses to 8000. Telstra reported that wages and salaries for its workforce totalled $5.157 billion last year. The cost saving from the 8000 job cuts will achieve over $1 billion by 2022.

As Telstra digitises its business, they are expected to make a non-cash impairment and a $500 million write-off of the value of its legacy IT assets. The digitisation program will retire more than 1800 plans and introduce 20 core plans, simplify product offerings supported by digital services, and deliver “new technology stacks” for the customers which will become the platform for the new products.

The actual impact of the non-cash impairment and restructuring costs are still pending on the Audit & Risk Committee and Board’s approval. Currently, the expected costs amount to $800 million for this year to June. The remaining restructuring costs would weigh in at around $350 million. However, the non-cash costs would not affect Telstra’s earnings guidance, which was ranged between $8.7 billion and $9.4 billion. The company had reaffirmed its 2019 fiscal year guidance.

Shares in Telstra have gained almost 30% this year. The market’s sentiment was neutral following the statement of the increased restructuring costs. Telstra’s share price opened $3.57 and closed at $3.56. After the day of the announcement, the stock had jumped up more than 2% to $3.64 in the afternoon.

Competitive telecommunication industry

On the topic of the 5G network, Telstra is collaborating with the Commonwealth Bank of Australia and Ericsson to give the Australians “a glimpse of the bank of the future.” Mr Penn said the company is “leading the world in our 5G readiness, both in timing and in coverage.” He believed that by 30 June, 5G coverage will reach to around 4 million people across Australia.

In the telecommunication industry, chasing closely behind Telstra, Optus had also announced that it will remove around 200 staff in Australia as part of its business transformation strategy. The program will “remove duplication, deliver operating efficiencies and embrace next-generation technologies, digitisation and automation.”

Given the highly competitive market and the regulatory interventions in recent years, all the Australian telecommunication companies are going through a challenging period. The impact on the financial performance of these factors is likely to be significant. By bringing the costs forward, Telstra wanted the transition to be as smooth and as fast as possible. This will help the company to reduce future uncertainties and stabilise its performance.

By Jack Lee

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