Telstra's AU$3b network spend criticised by analysts

The AU$3 billion to be sunk into its network betrays Telstra's previous underinvestment, according to telecommunications analysts.

Telecommunications industry analysts have expressed surprise and scepticism at Telstra's announcement to spend an additional AU$3 billion over the next five years on its core network, with one saying that it suggests underinvestment in previous years.

"That sort of number blew me away," said Daniel Mueller, senior analyst at Forager Funds Management.

"The smell about it is I think they just underspent on the network in the past, and this is catch-up spend because I just can't see how they generate an incremental return on this investment."

Deutsche Bank analysts Craig Wong-Pan and Peter Milliken said they were "surprised by the sudden increase" in capex, with Morningstar analyst Brian Han adding that there is "much investor scepticism" on the decision.

"Faced with a choice of acquiring or starting significant new ventures, for example, overseas or in non-core areas, versus investing in the domestic core franchise to plug this earnings hole, we would unequivocally prefer the latter," Han said in relation to the "earnings hole" that will be faced once the National Broadband Network (NBN) is completed.

During its 2015-16 financial results presentation on Thursday, Telstra CEO Andrew Penn said the AU$3 billion investment would allow the network infrastructure to handle Internet of Things (IoT) devices, increasing mobile usage, streaming services, and augmented-reality applications.

"We're talking about investing up to AU$15 billion over the next three years into the infrastructure and the technology to enable our customers in Australia and internationally to take advantage of the wonderful things that technology and innovation provides," Penn said.

"For our business customers, new opportunities in productivity and business insight will be offered. Everything from agriculture to banking, healthcare, to transportation services will be enhanced by millions of sensors and devices that are arriving with the Internet of Things and, similarly, application in areas such as drone technology and remote healthcare diagnostics will explode over the next four years."

The AU$3 billion is being spent in addition to the regular capital investment program, which involves between AU$3.5 billion and AU$4 billion per year.

"We should not lose sight of the fact that we continue to have the best networks in Australia with our mobile network providing the best coverage at the fastest speeds," Penn said.

"I'm confident that with the AU$3 billion strategic investment in digitisation and networks of the future ... that it will further enhance our leadership position."

Telstra reported a full-year net profit after tax of AU$5.8 billion, up 36.6 percent, on revenue of AU$26.7 billion and earnings before interest, tax, depreciation, and amortisation of AU$10.5 billion.

"The one thing I am disappointed about for the year is that despite our strong performance, our customer advocacy results fell four points. We did not deliver to the extent we should for our customers," the chief executive said.

"It is clear that we have more to do to improve our systems and processes to ensure that we consistently deliver a great customer service experience.

"Our customers and our networks are our biggest asset and it is critical that we invest in them."

Telstra has been having a rough year, with three executives -- CIO Erez Yarkoni, COO Kate McKenzie, and CTO Vish Nandlall -- having departed the company.

The executive exodus followed seven outages on the Telstra network during 2016: The first on February 22, which affected prepaid and post-paid mobile services and was caused by "embarrassing human error"; the second on March 17, which involved an hours-long national mobile data and voice outage; and the third on March 22, which was a smaller voice outage.

It then experienced an NBN and ADSL outage in May that resulted in the telco having to send free modems to customers still affected several days later; a mobile data services outage later that week; a broadband service outage in June; and an outage that took down businesses across Victoria, including banks, hospitals, department stores, and Jetstar.

As a result, Penn in June committed the telco to investing an additional AU$250 million in its network over the next six to 12 months in three major areas: AU$50 million to be spent on improving mobile network resiliency by creating better real-time monitoring and speeding up recovery time; AU$100 million on increasing the core fixed-line network's reliability and resiliency; and AU$100 million on upping its ADSL broadband capacity to cope with demand.

Telstra has also confirmed that it will be cutting 326 jobs across its Contact Centre and Telstra Business teams, and last week said it is considering removing another 204 jobs in Global Finance Services across business intelligence and analytics services, operational billing, credit services, and accounting.

With AAP


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