Announced in June, the T22 strategy aims to transform the once-monopolistic $34 billion telco to be more nimble and competitive, with a massively reduced workforce – 8000 jobs are going – and a less bureaucratic, more "agile" management structure. Some 1800 legacy products will be replaced with 20 much simpler ones, and there will be a focus on mobile and 5G.

While these will incur short-term costs to the business, particularly redundancy payments, consultancy fees, investment in automation technology and $500 million in lost fees as a result of product simplification, Mr Penn said the long-term savings would make these worthwhile.

"I stand back from the day-to-day and look at the next decade in our industry, and see incredible opportunity," he said.

T22 also splits off Telstra's infrastructure assets into a standalone entity within the firm, called InfraCo, opening the door for a possible demerger and potentially the acquisition of the national broadband network.

Telstra's mobile network infrastructure, including the "backhaul" wires leading to the towers, are not part of InfraCo, in a clear signal that Telstra sees its future in mobile, not fixed line. Mr Penn insists Telstra will remain a fixed-line broadband retailer.

A new executive team has been brought in to execute the plan, and in a series of reports to be published this week, the Financial Review interviews key members on the plans for the company.

Two of these new hires, group executive product and technology Christian von Reventlow, recruited from Germany, and group head network and IT Nikos Katinakis, recruited from Canada, insist Mr Penn is serious about transforming Telstra.


S & P credit analyst Graeme Ferguson pointed to two features of the T22 that may have credit implications: the $600 million cost of the restructure over FY19, and the loss of $500 million in revenue over three years as a result of the product simplification. He said these would "worsen the financial metrics in fiscal 2019" and result in a higher debt to EBITDA ratio.

The new executive team, from left: Michael Ebeid, Michael Ackland, Nikos Katinakis, Andy Penn, Alexandra Badenoch and Christian von Reventlow. James Brickwood

Overall, though, Mr Ferguson said the T22 plan was the right strategy.

"This is the biggest roots-and-branch restructure of Telstra in a generation. The 2019 results will incorporate a lot of these costs, but we believe they should have an enduring benefit," he said.

Citi analyst David Kaynes was less optimistic, warning the pain would last well beyond 2019. He warned core sales costs would rise $2.5 billion over the next four years, which would "more than offset T22 productivity gains". He projects core EBITDA will decline to $6b in FY21, and more cuts to the dividend.

Punting on 5G

In the three years to June 2019, Telstra will have spent $3 billion updating its IT system and building its new 5G network. Mr Penn describes the network as "5G ready", but in reality a huge amount of more building will need to be done.

Telstra has announced Ericsson as its key 5G partner. Jamila Toderas


Exactly how telcos will monetise 5G is not yet clear, but Mr Penn insisted not to have built the network would have been a more risky strategy than building it. "It's a punt not to do it," he said.

"I'm very clear firstly the business case on 5G stands up on its own by virtue of the improved efficiency of data transmission over the mobile network.

"Secondly, what I would say is that what previous generations of technology have shown is that customers are willing to pay more for access to the new technology first and fast. And so we do see revenues in the industry pick up in the first part of a new generation of technology rollouts."

Given Telstra depends on mobile for almost 40 per cent of its revenue – by far the single biggest source – competing aggressively will be paramount. But Mr Ferguson warned if competition was too intense in the mobile market – which might be the case if the ACCC were to block the TPG-Vodafone merger – there was a risk Telstra would have to "compete away" the savings achieved through the T22 strategy.

NBN resale margins 'zero or negative'

Mr Penn said two factors forced Telstra to make the T22 announcement in June this year. One was an explosion of competition in the mobile market. The other was the rollout of the NBN, which has ended the Telstra stranglehold on the nation's voice and data network.

The effect on Telstra's bottom line has been huge. In 2013, Telstra's fixed lines brought in $7.3 billion in revenue. By 2018, this had fallen to just $5.8 billion. EBITDA margins on fixed data fell from 41 per cent in 2013 to just 16 per cent in 2018. Mobile, by contrast, has gone from $9.7 billion to $10.1 billion, with EBITDA margins consistently around the 40 per cent mark.

S & P's Mr Ferguson said T22 "more or less concedes that they've lost the fixed [wholesale] business and there is no way they can get it back".


Mr Penn insisted Telstra was not turning its back on NBN retail, despite hints the company would attempt to pick off NBN customers with a mobile alternative. But he said the current NBN wholesale price was too high, and margins for resellers like Telstra were "zero or negative".

"I have no knowledge that the wholesale price will come down," he said. "I just look at the current economics of the industry and say it is unsustainable and ultimately it's either going to lead to a higher price for customers, or it's going to incentivise operators and customers to go to different forms of technology, which itself just makes this situation with the NBN economics even worse. It'll have to sort itself out."

The driver of a lower wholesale price would likely be a government write-down, something the current government has ruled out but that Labor has not.

Regarding a potential purchase of the NBN, Mr Penn was clear that could only happen if InfraCo became an entirely separate entity.

"We know that both sides of government have got a policy to privatise the NBN at some point. I don't know when that's going to be, but I do know it's going to be a big deal for the industry when it happens," he said.

"I want us to be in the best possible position to have a seat at that table, whatever that might look like, and I honestly don't know what I think the outcome should be. But I know from a regulatory standpoint our ability to participate in that being vertically integrated is clearly not going to fly."