Australia's Telstra to cut jobs, revamp network

SYDNEY (Reuters) - Telstra Corp Ltd, Australia's biggest phone company, said on Tuesday it would slash its workforce by nearly a fifth and overhaul its networks in the next five years.

The measures are part of a company-wide review by new chief executive Sol Trujillo and come before a planned sale of the government's $27 billion stake in the company in October or November next year.

Telstra forecast an earnings decline in 2005/06 of up to 30 percent -- versus a September forecast of up to 10 percent -- as it speeds up writing down existing networks and takes charges for redundancy costs.

However, it guaranteed its dividend for the next three years, committing to pay 28 cents a share for a yield of around 6.5 percent at its current share price.

"I suspect it is a bit light on the jobs, people thought there could have been a few more cuts," said John Guadagnuolo, who helps manage $600 million at Equity Trustees Ltd, including Telstra shares.

"The dividend yield should support the stock, and the free cash is still very strong."

Telstra shares, which last traded at $4.32, were on a trading halt on Tuesday. The stock has fallen 12 percent since the start of the year, under performing the broader index which has risen 14 percent.

"Overall I think the market will react warmly. This is about setting up the business for the long-term. It's not a drastic six-month profit improvement plan," said an investment banker who declined to be named.


Strategy revamp

Telstra is under pressure to cut costs and find new sources of revenue, with the rate of decline in fixed-line revenues projected to more than double in fiscal 2006 and mobile phone growth forecast to halve. Fixed-line revenues accounted for more than a third of total revenues in fiscal 2005.

"It's pretty simple, we need to grow revenues, we need to create new revenue streams," said Trujillo, who took up the top job on 1 July.

Telstra said it planned to:

- cut 6000 to 8000 positions over three years and 10,000 over five years.

- spend $10 billion over five years on a new Internet Protocol network, of which $2-$3 billion is on top of existing plans.

- pursue deep cuts to the number of its network platforms and business and operational support systems.

Trujillo said the company expected earnings before interest and tax (EBIT) to fall 19-24 percent in 2005/06 due to increased depreciation. This would rise to 25-30 percent if a provision was raised for redundancy costs. Telstra in September forecast an EBIT decline of 7-10 percent.

The US telecoms veteran said Telstra planned revenue growth of 2-2.5 percent a year through to 2010, with costs being held at the same level as at January 1, 2006. It planned EBITDA growth of 3-5 percent until 2010 and free cash flow of $6-7 billion by 2010.

Trujillo said Telstra aimed to have 25 percent of new revenue growth from new products by the end of 2008 and announced targets to increase the number of customers on its broadband and 3G mobile phone networks.

"Local customers, consumer customers in addition to business customers are now starting to use broadband in a big-time way," he said.

Analysts had been expecting Telstra to shift its focus to broadband as part of efforts to replace shrinking fixed-line revenues. As of 30 June, Telstra had a 41 percent share of the broadband market.

Trujillo has previously said he wanted to simplify the Melbourne-based company's billing system. Morgan Stanley recently estimated Telstra could reduce its billing costs by up to $130 million a year by consolidating the system.

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