Sensis Boss Senses Book Closing

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IT HAS long been just a matter of time before Telstra’s traditional white and yellow pages directories felt the full onslaught of the internet, and now it’s happened. At Telstra’s investor day briefing yesterday, chief executive David Thodey and chief financial officer John Stanhope revealed a sudden slide in Sensis’ revenue that will gut its earnings.

That bad news is, however, balanced by confirmation that on other fronts, Thodey is delivering. He was chosen to replace Sol Trujillo in May 2009 after telling the telco’s board that the group had completed a technology jump under Trujillo but needed to follow it up by becoming less complicated, more competitive with its pricing, and much more customer-centric.

The changes he has wrought are showing now, in revenue momentum in areas including mobile phones and broadband, and in productivity gains: and these are both adding enough to the bottom line to offset Sensis’ earnings dive.

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Thodey says Telstra’s revenue momentum was strong in the opening months of the current June year. Sales are being built in markets including mobiles and broadband without slashing profit margins, and despite Sensis’ dive, Telstra is holding guidance for low single-digit percentage growth in revenue and earnings before interest, tax, depreciation and amortisation.

That’s pretty impressive, because Sensis is in a hole and Sensis’ boss, Bruce Akhurst, looks to be a casualty. Sensis is no longer a direct Thodey report. It has been folded into a new business unit, digital media, that will also hold Telstra’s 50 per cent stake in Foxtel and BigPond, and be run by a new hiring, Rick Ellis, who has been headhunted from his role as chief executive of the New Zealand government broadcaster, TVNZ.

In the year to June this year, Telstra posted a 1.1 per cent rise in revenue to $25.3 billion, and a 12.4 per cent decline in earnings before interest and tax, from $6.5 billion to $5.7 billion. Earnings fell as revenue rose because Telstra invested in its restructuring, and also sacrificed profit margin to drive its market share up in key markets, including mobiles.

Within the result, Sensis was a significant element, even though the decline in the traditional directories business was under way: revenue fell by 6.4 per cent from $1.91 billion to $1.79 billion, and earnings before interest and tax fell by 14.7 per cent, from $1.02 billion to $871 million.

Under Akhurst, one of the people who was in the race to succeed Trujillo, Sensis re-oriented its advertising marketing towards digital media in March of this year. Sensis’ sales force is now working on iPads, and offering small and medium-sized businesses separate or bundled advertising packages covering the print directories and digital media. Supporting services such as web design are also offered.

Akhurst told analysts in March this year that he expected Sensis to post mid single-digit declines in revenue and high single-digit declines in earnings in 2011-12, 2012-13 and 2013-14 as it entrenched the new business model.

But the new emphasis on digital is accelerating the decline of the print directories. Customers are switching from print directories to digital alternatives that generate lower profit margins for Telstra. And the Sensis sales force has been tied up managing the migration of existing Sensis customers to the new model, resulting in below-budget sales to new customers, a crucial miss given that Sensis needs advertising volume growth to offset the lower profit margin it will get on digital platforms.

Based on Akhurst’s targets in March, Sensis should be on track this year to post a 5 per cent, $89 million decline in revenue this year. All of it would have been taken at the profit line, so earnings before interest and tax would have fallen by the same amount, or about 10 per cent, to about $782 million. Cost cuts would have clawed some back, producing Akhurst’s predicted high single-digit decline.

But Thodey and Stanhope said yesterday that Sensis’ revenue was now expected to fall by ”high teens”, and that Sensis was also copping margin compression – the outgrowth of customer migration from the print directories to lower-margin online Sensis products.

If revenue declines by 18 per cent, say, that will mean a fall of $322 million and Sensis’ earnings before interest and tax will be down by the same amount, a whopping 36 per cent decline to $549 million, barely half what the division earned in 2009-10.

There will be aggressive cost cuts to try to get some of that loss back, and Sensis has already laid off about 100 employees this month. Thodey has also said there will be a review of Sensis’ business plan.

Thodey knows, however, that in Sensis he is managing a business that is losing its rivers of gold and moving to a lower-margin environment. Before Trujillo arrived in 2005 there was speculation Sensis could be floated off for about $11 billion. Trujillo decided to keep it, but Thodey now says it will be sold if the price is right: the right price is now around $5 billion.

Still, there’s enough upside in Thodey’s reshaping of Telstra to cover Sensis’ retreat, at least for a while. Project New, the effort to simplify Telstra and make it more customer-centric, produced productivity benefits of $662 million in the latest year to June. Two- thirds of the gains came in the second half of the year, pointing to what project leader Robert Nason says will be much higher productivity gains this year. A second phase of Project New should repeat the dose in 2012-13.

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