Telstra Expands Infrastructure Business with Microsoft Deal and Future Plans

Telstra boss vies for more AI-hungry data customers

Gift 5 articles to anyone you choose each month when you subscribe. Telstra boss Vicki Brady is counting on more data-hungry customers for the telco group's expanding infrastructure businesses as the company reorients itself to capitalise on growing demand for carrying data underpinned by artificial intelligence. Microsoft's multimillion-dollar deal revealed on Monday to secure space on Telstra's new intercity fibre network before it is even finished validates the carrier's investment in superfast connectivity, said Ms Brady on Thursday, after the company reported a 13 per cent slide in annual net profit to $1.79 billion.

Telstra bets big on its infrastructure business

Telstra prefers to double down on investing its own telecommunications strengths in offering connectivity - in whatever form. But that also requires some major shifts in strategy. As well as continued strong growth in its mobile network, Telstra is promoting its course reversal on keeping and investing in its infrastructure assets like data centres, exchanges, sub-sea cables and fibre. The earlier option of spinning off these assets after setting up the legally separated InfraCo is also dead. The infrastructure business is now regarded as core to Telstra's future. Instead, the company wants to use new and existing infrastructure to capitalise on booming demand for data that has been massively accelerated by the promise of artificial intelligence services. This includes Telstra building 14,000 km of an intercity fibre network with Microsoft signing up as Telstra's first customer this week in a multi-billion dollar deal. According to Brady, the intercity fibre network will be an important part of "future proofing Australia's speed and capacity needs for the next 20 years". The lure of providing secure, reliable service can only become more appealing to businesses in an era where cybersecurity is under such relentless attack. Telstra is gambling it can make that $1.6 billion worth of capital expenditure pay off within a few years. Microsoft is also taking more capacity on Telstra's Asia Pacific sub-sea cable network with Telstra already carrying about one-third of the undersea cable traffic in Asia. Smaller, closer to customers Nor is Telstra willing to leave the suburban market in infrastructure to a broadband status quo commoditised by the National Broadband Network. Instead, Brady sees Telstra's existing assets spread out across Australia's neighbourhoods playing a major role in meeting the new demand dynamics of generative AI. The mega data centres under construction from a range of players are expected to be complemented by the potential of computation services and data storage in smaller facilities closer to customers. Telstra's ability to leverage its superior technology and reach includes so far avoiding data breaches that have so bedevilled the Singtel-owned Optus. "We do see that opportunity over time where there will be a need to move closer to customers," Brady said. "And we do have facilities. We have fixed network sites across the country. They are set up already. They have power on site, air-conditioning on site. They already house telecommunications infrastructure within them." That will clearly be a gamble in progress. For now, Telstra's growth continues to be powered by mobile, reporting an additional 560,000 mobile customers as well as an increase of 20 per cent in data on its mobile network. That translates into a 9 per cent increase in EBITDA for a division that accounts for over 60 per cent of group earnings. Telstra's ability to leverage its superior technology offering and reach includes so far avoiding damaging data breaches of customer details that have so bedevilled the Singtel-owned Optus. Optus reported a net loss of $480 million in the year to March 31. Not that its predictions of future infrastructure growth or assured delivery in mobiles insulate Telstra from some expensive errors in execution and a share price that has gone sideways over the past five years. In that sense, the obvious willingness Brady expressed in joining News Corp in finally selling out of Foxtel "at the right price" is a financial sideshow given the much larger business challenges and opportunities confronting it. Telstra's net profit fell by 13 per cent last financial year to $1.79 billion, for example, even though Brady naturally wanted to stress underlying profit growth of 7.5 per cent. Most of the profit decline was due to having to write down more than $300 million on its struggling enterprise business which provides sales of services and equipment to governments and businesses. The move to the cloud means much greater competition from global tech giants and others as well as a much reduced need for traditional equipment like handsets with EBITDA in that area slumping by more than two-thirds. No longer the company we love to hate "Fixed enterprise is clearly a long way from where we need it to be," Brady said. Telstra is also in the midst of a major redundancy round to cut 2800 jobs after announcing last May it won't meet its $500 million cost-cutting target by the end of this financial year. Consumers on mobile plans will face price rises from later this month while Telstra is also shutting down its 3G network in October. In recent years, Telstra has lost its gold medal status as the company that consumers love to hate to Qantas and other worthy contenders. But at a time of rising unemployment and cost-of-living complaints, job losses, price hikes and some (unwarranted) concerns about the impact of finally closing down the 3G network won't make the telco giant any more popular with the public. For investors, Telstra's share price ended up slightly by 2 per cent. It shows a preparedness to at least listen but not much more than that yet.