Telstra share price slips amid 2,800 cuts for growth

Australia's biggest telco is setting its sights on improved profitability with this cost-cutting move.

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The Telstra Group Ltd (ASX: TLS) share price is weakening on news the telecom giant plans to oust up to 2,800 employees.

Despite the move being marketed as necessary, shares in Australia's thirteenth-largest listed company are down 2.1% to $3.60 in light of the update. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) — Australian investors' yardstick — is only 0.1% lower.

Resetting costs during 'ongoing inflationary pressures'

Today, Telstra announced it will begin a 'reset' of its enterprise business. Up to 2,800 employees are expected to be removed as part of this restructuring.

The decision follows a review of the declining product segment, which experienced a 66.7% fall in earnings before interest, taxes, depreciation, and amortisation (EBITDA) in the first half of FY2024. Telstra noted a decline in connectivity and calling at that time, dragging the division's EBITDA down from $213 million to $71 million.

Telstra CEO Vicki Brady described the impetus behind the decision, saying it's needed to accommodate continued investments to deal with 'ever-increasing growth in data volumes' and provide better connectivity for its customers.

Yet, the Telstra share price is still moving lower today.

Additionally, Brady highlighted the tough backdrop Telstra is facing, stating:

This is occurring within a dynamic environment, with an evolving competitive landscape, rapid advances in technology, changing customer needs, and the ongoing inflationary pressures facing all businesses.

To reduce costs, Telstra highlights the following key items:

  • Reducing the number of network applications and services (NAS) products by almost two-thirds
  • Simplifying its sales and service model, and
  • Reducing the cost base of its tech services, with a particular focus on NAS products

Telstra management expects the majority of the cuts will be complete by the end of the year.

Finally, the telco is also scrapping annual inflation-linked postpaid mobile plan price reviews.

What about earnings guidance?

Making swift and broad cuts comes at a cost. Telstra is pencilling in $200 million to $250 million in one-off restructuring costs between FY24 and FY25. Although, these costs will not be included in the company's guidance.

Speaking of which… Telstra reaffirmed its FY24 guidance and pulled back the curtain on FY25. The company forecasts $8.4 billion to $8.7 billion in underlying EBITDA in the next financial year, reassuring investors that it is committed to achieving its 'T25' goals.

Has the Telstra share price lagged the market?

The Telstra share price is down 16% compared to last year. This is a distinct departure from the return of the Australian benchmark, which was roughly 8% over the same timeframe.

Even after dividends, Telstra's returns over the past 12 months are negative. Profits have increased slightly during this time. However, revenue and net profits after tax remain noticeably lower than at the end of 2018.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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