11 August 2006

The Manager

Company Announcements Office Australian Stock Exchange 4^th Floor, 20 Bridge Street SYDNEY NSW 2000

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

Telephone 03 9634 6400 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Full Year 2006 Results Analysts Briefing

In accordance with the listing rules, I attach a copy of the transcript from yesterday's Full Year 2006 Results analysts briefing for release to the market.

Yours sincerely

North brake

Douglas Gration Company Secretary

TELSTRA CORPORATION LIMITED

FY 2006 RESULTS

THURSDAY 10 AUGUST 2006

ANALYSTS BRIEFING

SOL TRUJILLO: Thank you David. Good morning everyone. I do want to thank you for coming because we have a lot to share with you today. Obviously here at Telstra we have been very busy since I first addressed you 12 months ago but also since I last addressed you in terms of the financial community six months ago.

We have been working hard as a company in terms of transforming the business. We talked about the fact that we were going to be taking tough medicine, we talked about the fact that we would be in essence doing the things that we needed to do over the next five years to fundamentally allow this company to create real, sustainable share owner value.

At the same time we talked about three year increments, five year increments and then obviously we operate within the idea of year-to-year in running this business. But today we will have a chance to tell but how we are transforming our customer experience, how we are improving our operations and essentially building all the platforms so that we can in fact increase delivery in terms of shareholder value.

So, the story I guess, to put it simply, will be simply one that says we are on track, we are on budget and we are on time.

If we can move to the first chart here. Last year in November we announced our transformation strategy. We talked about the fact that we were going to be investing in new networks in systems, new marketing capabilities, operating capability, as we think about our business. In doing so we gave you guidance, we gave you a five-year guidance, and then obviously we gave you guidance for the '05/'06 year.

The punchline here is that our results, our earnings, were at the better end of our guidance and if you look at our EBIT we came in at \$5.5 billion, which is reflected in terms of year-on-year a 20.7 per cent decline. That is reflective again of the investments that we have been making into the business as we have also taken costs out. What I want to do is take you through some of the numbers and help you understand what happened inside the company.

As we look at the main drivers, let's start first with revenues. In the case of revenues, our year end sales revenue was at 2.7 per cent end of year, which is higher than our guidance of 2 to 2.5 per cent. But the real story again, thinking back to we announced a strategy in mid-November, we began implementing it obviously in H2. The real story, therefore, is what happened in H2 versus H1.

If you look at our revenues, first half we reported 1.5 per cent year-on-year growth. Second half, we are reporting 3.9 per cent year-on-year growth. One of the core issues as we look at revenues that we have talked about, and I talked about last August and I talked about again in

February, was this element of PSTN. Obviously PSTN is a core part of our business and PSTN is a lesser part of our business today than it has been in the past. This now accounts for about 30 per cent of our revenues, but our PSTN first half declined at 7.6 per cent, second half it is down to 5.8 per cent. So we have made progress, we said we were going to do this; we have begun that progress by essentially working on many different fronts.

One is about our subscription pricing plans that I said we would put in place. I have seen this movie before; we are doing some of the things that have worked, not only in terms of my experience in the US but also my experience in Europe. Some of the issues are quite the same and our ability to simplify pricing issues, packaging issues for our customers is very important. So we are after that. We are doing it in our consumers part of the business; we are doing it also in our business segment of the marketplace.

On top of that, we have more aggressively started attacking win-back programs and processes and finally a key part of our strategy is around how we think about integrated services and our ability to offer those to our customers in simplified packages and in simplified ways. All three of those dimensions are making a difference as we start slowing down that rate of loss on PSTN.

On top of that I also talked in terms of revenues about the fact that we have to start creating new revenues from new products, new services, new platforms, new networks. So, today in the numbers that John will cover we are going to show you that our new wave revenues, as we call them, inside the business grew by 46 per cent to \$2.7 billion and now account for 13 per cent of our total sales revenue.

So that gives you a sense for what has been happening on the revenue side and clearly H1 versus H2, big difference, because the strategies are now being implemented. But that's not enough in terms of the way that we described what we were going to do, because we also have to tackle this issue of the cost structure of this company called Telstra. What I said when I first came was we were going to streamline this business, we were going to take out costs that were not important in terms of serving our customers and creating the experience that our customers want and need.

So we have been aggressive at that. We have taken out about \$157 million of opex spend through headcount reductions, handset procurements, sourcing reductions, productivity improvements and driving more efficiencies in our business. Again, all of this is really before we start turning up systems that we are currently starting to build, that we are investing in as we speak, this year, next year, when we start looking at our opportunities to further streamline and improve our customer experiences in terms of the business.

We have reduced, within the Telstra operations, the number of FTEs by 3,800. Now, that is a pretty aggressive number and a pretty significant number, when you think about the guidelines and the guidance that we gave you about after three years we would be looking at somewhere between 6,000 and 8,000 FTEs out of the business, and after five years 10,000 to 12,000. So, we are making good progress there. Again, it is about taking out work, it is about taking out all of the things in the business that are not important, again for our customers in terms of the experience that we want to deliver to our customers.

We have saved, as I said before, about \$500 million in capex by stopping over 800 projects which were not aligned to the strategy and we basically toughened our approach in terms of procurement and all the operating elements of our business. So when those of you that watch

what Greg Winn and his team are doing, it is making a big difference. That run rate, when you think about the base level of spend, which is really important to me, when John talks about underlying earnings, those are going to be critical drivers to watch as we go through year 2, year 3, year 4 and 5 of the transformation. So revenues, costs.

Now I want to talk about market-based management because you have heard me talk about that again from the very beginning, what's happened there. Clearly market-based management for me is the driver of a lot of the growth that you have seen in terms of acceleration, in addition to management working very hard in terms of the disciplines of driving growth and competing effectively in the marketplace. Because again some of you have heard me say we were taking tough medicine, but I think when you look at the results in the marketplace now, when we talk about some of these areas, we are dishing out some pretty tough medicine to our competitors as well.

In terms of market-based management, we are focused on what I would like to call high calorie growth. This has led to a strong second half performance in mobiles, broadband, IP solutions and Sensis. In the case of mobiles, I want to make sure that we all understand at least where our headset is at in terms of Telstra. We can talk about mobiles in total and we will in terms of our growth, but I want to focus today, just like I did in our last meeting, around broadband, where I said broadband is key and that is a game we will win as we compete in the marketplace.

But I would also say equally important is the notion of 3G and growing in 3G, because as we look at the consumer marketplace today - and when I say consumer I mean consumers in the home as well as consumers in businesses - the idea of growing with 3G is going to be critical because over the next five years most of us are going to be 3G and higher users of mobile services. So we have prioritised that here in H2 in terms of where our growth is going to be.

So our growth in terms of 3G subscribers, we are up 297,000 in H2 and we have added another 100,000 subscribers just since the end of June. We are seeing that 3G ARPU, which is critical when we think about again why 3G and is 3G really worth it versus 2G, because that has been a question raised in Europe in particular for most of the 3G deployments. We are seeing now, with our customers and our base, that a 3G ARPU customer is about \$20 higher per month in revenue than a 2G customer.

Some of you may say, "Well, why? I mean what's different?" Well, what we are seeing is that the number of actions taken in terms of accessing something, whether it be music or clips or whatever it might be, is up about seven times over where a 2G customer would be at. So, you generate that revenue, you generate the usage, you generate the kind of revenues that we are starting to see.

So, when you think about Telstra and you look at Telstra going forward, 3G is going to be a critical part of our strategic thrust going forward. That ties with what we said last November about building this 3G HSDPA 850 network. Because we are building competitive advantage, we are building capabilities that our customers are going to want and will use and will buy more from.

So, as we look at that, again; big success for us in terms of the strategic thrust that we have and being the 3G market leader. John will go through all the details in terms of the full set of revenue numbers, but again we outperformed our nearest or the biggest competitor we have in this marketplace in terms of revenue growth on mobiles.

In broadband, obviously, we are the leader. BigPond has the best capability in the marketplace by far and we continue to do well in this part of business. We have increased our market share, again in H2, by another percentage point. We are up three percentage points in terms of market share for the year, we have been adding retail subscribers at the rate of three to one, versus our nearest competitor.

On top of that, one of the other questions when you are an operator of a business that you have to spend time looking at is, well, we may be adding a lot of volume and we may be growing, but what does churn look like? What does churn look like? And in the case of BigPond again we have benchmarked churn and we are near world class, best in class kinds of levels of churn where we are running somewhere between 1 and 1.2 per month in terms of churn. That is critical as we look at how we are going to operate our business going forward. So churn is a focus point for us across the business, but in particular in broadband, where you have a lot of growth.

In the enterprise market, which is another growth platform for us as we think about IP services, we have delivered strong growth. Obviously David Thodey and his team have been working hard on integrated applications and services on top of just the pure carriage, but when we look at our IP growth we are leading the industry again and our growth here was over 34 per cent, our revenues are now over \$500 million just associated with these IP-based services. But that's not enough yet, we are going to do more, and David and his team have some exciting plans for the coming year.

But, moving on to Sensis, which is another growth platform that we have in our business, our information search and interactive applications and services business delivered a strong 6.9 per cent revenue growth and a 10 per cent EBIT growth, so Sensis has delivered on what we said we were going to do, so I am pleased with what Bruce Akhurst and his team are doing,

But there is more. The more is how we are growing. It is one thing to grow EBIT at double digits and it is another thing in this kind of business to not only grow EBITDA but grow top line at 6.9, almost 7 per cent. But the question is how are we doing it, do we have sustainable growth there? Because that should be a question everybody should ask and the answer is yes. We are growing our core product, which is print, but for the first time now we have reached the point where our on-line new media type of revenues, the absolute volume of growth has now exceeded that of print growth, which is reflective of the fact that we are growing fast, to the tune that our on-line growth is now about 46 per cent growth rate, which again, if you get inside my head and how I'm thinking about this business, it is about new revenue sources, it is about how we integrate and it is about how we create continuous and sustainable competitive advantage. That's what essentially Bruce and his team are doing right now at Sensis.

So we have accelerated growth, we are taking out costs, streamlining the business, changing our processes, investing in the business, got a lot going on inside the company.

One of the questions that somebody sceptical might say is, "Sol, you could lose focus, there are so many things going on, and what about the customer?" Well, to me that is equally important in all the numbers that we look at. If you look at the service delivery of this company and you look at the aggregate of the set of numbers that Greg Winn and Mick Rocca and the team that are out there working every day in terms of installing, repairing, engineering and doing all the things that are part of how we deliver service to our customers, our results now are the highest they have ever been in the history of Telstra. So, doing all the things in

terms of transformation, but still running the machine, running the business better than it's been run in the past and that's good news for our customers and ultimately it is good news for our shareholders

Let's move on and talk about the numbers specifically. We have got a chart here where you can read all the numbers and again John will go through these in some detail. I have talked about the first half revenues. The punchline here in terms of earnings is that it is at the better end of our guidance because we have worked hard while we have spent a lot and invested a lot in terms of the business. EBIT is down, we have talked about the tough medicine and we are going to continue taking tough medicine this year as well.

This year of '06/'07 will be our peak spend year in both opex and capex as we look at the business. We can see that our cashflow is still strong at \$4.6 billion, but again spending will accelerate this year.

As we move to the next chart, I just want to quickly cover some of what is also happening in a little bit more detail and again as we get into O and A we can talk some more. If you look at wireless as one of the core thrusts of the business that I talked back in November about, you have to understand what's happening in the 850 3G network. We said that we would build it in record time, said we would do it in a year's time, we would turn up our network by 1 January or the first part of '07, and I would say that we are on track to be able to do that. Right now, the plans are that we will have 98 per cent population coverage. Obviously with the 850 capability, for those of you that are using our network or anybody else's network. when you go in a building and sometimes you have to lean by a window or you have a dropped call, the experience is going to change significantly.

For those of you that are 3G users, and you've now started making, regularly, video calls, and you go on building and you see the degradation in terms of the experience today. 850 will change that experience as well.

When you look at the data speeds, in terms of the average network data speeds, ultimately when we launch this network at the beginning of next year, we'll be talking about turn up speeds, in terms of peak speeds, of 3.6 megabits that will be available. Now, I have to tell you that there is a guy sitting in the front row here by the name of Greg Winn who would correct me if we were inside the company, so I'll correct myself: Greg would say the network that we're turning up is capable of 7.2 megabits per second. When we turn up we will be limited by handsets and PC cards in terms of their data rates that will be embedded, in terms of the capabilities there. So from a customer experience standpoint the peak speeds will be 3.6 megabits. When we talk to customers we'll talk about an average experience of somewhere between half a megabit and a megabit in terms of if you have a lot of users on network, using within a cell site or a sector. But in early days you're going to find that the experience will be in the plus 1, 2 megabit kind of range in terms of the unique experience that's going to be there.

So we have a capability that's going to create significant advantage for us in the marketplace because we will be everywhere, we will be faster and we'll have more capabilities in terms of the network that we will have. Not only that, by the mid-year of 2007 the network capabilities will have peak capabilities going up to 14 plus megabits. So that's the wireless side; building competitive advantage as part of our transformation.

The next layer is around our fixed line and where we think about wire line capabilities with

our IP MPLS core, or as some people have talked about, this transition from the old circuit switch kind of network into an IP-centric network. We're reducing the complexity, we're building greater capacity and speed, which is going to enable us to take a lot of costs out of how we operate our networks. We're well on plan in terms of our ability to deliver that capability, so that all of our business customers are going to have the best in the world capabilities right here in Australia.

As we look at market-based management, it's making a big difference. If you talk to David Moffat, if you talk to Deena Shiff, they will tell you about the knowledge that we now have about our customers and what impact it's starting to have on campaigns and offers that we are working in the marketplace, it does make a difference. So we have now started implementing, we're still waiting for some of our IT deployments in terms of some of the CRM and other capabilities that will enable it to be implemented to a much more effective extent, but it's all there and it's all happening.

In the case of our IT systems, that is the work that is beginning, right? We started it in H2, negotiated contracts, picked vendors, picked suppliers, and now they're starting to build. Over the next two years there is a lot of work that will be happening where they build the capabilities, will stop the old capabilities, pull it out, insert the new, and that will dramatically change a lot of our experience that our people have in running the business, working the business every day, as well as the experience that our customers have in terms of doing business with Telstra. It's going to dramatically change the flexibility that we have in terms of introducing new products and services, how we combine things on bills, how we do all the things that our customers have been telling us in all the research that we have done since we've started this whole focus on transformation here in Australia.

So if we can move on to the next chart. All of this is about building sustainable shareholder value. We want to grow shareholder value and you don't do it by temporising solutions. You don't do it by looking for quick fixes for one quarter, one half or one year. So this management and the board have imposed a real discipline on the business that says, "We really want to do this right, and when we're done, this company will have capabilities like no other anywhere in the world." As you see the strategy play out over time, you will see the value of what we're going to do. Part of the benefit that we have here is that this telco, this company called Telstra, does have leading market share, which means we have scale. We have the most complete set of assets. We have fixed, we have mobile, we have broadband, we have Sensis, and we have a partnership in this company called Foxtel. We have customers that want more. They do want more, given the research that we have done. But they want it their way and they want it simpler, and they want it easier to use. They want a lot of things that would unlock some of the keys to spending that they do in other segments, with other companies, with other industries. In our case part of our growth is going to be about taking share from our competitors, because we're competitors. But a lot of it is also going to be about spending that occurs in other ways that we're going to go take. We're going to disintermediate others in the marketplace so that we can create growth in terms of this business. We're going to create value and I want to make sure that everybody understands that we are spending our time focusing on how we create the value drivers and how we affect the value drivers. So some of it is about our strategy, some of it is about revenue growth, some of it is about how we're going to integrate assets in terms of our services and create that 'one touch, one button, one screen' capability, but a lot of it is also about the cost. Those of you that do valuations, you do your models, you know how powerful low cost structures are. So we've taken the steps about one factory, there is no more silos, there is no more multiple networks, there is no more of any of the stuff that you used to hear about at Telstra: It's now under one leader, one

strategy and one set of implementations in terms of what we're doing.

We're rationalising all of our platforms that we talked about, 1,250 down to 250 to 300 when we're done. We're only keeping resources in the business, whether they be dollar resources or people resources, that are focused on the things that add value to our customers. If they don't add value to the customer, then we don't do it in terms of the way we're going to run this business going forward.

So if we can move on to the next chart. As we do that, I just want to emphasise some of our platforms here that are critical for growth that some of you just need to keep close to and keep track of as we evolve here as a company. One of those platforms is our broadband flat platform. We have an entity called BigPond and this entity is a well-branded entity. As a matter of fact, when we do our brand research it tests as high as almost any brand in Australia. and it is growing in its brand strength and significance. I made a decision last year to invest in this brand as a brand that customers will like, customers accept and customers will want to do more business with, and it is working, to be quite frank. We're introducing new offerings, we're going to do it in multiple platforms, whether it be DSL, whether it be HFC, or whether it be any other delivery platform, including our wireless high speed platform. Because our customers aren't just locked into one technology or one platform, as a matter of fact most of our customers are locked into capabilities that they want to have and have delivered to them.

But back to the broadband, back to BigPond. We're going to focus on integrating content and delivering differentiated value in terms of what we do there. As I told you back in November, our job is not to spend the game competing in the game of terms of just price discounting, it really is about adding value so that we differentiate ourselves from our competitors. Clearly, in the case of BigPond, we have done that, we have done it well. I don't say that based on my opinion, I say that based on what customers are buying. To me, as I've said before, I'm not here as a politician. I'm here as a representative of the shareholder. The votes that count to me are the votes of our customers and whether they're buying more. In this case the strategy is working well and we're going to further differentiate in that space. So if we can move on to the next one.

Beyond that I want to talk specifically about Sensis. We're going to continue to grow revenues and earnings here. Some people, after our November strategy session, questioned and actually I've seen some numbers of people estimating what Sensis's growth would even be for this year, and obviously they were way off. Our revenue is now up 7 per cent for the year, second half revenues were up almost 9 per cent and EBITDA was up double digits. We do have a world-class business here. I am familiar with this, I've been familiar with businesses around the world, and the capabilities that we have here are just as good, if not better, than anywhere else in the world, and we're now executing in terms of the strategies there.

So as we look at the business and we think about our on-line capabilities, in addition to print and by the way, we're not losing focus on print, we're very focused on the print business, but we're also focused on the great opportunities that we have here in terms of the business. But what we're also going to be doing is helping people understand that we're going to take Sensis on-line, through BigPond, in a big way. We're going to take Sensis onto mobiles, so that if you're in Australia, anywhere that you go, you can get access to the Sensis brand platforms that we have within that portfolio. So you're going to see continued growth here on the online business within this business as we continue to stay focused on our print business. You can go on to the next one.

$-7-$

So, in closing, before I turn it over to John, I just want to emphasise a few things again. As you track what we do it's important to look at H2 versus H1, kicked in our new strategy, and the question is, is the strategy working? Yes, it is. Are we doing what we said we were going to do? Yes, we are. A reminder, Opex, Capex, John will talk about this in a little bit of detail here, this coming year, 06, 07, will be our peak year in terms of our transformation spend, continuing to build those building blocks. The networks, systems and some of the core initiatives that we have that underlie our marketing efforts in terms of the business.

So the guidance that John will, again, articulate in more detail for the coming year will be that we're going to be look at EBIT growth in a range of 4 to 6 per cent on an imported basis. We're going to be looking at cash operating Capex of somewhere between 5.4 and \$5.7 billion. Again, it's a lot of money, but it's all about building for the future, it's all about building for sustainable shareholder value creation. So with that, I'll turn it over to John

JOHN STANHOPE: Thank you very much, Sol, and good morning, ladies and gentlemen both in Melbourne and in Sydney.

I know you're probably all dying to get to the O&A, but this is a fairly complex set of financials, because intermingled with our business as usual, if you like, performance, there is the transformation. So I do want to take a bit of time to go through the numbers for the year, and of course the outlook, as Sol mentioned, for fiscal 07, which is important as we continue with our transformation.

So let me start with the financial highlights for the year, some of which Sol has been through. But, quickly; sales revenue grew by 2.7 per cent. When you exclude the merger with New World, in Hong Kong, which came into play on 1 April, our sales revenue grew 2.4 per cent. Our domestic business, so the Australian sales revenue, grew 2.2 per cent. All of these are at the better end of our longer-term guidance of between 2 and 2.5 per cent CAGR over five years. Strong growth continues in broadband, Sensis and mobiles, as you've heard. The PSTN declined 6.7 per cent for the full year, with a first half decline of 7.6 per cent and a second half decline of 5.8 per cent. That is a slowing of that decline in the second half of the vear.

Just quickly looking at the operating costs, and remembering the first half did not include any transformation related costs; full year operating expenses grew by 13.8 per cent. If you net out the, or if you take out the net transformation costs of \$541 million, operating expenses grew by 9.2 per cent. I'll provide some further detail later in the presentation about all that.

We have declared a final fully franked ordinary dividend of 14 cents per share, bringing ordinary dividends per share declared for fiscal 2006, to 28 cents per share. Total dividends paid in fiscal 2006 amounted to 40 cents per share, which included two payments of 6 cents special dividends.

This is the first full financial year where we have reported under the Australian equivalent of International Financial Reporting Standards, or IFRS, as they are known. The fiscal 05 year comparatives have been restated to an IFRS, and this what our fiscal year 06 guidance was based on. One important change to the accounting methodology is that interest paid is treated as a finance in cash flow and is not part of the free cash flow calculation going forward. But, importantly, and I want everybody to understand, all our comparatives that you see in the documentation and in the slides presented here today, all the year-on-year movements, are like-for-like.

Sales revenue grew 2.7 per cent to the 22.8 billion you see there. As I said, without CSL coming in, it was 2.4 per cent. EBITDA and EBIT declined by 8.4 per cent and 20.7 per cent respectively, as the transformation costs did take effect in the second half of the year.

Net profit after tax decreased by 26 per cent.

We delivered at the better end on all ranges of our full year earnings guidance. We spent 4.3 billion in cash Capex for the full year, heavily weighted towards the second half, and within, also, the revised guidance range that we issued about cash Capex in May. We saved around 700 million in Capex in the fiscal and we banked \$500 million of that saving.

It's probably worth explaining how we move from the reported outcomes, or underlying, or EBIT position, to our underlying EBIT position, which is really trying to explain the underlying performance, or the real business performance of the business. The reported EBIT for the full year, as you've heard, was \$5.5 billion, or a decline of 20.7 per cent. From the reported result we add back the restructuring and redundancy provision, which you will see is \$427 million, to derive an EBIT position pre restructuring provision, of a decline 14.6 per cent; if you'll recall, the guidance was somewhere between 15 and 20 per cent, to \$5.9 billion. We then move, or remove, the net current transformation costs of 535 million, made up of savings from the Benefits Now program that you can see on the slide, current year redundancy costs above what we originally planned. So not all redundancy costs because we do have normal year-on-year activity there.

Accelerated depreciation and amortisation, due to the transformation strategy implementation, and I'll talk a little more about depreciation and amortisation later, and the program costs with the transformation program. So when you adjust for these, we arrive at our EBIT from our underlying operations, so our business performance, of \$6.5 billion, which represents a decline of 6.9 per cent. You will recall that our guidance for the underlying business was between minus 7 to minus 10 per cent.

The restructuring and the redundancy provision raised, of 427 million, represents \$186 million covering 2,600 staff being made redundant over the next one and two years, and \$241 million covering mainly CDMA migration, penalties associated with exiting leases early and decommissioning systems.

The result, really, is a story of two halves. The first half was characterised by modest revenue growth of 1.5 per cent and EBIT decline of 7 per cent, as the traditional PSTN business continued to fall and competition in the mobile space squeezed margins further. In the second half sales revenue grew by 3.9 per cent, more than doubling the first half revenue growth. The second half revenue growth was driven by improved Sensis performance, as you've heard, it's been driven by mobiles performance and the slowing down of the PSTN decline, and of course, the fact that the New World merger occurred in the second half. If you just take out the New World merger impact, the growth in second half of 3.4 per cent; still a very strong growth.

The expense line ramped up in the second half, as the transformation implementation took effect, and we responded to competitive threats, particularly in the mobile sector, with strong marketing campaigns in the last quarter. The increase in expenses impacted on margins, as you will see from the slide, with the EBITDA margin falling 7.7 per cent in the second half and 5.1 per cent for the full year. The EBIT margin fell 7.1 per cent for the full year on a

reported basis, as we did expect.

The underlying earnings margins, that is sort of removing the net transformation costs including redundancy and restructuring, were EBITDA at 45 per cent, a fall of 2.7 per cent, and an EBIT margin of 28 per cent, a fall of 2.9 per cent. So you can see the differences there between the transformation impacts and the underlying business performance. In the second half we did spend \$1.3 billion in transformation Capex, primarily on new next generation networks including the wireless 3G, 850 and the wire line IP core.

So let's have a look at the sales drivers. Broadband, Sensis and mobiles continued strong growth in the fiscal year, and I'll cover those in particular in more detail later. The Internet Direct and IP solutions revenue was up 29 per cent, driven by the increased use of IP-based services by our business customers, a trend that we believe will continue. Wholesale broadband revenue was up 77 per cent, driven by strong subscriber growth of 61 per cent, and solutions management, or managed services, if you like, that revenue increased 6.2 per cent, mainly driven by significant contracts, one by KAZ, our IT services group. Our pay TV revenues continued to grow, and while they are a pass through in margin terms, pay TV bundling is helping to reduce churn. Resale net churn improved to minus 13,000 SIOs for the month of June, compared to the year's average of minus 22,000. So churn is coming down.

So let me turn to broadband in particular. Retail broadband revenues grew by 58 per cent, to 730 million, this is just retail broadband, so BigPond. Our competitive broadband marketing initiatives helped grow the retail broadband subscriber base by 72 per cent for the year. Total retail broadband subscribers ended the year at 1.5 million. That's an increase of over 600,000, or 72 per cent, as we continue to migrate narrow band customers to broadband and win market share.

During the year we launched BigPond Cable Extreme with download speeds of up to 17 megabits per second, and BigPond cable subscribers grew by 26 per cent. We also launched BigPond wireless broadband, growing subscribers by 272 per cent in the second half. Our retail market share is now 44 per cent. We grew market share, as Sol mentioned, by another percentage point in the second half, and overall increase in the year of 3 per cent. Retail total broadband ARPU fell 13 per cent to \$52, of course impacted by price competition and our own discounted broadband offerings that have been very successful, as you can see from the previous numbers in the marketplace. On the upside, strong network performance and customer satisfaction have driven down the churn to 1.3 per cent per month, a level that really is world-class.

So let me have a look at mobiles, mobile activity in the company.

Mobiles revenue grew by 6.1 per cent, to just under \$5 billion for the year, which was comprised of mobile services revenue growth of 4.6 per cent, to \$4.5 billion, including terminating revenues and wholesale and data revenues. Mobile handsets; revenue growth of 23 per cent to \$467 million, with second half growth driven by our ramp up in the 3G market. Mobile services and operation was up 3.2 per cent to, or a growth of 261,000 to a total of 8.5 million customers. Strategic drivers of the growth included the increase in 3G subscribers, around 500 per cent in the second half, including wireless broadband. Data was the driver of mobile services revenue growth. It was up 26 per cent. Total data, as a percentage of mobile services revenue, is 15.3 per cent, excluding wireless broadband. If wireless broadband was included, data is around 16.8 per cent of mobile services revenue. Our 3G customers are driving data growth. Data, as a percentage of 3G revenue when wireless broadband is included, is 58 per cent, compared to 18 per cent for 2G. Mobile data revenue growth consists

of, there were over 3 billion SMS messages sent in the fiscal year, and that's up 31.9 per cent, and 20.2 million MMS messages were sent. That's up 81 per cent. Other mobile data was up 121 per cent, and that includes things like the Blackberry and so on and Blackberry and wireless cards, and so on, and the Blackberry SIO increased 84 per cent. Voice yields continued to be under pressure as more high value customers moved to capped plans. Of the post paid base, 7 per cent of our customers are on capped plans. Telstra increased its post paid percentage proportion from 57 per cent to 58 per cent during 2006, compared to a 3 per cent decline for our nearest competition, down from 47 per cent to 44 per cent, and Vodafone, down 2 per cent from 29 to 27 per cent. ARPUs stayed flat for the post paid period and total ARPU was down marginally, to 38.35, that's an ARPU number without terminating revenues, which was a decline of 2.5 per cent.

Our 3G average spend is around \$81.20, compared with ARPU from 2GSM of around 59.20. So you can see the higher spending customers are on the 3G network. Subscriber acquisition costs, with our increased marketing campaigns, went up 14 per cent to \$137 on average for the year, and it, of course, was driven largely in the last quarter by a very active campaign.

Let me just move to Sensis. Sensis delivered on its 67 per cent revenue guidance, growing revenue, as you've heard, by 6.9 per cent, to \$1.8 billion. Revenue grew by 9 per cent in the second half, so a strong second half, compared to the 5.3 per cent growth in the first half. The second half revenue growth was led by Yellow Pages on-line, and regional print directories. Yellow Pages revenue grew by 5.8 per cent to .2 billion, with print revenues growing, still growing, by 2 per cent, to just over 1 billion, while Yellow Pages on-line revenue grew 54 per cent to 124 million. White Pages revenue grew by 12 per cent to \$302 million, driven by strong performance both in print and on-line.

The Trading Post revenues were down 7 per cent due to one less sales week in the year, but with strong competitions from the dailies and the local print in Sydney and Melbourne. The revenues of the business are expected to return to positive growth in. 06, 07 due to the emergence of on-line as the major Trading Post growth engine. Sensis's emerging businesses delivered 19 per cent revenue growth in the year and now earn revenues in excess of 200 million. What I mean by emerging business, an example is the interactive local search capability, location and navigation services, and of course the 123 Voice Connect services.

Underlying EBIT in Sensis grew 10.2 per cent and after excluding some acceleration of $D&A$ that we did in that business as well and a write-back of deferred expenses. Reported EBIT was up 7.7 per cent.

Let's have a look at PSTN. PSTN revenues declined 6.7 per cent to \$7.5 billion and, as Sol said, PSTN now is a little less than one third of our revenue base and it slowed in the second half to a 5.8 per cent decline compared to that first half decline of 7.6 per cent.

Calling revenues were down across the board, driven by mobile substitution and a lower SIO base or number of lines in service and of course migration to broadband and there was some pricing discounts. Access revenues are down 1.3 per cent due to the number of lines reduced, which was 1.8 per cent to 9.94 million lines. Retail customers fell, so retail lines fell 3.4 per cent or 270,000, primarily to the migration and substitution to other products, broadband and mobile, and the wholesale customer lines grew 4.3 per cent or 90,000 as they churned from our retail business. So, you can see a net there of 180,000 line reduction.

A range of value-based subscription priced plans are in the market now. They have been

launched to also address the PSTN decline. They are really in their infancy and we expect to see the impact of that in '06/'07.

So, let me now move to expenses. Operating expenses increased by 14 per cent to 13 and a half billion dollars and excluding the transformation from operating expenses, the operating expenses increased by 9.2 per cent to \$13 billion. I will explain each category in more detail in a minute but at a high level labour costs increased driven by redundancy costs, goods and services purchased increased as a result of higher sale volumes of handsets with higher mobile subsidies, all this off the back of our aggressive marketing campaigns. There was also goods and services purchase related to the growth in broadband business.

Other expenses increased driven by consultancy service contracts and agreements associated with the rehabilitation of the network and project write-offs and I will explain this a little in a minute.

So, let's look at labour in particular in a little more detail. Labour expenses rose 13 per cent to \$4.4 billion in the year. But when you exclude all the redundancy impacts, so that's the R and R provision and the in-year redundancy, redundancy pay rises and increases associated - sorry, the impact, the growth, was 1.7 per cent, so 13 per cent real growth, 1.7 per cent.

Redundancy, pay rises and increases associated with controlled entities has pushed the labour expenses up, so we had a full year of a number of our subsidiaries but of course that was offset by a degree in staff numbers, overtime, agency and contractor employment. We will see the flow-through of the '05/'06 head count reduction which you have learned about in '06/'07 because much of it was in the second half of the year. Transformation, restructuring and redundancy costs total \$406 million, \$170 million of current year expense and \$236 million included in the R and R provision. So, we have a combination there of the provision and inyear redundancy costs.

Excluding the CSL New World merger, the workforce reduction was 3,859. Including New World so we brought some staff in when we merged with that entity, the workforce reduction becomes 3,262 on a net basis.

Goods and services. 12.3 per cent was the growth to \$4.7 billion. There were small increases across most categories but the biggest drivers of cost growth were cost of goods sold which were up 26.3 per cent. Cost of goods sold is a good thing as it is obviously following revenue growth and it was driven by our mobile marketing campaigns and the BigPond broadband demand.

Handset subsidies, so again associated with our mobile campaign, were up 18.9 per cent and of course CSL New World did launch through the year an aggressive handset offer in Hong Kong. Network payments, so payments out for the use of other people's networks, were up 5.1 per cent, driven by volume of traffic from mobile and SMS terminating on other carrier networks. In addition, the growth in our UK, US and Asia operations have increased offshore network out-payments.

So, having a look now at other expenses. They increased 16 per cent to \$4.4 billion. When you exclude the transformation related costs, this category of other expenses increased 12 per cent to \$4.3 billion. One of the largest areas to increase here was service contracts, they went up by 18 per cent. It was driven by transformation costs relating to the creation and operation of the program office and operational expenditure related to the construction, so opex not

capital related to the construction of the 3G 850 network.

We did increase our spend on network maintenance and rehabilitation in the access network and of course we started to maintain our 3G 2100 network. Volume-based increases included installations of digital pay TV and increased activations for BigPond product and these are things that we do through our service contracts and agreements. Marketing costs were up 7.9 per cent due to spending around our Commonwealth Games sponsorship, but also our more aggressive competitive responses, particularly in the mobile space.

The other expense category includes a restructuring provision of \$137 million and that is related to property rationalisation, cancellation of server leases, decommissioning of systems and stock obsolescence costs, so you obviously should be getting a flavour here that we have prepared the way in '05/06 with our provisions and so on for the transformation program.

Again, we have done this in depreciation and amortisation, so let me just talk you through this. As expected, our depreciation and amortisation expenses increased by 16 per cent to just over \$4 billion and that figure does include \$422 million of accelerated depreciation and amortisation on assets that we have reduced the service lives because they are coming out of the business, with the transformation. Excluding the acceleration of depreciation and amortisation, it increased 3.9 per cent and this increase is really consistent with the growth in our asset base over the past few years and now the inclusion of the New World assets with the CSL New World merger.

So, let me talk about capital expenditure now, our cash capital expenditure. The total cash capital expenditure increased by 4.2 per cent to \$4.3 billion and that, as I mentioned before, was within our cash capex guidance range that we gave in May. Excluding acquisitions, capex increased 20 per cent to \$4.25 billion as we execute our transformation. Domestically, so in Australia, we spent \$1.35 billion on the transformation in the second half and you can see on the slide this included \$634 million on building the new core IP network and next generation ethernet transmission network which will support high-speed broadband, \$455 million on building the 3G 850 wireless network and \$159 million on OSS and BSS streamlining and improving customer care and billing solutions while decommissioning numerous fragmented legacy systems.

Total domestic capex spent on existing networks, so our normal base, if you like, serving customer demand, was \$2.6 billion for the year, which we expect will continue to fall as we continue on with the transformation.

Let me just cover a couple of our international businesses here. We completed the merger between CSL and New World on 31 March. New World was consolidated into our group numbers from 1 April. The merged entry grew 12 per cent, of which 8.7 per cent was due to New World coming into the business and CSL revenue growth was driven by rising data revenues like in Australia with our business and local and international voice and prepaid revenue.

EBIT was down 5.4 per cent to \$HK686 million, driven by the inclusion of some merger costs, the increased subsidies as part of the increased promotional activities and higher offshore out-payments associated with higher international voice revenues out of that business in Hong Kong.

Telstra Clear reported an increase of 2.5 per cent in total revenue to \$NZ693 million. The

increase is attributable to a strong consumer revenue growth and the full year inclusion of Sytec, which is similar to KAZ and IT services group that we acquired in the prior year.

So, cashflows and our financial parameters that we continue to inform the market about. Free cashflow declined 12.4 per cent to \$4.55 billion due to lower earnings, the decline in earnings that you have seen, higher tax paid due to an instalment tax rate correction by the tax office, higher capital expenditure due to the transformation, and lower asset sales than the prior year.

With regard to our financial parameters, that is our debt servicing, our net debt gearing and our interest cover, you can see we are very comfortably sitting against all of those measures as at 30 June 2006.

Now, our guidance, 2007 guidance. In developing the guidance for fiscal '07 we have made the following assumptions. These are important: No FTTN build, ULL pricing in band 2 of \$22, and it is the largest year for transformation spend in terms of capex and opex and we have assumed in this guidance no additional provision being raised for restructuring and redundancy in '06/07. That last point is important. We may still consider to do that if we have the right conditions in terms of knowing if there are any more and it fits in with the accounting standards and so on. It is important you understand the assumptions behind this guidance.

The guidance is also based on reported numbers for fiscal year '06 being the base, so not the underlying numbers, and we expect revenue growth therefore of 2 to 2.5 per cent, so around still our long-term guidance CAGR for five years. That depreciation and amortisation will be at around the same levels as last year and that EBIT will grow in the range 4 to 6 per cent and our cash operating capital expenditure will significantly increase from last year to between \$5.4 billion and \$5.7 billion.

We expect our underlying EBIT, and this is calculated on the same basis as I stepped you through our underlying EBIT earlier, to be in the range of flat to minus 2 per cent when compared with the fiscal year '06 underlying EBIT of 6.5, so let me just get that into your head. Minus 6.9 per cent EBIT was the underlying business performance '05/'06. We are saying an improvement to flat to minus 2 per cent underlying EBIT performance in '07.

We expect the increase in operating capital expenditure for fiscal '07 is for increased transformation expenditure, including the completion of the footprint of the 3G 850 wireless network rollout, continuing wire line transformation and expenditure aimed at further reducing single points of network failure, as well as platform rationalisation and major spends in continuing our business support system and operational support system redevelopment.

The level of future dividends will be subject to regulatory outcomes and of course other normal board considerations such as the cash position of the company.

I just want to bring one more thing to your attention, because we are very much about no surprises and we don't want any surprises when we stand up here in February about the first half performance, so it is important that I take you through this.

There will be some unusual half one, year-on-year outcomes because of the profile of last year's spend and a revenue recognition change that is occurring and of course the inclusion of New World for the full year. The following factors will affect the half-on-half performance in the '06/07 fiscal year. There will be a delay in the revenue recognition of the Melbourne

Yellow Pages book until January '07, so it slips from one half into another. That will impact revenue and EBIT in half one '07, but of course it is made up in the second half.

New World consolidation, as I said, for the full 12 months, transformation costs occurring in half one '07, so the half we are in right now, compared to nil in half one '06, so again that will impact the half result and no accelerated D&A, or depreciation and amortisation, occurred in half one '06, but there will be some half one '07 and we expect that in the range of \$150 million to \$175 million will be recognised in half one of this fiscal.

The impact of these results will cause a significant reduction in the half one EBIT in the range of 17 to 20 per cent, so in other words you will see a large negative number in the half one result because of all those elements that I have just outlined and it is important that everybody understands that. But these impacts will be more than made up in the second half of fiscal '07 due to the timing, the transformation timing.

It is important, I believe, for us to provide this guidance to you so there aren't any surprises as we report our interim profit results early next calendar. You should not expect us, of course, to provide this sort of half-on-half guidance in future, unless there are some significant factors that we become aware of.

So, thank you for listening to that. I think it was important to take you through the detail and now Sol and I will take questions.

QUESTION: Patrick Russell, Merrill Lynch. Just a question on the guidance first in relation to the ULL. If we do see a change on that, will we see a formal set of guidance restated and potential timing on that from your perspective as you see it now? The second thing, I just wanted to get a feel as to how the second half PSTN revenues were affected by the wholesale price increases, whether you can sort of give any idea of what the underlying was ex that. Thirdly, on the operating costs up 9 per cent on an underlying basis. I guess trying to get a handle on when you think that can come back because that is pretty high growth, in particular looking at performance bonuses and commissions up 180 per cent; just trying to work out whether there is a dynamic there, the harder you push sales, the harder we are going to see negative surprises on cost of sales and that will confiscate the gains you are making in terms of your market share improvements. That's about it, thank you.

SOL TRUJILLO: I will take part of it and then I will ask John to comment. In terms of the guidance on ULL, I guess we will give updates based upon that moment in time or a comfortable period after we can assess whatever decisions the regulator chooses to make, so we will provide an update at an appropriate time. Relative to the second half PSTN, I will let John take a swipe at that regarding your specific focus on wholesale.

JOHN STANHOPE: Patrick, the wholesale impact on PSTN was that there was a price impact of 60 million, but that was the price movement for wholesale for the whole year in access and there was an \$89 million positive impact on volume in wholesale as well. That's again spread across the whole year, but just remember access went down \$44 million, which is 1.3 per cent, and retail was mostly volume, but there was a price impact positive of 60 in wholesale.

QUESTION: So I'm crystal clear on this, so stripping it out, that price increase would be \$60 million on a like-for-like basis if you hadn't put that price increase through.

JOHN STANHOPE: Yes, that's right.

SOL TRUJILLO: The third piece is relative to the push on sales and what I will do is I will just have David Moffatt, who basically has most of that responsibility in terms of volumes, I will have David talk about that.

DAVID MOFFATT: Thank you, Sol. Patrick, you have got an unusual amount of the renegotiations of all the dealer contracts that we had that are loaded into those numbers. What we did is we took nearly 200 plus, more than that, contracts and we renegotiated all of those and we took the trailing commission rates that we had and we brought them forward to a much shorter period of time, predominately from five years to two years, and there were some oneoff payments that were part of that.

To the comment about is the growth in cost of goods sold justified, the answer from our point of view is, if you strip that out, yes, it is, and the reason is very simple. We see a lift in ARPU, we have seen a very strong lift in the mix of data, almost double the rate of what we could get normally on a subscriber, and so the combination of those two things, all of which is on contract, means that we are very comfortable with the rate of growth that we have got and the cost aligned to revenue growth not just now but in the future.

SOL TRUJILLO: I will just add one other comment and that is clearly it is our intent to grow this business and to maintain and grow market share, so we will act accordingly in the marketplace in terms of, with those principles, to keep market share or grow it and we will do what we need to do, so that should be clear to everybody in this room and to all of our competitors.

QUESTION: Good morning John. Good morning, Sol. Tim Smeallie from Citigroup. Just following on from that comment on cost of sales, if we look at mobile cost of sales growth, it looked like it grew by about 20 per cent in the previous year on 6 per cent revenue growth. Just wondering do you expect will that trend continue and how many years should we expect that to occur? Secondly, looking at the capex guidance for next year, obviously that is hell of a lot of money to spend above business as usual capex, so can we get some clarity on where the \$2.5 billion is going and how that's being spent? It looks like a lot of that has been brought forward.

Thirdly, if we look back to the strategy day in November, I guess we saw there were three things that underpinned it: Business transformation, a ULL price of \$30 to support the revenue growth and fibre to the node to deliver I guess the sweet spot in growth from '09 onwards. I guess two out of the three factors aren't happening now, so can we get some clarity in terms of will we hear about a new statutory in the short term or can you give us some colour on that today?

SOL TRUJILLO: Let me begin with the last question and then I am going to ask Greg to talk a little bit about what we are spending the majority of our capex on as we go into the next year and then I will ask David to talk a little bit more about this mobile cost of goods thinking.

In terms of our strategy and back to November 15, I outlined kind of four or five key principles, maybe organised a little bit different than what you have articulated here. The first thing is that broadband is going to be critical in terms of our business and we were going to do what we needed to do to grow that business and we are doing that. Part of it is on the platforms it could be fibre to the node, where we could accelerate with more band width; part

of it was around ADSL in terms of how we already had infrastructure in place that we were using; part of it is that we have been using our cable infrastructure HFC for delivery of that; and then part of it is on an ongoing bases, in terms of day-to-day commercial relationships, we have commercial contracts, laying fibre for various customers, whether they be state governments, whether they be large enterprises, community developments, whatever it might be, so there is a whole combination of platforms that we are using and fibre to the node was one that we are articulated we thought would be great for this country and we thought would be great in terms of having a more ubiquitous, predictable, well-known base of capability for all customers.

You know, the government has made their choices and we will go with the flow. What does that mean at this stage? It means we are driving today, as you have seen in these results, and growing on the platforms we have been using and they are better platforms than any of our competitors. We will out compete our competitors on what we have today and we will continue to expand on those existing platforms. But there will be one new dimension coming into play that nobody will have, at least not initially and they will never catch up to us, and that is relative to our wireless broadband platform. That is going to be powerful, we are exploring technologies beyond just what I would call the classic, you know, you and I could make calls and we could do a lot of things on our devices today, but we are also going to be exploring what we can do around wireless local loop, off of that platform.

Again, if you talk to our technology experts, where I know some of you have, we have Hugh Bradlow here and Mike Ryde in addition to Greg and some of the folks that have been working on this; there is a lot of potential for us. I am not going to get into the details today, as I said earlier, because I am not going to explain to our competitors what we are going to do in the marketplace. I won't do that. We will let them find out in the marketplace what we do, as they have been so far the last six months.

In terms of what else are we doing as core and when I think about it as an operator, because the regulatory piece is a piece, it has been important, but it overtakes too much of the conversation is the way I think about it and the reason why I end up talking about it is because people ask me. But when we think about value creation and sustainable value creation, we have to get a much lower cost platform in this business and, yes, a little bit of our cost takeout is being masked by cost of goods in terms of how we think about mobiles and some of that is one time in terms of how David explained it and he will talk some more, but a lot of this is going to be about the people takeout, the process efficiencies, the reduced time that we have to have people interfacing with customers and doing work and checking work and doing all those things; that is still happening. We are implementing our IP kind of transition in terms of our next generation network because you have to remember our next generation network isn't just about fibre to the node. That's only a component piece. It is about soft switching, it is about this IP core, it is about your Edge network, it is about a lot of elements that we are doing regardless of regulatory kinds of activities.

So, a lot is happening. The vast majority of what we outlined on November 15 is not impacted, it is just that slice of fibre to the node. We have alternative delivery platforms that are better than what our competitors have in spite of what they say. We only talk about what will be delivered and we will continue to press those issues.

David, do you want to talk about the cost of goods issue?

DAVID MOFFATT: Thanks, Sol. Tim, a few things. Let's start with the customer. What we

have learned in this massive push on 3G is that the customers use more services and it is very dramatic to us, so we have compared usage on a 2G customer who has then migrated to 3G and we have seen very big uplifts in terms of revenue growth and in terms of data usage and, for example, the number of events, they go from using typically seven on a high performance handset as a 2G customer to maybe 25 on a 3G. So, there is a very big shift in the market, more capability, that's where you want to be, so obviously we have pushed the button on that.

On the cost of goods sold side, we are going to have a number of things happening. I explained the issue on the commission side, there is some one-offs in there. That is now much more aligned to ARPU growth because of the way we have restructured the arrangements, so that will track more to ARPU growth for us with our dealers and of course handsets. What we have done is, as a result of the early phase of 3D, a lot of those costs, of those unit costs are quite high. As we get volumes up and we push into our strategic partner arrangements, the prices of those come down, so you will see a commensurate reduction in the unit cost of those on a relative basis.

So the combination of what the customers want, the services, the revenue growth, all of those kinds of things, plus what we are doing on the cost side and the scale and of course winning market share and you can see we have grown our post-paid share by a point relative to all the major competitors and we have really pushed ahead in terms of the strategic game, which is all about 3G. As Sol said, we have added over 100,000 since June, 317,000, so effectively 4 per cent of the other players' major push that took them three and a half years to get.

QUESTION: So we should expect Telstra to still be very aggressive, in terms of subsidies, in the market over the next 12 to 24 months?

DAVID MOFFAT: Relative to the market we'll be competitive, but we know we're creating value as a result of what we're doing. We have absolutely no doubt about that.

SOL TRUJILLO: Greg, did you want to talk about the Capex spend?

GREG WINN: Basically to repeat what Sol said, I'll start from the, kind of, core out. One of our key strategies is soft switching. We have our first two soft switches in the country installed and running in our lab. We are going to press hard in this fiscal year with further deployment of the soft switch, begin that capability. There are 2 million line capacity switches moving out from the switching core into the back call or transmission network. That work is well underway, we're continuing to accelerate there. I believe Sol indicated, or John did, that we're at about 60 per cent of what we want to do there. We have installed, we haven't tested a lot of it yet, but we have it installed and are going through turn up phases.

Obviously on the 3G network, the early returns that David mentioned are extremely pleasing, so we're accelerating our 3G 850 build. We're still on plan, on target, but it looks like we may have some more opportunity there, so we're going to be to be looking at reinforcing our back call, given the applications. We're working on our service delivery platforms. New service delivery platforms are coming on-line that are going to enable more content, seamless, one touch, one click capabilities.

Then on the systems side, we have a lot going on in the system world as well. We have our first major systems drop late in the calendar year of 07, not this fiscal year, but the lion's share of the work will be done in this fiscal year and we'll be into a kind of a cold soak load testing, regression testing on all of our new billing systems, etcetera, late this fiscal year in preparation for the first cut over in the 07, 08 year. So there is a lot going on across the board, everything from our network operating centre capabilities, the IP networks, the cores, resiliency, survivability, robustness, and that's why the lion's share of Capex has been spent this year.

SOL TRUJILLO: Thank you. I'm going to take a question here from Sydney, since they've been waiting here, and then we'll come back here to Melbourne. Sydney.

QUESTION: Justín Cameron from Credit Suísse. Just two questions; one on the Capex, maybe a bit of follow up on the previous question. I'm just trying to understand how the Capex will trend over the next kind of three years now. If you look back six months ago, the guidance from Telstra at the time, I think, was 23 to 25 per cent Capex to sales, and I think given you've got this significant hump, I suppose, in the 07 year, can we start looking at factoring in a step back in the vicinity of 500 to \$800 million, and obviously, as a result of that, you get a significant improvement in the free cash flow in the proceeding, kind of, two years after that. So just a bit more feedback, I suppose, on where that trend will be in the next two to three years on a Capex to sales perspective. Secondly, probably for John: Just in relation to the PSTN, there was improvement in the trends for the fixed line business in the second half, coming in at a 5.8 per cent decline. Now, again going back six months ago, the guidance from Telstra was that it was declines of, I think, 8 to 9 per cent in the fixed line business. Are we expecting now to look at the circa 6 per cent declines going forward? Is that something that we can expect in the fixed line business, and what's the expectation there?

SOL TRUJILLO: Okay, let me start with the Capex. The answer - I'm not going to give you any numbers, so we won't do that at this stage. But in terms of the fundamental question you're asking, Justin, about will our Capex spend go down significantly after the 07 or 06, 07 year that we're now into; the answer is yes. It will go down significantly, but not fully back to what I would call normal spend levels because we're still deploying soft switching, we're still doing some of the work in terms of our core infrastructure and still finalising a lot of our IT work at that point in time. But the bulk of the spend is in this 07, 06, so the way to think about it is, obviously, this is our peak year, next year we see the beginning of a relatively significant decline, and after that then it really steps down.

Now, the guidance that we gave last November was that we would expect that our Capex to sales, the classic metric, would be in the low double digits range, as part of our guidance. I believe that, and obviously it's our intent to work to those levels, if not exceed them. Because we are building this, the networks that we are putting in place are going to be highly evolvable, and after that they're primarily software upgrades as opposed to a lot of physical change out of infrastructure, both at the wireless side and the fixed line side in terms of what Then on the IT side, what we will have will be the latest generation of we're doing. infrastructure.

I'm going to make one other comment, and I don't mean to go on too long in terms of answering this question; but the key difference of what you're seeing on this transformation, versus anything I have seen anywhere in the world, is that we are fixing the core systems and the core networks; not temporising, not slightly improving, these are fundamental evolutionary fixes that we're putting in place. One other thing is that we're enabling this integrated strategy, and you again will start seeing it play out over the next 12 months, 24 months, of how we can integrate capabilities from a customer experience standpoint that nobody in the world will be doing like Telstra. That's what the investment is for, Justin.

JOHN STANHOPE: Justin, just on PSTN declines, I'm not going to give out a number like I

did last year, but actually the number that I gave out last year we came very close to. But we are continuing to work on arresting the decline in PSTN revenues. It has a number of elements to it, it has integration of services, PSTN, mobile, broadband, and it has the subscription price plans that really, as I said, are new, relatively new, in the marketplace, so we still have the impacts of those to flow through. Of course, our market-base management segmentation will help our customers to understand there is still value to be had in the fixed line or PSTN network. So I guess I'm not going to give out a number. Justin, but it is still our aim to continue to arrest that decline. I might just make one comment on Capex, too, Tim's question. That is that there shouldn't be too many surprises about a higher Capex level in this fiscal year. I mean, we only really started the transformation in 05,06 and, sort of, we've only been going at it really seven months and we spent 1.3 billion in that seven months. So this is, as Sol has said a couple of times now, this is the intense year of our capital (indistinct).

SOL TRUJILLO: Back here to - - -

QUESTION: --- on the Capex, and I suppose I'm not going to get an answer on the dividend, but if you look at what's going on with the balance sheet settings of Telstra right now and if you're talking about Capex coming down from the 08 year onwards, and obviously in your big picture scheme of the operating perspective on the business, that will be improving. I mean, looking at the overall financial settings of Telstra, it would suggest that, from a dividend perspective, there is so much capacity there for Telstra to maintain its current payout. Realistically, going forward, I mean is there a risk to your dividend payout profile for Telstra?

SOL TRUJILLO: Ultimately the dividend payment is a function of board conversation. But, you know, as we think about cash flow, as we think about cash generation, there is many considerations. Part of it is, you know, how we're looking right now at our spend. We're making some significant investments in this business. There may be offsets or other impacts in terms of what happens relative to regulatory decisions and perhaps other marketplace requirements. So for us, you know, to make any further comments on dividends, as you're implying here, we're not going to. But, you know, obviously we have leverage on the balance sheet, we have strong cash flow generation, but there is always impacts that can take it the other direction, especially here in Australia, the way regulatory processes have historically worked. We will reserve judgment until appropriate times, as a board, to look at any issues relative to dividends or dividend payouts. We'll go back here to Melbourne.

QUESTION: Christian Guerra from Goldman Sachs JBWeir. I'll just ask you three questions this morning. The first one is on the broadband performance; obviously a fantastic performance, with 300,000 new subscribers. I'm just wondering if you could tell us how many of those new subscribers were bundled with the PSTN network. Secondly, just a question on your 07 guidance: You're talking about 07 being the biggest year in terms of transformation costs. I'm just wondering if you could tell us the magnitude of the number on the Opex side, excluding the D&A. Thirdly; in the first half we saw that you actually increased the useful life of some assets, which give you a D&A benefit of about \$65 million in the first half. I'm just wondering whether we should double that for the full year? Thanks.

SOL TRUJILLO: Do you want to take the broadband question?

DAVID MOFFAT: Christian, the answer on the broadband is 93 per cent of our customers, and that's been consistent all the way through, have PSTN services with us if they take broadband up with us. We have an offer in the marketplace at the moment which is 12 months at half price. One of the gates that you to go through to get that deal is to have your PSTN service with us. So we're very keen to have people bundle PSTN and their mobile services with us, and that strategy seems to be working well.

JOHN STANHOPE: Christian, the acceleration of depreciation is very similar in 06, 07. The service life impact is 134 million, so doubling is pretty close.

OUESTION: Just the 06 Opex, in terms of transformation program - sorry, 07 transformation program Opex.

JOHN STANHOPE: Sorry, what was the question in relation to that?

QUESTION: You said that 07 is the lightest year in terms of transformation costs on the Opex side. I'm just wondering, stripping out the D&A, what's the sort of Opex that you're talking about?

JOHN STANHOPE: I'm not going to give a growth number around it, if that's what you're talking. But, you know, Capex, Opex ratio, if you're talking about the Opex related to the Capex program, it's usually 90/10, somewhere around that; 90 per cent Capex, 10 per cent Opex.

OUESTION: So that's the number we should be using, just to be crystal clear, that 640 million was the Opex in 06, including the R&R provision, and in 07 we should be using that, sort of, 90/10 ratio on the transformation program Capex to Opex?

JOHN STANHOPE: Yes.

QUESTION: Thanks.

SOL TRUJILLO: We'll take a question from Sydney and then come back Melbourne.

QUESTION: Mark McDonald from BBY. Three questions. Firstly in relation to labour redundancy costs: I see that at note 7 to the accounts, page 40, the labour redundancy expense is expressed at \$356 million. I'm just wondering if you can clarify how that figure relates to the 186 used in the presentation? Secondly, I've also noted that in the second half, in your mobile networks, you saw a very significant change in the representation of CDMA to GSM in your customer base. The CDMA customers grew strongly in the second half and there was also quite a notable drop in the number of GSM customers, over 500,000. So I'm wondering if you can explain what you believe is happening in the mobile customer area to effect such a big swing, particularly in the context of your announcements relating to the closure of CDMA and the big uplift in customer numbers there? Thirdly, also in respect of the network based question; given your recent announcement that you're not going to proceed with FTTN, can you clarify the number of end user access lines that are carried, at least in part by fibre, to the local exchange? In the past we've heard that Telstra has made investments in fibre in the local loop from the exchange to RIMS. What proportion of your lines, of end user access lines, are carried over some form of FTTN in the network today?

SOL TRUJILLO: Okay, why don't we start first with the redundancies?

JOHN STANHOPE: Yes, the accounts question. On that page the redundancy relates to the in year redundancy as well as the provision. So the 356 is the redundancy expense in the year, as well as the 186 provision. So there was redundancy expensed in year, and we provided

redundancy for the future years. 186 is future years and the remainder is what was spent in the year.

SOL TRUJILLO: Relative to the CDMA question, obviously we are focused on 3G, as I said. We've rolled out, also, a very strong offer during the past year of EVDO, and I'll ask David Moffat to comment on that as well.

DAVID MOFFAT: Thanks, Sol. The change in terms of the CDMA subscribers is because those customers have that available to them at the moment and that part of the market is still growing for us. So obviously we're going to satisfy that demand. But it's also the point that Sol made around wireless data cards, which has seen a very heavy growth. So that's the numbers in the CDMA.

On the GSM side, what we did is we integrated two platforms and we had a series of customers who, on that, were basically weren't using the network, and so those customers have been deactivated. So that was a very large deactivation, it was really about 390,000. They were all prepaid customers. So our high growth strategies are on our customers who are on 3G, firstly, and on a contract, secondly on 2G and on a contract and are prepared to invest with us and stay with us and use services, and what we've done is we've detuned the focus on the prepaid side, particularly those that are not using actively with us, and we cleaned that out as we rationalised one of our platforms. To give you some idea for the prepaid users, who we still want to service; those customers who are unique users to us went up 12 per cent in the year. So we had a good growth in the customers who are prepared to work with us and grow with us. So that's what you're seeing in those movement of those numbers.

SOL TRUJILLO: I don't know if you can see here - can you see me here there in Sydney? I'm holding one of the data cards, you know, our BigPond card that you can insert into your laptop. Again, we have about 100,000 customers that have now become subscribers. So when we think about new wave and we think about next series of growth, clearly we're starting with EVDO, but when we roll out at HSDPA network, it's going to be big, because life changes at that point in time when you can get multimegabit capability and carry with you wherever you go. So we are the market leaders, we intend to be the market leaders, and we will continue to grow. In the interim, what we're doing with our EVDO customers is obviously we're generally entering into a contract with them and we will give them great service on the platform that they're using today that it will be even better as they continue to migrate on to our HSDPA platform going forward.

Then in terms of the fibre question and the number of ultimate lines served via fibre, I cannot give you that answer and maybe we can follow up with you off line.

QUESTION: Good morning, gentlemen, it's Richard Eary from UBS. Three questions - it's more on clarity actually. One is on the actual depreciation number that you gave out of 4 billion, or 4.1, for last year. John, you said earlier that you thought that was that was going to be the same level for 07, or does that number still include the accelerated appreciation on top of that? That will be the first question. Second, if that is the case, am I right in assuming that the EBITDA guidance on flat depreciation would be 9.7 to 9.8 billion for 07, pre any restructuring provisions that you may decide to book later in the year, depending on obviously how accounting standards change? Lastly, is that given where the margins are today relative to your long-term guidance, and obviously there are some issues with regards to long-term guidance based on regulatory decisions, can you just give us a little bit more clarity in terms of the magnitude of costs savings that we can expect to see coming out of the business in 08, 09,

in terms of, obviously, a rebound, in terms of whether you can put that - you know, some of your international peers have given some clarity on that. I just wonder whether you can put some numbers around that?

JOHN STANHOPE: Well, let me deal with the D&A question? The D&A has - that 4 billion has got the acceleration in it. What I said to - the 06, 07 year will be a similar level of D&A and will include some acceleration as well at about the same level.

QUESTION: So that's 4.1 for 07, is the number?

JOHN STANHOPE: It's around about the same level.

OUESTION: So that implies the EBITDA is around 9.7 to 9.8, based on your EBIT growth guidance?

JOHN STANHOPE: Yes. You can figure that out.

SOL TRUJILLO: In terms of the cost take out guidance in terms of absolute numbers, again I won't give you numbers at this stage. What we gave as guidance back in November was that when you looked at our cost structure, meaning where our cost levels were at that point in time at the end of first half, we said when we finished this transformation we'd be at that same operating cost level in terms of run rates, or better, if we can do that, in terms of the full implementation of this set of systems we're implementing, as well as the operating run rates of the new networks that we will put in place. We're still standing by that, we're still talking about the 6 to 8,000 full-time equivalent reduction in terms of the first three years, we're still focused on the 10 to 12,000 full-time equivalent reduction within the five-year period of time. So those are the core driver metrics in terms of how you think about labour costs within the business, and then some of the associated loadings and other costs that are generated with labour. But in terms of the process costs, I can't give you the individual ones because we're still in the process of detailing that as we implement some of the plans we have. Some of them we do have targets, but we don't disclose those at this stage.

OUESTION: So can I just follow up just one final question. With regard to the Capex guidance you gave of 5.4 to 5.7 billion, does that exclude any additional Capex which may come back to the table on plan B if fibre is now off the table? Or is that including some degree of Capex with relation to that change in strategy potentially?

JOHN STANHOPE: There is no fibre Capex in that number.

OUESTION: But is there any, sort of, HFC or plan B Capex within that number?

SOL TRUJILLO: We basically have reflected in that number what we think we need to compete and operate the business effectively to hit the numbers that we have given you as guidance.

OUESTION: Thanks.

OUESTION: - - - four questions: The first one, a similar question to an earlier question; I also noted the big increase in CDMA subscribers in the year. You've now got 1.7 million CDMA subscribers. What's your plan when the network does close? What are you going to do with these customers in terms of, you know, the cost involved in transferring them across

to the new network? Is there any forward guidance on how you're going to handle that? The second question on margins: The year just gone, if you strip out all the restructuring, redundancy charges, your margin has fallen close to 3 per cent. It's the biggest decline we've seen for - well really ever, I guess. It's a long way from the 50 to 52 per cent that you're looking for by 2010. Can you just give us a bit of a look at what the trajectory between 45 and 50 to 52 looks like? Are we going to see next year go down or up? Then in 08 - how quickly do we get back to up the 50 number? The third question is on your subscription pricing plans. We had a bit of a toe in the water on that earlier in the year at the very high end. How quickly do you think we're going to see subscription plans move across the mass market? Then, finally; now that fibre to the node is off the agenda, how quickly are we going to see Telstra offering the ADSL 2 plus services into the market with broadband speeds in excess of 1.5 megs on DSL? Okay, let me try to take them quickly here in the order that you asked them regarding the CDMA and the migration of customers. Clearly, as you've heard me say almost a year ago and today, we will expect to turn up our network by the first of the year in terms of the HSDPA network. The value proposition is going to be very strong in terms of speeds, reach, quality, advantage, services, etcetera. So what we expect to see before we reach that first quarter of CDMA, the first quarter of 08 when we have noticed everybody that we would intend to shutdown the CDMA network, we would expect to see a lot of migration based upon the value propositions that we're going to have in the marketplace. There may be some customers at the very end that, for whatever the reasons are, haven't changed. We will work very closely to migrate those customers, in a positive way to help them make that move over to the new network. Because, again, it will be a dramatically better experience for all of our customers. So how much we have set aside: we have it built into our plan in terms of - I'm not going to give you an amount because obviously we don't know for sure how many customers will migrate over. We have some estimates based upon what we've already seen with conversions from 2G to 3G, and also what we've seen in some conversions that have been modelled after other countries. But the point is, is that we think we have a strong value proposition, we will do what's right for the customer and we will make sure that this is a very successful migration, because, again, customers are going to benefit.

In terms of the margin question, you know, logically you can expect, as you have seen, that margins will drop as you increase Opex, in particular Opex spend fairly significantly. We've seen in the 05, 06 year, you're going to really see it in 06, 07 in terms of what we're doing in terms of Opex spend. It's a mathematical calculation. In terms of going past the subsequent year; we will start seeing margins climb back up. Why? Because, number one, spend will be reduced. But secondly what's going to take it back to some of the prior levels is that we're going to be on an operating model that's going to be different. When we looked at all the operating costs and you think about how we run our networks, it's going to be a different cost model. When you think about the front end of the business and you think about how we interface with customers, all the systems, all the time, all the processes involved are going to be dramatically streamlined. That cost of serving a customer is going to be dramatically different. When we introduced new products and services on the platforms that we do today, the cost to introduce, the cost of building the cost of systems, the cost of processes, the cost of people, all of those thing are going to be dramatically reduced. The cycle time in which we do it is going to be, again, significantly changed. All of those are going to be part of process costs take out, in addition to physical operational cost take out. We have modelled our business model going forward and we have a strong belief that we will be able to hit the EBIT margins that John has talked about in terms of the guidance here, and we're building all the layers of capability as we speak. So timeframe wise, yes, you will see it beginning in years three of our transformation, accelerating in year 4, and obviously really being strong in year 5, when we get to that point of having implemented most of what we said we were going to do.

In terms of the subscription, going across a broader set of customers, clearly both David and Dina have their plans and maybe David wants to make a comment and then Dina could you comment real quickly?

DAVID MOFFATT: Sure. The big competition that we faced at the top end, we have now obviously addressed that with a really competitive package and that meant that, from an industry point of view, where some of the mobile-only players were targeting us most aggressively, we have effectively neutralised that competitive risk and that's been really well received by the customers because it is a terrific value proposition. Across the rest of the base, we already had a terrific set of plans and, as Sol has already mentioned, we have seen a big reduction in the run rate of churn as a result of getting those plans just right.

Now what we plan to do is actually add more value, more value through the combination of integration and more value into existing capabilities that we know through market-based management works for our customers on the PSTN that maybe they haven't thought about as much in the past. So, we are pretty excited about the way in which subscription pricing has helped to us drive our overall business.

DEENA SHIFF: The small to medium enterprise-base introduced I guess the equivalent of what David has done in the consumer space in July, so we are only just starting to see the early effects of that. Satisfyingly, the take-up has been much higher in effect in win-backs from other players in the market, so obviously that's the best kind of incremental effects that we are looking for. It is early days yet, but what it is saying to us is that small businesses appreciate the cost certainty associated with this kind of price structure and will continue to put more types of pricing structures into the market to continue to effect the market outcome.

SOL TRUJILLO: The last question you asked was relative to DSL2 plus.

QUESTION: Yes. When are we going to see DSL speeds from Telstra greater than one and a half megs, as some of your competitors are now offering?

SOL TRUJILLO: We have them today. If you happen to be a Cable Extreme customer today, you can get up to 17 megabits per second today and we have customers that are on that service today. In effect, as I said earlier, our delivery plans, our service plans, our competitive plans are going to be tied to what we need to do with the SL2 plus to compete with those who are deploying, what we can do with our HFC network, what we can do with our wireless platform that we are building and enhancing, and what we are going to be able to do in terms of private contracts.

I am not going to give any specifics, I won't give you dates, just simply because I am not going to signal to our competitors what we are going to do, but, trust me, we will compete very effectively and we will have better value propositions in the market.

OUESTION: One follow-up question, perhaps a different way to ask the margin question. The margin erosion in the last 12 months was really all about customer acquisition; very aggressive handset subsidies, aggressive cost of goods sold. Do you have numbers in your mind about what market share figures you want to get to? In mobiles you have mid-40s, broadband about the same. Is there a number like 55 per cent share of the mobile market or broadband market we want to get? That's really going to drive your behaviour in terms of how aggressive you are going to continue to be on the customer acquisition.

SOL TRUJILLO: Again I am not going to give you a number and I am going to tell you why, besides not wanting to give you a number, because again I'm not going to signal to my competitors what we are going to do, but the answer to that question is not as simple as that. Because for me it is about winning the gains where it's important, so do I want to have a very significant success in terms of 3G market share? Absolutely. Will we be able to do that with the competitive advantage that we are building? Absolutely, because that's where customers are going to be. Just like customers now are moving, as they used to, in the mobile space onto a broadband platform, we are finding that this is becoming a way of life.

Band width and the need for band width in order to do things that are part of your everyday life is absolutely critical, so winning in 3G market share is very important and my expectations, if you are looking for something to quote me on, when we talk next year we should be the market leader in 3G, right? We got to the game late, we haven't deployed as early as others, but a year from now we will be the market leader, because this is the important game in which we need to win, in addition to broadband, in addition to wireless broadband, in addition to delivery on other platforms, as we think about it. That is going to be how we think about creating shareholder value and the simple reason is that that is where customers are willing to pay more and to do more and to use more as we think about the business going forward.

I am instructed that we have to end. I am sorry, Tim. We will bring it to ---

QUESTION: Just two very brief ones. Do you think you can get the 850 network up and running for the December quarter to launch with the Christmas period and also, just looking at Sensis, Bruce has a big target to get 3 billion in the next three or four years. Is he seeing anything in terms of yields per page in terms of Sensis and the new on-line threats?

SOL TRUJILLO: Again, just two quick responses. In terms of our network, we are on plan, we are working hard. Our target was to get it done in record speed, record speed being by the 1st of the year. That's what our plan is and that's what we are going for in terms of what we do.

In terms of Sensis, obviously I think the margins that we showed today, both in terms of print and the increase of margins on on-line, are very strong and improving and I think the job that our Sensis team is doing is terrific and the nice thing is that the new revenues are carrying very strong margins and I do have to say that this is a scale business. It is scale and we are going to look to scale up so that we can continue to improve margins. Thank you all.

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TELSTRA GROUP LIMITED Call Transcript 2006

65927_rns_2006-08-10_0412dc1c-f291-4b1d-8f76-2c2721f8cea5.pdf

Transcript from Full Year 2006 Results Analysts Briefing

TELSTRA CORPORATION LIMITED

FY 2006 RESULTS

THURSDAY 10 AUGUST 2006

ANALYSTS BRIEFING

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TELSTRA GROUP LIMITED — Call Transcript 2006

65927_rns_2006-08-10_0412dc1c-f291-4b1d-8f76-2c2721f8cea5.pdf

Transcript from Full Year 2006 Results Analysts Briefing

TELSTRA CORPORATION LIMITED

FY 2006 RESULTS

THURSDAY 10 AUGUST 2006

ANALYSTS BRIEFING

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TELSTRA GROUP LIMITED Call Transcript 2006