TELSTRA GROUP LIMITED - Call Transcript 2007

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10 August 2007

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 2007 Results Analysts Briefing

In accordance with the listing rules, I attach a copy of the transcript from today’s Full Year 2007 Results analysts briefing for release to the market.

Yours sincerely

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Douglas Gration Company Secretary

Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556

TELSTRA CORPORATION LIMITED

2006/2007 FULL-YEAR RESULTS

Heritage Room Westin Hotel 1 Martin Place Sydney NSW 2000

9 August 2007 at 9am

MR SPINCER: Good morning, ladies and gentlemen, and welcome to Telstra's results for the financial year ending 30 June 2007. For those who I haven't met before, my name is Ben Spincer. I'm the Director of Investor Relations here at Telstra.

In a few moments Sol Trujillo and John Stanhope will be presenting the company's results. After the presentation, there will be an opportunity for you to ask questions of John and Sol. Questions are going to be taken from Sydney first on this occasion, so please be ready to form a queue behind the fixed microphone. This may a futile request, but with a view to allowing everyone an opportunity to ask questions, please ask just one question. If you have further questions, you are, of course, welcome to rejoin the queue.

Without further ado, I take this opportunity to welcome our chief executive, Sol Trujillo, who will talk you through our 2007 performance.

MR TRUJILLO: Thank you, Ben, and welcome to Telstra, welcome to Australia, Ben. This is your first chance to be in front of the investor community, and we are really glad that you have joined us here.

Let me welcome all of you to Telstra's update in terms of H2 results as well as the annual results.

I like to start first with the punchline, and the punchline is that we are on or ahead of plan again. We are building competitive advantage and differentiation, and we are truly investing and delivering where it matters.

What is important also, as we think about delivering where it matters, is we are also, in the marketplace, delivering what matters to our customers.

In the case of value to customers and value to shareholders, our second half EBIT was up 42 per cent. Our full year underlying was up 7.1 per cent. Our domestic revenue growth positions us firmly as a world leader. Telstra is no longer a laggard.

Back in February, we talked about winning where it matters. Over the last six months, we have not only continued to win in these key competitive markets, but the positive trends are accelerating.

We said we wanted to be the 3G market leader, and we are, ahead of schedule. Mobile services growth accelerated in the second half to 13 per cent, finishing the year at 9.8 per cent. In Next G we are setting global benchmarks and driving competitive advantage, with more than 2 million 3G SIOs and now more than 1 million Next G SIOs.

We also said that we would continue to take market share, and we have. We have extended our market leadership with market share in the case of broadband up a further 2 percentage points to 47 per cent. We are leveraging scale with revenue growth exceeding cost growth, and we have passed the inflection point in broadband ARPUs, with ARPUs growing in the second half up 7.7 per cent.

We continue to innovate: we have launched BigPond TV, I-Pond and interactive content such as our Second Life presence and BigBlog. We have further slowed decline in the case of revenues on PSTN in the second half to 2.5 per cent with a world-leading SIO performance. Our residential SIOs actually grew 54,000 year on year. We have signed 356,000 customers to subscription pricing plans and, in addition, our market-based management segmentation and actual value delivery is significantly reducing churn.

We are executing on our media-comms strategy as well. Sensis: for the fifth straight year, world class performance in terms of revenue growth, which this year was up 8 per cent, and EBITDA margins north of 50 per cent. We are transforming Sensis to unlock future buyer, seller and shareholder value. While we missed our double/double target, we will continue to push for a best-in-class global directories business.

In the case of Foxtel, all of our key metrics have improved: EBITDA is up 40 per cent to $237 million, our SIOs are up 13 per cent and ARPU was up 3 per cent. Telstra's online network of websites is now the third most visited in Australia, as measured by AC Nielsen, after Google and Microsoft, ahead of all the major domestic media groups. SouFun, our leading Chinese real estate website, also performed at near triple digit top line and in excess of 150 per cent bottom line growth.

We are on track with our transformation program. We have launched two world leading networks in the past year, in the case of our Next G and Next IP, and we are on track with the first phase of our IT release, due at the end of this calendar year. As we pass the peak transformation spend year, benefits are going to start to materialise from our operations in FY08.

In terms of our key financials, we are on or ahead of plan or guidance on all measures. We said we would deliver, and we are.

John is going to take you through the financials in more detail, but the highlights include: revenue up 4.2 per cent - better than guidance and any consensus estimates that we have seen; underlying EBIT up 7.1 per cent - again, better than guidance and consensus - with second half growth of 42 per cent; strong free cash flow at $2.9 billion, despite our significant capex requirements in our peak transformation spend year. So going back to last year, we said this was going to be our peak spend year, and it has been. We maintained dividends at 28 cents, as indicated in the T3 prospectus. So we do mean what we say: we are building a solid track record of delivering on what we said we'd do.

We have invested heavily to transform the business into a world class integrated media-comms company. This is a journey. We've taken some tough medicine. In the first two years, this had a negative impact on financial performance - a cumulative net hit of more than $1.7 billion to the P&L. So we don't forget that. We know that in the total five-year transformation period we are going to deliver our shareholders the returns that they deserve.

But from FY08 we will leverage this investment. The annual transformation

impact is turning positive as we start to enjoy a healthy annuity stream of benefits in terms of both revenue growth and cost reduction, which will outweigh the reducing cost of transformation. This is going to result in the cumulative impact of the transformation turning positive in FY09, which is, again, the key driver of future earnings growth.

In the case of our performance, we do think in certain categories they truly are world class, and when we think about it, we talk about it in terms of key product areas where we are adding value for customers without pursuing a value-destroying price leadership proposition.

Again, going back to November of '05, my description of Telstra back then was that we were a price competitor. We were actually a price follower. I said we were going to move from being a price-driven company to one that is value-driven, as we think about adding value, delivering value, to our customers in differentiated ways, and if it is not obvious to all of you by now, I'm not sure it ever will be.

PSTN. In my first reporting period, we actually reported PSTN revenues declining at around 7.6 per cent. By contrast, in the last six months the decline was just 2.5 per cent. Two years ago, our retail SIOs were declining by around 4 per cent, and we have now turned this around to actually be flat. We are enjoying positive retail revenue growth in May and June and positive churn since October: a true world-leading performance. While the US and Europe continue to deteriorate with SIO declines of between 6 and 8 per cent over the last two years, we are now turning the other corner.

In the case of broadband, we have achieved a unique double among incumbents: during the second half, we increased both market share and ARPUs. Market share is up 2 percentage points to 47 per cent, but our revenue share would be significantly higher, as we have the highest ARPUs in the market, driven by mobile broadband, which has been a huge success with more than 300,000 wireless card users generating ARPUs in excess of $100. We are now at a run rate of 20,000 to 30,000 of these sales per month. We have improved usability through innovations such as I-Pond and further grown our content range, and our churn is global best practice at 15 per cent per year.

Next G's competitive advantage in the case of our mobile business has provided an enormous boost to revenue growth. Our second half grew at 13 per cent, accelerating over the last 12 months. These growth rates now match the US incumbents in a much lower penetrated marketplace, and we are outgrowing them prior to the initiatives that some of them are now starting to launch that are similar to what we are doing with Next G. But if you look prior to Next G, our growth compared to almost anybody else's growth in the US, we were growing at least less than half and now we are outgrowing and in a fully penetrated market.

In the case of some of the mobile trends, they are accelerating. Next G has allowed us to deliver on our promise to be the leader in 3G, and we got there ahead of schedule. So I have to admit to all of you that something I told you in August was wrong, absolutely wrong. Those of you that were here may remember that I said that we would be number 1 in 3G by May. We did it in January. So we took the market leadership sooner than we had in our plan.

We continue to take a disproportionate share of 3G market adds. We are currently running at approximately 60 per cent with Next G the majority of these adds, adding 1 million customers to our Next G in just nine months, or we are at a run rate of about 100,000 Next G customer adds per month.

We now have 22 per cent of the SIO base on 3G, compared with only 4 per cent pre Next G launch. We have now overtaken all of our European peers.

In the case of, again, some of the trends, Next G is game changing in terms of customer behaviour because, again, it is one thing to just sell the service, it is another to really find out whether customers are using the service differently.

Well, it is fast, it is real time, it is simple to use, with compelling integrated content, applications and services. In the second half we have seen a significant increase in data traffic, including more than 1 million video calls; Sensis search visitors up 39 per cent; monthly minutes of use per SIO up 53 per cent; almost 400,000 music downloads; and more than 300,000 game downloads. So our customers are using the services in different ways than we have ever seen in our past.

The 3G proportion of the base is going to continue to increase as we migrate the remaining CDMA customers over the next five months. This largely untapped base can experience high-speed data services for the first time. 2G customers migrating to Next G are spending, on average, 41 per cent more on non-SMS data services.

So when we talked about Next G back in October, and even prior to October, the belief that I had was that this is going to be a next wave of growth for the industry - not just for Telstra, but for the industry - and now we are seeing proof that that really is the case. When you enable a real time, any media kind of experience, people will use it, and it is different than anything that customers have had in the past.

In the case of the growth, our growing population of data users is helping us to maintain that ARPU uplift that we talked about. When we met a year ago, we talked about a $20 ARPU differential. Many of the sceptics in the room said "that's early adopters". When we announced our mid-year results, we had a $20 ARPU differential and, again, the sceptics said, "It's still early adopters". Well, we are now at 2 million-plus of our customers and we are still maintaining that $20-plus ARPU differential.

On a like-for-like basis, our cohort analysis shows a typical 2G user migrating to 3G spends between 5 per cent and 10 per cent more on the 3G network. This demonstrates Next G can deliver a sustainable ARPU differential.

In the case of BigPond and its initiatives in new media, the behavioural shift that we are seeing in mobiles is also happening in terms of our fixed line broadband business. BigPond has built a formidable value proposition, backed up by the fastest speeds in Australia, the best customer service, the best range of content and the only truly integrated offering. Now, all of those things equate to value. But we are not stopping there.

We are extending our leadership through the launch of innovative applications and content for the new media world with an improvement in the value proposition behind any innovation that we bring to the market.

Recently we have launched or enhanced interactive offerings, including our Second Life presence, and at this point we have the largest universe amongst real world brands; in the case of the games arena, we have the largest community gaming site in Australia, with members up 40 per cent year on year; BigBlog is experiencing more than 7,000 unique visitors per week. We have further expanded our BigPond TV offerings to mobile devices, with more than 60,000 unique visitors since launch less than one month ago. This also builds on the strong existing suite of free and paid content, including AFL, NRL, V8 Supercars, music, videos, et cetera.

So, again, as you think about a segmented world and a company that understands customers and understands that each customer may have different needs and can deliver to those needs, it creates new growth avenues and opportunities. This is the power of segmentation and understanding of our customers.

BigPond is embracing the Web 2.0 world, and with our new home page personalisation tool, I-Pond is spearheading our charge to the user-generated internet experience of the future. We are building a content factory to further establish our credentials in the media-comms space.

In the case of Sensis, we did have world class performance. The Sensis portfolio is a cornerstone of our integrated media-comms strategy as we maximise value for our fixed and mobile customers. It is an emerging business portfolio with exciting media-comms assets, including MediaSmart, which is our online banner advertising business across Telstra and third party sites, experiencing growth of 93 per cent; a mapping business experiencing triple digit volume growth in satellite navigation units; a reinvigorated voice business following a change to the pricing structure, providing more certainty and simplicity, leading to volume increases in Sensis 1234 of 21 per cent and a revenue increase in total voice of 14 per cent; a directories business managing the migration from print to online, while maintaining some of the best directory revenue growth rates and margins in the world. And, by the way, when I talk about the migration from print to online, that doesn't mean that print is in decline; it means that it still has value, but it carries even more value as we help those customers not only advertise in print, but in the online world.

The classified business is facing a difficult environment with competitors continually cutting prices, as we look at the print portion of the classified business. This has hurt the classified industry, with revenues down across the board. So, in the coming year, we are going to refocus the business to the online market where there is strong revenue growth, and we believe that there is a bright future for the Trading Post as part of our integrated media-comms strategy.

SouFun provides us with an exciting opportunity in China with growing revenues 97 per cent and EBIT 151 per cent.

It is our objective to expand into 100 cities by the end of 2008, each with a population greater than 1 million. We are also expanding into adjacent markets, such as mortgages and insurance, home furnishings and a series of other capabilities there, as more and more of the Chinese community continues to go online. It right now is the second-largest online market in the world, and within two to three years, it will be larger than the US and be the largest in the world.

These new initiatives and developments will provide further opportunities, obviously, for SouFun and allow it to continue its strong growth.

In the case of Foxtel, again, we're very pleased with the acceleration that we have in the Foxtel business. It completes our line-up of media-comms assets and continues to improve its KPIs across the board. I mentioned earlier that subscribers are up 13 per cent, ARPU is up 3 per cent, churn is at world-class levels below 12 per cent, and the penetration of the iQ box is up 6 percentage points to 16 per cent, again driving improved financial performance where EBITDA was up 40 per cent to $237 million and revenues were up 13 per cent.

Foxtel by mobile continues to be an attractive proposition for our Next G users with subscribers up 18 per cent. The Foxtel portfolio complements our BigPond content and, combined with Sensis, provides Telstra with an unrivalled integrated media-comms offering.

In the case of the network side of our business regarding transformation, our network transformation is making integration truly a reality, and it is on track across the three elements of access, core and platforms.

In the case of access, we have rolled out ADSL 2+ to 470 exchanges and now have the largest footprint in Australia. We are announcing an upgrade to our HFC cable network, with 30 Mbps capability to 1.7 million homes by the end of the year. We are very focused on our customers. When we do this, these will be the fastest broadband speeds in the nation bar none. And we'll also soon be upgrading our Next G data cards to 7.2 Mbps, again at the highest levels in the world.

Core. We've launched the world-class Next IP network with over 80 per cent of corporate and enterprise IP WAN networks now supported by Telstra's Next IP platform with our national footprint and world-class capabilities. This transformation cornerstone allows us to continue our network platform simplification and the cost reduction that is part of our transformation plan between now and the end of 2010.

Migrating to IP networks results in an additional 13 per cent customer spend from increased bandwidth, network expansion and value-added services such as security and hosting; integrated IP package versus standalone business DSL - ARPUs are higher by about 57 per cent and churn is obviously lower, so far at a rate of 4 per cent or so.

Next IP is driving significant value through integrating services and applications into the network. It is also giving our customers much greater flexibility by

future-proofing their businesses. I do have to say that this is only the beginning. When you look at what we are going to deliver with the rest of our IT transformation, with release 1 at the end of this year, release 2 completed by the end of next year and then subsequent follow-on releases after that, this company will look like no other peer around the world, given the capabilities that we will have. That means that our ability to deliver integrated services in a real-time fashion is bar none. It will be best in the world.

In the case of platforms, we have exited or capped 124 network platforms, delivering savings of $55 million. We are building capability to deliver competitive advantage, leverage scale and reduce costs - again, a world-class set of assets unmatched by our competition.

Our IT transformation is critical in delivering the full potential of the transformation benefits. All of it gets back to this core principle of simplicity and reducing the complexities that exist in our business today.

Our progress to date has included delivering important capabilities centred around: supporting revenue growth through a service delivery platform for Next G - turned up, done; in the case of improving sales effectiveness from better campaign management, as you've seen in our sales results - turned up, done; improving efficiency in front of house via a single log-on - turned up, done; improving mission-critical functions with new hardware, again, all part of our ongoing operations today - turned up, done.

We have exited a further 132 IT systems in the year and we are on track to deliver the first release of our new IT functionality at the end of the calendar year, as I said back in November 2005.

In the case of market-based management, I just have to share a few data points with you, and later in the year we'll have a lot more conversation, because this is so powerful in terms of running a business that is customer centric and market focused. It is making a huge difference, as David Moffat, Deena Shiff and Justin Milne would attest in terms of the day-to-day business that we're doing.

I go back to November 2005, when I stated that we are going to reshape this company from being one that is regulatory, political and Government focused to one that is market focused. The centre of that was going to be organising this business around customers, and the centre of that was going to be about truly understanding customers' needs and then delivering to customers' needs, because many times, many companies spend their time trying to deliver what they think customers want as opposed to what customers do really want.

So the main reason we are doing the transformation is all about the customer. The poll that I always like to pay attention to every day is what our customers are saying, doing and buying, and that is the poll that is driving this company today, so knowing our customers well and personally so that we can be better able to sell services to their needs.

The impact of market-based management is being felt right across the organisation. We now possess more intimate knowledge of our customers' needs. Outbound sales strike rates have doubled following a dedicated program by using techniques including segmented needs-based target lists, words that work and understanding customer preferences for how they are contacted - medium and time of day. The result has been 400,000 new services delivering $200 million incremental revenue. And I have to say this is just the beginning, because when release 1 happens and we turn it up and we start converting all of our customers over in the first half of next year to all the new systems, the power of what we can do with customers will be unparalleled in the history of this company.

Never forget that at the core of what we're doing inside this company is always about the customer. In the case of in the channel, we have implemented a number of channel initiatives: redesigning remuneration, reducing costs by more than $48 million over two years; rolling out 65 branded retail points of presence in the past year; and we've achieved 25 per cent like-for-like sales growth across owned and licensed shops. This is producing real tangible benefits, and there is more to come with our first IT release again at the end of the year.

In the case of our transformation, in the first-ever meeting that I had with you, the question that I was asked by perhaps some of you was about culture, what would it take to transform the culture inside Telstra and can that be done, given its legacy of being a Government arm and given the 100-plus year history of the company?

We are changing the culture. We are becoming very market based. We are becoming very performance based in terms of how we assess people, how we manage the business, how we reward and compensate people, because we are a business; we are a for-profit business. We have shareholders that we're accountable to, and we will drive that business this way.

So what is happening? Our technician productivity is up 17 per cent. Our revisits, meaning when somebody goes out to do some work and they get called back because it wasn't quite right or for whatever reason, are down 36 per cent. In the case of our front of house, our clearance rates have improved 12 per cent.

Our call centre integrated desktop is delivering benefits, just simple things like logging in in the morning, transaction keying and error rates are all down, driving significant productivity improvements, as David Moffat, Deena Shiff, Justin and others would attest to in terms of our business.

The learning academy is equipping our staff with the skills required in the new Telstra. Already 12,000 staff have passed through the academy in just 11 months. So not only are we migrating the infrastructure and the capabilities in the business, but we are enabling our people to go with that. And that's a big deal for us - investing in our people.

The results are pleasing - a more engaged and more productive workforce able to

focus on the important tasks, not being sidetracked by all kinds of complexity and duplication within our system and our business. We have built on early gains, but there is much more to come as we continue to upskill our workforce to world-class standards.

As we do all of this, this is about maintaining, building and continuing to advance competitive advantage. Through transformation, we will be well placed to meet all the competitive challenges head on. The good news is that with everything we're doing and the wins that we have in broadband, in mobiles and whatever, we are meeting all these competitive challenges head on, and it has nothing to do with copper loops. Everything I just talked about has nothing to do with what I call the old retrospective regulatory paradigms. It has everything to do with building value as determined and decided by customers, not regulators or Government officials.

In mobiles, we have unrivalled capability in terms of speed, breadth and depth of coverage. A big question mark remains over the proposed competitor Wimax offering. And there are enough experts around the world, whether it be Ericsson, who is the leading manufacturer of wireless infrastructure products, who has chosen not even to be in that game, or QUALCOMM, which is the biggest chipset provider to mobiles that isn't even in the game - there are a lot of questions out there in terms of choices that are being made.

Basically, it is largely unproven technology, and all the issues have already been spoken to, I think, plenty. The only issue that we have as we think about our coming year is how this will play out as the Government chooses to take taxpayer money and subsidise a foreign-owned company to the tune of $1 billion. But even then, we will deal with it. We know how to compete. We know how to win.

In broadband, we possess the premium cable and wireless services, as we upgrade our capabilities by the end of the year to 30 Mbps and as we take our mobile broadband up - our network is already at 14.4. Up until 4 August, we were the only network in the world at 14.4. My understanding is that there is a company in Singapore, StarHub, that covers 700 square kilometres. They have now upgraded to 14.4.

But we have the world's largest nationwide high-speed network in the world. We will continue to advance that. We have said that by 2009 we will take our speeds up to 40 megabits, and the handsets, the data cards and other things will continue to migrate as we plan, with all the suppliers that we deal with, on that migration path.

As I look at our competitors here in Australia, they simply don't have the capabilities that we do, because we are aggressively investing to serve our customers. Let me say that again: we're aggressively investing to serve our customers, not looking for handouts, not looking for Governments to help us, because we are a free-market, capitalistic-centric organisation that likes competing in the marketplace. We are way ahead of the competition in terms of integration. We are extending our competitive advantage by integrating content from leading brands, including BigPond, Foxtel and Sensis.

Finally, we have the best distribution network, including the largest shop and

dealer presence and leading market shares from which we can leverage scale benefits. Telstra has the total package, delivering a value proposition available only to our customers, and we are going to continue to invest to differentiate.

Let me quickly talk about regulation. The results have been achieved in our business despite our competitors enjoying very favourable access prices. Putting it in plain English, our competitors get extreme help and assistance from the regulator.

ULL and LSS prices, in the absolute sense, are among the lowest in the world, but when you adjust for the density characteristics of this country - I mean, I always used to think that Iceland was the least dense country in the world. Australia actually is less dense, which means higher costs. But when you adjust for population density, we have the lowest rates in the world at wholesale. No-one is even close to the extreme negative pricing policies of the regulator here in Australia. That's a fact. The data stands on its own. Anybody can validate that data.

But the more important point is that, in spite of that, Telstra with its better value delivered in the market is doing fine, thank you very much.

Given this unlevel playing field, we will continue to compete hard and win in the market, and we will advocate for our shareholders. We will continue to do that every day. We will continue to defend our shareholders' interests every day, so that won't stop. Inside our company, there is a maxim that I like to restate over and over again: regulators and politicians may try to decide winners and losers, but customers ultimately make the decision.

So, as I summarise the year, our new business model has helped us to achieve our best service results as well. Transformation has been about technology, it has been about culture. It's about creating a company that can stand up and be counted on the global stage.

We are already seeing the first fruits of this in our performance last financial year, with world-class performance in our mobiles, broadband, PSTN and Sensis businesses.

We are also developing the long-term strategies to maximise the values of our integrated assets as we become a true media-comms player. As I've always said, my primary focus is to create shareholder value. Our world-class operating performance is doing this today, while we firmly believe that our integrated strategy will lead to long-term shareholder value through continued positive earnings momentum, improving cash generation and higher returns.

So just to be clear, we remain on course to achieve all of our 2010 management objectives, while in 2008 we will see further proof that the earnings inflection point has been passed. We are forecasting continued revenue growth of 2 to 3 per cent in the coming year, EBIT growth of 3 to 5 per cent and a significant reduction in capex.

All of this is about what I would call the prudent way that we like thinking about

the market as we think about the year, as we plan for the year. We do have challenges. We will have challenges every year. But we remain confident that the plan is working and it will work well.

Thank you, and I'll now hand it over to John to take you through the financials in more detail.

MR STANHOPE: Thank you, Sol, and good morning, ladies and gentlemen here in Sydney and in Melbourne and those of you who are tuned in on the webcast.

As Sol has said, we are past the inflection point, as we said we would be. The transformation is driving real benefits and starting to dispel some of the doubts in the market around the outlook for incumbent operators.

Importantly, the transformation is on track and we are delivering on financial performance.

Looking at the financial results as reported, we reported strong financial and operational performance in the first half. This momentum not only continued but actually gained pace in the second half. We beat both our revenue and our earnings guidance.

Sales revenue increased 4.2 per cent to $23.7 billion, and domestic sales revenue, which is important, the home market, was up 3.5 per cent to $21.7 billion - a strong performance all round.

We returned to EBITDA growth, up 3 per cent year on year after reporting a decline of around 8 per cent last year. Our EBITDA margins declined by 0.5 percentage points, driven by the increased expenses in this our peak transformation spend year.

EBIT grew 7.1 per cent on an underlying basis, that is, after we exclude the Trading Post write-down, which was not part of our guidance. Reported EBIT grew therefore 5.1 per cent.

During the year, we crossed the earnings inflection point, and, as I will explain later, we expect earnings to continue to grow as the benefits of the transformation investment flow through to the financials. Principally as a result of our large investment in the transformation program, free cash declined 36.7 per cent to $2.9 billion.

We have maintained our dividend and declared a final fully franked ordinary dividend of 14 cents, bringing the total dividend to 28 cents per share declared for the year.

Our performance was driven by strong top-line growth as we continued to win in the key markets of mobiles, broadband and Sensis, boosted by the lower declines in our PSTN revenues. In the second half, our reported sales revenue growth was 6.7 per cent.

Mobile services delivered outstanding revenue growth, with the Next G network driving much of the second half revenue momentum.

For the first time, retail broadband revenue growth, in absolute dollar terms, exceeded the PSTN revenue decline. Contrast that with the last financial year, when the combined growth of retail broadband and mobiles matched the absolute dollar decline in PSTN. That is quite a significant inflection point passed.

Our PSTN focus on value-based segment offers and unparalleled customer knowledge - our knowledge of our customers - is paying dividends and is being seen in the financials. IP access revenue was up 29.5 per cent as our business customers switch to IP networks.

Let me now turn to our key markets and products, starting with broadband.

Our retail broadband business exceeded $1 billion in revenue for the first time, with revenue up 66 per cent year on year to $1.2 billion, outgrowing costs, so margins also increased. We achieved a unique double in retail broadband in the second half of the year, with market share increasing 2 percentage points to 47 per cent and ARPU growing by 7.7 per cent to $53.30 in the second half. We continued to grow our retail broadband customer base and we now have 2.4 million customers - up 900,000 or 60 per cent year on year.

BigPond continues to innovate and take the game to the next level. We recently entered the web 2.0 world with the launch of I-Pond and last month launched on-demand mobile TV with BigPond TV.

Let me now turn to mobiles. Total mobiles revenue increased 13.9 per cent to $5.7 billion, with mobile services revenue, that is, the usage of mobiles, growing 9.8 per cent - when you actually exclude terminating revenue, which, as we know, has gone down because rates have gone down, the usage growth is actually 11.8 per cent - to $5 billion, driven by strong 3G customer growth and increased data usage as customers use our superior content, applications and services available only on the Next G network.

And mobile handset sales grew 54 per cent to $718 million, driven by increased 3G handset sales as customers take up the Next G offering in increasing numbers and enjoy the network's unparalleled speed and coverage.

Mobile revenue growth was driven by an 8 per cent increase in mobile customers and an increase in mobile data usage. Revenue from access fees and call charges fell just 0.1 per cent for the year, therefore staying relatively flat.

In January, we became the 3G market leader, and now we have 2 million 3G customers, including 1 million on the Next G network. And for the year, we grew our overall 3G customers, just in the year, by 1.7 million.

We are making good progress migrating our CDMA customers across to Next G ahead of the scheduled CDMA network closure in January 2008. Our 3G customers, in particular our Next G customers, are driving data usage, with our active data users up 28 per cent since the launch of the Next G network in October. Foxtel mobile streamed minutes tripled in the half, and video call minutes of use were up 40 per cent to 580,000 minutes.

Mobile data revenue is up 50 per cent to $1.1 billion, which now accounts for 25 per cent of mobile service retail revenue, up 6 percentage points year on year, and that is made up of SMS data revenue growth of 30 per cent, driven by a 62 per cent increase in SMS volumes. Just think about this: last year, there were 4.9 billion SMS messages sent. Non-SMS data revenue was up 92 per cent, driven by the increased data usage following the launch of the Next G network in October, and 37 million MMS messages were sent this year, compared with just 20 million last fiscal year.

On a like-for-like basis, 2G customers moving to Next G in October 2006 continue to show a sustained uplift in usage and ARPU. The differential continues to be over $20 per month. You will see on this slide that we talk about a cohort analysis of this to make sure that we are checking like for like. We did about 16,000 customers, postpaids, back in October, and a similar number in March, and we are seeing a 16 per cent uplift in voice, a 22 per cent uplift in SMS and a 41 per cent uplift in non-SMS. So we have really thoroughly examined the veracity, if you like, the validity, of the claim of a $20 uplift in ARPU.

Wireless broadband data card revenue contributed the majority of the overall $220 million revenue growth in non-SMS data. The reported 533,000 wireless broadband customers includes browser packs ranging from $5 through to $16 per month. If we were to exclude the 200,000 $5, $8 and $16 browser pack users, our monthly data card ARPU from around 300,000 data card users is in excess of $100 per month. As Sol says, adding value is key. High speed access nationwide is a great capability and it is being used.

As you can see, we have grown mobiles revenue, but you all want to know, I realise, about mobile margins and if we have stabilised our subscriber acquisition and recontracting costs. Well, the answer is yes.

Our strong mobiles revenue growth has been accompanied by an increase in handset subsidies and subscriber acquisition and recontracting costs. That was expected, as we invested in growing our mobile business, and as we competed hard in the market and won market share. Our 3G market share increased 7 percentage points in the second half to 44 per cent - that is, 44 per cent of the 3G market.

The average blended subscriber acquisition and recontracting cost has increased from $137 in FY06, as we made this investment, to $187 this fiscal year. Our 3G average postpaid subscriber and acquisition recontracting cost - I will call it SARC; it is a lot easier - was $389, and, as discussed in the first half, the average selling price of the Next G handsets is lower than 3G2100, which now, of course, moving into Next G where we have lower prices, is helping postpaid SARCs to reduce.

As a result, the last few months of the fiscal year saw a reduction in SARCs. For example, in quarter 3, the blended SARC - so that's handset, subscriber and acquisition and recontracting costs for both postpaid and prepaid - was $209 and in quarter 4 it had dropped to $177. So, as the slide behind me describes, the SARCs costs are declining.

To be clear, and hopefully allow for some true like-for-like comparisons, I want you to know what we include in our SARCs number: we include subsidies, dealer incentives and performance commissions and cooperative advertising. If you want to make a comparison, you should make sure you are making a like for like.

Mobiles EBITDA margin increased in the second half around 4 percentage points as our investment in acquiring the higher ARPU customers actually starts to flow through to improved profitability, as we said it would.

Now let me turn to the PSTN. The PSTN is now around about 30 per cent of our total sales revenue. PSTN revenue declined 4.1 per cent to $7.2 billion for the year, which is the third consecutive half the PSTN revenue decline has declined and it is the third consecutive period that that decline has actually slowed. Importantly, in the second half, that decline was 2.5 per cent, a five percentage point drop or improvement, if you like, over the past 18 months.

Looking at retail versus wholesale PSTN, our retail PSTN revenue decline was 3.8 per cent, a 3.3 percentage point improvement from last year, and wholesale PSTN slightly worsened to 5.9 per cent, as, of course, ULL numbers increased from 120,000 at the end of last fiscal to 239,000 at the end of the fiscal just finished. Of course, as we win back retail PSTN customers, it has an impact on the wholesale business.

The slowing of the PSTN line loss is truly world class. For our retail business, we added 38,000 retail lines in the second half, and for the full year retail line loss was just 5,000. That is the total retail business. Our residential performance, so more in the consumer area, was even better, with the lines for the full year growing 54,000. We lost 1,000 in the first half and we grew 55,000 in the second half for that net outcome of a 54,000 growth.

PSTN retail revenue grew in May and June, led by Country Wide's local area marketing initiatives in Brisbane, Adelaide and Perth, while Telstra Business recorded positive churn and SIO growth in quarter 4.

Our market-based management-led initiatives such as subscription-based pricing and value-based segmented offers, along with our extensive customer knowledge, is helping us deliver a more tailored customer experience, which is flowing through into these PSTN financials.

The final key revenue driver I want to focus on is Sensis. Sensis revenue grew 8 per cent, including the 10 months of revenue from SouFun. The core business, that is if you exclude SouFun, grew 5.3 per cent. The directories business grew 4 per cent to $1.5 billion, and within this Yellow grew 2.6 per cent to $1.2 billion, with Yellow online growing 29 per cent within that number to $161 million, and White Pages grew

9.6 per cent to $331 million.

The emerging businesses - and that is MediaSmart and those businesses that Sol went through just before - delivered another strong result and accounted for 40 per cent of the total Sensis growth. Whereis location and navigation revenues grew 75 per cent, driven by triple digit growth in unit sales of satellite navigation data, and MediaSmart display advertising grew by 93 per cent.

The classifieds business revenue declined 12 per cent, with print revenue down and online revenue up, and that is consistent across the industry and right around the world.

As a result, we have written down the carrying value of the Trading Post business by $110 million, but we do continue to see significant online opportunities in that business.

EBITDA margins declined following the Trading Post write-down and Sensis' investment in the future. The investment is focused on refreshing various systems and processes as part of the overall transformation. Sensis is undergoing its own transformation, like the larger Telstra, and that includes the replacement of the old publishing system which is 12 years old. We also took the opportunity, given that we are moving that system out, to accelerate some depreciation there. Sensis is targeting organic mid-single-digit compound average growth rates for its revenue up to FY10.

I will just quickly touch on the segments. It is important to have a look at our segments. Down the left-hand side you see the products. On the right-hand side of this slide you see some segment highlights. As you can see, the retail business units have performed strongly across all key markets of PSTN, mobiles and Internet.

The transformation has driven the improved performance across all the segments, with Next G and Next IP networks already producing results with strong data revenue in Telstra Business and Telstra Enterprise and Government.

Our market-based management initiatives have helped drive positive PSTN churn and mobile customer growth in the consumer market, as you can see from the consumer numbers there.

Let me now focus on costs, our operating expenses. Operating expenses - that's before depreciation and amortisation - increased 4.4 per cent on a reported basis to $14.1 billion. The key drivers of the expense growth for the year include: in the mobiles area, increased volumes supporting the higher revenue growth, so cost of goods sold and acquisition costs; the year on year impact, of course, as we brought in New World and SouFun, and that was partially offset by the costs that were in the company we sold called AAS earlier in the year; and, of course, the Trading Post write-down.

Transformation costs reduced by $413 million year on year, but that was mainly due, of course, to the usage of the restructuring and redundancy provision that we raised in 2006, which was $427 million. We now have, as you can see from the slide, a

balance of $232 million left of that restructuring and redundancy provision.

Let me just quickly go through the various major areas of our cost base. Labour. Our labour costs declined by 8 per cent to $4 billion.

Salary and associated costs increased just marginally, up 0.3 per cent to $3.4 billion. That was driven by salary increases, but of course offset by the labour reduction we had, the full-time equivalent headcount.

Redundancy costs declined 72 per cent to $149 million, as we utilised most of the redundancy provision raised in the prior year.

We reduced our work force a further 1,887 in the year, and that takes our total headcount reduction to 5,746 since the announcement of our reduction of 6,000 to 8,000 over three years and 10,000 to 12,000 out to FY10. Of course that is excluding divestments and investments, because that is how we set the number, but if we were to include acquisitions and divestments, our total headcount reduction is 4,865, so it is not making a very large difference.

We are on track to achieve our 6,000 to 8,000 headcount reduction target by the end of FY08 and the 12,000 by FY10.

Goods and services, this is the second category of costs. Goods and services expense increased 9.6 per cent to $5.15 billion. Much of this increase in goods and services relates to our investment in the mobile market, in particular 3G. That was driven by the higher Next G volumes as we subsidised 1.6 million handsets versus only 1 million last year, which contributed $248 million to the overall increase, so the volume that has flowed through into our revenue.

Given that increased volume, handset cost of goods sold contributed a further $209 million to the increase in costs and, of course, increases in broadband volumes also pulled through some cost of goods sold for things such as modems and cables, and that added about $30 million or so to the increase.

Partially offsetting that increase was a 10 per cent decline in network payments to $1.8 billion. The main drivers of that were a $170 million reduction in domestic network payments, which included, of course, the reduction in the mobile termination rates from 18 cents per minute to 15 cents per minute, which was backdated to January 2006. That actually increased earnings $37 million in the full year, split between a $24 million reduction in revenue and a $61 million reduction in expenses. You need to be aware that we did have a small benefit from the backdating of mobile terminating rate changes.

Also contributing to the network payments decline was lower payments to Reach, our global connectivity company, for international capacity, and we had a $21 million credit relating to the sale of a data centre we had in Japan.

The other category of expenses, the other expense category, contains quite a

number of things, but the big items there are on the screen. It increased 11.2 per cent to $4.9 billion. By far the biggest item of increase is services contracts and agreements. That increased 18.6 per cent to around $2.2 billion, and this is very largely driven by the transformation. The transformation-related costs were $242 million of that increase for IT and wireline, and an increase in the volumes totalling around $110 million, including the need to contract people front of house for activation, recontracting and billing inquiries, as we had this enormous volume go through the organisation which translated, again, into the revenue result.

In the general administrative area, the costs increased 19.8 per cent to $949 million. We did spend more on promotion and advertising. That year on year increase was about $66 million. It related to our BigPond campaigns around wireless, around content and Sensis campaigns around Yellow, White and 1234 voice - you've probably seen the 1234 voice ad - and activity of course following the launch of Next IP.

There were accommodation-related cost increases of around $20 million for the maintenance of multiple mobile networks. As we built the Next G, we are running two networks there. That's why closure is important, or one of the reasons.

An increase in training. As we said, we would invest in training our people. That increase was about $34 million and you heard Sol say we trained 12,000 people through the year. And that is to make sure they have the right skills to better serve our customers.

The impairment and diminution costs increase of 18.2 per cent was mainly due to the $110 million write-down of Trading Post mastheads, and I have already mentioned that.

Outside the operating expenses, of course, is the depreciation and amortisation, so let's just have a quick look at that. Depreciation and amortisation was relatively flat at $4.1 billion. That includes $297 million related to accelerated depreciation and amortisation. So, in other words, we brought that forward. If you took that out to a normal D&A increase, if you like, it would be 3.5 per cent.

The drivers of the growth in D&A include growth in the asset base with the launch of Next G and the Next IP networks, which added about $150 million in depreciation, and the acquisition activity, so we brought in the network of New World, and that added about $74 million. They were offset by some asset retirements and business as usual service life reviews, and those retirements and the service life reviews combined reduced the D&A about $110 million.

As a result of our investment in the asset base, we expect D&A to be around $4 billion in FY08, and it will not include any further accelerated depreciation and amortisation.

Let me now quickly touch on the cash capital, because our guidance was around cash capital expenditure for the year. I remind you we said it was our peak year. We spent $5.7 billion in cash capex as we continued to invest in new networks, including the

world leading Next G and Next IP networks that will drive new revenue across next generation platforms and reduce complexity.

This fiscal year was our peak transformation capex spend year, and our cash operating capex was in line with our guidance. Accrued capex for the year was $5.9 billion.

The key drivers of the capex increase are - and you can see them on the pie chart there - switching investment doubled as we built the Next IP network. The IP network, the MPLS core, is all part of the switching fabric. Capitalised software rose more than $400 million as we invested in our IT transformation program. Other capex, which includes things like IT hardware and land and buildings improvements, doubled to $867 million and, as I said, the IT hardware or infrastructure is a big part of that. I should make sure you are aware, in particular we partially moved away from leasing boxes, hardware, to purchase them. EBIT impact is insignificant, it is either in D&A or it is in the lease costs.

The transmission investment rose $131 million to support the higher traffic volumes across our networks, and the mobile infrastructure spend was flat year on year as we continued to invest in expanding our Next G coverage and capacity, including the core transmission for the mobile network, plus, just to remind you, we made our last payment in the Hutch JV of $112 million, which is also included in that mobile number.

Customer access investment fell as we benefited from operation and technology efficiencies, particularly by the use of DSL.

For 2008, we expect a significant reduction in mobile and switching infrastructure investment, probably around $700 million, plus reductions in other asset investments and customer access, which will offset a further increase in software investment of around $200 million, as we continue with our IT transformation. So that's the capex story.

Cash flow and our financial parameters. FY07 was our largest spend year and, as a result, the free cash flow decreased 37 per cent year on year, or $1.7 billion to $2.9 billion. It was primarily impacted by our capex program.

However, on all financial parameters we still sit comfortably with our targets and our balance sheet remains strong, but we do need to maintain flexibility in the balance sheet to react to market conditions and whatever is thrown our way.

Our franking credits are sufficient to pay a fully franked final dividend.

Let me just touch on our three international businesses. CSL New World revenue increased by 27.3 per cent to HK$6 billion, which translates, I guess, into closely A$1 billion. That was largely due to the merger with New World PCS business back in March 2006. But including the merger impact, the CSL revenue increased 5.9 per cent and EBITDA margins were held flat.

TelstraClear revenue declined 5.2 per cent to NZ$657 million, driven by falling usage and increased competitor-led price erosion, with EBITDA margins also declining to 12.6 per cent.

For the 10 months, SouFun contributed US$41 million to the group revenue and reported 97 per cent revenue growth and 151 per cent EBIT growth.

Now let me move on to the FY08 guidance. Sol touched on this briefly earlier. Given our financial and operational performance in FY07 and the regulator-driven wholesale price changes and government subsidisation of competition, we are providing prudent guidance for FY08 and we expect revenue growth of between 2 and 3 per cent, we expect EBITDA growth of between 2 and 3 per cent and EBIT growth of between 3 and 5 per cent. The guidance is based on organic growth with no FTTN and no additional provisions.

It is important to note that EBITDA will decline slightly, we believe - and this is like I did last year; no surprises - in the first half driven by the profile of the transformation spend and the FY07 adjustments through mobile terminating rates, as we had that backdating and of course the sale of the AAS business. So there are things that have happened last year that will cause a possible decline in the EBITDA half one in this fiscal.

Cash flow is expected to improve in the coming years as our capital expenditure decreases, again, assuming we don't invest in fibre to the node. Accrued capital expenditure is expected to be in the range $4.6 billion to $4.9 billion. That is actually a reduction. Remember I said earlier accrued capex was $5.9 billion for FY07. That is a $1 billion reduction. We believe accrued capex is a truer reflection of our ongoing capex profile. I mean, it really is our commitments. We used cash last year because we had the Hutchison cash payment.

Finally, there is no change to our long-term management objectives, which are based on, I will remind you, the FY05 numbers. So thank you and now Sol and I will take your questions.

MR TRUJILLO: We'll go ahead and start here in Sydney, and I see first up is Tim Smeallie.

MR SMEALLIE: Good morning, Sol. Good morning, John. Firstly, congratulations. That PSTN performance is outstanding. In that context, in terms of the EBIT guidance for '08, is that based on an adjusted EBIT performance? Does that take account of stripping out the Trading Post write-down? If not, you're looking at about only 1 to 3 per cent EBIT growth, which would seem readily achievable given the PSTN profile. That is my first question.

Secondly, looking at Sensis performance, are you still comfortable with your $3 billion revenue target for FY11? And just looking more at the strategic issues, under the current Government proposal for the expert task force, we're looking at potentially 11 months before we get a decision on FTTN. In that context, can you deliver your long-range revenue and margin targets without investing in other technologies such as

HFC?

Finally, if you assume an HFC build and we were to see a change in Government - members of the ALP have been fairly vocal in their comments about their reluctance for Telstra to own a copper or a fibre network and an HFC network - in that context, I am trying to understand how does the Board and management assess capex investment with those risks?

MR TRUJILLO: John, why don't you start with the first one.

MR STANHOPE: The guidance is based on reported numbers. As to your point that it doesn't seem too challenging, I made the point as I went through that we believe that we need to be prudent because of the circumstances we are in. You have seen, over the past several months, the arbitrary nature of wholesale price reductions. We've seen the 17.70 to 14.40 band 2 ULL. Yesterday, we saw 2.50 LSS. And we have uncertainty around fibre to the node. That is why I said "prudent". That is why Sol said "prudent". We have to be careful of those sorts of things.

The other thing I want to say about the guidance is that we did have the impact of some EBIT contribution of US$16 million from SouFun and a couple of hundred million, or about a hundred million EBIT, I guess, from the New World acquisition, so that was in the prior year's numbers as well. So when you take all those things into account, we think that we are setting a guidance that we are comfortable with and it is prudent.

MR TRUJILLO: Let me add on to what John said, Tim. I think you've seen, since this management team has been in place, we don't miss numbers, and I won't say anything more.

The second thing relative to Sensis is the fact that, yes, I do believe that we'll hit the $3 billion target by 2011. As you recall in our November presentation, we talked about organic growth and we talked about some M&A growth, SouFun being one of those examples, and that over the five-year plan we would have a combination of both. I still remain comfortable that we will hit that $3 billion target.

The third thing that you asked about is whether our set of five-year management objectives is dependent on FTTN. The answer is no.

The last question you asked was how does the Board think about capex relative to FTTN, HFC, "XYZ", or whatever acronyms of investments people might think of. We have said this, I've said this since the day I got here and I will say it every day that I am here: we will only do things that are value accretive to shareholders, and that is why, on certain things, we have gotten into debates, disagreements, whatever you want to call them, with others about things we should do and things we should not do.

But the rule is very clear: we're here to create value, we respect our shareholders' investments and we will do only those things that add value. They are the criteria that we use at the Board, that's the conversation we have as management, and those will always be the driving forces here.

MR CHOPRA: Good morning, Sol and John. Sameer Chopra from Deutsche Bank. Congratulations on a strong revenue number. You've also taken about $706 million of transformation cost through this year and I'm wondering to what extent will this continue next year? You've also had a pretty good performance from Reach. What's driving that?

MR STANHOPE: Let me address the Reach question first. With Reach, both partners or both shareholders in Reach have been driving the cost base down in Reach, so we have been taking quite a bit of the costs out of Reach. As we do that, we go through what we call a true-up process: we allocate the cost reductions through the year to the parents, because we run Reach as a zero, break-even business. As you know, we changed the strategy. It's there to support the two parents operating in the respective regions.

We continue to focus on the cost base of Reach and we have set a plan for the year ahead, that is, lowering costs, so I would expect that to flow through. They're not big numbers, but we expect Reach to continue to run that way.

The transformation costs in terms of expense and capex will continue to decline. We are now obviously big into the IT transformation. As I tried to describe there, where the capex will reduce is where the transformation has changed. IT capex will go up in the '08 year and the expense base will continue to come down.

We have further headcount reduction as a result of the transformation as well. You saw the number of platforms and the number of IT systems that we've taken out of service, and we'll continue on the path to reduce those, to take costs out as well.

You saw the combination of a 3.9 total revenue growth and a 3.5 cost growth. I expect our EBITDA to improve and therefore margins to improve.

MR TRUJILLO: To perhaps supplement again what John has said - if you think about our management objectives for the five-year, we've been pretty clear. In the first two years, we were building out physical networks. Starting in 2007/08, we're building out our IT platforms, some of it carrying into '09. And then 2009/10 is about retiring or pulling out a lot of legacy and introducing a lot of the switching fabric into the network. Pretty clear, pretty simple. So '07, peak capex year; '08, step down; '09, step down, and that's where you start seeing the cash flow that we talked about in terms of the 2010 period of $6 billion to $7 billion of free cash. That's how we get there. We're on plan.

MR CHOPRA: And the real step change is between '08 and '09?

MR TRUJILLO: We're seeing a step change in '08 already beginning, and '09 will be the next big step change.

MR CAMERON: Justin Cameron from Credit Suisse. To follow on from that conversation before, you've reiterated your target of 46 to 48 per cent EBITDA margins for 2010. If you look at the guidance for 2008, it's obviously very conservative from a margin perspective. EBITDA margins are broadly flat, EBITDA growth of 2 to 3 per cent.

Post '08, where do you see these costs coming out of the business? You alluded to, obviously, the transformation, the spend you've been going through for the past two years, but where do you see the costs coming out that will drive that next run in the marginal growth of the business? Obviously, we will see the revenue growth profile continue, but there needs to be some step change, and just from a modelling perspective we're trying to understand how you can achieve that 46 to 48 per cent, given that the '08 number is still obviously very conservative.

MR TRUJILLO: Okay, if we have about three hours, I'll go through the list of things. But let's just talk about it sequentially in terms of turn-ups. In the case of the end of this year with our release 1, as we migrate our customers on to the new set of platforms that we have for the front end of the business, David Moffat, Deena Shiff, Justin and everybody will be able to start being much more productive and much more efficient in terms of managing the call volumes that we have.

So whether it be our direct labour costs or our contracts, the outsourced companies that we use, those costs will start reducing once we turn up the systems, we migrate the customers over and then start reaping some of the benefits. That's kind of stage 1.

When we turn down the CDMA network, we no longer are managing a separate network that has powering costs, that has maintenance costs, that has all kinds of costs. Those start coming out. When we start turning up, as we already are doing with our IP customers - I mentioned some of the cost savings; remember, we just turned it up two or three months ago - starting to drive operating savings with every order that we sell, with every ticket that we work, all the processes that are going to start flowing through into the numbers in '08 will continue to get bigger as the years go forward.

As we then move into release 2 of our transformation on the IT side, we start affecting our OSS, which is our operating support systems, and there we start talking about the connections in between the front end of the business and the back end of the business. In today's world, sometimes we can double or triple dispatch. Sometimes we don't have line-of-sight visibility for our technicians into accurate and complete records, et cetera, et cetera. There is a lot of productivity efficiency that will come then.

Associated with releases 1 and 2, then, you remember in November 2005 we talked about having 1,250 IT systems in place. We will start removing some of those. We've already started the removal of some of those systems today. Every system requires maintenance. Every system requires updates. Every system requires work.

We will start that reduction process of getting it down to the 250 to 300 level that we talked about back in November. That will be in '08, '09, '10 and even beyond that kind of period with the last few of the systems that are involved. All of that involves people. All of that involves cost. All of that involves software. All of that involves a lot of things that are embedded into the system today.

We're talking about hundreds of IT systems. We're talking about removal of

legacy network capabilities. We're reducing inventories, as I talked about, capping some of the platforms already. All of that will result in the additional headcount or a full-time equivalent reduction that we have estimated at 10,000 to 12,000, it will be in our run rate of opex and it will definitely be in the run rate of capex. That is my shorthand version of how we will take the costs out, and all of that is mapped out internally, inside the business.

MR CAMERON: In more product-specific terms, then, just looking at the mobile business, we saw the big margin fall, obviously, the first half result, and a lot of that has been driven by two things - the CDMA migration and also the acquisitive program that Telstra is on at the moment from a market share perspective.

Do you see the ability for Telstra to maintain that revenue growth profile whilst pulling back the reins on the acquisition program? Obviously, if you are looking at dollar value of numbers coming through the P&L right now, the acquisition strategy is really what is driving a big component of the margin dilution. If that continues for the next 12 to 18 months, then it would appear that it is becoming more difficult to hit that 46 to 48 per cent number.

MR TRUJILLO: Again, hopefully you took note of the numbers that John shared on H1 versus H2. A lot of things were built into our run rate on H1 costs that aren't in H2, and they will continue.

We now have virtually every manufacturer playing in the handset game today. Prices on 2100, to begin with, were higher than our prices for Next G. But now prices continue to go down. The segmentation work that we're doing in terms of how we're going to market, the targeting that we're doing - all of that is reducing some of the acquisition costs.

We've had a dramatic reduction in terms of our SAC costs H1 to H2. I don't have the number in front of me, but it's a 50 per cent, 60 per cent reduction - huge. And that's part of it, because the handsets, the data cards, everything that we're selling is part of those costs that you saw jump in H1, and actually in the fourth quarter of last fiscal year they're all going down. But the punchline is that there will be other costs - infrastructure costs, systems costs - that will also help EBITDA margins as we talk about the targets that we have.

I'm not blinking on those numbers, and I don't know what more to say other than to say, look at what we've said, look at what we've done, and it's all planned out in terms of how we go forward.

By the way, just one more thing. The other thing you have to look at is the ARPU. Clearly, the ARPUs there - $20 more per Next G customer on average as we think about margins. So margins aren't just about the cost; they're also about the revenues.

MR LEVY: Andrew Levy, Macquarie Securities. I just want to follow up on the answer that you gave to Tim's question earlier on FY08 guidance and the comments you made about the regulatory decisions. Given that they're on a downward decline, does that

mean that the FY08 guidance actually assumes that as to a number of the pricing outcomes in the market at the moment that the ACCC has handed down, you will see further declines in those rates? That is the first question.

The second question is: are you able to quantify the opex savings from the CDMA shutdown once that happens?

MR STANHOPE: Let me take the guidance question. The guidance does take into account recent decisions, and not just the wholesale impact but the flow-through impact in retail, so the guidance does take that into account. It's one of the reasons why we have been prudent. We've seen that happen. We've taken account of that impact. But what more can happen is the question.

MR LEVY: So you do have some kind of redundancy in there for further regulatory decisions to come out, like a bit of fat, so that if all the pricing stayed where it is, your numbers would go up?

MR STANHOPE: That's a fair conclusion you reach.

MR LEVY: Then my second question was on the opex savings that you will get once you shut down the CDMA, on an annualised basis?

MR STANHOPE: I'm not sure that we have a total quantified number here, but I just told you that operating two mobile networks has increased $20 million the accommodation costs, and that is fundamentally more sites and more towers and power. I am not going to give you a number, but it's a significant reduction in costs.

MR EARY: It's Richard Eary from UBS. I have three questions. The first one is that I think on slide 5 of the pack, you gave some net transformation benefits, and I think that the number, looking on the scale, in the FY10 period was $2 billion. I think that is the first time you have put out total numbers. Just by doing a quick bit of maths, if you do $2 billion based on your 2010 revenue numbers, you're looking at 7.5 per cent margin expansion as a consequence of the transformation coming through. If you look where the margins were at the end of last year, that seems to suggest that there isn't really much margin deterioration from a change in product mix or revenue mix. I just wonder whether you can clarify that first.

MR TRUJILLO: Again, I go back to the fact that there is always a numerator and a denominator in a margin calculation. So some of it is the cost take-out, but some of it is the revenue uplift that you get per subscriber, per unit sold, per whatever the measurement category is.

So it is a combination of both, and we're not going to give you the details of the break-out. But, again, we do believe that where we think handset costs are going to go, where we think our acquisition costs will go, where we think our infrastructure costs will go, if you look at the uplift that we're getting in ARPU, 80 per cent is now on the data services path, and the process costs, the network unit cost of a delivered megabit, or whatever the unit is that you want to use - it's a very efficient network and it only gets

more efficient as time goes forward.

So there is a whole combination of factors here that will take us to that uplift number. That is why when Justin asked the question earlier, I said I'm not blinking on that EBITDA margin at this stage, given what we know we're going to do.

MR EARY: So the suggestion is that the product margins should remain flat, with uplift in terms of higher margins like data products offsetting, let's say, the negative impacts on voice and legacy networks?

MR TRUJILLO: It's a net/net; it's an aggregated net kind of number. The answer to your question is yes.

MR STANHOPE: I'll add something to that. It's a 5.3 per cent margin increase we have to do out to fiscal year 2010. We finished the year at 41.7. In the second half of the fiscal year just gone, you've seen the mobile margin go up 4 per cent, so we are reducing the costs now of delivering that mobile revenue line, from all the things that Sol went through - lower handset costs and just getting volume, scale.

Then you overlay the transformation cost reductions and the top line, and there are always two parts to the equation. That's what we have to do to get a 5.3 per cent EBITDA margin lift. That's what we are about to do.

MR EARY: On the second point, I notice that there were no comments in terms of the dividend side. I don't know, John, whether you can give us a number for the franking balance on the balance sheet at the end of last year?

MR STANHOPE: I think it was about $76 million, and, as I said, we were able to fully frank through the year. So as we pay our tax during the year, we will have sufficient franking credits to 100 per cent frank. We didn't give a dividend guidance. The only guidance we have given, you will see throughout the documents issued today, is that we're back to the normal process of the Board deciding, as they always have, every half year what they should declare as a dividend based on cash requirements, profit and cash inflows.

MR EARY: Just the third question, in terms of the capex numbers, going back to the November '05 strategy when the actual five-year breakdown was given in terms of the capex, from memory the '08 year was probably looking at 19 per cent capex for that year, which included fibre then. The guidance that you are now giving for this year is probably closer to 19 to 20 without fibre. Can you give us a feel in terms of what projects have been brought forward and what additional capex is in there?

MR STANHOPE: When I go back to 15 November and think about that plan in terms of its timing, we've made a lot of decisions since then to pull forward a lot of capex. We've done Next G faster. We've done a lot more in Next IP earlier than we had intended. We have bought a lot of boxes earlier, IT infrastructure earlier, and we will do so again next year.

So, as you would expect, two years on, the timing of your program actually changes, but we are not changing or shying away from our guidance for fiscal 2010.

MR TRUJILLO: We will take one more set of questions here in Sydney and then we will move over to Melbourne.

MR LANGFORD: David Langford from Lehman Brothers. Just one quick question about mobiles: the data growth in mobiles was obviously impressive. However, calling revenues and access revenues in mobiles is still an important aspect of the revenue base and the product line. What do you think the outlook is for voice pricing in mobiles and how important do you think that is going to be for growth in the revenue stream and for the competitive offering that Telstra has in the mobile market?

MR TRUJILLO: I think voice will continue to be important, but, as you look at the mix of how we are going to grow revenues, obviously data becomes much more important every day. That is the good news for the industry - not just Telstra, but the industry, and Telstra is going to be the leader here in Australia - and that is that we are seeing that customers are finding new ways to use this real time any media kind of capability, whether it be for entertainment purposes or, as we are seeing with our data cards, for real primary business use, whether it be me personally wanting to go do my work at the beach or whether it be me personally while I'm sitting in an airport or wherever it might be that I choose to go.

We, as an industry, are going to learn a lot probably over the next 12, 18 months in terms of how much potential is really there, because it is a big disintermediating opportunity in terms of how people have spent their money. It is not just about new spend, but it is about disintermediating other ways that people have spent traditionally.

We have seen some of it, if you look at newspapers. That is kind of an old news story. Newspapers are on the decline in terms of their revenues because people are doing more things online and they are substituting how they spend.

So we are going to see it in entertainment, we are going to see it in health care, we are going to see it in education, we are going to see it in retail, we are going to see it basically in all forms, and if we had time today - we will try to do this later in the year when we have a deeper briefing - we would be able to show you some of the ways that customers are using now Next G. It is transforming people's business lives and personal lives in terms of everyday use.

MR LANGFORD: In terms of that disintermediation theme, how much more disintermediation do you think there is in terms of fixed line voice telephony as a result of mobile substitution?

MR TRUJILLO: Again that is a question yet to be answered in the longer term. So far we are not seeing a lot of that "substitution" one for the other.

I think what people are finding is there is a lot of integration value. The fixed line is still very important. In the consumer space we actually added lines, which is unique

around the world, and customers are adding all these Next G services. So when you look at household ARPU, when you look at the numbers of customers with three products or more, again, we don't have time to go over all the data, but that increased dramatically in strong double digit rates. We will draw more conclusions maybe in 12 or 18 months in terms of longer term what the impacts are. Right now it seems to be additive, not a net negative in terms of this growth at this stage.

MR LANGFORD: Thanks.

MR TRUJILLO: We are going to go to Melbourne.

MR MARTIN: Ian Martin, ABN AMRO. Just a couple of questions, if I could. First, dividends. You have not put any guidance out on dividends, but at the half year result I think you more or less ruled out a cut in dividends in the year ahead, and that kind of raises the possibility that if you are not paying 28 cents there might be a possibility of an increase in dividends in FY08. Is that a possibility?

Secondly, on the IT side of the transformation, you say the first release is going to be end calendar '07, the second release will be late calendar '08. My recollection is those dates previously were November '07 and April '08 for the business systems. I just wonder if there is a delay there and whether that is part of the reason why we have got that ongoing high cost in transformation and whether that is part of the reason for the flattish EBIT guidance?

MR TRUJILLO: Ian, regarding the first part of your question on dividends, as John said earlier, we as a Board will meet and determine dividend policy essentially annually, on our customary basis. As I have said at probably the last two meetings, the Board is very shareholder focused and we will do what we need to do in terms of providing a total shareholder return to our shareholders. So there is no change in dividend policy. The Board has redeclared the dividend, and that is all we have to say at this stage.

In terms of the IT issue, the dates I have said - you can go back and look in terms of what I said back in November '05 - were that by the end of '07 we would have our release 1 and by the end of '08 we would finish our release 2. I said that back in November. I said it a year ago and I have said it again today: no change. We are not behind schedule, we are on schedule with everything we said we were going to do. So when we get to the end of the year we will have this conversation again, you will be able to see what we have done and when we have another meeting a year later, we will be able to see what we have done with release 2.

The only thing that probably has changed since November '05, Ian, is we had talked in our charts about having 1,250 IT systems that we were going to reduce down to that 250 to 300 number. In doing the work after November, we actually found that we had another 130, 150 IT systems that people didn't even know about. So technically you are correct, we have a little bit more cost than we thought because there is more work to do there, but that is within our capex guidance. We are managing it within all the five-year management targets that we talked about. We are not changing any targets.

MR MARTIN: Can I just follow that up, then, Sol: it is a quite a common theme in IT transformations that as you do the work you find that there is more there that was undiscovered when you first started it. What is the prospect now that going through, and particularly getting to the peak of that IT transformation, there might be more examples of systems or processes, or whatever, that as you are trying to cut over add to cost in the year ahead?

MR TRUJILLO: Ian, I would say it is very little at this stage, and that is simply because we have had more than three months in the company to find all that. We have been here now 19 months. So we have all the existing systems inventoried, we know what has been done, and actually the code that is associated with release 1 is essentially written and so now we are in the process of doing testing and all the things that you do when you turn up new software. So that is on the first release.

The second release, again, we know all the IT systems and the code is being written as we speak, and that is a normal turn-up process.

Could there be a glitch? Could there be a problem? Yes, there is always a chance of that. What would that mean? It would mean delays of a few months, a few weeks. But at this stage I just don't see anything material that would dramatically change the momentum of the business, any guidance or direction that we have given at this stage. Life is sometimes full of surprises, but at this stage I think our management team is managing those issues well and we have contingencies, as you have seen, for about everything that we have done so far.

MR MARTIN: Thank you, Sol.

MR TRUJILLO: One more question out of Melbourne?

MR GUERRA: Good morning, Sol and John. It is Christian Guerra here from Goldman Sachs JBWere. I have three questions for you this morning. Firstly, on broadband, obviously sensational performance. I was wondering whether you could talk to us about what you have seen so far in the eight weeks of the new financial year in terms of, firstly, the wireless broadband net adds and, secondly, that great performance on the ARPU.

Secondly, in terms of Sensis, I think we saw the Yellow Pages print revenue decline for the first time in history. Again, coming back to that target of yours by 2011, I'm just wondering what you are intending to do about the Yellow Pages print side.

Thirdly, just on New Zealand, I think, Sol, the last time we stood up here you told us that you weren't happy with the performance in New Zealand and you were going to do something about it. I have noticed that the EBITDA and EBIT performance have worsened for the full year. I'm just wondering how your plans are coming along for New Zealand and what could be possible under that new regulatory environment? Thanks.

MR TRUJILLO: Christian, regarding updates on year to date, we are not giving any

updates other than we are covering what our full-year results are. You can draw your own conclusions from H1 to H2 in terms of whether we have momentum in the business or not, and I will let that speak for itself.

In terms of the print Yellow Pages, I view the print Yellow Pages as clearly integral to our Sensis strategy. What Bruce and his team are doing right now is reinvesting inside the business as we think about growing it on into the future.

I can assure you that the results this coming year will be better than the results last year. I will say that today, and you can hold me to it next year when we sit here.

I think print has legs to it and, again, it is a high-value source of return for advertisers. What you are going to see us do during the coming year is make sure that the strength of print and the value that it delivers to customers is well known to our customers. We have made some management changes in terms of that part of the business, and I think that with what we are seeing already in terms of early returns I will stand by what I just said about improved performance year on year.

Turning now to New Zealand, I think that across the business everything is going pretty well according to the plans that we have inside the business, but if you said, "Where is the one place where you are not satisfied?", it is New Zealand.

We have not quite gotten to where we need to be, but, again, if you look at some of the actions that our management team has taken, in particular in that second half, we are cutting costs, we are reducing some of the spend in certain ways, we are creating more synergies between what I would call the Australian operations and leveraging some of our capabilities here in Australia to support the team there in New Zealand, and now we have some indication, perhaps, in terms of what the regulatory interconnection climate will be.

There was a recent decision made on pricing in New Zealand, so at least we have that part, but the rest of the story is always terms and conditions that go with it. So we will continue to assess, Christian, how we operate there in New Zealand. It is important for our trans-Tasman business. We are doing well relative to that part of our business. It is mostly on the consumer side where we are not doing as well as we need to.

MR GUERRA: Sol, is it a business that Telstra needs, do you think?

MR TRUJILLO: Clearly, the trans-Tasman business, absolutely, yes, and we do very well in that part of the business. When you think about all the big banks, when you think about all the big commercial customers that we have that operate both in Australia and New Zealand, it is very important that we provide an integrated service and solution to them and, again, we are competing very well there. So that is not an issue. It is when we try to extend out into more of the consumer space where we can do better. The regulatory climate in New Zealand has been one in which they have not yet opened up access, as they have in Australia and the rest of the world, and they are working on it, so we will see how it evolves.

MR GUERRA: Thank you.

MR TRUJILLO: I think we are done with questions, so I want to thank all of you, and have a good day.

END OF SESSION

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