TELSTRA GROUP LIMITED — Call Transcript 2007

May 2, 2007

3 May 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 Telstra presentation to the Macquarie Australian Conference, Sųdneų

I attach a copy of the transcript from yesterday's presentation by John Stanhope, Chief Financial Officer to the Macquarie Australian Conference, for release to the market.

Yours sincerely

Pont brake

Douglas Gration Company Secretary

MACQUARIE AUSTRALIAN CONFERENCE

CFO TRANSCRIPT

2 MAY 2007 - SYDNEY

ANDREW LEVY: John joined Telstra 40 years ago and since that time he's worked in pretty much every role across Operations and Finance. In 1995 he was appointed Director of Finance and in 2003 he was appointed to his current role as the company's CFO. He is a Director of Telstra Super, Telstra Clear, Sensis, SouFun, Reach, and the Chairman of CSL New World Mobility, and I've just found out he's a coterie member of the Geelong Football Club as well, and across all his roles. John is now part of an executive team that is implementing and overseeing, you know, an all-encompassing transformation program that is pretty much re-shaping the way Telstra does business, and in many ways is leading the world in terms of what it's trying to achieve.

So on that note I'd like to call John up to talk to you.

MR STANHOPE: Thanks very much Andrew and good morning everybody. I'm going to have to scratch that zero off the 40 years I think. And one of my least successful activities is the Geelong Football Club, unfortunately. I'll just make sure this thing works for me. How about that. Okay.

Well here we are at the start of May and I've not got a lot of new news for you, but hopefully I can expand on where we are with our transformation and I'm sure people are interested in Broadband as well. We seem to get headlines, particularly in The Australian newspaper.

So I'd really like to start today with a brief re-cap of our transformation. You probably will know a fair bit of this, but it's important just to get this context, and of course we have the usual disclaimer there.

November 15 was sort of Watershed Day in 2005. It was significant in the history, or the 106 year history of Telstra. It was the day we did announce our five year transformation strategy. Prior to this date I think, if you followed Telstra for any period of time you would have realised that we had our high margin PSTN revenue and market share in decline, our costs were growing, our new revenue was minimal, we had too much complexity with three mobile networks, two transmission core networks, over 1200 IT systems and so on, and we basically had too much of everything, plus some more. And we weren't close enough to our customers, so we didn't understand our customers well enough. So that really translated into our customer service being below par.

Clearly that was an unsustainable position to be in and we needed to transform the business and we needed a plan for the future.

We recognised Telstra had to compete in a new world, not just against traditional Telco providers operating locally, but against global media comms business, as this business that we are in starts to converge.

As a result we developed a comprehensive five year transformation strategy and in a nutshell, this transformation strategy is about giving our customers a powerful, seamless user experience. It's about integration across devices and platforms giving customers the one click. one touch, one button, one screen, one step real-time user experience, and we've already found that that is what customers have warmed to, particularly in the next G, and I'll talk about that a bit later.

It's about growing revenue from next generation platforms and cutting the costs in the company as we remove that complexity that I was talking about. It's also about building competitive advantage because we were very much like our competition, and I'll touch on how we've done that already in Next G, and now, Next IP networks.

It's all about delivering customers new experiences and creating long term value for our own shareholders.

The scope and scale of the transformation is unmatched anywhere around the world, and we are setting the new world benchmark.

So, progress to date. When I spoke at this Conference last year we were only a few months into the transformation, and we tend to forget it is a five year journey. We even tend to forget that inside the company. But it is a five year journey and it has well laid out steps.

We're now 17 months in and we are ticking off the proof points one by one as we said we would, and as we said we needed to. Because when we introduced this transformation strategy there was a lot of disbelief.

So we are winning where it matters. We're winning in each of the key markets. So we're doing the transformation and also winning in the market. I mean, you can do a transformation and your financials don't improve: hev. You've got to ask yourself why you are doing it.

So we are winning in the key markets. We are the 3G market leader within excess of 42 per cent market share, and that was achieved four months ahead of our May target. We expected to be there about now, and we were four months ahead of that.

Our \$20 3G ARPU uplift, which is the difference between 2G and 3G, is driven by data use with non-SMS data ARPU up 74 per cent. We continue to take a disproportionate share in Broadband; market share was up another percentage point to 45 per cent at the half-year close 31 December 2006. The average revenue per user held for the first time since Broadband was launched, with the first half average revenue per user of \$49 flat on the second half '06. And it's grown since the launch of high speed plans.

The PSTN revenue. That chestnut. That revenue decline slowed further to 5.6 per cent compared with the 7.6 per cent in the first half of '06, and total line loss was only 0.8 per cent since June, and that is a best in class performance if you look around Telcos around the world.

We've held our residential lines, or our consumer lines, steady since June and we posted positive competitor churn, so starting to win basic access lines back. And we recorded market share gains for the first time since competition began.

So what about this transformation? We have made good progress in executing our transformation. You can see it on this slide. I'm not going to go through every point on this slide. And I'm pleased to say we're on track to meet our key milestones over the remainder of this calendar year. Last week you saw we announced the launch of the Next IP network. A key part of our wireline transformation.

So whilst this thing is not absolutely sequential, things are happening in parallel. Wireless is really first, and the Next IP wireline core has been second, and as I say, we announced that. And I'll provide some more details on the Next IP network shortly.

In October last year we launched the 3G 850 network which we call Next G. The world's fastest national wireless broadband network. And I mean that. It is the worlds fastest.

In February this year we increased the range and turbo charged the Next G network when we announced we had quadrupled network capacity to 14.4 megabits per second nationally, a world first, and extended the network range capability from - this is from the base stations, from 80 kilometres to 160 kilometres everywhere, obviously subject to some of the geographic conditions, and in some locations, 200 kilometre range from a base station.

We'll deliver the first release of our major IT capability at the end of calendar 2007, and I know people are watching what we do with IT with great interest, as it is perceived to be the highest risk area, and with reasonable grounds. But we are on track to deliver that, and the second release will follow in late calendar 2008.

So you can see we've been busy, but there's plenty more to come.

So the building blocks are in place. We've been able to achieve a lot in a short space of time by putting in place those building blocks, and it is a very programmed, and that's why we have a program office, programmed transformation.

So underpinning this future we've developed a new operating model, and I have spoken about this before, but I have to keep reminding people about what do you get at the end of this?

The operating model splits out product and service revenues in a traditional and new, and it further splits them on a network basis, traditional and next generation. And I think I may have talked about this at this conference last year, but it is important to understand that this is why we're doing this transformation. To get to this end point.

The bottom right quadrant is about re-engineering opportunities. This means traditional access and voice type products being delivered over Next Generation Networks and it costs less to do so. For example, VoIP, Mobile 3G, Broadband access, IP data, you can see them up there.

The top right-hand quadrant there is about inventing opportunities or it's the innovation that comes from what we are building. Now this means new products and services being delivered over these Next Generation Networks, and it's things like IPTV, video calling, more and more applications that are bandwidth hungry and need the bandwidth that these networks will provide.

In combination, so these two right-hand quadrants, we refer to those as our new revenues. And you can see there – well it's pretty difficult to read, I know, but right now we are at about 12 per cent of the base of our revenues, are the two right-hand sides, and we expect that and our long term objective is that to be more than 30 per cent of the base by fiscal year 2010.

This new revenue generation will result in a change in the economics for delivery of the products and services, and therefore changes the cost structure and lead to the maintenance of margins.

Now we've got a margin, long term objective 46 to 48 per cent. Now why I say maintenance of margins, that's exactly where we were '04/'05. So you might say - you can argue getting back to where we were or I would argue pre-transformation maintaining the level of margins.

So you can absorb price competition, you can absorb the pressure in the market and still deliver those sort of margins because you are building a lower cost infrastructure.

So Next IP. With the launch of the Next IP network last week and the Next G network back in October '06, we can offer our customers now the opportunity to eliminate time, distance and device constraints.

The Next IP network is not limited to the big end of town, as a lot of people think, but also benefit our small to medium sized enterprises. To demonstrate this I thought I'd just show you a video, if we could just play the Next IP video.

DVD PLAYED

Okay. There's quite a bit of technology lingo in there, but the bottom line is that with the products and services that we can deliver over this Next IP Network, our customers actually can increase revenues and decrease their costs and reduce the capital expenditure that they needed once to spend, and increase their earnings, improve their own customers' experience.

Fundamentally there's a lot of networks out there, they have to buy bits and pieces to put on the end of it. I'm trying to de-technical this story. So it costs them less because we've got this thing, what we call the multi-service edge, and it's as the words describe; there's multiple services that can come into this one point and they don't need all the things that they used to need to be able to operate their business. It simplifies the business for us as well.

Next IP will also help us reduce the network complexity and ultimately reduce costs as we migrate customers off all the fixed legacy networks that were spoken about in that DVD, to the new IP core and the multi-service edge that I just talked about.

So, you know, if you look at the history of Telstra, you know, we've got a lot of what I call the "N's"; special services network, digital data networks, ISDN. Lots of "N's". All those N's start to go away. And obviously, as they go away, it reduces not only the expense of running them, but it also - you know, we've been spending Capex on adding, enhancing, and so that all goes away as well.

In the IP world the intelligence resides in the network. New applications and services can be brought to market quickly and at a lower incremental cost, and that's the new operational model.

So you've got here some of the logic behind how we get to that economic model. That's the Next Generation Network.

I just thought I'd touch on this because since the half we have announced and talked about us building a Sydney/Hawaii cable link.

As the number of Broadband customers continue to grow, so does their appetite for more band width, of course, driven by the ever-increasing new content and applications that come to market, and they are delivered over these Next Generation platforms. But I just give you an idea; about 70 per cent of the Internet traffic out of Australia goes to the US. And so to have a pipeline or a cable to the US, or several for that matter, is very important. So in order to meet that demand, manage the costs effectively, we are investing in a submarine cable between Sydney and Hawaii. I'm not going to tell you how much, but the numbers bandied around in the press are too high.

This investment will reduce our reliance on third parties for band width. Right now the capacity out of Australia is filling up and we are having to use some Southern Cross capacity which has a partnership group that contains our competitors, and as the supply and demand equation starts to work, it's starting to cost us too much money to take traffic out of Australia, so we'll build our own. So it really is targeted at reducing our costs and meeting the demand, of course.

In addition we are one of 17 companies investing in a new submarine cable from Asia to West Coast US via Hawaii, which will also go through Guam, which just happens to be an interesting central point, but our Australia/Japan cable also goes through Guam so you can see there is a connection possibility there for us.

Let me just talk a little bit about Next G. Telstra has set the new benchmark in wireless broadband. Not just in Australia but, as I said before, in the world. We have the world's largest and fastest national wireless broadband network with those speeds I mentioned; 14.4 megabits per second.

We launch Next G in just 10 months, and for a country the size of Australia, that's pretty impressive. So you can understand why other Telcos around the world are looking to us for quidance, and our vendors are using Australia and Telstra as a reference site because we are ahead of the pack.

The Next G network is actually a data network which is optimised for voice, so rather than the old networks where most other networks around the world are voice, networks modified for data. So what does that mean? It means that the 3G 850 network is more efficient, leading to lower network operating costs and the competitive advantage that it brings. Next G is a powerful force in the marketplace and it has changed customer behavior. It is proving to be a growth opportunity for us.

But can the competitors match or better us in wireless any time soon? Well the answer's probably not. Not in the short to medium term anyway. Because we will continue to set new benchmarks. We have a plan for the future. By 2009 we expect peak network speeds to be around 40 megabits per second. While our competitors are assessing technology and issuing press releases, our customers are already experiencing the next wave of speed and content not seen in Australia before. We are leading the world.

Our Next G network operates over the 850 megahertz spectrum band which gives our customers the greatest breadth and depth of coverage of any 3G Network in Australia. Not only that, we have over 5000 base stations, which means we cover 98.8 per cent of the population. The competitor response so far falls short of matching the advantages Next G delivers us, and that's what they say they're going to do. What they're going to do doesn't match.

Wireless is the future and we do understand the future.

The competitive advantage is in the market now and it is delivering results. As of mid February we had 415,000 Next G customers and we are at a run rate of about 100,000 per month coming onto the Next G network.

Penetration of our content and applications is higher for Next G customers than the traditional 3G2100 networks that are out there which everybody else has. Our usage pattern shows the overwhelming adoption of services on the Next G network. On average each Next G customer makes 11 times more video calls than the other 3G networks, three times more music downloads, two times more game downloads and seven times more video streams than customers on the other 3G networks. Well, on our 3G network. Which is also out-performing others.

What this shows is that it does make a significant difference being higher speed, real time via one touch, one screen, one click, one button experience, making it easy for the customer.

Moving away from the network a bit, wireless and wireline, let me just touch on market-based management. It is an important part of transforming a company, one that doesn't get a lot of discussion, but we have been organised now for some time and resourced in and focused on seven consumer segments and five business segments. We have depth, linkages and reach that no other Australian media comms company can match into the customer base with the extensive research that we have. And this is how we are competing and this is how and why some of those earlier figures on basic access that I was talking about, this is one of the reasons we can achieve these sort of numbers or this sort of turn-around.

We can create dynamic user profiles that are based on contextual and cookie-based behavioral targeting, which still meet privacy commitments to our customers. For example, we can serve hotel advertisements to someone who is looking at one of our websites, such as Citysearch, because we know they were researching accommodation on another one of our websites. GoStay earlier that week.

We're connecting buyers and sellers, we've targeted information, we know how to find them, we know how to talk to our customers.

What you can see behind me here on the slide is a dynamic billboard advertising signage that displays different ads depending on who is nearby, based on a mobile location and segmented

profile information. So this person passes this billboard, we can flick onto the billboard something that's of interest to that person's profile.

We are identifying ways in which existing and Next Generation technologies can be used to deliver new applications and services that meet the needs of the identified segment and the person.

The possibilities are endless. Really they are only limited by your imagination.

You'll see the various billboards there.

At Telstra we're not only transforming the business, we are creating a new business. A new media comms business because the business is converging.

Telstra has such a deep array of assets we can go between screens, we can provide content to end users irrespective of whether they're looking at a PC, a PDA, a mobile phone or a TV. We have the scope to compete by innovating.

By 2010 consumers will demand a one command real time environment. The future is all about high speed broadband and integration of products that allows the consumer to move seamlessly between devices. It's about greater bandwidth capacity to handle the increased demand.

The future will be location, device and context neutral. By 2010 consumers will access HFC or FTTN, if it's built, and it will do everything, driven by three key experiences that determined the relationship between people, time and the place, integrated experiences across devices and platforms, real time on demand experience for instant information gratification, overcoming time and distance boundaries. And the ability for individuals to control the experience with information on their terms and in their format.

The future is about knowing customer preferences, anticipating future wants and satisfying them by reaching customers real time on their time and on their preferred device in their preferred format.

That's the future, but this future is dependent on high speed fixed line Broadband.

As you can see, we understand the future and we've had a plan for the future. We have a plan for Australia. Our plan involves investing around \$4 billion in fibre-to-the-node network. The network will be open to our competitors, so not like what you read in some of the press, "Telstra wants to return to the monopoly", the network would be open to our competitors provided we can earn a competitive return for our shareholders. We have held that position, now, for nearly two years.

So why fibre and not wireless? You just heard me say that wireless can get up to 40 megabit speeds. Well the speeds consumers will demand to access content applications and services over the Next Generation platforms can only be delivered consistently on fibre.

For example, on demand high definition TV requires between 6 to 10 megabits per second, recording for high definition TV requires 6 to 10. High definition gaming requires about 5 megabits. And by the way, multi-channel IPTV takes about 25 megabits per second. So when you multiply those requirements by the average number of users in a household, you can imagine that average household speed requirements can easily surpass 50 megabits per second.

However, our ability to invest in nation-wide high speed fixed broadband network and deliver a broadband future for all Australians, is in the hands of the Australian Government and regulators.

We are being left behind the rest of the world. To end the broadband drought we have launched the Broadband Australia Campaign, which we call BACK, which aims at educating the Australian public. We've set flyers to our customers and to our shareholders over the past few months, and ves, it is designed to put pressure on both sides or all sides of politics. Because we do believe this is what Australia needs as a nation.

Australians like being number one, but when it comes to broadband we're not even in the top 20 for broadband speeds and we just make up the top 20 for broadband customers per 100 people.

So I encourage you all to join the Broadband debate. It's on the front page of The Australian.

Since the half year results the same questions keep arising from investors and analysts, so I'm going to just address some of those.

CDMA migration. Okay, so you've built a Next G. What about this CDMA network? As part of the \$427 million redundancy and restructuring provision that we raised at the last full year, over \$100 million related to CDMA migration. But people ask me, "Well, how can you migrate 1.7 million CDMA customers for only \$100 million? It can't be done."

What is important to remember is we have CDMA customers coming out of contract during this year and as a result we will re-contract those customers out of the current year budget and not the provision, and they won't be offered CDMA. We're not selling CDMA any more. So there is a natural migration taking place.

Not only this. The migration has already started. I won't tell you how many numbers per week. It's a high number and increasing. And people are migrating because they see the value that Next G has to offer and what it provides them, in terms of the breadth and depth of coverage, the applications and content and how easy it is to use compared to CDMA.

The 850 handset range is also another question often raised. We launched Next G in October with four handsets and one PDA. We now have 13 handsets and 13 data devices. So I wouldn't say we've got a limited handset range. In fact our range is only going to increase, as you will have seen with the recent launch of the Samsung Blackjack, and we should have a 7.2 megabits per second device available by June this year.

The other question we get as well, "Okay, so you've built the network at 14.4 megabits per second speeds, but you've got no devices at 14.4 megabit speeds." As I've said, the Next G network is the fastest wireless broadband network in the world and you may be sitting there trying to reconcile the difference between that network speed and the handset speed.

Our current network speed of 14.4 megabits per second just simply allows more of our customers to experience the higher network speeds. And if handsets today - this handset today is operating at 3.6 megabits per speed, obviously four times that is 14.4, and that's the speed with which the data goes through the network.

Fibre-to-the-node. Lots of questions about fibre-to-the-node. Lots of questions being asked in press articles. We are still talking to the Government, the Opposition and others. But let me be clear. There is no change in Telstra's position. If there is not a competitive return for our shareholders, then we will not invest.

So before I close and open for questions, just let me re-cap.

We still face risks, such as regulation in particular and execution, of course, of the transformation, and transforming to a new media comms business. But we are moderating these risks, and obviously we're moderating them by ticking off the proof points.

We saw this last week with the launch of Next IP network, and it's slightly ahead of time, and back in October the launch of the Next G network. And we'll further reduce this risk with our IT transformation release at the end of '07.

We are not only building networks, we are also changing the game in the market, and winning in the key areas of mobiles, on line and broadband. We're also delivering, and this is important, on our financial performance, there's evidence at the half-year results we lifted our fiscal '07 revenue and earnings guidance and we've not changed our 2010 long term management objectives.

By 2010 we will be firmly established as Australia's leading, fully integrated media communications company. Thank you. I'll open it for questions.

ANDREW LEVY: Thanks a lot John. I might just kick it off with a question, unpredictably on fibre-to-the-node, but the Opposition have a plan, if they come into power, that would see them co-own a new network with yourselves or somebody else if they bid for it successfully. I was just wondering what Telstra's opinion on the viability of that is and how favourably or otherwise you'd see that?

MR STANHOPE: Well let me firstly say we welcome the Opposition raising and having a position on fibre-to-the-node or broadband in Australia. We welcome it because it has raised the debate and it's clearly put it on the table as an election issue, so that's great.

We don't like the aspect of the proposal which is part public, part private. As you can imagine, I've spent the last 10 years trying to get out of public ownership and we don't really want to go back there.

Now we think the right way to do it is to incent private enterprise, that's now us, and others, to build this with a regime that incents the investment. And, you know, if that takes us to uneconomic areas, there are other ways to address uneconomic areas other than the Government owning the network. The current Government has been doing that by, you know, broadband connect programs and so on. And we think that's still an appropriate mechanism. So we don't like the public/private ownership element of their proposal.

ANDREW LEVY: There are a couple of microphones around the room, so we'll take questions from the floor.

AUDIENCE MEMBER: John, you've spoken, obviously, today about the very large capital investment that Telstra's currently going through. Analysis would suggest that at the moment that capital investment, after dividends are paid, are causing Telstra to cash burn, to raise an old term. Could you give us some view as to when you would think that capital investment relative to cash flow might equalise and we might actually start to see some improved cash flows after dividends?

MR STANHNOPE: Yes, I'll say two things about it. We have said that this fiscal year, '06/'07, is the biggest cash burn year. And then our free cash position, or our cash position will improve. We've also said that fiscal year 2010 we believe that we will be back at levels of between \$6 and \$7 billion free cash flow.

Now I'm not going to tell you exactly when that cross-over point is that we stop borrowing, but you know, we are borrowing, as you suggest, fairly substantially this year because we have got a five and a half billion dollar Capex program going on this year. But that will decline next year and we will start to be cash self-sufficient soon.

AUDIENCE MEMBER: Sorry, could I just follow up with that question. Is the current level of cash burn, given those plans, as you would have expected?

MR STANHOPE: Yes.

AUDIENCE MEMBER: Are you prepared to answer, better or worse?

MR STANHOPE: It is as expected so, you know, there is no variation to our guidance on capital expenditure for this fiscal year, which was between \$5.4 and \$5.7 billion.

AUDIENCE MEMBER: John, over the next 12 months, I suppose, where should we really look for the cost outs of the business, as you start going through transformation and switching off different systems and networks and those kind of things, but you know, come, I quess, your next two results, which are the main areas do you think that the costs will start to be coming out?

MR STANHOPE: Yes. Look, I tried to give some indication at the half vear results announcement of the sort of time sequence of the costs coming out. You know, whilst we have done the IP core and we've announced Next IP and it does allow you to take out all the N's that I was talking about, ISDN and so on, you just can't switch them off the day you launch your new network. And the reason is a customer reason. You really have to migrate your customers across to the new services. And, you know, as CFO of the company, I also want to make sure the migration is at least revenue neutral and/or better. And in my view it ought to be better because we are actually offering more value to the customers with the new network offerings that we've got, both Next G and Next IP, and why would the customers want to pay more? Because the savings that they get from the simplification, "Hey, let's share them". It sounds fair to me.

So it takes a little bit of time, is what I'm saving. So I still would – we are still on track to get our head count reduction. Remember our guidance is 6,000 to 8,000 by the end of this next fiscal coming up, '07/'08. We're still on track to do that, and most of that will come from productivity, that we're still doing some IT things. While I say to you, the main release is at the end of this calendar year, we're still taking, you know, the smaller systems out and so we still can get productivity improvement. And it will mostly be from that before we get the big chunks out from less operating and support costs of systems and networks.

ANDREW LEVY: Is there time for one more from the floor? I might throw one up then. I'd be interested, John, in your thoughts on Telecom New Zealand's recent comments that they'd be willing to sell part of their network to their competitors. (a) is that something that Telstra would look at as an investment, but just generally, you know, the concept of what they're trying to $do?$

MR STANHOPE: Well we'd have a look at anything that's worthwhile. It depends what part of the network they want to sell. Obviously, you know, we're building towards a new Next Generation network here. I wouldn't see too much sense in buying an old run-down network. So, look, I don't know what the offer is, but you always have a look at what's on the table.

ANDREW LEVY: All right. Thank you very much, John, for your support at this Conference again and your time today.

MR STANHOPE: You're welcome. Thank you.