TELSTRA GROUP LIMITED — Call Transcript 2007

Feb 15, 2007

16 February 2007

The Manager

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Dear Sir or Madam

Transcript from Telstra's Analyst briefing - Half year results

Attached is a copy of the transcript from yesterday's Telstra Analyst briefing on the half year results, for release to the market.

Yours sincerely

North book

Douglas Gration Company Secretary

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

Telstra Corporation Limited

2006/2007 Half Yearly Results

Thursday, 15 February 2007

Analysts Briefing

. . . . .

ANTHONY O'BRIEN: Good morning, ladies and gentlemen and welcome to Telstra's first half fiscal year 2007 financial results.

My name is Anthony O'Brien, the acting director of Investor Relations at Telstra. I would also like to welcome those viewing by webcast today and those in Sydney, at the venue being hosted by Ben Pitt, my colleague.

Last time we met, back in October, we introduced the launch of the Next G network. Today we want to share with you a short video illustrating the real customer benefits Next G has delivered. After this brief video, I will hand over to Sol Trujillo to take you through the first half results.

(Video shown)

MR TRUJILLO: Good morning, and I would like to welcome everyone to our half year results announcement. The good news about today is pretty simple: We report half year results that are better than guidance, and the results show that we are continuing to deliver on our key transformation milestones and improve long-term shareholder value by growing and winning where it matters

I want to emphasise that because you heard it from me when I first got here; every time that you have had a conversation with us at Telstra, it is all about winning where it matters, and, most importantly, we are also continuing to build momentum in the marketplace, where, again, it matters.

Only 13 months into our transformation we are on or ahead of plan on virtually all fronts. We are winning on the platforms that I said were our priority. So what we are going to do now is go into some of the details.

Our earnings before interest and tax, EBIT, came in at \$2.8 billion, a decline of 15.7 per cent. which is better than the expected 17 per cent to 20 per cent decline detailed in our T3 Prospectus and our previous guidance. Normalised sales revenue, which is a true reflection of performance, was up 3.6 per cent, significantly ahead of guidance and in line with trends noted on investor day and during the T3 process.

Again, I like to think about that as kind of the health metre of the business. Are we creating more volumes, are we creating more growth? And the answer is we are ahead of plan.

EBITDA, \$4.9 billion, down 7 per cent, again better than expectations. Transformation opex and higher spending on mobiles were contributors to that decline, so again transformation and the acceleration in the volumes in terms of the business. While reported EBITDA margins fell year on year due to operating expenses in the half, on the underlying basis margins actually improved 1.7 per cent sequentially from second half 2006. This is important to note, simply because we are now starting to see the real impact of the transformation starting to bear fruit. Our cash operating capex, \$2.5 billion, up 22.8 per cent, again, as planned, reflecting 2007 fiscal year as our highest opex and capex expenditure. We declared this morning as a board the ordinary dividend of 14 cents fully franked; again, as expected and consistent with the statements provided and disclosures made in the T3 prospectus.

Most importantly, however, we have now reached what I call the earnings inflection point, and maybe more importantly, what I like to think about in a sports context is we have reached that pivot point where we are turning, and from here on, going forward we are going to be reporting positive earnings growth.

As a result, we have also increased our full year guidance, which John will deliver and cover in a little more detail.

Let me tell you now why I am pleased with the results. We are winning in each of the key markets that I have highlighted before, in terms of the importance for the business. This is really about winning where the business is going to be, not where it's been. I think that this is the key thing that you will hear from us going forward, as we have outlined in our transformation plans.

The first area that I would like to talk about is 3G. We said we are going to win in the 3G game and now let's talk about data. We have added more than 700,000 3G SIOs since June and we have now surpassed 1.2 million 3G SIOs in total. Not only that, we have maintained our 3G ARPU uplift of \$20 over 2G. Driven by data with non-SMS data, ARPU is up 74 per cent, which is really the future of 3G and it is really what Next G is about.

It is about the changed behaviour, the changed use by our customers because the experience is simpler, easier and much better.

In addition to 3G, you have heard me talk about broadband, that we are going to win in the broadband game. We continue to take a disproportionate share. Our market share is up 1 per cent now to 45 per cent, with customer growth of 55 per cent and revenue growth of 50 per cent. This is all in spite of significant price reductions in the marketplace, literally as we speak.

I also said that we would manage the decline in our core PSTN business. Broadband, mobiles, 3G, Next G, all positives, and they are growth variables for us going forward. The control variable that we have in the business is around PSTN.

As you know, a year ago, the first half last year we had a revenue decline of 7.6 per cent. This year our first half decline is 5.6 per cent. So again, a significant improvement.

But what are the underlying trends, more importantly? Our total line loss of 0.8 per cent since June is a best in class performance as we benchmarked anywhere around the world. We have held residential lines steady since June, or flat, as we posted positive competitor churn and recorded market share gains for the first time since competition. Let me say that again: If you look at the

volumes of customers leaving us versus customers we are winning back, we have now run at a positive level in terms of the business for the first time ever since competition was introduced in Australia

I said we would grow our digital online platforms. Sensis new media revenues were up 68 per cent as usage growth increased 21 per cent, as an example, whereas satellite navigation unit sales recorded triple digit growth as part of the portfolio there in Sensis. Foxtel is also performing strongly, with subscribers up 10 per cent and Foxtel subscriber revenue growth of 15 per cent.

Foxtel is now 100 per cent digital after closing its cable analogue network, which again from a significant standpoint is important to us because now we can enhance and improve services and capabilities and other things, as you will see over the coming months and coming years.

Let me give you some more detail as we think about mobiles in particular, because Next G is the game. We have redefined the game here in Australia - Next G is a powerful force in the marketplace. It will be a growth opportunity for us and it is also driving for us what I would call the high calorie ARPUs from the high calorie customers, and they are all correlated very well with Next G.

As I said earlier, we have now surpassed 1.2 million 3G subscribers, and as of Tuesday this week we now have 415,000 Next G customers. We are on track to live up to our forecast of October of becoming the market leader by May 2007 in the 3G space.

Given what has been announced so far by our competitors, we estimate that we have gained around 60 per cent of net 3G adds in the period and are nearing 40 per cent 3G market share. We are excited by the fact that the \$20 ARPU lift has been maintained as our base has continued to grow. Again, we have had the conversations before about early adopters and they tend to spend more, et cetera, et cetera. The punchline here for us is that ARPU growth is continuing in terms of our business.

We have increased our PostPaid percentage of the base to 59 per cent and we have improved our churn.

Again, when I think about driver metrics, driver variables, these are key things that I look at, to look at how we are doing versus our competitors, how we are doing in terms of driving long-term profitability.

While there is initially increased expense to attract these high calorie Next G customers, which John will get into in a little bit more detail later, the economics of this accelerated Next G growth are truly attractive. Since June 2006 our incremental acquisition and retention costs for 3G subscribers will be paid back in a little over three months; clearly an attractive return for our shareholders. I only wish in our business we had more of these kinds of growth opportunities.

While we are excited about the \$20 ARPU uplift, I want to be clear about this: More important is the reason for the uplift. I think we all should understand this. It is all driven by an increase in data usage. So the pivot point again is occurring in the marketplace. In December our 3G customers spent \$12 more on non-SMS data than our 2G customers. Our high calorie growth Next G customers are driving the change in both usage patterns, migrating from voice to content-rich applications and dramatically increasing network traffic.

Penetration of content and applications is higher for our Next G customers than what I would call classic 3G customers. The penetration of Foxtel by mobile on Next G is nine times higher than that on the 2100 network. Again, this is classic 3G versus Next G - nine times different, that is 7 per cent versus 0.8 per cent.

The penetration of mobile music on Next G is five times higher than 2100, or 24 per cent versus 0 per cent. The penetration of video streams on Next G is five times that of the 2100 network - 53 per cent versus 11 per cent.

Our usage patterns show the overwhelming adoption of services on the Next G network and on average each Next G customer makes 11 times more video calls than the 2100 customer - three times more music downloads, two times more games downloads and seven times more video streams than customers on our 2100 network.

What this shows us is that this does make a significant difference with what we have been describing as our realtime high-speed, one-touch, one-screen, one-click, one-button experience.

I believe that this will only accelerate further as we add more content and applications, such as the recent addition of four new channels to our Foxtel line-up by mobile.

It is also important to acknowledge our abilities in terms of building the Next G footprint in the period that we talked about last October, when we launched, of 10 months. I think we had true validation of this task last week when one of our competitors announced the construction of what I call a toeprint. It will take them three years to build a smaller, less capable and lower speed network than what we built in 10 months. There is an issue here of capability.

Most importantly, however, is the fact that we are the global leader in this area. As we announced in Barcelona earlier this week, as of today we have now upgraded the network to 14.4 megabits per second, which really means a quadrupling of current capability. Again, we do not have devices yet that are at 14.4, but that is not the important issue because what it really means is that we can have four times as many simultaneous uses with the network that is now in place versus what we launched in October. So we are on an unrelenting path for continued expansion of capabilities and our ability to service customers wherever they might be in Australia.

In broadband - or let me just continue here for one more second. In the case of our Next G, we also announced earlier this week and as of today, we have extended the network range capability from 80km to 160km, everywhere that we have a site. In certain locations we have now halved the capability to offer 200km to enable Australians to receive mobile coverage in remote sites, such as on ships, oil rigs, flying doctors, and, as we have seen recently with the bush firefighting efforts, we have enabled more capability in those kinds of situations and locations. Again, not just assuming market leadership or continuing market leadership in Australia but here in Australia, the citizens here, our customers here, have the best wireless broadband network in the world.

In broadband, we continue to outgrow the competition again and extend our market lead. Our market share was up another 1 per cent to 45 per cent. We are still beating our nearest competitor by 3 to 1. ARPU held for the first time since broadband launched, with first half ARPU of \$49 flat on second half 2006 and has grown since the launch of our high speed plans.

One third of entry level customers migrate within 12 months to faster speed or more capacity. Since the launch of ADSL $2+$ and HSDPA, 25 per cent of new customers have signed up to plans faster than 1.5 megabits. We have surpassed 200,000 wireless broadband customers with growth of 30 per cent year on year. So if you want to talk about something that's hot, something that's selling very fast in all of our stores and centres around the country, it's basically our wireless turbo card. It is making a difference, again, in our customers' lives, actions you probably saw on the video.

We have extended our broadband footprint, launching Bigpond's high speed fixed service, covering 91 per cent of the Australian population with speeds up to 20 megabits from around 360 ADSL $2+$ enabled exchanges and up to 8 megabits from the remaining 2400 ADSL enabled exchanges. Our Bigpond digital online assets are a key part of what you have heard me call our media comms strategy.

So, great growth, great acceleration, customers are voting, we are letting the marketplace work well. But we also had this other negative in our business, which is PSTN. I again talked about some of it a little bit earlier. We have some key pivot points there that I would like to detail for vour benefit.

We continue to tackle the decline of PSTN head on, we are slowing the revenue decline. We had 5.6 per cent in first half 2007 versus 7.6 per cent in first half 2006. But we are not stopping there. Our strategies of integrating services, initiating customer winback programs and offering value based subscription pricing plans are making a difference in the marketplace and ultimately in our results going forward, because this has led to total line loss of 0.8 per cent since last June, a best in class performance, consumer SIOs steady since June - another best in class performance; and positive consumer customer churn trends and actual market share gains for the first time since competition was introduced.

Sensis maintained a very strong performance on a normalised basis as we think about our strategies around the digital online businesses. Online usage was up 21 per cent on 2005, as Australians continued to use Sensis online products almost 42 million times a month - a very relevant set of brands, a very relevant set of assets, as we think about continuing to grow our online businesses.

New media revenues grew by 68.3 per cent, with share of total revenue up from 9.8 per cent to 15.3 per cent normalised; 33 per cent of new customers taking up print and online bundles. Yellow.com.au remains a major driver of growth in this business and emerging major growth drivers account for 33 per cent of our H1 revenue growth. They include brands such as Whereis, which is our satellite navigation business, 250 per cent growth in unit sales and 50 million maps served per month and they have recently launched high resolution aerial photography.

Again, if you want to do a taste test or a comparison test, look at our product verses Google or anybody else. Mediasmart is one of Australia's largest online media sales businesses with almost 40 per cent growth in customer in the past year. It served up around 1 billion online add impressions per month in November and December 2006. 1234 - customers up 20 per cent since services simplified in December 2006 – 1 million calls per month received with 85 per cent connected through to businesses.

Sensis continues to innovate, with exciting online initiatives to be launched in auto and general merchandise. For example, carshowroom.com.au has launched a beta with seven manufacturers and over 150 dealers who are already signed up. Approximately 60 per cent of costs growth will be invested in revenue growth initiatives in the fiscal year - only 11 per cent last year. Strong cost governance has given Sensis the capability to invest in high revenue growth areas without the big increase in costs

Just as a reminder, Sensis is growing at the top line and growing margins at the same time. Again, a very strong performance and full-year guidance remains a double digit revenue and double digit EBIT growth.

Let us move offshore, where we should update all of you on Soufun. Soufun is continuing its aggressive organic expansion since Telstra acquired its 51 per cent stake on a fully diluted basis, where we have already added another 16 cities to the footprint that we have in China. We have an objective of opening offices in 100 cities by the end of 2008. This is reflected in strong Soufun performance, with triple digit revenue and triple digit EBIT growth.

Revenue is up 107 per cent year on year and EBIT is up 131 per cent year on year. Soufun continues its phenomenal growth during the boom in China's real estate and online advertising sales. Obviously, the marketplace there is booming. Construction is fueling a lot of China's economic boom. Real estate investment was growing at 24 per cent in 2006. The increase in residential building areas, when you look at what's happening just in China this year, 2006, it was similar in size to recreating the city of Bangkok. That's how much volume and activity is going on.

While I was last in China, there was a CNN report on China construction talking about over 125 million units of housing under construction. Where you see all those cranes and all the things that are happening there, a lot is happening and we are right at the centre point of the force of gravity in China.

When we look at this, this is going to be reflected on our online sales. Online advertising will quadruple between 2006 and 2010 to over US\$3.2 billion. Online real estate advertising is expected to deliver over US\$1 billion in 2010. Soufun is growing even faster and represents an incredible opportunity. It's China's No. 1 real estate advertising website, it has 44 million unique users per month, 1.3 billion page views per month, and we have more coming as we continue to evolve the business.

So it is an online real estate business but we have extended now the business also into home furnishings and we will have other opportunities to take that platform in more directions. So more to come on Soufun.

In terms of cash operating capex, our investment this year is at peak levels, as we have described before, and it is driven by the transformation. Telstra is on track to meet key milestones over the calendar year 2007.

In the case of wireless, in addition to the announcements made earlier this week, today we are also launching a trial of a home-based wireless broadband service using our Next G technology on our 14.4 platform. In Wireline, we are making good progress on our key objectives, with turn-up of our IP MPLS core and multiservice edge both nearing completion. The IT transaction formation is on plan and on track.

We have begun delivering a series of important capabilities to the business, including first, what we call our integrated desktop, enabling a single log-in and realtime use of market based management data. When we say single log-in, historically, if you looked at our business, it takes our reps sometimes may be four or five minutes just to log on, given all the systems they have to get into that are part of our legacy environment. Taking that down to matters of seconds is a big deal in terms of our business.

Telstra's service delivery platform, delivering content applications and live streaming over our Next G network, all of that is happening. The volumes that are happening are all big and that is because we, through our IT transformation work, have enabled now a new service delivery platform.

Telstra retail integrated campaign. As we have ratcheted up, basically doubling the volume in the business, we had to have campaign management systems capabilities. We now have those employees to enable us to integrate our processes and some of the technologies, again as part of how we think about managing what we do in the business.

Our enterprise program management -- again, more enhancement for that part of our business.

In the case of our network planning, for those of you that know the business and know the industry. you are going to see a major change or a delta happening for anybody that operates networks. That delta is in a broadband environment, you have log linear change in terms of capacity requirements, literally as you think about location by location.

It's a much different paradigm than for those of us that have dealt with this network management over the last - I have not been in the industry for the last 100 years, but it is a fundamentally different paradigm.

So, having the network planning tools that can be dynamic, can be realtime, is clearly critical. But even more important than that is our ability to leverage these planning tools across all the platforms that we have, whether they be fixed line, wireless, HFC or whatever it is that we have within our business. So the momentum on our IT transaction formation is continuing, starting to be rolled out in terms of our business.

As we said in November 2005 and October 2006, we will deliver the first release of our major IT capabilities at the end of calendar year 2007 with the second release to follow late in calendar year 2008. Nothing has changed, other than we are now starting to get some of the fruits of our labour.

While we talked about the transformation, we still need to focus on customer service. Again, I am a zealot about this, I won't let it go, because when you have so many things going on in the business it is always easy to let some things drop, and it cannot drop in front of the customer.

So we are staying focused, we are staying intent on enhancing and improving our customer experience. So we are driving improvements in both service and quality in our business. We are getting there on time over 90 per cent of the time and we are getting it right the first time over 96 per cent of the time. We have posted the highest customer satisfaction performance on record for enterprise and government customer.

Our ADSL held orders have fallen by more than 80 per cent since the September 2005 level of 19,300 and our Bigpond cycle times are down 19 per cent to an average of 6.7 days, and you all get to see the published information that is filed with the regulator and the government regarding our service performances, which again are at all-time highs. These are the best service improvements in Telstra's recorded history.

In addition here are some examples to show how we are driving productivity improvements, from increasing efficiency and delivering benefits under a one factory approach. We now have more than 6,900 vehicles equipped with GPS, meaning higher productivity, more efficient scheduling

and ultimately greater safety. We are investing in our people. More than 6,400 front of house and field staff have improved skills from training at our Telstra learning academy. We have more than doubled the numbers of consumer staff on incentive based compensation. I have to tell you, this is good for customers, good for shareholders and really good for employees.

Our headcount is down 4,596 since June 2005, excluding the impact of the New World merger and other acquisitions and divestments. Maybe more importantly, it is important for me to state that we are on track to hit our target reductions of $6,000$ to $8,000$ by fiscal 2008 and 12,000 by fiscal 2010.

We have a lot of momentum in the business. But, as I frequently remind everyone inside the company, we are only 13 months into a five-year transformation. We have a lot more to do, but the good news is we are on or ahead of plan on all fronts.

In summary, we have doubled our rate of topline growth, our labour costs are lower than a year ago, we have great momentum in mobiles, broadband, digital online and the downward decline in terms of PSTN. We will aggressively pursue convergent services as we evolve into what I call a media comms business. As I said at the beginning, we are at that pivot point. From here on in it's all about accelerating the trends.

Now, that's essentially why we are raising our guidance on both the top line and bottom line for the year. With that, I'm going to hand it over to our CFO, John Stanhope, who is going to provide you with a more detailed analysis of our first half results.

MR STANHOPE: Thank you, Sol, and good morning to everybody here in Melbourne and Sydney and those who are viewing on the webcast.

Let me run through the financial highlights for the half in a little more detail. As Sol said, sales revenue was up 2 per cent on a reported basis and up 3.6 per cent when you adjust for the deferral of the Melbourne Yellow book revenue until the second half of this fiscal year. This actually does reflect the true performance of the business.

Strong growth in mobiles and broadband revenues continued and our market-based management initiatives have helped slow the decline in PSTN revenues to 5.6 per cent in the half just gone, compared to the 7.6 per cent deadline in the first half of fiscal 2006; an improvement of 2 percentage points in one year. Our operating expenses were up 9.9 per cent, driven by transformational related costs of \$137 million, higher subscriber acquisition and retention costs soared with our market leading growth in the 3G market; and an increase in our cost base following the consolidation of some acquisitions. New World and the acquisition of Soufun during the half.

On an underlying basis, excluding the impact of the transaction formation costs, our operating expenses grew 7.7 per cent. I will provide a little more detail on those expenses shortly.

The total transformation cost is \$285 million for the half after you include the \$148 million for the accelerated depreciation and amortisation associated with the transformation.

It should be remembered that the first half of fiscal 2006 did not include any transformation costs.

EBIT declined by 15.7 per cent in the half. This is ahead of our guidance of minus 17 to 20 per cent. As a result, we have increased our full year guidance, as Sol has mentioned, and I will update you a little later in the presentation on that.

We have performed better than guidance and we are at an earnings pivot point. EBITDA margins fell from 46.3 per cent to 42.3 per cent on a year on year basis, so half on half basis. That was due to the higher operating expenses in the half. However, on a normalised basis margins improved 1.7 per cent, sequentially from the second half of 2006.

So what am I talking about is from 42.5 per cent at 30 June 2006 to 44.2 per cent at 31 December 2006, as the transformation gathers momentum. What is in that normalisation? Of course, the transformation costs have been taken out and we have allowed for the Melbourne book being deferred.

Cash operating capex was up 22.8 per cent to \$2.5 billion dollars, as we continue to invest in new networks and systems as part of our five year transformation. Don't forget, the current fiscal year is our peak transformation spend year for capex. We have declared an interim fully franked ordinary dividend of 14 cent per share.

What are some of the sales revenue drivers? Mobiles and broadband delivered another strong half of revenue growth, as the revenue mix in the business continues to change. Importantly, mobile services or mobile usage has grown at 6.5 per cent. Retail broadband continues its strong growth at 50 per cent.

Sensis sales growth was also strong on a normalised basis, growing 7 per cent - again that is taking account of the Melbourne Yellow book

IP access grew 27 per cent as our BigPond customers continue to use greater bandwidth and use our new product set. As you can see from the slide, our growth in key markets is more than offsetting declines in legacy products and we have again slowed the PSTN revenue decline.

On a reported basis, Sensis revenue declined 11.7 per cent but on a normalised basis, again, after taking into account the Melbourne Yellow book deferral of \$174 million revenue, Sensis sales grew 7 per cent – another strong half revenue performance. On a normalised basis, Yellow revenue was up 1.5 per cent to \$526 million. Yellow online revenue continued to grow strongly, up 32 per cent to \$78 million. Yellow print revenue declined 2.5 per cent to around \$450 million, due to softer economic conditions, particularly around Sydney, and that has affected the Sydney book. However, the decline is more than offset by the increase in Yellow online.

Furthermore, around 33 per cent of new customers are taking both print and online bundles. Multi-product customers mean higher vields and, of course, are more sticky than the single product customers.

White Pages, its revenue grew 8 per cent to \$146 million, driven by strong half performances in both print and online revenue, as customers take up our feature options in White Pages.

New media revenues grew by 68 per cent in the half to \$136 million as usage across all sites increased 21 per cent, as Sol alluded to earlier. Emerging businesses such as Soufun, 1234, MediaSmart and Whereis are driving much of the growth, along with yellow.com.au and the whitepages.com.au, which represent exciting new growth rises in the media comms space that will lock in future growth for the Sensis business.

Trading Post is continuing to reposition itself in the online space, where there are many opportunities while experiencing ongoing competition in the print.

A strong costs focus and improving online sales and scale helped push EBITDA margins up almost 2 percentage points - a fantastic result in the Sensis business.

Sensis is now much more than Yellow and is on track to achieve its fiscal 2007 guidance of double digit revenue and double digit EBIT growth.

Let me now turn to retail broadband. Retail broadband revenue continued to grow at market leading rates, up 50 per cent to \$497 million. In November we launched ADSL 2 plus, offering speeds of up to 20 megabits per second. In December and January, 25 per cent of new broadband sales were for plans faster than 1.5 megabits per second. Migration of customers to higher speed plans has helped maintain the retail broadband ARPU at second half fiscal 2006 levels of \$49. This is the first time broadband ARPU has not declined since its launch.

Retail broadband customers continue to grow, up 650,000 year on year to 1.8 million. We changed our wireless broadband subscriber report in the half and both broadband and wireless broadband numbers of SIOs are included, and there are 204,000 wireless broadband customers included here.

Our retail market share increased to 45 per cent, a gain of 1 per cent, as we added customers, as Sol mentioned, at three times the rate in the half compared to our nearest competitor.

Our Bigpond customer service continues to win awards and we remain the top rated e-mail and telephone customer experience provider. In addition, our ADSL cycle times have improved by 19 per cent. They are now equivalent to about six days, down from eight days in the first half of 2006 to get an ADSL service.

Let us have a closer look at mobiles.

Total mobiles: We are on track to become the 3G market leader by May 2007. Total mobiles revenue grew 11.8 per cent to \$2.8 billion, made up of mobile service revenues, up 6.5 per cent to \$2.4 billion, driven by strong data growth from wireless customers accessing data services and, secondly, mobile handset sales revenue which grew at 69 per cent to \$357 million, of course due to the increased sales of 3G handsets as people flock to the Next G offering.

At December, total 3G mobile subscribers were approximately 1.2 million, with 415,000 Next G customers added from launch up until Tuesday of this week.

We added 12 and 13 times PostPaid SIOs in quarter two, versus Vodafone and Optus respectively, as we focus on higher ARPU customers who are paying for the extra value that Telstra provides.

Importantly, as Sol alluded to before, we maintained the \$20 per month 3G ARPU premium over 2G on a much higher customer base, so we think we are past the early adopters. Half of this premium is driven by the uplift in data usage as our 3G customers take advantage of our superior speed and content offerings on the Next G network, using video calling and data services such as Foxtel by mobile, music, games and video downloads.

Mobile data revenue grew by 39 per cent and mobile data now accounts for 22 per cent of mobile services revenue, and that is up from 19 per cent in the second half of the fiscal 2006. Non-SMS data - because it has in the past been dominated by SMS data - ARPU is up 74 per cent to \$3.10.

I do need to talk about mobiles acquisition costs. The strong mobiles revenue growth has resulted in an increase in handset subsidies and subscriber acquisition and retention costs as we do continue to compete hard and win in the key mobiles market. Our mobiles EBITDA margins have fallen from the mid to high 40s range in the first half of fiscal 2006 to the low 30s in the half. Our average PostPaid subscriber acquisition and retention cost increased by 50 per cent to \$250. The blended, so PostPaid and prepaid, subscriber acquisition and retention costs are \$183, and they were up 51 per cent.

Handset subsidies did increase by 98 per cent to \$417 million, driven by the higher volumes and the higher average handset subsidies per plan, as we do continue our aggressive 3G push with Next G.

We saw in the previous slide, and what Sol said earlier, that the 3G PostPaid ARPU uplift has been maintained. So this higher ARPU means the payback of the higher subscription acquisition retention cost is around three to four months, which makes this a good investment.

PostPaid churn has remained positive since April 2006 as we sign up more PostPaid customers, with 59 per cent now of the mobiles base on a contract, up from 55 per cent in the prior corresponding period. Our segments are working hard in signing customers to long-term contracts. Our progress has been first-class, with 54 per cent of the PostPaid base now contracted for at least the next 12 months, and this is up from 51 per cent in June 2006. Our PostPaid capped plan percentage remains low by industry standards at 10 per cent, in contrast to the mid 20s for our competitors.

As we lock in more of our base on higher ARPUs and we reduce handset costs, and we cash in, if you like, on our competitive advantage in 3G, we expect to drive margin improvement over the medium-term

PSTN: As we said a couple of times, the PSTN revenue declined 5.6 per cent to \$3.6 billion, which represents the second consecutive half in which the PSTN revenue decline has slowed with a 5.8 per cent decline in the second half of fiscal 2006 and a 7.6 per cent decline in the first half of fiscal 2006, and 5.6 this half. The improving trend in churn has helped stem the line loss, the smallest line loss since June 2002.

Our market base management research and resulting initiatives have led us to deliver a more integrated and tailored customer experience, which has had a direct impact on the bottom line.

One of those initiatives, subscription pricing plans, have proved very popular, with approximately 300,000 customers choosing to move to the simplified pricing offers, the \$89 plan being the most popular. More and more customers are taking advantage of our integrated product offerings, with the number of customers with three or more products increasing 13 per cent. PSTN ARPUs are holding or they just declined marginally by 4 per cent to \$61, so there is no large impact from subscription pricing plans.

Let me just touch quickly on some segment highlights here. I will have a brief look at some of our segments. Our retail business unit have each enjoyed strong performances in the half, led by consumer growth of 4.4 per cent. Business - that is the focus on our small business - has grown because of a new focus on that segment. Enterprise and government, that group has grown again this half after we normalise for the AAS divestment

The improving operational metrics talked about by Sol earlier have been driven by a more focused, more competitive presence leveraged off Telstra's strengths which do provide a real competitive advantage.

Let me get into a little more detail around operating expenses. Operating expenses have increased 9.9 per cent on a reported basis to \$6.9 billion and overall there were three key drivers for that increase in operating expenses, the first being mobiles and the increased subscriber access and retention cost that I went into in some detail earlier; the acquisitions, that is, the inclusion of a full six months of costs relating to New World, which merged with CSL, and four months costs relating to the acquisition of Soufun, which occurred in August, offset, of course, by the divestment of AAS from the KAZ Group; and thirdly, the transformation. This was mainly related to our service and contracts, which means we continue to make sure we variablise the costs of the transformation.

As I have said on a number of occasions, it is important to note we have not included any related internal labour costs and transformation costs. So a lot of people inside the company are also working on transformation.

After stripping out these costs, you see on the slide, business as usual expenses increased by 1.4 per cent. I thought it was important to step you through what the growth consisted of, and I have done that on this slide.

I now look at the main expense lines, starting with labour. Labour costs declined 2.8 per cent to \$2 billion, and that is the first time labour costs have decreased since about 2003. Salary and associated costs declined 1.3 per cent, and that has of course been driven by the overall reduction in the workforce. Redundancy costs decreased by 47 per cent, as we now draw down on the \$186 million provision for redundancy that we raised at the end of fiscal 2006.

We reduced our total labour force by a further 737 in the half and our workforce has reduced by 4,596 since the start of fiscal 2006. Of course, that excludes the impact of the New World merger, the other acquisitions and the divestments, and that is the reference point that we made earlier with our long-term objectives.

An over-busy Christmas period, and for the Next G launch we increased our short-term flexible staff levels. So keep that in mind when you are trying to reconcile the investor day work force decline, when we talked about the decline on investor day of 1,000 with a half decline of 737. We are on track, as Sol said earlier, to achieve our 6,000 to 8,000 headcount reduction by the end of fiscal 2008 and 12,000 by the end of fiscal 2010.

The other costs elements, cost of goods and services, let me take you through that. There has been investment in the mobile market as we compete aggressively in 3G. As a consequence, this category of goods and services has increased by 16.9 per cent to \$2.6 billion for the half. As I have already discussed in the mobile section, the increase in handset subsidies cost of goods sold and commissions was driven by an increase in volume and higher average subscriber acquisition and retention costs as we support that 3G growth.

Of course, with the higher demand in Bigpond, the Bigpond volumes have also had an impact on our cost of goods sold. Offsetting those increases was a decrease in network payments of 11.7 per cent to a total of \$887 million. That was due to a reduction in the mobile termination rates to $15$ cents per minute and that was backdated to January 2006 following an ACCC determination. The net outcome of the backdating has been a \$37 million EBIT benefit in the half for that fiscal period.

Lower payments to Reach also offset the increase, and that is our payments for operating and maintaining our offshore cables and the terminating costs as we get more efficiencies in the Reach business, and further offsetting, there was a slight increase in volumes of mobile and SMS traffic terminating on other carriers' networks.

The other expenses in the business I will just touch on. They increased 15.5 per cent to \$2.3 billion. When you take out the transformation related costs, other expenses increased by 9.9 per cent to \$2.2 billion, so it is a big element of the growth. Service contracts and agreements increased 17.4 per cent to \$1 billion. They have been driven by transformation costs of \$80 million relating to both the IT and Wireline components of the transformation.

As I said, that is the variablising of the transformation program. We did have an increase in the front of house volumes associated with mobile and broadband demand contributing to \$48 million of the cost increase.

Rental costs were up. These accommodation rental costs were up because New World came into our books, and in general administration costs increased 13.6 per cent, and that may alarm you, but it is related to the transformation. It is an increased focus on training.

You will recall we said we were going to train more of our people, we are equipping the field staff to better serve our customers. And there are some additional costs with the establishment of Next G as we are, for a short time, operating duplicate networks. So there are electricity costs, power back-up costs and so on. That duplication of costs will only continue until the CDMA network is switched off

Promotions and advertising costs were up 38 percent to \$212 million, that was due to increased market campaign activity around the launch of the Next G network in October, the launch of ADSL 2+ in November and, of course, a busy Christmas season.

I wanted to show you this slide to give you some perspective on the timing of future cost reductions because it is an often asked question. While this year is a big spend year on transformation, costs take-out will be progressive as platforms are removed, product exits take place and systems are decommissioned. This slide aims to show you the approximate timing of realising material benefits from the transformation.

However, cost reductions are also taking place now. The cost reductions to date have come from organisational redesign and operational productivity improvements, and they will continue as well.

I want to just quickly look at depreciation and amortisation expenses. Depreciation and amortisation increased 9.9 per cent to \$2 billion, and this does include the \$148 million of accelerated depreciation and amortisation for the CDMA network, some switching systems and software following the service life review we had as part of the transformation program.

Excluding the impact of that acceleration, $D&A$ grew 1.7 per cent and that increase is consistent with the growth in our asset base, the inclusion of Adstream, New World and Soufun assets.

Capital expenditure, our cash capital expenditure: Our total cash capital expenditure increased 23 per cent in the half to \$2.5 billion. During the half, we spent \$1.7 billion on transformation-related programs, including \$810 million on building and deploying the IP core network in Melbourne and Sydney, deploying IP DSLAMs and installing Multi Service Edge nodes. We spent \$597 million on building and rolling out the Next G network and upgrading it to 14.4 megabits per second, as Sol mentioned earlier today.

\$230 million was spent on streamlining and improving customer care and billing solutions, while decommissioning other IT systems, and \$108 million was spent on transformation related programs, including network improvements.

As expected, our business as usual capex declined as we divert our resource to the transformation. We expect this decline to continue leading to a lower capex to sales ratio once the transformation is complete in fiscal 2010. We are on track to achieve our full year cash capex guidance of \$5.4 to \$5.7 billion.

Cash flow: As expected, our free cash flow declined 56 per cent to \$862 million, due to the higher opex, related to 3G growth and transformation, higher capex due to the transformation program and the acquisition of Soufun, which was, you will recall, mostly offset by the sale of AAS.

Some of our financial parameters have increased, which we expect, since June, but we are still very comfortable on all measures versus the financial parameters we have set for the company as at 31 December.

I will just touch on international here. CSL New World revenue grew 41 per cent to HK\$3 billion, largely due to the consolidation of New World PCS in the group results for the six months, which contributed HK\$720 million or 33 per cent of the growth. Without New World, CSL grew by 8 per cent, so CSL is still growing. So I wanted to make sure you understood that.

Growth in data, international voice and mobile handset revenue also contributed to the strong revenue performance. Expenses were up 49 per cent in CSL to HK\$2.8 billion, driven only by the inclusion of New World and increased subsidiaries as the group started to return to SIO growth and improved churn.

Telstra Clear continues to grow revenue where we have infrastructure. However, total revenue declined 4 per cent to NZ\$335 million, and was driven by lower off-net usage impacting on calling and mobile revenue and there has been competitor-led price erosion.

For the four months, Soufun reported triple digit earnings and revenue growth and is on track to achieve full year triple digit revenue and earnings growth.

Let me turn to the guidance. Following our strong first half revenue growth, we have upgraded our fiscal 2007, so full year revenue and earnings guidance. Previous revenue growth guidance was 1.5 to 2 per cent growth, and now we are giving guidance of 2.5 to 3 per cent growth. The previous reported EBIT growth guidance was plus 2 to plus 4 per cent and now we are giving guidance of plus 3 per cent to plus 5 per cent.

This guidance has some assumptions behind it - still no FTN build, ULL pricing still in band 2 at \$17.70 per month; the shared spectrum or line sharing at \$3.20 per month; and, of course, that we continue in this year to have the largest spend in our transformational activity, both capital and operational expense; and that we do not raise an additional provision for redundancy and restructuring in fiscal 2007.

We expect positive earnings growth to recommence in the second half of this fiscal year and we have told you about this on previous occasions. Our second half EBIT growth guidance remains in the range of plus 37 to plus 40 per cent.

I just want to very quickly address some key misperceptions that have been around the market. I want to set the record straight here. I will start with PSTN, where there have been many suggestions of large scale declines and a lack of focus. However, what we have witnessed has been quite the opposite.

A new focus on the integration and retention has led to slower revenue declines and, as I have said, the decline has been slowed and the churn trend is positive. As you can imagine, overall it has had a very positive impact on company margins.

Next G: There has been much scepticism about our ability to execute on the Next G network, with concerns around technical performance, limited competitive advantage and take-up of devices resulting in a long period before delivery benefits. Well, again, the results are quite the opposite: The network is performing very well. Breadth and depth is a real competitive advantage being experienced by our customers.

We have entrenched that competitive advantage with the upgrade to 14.4 megabits per second, with its associated extension of coverage. We have now added 415,000 SIOs on this perceived limited handset range, which we are expanding in any event in March. All of this has helped drive strong mobile services revenue growth of 6.5 per cent.

Some of the other misperceptions - they range from a lack of understanding of our strategy, lack of understanding of the regulatory environment, and some off the market estimates around payback periods and investor sentiment. The facts are on the slide, and in the interests of time I will not go through each, but I encourage you to read through the perception and what we believe to be the facts.

There have also been - this is what I want to address head on - some wild estimates around the value to us of our property rationalisation. While there will be opportunities to close and sell some telephone exchanges, these will be on a much smaller scale than some suggest. So we have given you some indications there of the likely outcomes and again I just wanted to correct some misperceptions.

Turning to margin guidance, our margin guidance is one aspect which also receives enormous coverage, with many believing there is not a precedent for such a target. In addition to ignoring the unique differences that there are in Australia and Telstra versus global peers, this analysis is based on recent, and therefore some historic, margin performance. In fact, many global telco analysts are predicting healthy margin improvements to fiscal year 2010 for many in our peer group.

On this scale, Telstra is aiming to hold margins and we don't believe it is an extreme objective. You will recall the long-term objective of 46 to 48 per cent margins, and that takes us back to 2004/2005 margin levels.

Regulation: I need to briefly touch on regulation. Our recent regulatory activity has been well documented, with the launch of the constitutional challenge in the High Court to protect our shareholders' rights. This relates to the below cost determination from the regulator as we continue to aim to at least recover the costs for our legacy network as we provide access to it for others.

Lastly, at this stage, given our progress, 13 months into our strategy, we have no reason to change our long-term objectives. I supply this slide to show you those long-term objectives and just to remind you what they are.

So thank you and I will now pass back to Sol as we take your questions.

MR TRUJILLO: Thank you, John. As I understand it, we are going to go first for questions to Sydney and then we will come back here to Melbourne.

Q: Justin Cameron, Credit Suisse. I want to touch on the market share side. From the strengths today, we have seen improved market share on the fixed line, improved market share in broadband and improved market share in mobile. Has that trend continued over the January period that you have seen and do vou expect that that strong momentum that you have had obviously in broadband and mobile to continue for the next six to $12$ months?

MR TRUJILLO: Justin, I won't give you any January specifics. But the punchline is yes, we have momentum in the business and trends continue to look favourable. Again, it is going to be a function of hard work, differentiation and focus on the part of our people.

Q: Maybe just a bit more clarity on the mobile side. The guidance that Telstra has historically had on mobile is between 5 and 6 per cent growth at the top line. You delivered nearly 12 per cent revenue growth in mobile. Will there be any change to that guidance at all?

MR TRUJILLO: We are not changing our guidance per se on any particular category, but suffice it to say that our trends are staying strong and again we are always – how should I say it - cautious about what our competitors might do, how they play their price plans and price caps and a lot of other things in this space.

But we do have an advantaged product in the market, customers are voting, and they are using. So the good news here is not just share but it's revenue share. And revenue share is not just driven by SIOs, but also by usage. Again, when I think about an industry thought - not just Telstra but the industry - this whole phenomenon of high speed services in a mobile space is going to drive a different usage characteristic, which should drive ARPUs, for those who know how to play the game right and smart.

O: I am just wondering what happened to the previous underlying EBIT decline of minus 2 to minus 4 per cent? Has this changed in any way?

MR STANHOPE: No. If you take a normalised view of our half, it is about minus 2.9 per cent normalised to the half, so on the same basis. But we have improved the reported guidelines, so the reported - sorry, the underlying level has also improved but we are not today issuing any guidance on the underlying.

O: Just on the 3.6 per cent underlying revenue growth, what would that number be if you excluded the acquisition contribution from New World and Soufun?

MR STANHOPE: On a normalised basis, if you like, the best way probably to look at this is because Soufun and New World are both offshore - the domestic business growth, therefore, is about 2 per cent.

O: Can we expect to see a reversal of the CDMA trend for early next year? And the second question is around margins and return on capital on some of your new products, like the mobile data products you were talking about.

MR TRUJILLO: First of all, regarding the SACS trends, the SACS trends are actually better today than they were in October when we met last and they will continue to get better as there is more market knowledge and more capability, as product familiarity continues to occur in the marketplace. So we are on an improvement path relative to SACS and also retention as we think about our retention costs

In terms of what we see happening going forward relative to CDMA migration, we are basically on plan with what we intended to do. We are letting the market work, and the market is working relatively well as we look at the volumes of what we are doing and what customers have migrated already from CDMA to our Next G service in particular.

Finally, in terms of CDMA as it relates to SACS, that is partially built into some of the reserves that we took last year and it will be used or leveraged as appropriate as we go forward. So there are no issues in my mind at this stage.

O: Any comments on margin on the new products?

MR TRUJILLO: In terms of margins on the new products, obviously as we have higher ARPU then the margins will look more attractive. Our handset costs, our weighted average handset costs on our Next G devices are lower than those on 2100. So as we roll out more Next G customers versus what I call classic 3G customers, our margins only get better. Obviously, with usage continuing to grow in terms of by customer that is already a customer, there are no acquisition costs associated with that, it tends to be a much higher margin.

So the challenge for us, and I would say any player in what I would call the high speed game going forward, is how well can we market the usage and the capabilities that the customers already have on their devices? The good news for us is we made it one-click, one-button, one-touch key and we will continue to do that.

I will move to Melbourne and open it up for questions.

O: Christian Guerra, Goldman Sachs JB Were. I have four questions for you this morning. Firstly, it is probably a question for Justin Milne on Bigpond: The business looks absolutely bulletproof at the moment. I am wondering if there are any risks or other issues on the horizon that you are focusing on? Secondly, a question on the transformation program opex. Could you give us a guide on what you expect in fiscal 2008? You have obviously got another \$500 million of

redundancies to come over the next two or three years, but just a comment on any other restructuring or costs that you have coming up in 2008 and beyond.

Thirdly, just on cost of goods sold, we saw a growth of close to 20 per cent in the first half. I am wondering if you could comment on the outlook for cost of goods sold in 2008.

Lastly, on the depreciation charge, excluding the accelerated depreciation, that was a little bit lower than what was forecast. I am wondering if you have made any changes to useful lives or anything like that in the period.

MR TRUJILLO: Regarding Bigpond and the broadband play, then I will ask John to talk about the restructuring issues, then I will comment on the COGS view.

In terms of the broadband business, as you have probably seen in the last year and a half to two vears, we have fundamentally changed our value proposition to one of not just being a price player pricing at the market, but adding real value.

Bigpond has evolved now into a truly differentiated broadband ISP/portal, and customers are finding that value because not only does it deliver the best service experience - and that is now judged and gauged by third parties; we have won awards for it; but we have also been involved it in terms of services and capabilities, including content, whether it be AFL or V8 supercars or whatever, you can look at that and if you're a customer of Bigpond you get more and you get more value in the sense of what we are doing.

When you use the term bulletproof, I'm always cautious, because every day you have to re-earn your value, is my opinion. That's what I tell all the management in the business: "You are only as good as tomorrow, not yesterday." So we are always going to continue to drive the value. That's what I said when I first came here: We are no longer going to be the old price player but we are going to be a value player in the market, and we keep on adding value.

This is important also when people talk about regulatory issues and other things. Regulators may want to reduce prices but we are going to continue to increase value, which means the cost to compete is going to go up. So we are always going to have some insulation against price moves because we are going to be a value player. So in the case of Bigpond. I think we are doing well, we are going to continue to enhance and expand, and I think Justin and his team are doing a terrific job of driving true difference in the marketplace.

In terms of COGS, how are we thinking about COGS? I am not going to give you 2008 guidance. We will talk about guidance for 2008 when we announce the full year results. But the punchline here is we are on a mission to keep on driving costs downwards and we are keeping focus on the suppliers as we deal with them. Because, to be quite frank, Australia is not a big market for most handset players and. Telstra being the biggest, we are still not big in the greater scheme of things, which is why a year ago we signed the deal with Brightstar, so that they could aggregate volume, we could get better prices, and it has worked out well for us so far.

We are going to continue to evolve our product line, we are going to continue to have more players into our product space as we think about Next G and also as we think about Prepaid and Postpaid.

My sense is that we are going to continue to drive costs further down, so that as we look at our cost of goods, is it better than SACS, we will get better on a relative basis over time.

John, do you want to talk about restructuring?

MR STANHOPE: Christian, I am not going to give you 2008 capex guidance either, but just suffice to say that we have said it is a peak spend year this year. Business as usual capex will continue to come down and transaction formation capex obviously, given this is the peak year, will come down also. So we have given that guidance before. As Sol said, any specific numbers will come after full year.

With respect to restructuring costs, though, yes, there is more restructuring costs to take place, but let me remind you that the provision is more than a one-year provision, so it goes over into the 2008 year, and the utilisation of that will take place in the 2008 year as well.

When I look at both redundancy and restructuring costs, we have had less use of the restructuring element of that $R \& R$ because we are at the early days of the transformation. So more of that will be utilised in the 2008 half. So there is no intention to provide any more. We do have a two-year provision that we have taken up and there will be utilisation of that in 2008.

And your other question, depreciation: After the acceleration, you are right, it grew 1.7 per cent. The other asset base, impact of service live review, \$25 million - very small.

Q: Sol, can I ask you a follow-up question on Bigpond. You have been talking about building Australia's leading media communications company for over six months now. You have four fantastic content genres on the Bigpond site. I am wondering whether you are looking to expand those or add new functionality, for example, broadband TV. We are seeing that probably 10 European companies have now rolled out IPTV, the two big players in the US have done that, PCCW and recently SingTel have also announced plans for broadband TV. I just wanted your view on that

MR TRUJILLO: The great news for us and for all Australians is the fact that we also own 50 per cent of a business called Foxtel and we are working hard at leveraging the Foxtel asset, along with our Bigpond asset, in terms of this media comms definition.

I am not going to get into specifics now of what we have on the drawing board but we do have plans to continue to enhance the viewing experience, let us call it, for Australians, whether they are currently a Foxtel customer today or whether they are an internet-based user and acquirer of content.

So we do have plans, we will announce them at the appropriate time and we will stay on the path of a true integrated strategy, because, as we are finding out with Next G, it really does make sense to the customer and customers to use things more and better because it is an easier experience.

One more question here in Melbourne, then we will go back to Sydney.

O: Patrick Russell. Just a few questions. Firstly on CDMA, I wanted to dig a little bit deeper as to why we aren't seeing the migration started to expedite in relation to the Next G network, I guess just trying to get a handle on how quickly you can get that 1.6 million across, is the provision within the 2006 restructuring provision sufficient enough to basically get it across without an additional provision being struck? Just trying to get a little bit more on that.

Secondly, on labour, obviously it has ticked up a little bit since your previous comments. I am just wondering, while you are in this land grab of Next G and you have this massive migration on CDMA to occur and you are going very hard on broadband, is it likely that labour numbers will remain pretty high and you are not going to see any step reduction over the next 12 to 18 months, then we are looking more back into 2008/09 before we should be considering labour reductions?

Finally, on ULL, I am trying to get an understanding of the restrictions on the conversion rate ULL on an exchange per state per day basis. There was actual caps on that, they have now been lifted, and as a consequence we will see a significant step up in the ULL migration rate going forward.

MR TRUJILLO: Patrick, you have asked a lot here. Hopefully I have recorded it all in terms of the questions.

You first started with a comment which says we are not seeing much CDMA migration. I am not sure that I know what your data point is to support that.

O: I am looking at the sub numbers, they are pretty flat around the 1.6 million, and most of the migration seems to be occurring in GSM. I thought it might have been a little bit more the reverse.

MR TRUJILLO: Number 1, as you have probably noted, we launched Next G on 6 October and we did not want to start migrating customers on to a platform that was not going to be the relevant platform for the future, so we waited until Next G turn-up.

During the early month of Next G we had significant volume. The problem was that in some cases we ran out of handsets and other things, so supply became an issue for us, otherwise our numbers would be even higher, which is a nice problem to have, but it was a problem. So we now are plenty well stocked in all locations

One other issue for CDMA migration, a lot of customers out there now have the device that will work but they want car kits and other things in order to be able to feel that they can adequately migrate from the current experience that they have to the one that they want to have, taking advantage of Next G. We are now at a point where we can supply the needs there as well and we are stocking up for those capabilities.

The last thing I just say is that the numbers that you see are through the end of the year, so you are basically talking about a month and a half to two months worth of activity. I assure you that I don't have any issues at this stage or concerns about our ability to migrate the CDMA customers over because there is significant volume, significant take-up from them already.

Secondly, in terms of the reserve and the use of any reserves and will there be an additional requirement at this stage, we think we are adequately reserved for all that we are going to do and there are no issues there.

In terms of the timing of labour and how you describe the transformation. I think you are relatively close in the sense of we are going to meet our targets of $6,000$ to $8,000$ FTE take-out by the end of fiscal year 2008. That is going to happen. But the more important part of your question, I think, was how should everybody think about the continuation of the transformation?

This year I said that release 1 turns up at the end of 2007, and that will affect part of business in

the sense of enhanced capabilities, replacing some old capabilities and it will be the next year or the following year when we start pulling out all the legacy stuff, because now we have the new capabilities.

Release 2, which affects our LSS - it is kind of the backbone - and billing systems, that turns up again by the end of 2008. So once you have release 1 and release 2 done, that's when you really start affecting our ability to take out costs and more additional headcount because we have a lot of people still managing legacy systems.

When we turn up initially, we are essentially running two legacy systems, just like right now we have an additional Next G network in addition to the CDMA. Part of the additional take-out, the bigger back end will be when we start retiring the systems and taking them out of service. So that timing will be in late calendar 2008 and 2009 and 2010 periods. That will also be affected as we start turning up our soft switching capabilities in the metro markets that we described as part of our operating plans.

I think you have characterised it right in the sense that there is going to be big backend labour force reductions just simply because we will turn up the systems and withdraw them, but in the meantime we will still get our targets of 6,000 to 8,000 by end of fiscal year 2008. Did I answer your question?

O: ULL?

MR STANHOPE: ULL restrictions. Part of the reason we have changed our guidance is that the expectations that we had when we gave the last guidance on ULL take-up is smaller than we expected. But let me also add that we think we are still yet to see the full impact, and I believe that the take-up will increase over the next half. That is all I will say. I don't know any more details about restrictions and the freeing up of them but I do know the take-up is starting to increase.

O: Andrew Levy, Macquarie Equities. I wanted to ask you about your balance sheet. You pointed out that you are pretty comfortably geared versus your target financial parameters. Is that reflective of the risk you see to earnings over the next few years, or do you have a bit of a war chest that you could use for acquisitions, and what are your views on capital management in the absence of those opportunities?

MR STANHOPE: I have always said that we do reserve some flexibility in our balance sheet to be able to do various things, be they small acquisitions or whatever. But we are on a path here towards financial parameters as we spend more money to move towards the level that we have set out ourselves as to what we think is an appropriate set of financial parameters to give us that flexibility in our balance sheet going forward.

As I have said as I went through the announcement, we are comfortably below those parameters now, but as we spend this year - and you will see those parameters or those indicators go up as we complete this fiscal year - but we have no reason to change those parameters at this stage because we do want to keep some flexibility in our balance sheet.

Q: Just as a follow-up, given that you stepped out of the Telecom New Zealand directory sale on price issues, is there an ability to profiteer in some respects on the amount of private equity, capital and money that people will pay for these businesses with your Sensis business?

MR TRUJILLO: We basically stepped out of that, as you said, because of price. We are on the same mantra that I've said over and over again with everything we do: we only do things that improve shareholder value.

In the case of Sensis and the implied question about private equity, we are on a path here to improve value, both in Sensis and the integrated whole via our integration strategy.

You can see by the results of Sensis we are outgrowing virtually any player in the market, both top line and bottom line combined, and we will continue to do that in terms of increasing ultimate shareholder value. Is it all recognised in the share price yet today? Probably not. Could it be and will it be? I think so. But some of that vet remains to be worked and delivered as we grow the business.

So at this stage we are on an integration path, we are staying on the integration path and I think our shareholders will be well served in the aggregate for all that we do.

Q: Mark McDonnell from BBY. Firstly, congratulations on delivering a result better than guidance.

A couple of small revenue items that have not been touched on as yet, but where there are clearly some areas for further work. Firstly, in New Zealand, Telstra Clear has gone from bad to worse, the situation there is deteriorating. There have been revelations from a leaked memo over the Christmas period, a very colourful memo relating to the state of the business there. Apart from corporate transactions vis-à-vis Vodafone or Telecom NZ, operationally what scope is there for Telstra to improve the performance of what seems to be a continuously deteriorating situation in that business?

Secondly, in Australia there has also been a downturn in your IT services and managed business, and I am just wondering if that is receiving enough management attention, if there are significant initiatives there that can turn that around?

MR TRUJILLO: Mark, in terms of the two pieces, I may ask John to also comment on New Zealand after I make my remarks.

Obviously I am not pleased with the deterioration in performance, full stop, no qualification to that. So we are working on how we are going to improve that.

Clearly there is a major event that happened in New Zealand recently, which is the passing of legislation that will, I guess, what I would call break the monopoly. It is probably one of the few countries left in the world where unbundled local loops and access to network facilities and things like that are not allowed for at what I would call market terms and conditions. So the government has made a decision they are going to drive that way and now we are looking for clarity in terms of how soon, how much and for what. And that is coming, as I understand it.

So New Zealand is a location where we have some opportunities if everything gets enacted that has been discussed. Because so far we have been truly competing in a very limited fashion versus what you might find in virtually every other country. So enough said there: We are looking to improve, we will wait to see what the turnout is and we will deal with options at that point in time in terms of how we go forward. John.

MR STANHOPE: The only thing I would add, Mark, is that there has been - I did mention it in what I said earlier - a very intensive price-led competition occurring. Of the declining revenue, most of it or at least half of it is access and call revenue, and Telecom New Zealand, the competitor, has been very selective in their price points where Telstra Clear competes with them. So it is tough.

So what can we do about it? It is like Sol said: We do need offerings that we can provide into the marketplace from a better regulatory environment, and you would be aware we are also doing a sort of fixed mobile wireless broadband pilot in one of the small cities there, to see also what opportunities that might provide for us as well.

MR TRUJILLO: In terms of the second part of your question regarding the enterprise base, the business base, regarding integration and managed services and the focus there, that is a very intense focus that we have in our Telstra enterprise business as well as our Telstra business. I think you will see. Mark, some intensified initiatives in the second half of the year. I will not say any more at this stage, other than to say it is important and we will continue to do better going forward.

O: Sachin Gupta from Morgan Stanley. A couple of questions: John, if I can clarify, your mobile subscriptions at the end of December were 8.9 million and you have included 204,000 wireless subscribers in there, and you have got the same numbers in wireless and broadband. Is it double counting or am I missing something?

MR STANHOPE: Yes, it is double counting, and deliberately so. That is why I particularly said what I said, to make it very clear to everybody who has our documentation and our half year announcement. We think it is important that we do understand that broadband users are also wireless broadband users and that wireless users are also broadband customers. So that is the reason we have done it. Yes, it is double counting but we have explicitly stated that is why we have done it that way.

O: Where is the revenue booked, is it booked in mobiles?

MR STANHOPE: By the way, let me just add, our competitors also report the same way. So we are consistent.

Q: Secondly, on your wireless side of it, your broadband side of it, the growth has been quite strong. Can you give us an indication on the costs side of it how the costs are tracking in your broadband side, what sort of subscriber acquisition costs are there?

MR STANHOPE: Only to say that the margins in the broadband business continue to improve. I many not going to go into any more detail than that.

O: If you look at domestic competitors, Vodafone, Hutch and SingTel, they have got pretty extensive strategies overseas. Hutch is looking at X Series, Vodafone has HomePhone and SingTel Optus has Generation plans. It is likely that they will bring those plans to Australia in the next six to 12 months. What sort of impact do you expect on Telstra's business as a result of that?

MR TRUJILLO: There are lots of things on paper that I have seen since I have been here, lots of promises that have been made since I have been here, and all we focus on what we do is how we lead the market, not follow the market. We have our own integrated strategy, it is very clear, very obvious, it is in the market and customers are using it. What they do to catch up I am not going to spend my time focusing on, I am going to spend my time focusing on how we stay in the lead.

O: Ian Martin, ABN Amro. Sol, John mentioned quite a few perceptions that analysts have got wrong and contrasted them with the facts and performance and so on. Those perceptions have lead to a view from some that dividends might be cut in future years. I know you are not going to give me dividend guidance for future years, but given you are talking about pivot point and growth in earnings from cash flow, is it fair to say the risk of dividend being cut has been reduced or removed?

MR TRUJILLO: I think mathematically the answer is yes, and management philosophy and board philosophy, the answer is yes, because we have a view that says we are going to generate significant free cash with this transformation plan going forward. This is what we have said continuously - we said it on our T3 road shows, and that is why the board made the decision it did last August regarding the dividend that we have just declared.

We have confidence in our plan and we think it is good for shareholders.

Q: Richard Eary from UBS. Just one question: In the actual presentation today, you gave out a cost take-out graph or slide, on slide 15, that looks as though the big step change in materials of cost take-out is in 2009/10 year rather 2008. Looking at the guidance you have given for 2010, you have not really given us an idea in terms of where the step change comes from, whether it is a straight line graph from the current margins to 46 or 48 in $2010$ or whether it is a more U-shaped back ended graph. I am wondering whether the graph is representative of a more back ended recovery rather than front line or straight line.

MR STANHOPE: I am sure you would love numbers in the bubbles, Richard. I was trying to give you the indication that cost is coming out of the business progressively. In the first year or so, 13 months in, it has largely been around productivity improvements in the operations group and organisational redesign.

As we get further along, I am really saying to you, decommissioning of the systems is going to happen right at the end because as you do an IT transformation, it would be a dumb thing to do to switch off the old until you have got the new humming. So that is just practical common sense. And platform exits take a while as well and they will be done progressively.

So I just wanted to make sure you all understood that it is not going to happen in a big bang 2007/08, it will be progressive over the time. To answer your question, most of it will come late.

O: So that's correct in terms that it will be more backended?

MR STANHOPE: Yes.

MR TRUJILLO: Let me just add a little bit to that. In the meantime, we are driving productivity. Obviously this is a big company with a lot of people, a lot of volumes and a lot of processes that we are improving so far. So you saw on the operations side for the last year or year-plus about the fulltime equivalent headcount taken out. That was all basically productivity driven.

There is more that is going to be done. I talked about the GPS devices now put on vehicles. We are going to be able to drive more productivity, improve the safety for our people and do a lot of things with that. If we look at what David Moffatt is right now driving inside the consumer channels, we are getting productivity improvements literally by day because of the implementation of market-based management, where our strike rates - so when you think about per employee productivity, it is going up literally daily because our strike rates are improving because of the knowledge we have about customers. We do not have time today to get into all of that detail but productivity improvements will continue.

He is going to get further benefits from the um-up of what I described earlier, I call it the wrap around system, it is kind of an intermediary system we put in place where our front line people, instead of having to get into 12, 13 or 14 different systems they now have a single interface and single log-on and be able to acquire information from customers just once, instead of multiple times.

All of those things will drive productivity between now and the time at the back end when we start removing all the systems, when we start doing our switching office conversions, when we start doing all the other things that are kind of the culmination of the transformation. All of that is on plan but we are not going to be stopping on improving more productivity and more cost take-out between now and then.

Q: In terms of looking at what other people have done around the world on the ability to take out costs, a portion of the cost has been used to drive the top line to take advantage of step changes in competition. Looking at the revenue growth now in terms of competition levels, and it looks as though you are in a sweet spot, would it be better for you to take those cost sayings on board to drive top line in the next 18 months or would you prefer to put them back into the margin?

MR TRUJILLO: Right now we are putting some of it back into the top line. You saw our labour costs year on year are lower and you see that our COGS, our acquisitions costs are up. They are trending downward but they are up in terms of over a year or two years ago. So we are investing for growth and that is a good thing.

I have no qualms, especially when in our case we are investing for growth at higher ARPU. We are growing ARPU in our broadband fixed line business, we are growing ARPU in our mobile business and we are growing ARPU on our online digital platforms businesses and we are investing in some of the pricing plans that we have around our PSTN kind of old legacy business, where the decline rate has slowed and our actual wins versus losses is now positive. So we are investing in that because that does return better for the shareholders over the long term.

O: Tim Smeallie, Citigroup. Four questions I wanted to cover. Coming back to the CDMA issue. looking at the first half performance, it looks like there were 45,000 CDMA subscribers migrated on to the Next G network, clearly a stellar performance, but David has had the cheque book out to drive that growth. I am keen to understand, of the 135,000 that have been connected in the first six weeks of this year on to Next G, how many are CDMA or where are CDMA subscribers sitting at the moment.

Secondly, can we get a trading update on the business channel, in terms of how David Thodey's division is going and Deena's SMB division?

Thirdly, you are increasing your dominance across just about every sector of the industry - PSTN, mobile and broadband. Does that concern you from a regulatory perspective? Do you believe that there are any levers there that the ACCC could come out and impose on you?

Finally, you touched on in the last couple of strategy sessions your aspirations for 30 per cent of revenue growth to come from new products. In terms of that first half result, could you give us a feel of what percentage of that revenue do you deem as being new product?

MR TRUJILLO: Tim, you have asked a lot here. Let me start with the last one. What I have said in the presentation about 30 per cent, it was about new products, new platforms. Obviously, Next G is one of those new platforms for growth, and some of the things that Justin is building in his business and Bruce and others are building in their business. I do not have a calculation off the top of my head but are we at 7 per cent or 12 per cent? I don't know. But it is clearly fast moving, given the high double digit growth rate we have with our Bigpond platform now and also our Next G platform and then what we are doing in the Sensis business. So it is high double digits. Are we on a path to get to that 30 per cent from new products, new platforms? I think so.

Relative to what you termed as dominance, I would not call it dominance in terms of on all fronts. We are building value add. There is nothing here that we are doing that has anything to do with what I would call regulatory legacy focus. Are we better on Bigpond because we have more content, more services more capabilities? Absolutely. Are we better in the Next G world versus 2G or 3G players? Absolutely. But that is about investment in new stuff, not legacy.

Finally, as we look at the Sensis business and its expansion, it is highly competitive for advertising dollars. Are we building competitive advantage and are we the market leaders here in Australia? The answer is yes.

But I take no steps back, no apologies, no hesitation, because it has nothing to do with the copper loop, and the copper loop is the only thing the regulators should be focused on.

As you said, big players, SingTel, a big market cap company, Vodafone, a big market cap company, Hutchinson, big market cap owners - if they want to risk market capital in Australia, let them. I applaud them when they do that because if they want to take profits out of Australia they ought to invest.

We are investing, and we are investing to get competitive advantage. And if those companies can't keep up, they shouldn't whinge, they shouldn't complain, they should invest. That's the way the markets work.

In terms of business, how we are doing on business, we are accelerating. Deena Shiff, in terms of our Telstra Business business, we are ramping up our growth rate in terms of on all metrics, in terms of business. Again, when we talk about full year results we will have more coverage, and when we have our next year's investor day we will get into some of the details there.

On enterprise, during the last fiscal period we announced that we basically for the first time had crossed over to positive growth in the enterprise base. It is our intent to continue that growth as we deal in a very competitive marketplace, and there are facility based players in most of the metro locations.

In the case of CDMA, I think I have answered this question twice: the run rates on CDMA are very good, I will not disclose the numbers because I do not have them off the top of my head, but a fairly significant portion of our growth now is in CDMA and is continuing. Now that we have a full line-up of products and the capability around car kits and some of the other things that are necessary for customers that live out in the regions or the bush to feel comfortable moving over, I think we will see a lot more movement when we report results at the end of this fiscal year.

Q: On that point, in terms of the January 2008 close-out of the CDMA network, will you look at a trade-off between shutting that down definitively in January 2008 or if you have not migrated enough subscribers will you leave the network open for longer?

MR TRUJILLO: We will migrate the subscriber. I seriously am not overly concerned. Obviously I am concerned about everything we do every day. But we have a plan, we think this makes sense for customers and we will do things in a customer friendly way as we move over the next year.

Q: You touched on the competitive environment in metro for the business divisions. In terms of margin performance are you seeing pricing pressure continue to erode margins?

MR TRUJILLO: Tim, we are seeing pricing pressure everywhere. The question is: Does it erode margins or not? It depends on where we take out costs, how cost effectively we can manage. As you saw in terms of our period to period overall results, we are improving our underlying margins.

Not seeing any more people standing in line in Sydney, and none here in Melbourne, I will declare the meeting closed. Thank you very much.