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TELSTRA GROUP LIMITED — Call Transcript 2008
Feb 21, 2008
65927_rns_2008-02-21_d5843995-9f2d-4927-90ab-ac5eb7459052.pdf
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22 February 2008
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 Analyst briefing - Half year financial results
I attach a copy of the transcript from yesterday’s Analyst briefing – Half year financial results, for release to the market.
Yours sincerely
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Carmel Mulhern Company Secretary
Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556
T E L S T R A
FIRST HALF 2008 FINANCIAL RESULTS
Sydney
Thursday, 21 February 2008
1
MR SPINCER: Good morning everyone. My name is Ben
Spincer, Director of Investor Relations. On behalf of
Telstra, I'd like to welcome you to this first half results
for fiscal 2008. In a moment I will pass over to Sol
Trujillo and John Stanhope to run you through the results.
After that, we will have time to take some Q and A. We
have a microphone here in Sydney and another one at the
parallel briefing that we have in Melbourne and we'll be
taking questions in turn there. Again, a rather forlorn
request, but please could I ask you to restrict yourself to
just one question at a time so that we have the opportunity
to get through questions from as many people as possible.
Without further ado, I will hand over to our Chief
Executive, Mr Sol Trujillo.
MR TRUJILLO: Thanks, Ben. I'd like to welcome everybody
here to our first results briefing in our new Telstra
Experience Centre. The centre is helping our business and
enterprise customers realise their potential. We have
customers coming in here literally every day, every week.
This is a chance for us to collaborate and I think you're
getting a chance now to see, through our results, what some
of the impacts are.
This is the third half year that we are essentially
announcing our results and basically is the third half year
that we're delivering on our promises that we made back in
November of 2005. The punchline is that we remain on or
ahead of plan across the business and I have to include the
fact that we have achieved all of this without compromising
on the core strategy, the core principles, the core beliefs
that we've had and that we've articulated consistently
since we announced our strategy. Our customers and our
shareholders are the ones that we're centred on in terms of
how we think about running this business, our approach does
not change and we will continue to drive our business with
all of that in mind, whether it be our customers, our
suppliers, public policy, conversations, et cetera, it
won't change, you can see the impacts of what we're doing.
So today it basically is a continuation of that story
and today I have the pleasure of beginning to talk to you
about some more of what's been happening with our
transformation. So in terms of the punchline in our
business, we are reporting today a 6.2 per cent EBIT
growth. We have comfortably exceeded what we have seen as
the consensus view in the market and given the momentum and
2
strength across the business and despite the turbulent
economic conditions, we're now raising our reported FYO8
guidance. We now expect to achieve 3 to 4 per cent revenue
growth this year, EBITDA growth of 4 to 5 and EBIT growth
We have reported a strong set of financial results.
Domestic revenues are up 5.9 per cent in the half, versus 5
per cent in 2007, again as we focus on delivering results
in all of our Australian core businesses. We're now
starting to drive acceleration on the bottom line as the
benefits of transformation start taking hold. For the half
we've achieved reported EBIT growth of 6.2 per cent. This
includes the $100 million Foxtel distribution. Underlying
EBIT, which John will discuss in more detail, was even
stronger, with growth of around 8.5 per cent. These
results are all the more impressive when compared against
not just our domestic competitors, and I think you've seen
all of them report and clearly we have outperformed anybody
domestically, but the question is so how does our
performance rank against the rest of our peers around the
world? Again, I think you see now that we have
world-leading results. It's a continuation of the strong
trends that we've been building across our entire product
set that have emerged over the last 12/18 months, and I
have to candidly say which many in this room believed were
not achievable way back when, and are now beamed up, in
terms of we're taking the game up another notch in the
marketplace, in spite of what I would call tough price
In that environment, we've not only held our own, but
we've been able to accelerate growth by executing on our
integrated value-based strategy. I'll say that again. By
executing on our integrated value-based strategy. Again,
contrary to many of the predictions of analysts, pundits
and other observers, the good news is our customers are
actually voting with their wallets and they're choosing the
best value in the market. So I'd like to touch also on one
other item that we have not talked a lot about but is also
important to highlight and David Thodey and Deena Shiff
would be able to talk about this in a lot of detail, but
the point is that we have another interesting phenomenon
that's breaking the trends around the world, and that is
relative to our IP and data services, our access results.
They are up 8.3 per cent and this has been achieved again
during a migration phase to IP and we have changed the
paradigm by adding value and driving incremental revenues
through this migration, compared to the global model that
you see around the world, which is just reflecting a
reduction in revenues. The strength across the business is
perhaps best captured where we compare each of the retail
units growth and one of the things that I committed back
about six months ago, when we announced our full-year
results for the last fiscal year, I said we're going to
provide even more disclosures in terms of how our business
is running, so that everybody could see not only by product
but really how we run the business organised around
customers, so we're going to provide today, and we have
provided, additional detail around the retail units growth
and what you can see from the data is that the units are
now growing at rates that many in the industry again did
not imagine we could achieve just 24 months ago.
Differentiation has been the key to adding value. We
have more coverage, we have faster speeds, we have
one-click usability, we have more content, more services,
and a superior infrastructure, the networks, the
integration of the networks, the systems, et cetera, that's
part of that. So this has enabled us to drive new-wave
revenues to cover over 20 per cent of our total revenues
and help us deliver our key strategic imperatives.
Market-based management and value-based pricing have been a
central part of our transformation strategy since I arrived
and underpins our engagement with our customers. Growth in
multi-product holdings delivers dual benefits of higher ARPU
and lower churn. In consumer multi-product customers have a
higher per-product spend and we see churn halve as a
customer moves from a one to two-product bundles and as we
continue to evolve that relationship.
We're also reinvigorating the channels with the launch
of the Experience Centre that you have seen here, our
T[Life], for business, enterprise and all customers that
may happen to walk into, for example, the first T[Life]
store that we launched here in Sydney. Our customer
conversion rates of those customers who actually go into
the store and interact are three times those of our
standard store. Again, we're changing the game not only in
terms of networks and systems and products, but actually
how we go to retail, how we go in front of the customer in
the marketplace. Integration of our products is also
delivering differentiation our competitors simply cannot
match. One great example is our recent launch of the 3-Tab
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portal. With a combination of free and non-free content,
it demonstrates how we can leverage an advertising-driven
model between our mobile, BigPond and Sensis businesses and
is already resulting in a significant increase in usage.
Over the first 30 days since its launch, mobile content
daily page impressions have increased by more than 60
per cent. Value, value, value.
So what is the conclusion here? Given where regulated
prices have moved to, it has been important to shore up
that whole retail business. I have explained some of the
things that we're doing to achieve this and this chart
shows just how successful we have been, with the growth in
our retail performance far outstripping the decline in
wholesale. These trends will be the envy of all PTTs the
world over. As you have seen, retail growth is now
outstripping wholesale growth, but with one of the lowest
ULL and LSS price combinations in the world, our results
are clearly showing an increased take-up of these wholesale
products in preference to our wholesale DSL services. But
I don't want you to be misled by this shift from wholesale
DSL to ULL and LSS. The real story here again is a retail
one. We have wholesale prices below cost, some of the
lowest retail prices in the world in market from our
competitors, but at the end of the day it's the customers
who determine who they want to do business with and, as you
see, we are taking and winning broadband market share. So
again some people are confused because they think price is
the only variable in the market. Well, you have to ask the
question so how are we doing this? Customers in Australia
are more discerning than some competitors would have you
believe and price isn't the only variable. We are able to
offer the highest speeds, the best services, the best
content and with our Next G wireless broadband, unmatched
depth, breadth, speed and capacity.
On top of the broadband story, we're also seeing
continued customer growth in the retail PSTN business and
we actually achieved positive retail PSTN revenue growth in
the half. Again, something that none of our peers have
achieved. Retail broadband has continued its outstanding
performance and is driving success elsewhere in the
business. We believe we now have a 48 per cent share of
the market and we're just short of 2.6 million broadband
customers. Again, the strength of our integrated
value-based approach is evident. Australia has some of the
world's cheapest broadband offers, fuelled by below-cost
5
ULL and LSS prices, but we continue to take market share
while having the highest ARPUs in the market of all the
major players.
If you benchmark this against our global peers, it is
clear to see we are leading the world in this space.
Market share gains and ARPU growth is a rare double for
incumbents, many of which are facing declines in one or
both of these measures. Again, how are we doing this?
We've been very focused on achieving this strong broadband
result because it is one of the cornerstones of our
transformation to a MediaComms business. All of you heard
me say it two years ago; this would be centre to much of
what we do. So two years ago, our PSTN revenue decline was
substantially greater than the revenue increase from fixed
retail broadband. However, the additional revenue from
fixed broadband now dwarfs the revenue lost from the PSTN
decline. This is an inflection point that many incumbents
around the world are yet to reach. I say that broadband is
a cornerstone because it's a contribution to the Telstra
strategy on virtually all fronts. BigPond customers
continue to migrate to higher-value liberty plans, churn is
much lower for a bundled customer with broadband, leading
many of our bundled broadband offers. More than 90
per cent of BigPond customers have Telstra PSTN service.
BigPond is at the forefront of innovation and content
strategy. We continue to develop and leverage our content
assets, including BigPond games, office, movies, music and
exclusive sport, such as NRL, AFL, V8, et cetera. Today
I'm pleased to announce that commencing Saturday, 23
February, BigPond Sports Weekend will redefine the way
Australians watch their favourite sports, exclusive to
Telstra Next G mobiles and on-line at BigPond TV. BigPond
Sports Weekend is a fast-paced continuous nine hour sports
news and information show from 9am every Saturday and
Sunday, delivering up-to-the minute results, statistics and
highlights. BigPond Sports Weekend leverages BigPond
Sport's full suite of exclusive and non-exclusive sports
rights for the Internet and mobile phones and then combines
them with some sophisticated technology to deliver the best
mobile and on-line sports coverage in the world.
The BigPond home networking gateway is enjoying also
some great success with 20 per cent take-up since the
launch by new customers. Today more than three and a half
million 3G customers have access to the BigPond portal on
their mobile, again all part of our MediaComms strategy.
6
We have had another great performance in mobiles with
mobile services revenue growth of 12.5 per cent in the
half. Mobile services revenue growth for post-paid was even
stronger, at 16.7 per cent, while Prepaid grew at 3.8
per cent. These results show that we have further gained
revenue market share, which we believe is the most
important metric for this category. Again, when
benchmarked versus our global peers, this performance is
world-class, but don't just take my word for it, have a
look on the screen at what one of our most bearish brokers
said recently about the Next G network success. We
continue to push the barriers of mobile technology. Last
week in Barcelona, I announced an intention to be the first
operator in the world to upgrade to 21 Mbps later this year
and to 42 Mbps in 2009, which we have been saying for a
period of time now. We have Ericsson lined up, we have
Qualcomm lined up, we have all the players lined up to
enable our ability to take the game to the next level and
remember that, it's always about adding value as we think
about growing our business.
Next G's competitive advantage is helping us win the
Next G value game. Here are the facts that demonstrate how
successful we've been in 3G and why we are the envy of the
telco world in the 3G space. At the end of January we had
more than 3.5 million 3G SIOs, up from just 1 million at
the start of 2007, more than 38 per cent of our subscriber
base now. 40 per cent of 3G connections are new Telstra
customers and in the second quarter of 08, our 3G revenues
exceeded our 2G revenues and in the consumer space now we
have about 60 per cent of our base on 3G. Our 3G postpaid
ARPU increased by 4.3 per cent year-on-year. When we
reported such a high 3G ARPU 12 months ago, there was a
common view this was driven by early adopters and wouldn't
be sustainable and many people pointed to Japan with what
NTT DoCoMo did. We are breaking all trends and all
patterns that people have seen around the world. We are
well beyond the early adaptor stage. Next G is really
delivering a sustainable ARPU increase. There is now only
a small amount of revenue being generated on the CDMA
network, it is now well less than 3 per cent of our
revenues for mobiles. In the month of December, this had
just fallen even further and each month we take it down to
where now it's getting to be almost minuscule. While
mobile data continues to be the major growth driver, we are
very pleased with the growth in voice revenues. Total
voice, which is inclusive of messagebank and roaming, it
7
grew at 5 per cent.
So in particular I'm pleased that, in addition to
spending more on data, a customer that is migrating from 2G
to Next G makes significantly more calls and sends more
texts. Our cohort analysis indicates that a year after
migrating, customers make 9 per cent more calls and send 11
per cent more texts. There is value in 850, where you can
complete more calls, there is more value in bigger
footprint, where you have greater reach, there is value in
the quality of the networks, where your band width, your
backhaul, everything, is part of the story. It does
translate into growth.
It is true that over the last 18 months we have seen a
steady decline in mobile voice yield, as every operator
has, but what is important is that we've controlled this
yield decline, avoided entering price wars and seen a
commensurate increase in usage. This positive elasticity
of around 0.8 in postpaid voice both matches the current
trends in Europe and is a prime reason why we've been able
to grow mobile voice revenues. Data constituted 29.7
per cent of our mobile service revenues in the first half
and SMS revenues grew at 21 per cent. Telstra is one of
the first companies in the world where non-SMS data revenue
is greater than SMS data revenue and it is a growing
category. Non-SMS data revenue growth of 83 per cent is
driven by our expanding suite of 3G content and services,
plus wireless broadband.
Despite some reports in the media about a slowdown, we
have maintained our momentum in wireless broadband. We
continue to add new SIOs at the rate of over 20,000 a
month. At the end of first half 08, we had 464,000
wireless broadband SIOs. We're still outselling our
competitors when you combine them all. The good news is
that 99 per cent of Australians have access to wireless
broadband via the Next G network and despite concerns
around customers' price consciousness, we are pleased to
report wireless broadband revenue grew by more than 200
per cent to $230 million and we have maintained a high ARPU
of around $100. So far, our only global benchmark to
compare it to is Tele2 in Sweden, reporting wireless
broadband ARPU of less than $30. Of course, we can't
compare these numbers to some competitors. We continue to
report results, not rhetoric.
8
We have continued to slow the PSTN revenue decline and
it is now down to just negative 2.1 per cent. Basic access
ARPU was up 2.1 per cent due to increased penetration of
higher value HomeLine plans. Our strategy to slow the
decline in PSTN revenues is centred on our market-based
management, driven processes in our channels in our
business and as we talked more than a year ago, associated
with our subscription-based pricing. Our PSTN retail
performance stands out when compared again with our global
peers. Retail lines continue to grow. We added over
46,000 this half after the 38,000 we added in the second
half of 07. Two years ago our retail SIOs were declining
by around 4 per cent per year. Telstra's growth of retail
lines and a 3 per cent decline in total lines is a
continuation of the outstanding performance versus our US
and European peers, which have suffered total PSTN line
declines of somewhere between 5 and 8 per cent over recent
years. Our revenue trends are also well ahead of our
European and US peer group.
Moving on to Sensis, Sensis has enjoyed a strong first
half top line result as well. At the Investor Day Bruce
said that we would turn around the Yellow Print result this
year, and we have delivered on this in the first half of
positive Yellow Print growth. We have achieved this with
Sensis's largest ever sales force training program, new
circulation initiatives, and by selling and demonstrating
the value of yellow to our customers.
And be in no doubt that Sensis's growth is world
class. Our 2.5 per cent total print growth in H1 compares
to Yell, who operates in the UK, US and South America, at
negative 4.9 per cent, and significantly that 4.9 per cent
relates to the UK, and Idearc at negative 3.2 per cent and
there are other companies that have recently reported and
they are all reporting in the negative zone.
While Yellow and White print achieve growth, the
emerging businesses in Sensis are also delivering strong
results. These diversified businesses which include
Whereis and MediaSmart are providing new streams of revenue
opportunities and continue to constitute a larger
proportion of Sensis's revenue growth.
While revenue growth was strong, the showing earnings
profile is driven by the Sensis transformation. While
directory margins are sill at world class levels, Sensis
9
has been making investments in updating its systems and its
processes. We can see that the investment is already
beginning to pay dividends by the performance of our Yellow
Moving to China - Soufun. Soufun posted unaudited
revenue growth of 68 per cent and EBITDA growth of 97 per
cent based on its performance in US dollars and on a pro
forma basis in H1. Beyond that I can't comment, so I won't
As reported yesterday, Foxtel delivered another very
strong financial performance in the half. While revenues
were up 17 per cent, strong operating leverage has kicked
in to deliver 62 per cent EBITDA growth to $165 million in
the half. Foxtel continues to produce impressive KPIs
across the board with now more than 1.5 million total
subscribers, and same story as all of Telstra, increasing
As we announced at our Investor Day, Foxtel will begin
high definition broadcasting by the middle of the year.
Foxtel will also offer on demand HD movies on a
pay-per-view basis. And Telstra Mobile Foxtel continues to
be an attractive proposition for our Next G users with
subscribers generating on average around $11 of ARPU.
In terms of the transformation program we talked about
it a lot obviously on November 1. That was the highlight
that was kind of the centrepiece of our conversation then.
So I am going to be brief today. Suffice to say that it
TR1 - we went into production in October and we
started the migration of customer data records to the new
customer care and billing platform. We remain on target to
complete customer migration in the time frames that we
TR2 - the second release of the IT transformation
remains on track to go into production before the end of
In the case of Next G, our Next G billed out
continues. The Next G network now covers 99 per cent of
our Australian population and we have a plan for an HSPA+
upgrades to 21Mbps this year and 42Mbps in 2009.
As you have heard me say before, you know, we work for
our shareholders, we work for our customers, and that is
our end focus. The transformation of our networks, the
channels, the culture in our company is changing Telstra
into a world class company. Again, not my opinion; it's
measured by the results on a comparative basis.
Outstanding revenue growth in spite of head winds in all
products and segments, operating leverage, driving improved
bottom line performance, we continue to exceed expectations
and have today again been able to raise our guidance.
As we move towards our long term objectives we are
confident that our operational execution will result in
superior earnings growth profile than our global peer
group. As I said at the start, the company is beginning to
fire on all cylinders. We will also provide you with
another layer of insights today that John will take you
through with more detail of the performance of the
individual business units. So with that I am going to stop
and turn it over to John to take you through some of that
detail.
MR STANHOPE: Thank you, Sol, and good morning to
everybody here in Sydney, and good morning to people in
Melbourne on the hook-up. You see before you there the
normal disclaimer that take these sort of events.
Once again we have reported results ahead of the
market consensus. Sales revenue was up 5.3 per cent
highlighting strong growth across the entire business, both
in products and in our segments. We not only grew our top
line, but continued to grow our earnings with EBIT up
6.2 per cent. This does include the $100 million Foxtel
distribution and $37 million gain from the sale of our
eBusiness. Excluding Foxtel and the sale of eBusiness EBIT
grew by 1.5 per cent. You might recall our guidance was
that it would be a slight decline, so we have exceeded that
guidance.
You would have seen yesterday Foxtel confirmed that
they will make a further distribution to partners this
fiscal year. Our share of that distribution in March will
be $30 million. I'd like you to note that we are now
planning to receive ongoing distributions from Foxtel in
accordance with their gearing policy of three times EBITDA.
However, the level of these distributions will be a matter
for the Foxtel board.
11
Profit after tax was up 13 per cent, but you need to
understand this was assisted by a number of one-off
benefits at the tax line.
Our accrued capex was $2.3 billion for the half, and
we remain confident of hitting our full year guidance of
$4.6 billion to $4.9 billion, and our interim dividend
remains at 14 cents per share, fully franked.
After a strong first half, and in spite of the
prevailing economic conditions, our momentum has continued
in the second half, and we are therefore increasing our
guidance. The impact is up on the screen here - total
revenue growth was 2.3 per cent, the guidance now is 3 to
4 per cent, EBITDA growth was 3-4 per cent now 4-5 per
cent, and EBIT growth was 5-7 per cent, now 6-8 per cent.
So essentially we have lifted the range on all of these P&L
measures by one per cent, and our accrued capex guidance
remains the same.
What I have tried to do here is to make some
adjustments to take a bit of the volatility out of various
things that occur when you're doing transformations. Given
the one-off adjustments and provisions we have taken over
the last few years, this is sort of better representative
of the true underlying trends in our business. Our
underlying EBIT grew 8.5 per cent. This is calculated -
and I need to be clear to make sure you don't think we're
playing around with numbers here - by backing out all the
pure one-off transactions such as the profit on sale of
assets. You will recall the Trading Post writedown last
year, and while we are expecting future distributions from
Foxtel, we have taken the conservative approach here and we
have excluded the $100 million distribution in this
analysis.
And we have reprofiled the Yellow Book. You will
recall, going back a little while, we had a Melbourne
Yellow Book in a different half than we had before, and we
have smoothed out the transformation costs, meaning the
provisions we have made for it, and the accelerated
depreciation and amortisation that has happened.
So over the course, of course, of the transformation
period the accumulative effect of this will be obviously
the numbers will equal the reported numbers. It is a zero
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sum gain, but I thought it was worth showing to avoid the
wild movements that distort our underlying performance. So
you can see good steady rise there in our earnings when you
do that smoothing. Of course we are obliged to report our
reported numbers and that's why you see those on the slide
as well. Hopefully that gives you a better picture of the
underlying business performance.
I want to briefly look at where the strong top line
growth is coming from. As you can see from this slide, it
is coming from growth right across the board. Total mobile
revenue grew 14.5 per cent and, as Sol said earlier, this
is world class.
Retail broadband growth was strong at 65 per cent
driven by the continuing wireless broadband growth at more
than 200 per cent or $154 million. However, growth on the
fixed side was still impressive at 37 per cent - so the
growth in broadband, if you take out wireless.
Sensis also delivered strong growth at 7.8 per cent,
and we have further slowed the PSTN decline to 2.1 per
cent, and that also, as Sol said, is really world class.
Finally, IP access revenue growth now exceeds the
decline in specialised data. That is also a very important
pivot point. It is also an important change in our revenue
mix.
While the growth across our products is impressive, as
you know we run our business on a segmented basis.
Therefore, to give the market a better understanding of how
we look at our performance, or the performance of our
business, we believe it's appropriate to increase the level
of reporting, and we did say we would do that last time we
met.
So let me begin. Before I get into the real details,
I just want to highlight this, because this is an
outstanding overall retail result. Retail sales revenue
growth was 7.6 per cent, so that's out of our three retail
businesses - enterprise and government, business, and
consumer. The operating contribution from those three
units grew 8.5 per cent.
Now I will go into a little more detail. This strong
performance has come across all three of our retail
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businesses. Remember this is the half that some doomsayers
said that our retail performance would be destroyed by a
range of competitive products such as Fusion and bargain
priced wireless broadband. The reality you can see is very
different. We have grown market share in our major units.
Now, I want you to understand this slide. The
operating contribution shown in the table is effectively a
gross contribution. That's how we run the business
internally every day. That is, it's revenue less the
business unit directly incurred costs. The definition year
on year obviously is consistent so that the change is on a
like-for-like basis.
The operating contribution margin reduction in Telstra
business is a result of higher expenses across the board
there, in particular labour, as the Telstra business unit
continues to establish itself as a more fully formed
operational unit. Remember, it's not a very old unit in
our mix and it's been establishing itself, but you can see
a fantastic performance from that unit on the top line.
I am now going to just have a brief look at each unit
individually, so let's start with consumer. In terms of
the consumer business unit, sales revenue grew 8.5 per cent
for the half.
Our momentum continues to be driven by market based
management, the enhancement of our sales channels and the
breadth and range of our service offerings. Mobiles grew
at over 11 per cent in this segment and the proportion of
post paid customers on 3G is already 60 per cent in the
consumer segment.
Consumer now has over 2 million 3G customers - almost
triple the amount at this time last year. Importantly,
though, 3G postpaid ARPU has been maintained at over $70 in
this segment resulting in blended ARPU growth of 6.2 per
cent, so post and prepaid.
Internet growth of 45.6 per cent in this segment has
been driven by strong performance in ADSL and wireless
broadband.
With regard to PSTN, revenue growth was 1.2 per cent
in the consumer segment, and there has been eight
consecutive months of positive PSTN revenue growth in the
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Consumer segment.
In half 1 the subscriber acquisition and recontracting
costs (SARCs) have fallen by 20 per cent. This is despite
growing ARPU, market share and outperforming our
competitors in revenue growth.
The range of handsets has also grown, all major brands
are now in the range, and still SARCs are coming down.
This is truly a great result in the consumer segment.
Now, turning to Telstra Business, revenue grew 9.3 per
cent driven by growth in fixed, mobile and broadband. This
is a major turnaround since Telstra business's inception in
the second half of '06. As I said, it's a business unit in
its infancy really, and revenues back then were declining
by 1.5 per cent. So growth of 9.3 versus not long ago
decline of 1.5.
Mobile SIOs were up 15.9 per cent with over half of
TB's mobile customers on 3G. This has really driven the
dramatic growth in mobile revenue. Mobile data revenue in
this segment is up 72 per cent, now representing 23 per
cent of total mobile services revenues.
Telstra Business is gaining market share whilst
managing the variable cost base. Mobile subscriber
acquisition and recontracting costs are actually coming
down in this segment as well. Average postpaid SARCs, as
we call them, have fallen by 5 per cent from $238 in H207
to $226 in the half just gone - current half.
Broadband revenue growth was also strong. We estimate
that Telstra Business's broadband market share is in the
low 30s, but importantly it is growing. Telstra Business
has fought a tough battle to get the market share gains in
a highly fragmented market. And given we have recently
extended the ADSL2+ footprint, there is a real opportunity
here for that market share to continue to grow.
Now I'll move on to the last of our retail segments -
the enterprise and government segment. Through a lot of
hard work and focus and the introduction of Next G and Next
IP enterprise an government has seen revenue growth of
4.5 per cent. This is a great result following a number of
periods of very low growth.
15
The result has been driven by an exceptionally strong
performance in enterprising and government's core carriage
business, so voice, mobile and fixed. This is the first
time since competition began in Australia where core
carriage in this segment has grown, and is one of the
clearest proofs that the transformation really is improving
business performance, not only our business performance but
the performance of these enterprise and government
customers.
Mobiles growth was strong in the half with mobile
customers up 20 per cent and service revenues up 19 per
cent in this segment. Furthermore, non-SMS mobile data
revenues grew 74 per cent and now represents almost 30 per
cent of mobile service revenues in this segment.
Next IP is also driving customer take-up of data
services. IP and data grew by over 6 per cent driven by
strong demand for access services, which grew by over
28 per cent against the prior corresponding period, and
more than compensated for the revenue reduction in
traditional data. Again, Sol mentioned that and that is a
very important flection point.
Importantly, enterprise and government has delivered
outstanding customer satisfaction, as demonstrated in
survey results, which are at an all time high and higher
than our nearest competitor.
Let me talk a little bit about Sensis. Sol touched on
it. I'll give a little more detail here. I've talked
about the three retail units which doesn't include Sensis
in that 7.6 per cent growth, but Sensis has had a very
strong six months. Overall Yellow grew 3.2 per cent or
$17 million and, as Bruce predicted at Investor Day, Yellow
Print returned positive growth in the half. Revenues were
up 0.2 per cent for Yellow print and you saw overall White
and Yellow print up much higher than that. The Yellow
print by driven by strong canvasses, or sales, and higher
yields while Yellow Online delivered another strong half,
growing by 21.5 per cent.
White also continued to deliver strong results with
revenue growth of 10.3 per cent. That is both print and
online.
The business has strengthened through
16
diversification - in the "other revenue" category, what we
call emerging business growth was strong at 27 per cent.
These businesses are now delivering more than 45 per cent
of the total revenue growth in Sensis. Voice revenue, 1234
services for example, was up 18 per cent with core volumes
to 1234 almost doubling in the half.
In addition, Soufun, their unaudited revenue also grew
at 68 per cent in US dollar terms in the six months on a
like-for-like basis.
Again, as Bruce indicated at the Investor Day, Sensis
is going through its own transformation and this has
resulted in a minor decline in the EBIT, and we said that
would occur in the first half of this year as this
transformation takes place. We reconfirm today the
guidance for Sensis to achieve a middle single digit
organic growth in this full financial year.
Let me now talk about expenses because we haven't
touched too much on expenses yet. In terms of operating
expenses, these grew by 6.2 per cent for the half, and
total expenses which includes D&A, depreciation and
amortisation, were up 5.6 per cent.
This should not surprise anyone because, as I said on
Investor Day, our operating expenses are still expected to
increase in this fiscal year as we continue our
transformation, and especially the IT component of that
transformation.
I also said at Investor Day expenses will start to
fall from fiscal 2009 and reduce further in fiscal 2010 as
we do complete the customer migrations and start to turn
off the legacy IT systems and network platforms.
We are continuing to reduce the redundancy and
restructuring provision raised back in 2006 and the balance
of that provision at December 31 is $171 million. Of the
remaining restructuring provision, around $50 million of
that $171 million is available for CDMA customer migration
until the revised planned closure date of 28 April.
Let me now look at some of the expense categories in
some more detail starting with labour. In the first half
labour costs were up 4.8 per cent. Redundancy was up in
the half because many of the redundancies that we planned
17
across the year we've taken in the first half. Excluding
those redundancy costs, the labour costs were down one per
cent, and you need to remember - and I say this every
time - we also in that number have absorbed a wage rise of
somewhere near 3.5 to 4 per cent.
We are tracking at the upper end of our 6,000 to 8,000
head count reduction target, remember, after three years of
our strategy, with the total head count reduction since 1
July 2005 now at 7,875. That is a 1,768 decrease in the
half. As you can see, the high redundancy costs is
associated with some of that reduction.
It is important to remember that this head count
reduction number does exclude the impact of the acquisition
of Soufun and any divestments that we have had, so we keep
a like-for-like comparison from our statements back in
November '05.
So what does this mean for head count targets? It
means no change. We are still confident, of course, with
our 6,000 to 8,000 target this fiscal and our longer term
2010 target of 12,000 reduction. As we continue the
transformation the old systems and processes are being
replaced with the latest technology which will require, and
does require now, quite different skills. So we will need
to employ some people with these skills in the coming years
to meet the demands and the needs of our customers. There
is a skills refresh taking place as the business
transforms.
Let me just look at the directly variable costs here,
or goods and services purchased I guess we call it. The
growth here has been 4.3 per cent. Over the last few years
directly variable costs have grown at more than two times
sales revenue growth. Through managing directly variable
costs predominantly the better management of subscriber
acquisition and recontracting costs, the DVC growth in the
first half was just 0.8 times that of sales revenue. That
ratio with fluctuate a little bit in the short term, but we
are confident of meeting our DVC to sales ratio objective
of no more than sales, so a one times growth, over the long
term.
In terms of the trend in subscriber acquisition and
recontracting costs, our mobile customers are growing, and
our blended SARCs are coming down. The average blended
18
SARC of $150 has decreased significantly down from $175 in
the first half of '07 fiscal and $193 in the second half of
the '07 fiscal. That has been driven by lower subsidies
both in terms of volume of subsidies, but also the rate of
subsidies.
The weighted average cost per Next G handset has also
fallen by 17 per cent over the past 18 months. This has
been driven off the back of increased volumes. You might
recall that I said handset costs will come down as we get
higher volumes. This is occurring. In the Next G devices,
the volumes have gone up 77 per cent, year on year, and
we've got improved vendor support now of the 850 devices,
and I have told you the number keeps growing in terms of
the major brands.
Let me look at the other expenses category. There's
quite a number of items in this category. You can see
there promotion, advertising, something that we call
impairment - or we have to call "impairment" - general
admin, and so on. These expenses grew 9.5 per cent in the
half, but I want to concentrate on some of the larger
areas.
The biggest component in this category in absolute
terms is service contracts and other agreements. It has
grown 4.6 per cent in the half to $1.1 billion, but
consistent with what I told you on Investor Day, the key
driver of the service contracts growth relates to IT costs
linked to the IT transformation as the activity increases
to migrate consumer customers across to the new CRM and
billing systems. Importantly if the IT transformation
related costs are excluded, service contracts growth is
relatively flat.
Impairment and diminution costs were up 65 per cent or
$66 million half on half. Firstly, inside that component -
and it is blown out here on the slide for you to see - bad
and doubtful debts increased 48 per cent or by $38 million,
driven by a combination of increased mobile and broadband
volumes, so associated with the high increase in revenue,
and a review of credit terms for Sensis customers where new
customers can now pay post bill, and that is driving higher
revenue, but there is an associated bad debt with that.
Inventory is the other element here, and inventory
writedowns increased $28 million mainly due to stock
19
write-offs in addition to providing for slower moving
stock. So as those handsets get returned, and so on, they
have a lower realisable value, and the CDMA migration has
had impact on stock writedowns.
The final expense category in this group, if you like,
I want to cover is G&A or general and administrative
expenses which increased 12 per cent or $54 million.
Again, some of this has been driven by the IT
transformation. The IT cost growth was $31 million inside
that $54 million. It was driven by software licences and
hardware support and maintenance. You have to understand
that for a little while as we go through this
transformation we will run duplicate hardware and systems,
and they need support and maintenance.
Travel costs are up $5 million and that's been
associated with our staff travelling a lot around the
country caused by the inclement weather. And to meet our
customer fault repair requirements we have moving our staff
around more than ever before.
Legal costs have increased $14 million as we've
focused on the class action - I think you're read about
the results of that - and training expenses rose 5 million,
related to the transformation training, but also the
Learning Academy that you know about.
Let me move to capex. Accrued capital expenditure is
up 17.5 per cent. However, on a sequential basis, it's
fallen 40 per cent, as you would expect, given what we
spent last year and given our accrued capex guidance for
the full year of 4.6 billion to 4.9 billion, this implies a
second half largely consistent with the `first half and we
believe that's so. Just be aware that we will be incurring
additional capex of approximately 40 million, driven by the
ADSL2+ rollout, but that's accommodated in our current
guidance.
IT was a big driver of the increase in accrued capex.
Last fiscal year was primarily, in an IT sense, focused on
feasibility and the initial stages of delivery. However,
this half, major projects, including customer care and
billing transformation for the consumer segment, is driving
the capex up.
Transmission is the other area of growth. It rose 57
20
per cent, with the majority relating to the Sydney to
Hawaii cable. That added 75 million. There's also been
contributions to the Asia America Gateway cable and
additional capacity purchased from Southern Cross
contributing to the increase. This has been driven by
broadband, been driven by internet use, not surprisingly.
Fixed access, the network core capex, has fallen 6.4
per cent, with the large rollout of the wireline
transformation program having taken place in the last
fiscal and wireless capex also fell 14 per cent, which is
to be expected with the delivery of Next G also occurring
in the last fiscal year, but we do continue to add new base
stations to extend our competitive advantage and we now
have 6400 3G base stations, with 300 added in the past six
months.
Let me just talk about cash flow for a minute and our
financial parameters. With our largest transformation
spend year behind us - that's total cash spend - behind us
and the benefits already flowing through with our strong
earnings performance, free cash flow has increased 53.6 per
cent to $1.3 billion. You might recall that always cash
flow is lower in the first half than the second half.
In terms of our financial parameters, we sit
comfortably still on all measures and you can see those
also on the slide.
Just before I finish for questions, let me give you
some more colour on our financing position given the global
credit issues that are around right now. I do get asked a
lot if Telstra is exposed to the current issues in the debt
market. The answer is not substantially, and you can see
our debt maturity profile here on this slide. The average
maturity of our long-term debt portfolio is around five
years and we have moderate maturities to refinance in the
next few years. We have approximately $1 billion of
long-term debt maturing in the remainder of this year and
we will finance this with borrowings in the short and
long-term markets according to the conditions that prevail
when we go to market. While our cost of debt has risen
this fiscal year in line with the market developments, this
will be accommodated without any material impact, given our
strong credit rating, diverse access to funds and a strong
balance sheet. Borrowing costs will increase this year, as
they have for everybody, but this will be driven more from
21
the increasing debt rather than the rising rate.
Lastly, our long-term objectives remain unchanged from
the November investment day, but I do want to tell you that
we will be doing a review of these objectives as we now
move into our planning period and any change to these
long-term objectives we will advise you at our full year
results announcement in August. So thank you and I'll now
ask Sol if he'll join me back up on the stage and we'll
take some questions.
DAVID LANGFORD (Lehmann Brothers): Just first of all on the
the financing structure of the business and the balance
sheet. A number of pundits have had various views in terms
of needing to increase gearing or share buy-backs. How do
you see that the strength in the cash flows and the balance
sheet flexibility can provide greater upside in terms of
shareholder returns over the next year or so?
MR STANHOPE: First of all, we have got a set of financial
parameters that we're still sticking to. You should also
remember that we are still borrowing to pay dividends and
we are not at a point yet of huge cash flows to return to
shareholders. Having said that, we've re-confirmed today
our 14 cent ordinary dividend. We've said our free cash
flow will be somewhere between 6 to $7 billion in the year
2010 and the board will then have to decide, when it's got
that sort of cash flow, what they do with it, return to
shareholders or whether it's invested in other things and
we're not at that point yet.
MR TRUJILLO: The punchline is we'll make the right
decisions at the right time.
the operating performance. You've highlighted again the
leverage obviously the business is achieving, particularly
obviously given the competitive environment at the moment and
your competitors, obviously Optus and AAPT from a fixed line
perspective, have rolled over in the December quarter.
Looking at the numbers again, it would kind of appear that
you'd be again conservative in your top-line outlook on the
business; 5.3 per cent top-line growth, 6.2 per cent in the
second half of 2007. Is there something that you see
coming through in the second half of this year which will
see a slow down potentially in that run rate and, secondly,
22
just on the operating side in the costs and maybe more for
John, is there any major benefits we can see coming through
in this second half which will see the potential for
further large cost-out momentum coming through?
MR TRUJILLO: Let me go ahead and start and then I'll let
John add to whatever he feels appropriate. In terms of the
top line, we're going to be cycling second half on second
half, where last year we had a very strong second half
revenue delta, and that's with the launch of Next G and
partly through the half, the next IP business, so we're
cycling strong half on strong half. That's number one.
Number two is that we are always prudent in terms of
how we think about our guidance because we're more focused
not on what we say on paper but what we do in reality in
the market and so we will stay true to those principles as
we talk about guidance and as we deliver, we will
communicate in the market what our current views are.
In terms of the costs and the underlying benefits and
run rate, most of what we're still doing is just tightening
up what I would call operating excellence in the business.
We still haven't finished all the IT transformation, we
still haven't finished the migration and removal of all the
network piece parts - we said way back at the beginning
that we're going to have to reduce, in effect, the amount
of SKUs we have in our business - and that's all coming in
the latter part of '09 calendar year and '10, clearly
fiscal year. So that's where we're going to be looking,
again as we said back in November and as we said in
November of 05, when the big opportunities for cost
reduction will come.
In the meantime, managing our customer acquisition
costs, managing the retention costs, managing the
productivity in terms of our operations, which in this half
were up 20 per cent in terms of productivity improvements,
it's just that day-to-day management stuff that we're
working on right now and our team is getting pretty good at
it.
JUSTIN CAMERON (Credit Suisse): Maybe to rephrase the first
part of my question, how has the momentum been post-December, ie
the first two months of the year now? Has that continued along
the similar trends that we've seen for the first half?
23
MR TRUJILLO: We're not disclosing anything beyond what
we've reported, but, you see, in our guidance being raised,
we are confident in terms of what we've said so far and
we'll continue to operate as well as we can. Thank you.
SAMEER CHOPRA (Deutsche Bank): I have three questions. One:
previously you've disclosed how your capex breaks down between
maintenance capex and transformation capex, and I was wondering
if you can provide us with a flavour for that today.
The second one was your net debt was up about a
billion dollars but the finance costs were down about $20
million. I was wondering if you could explain what's going
on over there.
The third question is with such a strong operating
performance, I was wondering how you're tracking on your
REM report, if you could provide an update on the kind of
incentives that are probably still in place for the second
half.
MR TRUJILLO: I'll answer the third one. I don't know. I
don't spend my time thinking about it in terms of our
day-to-day operations. When the board made their decisions
about what it should look like, it's in place, we'll count
and do all the calculations at that point in time. Maybe
John has some idea, but that isn't the driving element for
us. The element is about winning in the marketplace, where
you see us on broadband growing 65 per cent, outdoing our
competitors three to one on mobiles and post-paid outgrowing
them again two or three times and the growth rates, which are
best in the world for developed markets. You just stay
focused on delivering the operating results and all the
rest comes with it at the right time and if we don't
deliver the operating results, then the rest doesn't come.
So we're not spending our time on your third question.
John, the first two.
MR STANHOPE: Maintenance capex remains about one eight to
two in full year - I'm giving you the full year context -
so it remains around $2 billion.
The answer to your second question is an interesting
one. The way we have to mark our derivatives to now fair value
accounting means there is a positive outcome in the financing
costs, so what you need
24
to look at and what I will tell you now is the real growth
in interest cost, so interest paid, is an increase of 88
million half on half. So the interest cost has gone up 88
million and that's a combination of more borrowing and
there has been a rate rise.
SACHIN GUPTA (Morgan Stanley): Just a couple of questions.
Firstly, if you look at your retail PSTN numbers, you have
had a 48,000 increase in the last six months and if you
compare that to Optus, what they reported is about a
100,000 decline. So I was just wondering this 48,000, how
much is a result of Optus slowing down versus the result of
The second question is, Sol, I think in the past
you've mentioned that retail outlook is - you're still
comfortable with a 2 to 3 per cent decline. I'm just
wondering if you can update that. Are you still
comfortable with the longer term 2 to 3 per cent decline in
MR TRUJILLO: Let me address the first part of your
question. Let me be clear. Telstra leads the market and
Telstra sets the tone in the market. What Optus does is -
it's interesting to us, but they don't drive the market.
Our retail PSTN improvement began much before Optus, boptus or
whoever else started doing whatever they do and we drive
our strategies. Our winback rates increased and
accelerated about a year and a half, two years ago, and
that's continued. How much is tied to their resale
customers deciding they don't want to move to their on-net
strategy? There is some of that, I won't say that there's
not some of that, but it's not the material element of what
we're doing in the market. The punchline is we're winning
Relative to your question about guidance, the guidance
that we gave on PSTN for the year was around the same run
rate as last year. The good news for us so far is that the
value propositions that we have in the market are working
well and the price issues that some like to report about
are beamed out with in different ways as to how we run our
business here because we're not a one-dimensional company.
So we're going to keep our guidance where it is at this
stage, but hopefully we will continue to outperform, as I
said back in August of last year and we stand here today to
say we did outperform where we thought the run rates were
at that point in time.
LAURENT HORRUT (JP Morgan): I was just looking at the reported
numbers in this half. Am I right in thinking that they
include the Melbourne Yellow Pages this half and weren't
included in the previous corresponding half?
MR STANHOPE: Yes, that's right.
LAURENT HORRUT (JP Morgan): So what would have been the
underlying EBITDA growth this half if we had sort of a like for
like comparison?
MR STANHOPE: I've tried to smooth that out. Just taking
that, I can't tell you that off the top of my head, but
that smoothing that we did, we adjusted for that and we
also adjusted for redundancies and transformation costs.
That 8.5 per cent is what I would call an underlying EBIT
rate.
LAURENT HORRUT (JP Morgan): At the EBITDA level, do you have
that number, at the EBITDA level?
MR STANHOPE: Equivalent to the 8.5?
LAURENT HORRUT (JP Morgan): Yes, that's right.
MR STANHOPE: No, I don't have that off the top of my
head. I can get it. We can work it out pretty easily.
LAURENT HORRUT (JP Morgan): Because it's actually quite a big
impact, as you know, especially at the EBITDA level, given the
Sensis margin.
So what would have been Sensis revenue growth like for
like half and half, because you're saying it's up, but if
you normalise for that impact, what would it have been?
MR STANHOPE: Bruce, can you help me there with the
Yellow. I think the question is about the Melbourne book.
Bruce was just saying - - -
MR TRUJILLO: Let's put it this way: the performance like
for like book to book was up. We won't give specific
numbers, but it is up and I'm pleased - - -
LAURENT HORRUT (JP Morgan): You'll understand for us it's
important to know what underlying like for like organic
26
growth is. Obviously it's a big adjustment from one half to the
other.
Anyway, the second question was on the dividend.
Usually at the first half you kind of confirm your
intention on full year. You've got ahead of you 4 or 5
billion - potentially I should say - a 4 or 5 billion
investment on FTTN. Does the 28 cents depend in any way on
MR TRUJILLO: First of all, the FTTN investment, whether
it happens or not, I don't know whether it will happen or
not and we're not building it into our financial planning
at this stage. We're working with the government, trying
to go through the processes and all that sort of thing.
In terms of the financing and how we think about the
business, obviously we would be looking at some point, if
we were involved and chose to be involved and were
selected, we would have to finance to some extent whatever
additional capex would be involved. Would it affect our
dividend? That's a decision for the board, but I don't
think that that's a necessary issue for people to be
LAURENT HORRUT (JP Morgan): Lastly, in the last year, the
business has a great retail momentum. Does it change in any way
the way you're going to approach this negotiation with the
government? Your terms, as they were a year ago, would
they have changed materially from a year ago now?
MR TRUJILLO: We're very shareholder focused. The
competitive returns we have to provide haven't changed at
all. As a matter of fact, market conditions are even
tougher today than they were a year ago. So the punchline
is the principles, the terms, all of that, are still the
same, it's just that now the question is, is there a focus
ANDREW LEVY (Macquarie Securities): Congratulations on a good
result. I just wanted to get some more detail, I suppose, on
TR1 and how that's progressing in terms of the number of
customers or the percentage of customers migrated to date versus
those
that will be done by June 30, and also what that June 30
deadline involves, whether it actually involves everybody
who's on by June 30 being billed at that time and hence
ready, I suppose, to shut down the legacy systems, and the
second question is just an accounting question on what the
accounting treatment of the Foxtel distributions will be
going forward, seeing that they're going to become more
regular if there's any change there.
MR TRUJILLO: Number one, relative to details on our
conversion and customer accounts and all that, we don't
disclose that, so I won't tell you, other than to say that
we're on plan and when we meet again in August, we'll talk
about whether we hit it or not.
I'm going to also add a sentence to your question
because I've been hearing this kind of on the periphery,
well, AAPT had their problems and some bank had their
problems and gee, what's going to be different about
Telstra? The simple answer is that we're on plan, okay.
However, if there was a problem, whatever it might be - I'm
getting this company so focused on customers that we're not
going to do anything that would be silly or create the kind
of problems that you see happening elsewhere, so that will
always be part of our operating plan, just like everything
we've done so far, but let me go back to statement number
one. We're on plan.
MR STANHOPE: I'll address the Foxtel distribution, but
first let me go back to that prior question about the
Melbourne Yellow Pages book. It isn't an issue for the
first half. The first half is like for like, so there's no
variation or normalisation that needs to take place. When
we get to the second half next year, when you look at the
half - or the end of this year, I should say, that's when
we'll have to talk about adjustments for the Melbourne
book. So this year's growth in Sensis is pure and like for
like, so I just clear that up.
Foxtel distribution, the accounting for Foxtel
distribution, I've told you about the $100 million
accounting is because it's come from borrowings. In so far
as our accumulated loss is concerned, it went from 83 up to
183. The $30 million that we get in March isn't new
borrowings, so that accounting won't take place, but when
it comes from a borrowing, the accounting I described
previously will continue to take place. So after our share
28
of Foxtel's profit this half just gone, our accumulated
loss is now 144 million.
CHRISTIAN GUERRA (GSJBW): I have three questions for you. My
first question is on David Thodey's enterprise division. Just
wondering if you could tell us how much of your total
sales - total Telstra sales enterprise in government is and
more specifically have you seen any weakness into sort of
January and February at the revenue line, given that the
sort of top four banks are in your top 15 to 20 customers
Australia-wide?
Secondly, John, just a question for you on the tax
rate. That looked a little bit low. Just wondering if you
could make a comment there, please, and just update us on
how the franking account is going.
Thirdly, just with the improving cash flow, I was
wondering if you could make a comment on how you see the
priorities going forward between acquisitions, given that
2011 Sensis target versus returning capital to
shareholders.
MR TRUJILLO: Let me take part of it and then I'll let
John take the rest of it. In terms of the business, we've
already had one question about what's happening in January,
et cetera, and the answer is we're not disclosing anything
other than our full-year results. Our raising of guidance
should be enough signal to everybody in terms of how we
think about the second half.
In terms of the last question that you asked, and I'll
let John give you the number response because I don't have
it with me here, if you look at how we think about our
business, obviously the board is going to make their
decisions based upon the cash that we will have at hand
and, as I've said in the past, the board will always have
that option of dealing with dividend adjustments, the board
will have the option of looking at share buy-backs, and the
board will also have options about strategic investments
that will be there. We're confident about where we're
going to be in terms of improving our free cash in the
business and we said that back in November when we had our
sessions and I'll say it again today. The run rate that
we're onto to 2010 with our free cash flow targets we're
still onto, so it will give us flexibility, it will give us
the kind of options that every board and every management
29
team would love to have. Beyond that I'm not going to say
much, other than to say we will explore all options because
from the very beginning, I will always go back to this
notion that says we're very shareholder focused. John.
MR STANHOPE: The answer about E&G's revenue as a total, I
think you can see it from our result. E&G's revenue is 2.2
billion and sales is 12.2 or so, so you can work the
percentage out there of the total growth, if that's the
question you're asking. If you're asking how much is
contracted revenue in the company or in E&G, E&G's revenues
are mostly contracted, so I'm not sure what you're getting
All I'll say about franking credits is there's
sufficient to 100 per cent frank the half and our
expectation is we'll have sufficient franking credits to
With respect to the tax rate, yes, it is low and
I alluded to that in my presentation. It is low because we
had some successful objections to our previous year tax
return, so we had an amended tax return, which gave us a 40
million outcome. The distribution is not taxable from
Foxtel, so that helps, and we also received a CSL exempt
from tax dividend and R&D contributed to it of about 8
million as well. So that's the array of things that
occurred to give us the low effective tax rate.
DAVID LANGFORD (Lehmann Brothers): Just in view of the strong
revenue growth, how much do you think the, for want of a better
description, unimpressive results that have been delivered by
some of the competitors and their distractions have resulted in
that very positive outcome, and I point to Telstra
Business, where AAPT and Commander have certainly been
distracted.
Secondly, to what extent have those impacts, those
competitive impacts, helped you to reduce your
activity-based costs in terms of customer acquisition?
MR TRUJILLO: I would say first of all our growth really,
again, is not tied to what company A, B, X or Z are doing,
it's based on we have a mobiles platform that is
dramatically better than any competitor in the market, we
have a Next IP platform that is dramatically better than
any competitor in the market, we have a whole ISP business
and portal and set of content and services that is
dramatically better than any competitors in the market and
we have our advertising business that's better than
anybody's in the market, so it's about what we're doing.
Yes, others might have problems here and there, but those
problems have occurred in the past and they vary by
company. The punchline is customers get to make the
choice. They're making the best value choice at this point
in time.
DAVID LANGFORD (Lehmann Brothers): And on the costs?
MR STANHOPE: I've already said to you the acquisition
costs in Telstra Business are going down.
DAVID LANGFORD (Lehmann Brothers): Are there any particular
initiatives that you've undertaken, though, that you can point
to that have pushed that forward?
MR STANHOPE: The head of the business unit is here. She
should make comment.
MR TRUJILLO: For the benefit of those who could not hear
what Deena said - Deena Shiff, our head of Telstra
Business, responded. Basically, she said it's better
planning in terms of the targeting that we do for our
customers, and I would add to it, it goes to the
segmentation that we have, it goes to our knowledge of
customers that we have, it goes to the product sets that we
have, it goes to the integrated features that we have. All
of that enables us to keep on driving some of the cost
improvements that we have, along with the revenue growth.
TIM SMEALLIE (Citigroup): Firstly, full credit to all the
management team. This is a very encouraging operational result.
A couple of questions I just wanted to cover. Firstly,
previously, John, you've disclosed mobile margins. I was
just wondering if we can get an update on that, in case
I've missed it.
Secondly, Sol, just looking at Foxtel mobile, you
outlined in Barcelona that only 2 per cent of the base is
using the Foxtel mobile service. Does that raise concern
in terms of consumer appetite to use mobile content or
content that's within the walled garden of Telstra, as
opposed to the wireless broadband performance, which is
skyrocketing, but you've also got three competitors that
31
have got effectively MP3G networks as well? I'm just
interested to get your take on that.
Finally, just looking at the FTTN potential, would
Telstra consider taking a minority stake in an FTTN
network?
MR TRUJILLO: The last question is an easy one to answer.
The answer is no. In case you haven't heard that answer at
least 20 times out of my mouth, the answer is no.
In terms of your first question and walled gardens and
things like that, the answer is we do have our own content
but we also provide access to everybody else's content. I
don't know if you saw the slide up here and what we're
doing with our 3-Tab portal. It's on the mobile, it's on
the fixed line, it's on the desktop, it's everywhere, so I
think you probably should erase language like that and
understand we are both moving content that we own and
control and distribute as well as others.
But to your point again, you quoted a number of 2
per cent. Almost 5 per cent of our Next G customers are
subscribing to our Foxtel mobile capabilities and what we
now have done - you saw it in the November session that we
had - we've upgraded the platform, essentially, to have the
ability to remotely program and control, along with channel
change, along with more channels, so we've enhanced the
capability.
I would say on first release it was interesting but
not good enough, and I will tell you today we will continue
to enhance the capabilities as we go forward because I do
believe, given our numbers being dramatically better than
anyone else in the world, there is an appetite, and for
those who are using it they are spending about $11 of ARPU
a month.
Now, the way I do maths, and this is the way I do
maths, is that people who generate another $11 of ARPU a
month, they are equivalent to five times of those who are
generating another $2 plus a month. So it is not so much
about getting to 50 per cent penetration of mobile Foxtel,
but it might be getting to 10 per cent or 15 per cent of
people who are going to spend $10 to $15 more. Then it is
going to be about adding search capabilities, then it's
going to be about adding other content capabilities, and it
32
may be different segments, again back to market based
management, different segments buying different things and
generating ARPU within that segment, and that is how we are
driving this business. This is not about you paint the
whole building red and that's the way we - that's how our
competitors do it, right; they come out with a discount a
day, a week, and all that type of thing. We are very
different in terms of how we are managing. We are managing
by segments, we are managing with knowledge, and we are
managing to grow value.
TIM SMEALLIE (Citigroup): Are you concerned you have only added
30,000 in the last 12 months to Foxtel mobile?
MR TRUJILLO: No, I am pleased. We are developing a
business. We are developing a new way for customers to use
the services. So, you know, I think our results are
terrific, and when you compare them to anybody else's.
They speak for themselves.
TIM SMEALLIE (Citigroup): Are you concerned about pricing then
on the wireless broadband front, given where Telstra's pricing
is relative to two other major competitors?
MR TRUJILLO: Again, I haven't seen any competitor that
has more volume than we do, generates more margin than we
do, and has more customers than we do, unless you have seen
something that I haven't. The second thing is that, you
know, those of us that know how to run businesses, we also
look at what the costs are, and those who invest in
companies also pay attention to looking at what's the cost
of doing whatever somebody is doing.
Some of these companies that like giving away the
service - now they have to give it away because they are
about four square blocks, and they're at one-third the
speed, and one-tenth the quality, but the other thing is
that when people do take the buffet meal, all you can eat
for 5 bucks, there's not many of those restaurants that last
very long because the cost of the goods far exceeds the
revenues generated, and you can only do it for so long and
then people quit financing what you do. Over time you will
see a combination of what I just described play out in the
market.
We will always be value competitive and price is not
the only variable. In case you haven't heard that, Tim, at
33
least 20 times before: price is not the only variable
behind what customers make in their purchase decisions.
MR STANHOPE: To answer, the mobile margin is up 35.1 per
cent which is up 3.7 per cent on the previous half, half,
compared to Optus's margin of 31.7 per cent.
TIM SMEALLIE (Citigroup): Just recapping, just on the Foxtel
distribution, so if you get another distribution based on
gearing up Foxtel first half '09, that will come through at the
EBITDA line; is that right?
MR STANHOPE: Yes.
MR TRUJILLO: I'm going to take any question in Melbourne,
and then we'll come back here.
CHRISTIAN GUERRA (GSJBW): I have two follow-up questions,
please. The first one is, Sol, you recently made comments about
making acquisitions in the Asia-Pacific region. I am just
wondering if you could you give us a little bit more colour
on what your strategy is and sort of potential
opportunities you may be looking at in terms of business
areas. Secondly, Ihave a question for Justin Milne, just
if he can maybe talk us through the thinking and the
revenue model behind the BigPond TV Sport Weekend program.
MR TRUJILLO: Relative to the comments about interested in
acquisitions in the Asia-Pac region, it's centred around
what we have been doing with Soufun. I think you've now
had enough data, the market has had enough data to see the
sustainability of a new business model that's very similar
to the business model of our Sensis business, and, you
know, great top line growth, great bottom line growth and
we will look for smart opportunities as we do that.
We are going to continue to look at our portfolio and
managing those elements within our portfolio as we did with
Soufun where we sold off an asset that was not strategic to
help finance the acquisition of an asset. And there's a
combination of things. Christian, I won't get into specifics
because I'm not going to pre-signal anything that we might
or might not do in the market because I don't like
overpaying for assets, and I don't like creating bid
situations around assets if I can avoid it.
Justin, do you want to talk about the three tab portal
34
and the BigPond Sports Weekend?
JUSTIN MILNE: The BigPond Sports Weekend - Christian, we're
pretty excited about this. It launches this Saturday. We
were rehearsing – all last Saturday. We see BigPond Sports
Weekend as kind of a lightening rod for all of our sports
properties. So they have all been collected together onto
one title called "BigPond Sports Weekend", and the customer
experience will be that virtually any time on the weekend
starting 9 o'clock in the morning until 6 o'clock at night
Saturday and Sunday the user can flip open their mobile
phone and find out what's going on with a continuous stream
of live broadcast, crosses for results, updates, sports
from all around the world and all around Australia. We
think that's pretty compelling, so that it gives you
continuous sports update in your pocket.
The business model for that is a subscription model
that will cost $3.95 with an introductory offer to start
off the season, so it will be $3.95 per month to subscribe
to that service. You will be able to have a day pass for
$1.95, or you'll be able to just click on it for 50 cents a
click, and the click will last for 5 minutes. So there's
lots of ways for people to get used to the service.
It will also become part of a subscription for AFL,
VFL or NRL. Those subscriptions are $9.95 a month for a
full pack of special AFL, for example, stats and special
reports and videos on demand, and BigPond Sports Weekend is
part of that subscription as well.
Over time we expect the model to move more and more to
advertising, and we will in fact start off with advertising
in there, because we think, along with our brothers at
Sensis, that the mobile advertising model is just huge
going forward. So this is one of the early forays, if you
like, which is truthfully experimental, but most media is
experimental when you get right down to it. So we are very
excited about it, we think it will be good, and the
customers will vote with their feet. So we'll see next
time we meet. Thanks.
MARK McDONNELL (BBY): Three questions.
Firstly, I'm wondering if you could update us on the
customer numbers for CDMA? In previous statistical
abstracts you have provided that number. It is not there
this time.
35
Secondly, I'm just wondering if you could expand a
little on your thinking about your competitive strategy in
mobiles, particularly in the context of the reduction in
the handset subsidy rate. Does this signal a shift from
aggressive subscriber growth orientation to improving the
margins from the existing customer base through higher
ARPUs, lower subsidies, et cetera, and whether we can
expect that reorientation to be ongoing.
Thirdly, really a refinement of the previous question
from the last analyst - with respect to corporate
opportunities, but specifically in Australia, given that we
have Commando with assets on the block, there are rumours
that SingTel is looking to divest the Optus satellite
fleet, what opportunities do you see for acquisitive based
growth specifically in Australia, or is Telstra simply too
big to be able to look at any meaningful acquisitions in
the domestic market?
MR TRUJILLO: Let me handle them fairly quickly because we
are about out of time. In terms of CDMA we're not
disclosing any numbers because now it's almost immaterial.
I think we reported that at end of the year they are less
than 3 per cent of our mobile revenues, so I'm not even
watching the full numbers, other than watching the process
so that we can close on April 29th.
In terms of SARCs, and as we think about acquisition
and retention costs and the reductions that you've seen, I
want to remind you about the fact that we have grown.
We've added more post-paid customers by a factor of 2 to 3
times than our competitors, so we're adding customers to our
base, in particular as we focus on post-paid in the last
wave of our launch of Next G. However, to your point, we
are reducing the cost associated with those acquisitions.
John covered handset cost reductions. It's about the
effectiveness of our market based management system, all
the segmentation, all the work that we are doing, so we're
reducing the amount of cost not so much because we're
trying to "just cut costs while we manage or mind our
EBITDA margin", it is about being much more effective as we
market that is driving the cost down as we go forward.
As to the third part of your question which was about
acquisitions inside Australia, naming some of the assets
that you did, my view right now is that we have real
36
strength in our channels, we have real strength with our
product sets, we have real strength in terms of our
footprint and coverage in almost every metric and every
category, so we don't have the need to supplement where we
are already the best in the market. So that is the mindset
that I have, and obviously I won't comment on any specific
opportunity other than to say we will explore something
that might enhance our capabilities, but right now I won't
quick questions. Firstly, on the tax rate, John, you did
mention obviously the one-offs in the first half result.
Can you just from a modelling purpose give us sort of like
a tax rate that we should expect for the full year and
whether that should change in subsequent periods?
The second question was in terms of, obviously there's
talk about a potential hard landing from a domestic economy
point of view, suggest you get some clarification in terms
of the magnitude of contractual revenues within the base.
Lastly, just from your trip to Barcelona, Sol, obviously
there's been a number of equipment vendors now thinking
about pushing further into the service layer from a
competition point of view - Nokia OV, for example. Can you
just give us your comments on how that changes the
competition within the service layer from a global
perspective and how that changes your relationship with the
MR STANHOPE: The tax rate will be less than the 30 per
cent at the end of the year, because the distribution and
all those things that I have said will flow through. Now,
I think your question is about going further forward. I
don't expect the size of those sort of tax amendments to
recur. Distributions will still be treated as non-taxable,
so the 30 million that we get in March will be not taxable,
so that will help the end of this fiscal year tax rate and
if there are future distributions - same application will
R&D always is around that same sort of level, and so
we will likely - we will have a less than 30 per cent
corporate tax rate the following year, but not to the same
extent as this year. Did you want me to talk about a
contract base? Richard, it is a difficult question to
answer, and I said before about the contract contracted
revenues in E&G. Most of the E&G revenues is contracted.
It depends on your definition of "contracted". I mean, I
could argue that every customer with us has a contract, but
they are easier to get out of than other contracts. I
mean, our consumer customer has a single simple form
contract, right, but it's easy to get out of. Then there
are mobile contracts that are harder to get out of. I have
had a look at this, and depending on your definition,
contracted revenue is somewhere about 40 to 60 per cent of
our revenue base.
MR TRUJILLO: The good news about our business is that
mobiles now are almost the one thing that we won't give up
in terms of our daily lives. The second thing is in terms
of our fixed line, they are so embedded in terms of our
personal lifestyle as well as business lifestyle that our
vulnerability versus others is probably not quite the same.
However, if there is a downturn of some sort, we could be
affected. I won't say that we wouldn't be, but here in
Australia we have different issues than other parts of the
world - full employment, that fairly robust economy at this
stage, and you know what the federal Reserve Bank and
others have been worried about is more on the inflation
side than is there a problem much like what you see in the
US.
Your question about Barcelona and the players, the
handset manufactures that are thinking or trying to get
into the services business - it's an interesting question,
because on the surface you could say that we will be in
conflict. In the case of Nokia, they made an attempt about
four years ago with Nokia World, or whatever it was, and
there were a lot of us. I was in Europe at the time
running Orange, and we had a conversation with them about,
you know, encroaching essentially on our business model and
what happens, and I think they learned a lesson at that
point in time. I think their approach on OV is a little
bit different. I think their approach is trying to find a
harmony of models, because in some cases companies like
Telstra - we have our own content, we have our own
Australia-centric kind of views of what we want to do. The
question is can we leverage some of what they have that we
don't have, bring it on in terms of our customers, and find
a model that works for both of us. That may make sense.
You have the Apple conversations, where in the US it
was launched in parts of Western Europe, it was launched as
38
a share of revenue. Well, you saw in China, China said
"No, not interested", and, you know, there's a lot of
conversations going on in the industry. I'm not going to
get into specifics about what we're doing and what we're
saying and what we're going to do, but suffice it to say
that we, Telstra, will stay true to our principles, stay
true to the shareholder, the customer, ways that we think,
and we will leverage assets as an integrated company
delivering integrated services. That won't change
regardless of who we do business with.
As you've seen, we do business with all the big
players, but we have introduced new players to the market
like ZTE, and others, and we will continue to do that as
necessary, as appropriate, so that our shareholders and our
customers win in the long term.
MR TRUJILLO: We will conclude the session, not having any
more questions. I thank you all for coming and have a
great day. Thank you.
oOo
39
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