TELSTRA GROUP LIMITED - Call Transcript 2009

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29 October 2009

The Manager

Company Announcements Office Australian Securities Exchange 4[th] Floor, 20 Bridge Street SYDNEY NSW 2000

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

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ELECTRONIC LODGEMENT

Dear Sir or Madam

Investor Day – Transcript

In accordance with the listing rules, I attach a copy of the transcript from Telstra’s Investor Day held on Wednesday 28 October 2009 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

TELSTRA CONFERENCE

INVESTOR UPDATE

TRANSCRIPT

28 OCTOBER 2009

SYDNEY HILTON

488 GEORGE ST, SYDNEY

START OF TRANSCRIPT

FACILITATOR: Good morning everyone. My name is Ben Spincer. I would like to welcome you to Telstra’s 2009 Investor Update. I’ll hand over in a moment to David. First, I would like to welcome

5 those listening in on the conferlink and watching on the webcast. We should have plenty of time for Q and A through the morning. There are a couple of microphones that you will see near the front of the room that we’ll be able to take questions from. We’ll also have a break at about 11am for coffee and hope to be finished by 1pm sharp.

10 I guess without further ado I will hand over to Telstra’s Chief Executive Officer, Mr David Thodey. Thank you.
15

DAVID THODEY: Good morning everybody. It’s great to have you here. Let me just start by thanking you for coming. We do appreciate you putting aside your morning to listen to us and we are looking forward to sharing quite a bit with you.

We thought we would change the process from what we have done before, because we thought a whole day was a bit too long, three to four hours seems a little bit better.

20 If we can, we’ll try and get you out by about 12.30 but at the moment we’re scheduled to be out of here by 1 o’clock. So hopefully that will give us a lot of time to go through a number of different subjects this morning.

As Ben mentioned, we do want to leave enough time for Q and A’s because I think that’s the other 25 thing, we don’t want to have a whole parade of presenters up here. So we will hopefully give you enough to time to prepare questions and we’d be happy to take any questions you have.

The other thing we have done in previous years is actually talked about a lot of new products. We don’t intend to do that today. Holly may just mention one as we go through, but we’re trying not to 30 make it a product announcement. We are really trying to make it a session where we can talk about the business as we go forward.

That said, let me just take you through the agenda: We thought we would address NBN first. We had a bit of a debate about this. It was meant to be a strategy update about how the business is travelling, but NBN is such a big consideration for us, we thought we’d start off with NBN and John and I are going to give you a bit of an update on that and then after that we will stop for Q and A. I’m sure you have a lot of questions.

I will make some comments in my formal speech. There are a lot of things that are under confidentiality that we can’t talk about, but we’ll try to give you as strong a sense as we can about how things are travelling, what’s involved and where we are going.

Then after that, for the last time John tells me, we will give you an update on IT transformation, in fact the whole transformation program. We’ve said that to you before. John’s been practising for this presentation for months and he’s really looking forward to taking you through it.

Then again we’ll probably stop for a bit of Q and A if we need to and then I will give you an update on strategy.

I do want to say it’s an update on strategy. This is about continuity. We have looked at where the

business is going. We have had a tremendous four years and the question now is where do we take the business? A lot of that work we’ve done has created a tremendous foundation for the business. It’s about how we now move it forward.

5 I’ll go through that. We’ll break for about half an hour for coffee, then we’ll come back and Holly will do a product roadmap update, then we’ll have the retail business units come up on stage and we’ll do another Q and A.
That’s the format for this morning. Let’s get right into NBN and as I said this is a critical, critical
10 subject for the company and as I said, you must understand that many of the discussions that we have underway at the moment are under confidentiality and non-disclosure agreements. There are some things we can’t talk about, but we do want to try and give you as much colour as possible about where we’re at, what we’re thinking about as we move forward.
15 As I said, I’m going to give you a re-statement of where we’re at and then John will talk a little bit about the financial considerations for the different options that we’ve been looking at.

Let’s get right to it.

20 I want to be very clear again about the position we have around NBN and regulation, which I’ve said a number of times, but I do want to go through it again because it’s very important – and the words are – very important.
Telstra has repeatedly said that we support the Government’s vision around NBN. In fact, over
25 many years we have put various proposals to the Government about a new high speed broadband environment. We support the vision that the Government has.
30

We have set up an NBN engagement group led by Geoff Booth. We have a dedicated team who are working both with NBN Co and with the Government as we work through all the different options that we have.

We remain positively and constructively engaged with the Government on the issues of NBN; positively and constructively engaged, but I want to be very clear, we’re under no illusions about the challenges that we face and this company faces.

We are absolutely committed to acting in the best interest of our shareholders. While we are negotiating with the Government, the ACCC and NBN Co, we have shareholders at the forefront of our mind at everything we do.

40 We all want certainty as we come out of this process. We want a solution that satisfies the disparate requirements of each of the stakeholders as we work through this and that at the end of the day we will have greater certainty about how we run this business going forward.
It is critically important that we do that. Everything that we do must be in the interests of our
45 shareholders and that will be the only thing that we do, and of course, customers and employees.

This is a challenge – an enormous challenge, but something that we are absolutely committed to working through.

So, what is happening at the moment? The discussions with NBN Co are progressing well. Can I

promise that a deal will be done? No, I can’t promise you that. Do I think that there is a pathway to get to a deal? Yes, I do. I think there is a pathway to get to a deal.

I want to give you a little bit of colour on this, because I think a lot of people think that this is a
5 straight negotiation. It’s not. This is a very, very complex set of streams of work that we need to work through to determine whether there is a way forward.

In short, there does remain a lot of uncertainty about some of these streams, but we have structured it very carefully so we can get to the right outcome.

I hope that this chart will at least show you some of the trigger points that we have as we’ve very carefully planned this out across all the complexity that we have to deal with.

15
Let me just make a few comments. Firstly, the Minister has publicly indicated that he wants to see progress on these discussions by Christmas and that this is a time line that we’re working to.

I do want to stress that we are committed to working to the Government’s agenda and we are ready to do so.

20 The Government has laid out three key stages in the process, which I show at the top there. Firstly, there was the fibre to the home announced, then they put the legislation up and now they’ve got it in the Senate. There will be, as we go into 2010, a period around separation, either we have to put in an undertaking or it could be voluntary structural separation.
25 I’ve got to stress that the regulator must be involved in all these discussions because we cannot go forward without the regulator’s agreement. While we may be negotiating with NBN Co, dealing with the Government we must have the ACCC a part of any agreement that we get to.
As I said, the legislation is now on the agenda to be debated in the Senate. It currently looks like
30 some time over the next six weeks that will take place. The Government is very keen to pass this legislation before they rise in early December.
Once the bill is passed, we move into the process of preparing any undertakings that we need to do. Any separation undertakings, be it functional or structural will take time to develop and there then
35 needs to go through the approval process, both with the Minister and the ACCC.

You would have read through the legislation that there are extraordinary powers of both the Minister and the ACCC in the legislation.

40 In parallel, the NBN implementation or discussions are proceeding. We have a dedicated negotiating team working with NBN Co to determine how we can best work with them.
45

The Minister is very keen to have some understanding of these opportunities before Christmas and that is what we intend to do, but this time frame is very aggressive, because there is an enormous amount of work to do and I’ll take you through some of that in a moment.

Another question we are often asked is: Will we seek shareholder approval for any agreement? I want you to be very clear about this. This is complicated by ASX Listing rulings. I am going to quote you what the Board’s current position is around seeking shareholder approval.

If the Board ultimately proposes a substantial change to the nature or scale of Telstra’s business in connection with the NBN, subject to the required regulatory approvals, the Board intends to seek shareholder approval.

5 I think that should very clearly spell out that if there is any significant change to this company, we will be coming back to shareholders.
10

Let me just move forward and try to explain to you why this is so complex. It is a very complex set of negotiations. The range of issues to work through in seeking a solution is more complex than even we had anticipated as we entered into this process.

It is based around deployment issues, migration issues and legislation and regulation.

Let’s just look at deployment issues. We need to agree the range of access services Telstra may or
15 may not provided to NBN Co; what services that they may provide in any mutual agreement as we go forward; what range of operator maintained services Telstra may provide to NBN Co and of course, with structural and functional separation, you know that there is enormous variation within each of those so-called well defined separation models, which we have to work through.
20 We also need to work out what the coverage proposals will be for the so-called 10 per cent and all these issues are enormously complex in their own right.

On the subject of migration – should that happen – we must consider all the management processes and approaches to issues such as volume of migrations, how it would take place in any 25 one day, what would be the process, what would be the positions of ONT terminating devices, who’s involved in doing what, access to premises, if there is to be a transition, how that would happen, who was going to take over responsibility for the service, how we would provide service continuity, what IT systems are involved, what changes are required, and of course, how do customers migrate or exit across from one service to another?

These are very complex issues. Even when we manage migrations within the business, they are very difficult. To do that between two separate parties will be extremely difficult.

Of course, on legislation and regulation, we must have agreement from a wide range of 35 Government departments and agencies before we can come to any agreement.

We will need obviously the Department of Broadband, Communications and the Digital Economy, Department of Finance, the ACCC, Treasury and a range of other departments before we can come to any agreement. Before we could even take anything to shareholders we need to make sure that all these parties are in agreement with any proposal.

This will take time. So we need to see the response to the proposed legislation, which is currently before the Senate, before we can even take it further forward.

45 The regulatory arrangements themselves, we also have to cover off such things as USO schemes and payments, CSG – customer service guarantee. What will happen to priority assistance or the medical assistance program? Who will be responsible for that? Network reliability frameworks, which we’ve been under for many years, and of course, will there be any disruptions to our networks?

I cannot stress enough, this is extraordinarily complex and we have not seen anything like this anywhere else in the world.

We have a lot of work to do. We must be realistic about the expectations that have been set and

we are going to do this methodically, carefully and we are going to have extraordinary attention to detail, because it’s both today and how this business looks in 10 years and in 20 years. You can be absolutely assured that we will work through every term and every condition.

Let me now lastly turn to legislation. I want to be very clear about legislation and the current bill before the Senate.

In our submission on the bill we said that we opposed the bill in its current form. It is very important to be clear about this. While we do agree with the NBN vision, we do not agree with the bill in its current form. We believe that the legislation is unnecessary and not helpful at this time for very specific reasons.

We are not opposed to the bill in its entirety. Of course we’d prefer it never to have happened, but now it is there, we have to take a position on the bill.

20 Let me go through the reasons why we have been at pains to take the Government through at this time.

Firstly, if the bill is passed, it will impede our ability to work on a deal around NBN, because inevitably there is an enormous amount of work that we have to do in preparing undertakings, et cetera. That is a big impost on the business.

It will reduce competition. We have said this a number of times; if we are prevented from getting access to LTE spectrum, in effect that will take one provider out of the market in rural Australia.

30 Also, if we are forced to sell FOXTEL, you understand under the shareholder agreement, the shareholding moves to the two other partners in FOXTEL. This is not about creating competition; this is actually doing exactly the opposite.

It will harm consumers because if we have to go through a double process from functional to some 35 form of other migration of NBN, that will be a double impost on our customers. Functional separation does have an impact on our customers. If we have to run a separate OSS line, if we have to do separate billing systems for functional separation, that will inevitably have an impact on our customers, just as it did with BT in the United Kingdom. It is very important that you understand that.

As we have also said, we will not necessarily deliver the industry reform that the Government is looking for and we are very concerned about the powers that the ACCC will have. We believe that this was unparalleled in Australia and there is no other industry where the regulator will have the powers that are currently in the legislation.

This is a real concern to us; and of course, as we have repeatedly said, it will destroy value for 1.4 million shareholders that purchased Telstra shares from the Government over the last 12 years and millions of others who hold shares and funds where Telstra is currently one of the stocks that they hold.

These are very important facts that we are being up front about; we’ve talked to anyone who would listen to us about why we oppose the bill in its current form and we will be seeking amendments to the legislation.

5 Our current belief is that the bill should be deferred until the current constructive negotiations with the Government and NBN Co are concluded, so that the Government can truly put a proposal to the Senate that covers off all the options, i.e., you need to see the NBN legislation. You need to see the implementation plan and study, because there are a number of things that we are unable to make any recommendation to our board about until we understand all these factors, and if we can’t make a recommendation to the board, we definitely can’t take anything to our shareholders.
10

That’s where we stand today. I hope that that gives you some clarity about what is happening and what will happen over the coming few weeks.

15 If the bill does proceed, we have already started the process of requesting a number of amendments to the legislation. We want to sure that it enables rather than impedes an outcome on NBN. We are absolutely confident that the Government will spend money on NBN – absolutely confident.
20 We also need to make sure that we have adequate checks and balances around ministerial and regulatory powers, otherwise we end up with not a clearer picture about our future.

I hope that gives you some clarity and I’ve been at pains to go through it in a lot of detail, about where we stand – and I’ll be happy to take Q and A later on.

What I’m going to ask now is for John to come up and give you some picture of the financial implications around NBN Co and the regulation. Then we’ll come up and take Q and A’s.

JOHN STANHOPE: Thank you David and good morning to everybody here in Sydney and of course, elsewhere.

I’m sure you’re not going to get all the numbers that you would like to have and there are very good reasons for that, but let me tell you how we’re thinking about this.

35 The financial implications of NBN and the new legislation are obviously of paramount importance to us and our shareholders’ best interests will underpin all of our decisions.

I think we have said that consistently. The Chair, David, all of us have been saying that very consistently, because that is what we’re required to do.

For example, our shareholders would rightly not be happy if we vended some assets for equity where there is no certainty as to the value of that equity or any doubts that there will be a return on that equity. But we would consider vending assets for an appropriate consideration of cash that is fair value or, even equity, if there is some form of guaranteed return.

Then there is the question of what assets we might consider selling or vending to NBN Co and what is the value of those assets?

We have a cost of capital, of course and you, as shareholders would expect us to at least cover that cost of capital in any decision we make.

The slide behind me shows a simplified version of what I consider our decision tree regarding NBN. We have the “do nothing” functional separation default, which has the NPV valuation impact that we discussed in August of more than 10 cents per share – that’s NPV value. Add to that the potential impact of being denied access to Advanced Wireless Spectrum and we have a decision to make: Can we do better for shareholders under a structural separation scenario?

The Government's explanation of the legislation sets out two broad forms of structural separation – a sale of the unbundled local loop or fixed access, or an agreed migration of customers from our network onto the NBN Co’s fibre to the premise network. In each case Telstra’s assets would be reduced, and shareholders would need to be made whole with some form of financial consideration.

From the Government’s perspective, the issue of timeliness is also important. Many of the proposals could take years to implement, and this is time when Telstra will be inwardly focussed if we are implementing a complex functional separation.

These next points are important. Key to the negotiations being successful is: (1) fair financial consideration for value transferred to NBN Co; (2) the structural separation undertaking cannot be overturned at ministerial or ACCC discretion; and (3) Telstra has access to advanced wireless spectrum, keeps its stake in FOXTEL and continues to hold the HFC cable asset.

If these conditions are met, structural separation appears to be a win/win for shareholders, the government and the NBN Co and the nation.

If I can just go back to that slide for a second, you can see obviously sell ULL, migrate customers. There are question marks there. That is not something we can talk about today because we are in constructive discussion, and obviously the impact of no advanced spectrum is something that we will and are not prepared to discuss today, or will not discuss today.

Let me move on to what most of you have seen before, but I want to go through it again. Given that some of the claims made that we are over-estimating the cost of separation are around, I think it is appropriate that we just have a look at this again from August. I wish some of the alternatives were cheap and straightforward but the reality is they are not.

In our regulatory submission in June we made the point that any changes to the current regime should assist, not impede, the transition to NBN. We made that point again to the Senate inquiry into the proposed legislation earlier in the month. That NBN can proceed in a timely fashion is a crucial issue, and Australia must learn lessons from overseas where onerous regulation of legacy assets can stifle investment and innovation, and, importantly, can take a long time and be a huge distraction to everybody, not just Telstra.

Again, the real point is the time everything takes. We cannot afford to put the services of our retail and wholesale customers at risk, so we need to do any complex and unnecessary systems changes very very carefully. That would take five years or more and would certainly impede the development of NBN.

I am just going to finish up before we go into Q and A, because I am sure there are many burning questions here, just to say I will finish where David started, I guess, which is we are constructively engaged with the government on its NBN proposal and intend to remain so. However, it is our

fiduciary responsibility to ensure that our shareholders come first.

David, I think we will now take some questions on NBN before we proceed with the agenda.

5 DAVID THODEY: Thanks, John. Ben is going to compere and we are happy to take any questions at all.
10

QUESTION: (Ian Martin, RBS) Two questions. You mentioned your opposition to functional separation. One of the reasons would be that it slows down migration to NBN. But I thought these were alternatives: If you agree to a structural separation which sees traffic or customers migrate to NBN, you wouldn't need to do the functional separation. Can you just clarify that?

Secondly, if the legislation passes and the ACCC has these powers to direct you to make investments, to transfer traffic and so on, there are no merit reviews, no procedural fairness reviews, what does that do to the business case for investing in capacity for declared services? Presumably there wouldn't be one.

DAVID THODEY: Okay, let me take the first one. What we are concerned about is that the bill gets passed and we haven't negotiated anything with NBN Co, so we have got to start the process on functional separation, then we come at a later time to an agreement. We then have to do the undertaking again, involving all that process. That is what we are concerned about. That is why we said let's see if we can get a deal done, and if we can, all that goes away and we have to go through it. That is the point we are trying to make about a delay in the actual bill. That is number one.

John, do you want to take on the second one about any investment and declared services. Obviously you are right, but there was something in the press that we want to clarify.

JOHN STANHOPE: It depends on how structural separation is done, but if the customers on the copper network were solely into NBN Co, you are right, there wouldn't be a need to be concerned about declared services. That simplifies all that. For us, there will be shareholder value decisions between which structural separation model is best and--

QUESTION: (Ian Martin, RBS) Sorry, just to clarify, this isn't the alternative where you go down the structural separation route. It is transitional regulation that says the ACCC has all these powers over declared services, existing declared services, but they might need maintenance cap ex and so on.

JOHN STANHOPE: Yes.

QUESTION: (Ian Martin, RBS) Where is the business case for that if the ACCC can come and quite arbitrarily take that investment?

JOHN STANHOPE: You see the NPV impact of structural separation. I mean it is not a strong business case at all.

45 DAVID THODEY: Can just I add something. John is absolutely right. If that got passed and the ACCC has all this power, we have to be very careful about any investment case. However, on the other side it could take them eight, ten years to do any transition. We have still got a lot of ADSL two plus out there. We may want to put some more. There was an article in the paper that inferred we had decided not to invest anything in the CAN. That heading was not correct. We will look at it on an 50 exchange by exchange basis. There are some exchanges we might quite like DSLAMs in there and

just get a few more customers, but we will be very careful. We know the payback we get every time we put a DSLAM in. So it will just go through the normal process, but we are obviously very concerned and very mindful of the increased power of the regulator in that environment.

5 JOHN STANHOPE: It is a long period of time before this thing gets built, and we have to satisfy customer demand. There are options to do that, one being broadband over copper. We will make the investments that make sense in that regard.
DAVID THODEY: Then of course the other thing is what maintenance are putting into the CAN,
10 number of faults per hundred, all that normal stuff. We are managing that very carefully. Mick and the guys are continuing to do what is required by current legislation, but we are very mindful of it.

QUESTION: (Christian Guerra, GSJBW) I have got three questions for you.

15 Firstly, it is pretty clear, and I think everyone in this room probably understands this as well, that if you do vend in assets into NBN Co to basically enable the build, but you cannot accept equity in NBN Co's consideration, do you think the government understands that equity consideration is completely unacceptable to your shareholders?
20 Secondly, I would like to understand your position on whether copper and fibre will sit side by side in an NBN world or whether the copper will be ripped out as the fibre is being deployed.
25

Thirdly, just on LTE, I think I might be missing something here, but I am not sure it is actually such a big deal for you, given that the spectrum won't be available until 2013-14. One of your competitors is fairly capital constrained and just from a political perspective I am not sure how your regional customers are going to feel about the biggest investor in regional services in Australia being constrained or restrained from offering services in an LTE world.

DAVID THODEY: Okay. The first one was...

QUESTION: Would you accept an equity consideration.

DAVID THODEY: Without knowing the financials of NBN Co or very clearly or having some guaranteed return, we are businessmen, like you. I think the question was: Does the government understand that? Yes, I think they do. Have they accepted that? No, I am not sure they have accepted that but that is our very clear position. I could not come to the board or to shareholders with anything unless it is very clearly defined what returns we would get. I would not do that. We have made that point to the Government and we will just have to wait and see how that plays out. That is the first one. The second one was?

QUESTION: Will copper and fibre sit side by side?

DAVID THODEY: Really good question. This concerns me probably more than anything else. If there is copper and fibre out there, say in Dubbo, and there is some with fibre and some with copper, operationally that is incredibly difficult. Then the second issue is your point around will we pull the copper out and put the fibre in, will that happen or not. We have not got to that point of discussions because that is would be, if we everybody got there, a staged migration or what would happen. There are a lot of operational considerations in there that I am very concerned about, and I know John is, USO obligations, who has got priority assistance, all these things that are really serious issues. Then there is just the issue about copper and fibre. Obviously, the easiest way to do

it is as you put the fibre in you pull the copper out, but the government is still saying that they are considering overhead. We can only hope they do okay.

QUESTION: Do you want to talk about LTE?

JOHN STANHOPE: Financially, Christian, it depends on the structural separation model. If the ULL code is a sale, then that asset leaves your books and you get fair consideration for that asset. If there is a migration of customers to NBN and there is a progressive migration and, therefore, your copper progressively loses its customers, then there will be an accelerated depreciation of your copper assets. That is just how it will occur.

Most countries around the world have co-existing broadband over copper and it is not an issue. I think the suggestion in one of the models here is that the copper gets turned off as customers mandatorily get migrated to copper, which has its own issues.

LTE, you are suggesting that four or five years out and it is not a such big deal. You are right about the sort of timeframe, but spectrum has finite capacity. Spectrum is important, but life may change over five years and somebody might dream up some new compression technology or something over that period of time, but we are not dismissing this as not important, it is very important to look forward to the future and spectrum is a requirement.

DAVID THODEY: I think it is fair to say we are looking at all options, John.

JOHN STANHOPE: Yes.

QUESTION: (Laurent Horrut, JP Morgan) I have two questions for you this morning. The first one is in terms of where the engagement is currently, and given the complexity of the issues that you are talking about, David, I am just wondering what level of agreement are you hoping to reach before Christmas, because I imagine you would want to establish a fair bit of comfort around the parameters of your engagement, including things like pricing, including things like, as you said, the level of Telstra's involvement in the rollout, et cetera. Realistically, this timing to achieve some kind of agreement before Christmas, how realistic do you think that it. That is the first question.

The second question is: I appreciate it is early days. I was just wondering if you could share some thoughts on what Telstra's cap ex portfolio might like look like in an NBN world. Last year you said you spent something like $700 million in fixed access cap ex. How should we try to think about your capital intensity if you do end up buying a layer two big stream services from NBN Co?

DAVID THODEY: Let me have a go at the first one, I will do a little bit of the second and John can finish up after me.

We are ready to work with the government to get to a December date, but there is a lot of work to do. I think that it is fair to say that NBN Co is still in start-up mode, and therefore, there is still a lot of learnings on their side. You have to work through all the different constructs about what they are going to do and how they want to approach it and then you get to some financial arrangement or not.

We are ready to go. We have been ready to go for six months now and we continue to be ready to go. We are really driven by the government's agenda, not us. We are ready. I think that is their position, and so as long as we can get clarity of understanding on their side, we could do it. Does

that help you?.

QUESTION: Yes. Are we looking at a two staged process whereby you would agree to heads of agreement as establishing the principal arrangement and then working on the details? Is that what is currently worked on?

DAVID THODEY: Without divulging all the confidences around the process, I think some general non-binding something may be good and then you work through the details. I think that is probably more practical but we still need to work through the details.

The second one was cap ex in an NBN world. This is very difficult to actually start to get a feel on, because we just don't know yet what the construct will be, whether it is migration or not migration. Very difficult. I know my answer but I better turn to the CFO, because he tells me what I am allowed to do and not do.

JOHN STANHOPE: That was a good way to avoid the question. I am going to avoid the question too, because it is almost impossible to answer. I am not really trying to avoid your question. It is because we don't know what the outcome will be. Think of a world where it is the default which is a functional separation world, obviously there is money to be spent on doing that and I've said before, $800 to a billion dollars. Therein lies an imposte, over a period of time, over five years or so on the company, but you also at the same time in that sort of scenario would be competing pretty hard and you may be making some investments, whereas in a structurally separated outcome world, depending what scenario it is of course, you may be spending far less capital on parts of your network. So it is impossible to answer because we don't know what the outcome will be. But one thing is for sure, there will be variation.

QUESTION: Of your 700 million of fixed asset cap ex from last year, how much more of that in the 4.6 billion that you spent last year, how much more is directly or indirectly related to the CAN, because it is obviously a lot of IT spend that goes in the CAN as well. That would be useful for us to know, what sort of touches the fixed network in the CAN?

JOHN STANHOPE: We are not spending a lot on the CAN to date in this fiscal because we have some uncertainties anyway. We are going through this an uncertain period, but obviously we are serving customers and we are spending capital on greenfields sites because we are serving customers in new estates. So we are doing all the things we have to do to meet customer demand and making sure we deliver service to our customers. That capital will be, is being spent, but are we developing new things in the distribution network, other than on HFC in Melbourne upgrade? No, and we won't until we get to a point of understanding the outcome of this.

DAVID THODEY: I just want to reinforce, we do think about this. It is just it is such a wide variance, it is impossible to give you real guidance at the moment. The only comment I would add on top of John is if we do have to maintain the CAN, customer service will remain incredibly important. So we will keep the right level of customer service. But often the things Mick's team, Michael Rocca's team, is about all these extra bits that you have to put up, tidying up the network, and that is where a lot of effort goes in that we talk about every year. We won't be doing anything we don't have to do.

QUESTION: (Sameer Chopra, Deutsche Bank) I have two questions. The first one is around scope. Are you in any way considering vending in your backhaul or your core network or is cellular the only model under the asset divestment that might be considered?

The second question is around cost of accessing the NBN. Currently the national average ULL price is about $30. Optus are talking about NBN access prices of $40 to $70. Your interests are probably in keeping the costs low. I was wondering how that negotiation is progressing.

DAVID THODEY: Okay. Scope, we will consider anything that makes good financial sense. Vending in the core IN, that is core to our business. Are we willing to consider options around them having access commercially, wholesale? Of course we are. We will keep assets that are core to this business and we don't have any intention or desire to vend those in. If there are specific areas where it makes sense, we would consider it, but I think it is probably better to say no.

In terms of cost of accessing the NBN, well, very good question. You obviously know more than we do. John, have you heard any numbers? No. We still want to see what the network configuration will be. We understand it is a layer two bit stream service, but that has not been confirmed, there is no legislation to say that. There is still a lot of work to be done. Today we have no indication - I am looking at Geoff Booth - on cost of access? Geoff has been in charge of that.

GEOFF BOOTH: Only what has been referred to here is the comment from the Minister. The Minister said 40 to 70 at one stage, but we have had nothing official, no.

DAVID THODEY: Put it this way: We are not putting any of those numbers in the model. John, do you want to add anything to it?

JOHN STANHOPE: No. But to answer your question, as a potential purchaser, the lower the better.

DAVID THODEY: Yes, and be assured that in any deal we come to, the future costs of this must be included. We cannot enter anything with any variation in that because it is just such a credible consideration on anything that we would do.

QUESTION: (Sameer Chopra, Deutsche Bank) I just wanted to confirm. Do your discussions with the government include an expectation around the future pricing on the access?

DAVID THODEY: We would be seeking that, yes.

QUESTION: (Mark Blackwell, Morgan Stanley) Just looking at the decision tree that you put up there, the numbers on the NPV per share are obviously a lot lower than what many in the market think the impact on Telstra is and certainly what the current share price is. I guess people in the market, by implication, are assuming that there will be other things that will cost you money in these outcomes. I would be as bold as to suggest that that might be around you market share on the margins you earn in fixed volume. What gives you the confidence that that is an incorrect assumption? That is my first question.

Secondly, and probably more importantly, I am wondering do you think that Telstra's market share in margins is different amongst the various options there, particularly between structural and functional separation? Do you think you would be more competitive in a structurally separated world or a functionally separated world?

JOHN STANHOPE: The last one is an interesting question. Let's understand the 10c per share shareholder value impact is the impact of spending the money to functionally separate and the ongoing about $100 million per annum to operate in that functionally separated environment. That

is what the 10c per share is. Others will have perceptions of how well we compete in that environment and so on, but that is not what we are - that is a straight cost of functional separation.

Do you want to have a go at the last one?

DAVID THODEY: The future world, what is our estimate on share and margins. It is very difficult and it is such a long period. Until I understand how quick it is going to ramp up, that is very difficult to really determine. Obviously, the CAN is a great source of cash for us, and obviously margin, so it will have some impact. What we are about is driving EBITDA growth. Therefore, the margin to me is still important but less important, but it has got to have an impact if it goes ahead over time. But this is a long build process. They haven't started yet. I would say it is probably going to be - well, there is a period - let me not put a time on it - a period before there is any impact on customers and then it is over time, all depending on what people do. If we did a deal, then that is a separate issue again, and you could probably do the sums yourself. You know what sort of margins we get from the core network. I am sorry, does that give you some sense?

QUESTION: (Mark Blackwell, Morgan Stanley) I guess you are going to make a recommendation to the board at some time point potentially next year.

20 DAVID THODEY: Yes.

QUESTION: (Mark Blackwell, Morgan Stanley) Well, before the NBN’s built and you have got to tell them here's the best outcome for shareholders and it has got to include something more than just the cost I imagine.

DAVID THODEY: Absolutely.

QUESTION: (Mark Blackwell, Morgan Stanley) You have got to make that estimation earlier than 2018, so I am wondering when you do it?

DAVID THODEY: As I said, until I have all the facts about what the future holds, it is very hard for me to give a recommendation to the board, but you are absolutely right that is a big consideration, but remember under the Telco Act there are certain outcomes that I cannot control. So you do look at different scenarios about looking at shareholder value and value for the company. That is what we look at and we model and have been modelling for the last eight months. But you have got to assume that as the CAN moves away, that margins are lower, but the question then is how we can find other revenue opportunities and what margin they will be at in EBITDA.

JOHN STANHOPE: In a functionally separated world, we see it often that that is the worst outcome for anybody, because NBN Co is competing against a Telstra. That is bad for us, but it is also bad for them. I think your question was is it better to be competing in an structurally separated world than a functionally separated world. Well, the answer is yes. In a structurally separated world, depending on the model I guess, you are buying off one network provider and competing full on in a retail world. You have got to be good at it, you have got to have good customer experience happening, but you offer your differentiation above the network layer and that is how you compete. But it is a far better environment for everybody, including us, to be competing in a structurally separated world than a functionally separated one.

QUESTION (Phil Campbell, Citi): Just a question for David and then one for John. I am just interested, David, on your views on given the current growth in the mobile business, what capacity

constraints that may face in the next four to five years, because if it does face some constraints, it almost appears to me as though the choice you have really got to make is to go down the structural separation path, because your LTE will give you access to more spectrum. So I was just interested in your views on that.

The second thing for John is: Obviously, if you do go down that route, the key is around fair value of asset transfer. I would be interested in your definition of fair value, because normally it is willing buyer, willing seller. In this case I think there is probably a willing buyer, but I don't know if there is a willing seller. So I was just interested in your views on how you look at that.

DAVID THODEY: Okay. The mobile business, remember when you look at the capacity on the mobile network there are two key things you look at. You look at your spectrum, but then you have got to look at all your infrastructure and your back haul. I want to stress again, which I have said before, our mobile network is second to none because with we have got fibre running to all the base stations. I think 85 per cent of all base stations of the Ethernet, Michael, or thereabouts, 85 per cent. So the back haul is second to none and remember that is where many mobile operators have fallen foul as the data volumes have increased.

You then come back to the spectrum issue, and LTE being 700 megahertz and 2.6 gigahertz. LTE, that's what most people have said that is where you need to get the spectrum and there have been all these arguments because we broadcast our access without spectrum. Yes, it is probably a better outcome, however, there are ways to refarm spectrum, and as John mentioned, there could be new technologies coming that may make it less immediate to get access to spectrum, but over time we will need it. But the question is the timing, and we have already seen enormous changes in the use of spectrum. We have the pilot going in Hong Kong with ZTE that John has been a part of. So we are getting experience now on it. It is a big consideration but I wouldn't put it in the absolute category of must have. There are options. Do you think that is fair, John?

JOHN STANHOPE: Yes. You wouldn't be surprised to hear me say I am not going to tell you what I think is fair. That is like leading with your chin when you are having discussions about what is fair. But there are various ways to value whatever is transferred. Whatever NBN Co is interested in, in terms of our physical assets, you saw me put up a model about migration of customers. Those customers have a value and there is a way of valuing the cash flow those customers generate for example. So there are various ways to do the valuation, and we think we have reached in our modelling, and we have done a number of options, a way of properly valuing that. That is something that we, if we get down that far, would put in front of our shareholders, how we have arrived at that.

DAVID THODEY: We should just make one point on spectrum. There is in the legislation there is access to the LTE or advanced spectrum they call it. The Radcom Act does still give the Government discretion on spectrum, I just want to make sure that everyone understands that.

QUESTION: (Mark McDonnell, BBY) I have just one question. That is if you are going to seek to maximise shareholder value under a structurally separated model, do you need to sell to NBN Co, or can in fact you transfer assets to any arm’s length, independent company?

DAVID THODEY: Okay, you would be right in assuming that we’re looking at all options, and we will continue to determine, I guess, all those options that we’ve considered, what is the best outcome. There are pluses and minuses in all those models but I think it’s very important you understand that there are multiple considerations here and that would be one of them. John?

JOHN STANHOPE: The answer is yes, you could. First you’ve got to find a buyer for an asset that’s probably going to decline over time. I guess the other consideration is, you know, trying to find a buyer, is the first thing that comes to my mind. Oh, the second thing is that - is that a sufficient structural separation undertaking to satisfy the Government?

That it separate out into a separate entity that has no relevance to NBN Co, we still have to put forward - you know, here’s how we intend to structurally separate, so whether that’s an acceptable way or not. You know it’s there for an option and it may to be considered acceptable, but it might be. But first of all you’ve got to find somebody that’s interested in the asset.

QUESTION: (Richard Eary, UBS) Three questions - the first is tax. Can you give us an idea in terms of tax issues surrounding any eventuality, whether it’s a migration path or a physical sale? The second one is that if we go down a migration route, clearly there will be costs in terms of migrating customers across, could you just give us a feel in terms of - not numbers but how that happens and as a result of your conversations with the Government are you expecting NBN to bear the costs or is the Government expecting you to bear the costs, or is there a quid pro quo that you can talk through? The last one is HFC, it hasn’t been raised today, but obviously there’s an opportunity cost for you keeping traffic on net versus what the value of the asset would be and I’m just wondering whether you can talk about HFC with regard to the context of your discussions with the Government?

DAVID THODEY: Okay, John, do you want to take the tax one first?

JOHN STANHOPE: Yeah, depending in what structural separation option they obviously have varying tax implications for us. A sale of asset obviously has a different implication than a migration of customers for example. Obviously we’ve looked at all those tacks - it’s fairly complex and probably too complex to go through here, Richard. But at the appropriate time I will take you through that.

I mean it is something, again, that, you know, if and when we reach a conclusion, again it will be something we’ll have to explain to shareholders, because at the end of the day this is about the cash impact and also the tax issues have implication for NBN Co, the Government the whole negotiation. It is part of discussions.

I am not going to go, you know, there’s the capital gains tax, there’s the pre-87, there’s a whole lot of various implications.

DAVID THODEY: I just want to stress that in our negotiations we have raised the tax issue and I 40 should have raised the ATO as one of the other departments that we would have to get agreement is we were to do anything. So but it is very complicated.

Let me have a go on the migration costs. The short answer is we are acutely aware of the complexity of a migration customer by customer. Lead in costs, where the terminating unit will go, 45 how many visits to the home - remember the terminating unit requires power and therefore an electrician, someone who has got to find out where you’re going to put it, then the connection to the existing home. We are very aware of all those costs.

Have we worked through who is responsible for what? No, but it would be our strong position that
50 he who is implementing the service should carry the cost. We already have a network that works perfectly well, so we have no desire to take up any of those costs. But again if the Government was just to put in a bit to bitstream down the street and the resellers were responsible for the lead-ins, that’s a different scenario but that has not been agreed at this time, right, John?
55 JOHN STANHOPE: Yeah.

DAVID THODEY: So there’s still quite a bit of work to be done there and you really need to ask NBN

Co about what their design will be and it’s not been concluded at this time. HFC, John, do you want to take HFC?

5

JOHN STANHOPE: Yes, I did mention HFC in the context of wanting to retain ownership of that asset. Again, depending on the outcomes it will - how important HFC will be will depend on the outcome. So in a structurally separated world the HFC may be an asset that we don’t need to use because we’re considering a buy-build. So do you buy fibre off NBN Co or do you upgrade your HFC? It’s going to become a straight economic decision for is as to what is the most economic way to service the customer for their demand of bandwidth, fundamentally.

DAVID THODEY: On HFC, I want to be clear, it has value. We have long term contracts with a very significant customer, it must be there unless we find some other solution and if we have to move the FOXTEL off HFC, I have got to know where it’s going. So someone has got to help me here. So there are a lot of considerations, yeah, on net traffic we like.

QUESTION: (Richard Eary, UBS) Just on another balance sheet issue in terms of how the course of action may help make a - in terms of pension liabilities, and I don’t know whether you’re going to touch on this later in your slides, John? But if there is a transfer of staff across to NBN to help it build NBN or manage the migration, you know, what happens with potential future redundancy costs, pension liabilities, are these up for discussion and debate along with the tax issues?

JOHN STANHOPE: All relevant discussion points, Richard. But here is, you know, whether staff go across is a matter of an open issue. I mean, but all those things are considerations that are on the table.

Who knows, you know, we might build it on their behalf on a contract. There are all various options that are being considered. Obviously, if staff went across, then hey, pension liabilities are there and they need to be dealt with.

30
QUESTION: (Richard Eary, UBS) Thanks, guys.

DAVID THODEY: I think it just reinforces the complexity of all the considerations that need to be gone through. You raise really good points, Richard, and they are all being considered.

QUESTION: (Sandra McCullagh, Credit Suisse) You’ve said equity is not palatable in an NBN deal, unless it’s guaranteed and that the Government understands that. How palatable to the Government is paying cash to Telstra for vending an asset? Have you had those discussions and can you reveal that? Has the discussion about perhaps a revenue stream, like an annuity for some of the assets been discussed and how palatable is that to Government? That is the first question.

The second question is about functional separation and the systems. How possible, with the current set up of your systems is a shared service Co type model, meaning you won’t have to duplicate your systems? Have your systems got the type of security and other things that you would need in a shared services type model?

DAVID THODEY: Okay you really should address some of those questions to the Government, but let me give you what perspectives I can give. As I said, equity - unless we understand the returns, it’s very difficult to see how we do it. But we don’t know, it’s hard. I mean I’m not saying no to equity because if they came to us and said, here’s a guaranteed environment, then we’d obviously look at it. I don’t want - I’d hate for you to go out and say we’ve said no to equity, because that’s just premature. I don’t know, because no one has seen the financials on NBN Co, at least I haven’t, unless you have, or how the structure could be.

Have we discussed cash versus revenue streams? They are all options that we are willing to consider. We are not wedded to any position, except we just need to make sure that it’s value, and real value, not hypothetical value, not maybe if - it has got to be value because we have real assets today and our shareholders need to be looked after. I can’t say it any more strongly than that

really.

Now, in terms of functional sep... I’m going to ask John to answer this. This is a big, big project.

5 JOHN STANHOPE: I love your proposition of, you know, shared services or we sort of call it partitioning of our current systems in order to so-call functionally separate. I think in my model you can see that is a less impactful on shareholder value, and we could do that. I just don’t think that’s likely to be an acceptable functional separation.
10 Why do I say that? The Government often speaks about the BT style model. The BT style model isn’t the partitioned model, it is a separate system. The far right of that slide is where we think it’s heading because of all the statements made. But I’d love to go to the least cost, you call it shared service, I call it the partition model. But I think it’s highly unlikely if we get to that default position.
15 DAVID THODEY: I just raise - having worked in the IT industry, I am not sure what value it creates for Access seekers by having a separate computer, a separate financial system, a separate activation, a separate OSS. I know it’s under the guise of transparency and equivalence, but I’m not sure that that’s true. Well I know it’s not true. However, there is perception and there is reality. However, I would like to have that conversation with the regulator at the right time, should that be
20 where we get to, because I think that it will take - make sure it takes a lot longer to get there.
25

Remember, John is saying, five years for functional separation BT model at which time if NBN went ahead, eight years, you’ve got to say, hey, what’s going on, what’s the value here for the consumer and the access seeker, which is where this debate is meant to be about, about creating a more - socalled more competitive market, so that would be my view.

QUESTION: (Sandra McCullagh, Credit Suisse) Has the regulator looked at the utilities industry where the partitioning and shared services model has been used for the utilities to achieve a functional separation? What is his issue with not being able to use that in telcos?

DAVID THODEY: I think that’s a very, very good point. You’d have to ask Graeme.

QUESTION: (Sandra McCullagh, Credit Suisse) Okay.

35 DAVID THODEY: Look, there are a lot of good models and ideas that come from the utility industry which have been doing it for far longer than the telco industry. They seem to work perfectly well. Prices seem to be set pretty well and part of our submission, in the early days, around the regulation was to adopt some of those models. However, at the moment it seems to be heading down a different action. However, I’m hopeful that reason would prevail should that be necessary. 40 That fair John?

JOHN STANHOPE: Yeah, absolutely.

DAVID THODEY: Sandra, I think you’re raising very good points. So a lot more work to be done.

QUESTION: (Ian Martin, RBS) Sorry, I have a second chance, but I was interested in the answer to your question about the mobile spectrum and there are ways to manage that. I initially had the same view, but the more you look at the legislation, the more diabolical it looks in terms of how it does constrain Telstra. For instance, it penalises anyone that deals with Telstra over that spectrum, so you couldn’t get a situation where someone owns that spectrum, operates a service like 3GIS that they might provide to Telstra, you couldn’t do that. You may not even be able to roam onto that part of the spectrum.

As well, it’s not just the risk of this spectrum that’s designated in the legislation because the minister can actually designate any part of the spectrum under that legislation. So he could

designate part of the spectrum you already have, presumably he wouldn’t take it off you in this licence period, but there is a real possibility that you wouldn’t get the licence renewed for the spectrum you already have. So it does seem to me that there is a very serious constraint to your mobile business there in future.

DAVID THODEY: I agree with your interpretation of the Act, plus the Radcom Act which gives the minister discretion. It would be pretty diabolical to get to a situation like that, wouldn’t it?

QUESTION: (Andrew Levy, Macquarie) There’s been lots of discussion about various scenarios that

10 could follow through an NBN, but not much discussion this morning about your duct network and the value of the duct network and how you might be able to utilise that. I was just wondering if you could maybe give us some colour on what would be available for utilisation for NBN, how you’re seeing that through all the negotiations.
15 DAVID THODEY: Let me ask John to answer that because we have obviously considered the duct network which is available to accessing today.
20

JOHN STANHOPE: Exactly. Yes, I mean there are assets we have that are more valuable to NBN than others. Ducts and pipe access is obviously valuable because if they’re going to go underground it’s going to cost them less and take them less time. So that has a value. Now how we value that is – you can do it a number of ways. There’s been some sort of valuations, I understand, that have been accidentally released. They don’t necessarily bear any relevance or much relevance – there is some relevance – to how we might value that particular asset to NBN Co.

25 What’s important is not so much the physical asset perhaps as the space in it. You may have to figure out how you value the space rather than what the written down book value is of a duct or a pipe. So there is various ways to – and we are looking at various ways to value what is the valuable asset to NBN Co.
30 QUESTION: (Andrew Levy, Macquarie) Just as a follow up, what percentage of your duct network would have capacity in it that could be used, versus what’s buried or there’s no space for?

JOHN STANHOPE: Oh, I can’t tell you exactly. In fact Mick Rocca would say to me, you know, to be exact about how much capacity, there’s probably almost impossible.

DAIVD THORLEY: A lot, yeah. But a lot – this capacity, it’s worth a lot of value. By the way, I think it’s a very important point that you’re sort of alluding to. As you go through these discussions, there’s value – we were trying to look what value is NBN Co around what we offer, then there’s other considerations to do with the Government about fairness and equity. I just want to make that point.

FACILITATOR: Thanks everyone. Thanks David and John. We’ll draw stumps now on that stage. I’ll hand over to John who will run through closure on the transformation and then David will come back for an update on the strategy refresh.

JOHN STANHOPE: Okay, I’m sure you’re on the edge of your seats for this. As I promised you in August, I am going to give you an update on the transformation program from a financial perspective, but also from what capabilities has this thing given us in Telstra. It is something that I’m going to enjoy doing because this is the last time I’m going to stand here and talk to you about the IT transformation.

As we highlighted in August, these programs really are now business as usual and it has been a success and the benefits will continue to be felt but we’re no longer to report out on them separately. Let me get straight into the benefits here.

The transformation’s delivered huge benefits over the past four years and it will continue to do so going forward. We shouldn’t forget that. Since fiscal year ’06 we have achieved over $5 billion more revenue than the consensus view forecast prior to the transformation, that’s what that left hand graph on the slide indicates. By the way, so that’s against the consensus view back then, in actual reality, we’ve created $3 billion more revenue since ’04/05 and 500 million more EBITDA since ’04/05 to the end of fiscal ’09.

From a customer perspective, the networks and systems we’ve built are truly world class and provide us with differentiation and a strong competitive advantage. From a financial point of view, the Next G and Next IP networks enable us to achieve CAGRs of above 30% in the areas of mobile data, retail broadband and IP access over the last four years.

In October 2006 we launched the Next G wireless network. It has delivered a compelling and unique offering to Telstra’s mobile customers all over Australia, that is high speed wireless broadband on Australia’s largest and fastest national wireless broadband network. Providing coverage to 99% of the population, Next G has driven 3G penetration of our wireless customer base to more than 60% as at 30 June ’09 and resulted in mobile data revenue more than tripling between 2005 and 2009 and helped more than double mobile data RPOO between ’05 and ’08. We have now more than one million wireless broadband customers.

Telstra’s other network investment was the Next IP network providing an unrivalled combination of IP coverage and reliability. Telstra’s Next IP network enables Telstra’s ADSL traffic to traverse the network, that’s over 4800 DSLAMs. It has accelerated the migration of enterprise and government customers to an IP world and it will help drive customer take up of value added IP products such as cloud computing, security and hosting.

Finally, the IT transformation has provided us with a much needed simplification and upgraded our operating support systems and our business support system environments. It was the once in a 20 year investment that we needed to do around our IT architecture. The IT Transformation is still somewhat misunderstood, so I’m going to take just a bit longer and go over a little bit of history for you.

The IT transformation has been incredibly complex to implement; most are. Given we started fourand-a-half years ago and despite adding to scope and that we found more complexity than first thought, the outcome is financially positive and the functionality delivered. The incremental benefits beyond fiscal year ’12 are in excess of $1 billion per annum with around $500 million of incremental revenue and around $700 million of cost savings, the detail which you’ll see in a few slides further on in this presentation.

The benefits being realised in fiscal year 2010 are not as great as we planned for some four years ago, but are consistent with what I said in the fiscal year ’09 results announcement. You’ll recall we said we are delayed 12 to 18 months. We’ve deferred some of the benefits therefore and about 150, you might recall I mentioned, from ’10 to fiscal year ’11. As I said back then, we’ll miss about 100 million of benefits, mainly because we’ve made a conscious decision to retain some systems.

Overall the project is a success, the financial benefit from the IT transformation, a combination of the increased revenue and cost savings in fiscal year ’10 alone will be around $300 million. This benefit increases by around 500 in 2011 and as I said should be in excess of a billion in 2012.

5 Before I step you through some more detail on the IT transformation, it’s worth putting the IT component into the context of the much larger financial undertaking that the company took, that is, the $12 billion investment that we made in transforming the company over the last four years.
Across the entire capital programming, the expenditure peaked in fiscal year 2007 which was the
10 year we actually launched Telstra Next IP and Next G networks and pleasingly, as you all know, our capex this year will drop by around a billion dollars on a cash basis and a bit less on an accrued basis as we return to what we’re calling a business as usual investment program. So we’re back down to our 14% levels capex to sales as you will be familiar with.
15 It’s worth noting in fiscal year ’07 IT transformation increased significantly on the prior year as we incurred the expenditure on capitalised software through deployment of new capabilities across customer care and billing, inventory management and supply chain services. There was a significant spend on IT hardware was we moved from leasing to purchasing outright.
20 In fiscal year ’08, 1.2 billion was spent as we commenced moving the customers onto the new billing and support systems, so the migration of our customers. Last year we spent just under one billion on the IT transformation, the decrease year on year reflects the number of projects that were nearing completion towards the end of fiscal ’09.
25 Given the time and financial scale of this transformation, not surprising there was some scope change along the way. This included financial scope change as well as with actual dollars being allocated in a slightly different mix to what had originally been planned in the overall transformation. So I do want to take some time to set the record straight and in the interests of total transparency which this company prides itself on, I will go through the overall costs of the
30 program.
35

As noted on the last slide, the total cost of the transformation will be $12 billion or more precisely I guess from this slide, $11.9 billion. The total spend on IT will be around 1.5 billion more than we originally planned. That number is – that’s been deliberate. I want to emphasise it’s not an overrun in our spend, but back in ’04/05 there were things that we did not have in scope that we’ve brought into scope, for example. It is not a concern, therefore and we actually delivered 1.3 billion lower spend in other areas in our transformation program, meaning that – and we’ve said this before – a total overspend in our $12 billion program of around 2% of the original budget we set back in November 2005.

So we’ve managed the whole transformation and we said back then there would be mixed changes and we would be moving money around. So it’s a relatively small incremental cost over such a massive five year transformation project. So there’s been no transformation costs blow out at Telstra which is often said.

Offsetting the increase in IT transformation capex have been scope changes of 1.3 billion in other areas, so we spent a little more on wireless and less than expected on wireline. Remember, wireless is now 99%, back then we were talking about 96. So there have been some changes in the mix. Not surprisingly, you make decisions as you go through these things. We spent less than expected on wireline network fixes and platform rationalisation.

So let me give you a little more insight into the scope changes impacting the IT component of our capital expenditure because I think it’s important to understand. So again, in the interests of transparency, so what happened? What’s happened over the last four years? So I draw your attention to the areas where we’ve allocated some more resources. Significantly, the inclusion of BigPond into scope and additional programs such as network planning so in the OSS layer and Sensis integration, they came into scope.

The additional expenditure is providing us with significant incremental benefits, as I have outlined. We have spent an extra $500 million as we have added many new items to the transformation, such as Enterprise Data Warehouse, the Media, which is an IT solution allowing new customer sales service applications to work with legacy fulfilment. Integrated Desktop, which simplifies the service assurance customer contact environment and on-line billing. We have had on-line billing before, but this was a new approach to on-line billing.

Originally, BigPond was outside of the scope, as I said, of the billing transformation, so not just in terms of ordering, but also billing. Another $200 million was spent to deal with the additional complexity beyond original scope. So yes, we did find greater complexity as we went through this program and we have also capitalised around $400 million of infrastructure which we had

previously planned to lease. We just did the business case on economics and it was better for us to buy instead of lease.

Let me be clear on this, there is a bit of information on this page, of the $1.5 billion increase in the IT spend in IT Transformation only $200 million relates to added complexity. $400 million relates to a business decision to capitalise business infrastructure and the balance relates to scope changes that we brought in deliberately into this Transformation program.

Realising some of you will go away and reconcile the numbers we have published to against investor presentations from years ago, I thought I would save you a bit of time. The complexity of the project, the deliberate scope changes we have made and the fact that we have done a lot more than we originally planned means that some of today's numbers are different to comments made two years ago when I last updated you on transformation finances. I just wanted to reconcile really in fiscal year 2010, because we haven't spoken about beyond fiscal year 2010 before, what we stated in 2007. I said at that time $300 to $400 million would be saved, cost savings, and we are now $159 million. With the $150 million deferred and the $100 million foregone, this adds to up to $409 million, so it reconciles with what I said consistent with 2007, but of course at the results announcement I mentioned the $100 million lost and $150 million delayed.

Moving on, let's look at the financial benefits and the exciting capability that this IT Transformation is delivering Telstra.

As I said earlier, we are expecting around $300 million of benefits, that is revenue and costs savings, this financial year. Around $800 million in 2011, so again a mix of revenue and costs savings, and in excess of $1 billion in 2012. We need to realise these benefits on this fairly significant investment. So you invest $3.9 billion in an IT transformation, these are the sorts of numbers you would be looking for to get your return on investment, and you can figure out for yourself, it is a pretty short paper. This slide shows both the incremental revenue and the cost savings from the capabilities, so per capability you can see there, as well as the second last line there, which is the actual IT cost reduction.

I guess the numbers are great, but equally important is the capabilities that it gives us, and it is the capabilities that actually deliver these financial outcomes. So I briefly want to go through them.

Firstly, let's look at CRM or Customer Relationship Management. The benefits around improved CRM capability include optimised call routing and handling, reduction in agent desktop applications - remember we talked about all the applications our agents had to deal with pre-distransformation - and of course improved usability, decreased customer transfers, decreased repeat calls and increased time on the customer discussion instead of time wasted looking up data and going across systems.

The second stream of functionality is that of self service and identity management, including a reduction in paper bills from increased on-line bill usage, decreased consultant call minutes with more queries going on-line, increased successful and automated flow-through of on-line transactions and improved customer experience for customers choosing the convenience of transaction with Telstra on-line. These are functionalities, or capabilities I should say, that have been built.

The third capability is the Sales Catalogue. The capability includes simplified and reusable cross product bundling capability due to a central product catalogue, strategic pricing management, standardised and rationalised product offerings, consistent product constructs across product and lines of business, and simplified ordering and billing.

Campaign Management. It is a capability that has been enhanced by a single view of customers for market segmentation, data to increase multi-product holdings across the consumer base. It enables Telstra to choose the optimal time channels and mediums for a campaign reach to the desired customer segment, and improved selection and consolidation of data for planning and reporting, so a strong data mining capability.

Other improvements come from Credit Management functionality. It allows real time credit 30 assessment during the order process. Collection events are triggered based on customer data that is present in a single system, extended credit reference association capability and a whole of customer view of debt, which is important, the financial benefits being a reduction in bad debt and fraud.

35 Usage Processing is yet another capability. It gives us the delivery of a convergent mediation platform allowing us to bill for all call usage out of one platform. Flexibility for supporting customer negotiated rates, which is often the case, particularly the high end of town, enterprise and government, and making it easier to correct any usage errors before they get to bills.
40 Lastly, we simply get cost reductions from running the new IT environment, labour efficiencies, lease cost reductions, systems rationalisation and service levels from our vendors savings.

There is a plethora of other improvements, but in the interests of time I will just touch on a few briefly.

Core billing benefits come from a single system to manage integrated billing accounts for all services and cross bundling and discounting capabilities. We will realise number management benefits from a consolidated number management base or system, meaning there is a single number

management platform across technologies. We have improved functionality in the area of physical network inventory management with a single view of all physical inventory. I know this has been a

rather technical look at the IT capabilities, but to understand these numbers haven't been plucked out of the air, they all relate back to the delivery of these capabilities. Capabilities that also allow us to differentiate ourselves in the market.

5 In wrapping up I just want to remind you that it has been much more difficult to implement than we anticipated and the journey has been painful for many of our customers and as you go through these sort of major things you try to avoid that, but we know some of our customers have come on this painful journey with us and of course we are getting through that deployment or those deployment issues. We have learnt a lot, our key learnings being the need to maintain ongoing
10 strategic investment in core platforms. You just can't stop investment and then do big bangs. Big bangs are painful and we don't want to do that sort of thing again. So continuing investment is important. Never under-estimating the complexity of telecommunications IT infrastructure, the alignment of networks, products and customers is a significant challenge, one which we have had to undertake, and taking the time necessary to drive simplification of process and data before
15 transforming IT is a lesson learnt, and ensuring that you have the systems and processes in place to manage your customers and staff through the transition. Despite hiccups long the way, I think David Moffatt, John McInerney and their respective teams have done a great job of doing that.
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All that said, thanks for listening to the IT Transformation closure if you like. It is now business as usual, as we said a few months ago.

I am now going to hand over to David, who is going to take us into the strategy. Thanks, David.

DAVID THODEY: Thanks, John. Okay, we have now got roughly half an hour. I am going to give you an update on strategy. Then we will have a cup of coffee, then Holly is going to talk to products. Then we will have about half an hour, quarter of an hour on Q and A.

This is a strategy update and I am delighted to be talking about how we are going to grow the business rather than actually protect it from other forces. This company, as I think John has taken you through, has a tremendous set of platforms from which to grow on. An outstanding set of network assets, tremendous people skills and a great executive team, but we are facing some regulatory changes. I will talk more about that later on. I want to say our strategy is very simple. It is about serving customers better than anybody else. Easy to say, but incredibly hard to do. But it must be a continuation of what we have done over the last four years as I mentioned in my introduction.

I do want to stress a really important point. Our company needs stability and continuity at this time. We have to focus on our core business and that is what we do best, about building networks and serving customers, because when you do all the analyses and look at all the numbers, that is where we create value and we have proven it year after year, that we make value, we create value by focussing on our core business, both for our customers and for you, our shareholders.

I want to stress, we are an Australian company. 95 per cent of our revenue comes from Australia, 98 per cent of our profit comes from Australia, and we still see good growth opportunities in Australia. We do have some valuable Asian assets which we will continue to invest around, and that is very important because they are valuable assets.

However, the market in which we operate is changing. We can no longer rely on a fixed copper access network the way that we used to. This has been a tremendous source of free cash flow historically, but it will not provide the differentiation we require or the EBITDA growth that we will

require in a new world, and we must adapt to this new world, a world of new platforms, new applications, new services, new technologies, new offerings.

What does this mean for our shareholders? How do we best leverage these world class assets? How do we use the time that we have to recreate the business? Because we are uniquely positioned like no other Telco in the world. One thing that Sol often said was becoming a world class Telco and we share that vision. The strategy I am going to discuss today is not dependent on NBN, because that would be foolishness. It is got to be dependent on our way forward, how we continue to create value. It as a continuation of our existing strategy but focussed on the customer, and the customer must be at the heart, at the centre of everything we do. We have the assets and the capability to execute the strategy both now, and the future and the people.

Let me just now turn to the Telecom's market. I am trying to give you a bit of a perspective of hour how we see the market playing out, where we see the competition, where we see some trends and then we are going to relate it back to what we think we need to do.

It has been a very strong market here in Australia for a number of years and from what we see it shows every sign of continuing to be so, partly fuelled by the economic growth that Australia has had, and as you all know the Australian economy has performed very well, but competition is active and well in Australia. Our industry has been growing faster than GDP for a number of years. This has given the industry and Telstra tremendous confidence in which to invest in new innovative services, something we must continue to do. The wonderful thing is the demand for our core product and our services is incredibly. In fact, many people in other industry industries would be absolutely delighted to have the demand that we see in our industry. How you extract value is the critical thing as you go forward. But competition is active and innovation is real.

You have seen our broadband share, now about 45 per cent, mobile 42 per cent. We have 600 ISPs competing with us now in the broadband market, but we have seen a rationalisation of the mobiles market. We now have three major operators in the market. We believe that is a good industry structure and plays out well for us going forward. It is a very strong market but it is a competitive market.

Let me change tack a bit and talk about some of the global trends that we see. I just want to touch on this because I think it is very important for any context. Some of this you will know but some of it I hope will be a little bit new. We remain very confident and we are very encouraged about what growth we see in the wireless business going forward. 21 million users in Australia, but if you look across the world, all the predictions we see are that the number of subscribers on the wireless nets will continue to grow very very strongly as things like machine to machine, you, PDAs, new wireless access devices become available. So we see very strong growth in SIOs across the mobiles market and increasing usage. All the statistics we see on our networks confirm this. So we remain very bullish about the wireless network opportunity.

Broadband, both mobile and fixed. With the tremendous growth in on-line, in the desire for content, it is incredibly important that the broadband infrastructure is there, but I do want to stress some things. Today we have one million wireless broadband customers and we have 2.5 million or thereabouts fixed broadband customers. We still see tremendous growth in the number of subscribers, but our personal view is that about 60 per cent of those broadband customers will be wireless out to 2015 as you see good growth. We think wireless broadband is a compelling proposition and it is across all industries and all markets. It is extract exactly the same experience as when people went from fixed telephony to mobile phones. We see the same characteristics

playing out in the broadband market.

Obviously, we have talked a bit today about NBN. I hope that was helpful to you, but we are seeing growth in fibre access technologies and driven in a large part by government and regulators. I do want to stress, as we have said before, the return on investment, the financial case for building fibre to the home is not compelling. We have looked at this over many many years. Certainly, in certain areas you would put fibre in but it is not a compelling proposition to all homes.

We are seeing the growth of the intelligence in the core network. I want to stress this. The nature
10 of networks are changing. Physical access used to be the point of differentiation. It will not be in the future. It must move to the intelligence and the capabilities within the core network because that is what people want. When you are trying to manage large amounts of content, putting applications closer to the customer, you need enormous intelligence in the network. One of the statistics that John did not mention is that a lot of our IT work now relates to the network. John
15 McInerney's work now nearly 50 per cent of the work he does is around IT in the network, not just doing CRM and billing systems, as important as they are.
20

We need to design these networks for enormous growth. I’ve said before, the actual packets on our Next G wireless networks are doubling every 14 months, and the traffic on our IP network is doubling nearly every 18 to 20 months. This is unbelievable growth, but we must lead the migration to new technologies – we must lead, not be driven there.

We have already seen that we have migrated from traditional data to IP, our IP revenues are now greater than our legacy data products. That’s a very important inflection point.

I have talked about PSTN and mobile. Our mobile revenues are now greater than our PSTN revenues. That is a significant change and starts to really drive out a different dynamic within our business.

30 That is very important as we lead this migration to new technologies. But also, the demand from our customers is changing. In the enterprise and business base they want solutions; they want end to end capability. They are not interested in understanding whether it’s ADSL 2 plus, fibre to the home or any other technology that comes along. They want to run their businesses and they want solutions that allow them to that seamlessly.
35

In the enterprise market we are also seeing that as customers saying we do not want to have big network teams, we want you to manage it end to end. Nerida can talk about the tremendous demand for network outsourcing.

40 It’s the same for consumers. More and more of the letters I get from consumers are they are sick and tired of having to worry about whether there is CON activity down their street; what sort of technology they are doing? They want a company that can do it for them. I cannot stress enough about the importance of simplicity in providing our services to our customers.
45 All this means that we need to create a differentiated network. We need to have new capabilities as a Telco, as we move forward, which will mean, we need to change.
50

Let me talk about the wonderful assets that Telstra has. I just want to spend a little bit of time on this, because even in my very short sojourn as CEO, we often say, what’s our competitive advantage? What really makes Telstra unique? What makes it different?

I want to talk about this and try to bring out some very important points about the industry in which we operate. Coming from the IT industry, Telco is different. I want to talk about scale and how critically important scale is to drive economies.

I want to talk about the unprecedented access that we have to customers. Let me be very clear. I did not say customer experience; I said we have enormous access to customers. The deep engineering capability, both in capability and the design capability we have, and the tremendous products and portfolios we have.

Let’s just talk about the scale advantage: 5,000 exchanges; 6 million kilometres of fibre already in Australia. If you don’t know what 6 million kilometres of fibre means, it means that you can go up to the moon and back again eight times; so that’s a lot of fibre across Australia. People say we’re not a fibre nation, there is a lot of fibre out there and that’s our fibre.

Our Next G mobile network, 2.1 million square kilometres, as we’ve heard before, over twice the size of our nearest competitor and it’s larger than the state of Queensland – as I tell Anna Bligh often.

But also, we have an integrated wireline and wireless network. It is an integrated network, but the IP network, on a scale of up to 92 terabytes per second; 77 times faster than and more scalable than anyone else’s network.

This is a tremendous asset that we use every day and of course with those growth rates, you need it, but it takes investment. It takes dollars to get it there and it needs incredibly skilled people to keep it running.

I want to say something here: A lot of people think you just put fibre in the ground and it works, or you just put a connection into a customer and it works. Let me tell you: It doesn’t. You need to get it operational; you need to have access points, you need engineers to be able to scope the network; you need to manage the performance.

We, and we know these networks well, have problems doing it because of the scale and the complexity. If we have problems, I tell you, a lot of other people are going to have a lot more problems than we do. So we have tremendous scale.

It doesn’t end there. Our sales and marketing capability are second to none in this country. Can we improve – absolutely, but when you start talking about our wonderful T[life] stores – I go in there and it’s just a pleasure. We have got one hundred of them already, more to roll out and of course we’ve got the other couple of hundred stores that we will implement.

Also now we’re putting in local business stores to serve the needs of small and medium business that Dina is running. We have over 5,000 sales people every day knocking on the doors of customers. That’s just our people, plus our dealers, plus all the agent staff that we use. There is no other sales channel like ours, but it is ours to have to drive forward and to make a difference.

Of course, we have 5,000 points of presence across the country and these are not replicated easily. Also, as I said, we have an enormous number of interactions with our customers every day. I wish they were better, but they are enormous interactions. We are going to make them better.

We provide 9 million fixed line services, nearly 10.2 million mobile services, but our Telstra people and contractors complete about 25,000 customer visits every day.

5
I talked about the T[life] stores and the number of people who come through those doors every day – I don’t have those statistics, but we also send out over 100 million bills every year, wonderful bills. They are getting more accurate and we’re delighted about that!

[LAUGHTER]

10 This is tremendous capability, but also when you look at our engineering capability, it’s both engineering depth, but it’s design capability.

We have four times more engineers than anyone else in Australia. You just don’t change that, and of course, many of them have got tremendous experience.

You have got deep domain network engineering capability, we have the field technicians that Michael manages, knowing how to make that network run and our product engineers.

I do want to stress, even when I go up and talk to these guys, the amount of knowledge about these
20 networks work, where the bearers are, where the sub-bearers are, you need to have incredible knowledge about how these networks actually operate. It is not all written down and it is a tremendous competitive advantage.
Also, we have an unmatched portfolio of products and brands. Some of them are listed there.
25 Yellow and White Pages was Sensis, Whereis, FOXTEL, Next G, Next IP and now the Next G services portfolio.

We have six strong brands in China, plus we have CSL and we have REACH.

30 The reason I wanted to go through this is that this is about the core of the business. This is what I do every day. This is what John does; this is what David does; Geoff. This is what our core capability is and it is a wonderful, wonderful set of assets that we have.
It is important to understand what they are before you go off and start talking about strategy,
35 because for too long and too often people go off and do other things rather than focussing on what you’re good at doing. What you’re good at doing is running networks.

That’s a wonderful set of assets. That was what we spent a lot of time in, what is really our core. However, we are conscious that the market is changing, so we have to adapt. We have to make 40 some changes. Some of these changes are already underway, but some of them are very important to understand.

We have had tremendous reliance on access networks over enormous coverage, tremendous access; however we now really need to build out our service delivery platforms to be able to differentiate beyond the access layer.

We have always had reliant and resilient networks, but now we need to move to security, embedded security in the network.

Sometimes these things are said glibly, but let me assure you, when I go down to the global operations centre and we talk about security, every day, 24 hours a day, we are worried about security. We get threats, we get attacks from offshore nearly – well, it is every day and you have to have resilience in the network.

A lot of people take this for granted. They do not understand the complexity involved in running these networks. You don’t build this capability overnight. So we need to really drive the advancement of how we do that.

We’ve had this broad portfolio of products and bundles, but now we need to be more focussed, because integration isn’t something you just throw at customers, you need to know where it really makes a difference.

We’ve had some good experiences and some bad experiences. Integration across fixed and wire line is very important, but you’ve got to make sure customers are going to pay something for it, not just because you can do it, or that a supplier walks in the door and says: hey, here’s a great new technology – it’s because it makes a difference.

We’ve always had a deep network capability, design capability, but we’ve now got to move that more to a solution design and delivery capability with deep partnerships. We need innovation in Australia and with our partners.

Of course, I talked about customer access and reach, but now we’ve got to move this to an outstanding customer experience. Something that our customers value; not that they feel like they’ve got to go to the Ombudsman to get satisfaction. I find that an indictment on this company and the whole management team share that.

However, this industry has become addicted to this sort of behaviour and one of the most important things I can do – we will do – is to change that going forward.

Satisfied customers stay with you, they don’t churn; critically important.

Let me talk about this strategy. I want to stress, this is about stability and continuity. This is not about a revolution, it’s about an evolution. This company does not need a new strategy. It needs better execution; it needs focus – we’ve talked about the IT transformation – and we have made enormous strides in that.

Let me just take you through one chart on our strategy. Firstly, we are going to create a wad of solutions, that are simple, easy and value to our customers. Very simple, not very complex; I can understand it, our customers to understand it, so that makes a good starting point.

I have talked about the sources of differentiation. Once you understand those then you know where you’ve got to go.

45 We have just tried to put the nine strategic imperatives under four key areas. Firstly, we are going to continue to invest. We are going to invest in innovation and differentiation. We have not finished, however, it will be within the envelopes we have already set out.

We are going to continue to focus on satisfying our customers and what’s critically important here is we must simplify this business. This business has become too complex. Too many points of failure;

too many hand offs, too many bits of data that aren’t the same. We’ve got to get simpler, otherwise we’ll never deliver a compelling customer experience, and of course, we must grow. We must grow the business. We must have EBITDA growth.

5 This is about focussing on our core business. It is about leveraging our core strengths and moving forward.

Let me just now turn to how we are going to do this. It’s very simple, it’s not very complicated; I like simplicity.

We are going to leverage and grow from the core. It’s going to be around focus on our customers, retail link, customer link, that’s what we’re about. If we can serve our customers better we will grow.

15 Investing – there are three key areas in investing we are going to focus on. We are going to continue to build out our Next Generation infrastructure. I’ll talk about that in a moment.
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We are going to continue to differentiate through integration because that is enormous value to our customers if you pick the right area, and we must continue to invest in growing in what we call adjacent markets; markets that are close to our core where we can leverage capability.

Also, we’ve got to continue to satisfy our customers. I’ll talk about some of the things we’re doing in that area. It’s strange sometimes to put that on a strategy, but we need to. Also, we’re going to drive productivity and simplification – simplification – simplification.

Then we’re going to grow. We are going to grow from our core assets; as I talked about, enormous growth in wireless, enormous growth in IP and in Broadband. We are going to continue to focus on the Next Generation Home, as that whole world changes, we think we’ve got some exciting things there.

Sensis advertising remains critically important for us as we go forward and of course, we will have selective growth in our Asian assets to try to drive greater value.

Let me now quickly turn to these nine areas. I’m going to go pretty quickly, but I just want to give you a sense of them.

Firstly, we must invest in the Next Generation infrastructure. You see there, down the bottom you’ve got the IT platforms which John just spoke about, customer care and billing, Next IP, Next G.

What we’ve got to do – we’ve already started, but there is a lot of work to do, because this is where the complexity comes in. You talk about the OSS layer, how you manage the networks, but we now need to deliver applications and content to our customers in a repeatable and a reliable way. To do that you need two core capabilities. You need assured networking, very, very important and very hard to do, but you also need content delivery network capability.

When you start to move large amounts of video – which you look at the growth projections on video networks, it is enormous. John Chambers gets up and talks about it, Ericsson talks about it and we see it, even in our own business, video is an enormous traffic on our networks already and will continue to be; or the social networking sites. Just think about the number of video clips that move across a network.

So content delivery; if you’re trying to deliver content for the United States to someone in Wagga – I should go maybe to Melbourne, let’s go to Geelong – in Geelong, think about how you’re going to get these megabytes of information out. You’ve got to find a whole architectural framework on which to do that.

IMS is very important because it allows you to deliver these applications in content across wire line and wireless in a seamless way. Today you have a completely different experience. You have on your home a fixed environment as compared to your wireless. We have got to bring that integrated together. Holly will talk about. Of course, you need a framework on which to do that, as well as enabling these wonderful new applications around – infrastructure as a service; software as a service, which is around cloud computing network absence services. I will talk about that in the next chart.

15 This framework is easy to put up in a chart like this, but let me assure you, this is probably more complex than building Next G and Next IP.
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In terms of differentiation, we have got to be very, very clear about doing it where it really matters to the customer. I talked about IMS across the fixed and wireless environment, but just think about a simple thing about video. If you’ve ever been to a video conference, someone’s on a mobile phone and you’re using high def video, they don’t talk to each other very well. So how do you build that compelling experience?

We have just been through this with the emergency services and fire in Victoria. How do you get someone coming in on a video and actually a compelling experience that affects the environment? These are not theories, this is about life threatening, life enabling applications that can change the way people live and work.

Also, things like applications in the network, software as a service. Deena has had some wonderful experience with this.

It’s going to take time. This is the future. We’ve already had ASP models. I was involved in those back in the late nineties, but putting applications in the network now is no longer a theory, it’s no longer hypothesis, it is real and that is what is happening, but to do it requires a whole different infrastructure.

Today we’ll be talking about T-hub, which is the new home experience and Holly will talk about that. But I do want to talk about unified communications, as you see in the IP telephony environment, but there is unified messaging, My Connect is a wonderful experience of a web email server getting access to SMSs and MMSs, about how you bring these things together.

How do you deliver that in a simple way so customers don’t get confused is very, very important; wonderful capability but it means integration where it matters most.

Let me move on. Investment in adjacent markets; there are a couple of areas I can talk about here, but this is very important. We debated for a long time about how far we should go away from the core of the business. How do we make sure when we move into applications or infrastructure, you’re leveraging true capability we have today, not suddenly stepping out just because it’s a great looking business opportunity and thinking we can do it overnight.

The truth is, we proved ourselves over the last 10 years I’ve been here – we don’t do it well, but taking a step away from just what we do, a little step that uses all the capabilities – very, very important and you can do very well.

5 A great example here is what we call our Next Generation services or infrastructure as a service, where we can slowly take over more of what our customers have traditionally done, but we do it in the network in a replicable way, in a way that can be done at a low cost so we make good margins from it.
10 The danger in services is uniqueness. Every time you do it again and again, money just gets eaten. You’ve got to find a replicable model and that’s what we will do as we go forward. Something we’ve talked about before but we will continue to invest in as we go forward.
In terms of customers, we’ve done some wonderful work here with customers over the years in
15 terms of market based management, understanding the needs of our customers, really trying to understand across all the sectors how we can be more focussed on the needs of our customers.

However, despite that wonderful work, the experience our customers are getting is not good enough.

I put up there complaint volumes, our transaction surveys. Everything we look at says we can do it better and of course the industry right across the world – I saw some data the other day, that said that the telecommunications industry has the worst customer satisfaction of any industry – any industry.

We have a job ahead of us, because I’m not going to accept that. You see it in churn numbers, you see it in the behaviours of our customers; you see it in all the interactions that drive cost into our business every day.

30 We are going to manage our complaints better. We’re going to get to the root cause. We’re going to re-engineer our processes end to end. We’re going to simplify. We’re going to take out complexity. We’re going to make it easier for the customer.

We’ve started on this journey. It is going to take us time, but it’s not just about delivering a better 35 customer service; it’s going to take cost out of the business, because every time we do it badly, it creates cost and we talk to customers too many times. This is a good strategy and we are committed to it.

We have set the priorities in the company, we’ve established the offers of the customer; we’ve already set new standards around responsiveness in responding to customers. Every day I read every customer complaint that comes into my office and I expect every one of my executives and every one of my managers to do that, so we can be responsive as we move forward.

We’ve set company-wide targets on customer satisfaction; the voice of the customer – not what we think. We have set new standards around how we will interact with customers and we have a council, but it is driving deep into the business. We need to re-engineer many of our processes.

We have too many touch points every time a customer wants a new service and when we want to restore a service. We are committed to this.

The result of this must be financial. We must reduce churn. Churn has many elements to it. Let me not imply to you that our customer service is why we get churn. Customers migrate to new services, they move from fixed to mobile, but we can do better. There is a fair percentage of our churn that comes from dissatisfaction and we are committed to reducing our churn as we move forward. Happy customers are loyal customers; it ain’t that hard.

I’ve talked to many of you about some of the experiences you’ve had. If we can improve that, people won’t leave us. People have an enormous barrier to churning, they don’t want to. It just creates problems, but we make it so hard at times, we need to get better.

Then, of course, I’ve said we’ve got to get simpler. I’ve got to drive productivity. I have just tried to reference – this is not something new. We’ve already had this tremendous result from our field technicians who we’ve got; 55 per cent improvement since November, better customer experience, all using new technology, Michael Rocca and the team have done that.

From the house clearance has improved, we are getting better in terms of trouble reports, but that is not enough. We need to do more and it will deliver real value, real cash to our business as we go forward.

So simplification and productivity is a strategy for us as we move forward.

Let’s move forward. We must also manage and lead this transition to new services. I’ve talked about this before, PSTN to mobile, legacy data to IP and also potentially, as we migrate our customers off copper to fibre. Just another migration we need to manage and to do it well.

We are going to do this while growing the business. We must grow the business if we do that. We’ve done it in the past and we can do it in the future, if we focus on the core vital few.

This may be not exciting, but it’s real and that’s what we need to do. That’s what this business will do as we move forward.

For example, let’s look at broadband. How we can just grow this category across fixed and wireless broadband. I have already mentioned, that chart on the left hand side there is CISCO’s estimates of the enormous growth that will happen on IP networks. Look at that growth of video out to 2012, 20 time factor – actually probably a four times factor of five to 20; enormous growth.

You have got to have networks that are going to be able to cater for that. When you look at our own retail broadband experience, over the last four years, we’ve had enormous growth in wireless and fixed broadband, and yet, we are only at 62 per cent penetration of fixed broadband. We are only at a 10 per cent penetration on wireless broadband and in terms of smart phones, only at 8 per cent.

Every time you get another SIO you drive your ARPU up and your revenue goes up, and in terms of broadband, there is a great appetite for faster speeds, greater broadband access going forward; and we see enormous opportunity in this area. It is just about pricing it, creating value as you go forward.

So, we are going to do the basics right, but also as we move forward – we talked about the Next Generation of home for years. I can remember talking about it nearly eight years ago. There is a

reality, there is a shift taking place in the market now and if you can build seamlessness across broadband, fixed PSTN and also mobility applications, you start to differentiate yourself.

I’m not going to say much more about that, because Holly is going to talk about that later on, but 5 this is very important. Working with Justin Milne in Telstra Media, they’re a very important part of what we do.

Sensis remains a core business for us as we move forward. It is a critical part of our portfolio and it is all about advertising, connecting buyers with sellers. That’s what this business is. Yellow Pages usage is growing across all channels and it’s exciting. The team at Sensis are on fire.

The business is not about managing print to online solely, but managing a portfolio of channels that offer print, online, mobile opportunities for all our customers and this company has tremendous access in the small to medium business. It is second to none. It is a wonderful company and we plan to continue to see its growth. It has challenges around print but we think we’re there to manage through that transition. Print is a point of difference, not an incumbent – can’t rely on it but we think it’s got great opportunity.

No-one is able to match our ability to help advertisers easily find customers across all these access or print online voice and mobile applications.

Working with Justin’s team again in Telstra media, content is wonderful. I won’t say content is king; I think access is pretty important, but working together we can really build true differentiation.

25 As I said, the ninth area is to grow selectively in Asia. I think it’s very important – a lot of people ask: What are you going to do in Asia? Have you got a big Asian strategy? Are you going to try and move your business to Asia?
We’ve got some great assets there, which we must continue to look after and nurture and grow.
30 Are we about to move to Asia holus bolus – no, we are not. We see tremendous growth here; however, we will continue to grow our assets in Asia where it makes sense.

China has some tremendous opportunities. You just look at the statistics here. I mean, scale is wonderful. Does that mean we are only focussed on China? No, we’ve still got CSL and we’ve got 35 REACH. Are we about to go and buy a mobile business in Cambodia? No, we’re not, but we are about building what we have today.

It’s very important that you understand that we will selectively grow as we move forward. What is our strategy? Well, as I said, it’s about investing, it’s about satisfying our customers and it’s about growth.

They are the nine things we are going to do. It is, in some ways, not that exciting, but it is real and it is about doing what we do best and doing it better.

45 I should mention some things that we don’t intend to do, which is always a nice counter to what we will do.

We have no desire to acquire weak performing Telco assets and turn them around. I’ve got enough work to do here. Do we have any intention of buying media assets? No, we don’t. Do we have an

insatiable appetite to go and buy a print business in directories? No, but if we found one we would look at it’s not core. What we would like to do is to continue to drive where Sensis is going.

Are we about to buy major assets without a positive growth profile? No, we are going to go where 5 there is growth profile? Are we about to diversify into areas outside ICT? No. We are about being a Telco and we love it. We think there is enormous value still to be created from this business and our directories business and we’re going to do it better; we’re going to drive more value from the business and we’re going to grow as we move forward.

10 Let me just now talk about our guidance. I want to reiterate that the guidance for the year we provided in August still stands. We expect continued top and bottom lying growth and a free cash flow of $6 billion this financial year.
In the notes in the release we put out, we did say our top line growth guidance has come under
15 some pressure from the strength of the Australian dollar, as you would expect. While this is something of a wash at the profit line, we would expect it to take some minor impact on our top line revenue numbers.
As we said in August, the guidance also excludes the impacts of any Government regulatory review
20 of NBN should it happen in the foreseeable future, but as I also said: we still have enormous complexity to get through in that process or any unexpected outcomes from any ACCC wholesale pricing determinations.

As I’ve said before, I want to be very clear about what priorities we have as a management team.

25 We are focused on EBITDA growth, not just EBITDA margin and also we are a value provider, but as I’ve also been very careful to explain to you, we will carefully manage the trade off between share and profitability, because we must maintain share.

We are continually reviewing what our premium is which we believe we deserve in the market to 30 make sure it’s real. At times we get too far out of market and we are very committed to making sure that we are competitive but based on real value that we deliver to our customers, that they are willing to pay a premium for. If they are not willing to pay a premium for it, we will move with the market. This is about real value, not just a wish.

35 I trust that this gives you some sense of what our strategy is as we go forward, our strategic vision – to serve our customers better than anyone else through providing a world of solutions that are simple, easy and valued by our customers.

We are continuing the strategy we developed four years ago, this is an evolution, but with a greater 40 focus on our customers. As I said, this is where we really do create value. We have proved it time and time again. We have now got these nine initiatives that will be based around invest, satisfy and growth. The outcome of our shareholders from this strategy should be sustainable free cash flow generation that will provide the board the flexibility to make the required decisions that they need to going forward.

We remain incredibly enthusiastic about this business. The demand for our products and services is second to none. We have unique capability and an outstanding platform for growth.

We have strong growth prospects and we have the strategy and the people to execute on these initiatives as we go forward, but let me stress, 95 per cent of this is execution, 5 per cent is strategy.

We remain absolutely committed to being a world class Telco. That will be the standard we measure ourselves against and we will continue to grow our advertising business through Sensis as a core part of our business.

Thank you very much, that’s it. We’re going to take a break now and then we are going to ask Holly to come and present on product, then we will have Q and A.

[MORNING TEA BREAK]

HOLLY KRAMER: Thank you, Ben, and good morning everyone. Not that I'm actually counting but this will be the fourth time I’ve had the opportunity to talk to you about our plans for building out products and services that help Telstra differentiate in the market. David talked a lot about our strategy being based on differentiation so I want to talk to you today about how we’re planning to do that.

So for the fourth year we have followed the same strategy and it’s quite simple as well. It’s leveraging all of the investments that we’ve made over the past years in brands, network and service delivery to drive a unique experience for our customers. Our product roadmaps that we develop each year are aligned to three segments and we build our capability from the network layer right up through the services and applications that we offer in each of these markets.

Now what has changed, although the strategy remains the same what has changed over the past few years is the nature of the competitive environment. We’re seeing far better competition coming from the over the top players and also from the device vendors than we ever have in the past and although we continue to invest, as you’ve heard today and has been well discussed, we are facing a future where our reliance on the network access layer as our primary source of differentiation is being eroded.

So we are looking at our opportunities to differentiate and add value going forward and realising that they will now come from new sources. You heard David talk about the strategic investments that we’re making in the core in building out network intelligence and service enablers that allow us to deliver a content in applications whether they’re on our own or with the content owners that we choose to partner with, but to deliver them with better quality, guaranteed service levels and as an integrated experience.

And unlike the over the top and the device players, we hold customer relationships in many cases, we hold the customer relationships and that enables us to deliver a more integrated or a more holistic end to end experience for the customers when in most cases they’re not able to achieve.

So we may choose to co-operate, we may choose to compete with all of these players, but the key point is that our investments and our strategy are all about shifting the competitive battle ground away from network access and I can assure you that based on the investments that we have been making, and will continue to make, that we’re well ahead of our competitors in this regard.

So let’s get specific. Let’s turn to each segment and see how these strategies are playing out.

In Enterprise and Government David has already talked about the migration of our customers to IP and this providing a new platform for growth. Well, we’re well past the crossover point in legacy data and now have IP penetration into this space, 62 per cent of our customers.

So the move to IP is great because the move to IP then opens up the door to provide an increasing array of services from network management to security, telephony, hosting, in many other value added applications.

As you can see, those little numbers circled on there are penetration numbers and so the penetration of managed services has also passed the half way mark and we’re seeing steady growth in the uptake of applications as well.

10 Now the best evidence of this success, we can certainly say that we are, but the best evidence is the success that Nerida and her team have had in the last year of securing deals in the private and the public sector from the landmark tenure, outsourcing deals with CBA and Coke, to the broadbanding of the education system now extending to New South Wales and Catholic Education.
15 And while unified comms, we must admit, has been the subject of a fair bit of slide wear over the past years this, too, is really becoming a reality. The ground swell of commercial rollouts in both hosted and managed CP offerings along with hybrid solutions that combine both for customers like Aussie Post.
20 Our unique offerings are as a result of the Cisco/Microsoft partnership which we announced last year and I'll touch on in a minute. These are resonating in the market and that’s what’s helping build this pipeline for growth for us.

Now probably one of the most exciting opportunities for us in the future is in managed ICT. Our 25 recent cloud computing deal with Visy has been much publicised and I'm pleased to say it’s very much on track. But our customers can see that the benefits of Telstra delivering virtualised scalable ICT offerings and allowing them to move to opex based models are the way that they’re going to achieve productivity in their own businesses and we’re investing heavily to make sure that we are the leaders in this market.

So Next IP has indeed created a platform for growth for us but what we’re doing is we’re building capability on top of the network itself, in the intelligence and in the platforms to help us deliver value added services and move up the ARPU escalator.

35 So turning to the business segment, we have a similar strategy for driving growth in this market. Deena and her team have had very good success in moving customers onto our access networks with business broadband and IP. In fact 25 per cent growth in the last reported quarter and, again, as a result of solid product offerings that meet the needs of this specific segment of customers.
40 So each year we’ve enhanced business broadband to deliver better security, better performance that businesses need. So as we migrate our customers in this segment up from the consumer offerings into business we’re seeing an average ARPU uplift of around 28 per cent so customers are actually willing to pay for the services that they really need.
45 Similarly we’ve simplified Connect IP by bundling it and therefore it offers a secure reliable service but we’ve also made it easier for customers to purchase and also we’ve reduced our time and the process the customers go through to activate, quite significantly in fact, over the last six months or so.
50 And then beginning to grow on top of that we’ve bundled IP telephony into the Connect IP product

and what we’ve seen in the last year is a threefold increase in the uptake of IP telephony amongst customers on this base. And through our partnership with Microsoft and others, we’re working with TB to build out integrated email solutions that work on fixed and wireless. So David talked about integration where it matters, email is absolutely, positively integration where it matters. You want your email service in your office to be the same one that you’re receiving on your mobile device and so we’re building a really strong set of seamless offerings here.

And I would hope most of you are familiar with T-Suite, our SAS portal for business applications. Just two months ago we launched the Microsoft online suite of collaboration tools into T-Suite. This is a world first and we’re working closely with Microsoft and their channel partners as well to develop the market for cloud services.

It is, as David said, still early days and yet the business case for small businesses is extremely compelling and we’re confident that our leadership in this space will help us build stronger relationships with these customers going forward.

Now the next thing I want to do is give you a brief update on the Cisco and Microsoft partnership because we did announce it here and investor day just under a year ago.

20 I'm pleased to say that as a result of that collaboration we’ve jointly launched 15 products since then and we have a further 18 in our pipeline in the coming year. And it’s not just any pipeline, it includes many, many market firsts and even world firsts because that’s the nature of these relationships. These companies recognise that working with us they can test the market, they can test their relationship with carriers because, again, don’t forget this is a shift in their model, in many
25 cases moving to a good and simpatico relationship with carriers where it’s often been kind of an interesting relationship.

So I’ve highlighted many of these in the last few slides but just some examples of what we’ve delivered are the integration of our TIPPIT IP Tel service with Microsoft’s OCS client, so when you’re using OCS you’ve got one click to call over the TIPPIT network for our hosted UC customers. We’ve also done that in the Cisco environment as well, integrated OCS into Cisco, again trying to make sure that we’re covering all of the market needs.

We’ve delivered telepresence B2B on the Telstra network. We are seamlessly integrating mobility 35 where it matters into these offerings and we’ve also worked very closely with Cisco to develop a model, we actually have a specific lab in Melbourne where we’re delivering much greater speed to market on the latest software releases in managed networking, helping us to stay right at the forefront of the market.

40 So we see these partnerships, and David also talked about kind of the shift in where we’re going, that these strategic partnerships are absolutely the cornerstone of our product strategy and we’re already working with these to expand those relationships not just to these specific segments and these categories, but into new areas as well so it continues to really build and go from strength to strength.

So now I'll turn to consumer for a moment. David’s introduced you to the concept of the Next Generation Home. As you know, the last few years we’ve had a significant focus on Next G and we continue to, and I'll talk to that in a minute, but this past year has really seen us shift our focus and attention heavily into building the foundations of this Next Generation Home.

High speed fixed broadband is central to our customer product strategy and it’s going to form the basis of our multi-product holdings that we’ll provide customers into the future regardless of whose fibre or HFC access network is connected to their home and that’s a really important thing about this product strategy. It’s based on high speed access but it works on any access network.

But building the Next Gen Home is not just a simple and straightforward task, it’s not just about rolling out one product after another. There are a number of components that all need to be in place to deliver an experience that our customers are going to expect from Telstra, in fact, a Telstra experience that differentiates us in the consumer market.

So the first element, of course, is the network. Since March we’ve upgraded another 450 exchanges which now means that 90 per cent of Australian houses, or nearly 90 per cent of Australian households, have access to high speed broadband. Today, about a third of our customers are choosing to take up high speed plans and that’s continuing to grow.

The good news is that high speed customers are more satisfied and they’re delivering us higher ARPU. And, of course, high speed is obviously what’s driving this greater consumption of video services but we’re also finding that the bandwidth allows for increased simultaneous usage in the household. It’s not just one person downloading large files, it’s multiple people doing multiple things at the same time and, of course, that then continues to grow and drive greater bandwidth and so on.

The second element of the Next Gen Home or, in fact, I would say a prerequisite, is our ability to support our customers in the double, triple, quad play households. The IT transformation has been fundamental to our service proposition and I have to echo John’s comments here, it may have been a challenging task and it’s certainly been a challenging task, but we’re nearly there and it is going to be absolutely critical, the ability to see all of our customer services at one time, it’s going to be critical to our success in servicing customers in the Next Generation Home of the future.

40

Moving to the third area, you would be very familiar, I would hope, by now with our commitment to providing best in class content and applications as part of the Telstra proposition.

Over the past year, Justin and his team have continued to work very hard to improve and expand all the time on the BigPond content offering, improved and updated the BigPond homepage which is seeing significant growth, not just to the site itself but to customers taking offers and going to take up our applications and services that are distributed on the portal.

We’re also introducing new categories like health. Health I think, was one of those sort of speculative ventures that’s now really turned out to be one of the most compelling and highest traffic sites on BigPond so we continue to invest and differentiate on the content side.

On the application side, again harking back to last year and those of you who were here last year, we launched My Connect which is our integrated fixed and wireless unified messaging service that supports our online and mobile customers.

Over this past year, since we last spoke about that, we’ve seen over a million customers migrate to the webmail service and what we’re seeing now is month on month a growth in the use of the mobile functionality. Those are typically chargeable services so that’s what we want to see and that’s what we are seeing and it’s growing steadily, as I said, month on month.

So, yes, customers are seeing value in this integration, David’s point, it’s taken them a while, it’s taken us a while to get it exactly right but it’s delivering as we expected.

5

And the fourth component is devices and I think this is probably the most critical in the sense that it’s through our device ecosystem that the full experience of the digital home is actually tangibly delivered to the customer.

In the past year we’ve done a number of things. We’ve launched better quality, lower cost Wi-Fi home network gateways and these are being taken up now by 75 per cent of our new fixed broadband customers. This has been a dramatic shift.

The good thing about that is that this gateway provides the platform for a future roadmap of a whole range of things, of further connected devices, of management of content distribution through the home and the introduction of new home services like energy, management, security and so forth. So it’s really putting that platform in the home that enables the customer to really begin to get more and more value out of the Next Generation Home.

Meanwhile FOXTEL continues to enhance our pay TV offering and our partnership on the mobile side extends this service onto the mobile platform as well. That’s been a real great example of collaboration.

But one of the most exciting new innovations for the home is what we’re calling the fourth screen. This is a whole new device experience that brings together PSTN calling and touch screen access to the internet in the form of a seven inch tablet and a cordless handset. So it’s not a PC, it’s not a TV and it’s not a mobile device, it’s a fourth way to consume both calling and internet services.

So today we’re introducing to you a new service call T-Hub and we’ll be bringing this to market in the coming months. It’s essentially what we call the home phone reinvented and we’re going to be using it to differentiate Telstra’s fixed line offerings, fixed line bundles, with an only at Telstra experience.

We’ve combined enhanced touch screen calling experience that you get today if you’re using an iPhone or an HTC with integration into your online address book, one click access to BigPond and Sensis content and popular internet services, YouTube, Facebook and the like.

Add to that the ability to listen to internet radio, a device that works as a digital photo frame when it’s not in use and that’s also still just a fraction of the capability that you can use in this device.

So I imagine some of you might have seen them, we have a few of them on display here today, and I would encourage you to check it out, have a look and certainly give us your feedback, but we’re really excited. We think this is really going to start to transform and create a whole new way for customers to interact not just with fixed line calling but also with the internet, sort of the snacking experience if you will.

45 So moving on, Next G does absolutely continue to be a platform for growth and a source of differentiation for Telstra. As David said in terms of what are we seeing as trends, everything’s going wireless. Wireless is complimentary to fixed but there’s a world of potential from growth in wireless.

50 So as we’re driving the 3G penetration into our base, we’re able to do something that very few

telcos have been able to do which is the fact we’re holding our voice revenues which is allowing us to then drive pure growth from the growth and data on top of that.

We’ve done this not only through network superiority but also through innovation in areas like wireless broadband, in user interface design and the continued development of apps and services.

Now I’ve talked, we’ve talked for a long time about our work with the device vendors to customise our user interfaces. We’ve also talked about the launch of Telstra One which is our own customised user interface and since we’ve launched UI One on a number of devices into the market we’ve seen increased data pack attach rates for those devices, data pack and content ARPU uplift and increased usage, and I mean serious increased usage.

For example, the use of centre search on these devices is eight times greater than on native device UIs where search is buried and you have to search for search. So it’s really making a difference when you pull these capabilities to the surface.

We’ve also recently launched FOXTEL and BigPond TV on the iPhone and if you don’t have an iPhone and you haven’t seen it, find someone who does because I suggest you take a look at it. It is truly a mobile TV experience and really, really impressive, I must say.

So moving to the next slide, I just want to touch on wireless broadband for a minute because this is, you know, by anyone’s terms this is an explosive category for growth. Without a doubt Next G alone is providing us unmatched speed and coverage in this area. But we have continued to innovate on our products so that we can command premium in the market by delivering even more value beyond the network.

So while the BigPond products offer unique content and applications in the consumer market, we’re building out a full range of products that target the needs of all the segments. We’ve just launched a product in recent weeks called Enterprise Mobile Broadband Plus, right at the top end of town, as an example and what we’re doing now is providing corporates with a fully integrated fixed and wireless access to a corporate VPN bundled into a wireless broadband product with enhanced security, device management and a global roaming footprint.

So this means now that a CIO can really take control of what their staff are doing, which access network we’re using, ensure that they’re getting the best experience and also the company’s got greater certainty over security and cost control. And what you find is that when you’re providing something that companies need at this end of town, they will pay for it and that’s how we’re sustaining differentiation and price premium into our service.

We’re going to continue to extend our wireless leadership going forward and we have committed, as you would know, to maintaining market leadership in high speeds. We are investing to capitalise on the enormous potential in m2m. In fact I'm not sure if you would realise this but m2m, machine to machine or telemetry in wireless is already a hundred million dollar business for us today, but it’s one that has huge growth potential ahead of us. We like to say a SIM card in anything that moves or doesn’t move so we really think there’s great potential for telemetry going forward.

We’re also capitalising on phenomenon like social networking and the third party apps store, creating better customer access to those services from their mobiles and not necessarily trying to create our own but leveraging what’s already happening out there because we can monetise this through the sale of data packs, through SMS revenues or through revenue shared deals with some

of these other players in this market. So there is opportunity and we’re taking advantage of those opportunities to capitalise on these phenomena in the market.

So I think it’s safe to say that there is plenty of runway and growth left for us in mobility.

Now just before I close, it is important to note that the product roll isn’t just about fun and games and developing new product and driving top line revenue, we’re also about managing product unit cost through the product life cycle. As John has alluded to in the transformation presentation, one significant element of the transformation has been the exit of all products and platforms and the migration of customers to new ones.

As you can imagine, the introduction of new networks, new IT systems, the migration of all those customers has been an enormous program of work that was all driven by transformation.

Now what’s happened is that in the last three years we have exited roughly 90 products. That is products only. If you include plans it’s in the many hundreds or even thousands. We’ve exited 90 products. I would hazard a guess that that is about 10 times as many as we exited in the first, in the prior decade. It’s just not natural for telcos. It’s natural to build new products, not to kind of clean your house, but what has happened is we’ve actually developed a core competency in this area and it’s very much become a part of our core business and it’s very important, of course, to our life cycle management because it’s about driving out cost and driving out complexity from the business. Not just cost at the back end but cost and complexity at the front end for our customers and our front of house staff.

So in summary, I just want to reiterate, there we go, the points that David made at the outset and that our product strategy is very much aligned to, in fact is a fundamental part of the corporate strategy. We’re investing. We’re investing to innovate and differentiate in our product area, its product and technology combined set of activities to create this new form of differentiation. We’re delivering on our commitments to bring these products to market for our customers and satisfy

what they tell us they want and, as you’ve seen demonstrated in a lot of these areas, we are realising growth from this strategy of starting at the access layer and moving up through differentiated products and services.

So thanks very much for your time today. Over to you, David.

DAVID THODEY: Well, thanks, Holly, for that. We are just now going to move into the Q and A session. That is the end of the formal presentations. We are available until one o'clock, but if you have to go that's fine. I am going to invite the retail GMDs and Holly is going to stay up here, so if you come up on the stage now. We are happy to take any questions across NBN, IT Transformation, strategy or product roadmap. Obviously, it is hard for us to talk about numbers in this product today, but any of the guys can talk to you. I think you know Holly who has Product Management, David Moffatt, Consumer and Channels, Justin Milne, Telstra Media, Bruce Akhurst, Sensis, Deena Shiff, Telstra Business, Small Media Business, Nerida Caesar, Enterprise and Government, and John. So happy to take any questions and just an opportunity for you. First question.

QUESTION: (Sameer Chopra, Deutsche Bank) I have two questions. First of all, these investments that you are making in IMS for example and the SDF of the product layer, do you see these as being business as usual or should we expect another IT capex above all that might come at a later stage?

DAVID THODEY: I can answer that. Within our business as usual.

QUESTION: (Sameer Chopra, Deutsche Bank) The second one is: In previous investor days you focussed a lot on cost out and the potential within the business. The strategy we have seen today has been around new products and growth coming from products. You have spoken about simplicity and simplifying processes. Is there room for further cost cuts?

Can you get your processes efficient enough that you could rip another half a billion over and above the current IT plans?

DAVID THODEY: Without committing to any numbers, absolutely. I think we have got to continue to drive simplification and productivity in cost reduction, absolutely, but we are not making any commitment to numbers though. Very very important.

15 QUESTION: (Sameer Chopra, Deutsche Bank) The third one is around - we have spoken about products. The other aspect of that is a go to market strategy. Some of these products will require quite a unique go to market, particularly around small businesses and corporates. Do you have those capabilities? Can you actually generate revenues from the products?
20 DAVID THODEY: That's a really good question. We didn't go through that today. Why don't I ask Deena to talk a little bit about what we are doing in Telstra Business around the business centres and some of the new innovative go to market strategies and then if you need anything more we can go there but very important.
25 DEENA SHIFF: I guess you are saying as we go up the application stack, how do we sell and support. So good question. What we need to do, and I think this goes to the goal of trying to provide a more holistic and improved service for the customer in any event, is to multi-skill customers, so multi skill our own people when they deal with customers, so when they go to mixed fault centre they are actually multi-skilled now in dedicated groups in Perth and Townsville and can deal with trouble
30 shooting across a range of services including T-Suite actually. We are also deepening the coverage in the mid market. We don't have account management, so that you can get more face to face contact. A contact centre will tele appoint into somewhere like a business centre so that you can get a more intimate experience in relation to applications and also better access to support, obviously putting a lot more work into on-line service and support. So a range of activities with T-
35 Suite. We have just recruited dedicated staff who are a bit more web 2.0 than our existing sales staff and segregated them to incubate that service because it is fairly unique for us and for the market actually.
40

DAVID THODEY: David, do you want to talk about on-line in the consumer because on-line is incredibly important for us as we move forward?

DAVID MOFFATT: Sure. The go to market strategy in consumer is all about channel integration and differentiating through a high level customer experience, very high touch point, say a T Life store, all the way down to customers having the opportunity to self fulfil and to find out about products and service and integration, et cetera. So a big investment that is already in the program of work and part of the forecast is to create upgrade the on-line capacity to create that multi-channel opportunity, which is going to be (a) lower cost, and (b) much better from a customer point of view.

QUESTION: (Sameer Chopra, Deutsche Bank) Can I ask David a question on that? David, when you look at some other related industries, like airlines for example, a lot of their sales and servicing is

done on-line, whereas telcos have never really taken up on-line. Where do you think realistically do you think consumers?

DAVID THODEY: Let me have a go at that. I am an absolute advocate for on-line. The challenge within the Telco industry is the complexity of the product. When you order an ADSL service, you have got to check whether there actually is service there, go through all the banking systems before you can actually do it. You can do an on-line order and pass it through overnight and come back. I am absolutely committed to on-line. I think it can deliver a better customer experience and take costs out. Stuart Lee who is sitting here has the role to co-ordinate on-line channels, and in the business units Deena has a very active on-line strategy, as does David with the on-line T shop, I am not quite sure, T life shop, and Nerida is working how we can do it in terms of serving enterprise customers, where you have got one person wanting to look at provisioning services. It is a very very important part of what we need to do.

John McInerney within the Transformation has built out all the IT infrastructure standardised across all the platforms so we can do it, but it is a completely different model because the business unit has got drive out integrated into their current coverage models. This is very important to us and relates to your earlier question about cost out, better customer service and hopefully getting better access. So thanks for that.

QUESTION: (Mark McDonnell, BBY) Yes, I have two questions. The first one is the dividend policy. Great to hear of the re-affirmation of the $6 billion free cash flow. The dividends have been capped at 14 cents per half now for some time. What is the current disposition within Telstra to increase the dividend in line with improved earnings and improved free cash flow?

DAVID THODEY: You know that it is a Board decision, but in the past the Board has always been very favourably disposed to shareholders and I think that will continue to be the case but it is a matter for the Board. John, do you want to comment further?

JOHN STANHOPE: No, I would just add that we nailed the $6 billion. There is obviously cash that is available for use. We would like to think as well that come decision time we might know more about the NBN. As I said earlier, depending on what outcome, we may need to invest, we may not need to invest. As a Board you would like to know the full picture, but, as David says, we have a predisposition to shareholders.

DAVID THODEY: And I think it is fair to say if we haven't got anything better to invest in, I can't think of a better place to put it than shareholders.

QUESTION: The other question I have is really about pricing, which really you haven't addressed as part of the strategy, but it does seem to relate to the ongoing challenges around margins, particularly EBITDA margins and the inherent intermodal cross subsidisation which occurs where a disproportionate amount of earnings are derived from legacy businesses, particularly voice. So there are clearly challenges for this, and particularly around investment decisions and inappropriate signals around investment where you are achieving lower rates of return due to mispricing between voice versus data versus video. I am wondering to what extent Telstra is looking to realign its pricing towards resource consumption and asset use within the business and to seek to remove some of these long running impairments to efficient investment?

DAVID THODEY: That is a big question, and yes, we did not address our pricing strategy. Let me just go through how we approach it.

Firstly, I have kept a dedicated pricing team reporting to Kate McKenzie that sits outside the business units, because you are absolutely right, you need an integrated pricing strategy. We also always try to leverage off whole of customer or whole of business contracts to look across a basket of products in our pricing strategy, because that allows us deliver differentiation. However, you are right as the profitability of any of your product portfolios moves around and you need to look at the market to make sure that you are correct in not becoming either reliable on maybe legacy products and where you price into the market. So the pricing strategy is an enormously complex area, but as I tried to allude to, rather than going to deep presentation on pricing strategy, it is about maintaining real premium but also being competitive, and there is no question that in certain products we have become too far out of the market and we need to come back in line.

It is not often actually purely margin, that is part of the question. Sometimes it is just getting clarity about what we want to offer, sometimes it is just getting it through the systems to be able to respond more quickly. I am happy to pick it up separately, but that is pretty much where we are at. Does anybody want to comment. David?

DAVID MOFFATT: The big thing is: Is the market opportunity growing? And I would argue in the consumer space the answer is yes in terms of the capacity of our products and services to be relevant. Have we today as a result of prioritising the mass market migration and moving to the new systems to get ready for whole of customer meant that we have left some of our pricing decisions in market for a little longer? The answer is absolutely. But do we understand the value and mix shift that is going on when people take different types of products and services? Totally.

25 So there is a positioning here to say at the right time you can always address value in a particular product category, and when you think about how these assets work together in a fully integrated way now to serve the customer, then the point becomes less about an individual product pricing strategy in isolation of the whole of customer point to what David said before. We very much understand both product profitability, whole of customer profitability, assets that serve those

30 customers and the mix shift that is going on, and that is where we are going. That is what we have been building for the last four years, integrated channels, integrated IT systems, whole of customer view and the capacity to bundle and have shared use and all of those kinds of things. So that is what is coming.

35 DAVID THODEY: Does that give you a sense? You are probably looking for a bit more detail than that.

QUESTION: Yes, but I think it should be okay for now, thanks.

40 QUESTION: (Christian Guerra, Goldman Sachs JBWere) I have got two questions. My first is also on pricing.

The thing that stood out for us with the full year result was the fact that your operating momemntum really slowed into the second half, and obviously there is a whole bunch of reasons behind that, but clearly one of them is pricing, and the fact that your broadband went backwards for the first time in the company's history was obviously a big issue.

Can you talk to us about the timeframe for the price reductions, which I think there have to be, and also you talked about the cost savings coming from the IT Transformation. Can you talk about how much of those cost savings will be reinvested as opposed to likely fall in the bottom line?

Secondly, John, a question on capex. Obviously without a new set of 12 billion dollar capex over the last four years, what is the timeframe now before the next capex bubble and how long will you be on this capex holiday for post 2010?

DAVID THODEY: I got three questions there. There was pricing on broadband and wasn't there a reinvestment question and then there was the capex.

QUESTION: Price generally...

DAVID THODEY: Without wanting to disclose too much, it is imminent. We are actively ramping up and we agree that we think that the fixed broadband decline is not good. Even though we had good revenue growth as people migrated to the higher plans, we did lose share in SIO. So we think we probably maintained share at a revenue level in fixed broadband. That's the current estimate, but that's not good enough. We want to make sure that the value premium is in the correct position in the market. So watch this space is the short answer.

In terms of re-investment, I am not quite sure I understood the question related to that.

QUESTION: You've talked about all these cost savings that are coming through in the next two to three years, quite a lot of those from the IT Transformation. Will we see the cost savings in the bottom line or will they be reinvested in acquiring customers?

DAVID THODEY: I think it will be a mixture. But why don't I throw it to John and he can pick up on the capex one as well, but the short answer is we are about the macro things. EBITDA growth, that's what we want to deliver, free cash growth and we will play with the parameters within that.

JOHN STANHOPE: On the re-investment of savings, there will be some of that, but getting back to the pricing point, and I think somewhat to Mark's point, we have done all this transformation in wireless, wireline and IT in order to leverage some economies of scale here. So whilst we will need to and you will see us adjusting prices to make sure we are not too far out of market, you have also got to focus on the unit cost coming down, getting the value from your investment. So the IT transformation will help us as well as the economies of scale in the network, help us get the unit cost price down so that when you drop prices you can at least maintain margins. Remember we talked about maintaining margins. That is how you do it when you are adjusting prices to stay in market. I just make that point.

The capex point, I am really glad to hear that you think that 14 per cent capex to sales is a holiday. That's pretty good. Your question about the bubble, I think that's pretty hard to predict. Obviously, when LTE comes along, and let's say we are still in the LTE game, there will be a capex bubble, because you need to make investment in antenna, you need to obviously make the investment in the software and so on, so yes, that is the bubble. The outcomes of NBN are particularly important, because you might get a bubble depending on what the outcome is if we have to invest to compete or you might get the bubble pricked if the right outcome comes and you don't have to spend so much capital on part of your network. So it is a hard question to answer. The one technology event we do know is in the future is LTE. Major technology change we just can't see immediately.

I always say the 14 per cent capex to sales is good for the next two to three years at least, and then I know LTE's coming along.

QUESTION: (Christian Guerra, Goldman Sachs J B Were) And can I just confirm that the systems are all okay now in terms of bringing out new pricing and new plans, there are no issue there with systems?

DAVID THODEY: There are still about a million customers to move from old to new, maybe a little bit more. So that creates a little bit of complexity but majority is there, and we will get that done pretty soon. The complexities when we had some people on legacy, some on new, that just made a very hard to do pricing plans in both. Now we are pretty much through it. I would say 85-90 per cent of the way through.

QUESTION: (Daniel Blair, Southern Cross Equities) I guess just following up on the retail strategy, I will be a bit more direct. Would you tell us what you want to hold broadband market share at, and, secondly, what do you see the discount to your current pricing levels? And then on the voice side of things you talked about stimulating usage. I think we heard that at the full year results. Would you just tell us what you are doing in that space? That is my first question.

DAVID THODEY: Okay, we will just give you some general comments on that. We think that we want to generally maintain share, that's where we want to be, prior to fourth quarter last year. I am not going to talk about specific discounts, but I think we want to continue to differentiate our product through bundling, packaging but also being competitive at the different levels within any broadband offering, and also we have great content, BigPond that Justin is working with, et cetera, that really does drive value, so we will continue that, but I can't talk specifically about any premiums of discounts.

25 In terms of PSTN and usage, a very good question. We are obviously in migration from fixed to mobile, and with the current impact of the economy people are not calling as much, but products like Holly's and in terms of T-Hub, some of the other stimulations we will put into the market, we are hoping to see that at least flatten out. Do you want to add anything else Holly or David?

30 DAVID MOFFATT: All I will do is make the obvious business point about the net present value theory that I think you all understand, which is you have got to maintain the capacity to continue to generate cash in earnings and margin while you are shifting through the inevitable customer behavioural migrations to different types of usage. I think we have done that pretty well, not perfectly, but we have done that well in order for shareholders to get a good return and for us to
35 have the capital to re-invest in new plans and pricing.
40

As usage comes down per user in terms of fixed line, the value that a customer gets is less relative to the access price. We understand that and that is why the new products and services, things that allow you to do a lot more, will stimulate usage, and what we have also seen is net usage has gone up per customer. People are communicating more in more ways. So you have got to look at your product substitution effect and the effective value that a customer gets and price to that. We won't claim to be perfect on that score, but I think if you look around the world and say who has managed their fixed line migration and yield and returns the best, we would be up in the top quartile, if not, right at the very top end.

Now the question is: With our bundling and packaging capability and new devices, can we stimulate more usage and adjust pricing? We think the time is right to think that through, where customers will pay for what we have got and I think continue to use more.

DAVID THODEY: That's good. And just like in the broadband area we have plans to remain

competitive.

QUESTION: (Daniel Blair, Southern Cross Equities) Just as a follow up, in terms of the NPV of the customers, does that become a consideration in the NBN conversations?

DAVID THODEY: The NPV of the customers?

QUESTION: The number of customers and obviously the NPV, does that become a consideration as you discuss the value of those customers in terms of the migration passed to NBN, i.e. being a bit cynical, would you buy share to enhance those conversations?

DAVID THODEY: I don't think we will do anything stupid in the market because I don't think it is in our interests to do so, but are we planning on competing aggressively, both on service, value and price and how we can differentiate the product, absolutely, because that is important and I think we deliver a great service. I want to be very clear about that, I want to compete. One more and then we will go on.

QUESTION: Just my final question: On the Transformation, and, John, I know you want to put this to bed, in terms of the numbers you outlined in terms of cost out and revenue benefits, can you give us some clarity around the base case, what you see as the base case? You are obviously talking about $300 million of benefits this year, $700 million the year after and so forth. Can you give us some clarity around what that base case is, and then as a follow up, in terms of those benefits can you give some clarity around both the hard and soft benefits. So if we are talking about revenue, we might be talking about how this in turn improved what has happened in terms ARPU uplift, softer benefits might be.

JOHN STANHOPE: There is a lot in that question. When you say the base case, I consider what we put up there is the base case. That's what we are going after. As usual, I guess the harder elements are the cost savings because you have greater control over it. The elements of the revenue increment I would call softer but we will go hard after them, because we are making assumptions about better customer relationships because we have got a single view of the customer and therefore we have got their information, we can sell more to them and so on. That is very largely, cost is too but very largely on the perfect execution. So there is a perfect execution assumption in that base case. It is $300m this year and, as I said, $700m the year after and it builds to a billion dollars. We have gone over those numbers, they are not dreamt up by IT and they are not dreamt up by a CFO. They are numbers that have been checked through with all the people sitting up on this stage. I call it the base - it is the base case.

QUESTION: Just to clarify, presumably they are a comparison back, they are not a comparison to the previous year, they are a comparison to a pre-transformation view of the world. I am just trying to understand what that case is.

JOHN STANHOPE: Because we added some functionality, this is better than the base case we thought of back in 2004-05 because we have added scope but we have also added benefits, so we have got a cost and revenue benefit. So it is better than what we thought we would get back in 2004-05.

DAVID THODEY: Okay, thanks.

QUESTION: (Laurent Horrut, JP Morgan) Two questions, one for Bruce, one for Justin. Starting with

Justin, there are persistent rumours about BigPond launching an IPTV box or an IPTV strategy before you ran. Historically you were quite happy at Telstra as a company to have BigPond and FOXTEL competing at the margins. It looks to me more and more it is a bit more than at the margin, and given what FOXTEL has announced recently as well. So I would be interested to get an update on content strategy within Telstra.

Second thing, to Bruce, is the decision to close the Trading Post paper version, I am just interested to have your thoughts on whether you thought during this last downturn you have seen a sort of acceleration in migration to on-line, hence why you would have taken that decision, and maybe to cost for the print Yellow Pages as well.

DAVID THODEY: I might get Justin to answer both those because he is now responsible for the Trading Post and Sensis. So Justin.

JUSTIN MILNE: First of all, everybody likes to come up with ideas of how BigPond is competing with FOXTEL, but just a mini reality check is FOXTEL is a $1.5 billion pay TV business. BigPond is a $2 billion ISP business, that is substantially our universes are different, but like everybody in the world screens are convergent. If you think about the world going forward, there are a couple of things that are at the front inch of my consciousness.

First of all, a mobile phone in 20 years will be a thousand times more powerful, and when it a thousand times more powerful, which is a hell of a big number, it is going to be all about the content that is on that screen, and if you think about the screens that we use everywhere, and Holly has talked about the T-Hub, virtually every way that we communicate requires a screen and every one of those screens will be connected to the internet. So all the content providers will be providing content on all of the screens that they can. The important thing, I think, from Telstra's point of view is that it is hard for me to think of anybody who is in a better position, because we have got customer relationships with all of the customers on all of the screens. That is the way I think about our world going forward.

In terms of Trading Post, we are in the process of just about to complete the migration of customers from print to on-line. The truth is that Trading Post print is a dinosaur I guess. It is in something like the same sort of position as many other print publications around the world. Users are simply migrating to screens. It is more convenient, it is much more effective, it is more cost effective, you can search better faster, you can transact, you can do all kinds of things on screens. That business is no exception. We have been reasonably bold in moving early on that and I am extremely glad we have. Interestingly, our users are voting with their feet. The number of ads that we are placing online has increased dramatically since we just announced our migration. We will also be I think one of the first classified businesses in Australia. Shortly we will launch a complete mobile service. So you will be able to take a picture of your used jalopy with your phone, you will be able to place the ad, you will be able to pay for the ad, and then you will be able to see the ad and sell the car, all on a mobile phone, without having to go near a keyboard. We think that is the future of classified businesses and we are moving really to get there.

45 QUESTION: Apparently you have been ready to launch a box able to deliver IPTV services outside of FOXTEL.

JUSTIN MILNE: I know if I asked you not to tell anybody you would, but you will have to forgive me if I don't reveal our entire product range going forward.

DAVID THODEY: I think it is fair to say we will continue to pilot a lot of technologies going forward.

QUESTION: The read across for Yellow Pages print, if the trends are there in the Trading Post paper, they probably are there in Yellow Pages print?

BRUCE AKHURST: We are not seeing that in Yellow Pages print. Our usage is pretty constant. It goes up and down a little bit, but overall the usage in print is wholly. We have launched this year 13 new companion directories in regional markets, in the car directory you might know it as. That is increasing usage in print. So the usage between our books can vary a little bit. I think the very interesting story as far as usage is concerned, which is the life blood of the business for our advertisers, is it is up ten per cent this calendar year on the back of constant usage in print but quite a dramatic increase in digital products and also through the syndication arrangements we have done with Google and now with Bing. So that is quite a pleasing story. On the other hand, like all advertising businesses, those of you who followed it this calendar year, the early part of the year, as I said at the half year results, the print results were subdued, but we are seeing nice growth, double digit growth continuing in on-line and quite good growth in the regional markets now too.

QUESTION: (Ian Martin, RBS) David, I just wondered if you could give an update on the discussions with the employees and so on the workplace agreements. I think you offered nine per cent over three years, was it?

DAVID THODEY: Just a little bit higher I think, Andrea. We are still into the middle of negotiations and we should know, Andrea, within a couple of weeks couple of weeks.

QUESTION: And I just wondered how sensitive the guidance is in the three year outlook too?

DAVID THODEY: No, currently all within guidance. No omission.

QUESTION: (Sandra McCullagh, Credit Suisse) Three questions, David. EBITDA growth, you said the focus will be on EBITDA growth. Can you give us an idea of what is the sustainable EBITDA growth over the next three years? Secondly, you have mentioned Asia but you haven't said anything about the New Zealand business. What is the future for that business? Can it become profitable?

35 Thirdly, 2G, are there any plans on the 2G network and more of a push of customers to 3G?

DAVID THODEY: I will share the questions around just to get some of the other people involved, but EBITDA growth projection is low single digit for the next 12 months. It is very hard for us to give you anything more than that, just because of all the uncertainties but we are still planning on growth. I am sorry, it is just difficult in the current environment. We see a lot of good opportunities going forward, but it is just with all the variables that we have got at the moment it is difficult.

In terms of New Zealand, while it is profitable on the New Zealand books, which has been a great achievement of John, the current Chairman of TelstraClear, and we are currently going through a lot of work to see how we can make sure we are getting the economies of scale across the Tasman. I will ask John to comment on that and then I am going to ask Holly to comment on the 2G, 3G mobiles, very important as we move forward.

JOHN STANHOPE: TelstraClear in New Zealand is still an important business to us. There are still the cross Tasman relationships, multi-national - sorry - intercompany, if you like, relationships that

we have, and our approach to TelstraClear is to improve the profitability and it is improving, and it will improve again this year. Our approach to it is to integrate the functions that we can, and that are sensible to, back into Australia, and our expectations are in the order of a $20 million saving from that sort of integration and therefore increased improvement in the bottom line. So we are running the businesses lean and mean as possible and leverage off the capabilities back here in Australia. That is fundamentally the strategy.

DAVID THODEY: Maybe I can clarify. I think of our domestic business as Australia New Zealand. That is why I don't talk about it specifically, and more and more that would be the way that we run the business. I think that only makes sense. It just takes time. We always have local presence in New Zealand because it still is another nation, as you would appreciate, and we have strong sales and market. The more that we can just run common infrastructure, common banking systems, but that takes time and I am not about to invest a lot of capital to get that done. We are doing it step by step as it makes sense and bringing the architectures and networks closer together so we can run similar products. Deena has just gone on the Board, which has been great, so she is now leveraging her capability there and we will continue to do that as we move forward because that is the best way to run it.

Whether we will ever get to true seamlessness across Australia New Zealand, I am not sure that the customer wants that, banks maybe, but I am not sure the customer does, but in the enterprise market it is a very big requirement and we do often trans Tasman deals in the enterprise market, and that is probably where we have seen more, Nerida, over the years, haven't we? Yes. So that is it. 2G to 3, I will pass that to Holly.

HOLLY KRAMER: Ever since the launch of Next G we have moved aggressively to migrate our customers. You saw on my chart that we are at 62 per cent migration. In David's segment in Consumer, he just leaned over and mentioned to me that 80 per cent of our consumer post paid customers migrated. We actually looked in the planning round for this year at the business case for doing a very aggressive migration and what we found is - I mentioned the $100 million of revenue that we get from them and there are really just some FOs that aren't worth migrating and then we have got prepaid which we launched later. So that is a little bit later to go through the migration and we have all of those of you who we can't pry your 2G blackberries out of your hands. So there are just a few areas that it would actually probably be more cost than benefit for us, but certainly in every area where we can we are migrating as aggressively as possible. It is both on the revenue side and the network cost side that it is of benefit to us.

DAVID THODEY: We still see good ARPU growth as we migrate to 3G.

HOLLY KRAMER: Yes.

DAVID THODEY: Which is the critical thing.

QUESTION: (Alice Bennett, Merrill Lynch) I’ve got a couple of questions, maybe for John on the mobile front. You talked about a capex bubble associated with LTE. I’m just wondering if you could give us a little bit of a feel for what that might be? Whether it would be more or less than you spent on the Next G network, I don’t need exact numbers? But also where do you see the potential for Spectrum swapping deals as you look to potentially unwind the 3GIS arrangement at some point in the future and whether you could see yourself ending up with more of the 850 spectrum?

50 Got a question for Bruce, on Sensis, just wondering if we could get a bit of an update on SouFun and

the other Chinese investments and how they’re travelling? But also on the domestic front, just wondering if you can give us a feel for how you measure usage, when you just mentioned that print usage is constant, how are you measuring that? Are you doing surveys to see whether people are actually using the print product?

Lastly, just for Justin, a question on the media front? A number of years ago Telstra looked at acquiring Fairfax, which obviously didn’t happen. I’m just wondering how you see print - potential for acquisitions in print, given you’ve just shut down Trading Post but also whether you’d back yourself to monetise the news and information and classified content online, better than someone like a Fairfax Group. Just really if it is something you’re still at all considering?

DAVID THODEY: Okay, John.

JOHN STANHOPE: Okay, on the LTE bubble, I’m not going to give a precise number but just to respond to your question. It’s, as I said earlier, it would be an antenna change outside, so it’s a fairly - it’s a bubble because there is that significant build out. But unlike Next G you wouldn’t need to build a lot of extra base stations, if any, so that’s important. So comparing it to Next G, it’s probably not as expensive but it still - will be a bubble.

On the spectrum issue, spectrum, as I said earlier has a finite capacity and technologies may come along to expand that capacity. So any spectrum is important and if you can obtain any more spectrum it’s a good thing. I’m not going to comment on what’s going on with 3GIS and so on, but you obviously know they have some 850, and it’s a spectrum band we’re in and that would be valuable to us as well. So any spectrum by way of a means that we can acquire, or swap or exchange, or however it might happen, we’re interested.

QUESTION: (Alice Bennett, Merrill Lynch) Can I just ask a follow up question on spectrum in terms of the digital dividend? It’s obvious the spectrum won’t be available for a long time, but do you have any sense how early they could auction that spectrum off?

JOHN STANHOPE: Sorry, which spectrum?

QUESTION: The 700 megahertz, the digital dividend.

35 JOHN STANHOPE: Oh I don’t know what their timetable is.

DAVID THODEY: We just got clarity that firstly it will be available, we understand, but no, there have been no dates but you would expect a year or two, maybe. It may be earlier, but okay, so thanks, John. Let’s now go to Bruce, on China and Sensis usage.

BRUCE AKHURST: The businesses in China are performing very well. They’ve withstood the GFC well and we’re seeing renewed growth and optimism, as you’ve read in the newspapers recently in China and we’re seeing that coming through in our businesses too.

45 I think as David and John mentioned, one of the issues has been the appreciation of the Australian dollar against the US dollar, quite a dramatic change, I think a 30% change, so far this year. So that has an impact on translating that back into Australian dollars, obviously. But in local terms they’re doing very, very well, the growth is there and we just see a lot of opportunities around those businesses in China, including the ones that Justin mentioned.

DAVID THODEY: I might get Justin, who’s involved in some of the other ones to speak.

BRUCE AKHURST: On the Yellow Pages usage front, let me just make one point, I think it’s really important to understand. All uses are not equivalent. So measuring eyeballs, page impressions, all of these things are interesting, but the most important thing is how many leads do we provide to our advertisers that turn into sales for them. That’s the real return on investment that they’re interested in. That’s the value that we bring. So we’re trying to get to a different form of currency where instead of just measuring traffic numbers and these other approximates to that key thing, we’re really measuring leads because we know that we have a dramatically different conversion to purchase value proposition to our customers than anybody else - dramatically different.

In terms of raw usage though, our Yellow network in a month draws about 11 million unique users. So that’s across all of our product ranges in yellow alone and it’s probably a similar number in white, which is half the Australian population or more is using those products every single month.

As we’ve sat here today, there’s probably been, up until now, two million uses of our Yellow print products alone and by the time we go home tonight there will e probably four or more million uses of those print products alone.

20
So print is very, very, heavily used against all of the other digital products wherever you look. So that’s kind of an interesting thing. As I say our measurement of that is remaining constant.

How do we measure it, is the other question you asked? We have now seven thousand metered ads, which means each display advertisement has a unique telephone number which means that we 25 can track how many calls come to that number because it only appears in the Yellow Pages print book for example.

We are extending that program quite dramatically so we can give you the advertiser very specific information about what usage you’re getting from your print ad. Now you can’t get that for TV, radio, newspaper, billboards or any of our competitors, so we’re quite excited about that.

On top of that we do a whole range of surveys that supplement our information. There’s Frost and Sullivan, there’s a whole range of other industry experts that collate that information.

35 Okay, thanks, Bruce. Justin, very quickly can you just do the other Chinese that’s in - you’re not buying Fairfax.
40

JUSTIN MILNE: Yes, surprisingly we’re not buying Fairfax, or even News. I mean if you look - there are some numbers that came out yesterday that we were looking at which I think said that in the US circulation and readership declined 12% year on year, so you know , you’d be brave to put a business case together around that.

One of the reasons is if you think about the way people use mobile phones these days, and we know this because we can see what people’s usage is of course is a tremendous spike in usage when people get up first think in the morning. The first thing they reach for is their mobile phone.

For lots of people it’s their alarm clock - it’s for Yellow Pages, says Bruce, but after they’ve gone for the Yellow Pages, they go for the mobile and they check their messages and they check the news.

50 So what we have discovered is that our news service on mobile is many, many, many times more

used than our competitors in the traditional newspaper media. People are perfectly happy to get a BigPond news service on their mobile, which is a pretty good news service and it’s got the top 30 or so stories for the evening or for the night, that have come in during the night. So it’s a rapid update, it’s with you all the time, it’s sort of 24/7, it’s in your pocket and that’s the way people are moving. So that’s the areas that we’re concentrating on.

DAVID THODEY: Great and let me just quickly add that the – you were going to talk about the other China companies, just a couple of sentences.

JUSTIN MILNE: We’ve got a lot of big businesses in China, Bruce’s businesses which are the biggest in the world in their spaces in real estate and in auto. Then we’ve got some mobile value added services businesses; one’s called China M and one’s called Sharp Point and together they are the biggest mobile VAS businesses in China by revenue. They’re doing some tremendous things with some tremendous relationships.

We’ve got a lot of other relationships that we’re forming through those companies in China doing some very exciting things where China’s sort of the most amazing growth story, just so exciting and these are businesses that are doing very well in that space.

DAVID THODEY: I do want to say, Tarek Robbiati’s here who runs CSL at the back there and we’ve been very pleased with the roll out of LTE and the business continues to power along there. Impacted a bit on the exchange rate, but pleased with what we’re doing there.

Two more questions, one question each if I could, because then we’ll get you out of here.

QUESTION: (Richard Eary, UBS) Yeah sure, one question. I was just wondering if we could talk - you know, we’ve just come out of a pretty severe downturn, I was just wondering if we’ve got time to go across the three key segments, how it affected customer behaviour through that period in terms of not just churn but decision making of guys who stayed with you and how you dealt with it; then maybe an update on what the latest – how the economy’s impacting those divisions.

DAVID THODEY: Happy to do that and can I just check what the last question will be and is that related? Could we maybe hit – or is it completely different?

QUESTION: (Richard Eary, UBS) I’ll relate it for you David. In terms of the actual guidance of six billion there was pension top ups of about $500 million, but clearly bond yields and stock markets have moved in your favour. Can you give us an indication on whether that guidance still includes a pension top up and potentially also whether there’s any FOXTEL dividends going to come through as well?

DAVID THODEY: Okay, so why don’t we go David, Deena, Nerida, John. Actually we’ll get Bruce to say a few words, just a few words and then we’ll wrap up.

DAVID MOFFAT: So the consumer behaviour, definitely people started to be a little cautious in terms of frequency at which they were trading their assets, but the industry was so buoyant in terms of value discounts and all the rest of it that it remained pretty high. We didn’t see a perceptible change in foot traffic.

What we did see is that in the early stage of the recession people were much more cautious on their payments, so we did see some slowdown in payments. We’ve actually seen that pick back up again

to normal, in fact even better than normal levels in terms of those issues. So no basic issues in the core fundamental business for usage and behaviours in the consumer base, although obviously there is a lot of value out there in the different choices that customers have made, so they’re switching and swapping a bit more than they were before. But that’s something we’ve got plans for.

BRUCE AKHURST: Usage is up, customer satisfaction is up, employee engagement is up. Customer numbers have held, the customers have been very loyal. At the top end of town in the early part of this calendar year, what we found was the subsidiaries of multinational companies were getting directives from head office, cut your advertising expense and I think that hit all advertising media businesses. So that was one factor we noticed.

The other factor we noticed was, for businesses that were looking to expand beyond their territory, a lot of them said, no I’m just going to concentrate on my home base now, this is defend my core. So they weren’t aggressively advertising into new territories through out of area directories. Onlines remained double digit; quite pleasing growth there. Mobiles phenomenal growth; two million visits a month at the moment.

DAVID THODEY: Deena, small and medium business.

DEENA SHIFF: Yeah, the last quarter of last year there was a moderating effect I think in attitudes to investment as Bruce said, not just by the branch offices of multinationals but across the board as people kind of considered or were nervous about investing in CPE or new services.

25 The underlying trends at the moment for usage around PSTN and mobiles are pretty consistent with the historic trend actually and in some ways there’s some upside in that people who are worried about the carrying costs of their services will look with more enthusiasm on things like T-Suite which have variable costs. So that’s helped us provide a bit of a window for that, still early days.

30 Broadband growth is, especially for business broadband products, because of the big behavioural shift in small business to broadband and broadband-enabled services is continuing a pace.

DAVID THODEY: Nerida.

35 NERIDA CAESAR: We actually saw some quite interesting shift in the customer conversation, so it’s started to move more in the direction of all inclusive services, how we can extend the applications to take on more from the customer to deliver either intensity into new segments, so if you look at the very well publicised Coca Cola example, there was no issue there in terms of their commitment to a 10 year contract and extending out to some very important applications in the business. So the
40 CEO reported in the press release having every Coke machine connected real time through Next G and reporting when they’re out of Coke or when they’re down because at the end of the day that’s lost revenue for Coca Cola.
45

Commonwealth Bank, again the well reported contract. If anything we’re seeing intensity from the bank to move the transition faster, move the transformation faster so that we can deliver the value and the different layers of applications. So we saw that conversation definitely starting to move a lot quicker with our customers and becoming a lot more pervasive around the application layer.

Two fairly significant reports that we put out in industry, one was around the generation Y segment and for financial services, very specifically. We’ve had an enormous uptake in terms of our

customers in finance and insurance wanting to understand the details of that report; how can it help deliver revenue into that segment of the market.

5

We also put into market back in February the Telstra productivity indicator and launched that for government on Friday with Lindsay Tanner as you potentially read in the press. So again, intensity around productivity, recognising that it is important, there is a gap, a large percentage of private and government are not measuring it, so Telstra, can you work with us, help us measure it and help us lay the applications to start to deliver the productivity.

So for us it’s very much a differentiated conversation but a much broader conversation now about not just the networks, but how we deliver the service capability for new segments to market and driving competitive advantage for those customers in the markets they choose to be in.

DAVID THODEY: Thanks Nerida. John.

JOHN STANHOPE: Richard, the assumption remains the same in the guidance that there is still $500 million payment for the pension fund. There’s a little way to go in the market before our contribution would reduce. FOXTEL distribution as a partner, we’re still looking for a distribution. It is a decision of the FOXTEL Board and we’re looking for a distribution from any operational free cash. So yes, we’re looking for a distribution.

DAVID THODEY: Thanks John. Okay, we’re just a little bit over 1:00. Firstly, thanks very much. I hope that it’s been informative and you’ve had an opportunity to ask questions. We wanted to try to make it a more interactive session.

If you’ve got any feedback, please give it to Ben or any questions we’d be happy to take those. We want to make these productive sessions, not just a one way monologue and we can always improve. So thank you. We have a lot of work to do on NBN and regulation; I hope you’ve got a good sense of that. IT transformation, John’s not going to talk about it again. Strategy, we’re about continuing to do what we do best and we have a wonderful product portfolio.

Thank you very much for your time and we’ll look forward to talking to you some more.

[LUNCH BREAK]

AI assistant

TELSTRA GROUP LIMITED Call Transcript 2009

65927_rns_2009-10-28_ca872384-b061-45cd-b90f-c2f5834cc820.pdf

Office of the Company Secretary

ELECTRONIC LODGEMENT

Investor Day – Transcript

TELSTRA CONFERENCE

INVESTOR UPDATE

START OF TRANSCRIPT

JOHN STANHOPE: Yes.

QUESTION: Do you want to talk about LTE?

JOHN STANHOPE: Yes.

5

really.

playing out in the broadband market.

[LAUGHTER]

40

5

QUESTION: Price generally...

5

AI assistant

TELSTRA GROUP LIMITED — Call Transcript 2009

65927_rns_2009-10-28_ca872384-b061-45cd-b90f-c2f5834cc820.pdf

Office of the Company Secretary

ELECTRONIC LODGEMENT

Investor Day – Transcript

TELSTRA CONFERENCE

INVESTOR UPDATE

START OF TRANSCRIPT

JOHN STANHOPE: Yes.

QUESTION: Do you want to talk about LTE?

JOHN STANHOPE: Yes.

5

really.

playing out in the broadband market.

[LAUGHTER]

40

5

QUESTION: Price generally...

5

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TELSTRA GROUP LIMITED Call Transcript 2009