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TELSTRA GROUP LIMITED — Call Transcript 2009
Aug 13, 2009
65927_rns_2009-08-13_02604629-7694-4f4a-90c2-c497fc483bcf.pdf
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14 August 2009
The Manager
Company Announcements Office Australian Stock Exchange 4[th] Floor, 20 Bridge Street SYDNEY NSW 2000
Office of the Company Secretary
Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA
Telephone 08 8308 1721 Facsimile 03 9632 3215
ELECTRONIC LODGEMENT
Dear Sir or Madam
Transcript from Full Year 2009 Financial Results – Analyst Briefing
In accordance with the listing rules, I attach a copy of the transcript from yesterday’s Full Year 2009 Financial Results Analyst briefing, 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
FULL YEAR 2009 FINANCIAL RESULTS
ANALYST BRIEFING
THURSDAY, 13 AUGUST 2009
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BEN SPINCER: Good morning everyone, my name is
Ben Spincer, Director of Investor Relations. I would like
to welcome you to Telstra's results for the full year 2009.
In a moment I will hand over to our Chief Executive
and CFO to run through some of the numbers, and then,
obviously, we will have an opportunity to take some
questions. We have people here in Sydney, we have people
on the webcast and people on a Conferlink. We will take
questions both from the floor here and also from the phone,
after David and John have spoken to you.
So, without further ado, I will hand over to Telstra's
Chief Executive Officer, Mr David Thodey. Thank you.
DAVID THODEY: Thanks, Ben. Well, good morning. It is my
great pleasure to be here to deliver the Telstra 2009
results. Let me start by saying that we have delivered
very strong results that are in line with guidance and,
despite the tough conditions, we will be maintaining our
dividend, which we think is a good result.
We have achieved everything we committed to do in
2009, and our business remains focused on our target of
$6bn of free cash flow for 2010.
We remain optimistic about our business. The demand
for our products and services remains very strong right
across the market, despite the downturn. So, despite these
tough trading conditions, we are growing top line and
bottom line, and, as John keeps reminding me, we have a
very strong balance sheet, which we are delighted about.
I think that the strategy we set four years ago has
really delivered tremendous results, but we are entering
into a new stage. We really have to drive the benefits
from the incredible investment we made in transformation,
and that is both the IT transformation and also the network
transformation. I want to stress that, because driving
operational benefits and real value from those investments
is critically important and it has to be across both areas.
Telstra's transformation has been long. It is
complex, but it has been a very, very necessary journey and
I think, as I reflect on the business that I have been in
now for 10 years, it was a very necessary transformation
that we had to go through, because it has really set us up,
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as we go forward now, I believe, for the next 10 years.
But a critical part of this, and something I have
talked about quite a bit, is that we have to focus on
customer service. Customer service is not just a
catch-cry. It is about the fundamentals of what it is to
run a good business. Good customer service means that
customers don't churn. Good customer service means that we
are able to drive increased ARPUs and drive increased
penetration and share. So, as we move forward, customer
service is going to be something that we have to focus on
to drive shareholder value.
The economy is slower, and we do have regulatory
changes and also the NBN that are on the horizon. As we
have looked at that, we have had to implement some specific
strategies to make sure that we are ready to compete
aggressively in the market.
Later on I am going to discuss the national broadband
network, but I want to start by saying that we share the
vision that the government has for a fibre-to-the-premises
solution, and we share the view of the government that we
have to engage. They are willing to engage and so are we,
but we are engaging based on one premise, and that is about
driving shareholder value, protecting shareholder value.
It is critically important for us as we go forward.
What I thought I would do today is to discuss four
things. Firstly, I want to go through our results and give
you a bit of perspective on that. John will give you all
of the details. I do want to talk a bit about how we see
the market and our demand out there in terms of responding
to the market conditions. Then I want to look at what our
priorities will be for the next two to three years, and
then I will talk about our guidance for the next 12 months.
So, let's now turn to our results for the last 12 months.
As I said, we have delivered strong results, and it
has been in difficult times. We believe we have a solid
foundation as we move forward into this year. Sales
revenue was up 2.9 per cent; total revenue up 2.7 per cent;
and if you normalise for the KAZ sale, it was a 3 per cent
growth, which was right on guidance. Of course, if you
look at the normalisation of KAZ, it does not impact either
the EBITDA growth or the EBIT growth.
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Expense growth was just 0.6 per cent, and I have to
say that expenses are being managed very, very tightly; and
of course labour costs have been declining, which has been
a key focus for us as we have run the business.
Our declared final dividend of 14 cents, coupled with
the paid interim dividend of 14 cents, is now substantially
covered by our free cash flow, and our free cash flow was
up another 13 per cent to $4.4bn. Profit after tax was up
by 10.3 per cent, and our margins, reported on a full-year
basis, were 43.2 per cent.
As I said, we believe these are strong results in a
tough economy, and we have delivered on what we committed,
which was our guidance.
John is going to take you through more details on that
later on. What I want to do now is to give you some colour
across how the customer segments performed, and also the
product portfolio, so let's have a look at that.
At a retail level our growth was 3.4 per cent, and on
our international portfolio it was 14 per cent. This more
than offset the declines in our wholesale business. Let me
go through, very briefly, just a few highlights of each of
the customer segments.
Firstly, the Consumer group, led by David Moffatt, had
a strong year. Their second half was stronger than their
first, but I want to stress that David and the team have
been working diligently as they have rolled out the new CRM
systems. All the training, the education and the process
changes have been an enormous focus of the whole team as
they have really driven out the transformation systems.
I cannot stress how important this is, because you
have to do that while continuing to add value in the
market, drive out the differentiation and put out the
packaged offerings. David and the team have done a
tremendous job in this, and to see slight growth in the
second half was very pleasing.
Also we have been driving out all our program around
the T[life] stores. This is about changing the retail
experience. T[life] stores have a tremendous feeling when
you walk in. They have a good feel about them. We are
attracting customers in there, and so this has been a key
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part of building our distribution capability. T[life] is a
critical part of our retail presence in the market. So the
Consumer group has a strong result at 3.1 per cent, and
I am confident that, as the team are consolidating around
the new core systems, we are going to see improvement as we
move forward.
Now to the small business market and Deena Shiff.
4.7 per cent growth. This is, I think, a tremendous
result. As you know, small business is the heart of
Australia, and they have done it tough over the last
12 months. There has really been a lot of pain out there,
and Deena and the team have really responded well.
Remember, one of the big differences for us in the
small business market is our tremendous coverage in the
market. The team has enormous reach, right across
Australia. Working with TCW and Brett Riley, this has been
a tremendous partnership and something we have to continue.
We are seeing some changes in the small business
market. They are taking up more wireless products,
wireless data especially, up nearly 31 per cent; and we are
starting to see small businesses adopt IP more fully than
we have in the past. IP access was up 44 per cent year on
year. So you are starting to see some changed dynamics as
small businesses are starting to do things more online and
starting to really have a greater need for doing things
while they are on the move. So it is quite an exciting
time for the small business group, but I want it to be
considered that small business has done it tough.
We are very committed to this market. We are
committed to building long-term relationships with small
business right across Australia, because it really is the
heartland of Australia and what we do. So a strong result:
not as strong as the previous year, but, we think, a very
good result.
The Enterprise & Government group, led by Nerida
Caesar - who, by the way, I should quickly say, ran the
Wholesale group just for a month and, before that, was
running the National Sales Group - had 2.9 per cent, but
when you normalise for the KAZ sale, the overall results
were 5 per cent year on year. In the enterprise sector,
that is a very, very strong result. Again, we are seeing
quite a bit of change in that market. The adoption of
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wireless products is very strong, especially wireless data.
One of the interesting statistics in the enterprise
market is that 44 per cent of our mobiles revenue is
actually coming from wireless data. I think that is
probably a world record, but you can see the changing
dynamics in the enterprise as they are doing more and more
in the face of their customers where we have more people
out there doing things on the move, and our Next G network
The other big thing is around IP access growth. That
was up 23 per cent and that follows the trends that we had
in the prior year, up to $582m. We are seeing a very
strong adoption of IP. Now, remember, IP is like the heart
of a business, because that is what connects every branch,
every location. It is about how they transact their
business. So this is exciting. Of course, we are going to
see voice IP, further applications and cloud computing in
this market - of course, I am very familiar with that
We are encouraged by that, and of course we had strong
sales results in that market, as you see - strong wins with
CBA and the Australian Catholic Network, the Catholic
Church. So we are very pleased. We had sales of $1.1bn,
that is net incremental sales, for last year. So a very
strong result. So right across that retail segment we had
Sensis. I have to say it is a world-class
performance: 5.8 per cent growth. As you know, we have
talked a lot about this business, and when you look at the
directories business around the world, there is no
directories business like it. Bruce Akhurst and the team
Print directories grew in a weakening market with an
8.2 per cent increase in White Pages and Yellow Print
revenue growth. That is outstanding. White and Yellow
Online sites have experienced strong growth, with White
Pages up 107 per cent and Yellow Online up 15 per cent.
This business remains core to us. It is a very strong
business. Bruce and that team continue to move that
business forward, managing the complexities around print
and classifieds, and they are doing it very, very well. It
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Paul Geason, now running the Wholesale group, has come
in after a year of negative growth last year, which was
primarily driven by the continuing ULL build, which you
would have expected, and also DSL revenue declines. This
was expected, we had planned for it, and we are delighted
to have kicked off the year with a very strong win with
AAPT, which has been a very longstanding customer, and I
think this has positioned us well as we look forward.
Let me now turn to talk about International, because
that is an important part of the portfolio. While 91 per
cent of our sales revenue is domestic, international
operations continue to grow, and it is very important for
us as we move forward.
Let me make a few quick comments: SouFun is growing
at 29 per cent in local currency. The other China assets -
PCPPop, Autohome, Sharp Point and China M - all are meeting
expectations. I was up there just recently and I had a
good review with the team up there. We remain very
encouraged about those investments.
China M and Sharp Point provided combined revenue of
about $50m, but the interesting point was EBIT of
32 per cent for the first five months; a very strong
result.
TelstraClear in New Zealand delivered, in local
currency, 2.3 per cent growth, so we are pleased about how
that is performing. You will see in the accounts there is
some normalisation as you take out trans-Tasman, but in
local currency it is doing very well and competing
strongly.
Of course in Hong Kong, we have CSL New World. It is
a tough market in Hong Kong, but we have invested in the
Next G network. It is a world-class network. It is
probably the fastest wireless IP network in Asia at the
moment, and we believe that the team are well placed as we
move forward into this year.
So you can see, across the segments, strong results.
We are competing vigorously and we are also focused on
serving our customers.
Let's now turn to the product portfolio, and let me
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just give you a few highlights. John will pick up a little
bit more of this later on, but I do want to give you a
little bit of colour here.
Firstly, mobile services revenue growth, 10 per cent,
with wireless data up 31 per cent to $2bn. This is a very
strong result. A very strong result. Notably, 30 per cent
of our domestic sales revenue is now wireless. Mobile
retail SIOs are up 9 per cent; 3G SIOs are up 45 per cent.
I want to stress that the movement of our base across
to the Next G network is very important. Wireless
broadband SIOs are now over 1 million. We had 99 per cent
growth year to year, and mobile ARPU blended was up
4.8 per cent.
Now, a very important inflection point happened this
year. I want to talk a little bit about that, because it
is important. Our mobiles revenue now is bigger than our
PSTN revenues. That is the first time in a year that we
have ever had that happen. So we are now $500m of mobiles
revenue greater than our PSTN revenue. So we are very
pleased about our mobiles revenue and we think that it is a
good base as we go forward.
In terms of IP and data access, again, this portfolio
is very important for us as we move forward. We have seen
8.1 per cent growth, and that is driven off our growth last
year, so we think this IP platform is going to be a key
growth platform as we move forward.
What is interesting as you look at that, is that
IP access growth was 25 per cent. So as you are driving
out more access SIOs then you can drive out your usage on
top of that. So another great year for the IP access
portfolio, IP portfolio, and of course it is about managing
the traditional legacy product as we migrate to the new IP
platform.
PSTN decline of 4.9 per cent was sort of in line with
what we expected. What is important to note here is that
the retail revenue decline was 2.5 per cent, so coming back
to the wholesale decline, that is where we have seen this
migration across to LLU and the DSL decline as well.
Fixed broadband had a growth of 16 per cent, which was
driven by primarily ARPU increases; 2.3 million retail
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broadband SIOs. ARPU increased by 6.5 per cent up to
$57.70 as more customers are taking up premium, ADSL2+ and
Cable Extreme plans. So what we are seeing in that
broadband portfolio is people migrating to the faster
speeds, and we are seeing the ARPU increase, which we think
is a good outcome. But I do want to stress that we are
going to manage this share and revenue growth very, very
carefully, in terms of profitability as well.
I do want to mention Mick Rocca and the team who are
driving our Managed Network Services. Besides doing all of
the hard lifting out there in the field, Mick and the team
are doing very well. One key part of the portfolio is this
Managed Network Services portfolio which Michael has taken
responsibility for. We have seen 5.3 per cent growth.
This portfolio is the managed services. It is around
Managed WAN, Managed Radio, IP Telephony and all of the new
set of managed services.
This, we believe, will be very important for us as we
go forward, both in the enterprise market and also in the
business market, so we see this as a platform for growth as
we move forward.
Now to Media and Content: 9.8 per cent growth. As
I mentioned, this was underpinned by the Sensis growth,
which had strong growth, but also our Media business is
doing very well. It has continued to meet expectations.
It generated almost $100m of domestic revenue last year.
Now, this 42 per cent increase across BigPond and our
Next G customers is an important element to focus in on,
because we are seeing our customers wanting to download
more movies, more music, more games, more news and more
sports. So this is very important, because we are starting
to see a change as customers are really wanting to engage
with different types of content and this is a focus we have
to have as we move forward.
Finally there is Foxtel, which continues to deliver
very strong results. They have got great momentum and we
are delighted with their strong results - double digit
revenue and EBITDA; subscribers up and churn down. Foxtel
is a very strong business. Our content continues to
provide us with a great platform as we move forward.
Those are the key highlights of 2009. I want to
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stress this is strong result and I want to recognise the
executive team and all the Telstra staff. They have done
exceptionally well in tough conditions. We started the
year not expecting the global downturn. We have managed
through that. We have adapted to the situation and to come
out with a year at 3 per cent growth normalised for KAZ is
very encouraging, plus free cash flow growth of 14 per
cent, plus the profit growth. We are very encouraged and I
Let's talk about demand in the market because that is
important. I want to touch on a few highlights because
sometimes you forget; as you look at what the fundamentals
of the business are like, you have to look at what the
market is doing. There are a few things to highlight.
Firstly, the 24 million services we have right across all
our platforms; they grew 2 per cent year to year. On a
base of 24 million, that is encouraging. Broadband
customers reached 5 million for the first time and, as I
said, wireless broadband customers are up 99 per cent to
We have had tremendous growth on this IP platform.
Remember as you build the platform, you have to build and
attract all the access points from your customers, so you
have to be out there selling these products. IP MAN and IP
WAN are up 31 per cent and 21 per cent respectively. When
you put across that managed network services, that is a
very strong result and we think it positions us very well
competitively, but the demand for those products is strong.
Mobile data revenue, as I mentioned, is 31 per cent
year on year growth. Internet advertising revenues across
Australia and China for the first time hit half a billion
dollars. Traffic on our mobile network is doubling every
19 months. Let me say that again the traffic on our mobile
network is doubling every 19 months - 11 billion mobile
minutes and 8 billion calls on our fixed line network.
So when you look across that, the demand, the need for
communications products and services is strong. It has
been impacted by the economy, but we think the underlying
demand is strong. From a market share perspective, we
estimate that we have held share across fixed voice,
revenues and SIOs. So we think we have held share there.
However we think we have had a slight loss in our mobile
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SIOs and revenues. I want to pause here for a moment
We are balancing share and revenue with profitability.
We look at this every month. It is a trade you are always
doing, and we are going to optimise this for the best for
our shareholders. You can spend a lot of money attracting
a lot of customers and get top line growth. To drive
revenue growth and profit growth is what we are focused on.
The number one objective with customer service is, for this
company, profitable revenue growth, not growth at any cost,
and I want to stress that because this is a key focus for
us as we move forward. So as you look at that, strong
Let me just turn now to the tremendous cornerstone of
our strategy. These two networks, Next G and Next IP.
You've heard the rhetoric around Next G and Next IP and
sometimes I don't think it is really reflected of the
incredible asset that we have. These two networks,
integrated networks, are at the foundation of what the core
When you look at the numbers now, there has been a
significant change: mobile, fixed retail, IP and data access
now contribute 44 per cent or $10.2bn of our domestic sales
revenue. That is significant. As I also said, we have
seen strong growth in wireless broadband and broadband SIOs
are now 5 million. I can remember three four years ago,
that was a dream. So we have had significant change. But
we are seeing this change in our product portfolio and we
think within the next three to five years, that coming off
these platforms about 65 per cent of our domestic revenues
will be off these platforms. This is very important to
understand, so the aggregation across mobiles, fixed retail
broadband, IP and data access, that reflects the very strong
demand for these products and services and has been the
So two world class networks provide the foundation for
our growth as we move forward, and also we are in a unique
position. The integration of wireless and fixed two next
generation networks really does position us in a pole
position in this market. More and more we are seeing our
customers saying, "I don't care if I'm connected wirelessly
or from a fixed environment. I want the same experience."
This is very important in terms of our strategic position.
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Then when you add in the content and what we are doing in
terms of media, I think we have a very strong platform to
To summarise that section: demand for our core
products remains strong. We are encouraged by that and we
are going to continue to manage the balance between share
I want to talk about the priorities as we move
forward. As I introduce this, I know the media are saying,
"Hey, David, you have been in the job 90 days. What's your
strategy going forward?" Before I get into the priorities,
I want to signal we have had a complete review of our
strategy, a refresh of our strategy underway for about two
and a half months. We have been going through from the
basics, looking at what we need to do going forward very
importantly working with the management team and with the
board. We are going to share the results of that strategy
review/refresh in October at the investor day.
What I want to talk to you about today is the
priorities as we see them going forward and they fall into
four. Number one is customer service. I am going to talk
a lot about this today because it is so important for this
company. We are committed to delivering a strong
differentiated customer service. I'll come back and talk a
little about each of these in a moment. Second is
operational improvements. I have already said it is one
thing to do a transformation; it is another thing to drive
the value from a transformation. You put in new IT
systems. It does not mean you immediately get benefits.
It is hard work, very hard work, because you have to get
down and redesign processes, you have to train people in
new systems, and we are absolutely committed to doing that.
While I would never say to John that the hard work is
yet to come because the IT guys have done a tremendous job,
in many ways the work it still ahead of us. The
transformation work is now moving into business as usual
because the IT systems are there. We now need to drive the
value from them right across the business. That will be
our focus, to really drive value from this new IT
With regard to our strategy product differentiation,
the integrated products and innovation remain at the heart
of what we do. This is very important and our aspiration,
our objective to be a world-class telecommunications
company has not changed - not just the best in Australia,
but the best around the world. If we can truly leverage
off this wonderful fixed infrastructure, the mobiles
infrastructure and the wonderful assets we have in Sensis,
we are in an incredible position, we have incredible scale
and real differentiation. So if we can take that and
really meet customers needs, we believe that we can move
this business to a whole new dimension.
But it is also about pricing for value. While we want
to be the best, we also want to be able to justify the
premium we charge in the market, not just because of the
Telstra brand, but because it is a differentiated
experience, because we can actually articulate the value
that we bring. So that is very important as we move
Then, of course, we have regulation and NBN. This is
a critical part of what I am doing, this is all about
getting regulatory certainty for this business as we move
forward and protecting shareholder value. We continue to
talk to the government and we are trying to look to see how
we can help them realise their vision for fibre to the
home, but as I said, our focus is on our shareholders and
If we can do these four things, we think we can really
drive good growth as we move forward and also strong
Let's just move on. I want to talk a little to each
one of these because I think it is important that we spend
a bit of time on them. Let's talk about customer service
firstly. As I said this is at the heart of what we do.
Many people might say, "Hey, this is a personal mission of
yours David." Well, yes, it is, but I have to stress this
is not about passion or emotion. This is about good
business. This is about good business because if you
deliver good service, customers stay with you; in fact they
are very forgiving. We have already taken a number of
steps around customer service, and I am spending a lot of
time on this myself, both talking to customers, responding
to customers and talking to people around the company
because it touches every part of our company.
These things are not going to change overnight. Our
company is too big to see instantaneous change, but we have
started a journey and I can't stress how important that is.
This is not theory. I've been around too long and our
management team has been around too long. This is about
tough work. It is about every time a customer contacts
Telstra, they have a good experience. For investors people
sometimes say, "Well, what are your results?" But if you
don't get customer service right, your results go the wrong
way.
So we have taken a number of key actions and I want to
touch on them. We have already put millions of dollars
into training, specifically in terms of call
centres and retail shops. This has been an enormous
project. Don't underestimate that. You have to train
people to deliver good customer service and the new tools
so you actually deliver a differentiated experience. So
now we can talk to a customer and have all their products
and services in front of the consultant as they are talking
to the customer.
Also we have taken some bold moves. Customers have
problems and the one thing when you have problem is you
want someone to respond quickly. We have set new targets
across the business, for every complaint that comes in, our
target is to acknowledge it within 24 hours and respond in
some way with a solution or an agreed action plan within
five working days. This is important because it starts to
change the culture and the dynamics of the country - very
important.
Also we have set a target for all Telstra employees
and a bonus around customer satisfaction. Let me talk
about this for a moment because this includes all our call
centre staff, every technician, every engineer right across
the business. What this is about is measuring them,
measuring us on the voice of the customer. This is not an
internal measure. We will be doing surveys to determine
what our customers say about our service and only then will
we recognise that performance - very important.
We also made a few organisational changes. We have a
new centre for customer service and satisfaction and we
have also put in place a Customer Satisfaction Council
which I chair. These are important organisational changes
just for the change.
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Also we have to have some quick wins because you have
to get momentum. We have already looked at this but one of
the critical points for many of our customers is when you
move residence. So if you are moving with your PSTN
service and your broadband service often you've had to talk
to different parts of the business to try to get that
coordinated. Immediately we have looked at that said,
"Okay, how can we get one person out there to get that
done, get you on line and talking as soon as possible?"
David and the team, and with Mick Rocca, have done a
tremendous job. This is all about speed, about responses,
about really driving out for our customers a differentiated
experience.
These may be small steps, but I want to stress they
are important steps in terms of the long-term program. We
have a long way to go but we are very committed to getting
to the end of this journey and we will talk more about that
because this is important. We will have to invest in this
to get the results that we need.
Let us now turn to operational improvements. I have
already talked about that. We have done a tremendous
amount of the work in the IT area and we still have some
legacy products to exit as we go forward. We have to keep
driving this out and we are sort of moving into that stage
where from having talked about transformation, we are
moving into a "business as usual" stage. I don't want in
any way to imply we don't have a lot of work to do because
the team is still working very, very hard; but now it is
about driving the benefits from this.
I want to give you some statistics, because up here on
the chart you can see this progression across the last few
years. As of last weekend we have 9.2 million customers
across on the new platform. We are getting better and
better at doing it. That is a tremendous result. The guys
worked all weekend and very encouraging. Also 17.8 million
of our services have now moved across from the old platform
to the new, so we are starting to see the new benefits.
When you are still working with two platforms, it makes it
very difficult and we have to get that work finished as we
move forward. So over 70 per cent of the services were
migrated and customers. As I said we still have a bit more
to do but we will work through that. We have to get the
consumer migration finished and David and John are focused
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on that. We do need to start to move into this area now.
For those who know the technical side, this is very
important, this is about enabling Mick and the team to
manage the networks better. That allows you to do remote
diagnostics better, it is about reducing the number of
truck rolls. That is very important as you put in that
management layer across the business and of course
extending the ability of the platform, the CC+B platform is
critical right across the business, so Deena and Nerida are
looking at those as we move forward.
Also John keeps reminding me we have to turn off the
old legacy systems. He has gone a great job of doing it.
That is where you start to drive some productivity
improvement reducing really sunk capital, get rid of it,
move forward, and John and the guys are doing a good job at
that. But I can't stress enough that this is not easy
stuff. I have been around too long and I have been
involved in too many IT and network transformations. There
is nothing easy in here, easy to talk about but harder to
do. I have to say I do not know a better IT
transformation. I have looked at banks over the years, I
have looked at big retailers who have come out with big
statements around IT transformation. John will talk about
this later on, but we are within $200m of what we estimated
in terms of the overall transformation program. That is
very good and we now have that platform out there. So I
do want to give credit to the team.
We have more work to do - we do and we will get that
done. It is about setting this platform for the future.
If you can get this right, it gives you the ability to be
fast to the market and really drive out the changes and
deliver the benefits that we have talked about - so that is
very important.
Let me talk about the third one quickly because this
has been at the heart of what we have done. This has been
about the engineering guys and the product guys really
building differentiated yet integrated products that really
give true innovation. One of the great challenges that we
have is providing a unique experience across fixed and
wireless. This is a seamless experience. This is like the
strategic holy grail and we are making progress, tremendous
progress in this area because this drives true
differentiation and integration. You can see on the chart
there the common interface across all these platforms
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allowing people to have ease of use. Sol did talk about
one click, one touch, but this is about simplicity; it is
about making the experience stronger. When you have that
foundation, the integrated platform of Next G and Next IP,
plus putting across this content and a great user interface
you have a tremendous differentiation. Whether you are at
home on the move, you're in the office, no matter where you
are, if you are overseas, you will have a common
experience, common interface which drives a true end-to-end
experience.
Critical to this is our relationship with Cisco and
Microsoft and you have already seen some announcements in
this area. We think those relationships will be very
important as we go forward but I have to stress: our
objective is to keep customers connected - that is what we
are trying to do - and to drive usage. If you have people
connected, then they drive usage, they use content. What's
the outcome of that? Lower churn, more usage and satisfied
customers and shareholders. That is what it actually gets
back to. Over the next six months you will see some
exciting announcements from us. We are very enthusiastic
about this product differentiation. That is a very
important part of our priorities as we move forward.
Let me turn to the fourth point, which is NBN and the
regulatory environment. As many of you know, a couple of
months ago we made a very important decision and that was
to get back to the table. We wanted to talk about the
issues. We have a firm belief if you're not at the table
well, you can't talk about the issues. So we are engaging
constructively with government at the moment. We will work
through this. It will be methodical and it will be with
integrity and absolute transparency because we have to
drive a good outcome for our shareholders, also our
customers, also the people of Australia, as we strive to
meet their needs, and look at what are the government's
objectives, we will get to an outcome.
I want to be clear. The implementation study has only
just been kicked off. It probably will not be completed
for six to nine months, so it is very hard to get full
visibility of all the issues. It is very hard to get
definitive statements, but it will change. It will change
by the week, by the month and we will be in continued
dialogue with the government to see how we can get to an
outcome that is in the best interests of all parties.
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But the final determiner for me, for the Board, for
the management team is about protecting shareholder value.
We have no other objective. Customer service is there but
it is all about protecting shareholder value. I cannot
stress that enough. That is the way we have discussed it
with the government. That is the way we talk about it and
the way we will move forward.
Let me talk to the regulatory environment. At the
same time as the NBN announcement, the Commonwealth also
issued a discussion paper that many of you would have read
about the possible futures around regulation of our
industry and specifically of Telstra. The government
received many submissions about the options. It has
canvassed many options and is considering what options it
will take. It has been indicated already that the outcomes
of this review, once they are determined, will result in
legislation and we believe that legislation will be
introduced before the end of this year.
Our submission focused on two key things, one was
around transparency and the other was around equivalence.
That is what we are after because, more than anything else,
this company needs regulatory certainty. That is what will
gives us the environment in which we can move forward with
certainty. You know the extent of these regulatory changes
and I cannot really comment further because we do not know
what they will be. John will go through some of the
scenarios and talk a bit more about that, but I stress we
remain actively engaged with the government in talking
through the options.
To summarise we believe the four priorities we have
are in the best interests of shareholder as we move
forward; namely, providing customer service, driving
operational improvement, product differentiation, and also
addressing NBN and the regulatory environment.
Let me turn to 2010 guidance. We have spent a lot of
time discussing guidance. It is a tough economy and I
think you would have seen from many announcements already
that it is very difficult to give you certainty about the
future, but we felt it was important to try to give you
some sense of what we see the trajectory is like as we move
forward. I want to start by confirming that we will
continue to grow top line and our bottom line and we are
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focused on our target of $6bn of free cash flow. We have
looked at the challenges in the market. We have already
spent a large amount of time looking at how we can best
respond to these market conditions. We have looked at
product differentiation, how we can drive out real
difference in terms of our distribution strategy, looking
at services, technology, inflection points and, of course,
managing costs in a mature and careful way.
We are very mindful of our outlook and it is really
impacted by four things. John and I will talk about this,
but it is very important that you get these parameters.
The economy is likely to continue in a slowish environment.
We may see some growth later in the year but as we look
forward, we don't see significant change. Of course,
unemployment is the thing that probably hits us more than
anything else. As unemployment flows through, we see that
in calling patterns.
We have experienced some price-driven competition. We
are very considered in our response to that. A lot of
people talk about that, but we are about profitable revenue
growth so we are very considered about not going after
top-line growth at any expense. Also we have seen some
delay, and we have talked about that before, in terms of
the benefits flowing from the IT transformation. We think
that we are behind and we will not see as much as we had
expected in 2010. We also we have to get this customer
experience right - so we have to invest.
Those are the four parameters that we have and we have
looked at our guidance. I am very confident about the
future. I am confident about our growth and I am confident
about our bottom-line results. So we will continue
momentum as we move into 2010. We managed costs very well
in the second half of last year and we will continue to do
that. We will be considered about what we spend our money
on.
We are absolutely committed to the target of $6bn of
free cash flow; however it has a slightly different revenue
mix than what we had anticipated both in margin and in
capex. These are all changing therefore we have given you
some change in our guidance. This guidance excludes the
impacts of any unforeseen changes from the regulatory
environment, NBN and any unexpected outcome from the ACCC
review of our declared services pricing.
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Let me summarise before I pass on to John. We are
focused on three things going forward and remain confident
about them. Firstly, financial results: we will grow top
line and bottom line and our free cash flow equation
remains very, very strong. Customers: customers are at the
heart of everything we do. We are focused on our customers
and we want to provide to our customers an experience that
they value. Also the national broadband network and
regulatory environment: we are committed to remaining open
and in dialogue as we go forward but we are focused on
shareholder value.
I also mentioned that we are currently doing a refresh
on our strategy. We will take you through that in October.
We think this is an exciting path as we start to plan our
next three to four years.
May I finish by thanking the executive team and also
all the staff at Telstra who have worked incredibly hard to
deliver very strong results in a very strong environment.
I can't stress how pleased we are with the results. We
think this is a very strong result as we move forward. We
remain confident about the future. Despite the economic
downturn, the demands for our core products and services
remain very strong. With that, let me now pass to John
Stanhope, who will take you through these points in more
detail, thank you.
JOHN STANHOPE: Thank you, David. I know you all want to
get to questions quickly, so I will be as quick as I can
be. I am delighted to tell you we have reported in line
with our key financial objectives or our guidance for the
fiscal year 2009.
These results are a great achievement given the impact
on the Australian economy of the turmoil in the global
financial markets, something none of us have really
experienced before. As I have said previously, we continue
to be resilient but not immune to the economic conditions
that we are in right now.
First, I will take you through the key numbers. David
has referenced some of these. Sales revenue grew 2.9 per
cent to $25.4bn and total revenue grew 2.7 per cent to
$25.5bn. If you adjust for the budgeted revenues not
received due to the sale of KAZ - which was sold in April,
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you might recall - the total revenue grew by 3 per cent,
which is in line with our guidance from February.
Our tight control of opex continues, with operating
expenses up just 0.6 per cent for the year and down
0.5 per cent on the prior corresponding period in the
second half, so that is reflecting our determination to
EBITDA was up 5.1 per cent, or half a billion dollars,
to $10.95bn, with margins expanding by 1 percentage point
to 43.2 per cent. EBIT rose 5.3 per cent, which is above
the upper level of the guidance that we gave, which was in
the range of 3 to 5 per cent, so our EBIT is now $6.6bn for
Profit after tax and minorities rose 10.3 per cent to
$4.1bn. The higher profit after tax relative to EBIT
occurred due to a 17 per cent decline in finance costs due
to the fair value adjustments that occur under IFRS.
Free cash flow continued its upward trajectory due to
higher EBITDA and reduced capex, and we have maintained our
final fully franked ordinary dividend at 14 cents per
share, bringing the total for the fiscal year to 28 cents.
Our dividend is now substantially covered by free cash
flow, which is another key financial milestone for the
Let me now talk a little bit about the guidance. I am
pleased to provide this guidance for fiscal year 2010. It
demonstrates that we are leveraging the transformation
investment made over the last four years, and we remain
firmly fixed on our target of $6bn free cash flow in 2010.
This is consistent with my comments back in February that
we expected to be towards the low end of the previous or
The target now, we should note, includes around a
$500m cash outflow or cash contribution to our pension
fund. That was not originally in the plan way back, four
With respect to the other guidance measures, the old
five-year CAGRs set in 2005 will obviously be too broad a
guidance range for 2010. So we have therefore simplified
our 2010 guidance whilst retaining the detail from the
original objectives, and we have attached at the back of my
presentation a reconciliation to the old objectives, so you
In 2010 we expect to see low single-digit revenue
growth, and EBITDA margins will be maintained. In these
difficult economic times, I am delighted that we continue
to see the top line growing, complemented by bottom line
growth. One point to note is that this is a sales revenue
guidance to be consistent with our EBITDA margin
calculations; not the total revenue growth as was the case
For 2010 we expect EBITDA margins to be maintained.
There are three primary reasons for this being lower than
the original targeted margin of 46 to 48 per cent in fiscal
Firstly, the economic slow-down is clearly impacting
the business, with falling usage levels for PSTN, which is
high margin, as we all know, and mobile voice calls.
Secondly, we are getting greater than expected growth in
lower margin products, such as broadband and IP. Thirdly,
we see a slight delay - and I did mention this
in February - in realising the benefits from the IT
transformation. And there is a fourth: we could have cut
costs deeper, I guess, but we are now very conscious of the
customer experience, that it needs improvement, and so to
make radical cost cuts while we are trying to do that was
Importantly for our shareholders, the strong revenue
growth we have seen over the last few years means that
absolute EBITDA in 2010 should still be close to $1bn above
the November 2005 consensus level, and around $500m above
With D&A - depreciation and amortisation - at around
$4.5bn, we do expect to see EBIT grow next year in the low
single-digit range. We expect accrued capex of less than
$3.8bn in fiscal 2010, which equates to around 14 per cent
capex to sales, as was our guidance previously, and I want
to briefly comment on the overall cost of the
transformation program, as this seems to be a little
I remind you that the overspend on the entire
==> picture [455 x 25] intentionally omitted <==
transformation is around $200m, and there is mix change
within that total number. Remember, it is not just about IT.
It is about 2 per cent of the original transformation budget.
This is a relatively small incremental cost over the huge
five-year project.
Results day really is not the time to go into the
details of this, but I will talk about it in detail at
investor day - and I actually mean where the capital was
spent, the change in mix from IT, network, and so on, and
the cost outcomes. So I will do that in October.
All of the guidance that we are giving here, of
course, does, as David said, exclude the impacts of any
government regulatory review or NBN outcomes and any
unexpected outcome of the ACCC wholesale pricing
determinations. They are on foot and we have, in our
guidance, made some allowance. However, it is along the
lines of what we expect, and we could get an unexpected
outcome.
Let me move on. Our product mix continues to evolve
as our retail units leverage the transformation investment
in the Next G and Next IP networks. Mobiles, retail,
broadband and IP and data access are growing as PSTN
continues to decline as the customer needs evolve and they
change their telco spending habits.
Since the start of the transformation, the proportion
of revenue from PSTN - and you can see this in the pie
chart - has declined by 10 percentage points to just
25 per cent, while mobile revenue increased by 6 percentage
points to 27 per cent, and so that is what I mean by this
product mix change that we are experiencing.
This year, we again achieved double-digit revenue
growth in mobile services, at 10.0 per cent; revenue growth
in fixed retail broadband grew 15.9 per cent; there was an
8.1 per cent revenue growth in IP and data access; and a
5.8 per cent revenue growth in Sensis.
PSTN revenue declined, and that decline continues at
4.9 per cent. It is a combination of things: a
substitution to other calling products, but also just lower
usage from the impacts of the economy.
In terms of product profitability, I am pleased that
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over the last 12 months we have seen improving margins in
mobile, fixed internet, IP and data access and Sensis, with
declining margins tracking declining revenues in our PSTN
business. The way forward in these new product areas is
for us to keep getting economies of scale, which is
obviously our objective.
Given their growing importance, I want to give you
some more colour on mobile data and IP access, which is the
next slide. Mobile data grew 31 per cent, with annual
revenue now in excess of $2bn, almost double the amount
two years ago. I note that we have slightly rebalanced how
we report the breakdown of mobile data. We have tried to
simplify this. Wireless broadband now constitutes cards,
USB dongles and embedded modems, while mobile browse packs
are in what we call non-messaging data.
Wireless broadband revenue surged 69 per cent to
$587m, with SIOs up from 526,000 to reach over 1m at the
end of June, and other non-messaging and data revenues
increased 19 per cent to $547m, which you can see on the
left-hand graph on the slide.
During the year, SMS volumes grew 28 per cent, so that
SMS continues to grow to 9bn - that's quite an amazing
number - while MMS volumes grew to nearly 70m and that
includes video calling.
The Next IP network is also delivering, with IP access
revenues up 25 per cent to $667m. IP MAN/Ethernet revenues
increased 38 per cent to $321m and IP WAN revenues climbed
19 per cent to $216m. IP access revenue now exceeds legacy
data revenue. So you can see the shift away from old
technologies to the new technology and us leveraging our
investment in Next IP. Our investments in the Next G and
Next IP networks are really clearly showing dividends.
Just briefly on the segments, I want to mention the
performance of each of the three retail units to highlight
the momentum in the second half in particular. Our
Consumer business unit had a very solid performance with
sales revenue up 3.1 per cent and EBIT contribution up
3.2 per cent. The second half revenue growth actually
exceeded the first half growth, and that was a great
achievement, given that the second half included the impact
of the deteriorating economic circumstances, continued
aggressive competitor pricing, the integration of BigPond
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access into the retail units, the transformation of the
retail channel via T[life] store roll-out, and the
stretched resources that were in Consumer, given the
migration of millions of customers into the new IT systems.
So that performance was in a fairly difficult year, I am
sure David Moffatt would agree, for Consumer.
In Telstra Business, our Telstra Business group
achieved total sales revenue growth of 4.7 per cent, with
operating leverage continuing to accrue. The growth was
also achieved despite a significant slow-down in growth in
the second half in mobile and PSTN.
In the fiscal 2010 we will do more to take advantage
in the business segment of Next G and Next IP, and we
believe that churn will fall over the next 12 months in
this segment while our fixed broadband market share will
again increase in this segment.
Our Enterprise & Government business unit had a great
year, as you heard David passionately speak about, with
revenue growing 2.9 per cent to nearly $4.8bn, with EBIT
climbing 5.2 per cent, and underlying revenue growth in the
TE&G segment, taking out the KAZ sale impact, was
5 per cent, so underlying performance was 5 per cent.
We have had many contract wins, as David referenced,
helping to ensure the further momentum in growth, and these
included the Commonwealth Bank, worth up to $1bn over the
next 10 years.
Let me just touch on the global stage. Our
international businesses generated more than $2bn of
revenue in fiscal year '09. CSL New World, as you heard
David say, was hit by very tough economic conditions in
Hong Kong where there is already a very strong competitive
market. It did have, in Hong Kong dollars, double digit
declines in revenue and EBITDA, resulting from falls in
voice revenues and volumes of handsets sold. However, with
the significant investments that we focused on in CSL in
the year just past, we expect - well, we know - it is well
positioned for growth going forward.
TelstraClear produced a solid performance with revenue
growth of 2 per cent despite the impact of the ongoing
New Zealand recession. The Consumer business inside
TelstraClear grew revenues nearly 20 per cent, while the
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Enterprise & Government group in New Zealand won many new
customers.
Our China assets continued to experience very positive
growth rates, with SouFun delivering local currency revenue
growth of 29 per cent and EBITDA growth of 55 per cent, and
we are also very pleased with the integration of our
purchases in the online and mobile content spaces.
Autohome and the computer equipment vertical are also
performing very well, so those investments are proving to
be doing very well.
Let me move onto expenses quickly. Opex growth, just
0.6 per cent, was comfortably exceeded by sales revenue
growth, so good gross margins, if you like. Our expenses
are under tight control and operating leverage is emerging
from the transformation investment with more to come. So,
yes, while there is some delay - and I mentioned that back
in February - we are still on the path of leveraging that
transformation.
I am going to go into each category a little bit.
Labour costs first. They fell by 0.6 per cent to $4.1bn,
mainly due to the reduction of 2,881 FTEs, or full-time
equivalent staff, during the year. That now brings the
reduction to 11,665 since 2005. You will remember that
back then we mentioned 10,000 to 12,000 as the likely
reduction from productivity improvement. So we have
achieved that objective a full year early. Both figures,
of course, as we always do to get to the reference point,
exclude the impact of acquisitions we have made since then
or divestments we have made since then.
In the second half of the year labour costs fell
4.2 per cent, and this is important, and the labour
reduction gives us a good run rate, therefore, going into
2010.
Labour costs would have declined even further - that
is, by 2.3 per cent - had it not been for the calculation
we have to make for long service provision which bounces
off the 10-year government bond rate. A lower discount
rate causes the value of the long service leave obligation
to increase.
There will be further reductions in FTEs in the coming
year, although they will be smaller than in recent years,
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and we will do, in terms of staff, what we have to do to
deliver the improved customer experience that David has
spoken about.
Let me talk about the directly variable costs. They
increased by 2.5 per cent but still met our objective of
maintaining the sales revenue growth at or above the rate
The cost of goods sold fell 5.4 per cent to $1.9bn,
mainly due to lower use of handset subsidies. We were
vigilant in the management of subscriber acquisition and
recontracting costs, with the blended rate decreasing by
12 per cent from $158 to $139 in fiscal year '09. This was
assisted by the increased use of our mobile repayment
option and lower subsidised post-paid volumes. So it was a
The reduction in cost of goods sold was offset by a
$185m increase in network payments. $84m of that was due
to FX impacts, and $76m was due to increasing traffic
volumes terminating on other networks, be it offshore or
In the other category, service fees increased
14 per cent, primarily due to a rise in the pay TV expense,
but of course that has an offsetting increase in pay TV
revenue.
Service contracts and agreements and other expenses.
Service contracts and agreements tends to get a bit of a
focus, so let me talk through these. We achieved a
0.4 per cent or $21m reduction in service contracts and
agreement expenses and the other expense categories.
Leading the decline was promotion and advertising. It fell
$78m, or 17 per cent, as we adopted a more targeted
go-to-market approach in our promotion and advertising, and
discretionary costs fell 12 per cent or $53m due to our
tight cost control through the year, with double-digit
declines in things like travel - so we are using our own
technology, Telepresence, and so on, to cut down our travel
bill - and legal costs reduced and the transformation
training wound down as well, so we spent a little less on
Importantly, the service contracts and agreement costs
did continue to increase, nearly to $2.4bn, partly due to
higher call centre volumes being handled by our industry
anscriptproducedby Merrill Legal Solutions
Now, we did say back in February that we were
experiencing higher call volumes as we moved through this
migration, and, yes, we have had to use our industry
partners more to help us with those volumes as we have
However, service contracts and agreement costs
fell 2 per cent in the second half. So we are starting to
see the volume peaks reduce and we are getting back to
Bad and doubtful debts increased by 15 per cent to
$289m - probably not surprising in these sorts of
conditions. We had higher aged debts and insolvencies due
to the economy and we had some transitional issues as well
with our IT systems, and we were unable to make as many
outbound calls and so on. However, the total impairment
and diminution costs fell 4 per cent as we improved our
stock management and we had far lower stock write-downs and
we had better terms, so far better management of our
Let me move on to capex and depreciation and
amortisation. The accrued capex was $4.6bn, or very close
to, which was in line with our guidance range. The capex
continues to track lower from the transformation peak in
fiscal year '07, and this year it still included relatively
high levels of IT capex, but it is on the decline, and it
includes, in part, the upgrade of the HFC in Melbourne,
The downward trajectory will continue, with accrued
capex expected to fall to less than $3.8bn in fiscal year
2010. Depreciation and amortisation climbed 4.8 per cent
to $4.4bn this year, and the D&A included $172m for the
accelerated depreciation of the network at CSL New World.
David has spoken about the regulatory review, and so
you know our position, but I do want to talk a little bit
about this. There is one area where there probably remains
confusion and misinformation about functional separation or
the impacts on our business. There are lots of flavours of
operational and functional separation. Some represent a
tightening of the existing regime, whilst others require an
Transcript produced by Merrill Legal Solutions
almost complete unwinding of our IT transformation. As
I said, in Hong Kong, in March, our estimate of the impact
of a base case - so light touch, if you like - functional
separation is around 4 cents per share and that's an NPV
calculation not an EPS impact. These are mostly one-off
costs and not an ongoing burden.
Whilst more extreme separation would be probably
enticing for our competitors, it could take five years or
more to implement and would be a major disruption for
Telstra inside the company, but also a disruption for us in
serving our customers. It is something that has to be kept
in mind with respect to regulatory and legislative changes,
and in our regulatory submission in June we acknowledged
the concerns expressed by the government and the ACCC about
the current telecoms environment, especially the perceived
lack of equivalence and transparency, but we also did not
overlook NBN, and made the point that any changes or
remedies to the current regime must assist, not impede, the
transition to NBN.
That NBN can proceed in a timely fashion, we believe,
is a crucial issue, and Australia must learn from the
lessons overseas where onerous regulation of legacy assets
can stifle investment and innovation and can take a long
time and be a huge distraction from what now is the main
game, we believe, the NBN.
Let me quickly go to free cash flow. It is growing
strongly. Free cash flow increased by 13.2 per cent to
$4.4bn this year. The operating cash flows were $9bn while
investing cash outflows were $4.6bn. The decrease in
investing cash outflows was mainly due to the operating
capex as the transformation capex continues to decline.
I would just say one thing. I guess some people in
this room are saying, "Okay, $4.4bn; you talk about $6bn, how
do we get to $6bn from that point?" Let me hit the question
before you ask it. It will come from about $1bn lower cash
capex; the remaining $600m will come from EBITDA
improvement, improvement in working capital, and some lower
tax payments as we realise the benefits from some tax R&D
claims related to our transformation.
Financial parameters and interest. Let me just touch
on these. In terms of financial parameters, we remain at
the stronger end of our target ranges for each. Debt
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servicing or net debt to EBITDA is 1.4 times versus our
target of 1.7 to 2.1 times; our net debt gearing ratio is
at 55.2% versus our target of 55% to 75%; and EBITDA interest
cover is 9.6 times versus our target of more than 7, so a
strong financial position. Our borrowing costs fell as the
average effective interest rate on average net debt fell
from 7.3 per cent in fiscal 2008 to 7.1 per cent in fiscal
year 2009. So spreads increased but base rates for
borrowings declined.
So let me conclude with the same message that we have
been giving for several years: we remain firmly focused on
delivering the financial outcomes of the transformation.
In particular, we are aiming at delivering $6bn of free
cash flow in fiscal year 2010. That is what we believe our
shareholders value the most.
The mix of top line growth, margins and capex to
get to that target has moved slightly over the last few
years as the customer needs have evolved and the economic
slow-down has occurred, also impacting a whole lot of
parameters. But we are firmly fixed on delivering that
target of $6bn free cash flow.
Thank you, David and I will now take some questions.
BEN SPINCER: As I mentioned, we will take questions from
the floor here and also from calls. We will take the first
three questions from the floor here and then we will go to
the conference call. The first question will be from
Ian Martin.
IAN MARTIN: Thank you. David, well done, first up. You
have come out on the front foot regarding expectations for
next year. It looks quite positive, except for a couple of
instances that I would like to ask about. One is the
EBITDA margin outlook - that you want to maintain margin at
the 43.2 per cent, roughly. But, in fact, it was 42.2 in
the first half '09; 44.2 roughly in the second half.
Should you be maintaining at that higher level, in the
44 per cent range, if not pushing to 45? That is the first
question.
Secondly, the free cash flow targets. You have
emphasised that, and well done to you on doing that and
maintaining that target, but the question now should be,
well, what is going to happen to that cash flow? Your
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outlook statement mentions significant excess free cash
flow and all the flexibility that that brings - I just
wonder what the options are there and why we haven't
perhaps been more positive about some of that cash now
coming back to shareholders.
DAVID THODEY: Thank you, Ian. Let me take both
questions. Firstly on the EBITDA margin. We did reflect
on this a lot. As I said, we are seeing a change in
product mix and we want to try to make sure that we manage
that carefully.
The economy is slower, so, therefore, revenue. We
just want to be considered about what we are saying going
forward. Then, of course, we want to leave some investment
in terms of customer service. Yes, I am aware of where the
EBITDA margin finished for the year and we just think that
it is probably, using a word that John has used before,
considered margin, but if we can push it higher, we will,
but we just think that that is the right place to start.
Cash flow. Well, yes, we do have options, and we are
going to continue to look at what options we have going
forward. Again, what we do with the cash is something that
we discuss at the board, and as we go through that we are
going to continue to look at where we need to invest, and
if something good comes up - but let me assure you, if we
can give more back to shareholders, we definitely will, but
we are just going to leave that open for now because we
want to continue to get the strategy behind us, and we will
give you some sense of that in October as we go forward.
IAN MARTIN: May I follow up on that? Is there some risk
that some of that cash flow might in fact flow into NBN Co
in return for some equity there, but ultimately into a
vehicle that Telstra wouldn't have control of?
DAVID THODEY: Ian, as I said, we have not factored
anything in there because it is so hard to know what the
parameters are there. We will work through it and see
where we get to. That is an option, but the only way we
would ever do that is if we think we are going to drive an
improved shareholder outcome. I cannot stress that enough.
That is the only setting we really have. If we do do that,
we will come back and talk, but that is not on the horizon
at the moment. John, do you want to make any comments on
that?
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JOHN STANHOPE: No, I think you have covered it, really.
IAN MARTIN: Thank you.
SAMEER CHOPRA: Good morning, Sameer Chopra from Deutsche
Bank. I have two questions. In terms of depreciation
currently, the business is doing about $4.5bn. How do you
see depreciation playing out in the future, because D&A is
running above capex. When should we start factoring a
pull-back in depreciation? That's one for John.
One for you as well, David: you spoke about some of
the strengths in your products and segments. If you were
to look out, say, three years out, which products and
segments do you think can keep sustaining that level of
growth? What are you most optimistic about?
DAVID THODEY: Let me ask John to handle the depreciation
question and then I will handle the growth points.
JOHN STANHOPE: Sameer, you have to remember that the
spend that we have made on IT is large, and that has short
amortisation periods - so five, six years. So you won't
see D&A go down for a while. I have said this a number of
times. It will hover around the $4.5b for a few more years.
DAVID THODEY: The growth trajectory of what are the key
products: unquestionably, wireless. Wireless is a very
compelling proposition, and you have seen this ability to
grow wireless data which, in many instances, has been
incremental. So that is a critical trajectory.
The growth in broadband. There is an insatiable
appetite for broadband access, both in IP but also in the
residential market. The critical area is how you drive
value from that. So I think that is a very strong
trajectory for us as we go forward, irrespective of what
happens around NBN.
Thirdly, we do see strong opportunities in this
managed network services area. We think that in the
enterprise and in the business market, network-based
applications, network-based services, the intelligence
within the whole cloud environment is playing uniquely into
the strengths of the telco, and I say that as a guy who has
worked in the industry for a long time. So they are the
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three trajectories.
I would also like to mention the online world. We are
seeing some very encouraging signs there. We are just
going through that at the moment. The China portfolio has
tremendous growth. Now, obviously in China you have to be
careful, there are risks in doing business there. But in
terms of the online verticals and what Bruce is doing
within Sensis, I think they set us up well for the future.
They would be the four key ones that I would be looking at.
SAMEER CHOPRA: Thank you and congratulations.
RICHARD EARY: Hi, Richard Eary from UBS. Just a couple
of housekeeping points. John, you mentioned on the tax
side that you thought there was obviously going to be a
reduction of tax in 2010. You paid $1.6bn in tax this
year, can you give us a feel in terms of what the R&D
benefits are going to be?
JOHN STANHOPE: I won't give you a precise number but it
is north of $100m.
RICHARD EARY: Okay, thanks. Just with that in mind,
presumably when you give the guidance $6.5bn free cash flow
pre the pension top-ups and you add back the cash capex of
about $3.8bn, and then you add back the tax, clearly you are
getting to somewhere between $11.5bn and $12bn in EBITDA;
is that fair to state?
JOHN STANHOPE: You are pretty close.
RICHARD EARY: Just on Sensis, there were obviously
comments that you were pretty happy with the way that the
business is moving. Clearly as we are moving into the end
of this year when we do all the pre bookings, is there any
feel you can give us in terms of how that business is
tracking in terms of pre booking or pre sales?
DAVID THODEY: Look, there is no question the economy is
tighter. I think, as I have spoken to Bruce, we talk about
the canvasses. It has been more challenging, but Bruce and
the team have quite a unique proposition. Remember, they
go in with a proposition saying, "If you advertise in
Yellow Pages, these are the results we can give you", and
while it has been up and down, I think the guys are
feeling, you know, considered about it. I don't think it
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has been a run-away year, but Bruce do you want to make a
comment?
BRUCE AKHURST: Yes, I think we are very happy with the
product range and the new products - the voice products,
the online products, the China products are all doing very
well. White has had a great year and that is continuing
on. The print products are a bit slower this year than
last year, reflecting right across Australia in the
advertising industry. We are seeing market share growth,
we are seeing retention of customers and more growth in
customer numbers, but it is a little bit more subdued, we
are seeing, just at the moment.
RICHARD EARY: Is that because the numbers are down year
on year in terms of the pre-bookings to date?
BRUCE AKHURST: I don't know that we are giving those
forecasts, are we?
DAVID THODEY: No, it will probably reflect how the
economy is going would be the best way to go, because the
small business base really reflects what is going on in the
economy and they are pretty considered about where they are
putting their money but we are very confident about the
business.
RICHARD EARY: I have one last question on International.
You touched on it a few times in the presentation. I don't
know whether you can give us a feeling in terms of your
thoughts on how Telstra International looks in the future
and maybe give us an update in terms of whether a SouFun or
an IPO is planned.
DAVID THODEY: Firstly I will give you more detail as we
finalise the three to four-year strategy. Obviously as you
look at Australia, first of all that has always been our
focus. That is where we derive most of our revenue and
profit from, so we will have a very strong focus on
Australia. But over the years we need to continue to look
at how we can expand the business. Right back from OTC
days to now, it has always been a critical part of our
strategy, but it is only, what, 10 per cent of our revenue,
so it is very small. It will play a part in our ongoing
strategy but the question is how, and that is what is the
big question. So you have to be very considered about
where you go.
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Secondly, we have been pleased with the businesses in
China. We are learning a lot about how to do business in
China. It is not without its challenges but the financial
results have been very strong. We continue to have a
strong team up there, Bruce and Justin are spending time up
there. John is on the board and we are continuing to
watch that very carefully. But remember it may be a small
part of the business but it is a very fast growing part.
JOHN STANHOPE: As to your question about the IPO, we have
not made decisions. We are still considering the IPO, and
it is market determinants, and all sorts of things as to --
DAVID THODEY: It is an option; as we go forth it is an
BEN SPINCER: I will now go to the line and take a couple
THE OPERATOR: The first question comes from Christian
CHRISTIAN GUERRA: Good morning, and thanks for you time.
I have two questions for you. Firstly, on E&G and the SME
business. We saw a big slowdown in the second half in
terms of revenue growth with E&G falling to 1.9 per cent
from 3.9 in the first half, and on the business segment
going to 2.2 from 7.2 per cent. I am wondering if you can
talk about what is driving that, whether it is the economy
or whether you are losing share, and also if you could talk
about the impact on the margins given that I remember back
in fiscal '03 when E&G got crunched, your margins got
Secondly, on the cost and the cost saving target,
John, you talked in the past that you intended on targeting
a $500m to $800m cost reduction by fiscal '10. I am
wondering what the new numbers look like and also whether
you are confident of margin expansion into fiscal '11 as
you highlighted at investor day the last year.
My third question is on the NBN. I am sure you can't
say too much at the present time, but your fixed broadband
subscribers went backward in the past six months, which
clearly has implications for the demand equation with the
NBN. I am wondering if you can talk about that, please.
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DAVID THODEY: Do you want me to take the first one, John,
and I'll give you the second one? Enterprise & Government
and TB - two different stories. Firstly the half on half
on TEG was primarily driven by the KAZ sale. If you
normalise for that, it is roughly about the same.
Enterprise & Government is tracking well and the sales
pipeline is strong as we move into the year, so we don't
see any real risk in there; in fact, on the margins side
I'd say as strong as I've ever seen it.
However, Telstra Business in the SME market, I think
is a more reflection of the market rather than share loss.
It is just tough out there. It is not so much a loss due
to churn; it has more either been cancellations or usage.
That is really where we have been hit. I think that really
reflects the market.
In terms of the margin impact, yes, it could be
something which is sort of reflected in our considered view
around margin going forward, but I think it would be more
appropriate to say it is just the market; the small
business market is tough. However our share of our
presence there is as strong as I've seen it for many years,
John, do you want to comment on that and on the second
point?
JOHN STANHOPE: I think you are right about TEG and TB.
Let me take the cost saving, Christian, the $500m to $800m.
Clearly, the 2009/2010 guidance we have given indicates
that I don't expect all the $500m to $800m to be achieved.
Some of the reasons we have already given; for example, we
do not want to cut too deeply because we want to
improve the customer experience. That is one reason. The
product mix is another reason. You might recall in the
$500m to $800m, I think I put up a chart that had a level
of DVCs that we expected. Those DVCs are a little higher
because of the product mix change.
I mentioned there has been delay in the transformation
cost-out. At this point in time I think there is probably
about $100m we won't get just because of some circumstances
that have occurred in doing the transformation and I will
explain more about that in October. There is about $150m
that has been deferred, so delayed, and that was the delay
that I signalled in February. When you add those two,
there is $250m in the $500m to $800m some of which is
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delayed, some not occurring, and the DVC impact has reduced
it as well. That fundamentally is what has happened in
2010 in our guidance. As to your question about 2011,
therefore I do expect improvement in 2011.
DAVID THODEY: Let me have a go on the fixed broadband
question, Christian. As I said, broadband growth was up
15.9 per cent. We had very strong growth in ARPU. We have
had a mixe change to the higher speed plans. Yes, while
we had 20,000 growth in subscribers over the full year, it
is a changed market, and this is a classic example where we
are trying to get this share/ARPU profitability mix right.
We are looking at that one and we will continue to
determine what is the right outcome there. 15.9 per cent
growth in revenue across and improving profitability, I
think that is a very strong result. However I am conscious
about our share. But remember with NBN and Tasmania,
there is a way to go before NBN may be out there, but we
are very conscious to make sure that share and
profitability are kept in balance. But, yes, that is a
very important focus for us and the team are working on
it - so watch this space.
CHRISTIAN GUERRA: David, I am sorry but my question on the
fixed broadband was more about the implications for the NBN
economics if the subscriber base is going backwards.
Clearly that is a bit of an issue.
DAVID THODEY: No, I would say that I think that our
subscriber numbers probably reflect a bit of a decline in
share. I think the overall broadband numbers are probably
increasing in the market.
JOHN STANHOPE: Just slightly.
DAVID THODEY: Yes, just slightly. The growth rate in the
market has definitely come back a bit, but what is very
important is what will customers pay for high speed? That
is what I think is the big question. Sorry I got that
wrong, but that is very important
JOHN STANHOPE: I will give you a bit of a reference
point, Christian. Our ARPUs have increased. There has
been, I think, a 20,000 increase in SIOs overall, that
includes wholesale - so retail fixed broadband has
increased far more than that, about 140,000. We have seen
an extra 82,000 people go up to 20 megabits per second.
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That is very important to keep continuing to grow the
revenues and that is how you get the 15.9 per cent revenue
DAVID THODEY: It is really about managing these dynamics
but I've got your point, Christian, thank you.
BEN SPINCER: Another question from the line.
THE OPERATOR: The next question is from Alice Bennett
ALICE BENNETT: I have a couple of questions. Firstly, on
the mobile business, you referred to chasing, I guess,
profitability rather than market share. Can you give a
sense of what has occurred with your mobile margins over
the last six months? Secondly, on the HFC upgrade, could
can give a bit of an upgrade on how you are proceeding in
Melbourne and whether you are still intending to proceed to
the other cities outside Melbourne? Thirdly, on Sensis,
that is a really very good result, particularly on the
White Pages. I know you talked about it a bit but can you
given us a sense of exactly what's driving that? Is it
increased use of colour or how you are getting that growth
in the print business? On the Sensis, I am wondering if
you can give a sense of whether there is a vast difference
between the regional and metro print publications. I guess
trying to get a sense of whether the online penetration in
regional markets has made any difference to your print
DAVID THODEY: Let me start off on the first question then
I will pass to John because I think he will give you a
better sense on the margins. I said the balance between
share and profitability is what we are managing. For
example, there were enormous subsidies in the market around
the iPhone in the last six months. We took a considered
view about our subsidies in the market. As you saw SARCs
are down and we very carefully managing that.
We do think that the whole proposition around PDAs is
very strong, but we are have to have a balanced view about
that as we go forward because we have learned over the
years, even back to when I ran the mobiles group, that you
can get a bit carried away with just driving top line
growth. However when we look at our results, 10 per cent
growth at the revenue line, tremendous growth in terms of
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subscribers, 33 per cent of wireless data. In terms of the
margins, John?
JOHN STANHOPE: The margins have grown. The mobile margin
is about 37 per cent, EBITDA margins. Last year I think we
told you they were 36 per cent. We have actually got a far
better economic model to work out margins these days. They
were probably a bit overstated last year. In actual fact
the margins have grown more than 1 per cent over 2007/2008,
but they are 37 per cent and have grown.
DAVID THODEY: To answer your question it is all about
balance going forward. We do not want that share to get
away on us. We will manage it carefully as we go forward
month by month, quarter by quarter. The wonderful thing
about some of these new systems and the retail outlets is
that we are getting better as we go forward.
In terms of HFC we are committed to that roll-out. We
have the team working on it now. We are excited about
seeing what we can drive from HFC. We have good product.
Just putting 100 megs out there really doesn't mean a whole
lot. We have to have things for it to use, to change the
experience. So we are committed to that roll-out. We
think it will be exciting to watch and to see how it
performs and we have some good plans in that area.
In terms of Sensis, let me ask Bruce to comment.
Bruce is out there hustling on the streets every day, so
Bruce why don't you give some comments on this.
BRUCE AKHURST: It is a great product. The customers love
it. Everyone is using it and we spent a lot of time being
able to explain that value proposition to customers. There
hasn't been any particular magic about it other than really
understanding what that value proposition is, how we bring
buyers and sellers together and how if you want to be in
business in Australia, whether it is in metro or regional
small business you have to be in the Yellow Pages; and if
you're in the Yellow Pages you are then online, you are
then in mobiles, you are then on 1234. We have now done a
syndication arrangement with Google. We have increased the
reach of your Yellow advertising by about 25 per cent over the
last 12 months so it is a much, much stronger value
proposition.
In terms of how the particular products within that
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portfolio formed in the last financial year, Yellow Metro
was slightly negative. Yellow Regional was slightly
positive. White Metro was quite strongly positive and
White Regional was not quite as strongly positive. We are
seeing solid maintenance of the print product overall;
overall the print was positive. The metro areas were under
pressure, but the growth that we are seeing is coming from
all of these product extensions into these new digital
formats.
DAVID THODEY: Thanks, Bruce. I want to add maybe an
editorial commentary. I have been incredibly impressed. I
didn't know the Sensis business as well, but the level of
sophistication that they have when they talk to a customer
about the value that that print product drives is quite
outstanding. The difference from just putting an ad in the
paper or putting something out there in a flyer is we can
track the response rate and therefore the return. I don't
know many other products that can do that. That has been
the incredible difference we have seen in Sensis over the
last two years and that is a great credit to the team.
There is some great sales excellence, so a great result.
I hope that we have answered your question on the
upgrade on the HFC. I think I've covered that okay.
BEN SPINCER: A couple of more questions from the line.
THE OPERATOR: Our next question is from Mark Blackwell
from Morgan Stanley.
MARK BLACKWELL: I have a few questions on wireless
broadband. It is great growth in subs, of course, but it
has come at the expense of ARPU, which is obviously what
most would have expected given the $80 you were getting
before. But is 62 or thereabouts what you are expecting to
sell at or should we expect that to continue to fall? What
is your view on that product and where the pricing will go?
DAVID THODEY: Let me make a few quick comments and then
I'll pass to John because he has the details. There have
been a number of factors there. You will remember we put
out a prepaid product this year and that definitely pulls
that ARPU down. There has been price competition. We
think we are getting into the right ballpark. It will be a
matter of the mix. We obviously are focused on driving
contracted customers as we go forward. We think the
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prepaid product is good. John, do you want to comment?
JOHN STANHOPE: That just about covers it. It is
primarily driven by going into prepaid wireless broadband.
It has proven very popular. Obviously the mix change has
changed the ARPU. If it continues to be as popular as it
is, yes, it can go down a bit further.
DAVID THODEY: Yes, I agree. It is a wonderful
proposition. There are up to a million subs now, which is
great. We are looking for to seeing that grow. Of course,
we still think there's lots of life left in that Next G
network as we go forward.
BEN SPINCER: The last question from the line, please.
JOHN STANHOPE: Just on that, the counterbalancing factor
is that more and more smart phones will come on the market,
we will have more take-up in wireless broadband, so
absolute growth will still be strong
THE OPERATOR: The next question comes from Sachin Gupta
from Nomura.
SACHIN GUPTA: I have three questions. (Indistinct)
DAVID THODEY: Sachin, can you repeat that question?
SACHIN GUPTA. ....(Indistinct ). Lastly, you mentioned a
number of times that protecting shareholder value is being
discussed with the government and talked about 18 per cent
previously. I was just wondering is that still the basis
of discussion? .
DAVID THODEY: We missed the first question. Do you want
to repeat the first question?
BEN SPINCER: Yes. Sachin, could you repeat the first
question, please? We've missed him. We will take the
second and third question.
DAVID THODEY: You take the second one.
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BEN SPINCER: The second question was around the trends in
EBITDA growth by 2010 being somewhat below prior
JOHN STANHOPE: I think I went through it in my
presentation. We have had this DVC mix change which has
increased the DVCs. Then when you have the PSTN coming off
and that being a high margin product set, then that's what
has happened to EBITDA margins. The growth in EBITDA has
also been impacted by the cost explanation that I just went
through. EBITDA growth would have been greater had there
not been that delay in the cost IT transformation
realisation. All those things have accumulated, if you
like, into EBITDA growth and the EBITDA margin situation.
With regard to the third question about 18 per cent
return, we are a long way off discussing what detail of NBN
might look like. At the end of the day, and you might have
picked up in our tone today, in what David has said and
what I have said, this is about protecting shareholder
value. In protecting shareholder value, that could mean a
return that actually results in that protection. We are
not locked into a number is what I am really saying.
PHIL CAMPBELL: Phil Campbell from Citigroup. I have a
couple of questions for David. From the presentation this
morning, I am picking up probably three subtle but
important changes since you have taken over. The first one
is obviously a greater emphasis on customer service; the
second one is this focus on the market share and margin
mix; and the last one is obviously the NBN where you are
actually talking more friendly with the government. I want
to check whether there are any other changes that I may
have missed or if those are the three that you think are
The second question is that maybe you could give us a
bit more information on the first two. In terms of
customer service, is it a case that customer service levels
have declined to quite a bad point or is it a case of
trying to make sure that service levels are at a high level
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as we go into an NBN environment?
The other question is on this margin kind of market
share mix, I can kind of understand the background for
that. Again like in mobile you would think with Hutch and
Voda doing a merger, you might have thought the opposite
and though maybe you would more aggressive in that space.
A little more background around two those things would be
great.
DAVID THODEY: In terms of the subtle messages I was
trying not to be so subtle. Customer service is critically
important. You say why? Well, when you go through a big
transformation, there are all those impacts, but this is
something that is at the heart of what we do. Think of the
number of customer interactions every day in our front of
house, in terms of the field technicians. We think this is
an incredible opportunity to really differentiate.
Before I go into that a bit more, the only one you
have missed in terms of those first three was product
differentiation and the integration across Next G and Next
IP. This is very, very important and has been a continuous
theme. So actually there are more than three; there are
four.
Coming to customer service, yes, we have seen the TIO
complaints; in our industry, not just Telstra, our industry
has gone up. Our share of the complaints going to the
Ombudsman is about the same, but we have far too many. If
you go back over five to six years, I think it has been a
significant increase. That is not good for our industry.
It is not good for Telstra. It is not good for our
customers, and I am not going to put up with it.
May I also say that I do not need an Ombudsman to
handle our customers. It is such an indictment on our
industry and on Telstra. So that is the reason. But more
than that, if I can reduce churn and I can differentiate -
you know the numbers, any customer you save, it is far
better than trying to acquire one. So we are about
reducing churn. If we can hold our customers longer that
is good for our shareholders - so very simple.
The second question was around the share mix. I am
not quite sure how to answer that one in the sense that it
has always been a priority for us. In fact when we have
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talked about differentiation and value, we have always been
very considered about that mix. Maybe it has become a
little more prevalent now because we have seen people put a
lot of money into the market to try to attract subs and we
are conscious not to fall into that trap. That does not
mean we don't want to be competitive. We want to have a
premium around value that is justifiable and clearly
articulated, and we will move with the market. But it is a
very considered mix, and we have learned over the years to
be better and better at this, by every day, by every week
and by every month. That's what I think is probably the
bigger change. At any one time, we will see some of it up
and down, but we are about profitable revenue growth. I
hope that gives you some colour. We can talk more about it
as we go forward.
BEN SPINCER: We have four more hopefully very quick
questions from the floor. We need to move on to the media
MARK MC DONNELL: Good morning. Well done, on the results
and if I may say also congratulations on a far more credible
set of forecasts particularly around the EBITDA margin. There
are three areas I would like to touch on briefly: revenue,
opex and capex. On the revenue side I was wondering if you
could be a little more specific about the composition from
new services into your growth expectation and in particular
into the second half. Presumably by then the DOCSIS 3
upgrade will be complete and we should see a range of new
products coming through, particularly in broadband. So
what proportion of your revenue growth guidance is
MARK MC DONNELL: In relation to opex, you've spoken about
further head count reductions. I am wondering if you can
quantify that. Also in relation to cost overruns in the IT
transformation program, my understanding from speaking to
IT people at Telstra, is that there are still major issues.
There are certain functions in Siebel, for example, that
take five times as long to perform as in the old legacy
systems. What are your expectations about the future
dimensions of cost overrun? What sort of contractual
protections do you have, and what is the magnitude of that
Then that leads to my third question, which is more
capex related and that is actually about where we are in
the capex cycle and in particular what is implied by the
technology transformations that have occurred and the
substitution of purchased equipment for leased equipment?
In particular are we seeing a truncations of the capex
cycle, so while everyone is focused at the moment on a
reduction in FY10 as we go forward, the replacement times
for a lot of the network and IT equipment and software may
in fact be much shorter than historically? Can you comment
DAVID THODEY: Let me have a go at the revenue one and
then I will get a little bit of colour from John as well.
Firstly your supposition that we have to drive more from
the new products is right. As to the flow-through of that
into the specific numbers, we would probably need to come
back to you and give you some colour. We do have a lot of
focus on how to drive out from the HFC upgrade but also
some of these integrated products in terms of the home of
the future and also the business of the future.
As I said, driving that growth from off the platforms
is pretty important. It is sort of in the mid-40s; we
think that will go significantly up as we go forward - so,
yes, very important. Some of the managed services areas
are important, also, in terms of content. Do you have any
specific numbers, John, because I don't have any off the
JOHN STANHOPE: No. Obviously we're expecting growth in
the newer products that we have today, wireless broadband
and so on, but I don't have a proportion of the growth
DAVID THODEY: We can probably come back; we just have not
done that calculation. Obviously PSTN is still going to go
down. We have to keep driving that up. Let us talk about
the opex head count and IT transformation, and if the guys
down the front want to help me out, they can. Firstly we
have not given any guidance specifically on head count, but
I want to stress that this business is always moving. We
are a technology company. We are about using technology to
drive productivity. Therefore we are very focused on how
The skills mix is the other thing. We are seeing some
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of our old skills we don't need. Especially as we start to
move people more on line, what are we going to do with the
people who have traditionally taken calls? So, yes, we do
expect over time to drive productivity improvement - we
must do. That's about at our heart, but we did forecast,
DAVID THODEY: We are not putting forecasts out there but
let meet assure you our focus on productivity remains as
Now, in terms of the wonderful Siebel roll-out, I am
going to share a little bit of experience with you and then
A lot of people have asked me about Enterprise &
Government, why have they come across now. I will tell you
why: because we did it in 2002. We put Siebel in. No-one
somehow managed us to think about it, but we did it.
I can remember what happened. We put it in and the
first release was an absolute failure. Then we had to pull
it out and put it back in, and I think it took us something
like 15 months of just working every application, trying to
get the processes right. Some we had instantaneous
benefits from and some took us a good while, because we had
to redefine the way we did the transaction.
Siebel is a wonderful product, it gives you a lot of
flexibility, but it takes time for people to get the value
from. So I'm not concerned about driving the value from
the Siebel deployment at all, absolutely not. I think it
will take us time, and that is partly what we have
I don't think there is any necessity for recourse to
anyone because we are going to drive the value from the
product, but it just takes time, and when people stand up
and say, "You drop a new release in in a CRM and you get
instantaneous benefit", well, it is just not true. So that
is where we are focused. So, no, we do not have any
David, do you want to put on any colour, or John?
These are the guys who are doing it, and they are running
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it every day
DAVID MOFFATT: The average handling time for an agent to
serve a customer changed a little bit through the
deployment as people got used to it. It was as big a
change as we are ever going to have in any 10- to 15-year
period of time at front of house, so everyone had to be
retrained in all new processes, while we are simultaneously
migrating customers, et cetera, et cetera.
There are certainly a couple of things that might be
up and down in terms of the relative individual components
of how you serve a customer, but, overall, our average
handling times are trending right back down to where we
want them to be and they are right on track. So with that
comes the benefits that we need.
But, as David has indicated, the focus is now on
investing in the customer experience, solving their problem
the first time, making those kinds of changes. The Siebel
system helps us enormously to do that because we can see
the entire customer record in one place and we can serve
the customer for all of their needs which we could not do
before. So this is definitely a major step forward for the
company and for the customers, particularly, as a result of
what we're doing, and for our agents.
I will finish with the comment that we did a pulse
survey of our employees through the middle of this which
was for us to test how things were going, and employee
engagement went up 2 per cent. So from my point of view,
I am totally satisfied that we have not yet finished all of
the benefits that are going to come from the releases that
are yet to conclude, but once we put the whole package
together it is going to be a terrific result for our
employees, our customers and, ultimately, the shareholders.
DAVID THODEY: Let me add quickly another editorial
comment. One of the great things we have now done is that
the benefits from the CRM now sit with David. So in his
plan for this year, and for next year, he has to realise
the benefits, both in customer service and in the
productivity benefits. But I don't want to just leave it
out there. It is difficult. It is not straightforward.
We still have a lot of work to do to get it bedded in, and
get the real value, but now the work starts.
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JOHN STANHOPE: I have another comment about IT. We are
all experts in IT, as you know, but on the cost front, you
made the comment about costs overrun. I commented on
realisation of benefits, but there are lots of rumours out
In October I am going to take you all through how much
capex we have spent and where. There are things in this IT
transformation program and spend that when we started
weren't in there - for example, BigPond wasn't in the
transformation; now it is. That took some more money. So
there is a whole lot of things that I will go through to
detail the spend, and it will become clear to you.
Yes, there is a little bit more complexity, and we did
spend some more money as we came to the realisation of more
complexity, but I will take you through that in October.
Capex, life cycle and so on. We foresee over the next
few years around 14 per cent capex to sales, and as sales
go up that means, therefore, capex will go up slightly, and
we think that that will cope with what I would call normal
Let's say LTE comes along, or 4G mobile, whatever you
want to call that. There will be a kicker. There is no
doubt about that. And there may be a time when there are
other technologies that come along that cause a kicker,
but, right now, for the next few years - and LTE is not
tomorrow or next year, maybe not the next year after that.
Over the next three years, I am confident about our
But you are right, there will be some technology
life cycles that give a kicker in the capex, as always
MARK MC DONNELL: Okay, but, just to clarify, that's 14 per
cent for the next three years, John?
JOHN STANHOPE: That's what I have said, around
14 per cent. I have said that I am confident, unless
something comes along. If LTE has to come forward for some
reason, I'm wrong. But, failing that sort of thing
happening, it should be around about there.
LAURENT HORRUT: Laurent Horrut, JP Morgan. I just have a
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question: given your EBIT growth guidance now, and
assuming you don't have a similar IFRS adjustment in 2010
am I right that you think that your impact could be flat
from the $4.1bn that you have just reported?
JOHN STANHOPE: I am not expecting it to be flat but I am
not expecting it to be as high as this year.
LAURENT HORRUT: Just on the IFRS adjustments, you are
reporting $900m in interest costs this year; the normalised
level would probably be more like $1.1bn.
JOHN STANHOPE: As the debt maturities wind out, your
fair value gain will decline, and so next year the gain will
be less and less as the debt profile reduces.
LAURENT HORRUT: A very quick second question. Looking
back at the transformation plan, when it was outlined five
years ago, there were three objectives: revenue growth
acceleration, opex reduction and capex reduction. I guess
it would be hard to argue that you have not been successful
in the revenue growth objectives, so we will give you full
marks for that.
It is less clear to me what it has actually delivered
in terms of structural benefits on the opex, on the cost
base and on the capex side, because I do remember years
where Telstra was actually spending only 14 per cent of
sales and I do remember that in 2005 the margins were
47 per cent. So I am just trying, looking forward, to
think we have spent $5bn or $6bn of incremental capex above
what should have been spent, would have been spent,
otherwise: what are the actual structural benefits that
are going to last beyond 2010?
DAVID THODEY: Let me give a perspective and then I will
let John comment. I think you are right. I think we are
yet to see the flow-through of the benefits from some of
the IT transformation. But remember, Next G, Next IP -
enormous value. In terms of just the operations in that
business there has been a lot of value. But in terms of
the IT transformation, we are yet to see the flow-through.
We have done a lot of investment, training, getting people
to get used to these new systems - new bills. It is an
enormous job. When you put a new release of the software
out, there is an incredible amount of work of looking at
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every plan iteration.
So, as John said, we think that is delayed and we
think it is out in the future, but we had no option. We
had no option. As the business was getting more
complicated, the systems were getting harder and harder to
manage, there were too many legacy systems, we had to do
it. But, yes, we now have got to drive the benefits out.
So, still a work in progress.
ANDREW LEVY: Andrew Levy, Macquarie. Just a quick one on
the functional separation slide. Can you give us an idea
for the BT and Telecom New Zealand models, what are the
implementation versus ongoing operational impacts, if you
had to split it percentage wise, capex versus opex? And
the other part was, I guess, do you have any assumptions in
there on market share shifts or product shifts because of
the separation if it was imposed on you, or would that be a
separate factor?
JOHN STANHOPE: It is a separate factor. The latter is
not factored in.
The right functional separation - we saw a range from
adjudicator, which was part of our submission, and then you
could have adjudicator plus transfer pricing, or you
could have adjudicator plus transfer pricing plus
partitioned systems and, as you go up those forms of
separation, it costs you more and it takes you longer.
The 4 cents or the $500m that I talked about, the
4 cents NPV, is down at the bottom end, with some
partitioned systems. So it is transferred pricing - well,
we had not thought of the adjudicator back then. So it is
quite a light touch, and then you can get right up to the
other end, a very expensive unwinding of the IT systems in
order that you have complete separation. I won't say how
much, but that is a lot of money and a lot of time.
ANDREW LEVY: The thing I am trying to get a feel for is
how much upfront capex and money you would have to spend
directly on the systems and how much should be ongoing - if
you have oversight --
JOHN STANHOPE: Okay. Again, it depends on which model.
ANDREW LEVY: Yes, just for the bigger ones - Telecom NZ,
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BT.
JOHN STANHOPE: I will give you a range, $800m to $1bn,
and ongoing, $50m to $100m, in five to six years.
ANDREW LEVY: Just on that last part, should you have
something for change in competitive dynamics?
JOHN STANHOPE: When you think about it, you are still in
the retail market, it is just the cost of being in that
market. So the cost to operate goes up. I don't know that
it affects your go-to-market all that much.
ANDREW LEVY: Thank you very much.
SANDRA McCULLAGH: Sandra McCullagh, Credit Suisse. David,
I think you should just quantify the customer service
comments that you made. Could you give us some idea of
what the lower-than-desired customer service is costing you
in terms of churn and compensation for customers? So what
is the potential prize at the end of this customer service
improvement.
DAVID THODEY: That is a good question. Firstly, I am
primarily focused on getting rid of the unnecessary work.
I think there are too many repeat calls coming into the
business; there are too many transfers; we are having to
respond to too much. So I think there is enormous
opportunity to reduce work. That is in the five to
10 per cent-type range. That is in work elements, as you
go forward.
But the critical thing is if you can just move churn
by 0.1, 0.2 of a per cent, the benefits to us are that it
goes straight to the bottom line. So they are the sorts of
things. I don't need to move churn very much to get an
enormous benefit.
We are still working through some of that. We have
some internal targets which we have set, but we will see
that, maybe we will talk about that at the end of the year.
But, very important: this is not just a nice, feel-good
thing. We want business results from it.
BEN SPINCER: Thank you very much. We will conclude
there. I will pass back to David in case he has any final
comments.
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DAVID THODEY: Thank you very much. Thank you for
your time. We will obviously be talking to a number of you
over the next few days, but we have finished with strong
results and we are looking for to the next year. Thank
you.
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