TELSTRA GROUP LIMITED — Call Transcript 2009

Feb 10, 2009

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11 February 2009

The Manager

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

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ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from analyst/media briefing on Telstra’s expanded presence in China

Attached is a copy of the transcript from today’s analyst/media briefing given by Sol Trujillo, Telstra Chief Executive Officer and John Stanhope, Telstra Chief Financial Officer.

Yours sincerely

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Carmel Mulhern Company Secretary

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

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TELSTRA ANALYST AND MEDIA CONFERENCE CALL 11 FEBRUARY 2009

SOL TRUJILLO: Today I'm here to talk about Telstra's latest strategic investment to promote future and sustained growth and it's about some acquisitions that are going to accelerate Telstra's plans to achieve the billion dollars in revenue with strong margins and cash flow from our Chinese media assets that I talked about a year ago and then again about six months ago to do it all by 2013. They move us further along on our journey to becoming a media-comms company, and so when you think about Justin Milne and Telstra Media and the things that we're going to be doing obviously this is going to be a critical part or a beginning part in addition to what we have domestically with our Big Pond business, and basically these assets or these acquisitions are capitalising on our strengths which centre today, as you probably all know where we essentially lead the world in this 3G phenomenon that we in Australia call Next G.

Telstra today has expanded its presence in China, the world's fastest growing on-line market, the world's largest mobile market. We talked about it as the world's largest mobile market even though about half the people in China are yet to buy their first mobile phone.

We acquired controlling interests in two of the country's leading mobile content and on-line music businesses. Telstra's acquired 67 per cent interest in both China M and Sharp Point. China M is the leading supplier of consumer mobile content serving 350,000 customers daily, while Sharp Point operates China Mobile's rapidly growing central mobile music platform. Both businesses enjoy strong commercial and contractual links with the country's mobile phone giant, China Mobile.

Now, as you think about it, obviously this has value for us in China and continuing to develop our presence, but on top of that the platform of the technology giant will also have relevance in what we do with Big Pond and how it will deliver the type of services that we deliver today. The initial aggregate consideration for the transactions was less than A$180 million with up to an additional A$124 million payable in earn-out provisions in the 2010 calendar year.

Telstra will fund the acquisitions from our existing cash facilities.

We believe that pro-forma revenues from China M and Sharp Point for fiscal 2009 will be around A$100 million. Both businesses are already profitable and we expect the acquisitions to be earning per share accretive beginning in 2010. These acquisitions add to our portfolio of on-line assets in China that already include the majority interests in SouFun which is China's number 1 real estate website, Norstar Media, operator of Chinese auto and digital device sites, CHE168.com and IT168.com, Autohome/PCPOP which is the operator of the country's leading automotive on-line sales site, autohome.com.cn and the popular digital device site PCPOP.com.

We said in our results announcement in August that we saw China as a billion dollar opportunity in five years with 30 to 40 per cent EBITDA margins.

Today is another step, and it's an important step towards meeting and accelerating that target but doing it again consistent with the strategies that we articulated as a media-comms business. As well as being a market leader in key on-line verticals obviously with this series of steps now we're becoming a central player in the mobile data value chain.

While the market is concerned about economic slowdowns in China it is still an economy forecast by the IMF to grow 6.7 per cent in 2009 way ahead of almost everyone else. Now, if

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those of you that have followed the marketplace the Chinese government issued 3G licences about a month ago which now the race has started in China in terms of the builds. As you have probably read there have been estimates of spend to build out the infrastructure of approximately $41 billion that will be made in China over the next year or two in order to realise the vision that the Chinese government and the companies operating in China have. Telstra will now be well positioned to benefit from those investments and that growth. As well as expected rapid increase in terms of the penetration of mobile phones and personal computers and the imminent shift of Chinese consumers from that old 2G platform to 3G services.

Our success with Next G in Australia shows Telstra knows how to offer customers a compelling mobile data experience and I will editorially say that many companies in China have looked at the experience that we have had and are very interested in this kind of partnering relationship. We have the entrepreneurs of companies like these two that say because of what's about to happen in China having the expertise that we have demonstrated and managing content and services the way that we have for Big Pond capabilities they do value that and they do want to see it brought to their businesses the opportunities they can see. So we're now in the business of exporting that expertise to China.

So let me map out the potential for growth. There are more than twice as many Chinese phone subscribers as in any other market. China had over 600 million in 2007 according to a Merrill Lynch report. They also forecast that there was several years left of double digit growth. They estimate the mobile data market in China was worth nearly 20 billion US in 2008, more than six times the size of Australia's mobile market. Penetration of Smart Phones has barely begun. 3G networks are only now being deployed in the country. 3G will lead to increased use of data and content as we have demonstrated here in Australia and how it is demonstrated in other countries around the world. So you can see that this is an exciting day obviously Telstra and our shareholders, part of our strategy for growth and gaining new revenue.

So let me stop there and John Stanhope and I are more than happy to take, as Ben said initially, questions from the analysts.

SAMEER CHOPRA DEUTSCHE BANK: I had two questions, one is to Sol, how are the China businesses being organised, you know? You now have seven businesses in that country. Will you consolidate these businesses under an umbrella Chinese company? That's kind of my first question.

The second one is the margins on these businesses are they in the 20 per cent range, are they in the 30 per cent range, if you can provide some colour around that?

SOL TRUJILLO: Well, from a structural stand point we do have a vehicle that will be used for the acquisition of the seven properties in our investments, so to that extent, yes, we do have a consolidating entity, but in terms of operationally my philosophy that we have very good management as part of the business that we acquired and that's part of our due diligence is to make sure that the companies we acquire are not just good companies, but they really have good management and that are consistent with the direction that we want to go, so we have essentially used the model that says use the local management, try to retain its management so that we can continue to grow, evolve a more integrated viewpoint of the Chinese marketplace. We initially have done that through our Sensis organisation and now Justin through his Big Pond experience and all that will be managing and directing and integrating much of what happens on these two businesses. Bill and Bruce and Justin will be looking for those synergy opportunities of course

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and that is something that each of the businesses are focused on because of the past experience we have here at Telstra. Okay.

SAMEER CHOPRA: Sol, can I just ask a clarifying question? Is there shared infrastructure across these companies and do they report directly to Justin and Bruce or do they come through a China CEO?

SOL TRUJILLO: In terms of shared infrastructure, each one has its own platform. Now, in time we will be able to look for synergies on some of the platforms, some of the technologies. The answer is yes, but right now we're making sure that the businesses are integrated, strategies are executed and doing that. In terms of reporting relationships the first four businesses that we acquired they have reported into groups, but we have a Board structure as well because we are not one hundred per cent owners because we wanted to retain involvement not only from management but also our partners, so there is a governance structure that the CEO reports into, but from a Telstra stand point the executives are accountable in these acquisitions to Justin.

DANIEL BLAIR SOUTHERN CROSS EQUITIES: Firstly a follow up from Sameer's question around the previous acquisitions and the acquisitions today do you see any synergies around - collapsing around the mobile value chain and I guess following up to that earlier question around costs that was the first question. The second question was around can you just provide some clarity on the prices - the price paid for the two acquisitions announced today, and secondly just around the revenues and the accounting of the revenues when will the revenues be - from what date will the revenues be consolidated, if you can just give us some colour around the quantum of those revenues, please.

SOL TRUJILLO: Okay, I'll answer the first half and John if you'll take the second half. In terms of the synergies and looking at the value chain, one of the interesting conversations that Justin and I have had is relative to the fact in China with that size of base of customers in the case of China Mobile having 450 million moving to 500 to 600 or whatever number they'll hit and the platforms that we have today serving them which includes, you know, phones and other things that are being delivered in huge volumes daily that is highly leveragable and the scale will matter as companies continue to deliver more content and more services.

The sophistication of the technology platforms is impressive in terms of the companies that we are acquiring and we do think there are not only going to be synergies across what we do in China but even with Australia, and how we can deliver services here, so not only will we export some of our experience and capabilities there, we will also import some of the technology capabilities that they've developed to manage massive volumes at lower unit cost. John.

JOHN STANHOPE: Okay. As to the price that we have paid for the two acquisitions in total the acquisition price will be A$302 million, but I do want to point out there are some earn-outs associated with the purchase and so some hurdles to be achieved, and in cash terms it will be around A$180 million in this fiscal year and about A$178 to be precise and A$124 million spread over the next two fiscal years, so total purchase price A$302 million. As to your accounting question we will start to consolidate this into the Telstra books from completion and the deal is being done, so about five months of financials will go into the full year.

MARK BLACKWELL, MORGAN STANLEY: Hi guys, thanks for taking a question. Firstly just wondering how opportunistic is this acquisition? Is it something that just came up or is it part of a broader sort of search and find and buy process in China and secondly wonder if you

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can comment on how you are doing things differently nowadays from overseas investments versus what's happened in the past and I'm talking about sort of five or 10 years ago, thanks.

SOL TRUJILLO: Let me take it in two pieces. Number 1 is it opportunistic, the answer is no. As I mentioned in my comments everything that we're doing is part of a strategy and obviously building a media-comms presence not only here in Australia which we have done in a bigger way, broader way, more integrated way than anybody else, but also as we export some of the capabilities we have built here elsewhere we think we can do that, so it is part of our media-comms strategy. Now, did it happen overnight? Did somebody show up at the door step? The answer is no. We are looking for opportunities that we can continue to grow and evolve a bigger platform, a bigger presence so that we can in fact build a very large scale business. Now, the first target we set was to get a billion dollar business set up in China and you can see that we're well on our path to do that and that really is, I think, the key for us is we think about the business, so I think in terms of opportunistic, no, strategic, yes, is it scaleable, is it integratable and will it add more value to us over time the answer is yes.

ANDREW LEVY, MACQUARIE: Thank you. Two questions. The first is who have you bought it from and what's the involvement if any, going forward, apologies if I missed that earlier and the second one was there's now a number of investments in media and getting into mobile services, but does Telstra have any operator ambitions in China outside of the CSL New World.

SOL TRUJILLO: Well, in terms of the individuals I won't give out the names of the individuals because like most companies that are built entrepreneurially, they have founders, then they have other investors and there's a collection of those in each of the two cases, so Andrew, you know, it's basically the founders and investing partners from the very beginning.

In terms of do we have aspirations beyond that in terms of operational in the more Telecom light part of China the answer would be a simple yes, but, you know, the Government policy is currently at the stage are not supportive of what I would call investments at an aggregate level in an aggregate company and my philosophy has always been that my shareholders can always invest directly in a company, they don't need us to invest for them into a company, so if there are opportunities that arise where we can export some of the competencies and capabilities, you know, we will take a hard look at them, but in the meantime we will build a presence in this on-line 3G environment that is unique essentially to the world given the scale.

You know, auto sales in January in China has surpassed the US in just absolute auto sales volume. China how has 290 plus million on-line users and again most forecasts are in the next five years that they will dramatically increase the number of on-line users. It's an on-line economy and those who can develop strong early market position and strong brands preference position as we have done, you know we're in a great position to continue to aggregate and build a position that we can leverage, not only there but perhaps in some ways back here in Australia, so we will look for opportunities but again we will be very thoughtful about what we do and we just don't know any other way and that ties back to the last question where these kinds of investments are much different than buying major businesses that, you know, you buy in peak periods where you pay peak premiums that you end up being able to earn back or you don't. If you don't you end up doing writedowns and I think in this case you'll see we have been very prudent in terms of the valuations, we have been very prudent in terms of the management and execution and prudent in terms of how it fits the strategy

RAYMOND TONG, GOLDMAN SACHS: Morning, Sol, morning John. Just one question just

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on the competitive landscape in China. Could you may be give a sense of who are the main competitors, what you see as the main competitive advantage of the two companies you've bought, thanks.

SOL TRUJILLO: That's a good question and part of the reason why we have picked the companies that we have is in all cases we have either gotten the number 1 or number 2 market position. In the case of China you have a very fragmented marketplace as rapidly as it has evolved, so again back to what I said earlier our ability to bring our expertise, our knowledge about management positioning, some of the integrations, some of the scale that we can bring in terms of helping the businesses collaborate in an on-line context better than they can individually, all of that is part of it, so the long answer - to truncate my answer here, the market is very fragmented so when you talk about a primary competitor there really isn't one, there are many, but again we have taken those who are the largest players in the market generally and we're going to make them even bigger as we go forward.

PHIL CAMPBELL , CITI GROUP: Morning Sol, morning John. Just a very quick question. In terms of the $1 billion revenue aspiration for 2013 is that - do you mean kind of organic growth from the seven businesses you own or is it kind of implied additional acquisitions to get to that number? Then just a follow up from one of the questions previously, what type of margins we would expect these type of businesses to be earning in a couple of year's time.

SOL TRUJILLO: I would just say first of all, to keep it simple, the vast majority of the growth will be organic. These are businesses that are growing at strong double digit rates, and secondly we're looking at businesses that are generally in that 30 to 40 per cent EBITDA margin range which is a key criteria for us, so we're not out buying low margin business and that's the beauty of the strategy that we have here and that will be part of our opportunity about bringing more synergy to the market.

TRACEY LEE AUSTRALIAN FINANCIAL REVIEW: Sol, I just wanted to ask, given Telstra's China strategy are they still - is Telstra still considering perhaps talk about spinning off your stake in Soufun spinning off, you know, the Soufun company as a stand alone float or something?

SOL TRUJILLO: Tracey, I think another important question. Part of our thinking at Telstra has been that obviously we can make these investments in companies. We can help grow the companies perhaps faster and sustainably over a long period of time taking advantage of the natural market dynamics, but at some point we've always had the view that says we need to monetise it on behalf of our shareholders, and IPOs become part of that ability to monetise and timing of those IPOs is also a function of market conditions and business conditions, et cetera, et cetera, so the short answer to your question is yes, IPOs are part of how we think about these acquisitions and again it's for shareholder purposes that we can help our shareholders always realise the returns that it would like to see with the investments that we make.

TRACEY LEE: Great. I have a second question then as well. Sol, have you yourself visited China in the last 12 months and seen, I guess, these assets in operation?

SOL TRUJILLO: Yes ma’am, I personally visited the businesses. I always do that as a matter of due course, because I have to see it with my own eyes, I have to meet with the management, with my own contacts and then we do have operating reviews as part of that process, and that's just the discipline that I have learned over the last 30 plus years.

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TRACEY LEE: The last question which was a follow on from the previous analyst's question, you were saying you thought quite a lot of the growth to get to your 1 billion target would be organic, but there is obviously - Telstra is actively looking at further acquisitions in China? There is still a lot of opportunity.

SOL TRUJILLO: Tracey, the answer is again a simple yes, we will continue to be looking out for other good opportunities and again remember our criteria, it has to be strategic, it has to be a differentiated kind of business and it has to be consistent with the direction of media-comms focus that we have as a company, so in addition to the financial criteria where we're looking for well performed EBITDA margin opportunities.

MICHAEL SAINSBURY, THE AUSTRALIAN: Did you actually give dollar values for the deal and also is it going to sit in - is it going to sit inside Sensis or the Telstra Media Group?

SOL TRUJILLO: Well, John will again cover the actual numbers as we will report, but in terms of its reporting responsibilities this will - I guess I said a little bit earlier, we have an investing vehicle for the investments that we have made in China so we have a structure to be able to do that, but that is more of an investing vehicle. In terms of management, direction, direct, you know, authority, each of the investments has its own Board because we are taking the major stake in these companies but we still have other investors which include management and founding investors that might be part of it, so we have a governance process but as we manage the first set of investments that we have had in China under the supervision and direction of Bruce Akhurst of Sensis. Clearly these acquisitions will be managed and directed and enhanced by Justin as part of our Telstra Media organisation which includes Big Pond.

JOHN STANHOPE: Michael, the purchase price of the acquisition is A$302 million and it's spread over a number of financial years, this year A$178 million and the residual A$124 over the next two and that's based on certain milestones and targets being met along the way.

LUKE COLEMAN, COMMUNICATIONS DAILY: Good morning, gentlemen. Just wondering if you'd just accelerate the pushing into China after being taken out of the formal national broadband network process. Was that the catalyst for this?

SOL TRUJILLO: That's another important question, but I would answer it in a different context. Clearly we have had our interests in China. It's now almost 3 years from the point in time when we acquired Soufun and we said that we would be doing more. Last August we announced our investment in a couple of other businesses and so it's been part of our strategy, and it has nothing to do with NBN or MBM or any other acronym that you might have. The interesting thing is when I gave a presentation at a Citi conference in January we quantified what we thought the downsides of an NBN exclusion, let's call it, we quantified those benefits out over a 10 year period or so being about billion dollars and here we have a series of investments in China that will more than replace that and with high growth and much less investment.

How we manage portfolio investing activities is to look at strategy and as we look at the evolution of the company obviously this company needs to continue to grow and to diversify its opportunities. The good news is how we have created a very nice position in China, we have a good environment for growing and investing there and we will continue to look for opportunities as makes sense consistent with our strategy and criteria

SOL TRUJILLO: All right, thank you everybody for taking the time, and I would encourage you

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to travel to China to take advantage of these products.

CALL ENDED