TELSTRA GROUP LIMITED — Call Transcript 2009

Jan 7, 2009

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8 January 2009

The Manager

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

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Dear Sir or Madam

Transcript from the Citigroup Entertainment, Media and Telecommunications Conference 2009 - Phoenix Arizona

Attached is a copy of the transcript from today’s Citigroup Entertainment, Media and Telecommunications Conference 2009 - Phoenix Arizona 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

Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

Start of Transcript

Sol Trujillo:

Good afternoon. I want to say that it is a pleasure to be here today for a lot of reasons, one is to talk about the company, but maybe more importantly to talk about the context in terms of which we're operating our business today.

Those of you that have known me over the years, my primary philosophy has been that customers always decide who they choose to do business with. Not regulators, not governments, not analysts or anybody else, it’s basically customers. And I think that philosophy has served me well and has served the companies that I have been associated with over a number of years.

So when I talk about that, it has been part of the core of our strategy and if you look at our strategy and the execution of it through the numbers that we announced publicly in June of ’08, which was the end of our fiscal year, at the retail level we had grown revenues close to 6%. In the case of mobile, our services revenues we had grown at 12.3%, and in the case of fixed, we had positive growth in our retail access lines, which is highly unique as you look across the world. In the case of broadband we grew subscribers at 4x the rate of our nearest competitor and we added two points of market share.

In terms of directories, we also grew directories, that part of our business at 8%. Our print business we grew at 5%. So there is no part of our company that we have not had as that principle focus customers, and how we grow and add value for our customers.

In the case of our IP revenues, they exceeded legacy data revenues for the first time in that fiscal year with IP access growth of nearly 30% and again, we are taking market share.

You may have read in early December that we were excluded from the Australian government process called NBN to award a contract to upgrade broadband infrastructure in Australia. Effectively, our network but adding some fibre components to it.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

I will talk about that a little bit later, because the truth is that in spite of all the political and regulatory manoeuvrings, Telstra continues to excel operationally against almost any benchmark and that is not fully reflected I would say today clearly in our share price.

Now, I have a chart up here that is the usual disclaimer chart. I just want to leave it up for a second more so that again, everyone understands the disclosure issues.

In terms of the next chart, share price performance. In spite of the NBN exclusion, Telstra outperformed the benchmark ASX200 by 23% during 2008. This out performance was due to the world class set of operating results of the business and the continued successful execution of our transformation strategy. Nothing has taken us off plan. Nothing is going to take us off plan in terms of how we continue to execute on everything we laid out in November of ’05.

So when we look at this, we have been delivering for our shareholders and we outperformed the global telco benchmarks by nearly 20% in 2008, and that is including the drop that we experienced as a result of the NBN government process.

So it is not just in 2008 that we have been outperforming, it is through the period, once we made our decision, once we began executing in terms of our results.

So since the government sold its majority stake in Telstra in November of ’06, we have outperformed out domestic ASX200 by 36%. So again, it is a continuation and a reflection of the kind of operating performance of our business.

But right now, we are three years into our five year transformation program and we are achieving again best in class performance across almost every sector of our business. 92% of our revenues are generated in Australia but we also have strong businesses in New Zealand, Hong Kong and a fast growing portfolio of online

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

businesses in China. These businesses provide Telstra with a unique opportunity in this very large high growth market.

We will not report results for the six months to end December until late February, but I want to remind you of how well we performed in the fiscal year to June 2008 and some of our significant achievements.

We have taken market share in virtually all key product lines. So we’ve had strong financial results where we have solid top line growth with expanding margins, improving cash flow and are on track to hit our free cash flow target of $6 to $7 billion in fiscal year ’10.

Balance sheet strength with no long-term debt maturing until 2010. So again, every metric, everywhere you want to look, no surprises, all fundamentally good.

This puts Telstra in a strong financial position, despite the global markets. We're undoubtedly seeing an economic slowdown in Australia and as we’ve said in the past, our business is proving resilient, but not immune, to the economic slowdown.

Our operating performance also puts us ahead of our global peers. We continue to see double digit growth in our mobile business far exceeding our peer group, as you can see on this slide. More than 5 million Australians or over 50% of our mobile subscribers are now on our world’s best 3G or as we call it Next-G network.

These customers see a continued $20 a month uplift in ARPU. Again, I don’t know that it is matched anywhere else.

In just two years, our wireless broadband revenues have gone from nominal levels to fiscal year ’08 revenues of more than half a billion dollars. In fixed, we have bucked the global trend by actually growing retail fixed access lines, helped by our innovative pricing and the benefits of our integrated customer centric strategy.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

In broadband, our market share continues to grow, unlike most of our peer group, and at the same time we saw 2.9% growth in broadband ARPU in the last year.

So as we talk about our business and we talk about volumes, it is about the growth in the core, let’s say, units, but equally and more important it is about ARPU and ARPU growth and it is also about ultimately how we are expanding margins in terms of our business. Again, this is not a uni-dimensional strategy, it is a multidimensional strategy that we have been executing on once we got started in terms of turning up our services.

Now, in terms of the FTTN network in Australia, we have been keen to build this network for 3.5 years under the right terms and conditions. Actually, I was the first one to propose this whole notion when I first got there.

We have now been excluded from a bidding process for building this NBN or National Broadband Network. Building FTTN within the current RFP process was always basically as we looked at it as defined under that RFP process, a marginal case, and we were not prepared to destroy shareholder value by committing to potentially onerous conditions.

So let me reiterate our key message. Following our exclusion, we have and will continue to move on focusing on creating shareholder value by offering our customers the best possible experience and innovative services.

We also have other options for providing high speed broadband services, and I think this is kind of the let’s say not understood point of where we already are. Because when I first proposed this notion of a broadband network, that was 3.5 years ago. In that intervening period of time we have penetrated the market in a big time way and I will cover some of those numbers in a minute, but let me just say this, there has been little serious debate in Australia on the prospects of a third party builder of this new network. So I am going to talk about some of the issue that

whoever builds it is going to have to deal with.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

Number one, it is not clear if any other bidder has material financial backing, and I know in today’s environment that is probably a bit of a surprise to this kind of audience. In these markets, obviously that is not trivial. We believe the full cost of building to 98% of the population approaches about $15 billion with the government committing to just $4.7 of that $15 billion.

So there is a big task for whoever builds it and a big funding task as we looked at it.

There remain unresolved technical issues around network operation, information systems and security when you think about a fragmented network, so if somebody else were to build it there are some assumptions about some kind of separation, some kind of subloop unbundling, some kind of other issues that have not been done anywhere else in the world.

Let me say this one more time. This has not been done anywhere else in the world. The reason why is pretty obvious to those of us that operate networks and companies like Telstra, and that is that it imposes fragmentation of a network so that it creates all kinds of national security issues, it creates customer service issues where nobody has full line of site visibility to end problems and being able to resolve problems, so you know, the days that those of you that live in the US remember when AT&T was broken up and you saw a lot of finger-pointing and all kinds of things,

multiply that times 100 and you will have that kind of environment in Australia with nobody every having gone through this, nobody every solving those issues and it becomes a huge customer issue in addition to what I mentioned earlier, which are national security issues.

Number three. There are many very substantive legislative changes that will need to be considered, such as the statutory monopoly being sought by other bidders. If pursued by the government it will put Australia in conflict with WTO regulations, major competition policies and other major policy and economic initiatives being discussed by the government.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

For, and even if another company does build the NBN, it will take many years, and they are saying publicly that they will start in the least commercially viable areas first, which means the rural. So start in the rural and then build towards the cities. Now, to put it in context, those of you that live here in the US, you’ve probably heard from Ivan Seidenberg, and he is talking about FiOS. They’ve been at FiOS since 2003. They have now crossed over a million whatever subs after five plus years.

In Australia the objective is to build out to 98% of the population in five years. So the magnitude of the task is huge. The kind of company required to do it is going to have to be very competent and very good.

So any alternative build is going to be very challenged, just for all the matters, whether it be a Telstra or anybody else, just operationally, but there are a few other issues that I pointed out that are of consequence and need to be considered as anybody looks at implications of an alternative build.

The last one that I would just say that is an alternative build may not be carrier grade and upgradeable. Instead, several of what we understand being discussed proposals appear to be, perhaps using some common phrases that people in the industry use, to be a suped up best effort internet service when you think about the way that some of the architectures may work.

So again, not easy, it is a difficult process and the economics as we said at the beginning were marginal. So we held fast to the principles that we have about creating value. Period, end of story, if somebody else does it, plenty of challenges, plenty of questions and we wish them all the best if they can pull it off.

Some analysts and the chairman of a rival consortium have suggested that because of this there is imminent risk to much of Telstra’s current business and profitability. So again, my purpose here is to give you a context and then to make sure that we’re all grounded in what’s reality. Because they have stated numbers

that I think have created some concern relative to Telstra’s current Page 6 of 14

Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

business its profitability - so again I want to cover this and provide a dose of reality and some truth.

I think that when we look at the broadband networks and the investments that we have already made it’s important to understand that we already cover a vast portion of Australia with broadband today starting with our Next G network which covers 99% of the population and as of last week we turned up to 21 megabits per second. It’s the largest, fastest network, most capable wireless network in the world. So we’re already entrenched in the broadband business and as I said, with broadband we do reach 99 per cent. We’ve already upgraded to 21 and it’s our plans over the next year or year and a half to take it at least to 42 megabits per second.

So when you talk about getting up to broadband speeds of 12 megabits in an RFP and you have a nationwide network that reaches 99 per cent of the population that we’re generating already $20 more per month of ARPU and we’re expanding margins I would say that we’re probably in a good competitive position.

Now when we look at the super fast speeds that we have at 21 peak throughput speeds you know we add a new dimension to the wireless broadband experience with better internet browsing and file downloads even faster than probably what most of you experience here in the US with your fixed broadband connections. We believe the true high speed near ubiquitous wireless broadband is really a game changer and it has been for us in Australia. It’s a game changer for the industry and for the economy because it’s now starting to change how healthcare is delivered, how education is delivered, business entertainment and not just people browsing on the internet. And I think that’s the most important dimension of conversation that we need to have.

When you look at breaking down how we’re generating ARPU how we’re serving our customers and why those customers that are taking these data cards or USB port downloads and plugging it in

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

and doing what they do every day we’re talking about $90 plus dollars a month of RPU from most of those customers. So again we’re talking about growing the business not just offering a technology.

Now when we looked at fixed broadband both ADSL and cable we deliver ADSL from exchanges serving 92 per cent of the population, 92 per cent of the population today. With ADSL 2 plus providing speeds up to 20 megabits per second from exchanges that serve more than 80 per cent of the population. So if somebody were to build a network and somebody were to reach 92 per cent of the population in any of your lifetimes, we already are there serving the customers at very high speeds.

Now when we think about the 20 megabits ADSL 2 plus we’re already covering more than 80 per cent of the population. But never forget we’re also a cable company. We have an HFC cable infrastructure that enables our customers to experience high speed broadband today as well. The network passes 2.5 million premises on a densely populated cities the five big cities,

1.8 million households can receive 30 megabits per second today with the rest being able to be served at 17 megabits per second. We’ve also trialled DOCSIS 3.0 which will enable the HFC to deliver speeds up to 100 megabits per second and I’m sure at this conference you might have heard from Comcast or Time Warner or somebody talking about their deployments. Well the technology is now real, the technology is being deployed and we have that also as an option if somebody chooses to compete and to compete with us, the only difference is we’ll be there a lot quicker a lot faster a lot bigger, a lot more integrated and with more capabilities than anybody else.

So when we think about that then and we think about the competition regulator and some of the choices that they have working with the Ministry we think about this in a very serious way because in our classic environment we do have lots of issues to deal with including pricing wholesale access at what we call below

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

cost rates and so when we think about our competitors they do have choices but they haven’t exploited those choices to date of owning infrastructure, building infrastructure because we do and we do offer services at wholesale at below cost.

Well some of that will change under an NBN because not only is it about the first cost of building, once you build you have to operate it and those of you that have operated networks and you remember the mid-90s and late 90s here in the US and you remember all the building that occurred and all the companies that have now disappeared, because people did business cases on first cost and they looked good. And I know some of you remember a lot of that.

So there was a lot of wasted capital in that period of time because the reality isn’t just about first cost it really is about total cost and lifetime cost. So we’re serious, we have a plan we know what we do if we need to go right or if we need to go left it doesn’t matter we have thought about it.

So now I want to talk about some of the specifics about the conversations that have occurred in case some of you have followed it. We’ve had some people talk about the fact that we might lose $4 billion of profits, 40 per cent of our profits have been suggested by some analysts and also some other people in consortiums if this were to happen. So let’s put it in real facts, real terms that are all public information.

Today, only around a quarter of our revenues are PSTN related. Now I think all of you know that that is declining. We’ve had a PSTN revenue decline that is a lot less in Australia than it is elsewhere but the punch line is it is declining. Three quarters of our revenue have nothing to do with PSTN.

In the case of wireline retail with our extensive cable footprint we can choose to migrate our metro retail PSTN and broadband traffic onto our HFC cable network. While around $3.1 billion or 13 per cent of our FY08 sales revenue was non-metro retail PSTN and broadband, much of this revenue could also be migrated onto Page 9 of 14

Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

other networks in the years before an NBN service would be rolled out.

Remember that rural wireline services are not intrinsically very profitable. I pause on that because those of you that have ever tried building rural networks, not very profitable, in a country the size of Australia it makes it even tougher. Yes there is a risk we might see some slight market share erosion but we have shown time and time again that we can win in the retail market if there is a level playing field and even if there is not, no one is going to take 100 per cent of that market share. Remember principle number one, Sol’s principle number one which is customers decide who they’re going to do business with not regulators, not governments, not analysts or even CEOs. Customers decide.

Wholesale, we have around a billion dollars in wholesale voice and broadband access revenue, but this area of the business is already in decline and as a result some of the lowest wholesale rates in the world already exist in Australia. And in spite of having the lowest wholesale prices if you want shared spectrum in Australia you pay us A$2.50, we’re taking market share. If you want an unbundled local loop you pay a little over $14.00, we’re taking market share. So again, customers decide who they choose to do business with.

In the case of the government, some have suggested the government Federal and State will not contract with us as fibre rolls out.

In fact, only a billion dollars of revenue has come from federal and state government customers in fiscal year 2008. Of that much related to the areas unlikely to be impacted by NBN including IP access, mobile, business services and applications, which are highly competitive already. In fact, half a billion dollars or around 2% of sales revenues was derived from PSTN and DSL services sold to government customers. So again, putting things in context real numbers, real quantification, not mythical kinds of numbers or ghost in the closet kinds of numbers as I’ve heard people suggest.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

All up in allowing for my mitigation strategies, rational analysis would suggest that at most a mid single digit percentage of revenues or perhaps $1-2 billion may be at risk, and that is over an extended period of time because it takes time to build all this. And even if you build it, it’s not a guarantee that it’s going to work so you have to know what you’re doing, and this is likely to be low margin revenue as well with any third party build commencing first in the uneconomic rural areas.

So hopefully this is helpful in terms of giving you a context, so when we say that we are making choices as a board in terms of decisions that we make on whether we bid, we don’t bid, how we negotiate through a process or ultimately then how we choose to go forward and compete, it is with all of this in mind. And it’s very well thought out, very well documented, very well debated and it’s always backed by good economic analysis.

So now let me move back to the most important point that I like to drive a business with, and that is the customer because ultimately the customers decide. We continue to differentiate. We are adding value for our customers by continuing to integrate our products or services, our content across multiple platforms, multiple devices and importantly we’re leveraging the intelligence in our world class networks. For example, I mentioned last week we upgraded our NextG network nationwide, which is now running at peak throughput speeds of 21 megabits per second. Now, we’re the first in the world to do this.

By the end of the first quarter we’re going to have devices, data cards and other things that will enable consumers actually to experience it more than just the efficiencies in how the network operates. And in the first half of the year we’ll have devices as well that consumers will be able to have this experience, which is already the best in the world in Australia but it’s only going to get better. So when you are making a choice as a consumer in Australia, you have a choice and it is clear, it is distinct. You have a company that serves you with the best, the fastest, the largest,

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

the highest speed, priced to the value delivered versus those that price to the value that they deliver. Not ubiquitous, much slower, not with backhaul, not with a lot of other things. So we are competing, and we don’t have expectations of taking 100% market share, so we’re competing to gain the right set of customers that we deliver the best value to and we continue to grow our margins in the business.

If you look at advertising revenue across our network of online and mobile sites, it continues to grow as well. Since the start of calendar year 2008 Telstra BigPond sites have recorded more than 50% growth in total advertising revenue. BigPond music downloads have grown by 35%, movies 59%. BigPond games have achieved 30% growth. So we’re now continuing to extend what I would call the ecosystem of services, kind of all available, all in capabilities to our customers, but we’re taking it to the next dimension now. We’re delivering unified messaging here in the first quarter and bringing communications together in one place. Customers can access text, email, phone messages from one secure integrated mailbox.

We have a strategic alliance with Microsoft, which they’re not doing with anybody else in the world that will leverage our high speed Next-IP and Next-G networks for our business customers, again, integrating all these features and services. And making it one button, one click kind of simple, which has been the mantra and which we’re delivering the services that we deliver in Australia. We have an alliance with Cisco, again unique, which will allow Australian enterprises to access fully managed Cisco Telstra offerings backed by single service level agreements. And again, it’s about leveraging the intelligence through the network, not through boxes. And that’s really the distinct competitive advantage that we’re going to start delivering even further in the marketplace later in 2009.

We have agreements with Google that will provide Australians with access to yellow business listings on Google Maps, and all the

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

portfolio and the context that they have. They used to have an agreement with News Corp. They dropped it and they moved over with us, because they see better accuracy, better completeness, better capabilities in a partnered kind of relationship.

So we are continuing to innovate. We’re not waiting for the market to catch up. It’s no longer about access to platforms alone. It is about the customer experience and I’ve said this from the beginning, so I won’t dwell on it any longer because we are running out of time. I do want to say that we’re not announcing any new results today. We’ll announce results in February. But as a reminder in November at our investor day, we did talk about the fact that our mobile services revenue continues to grow at double digits. Okay. We’re in 100% plus penetrated marketplace and we’re still growing mobile services revenues at double digits.

We added 90,000 wireless broadband customers in that period. We stated in terms of our guidance back in November that we were not changing our guidance for the fiscal year. We would continue to monitor the implications of kind of the economic downturns, and at mid-year we would update our guidance at that point in time. But rest assured we’re going to continue to grow revenues, we’re going to continue to grow earnings, we’re going to continue to grow cashflow. We’re going to continue to expand our EBITDA margins as we look at our business going forward. So we also did say as one other point of clarity with the exclusion from the NBN process, again we did not change our guidance, because we do not see it as relevant in the current fiscal year. Perhaps over a longer period of time, until we have more clarity in terms of decisions, in terms of process, in terms of approach, in terms of a lot of other things.

So the punch line here is we’re on plan, we’re on track with our transformation. That is the core of our business. That is the core under which we’re driving our business. As I said at the beginning, nothing takes us off track from that process. So stop and open it up for a couple of questions.

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Telstra – CEO Presentation at Citigroup EMT Conference Phoenix Arizona 7 January 2009

End of Transcript

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