TELSTRA GROUP LIMITED — Call Transcript 2011

Feb 10, 2011

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11 February 2011

The Manager

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

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

General Enquiries 08 8308 1721 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Analyst briefing - Half year financial results

I attach a copy of the transcript from yesterday’s Analyst briefing – Half year financial results, for release to the market.

Regards

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Carmel Mulhern

Company Secretary

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

TELSTRA HALF-YEAR RESULTS ANNOUNCEMENT

THURSDAY 10 FEBRUARY 2011

MR BEN SPINCER: Good morning, everyone. My name is Ben
Spincer. I would like to welcome up you to Telstra's half
year results for fiscal 2011. I welcome those people in
the room here in Sydney. I welcome those people on the
phone lines and also those people watching this via the
web. I will hand over immediately to the CEO, David
Thodey, who will introduce the results to you. Thank you.

MR DAVID THODEY: Thank you, Ben. Good morning, everybody,
and welcome to our half year results, and especially
welcome to those people on the web cast and I do need to
give a quick plug for all those on channel 409, on the
IPTV T-Box which we are actually screening life today.

We are going to follow a similar format to what we did
last time. I think it worked quite well. I am just going
to give a few introductory words and there are a few
things I want to cover on NBN and the floods. Then I am
going to ask John to take us through the detailed
financials and then I will come back and talk about how
we are going against our strategy, because that is
critically important for us. But before I talk about the
floods and NBN, I do just want to stress the three key
messages that we have today.

The first one is we have seen very strong sales results
in the first half. We now have almost one million
additional Australians choosing Telstra in the last six
months. We went back over the records for ten years and
we have never had as strong a six month period. So we are
feeling good about that.

Secondly, our strategy is on track. We are now tracking
that very clearly and we are delivering results. I want
to take you through that because that is very important
for us, and very importantly, and importantly for me, we
have delivered on the half and we are confirming guidance
for the full year. Let me stress that is very important
to me.

Let me now touch on a couple of things. They are the
three key messages for today and I will come back and
talk about them, but I do want to talk a little about the
floods and I want to talk about NBN, because they are two
big issues for us.

I know many of you read a lot about the floods, but for
those who don't know, we obviously track weather

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conditions pretty carefully and we can't really remember
a period where we have had such an extensive period of
inclement weather, both the intensity but also the scale.
Remember we had a very wet period before Christmas, even
in Victoria. We have had a lot of issues in Queensland
and then it went out into Western Australia, down to
Victoria and now up in North Queensland. It has put
extreme pressure on our staff, our customers and also on
the network.

I do want to take a moment - I don't often get an
opportunity to recognise the incredible people in Telstra
and how proud I am of their efforts. Our field staff as
emergency services people go in and one of the first
things people want is connectivity. So we really play a
critical role and our people have just done a tremendous
amount of work, and of course the work goes on. You try
to restore services, but then it goes on for a number of
months as you work through that. Our people really have
gone to extraordinary lengths and often it is at their
own personal cost, both their homes and their families,
just to make sure our customers are kept going. There
have been tremendous personal stories. I do want to
personalise it a little bit today because sometimes in
big companies you lose the personal aspect of that. You
have got to get power up. You have people who have been
incredibly innovative in terms of people getting in to
restore services. We have had police escorts, we had the
defence force, black hawk helicopters getting into
generators into areas. It really is an incredible story.
We are very grateful for what our people have done and I
mean that really sincerely.

There is one specific story I can tell you. I know this
is a financial briefing, but I think it is important to
get the personal story. A guy called Clint Dickson, who
is one of our field technicians here in Sydney, had an 18
hour day. First of all, we have had these cells on wheels
and we had to move them from Sydney to Cairns. So he
personally took it up to Cairns. He flew out to Palm
Island in a light aircraft. Then he worked all night
getting the mobile base station up and running. He did it
by flashlight because there was no power. Then he spent
the rest of the night in the hut sleeping up there. That
is the sort of story you get. I could tell many many
stories like that. That really is Telstra. That really is
the essence of this company.

As you look at investing in Telstra, I think that is the
passion and commitment that makes this company different.
At the moment we have around 700 people working up in

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North Queensland and they do not it as part of their job
description; they do it because they are passionate about
this company. Remember as that cyclone went through, only
nearly a week ago, we had the majority of services up and
going within five days. That is an incredible feat. There
is still a lot of work to do, because there are a lot of
faults out there, but we are just doing a tremendous job.

Obviously, for you, what is the cost of this in terms of
Telstra? It is very very hard to put a financial cost on
it just at the moment. We have got to go through. We have
already spent money getting technicians up there, but
most of it is going to be Opex. The network itself has
stood up incredibly well. Mick Rocca, who is here today,
has been out looking at how things have gone. So it is
going to be mostly Opex in terms of the cost, but our
most important priority is getting customers' services up
and running. As soon as we know, we will let you know
what the financial impact is, but we need to get a bit
more certainty on that.

People up there had some help from black snakes and
various people but it has been an incredible job and our
people have done it very well. That was the first thing.

Let me now turn to the NBN negotiation update, because I
am sure you are very interested in how we are going on
that. We are making good progress and we are working
towards the finalisation of these negotiations. We are
pleased today to announce I think a very important
milestone, which is the finalisation of the key
commercial terms with NBN Co.  The reason why this is so
important is that this sets the framework so we can
document the definitive agreements. It has taken a lot of
hard work to get there and of course this is all about
delivering that approximate $9 billion in post-tax net
present value to Telstra and our shareholders.

Of course, the other key part of that is working with the
Government. We are pleased to announce today also that we
have reached in principle agreement with the Federal
Government over the specific measures that we expect will
deliver that further approximate $2 billion of post-tax
NPV. That adds to obviously the $11 billion and we have
been very focused on preserving that value for our
shareholders, because there is an enormous amount of
negotiation and there are a lot of moving parts that
could move during the discussions. So very important and
it is an important milestone. We are going to keep you
informed as we go forward.

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One of the things that you often ask us is: Can you give
us more detail about what is actually in the contracts?
There is a certain amount of confidentiality, but I want
to assure you that as soon as we have got those
agreements tied down, we will be sharing that
information, so that you can start to look at the
substance of those proposals. So very important
milestone.

Still a lot of work to be done and we have set ourselves
a target of 1 July to put the proposal to shareholders.
This is a very ambitious target. However, we thought it
was important to put that out there and I want to be very
clear that that still depends on a number of factors.
Remember are three legs to the stalk. There is work with
the Government, with NBN Co, and now we have got to work
with the ACCC around interim separation, and there is
still legislation to go through the house. While some of
those are out of our control, we are going to do
everything we can, because we think it is now time to be
clear about our timeframe and then we can move on. We
believe this target is achievable but very aggressive and
that is what we are going to be working to.

I am sure you will have some questions about that later
on and John and I will be happy to take those.  Let me
now throw it to John, who is going take you through the
financials, and then I will come back and give you an
update on strategy. Thanks very much.

MR JOHN STANHOPE:  Thanks, David, and good morning
everybody here and wherever you may be this morning.  I
don't want to over complicate things this morning. Put
simply, we are executing on our strategy as we outlined
to you last year and we are delivering the results that
we expected. Most importantly, we are confirming guidance
today.

As we discussed back in August, this is a transitional
year where we invest to prepare the company for the
future. Therefore, as expected, our results have been
impacted by the spending necessary to implement on this
new strategy. As you know, this year we are investing to
retain and grow our customer base, to improve customer
service satisfaction, to simplify our business and core
processes and to make investments in new products in
order to grow revenue streams. As you will see, we have
seen great momentum in the growth of our customer base in
the half. This augers well for revenue growth in the
future.

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Firstly, let me take you through the key numbers for the
half on a reported basis. Sales revenue declined
marginally by 0.5 per cent to $12.3 billion. There were
some one-off factors that impacted the sales revenue line
this half, which I will discuss in a moment. The impact
of the significant increase in the customer base is also
not yet fully evident in the revenue line, but that is
really just a matter of timing.

At the Opex line this half we have undertaken the
strategic investments detailed to you last year.
Therefore, operating expenses grew by 10.7 per cent or
$757 million to $7.8 billion. As a result of our
strategic Opex investments, EBITDA fell by 13.9 per cent
or $737 million to $4.6 billion.

On a guidance basis, which excludes the Octave impairment
that we did announce late last year, and the net
accounting gains on the sales of businesses including
SouFun, the decline in EBITDA is 12.5 per cent.  This is
in line with our comments at Investor Day that we expect
that the EBITDA decline this half to be low double
digits. Remember, the bulk of the expense growth has been
to support the growth in customer numbers.

EBIT declined by 24.1 per cent or $756 million to $2.4
billion, and net profit after tax declined by 35.6 per
cent to $1.2 billion, in line with expectations. Higher
net finance costs after recent rate rises were more than
offset by lower income tax expense. Free cash flow was
down 22.9 per cent to $2.02 billion, but is on track for
our full year guidance. We have maintained our fully
franked interim dividend at 14 cents per share.

I also just wanted to briefly mention the underlying
performance of the business after removing some one-off
factors and other adjustments. These factors, which when
you look through the slide back are detailed in an
appendix, include the removal of the Octave impairment,
adjustments to exclude accounting gains and losses on the
sale of businesses, including SouFun, and the movement of
the recognition of the Sydney Yellow Pages book for the
second half and a few FX fluctuations and so on, which
don't amount to large numbers.

After you do that, and so trying to get back to
underlying business, sales revenue actually grew 0.7 per
cent and EBITDA fell 11.1 per cent and the attributable
profit after tax declined 24.9 per cent.

So let's have a look at this continuing strong growth in

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the customer base which is at the heart of our strategy.
Part of the strategy is to do this without sacrificing
ARPU, or average revenue per user, so that we can grow
revenue and profit over the medium term. The results were
very positive this half. As you can see from the chart,
first quarter trends were maintained or improved in the
second quarter.

During the half we added 420,000 bundled customers. This
is very encouraging, given some customers not only spend
more by taking new products but these bundled customers
have a much lower propensity to switch or turn. We have
also added 919,000 mobile customers during the half. This
included nearly 300,000 post paid mobile hand held
customers and more than half a million mobile broadband
customers. Customers clearly value services on our fast
and reliable Next G network. That is the largest, as you
heard David say, growth in over a decade.

We added 139,000 retail fixed broadband services during
this half. This reversed the trend of recent halves where
we were in decline. So our strategy is working and we are
taking profitable market share back, and we have achieved
a significant increase in customers while maintaining
ARPU in mobile hand held post paid and retail fixed
broadband. The chart highlights how well ARPUs have
generally held up. We continue to manage ARPUs in light
of our improving churn data, focus on our customer
service, growing customers numbers and our go to market
strategies for each of our segments.

There is considerable detail on the chart on the ARPU
drivers by product. While there is probably not time
today for me to go through all of them, I would like to
highlight that bundles are revenue accretive due to new
customer acquisition, improved retention rates and
additional product take-up from our existing customers.
In the second half we would expect modest declines in
ARPU as customers will move and are moving to competitive
price offerings, but this is within our expectations for
the year.

From a product perspective, I wanted to give you an
overview of the "puts" and "takes" in the top line
performance. We continue to be buffeted by the strong
PSTN headwind with a $253 million decline as usage levels
continue to fall across all categories. However, the
decline in PSTN revenue was more than offset by the
continued strong growth in mobiles. Mobile services
revenue grew 6.5 per cent, or $210 million, to
$3.4 billion, and mobile hardware revenue grew 37 per
cent to $566 million. Revenue for Advertising and

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Directories fell 18.7 per cent, or $182 million, to
$793 million. Remember this was partly caused by a change
in the recognition of the Sydney Yellow Pages print
revenue to the second half, which has an impact on that,
which is about $83 million.

If the Sydney Yellow book revenue is added into the first
half then Yellow revenue declined by 13.7 per cent, and
Sensis sales revenue overall would have declined by 7.9
per cent. Later David will discuss the actions we have
already taken to transform Sensis into a digital
business. IP and Data Access revenue was relatively flat
as we saw continued strength in the IP access product
from customers migrating to these services, but it is not
being offset by a decline in all the legacy data products
such as digital data service, ATM and frame relay, and so
on. IP access alone had another strong half, growing at
20.1 per cent.

All three major retail segments—and this is very
pleasing—returned to revenue growth in the first half of
the year after the challenges faced last year.

Telstra Consumer and Countrywide sales revenue grew 1.9
per cent as the segment focused on retaining and growing
the customer base. Mobile revenue grew in this segment by
12 per cent with the growth driven by mobile data revenue
and higher handset sales. In the consumer prepaid hand-
held segment, revenue growth of 9 per cent was achieved
and in the second half double digit revenue growth is
expected. In terms of the bottom line, the EBIT
contribution declined by 14 per cent because of the
investment we are making to grow the customer base.
However, we expect an improvement in the EBIT
contribution in the second half as higher mobile and
fixed broadband customer levels translate into revenue.

In Telstra Business, our business segment, sales revenue
increased by 2.2 per cent with revenue growth across all
of the products, with the exception of PSTN. Mobile
services revenue was up 10 per cent which included mobile
broadband growth of more than 20 per cent. And on the
fixed side, PSTN revenue fell 8 per cent while fixed
internet or fixed broadband revenue rose nearly 4 per
cent.

Finally, the Telstra Enterprise and Government segment
increased sales revenue by 1.3 per cent. The growth was
driven by IP access revenue growth of 19 per cent and
mobile services revenue growth of 11 per cent. Expenses
declined slightly and we have a very strong sales
pipeline for the second half with an increased focus on
Network Applications and Services.

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Let me turn now to costs. As expected, Opex increased by
10.7 per cent, or $757 million, to $7.8 billion.
Excluding the Octave impairment of $133 million and a few
other smaller adjustments set out in the slide and in the
appendix, the increase was $694 million or 9.8 per cent
growth. As you can see, much of the Opex increase was due
to sharp increases in both cost of goods sold and
subsidies as we invested to retain and grow our customer
base. As a result, goods and services purchased as a
proportion of sales revenue increased from 21.6 per cent
in fiscal 2010 to 25.7 per cent for the half. We expect
this rate to fall as revenue from customers is retained
and acquired increases and the level of cost of goods
sold and subsidies stabilises.

Next, I wanted to update you because there was much
discussion about this as we talked about our full year
back in August. I just want to update you on the
incremental Opex investments we are making, or have made
already, in this financial year. The categories that
specifically relate to the investment in the customer
base rather than business as usual are on this slide. I
want to remind you that, as we told you last year, some
of the expense categories are front-end loaded to the
first half as we hit the ground running on our strategic
initiatives. During the first half we spent around an
additional $500 million on directly variable costs, which
includes subsidies, cost of goods sold, and network
payments to maintain and grow market share.

We have spent a little more this half than originally
planned as we made conscious decisions to respond to the
demand that arose in the market. You saw the services in
operations chart earlier that shows that demand and how
strong that demand has been. So as a result we have
acquired more customers than we expected in the half, and
we achieved strong growth in the customer base. In the
second half we anticipate that we will continue to invest
in subsidies and cost of goods sold to acquire customers
and to keep the momentum going in our business. However,
we are going to find savings in other areas such as
labour and so on to support that investment in the
growing customer base.

It is also important to remember that some of this
incremental directly variable cost is offset by the
higher mobile revenues that you get as we acquire the
customers, and also we will reduce other Opex spending,
as I said. The point being that we will be continuing to
support our customer growth and spending on directly
variable costs but, importantly, this is about our
success in the market. We do intend to still deliver on
our financial guidance.

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This half we also incurred around $100 million on
initiatives related to new product growth such as the T-
Box and T-Hub and network applications and services.

In relation to our Project New, which is to simplify the
business during the first half, we incurred around
$180 million of costs and realised about $90 million of
incremental benefits from these early investments. But we
remain on track to spend about $290 million but achieve
about $250 million of benefits this fiscal year. You will
recall we talked about this project in terms of the main
benefits coming from next year, but there will be an
increasing occurrence of benefits in this second half. So
there are clearly timing issues here and we weighted
redundancy, for example, to half one so that more
benefits are realised in half two and, of course, as is
said, in the next fiscal year. Overall, I am confident
that we are on track with our plan and the strategy will
deliver on our guidance.

Let me talk about some of the key expenses for the
categories. I know I have talked about the directly
variable cost but let me talk about labour for a minute.
Labour costs marginally increased by 1 per cent. We had a
3.5 per cent fall in salary and associated costs, which
was offset by a 56 per cent, or $58 million increase in
redundancy costs as we implement the simplification of
our business. As indicated on the previous slide, the
directly variable costs increased by 20 per cent, or
$533 million, primarily due to the subsidies and the cost
of goods sold that I explained. Part of the cost increase
was offset by a $153 million increase in the mobile
hardware revenue received through the first half of the
year. We will see the benefits in customer usage revenues
going forward.

Most of the half on half increase in handsets, cost of
goods sold and subsidies was due to a rate increase as
the penetration of smartphones continues to climb.

In the "other" expense category, service contracts and
other agreements costs increased by 6.7 per cent with us
engaging more contract people in the call centres and in
sales support, as we focus on customer service. Costs
associated with the commencement of Project New also
contributed to the increase on a year-in year-out basis.
We continue to manage our discretionary costs and as a
result general and administrative expenses declined for
the fourth consecutive half and they remain below first
half '07 levels. This half, general administrative costs
were reduced by 5.5 per cent, with further reductions
across a range of categories, including travel and IT
leases and so on.

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As we invest to retain and grow our customer base, EBITDA
margins in mobiles and fixed broadband have declined this
half. The dilution resulted from several factors,
including higher upfront acquisition costs, including
subsidies and cost of goods sold, and higher sales and
marketing expenses. During the second half of the year we
expect mobile margins and, for that matter, the total
Telstra group margins, to improve. Despite the reduction
in PSTN revenue and ARPU, PSTN and EBITDA margins remain
relatively stable due to cost control and reduced usage.
IP Access EBITDA margins were also stable.

Let me just turn to free cash flow and capex expenditure.
Free cash flow was just over $2 billion this half,
including the $320 million cash proceeds for asset sales.
I am aware that the market consensus expects a smooth
half-on-half free cash flow profile; however, that has
never been the case at Telstra due to the timing of our
capex cycle and, for that matter, our STI or incentive
payments. For example, only 42 per cent of our full year
free cash flow occurred in the first half of the last
financial year. This year I would expect the same pattern
of free cash flow, so therefore it will be weighted
towards the second half of the fiscal year, for similar
reasons.

While on cash flow it is appropriate to point out that
our working capital increased as we funded the retention
and growth of the customer base. This included a
$137 million increase in customer deferred debt due to
the increased popularity of our mobile repayment option,
where a customer gets to pay off their mobile over the
period of the contract. These are prevalent options on
smartphone offers, T-Box offers, T-Hub products. Accrued
operating capex fell 9.4 per cent to $1.45 billion or at
a level of 11.8% of sales revenue in the half as capex
fell. We have completed the major IT transformation
projects. Our 14 per cent capex to sales guidance is
confirmed today as part of our overall confirmation of
our guidance. Cash capex in the half was $1,831 million
as accrued capex unwinds in the half one as usual. That
causes our first half, second half variation in profile.

As I said at the start, I confirm the full year guidance
since the business is performing in line with our
expectations. There are a number of other factors that
mean that the second half will be better than the first
half. These include both underlying improvements to the
business and the impact of one-off factors. In terms of
the underlying improvements, we expect that growth in the
customer base achieved in the first half will translate
into a better top and bottom line performance in the
second half, and we expect to realise more benefits from
Project New in the second half, as I mentioned.

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The results on our guidance basis will also be positively
impacted by some other items, and that is, of course, a
recognition of the Sydney Yellow Pages book revenues in
this second half and a sequential fall-off in the amount
of the redundancy expense. So it was front-end loaded
into half one and the fiscal 2011 results will be
impacted by cycling the year-on-year impact of the CSL
New World goodwill impairment charge that happened in the
second half of the last fiscal year. Due to these factors
we still expect flattish sales revenue, a high single
digit percentage decline in EBITDA, capex to sales of
around 14 per cent, and $4.5 to $5 billion of free cash
flow.

I want you to note the assumptions that the guidance is
based upon that is set out on the slide, that is, we are
assuming price stability, no further impairment, and so
on. Our guidance is really based on conveying normal
business performance. Finally, we believe that the 28¢
fully franked dividend can be paid across the next two
years with the current balance in the franking account
combined with the franking credits that will arise on tax
instalments expected to be paid. I will now hand back to
David to elaborate on our strategy.

MR DAVID THODEY:Thanks John. What I am going to do now
is come back and look at our strategy that we laid out at
the AGM last year and at the strategy day. Let me just
stress again the three key issues. Very strong sales
results which we think auger very well for the future. As
John went through it, there has been investment to get
that customer growth but that was what we planned to do
and that is what we executed on, so it is in line. It was
a little bit more than we expected because we had such a
strong response from the market. It was both the
investment but also our products and plans were more
competitive in the market too.

I will talk a bit about customer service. One of the
great things here is that churn levels are very low.
Those are probably some of the lowest churn levels we
have seen which means that customers are staying. We have
seen strong first half results. We are delivering on our
strategy and we are also confirming our guidance. As you
know, a lot of changes are going on in this industry:
fixed to mobile migration; the incredible growth in data
as customers want to use our services more and more; and,
of course, there is growing competition, which is just a
way of life for us now.

Last year we outlined these four main initiatives. The
cornerstone of that was around customer service because
without having good customer service you could spend a

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lot of money and not retain customers. While we made good
process—and I will take you through some of that—there is
still a long way to go. Second, retaining and growing our
customer base. The signs are good. There is more work to
be done but we are feeling comfortable with where we are
at the moment. Thirdly, the significant work that Robert
Nason and the team have been doing right across the
business to simplify the business so that we can really
start to get better end-to-end processes, really
addressing some of the fundamentals in the business to
reduce our cost base. Then of course at the same time we
are looking for new ways to create shareholder value.

Let me just take you through a brief update because I do
not want to belabour on where we are at with each of
those. Let us look at customer service. As you would have
seen, we have implemented a large number of improvement
initiatives that I think are making progress and we are
seeing a good response from the market around them. But
there are lots of things that we still need to do and
they are proving popular. Many of the things we have
implemented, like the weekend appointments. We had over
30,000 weekend appointments, so that has been a big
change for us in allowing people to say when they want a
technician to come to do a service. That has been a
really good initiative.

Remember we went to a 24-hour, seven-day-a-week call
centres which was a big change in our strategy. We have
already taken over two million calls. That is again being
available when customers want to deal with us, which is
very important. What has been the result of this? This is
all around reducing customer churn. Churn and ARPU are
really about equal importance. If you can get your churn
levels down and hold ARPU you will drive a good business.
Look at the churn results. Deactivation rates have fallen
from 25 per cent to 16 per cent for fixed broadband, and
in mobiles it has moved from 15.8 per cent to 9.7 per
cent. These are annualised numbers. These are very good
results—probably the best we have had for about five
years. That is a good indicator of how the business is
going.

The other important thing is this: While we can say we do
many good things it is really what our customers are
saying about us. Remember we ran the customer
satisfaction survey and we measured the net satisfaction
index? We have seen a good improvement of 1.3 per cent in
the first half. That is continued into January; we set
ourselves a target of 6 per cent improvement for the
year. There is still work to be done but it is trending
the right way. So all in all we have very good results.
This is a very important incentive for all the management

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at Telstra: 40 per cent of at-risk compensation is
dependent on us meeting our customer satisfaction target.

This has got a lot of focus within the business and I
think it is the right thing because it makes this company
focus on external factors like customers. We are very
serious about these things; we are making good gains; and
we have taken decisions that we think will result in a
long-term improvement in the underlying factors of this
business, that is, customer service. The second one was
around winning new customers. I think John has taken you
through that—good, strong sales. Of course, this is
starting to bear fruit. But, of course, winning customers
needs to translate into revenue and profit.

We are very conscious about the quality of the customers
we are getting and how that will flow through. The chart
you see behind us is the relationship between mobile
services growth and about winning customers. You used to
see about a 12-month to 18-month lag from hardware
revenue growth flowing through into services revenue
growth. That has been the case historically, and we
believe that that will be the case going forward. As I
said, the quality of our customers is very important—the
new customers we bring on. Let me remind you of some of
the statistics that John took you through.

We now have 800,000 customers on a bundled plan. Remember
that is a two-year contract and they are taking more
services—a critical part of our strategy. More than one-
quarter of our handheld base is now on smartphones, and
you know with smartphones they have a higher ARPU, and
they are spending more with us. Of course in the fixed
broadband customer space there has been a significant
shift from low to high data plans, which has been very
much driven by competition in the market, and from low to
high speed plans.

Seventy-four per cent of our ADSL customers are on high
speed plans and that is up from 13 per cent just a year
ago. That has been an incredible shift. Thirty per cent
of ADSL customers moved on to the higher data plans and
that was from 1 per cent a year ago. So there are big
changes. We are very pleased with our success in the
fixed broadband market and, importantly, we are
attracting the right types of customers. Spending a lot
of money to attract customers that may have a lower ARPU
is not necessarily a good strategy. It is about winning
in the market. Last time we were together Gordon
Ballantyne shared a little bit about the key
battlegrounds in the consumer market.

Remember we talked about prepaid mobile, post-paid mobile
and also fixed broadband. We see these as key areas that

13

we have got to be more competitive in. So let me just
give you a quick update on how we are going there.
Prepaid handheld services revenue in the consumer market
was up 9 per cent. Our cap plans that we introduced last
July have proven very popular and have driven an increase
in ARPU for this category, which is very encouraging.
Post-paid mobile: we have generated tremendous momentum
there—221,000 consumer customers, additional consumer
mobile customers. Many of them are using smartphones, as
I said.

Then a very important factor, as you know, is this PSTN
and fixed broadband mix. We look at this category a lot
because that is obvious in the PSTN results—a 8.4 per
cent decline. But for the first time for a long time we
have had a positive movement in terms of the net customer
improvement. You can see there from the graph that has
been a big turnaround from where we were just a year ago.
A lot of them are on bundled plans, which means it is a
two-year contract. So there is good progress and we are
seeing fixed and mobile as complementary, not
substitutional, and that also is a good sign for the
future.

Now the third part of the strategy was: How we can
simplify this business? As I said, Robert Nason has been
working on this right across the business, but it is part
of the business. This is about simplifying the business
so we can really take cost out in a sustainable way. It
is also about improving customer service because any
large telecommunications company has a lot of complexity
in it. If you get the simplicity you get better customer
service, happier employees and, in the end, you deliver a
better result for your customers. We have had 27 projects
running across the business, which is a large number of
projects, and we are now into execution phase. This is
moving into good old business as usual.

Let me talk about some of them as I want to give you a
bit of a flavour. We talked about a leaner operating
model. Three hundred executives have left the business so
what does that mean? It is all about speed of decision
making; it is about reducing layers of management so we
can be quicker in responding to the market. It is also
about getting more efficient organisational structures,
and that is what we have been doing. That has been a big
change.

But we cannot stop there. We have to simplify our
processes, change the way we serve our customers and
change the channels that we use. Just an example, if a
customer now wants to get global roaming they do not have
to ring the front of house; they can go online, use a
simple web form and get that activated. That sounds

14

simple but when you are taking literally millions of
calls each year this has a big impact on the business.
Our target of getting 35 per cent of all the
transactions, that is service transactions and sales
transactions, online is a critical part of the strategy.
You will be hearing some more about that in the following
weeks.

We continue to review all our call centre channels. We
are looking at training. A big change that I hope you
picked up was when we brought Countrywide and Consumer
together. We have a very strong geographical coverage
model. We have 33 area general managers right across the
country responsible for serving customers in that area.
That has worked well. We have efficiencies but we also
have a better outcome. Our people are really focused on
local customers. This has been a tremendous initiative.
We have worked through all that, the people are in place
and we are making good progress.

Simplifying pricing makes it easier for customers to make
a decision, it makes it easier for provision, and it
makes it easier to bill. Certainly an example is in the
broadband area where we have reduced our number from 12
to four plans. That has been a big movement so we are
simplifying it. We had to be very specific about what our
customers wanted, but that has been a big change.

Cultural change is very important. We have started that
in Telstra—a business that is really focused on the
customer. That is holistic change and we are working
through the program. Every manager in the company rolls
it out to every employee. That will take time but it is
getting embedded in who we are as a company. I am very
pleased about the progress there but, of course, we have
a long way to go to deliver the sorts of results that we
need.

And, of course, in delivering greater shareholder value
it is important to have good contracts without partners.
We will continue to do that. That is about the value we
are getting and it is about the nature of the partnership
we have. We outsource a lot of work to various partners.
Robert and the team have been working through that and we
are making good progress.

Last year I said, "How do you know what are the lead
indicators that will give some sense about how we are
travelling?" I put the chart back up about how we are
going. It is not an exhaustive list because we have a
large number or of key lead indicators, but it represents
the sorts of things we are doing. Five out of the eight
indicators are travelling well but we still have some
work to do on a few of them. What I want to point out is

15

TIO complaints. We have seen an increase in TIO
complaints just over the last month. Some were driven by
the floods, but that is an area we are really focused on.
More importantly, I like hearing about issues and about
how quickly we respond to them. That is what we are
doing. We are getting far more responsive and we are
saying, "Let us solve problems and get it done so you can
get on and live your life." More needs to be done but I
think we have made good progress.

Let me just turn to the last area—the three areas we are
really focused on in driving shareholder value. Let me
give you an update across the three. The first area is
around what John mentioned, which is the network-based
applications and services. It is called NAS for short but
I will call it network-based applications and services.

This is all about customers migrating to IP networks.
There is a lot more work that needs to be done to manage
them, to integrate them and to put applications over the
top of them. The lead indicator in terms of the
opportunity is about IP access growth. As John mentioned,
we have seen very strong growth in IP access over the
last six months—in fact, over the last three years. This
augers well for the opportunity in network-based
applications and services.

But there are also some key categories that you look at.
One of the key categories is unified communications. This
is the ability to provide voice-over IP, or voice
services, messaging services over the core telephony IP
to any service. There has been a strong growth and we are
seeing tremendous demand. In fact over the last half, the
actual sales volumes have been very encouraging. Though
as you look at the revenue it is actually slightly down,
but that is because we exited some products that were not
profitable and a couple of contracts with customers as
well. There are very strong results there.

I still think this has tremendous opportunities as we go
forward. Over the next three years we think we can double
the size of this business. That was NAS.

What about our Asian assets and driving shareholder
value? As you know, Tarek Robbiati has been running that
business. I am pleased with the focus we have on the
Asian assets because we now have one division looking at
our Asian assets. It can be across everything that is
happening in Hong Kong, in China and right across Asia.
We have made some really good progress.

I want to take you through what we are doing there. It is
all about driving shareholder value. Firstly, CSL has had

16

very strong momentum in Hong Kong. It remains the most
profitable operator in Hong Kong. I had the pleasure of
being in Hong Kong as we launched one of the first LTE
networks in Asia. That has gone incredibly well and it
has been the catalyst for some tremendous growth. In
local currency we saw revenue growth of 24.3 per cent. A
lot of that was in the smartphone growth. So we had 110
per cent growth in handset revenue but good solid growth
around our mobile services revenue. Also, profitability
is going well. We are expecting a very strong year from
CSL and we expect EBITDA to continue to grow.

That was the first one. Then, just a few weeks ago, we
announced the change in the structure of our Reach joint
venture. I do want to just mention here, Reach has the
best IP network in Asia Pacific and it is very important
in terms of what we want to do as a business going
forward. So the demerger gives us greater control over
this platform and it is going to allow us to deliver what
we need to do, which is end-to-end services to our
Australian customers going into Asia, but very
importantly it is about European and US companies coming
into Asia and giving them a really strong service through
the region. We are very pleased about this. We have still
got some more work to do to improve it but it is a
tremendous result and has been the result of a tremendous
amount of work over the last two months.

Thirdly, the China portfolio: As you are aware, we had
the SouFun IPO last year, which was good to get away, but
then we did review the Octave investment and there has
been quite a regulatory change there, which we wrote down
that business because of those regulatory changes. That
is one of the things with doing business in China, but we
remain very focused on China because Sequel and L Mobile
continue to perform very well.

Our strategy across all these Asian assets will continue
to drive shareholder value over the period.

Let me just finish on the last one. That is around the
media portfolio. When I talk about media, I include
Sensis, I include Foxtel and I include the Bigpond
content assets. Let me touch on a few of these.

Firstly, Foxtel has had a very strong first half. 9 per
cent revenue growth, 17 per cent EBITDA growth, nearly a
quarter of subscribers are now using high definition
services, 70 per cent have IQ and 25 per cent have IQ2.
That has been great and I think we are coming through a
tremendous period with Foxtel. We are very pleased with
the performance of that team.

17

We have our own IPTV product, T-Box, and that continues
to exceed our expectations. We have over 100,000 T-Boxes
sold, but more than one third of our T-Box households are
active Bigpond movie download users. So they are renting
now on average more than one movie every week. Remember,
that is a big source of revenue, downloading movies.

Also we have been working very closely with Foxtel and
you would have seen that we announced that from May our
T-Box will carry 30 channels of Foxtel content. That is,
I think, a great demonstration of this very close working
relationship we have with Foxtel, which will be very
important for us as we move forward.

Now let me move to Sensis. Just as we forecast, Yellow
print did decline and that decline did accelerate. The
good news is that we are well into executing our strategy
that will support our customers growing for digital
solutions. This has been something that we have talked
about for a long time and I have been very pleased with
the work that we have done. In the last year, remember,
we rebuilt the Sensis IT platform so we would be ready
for this space, because in an on line world it is very
different to a print world, and we have recently
announced some very strategic partnerships with key
industry players, being Google and Bing. They are very
important announcements. Also, we have put out new
applications on mobiles and tablets. This is driving very
strong usage of our on line Yellow Pages digital product.

It is important to understand the underlying trends and
opportunities facing Telstra. We want to get Bruce to
give you all a briefing over the next couple of weeks
about some of the underlying changes that we are putting
into the business, because I am sure that you are looking
at that and saying what is happening to the print
business, but we really do believe that with print and on
line together we have a very strong proposition. So what
he will talk about is three key things: Firstly about the
expanding of the digital business to drive growth and how
we are going to simplify the customer experience in terms
of opening up this market. Remember Sensis has a very
strong relationship with a large number of small
businesses across Australia. Secondly, to support print
as a valuable provider of advertiser leads. If you can
have print and on line working together, we think that
creates a good partnership. We have been looking at
different operators around the world for over two to
three years and we have seen them go through their own
transitions. Thirdly, how do we maximise value from the

18

other parts of the Sensis group? Remember there is still
White Pages, there is Whereis, there is Sensis Digital
Media and Adstream. Last year these businesses generated
around a third of the sales revenue from Sensis. I do
want to stress that we did see cash flow improvement in
the first half from Sensis.

So a lot of work to do, but we would like to take you
through our strategy. To sum up, Foxtel is performing
well. We are pleased with T-Box and the Sensis strategy
is about creating this long term value for shareholders
by taking advantage of this move to digital marketing.
That is why we still expect good strong growth from this
portfolio.

Just before I conclude, I started off with talking about
the floods. A key person who was part of that has been
Michael Rocca. As you would have seen in the press,
Michael is leaving the business after 43 years service in
the business. He has been a tremendous contributor and I
just want to publicly recognise Michael today for his
great contribution. He has really been a stalwart of this
company for many years. So Michael, on behalf of us all,
thanks very much.

To conclude, strong sales momentum in the first half, one
million mobile and fixed broadband additional customers
through the half, and that is taking us good momentum
into the second half. Delivering on our strategy.
Everything we said we would do we have done and we are
confirming full year guidance. And I think we have met
another critical milestone in our NBN negotiations. Also
we have taken a number of concrete steps to improve
customer service. We are starting to see results there.
We are retaining our customer base, simplifying the
business, and of course we believe we will drive
shareholder value.

With that, let me ask John to come up and join me and we
are happy to take some Q and As. Thank you.

QUESTION (Laurent Horrut, JP Morgan): Thank you. Good
morning, John and David. First question on the NBN. How
long do you think the documentation should take now? And
once the documentation is finalised and therefore signed,
will that put you in a position to come publicly and give
us the key terminals on the NBN agreement?

On the back of that, just wanting to see if you had some
thoughts to share in terms of now you have got some of
the key inputs in terms of Opex, capex, et cetera, how do

19

you think your model is going to evolve over time?

MR DAVID THODEY: In terms of documentation to get to
definitive agreements, we think a couple of months. We
have got a lot of focus on it. Remember it is about
documenting what we have agreed. That is number one. The
team are working on that now. As soon as we have got
them, we will give you some more information on them.
Once we get everything together, we have got to get an
independent assessment before we bring everything back to
you for a vote, but we will try and share with you at
that point some more information.

In terms of the long-term modelling, obviously we have
done a lot of work on that area. As we move through into
that period we will share with you some of that
information, because there are a lot of moving parts in
that, as you will understand. There is the decline in the
PSTN, high margin, but we have got new NBN revenues
coming in. That depends on the roll-out of NBN Co. John,
you might want to comment because you and the team have
been doing a lot of work on that.

MR JOHN STANHOPE: We have done a lot of work and we are
also doing a lot of work on the product set that we will
take to market and estimating the revenue and the margins
that may occur from that. It is a little premature to
start talking about what that looks like. When we get to
sign up deal and sign, we will, and we look forward to
the next few years, we will give some guidance on where
that is going, but it is just a little early.

QUESTION: I am interested on the capex model. You would
have to think that the capital intensity in your business
should have to come down over time, given you are moving
to a potentially lower market share for a business model.
I was just interested, you are spending 14 per cent of
sales now. What would you say would be a reasonable
assumption five years from now?

MR JOHN STANHOPE: I think we have said we are looking at
continuation from now of 14 per cent. You are right that
there is a change where you spend your capex, but you
shouldn't under estimate that there is some capital
expenditure required to have a new product set and the
interaction between Telstra retail and the wholesaler
called NBN Co. So there will be some spend necessary for
that, but certainly not exceeding 14 per cent capex for
sale. There will be opportunities for capex reduction in
other areas of the company.

20

QUESTION: I am just wondering, in the first half 11
performance, in the presentation you were showing an
EBITDA decline of 12.5 per cent and then in the financial
highlights you are showing 11 per cent. I just want to
clarify, the main difference being the Sydney Yellow
Pages in terms of adjustment? So would it be fair to say
the more like for like type number would be 11 per cent?

MR JOHN STANHOPE: Correct.

QUESTION: Okay, I just wanted to clarify that, and just
in terms of adjustments, the 75 million in your finance
cost of fair value adjustment, can I just clarify they
are non-cash cost?

MR JOHN STANHOPE: Dominated by valuation reval, yes.

QUESTION: Yes, so that tends to inflate the finance cost
for this half?

MR JOHN STANHOPE: It does.

QUESTION: Putting all that in the mix, if I get a normal
impact number of say 1.4, does that seem reasonable to
you, putting all these adjustments?

MR JOHN STANHOPE: Yes, that is reasonable.

QUESTION (Daniel Blair, Southern Cross Equities): Could
you give us a sense for trading into Jan and Feb?  That
is the first question. Perhaps we will start there.

MR DAVID THODEY: Momentum continues. Obviously, with an
exceptional first six months, I don't expect it to be as
big as the first half, but we are still expecting strong
performance through the half, but January and February
are looking good.

QUESTION: In terms of ARPUs, obviously one of the key
drivers, can you give us a sense for ARPUs for new
contracted customers versus the existing base across
mobile, PSTN and things like that?

MR DAVID THODEY: I will get John to get you the exact
details. Obviously we are managing the recontracting
because we have got new cap plans in the market, so you
are seeing some decline there, but the new customers
coming on are coming on at a great ARPU, because of a lot
of the smartphones so we are getting a good mix there. We
are managing the recontracting very carefully, and if you
look at where Gordon, especially in the consumer market,

21

is just managing those levers, I think we are doing it
very well at the moment and attracting the right sorts of
customers. John, have you got anything there?

MR JOHN STANHOPE: I will repeat what I did say about
ARPUs. You saw the ARPUs were holding up pretty well, but
I do anticipate ARPUs will come down in the second half
because people are signing up. The new acquisitions are
recontracting. Part of the success, part of the 919
million mobile success is not just us subsidising
customers, also we have adjusted our price points and
have included more data, et cetera. So by definition
ARPUs will come down a little in the second half.

QUESTION: Finally, guys, I think previously you have said
of the billion increment in Opex you expected, looking
forward into FY 2012, perhaps two thirds of that would be
the cost of ongoing business. Has your thinking changed
around what we could expect in terms of the Opex
increase?

MR DAVID THODEY: I think it is pretty much as we said
about, about two thirds ongoing.

QUESTION (Mark Blackwell, Morgan Stanley): I have two
questions. Firstly, in the prepaid market, just wondering
if you can give us some feedback on what is going on
there? It seems as if you are reporting much higher
ARPUs, but in a subs sense the market is down. Your
competitors are reporting quite sharply, Optus 66,000
down, Vodafone I think were just slightly down in prepaid
subs. Does that impact to smartphones firstly? I am just
wondering what is driving that. I am also noticing by the
way in that context that your SMS numbers are now pretty
flat. I am just wondering is this a smartphone impact on
prepaid market and is that having a follow on impact on
your SMS?

MR DAVID THODEY: I think to a certain extent. We are
pleased with the prepaid result, because remember that
has been a market that hasn't been as strong as we want
it to be. It is great to see growth, but remember ARPU
was up, which is very good.

We did, just prior to Christmas, put some smartphones on
the prepaid offer and I think that while it was on a cap
plan, it is having some impact.

Were you referring to SMS on prepaid or SMS total?

QUESTION: I don't think we were told an expense on

22

prepaid, so just expense total.

MR DAVID THODEY: I think overall that is probably a trend
we have seen, especially in corporate in business and
email is just as good, but the SMS volumes are still very
high and growing very well. Have you got those numbers?

MR JOHN STANHOPE: The total volume is 4.8 billion SMSs,
but SMS revenue actually grew $116 million. That is 25
per cent. So SMS is alive and well.

QUESTION: A second question on Sensis, the digital
revenue growth there. I seem to recall that in the past
you have experienced digital growth of 10 plus per cent,
obviously counteracting the decline in the print book,
but this time you are showing digital revenue growth of
only 0.2%. Obviously we are going to hear more about this
in a couple of weeks’ time, but is that worrying? Do you
think that your customers need a different offer from
Telstra or from Sensis on the digital product? Why is the
digital growth really slow?

MR DAVID THODEY: I think there has been a combination of
things. We are in this transition period now because we
are delivering a whole lot of new digital product to
market which we will take you through. The actual growth
in sales was about 20 per cent through the period, but
the revenue did not flow, partly through competition, but
I think there are some execution things there. Bruce will
take you through some quite exciting plans going
forwards. So a bit of work to do, but I think the guys
are onto the right things now. So we will take you
through to give you more detail because you have got to
go through the buildup of what those digital revenues
are.

QUESTION: So you said 20 per cent in volume growth?

MR DAVID THODEY: It was the number of contracts we signed
in the first half. So I think that is good.

QUESTION: That is people who are taking a--

MR DAVID THODEY: Taking a digital product from us, yes.
So that is good.

QUESTION (Mark McDonnell, BBY): Two questions from me,
firstly on the NBN, secondly on your result.

The NBN is now a sharply politicised development. We have
had recent statements from the Shadow Minister,

23

Mr Turnbull, that the Liberal Party supports structural
separation but remains implacably opposed to the NBN.

My question is: Given those circumstances, is Telstra
prepared to provide a choice to shareholders at the
forthcoming EGM around the form of structural separation,
one option being the Labor Party preference for a deal
with the NBN and the other option being a Liberal Party
preference for structural separation that does not
involve the NBN?

MR DAVID THODEY: Mark, what we will take to shareholders
is what we have certainty about. That is all I can deal
with, and that will be the current proposal that we have
worked with the Government and NBN Co and the ACCC at
that time. That is all I can take to shareholders,
because, while I may understand the policies of the
Opposition party, they are not in place, and so it would
be very hard to give anything a certainty.

However, we are taking to our shareholders what we know
and that will be up to shareholders to vote on. That is
all I can deal with. I can only deal with reality.

QUESTION: My second question relates to your project
simplification.

The emphasis in the way that you talk about this is
largely on process and internal organisation, some
reference to pricing, but one of the great sources of
complexity in Telstra's business is the shear diversity
of your activities. In that regard it is quite apparent
that a number of your businesses are struggling and have
struggled for quite some time. Yet we never hear anything
about simplification involving turnaround measures or
plans to divest under-performing assets, and I refer in
particular in this case to Telstra Clear.

Now, David, you know that I questioned your predecessor
about this business on several occasions over a number of
years. This has been a long running sore and, as we see
from these results, it not only continues to lose money
but those losses are getting worse. What are you going to
do about it?

MR DAVID THODEY: Telstra Clear, which as you know John
has been Chairman for a while, continues to get a lot of
focus. We have looked at a number of options there, Mark,
and we continue to look at what is the best thing for
shareholders. We have an investment there. If we could
find a better return for what we are doing we would do

24

that. The first half was now quite what we wanted it to
be. The guys have put a bit of money into acquiring some
market share.

At the moment we are steady as we go. I think if you know
something that we don't know, let us know, but at the
moment we are going to work through that business and try
and make it as profitable and as well performing as we
possibly can. That is really the option we have in front
of us at the moment.

QUESTION (Digby Gilmour, CLSA): Thanks very much. Hi,
David and John. The first question just on the NBN. I
know you don't want to give details but just to clarify I
think what you have made as caveats to the NBN agreement
being completed, price stability confirmation of the tax
treatment and then also the legislation on the NBN. Can I
just clarify exactly what you mean by those three
caveats?

MR DAVID THODEY: Right, let me ask John to do that.
Pricing stability and regulatory stability is probably
the right term for the first one. John, do you mind
taking us through.

MR JOHN STANHOPE: Yes. The price stability is about
copper pricing fundamentally. We have been arguing that
it is best for the industry to have some stability around
copper prices as it enters into an NBN world. Of course,
copper pricing is very dependent on ACCC consideration.
Pricing stability therefore is of concern to us. Sorry,
the second and the third?

QUESTION: The tax.

MR JOHN STANHOPE: The tax is just simply deductibility
for payments for NBN accessing our network. Our
interactions with NBN are appropriately deductible. I
don't have any strong concerns about it. Nevertheless, it
has got to be finalised so that there are no adverse
implications because of course the financials depend on
certain tax outcomes.

MR DAVID THODEY:  And of course legislation.

MR JOHN STANHOPE: We have got to go through and we have
got to make sure the NBN legislation is all clear.

MR DAVID THODEY: We have got to work through those. Of
course, having regulatory stability for interim
separation is really important because that can have a

25

big impact on valuations. So we need to find some way
that we can work that and that is why we have got to work
through with the ACCC over the next couple of months.

QUESTION (Christian Guerra, Goldman Sachs): Good morning,
David and John. Thanks for your time. Just two questions
from me as well.

Firstly, just on the operating cost outlook, I think you
said at the Investor Day that the DVC costs would be up
$450 million this year and labour is up $230 million,
which I think you also put in the presentation. It looks
to me like you spent basically $500 on the DVCs, so you
have spent the annual allocation in the first half and
the labour costs have only increased by about $20 million
bucks versus the $230 that you guided to.

So I am just wondering what the outlook is for the second
half on both of those measures, because if you continue
spending on the DVCs and that labour increase comes
through, I would just like to better understand where the
savings are going to come from?

My second question is on Sensis, where I think adjusted
sales fell by 14 per cent with print down 18 per cent
once you adjust for Sydney. I do understand that you are
looking at some digital initiatives, but previous it was
around 50 per cent of total sales. I am just wondering
how confident you are that you can arrest that decline
given that the print decline is now pretty much in line
with what we are seeing globally with directories? The
reason for the question is because Sensis, as I am sure
you know, is over 10 per cent of your group EBITDA.

MR DAVID THODEY: Thanks, Christian. I am going to get
John to answer the first one, because he did go through
some of that in his presentation but he will just take
your through it because that is a very key point. We did
spend half a million on DVCs and, as John said, he did
confirm guidance and we will show you how we do that.

On the Sensis one, John might want to make some comments
and I will make some comments on Sensis too, because we
clearly understand how important Sensis is in our
business.

MR JOHN STANHOPE: Christian, the $450 million that we
talked about was mobile DVCs. DVCs in total we said would
be about $650 or so, and you are right, roughly speaking
labour increase is going to be about $200 and other
expenses is going to be about $200, and you are right,

26

labour, the increase is only $20 for the first half, and
what I did say was that we will continue to support the
momentum in growing the customer base. So the DVCs may
well be higher than what we did say, but as you can see,
already the labour expenses are running at a rate that is
lower than we anticipated. That is because we have done
some things earlier emanating from the simplification of
the business. So we do expect the labour additional cost
to be lower than we said back on Investor Day.

In the other expense category, roughly that was to grow a
couple of hundred as well. Right now that has grown about
$200, but $133 of that is the Octave impairment. So you
can see the run rate in other expenses is also not as
high as we expected.

So to answer your question, we will spend a little more
on DVCs, as I said, but our intention is to offset it in
other expense areas and deliver on our guidance.

MR DAVID THODEY: Thanks, John. I would just like to add
on top of that question, we are making good progress
around the re-engineering works. I think that we are
seeing good engagement across the business that is
driving some really good improvements. So that has been a
little bit of the upside that we have in terms of cost
out. So good news there. Still lots to do. But as John
said, I don't think the DVCs are quite at the same levels
as they were in the first half, but we will still keep
momentum going as we go through into the second half.

Let me answer the Sensis question, because it is very
important that we really move this business forward. Of
course, you all know the stories around Yellow Pages
directories around the world. Yes, we are seeing some of
that change in customer behaviour from print product to
on line product. We are well positioned now for that
change but as that revenue mix changes, there are a
number of different elements to that, when you recognise
revenue, how you do it, how you could continue to make a
very compelling offer to the customer around print and on
line. I think that is what we really do have a
differentiation in.

Revenues will continue to decline. Therefore you have to
do quite a bit of work to take your cost base out.
Because we did the big i-Gen project nearly 18 months
ago, we are now seeing costs starting to come out of the
business. Remember that the online digital sale is a very
different sale to what you have traditionally had within
the print business. That is the change we are going
through. So those costs and that EBITDA are important to
us as we go forward. While it may be a different mix on

27

revenue and expense we have a very clear target about how
we are going to maintain the free cash flow and the
EBITDA from this business. But there will be a transition
period and that is what we are going to take you over
sometime in the next couple of weeks. We will try to give
you a bit more colour. This is not a surprise; we have
been working on this a long time. We are very aware of
what the trend has been around the world.

QUESTION (Tony Wilson, Evans and Partners): Good morning,
David and John. John, you put up a slide showing product
profitability and on that slide we saw a substantial
decline in mobiles and fixed internet margins. I gather
the reason for that, or a large part of the reason for
that, is the new deals you are doing—the bundled deals—
and just below pricing plans. The implication is that the
margins on those new customers and old customers that are
converting to these new plans are a lot lower than the
average for the half. Can you give me an indication of
where those margins are on the new deals you are doing?

MR JOHN STANHOPE:I cannot tell you the deal-by-deal
margins but I can tell you that your assumptions are
right. There are two things that are driving the margin
reduction. One is that there are different price
offerings in the marketplace so that will have some
impact—and it is having some impact—on ARPUs and
particularly our wireless broadband ARPUs. If you look
into the details of our results, wireless broadband ARPUs
have dropped quite considerably. And of course the half
year result has a lot of the upfront acquisition costs.
So on a half basis you are seeing the load of the upfront
costs in that result. Those margins will improve over the
second half, but will we get mobile margins back to where
they were before? No, they will not but they will not be
where they are now because we have got the upfront costs
in the first half, in the same instance as broadband.

MR DAVID THODEY:Remember we are more competitive in the
market around mobile fixed broadband but we are still
selling the value that we believe we deserve because of
the strength of the network, the fixed broadband network,
and the service that we give. It is about being
competitive but, as John said, there is a lot of upfront
loading because of the variable cost, and because we are
upfront therefore it flows through. I would not get too
caught up in that. As John said, it improves all the
time.

MR JOHN STANHOPE: I guess I should remind us all that we
have been travelling at quite high margins. That has been
somewhat of an outcome of where we have been in pricing
in the market and our "go to market" model. Let us be

28

clear here: We are aiming at growing earnings and EBITDA,
not so necessarily focused on growing margins.

QUESTION (Sachin Gupta, Nomura): Good morning and thank
you very much. I wish to ask just a few things. On your
wireless broadband there are 500,000 customers. Is that
new customers or are you getting customers back from your
competitors? Fixed line trends look resilient and you
have only lost 506 million in the last half.

MR DAVID THODEY:Your question is: Are they new customers
verses winning back customers from competitors? It is too
early to tell that. Remember it is not quite attuned. We
can tell with mobiles when you tune the number but mobile
broadband people tend to buy a new dongle. It is a bit
hard. We can come back to you with what our estimates
are. I have an idea of what it is but I think there are
quite a few new people in that category. Sacks & Sacks,
are you getting just one question?

QUESTION: Just the one, yes. You spend half a billion
dollars on DVCs but if you look at the sequential mobile
trend you have had only 5 per cent mobile growth, which
is marginally different from what you have done
historically. Is that reasonable or are you expecting a
much stronger pick up in the second half?

MR DAVID THODEY:We think it is reasonable but we think
there will be a bit of a pick up as we go back in the
second half.

QUESTION (Ian Martin, Bank of Scotland): I have two
questions. Can you tell us the proportion of mobile only
households as at the end of December?

MR DAVID THODEY:John, where are we at?

MR JOHN STANHOPE:I have not done that estimate. It is
still 12 per cent.

MR DAVID THODEY:I would say 12 to 13 per cent; in that
range. We are not up to the 20 to 25 per cent of the
United States; it is 12 or 13 per cent.

QUESTION: In relation to the regulatory certainty
question about the price of copper, the ACCC has a
different interpretation on that. It also proposed a
massive reduction in the value of the asset. If they
confirm that, presumably you would have to fight that in
the courts. I expect you would have to fight that in the
courts. Would that then mean that you could not say we
had regulatory certainty? We do not know what the value
of the network is, we are negotiating; therefore, you
will not meet that 1 July deadline.

29

MR DAVID THODEY:There is a risk to get to the position
where we have certainty over the period. So what do we
bring to shareholders? I can stand there and the board
can stand there and say, "This is what we expect to get
from this." Yes, there are a lot of moving parts in there
but we have done the discussions, we have disclosed that,
we have said that both to the Government and NBN and to
the regulator and we will have to work through that. We
will have to find way through it. We cannot live in an
open ended world if we are going to do something as big
as this. So, yes, there is a lot of work to do. John, do
you want to add something?

MR JOHN STANHOPE: I want to add that there is a
consultation process that has been running with regard to
that return on asset base methodology. We have put our
views and others have put their views. We do not yet have
an outcome of that consultation. But that is all part of
the pricing stability discussion.

MR DAVID THODEY:And condition precedent. But you are
absolutely right. We understand it pretty well.

QUESTION: Can I confirm one other thing that John said?
The dividend next year, the board wants to pay 28¢ as
well. The tax position is such that you can fully frank
that as well.

MR JOHN STANHOPE:I did say that.

QUESTION (Sameer Chopra, Merrill Lynch): I have two
questions and the first one is on gearing. You talked
about the comfort level of gearing as being around 1.5 to
1.9 times net debt to EBITDA. How does that change as you
become a retail centric business, or as you divest your
network? Do your comfort levels change? That is the first
question. The second one is that mobile SARC is running
at about $162 in this half. It was $149 last year. I
would have expected a bigger SARC number coming into this
result. What are you expecting in terms of trends on
SARCs? Is there a bigger smartphone in the base? Are you
expecting SARCs will lift from here, stabilise, or come
off?

Mr DAVID THODEY: I will ask John to talk to the gearing
one. He might want to comment on the SARCs and then I
will wrap up. In terms of modelling we are doing a lot.

MR JOHN STANHOPE:The gearing or debt servicing target,
the conditions were in today. We regularly have a look at
our target zones, if you like. But I am not expecting
much shift in the free cash flow capability of this
company. So I am not expecting too much change in our

30

target zones whatsoever. You might have noticed that we
have reduced our target a little bit; it was a little
higher than that. That was simply a change in the world
financial environment. That is why I am saying that. It
is just some evidence that from time to time we need to
review these parameters. We will in a couple of years
time when we are full on into an NBN world.

We have expectations of what that world will deliver and
look like but we might be absolutely wrong. But right now
I would not see any need to radically change those
targets. SARCs—the $162 from $149—was driven by the
combination of the cost of smartphones. As I said in my
presentation, it was fairly much driven by rate. In fact,
if you bear with me for a second I will give you a bit
more detail—a bit of a split. It is probably in the
documentation that we have given you. Of the $162,
41 million, an absolute, is driven by rate and
100 million is driven by volumes.

The increase in SARCs was $141 million. This includes
CSL, by the way, because that is in our expense line: 41
by rate, 100 by volume. So rate has not been the primary
driver.  The volume of handsets we are subsidising is
quite high, as you can tell by our additions.

QUESTION:  SARCs are not really picking up. Is that one
of the Project New benefits? I think you were taking the
contract of Brighstar and looking to do it in house.

MR DAVID THODEY:Be careful there; we have only taken the
management of our sourcing. They are still doing all the
supply chain warehousing for us and they are doing a good
job. There have been a lot of good results. We do that I
think pretty efficiently. But also I would like to say
that the whole distribution strategy we continue to look
at that driving the cost of the most efficient channel
while meeting customer demand. Gordon and the team have
done some good work, but it is also in the enterprise
market and the business market. Your question is: What
have we spent? I think it will flatten. It may be a bit
up in the second half but generally I do not see it going
much higher. Are we doing a good job at trying to buy
correctly and looking at the handset mix, et cetera?
Those are the things you have to do, as you well
understand.

MR JOHN STANHOPE:I add that in the second half of the
year we expect far more on the mobile repayment option
than on the subsidy. So that also helps with the full
year SARCs rate.

QUESTION (Brad Clibborn, Credit Suisse): I have two
questions. My first is around interest and tax and my

31

second is around head count and labour costs. The
effective tax rate was quoted as 33 per cent. John, could
you give some clarity on that? On interest you noted the
average interest cost was increasing as well as on high
liquidity and financing costs. Could you give us an idea
as to where that is expected to go? Secondly, the head
count is down around 1,000 in the first half. Will you be
doing a similar reduction in the second half? If not,
would that be pushed out to FY12 to get an idea around
redundancy costs?

MR JOHN STANHOPE:On the effective tax rate, it is 33 per
cent, so it has gone up a little bit because we have not
had so much R&D claims and investment allowances, given
that the transformation expenditures have come off. So
that is fundamentally what has affected the tax rate. In
terms of the borrowings, the actual interest expenditure
has gone up mostly because of the rate. You will see in
our figures that our net borrowing has gone up about
$450 million. That is timing, right? So net debt went up
about that amount in the first half. It is just timing
and cash flows. So the interest expense increases is just
rate. That will continue because rates have gone up and
we have had to refinance. But it is not huge; it is not
tens of millions of dollars.

The FTE, let me talk about redundancy. Redundancy, we
spent $160 million in the first half. We do not expect to
spend that much. As you remember in the second half I
said the total redundancy expenditure is likely to be
$220 million or so in the full year. It will be around
about that mark; maybe a little bit more. We will time
our redundancies appropriately but it will not be
anywhere near the first half for redundancies. As I said,
we frontend loaded our exits. You are right: the exits
were 700 and so in net terms. There will still be some
exits in the second half but not at the same rate.

QUESTION: Will that tax rate be 33 per cent for the full
year as well?

MR JOHN STANHOPE:It might come down a little—down
towards the 30 per cent.

MR DAVID THODEY:I want to come back to this labour and
labour sub. It is not just the head count; it is about
labour and labour sub. We have a lot of focus on that. I
am expecting it to continue to decline and that is what
we have to do as a business. Yes, we have some redundancy
costs but the only result here is to drive a more
efficient business. Every business unit has targets to
drive efficiency, so it must come down.

32

There are mixtures in the FTE numbers. There is some
contractors and agency staff. Everything is up for grabs.
So a lot of work going on.

QUESTION (Christopher Vagg, Citigroup): Good morning.
Just on mobile, in particular iPad customers. Are iPad
customers a material number for you guys and if they are,
are they classified as mobile broadband or purely in hand
held?

MR DAVID THODEY: John, you will have to help me here.

JOHN: They are classified as prepaid mobile broadband.

MR DAVID THODEY: And the number of iPads, it is on the
top of my tongue. Gordon, can you remember? It is about
70,000, and Galaxies, not as many but going okay. But the
ARPUs are not anywhere near what we get. They are sort of
in the low numbers. We could get you the data on it. It
is an emerging category that, because people go onto wi
fi a lot, what you get on the 3G network is not quite
what--

QUESTION: Given that mobile broadband ARPU is around $40
down, as these other segments grow, we could probably see
ARPUs trending even lower, given those lower price
points?

MR DAVID THODEY: Yes. What we are doing now, and the ARPU
story is getting more and more complicated, because we
are also getting a lot of machine to machine, and that
can be as low as $5 ARPU. Then you getting tablet
category; then you have got the straight mobile phone;
then you have got a smartphone and different types of
smartphones. So while we may be seeing overall ARPU
declines, the actual cost to sell, every category has a
different equation. We can get you that data, because
that is a lot of the work we are doing now as we start to
move into these new areas which is going to continue to
grow the number of so called subscribers on the wireless
network.

QUESTION: Just another question around your mobile
network, mobile capex in particular. You have half a
million new wireless broadband customers. Obviously, data
utilisation is increasing. Can you give us a feel for how
that is tracking and how the network is going. Obviously
your competitors have been spending a lot outside of the
floods. They were having to spend a lot for various
reasons but how is Telstra's network?

33

MR DAVID THODEY: The network is holding up incredibly
well both in terms of its performance, in terms of the
head room, there is a lot of head room, in terms of the
amount of data we can carry. Remember it is roughly 90
per cent data packets and ten per cent voice, or around
about there, but we are very pleased with the network and
we have some good plans coming up, and managing the cap
ex well, and continue to drive recovery proposition and
speed proposition. We are very pleased with the network.

QUESTION (Andrew Levy, Macquarie): Your latest cap plans
or the cap plans when I looked at it on the computer have
an embedded MRO or mobile repayment option charge in
them. And, John, you referred before when you were asked
a question to greater mobile repayment option take-up in
the second half. That kind of sales technique I guess
pulls forward some of your revenue. Can you talk to when
that was introduced what the impact on the FY 11 accounts
would be versus selling how you used to sell and also
what the ARPU impact will be in the medium term?

MR JOHN STANHOPE: We introduced zero MRO option in
December and that had an impact on the revenue line in
that the phone is not subsidised and the cost of the hand
set is spread over revenues, amortised over the contract
period, and it is spread over hardware and usage. It is
one of the reasons that I mentioned that ARPUs will
decline in the second half, because rather than a
subsidy, it has a net revenue impact.

That is how that works. You come in and buy a hand set on
a zero MRO plan, meaning your handset doesn't cost you
anything, but in an accounting sense for Telstra it is
amortised over the revenue contract period offset against
your hardware sales.

QUESTION: So the sale is recognised on day 1 or the sale
is recognised over 24 months?

MR JOHN STANHOPE: We make the sale on the day but the
accounting is that the revenue declines over 24 months,
it is amortised over 24 months.

QUESTION (Laurent Horrut, JP Morgan): I just want to go
back to the comment you made on the documentation. You
will think that I am obsessed with the timing, but we
have been in this sort of information void in terms of
real NBN disclosure for the eight months. It is kind of
getting a bit long. And two months documentation process,
I am not sure what term you use, but that seems to be an

34

awful long time to put these documents together. I am
sure you can do much better than that.

Is the idea that you are waiting to have the legislation
through, that you don't want to add to the current
controversy by releasing more detail on your definitive
agreements? I am struggling with the timing of the
disclosure.

MR DAVID THODEY: No, we are not waiting on the
legislation. Do you deal with lawyers?

QUESTION: Unfortunately, yes.

MR DAVID THODEY: We love them dearly and they are a great
group.

MR JOHN STANHOPE: We shouldn't underestimate the
complexity of this agreement. I have been up to my
armpits in the whole thing. And we shouldn't
underestimate the importance of what we have said today.
I know it is easy to say you haven't told us much new
about NBN today, but to actually agree the deal terms is
really the blueprint for the lawyers to go document. Why
we haven't got any further than we have is that we
haven't been in that position. We have been still talking
about the deal terms, Telstra to NBN, and for that matter
the elements of the Government contract that will merge
between Telstra and the Government. So that really sets
the blueprint for the lawyers to go away and do the
documentation.

Having said that, that doesn't mean that that doesn't
have its own complexity. I just want to make sure people
understand here that where we have got to and what we
have announced today is an important milestone, because
the blueprint is there for the documentation there is.

QUESTION: Have you signed a document with NBN Co?  Have
you signed a term sheet? Have you signed something that
binds the two organisations into the documentation
process?

MR JOHN STANHOPE: We have agreed the deal terms on an
exchange of letters.

QUESTION: Thanks for that clarification. It is very
useful. The second question is around the interaction
between your volume acquisition and the impact that it
has had on ARPU, particularly if you had to go back and
look at the last six months in terms of how you have

35

driven the volume acquisition in mobile and fixed
broadband, what would you say has been the most important
driver in terms of how you have driven that subscriber
growth? What I have in the back of my mind is from my
point of view I think you have driven that a lot more
through the cost reinvestment than an actual price cut
but I would be interested to have your view on it.

MR DAVID THODEY: I think it is a mixture of all of the
above. Remember nine months ago some of our plans had 35
per cent premiums on them. I think that we were not as
competitive as we needed to be. We were not as strong in
some of the smartphones as we needed to be. I think also
our promotion was not quite where it needed to be. So as
you would understand it, the balance between all of the
above and getting the channel working correctly. I think
we have just had a really good mix of that and we have
been very conscious not to start a price war, because we
don't believe that is in anyone's interest but we did
want to make sure that we were having attractive plans
where the right hand sits at the right level. So that has
been a lot of the work that we have done and I think we
have a better management of it on a weekly, monthly
basis. I would put that down to that. John, do you want
to add any more to that?

MR JOHN STANHOPE: No. I think you are exactly right. It
is a combination of things. It is not just the
acquisition.

QUESTION: A final one, just on the DVCs, looking at
mobile down in margin of sort of one per cent, fixed
broadband being marginally 1.7 per cent, is that the sort
of DVC run rates you are thinking of taking into the
second half or there will be a bit of an ... on the DVC
rate, in terms of ARPU compression?

MR JOHN STANHOPE: I have already mentioned the MRO impact
on the mobile ARPU, so it will be a little more than 1.7
per cent.

MR DAVID THODEY: Just a little bit more, but with the
strong volume and the right customer mix coming through,
that is where we feel confident.

QUESTION (Andrew Anagnostellis, Deutsche Bank): Just on
the PSTN business, it is a reality that it is declining
but are you disappointed with the rate of decline in the
last half, given all the new products you have
introduced? And just philosophically going forward in an
NBN world, does this business just continue to run off or

36

is there some sort of strategy to either accelerate or
slow the decline?

MR DAVID THODEY: No, we are not disappointed. It is
pretty much where we expected it to be. You can see from
the bundling strategy in some of the PSTN access pricing,
we are balancing it. I will get John to take you through
a little bit of the mix in the PSTN because you have got
to look at access and calling rates. John, did you bring
those numbers?

MR JOHN STANHOPE: Yes, I have the numbers. It is all in
my head anyway. It is driven by usage, as I think I said,
and people are just using other mobile and Facebook to
communicate. As I told you, SMS is alive and well and so
on. Obviously access is still the highest element of the
PSTN revenues and that declined about 4 per cent. So the
line reduction is not too bad, people actually having an
access line, but the 8.4 per cent is driven by 20 per
cent reduction in local calls and 13 per cent in
national, long distance. They are the sort of numbers
that are driving the 8.4 per cent. So it is usage again.
But access lines, access revenues, access revenue
reduction of 4.4 I think it is, that sort of mix that is
going on, I guess that will continue as people continue
to use other forms of communication and access lines will
gradually come off. In the brave new NBN world it will be
quite a different voice. It will probably be an
application but who knows how much it will be charged
for.

QUESTION: Just in terms of the whole reason you are doing
the strategy is to restore earnings growth, clearly this
year it is not happening. What confidence should
investors have that the measures we are seeing this year
are going to translate into earnings growth next year?
Obviously, we don't expect a formal guidance but just
perhaps in terms of some of the revenue and cost drivers
that could flow through to next year.

MR DAVID THODEY: I think one million new services is
pretty good proof point, as I showed in my chart in terms
of revenues returning and profitability. You just need to
look at the fundamentals. Yes, we have invested around
customer growth, which we told you we were going to do,
we told you what was going to happen this year and it is
all about returning to top line growth and profit growth.
With the cost out and we see the labour improvement, yes,
there is some variable cost increase, but that is good
investment. You are getting returns in ten, eleven
months, that is very good.

37

I think that is the proof point. The momentum in the
business is very strong and we will keep it going because
it is a good thing for our shareholders.

MR JOHN STANHOPE:And the simplification of the business,
Robert told you that all that time has been spent on
identifying all the opportunities. That has been done.
Now we are into execution of those seven projects that
David mentioned to have a totally different cost base in
the organisation—a lower cost base.

QUESTION (Digby Gilmour, CLSA):  Thanks for coming back
to me. I have two questions actually. First, NBN cash
flows. John, within your assumptions, what proportion of
the $11 billion for NBN will be realised before the
election? Let us say before the year FY13? What supply
contracts or contractor service arrangements will provide
certainty over the remaining cash flows if there is a
change in government? And then very quickly I have
another question relating to Yellow Pages and to the 18
per cent decline in adjusted print revenues. Can you
please give us some indication there? You have indicated
higher cancellations and a declining yield. What was the
volume and yield mix within that 18 per cent print
decline?

MR JOHN STANHOPE:The first challenge is picking when the
next election will be. We talk about our election being
three years out. Remember in the first three years the
cash flows from the NBN arrangements will be great. The
cash flows come from the infrastructure leasing so they
will not be doing a hell of a lot of work in the first
three years. Therefore the other element of cash flows
that come to the company, which is payment for
decommissioning customers, also will not be very much in
the next three years. If we assume that an election will
be in three years time, they will not be very high over
the next three-year period.

MR DAVID THODEY:And in terms of Sensis, Bruce Akhurst is
in Melbourne. Bruce, are you there? What I think would be
best, there are a number of different numbers you have to
look at across print and digital. What I think we will do
is come back and we can give you some more colour on that
because I think that is a longer story. But I understand
what you are driving at. It is something we are looking
at. We will come back on that one.

QUESTION (Christian Guerra, Goldman Sachs): I also want
to ask a couple of follow up questions. The first one is
on your labour post growth expectations for FY12. My
first question is something you touched on earlier,
David, on your plans for the mobile networks. What does
that mean for your cap expectations for the company for

38

FY12? Thirdly, just touching on something that you
mentioned, you obviously talked at length over the last
six or seven months around the $11 billion number—
something shareholders are very focused on. What sort of
strategy do you have in place to reduce the risk of NBN
not getting to 93 per cent coverage, and what does that
mean for your total compensation package?

MR DAVID THODEY:Let me answer the second question. Any
plans we have within the wireless network is just within
the normal capex, so there is no additional capex that we
are planning for at all. In terms of NBN Co, you are
asking exactly the right sorts of questions. If it does
not get to 93 per cent what does that mean? That is why
there is a lot of discussion that we have to have about
what that means. Of course the implications of where
exchanges are turned off and not turned off and all those
sorts of things are critically important—probably more
important than is apparent from what people think you are
doing in a top line deal. In terms of labour costs for
the second half of the year, John?

MR JOHN STANHOPE:Christian asked about fiscal year 12.
We are not really guiding on fiscal year 12, Christian.
To your capex question, that was a fiscal year 12
question as well, and I am not saying this is fiscal
year 12, but over the next three or four years we will
have a spectrum renewal requirement. So that will add to
our capex requirement. But that is sort of fiscal year 13
and beyond. Other operators will have that requirement as
well.

MR DAVID THODEY:But in terms of my comment about what we
are doing there is no additional capex. Does that answer
your question, Christian?

QUESTION: Thank you very much.

MR DAVID THODEY:There is great momentum. We are going
well and we look forward to finishing the year strongly.
Thanks very much.

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