FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Date: For the period ending 31 March 2006
TELSTRA CORPORATION LIMITED
ACN 051 775 556
242 Exhibition Street
Melbourne Victoria 3000
Australia
Indicate by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
Indicate by check mark whether the registrant by furnishing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934
If Yes is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
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7 March 2006 |
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Office of the Company Secretary |
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The Manager |
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Level 41
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242 Exhibition Street
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Company Announcements Office |
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MELBOURNE VIC 3000
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Australian Stock Exchange |
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AUSTRALIA |
4th Floor, 20 Bridge Street |
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SYDNEY NSW 2000
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Telephone
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03 9634 6400 |
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Facsimile
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03 9632 3215 |
ELECTRONIC LODGEMENT
Dear Sir or Madam
Goldman Sachs JBWere Australasian Investment Forum New York
In accordance with the listing rules, I attach a copy of a presentation by John
Stanhope Chief Financial Officer Telstra, made at the Goldman Sachs JBWere
conference, for release to the market.
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Yours sincerely |
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Douglas Gration |
Company Secretary |
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Telstra Corporation Limited |
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ACN 051 775 556 |
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ABN 33 051 775 556 |
Telstra Corporation Limited
GSJBW Australasian Investment
Forum
John Stanhope
Chief Financial Officer
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to buy
These presentations include certain forward-looking statements that are subject to various
risks and uncertainties. Actual results, performance or achievements could be significantly
different from those expressed in, or implied by, these forward- looking statements. Such
forward-looking statements are not guarantees of future performance and involve known
and unknown risks, uncertainties and other factors, many of which are beyond the control
of Telstra, which may cause actual results to differ materially from those expressed in the
statements contained in these presentations. For example, the factors that are likely to
affect the results of Telstra include general economic conditions in Australia; exchange
rates; competition in the markets in which Telstra will operate; the inherent regulatory risks
in the businesses of Telstra; the substantial technological changes taking place in the
telecommunications industry; and the continuing growth in the data, internet, mobile and
other telecommunications markets where Telstra will operate. A number of these factors are
described in Telstras Annual Report and Form 20-F. |
All forward-looking figures in this presentation are unaudited and based on AGAAP. Certain
figures may be subject to rounding differences. All market share information in this
presentation is based on management estimates based on internally available information
unless otherwise indicated.
1
Disclaimer
1 |
1
What have been the trends in the business |
The story so far...
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to buy |
Revenue mix shifting to currently
lower margin products
Revenue and cost trends are concerning...
Income Growth
1H05 2H05 1H06
1.9%
2.6%
4.6%
3.0
5.0
4.0
0.0
1.0
2.0
%
6.0
10.0
8.0
0
2.0
4.0
Cost Growth Before Interest
%
4.0% 3.1%
6.3%
1H05 2H05 1H06
We have too many of
everything |
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3
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to buy
Page 5
Where are we now?
Highlights of 1H 2006
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Sales Revenue 11.28 11.44 1.5
Total Income 11.36 11.58 1.9
Operating Expenses (before D&A) 5.88 6.28 6.8
EBITDA 5.48 5.30 (3.4)
EBIT 3.75 3.49 (7.0)
NPAT 2.39 2.14 (10.3)
Basic EPS 19.1 17.3 (9.4)
EBITDA Margin (%) 48.6% 46.3 % (2.3)
Domestic Operating Capex (incl 3G) 1.72 1.81 4.8
Free Cash Flow 2.04 1.96 (4.0)
Total dividends per share (cents) 20 20 -
Results
($ billions except margins & EPS) 1H05 1H06 % Ä |
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4
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Sales Drivers
Internet & IP solutions 888 42
Mobiles 2,486 4.6
Sensis 944 6.3
Pay TV 156 29
ISDN 421 (7.1)
Specialised Data 453 (8.5)
PSTN Voice 3,818 (7.6)
Drivers of
Revenue Growth
Actual
$m
Growth
%
-313
56
109
264
35
-42
-32
Movement
$m
Growth drivers broadband, Sensis, mobiles
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Page 8
1H 05 1H 06
Labour +9.1%
Redundancy
Salary increases
Controlled entities
Goods & Services Purchased +3.4%
Network payments
Pay TV bundling
Handset subsidies
Other operating expenses +8.4%
Service contracts
Prior period currency gain
$2,053m
$2,214m
$2,011m
$1,882m
$2,141m
$1,855m
+6.3% $8,089m $7,609m
$1,732m $1,810m
Depreciation and Amortisation +4.5%
ADSL build
3G JV/spectrum |
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FY06 operating capex guidance $4.8b-$5.1b
Operating Capital Expenditure /
Cash Flow
Capex:
3G JV payment to Hutchison $312m
International transmission
Cashflow:
Lower earnings, lower investment
spend
1,724 1,806
107
179
1H 05 1H 06
Domestic
8%
Offshore
Operating Capex
111
240
94
154
517
1000
1200
1400
1600
1800
2000
2200
1H 05
Cash EBIT
Working Capital
Tax
Operating Capex
Investing Capex/Proceeds
1H 06
Free Cash Flow
-4% $2,038m
$1,956m
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Page 10
What does this mean for FY06 EBIT guidance ?
Guidance |
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6
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FY06 Earnings Guidance
FY06 EBIT change vs. FY05 (percent)
-30%
-20%
-10%
0%
-7% to -10%
-15% to -20%
-21% to -26%
September 05
guidance
Program EBIT
improvement
(incremental
Rev less
COGS)
Net Program
opex cost
(inc. additional in
year redundancy)
Additional D&A due
to network
decommissioning
Total R&R provision Total
On track to meet FY06 guidance
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Page 12
What are we doing to change the business ?
Strategy |
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Our Strategic Priorities
Focus on integrated services
Invest to take out complexity and cost
Implement market based management to know
the customer like never before
Win in mobiles and broadband targeting 55% retail broadband
market share by FY08
Invest in new services and applications
to differentiate ourselves
Accelerate opportunities at Sensis
Target investment to where we can create value and limit
investment that lacks shareholder safeguards
We are taking the tough medicine
to create long term shareholder value...
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to buy
Page 14
Our Strategic Priorities -Market Based
Management
Differentiation at
Telstra
Leverage off our position as the
only full service provider in the
market to create truly
integrated customer solutions
Simple, easy-to-use, one click
applications
Intuitive functionality and
navigation
Common interfaces
Personalisation
Shared application services
Market-Based Management puts our customers at the centre of
everything we do. It is the first key pillar of our new strategy
Impacts on
Telstra
Growth
Improved Sales
Improved ARPU
Customer Satisfaction
Reduced Churn
Cost to Serve
Efficiencies of spend
Profitability
Improved customer
lifetime value |
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Our Strategic Priorities One Factory
Our current network and IT infrastructure:
Has significant duplication, complexity and under investment
Is not equipped to deliver integrated applications & services
Is not cost effective
We have implemented a One Factory model:
Principle #1: Do it once
Principle #2: Do it right for the customer
Principle #3: Do it in an integrated way
Principle #4: Do it at low unit cost
Outcomes:
This will lead to a more streamlined, leaner structure with less
complexity resulting in reduced headcount and costs
We will transform our IT capability to deliver truly integrated
services that customers value, in a profitable manner
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Page 16
Timeline for NGN Build
3G wireless
IT (OSS/BSS)
Class 5 &
Class 4
Soft Switches
ATM-Core Exit
Multi Service Edge
Next Gen Ethernet
IP/MPLS Core
Broadband Access
IP-DSLAM & FTTN(MSAN)
Year 5
FY10
Year 4
FY09
Year 3
FY08
Year 2
FYO7
Year 1
FYO6
Major
Milestones:
IP DSLAM progressing/FTTN on hold
Exit
Build Complete |
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Page 17
What progress has already been made?
Progress to date
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Strategic Outcomes Progress to date
1000 workforce reduction since June 30 (incl
contractors)
Cost reduction programs commenced
1H06 Capex saving of $300m identified and redirected
to transformational projects
Over 400 low value projects stopped
Unsatisfied ADSL orders reduced by 48% since August
22,000 customer interviews completed, with 7 needs
based segments identified
Its early days, but there is progress
in the transformations strategic goals... |
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10
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Strategic Outcomes Progress to date
Vendors signed:
Ericsson 3G 850 network to over 5,000 sites
Cisco IP core
Tellabs -Multi-Service Edge/SDN replacement
Alcatel IP DSLAMS and softswitches
IT transformation:
Detailed scoping for all 26 Operational Support Systems
(OSS) domains complete
Siebel Business Support Systems (BSS) licensing
agreement signed
Complexity Reduction:
Almost 200 platform exits identified
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Page 20
However, outcomes will be impacted by the
regulatory environment
Regulation |
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Regulation
ULL
Issue structure and level of pricing
Our position $30 averaged undertaking lodged
Next steps ACCC report to Government by end of March on price structure. ACCC
assessment of price level undertaking expected shortly after
Safe guard
Issue lack of regulatory certainty on new investments
Our position FTTN on hold as we seek new investments to be regulated like all
other industries
Next steps discussions with Government continuing
Operational Separation
Issue Draft plan is available for public consultation
Our position- ensure application of the principles do not impede our ability to
fairly compete in the market
Next steps report to Minister by end of March, Minister response due end of June
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Page 22
Stakes in the Ground*
FY10 will be the same level as of Jan 1st 2006**
Revenue growth 2.0% to 2.5% p.a. (FY10 vs. FY05)
20-30% of new revenue growth
Down 6,000 8,000 over 3 years
Down 10,000 12,000 over 5 years
Falls to 12% of revenue in 2010 after
$2.5B $3.5B bubble in FY06-FY08
New product revenue
Workforce
CAPEX
Cost
EBITDA ($) 3-5% p.a. growth through FY10
EBITDA margin 50% 52% by FY10
$6B $7B by 2010 Free cash flow
Intend to pay 28 cps to FY08*** Dividend
*Subject to a reasonable regulatory outcome
**Annualised
***Subject to normal Board considerations |
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Page 23
Key Messages
1H result shows continuation of deteriorating
traditional product trends
We are setting the foundations for successful
execution of strategy
A new strategic direction has been announced
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to buy
Telstra Corporation Limited
GSJBW Australasian Investment
Forum
Q&A |
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7 March 2006 |
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Office of the Company Secretary |
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The Manager |
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Level 41 |
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242 Exhibition Street |
Company Announcements Office |
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MELBOURNE VIC 3000 |
Australian Stock Exchange
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AUSTRALIA |
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4th Floor, 20 Bridge Street |
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SYDNEY NSW 2000
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Telephone 03 9634 6400
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Facsimile 03 9632 3215
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ELECTRONIC LODGEMENT
Dear Sir or Madam
Transcript of speech by John Stanhope Chief Financial Officer Telstra, at the Goldman
Sachs JB Were Australasian Investment Forum New York.
In accordance with the listing rules, I attach a transcript of a speech given by John
Stanhope Chief Financial Officer Telstra, at the Goldman Sachs JB Were conference, for
release to the market.
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Yours sincerely |
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Douglas Gration |
Company Secretary |
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Telstra Corporation Limited |
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ACN 051 775 556 |
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ABN 33 051 775 556 |
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CFO Speech for International Roadshow
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March 2006 |
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MODERATOR: Well, ladies and gentlemen, well move to our next session, and its my pleasure to
introduce John Stanhope, Chief Financial Officer and Group Managing Director of Telstra
Corporation, and hes here with David Anderson, the head of Investor Relations.
John was appointed to the role of CFO in 2003, and its interesting just to note the press
over the last couple of days with the potential for the AT&T and Bell South merger, because in
Australia this is something that Telstra ought to use in terms of providing services right across
the spectrum. So its interesting to see others moving back that way.
Telstras in the midst of a major business transformation program which well look
forward to hearing about, and is currently capped at around 48 billion Australian dollars.
So, John, welcome.
Slide 1
MR. JOHN STANHOPE: Thank you very much, Graham, and good morning, everybody. Its very
interesting what has occurred since I was here 12 months ago at the inaugural Australasian Goldman
Sachs conference. New CEO, new strategy. You cant change much more than that really. But its
exciting times in Telstra, it really is.
Its been a year I guess since I addressed you, and what Ill do today is while Ill focus a
little bit on the half year or interim result, I really want to give you a sense of our strategy
and how were proceeding with that.
Slide 2
Obviously, we have the normal disclaimer that
youre all used to seeing I guess.
Slide 3
Okay, so let me start by explaining why we needed to undertake this transformation. The
reality is that the financial trends at Telstra, not dissimilar to telcos around the world I
suppose, are not good, and they have continued on from the last fiscal year. So the trend
continues. And what Im really talking about here is that the Telstra top line growth has been
decelerating, and what is concerning I guess is that the PSTN or the fixed line revenues are
declining at such a rate, that the revenue base associated, or more to the point, the earnings or
the EBIT growth associated with the products that are growing broadband, wireless, and our
classified advertising business called Sensis are not yet big enough to compensate the earnings
reduction caused through the decelerating PSTN or fixed line revenues.
Our telecom related revenue mix is shifting towards those lower margin products with PSTN
revenues now 33 percent of sales compared to 40 percent two years ago. Broadband growth is strong,
and its margins will improve as we build scale and reduce the operating costs in the delivery of
those services.
It is essential that Telstra does maximize its market share in the newer revenue streams to
capture as much of the migration thats taking place away from PSTN to those products as we
possibly can.
With a multiplicity of network elements and the rapidly rising volumes, the cost of running
all of this is growing rapidly as multiple evolutions of mobile technology mean we are currently
running three wireless networks. We have multipole evolution of data services, most of which is
still in the network. And this is clearly inefficient. So all those things are the reasons why we
need to transform this business.
Slide 5
But with that, let me just give you an overview of the results for the first half. I
wont spend too much time on this.
Slide 6
Overall, the results of the first half was in
line with the guidance that we gave and consistent with
the trends that we had flagged at our strategy day on the 15th of November last year.
Modest sales revenue growth was more than offset by cost growth, leading to a decline in earnings
performance and margins. The 6.8 percent increase in operating expenses before depreciation and
amortisation does include a 78 million increase in redundancy and associated costs as we continue
to focus on reducing staff. Without the increase in that redundancy cost, the growth would have
been about 5.6 percent.
Domestic cash operating CAPEX increased 5 percent, driven by the latest joint venture
payment to Hutchison for our 3G network sharing agreement on the 2100 megahertz band.
A fully franked dividend of 20 cents per share has been declared which includes a 14 cents per
share ordinary dividend and a 6 cent per share special dividend.
Slide 7
The key drivers of our sales revenue growth continue to be internet, broadband, mobiles,
and our Sensis business, offset, as I said earlier, by the declining PSTN and legacy data
revenue.
Broadband revenues continue to surge. They
were up 73 percent. Our recent marketing offers have
gained traction as we added 41,000 more retail subscribers than wholesale in the past six
months. On the strength of that result, we believe we have increased our retail market share to 43
percent, thats up 6 percent for retail broadband over the last two years. And youll see later we
have an ambitious target to even increase that further.
Our information services search and transaction business, Sensis, delivered a 5.3 percent
revenue growth over the first half, and it is on track to meet its 2006 financial year target of 6
to 7 percent organic revenue growth.
Total mobiles growth has slowed, and I would characterise this as a fairly mediocre result,
4.6 percent compared to the prior years. As expected, capped plans, or bucket plans as theyre
probably more known here, impacted yields in the average revenue per user. Calling revenues are
flat with mobile services growth driven by mobile data which was actually up 14 percent in half
on half. Where mobile data was once dominated by SMS, high speed data revenues are now emerging
with blackberries and other data usage.
The PSTN decline accelerated slightly faster than we expected at 7.6 percent as volume
migration and yield pressures continue. Those trends will be
addressed when we implement our market based management approach. However, we are seeing good
retention from our latest broadband offer.
Slide 8
Operating expenses including depreciation and amortisation were up 6.3 percent. The major
driver was in labour, which was up 9.1 percent, and as I mentioned earlier, $78 million was
because of the redundancy payments as we begin the staff reduction program. But salary increases
accounted for 45 million, and there was a 59 million increase from controlled entitles coming in
for the full six months into the calculation of our result and, therefore, the growth in costs.
The increase of 3 percent there you see in goods and services purchase was driven mostly by
higher network payments for a full six months of offshore acquisition activity and increased
domestic volumes. Other expenses increased 8.4 percent, mostly related to increased service
contracts. So contractors associated with broadband demand in particular and some customer access
network rehabilitation.
Depreciation and amortisation was up 4 to 5 percent as the asset base does continue to
expand to support broadband and mobiles in particular. The new strategy will impact depreciation
and amortisation, as
we mentioned, on the strategy day in the second half as we take elements out of the network as we
build our next generation network.
Slide 9
Operating capital expenditure increased 8 percent largely due to the $312
million 3G joint venture investment payment we made to Hutchison. The other main driver is
the increased international cable capacity required to support the increased demands for data and
higher bandwidth from the increasing broadband penetration in Australia and obviously the
consequential international traffic that occurs from that. The pipes are filling up out of
Australia, across to particularly the U.S.
Our
guidance for full year, or fiscal year 06 I should say, cash operational expenses, CAPEX
rather, including offshore, is between 4.8 and 5.1 billion which includes spend on the strategic
initiatives that we will be taking in 05/06.
Free cash flow, you can see from the slide, has declined 4 percent as a result of a number of
factors. The graph shows declines in the operational categories of EBIT, working capital, tax, and
operating CAPEX, partly offset by an improved investment CAPEX position. We havent made as many
acquisitions in this
first half as we did in the first half in the prior
corresponding period.
Slide 10
So let me now just sort of finish off the half year that was by looking at the outlook for
the full year.
Slide 11
We expect EBIT to decline 7 to 10 percent before taking into account the strategic review
overlay. When we include the strategic impacts like the accelerated depreciation I mentioned
before, we expect EBIT to decline 15 to 20 percent, and should we take a provision for redundancy
provisions in June 06, then itll be somewhere between 21 and 26 percent. So 05/06 is really the
first year of where we need to spend to, or reinvest for the future if you like with our new
strategy.
A regulatory caveat remains pending key decisions by the regulator and/or the government,
but more about that shortly.
Notwithstanding this, we remain committed to improving long-term shareholder value, and
thats what were really on about with respect to this new strategy or the transformation that
this company needs to undertake.
Slide 12
So lets now turn to how we can do that
through the successful execution of our new strategy.
Slide 13
Our objective is to create long-term shareholder value by providing
integrated communications services. We will be, we will invest to take complexity and cost
out of the business. We will get to know our customers like weve never known them before through
market-based management. And we must win in broadband and wireless by doing it smarter around
value-added and integrated services.
We can increase ours by adding application and
content value.
We are going to invest in new services and applications to differentiate ourselves in the
market. Telstra with its breadth of product range is uniquely placed to do this. The one thing
about Telstra in Australia is that it has all the service opportunities to it its a cable
company, its the fixed line company, it provides pay TV services, etc.
Where well accelerate the growth opportunities at Sensis, that it is our information
services, search, and transaction business. And we will
target investment where we can create value and limit
investment that lacks shareholder safeguards.
Slide 14
So let me just talk about a few of those things. The goal of market-based management is for
us to know our customers like never before and deliver integrated services personalized or
tailored to them. Our strategic marketing initiatives are the key plank in changing Telstra into a
customer driven organisation. Were putting the customer at the center of everything we do, and
this will be reflected through improved market shares, higher average revenues per user, and
reduced churn.
Ultimately, the key to reinvigorating our top line growth is knowing the customer intimately
and delivering value that theyre willing to pay for. We continue to focus on integrated voice,
video, and data services to truly differentiate what we can do for customers.
And those are not just words coming from me or on a page. Well be demonstrating some of this
at the Commonwealth Games shortly to be held in Australia.
Slide 15
Now let me just move back to the second key
pillar of our new strategy, and that is our One Factory
model. Our current network infrastructure is complex, duplicated, and costly to run. We are
going to streamline our processes and bring all the components under our One Factory model.
The Factory will provide the platform through which we will deliver innovative, integrated
services available only from Telstra. Its going to operate with four basic principles. Well,
already is operating with four basic principles: Were going to do it once, were going to do it
right for the customer, well do it in an integrated way, and well do it at low unit cost.
Were going to make things simple, but the payoff will be extraordinary. Its going to
unleash value and energy right across the company, and it will make the savings sustainable
which is very, very important.
Slide 16
Turning now to our next generation network strategy where we have set some aggressive
technology transformation targets. One of the first things that were going to do, were going to
provide a platform for rapid and ubiquitous delivery across an integrated services platform and
networks, offering a consistent customer experience, again, with lower or low unit
costs. Then we can scale costs effective, and it will
be aligned to our customers needs.
Our plans to roll out fibre to the node are on hold, we announced that in December, because it
is subject to regulatory safeguards. But other elements, and this is important, of next generation
network rollout will continue in order to modernise the core network and save costs.
For example, very quick example, 200 central offices or telephone exchanges will be
reduced to 10 soft switches. You save the land, the buildings, the air-conditioning, battery
power, all those sorts of things. So the scope is quite enormous.
Our next generation Ethernet will provide common carrier grade aggregation for all traffic
onto the IP core. Its going to be cheaper, its going to be more reliable than our current
architecture. It will support the capacity and demands of our new applications, more cost
effective, especially in video and IP.
We will simplify the multi-service edge with a single operating support system architecture
with eight times speed increase. Were going to remove over 1,000 edge devices, and were going
to support the common services to our customers regardless of what kind of
access network. So this will provide connectivity for business customers, be it frame relay,
ATM, Ethernet over a common IP core.
The support voice services over the core include the plan over telephone service and voice
over broadband. Were gong to have high capacity soft switches which will provide for a full
redundant, resilient network, and, as I described, at a much lower
cost. The new architecture is designed to accommodate multipole access technologies.
Were rolling our a single national 3G mobile network in 850 megahertz spectrum band with
higher data speeds through HSDPA and upgradeability to Super 3 and then 4G.
We will be rationalising our business operational supports system which currently number over
1,200. We plan to remove some 80 percent of these systems within three years. So theres a real
excitement around our operations area as they set about the task of taking 1,200, over 1,200
systems down to 300 or so.
Slide 17
Obviously, the transformation will be a long-term process. This is a plan that will take three to
five years. But heres some of the progress already
made.
Slide 18
Weve commenced our headcount reduction with 1,000 of our workforce including contractors
leaving the company since June 30, taking our workforce to 51,000. We have commenced a number of
cost reduction programs.
A comprehensive review of OPEX projects stopped in excess of 400 low value projects and a
CAPEX review has identified over $300 million that have been redirected to our strategy
imperatives.
A 48 percent reduction has occurred in our
ADSL held orders.
Weve undertaken the most comprehensive customer survey program ever undertaken in
Australia. To date, weve completed over 22,000 interviews across our consumer and SME base. We
now have a much greater depth of customer research from which weve identified seven specific
segments within our consumer area 18 product segments and 126 micro-segments.
Slide 19
Just quickly to our network transformation. We have already signed a number of key contracts
and have our strategic vendor partners in place to build our next generation network. The IT
transformation team
have finalised the detailed scoping of all 26 operation support system domains and signed a BSS,
business support system licensing agreement with Seibel.
In our pursuit to reduce complexity, almost 200 platform exits have been identified. In our
pursuit to reduce complexity, all these things are now in place. So you can see theres a lot of
activity in the short time since we announced our new strategy. It was only
the 15th of November. It seems a lot longer ago, but all those things have happened
since. So we are moving quickly.
Slide 20
However, there is a key caveat to all that were doing. It is the regulatory environment in
which we operate.
Slide 21
So we see three key regulatory issues that impact our strategy. It is the Unbundled Local
Loop, it is how the pricing is organised, whether its averaged or de-averaged, and it is about
the cost. We are looking for a $30 national average price, and we expect to have a report back
from the regulator by the end of March on the structure of the pricing and also give some estimate
of our undertaking which is for a $30 price.
The second key issue is safeguarding new investments. While we announced our plans to roll
fibre to the node as part of our strategy, its always been subject to the appropriate safeguards.
We dont currently have those, so thats why we put fibre to the node on hold. We continue to have
discussions on our position with the government.
The final issue is operational separation. We have made a draft plan available for public
consultation, that period ends very shortly, and the government responds to our plan, and then if
it needs upgrading, then it will be upgraded. But the first two are the most important regulatory
issues that we face. Operational separation, whilst it will cost us some administrative costs, it
is not the most important. The first two are.
Slide 22
So subject to the reasonable regulatory outcomes I just talked about, let me now reiterate
the long-term financial outcomes we expect from the transformation or the new strategy for
Telstra that we did enunciate on strategy day.
We are committing to 2 to 2.5 percent revenue growth over the next five years with 20 to 30
percent of revenue growth coming from new services. Our 2010 cost
structure
will be no higher than the annualised number of the first half of fiscal year 06 that
weve just reported on. By fiscal year 2010 we expect EBITDA margins will be recovered to
between 50 to 52 percent.
We will have 6,000 to 8,000 fewer employees and contractors on our payroll in three years
time. We are going to spend 2.5 to 3.5 billion in capital over and
above our normal capital program in the next three years to transform the business.
After transforming the business, we expect CAPEX to fall to 12 percent of revenue; from then
on to grow, and from then on to grow in proportion to future revenue growth. And we expect to
generate free cash flow in the order of $6 to $7 billion by the year 2010.
And for our shareholders, we intend to pay 28 cents per share fully franked divided for the
next three years, of course, subject to normal board considerations.
Slide 23
So with that, let me leave you with our key
messages.
The underlying trends of deteriorating traditional product revenue and cost growth have
continued in the half just gone. However, we have set
the way forward to transform our business, and weve
made a tremendous start in a very short period of time.
A final point, as you may be aware, the Australian government now has the ability to sell its
remaining stake in Telstra. Global coordinators and the institutional sale panel have been
appointed. The government is expected to announce the decision in early April as to the timing of
the further sell down and how it might occur. And Telstra supports, of course, the further sale,
and well work with the government to achieve this.
So thank you for listening to that, and Im sorry it was a little rushed, but I really did
want to lay the foundations more about out strategy and how well it has already started.
MODERATOR: Thanks, John, we probably have time for a couple of questions. Does anyone
have a question from the audience?
QUESTION: Hi, could you just talk about what the cash costs of all those redundancy takeouts
are and
MR. STANHOPE: Sorry, the what?
QUESTION: The cash costs of the redundancies on the last slide.
MR. STANHOPE: Yeah.
QUESTION: And then what you assume for the
five-year labour cost growth.
MR. STANHOPE: Yeah, okay, the cash costs of the redundancies already built into this plan are
about, in the 05 about $250 million. We had 100 million
in the original plan, and we increased it by 158 for the second half
for so far 06 year, and
then therell be around a further 300, 350 million to complete the 6,000 to 8,000 redundancy
program.
Now if we meet all the criteria, well provision for that in this fiscal year. There will
be some restructuring provision as well. So in other words, the cost of taking out
air-conditioning and removing, writing off some projects that wont be finished, etc. that well
also include in our restructuring costs. Sorry, the second part of the question was?
QUESTION: (inaudible)
MR. STANHOPE: Oh, okay. The salary assumption is we have an award agreement of 2 percent
increase over the next three years, and the contract staff and thats about half our staff.
The contract staff increases are 3, 3.5 percent.
MODERATOR: Is there one more down here?
QUESTION: Apologies, John, but until this morning, I hadnt seen these EBITDA target, EBITDA
margin targets for the outer period. Can you just roughly break down where, the composition of
that by business division? With a lot of your wireless competitors globally moving closer to 30
than 50, these are very exciting numbers if you can hit them.
MR. STANHOPE: Well, our wireless margins are already substantially higher than are our
competitors and world peers. Fundamentally, and its probably the most common question I get asked
about our strategy is how do you get margins, EBITDA margins back up to above 50 percent.
Two reasons really. Our market based management approach is very important, but all that
means is knowing the customer a lot better, but it also is a bit about knowing what to sell them.
And what we intend to do is lead in Australia away from price discounting to value pricing, but
you have to create the value before you can sell the value to your customers.
So how do you do that? And its by integrating services, both wireless, broadband, fixed.
So in other words, if Sol was here today, hed be talking about the One Touch, the One Screen,
the One Button. Even that in itself creates value for a
customer that a customers prepared to pay for. Thats just a simple example, but its also about
then adding applications and content to your broadband. We have set a significant ARPU increase
target for our broadband business, for example, because up till today its just been about access
and download limits being exceeded.
Our broadband ARPUs are about $50 today, a bit north of $50. We think we can get those a
lot higher by value-added applications and content for our customers.
Now thats the revenue upside, so integrated services, applications and content,
leveraging our Sensis business which we already are between our big pond and Sensis business,
and, of course, the cost takeout. I mean, thats also an element of it.
And I did get asked a question earlier this morning, you know, you guys have been taking
costs out for some time, and I can remember 2001 we had a 10,000 staff reduction target. We
achieved it. Now were talking about 6,000 and 8,000. So how can you do that?
Well, weve got six work ticketing systems to the 7,500 workforce that just is so
unproductive. It sends truck rolls to wrong places. It sends multiple truck rolls, because youve
got six ticketed systems, the truck will roll out to do broadband, and the
customer has moved home and wants broadband fixed line and pay TV. The truck goes three times
instead of once just because we got multiple ticketing systems. So for our house customers, for
our house staff weve got six systems. They manipulate four sales contacts. So weve got staff
working, doing good work, but theyre doing it all because theyve got, this duplicity and
complexity of systems.
So its those revenue things I described plus
the cost out.
MODERATOR: Well probably have to leave it there, so Id like to thank John very much
indeed for his presentation and for you and David attending the conference. Thank you very
much.
(applause)
|
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10 March 2006
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Office of the Company
Secretary |
|
|
|
The Manager
|
|
Level 41
242 Exhibition Street |
Company Announcements Office
|
|
MELBOURNE VIC 3000 |
Australian Stock Exchange
4th Floor, 20 Bridge Street
SYDNEY NSW 2000
|
|
AUSTRALIA
Telephone 03 9634 6400
Facsimile 03 9632 3215 |
ELECTRONIC LODGEMENT
Dear Sir or Madam
Telstra presentation to the Citigroup Investment Conference, London.
In accordance with the listing rules, I attach a copy of a presentation by John Stanhope
Chief Financial Officer Telstra, at the Citigroup Investment Conference, for release to the
market.
Yours sincerely
Douglas Gration
Company Secretary
Telstra Corporation Limited
ACN 051 775 556
ABN 33 051 775 556
Telstra Corporation Limited Citigroup Investment
Conference |
John Stanhope Chief
Financial Officer |
These presentations include certain forward-looking statements
that are subject to various risks and uncertainties. Actual results,
performance or achievements could be significantly different from
those expressed in, or implied by, these forward- looking statements.
Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties and
other factors, many of which are beyond the control of Telstra, which
may cause actual results to differ materially from those expressed in
the statements contained in these presentations. For example, the
factors that are likely to affect the results of Telstra include
general economic conditions in Australia; exchange rates; competition
in the markets in which Telstra will operate; the inherent regulatory
risks in the businesses of Telstra; the substantial technological
changes taking place in the telecommunications industry; and the
continuing growth in the data, internet, mobile and other
telecommunications markets where Telstra will operate. A number of
these factors are described in Telstras Annual Report and Form 20-F. |
All forward-looking figures in this presentation are unaudited and
based on AGAAP. Certain figures may be subject to rounding
differences. All market share information in this presentation is
based on management estimates based on internally available
information unless otherwise indicated. |
2
The story so far...
What have been the trends in the business?
3.0
5.0
4.0
0.0
1.0
2.0
% |
What have been the trends in the business?
Revenue mix shifting to currently
lower margin products
Revenue and cost trends are concerning...
Income Growth
1H05 2H05 1H06
1.9%
2.6%
4.6%
3.0
5.0
4.0
0.0
1.0
%
6.0
10.0
8.0
0
2.0
4.0
Cost Growth Before Interest
%
4.0% 3.1%
6.3%
1H05 2H05 1H06
We have too many of
everything |
2
Im ready
to buy
Page 5
Where are we now?
Highlights of 1H 2006
Im ready
to |
Page 6
Sales Revenue 11.28 11.44 1.5
Total Income 11.36 11.58 1.9
Operating Expenses (before D&A) 5.88 6.28 6.8
EBITDA 5.48 5.30 (3.4)
EBIT 3.75 3.49 (7.0)
NPAT 2.39 2.14 (10.3)
Basic EPS 19.1 17.3 (9.4)
EBITDA Margin (%) 48.6% 46.3 % (2.3)
Domestic Operating Capex (incl 3G) 1.72 1.81 4.8
Free Cash Flow 2.04 1.96 (4.0)
Total dividends per share (cents) 20 20 -
Results
($ billions except margins & EPS) 1H05 1H06 % Ä |
3
Im ready
to buy
Page 7
Sales Drivers
Internet & IP solutions 888 42
Mobiles 2,486 4.6
Sensis 944 6.3
Pay TV 156 29
ISDN 421 (7.1)
Specialised Data 453 (8.5)
PSTN Voice 3,818 (7.6)
Drivers of
Revenue Growth
Actual
$m
Growth
%
-313
56
109
264
35
-42
-32
Movement
$m
Growth drivers broadband, Sensis, mobiles
Page 8
1H 05 1H 06
Labour +9.1%
Redundancy
Salary increases
Controlled entities
Goods & Services Purchased +3.4%
Network payments
Pay TV bundling
Handset subsidies
Other operating expenses +8.4%
Service contracts
Prior period currency gain
$2,053m
$2,214m
$2,011m
$1,882m
$2,141m
$1,855m
+6.3% $8,089m $7,609m
$1,732m $1,810m
Depreciation and Amortisation +4.5%
ADSL build
3G JV/spectrum
Operating Expenses |
4
Im ready
to buy
Page 9
FY06 operating capex guidance $4.8b-$5.1b
Operating Capital Expenditure /
Cash Flow
Capex:
3G JV payment to Hutchison $312m
International transmission
Cashflow:
Lower earnings, lower investment
spend
1,724 1,806
107
179
1H 05 1H 06
Domestic
8%
Offshore
Operating Capex
111
240
94
154
517
1000
1200
1400
1600
1800
2000
2200
1H 05
Cash EBIT
Working Capital
Tax
Operating Capex
Investing Capex/Proceeds
1H 06
Free Cash Flow
-4% $2,038m
$1,956m |
Im ready
to
Page 10
What does this mean for FY06 EBIT guidance ?
Guidance
Impact of new strategy yet to be felt |
5
Im ready
to buy
Page 11
FY06 Earnings Guidance
FY06 EBIT change vs. FY05 (percent)
-30%
-20%
-10%
0%
-7% to -10%
-15% to -20%
-21% to -26%
September 05
guidance
Program EBIT
improvement
(incremental
Rev less
COGS)
Net Program
opex cost
(inc. additional in
year redundancy)
Additional D&A due
to network
decommissioning
Total R&R provision Total
On track to meet FY06 guidance |
Im ready
to buy
Page 12
What are we doing to change the business ?
Strategy |
6
Im ready
to buy
Page 13
Our Strategic Priorities
Focus on integrated services
Invest to take out complexity and cost
Implement market based management to know
the customer like never before
Win in mobiles and broadband targeting 55% retail broadband
market share by FY08
Invest in new services and applications
to differentiate ourselves
Accelerate opportunities at Sensis
Target investment to where we can create value and limit
investment that lacks shareholder safeguards
We are taking the tough medicine
to create long term shareholder value... |
Page 14
Our Strategic Priorities -Market Based
Management
Differentiation at
Telstra
Leverage off our position as the
only full service provider in the
market to create truly
integrated customer solutions
Simple, easy-to-use, one click
applications
Intuitive functionality and
navigation
Common interfaces
Personalisation
Shared application services
Market-Based Management puts our customers at the centre of
everything we do. It is the first key pillar of our new strategy
Impacts on
Telstra
Growth
Improved Sales
Improved ARPU
Customer Satisfaction
Reduced Churn
Cost to Serve
Efficiencies of spend
Profitability
Improved customer
lifetime value |
7
Im ready
to buy
Page 15
Our Strategic Priorities One Factory
Our current network and IT infrastructure:
Has significant duplication, complexity and under investment
Is not equipped to deliver integrated applications & services
Is not cost effective
We have implemented a One Factory model:
Principle #1: Do it once
Principle #2: Do it right for the customer
Principle #3: Do it in an integrated way
Principle #4: Do it at low unit cost
Outcomes:
This will lead to a more streamlined, leaner structure with less
complexity resulting in reduced headcount and costs
We will transform our IT capability to deliver truly integrated
services that customers value, in a profitable manner
Im ready
to buy |
Page 16
Timeline for NGN Build
3G wireless
IT (OSS/BSS)
Class 5 &
Class 4
Soft Switches
ATM-Core Exit
Multi Service Edge
Next Gen Ethernet
IP/MPLS Core
Broadband Access
IP-DSLAM & FTTN(MSAN)
Year 5
FY10
Year 4
FY09
Year 3
FY08
Year 2
FYO7
Year 1
FYO6
Major
Milestones:
IP DSLAM progressing/FTTN on hold
Exit
Build Complete |
8
Im ready
to buy
Page 17
What progress has already been made?
Progress to date
Im ready
to buy
Page 18
Strategic Outcomes Progress to date
1000 workforce reduction since June 30 (incl
contractors)
Cost reduction programs commenced
1H06 Capex saving of $300m identified and redirected
to transformational projects
Over 400 low value projects stopped
Unsatisfied ADSL orders reduced by 48% since August
22,000 customer interviews completed, with 7 needs
based segments identified
Its early days, but there is progress
in the transformations strategic goals... |
9
Im ready
to buy
Page 19
Strategic Outcomes Progress to date
Vendors signed:
Ericsson 3G 850 network to over 5,000 sites
Cisco IP core
Tellabs -Multi-Service Edge/SDN replacement
Alcatel IP DSLAMS and softswitches
IT transformation:
Detailed scoping for all 26 Operational Support Systems
(OSS) domains complete
Siebel Business Support Systems (BSS) licensing
agreement signed
Complexity Reduction:
Almost 200 platform exits identified
Im ready
to buy
Page 20
However, outcomes will be impacted by the
regulatory environment
Regulation |
10
Im ready
to buy
Page 21
Issue structure and level of pricing
Our position $30 averaged undertaking lodged
Next steps ACCC report to Government by end of March on price structure. ACCC
assessment of price level undertaking expected shortly after
Safe guard
Issue lack of regulatory certainty on new investments
Our position FTTN on hold as we seek new investments to be regulated like all
other industries
Next steps discussions with Government continuing
Operational Separation
Issue Draft plan is available for public consultation
Our position- ensure application of the principles do not impede our ability to
fairly compete in the market
Next steps report to Minister by end of March, Minister response due end of June
Im ready
to buy
Page 22
Stakes in the Ground*
FY10 will be the same level as of Jan 1st 2006**
Revenue growth 2.0% to 2.5% p.a. (FY10 vs. FY05)
20-30% of new revenue growth
Down 6,000 8,000 over 3 years
Down 10,000 12,000 over 5 years
Falls to 12% of revenue in 2010 after
$2.5B $3.5B bubble in FY06-FY08
New product revenue
Workforce
CAPEX
Cost
EBITDA ($) 3-5% p.a. growth through FY10
EBITDA margin 50% 52% by FY10
$6B $7B by 2010 Free cash flow
Intend to pay 28 cps to FY08*** Dividend
*Subject to a reasonable regulatory outcome
**Annualised
***Subject to normal Board considerations |
11
Im ready
to buy
Page 23
Key Messages
1H result shows continuation of deteriorating
traditional product trends
We are setting the foundations for successful
execution of strategy
A new strategic direction has been announced
Im ready
to buy
Telstra Corporation Limited
Citigroup Investment Conference
Q&A |
12
|
|
|
10 March 2006
|
|
Office of the Company Secretary |
|
|
|
The Manager
|
|
Level 41 |
|
|
242 Exhibition Street |
Company Announcements Office
|
|
MELBOURNE VIC 3000 |
Australian Stock Exchange
|
|
AUSTRALIA |
4th Floor, 20 Bridge Street |
|
|
SYDNEY NSW 2000
|
|
Telephone 03 9634 6400 |
|
|
Facsimile 03 9632 3215 |
ELECTRONIC LODGEMENT
Dear Sir or Madam
Transcript of speech by John Stanhope, Chief Financial Officer Telstra, at the
Citigroup Investment Conference, London.
In accordance with the listing rules, I attach a transcript of a speech by John Stanhope
Chief Financial Officer Telstra, at the Citigroup Investment Conference, for release to the
market.
Yours sincerely
Douglas
Gration
Company Secretary
|
Telstra Corporation Limited |
ACN 051 775 556 |
ABN 33 051 775 556 |
Speaker key
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|
T
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Tim |
JS
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John Stanhope |
Q
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|
Question from the floor |
T Right, its my pleasure to introduce John Stanhope, the CFO of Telstra. Thank
you very much.
JS Thank you very much, Tim, and Ill say good morning ladies and gentlemen, and it really is a
pleasure to be here today. I was here last year and, let me say, much has changed in Telstra
since I was here 12 months ago. A new CEO and a new strategy, theres not much more change than
you can get than that, and Id like to also say Donald McGauchie, our chairman, is with us
today, which is also great, as Donald was on a panel yesterday. Its great to have him here
this morning as well. Well, as I say, its been a time of significant changes in Telstra,
really culminating into a new strategy which we announced on the 15h November last year, so
today what Ill take you through is some key aspects of that strategy and, of course, I will
briefly touch on our recent interim results. Obviously we have the normal disclaimer, so let me
start by explaining why we needed to undertake this transformation and it really, basically and
fundamentally, is because of the trajectory the company was on. The reality is that the
financial trends at Telstra are not good and they have continued on from the last fiscal year.
Telstras top line growth rate has been decelerating and what is concerning is that PSTN or the
fixed line revenues are declining at such a rate that the revenue base associated with our
growth avenues of broadband, wireless and our Sensis business, which is the Yellow Pages or the
Information... what we call the Information Search and Transaction business today, are not yet
big enough to compensate for the margin degradation that is occurring as a result of the fixed
line revenue decrease. Our telecom-related revenues, the revenue mix, is shifting towards a
broadband, wireless revenue set and so the fixed line revenue is now about 33% of sales
compared to 40% two years ago. Broadband growth is strong and its margins will improve, of
course, as we build scale and we actually reduce our operating costs in those areas. Its
essential for Telstra to maximise its market share in the newer revenue streams to capture as
much of that migration thats occurring between fixed and wireless and broadband. With the
multiplicity of network elements and the rapidly rising volumes that were seeing, the cost of
running all this is growing rapidly. Multiple evolutions of mobile technology that we have, I
mean we are currently running three wireless networks, we have multiple evolutions of data
services, most of which are still in the network. And so, what am I saying to you? This is
clearly very inefficient and has also led to the new strategy that Ill talk about in a minute.
With that overview, let me turn to the results of the first half very quickly. Overall the
results for the first half were in line with the guidance and consistent with the trends we had
flagged at our strategy day on the 15th November last year. Modest sales revenue
growth was more
than offset by cost growth, leading to a decline in earnings performance and margins. The 6.8%
increase in operating expenses, you can see there, before depreciation and amortisation, does
include 78 million increase in redundancy and associated costs, as we start on the strategy
path of reducing costs, labour costs, as well as other costs. Without that increase in
redundancy the growth would have been 5.6% but, nevertheless, still higher than the
top line growth. Domestic cash operating CAPEX increased 5% and thats been largely driven by
the last payment to our joint venture partner, Hutchison, for our 3G network sharing
arrangement. A fully franked dividend of 20 cents per share was declared which included 14
cents per share ordinary dividend, 6 cents per share special dividend and you will recall, back
on the strategy day, we announced that capital return strategy has now ended after two years of
returning capital shareholders. The key drivers of our sales revenue growth continue to be
internet, broadband, mobiles and the Sensis business offset, as you can see on the slide, by
the declining PSTN, as I was talking about earlier and legacy data revenues. Broadband revenues
continue to surge up 73%, our recent markets offers have gained traction as we added 41,000
more retail subscribers than the wholesale subscribers in the past six months. On the strength
of this result, we believe we have increased our retail market share, thats our broadband
retail market share up to 43% and thats up 6% over the past two years. Our information
services search and transaction business Sensis delivered 5.3% revenue growth in the first half
and we believe its on track for a full year, fiscal year 06, kind of 6 to 7% organic revenue
growth. Total mobiles growth did slow to 4.6% but as expected capped plans or bucket plans,
depends where you are, what you call them, impacted yields and the average revenue per users.
The calling revenues are flat with mobile services growth driven by mobile data which was up
14%. Where mobile data was once dominated by SMS, high speed data revenues are now emerging,
through use of blackberry and the use of wireless PC cards. The PSTN decline accelerated
slightly faster than we expected, at 7.6% as volume migration, this is not really lines being
cancelled although some 140,000 were, it is volume migration and yield pressure and that
migration is across the wireless and broadband. These trends will be addressed when we
implement our market based management approach, however we are seeing some good retention now,
so [unclear] as a result of our latest broadband offer which has a combination of bundled
offers which includes that you have your fixed line with Telstra. Operating expenses, let me
just touch on those, including D&A, we were up 6.3%, the major driver was in labour which was
up 9.1% and redundancy cost, as I said, increased 78% so of that 9.1%, 4.1% was the growth in
redundancy program. Salary increased contributed to it by 45 million and there was a 59 million
increase from controlled entities, owing to a full six months of accounting of some purchased
entities in the prior six month or the prior corresponding period. The increment of 3% in goods
and services purchases was driven mostly by higher network payments, again from a full six
months from some of our controlled entities and also increased domestic volumes. Other expenses
increased by 8.4% mostly related to increased service contracts, fulfilling the broadband
demand which really did take off. Depreciation and amortisation was up 4.5% and this was
because the asset base expanded to support the broadband and mobiles part of our business. The
new strategy will impact depreciation and amortisation in the second half, which we
did foreshadow in our strategy announcement because we do need to accelerate depreciation as we
take old parts of the network out and replace it with our network modernisation. Operating
capital expenditure increased 8% largely due to the payment of $312 million to our joint
venture partner, Hutchison in the 3G 2,100 spectrum rollout, the other main driver is the
increased international cable capacity that was required to support the increasing demand in
bandwidth required from broadband penetration, so obviously as broadband penetration has
increased now to about 30% in Australia, the amount of international traffic leaving Australia
has increased and network payments and capacity needs to be built. Our guidance for fiscal year
06, cash operating CAPEX is
in the 4.8 to 5.1 billion range which does include the spend in the second half of this
fiscal year on strategic initiatives.
Free cash flow has declined 4% as a result of a number of factors. The graph shows the
declines in the operational categories of EBIT, working capital, tax and operating CAPEX,
partly offset by lower investing CAPEX, in other words, we made quite a few acquisitions in
the first half of last fiscal versus the first, or the fiscal half just gone. Now let me just
turn to the outlook before I get onto the new strategy and the transformation thats taking
place. We expect EBIT or earnings to decline 7-10% on our normal business operating
performance which is one of the reasons, of course, that we are embarking on a new strategy.
That is just unsustainable. When you add the strategic review overlay, which includes some
spending on the new strategy and the accelerated depreciation, we expect EBIT to decline
between 15 and 20% in the 06 full fiscal year, and if we decide to take a redundancy the
last part on the bar chart there a redundancy and restructuring provision, then our outlook
is minus 21 to minus 26% on the EBIT. But, of course, that will be taking quite a big, and it
is taking quite a big of the pain upfront for us to get the gains later on that we anticipate
from our strategy. So notwithstanding that, of course, we are committed to improving the long
term shareholder value of this company. This is really fundamentally about a new strategy to
make sure there is longer term shareholder value and that this company doesnt suffer from a
death-by-1,000 cuts, as I like to refer to it as.
Let me now turn to how we can embark on the new strategy and convince you that we are on the
road already toward a successful execution of our new strategy. Our objective is to create
long term shareholder value by providing integrated communication services. What does that
mean? Thats not bundling because bundling means discounting; it really means providing one
click, one touch, one screen value for the customer with integrated services wireless,
broadband, our Sensis business, so that the customer truly gets an integrated communication
service which adds value and actually they are prepared to pay a value price for. We want to
lead the industry out of price discounting into value pricing. But, of course, you have to
provide that value to the customer and doing so is knowing the customer the best by market
based management, but also them knowing what integrated services the customer wants and
therefore what money or value theyre prepared to attach to it and pay for. We will invest to
take complexity and cost out of the business. Just a quick few examples. Weve got six work
ticket systems for our field workforce which is highly inefficient.
Weve got six systems that our front-of-house staff have to contend with and that means more
and more training, and so on. So the opportunities to take the complexity out of the business
and therefore the cost out of the business remain, and we have started the path or the journey
on doing that. We will get to know our customers like weve never known them before through
the market based management approach. Weve already started that. Weve interviewed 22,000
customers. Weve established seven segments in the consumer segment just staffing those up.
The level of research thats been done in the company has never been done before.
We must win in broadband and wireless by doing it smarter around value-added and integrated
services, so the integration of broadband, wireless, fixed, as I was talking about before. We
will invest in new services and applications to differentiate ourselves in the market, and
Telstra, with its breadth of product range, is uniquely
placed to do this. I know weve said many years that we are a full service company already.
Youre seeing AT&T and Bell South what theyre really trying to do here is get back to a
full service offering that, fortunately, Telstra already is in a position, or already has. We
will accelerate growth opportunities at Sensis. Thats our information services search and
transaction business. Its moving from just a yellow-pages classified advertising business to
a sell, buy and pay business, so the whole transaction and interacting with our broadband
business, to share that content and application base that it has, including mapping and
navigation facilities and so on.
We will target investment where we can create value, and limit investment that lacks
shareholders safeguards, and perhaps a little more later on that. The goal of market based
management, just to give you a little more about what am I talking about here, is for us to
know our customers like never before and deliver those integrated services that I was talking
about tailored for each customer, so personalised. Our strategic marketing initiatives are the
key planks in changing Telstra into a customer-driven organisation. So this strategy is not
just a focus on cost out and reducing complexity; certainly for the customer, will help the top
line but its also about generating growth on the top line of the company. Were putting the
customer at the centre of everything we do, and this will be reflected through improved market
shares, higher ARPUs and reduced churn. Ultimately, the real key to reinvigorating our top line
growth is knowing our customer intimately, delivering the value theyre willing to pay for, and
we continue to focus on integrated voice, video, broadband, data services, to truly
differentiate what we can do for the customer.
Now let me move to the second key pillar of our strategy, what we call our One Factory Model.
Our current network infrastructure is complex, duplicated, and costly to run. We are going to
streamline our processes and bring all the components under our one factory model headed by our
chief operating officer, Greg Winn. The factory will provide the platform through which we will
deliver innovative, integrated services available only from Telstra, and theres a principle.
There are four principles really that we are working to inside the one factory approach. Were
going to do it once. Were going to do it right for the customer. Well do it in an integrated
way, and well do it at low unit cost. So, fundamentally, were going to make things simple,
but
the payoff will be quite extraordinary. Its going to unleash value and energy right across the
company, and it will make the savings sustainable.
Let me now turn to yet another key part of our strategy; that is our next generation network
strategy, where we have set some aggressive technology transformation targets. One of the first
things that we going to do is were going to provide a platform for rapid and ubiquitous
delivery across integrated services platforms and networks, offering consistent customer
experience, again with low unit cost. Then we can scale cost effectively and it is aligned to
the needs of the customers. Our plans to roll out fibre to the node we announced in December
are on hold, subject to regulatory safeguards. But all other elements of our next generation
network build will be done in order to modernise our core network. A quick example, there are
about two hundred telephone exchanges or switches in the five major capitals. We will replace
them with ten soft switches and so you can imagine less land and buildings, less air
conditioning. All the costs related to those switches will be, will be reduced. Our next
generation ethernet will provide common carrier grade aggregation for all traffic onto the IP
core. Its going to be cheaper. Its going to be more reliable than our
current architecture. It will support the capacity and demands of new applications more
cost effectively, especially video and IP. We will simplify the multi service edge, which
is a... which is with a single operating system.
So weve got a whole heap of, of parts that touch the network and platforms that touch the
network to provide the multi services. Well move to one single operating support system with
eight times speed increase. Its going to be cheaper as well, and more reliable than our
current architecture. So the IP core will provide connectivity for business customers and lots
more functionality. The support voice services over the core include the plan over telephone
service and voice over broadband. We are going to have high capacity soft switches, like I
described, which will provide a full redundant resilient network. I mean, I said its ten
switches, but you really only need five, but when youve got two million customers on each
switch, you do need back up. And I was saying to some wally before, you like to feel like
youre flying, when youre flying in a plane, that there is a back up computer on that plane.
We need the back up, so thats why were talking about ten soft switches. We are, we are going
to have high capacity soft switches that will have that redundancy and the new architecture is
designed to accommodate model access technologies. Were rolling out a single national 3G
mobile network in the 850 spectrum band with higher data speeds through the HSDPA, which is
high speed data packet access, and the upgradeability of super 3 and then 4G capability. The
importance of moving to the 850 spectrum band is that you get greater coverage at lower cost,
better in depth building coverage, and it gives Telstra a competitive advantage because we
will have the only nationwide 850 megahertz 3G network with high speed data capability. We
will be rationalising our business and operational support system which currently number over
twelve hundred, and weve set ourselves some very ambitious targets. For example, a reduction
by 75% over the next three years and, by the way, the senior management team, the top 300
managers, are incented to achieve those transformational targets. We plan to remove, as I say,
75% in three years. Its a really
exciting time in our technology group. Challenging, yes. Its ambitious, yes, but we believe
weve got the right skills now that have come into the company in order for us to be able to
do it. Obviously the transformation will be a long term process. It is a three to five year
strategy. Importantly, its one that we will stick to and have to stick to, to get this done
to, as I said, provide long term shareholder value. Weve commenced our head count reduction
with 1,000 of our workforce, including contractors, leaving the company since June 30, taking
our total workforce including those contractors, to 51,000. Weve also commenced a number of
cost reduction programs. A comprehensive review of OPEX projects stopped in excess of 400 low
value projects and a CAPEX review has identified savings of $300 million which is available
and will be redirected to our strategic imperatives. A 48% reduction in unsatisfied ADSL
orders has occurred since August, as we focus on the customer experience. Weve undertaken the
most comprehensive customer survey program. 22,000 interviews were hit. We now have a much
greater depth of customer research, from which we have identified the seven needs by segments
I referred to earlier.
Turning now just to our network transformation, and what Im trying to do here is give you an
idea... remember 15th November is not really all that long ago, and I just want to
give you some information about our progress on the journey so far. Weve already signed a
number of key contracts and have our strategic vendor partners in place to build our next
generation network, and this is... mostly this is turnkey
activity. The IT transformation team have finalised the detailing scoping of 26 operational
support system domains and weve signed a business support system licensing agreement with
Siebel, and weve appointed Accenture to drive the BSS program. In our pursuit to reduce
complexity, almost 200 platform exits have already been identified, so you can see there has
been a lot of activity in the short time since we announced our new strategy only on
15th November, not long ago. However... now let me just say there are... a key
caveat remains on our strategy and it is that the regulatory environment we operate is
reasonable. We see three key regulatory issues that could impact our strategy. The first is
unbundled local loop and the issue here is pricing, both the structure and the level of that
pricing. As the government has already called for retail pricing parity which is another way of
saying, retail average pricing, our position is that this must then lead to wholesale parity,
or wholesale average prices. We have recently submitted our undertaking for a $30 national
average price, and we expect the regulator, the ACCC, to report back to the government by the
end of March on the structure of pricing and to also give an assessment of our undertaking,
which was average $30. The second... and we... that sort of time frame, early April, is when we
expect that... some decisions to be made.
The second key issue is safeguarding new investments. Remember, I mentioned we put fibre to
the node on hold. We announced that plan, but then, then we decided we would put it on hold.
And it is because we had no indication that we would have some safeguard around that, that
investment. So we dont have that regulatory certainty at this point of time. We are
continuing to, continuing to discuss our position, however, with the government. Its a very
important issue. I mean, as the board and management of the company have the fiduciary duty to
make sure the
shareholders money gives a reasonable return on that investment, we are not prepared to
invest until such time as we have some guarantee that a commercial return can be made on that
investment.
The final issue is operational separation. We have made a draft plan available for public
consultation. This is... operational separation is transparency to how our wholesale business
operates and interacts with our retail business and our competitors business who buy from us
in a wholesale way. We want to ensure the application of the principles dont impede our
ability to fairly compete in the market. We plan to provide the government with our amended
plan, and any feedback from the consultation process by the end of March, and the government
are then due to respond to us within 90 days. Quite frankly, operational separation is an
additional regulatory administrative burden, and in the order of the regulatory impacts are,
as Ive actually gone through them, third, unbundled local loop and the safeguarding of new
investments, are very much the most important of the regulatory issues that remain
outstanding for us.
So, subject to the reasonable regulatory outcomes Ive just talked about, let me now reiterate
the long term financial outcomes we expect from our new strategy, or the transformation of
Telstra that we enunciated on strategy today. We are committing to a two to two and half
percent revenue growth over the next five years, with 20 to 30% of that revenue growth coming
from new services. So broadband applications and content on broadband, our Sensis business,
and data applications, and IP telephony and all that brings. Our 2010 cost structure will be
no higher than the annualised number of the first half, fiscal 06, that we just concluded. By
fiscal year 10, we
expect EBITDA margins will have recovered to between 50 to 52%; just so you know today theyre
46.3%. We will have 6,000 to 8,000 fewer employees and contractors on our payroll in three
years time. We are going to spend 2.5 to 3.5 billion in capital over and above our normal
spend, which is about 4 4.5 billion to transform the business. Thats additional spend on
network and additional spend on the IT platform rationalisation. After transforming the
business, we expect CAPEX to then fall to around 12% of sales revenue; from then on to grow in
proportion to the future revenue growth. Then we expect to generate free cash in the order of
6 to 7 billion by the year 2010. For our shareholders, we intend to pay 28c per share, fully
franked dividend, for the next three years, including this 05/06 year, subject to the normal
board considerations. What does that mean? Obviously, if we get a horrendous regulatory
outcome, the board will have to reconsider that particular dividend payment, but that is our
intention at this point in time.
With that, let me just leave you with our key messages. The underlying trends of the business
see a deterioration in the traditional product revenues and cost growth is too high and we
just have to address that situation. That is why weve embarked on this new strategy. So weve
set the way forward to transform our business, and hopefully youve seen a good start has been
made. Just one final point: as you may be aware, the Australian government now has the ability
to sell its remaining stake in Telstra.
Global coordinators and institutional sale panel have been appointed. The government is
expected to announce a decision in early April as to the timing of the further sell-down, how
it might be done in terms of will it be all of it, will it be some of it, and Telstra
supports, of course, the further sale, and we will work with the government to achieve this,
and we are, and continue to do so.
So thank you for listening to the Telstra story. Its an exciting journey weve just
embarked on, its one we have to take, so thank you, and well see if therere any
questions.
Q I guess none of this will be really effective unless you can get a culture change within the
company. Is that a fair comment? What are you doing to address that issue?
JS Yes, thats certainly a good question. Culture change has to be part of this
transformation. Its not going to get done if its not done by the people, and in fact we,
only just last week, started with our 300 top managers, getting their commitment, getting the
understanding of the strategy, why, what we have to do, how were going to go about it, what
we want them to do differently, which was very key to the start of the cultural change. Weve
got a new GMD, or Group Managing Director of HR, and she is very focused on this cultural
change. It also involves the senior team going around to every employer to talk to them about
what we need them to do differently. So there is a major cultural change programme going on,
and weve made announcements as well about a $200 million, over five year, investment in
training of our staff front-of-house staff, the technical staff and that will be part of a
culture change as well. Its fair to say training has been neglected over the last few years.
Weve got to, weve got to make sure those people are trained in the new technology, for a
start, and also how we want them to behave going forward, so yes, very, very, very much an
important part of the transformation.
T Last question. Tim?
Q
John, you touched on the 28c dividend, assuming no horrendous regulatory outcomes. Can you qualify or give some quantification of that horrendous outcome? If there is
a horrendous outcome, what is the actual procedure youre currently proposing, and no safe
harbour on [inaudible]. Is that what you class as horrendous?
JS I think thats pretty horrendous, Tim. As I already said, I think, after the Strategy Day,
you know, we had a regulatory breakout session and I explained that first order impacts of
what the ACCC want for unbundled local loop is an impact on the enterprise value of $6
billion. Thats... and the secondary impact of fly-through under the wireless business, adds
another $1.5, $1.8 billion. Thats a horrendous outcome and Im sure the board would have to
reconsider the intention of 28c if that sort of outcome happened.
T We might leave it there. If I could ask everyone to thank John for his time.
[Applause]
T Thank you very much. That was very detailed.
MESSAGE FROM THE CHAIRMAN AND CEO
Dear Shareholders
The first half of the 2006 financial year has been challenging for
Telstra. The Board had to make tough decisions, including advising you
in August that Telstras operating earnings would decline for the
first time in light of the adverse operating trends in the business.
The Board and the new senior management team agreed we needed to
transform your company. We must innovate, reduce complexity and costs
in the business and look to the future internet protocol (IP),
broadband and wireless technologies to deliver truly integrated
services for our customers. >>
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Left to right:
Donald G McGauchie AO
Chairman
Sol Trujillo
Chief Executive Officer |
www.telstra.com 1
MESSAGE FROM THE CHAIRMAN AND CEO
In November 2005, we announced a ground breaking program designed to
reverse the negative financial trends and focus on delivering customers
new experiences that should lead to the creation of long term value for
our shareholders.
This transformational strategy represents an historic and fundamental
change in the way we operate. It will not happen overnight it will
take three to five years to complete. Although its early days, we can
already report progress: hard decisions have been made and challenging
targets set, new strategies are in play, savings have been identified
and key contracts signed.
FINANCIALS
The result for the half-year
reflects the trends that emerged
in the previous financial year.
Income was up, but so were our
expenses. Total income (excluding
finance income) increased by $218
million, or 1.9%, to $11.6
billion,while total expenses
(excluding finance costs) increased
by $480 million, or 6.3%, to $8.1
billion. Telstra reported a profit
after tax of $2.1 billion, down $245
million or 10.3% on the previous
corresponding half-year.
Costs are rising faster than
revenue and this is
unsustainable. We are fixing this
with our new strategy, our new
management team and our new
approach to customer service.
Telstra continues to be challenged
by a shifting revenue mix from
traditional high margin fixed line
PSTN voice products to newer but
lower margin products. PSTN
revenues declined 7.6%. PSTN usage
- and therefore revenue continued
to fall at an accelerating rate. This is a major concern for
us, which we are addressing with
our new strategy.
2 www.nowwearetalking.com.au
á 1.5%
Sales revenue increased by 1.5% to $11,439 million.
Revenue growth was due to increases in
broadband, mobiles, IP solutions, advertising
and directories and pay TV bundling, offset by
declines in revenues from PSTN calling
products, specialised data and ISDN products.
Sales revenue ($m)*
Half-year ended 31 December
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01-03 prepared under previous AGAAP, 04-05 prepared under A-IFRS |
Total income growth was driven
by internet and IP solutions
(including broadband), mobiles and
our information services, search
and transaction business, Sensis.
The growth in broadband customers
continues to surge. We added more
than 300,000 BigPond® broadband customers over the
six months and retail broadband
revenue was up 62.6% compared with
the prior corresponding period.
Mobiles revenue growth of 4.6% was
driven by increased wireless data
product usage. Telstra added 345,000
total mobile customers in the
half-year for a total of 8.6 million.
The rollout of a new national 3G
network is a key part of our plans
for continued mobiles growth.
Sensis continued to grow, with a 5.3%
increase in revenues on a stand alone
basis. White Pages® increased its revenue by 13%,
driven mainly by online growth.
Total company expense growth
(excluding finance costs) of 6.3% was
driven by increased labour costs,
goods and services purchased and
depreciation and amortisation
expense.
Our free cash flow generation
remains strong despite a 4%
decline to $2 billion.
We have declared an interim
dividend of 14 cents per share and
a special dividend of 6 cents per
share, bringing the total interim
dividend to 20 cents per share or
$2.5 billion.
PROGRESS ON NEW STRATEGIC DIRECTION
Our strategy announcement on 15 November 2005 marked a new beginning for Telstra. The company
is moving forward by focusing on broadband, building a new national 3G wireless network, deploying
IP technology to meet the evolving needs of customers, and driving our Sensis business.
The new strategy will be delivered
through the one factory approach.
The four basic principles of the one
factory methodology are: do it once,
do it right for customers, do it in
an integrated way and do it at a low
unit cost.
Market based management, also
core to the strategy, will be
instrumental in knowing our
customers better than ever
before.
www.telstra.com 3
MESSAGE FROM THE CHAIRMAN AND CEO
This involves extensive
customer research, which is already
well advanced. We will know the
customer better than any of our
competitors.
Although the transformation of
Telstra is only in its infancy,
progress is encouraging. The core
network transformation is on
schedule with key vendor contracts
finalised. The national 3G mobile
network is on track. New cost
reduction programs have commenced
and capital expenditure savings of
$300 million have been identified
for redirection to transformation
initiatives. A new contract for
acquiring mobile handsets is already
delivering savings, and we have
exited leases on 15 office
buildings.
A benefits now team has been
established and is driving rapid
savings worth several hundred
million dollars over the year.
MANAGEMENT TEAM
There have been several new
appointments to the senior
leadership team in the first half
of the year. These have been
driven by the need for a more
innovative approach that involves
better segmenting our customer base
and bringing new services to
market.
Telstra confirmed its commitment
to the small and medium
enterprises (SME) segment by
creating a new group to specialise
in this area.
We have created a new product
management group. It will deliver
new products, particularly wireless
broadband products, that work
together, deliver real value to our customers and differentiate us from
our competitors.
There is an enormous amount of
work ahead of us, and there is a
real sense of urgency around the
work to be undertaken.
OUTLOOK
In the short term, we expect
tough trading conditions to continue
for the remainder of the 2006
financial year. Earnings before
interest and tax (EBIT) is expected
to fall by 7-10% before items
associated with the new strategy are
included. Including this years
investment in transforming Telstra,
EBIT is expected to fall by 15-20%
or, if we take a large provision for
redundancies, by 21-26%.
4 www.nowwearetalking.com.au
Total dividends per share were 20
cents for the half-year which included a
special dividend of 6 cents per share.
Both dividends are fully franked.
Dividends per share*
(cents per share)
Half-year ended 31 December
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02 includes special dividend of 3 cents per share 04 and 05 includes special dividend of 6 cents per share |
In the longer term, we expect
total revenues to grow by 2-2.5% per
annum over the next five years, with
20-30% of this growth to come from
new products and services. In five
years, our cost base will be no
higher than the annualised costs we
reported in this half-year. We intend
to be extremely disciplined in our
cost structure in the coming years,
leading to improved profit margins
for the business.
Under the new senior management team
and with the support of your board,
we are working to protect and grow
shareholder value. This is why we
will continue to advocate changes to
the current intrusive regulatory
regime and why we have undertaken a
new strategic direction.
Be assured that, as Telstras
transformation journey continues, we
are committed to keeping you, our
shareholders, informed every step of
the way. We want you to understand
the issues that affect the future of
your company. We encourage you to
visit out internet sites,
www.telstra.com and
www.nowwearetalking.com.au, to find
out more about our journey. We would
welcome your participation in the
policy debate or your views about our
new strategic direction.
We and the senior management team
will continue to tell it like it
is.
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Donald G McGauchie AO
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Sol Trujillo |
Chairman
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Chief Executive Officer |
www.telstra.com 5
strategy
By streamlining our operations, while better satisfying the needs of
our customers with 1 CLICK, 1 TOUCH, 1 SCREEN, 1 BUTTON, 1 STEP
solutions, we can deliver the financial performance improvements expected
by our shareholders.
On 15 November 2005, we
announced the results of our
strategic and operational review.
This review is a blueprint for
building a new Telstra by providing a
solid platform to drive future growth
and create shareholder value.
The strategy will provide new
networks, processes and products and
for the first time, a truly integrated
customer experience. Costs will be
taken out of the business by
simplifying our network and IT
architecture. Revenue will grow with
new and innovative products, services,
applications and capabilities.
Customers will enjoy a simple and
easy way of doing things 1 click,
1 touch, 1 screen, 1 button and 1
step.
The transformation of Telstra will not
happen overnight. We estimate the
strategy will take between three and
five years to fully implement and
require an incremental capital
investment of $2-$3 billion up to 2010.
To stay ahead of the game, we must
invest. We must innovate. We must
improve.
The key features of the new strategy are:
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market based management |
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a next generation network (NGN) |
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a national 3G GSM mobile network |
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4. |
simpler business and operational support systems |
Market based management
Through customer research, we will
know our customers better than any of
our competitors.
Market based management is a simple
process that puts customers at the
centre of everything we do. It is based
on extensive research that informs us
about our customers needs, priorities
and expectations. This knowledge forms
the basis of a relationship with our
customers around which we organise all
our processes and procedures in fact,
our whole company.
When completed, we will have
conducted 90,000 consumer interviews
and involved 16,000 small businesses
in our small business consumer
research panel.
Progress to date
We have already conducted
22,000 interviews with consumer and
small business customers. This is
ground breaking research for the
Australian telecommunications market.
Next Generation Network (NGN)
Telstra currently has more than 300
different network platforms made up of
multiple fixed line and wireless
networks. The NGN project will remove
this network duplication via the
construction of a state-of-the-art
Internet Protocol (IP) core network.
Reliable, robust, secure and offering
huge capacity, this new core network
will be in place by the end of 2007.
It will enable us to offer an array of
new services such as broadband internet
access many times faster than todays
speeds, multi-channel TV delivered over
the internet and video conferencing.
6 www.nowwearetalking.com.au
Strategy timeline
The proposed fibre-to-the-node
(FTTN) network would have seen fibre
extended from Telstras telephone
exchanges out to neighbourhood nodes
with the aim of providing high-speed
ADSL2+ broadband internet to
metropolitan areas. Due to regulatory
uncertainty, the FTTN network upgrade
has been placed on hold for the time
being. Existing infrastructure combined
with software and network upgrades will
continue to meet our customers needs,
including appealing broadband offers.
Progress to date
Work on the IP core and IP
DSLAM (Digital Subscriber Line Access
Multiplexer) initiatives continues,
with major contracts signed with
Cisco and Alcatel. The first IP
DSLAMs arrived at the end of February
2006.
National 3G GSM mobile network
At present, Telstra has three mobile
networks GSM, CDMA and 3G GSM. This
duplication results in more complexity
for our customers and higher operating
costs.
With recent technology advances,
Telstra will build one national
wireless network a new 3G GSM
network which will cover more than 1.6
million square kilometres, 98% of the
population and will replace the
existing CDMA mobile network. Voice,
video and high speed data capabilities
over the new 3G GSM network will
exceed those of the existing CDMA
network capabilities while offering at
least the same, if not better,
coverage.
Progress to date
Contracts have been signed with
Ericsson to roll out the network to
5,000 sites across Australia.
Construction teams have been mobilised
in each state, with more than 1,500
audits and 250 site designs already
completed.
Simpler systems
Telstra has over 1,200 business and
operational support systems. We are
looking to reduce this number by 75%
in three years and 80% in five years,
at a cost of $1 billion over five
years.
Systems rationalisation will mean
significant improvements to the
customer experience and long term
savings for Telstra. Customers will
enjoy improved service via real time
product and service activation;
flexible bill reporting and analysis;
and proactive management of any
problems.
Progress to date
We are currently negotiating
contracts with our preferred vendors
to carry out this part of the
strategy. Under the customer
experience layer, known as our
operational support systems (OSS),
detailed scoping has been completed.
Cost reductions
With simpler, more efficient systems,
Telstra will not require the same
number of employees and aims to reduce
its total workforce by between 6,000
and 8,000 over the next three years.
Progress to date
The total workforce now stands at
approximately 51,000, a reduction of
1,000 since 30 June.
www.telstra.com 7
regulation
Telstra is SUBJECT to a value destroying REGULATORY
REGIME, which unfairly restricts our ability to compete, and
forces our shareholders to subsidise our competitors.
Regulation and the regulatory
environment we operate in are crucial
to the future success of Telstra. The
current regulatory environment
restricts Telstras ability to compete
fairly in the market and maximise
value for customers and shareholders.
Telstra is undertaking significant
network investment to deliver
state-of-the-art services to our
customers. Investment is required to
upgrade the core network, upgrade the
fixed access network and introduce a
single, national 3G mobile network.
Telstra needs regulatory certainty,
especially in relation to the
fibre-to-the-node (FTTN) project,
before we are willing to invest our
shareholders funds in certain
elements of our network upgrade plans.
We continue to work with the Government
and the Australian Competition and
Consumer Commission (ACCC) on achieving
a satisfactory regulatory outcome for
our shareholders and customers alike.
There are several key regulatory
decisions, either recently made or
pending, which will shape the future of
your company. These include:
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Unconditioned Local Loop (ULL) |
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network investment safeguards |
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operational separation |
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ACCC review of regulation on fixed network services |
ULL
ULL is the use of copper wire that runs
between a customer premises and the
equipment at the end of the copper
wire, generally located in a Telstra
exchange. The copper wire forms part of Telstras copper access network which
Telstra is responsible for
maintaining, including rectifying any
faults on the network.
The present regulatory regime requires
Telstra to provide competitors with
access to its copper wire at a price
which is supposed to allow Telstra to
recover the efficient costs of providing
ULL. Telstras equipment at the end of
the copper wire can be replaced with the
competitors own equipment and the
competitors can then provide the full
range of communications services
(including voice and data) to their
customers using Telstras copper access
network. The amount Telstra can charge
to ensure it recovers the costs of
providing ULL is a significant
regulatory issue.
Over several years, Telstra has sought
to achieve price certainty for the
supply of ULL through the lodgement of
undertakings with the regulator. If
accepted by the regulator, an
undertaking provides a standard set of
terms, including price, for the supply
of ULL for a set period of time. The
regulator has rejected each of Telstras
undertakings and has even recommended
Telstras prices be discounted below
what the regulator has previously
considered to be model prices for ULL.
The regulator also advocates
geographically de-averaged ULL
prices. This means competitors pay
lower rates for access to copper wire
in metropolitan areas than in regional
or country areas. This encourages our
competitors to offer services in highly
profitable metropolitan areas with
little or no regard to regional
Australia, which is left for Telstra to
service at considerable cost. From 1
March 2006 the Government has imposed a
retail pricing parity obligation on
8 www.nowwearetalking.com.au
The real issue Telstra faces is that despite management and the boards efforts, the
companys destiny and that of the industry lies in the hands of the competition regulator
Citigroup analyst Tim Smeallie, quoted in The Australian (10 February 2006)
... the propensity of regulators to expropriate the bulk of the gains from new investment could
create an outcome where Telstra shareholders funded investments in the network that produced better
returns for its competitors than its shareholders
Stephen Bartholomeusz, The Age (10 February 2006)
Telstra to charge its retail customers for a basic line rental product at the same price no
matter where they live in Australia. Telstra therefore believes that the regulator should allow
Telstra to structure its price for ULL in a manner that is consistent with the Governments policy
intent of one price for all Australians.
In December 2005, Telstra lodged another undertaking with the regulator reflecting this view.
Network investment safeguards
Telstra wants regulatory or legislative certainty before we invest shareholders funds in the FTTN
phase of the next generation wireline networks, which will provide broadband services at far
superior speeds than are available today.
Telstra requires certainty that we will be able to make our own decisions and therefore have
control over this very substantial investment. For example, we should not be forced to offer our
competitors access to this network at prices below our cost. If this were to occur, Telstras
competitors could enjoy all the benefits associated with access to the new high speed network with
minimal risk to their shareholders, while Telstra shareholders bear the investment risks.
To date, we have been unable to obtain such regulatory certainty and as a result, in December 2005
Telstra announced the FTTN upgrade of the wireline access network is on hold.
Operational separation
Federal Parliament has passed legislation imposing operational separation on Telstra, but what is
operational separation? The Governments stated objective of operational separation is to provide
transparency that Telstra is not favouring its own retail activities over the activities of its
wholesale customers, while allowing Telstra to obtain legitimate benefits from vertical
integration. (Explanatory Memorandum to amending legislation p82)
Telstra acknowledges that operational separation will provide more clarity and transparency of our
business. We are now focused on implementing it in a way that does not reduce flexibility or
substantially add to our costs.
Our draft operational separation plan is currently in the public consultation phase and the
Minister for Communications will notify Telstra whether or not it is approved by 30 June 2006. The
pricing principles aspect of operational separation is not yet finalised. We are working with the
ACCC and Government to make sure the application of the principles does not impede our ability to
fairly compete in the market. We expect this to be finalised by 30 June 2006.
ACCC review
On 21 December 2005, the ACCC announced a broad ranging strategic review that will examine the
future regulation requirements of certain key network and wholesale services on the fixed network.
The review will mainly focus on existing declarations of fixed network services. However it will
also cover broader questions surrounding regulation, in light of emerging market, technological and
network developments. The review is expected to take up to a year to complete.
Telstra welcomes the announcement of a wide ranging review of fixed network regulation.
www.telstra.com 9
business activity
BigPond ®
BigPond® remains Australias leading Internet Service Provider (ISP) with more than
2.3 million customers. In the first half of 2005/06, Telstras retail broadband customer base grew
by 37% to 1.2 million, delivering strong revenue growth in a competitive environment.
BigPond® Wireless was launched in August offering wireless broadband access to the
internet using Telstras mobile network. BigPond® Wireless already has more than 10,000
subscribers.
BigPond®s content business continues to grow with BigPond® music sales
growing strongly despite increasing competition. The BigPond® Movies and
BigPond® Games businesses are set to release new products in the second half of the
financial year.
Sensis
Sensis is one of Australias leading information resources and one of the worlds top 10 directories
companies. The first half results included accelerated revenue growth in the online advertising
business, with growth of more than 50%.
A number of innovative and exciting service initiatives were introduced across the product
portfolio including the Yellow Pages® On the Go directory, the provision of movies and
weather information on the Sensis® 1234 voice service and the launch of the text version
of Sensis Mobile on all Telstra Active (3G), WAP and i-mode1 compatible phones.
Online transaction capability was launched on our tradingpost.com.au website in November, allowing
consumers to contact a seller by phone or email, buy online or make an offer.
Consumer and Marketing
Telstra Consumer and Marketing remains the market leader in packaging, where customers combine the
purchase of fixed, mobile, broadband or pay TV services. Telstra leads with 2.9 million2
households preferring a single carrier providing them with more than one product.
In September 2005, Telstra launched 3G services in the major capital cities and coverage was
available to 46% of the Australian population. The new mobiles service launched under the Telstra
Active brand offers customers video calling, capped plans and information and
entertainment services. This allows our customers to view video news reports from National Nine
News, CNN and Sky News, amongst others, and access mobile email.
Business and Government
Telstra Business and Government signed several major customer contracts over the first half of the
year. These demonstrate our commitment and capability in successfully transforming the business
into an integrated carriage, services and solutions business.
Recent customer wins include KAZ, our information and communications technology (ICT) solutions
provider, winning separate five year contracts with the Department of Defence, (worth approximately
$200 million) and ING Australia (worth approximately $33 million).
10 www.nowwearetalking.com.au
Retail broadband subscribers
á 37%
Retail broadband subscribers grew 37% in the half, making BigPond® the market
leader in broadband growth
Westpac renewed its contract for a further five years, worth approximately $400 million.
PricewaterhouseCoopers signed a contract to roll out 2,000 mobile broadband services, which will be
the single largest rollout of mobile broadband services in Australia.
Country Wide
Telstra Country Wide local managers oversee the telecommunications needs of more than six million
customers, who live and work outside Australias major cities. This local presence and commitment is
a key component of our continued growth.
Since July 2005, we have invested $45.5 million to extend mobile and high-speed wireless data
coverage in regional areas. Through the Governments Higher Bandwidth Incentive Scheme (HiBiS), we
have brought broadband ADSL to 787 exchanges since the scheme began in April 2004.
Wholesale
Telstra Wholesale continued to deliver strong revenue growth, particularly in the area of broadband
products. To date, Telstra Wholesale has achieved year-on-year revenue growth of 18%.
Telstra Wholesale continued to focus on improving the stability of and access to Telstra systems as
part of an ongoing commitment to overall service improvements. As a result, wholesale customers
experienced record levels of automation in relation to order requests over the past six months,
with average automated orders now exceeding 150,000 each month.
Telstra Services
Telstra Services is the service arm that builds, operates and maintains the networks, and is the
face of Telstra to many customers. Telstra Services will play a critical role in implementing many
of Telstras planned strategic initiatives.
International
In December 2005, the merger of Hong Kong CSL and New World PCS was announced. Once final
regulatory and shareholder approvals are received, this will create Hong Kongs largest mobile
business. Telstra will own 76.4% of the merged company.
TelstraClear, Telstras fully owned New Zealand subsidiary, is focusing on its national IP backbone
network and its residential networks in Wellington and Christchurch, where it has introduced a
digital television service.
Corporate Social Responsibility
Our activities over the first half included:
|
|
Conducting Blood for Life day, with more than 2,600 Telstra staff donating blood to the Red Cross Blood Service. |
|
|
Ongoing support of the adolescent and young adult cancer care program, onTrac@Peter Mac. |
|
|
Supporting 525 community projects and providing grants of around $4 million through the Telstra Foundation Community
Development Fund and Telstras Kids Fund. |
|
|
Equal first ranking in the Horwath 2005 Corporate Governance Report, which rates the corporate governance practices of
Australias top 250 companies. |
www.telstra.com 11
SELECTED ITEMS FROM THE
income statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months to |
|
|
6 months to |
|
|
|
|
|
|
Dec. 2005 |
|
|
Dec. 2004(a) |
|
|
change |
|
|
|
$m |
|
|
$m |
|
|
% |
|
|
Sales revenue |
|
|
11,439 |
|
|
|
11,275 |
|
|
|
1.5 |
|
1 Total income (excluding finance income) |
|
|
11,578 |
|
|
|
11,360 |
|
|
|
1.9 |
|
|
2 Total expenses (excluding finance costs) |
|
|
8,089 |
|
|
|
7,609 |
|
|
|
6.3 |
|
|
Net finance costs |
|
|
443 |
|
|
|
424 |
|
|
|
4.5 |
|
Profit before income tax expense |
|
|
3,046 |
|
|
|
3,327 |
|
|
|
(8.4 |
) |
3 Income tax expense |
|
|
907 |
|
|
|
942 |
|
|
|
(3.7 |
) |
|
Net profit |
|
|
2,139 |
|
|
|
2,385 |
|
|
|
(10.3 |
) |
Outside equity interests in net loss |
|
|
1 |
|
|
|
|
|
|
|
N/M |
|
Net profit available to Telstra Entity shareholders |
|
|
2,140 |
|
|
|
2,385 |
|
|
|
(10.3 |
) |
Basic earnings per share (cents) |
|
|
17.3 |
|
|
|
19.1 |
|
|
|
(9.4 |
) |
Diluted earnings per share (cents) |
|
|
17.3 |
|
|
|
19.0 |
|
|
|
(8.9 |
) |
Interim dividend declared per share (cents)(b) |
|
|
14.0 |
|
|
|
14.0 |
|
|
|
|
|
Special dividend declared per share (cents)(b) |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
|
|
Total interim ordinary dividends declared
including special dividend (b) |
|
|
2,485 |
|
|
|
2,485 |
|
|
|
|
|
Dividend franking percentage at 30% tax rate |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
(a) |
|
This is our first financial report prepared in accordance with Australian equivalents to
International Financial Reporting Standards (A-IFRS). When preparing this financial report we have
amended certain accounting and valuation methods applied in the previous Australian Generally
Accepted Accounting Principles (AGAAP) financial statements to comply with A-IFRS. With the
exception of financial instruments, the comparative figures have been restated to reflect these
adjustments. We have taken an exemption available to only apply AASB 132:Financial Instruments:
Disclosure and Presentation and AASB 139:Financial Instruments: Recognition and Measurement,
from 1 July 2005. |
|
(b) |
|
On 9 February 2006, the directors of Telstra Corporation Limited declared a fully franked
interim dividend of 14 cents per ordinary share and a fully franked special dividend of 6 cents per
ordinary share. The record date for the interim and special dividends is 24 February 2006 with
payment to be made on 24 March 2006. Shares will trade excluding entitlement to the dividends on 20
February 2006. A provision for dividend payable has been raised as at the date of declaration,
amounting to $2,485 million. |
|
|
|
The income tax payments anticipated to be made to earnings in the current year should enable
full franking of the fiscal 2006 final ordinary dividend. |
12 www.nowwearetalking.com.au
|
|
|
|
|
|
|
1 |
|
Total income |
|
Total income (excluding finance income) increased by 1.9% or $218 million to $11,578 million, due to: |
|
|
á1.9%
|
|
|
|
sales revenue increasing by 1.5% or $164 million to $11,439 million mainly due to growth in broadband,
mobiles, IP solutions, advertising and directories, and pay TV bundling revenues, offset by a decline in
revenues from PSTN calling products, specialised data, narrowband and ISDN products. As the market continues
to move towards newer technologies to satisfy their telecommunications requirements, we continue to see a
shift in customer demand from our traditional products such as PSTN to our emerging products such as
broadband; and |
|
|
|
|
|
|
other revenue/other income grew by 63.5% or $54 million to $139 million primarily due to an increase in
Higher Bandwidth Incentive Scheme (HiBiS) receipts from the Government resulting from the provision of
broadband services to regional, rural and remote areas of Australia. |
|
|
|
|
|
|
|
2 |
|
Total expenses |
|
Total expenses (excluding finance costs) increased by 6.3% or $480 million to $8,089 million due to: |
|
|
á 6.3%
|
|
|
|
an increase in labour expense of 9.1% or $171 million, led by a rise in salary rates and higher redundancies; |
|
|
|
|
|
|
increased goods and services purchased of 3.4% or $73 million, attributable to increased network payments
resulting from an expansion in some of our overseas businesses and higher service fees due to
growth in pay TV volumes; |
|
|
|
|
|
|
an increase in other expenses of 8.4% or $156 million, mainly due to higher service contracts and other
agreements resulting from increased network maintenance, increased activity to meet broadband demand and
increased consultancy usage; and |
|
|
|
|
|
|
higher depreciation and amortisation expense of 4.5% or $78 million, primarily due to the growth in
communications plant and software additions required to support the increasing demand for broadband ADSL
services, as well as the additional expense resulting from our recent investments in 3G networks, both
domestic and offshore. |
|
|
|
|
|
|
|
3
|
|
Income tax expense
|
|
Income tax expense decreased by 3.7% or $35 million to $907 million, giving an effective tax rate of 29.8%. The lower
income tax expense was primarily due to the reduction in profit before income tax. |
|
|
â 3.7% |
|
|
|
|
www.telstra.com 13
SELECTED ITEMS FROM THE
balance sheet
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
As at |
|
|
|
31 Dec. 2005 |
|
|
30 June 2005 (a) |
|
|
|
$m |
|
|
$m |
|
|
Cash and cash equivalents |
|
|
817 |
|
|
|
1,548 |
|
Other current assets |
|
|
4,414 |
|
|
|
4,066 |
|
1 Total current assets |
|
|
5,231 |
|
|
|
5,614 |
|
|
Property, plant and equipment |
|
|
22,901 |
|
|
|
22,939 |
|
Intangibles |
|
|
6,146 |
|
|
|
6,197 |
|
Other non current assets |
|
|
1,031 |
|
|
|
409 |
|
2 Total non current assets |
|
|
30,078 |
|
|
|
29,545 |
|
|
Total assets |
|
|
35,309 |
|
|
|
35,159 |
|
Current borrowings |
|
|
1,872 |
|
|
|
1,507 |
|
Other current liabilities |
|
|
4,339 |
|
|
|
4,903 |
|
Non current borrowings |
|
|
11,201 |
|
|
|
10,941 |
|
Other non current liabilities |
|
|
4,164 |
|
|
|
4,087 |
|
3 Total liabilities |
|
|
21,576 |
|
|
|
21,438 |
|
|
4 Equity |
|
|
13,733 |
|
|
|
13,721 |
|
|
SELECTED ITEMS FROM THE
statement of cash flows
|
|
|
|
|
|
|
|
|
|
|
6 months to |
|
|
6 months to |
|
|
|
Dec. 2005 |
|
|
Dec. 2004 (a) |
|
|
|
$m |
|
|
$m |
|
|
Net cash provided by operating activities |
|
|
3,948 |
|
|
|
4,393 |
|
Net cash used in investing activities |
|
|
(1,992 |
) |
|
|
(2,355 |
) |
5 Free cash flow |
|
|
1,956 |
|
|
|
2,038 |
|
|
6 Net cash used in financing activities |
|
|
(2,721 |
) |
|
|
(1,616 |
) |
|
Net increase/(decrease) in cash |
|
|
(765 |
) |
|
|
422 |
|
(a) This is our first financial report prepared in accordance
with A-IFRS. When preparing this financial report we have amended certain
accounting and valuation methods applied in the previous AGAAP financial
statements to comply with A-IFRS. With the exception of financial
instruments, the comparative figures have been restated to reflect these
adjustments. We have taken an exemption available to only apply AASB
132: Financial Instruments: Disclosure and Presentation and AASB
139: Financial Instruments: Recognition and Measurement, from 1 July 2005.
14 www.nowwearetalking.com.au
|
|
|
|
|
|
|
1 |
|
Total |
|
Total current assets decreased by $383 million to $5,231 million due to:
|
|
|
current assets
|
|
|
|
a decrease in cash assets of $731 million as our cash balances and net cash flow
generated from operations was used to fund our investing and financing activities
including increased dividend payments; and |
|
|
|
|
|
|
an increase in other current assets of $348 million predominantly due to higher trade
receivables and accrued revenues impacted by the timing of cash receipts. In addition,
inventories increased due to higher inventory of mobile handsets and material held for
consumption on capital work programs. |
|
|
|
|
|
|
|
2 |
|
Total non |
|
Total non current assets increased by $533 million to $30,078 million due to:
|
|
|
current assets
|
|
|
|
an increase in other non current assets of $622 million due to the recognition of an
interest rate swap asset on adoption of the new financial instruments accounting
standard. In addition, our defined benefit assets increased as a result of actuarial gains
on measurement of these assets as at the 31 December 2005 balance sheet date; and |
|
|
|
|
|
|
a decrease in property, plant and equipment of $38 million mainly due to the additions
in our communications plant and software assets being offset by our depreciation and
amortisation. |
|
|
|
|
|
|
|
3 |
|
Total liabilities |
|
Total liabilities increased by $138 million to $21,576 million due to:
|
|
|
|
|
|
|
higher total borrowings of $625 million, mainly due to an increase in borrowings
during the half-year and the impact of the market revaluation of certain borrowings
on adoption of the new financial instruments accounting standard; and |
|
|
|
|
|
|
a decrease in total other liabilities of $487 million predominantly due to lower trade
and other payables as a result of installment payments on the deferred settlement of
the 3G radio access network. In addition, the timing of cash payments and lower accruals
contributed to the decrease in total other liabilities. |
|
|
|
|
|
|
|
4 |
|
Equity |
|
Equity increased by $12 million to $13,733 million. This increase was due to the inclusion
of our net profit for the period of $2,139 million, actuarial gain on our defined benefit assets
of $223 million, adjustment on translation of financial statements of non-Australian controlled
entities of $81 million and the addition of the cash flow hedging reserve of $42 million. This
increase was offset by the payment of the fiscal 2005 final ordinary dividend of $2,485 million. |
|
|
|
|
|
|
|
5 |
|
Free cash flow |
|
Free cash flow decreased by $82 million to $1,956 million mainly due to a reduction
in net cash provided by operating activities as a result of lower operating profit and higher
working capital. This reduction was partly offset by a fall in net cash used in investing
activities due to lower investment expenditure compared with the prior corresponding
period. The prior corresponding period included the major investment acquisitions of
the KAZ Group, PSINet and Telstra Business Systems. |
|
|
|
|
|
|
|
6 |
|
Net cash used
in financing
activities |
|
Net cash used in financing activities increased by $1,105 million to $2,721 million
mainly due to lower net proceeds received on borrowings and increased dividend
payments, partially offset by there being no share buy-back in the current half-year. |
www.telstra.com 15
shareholder information
How can I access and change
information about my shareholding?
You can contact the Telstra Share
Registry on 1300 88 66 77 or you can
visit our website at
www.telstra.com.au/abouttelstra/investor/
services.cfm. From this site you can access your
holding information, you can make
changes to your holding record, or
you can download forms to complete
and return to the Telstra Share
Registry to ensure that your details
are up to date.
To access your shareholder information
via this secure website you will need to
log in using your Securityholder
Reference Number (SRN) or Holder
Identification Number (HIN), as well as
your surname or company name and
postcode.
Can I reinvest my dividends into a
dividend reinvestment plan with
Telstra?
Telstra does not currently have a
dividend reinvestment plan (DRP). In
the past, we could not easily
introduce a DRP because the Telstra Corporation Act prevented a reduction
in the Commonwealths equity below
50.1%. Since the passing of the sale
legislation that restriction no longer
applies, however, we are not currently
looking to raise additional capital so
we have not reconsidered the
introduction of a DRP at this time.
What is this new website
www.nowwearetalking.com.au
about?
nowwearetalking.com.au is an interactive
website for shareholders, customers and
anyone with an interest in the
challenges facing the telecommunications
industry in Australia. The site features
views and opinions from industry experts
and some popular blogs written by
Telstra staff talking about their
day-to-day work.
Shareholders are especially welcome to
join and contribute to the
nowwearetalking.com.au discussion
forums.
Shareholders by state as at 31 December 2005
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
Shareholders by state* |
|
Shareholders |
|
|
Shares |
|
Australian Capital Territory |
|
|
35,329 |
|
|
|
65,084,093 |
|
New South Wales |
|
|
495,448 |
|
|
|
1,047,656,636 |
|
Northern Territory |
|
|
7,663 |
|
|
|
11,979,809 |
|
Queensland |
|
|
236,933 |
|
|
|
499,200,354 |
|
South Australia |
|
|
120,506 |
|
|
|
234,466,080 |
|
Tasmania |
|
|
23,493 |
|
|
|
42,580,559 |
|
Victoria |
|
|
508,303 |
|
|
|
1,034,268,811 |
|
Western Australia |
|
|
157,944 |
|
|
|
306,239,890 |
|
|
Total Australia |
|
|
1,585,619 |
|
|
|
3,241,476,232 |
|
|
* |
|
Retail Shareholders (holding less than 100,000 shares) as at 31 December 2005. |
Total Shares **
|
|
|
1 |
|
i-mode and the i-mode logo are registered
trade marks of NTT DoCoMo, Inc. in Japan and other
countries |
|
2 |
|
Consumer survey conducted by Roy
Morgan Research Centre, December 2005 |
16 www.nowwearetalking.com.au
Telstra Corporation Limited |
Incorporated in the Australian Capital Territory |
Telstra is listed on Stock
Exchanges in Australia, New
Zealand (Wellington), and the
USA (New York) |
General Telstra Enquiries and Switch Board |
Australia: 1300 368
387 All Other:
+61(8) 8308 1721 |
Australia: 1300 88 66 77 All
Other: +61(3) 9615 9126 email:
telstra@linkmarketservices.com.au
website:
www.linkmarketservices.com.au
Facsimile: +61(2) 9287 0303 |
The Telstra Share Registrar |
Link Market Services
Limited PO Box A942 Sydney
South NSW 1234 Australia |
Level 36, 242 Exhibition
Street Melbourne Victoria
3000 Australia |
David Anderson
General Manger Ph:
+61(3) 9634 8014 |
Level 41, 242 Exhibition
Street Melbourne Victoria
3000 Australia |
Douglas Gration
Company Secretary
Ph: +61(3) 9634
6400 |
Telstras Investor Relations home page
at:
http://www.telstra.com.au/abouttelstra/
investor |
Telstras new interactive
website: |
http://www.nowwearetalking.com.
au |
ACCC Australian Competition
and Consumer Commission the body
responsible for regulating the
telecommunications industry ADSL
Asymmetric Digital Subscriber Line
compression technology that allows
voice, data, video to be delivered over
an existing copper network CDMA
Code Division Multiple Access a
mobile standard which provides voice,
data, fax and short messaging services
DSLAM Digital Subscriber Line
Access Multiplexer technology located
at Telstra exchanges that separates
voice and data signals FTTN
Fibre to the node infrastructure
that delivers fibre close to customer
premises. FTTN will deliver broadband
data and potentially television services
to customer premises GSM
Global System for Mobile
Communications one of Telstras two
digital networks. GSM covers 96% of the
Australian population IP
Internet Protocol the method or
protocol by which data is sent from one
computer to another on the internet
IP Core the core element of
a network which carries and logically
splits voice, data and video using IP
technology Multi Service Edge
technology that aggregates
customer lines with multiple services
such as voice, video, data and internet |
Next Generation Ethernet
high speed technology that aggregates
all traffic onto the IP network
NGN Next Generation Network
enables multiple services such as
voice, video and data to be integrated
and efficiently carried over the
network ULL Unconditioned
Local Loop is the use of copper wire
that runs between a customer premises
and the equipment at the end of the
copper wire, generally located in a
Telstra exchange Wireless -
use of radio transmission signal to
connect to a network (i.e. mobile
communication) Wireline -
relates to the fixed access network,
that uses either existing copper or
fibre lines to connect to a fixed
network 3G GSM Third
Generation Global System for mobile
communications is the evolution of
the current GSM 2G and 2.5G technology
to support voice and high speed data
and multimedia services |
Designed and produced by The Ball Group Melbourne and Sydney TEL0069 03/06 |
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© Telstra Corporation Limited (ABN 33 051
775 556) 2006.
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Trade mark of Telstra Corporation Limited. |
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® Registered trade mark of Telstra Corporation Limited. |
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31 March 2006
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Office of the Company Secretary |
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The Manager
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Level 41 |
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242 Exhibition Street |
Company Announcements Office
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MELBOURNE VIC 3000 |
Australian Stock Exchange
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AUSTRALIA |
4th Floor, 20 Bridge Street |
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SYDNEY NSW 2000
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Telephone 03 9634 6400 |
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Facsimile 03 9632 3215 |
ELECTRONIC LODGEMENT
Dear Sir or Madam
Telstra presentation to Credit Suisse Investment Conference, Hong Kong
In accordance with the listing rules, I attach a copy of a presentation by Sol Trujillo, CEO
Telstra at the Credit Suisse Investment Conference, for release to the market.
Yours sincerely
Douglas Gration
Company Secretary
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Telstra Corporation
Limited ACN 051 775 556
ABN 33 051 775 556 |
Telstra Corporation Limited
Credit Suisse Investment Conference Hong Kong - March 2006
Sol Trujillo
Chief Executive Officer
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Disclaimer
These presentations include certain forward-looking statements that are subject to various
risks and uncertainties. Actual results, performance or achievements could be significantly
different from those expressed in, or implied by, these forward- looking statements.
Such forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties and other factors, many of which are beyond the
control of Telstra, which may cause actual results to differ materially from those expressed
in the statements contained in these presentations. For example, the factors that are likely
to affect the results of Telstra include general economic conditions in Australia; exchange
rates; competition in the markets in which Telstra will operate; the inherent regulatory risks
in the businesses of Telstra; the substantial technological changes taking place in the
telecommunications industry; and the continuing growth in the data, internet, mobile and
other telecommunications markets where Telstra will operate. A number of these factors are
described in Telstras Annual Report and Form 20-F.
All forward-looking figures in this presentation are unaudited and based on AGAAP.
Certain figures may be subject to rounding differences. All market share information
in this presentation is based on management estimates based on internally available
information unless otherwise indicated.
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Telstra - the leading player with scale
Telstra is well positioned to take advantage of truly converged communications...
I Telstra offers a full suite of communications services
O Wireline - unparalleled reach to customers across Australia
O Wireless - already rolling out one of the worlds most advanced networks O Strong
advertising & search capability via Sensis O BigPond -
Australias largest broadband
provider I The strongest brand name in the industry in Australia
I The highest market share in Australia while proactively managing offshore opportunities
I Ability to drive economies of scale
I Strong balance sheet & cash flows allow us to fund growth opportunities
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We are on the move
To know our customers and meet their needs better than anyone else
We are on the move:
Driving a new customer experience
Driving new revenue sources
Driving reduced complexity in the business
Driving costs down
Driving a new competitive culture
Driving a new regulatory agenda
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And heres the reason why....
Income Growth
Revenue mix shifting to currently lower margin products
Intense pricing pressure in a competitive market
Cost Growth Before Interest
We have too many of everything
Regulation is increasing costs and hampering growth
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1H 2006 Result was on Plan
Results tracking with plan
PSTN, Mobiles
Sensis
Strong broadband performance
Dividends consistent with guidance
Tracking to full year guidance
Total Income +1.9% to $11,578m
Costs +6.3% to $8,089m
EBIT -7% to $3,489m
PSTN Revenue -7.6%
Volume & Price erosion in PSTN
Mobiles +4.6%
Sensis Revenue +5.3%
Strong on-line growth
On track for 6-7% revenue growth in FY06
+593k broadband customers in 1H to 2.3 million
Retail SIOs growing faster than wholesale
Retail broadband revenue +63%
Fully Franked Interim Ordinary Dividend 14cps
Fully Franked Special Dividend 6cps
Underlying EBIT -7 to -10% before strategic overlay
EBIT -15 to -20% before redundancy provision
EBIT - 21 to -26% with redundancy provision
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Our Strategic Priorities
We are taking the tough medicine to create long term customer value and shareholder value by...
Implementing market based management to know the customer like never before
Investing:
Oin new services & applications to differentiate ourselves & grow revenues
to take out complexity and cost - one factory
to reduce workforce by 10-12k over next five years
Accelerating opportunities at Sensis
Targeting investment to where we can create value
Not investing in services that are below cost or will destroy shareholder value
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Strategic Outcomes - Progress to Feb 06
Its early days, but there is progress in the
transformations strategic goals...
Cost reduction programs commenced
1H06 Capex saving of $300m identified, redirected to transformational projects
1000 workforce reduction since 30 June 05 (incl contractors)
Market Based Management - 22,000 interviews completed. Weve identified:
7 Needs-Based Segments
18 Product Segments
126 Micro-Segments
NGN vendors signed
Ericsson - 3G 850 network to over 5,000 sites
Cisco - IP core
Tellabs - Multi-Service Edge/SDN replacement
Alcatel - IP DSLAMS and soft switches
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CSL/New World merger
First mover advantage in consolidation of HK mobile market
The merged entity will be No. 1 operator in HK mobile market
At least A$400m of cost savings to the merged entity
The merged entity will enjoy strong brand recognition across all market segments
No gain or loss on effective disposal of CSL stake and CSL carrying value
The transaction meets Telstras strict acquisition criteria
The merger enhances Telstras strategic options with CSL
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Regulation
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I Issue - structure and level of pricing
I Our position - $30 averaged undertaking lodged
I Next steps - Government decision expected early April. ACCC assessment of price level undertaking expected shortly after
Safeguards
I Issue - lack of regulatory certainty of commercial return on new investments
IOur position - FTTN on hold as we seek new investments to be regulated like all other industries I Next steps - discussions with ACCC and Government continuing
Operational Separation
I Issue - legislation requires plans effecting transparency and equivalence re key wholesale services I Our position- ensure application of the principles do not impede our ability to fairly compete in the market INext steps - Minister response due end of June to our amended plan
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Telstras transformation will deliver...
Customer
O Needs based solutions
O 1 click, 1 touch, 1 screen, 1 button, 1 step O Simplified and integrated customer experience
Network
O Leading wireless network
- Biggest network in Aust
- Fastest speeds
- Best in-building coverage O Australias largest IP network
- Simpler environment
- Common standards & platforms
- Faster development and deployment of services O Lower costs
Bigpond
O Australias leading ISP and services entity O Targeting 55% market share by FY08
Sensis
O Australias leading information resource O 50 years of
experience managing Australias leading local business
Financial Targets*
O Revenue growth
- 2.0-2.5%pa to FY10
- 20-30% from new services by FY08 O FY10 costs at same level as annualised 1H06 O EBITDA margin 50-52% by FY10 O EBITDA 3-5% growth to FY10 O CAPEX 12% of sales by FY10 O FCF - $6-7bn by FY10 O Dividend 28cps to FY08
Subject to a reasonable regulatory outcome
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31 March 2006
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Office of the Company Secretary |
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The Manager
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Level 41 |
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242 Exhibition Street |
Company Announcements Office
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MELBOURNE VIC 3000 |
Australian Stock Exchange
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AUSTRALIA |
4th Floor, 20 Bridge Street |
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SYDNEY NSW 2000
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Telephone 03 9634 6400 |
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Facsimile 03 9632 3215 |
ELECTRONIC LODGEMENT
Dear Sir or Madam
Transcript of presentation by Sol Trujillo CEO Telstra, at the Credit Suisse
Investment Conference, Hong Kong.
In accordance with the listing rules, I attach a transcript of a presentation by Sol
Trujillo, CEO Telstra at the Credit Suisse Investment Conference, for release to the
market.
Yours sincerely
Douglas Gration
Company Secretary
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Telstra Corporation Limited
ACN 051 775 556
ABN 33 051 775 556 |
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(9.50 am) |
Friday, 31st March 2006 |
MODERATOR: Our next presentation this morning is from
Telstra. Were very pleased to have Telstra back at the conference this year. Making his
first appearance at the conference, Im very pleased to welcome the chief executive officer,
Mr Sol Trujillo. Thank you, Sol.
MR TRUJILLO: Thank you. Good morning, everyone.
Im obviously here to talk about the leading player in Australia, and when I say the leading
player, I always like to talk and think given the fact that Ive operated in the US, Ive
operated in Europe, Ive operated basically around the world I always like to think about
scale, because scale matters in this industry. Youve seen it almost anywhere, any continent,
as you watch how the market evolves. In the case of Australia, Telstra is the player, and we
do have scale. We are the biggest player in terms of wireline, the biggest player in terms of
wireless, and obviously we are the player in terms of advertising, search, transaction
capabilities.
Finally in terms of our newest platform, which is really critical, I think,
anywhere in the world, is the broadband platform, with our BigPond play. Obviously we are the
player in terms of the marketplace.
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Australia is a country that is going through a transformation, in terms
of the industry, because one of the things that I think needs to happen is
obviously that we transform how the structure is worked, how Telstra is
competed and how aggressive we will become.
Now, also in terms of Telstra, in
Australia we are the biggest brand name. Any brand recognition survey thats
done, Telstra is the name that everybody will name either one, two or three in
any brand survey, which is something that we are starting to leverage and will
continue to leverage, in terms of our business.
We do have the highest share
in virtually every category, and most importantly, we have the ability to
drive economies of scale, which everywhere Ive been when I ran Orange,
when I was at US West obviously all those become critical, as you think
about new technologies, and as you think about strong transitions.
The final
point that Id just make relative to an introduction to Telstra is that
obviously, as you look at our financials, we have a strong balance sheet, we
have strong cash flows in terms of the business, in terms of being able to do
the things that we need to do, in terms of running the business and
transforming the business.
So, as we move to the next chart here, the way
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I like to think about what were doing, since I arrived last July, is that we
have started the transformation, and were a business thats basically what I
call on the move.
Were on the move because were changing the way that we go
to market; were changing the way we operate in terms of delivering an
enhanced customer experience; were changing the way that we think about
revenues and our sources of revenue, because one of the things that I believe
fundamentally is we have our old revenue streams that are under attack, either
competitively or secularly in terms of some fundamental changes that are
occurring with things like PSTN, so we have to create new ones and we have to
create new applications and new services. Youre seeing that with what were
going to be doing and are starting to do, whether it be in our BigPond space,
our broadband arena, or in terms of our mobile arena; and finally, in terms of
how we think about our advertising business, which we have called Sensis,
which is more than printing Yellow Pages. It is about online advertising,
its about search, and its about transactions as we go forward.
So were driving the new revenue sources. Were also driving reduced complexity in
terms of our business. When I say complexity, if you look at
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Telstra, we had about 1,250 operating systems in our business. Were going to
be taking those down dramatically.
If you look at how customers interface with
Telstra fairly complex. If you look at running three wireless networks
fairly complex. Customers have to make choices, not quite understanding the
difference between CDMA and GSM, and we put them into those positions to be
able to have to do that; and obviously were driving a new competitive
culture. We are going to compete and were going to compete hard, and I think
those that we compete with are finding that out, with some of the things that
were now starting to do in the marketplace.
If you look at our first-half
results announcements and if you look in the broadband space, our nearest
competitor grew one-fourth the amount of volume in terms of broadband
connections that we did. So we are competing and we are competing hard in
terms of the business.
Finally in terms of being on the move, we are
aggressively working a new regulatory agenda. That receives a lot of
publicity and gets a lot of coverage, in terms of the marketplace, and in
particular the media, but it is critical as well. But I just want to
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emphasise, thats only one dimension of the full set of issues and initiatives
that we have within the business.
In terms of the move, in terms of reminding
ourselves about scale, in terms of what Ive just talked about, its important
to keep in mind that theres a reason for all this. Why transform? Why drive
the business the way were doing? Why be so aggressive on regulation? Why be
so aggressive in terms of the cost structure and the numbers of people, the
numbers of costs that were going to take out of the business, and why are we
going to push so hard on innovation within the business
Heres why. Its basically that if you look at our business today, weve had a lot of pressures
that have been hitting at this company for the last few years. We have PSTN
revenues that are in decline. We announced in terms of our H1 that our PSTN
revenues were declining 7.6 per cent. If you look at our cost structure, when
I got there and we announced our last years results for 04/05, our retail
revenues were essentially flat, while our expenses were increasing, at retail,
at about 10 per cent. If you looked at our wholesale business, our wholesale
revenues and wholesale costs were running at about the same amount, 13/14 per
cent, at that point in time. Were going through a migration in terms of
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our revenue streams.
If you look at PSTN declining at 7.6 per cent, youre talking about a
portion of the business that used to be, if you look back five or ten years
ago, probably 70 to 80 per cent of the revenues of the business, and clearly
100 per cent of the profitability of the business. All of that has been
eroding, so now I like to remind people that theres a principle in life in
terms of almost any business in any industry: not all revenue dollars are
created equal.
What I mean by that is that the margins are different. When
you look at a PSTN business, where you didnt have to market, promote, spend a
lot of dollars to generate the dollars, because they were on, you know,
recurring-revenue kinds of plans, which are stated on your monthly bill, as
opposed to items that you have to re-contract literally every day in terms of
your business, and you have a customer base thats continuing to change.
Well,
were having to deal with all of that. Weve got pricing pressures, weve got
Cap plans, weve got a lot of things that are happening on the mobile side
that are changing the structure of the business.
Finally, we have a whole
layer of complexity within this business, with technology change. When you
think
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about migrating into an IP kind of world, the customers are ready now to move
into that. If you listen to any of the banking industry folks talk or if you
listen to virtually any other industry, theyre changing their cost structures
by leveraging the technologies that we can deliver, or, if we dont deliver,
they will find somebody that will deliver.
So theres a whole lot of pressures
in terms of our business today that says we do have to change, we do have to
transform. My belief is that we need to do it faster than anyone, we have to
do it bigger than anyone, because the rewards and the price are much better
than anybody elses that we compete with within Australia.
If you look at our
first-half results then, I wont spend a lot of time because all of you get
this information and its all publicly available, but when we look at the
results you can see that were basically on plan.
What I want to do is remind
you that, as we go forward, the plan that we have is extremely aggressive,
because were fundamentally changing our go-to-market with our market-based
management system that were putting in place, the cost take-outs, but it also
means the network transformation that were doing, as well as the IT
transformation that were doing, because just
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doing the network without the IT is really a waste of money, in
terms of how I think about a business like this. So we are in fact moving
hard.
But in terms of our results that we announced first half, you know, we
were on plan. Our mobile results were what I would just call okay. They
werent great, they werent bad; they were just okay. In terms of Sensis,
they were okay for first half, but obviously we have an aggressive plan for
the rest of the year, as well as for the five-year period, in terms of
Sensis.
In terms of our broadband, it was strong; it was very strong. I think
all of you saw that vis-a-vis those that we compete with. Obviously our
dividends and our dividend payment, we said we were going to pay the
dividend, fully franked, and we stayed on what weve said.
In terms of our full-year guidance, weve communicated that and we
will continue to communicate the same guidance that we have given before.
So let me again then revisit our strategic priorities. I like using
this language inside the company, but I also like to use it when Im talking
to some of our investors that Ive met with over the period of time that
Ive been in Australia. We do have to take some tough medicine. This is not
about just deploying
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a network element. Its not about changing a operating system. Its not just about introducing
a new product or a new service. This is a fundamental transformation, and were going to have
to go through about two years worth of tough medicine, meaning that were going to make some
investments to take costs out, were going to make some investments to grow our revenue base, and
were going to be making investments to fundamentally enable us to grow shareholder value over the
next decade, not over the next quarter, or year, or two.
So first on the front end is that were changing how we interface with customers. As we now
start measuring our customer satisfaction, the results are starting to show effects of some of
what were doing. Were about to also launch, and were in the process now of filling jobs and
doing some of the things that weve had work underway, of implementing what we call market-based
management, which basically means that were segmenting the business, and segmenting more than
just consumer, SME, enterprise which is what everybody tends to do. Underneath that, in the case
of consumer, we have about seven segments and about 120 to 130 microsegments that we will be able
to market to when we get all of our resystemisation done, and when weve finished some of
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the work that were going to be doing in terms of our network capabilities,
which will be important in terms of differentiation, because I have a
fundamental belief in terms of managing business, and Ive served on the
boards of world-class companies, and its all the same.
The point of differentiation that you ultimately have is not necessarily
the technology. Its about your go-to-market system, and its about what
points of differentiation you really can deliver, and to me, in this business,
because were a services-based business, its about knowing your customers
better than anybody else and then executing on what you know about your
customers and what their needs are.
So we have implemented, and are, I should say, implementing, a
market-based management system. As I said before, were investing in terms of
new applications
and services. If you were there in Australia during the Comm Games, you
saw at the beginning of what I call the one click, one touch, one screen, one
button environment for our customers, where with one of our devices here you
can see you can fill in the name on the front of the device, and this one
is a Samsung device, but if we had a camera here that you could zoom in on,
you could see that there are two words here: one says Big and one says
Pond. Now we have
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integrated essentially our broadband services and capabilities and made access one-button simple.
So when you think about how we compete versus brand X, Y or Z in
Australia, this is going to be dramatically different. I can show you here
that right here in Hong Kong I can get to my BigPond site, probably within
about 15 to 20 seconds, using a 3G phone, using essentially our CSL network
as a roaming network. You can see right here, those of you that are close
enough, that Ive got the BigPond site right here.
Does that start changing the game? Does that start making my use of
your broadband services, Telstras, much easier, much different and in a
differentiated way?
What we were doing during the Commonwealth Games is that we were
showing live broadcasts of Channel Nine, showing the Games, realtime. So we
were running a series of ads in Australia basically during the Games saying
you could be out in the park but pretend that youre sitting in the stands
watching the game.
Now, most of you are familiar with mobile TV, but this is not about
just mobile TV. It is about an integrated service that was fed through our
BigPond application, so that if you were at home at your PC you could watch,
and if youre on the go with your device, you get the same feed, but with
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information that might be relevant, when you think about stats and other
things, when you want to not only view whats going on, but get other
information thats associated.
Thats part of the integrated experience that were investing in, in
terms of the business, to start changing the customer experience, where its
again one touch, one click, one button simple, because the lesson I have
learned in business is that if you make it simple, people use.
We all know the stories about the books, you know, the training
manuals, the training sessions, all that sort of thing. If youve got to be
trained, I have a rule in our company that says if it takes longer than 30
seconds for me to either intuitively figure it out or for you to explain, I
probably wont use it.
I can teach you in five seconds or less how to get onto your BigPond
site on your mobile device, and its reading two words and pushing one
button. Thats a big deal, and were going to do that with many other
services as we go forward.
That also gets to Sensis. If you get onto our BigPond site or on our
mobile devices, you will see Sensis prioritised. So now you want
information, you want information about a business, you want to get to
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a restaurant, you want to get wherever you want to go? Its all now one
touch, one click simple in terms of Telstra.
So now you think about how we compete for advertising dollars with
Google, with Yahoo!, with whoever: those of you who have used their
services, you have multiple clicks, multiple screens, multiple rolls. Now,
you can get it on most devices. So the point is not whether its on the
device. The point is whether its one click, one touch, one page simple, and
thats kind of the core essence of the vision that I have for this company
going forward, as we think about new products, new services, new
capabilities, applications, et cetera.
We are investing, as we speak, in terms of those capabilities, to grow
revenues into the future, but its also about the power of integration, so
that whether it be Foxtel, Sensis, BigPond, any of our core brands that we
have within our business, its all going to be simple for a customer.
Now, obviously part of the discipline that we are also bringing to
Telstra is about investing where we can make money. Thats what were
telling regulators, thats what were telling the Government, thats what
were telling our investors, and thats what were
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telling our customers. Were going to invest our resources, our capital,
where we can in fact make money, and we are not investing in those services,
those capabilities, that will not create value for our shareholders. That
will be a strong discipline as we continue to manage this business going
forward.
So in terms of strategic outcomes, then, you know, theres a lot of
work underway. If you went into Telstra today and you know people that work
there, they will tell you, theyve never seen anything like this, the speed
at which were moving. We announced a decision on November 14th we had a
board meeting, around our wireless 3G HSDPA 850 network. On
November 15th we announced it to the market, and during the Christmas
holidays we went to our vendor, which was Ericsson, and said, Youre going
to have to keep some of your factories open, during what they would
normally view as a shutdown period during the month of January, because we
said we want our infrastructure hitting our docks in February, because in
February were going to start installing the hundreds of pieces of
infrastructure that weve got to put in place to turn up a network by the
end of this year. Ericsson is doing that, we are doing that, and were on
schedule with what were planning to do.
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Now, weve already commenced also the cost reduction initiatives. Were
taking out the easy things first, which is what any company would do and any
CEO would do. We announced it at first-half results, weve taken out
approximately 1,000 full-time equivalents in terms of the business, but
theres more that were doing and well talk about those when we announce
full-year results.
In terms of market-based management, Ive talked about that. In terms
of next-generation vendors, we have negotiated the contracts. The cost
points at which
we have negotiated these contracts are terrific. They are very
aggressive. I can also say that we are making sure that everybody thats
playing with us is going to have some element of their benefit and their
payments at risk, because I am a performance-based person and I want
results, not only from us but also those that we do business with.
As we go on, then, I also want to share one other piece of news in
terms of our business today, and that is that today we will be announcing
the completion of the CSL/New World merger, and obviously here in Hong Kong
thats very important. We made a big investment at Telstra a few years back
in terms of CSL, and were at a point now where were looking to create
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more value, given some of the market adjustments and value adjustments
that have occurred over the last couple of years.
This merger with New World does create value, but it most importantly
gets us some advantages that I think are important, as we think about the
Hong Kong market.
No. 1 is I think consolidation is important. This is an important step
I think in terms of maybe a series of activities that the market will have.
We will be the No. 1 operator in the Hong Kong mobile market. I mean, I
stand here today, Ive had not much to do with CSL in terms of its history.
It is the No. 1 player. Those of you who live here, you know it. If youre a
user of it, you know it, and if youre not a user of it, you probably even
better know it, using the networks of those who we compete with.
In terms of the benefits, at least 400 million of cost savings to the
merged entity. The merged entity will enjoy obviously the strength of the
brand that we have with CSL as the umbrella company. But we will be very
focused, as we have been, in terms of the segmentation of the market and
the strong segmentation that weve had in terms of the business.
In terms of the gain or loss on disposal of the CSL stake and CSL carrying value, again, all
these numbers
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have been shared, and I would just say that this is part of the kind of
criteria that were using in terms of the things that were going to do or
not do in terms of the business.
The final point I would just make is that Hong Kong is an important
market. I think this merger and the market position that we have as the
market leader creates more options and more alternatives for us, as we think
about strategic plays within the region here in Asia Pac.
Ill move on and talk just a bit about regulation. I think its
important, because when I think about a business like Telstra, clearly your
revenue capabilities and your innovation capabilities around revenues are
important, and your cost structure is important, and were dealing with both
of those. The third thing is about how you think about your culture and
other elements within your business. Finally, when you think about this
notion of regulation, it also affects your ability to generate revenue
growth, it affects your ability in terms of your cost structure, what you do
and what you dont do, and it also affects your ability, sometimes, to
innovate.
In the case of Australia, weve had a battle I wont underscore or understate the nature of
the
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battle and this battle is very similar to the battles that we used to
have in the States back in the mid-90s to late 90s, depending on the part
of the US. There was a philosophy in the US that said one company invests
and everybody should share off of it and share at very low cost, so that you
can have a lot of competition.
Well, I think you saw the outcomes of that. There were lots of losses,
lots of investments, and the primary investors, which were the Baby Bells,
stopped investing. The US we used to be the market leader
all of a
sudden fell in the rankings in terms of broadband deployments and all kinds
of things. And so finally the policymakers in the US learned that that kind
of direction was not a sound direction.
Now, if you look at the WEF report that came out this week, youll find
that the US is back on top in terms of innovation, technology use, et
cetera, et cetera, under the criteria that they use, whereas the US in prior
years had been much lower in the rankings. Its all coming together because
theres an environment where investment makes sense, people are investing,
there is consolidation occurring, and the economics get sounder as you go
forward.
Well, in the case of Australia, the direction has been just the opposite. The direction has
been about
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creating more regulation, more sharing, less incentive to invest, and Ive come in basically
and said that that makes no sense; from a shareholder standpoint it makes no sense, as you think
about delta investments, and delta meaning the delta sign.
So weve had a lot of debate, weve had a lot of discussion. Its centred around unbundled
local loop and how you price it. Do you average, do you de-average, and if you average or
de-average, at what price do you set, based on what kind of costing methodology?
Having been through these arguments before or, as I like to say, having seen this movie
before, the answers are clear to me, and the outcomes should be clear to most, because now, if you
look in Europe, in you look in the States, if you look in many places, youll see that everybodys
coming to similar kinds of conclusions.
But were still waiting for decisions on unbundled local loop; were looking for some
decisions in terms of rationality for incremental investments, where if our shareholders risk
capital then they should get the benefits from it, not our competitors shareholders. That is a
principle that we will hold true to, and this view is not only Sols view but its the view of the
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full board of Telstra.
Then the third issue and area of discussion has been around operational separation, where
there is a view around how much separation there should be. Clearly, in my view, the amount of
separation that we have in place today if you drop in an order from Telstra on the wholesale
side, if you drop in an order from any one of our competitors, they all flow through the same
systems, the systems are blind to it, and the outcomes, the intervals, are all the same. Anybody
can audit it, anybody can monitor it. Thats basically the argument that weve made, and weve
actually shown people. So theres a difference in rhetoric versus facts. So were making sure that
theres an understanding of all of that.
So whats the importance of that? The importance of that is that it could affect some of what
weve talked about in terms of our strategic plan. If we get a negative unbundled local loop
decision, as what might be recommended by the regulatory body, we will not build fibre to the node.
We will not build fibre to the node. Theres been some people that would say, Well, gee, its just
Telstra gaming, its posturing and its negotiating. Let me be clear. There once was a President
in the US that said, Read my lips. We
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will not build fibre to the node, because the economics make no sense.
So thats the second half of Read my lips: because the economics do not make sense to our
shareholders. Its not an emotional thing, its not an ego thing, its not a tactical thing; its a
financial thing. If anything, weve just got to be clear about that.
Does that mean that Telstra is in trouble? Does that mean that our financials go to hell? Does
that mean, you know, whatever, whatever? The answer is no, because theres multiple dimensions to
this business. One is about revenue growth: will we innovate, will we create new services, will we
do all that? And do we need fibre to the node to do that? Do we need fibre to the node to do what I
just showed you? The answer is no.
On the costs side, are we going to take out a lot of costs in terms of this business? The
answer is yes.
Then the third dimension is just under what conditions we will have to compete on a regulatory
sense. I would just say to all of you that I have contingencies. We have plans, and what I call
Plan A, Plan B or Plan C, were ready to go. All we need is a regulatory decision by the Government
and we will
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move.
So, in summary, Telstras transformation is going to be important. Its going to be
fast-paced. But its going to take a couple of years before we start seeing the fruits, the big
fruits, of the labour in terms of the networks, in terms of the resystemisation of the business,
and obviously as we start rolling out some of the innovative new products, new services and new
revenue streams, because they will enable on one side new revenues, as we think about billing,
subscription, whatever, per use; but they will also enable us to start disintermediating how
consumers or businesses spend on other services today.
Thats an important point because I think a lot of people say, well, theres not a lot more
spending out there and theres not a lot more ARPU out there because there are some price pressures
on some of the existing services. The answer is, that is partially true, but at the same time there
are a lot of things we dont generate any of the revenues on today that we will start generating
revenues on.
Youve seen on BigPond, we have BigPond movies now, we have music downloads, we have the
largest amount of downloads in Australia in terms of music downloads of anybody, and Apple has been
in the market, others have
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been in the market.
If you look at Sensis and you look at transaction revenues, you look at search revenues, if
you look at the growth in our online business, which is over 50 per cent growth per year, and we
have a pretty big base already, theres a lot of new revenue sources that we have within the
business.
Obviously, as we think about Foxtel, theres opportunities with that in terms of some of the
things that were working now as a board at Foxtel to accelerate growth. So think about CSL and
this transaction with New World theres a lot of things that weve got underway that have
nothing to do with the regulator but have everything to do with managing a world-class business.
So, in terms of our targets, you can see them up on the chart; youve seen them before on
November 15th; you have seen us reiterate them back when we announced our first-half results
pretty clear.
So I will stop at this point and open it up for questions, because I think that may be the
more relevant use of time at this stage.
MODERATOR: Okay. Were coming towards the end but weve probably got time for one or two
questions from the audience, if people feel free.
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Q. |
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Thanks, Sol. Youve made a lot of mention about the regulatory environment obviously in
Australia. One thing obviously that has been happening over the last couple of weeks has been a
variety of mixed messages on whats happening with regulation in Australia, a lot of talk about a
compromise being reached with the regulator and also the Government. |
Whats your interpretation of the regulatory environment? In particular, do you see
rationality returning between Telstra, the regulator and the Government?
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MR |
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TRUJILLO: Thats a multi-billion-dollar question. I guess Im always hopeful that
rationality ultimately will prevail. We are having constructive conversations with the ACCC,
literally as we speak. |
Beyond that, I shouldnt comment much more, because until you reach agreements on anything, as
far as Im concerned there are no agreements. But I think that the dialogue this morning,
Minister Minchin came out and talked about how important he thought T3 was, and the fact that he
wanted to see it happen and how he was going to go about doing it. I think that hopefully over the
next few days or week or two or whatever you will see less rhetoric and more real conversation
occurring.
But at the end of the day we will work that side, we
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will work it hard, because we want to be as positive and constructive as we can be in finding the
right solutions for Australia for the long term.
However, I wont take that to the bank, I wont bet on it, because we have our operating plans
that I will bet on, in terms of how we will create value for our shareholders. If this happens,
its an enhancement. Otherwise, weve got other plans that will help us create the value that we
think we need.
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Q. |
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On that point that you highlighted, obviously the focus then is on the actual underlying
fundamentals of the business. I mean, to date, are you ahead of target on the operating statistics
side, obviously looking at the cost-out, and you highlighted a couple of points in the slides, but
are you comfortable where you sit are you 110 per cent ahead? I mean, how far ahead are you of
your internal targets at the moment? |
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MR |
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TRUJILLO: For disclosure reasons, I wont answer it the way youve asked the question, but
will say Im comfortable with where were at. As we said at our mid-year results, were on plan,
and I dont see anything at this stage that will take us off plan in terms of where we want to go,
because our plans are extremely aggressive in terms of the amount of cost take-out, in terms of how
we think about revenue growth. |
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Im holding our team to it and theyre delivering so far.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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TELSTRA CORPORATION LIMITED |
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Name:
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Fiona Mead |
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Title:
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Acting Company Secretary |
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Date:
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31 March 2006 |
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