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Executives

Andrew Keys - Director, IR

David Thodey - Chief Executive Officer

Andy Penn - Chief Financial Officer

Analysts

Ian Martin - CIB

Mark McDonnell - BBY

Fraser McLeish - Credit Suisse

Raymond Tong - Goldman Sac

Sameer Chopra - Merrill Lynch

Sachin Gupta - Nomura

Richard Eary - UBS

Laurent Horrut - CLSA

Paul Brunker - J. P. Morgan

Telstra Corporation Limited (OTCPK:TLSYY) F2Q2014 Results Earnings Conference Call February 12, 2014 5:15 PM ET

David Thodey

Thanks, Andrew. Yeah. Good morning. Great to have you here and it’s good to go through the First Half Results for 2014. What we thought we would do is pretty much follow the same format we always do. I am going to give you a quick update on some of the highlights and then, Andy, is going to come up and take you through a more detailed just analysis of the numbers and a bit of the perspective, and then I will come up at the end and just trying to take you through against our strategic priorities just the relevant bits in terms of the results and then we will your questions.

So, firstly, to the highlights of the first half, well, I think the results really do reflect the continuing focus we have had around the strategic priorities of improving customer efficacy, really driving value from the wonderful domestic core business that we have, but also spending time around growing our new business opportunities.

Very important to note that our customers really do remain our number one priority and we are committed to improving in the way we serve our customers and providing them with the access to busy networks in Australia and the real measure of that is where the more Australian choose to come to Telstra and I'm pleased to say that they are.

During the half we added 739,000 new domestic retail mobile customers, 75,000 new retail fixed broadband customers, 117,000 new customers on a fixed bundle and 2,189 new IP services which are mainly in the business and enterprise markets.

Over the last six months the business has continued to grow. On a reported basis revenue or incomes up 4.1% to $12.8 billion, EBITDA grew by 7% to $5.3 billion and net profit after-tax increased by 9.7% to $1.7 billion. And I am also pleased to announce that the Board has increased Telstra’s interim dividend to $14.5 per share.

Very importantly as well is that we are confirming that we are on track to meet our full year guidance. But let me just look for moment at the product revenues. Revenue in our mobiles business was up 6.4% a strong result. Revenue in fixed data was also 6% and revenue in our network apps and services business was up 29.3% which was a very strong result and the international business was up 28.3%. I think the group [embarrassed] strong set of results.

We are also very committed to maintaining our technology and product leadership. This is really at the heart of so much what we do. During the half we invested $1.8 billion to maintain that leadership and we ready to believe that that investment is delivering real tangible results in terms of both topline and bottom line.

I mean for example, by Christmas around the 4G network, we are committed to covering 85% of all Australians and we are pleased to say that we delivered on that. Over the past six months we have upgraded 1,500 base stations to have 4G capability and we now have 3500 4G mobile base stations switched on and working around Australia. I want to stress that 4G network is now four times, four times larger than any other comparable network in Australia.

Besides investing in core network, we've also been investing in new business initiatives. And of course, this is so important for us driving out the portfolio and also driving innovation.

These investments included companies like North Shore Communications and O2 networks that are really bolt-ons to improve our capabilities in the NAS business. We also continue our investments in the health industry and we acquired 50% of FredIT which I will talk about little bit later on.

Now to fund this growth operating expenses are up 2.1% in the half. These are largely driven by the cost supporting this revenue growth, especially the very large contracts like Department of Defense and Department of Health Services, as well as driving out new initiatives in customer service.

Revenue growth is translated pleasingly into growth of the bottom line. These half earnings per share were grown by 8.7%. These are a solid set of results and I think it set us up well for the future.

Let me know hand over to Andy, who is going to take through more of the details. So, Andy, over to you?

Andy Penn

Thank you very much, David, and good morning, everybody. In my presentation this morning, I will firstly take you through the overall results and comment on how we tracked against guidance. Secondly, I will take you through our product and business line performance. Thirdly, I will comment on our expenses and productivity program. Fourthly, I will provide you with an update in relation to our key balance sheet movements and capital position. And finally, I will conclude with some comments on guidance for the balance of 2014.

Before I take you through the results and following the execution of agreements for the sale of both Sensis and CSL, I would like to clarify how we are required to account for these transactions in these results.

We are required to report both businesses as held for sale. In the case of Sensis we expect to book a loss on the sale of approximately $150 million subject to the timing of completion and $100 million of that has been booked at the half year.

In the case of CSL, we expect to book a profit on the sale of approximately $600 million and this will be accounted for in the second half of the year when we anticipate the transaction will consummate.

In the case of Sensis we are also required to treat this business as a discontinued operation. The effect of this is that it has been deconsolidated, sorry, from the current period and the prior comparative period. And then the net profit after tax and depreciation and amortisation of Sensis is recorded as a discontinued operation in the accounts of Telstra after net profit after tax for Telstra.

CSL is not treated as a discontinued operation because unlike Sensis where we are exiting the print advertising business completely, mobiles continues to obviously be a core business for Telstra.

With those clarifying points made, I will now move to the results. Sales revenue for the half year were up 3.6% to $12.6 billion. Total income was up 4.1% to $12.8 billion and EBITDA was up 7% to $5.3 billion. On a guidance basis, excluding the impacts of M&A, total income and EBITDA were up 3.3% and 6.6%, respectively.

There was a small decrease in depreciation and amortisation of 2.7% reflecting some minor changes to asset lives. EBIT was up 14% to $3.3 billion. After accounting for the loss from the Sensis discontinued operations, including the impairment, net profit after tax was up 9.7% to $1.7 billion.

Commenting further on some of our key financial measures, accrued CapEx decreased slightly down 2.1% and the CapEx to sales ratio for the half was 14.4%. Free cash flow declined 23.4% to $1.7 billion. However, the first half of 2013 included the proceeds from the sale of TelstraClear. Excluding these, free cash flow was up 11.2%.

Earnings per share increased 8.7% to $13.7 per share and as David mentioned, the Board has declared a fully franked interim dividend of $14.5 per share.

Return on equity was broadly flat as the increase in profit was matched by equity gains from the superannuation fund which strongly return to surplus. Return on invested capital was up 1.7 percentage points to 15.2% reflecting strong returns from our investments in the Mobiles business in particular.

Turning to group sales, in the first half of 2014, we saw continued growth in sales revenue. Sales revenue was up 3.6% to $12.6 billion. We saw small declines in Fixed, Media, Data and IP, which I will cover in a moment. However, these were more than offset by strong growth in Mobiles, NAS and International, up 6.4%, 29.3% and 28.3%, respectively.

I will now walk through our product and business line performance. Firstly Fixed, Fixed revenues were down 1.5%, an improved performance on previous periods. This was due to slower declines in PSTN, growth in Fixed Broadband and revenue from the NBN Infrastructure Services agreement.

Fixed Voice was down 7.3% with the number of retail lines down 155,000 to 6.4 million. Fixed Data revenue was up 6% and Retail Fixed Data revenue was up 7.8%. A further 75,000 new Retail Fixed Data customers were added in the period while ARPU increased 1% to just under $55. We continue to see strong performance in bundles up 117,000 due in part to the success of the Entertainer bundle.

EBITDA margins trended in line with expectations with Fixed Voice declining 1 percentage point as the portfolio declined in size and Fixed Broadband excluding the early NBN connections increasing 1 percentage point as we continue to expand the scale of this business.

The Mobiles business continued to perform strongly. Overall, revenues were up 6.4% with Mobile Services revenues up 7.3%. This follows strong growth we have experienced in SIOs over recent periods. In fact our total number of services has increased 50% in the last three and half year.

During the period we added 739,000 retail Australian Mobile customer services to take our total number of services to 15.8 million. This included particularly strong growth in pre-paid, while net adds in post-paid were lower than in the first half of 2013 reflecting the slowdown in the market overall. We estimate that we still took market share in post-paid.

Revenues were up 5% in post-paid handheld and up 19.4% in pre-paid. The pre-paid performance was driven by an 11.7% increase in unique users and a 6.2% increase in ARPU.

In post-paid handheld, ARPU, excluding MRO impacts, this was up 2.1% to just over $66. With more than 4 million customer services now on the 4G network, we are seeing increase demand for data. This is driving ARPU and assisting with the further improvements in the EBITDA margin which for Mobiles expanded by 2 percentage points to 39%.

We have invested a further $650 million in the half and having achieved 85% coverage of Australia with LTE, we remain committed to continue to invest in Australia’s best mobile network.

In the second half of the year we will be further deepening our LTE coverage, investing in additional capacity and a number of other innovative trials and preparations for the digital dividend spectrum which will become available in 2015. Overall, another very strong performance from our Mobiles business.

In data and IP, IP access revenue did not fully offset the declines in ISDN calling and data products. We have seen strong customer growth with IP MAN SIOs growing 14%, increases in volumes bandwidth upgrade -- upgrades and IP access revenue is up 3.9% to $581 million.

This has been offset by intensified competition on large contract renewals and ISDN revenues declining 8.8% really driven by calling substitution and the movements from legacy to new IP-based products.

In NAS, we saw another very strong period of growth with revenues up 29.3% to $821 million. Revenue growth has accelerated due to the number of large contracts that we assigned in recent times including the Department of Defence. Performance was also assisted by the acquisitions of O2 and North Shore Communications. The latter added $17 million to revenue in the first half.

As with previous periods, we saw strong revenue growth across all major product categories, with Cloud up 28.6%, Unified Communications up 27.6%, our Managed Network Services up 64.8%. To support this very strong growth in NAS, we have increased our operating cost and increased our headcount by more than 700 for the onboarding of the major new contracts that we have signed and also to scale up the further growth in the future.

Notwithstanding these drivers of cost, we have more work to do to improve efficiency of NAS business and further improved margins. Looking at the results from a general perspective, Telstra retail income for the first half was up 3.9%. This includes consumer and business. Consumer was up 5% underpinned by growth in mobile services revenue and ARPU as well as Fixed Data revenue which was up 7.8%.

Business was up 0.9% underpinned by Fixed Data, up 6.9%, and offset by lower Fixed Voice and Mobile Services revenue. In November, we announced the creation of our Global Enterprise and Services business unit led by Brendan Reilly, consolidating Enterprise & Government, the Telstra Global Submarine Cable business and NAS.

Global Enterprise and Services was up 3.2%, underpinned by the strong growth in NAS and partly offset by weaker Mobile Services revenue. Wholesale revenue was up 9.8%, driven mainly by the NBN Infrastructure Services Agreement revenues and a growing prepaid 3G wholesale mobile business.

Turning now to media and firstly Sensis. I will make a couple of comments on the operational performance of Sensis in the first half, and then speak later about the transaction. Overall sales revenue for the half was down 13% with Print revenues declining 31.7% and Digital revenues up 7.5%.

Part of the decline in Print revenues was due to the Adelaide books where the revenue recognition will move to the second half of the year due to the timing of book deliveries. The Sensis EBITDA margin for the half year held up well at 20%, although the seasonality of this business is that most of the earnings are recorded in the second half.

Foxtel’s revenue was up 0.6% for the half year and EBITDA was up 6.1%. The EBITDA performance was partly driven by the continued flow through of the cost synergies from the acquisition of AUSTAR. EBIT was up 23.5% to $273 million.

Whilst revenue was only up 0.6%, customer numbers were up 5.2% underpinned by strong sales of FOXTEL on T-Box and reduced churn, which was down 1.8 percentage points to 12.4%. In Telstra’s books, the interim dividend received from FOXTEL was down slightly to $50 million and cable revenues down 1.6%.

There is considerable product development at Foxtel to stimulate further customer growth. Foxtel Play and Foxtel Go have already been launched with Presto, the new SVOD platform, due to be launched soon. The team are also working on plans for the launch of a new set top box IQ3 and a Triple Play offering.

In our other media businesses, revenue was up 2.7% to $379 million. PayTV was up 4.5% to $348 million with very strong contribution from Paylite, up 64.5% to $51 million. The success of the Entertainer bundles has driven significant growth in Paylite revenue. In the first half, we sold 124,000 T-Boxes. In addition, we saw a 12% increase in movie downloads with more than 100,000 users now streaming on average over three movies per month.

Digital Content Services revenue declined notwithstanding growth in subscription revenue from NRL, AFL and MOG. These were offset by the continued decline in feature phone services.

Turning finally to our International portfolio. Overall revenues were up 28.3%, or 15.5% on a local currency basis. CSL revenues were up 27.5%, or 13.2% in local currency, as we added a further 227,000 customers. Revenue from our China Digital Media businesses was up 53.8% in local currency with a very strong performance from Autohome.

Finally, Global Connectivity and NAS were up 9.7% to $323 million as we added over 50 new customers. In conjunction with our strategy to further expand Global Enterprise Services into Asia, we also launched new Cloud platforms in Hong Kong, London and Singapore.

Before making a couple of comments on productivity, I will take you through the key elements of the income from our NBN. Total NBN revenue in the period was $294 million. This included $136 million from the Commonwealth Government agreements and other Government policy commitments, $139 million from the Infrastructure Services Agreement and $19 million in PSAA payments.

We continue to amortise the revenue previously received for the Retraining Deed and Information Campaign and Migration Deed. In relation to the latter, the amortisation will conclude in the second half of the year. TUSMA net revenue increased in line with expectations.

Income received under the Infrastructure Services Agreement relates to the transit network which we expect to complete the buildup in the second half of the calendar year and access payments which will continue to increase over time in conjunction with the roll out of NBN.

Let me now turn to our expenses. Total costs grew 2.1% to $7.51 billion. Excluding TelstraClear and the impact of foreign exchange, expenses increased 4%. In the period, our additional investments in DVC’s and business growth were $230 million and $210 million respectively.

FX impacts added a further $110 million to our costs. As mentioned earlier, one of the key drivers of costs in the first half have been those to support NAS, although we clearly have more work to do to improve the efficiency of NAS and further improve margins. Against these increases, our Productivity and Simplification Programme delivered $230 million in net benefits to our expense position for the half year.

Turning now to capital management. I refer to the strategic framework for capital management which we presented to the market for the first time two years ago. And this remains the key benchmark against which we make all capital decisions.

The framework has the joint objectives of maximising returns for shareholders, maintaining our financial strength and retaining financial flexibility for investing in the future. In this regard, we continue to manage the balance sheet consistent with a Single A credit rating whilst as we have just announced, the Board has declared a 5.5% increase to the interim dividend to $14.05 per share on a fully franked basis.

As mentioned previously, our capex-to-sales ratio in the first half was 14.4% as we applied the additional investments to rolling out the LTE network. And we ended the half year with cumulative excess free cashflow of $1.8 billion.

In relation to some of the more detailed capital movements. Our total accrued capex decreased by 2.1% to $1.8 billion. This included the $650 million investment in the mobile network that I mentioned before.

Our net debt position increased slightly to $13.9 billion following the successful $0.5 billion Aussie issue in October. We have also reduced our average borrowing costs from 6.4% to 6.1%.

During the half, we were particularly active in portfolio management. We announced investments totaling $226 million. These included increasing our investment in Ooyala, the acquisitions of NSC and O2 Networks to further enhance our NAS capabilities,

DCA and FredIT in the eHealth space and into Box, a U.S. based -- U.S. cloud based file storage provider which were invested by Telstra Ventures.

We also slightly increased our investment in Autohome before very successfully listing this business in December on the New York Stock Exchange. Finally, subsequent to the year-end we announced the signing of an important Memorandum of Understanding to develop a joint NAS business with Telekom Indonesia.

We also made two significant announcements in relation to the sale of our 76.4% interest in CSL and 70% of our interest in Sensis. I have already mentioned to you how these have been treated in the results from an accounting point of view.

The conditions precedent that need to be satisfied in relation to both transactions are progressing as expected. For CSL, this is subject to regulatory and purchasing shareholder approval. OFCA, the currently relevant regulator in Hong Kong has been through a public inquiry process and is now in the process of reviewing submissions pending a decision which we expect on this matter will be before the end of March.

On Sensis, the financing and FIRB approval conditions precedent are progressing as expected and we expect these transaction also to complete by the end of the first calendar quarter.

Before handing back to David, let me make a couple of comments on guidance for the rest of the year. Our guidance for 2014 remains low single digit growth for both total income and EBITDA and a capex-to-sales ratio of around 15%. We expect free cashflow to be in the range of $4.6 billion to $5.1 billion, excluding the impact of the M&A activities that we have announced.

Thank you and I will now hand back to David.

David Thodey

Thanks Andy. It’s a good field for the details behind some of the numbers and we could take questions after I take you through just a little bit of an update on our strategy and how it really relates to results. As you know, we’ve got three core strategies that’s ready guide our every decision, firstly around customers, improving customer efficacy and that is a very simple but very complex sort of things to do, driving value from our core business and building new growth businesses.

So let me give you quick update on each of those and I will distribute quick update on NBN as well, just a very quick update. So firstly to improving customer efficacy, as I continue to say, it is our number one priority because it drives so much value for the company and shareholders. And we really are focused on creating sustainable differentiation through customer service and we focus on four areas, NPS, product differentiation, process improvement and then how do we create unique service experiences.

So let me go through each one of those. In terms of this NPS system, it is very important to understand that isn’t just one metric. It’s -- we measure NPS on every customer interaction, every episode that is when people do something with Telstra, every product, every process. And it really instills everything in the company.

We also measured what we call a strategic level, sort of, this perception level of what customers say when you ask them, would you recommend Telstra to a family, associate or a friend. And that is a very telling and very hard metric when you only got to count as an advocate when they score you nine or a ten. And every person who works at Telstra is a target, every person. From me, all the way down to a field technician. I should say across the field technician or to someone in front of house.

And so this is the way we run our business. So, I’m going to say much more about. I just want you to understand that it’s core to who we are. In terms of products, we continue to invest in a wide range of new products and drive differentiation. Just a few highlights. We’ve introduced the Telstra StayConnected product, which allows you to swap out your mobile device or replace it, should you lose it, also restores all the data on the device and it helps people to get back online very quickly. That's been a very successful launch and we had about 175,000 customers take up the service and the attachment rates about a third. So it’s been very good.

We are also introducing new Telstra Platinum service. It’s a premium service that offers customers end-to-end technical support both for connectivity but also for devices and applications and the early signs in that area is very positive. We continue to enhance a number of our products, trying to address Excess Data Usage, international roaming charges and we believe that we are really offering some great products in that area.

Thirdly, our customers do want simplicity. Therefore, driving process improvement is very, very important and we do this in association with NPS. But every process in Telstra has an owner. We measure. We try and understand how we can take cost out while actually creating a better customer experience. And so if you are talking the area like the online space, we’ve now increased the number of online service transactions to 44% of the total and that’s across all segments and that’s basically digital interaction.

We now have a third of our customers have chosen a paperless bill, and we also now have paperless contracts in the shops. We also provide 24/7 support, so our customer contact is 24 hours a day, seven days a week. You can also use the app on your mobile phone or you can call us you can use Live Chat, get on to Facebook, get on to Twitter. These are innovative good ways in which we can track with our customers. But you've got to change your process to do that.

Also, we are trying to build unique customer service experiences, things that what we say money can't buy. Since launching our banks loyalty program in March 2013, we've had over a million people who have enjoyed unique service experiences. There are things like you enjoy, Brad Pitt or you can go to Michael Bublé or Jessica Mauboy. These are things that normally we would -- a Telco wouldn't offer but we do now. So it's quite impressive. Also we offer movie, sports and tickets, movie, sports, music tickets and also we are going to continue to provide some really great experiences.

So when you are all said and done, what you really got to do, you've got to both lead in product network innovation and we've always been known for that. But we also got to be known for great customer service and experience. And of course if you get both right, it really creates value for our shareholders and for our customers.

The other areas around driving value from the core business and we often talk about our key domestic products and services, because they do make up the bulk of our business. And in those -- in this area, we really try to focus on three areas. One is customer and revenue growth because that's what drives good core businesses. Network leadership and then there is whole cost simplification focus that we've had for the last four years.

Let me briefly touch on each of those. So, I think, Andy is really taking you through some of the great results we’ve had across mobiles and fixed data. But let me just quickly remind you of those. So even though we think the market probably went backwards in the September quarter, we've seen one the fastest take-ups of 4G mobile of any operator in the world at 4.1 million 4G mobile devices on the network. We've also seen good growth in mobile services, which we’ve already taken you through 739,000. We've seen good handset ARPU growth of 2.1%, that's excluding MRO and churn remains at near record lows at only 10.6%.

Also as the NBN changes come, we're very pleased that we’ve continued to grow our fixed data services of 75,000. And so we continue to invest in improving the experience on the ADSL network. We have done a number of upgrades that if we cross 4,400 suburbs and also upgraded the cable network at 49 nods at 130 force suburbs. So we are keeping those networks and the customer experience at the right level.

Also as we’ve often talked about, bundling is very important because when you sell a bundle a customer signs up to two-years service and we now have a total of 1.7 million customers on a bundled plan. This is a very important part of our businesses we bundle and entertainment because we see this as a real differentiator, both today and in the future. So, I think from a custom revenue growth perspective, we had good results and we will continue with that focus.

In terms of network leadership, Andy touched on this as well. But again, $1.8 billion we have invested. It is very important we keep our leadership in 4G. Andy also mentioned that we are not stopping. We are going to continue to drive out further investments in those networks to improve customer experience and also to continue to drive more efficient capital allocation.

And then, lastly driving productivity through simplifying the business, the productivity program remains on track. This is hard work and we’ve got a great team led by Robert Nason during that, we could all the business units. We’ve seen benefits of $225 million in the first half. Important to understand that driving productivity benefits really gives us the right to invest in new growth opportunities in customer service initiatives and that's ready what we do.

Processes and service improvements led to a 9% reduction in December Quarter Call volumes for our consumer business. That’s very impressive, 9% reduction. So driving value from the core is critical. Given the scale of our core business, you drive enormous shareholder value and I do believe the potential to grow this business remains exciting. So that’s driving value from the core. Turn to Middle new growth businesses and I really want to focus more on NAS and Asia, at least initially.

We have a clear strategy in place designed to realise the opportunities that we believe exists across these portfolios. So let’s talk briefly to NAS. As a result I think straight from themselves, we've got significant capability in this business and it is a capability driven business and we’ve enhanced that with North Shore Communications and O2 networks.

But the changing nature of our business means that there is a changing mix in our expense base to support this very fast-growing business. Over the six months, we have successfully transitioned in two of the largest managed services contracts in the history of Telstra. I have already mentioned Defence and Health Services. But this includes the upfront transition, which includes a significant equipment, et cetera, so that there usually is a bit of a front-ended cost base in terms of these large contracts, so that’s NAS.

Turning now to Asia, we really have continued to focus in on what will we do in Asia. I'm very pleased about the restructuring of the business around the global enterprise services division, which will run our enterprise and government division here in Australia and also right across Asia and the NAS business. We are also looking for opportunities to leverage our core capabilities and optimize value in mobiles and that word is very important.

It’s really looking for opportunities to leverage our core capabilities and optimize value across mobiles. And we will continue to look for longer-term growth opportunities in that market. But we do have significant scale and scope in Asia. And many people don't understand just how big it is. If you just a few quick points on that, in the last 18 months we have opened 15 new points of presence internationally. So Telstra now provides customers access to 1,900 points of presence, and we operate in 230 countries and territories, 230.

We have invested in two new submarine cables, bringing the total number of cables in which we have investment to more than 20. We’ve opened data centre as Andy mentioned in Singapore and we now have seven data centres that we directly operate and we have another, the 11 that we have some involvement with, which brings us to a total of 18. So these assets position us well as we look to grow the NAS business beyond Australia and expand our global footprint.

Andy also mentioned the Memorandum of Understanding with Telkom Indonesia. And it will form a new joint-venture to provide network applications and services in Indonesia, which as you know was a very fast-growing market. Under the terms of the MoU, the joint venture will be the exclusive provider of these services in Indonesia for Telstra and Telkom Indonesia, giving both companies the opportunity to build market share in that fast-growing market.

It is a memorandum of understanding now, and we will move to file as contract as soon possible. Also last year, we increased our stake in order and that is the leading online marketplace for cars in China. It was listed on the New York Stock Exchange last December. Telstra has a 65.4% stake in Autohome, which has a market cap of around about US$3.25 billion based on the current share price, that's been an impressive investment.

Our strategy in mobiles is also to optimise value. Our decision to sell CSL is consistent with this strategy. In our view, the nature of the Hong Kong market is such that consolidation is important for long term economic reasons. So we feel comfortable with that decision.

I also want to mention briefly. The emerging power opportunities we have identified in health, Global Applications and Digital Media. Over the past six months, we have undertaken a significant amount of work in these areas. First, she held a decision to take a 50% increase in Fred IT Group is I think a good example.

The company offers e-health solutions to the community, that’s what general practitioners and pharmacists and is helping to overcome some of the issues that result from the fragmentation that we all know exists in the health industry. And it connects over 15,000 doctors and 3,900 pharmacies through its script exchange service.

So this is all about driving efficiency of information for us. In the applications area, I’m pleased to say that we continue to focus in on that area. We increased our equity stake in Ooyala. We launched our start-up accelerator program called muru-D and we are also continuing to look for at and a value of large numbers of new opportunities in Australia and globally.

In digital media, we believe in the multi screen experience. We think that this is a growing and exciting opportunity. Over the past six months, we’ve had 5,400 new significant take up the new entertainment bundle and we’ve now had 360,000 households registered for Foxtel Go and that is a 15% increase for the half.

We strongly support Foxtel's commitment to bring subscription video-on-demand service to the market and we’ve got a team working on that new platform capability right now which we hope will soon be available. The technology is built on leading-edge software platform Ooyala really is at the heart. So building new growth businesses is an ongoing priority for the company.

Let me now move on to make a few brief comments about the national broadband network. I just want to make it a pretty brief because we have commenced negotiations with NBN Co and the government. And what we’re going to do is as we achieve milestones we will update you. As you know we are ready to assist the government in achieving its objectives to move to a multi-technology NBN rollout, but we’re very mindful of achieving our objectives which are as follows.

We will act in the best interest of our shareholders, number one. Number two, we are going to maintain the value of the current agreements. Number three, we’re going to move to drive certainty of outcomes as soon as reasonably possible, and our intent is to try to enhance regulatory certainty. As for any additional road Telstra could play in the NBN build, for example doing more work on design and construction, we are very happy to consider any opportunity should they become available and prove commercially attractive.

NBN Co and the government continue to work through their process. They have completed their strategic review, of which the results were released last December. NBN Co and the government are now considering review and they will issue a new corporate plan. NBN Co also gained acceptance for their SAU, which is a special access undertaking and that's been approved by the ACCC. And on outside we signed the two-year wholesale broadband agreement with NBN Co and we continue to be focused on building the transit network which will be completed by the end of this year.

So let me just summarize, we delivered revenue, profit and customer growth which we’re very pleased with. We’ve increased the dividend for the first time in eight years. We continue to invest in our core business driving productivity and network leadership and we continue to focus on new growth initiatives having made several strategic investments in the first half of the year. And we are on track to meet our full year guidance.

Thanks for your time this morning. Andy and I will be delighted to take any of your questions and I would just like to finish by thanking the team that I work with are great team and while we’ve got so lot to do we are very pleased with our results at the half. Thank you.

Question-and-Answer Session

Andrew Keys

Okay. We will take questions here in Melbourne first and then over the phone. Good morning, Ian.

Ian Martin - CIB

Good morning. Strong results, well done. I think our strategy seems to be working in terms of the things you’re putting in place, hope exploit the fantastic operating leverage your company has. I just want to know why the guidance is still so low when you’re clearly abating that, first question. Second, just in terms of that operating leverage, the one area where it’s a little hit tricky given the declines in volumes is the fixed volume margin but it seemed to be at least largely making up the decline in margin on voice with gains in fixed data. Can you just -- now we got up half year of subscribers from NBN. I think a few months ago you suggested a 20% gross margins for Indian customers, it seems low to me and I wonder what experience that first half with is enough to go on there in terms of guiding margins?

David Thodey

Why don’t I just pick up that last one Mark and then I will get Andy to talk about some of the specifics on the half to half. You look on the NBN still really early days and we’re only talking about tens of thousands of connections. And remember the amount of work that we have to do to get less systems right and processes and it’s a very complicated interaction with NBN in terms of provisioning systems, transferring customers from there copper or cable across to the new NBN systems. So in terms of margins you won’t see ongoing predictable margin. I don't think for about probably now the year and half two years. You've really got to be in the hundreds of thousands millions of services before you get a stable sort of run rate on it.

So at the moment we still got a lot of work to do to really smooth out that process and get the customer experience data as well as managing costs, so that’s why I am seeing a whole lot on the margins at the moment. Do you want to talk to the half to half and some of those other questions?

Andy Penn

Yeah, 20% margin, I think you mentioned gross margin today. Yeah, I think that’s about we should target 20, 25 actually is where I would like to be, but as you know this has got market forces etcetera and we’re really going to drive a really efficient right customer experience. And that’s what a lot of the thinking is going into the moment, how you automate the process, how you make it easy for customers so you will have to truck roll and it’s a lot of hard work to be honest. And of course remember the way the NBNs rolled out, it’s not done street by street if Sam and so you got teams working one end of the suburb, another end of the suburb and so we think there is some better ways we might be able to do it, but working that one through.

Ian Martin - CIB

Okay, Andy.

David Thodey

Thanks very much Ian. The question on guidance is that well if you look at a guidance result for the half year it’s 3.3% on income and 6.6% EBITDA, so I assume you are sort of referencing the EBITDA rather than income. A couple of things, I mean, firstly as you know a guidance basis basically excludes the impact of M&A in the current period and it’s most of the FY ‘l13 base number. So you might recall in the first half of FY ’13 we had the impairment to the sale of Telstra so that’s actually depressing the first half of 2013 numbers relative to the first half of 2014 and that will even itself out over year. so that will have an impact and the second probably key driver is also the census because we provide this on a pro forma basis excluding the impact of M&A, has sharper decline in the second half here in terms of earnings than in the first half and so that would drag back down on guidance basis as well. So when you take those two factors into account in conjunction with the business generally, then we’re still comfortable with the current guidance that we’re providing.

Ian Martin - CIB

No, no. You get that.

David Thodey

So obviously we’ve got fixed margins, which was the other?

Andy Penn

Great. I will just one comment Ian. I think the underlying operating performance of the business sounds good. So there is some just anomalies in the half to half.

David Thodey

The other question is really on the license fixed margin, so I think you probably answered for us which is that we saw a 1 percentage point decrease in fixed voice and a 1 percentage point increase in fixed broadband and that is very much reflecting the changes Ooyala fixed voice enjoys a EBITDA margin of about 60% and declined 7.3% in the first half. So we are pretty pleased that we continue to probably get across the rest of that business and productivity that means the margin impact was only 1 percentage point. Fixed broadband is benefited just from again the increasing scale there.

Andrew Keys

Thanks, Ian. Good morning, Raymond.

Ian Martin - CIB

Good morning David. Good morning Andy. Just three question, just firstly in mobile just the margin improvement you mentioned was driven partly by handset subsidies and do you think you are at the right levels at the moment and balance I suppose to growth in margin and do you think that there is further scope for sort of (inaudible) go down a bit more?

Andy Penn

Why don’t you go first, if you like to go.

David Thodey

No, no, no.

Andy Penn

So you are right that was the part of the reason the margin improved 2 percentage points but it also improved because we got ARPU growth and data monetization and also continued productivity and Sky growth as well. So activations were slightly lower in the first half of this year relative to last year so that would have been one. Cost of mobile phones has gone up slightly, but the cost of customer contributions as well as gone slightly more than that.

So it has had an impact but not a huge impact. So I think the more important point is actually the value of the overall mobiles proposition. We continue to invest very heavily in the network that’s clearly demonstrating in itself in the factor we got very, very strong customer growth and also the value of the overall product and innovation we are doing at the product side of the innovation that David mentioned as well. So I think the overall value production for customers is pretty attractive and I think that demonstrated by the nearly three quarters of a million of exercise that we had in the first half.

So I was just going to make a very similar comment. I think the balance is about right. I think what we have got to be very attuned what’s going in the market, but when you got a network of the size and scale and breadth that we’ve got, it’s a great value proposition and our job is to make sure people understand that get great experience and continue to price for value.

David Thodey

(Inaudible) just in terms of the cost sale, I think online cost is up 4% probably due to sort of the decontracts and investment in mezz, can you talk about I suppose when that looks to the second half with that investments is going to continue and when do we I suppose expect to see the inflection point in the earnings for ASP contracts?

Andy Penn

Look at a general level you see it’s the first year to two years on a big sort of five to six year contract that you have a bigger cost bubble, but look my our viewing is that going into next financial year you should start to see some data clarity about how we are driving data methodologies send as a confidence to drive margin of these contracts.

Andrew Keys

Thanks, Raymond. Operator, could we please take some questions from analysts on the phone.

Operator

Thank you. Our next question comes from Mark McDonnell at BBY.

Mark McDonnell - BBY

Thank you. Good morning gentlemen. Three quick questions for me. Firstly David on the NBN, thank you for the very helpful clarification of your objectives. I am wondering if you could comment on the timeframe for the renegotiation, your expectations if not absolute worse case but should we say that the mid case outcome is 6, 12 months. I am just curious to know your thinking about that?

Secondly with regards to your comments about supporting Foxtel, I am wondering if you could shed some lights on what the nature of the problem was with the aborted launch of the (inaudible) service and again long is it likely to be before that service is up and running?

And thirdly in relation to the capital management, I am just wondering if I know you in the past you stated that your preference is to pay fully frank dividends as the preferred methods for capital return, but given that you franking credit balance is quite large, obviously find the number in the accounts but based on the amount of the tax you are paying and I suspect that it’s you are running very close to the wire. I’m just wondering to what extent you are looking at other options including, for example share buyback. Thank you.

David Thodey

Great. Thanks, Mark. I will let Andy take the third question, but let me take the first two. Timing is very hard to comment. We’re really driven by the government on this one. Been obviously -- Mark, we would like to get it done as soon as possible as I'm sure the government would. And it’s just a little bit too early to really give any indication of that because it's just been the last few weeks that people got back from leave and they started the process. But what I will commit to you is as soon as we've got any sort of sense of milestones we’ll let you know that it would be not appropriate as we just don't know at the moment. So we’ll keep you posted on that one.

Your question on the Foxtel Presto and the platform, yeah, look, it is light and it’s related to two things. One was just the integration of a number of different software products to really give this type of customer experience we wanted to give. And that took us a bit of work going up into Christmas. And then, Hey 'Presto, one of the interfaces that Google was providing us was pulled and we had to go to option B, which sometimes is just the way it is. But look it is imminent. I won't announce the date but it's very close and we are very keen to get that product into market and to support it both through Foxtel and looking at how we can also evidence to Telstra bundle. So that’s the first two. Andy, do you want to take the capital management?

Andy Penn

Sure. Good morning, Mark. On capital management, we don’t actually include the Franking balancing the half-year accounts, it isn’t a full year accounts, that’s why you cannot see it. But the full year amount recorded was slightly negative and it’s sort of slightly negative, so that’s the situation with the Franking. Yes, you're right and we stated in our framework that the Board's position is the preferences of shareholders like fully Franked dividends. And as I have maintained in the past, I think we will be able to that over the longer term. Firstly, we’ve got to get sustained earnings right in places we are continuing to achieve that.

And secondly, we don’t expect account to the extent of that comes from offshore and doesn't generate Franking, we will need to have a payout ratio which is less than a 100% which we have achieved last year as well. You might recall the government's policy decision to change the installment basis for corporates this year comes in.

So effectively what that means in 2014 financial year, we will pay in cash flow terms $14 months of tax and given that we pay $1.8 billion a year in tax that has about another $300 million with the Franking into account in the second half of the year. So, I don't have any particular concerns on franking.

I think more broadly your question was in relation to capital management share buybacks et cetera. I think look, all I can say is that obviously keen interest in what we think about, when we think about capital management that’s why we provided the framework that we have, obviously, if we had something to announce we would. But what I would say is that any decisions that we make will be firmly in line with that capital management framework and certainly not before we receive proceeds from transactions because they still have to go through and meet regulatory approvals et cetera. So, I think that would be comments, David.

David Thodey

Yeah. And look, I can’t just reinforce marked at the borders, really active in their capital management considerations and will continue to be.

Mark McDonnell - BBY

Thanks very much.

David Thodey

Okay. Operator, next caller please?

Operator

Thank you. Your next question comes from Fraser McLeish from Credit Suisse. Go ahead, please.

Fraser McLeish - Credit Suisse

Thanks very much. Just couple from me. Andy, just on the guidance I just want to be that clear, the growth of low single-digit from the $10.6 billion base that includes Sensis EBITDA, does it?

Andy Penn

Yes, it does. It’s because effectively the way in which we do guidance and it obviously becomes more complicated in a period when we have M&A, is that we remove the impacts of M&A from the current period. So it effectively remains a TelstraClear. Impairment is still in the FY ‘13 base but we need to adjust FY ‘14 for any M&A that we do in FY ‘14. So the answer is yes.

Fraser McLeish - Credit Suisse

Yes. So we add in Sensis and then take it out again to get to the number on a reported basis.

Andy Penn

So, Fraser, probably that has been complicated but obviously that’s the only way in way which we can really do guidance.

Fraser McLeish - Credit Suisse

And just David, the other question I wanted to ask is just on the efficiency savings. Looks like there is sort of run rate a bit less in the half from what it has been tracking out for the last few periods. Is that slowing down the amount of savings you can get, or you are still feeling pretty proposed to -- there is some plenty of savings you can continue to drive going forward.

David Thodey

Look, it’s primarily timing, Frazer. It is list for the half. We’ve got a very active set of initiatives to drive out in the second half. I’m looking at Robert and he’s nodding at me saying you can do it. So we are still targeting at that gross level, the $1 billion. So we’ve got to do it. We got to keep at it.

Fraser McLeish - Credit Suisse

And there are few more years to go in that on that sort of level.

David Thodey

They get harder Fraser. But yes, we think, we can do it. And we are currently planning for the next two to three years, $1 billion a year at a gross level. It’s not easy work but committed to.

Fraser McLeish - Credit Suisse

Okay. Thank you very much.

David Thodey

Thank you. Next caller please, operator?

Operator

Thank you. We don’t have any other questions registered at the moment.

Fraser McLeish - Credit Suisse

I will just ask two at this point. The Asia growth strategy, I think looks quite promising. Can you just give us a little broader indication of level of resources going into that? I saw a media report recently, I think when the Singapore data centre was opened, it was about 20 million, I guess that’s excluding the infrastructure?

David Thodey

Yup, Yup. Well, with we both doing two things, both were investing capital as well as people. In terms of business development and new initiatives probably close to 100 people and neither were put into that sort of area. In terms of capital, in terms of the cables, cloud, you got that number for thought?

Andy Penn

It’s pretty modest, Ian, but it will be less than a GBO100 million.

David Thodey

Yeah, less than a GBP100 million. What we are trying to do is find areas where it doesn't take enormous risk. I mean, let’s take the JV with Telkom Indonesia, that's a services business. There will be we capital required but it's not like going in and acquiring enormous business that you may or may not have great experience and so its about setting foundations that we can grow over time in fast-growth areas. And so we'll continue to look for those sorts of opportunities going forward and we got a good base to that from.

Fraser McLeish - Credit Suisse

Okay. You might have comment about leveraging mobiles as well which is kind of curious when you assault CSL. How do you leverage mobile into Asia?

David Thodey

The awards were carefully chosen. I didn't say going by mobile operations, firstly so just it shows what I didn’t say. But what we find is that Telstra mobile engineers are probably some of the most respected engineers in the world. We’ve built this great capability under a Mike Wright and the team near that have really been at the forefront of the deployment of large mobile networks that really take advantage of new spectrum. And we’re finding this quite a lot of opportunities where we could partner with operators to help them in the deployment where we really lifting our capability. Now we need to see how that plays out but we think that's a good opportunity.

Andy Penn

And David, is it worth mentioning, the point on CSL, so appreciate one level unit and at a high level that could look contradictive. And the bottom line is, I think is have a very successful business in Hong Kong. But the Hong Kong market is really in need of consolidation as five players in the market of only eight million people and indeed this and Spectra changes which are upcoming, which are only going in a sort of thinking character market to open up more.

So we’ve been strongly of the view that market will benefit from consolidation. And having looked for opportunities in that regard, we are economic rationalists. And the offer that was put in front of this was a very attractive one, because it took advantage of that consolidation opportunity. And that's why as David said, we’ve chosen our awards very carefully that it's about optimizing value and our view is this is the right time to optimize value on that asset.

Fraser McLeish - Credit Suisse

Okay. On the regulatory front as well, as I noted one of your Indian objectives is to try and provide some -- encourage some regulatory certainty. Good lucky with them.

Andy Penn

While that's going on, the ACCCs is going to start its fixed services review, resetting the range of fixed line services, access price services from July. I think last time that happened was terrible for our investors. It was terrible for your shareholders. They actually seat back several times doing your way they were going.

Billions of dollars lost by your shareholders. I notice you put out it in a debt prospectus last year, you warned debt investors that these pricing arrangements forcing the price below cost. Most of the risk obviously is held by equity investors rather than debt investors. So, I just wonder what your advice is to shareholders about that upcoming review and what’s your expectation given where we were last time?

David Thodey

Well, certainly a really good questioning because as you know regulators have a mind of their own. And we have to be very actively involved in which we are. And I think there's a number of considerations as we go into this review, remember you've got the NBN on one side versus the copper network.

And I think that in terms of looking after the interests of the consumer that factors going to have to be considered. Also in terms of the copper network and specifically fixed broadband network, there is some principles from the electricity industry about core capability of infrastructure to support the future.

Kate McKenzie gave a very, I think insightful presentation about the impacts of contention to consumer experience. And if investment does not continue in some aspects of the copper network of like fixed broadband, there could be serious consequences for consumers. I think there is some other mitigating factors here that need to be considered as the ACCC deliberate and we will be very active in that process on OREO. I think its better I can say for now.

Fraser McLeish - Credit Suisse

Okay. Thank you.

David Thodey

Question from you, Raymond and then we’ll go back to the slides.

Raymond Tong - Goldman Sac

Just two further questions, just in regards to the NBN payments, the infrastructure payments. I think is the $139 million, it was up from about $60 million in the second half. Just and how should we be thinking about those payments and how they ramp up in the second half into FY’15 just given the transit network is due to be handed over by midyear.

David Thodey

I think maybe the way to think about it, Raymond, is that the infrastructure service agreement payments, obviously are largely to do with the transit at the moment because the level of rollout from NBN is obviously quite modest. So you can assume that that’s going to continue sort of at the current level and then it’s going to be subject to the level of rollout of NBN, PSI, similarly is obviously going to be a subject to the level of rollout of NBN business sort of more or less sort of at a full levels. So that’s going to sort of trend in same path that you can see there and then the information campaign and migration that will -- the amortisation will concluded in the second half of the year.

Raymond Tong - Goldman Sac

So, we should be expecting $140 million for the second half is that sort of what you trying to say?

David Thodey

I don’t recoup, the numbers out there, but I think you are making assumptions about the rollout of NBN and I try to sort of tell you those numbers which in Sensis fixed and those are the subject to the rollout.

Raymond Tong - Goldman Sac

And just secondly, just in terms of I suppose the free cash flow targets and guidance that you put out before of $2 billion to $3 billion, can you maybe give an update to that, I think you have about $1.8 billion at the moment?

Andy Penn

Yes. Also just to sort of reflect back on that, so that was something that you communicated to you two years ago in April of last year and we said over three year, so that’s in a year’s time as you rightly point out we are $1.8 billion at the moment. It was also subject to the rollout of NBN and of course, it’s the number of very significant transaction since then.

So basically, if these transactions consummate and that’s going to add approximately $2.5 billion of accumulative fresh free cash flow between now and the end of the second half of the year, so on that basis we will be well beyond the $2 billion to $3 billion within the second half of this year.

Andrew Keys

Okay. Operator, next caller please.

Operator

Thank you. Your next question comes from Sameer Chopra of Merrill Lynch. Go ahead please.

Sameer Chopra - Merrill Lynch

Good morning. I just had two questions on the NAS business if I can. First of all, you spoke about as a NAS contracts are digested that were will be changes in the OpEx structure and the margins from these, can you just give us a sense for what we should expect on labor and service contracts like what happen next year as a defense contract hits maturity? And the second one was Asia NAS pipeline, if you can give us a sense of what the pipeline in Asia looks like? Thanks.

David Thodey

Okay. Sameer, yeah, look -- the way these services businesses run is how as you bring on new contracts as you set up competences across multiple customers. So let’s take an area like managed WAN or managing large complex IP networks.

We have picked the contracts from IBM, we have got health and defense, and the key capillaries how you drive consistent processes across all three, so you get the leverage of scale.

I mean, in any one of these services businesses you would expect in the area of mid 20s type margins and that’s where we are really focused on at the moment. We are doing, okay, at the moment, but we think there is more to be achieved.

Also, you have got the big outsource contracts but then you have got the what we call the disciplines, disciplines around unified communications, video conferencing areas like building out the emergency mobile networks in Queensland for G20. We are doing a quite a bit in the health area. And so they are specific individual what we call integration projects and again they can range from 25% to 35% type margins.

So two different types of business within the NAS portfolio and I think the challenge for the team and for me as well is how we really drive that scale productivity but we think we have got good opportunity to do it and that’s day-to-day blocking and tackling that we need to do.

In terms of the pipeline across Asia, yes, look it’s pretty strong actually. We have seen a lot of activity as we build out our presence in Southeast Asia. We have got to do more work as we get in to North Asia I think. We have had a lot of interest in the core international carriages coming in, companies coming from the U.S. into Asia and China, a large number of contracts with the large IT vendors doing very well, what we call over the top vendors but that’s not managed services that’s more core carriage. But we are very pleased with the sort of initiatives we are seeing, we are seeing quite a bit coming out of Korea, South Korea.

Again, that’s why we are having to increase our coverage in the market and so sales if its now we get the capability. So early sign is good. Overtime, I think, I will be give you more of a idea of pipeline and what contracts we signed in the quarter and Brendon Riley who is running a business, he is very familiar with that from having run IBM Global Services throughout Europe and in Asia, so couldn’t think a better guy to do it.

Sameer Chopra - Merrill Lynch

Thanks, David.

Andrew Keys

Operator, next caller please.

Operator

Thank you. Your next question comes from Sachin Gupta from Nomura. Go ahead please.

Sachin Gupta - Nomura

Yeah. Thank you very much. Just have a few questions. Firstly, on the PSTN business, the decline seems to be improving, is that something you think you can continue, are we getting to the bottom of this decline?

Secondly, you have fantastic mobile margins, just any thoughts on where you think the mobile margins could go from here on a 12-month or like 24-months view?

And lastly, just on these Asian strategy once again, you have talked about enterprise and mobile, I mean, I imagine enterprise would be looking to form more alliances, I am not sure I entirely understand what exactly the mobile strategy in Asia? Thanks

David Thodey

Okay. I will back few comments and Andy can maybe pick up a few too. Look, PSTN decline, yes, look it’s a good six months result. Remember, you have got NBN coming and so I think you have got a fact that, I would be delighted PSTN decline so about the same level. But it really depends on how quickly NBN ramps up to make a real estimate until we got through the negotiations we really don’t know the answer there.

Mobile margins, we think they are about where they should be. I think that while we don’t have a forecast on margins, we always said high 30s, so it was about where we would like to be. I think in any period you might get ups and down depending on a lot of factors go into that especially around our basement cycle and the network, what happening with the handset vendors and of course, we like competition with handset vendors and long way that continue.

So I think that’s better around the high 30s is where we should plan to be. But maybe I can just help you on this Asia strategy, because isn’t that difficult, it’s pretty simple. In the enterprise government sector, where enterprises and government’s need large complex projects with large IP core networks that’s what we do, have done, always will do for many years in Australia and throughout Asia and that’s a good business.

That includes cloud computing, I mean in Australia, the computing market is about $12 billion market, so if you want to extrapolate that through into Asia, it’s a very, very big market. You take very much share, get good growth so that’s a great opportunity but its all around managing complex networks for large enterprising government customers. Put that aside you got that one? That makes sense Sachin?

Sachin Gupta - Nomura

Yes. Thank you.

David Thodey

Okay. Mobile is completely separate. Over the years, we have looked to buy mobile operators around the region, they are very high multiple and very hard to create value for shareholders.

So rather then doing that we are working with other operators where it make sense to basically export our talent and capability to help them build differentiated networks and that may take many different commercial constructs, but it has got far less capital investment, let’s not to say we want to put capital out there, but it’s just a very different model more of a partnership model. So that’s what we are doing in the mobile business and will see how we go over the next couple of years. Is that makes sense?

Sachin Gupta - Nomura

Yes. Thank you. I think that’s fine. I appreciate it.

David Thodey

Okay. Right. Overtime, I will be able to speak you more about it. Okay.

Andrew Keys

All right. Operator, next caller please.

Operator

Thank you. Your next question comes from Richard Eary from UBS. Go ahead please.

Richard Eary - UBS

Good morning guys. Just a couple of questions from myself, I mean, if you look at the revenue base now coming through that, there is obviously an increasing contribution from NAS and international products? Can you just give us a sense of actually where the profitability is trending within those products given the growth rate? That’s the first question.

The second question with regard to obviously deployment of capital and obviously, talk around Asia, how confident you are -- are you obviously delivering a better return to shareholders in Asia than obviously the work that you are delivering domestically, some sense in terms of guidance around that and how are you thinking that would be great?

And then just lastly, if you look into the market pricing, obviously we saw a little bit of increased competition in the market towards the backend of December, there is obviously new plans out coming through this year and understand that you are trying to make some changes in terms of your plans as of this March, I just wondered if you can sort of talk around how you are actually viewing the market at the moment and how you see that trending over the next six to 12 months.

David Thodey

Okay. While I get, Andy, to talk to the profitability of the business in Asia and NAS, but as a couple of sort of introductory comments. It still in the early stages which about continuing growth, it’s still in terms of the total not significant. But I remain incredibly positive about the opportunity and I will make some comments about what I think the work we conduct in Asia at the moment. But let me get Andy to talk just to that one and then I will pick up on competition.

Andy Penn

You can…

David Thodey

I actually got e-commerce, we can …

Andy Penn

No, no. Sure. Well, sorry, firstly, I think in relation to profitability, international definitely we are growing profitability there if you look at the underlying businesses that we own during the period and also (inaudible) growing very-very strongly and as demonstrated by success following the listing the Telstra global business continue to improve profitability and also see ourselves we will be able to see we have entered into an agreement to sell that nonetheless in the period grew profitability.

So on the NAS side, profitability on NAS did not grow in the first half but that’s for the reason we have already converse in a very detail why in relation to the contracts that we have taken on but as David has mentioned, aspiration will be now to improve the profitability of that over the time.

Having said that, we wouldn’t expect NAS services business to enjoy the same sort of margins that we do on our carriage business and as in relation to international we have function as the nature of the businesses and I think realistically moving forward they are going to be more entitled towards global enterprise services NAS than they are carriage businesses for the reasons we have discussed strategically.

So, I think, there the points around the evolution and I think the points on route will follow that as well. So obviously in our call infrastructure based carriage business, our mobile businesses, our fixed line businesses, they are large capital investments and relatively large EBITDA margins to reflect the level of capital we are investing, whereas the services business is tend to be more capital light and slightly lower margin but nonetheless they are going to require capital in the early days to support the growth of those businesses.

So I mean there the contextual comments I would make David, I think, we interestingly for you, we actually published for the first time in my presentation the right number at a group level because I think its really important number and one that you are sort of putting your finger on there which is the way focusing on very hard in terms of making the internal capital investment decision that we need to make.

David Thodey

And look and I think that’s exactly right. I mean, Richard, its an area that we spend a lot of time on because as you build out sort of the services side of the business, it does have a different financial structural amount, considering amount of capital you need to put in and how you drive the terms we need to be very careful about how we mange it, how we report it but when you look at Asia and you look at the incredible growth that is in all those markets and as you know it’s a heterogeneous, and as you build capability and the desire and opportunity right across those markets, I think one of the things that we bring is great capability, I personally think it’s a great opportunity for Australia, not just for a company like Telstra.

And I think, well, I am hoping that there is a lot of support for it because as in Australian domicile company with such a great legacy, I think we have got a great opportunity to grow. Now we need to be considered about there because we are very conscious of shareholder returns and our life retail shareholder base as well.

But it’s -- I think it’s a land of opportunity. Now just because you go there it doesn’t mean you make money, you got to be really disciplined, you got to spend time understand markets but we have got 75 years of history and that’s actually if ever travel overseas actually put us in an incredible state whenever we turn up to these market.

Now, so, I think we can get good returns. We will not do unless we can. Now, it may take a couple of years to get to the terms we need, but we will only do it if we can. When you turn to the competition in the mobile’s market, look I remain an eternal optimistic, Richard, about the mobile’s market. The demand for parts and services remains at all time highs.

The innovation going into that industry is second to none, everything is becoming mobile-lead and I know that you have different views on it. But I think the returns from this business will continue to be strong for a numbers of years. Now, there will be periods of high competitions, there will be times when pricing moves around but when consumers and businesses are dependent on the service, I think the opportunities are enormous. So yes, we will continue to have the normal skirmishes we have in the market and that long competition would be rich and vibrant. But we're well prepared and we will continue to run a balance business and drive differentiation. We’ve never been a price point and never will be, but we will look for differentiation at all level. So yeah, a little bit more noise in the market, but we're ready and upward.

Richard Eary - UBS

Okay. Can I just ask you follow-up is that I mean, I think Andy or David, yourself mentioned that obviously the transit ring for NBN which is obviously this last two three deployment will finish at the end of this year which obviously I think will result and obviously capital intensity is falling out in '15.

But if we're looking at obviously the growth in NAS and obviously from a Global Services point of view, in terms of a delayed return would obviously capital investment upfront. Should we not think about capital intensity dropping in the business in '15 but more been held at similar levels. I know this is obviously not in the guidance. But I'm just trying to get an understanding that we're pushing more growth in NAS and Global and is that delayed impact to the capital investment upfront. Are we not going to expect to step down as the sort of metro reign CapEx comes out in ‘15?

Andy Penn

Richard, it's Andy. I mean I think as you probably recall, we -- within a framework we've set to them medium term. So the target on capex-to-sales ratio at a group level is 14%. We increased that to 15% for the last year and this year which got us another $0.5 billion to invest in accelerating the OTA rollout as well as supporting the NBN transit duties you point out. You're right, I mean looking at the capex-to-sales ratio at the group level is sort of accrued instrument we don't look at it like that.

That's just why we reported for the market to be helpful, but I mean we obviously give it -- look at it more granular level business-by-business, notwithstanding that, I don't actually think the points of Chinese that we've discussed in material and after change their views around 14% is the right sort of medium term number. So we will complete the -- we'll say complete, we have completed the obviously, the additional rollout of LTE and we’ve got a lot more planned on mobiles, but we believe we can do that within a capex on blocks.

Richard Eary - UBS

Okay, thanks guys. Much appreciate it.

David Thodey

We have about 10 minutes left in this briefing. So probably time for another couple of questions. Thank you, operator.

Operator

Thank you. Your next question comes from Laurent Horrut from CLSA. Go ahead please.

Laurent Horrut - CLSA

Thank you very much. Thanks David and Andy. First off, let me just say, I think you've done a great job at recovering some pretty tricky situation in 2009. And but -- enough with the flattery, I think you've done a great job, but I'm going to ask you some tough questions now?

David Thodey

Okay Laurent.

Laurent Horrut - CLSA

All right, first one is Andy, I’m a bit intrigued by the difference in accounting treatment between Sensis and CSL because if you say you, you're discontinuing Sensis. You still have the trading post, you still have to your locals. I don't really understand how different the two transactions are and well beyond that, what would be the best way to work a true FY‘13 pro forma based. It is just to check 248 from CSL out of the number, the restated number you published. And just --Andy, another subset on that is EBITDA consensus for FY‘15 is roughly $10.8 billion. You're assuming a slightly better guidance and I just can’t get there. So I'm just wondering how comfortable are you with that sort of forecast in the market, that's my first question? You want me to ask all my question or I go one-by-one.

Andy Penn

No, I'm happy to tackle that first one.

Laurent Horrut - CLSA

Okay, okay.

Andy Penn

I mean look at -- just in terms of the different statement in Sensis and CSL is a decision of the accountants can I say rather than necessarily. I mean basically the premises as I outlined before that Sensis is predominantly a print advertising business and we have pretty much got out of the print advertising business as the consequence of the sale of that asset, notwithstanding your point of that trading post.

So I mean to all intensive purposes we have exited the print advertising business. CSL is a mobiles business which is very, very different. We are definitely not out of mobile business as they are core business of ours and in the end to balance, that is fundamentally what drives the advice from the auditors as to why we need to treat those businesses in the one which we treat them.

So I can’t really add any more than that. I’m afraid it’s -- it's account adjudication and that's why -- I'm not quite sure I fully understood your question in terms of how you need to do with the pro forma. But I think when we're looking at guidance we need to think that guidance basis is ignoring the impact of M&A in the current period.

So we need to sort of say well let's assume we didn't exit Sensis and indeed the transactions and consummated yet. We’ll see it sell for the rest of the year. And then looks -- let’s look at what our result would be likely to be. So we have to make some judgments as to how those businesses were trading relative to their plans in consolidation with the rest of their business performance. And we are very comfortable with their guidance of low-single-digit growth at that time.

I can't comment on obviously what the market is saying other than to say that we also keep a very close eye on what the market thinks that result would be and well we do see a significant difference with what we saw our results would be. Then we would have a disclosure obligation which we would obviously need. So I think you can conclude from that. We don't see that difference we're comfortable with guidance and we’re comfortable with how the market thinks we are performing.

Laurent Horrut - CLSA

Now that makes sense. Just exactly and so you restated EBITDA '13 [10168]. So do we take 248 of CSL to get to the real number for '13 that was CSL contribution in '13. Is that how we should approach it?

Andy Penn

I don’t think you need to take CSL as a tool but I mean what we did, we did publish the note on how we have restated the accounts. And I can point to you to that. If that doesn't clarify your question maybe you could raise it with Andrew Keys at Investor Relations. And we will add to the transcript from this briefing any further clarification that is necessary.

Laurent Horrut - CLSA

Great. And now question for David. David, historically, you've always indicated that you think Telstra should stand between 14% and 15% of capex every year. My question obviously in the context of NBN, is there any potential capex events over the next three years. That would mean you have to spend much more than 14%, 15%? And how would you in the context of a potential involvement in NBN, is there a scenario where Telstra does have to spend it's own capex towards an NBN rollout?

David Thodey

Under the current contracts, no. There is no significant capital requirement and anything that is in place. So if that was to change through the negotiations and we believe it was in a business to shareholders, we would consider we would come back until to data, but there was nothing that you should figure into your spreadsheets more.

Laurent Horrut - CLSA

Okay. Fantastic. Subset please, just each structural separation off on the table today. Is there a scenario where in exchange for your involvement, further involvement from Telstra in the NBN, there is a caveat, particularly maybe HFC where by you could actually retain some of our declined assets or I should say access networks. And very last one to Andy, if you had the choice of doing three options at delivering the same NTD, one was reinvestment in the domestic business, second one was in M&A opportunity and the third one being capital management and buyback all delivering the same NTD, what would be your preference?

David Thodey

I think, I can answer your first question. We are not concerned of any structural separation. That's the first one and the answer on the second one, I’m sure Andy is going to give you.

Andy Penn

Well, no, no it sounds like a multiple choice. So I would just love at school, but -- now look I think it's quite a simple answer and I think we've already articulated in capital management framework which is that -- where we would on to take an acquisition, it would need to show benefit ahead of buyback at a similar level.

So we're trying to make sure that we helped ourselves of that discipline. But I think also in that capital management framework, we said that clearly, this is about looking to increase the dividend over the longer term. What I'll say consistently is to do that we have to grow earnings and to grow earnings, we need to continue to reinvest in the business. We can do that organically.

We've invested a $0.5 billion over the last couple of years in addition to what we normally would really continue to solidify leadership in mobile networks. And we'll continue to do that. And then we've also announced $226 million of acquisitions as well to support NAS, to support eHealth, Telstra Ventures. So the good news is I think we're in the strong position to find those opportunities but also in a very discipline line.

Laurent Horrut - CLSA

And just Andy, how is the M&A environment in Asia in terms of multiples in variations, I imagine it’d be quite tricky?

Andy Penn

Well, I think, Laurent, I think Andrew was going to throw our mike. This is the last question which we must because we do have a few other people. But -- what I would say really we just repeat what David said earlier. I think in the core infrastructure business, in mobile businesses, which is why strategy of mobiles is quite settled is that the multiples are very difficult to see right shareholder value from, but nonetheless we do see opportunities to leverage their capabilities to add value but unlikely to be through sort of acquisitions of existing large incumbent mobile players unless something radically changed.

David Thodey

Laurent, I just want to put a qualifier on my comment. To the four principles, I laid out I was going to say there is nothing off the table because it was a base interest of shareholders then I'll do it. But today, we have never seen the structural separation generates real value for shareholders. But if during the course of the negotiations something was put to us that drove even more value we would consider. So I just want to be absolutely clear, nothings off the table, but we do what we know today that I would actually comment on.

Andrew Keys

Okay. Operator we have time for one more caller. Thank you.

Operator

Thank you. Next question is from Paul Brunker, J.P. Morgan. Go ahead please.

Paul Brunker - J. P. Morgan

Thank you. I've got a quick one. So in terms of mobile business, could you see any change in momentum during the half or since the half and did -- thinking about what happened to Vodafone numbers over the course of the half but you saw deal gains had to face steady pace or light tailed off towards the end of the half. And just quickly on the Belong brand, obviously it's going to be one to rolled out nationally. Any comments about where you see those subs coming from what portion of non-Telstra subs? Thank you.

David Thodey

Yeah Paul. Could you just give me a little bit more in your question about your reference to Vodafone? What were you referring too?

Paul Brunker - J. P. Morgan

Just referring to the fact that their sub losses were very heavy in the September quarter and much less so in the December quarter or low number this morning for December went for a good. So I was wondering whether you've seen most of the gains happening early in the half and momentum tailed or was there steady-steady pace over the half?

David Thodey

Well, yes, I think you're right. Both other operators have reported negative quarters in the December quarter. And as we go into the -- just getting some help here.

Andy Penn

That’s right. Just pointing out to David that we did announce at the first quarter, I think in our analyst at Investor Day at SIOs in the first quarter which I think from a collection were $235,000 in the first quarter and we just…

David Thodey

739.

Andy Penn

Yeah, I think where Paul is going is sort of early signs. Look the markets got little more heated up but really dice the quarter I'd say. And so no I'm confident we got a great team in mobiles and well attuned what they need to do. And we believe in the strong momentum in mobiles and we will do what is necessary going forward. But we are a valued based player.

In terms of Belong brand, look -- when we went through the Belong business case, obviously what you've got to consider is a lot of substitution is going to take place. So you were just moving your own customers from your own branded product to another brand. And of course that wouldn't be a very sensible thing to do. We are very targeted around the Belong brand about where we want to be that to be strong, just like we are in the Boost brand as well. And as we ramped that up in the next quarter and the half, hardly we will see net editions coming forward. Okay.

Paul Brunker - J. P. Morgan

All right. Thank you.

Andrew Keys

Thank you. It’s the last of the questions. David would you like to make some closing remarks please.

David Thodey

Look -- thanks Andrew. Look all I think all I can really repeat is that it’s been a strong half. We’re pleased with where we’re at. But as always in this industry, you never risk on your laurels and we’ve got a lot of work to do as we go ahead but just deliver revenue, profit and customer growth. It’s great to see increase in dividend and also the confirm guidance. I think we’re in the right place at the half but now we move onto the next half in the next year. So thanks very much.

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