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Executives

Andrew Keys – Head-Investor Relations

David I. Thodey – Chief Executive Officer

Andrew Penn – Chief Financial Officer, Director-Finance and Strategy

Analysts

Mark McDonnell – BBY Ltd.

Fraser McLeish – Credit Suisse

Raymond Tong – Goldman Sachs

Sameer Chopra – Merrill Lynch Equities

Sachin Gupta – Nomura Singapore Ltd.

Richard Eary – UBS Securities Australia Ltd.

Laurent Horrut – CLSA Australia Pty Ltd.

Paul Brunker – JPMorgan Securities Ltd.

Telstra Corporation Ltd. (OTCPK:TTRAF) F2Q2014 Earnings Conference Call February 12, 2014 5:15 PM ET

Andrew Keys

Good morning. I am Andrew Keys, Head of Investor Relations at Telstra. On behalf of the company, welcome to today’s Investor and Analyst Briefing for our Half Year Financial Results. After presentations from CEO David Thodey and CFO Andy Penn, we will be taking questions from investors and analysts.

I will now hand over to David Thodey. Good morning, David.

David I. Thodey

Thanks Andrew. Yes, good morning, great to have you here and it’s good to go through the first half results for 2014. What we thought would do is pretty much follow the same format we always do. I’m going to give you a quick update on some of the highlights and then Andy is going to come up and take you through more detail just analysis of the numbers and a bit of perspective and then I’ll come up at the end and just try to take you through against our strategic priorities just the relevant bit and terms of the results and then we’ll take your questions.

So firstly, to the highlights of the first half. Well, I think the results we will need to reflect the continuing focus we’ve 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 already do remain our number one priority and we are committed to improve in the way we serve our customers and providing them with the access to the BIS networks in Australia.

And the real measure of that is where the more Australians choose to come to Telstra and I’m pleased to say that they are. During that half, we’ve added 739, 000 new domestic retail mobile customers, 75,000 new retail fixed broadband customers 117,000 new customers on the fixed bundle and 2,189 new IT-services, which are mainly in the business enterprise market.

Over the last six months, the business is continued to grow on the reported basis, revenue or income is 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’m also pleased to announce of the board has increased Telstra’s interim dividend to $0.145 per share. Very importantly as well is that we’re confirming that we’re on-track to meet our full-year guidance.

But let me just look for a moment at the product revenues. Revenue in our mobiles business was up 6.4% the strong result. Revenue in the fixed data was also up 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 you would agree with me there are strong set of result. We’re also very committed to maintaining our technology and product leadership this is really at the heart of sum at what we do.

During the half, we invested $1.8 billion to maintain that leadership and we ready to believe that investment is delivering real tangible results in terms of both top line and bottom line. I mean for example, by Christmas around the 4G network we committed to covering 85% of all Australians and we’re pleased to say that we delivered on that.

Over the past six months, we’ve upgraded 1,500 base stations to have 4G capability and we now have 3,500 4G mobile base stations switched on in a week 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 have also been investing in new business initiatives. And of course this is so important for us in driving out the portfolio and also driving innovation. These investors – investments included countries like North Shore Communications and O2 Networks that are really bolt-ons to improve our capabilities in the NAS business. We also continue our initiatives in the health industry and we acquired 50% of Fred IT 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 has translated pleasingly into growth at the bottom line. This half earnings per share will grew by 8.7%. These are solid set of results and I think it sits up well for the future.

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

Andrew 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 track against guidance. Secondly, I will take you through 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 acquired [ph] 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 a $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 it – it has been deconsolidated- sorry – from the current period and the prior comparative period. And then the net profit after tax and depreciation and amortization 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 very cool 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 is 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 in EBITDA were up 3.3% and 6.6% respectively. There was a small decrease in depreciation and amortization of 2.7% reflecting some minor changes through asset.

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%. Earning per share increased 8.7% to $13.7 per share and as David mentioned the Board as declared a fully franked interim dividend a $14.5 per share. Return on equity was broadly flat of the increasing profit was match by equity games 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 the 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 will 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 a product and business line performance. Firstly fixed, fixed revenues were down 1.5% and improved performance on previous periods. This was due to slower declines in PSTN, growth in fixed broadband and revenue from 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% and further 75,000 your retail fixed data customers were added in the period well after increase 1% to just under $55.

We continue to see strong performance in bundles of 117,000 to in par to the success of our entertainment bundles. EBITDA margins trended inline with expectations with fixed voice declining one percentage point at the portfolio declined in size and fixed broadband excluding via the NBN connections increased one percentage points as we continue to expand the got of this business.

The mobiles business continue to perform very strongly. Overall revenues were up 6.4% and mobile services revenues were up 7.3%. This follows strong growth that we have experienced in size of our recent periods. In fact the total number of services is increased 50% in the last 3.5 years.

During the period, we added 739,000 retail Australian mobile customer services to take that total number of services to $15.8 million. This included particularly strong growth in prepaid and walnut imposed by lower than in the first half of 2013 reflecting a slowdown in the market overall. We estimate that we are still took market share in postpaid.

Revenues were up 5% in postpaid handheld and 19.4% in prepaid. The prepaid performance was driven by 11.6% increase in unique users and 6.2% increase in ARPU. In Postpaid handheld ARPU excluding the MRO impacts this was up 2.1% to just over $66.

With more than $4 million customer services now on the 4G network, we’re seeing increased demand for data. This is driving ARPU and assisting with further improvements in the EBITDA margin, which the mobiles expanded by two percentage points to 39%. We’ve invested a further $650 million in the half and having achieved 85% coverage of Australia with LTE we’ve remained committed to continued to invest in Australia’s best mobile network.

In the second half of the year, we’ll be further depending LTE coverage, investing an additional capacity in the number of other innovative trolls in preparations to the digital dividend spectrum which will be come available in 2015.

Overall another very strong performance for our mobile business. In data and IP, IP access revenue did not fully offset the declines in ISDN calling and data products. We’ve seen strong customer growth with IP man size growing 14% increases in volumes bandwidth upgrade an IP access revenues up 3.9% to $581 million. This has been offset by intensified competition on large contract renewals an ISDN revenues declining 8.8% really driven by cooling substitution in 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 is accelerating due to the number of larger contracts that we’ve signed in recent times including the department of defense. Performance was also assisted by the acquisitions of O2 and North Shore communications. Telstra added $70 million of 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% and manage network services up 64.8%. To support this very strong growth in NAS we’ve increased our operating costs and increased our head count by more than 700 to the on-boarding of the major new contracts that we’ve signed and also to scale after further growth in the future. Notwithstanding these drivers and costs we have more work to do can improve the efficiency of the NAS business and further improved margins.

Looking at the results from the channel perspective, Telstra retailing come to the first half was up 3.9%, this includes consumer and business. Consumable was up 5% underpinned by growth in mobile services revenue and ARPU as well as fixed rate of 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’ve announced correction of our global enterprise and services business unit led by [indiscernible] consolidating enterprising government, which also global submarine cable business and NAS. Global enterprise 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 MBA in infrastructure services agreement revenues and growing prepaid 3G, how is our mobile business.

Turning now to media and firstly Sensis. I’ll make a couple of comments on the operational performance as 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 declining print revenues was due to the Adelaide books with 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% below the seasonality of this business is that most of the earnings are reported in the second half.

Foxtel’s revenue was up 0.6% for the half year then 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.

The 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 revenue is down 1.6% there is considerable product development at Foxtel to stimulate further customer growth.

Foxtel Play and Foxtel Go have already have been launched with [indiscernible] the new working 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 a 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 but these were offset by the continued decline in feature 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 [indiscernible].

Finally global connectivity in NAS were up 9.7% to $323 million, as we added up 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’ll take you through the key elements of the income from our NBN.

Total NBN revenue in the period was $294 million this included a $136 million from the Common Wealth government agreement and other government policy commitments, $139 million from the infrastructure services agreement and $19 million in [indiscernible] payments.

We continue to advertise the revenue previously received for the retaining date and the information campaign to migration deed, in relation to the latter, the amortization will conclude in the second half of the year.

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 build out in the second half of the calendar year and excess payments which will continue to increase over time in conjunction with the roll out of NBN.

Let me now turn to our expenses, total cost grew 2.1% to $7.51 billion excluding TelstraClear and the impact of foreign exchange, the expenses increased 4%, in the period our additional investments in [indiscernible] and business growth were $230 million and $ 210 million respectively. FX impacts it added a further $110 million through our costs. As mentioned earlier one of the key drivers of costs in the first half have been know to support NAS, although we clearly had more work to do to improve efficiency of NAS and further improve margins. Against these increases, our productivity and simplification program delivered $230 million in net benefits to our expense position for the half year.

Turning now to capital management, are referred to the strategic framework for capital management which we presented to the market for the first time two years ago. And this reminds the key benchmark against which we make all capital decisions. The framework has the joint objectives of maximize returns to 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, while we have just announced the Board has declared a 5.5% increase to the interim dividend of $14.5 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 rolling out VLT network.

And we ended the half year with cumulative excess free cash flow of $1.8 billion. In relation to some of the more data of capital movements at total accrued CapEx decreased by 2.1% to$1.8 billion and this included a $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 dollar other issues in October. We have also reduced the average borrowing costs from 6.4% to6.1%.

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 our two networks to further enhance our NAS capabilities, CCI and Fred IT in the e-Health space. And into box a U.S base – U.S cloud based file storage provider which we have invested by across the ventures. We also slightly increased our investment in Auto Home 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 Telecom, 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.

To CSL this is subject to regulatory and purchasing shareholder approval. Both the relevant regulatory in Hong Kong has been through a public inquiry process and is now 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 further approval conditions precedent are progressing as expected. And we expect these transactions also to complete by the end of the first calendar quarter.

Before handing back to David, I will make a couple of comments on guidance for the rest of the year. Our guidance for 2014 remains low single digit growth by total income and EBITDA and a CapEx to sales ratio of around 15%. We expect free cash flow to be in the range of $4.6 billion to $5.1 billion excluding the impact of M&I activities that we’ve announced.

Thank you and I will now hand back to David.

David I. Thodey

Thanks Andy. I think it gives a good feel for the details behind some of the numbers and we can take questions after I take you through just a little bit of an update on our strategy and how it really relates to the results. As you know, we've got three core strategies that sort of really guide our every decision. Firstly, around customers improving customer efficacy and that is a very simple, but very complex 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 just give you a quick update on NBN as well, just a very quick update. So firstly to improving customer efficacy as I continue to say, this is our number one priority, because it drives so much value for the company, our shareholders. And we really are focused on creating sustainable differentiations through consumer service.

And we focus on four areas: NPS, Product Differentiation, Process Improvement and then how do we create Unique Service Experience. So, then we go through each one of those. I mean in terms of this NPS system, it’s very important to understand that doesn’t just one metric, it’s – we mentioned NPS on every customer interaction, every episode that is when they could do something with Telstra, every product, every process. And it really instills everything in the company.

We also measure that what we called a strategic level is sort of this perception level of what customers say when you ask some, would you recommend Telstra to a family associate or friend. And that is a very telling and very hard metric when you only got a countless in advocate when they score you a nine or ten. And every person who works at Telstra has a target, every person, from me all the way down to field technician I should say across to a field technician or to a – someone at the front house. And so this is the way we run our business.

So I’m not to going to say much more about it, I just want you to understand of its quarter who we are. In terms of products, we continue to in face in a wide range of new products and drive differentiation. Just a few highlights, we've introduced Telstra StayConnected product, which allows you to stop out your mobile device or replace if you loose 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, we had about 175,000 customers take up the service and the attachment rates about a third, so it’s been very good.

We also introduced a 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 also continue to enhance a number of our products and are trying address excess data usage international roaming charges. And we believe that we are really offering some great products in that area. Thirdly, 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 and we try to understand how we can take cost out while actually creating a bit of customer experience. And so if we took an area like the online space, we have now increased the number of online service transaction 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 contract in the shops. We also provide 24/7 support. So customer contact is 24, else a day, seven days a week. We can’t use the app on your mobile phone or you can call us in this live chat get onto Facebook, get onto Twitter. These are innovative good ways in which we can attract with our customers, but you’ve got to change your prices to do that.

Also we’re trying to build unique customer service experiences, things that what we’re saying money can’t buy. Since launching our Thanks loyalty program in March 2013, we’ve had over $1 million people have enjoyed unique service experiences and things like we enjoyed great pit or you can go to Michael Bublé or Jessica Mauboy. These are things that normally Telco wouldn’t offer, but we do now.

So it’s been a quite impressive also we offer movies, sports and tickets; movies, sports, music tickets and also we’re going to continue to provide some really great experiences. So when you also have been done, what you’re really going to do, you’ve got to both lead in product network innovation and we’ve always been on for that. But we also got to be none for great customer service and experience. And of course, if you get both right, it already 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 makeup 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 the 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 us through some of the great results and head 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 have seen one of 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 through $739,000. We’ve seen good hands in 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 have continued to grow our fixed data services of 75,000 and so was contingent in this improving the experience on the AG cell network. We have done a number of upgrades that networked across 4,400 suburbs and also upgraded the cable network 49 nodes and 134 suburbs.

So we are keeping those networks in the customer experience at the right level. Also, as we’ve often talked about, bundling is every important, because when you sell a bundle a customer signs up to two-year service and we’re now at total of $1.7 million customers on a bundled plan. This is a very important part of our businesses we bundle in entertainment, because we see this is a real differentiator both today and in the future.

So I think from a customer and revenue growth perspective, good results and we will continue that focus. In terms of network leadership, Andy touched on this as well, but again, $1.8 billion, we have invested, it’s very important we keep our leadership in 4G.

Andy also mentioned that we’re not stopping. We’re going to continue to drive out further investments in those 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 a hard work, and we’ve got a great team led by Robert Nason doing that all the business units. We’re seeing 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 and customer service initiatives and that’s really what we do.

Our process in certain improvements led to a 9% reduction in December quarter core 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 regard this business remains exciting. So that’s driving value from the core.

Let me now turn to building new growth businesses, and I really want to focus more on NAS in Asia, at least initially. We have a clear strategy in place designed to realize the opportunities that we believe exist across these portfolios. So let’s talk briefly to NAS. As a result, I think speak for themselves, we have got significant capability in this business, and it is a capability driven business. And we have enhanced that with North Shore Communications and O2 Networks. But the changing nature of our business basically is 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 defense and health services. But this includes the upfront transition, which includes the significant equipment et cetera, so that they are used to use a bit of a front-end 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’re also looking for opportunity to leverage our core capabilities and optimize value in mobiles. And that one is very important is 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.

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 operated 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 centers as Andy mentioned in Singapore, and we now have several data centers that we directly operate, and we another have 11 that we some involvement with, which brings us to 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 application services in Indonesia, which as you know is 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 Telecom Indonesia, giving both companies the opportunity to build market share in that fast growing market. It is a memorandum of understanding now and we’ll move to final complex as soon as possible. Also last year we increased our stake in Autohome and that is the leading online marketplace for cars in China. It was listed on the New York Stock Exchange last December. Telstra has 65.4% stake in Autohome, which is a market cap of around about US$3.25 billion based on the current share price. That’s been an impressive investment.

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

I also want to make some briefly, the emerging opportunities we’ve identified in health, global applications and digital media. Over the six months we’ve undertaken a significant amount of work in these areas. First E-Health, our decision to take a 50% interest in FRED IT Group is I think a good example. The company office E-Health Solutions to the community that’s where to general practitioners and pharmacist and is helping to overcome some of the issues that result from the fragmentation that we all know existing the health industry, and it connects all the 15,000 doctors and 3,900 pharmacy through it script exchange service. So this is all about driving efficiency of information.

In the applications area, I’m pleased to say that we continue to focusing on that area, we’ve increased our equity stake in Ooyala, we launched our start-up accelerated program called muru-D and we’re also continued to look for a app and value our large number 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 have 54,000 new customers take up the new entertainment bundle and with now have 360,000 household registered for FOXTEL guide, and that’s a 15% increase for the half. We strongly support FOXTEL’s committed 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 its software platform of which Ooyala really is at the high. 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 even pretty brief because we have commenced negotiation with NBN Co, and the government and what we’re going to do is as we achieved milestones we will update you. As you know we are already to assist the government and achieving it’s objectives to move to a multi-technology NBN rollout. But we are 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’re going to maintain the value of the current agreements. Number three, we are 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 role Telstra could play in the NBN build for example doing more work in design and construction. We are very happy to consider any opportunity, should that become available and prove commercially effective. NBN current government continue to work through their process that completed this strategic review which the results were released last December. NBN&Co and the government are now considering the view and I will issue a new corporate plan.

NBN&Co is also gaining acceptance for the SIU which is the special axis undertaking and that has been approved by the ACCC and on our side, we’ve signed the two-year wholesale broadband agreement with NBN&Co and we continue to be focus 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 are very pleased with. We have 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 just like to finish by thanking the team and I work with our right team and while we have got several lot to do, we are very pleased with our results at the half. Thank you.

Question-and-Answer Session

David I. Thodey

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

Unidentified Analyst

Good morning. Strong results well done. I think our strategy says to work in terms of the things you are putting in place, help support the fantastic operating leverage the company has. I just wonder why the guidance is still so low when you are cleverly evading that, our first question.

Second, just and goes that operating leverage to one area where it’s a little bit tricky, given declines in volumes is the fixed line margin. But essentially, at least largely making up the decline in margin on voice with gains in fixed data. Can you just, then we have got half year of subscribers from NBN.

I think a few months ago you suggested a 20% gross margin for NBN customers it seemed very low to me. And I wonder what the experience that first half is with there is an enough to go on their into guiding margins.

David I. Thodey

Yeah. Why I don’t just pick up that last and I will get to Andy to talk about some of the specifics in the half-to-half. You look on the NBN still really early days, when we are only talking about tens of thousands of connections and remember the amount of work that we have to do to get our systems right and processes. And it’s a very complicated interaction with NBN in terms of provisioning systems transferring customers from their copper roll cable to across to the new NBN system.

So in terms of margins you won’t see a ongoing predictable margin. I don’t think for about probably another year and half, two years. You really got to be in the hundreds of thousands, millions of services before you get any stable sort of run rate on it. So, at the moment we still have a lot of work to do to really smooth out that process and get the customer experience data as well as managing cost. So that’s why you are not 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 that... yes.

Unidentified Analyst

20% margin I think you mentioned gross margin…

David I. Thodey

Yes, I would say look I think that’s about we should target 20, 25 actually is where I would like to be and but as you know this has got market forces et cetera, we have really got to drive really efficient great customer and 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 the customer so you have to track well and it’s a lot of hard work to be honest. And of course remember the way the [indiscernible] rolled out, its not down street-by-street if said and so you got teams working, one end of the suburb and other end of the suburb and so we think there are is some better ways we might be able to do it [indiscernible]. Andy.

Andrew Penn

Okay and thanks very much. The question on guidance is that well if you at our guidance result for the half year its 3.3% on a income and 6.6% EBITDA sorry assume you sort of referencing EBITDA rather than income. And a couple of things I mean firstly as you know guidance basis basically excludes the impact of M&A in the current period and is based of FY2013 base numbers.

So when you mark a call in the first half of FY2013 we have the impairment for the sale of TelstraClear so that’s actually depressing the first half of 2013 numbers relative to the first half of 2014 and that lead me to it that I ever use it, but that will have an impact, and the second probably key driver is also the Sensis, because we provide this on a pro forma basis excluding the impact of M&A, it has a sharp decline in the second half of the terms of earnings and in the first half and so that would drag that down on a guidance basis and as well. So when you take those two factors into account in conjunction with business generally then we are still comfortable with the current guidance that we are providing.

David I. Thodey

Pardon me to it I think you…

Andrew Penn

No, no, no you got it.

David I. Thodey

So obviously it got a fixed margins which was the other…

Andrew Penn

Right, I just have one comment in; I think you know the underlying operating performance of business remains solid good, so I bet there some anomalies in the half to have.

David I. Thodey

And in my – the other question is really on the underlies in the fixed margin. So I think you have probably answered for us which is that we sure one percentage point decrease in fixed voice at one percentage point increasing fixed broadband and that is very much reflecting the changes scale both to businesses fixed versus – EBITDA margin of about 60% decline, 7.3% in the first half so we are pretty pleased that we continue to scale across the rest of our business in productivity that mains the margin impact 91 percentage point. Fixed broadband is benefited just from again the increasing scale there.

Unidentified Analyst

Great. Thanks.

David I. Thodey

Thanks and good morning Raymond [ph].

Unidentified Analyst

Good morning David, good morning Andy. Just three questions. Just firstly in mobile just the margin improvement you mentioned was driven partly by subsidies. Do you think you are at the right levels of the moment to bill suspects growth in margin and do you think that there is further scope for sort of hands on subsidies, could you go down a bit more?

David I. Thodey

Once you go first, there you go...

Andrew Penn

No, no I can…

David I. Thodey

No, no, no, no.

Andrew Penn

So well I think, so you are right that was part of the reason the margin improved two percentage points, but it also improved because we got APRU growth and data monetization and also continued productivity and scale growth as well, so activation was 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 up slightly more than that. So it has had an impact, but not a huge impact. 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 fact that we got very, very strong customer graph and also the value of the overall product and the innovation, we are doing the product set of the innovations that David mentioned as well.

So I think the overall value proposition for customers is pretty attractive and I think that’s demonstrated by that 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, that I think the balance of that right. I think we’ve got to be very attuned what’s going on 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 and get great experience and continue to price for value.

Unidentified Analyst

Just in terms of the cost outlook on, I think online cost was up 4% probably due to the sort of the big contracts investment in NAS, can you talk about I suppose when the outlook for the second half with that investment is to going to continue and when do we I suppose expect to see the inflection point in the earnings for these big contracts?

Andrew Penn

We look at a general level you see it’s the first year to two years in the big sort of five to six year contract that you have a bigger cost level, but my – our view is that going into next financial year it should start to see some better clarity about how we’re driving better methodologies centers of confidence to drive margins over those contracts, yeah.

Unidentified Analyst

Okay.

Andrew Penn

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

Operator

Thank you. And our next question comes from Mark McDonnell at BBY. Go ahead please Mark.

Mark McDonnell – BBY Ltd.

Thank you, good morning gentlemen. Three quick questions from me. Firstly, David on the NBN, thank you for the very hopeful clarification of your objectives I’m wondering if you could comment on the timeframe for the renegotiation, your expectations there, not absolute worst case, but should we say a mid case outcome six months, 12 months just curious to know your thinking about that. Secondly with regards to your comments about supporting export for Foxtel, I’m wondering if you could shed some light on what the nature of the problem was with the launch of the Austar service. And again how long is it likely to be before that services up and running? And thirdly in relation to the capital management, I’m just wondering if I know you in the past you’ve stated that your preference is to pay fully franking dividends as the preferred method for capital return given that your franking credit balance is quite low – find the number in the accounts, but based on the amount of [indiscernible] paying I suspected it’s – you are running very close to the wire. I am just wondering to what extent you’re looking at other options including for example a share buyback? Thank you.

Unidentified Company Representative

Great outlook. Thank Mark and I’ll 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 as just a little bit too early to really give any indication of that because it’s just being the last few weeks that people got back from leave and those started the process. But, what I will commit to you as soon as we have got any sort of sensitive milestones will let you know, that it would be not appropriate just we just don’t know at the moment. So, we will keep you posted on that one.

Your question on the Foxtel Presto and the platform, yes, look at it is light and it related to two things. One was just the integration of a number of different subway 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 high Presto one of the interfaces that Google was providing us was Board and we have to go to option D, which sometimes is just the way it is, but look it is eminent, eminent a wind announced a date, but it’s very close and we are very clean to get that product into market and to supported both through Foxtel and looking how we can also added into the Telstra Bundle. So that’s the first two. Andy you want to take the capital management.

Andrew Penn

Sure, good morning Mark. On capital management, we don’t actually include the franking balance in half year accounts it is in the full year accounts here. But, in the full year it might recorded slightly negative and it’s sort of – so slightly negative so that’s the situation with the franking.

Yes. You’re right and we stated the framework that the board position is preference is that a shareholders like fully franked dividends. And as I maintained in the past, I think debt to that either longer term firstly we will got sustain, we got to get sustained earnings right and pleased that we’ve continuing to achieve that. And secondly, we need to take account to the extended that comes from offshore and doesn’t generate franking will need to have a pay out ratio, which is less than a 100%, which we have achieved last year as well.

You might recall the governments policy decision to change the installment basis for corporate this year that comes in. So effectively what that means in 2014 financial year will pay in cash flow terms 14 months of tax and given that we’ve paid $1.8 billion a year in tax that as about another $300 million with the franking into a accounting the second half of the year.

So I don’t have any particular concerns on franking. I think will broadly your question was in the related to the capital management share buyback et cetera. I think that all I can say is that obviously came interesting and what we think about when we think about capital management that’s well we provided the framework that we have obviously if we had something to announced we would. And but what I would say is that any decisions that we make will be firmly inline of that capital management framework and certainly not perform we proceeds from transactions because I still have go through make regulatory approvals et cetera. So I think that would be my comments.

David I. Thodey

Yes, and I can just reinforce Mark that the board is really active in their capital management considerations and will continue to be.

Mark McDonnell – BBY Ltd.

Thanks very much.

David I. Thodey

Okay, operator next caller please.

Operator

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

Fraser McLeish – Credit Suisse

Thanks very much and just a couple for me. Andy just on the guidance so I just wanted to be that clear the growth of the – from the low single-digit from the $10.6 billion base that includes Sensis EBITDA does it?

David I. Thodey

Yes, it does. It’s – because effectively the way in which we do guidance and it obviously becomes more complicated period when we have M&A is that we removed the impact of M&A from the current period. So it effectively remains perfectly impairment is still in the FY 2013 base, but we need to adjust FY 2014 for any M&A that we do in FY 2014. So the answer is yes.

Fraser McLeish – Credit Suisse

So yes, so we add into Sensis and then take it out again to get to the number on a reported basis?

David I. Thodey

So probably as I said being complicated, but adversely that’s the only way in which we can really do guidance.

Fraser McLeish – Credit Suisse

And just David the other question I wanted to ask was just on the efficiency savings, it looks like there is sort of run rate a bit less in the half than what it had been tracking out for the last few periods. And is that sort of – is that slowing down the amount of savings you can get or you still feeling pretty positive, there is plenty of savings you can continue to drive going forward?

David I. Thodey

Look, it’s primarily timing Fraser. We are – it is less 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 is nodding at me saying, he can do it. So we’re still targeting at that gross level the billion. So, yes, we’ve got to do it, we’ve got to keep at it.

Fraser McLeish – Credit Suisse

And is there a few more years to go in that – on that sort of level?

David I. Thodey

Yeah, they get harder Fraser, but yes, we think we can do it. We’re currently planning for the next two to three years within a year at a gross level. It’s not easy work, but committed to.

Fraser McLeish – Credit Suisse

Perfect. Thank you very much.

David I. Thodey

Thank you. Next caller please, operator?

Operator

Thank you. We don’t have anybody on the question to register at the moment.

Unidentified Analyst

A plenty of questions for you David. I will just ask two at this point, the Asia growth strategy, I think it looks quite promising, can you just give us a broad indication of level of resources going into that, I saw a median report recently, I think when the Singapore data center was opened…

David I. Thodey

Yes.

Unidentified Analyst

That was about $20 million, I guess that’s excluding the infrastructure?

David I. Thodey

Yes. Well, we’re both doing two things, both were investing capital, as well as people. In terms of business development and new initiative is probably close to 100 people Andy that would put into that sort of area. In terms of capital, in terms of the cables, cloud, you got that number off the top of your head?

Andrew Penn

It’s pretty modest in – but I mean less than $100 million.

David I. Thodey

Yes, less than $100 million. What we are trying to do is find areas where it doesn’t take enormous risk. I mean like let’s take the JV with Telkom Indonesia, that’s a services business, there would be some capital required, but it’s not like going in and acquiring an enormous business that you may or may not have great experience. And so it’s about setting foundations that we can grow over time in fast growth areas. And so we’ll continue to look for those sort of opportunities going forward, and we’ve got a good base to do that from.

Unidentified Analyst

Okay. You made a comment about leveraging mobile thus far, which just kind of curious when you sold CSL, how do you leverage mobile into Asia then when…

David I. Thodey

The words were carefully chosen. I didn’t say going by mobile operations firstly, so just to make sure, 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 guy called Mike Wright and the team there that have really been the forefront of the deployment of large value of our 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’re really living our capability. Now we need to see how that plays out but we think that’s a good opportunity.

Andrew Penn

And David is it worth mentioning I mean the point on CSL, so I appreciate one level at a high level that could look contradictory I mean the bottom line is I think have you is that we have a very successful business in Hong Kong but the Hong Kong market is really in need of consolidation as five players in a market of only 8 million people and indeed there is some spectrum changes which are upcoming, which are only going to sort of potentially encourage the market to open up more.

So we’ve been strongly off the view that market will benefit from consolidation and having looked for opportunities in that regard, I mean we are economic rationalist and the offer that was put in front of us was a very attractive one, because it took advantage of that consolidation opportunity and that’s why as David said we’ve chosen our words very carefully that it’s about optimizing value [indiscernible] this is the right time to optimize value on that assets.

Unidentified Analyst

Well just last one on the regulatory front as well as we’ve noted one of your NBN objectives is to try and provide some encourage some regulatory certainty good luck for that, while that’s going on the actual procedure is going to start it’s fixed services review as we are resetting the range of fixed line services, access priced services from July, I think last time that happened it was terrible for investors, terrible for your shareholders [indiscernible] back flipped several times, don’t know where they were going billions of dollars lost by your shareholders I know you could add in a debt perspective last year you owned debt investors that these pricing ranches force you to price below cost, most of the risks obviously is held by equity investors rather than debt investors. I just wonder what your advise is to shareholders about that upcoming review and what your expectation given where we were last on.

David I. Thodey

Well it’s I mean really good question in because as you know regulators have a mind of their own and we have to be very actively involved in them which we are and I think there is a number of considerations as we go into this review. Remember you’ve got the NBN on one side, this is the copper network and I think that in terms of looking after the interest of the consumer that fact is going to have to be considered also in terms of the copper network especially the fixed broadband network 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 scenario, I think that’s all that I can say for them.

Unidentified Analyst

Okay, thank you.

David I. Thodey

Question from you Raymond and then will go back to the clients.

Raymond Tong – Goldman Sachs

Just a two further questions just in regards to the NBN payments the infrastructure payments I think is about 139 million up from the 16 million in the second half. Just how should we be thinking about those payments and how they ramp up in the second half into FY 2015 just given the transit network is due to be handed over by midyear?

David I. Thodey

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

Raymond Tong – Goldman Sachs

That should be expecting $140 million for the second half is that sort of what you want to touch?

David I. Thodey

I don’t want to. That the numbers out there, but I think you are making your own assumptions about the rollout of NBN, but try to sort of tell you those numbers, which is the sense of fixed and those that are subject to the rollout.

Raymond Tong – Goldman Sachs

And just secondly just in terms of as far as the free cash flow targets and guidance that you put out before of $2 billion to $3 billion can you may be given update to that, I think you have the $1.8 billion at the movement.

David I. Thodey

Yeah, it was just sort of reflect back on that. So, that was something that we communicated two years ago in April of last year, and we said over three years. So, that’s in a year’s time as you rightly point out where 1.8 billion at the moment. It was also subject to the rollout of NBN and of course there has been a number of very significant transaction since then. So, basically if these transactions consummate that’s going to add approximately $2.5 billion of cumulative 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 we target in the second half of this year. Okay, operator next caller please.

Operator

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

Sameer Chopra – Merrill Lynch Equities

Good morning. I just had two questions on the NAS business if I can. First of all you know you spoke about as a NAS contracts digested that 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 happens next year, as the defense contract, hits maturity. And the second one was Asia NAS pipeline, if you can give us a sense for what the pipeline in Asia looks like? Thanks.

David I. Thodey

Okay, Sameer. Yes, look why these services business is run is how as you bring on new contracts as you set up components across multiple customers. So, let’s take an area like managed when or managing large complex IP networks. We have picked up the contracts from IBM. We got health and defense and the key capabilities is how you drive consistent prices across all three so you get the leverage of scale.

I mean in anyone of these services businesses, you would expect in the area of mid-20s type margins and that’s where we are really focused all at the moment. We are doing okay at the moment, but we think this 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’re doing quite a bit in the health area. And so they’re 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’ve got good opportunities 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’ve seen a lot of activity as we build out our presence in Southeast Asia. We’ve got do more work as we get into North Asia I think. We’ve had a lot of interest in the core international carriages companies coming from the U.S. into Asia and sign a large number of contracts with large IT vendors doing very well. What we call over the top vendors. But that’s not managed service that’s more core carriage. But we’re very pleased with the sort of initially we are seeing quite 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 it now as we got the capability. So early sign is good. Over time I think we’ll be able to give you more of idea of pipeline and what contracts we’ve signed in the quarter and Brendon Riley he is running a business very familiar with that from having run IBM Global Services throughout Europe and in Asia. So, Brendon a better guy to do it.

Sameer Chopra – Merrill Lynch Equities

Thanks David.

David I. Thodey

Operator next call please.

Operator

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

Sachin Gupta – Nomura Singapore Ltd.

Yes, 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 margin just any thoughts raising the mobile margins could go from hereon on a 12-month or a 24-month view. And lastly, just on this Asian strategy once again, you talk 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 I. Thodey

Okay, I’ll make 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’ve got NBN coming out. So I think you’ve got factor that, I would be delighted PSTN decline so we’ve got the same level, but it really depends on how quickly NBN ramps up to make a real estimate until we’ve got through the negotiations we really don’t know the answer there.

Mobile markets we think there are about where they should be I think that while we done forecasting margins, we voiced in high-30s we’d like to be I think in any period you might get ups and downs depending on lot of factors going to that especially around our basement cycle in the network. What’s happen with the handset vendors and of course we like competition with handset vendors and along that may continue. So I think that’s better around the high 30s is where we should plan to be. Look maybe I can just help you on this, I just [indiscernible] isn’t that difficult, it’s pretty simple.

In the enterprise government sector, where enterprises and governments need large complex projects with large IP core networks, let’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 markets is about a $12 billion, so if you want to extract that through into Asia it’s a very, very big market, we are going to take very much share to get good growth. So that’s great opportunity, but its all around managing complex networks for large enterprise and government customers, put that a side, you got that one. Thank make sense?

Sachin Gupta – Nomura Singapore Ltd.

Yes, thank you.

David I. Thodey

Okay. Mobiles completely safer, over the years we’ve looked to buy mobile operators around the region, they are very high multiple and very hard to create value for share holders. So rather than 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 contract, but it has got far less capital investment and sorry to say we won’t put capital out there, but it just a very different model more of a partnership model. So that’s what we are doing in the mobile business and we’ll see how we go in the next couple of years. Is that make sense?

Sachin Gupta – Nomura Singapore Ltd.

Yes, thank you. I think that’s fine, appreciated.

Andrew Penn

Okay, great. Over time we’ll be able to speak to you more about it, okay.

David I. Thodey

All right, operator next caller please.

Operator

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

Richard Eary – UBS Securities Australia Ltd.

Good morning guys. Just a couple of questions from myself, I mean if you look at the revenue base now coming through that its 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 rates, it’s the first question. The second question with regard to oversea deployment of capital and obviously talk around Asia. How confident you are – are you have obviously delivering a better return to shareholders in Asia than the oversea the rights that you are delivering domestically, some sense in terms of guidance around that how you thinking about that would be great.

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

David I. Thodey

Okay, well I get Andy to talk to the profitability of the business in Asia in this, but as a couple of sort of introductory comments, its still in the early stages which of all continuing growth, its still in terms of the total, not significant, but our remaining incredibly positive about the opportunity and I’ll make some comments about where I think the – kind of Asia in a moment, but let me get Andy to talk just to that one and then I’ll pick on competition.

Andrew Penn

No, sure sorry firstly on I think in relation to profitability international definitely we are growing profitability there if you look at the underlying businesses that we owned during the period I mean also is growing very, very strongly and as demonstrated by success following the listing the Telstra global business continuous to improve profitability and also CSL would be obviously we’ve entered into an agreement to sell that nonetheless in the period grew profitability side.

On the NAS side, profitability on NAS did not grow in the first half, but that’s for the reason we’ve already canvassed in very detail way in relation to the contracts that we’ve taken on, but as David as mentioned, as pricing will be now to improve the profitability of that. And over time having said that, we wouldn’t expect the NAS services business to draw at the same sort of margins that we do on our carriage business and in relation to international via function of the nature of the businesses. And I think realistically moving forward, they are going to be more oriented towards Global Enterprise Services, NAS and carriage businesses for the reasons we’ve discussed strategically.

So I think the data points around the evolution and I think the points on Rike will follow that as well. So obviously in a core infrastructure based carriage businesses, their mobiles businesses, their fixed line businesses, their large capital investments and relatively large EBITDA margins to reflect the level of capital we are investing, whereas the services businesses tend to be more capital light and slightly lower margins, but nonetheless are going to require capital in the early days to support the growth of those businesses.

So I think there are the contextual comments that I would make David I mean 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 it’s a really important number and one that you are still putting a finger on that which is that we are focusing on very hard in terms of making the internal capital investment decisions that we need to make.

David I. Thodey

Yes. Look, Andy I think that’s exactly right. I mean, Rich, it’s 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 structure amount concerning the amount of capital we need to put in and how you drive returns. We need to be very careful about how we manage it, how we will report it. But when you look at our Asia and you look at the incredible growth that is in all those markets and as you know, it’s a heterogenous market, 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’m hoping, that there is a lot of support for, because as an Australian domicile company was such a great legacy. I think we’ve got a great opportunity to grow and we need to be considered about that, because we are very cautious to share all the returns and our large retailer shareholder base as well. But it’s I think it’s a land of opportunity.

Now just because go there, it doesn’t mean you make money. You’ve got to be really disciplined, you’ve got to spend time understanding markets, but we’ve got 75 years of history and that’s actually, if you have a travel overseas actually put us in incredible statement if we turn up to these markets.

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 returns we need, but we will only do it if we can. When you turn to competition in the mobiles market, look I remain a internal optimist Richard about the mobiles market. The demand for our products and services remains at all-time highs. The innovation going into that industry is second to none. Everything is becoming mobile lid. And I know that you have different views on that, but I think the returns from this business will continue to be strong for a number of years.

Now there will be periods of high competition, there will be times when pricing moves around, but when consumers and businesses are dependent on a 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 may competition be rich and vibrant. But we are well prepared and we will continue to run a balance business and drive differentiation. we have never been a price plan, never will be. But we will look for differentiation at all levels. So yes, a little more noise in the market, but we are ready and up for it.

Richard Eary – UBS Securities Australia Ltd.

Thanks. I can just ask a follow up is that, I mean I think Andy or yourself mentioned that obviously, the transit ring for NBN, which is obviously, the sounds of 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 2015. but if we are looking at obviously, the growth in NAS and obviously, from the global services point of view, in terms of a delayed return with obviously, capital investment upfront, should we not think about capital intensity dropping in the business in 2015, but more being held at similar levels. I know this is obviously, not in the guidance, but I’m just trying to get an understanding that if we’re pushing more growth in NAS and global and there’s a delayed impact to the capital investment upfront. Are we not going to expect to step down as just sort of metro ring CapEx comes out in 2015?

Andrew Penn

Richard, it’s Andy I mean I think as you probably recall, we within our framework, we’ve said that our medium-term sort of target on CapEx to sales ratio at a group level is 14%, we increased that to 15% for last year and this year, which gave us another $0.5 billion to invest in accelerating the LTE rollout, as well as supporting the NBN transit builders you point out. you are right, I mean looking at the CapEx to sales ratio at the group level is sort of a crew instrument, we don’t look at it like that, that’s just a way we report it for the market to be helpful. but I mean we obviously give a look at it a more granular level business-by-business. but look not withstanding all of that, I don’t actually think that the points of change that we’ve discussed to material and after change our views around 14% is the right sort of medium-term number. so we will complete the – let’s say complete, we have completed obviously the additional rollout of LTE and we have got a lot more brand on mobiles. But we believe we can do that within our CapEx envelopes.

Richard Eary – UBS Securities Australia Ltd.

Okay. Thanks, guys. I must appreciate it.

David I. Thodey

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

Operator

Thank you. and next question comes from Laurent Horrut from CLSA. go ahead, please.

Laurent Horrut – CLSA Australia Pty Ltd.

Thank you very much. Thanks, David and Andy. First off, let me just say, I think you’ve done a great job of – that’s of recovering from a pretty tricky situation in 2009 and with enough with a flattery, I think you’ve done a great job, but I’m going to ask you some tough question?

Andrew Penn

Okay, Laurent.

Laurent Horrut – CLSA Australia Pty Ltd.

The first one is, Andy, I’m a bit intrigued by the difference in accounting treatment between percentage in CSL. but if you say if you’re discontinuing Sensis, you still have the trading posts, you still have true locals. So I don’t really understand how different the two transactions are and well beyond that what would be the best way to work through FY 2013 pro forma base and it is just to take 248 from CSL out of the number the restated number you published and just Andy I’m going to subset on that is EBITDA consensus for FY 2015 is roughly $10.8 billion. You’re going to assuming a slightly better guidance going forward. I just can’t get there. So, I’m just wondering how comfortable are you with that sort of forecasting the market, that’s my first question. You want me to ask more questions or I go one by one?

Andrew Penn

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

Laurent Horrut – CLSA Australia Pty Ltd.

Okay.

Andrew Penn

I mean look at just in terms of the difference treatment in Sensis and CSL is a decision of the accounts can I say rather than necessarily made. That I mean basically the premises as I outlined before the 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 about trading close. It all intents and purposes we have exit the print advertising business.

CSL is a mobiles business, which is very, very different. We had definitely not got out of mobiles business as if core business of us and in the end imbalance that is fundamentally what drives the advice from the auditors as to why we need to treat those businesses in the way which we treat them.

So I can’t really add anymore than that, I’m afraid. The adjudication and that’s the way these 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 are looking at guidance, we need to think that our 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 transaction isn’t consummated yet or CSL for the rest of the year and then looks – best look at what our result would be likely to be. So, we have to make some judgments as to how those businesses we are trading relative to their plans in consolidation with the rest of that business performance. And we are very, very comfortable with our guidance of low single-digit growth at that time.

I can’t comment on obviously what the market is saying other than decide that we also keep a very close eye on what the market thinks our result would be and where we do see significant difference. We got to see our result to be then we would have a disclosure obligation, which we would obviously meet.

So I think you can conclude from that. We don’t see that difference, we are comfortable with guidance and we are comfortable with, we have the market things we are performing.

Laurent Horrut – CLSA Australia Pty Ltd.

That makes sense. Just for clarity so you have restated EBITDA 2013 10168, so we take Q4 2008 of CSL to get to the real number for 2013, that was CSL contribution in 2013, is that how we should approach it?

Andrew Penn

I don’t think you need to take CSL out at all, but I mean what we did publish the note on how we average stated the accounts and I can point you to that if that doesn’t clarify your question maybe you could raise it with Andrew Keys in Investor Relations and we will add to the transcript from this briefing any further clarification that is necessary.

Laurent Horrut – CLSA Australia Pty Ltd.

Great. Now question for David. You know historically you have always indicated that you think Telstra should stay in between 14% and 15% of CapEx every year. My question is obviously in the context of NBN, is there any potential CapEx event 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 potential involvement in NBN is there a scenario where Telstra does have to spend its own CapEx towards an NBN rollout?

David I. Thodey

Under the current contracts no. There is no significant capital required in anything that is in place. If that was to change through the negotiations and we believe it was in the best interest of shareholders. We would consider we would come back and talk to you about it but there was nothing that you should figure into your spreadsheets alone.

Laurent Horrut – CLSA Australia Pty Ltd.

Fantastic [indiscernible] please, just these structural separation of on the table today is there a scenario where in exchange for your involvement, a further involvement from Telstra in the NBN there is a caveat particularly maybe HSC whereby you could actually retain some of the fixed line assets or I should say access networks and very last one to Andy, if you had the choice of using three options at delivering the same NPV one was reinvestment in the domestic business.

Second one, was an M&A opportunity and the third one being capital management and buyback all delivering the same NPV, what would be your preference?

David I. Thodey

I think I can answer your first question, we’re not considering structural separation, that’s the answer to the first one, and the answer to the second one I’m not sure Andy is going to give you.

Andrew Penn

Well, no, no it sounds like a multiple choice as I was used to love in school but no, no I think it’s quite a simple answer and I think we have already articulated in our capital management framework, which is that where we would undertake an acquisition it would undertake an acquisition it would need to show a benefit ahead of buyback at a similar level.

So we are trying to make sure that we how to service that discipline, but I think also in our capital management framework, we’ve said that clearly this is about looking to increase the dividend over the longer-term what I would 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 $0.5 billion over the last couple of years in addition to what we normally would do really continue to solidify our 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 Telstra venture, so the good news is that I think we are in the strong position to find those opportunities but also in a very disciplined way.

Laurent Horrut – CLSA Australia Pty Ltd.

And just Andy how is the M&A environment in Asia in terms of multiples and valuation I imagine be quite tricky.

David I. Thodey

Well I think [indiscernible] I think Andrew was going to throw at my fist the last question between NAS because we would have a few other people, but what I would say it really would just repeat what David said earlier but I think in the core infrastructure businesses in mobiles businesses which is why a strategy on mobiles is quite subtle is that, the multiples are very difficult to see how you make shareholder value from but nonetheless we do see opportunities to leverage our capabilities to add value but unlikely to be through sort of acquisitions of existing large incumbent mobile players unless something radically changed.

Andrew Penn

But I just want to put a qualifier on my comment, to the four principles I laid out I also want to say there is nothing off the table because it was the best interest of shareholders then I’ll do it. But today we have never been able to see the structure separation generates real value to shareholders.

But if during the course of the negotiations something was put to us that drove even more value we would consider. So because I just want to be absolutely clear nothing is off the table, but we do what we know today is going on and comment on it.

Okay operator we have time for one more caller thank you.

Operator

Thank you. Our next question is from Paul Brunker with JPMorgan, go ahead please.

Paul Brunker – JPMorgan Securities Ltd.

Thank you. I’ll make it a quick one, so in terms of mobile business did you see any change in momentum during the half or since the half ended thinking about what happened to Vodafone’s numbers over the course of the half and whether you saw your gains at a fairly steady pace over the late tailed off toward the end of the half and just quickly on the on the Belong brand, obviously it’s going well enough to be rolled out nationally. Any comments about where you see those subs coming from what portion of them are non-Telstra subs. Thank you.

David I. Thodey

Yes, Paul, could you just give me a little bit more on your question about your reference to Vodafone, what were you referring to?

Paul Brunker – JPMorgan Securities Ltd.

I am just referring to the fact to the subs losses were very heavy in the September quarter and must left so in the December quarter although opposite numbers this morning for December weren’t very good. So I was wondering whether you’ve seen most of the gains happening early in the half or what – momentum tailed off or was there a steady pace over the half.

David I. Thodey

Well, yes, so 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.

Andrew Penn

Yes, just pointing out today that we did announce at the first quarter I think in the our Analyst – Investor Day SYOSS [ph] in the first quarter, which I think from recollection were $235,000 in the first quarter and we did…

David I. Thodey

$239,000 in the…

Andrew Penn

$239…

David I. Thodey

Yes, I think where Paul is going is sort of early signs. Look the markets got a little more heater but early days of the quarter I would say. And so no, I’m comfortable that we’ve got a great team in My Balls and well achieved of what they need to do. And we believe in strong momentum in mobiles and we will do what is necessary going forward, but we are a value-base player. In terms of Belong brand, look when we went through the Belong business course, obviously what you’ve got to consider is a lot of substitution is going to take place, you’re just moving your own customers from your own brand of product to a another brand and of course that wouldn’t be a very sensible thing to do. We’re 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’ve ramped it up in the next quarter and half, hopefully we will see near additions coming forward. Okay.

Andrew Keys

All right, thank you. it’s the last of the questions. David would you mark to make some closing remarks, please.

David I. Thodey

Look, thanks Andrew, look I think we like in really repeat is that its been a strong half, we are pleased where we are at, but has always in this industry, you never rest on you laurels and we’ve got lot of work to do. But deliver revenue, profit and customer growth it’s great to see increase in the dividend and also the confirm guidance I think we’re in the right place of the half, but now we move onto the next half in the next year. So, thanks very much.

Andrew Keys

We’ll be taking a short break and we’ll recommence for a media briefing in ten minutes. Thank you.

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