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Executives

Andrew Keys - Head of Equity Investor Relations

David Thodey - Chief Executive Officer

Andy Penn - Chief Financial Officer

Analysts

Paul Brunker - J. P. Morgan

James Freeman - Deutsche Bank

Fraser McLeish - Credit Suisse

Richard Eary - UBS

Raymond Tong - Goldman Sachs

Sachin Gupta - Nomura

Telstra Corporation Limited (OTCPK:TLSYY) Q4 2014 Results Earnings Conference Call August 13, 2014 7:15 PM ET

Andrew Keys

Okay. Good morning, everyone. I'm Andrew Keys, Telstra's Head of Equity Investor Relations and on behalf of Telstra I welcome you to our 2014 Financial Results Presentation. As an important symbol of respect it is our customer significant Telstra events to acknowledge Australia's first papers. Today, therefore I want to acknowledge that we made on the traditional land of the got to go paper of the organization and time respect to elders past and present.

After the presentation from CEO, David Thodey and CFO Andy Penn, we will be taking questions from investors and analyst here in Sidney and through our conference call service at the end of the analyst presentation will be having a ‘media conference as well. Good morning and over to David.

David Thodey

Thanks Andrew. And let me just add my good morning and thank you very much for coming, it's great to have you here at our full year results for 2014. Now the format for (inaudible) just some other what we do in the every year and maybe quick overview of the results and some of the highlights Andy is going to come up and take us through the details and I'll come back and just give you a bit of an update on how we going to get strategic priorities and then we will look forward to taking your questions.

So, let's get right into the results. Well, I am delighted to say we've delivered a strong set financial results and we're seeing consistent earnings growth and increased shareholders returns. What's pleasing is that we are really excited to see results coming from our consistent execution of our strategy.

So, the results, on a reported basis total income increased by 6.1% to $26.3 billion, EBITDA grew by 9.5% to $11.1 billion and net profit after tax increased by 14.6% to $4.3 billion and earnings per share increased by 14.3% to $34.04 per share with good underlying growth. So, the underlying demand for our products and services remained strong and you have heard me talk many times before about the revenue growth and connectivity and by the usage and these trends have continued over the last year. Our product results are reflecting this. Revenue in our Mobiles business grew by 5.1%. Wireless business really does remain a benchmark across developed markets for service revenue growth and I think Network Innovation as well which is a great credit to the engineers at Telstra.

Revenue in fixed voice pleasantly only declined by 7.5% and fixed data revenue increased by 6.3%. These are the stronger fixed results we have had for five years. And then in our network apps and services that's what we call NAS, it was up 27.8% which is a great credit to the team.

Also our focus on customer service has seen our customer base growth. With an improvement in our customer efficacy across all segments, the aggregate improvement in this measure, we call NPS Net Promoter Score was plus 3 points which is pleasing.

We’re seeing good growth in customer numbers. We now have 16 million mobile customers and we saw a growth of 937,000 across the 2014 year. We now have got 3 million fixed retail data customers after growth of another 183,000 customers. And what’s really pleasing about that is that 63% of that 3 million or about 1.9 million of those customers are now on a bundled plan which is so important for us.

And churn is at record levels. While we’ve been doing that, we’ve also invested in establishing new platforms for future growth. We continue to invest in innovation, networks and as you often hear me talk about customer service and experience.

Last year, we spent $1.1 billion of capital in the wireless network and retaining and growing our network leadership. We now have 5.2 million 4G customers connected to our 4G network and I just want to remind you that's covering 87% of the population that 4G network is four times the geographic coverage of any other 4G network in Australia. So, we continue to really invest in that network leadership.

Our network leadership position will be further enhanced by our announcement to create one of the world's largest Wi-Fi networks and I’ll talk a little bit more about that later on. We also established which is very significant for us, this global enterprise services business. And we’re already investing in building capability in that group as we look to service our enterprise customers here in Australia and across the region.

We’ve continued to expand and extend our NAS business in Asia and we’re seeing our resources really being focused into these new areas. We’ve continued to invest in our longer term growth opportunities which I’ve talked about eHealth and our global applications and platforms group. I’ll talk more about that and that includes the acquisition we announced just the other day of Ooyala. We have been disciplined in our approach to capital and portfolio and management and this is a really key part of what we’re doing over the last 12 months. This has included the sale of CSL, 70% stake in Sensis that was a directories business and as I said the increase in the stake in Ooyala. Recently our reported free cash flow is $7.5 billion which has provided us this flexibility to really engage in portfolio and capital management. So, I think a strong set of results.

But now let me turn to the very important subject of shareholder returns. After increasing our interim dividend by half a cent in February 2014, I am pleased to announce that the Board has declared a final dividend of $0.15, bringing the full year dividend to $0.295. This is an increase of 5.4% or $0.015 for the 2014 year. Just this is our second consecutive dividend increase. Pleasingly, EPS generated from our underlying businesses also continued to grow. If you take into account the moves from portfolio management, we’ve delivered EPS growth of 14.3%. This is a third consecutive year of EPS growth and the fourth consecutive year of revenue growth.

I am also pleased to announce today $1 billion off-market buyback. Now Andy is going to take you through the details of that in a moment. We have spent a significant amount of time analyzing what was the best thing to do and the Board considers this the most effective way to return additional value to shareholders at this time, with our increased dividend and the $1 billion buyback we will return $4.7 billion to shareholders this year from our full year ‘14 operations.

So, I think we’ve got a clear strategy that we are very focused on implementing, we delivered strong financial performance, we continue to take a very disciplined approach to portfolio and capital management and we are carefully investing to provide long-term sustainable growth.

So with that introduction, let me now through it over to Andy. He is going to come and take you through the detail of the financial results. So Andy, over to you.

Andy Penn

Thanks very much, David and good morning everybody. In my presentation this morning firstly, I will 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. Fourthly, I will provide you an update in relation to our key balance sheet movements, capital position and portfolio management which you hear from David has been significant during 2014.

And finally I will conclude with some comments in relation to guidance for 2015. Before I do take you through the results, just a couple of clarifying points in terms of the accounting treatments. As you know, during the year we sold 70% of our interest in Sensis and we are required trade this business as a discontinued operation. The effect of this is that will be deconsolidated in the current and prior periods and also from the operating results as well as the loss on sale of $150 million.

In the case of CSL, we completed the sale of CSL as 76.4% interest in May and we had included the consolidated results both revenue and EBITDA for the 10 months to the end of April as well as the profit on the sale of 561 million, which is in EBITDA results.

Also finally following the liquidation Sharp Point in China, we've recognized the negative foreign currency translation reserve related to that asset of 98 million that's also in EBITDA this year. With those clarifying points let me now just take you through the results in a bit more detail.

Firstly sales revenue was up for the year by 3.4% to 25.1 billion, total income was up 6.1% to 26.3 billion, EBITDA was up 9.5% to 11.1 billion. On guidance basis, excluding the impacts of M&A activity, total income and EBITDA were up 3.5% and 4.7%, respectively. We've reported a small decrease in depreciation and amortization of 3.1% which relates to some minor changes to asset lives. EBIT was up 18% to 7.2 billion and net profit after-tax was up 14.6% to 4.3 billion. Earnings per share grew strongly up 14.3% to $34.4 per share as you just heard from David.

Commenting on some of our key financial measures, accrued CapEx for the year was flat at 3.7 billion and our CapEx to sales ratio was 14.6% a little under guidance of 15%. Free cash flow grew very strongly, up 48.9% to $7.5 billion including the proceeds from the sales of Sensis and CSL. And as David has mentioned, the Board has declared a fully franked final dividend of $0.15 which is up 7.1% on the 2013 final dividend and this brings the total dividend for the year to $29.05 per share on a fully franked basis up 5.4%.

Return on equity and long return on invested capital, both grow in line with our operating performance up 1.3 percentage points and 2.3 percentage points respectively. Gearing fell 7.5 percentage points to 43% recognizing the very strong liquidity position that we held at the end of the year.

Turning to sales, we saw continued growth in 2014 with sales revenue up 3.4% to $25.1 billion. We saw slow declines in fixed, media, data and IP which I'll comment on in a moment. These were more than offset by continued strong growth in Mobiles which was up 5.1% in NAS which was up 27.8% and in International which was up 15.1%. Sales revenue was supported by foreign currency translation gains of $179 million and acquisitions of approximately $100 million.

I will now walk you through our products and business line performance. Our fixed products performed particularly well as you heard from David with revenues down less than 1% for the year. Overall fixed voice revenue was down only 7.5% the lowest rate of decline in over five years. Retail fixed voice customer line lot slow $278,000 compared to $353,000 in FY13 and PSTN ARPU declined at 94.1%. This was assisted by improved marketing activity and loyalty offers and retaining customers. We saw strong growth in fixed data, revenue was up 6.3% in we've raised our fixed data up 7.5%. Retail fixed data customers increased by 183,000 to 3 million and ARPU was up just under 1% to $55.

The fixed voice margin fell 2 points due to lower revenues, whilst the fixed data margin improved 3 points due to continued revenue growth and productivity initiatives. Finally, we continue to see strong growth in bundles with customers up 259,000 to 1.9 billion representing 63% of our fixed data customer base. Our Entertainer bundle which continue to attract high customer demands during the year was a key driver.

Our mobiles business also had a very strong year. Overall revenue was up 5.1% with mobile services revenue up 6.1%. Postpaid handheld revenue grew up 4.2% due to customer growth, license and strong ARPU. Prepaid handheld revenue grew strongly up 20.9% driven by the popularity of our Cap Encore plans and growth in data usage driven by the increase in smartphone penetration.

During the year, we added a further 937,000 domestic retail mobile services to bring our total subscriber base to 16 million. This included 5.2 million mobile devices on our 4G network, 3.8 million handsets and 1.4 million mobile broadband services. That continued growth in mobiles lead to a further 2 point increase in our margin to 40%.

Postpaid handheld ARPU excluding MRO was up 0.7% to $65.80 driven by increases in domestic usage which more than offset price reductions in international roaming. In data over IP we saw the decline of 2.4% as customer migration from legacy product onto IP solutions continued. Whilst we’re taking volume growth in IP access we are also seeing some price competition. IP access revenue nonetheless grew 3.3% driven by IP MAN service up 6.8%. We also continue to increase our market share in IP access due to strong network differentiation including our market leading network intelligence services and continued investment in IP value-added services.

The ISDN declined of 8.4% was due to a line loss of 4.7% and a decrease in core revenues of 15%. This was a result of customer migration to unified communications which as you’ll see when I talk about NAS in just moment grew strongly. Finally, across the portfolio we maintained our EBITDA margins of 65% as a consequence of strong productivity initiatives. In NAS we saw growth with revenue up 27.8% to $1.9 billion. We’ve seen further new business signings and pull through revenue from existing large contracts including the department of defense.

During the year we also acquired North Shore Communications and O2 Networks which added to our capabilities. Within NAS we grew revenue across all major product categories with cloud up 32%, unified communications up 21% and managed network services up 56%. We also continued to grow the NAS portfolio we’re also focusing on profitability. As we bring on new customers there are certain start up costs associated with this business. But as they mature we’re able to strengthen the profitability of these contracts. We’ve also focused on customer management across the portfolio and as a consequence we improve the profitability in the second half of the year.

Turning now to media and firstly Foxtel. Foxtel’s revenue was up 1.4% while its EBITDA was up 5%, both driven by customer growth ARPU growth and strong cost control. Total subscribers were up 5.6% to $2.6 million; this was strongly supported by sales from Telstra. Customer growth also assisted by further improvements in churn which was down 1.7 percentage points to 12.5%.

EBIT growth of 15.9% was driven by lower amortization of intangibles recognized for the Austar acquisition. Foxtel management has had a very busy year during 2014, building further IP based offerings. These have included the further enhancements to the Foxtel play product which offers Foxtel’s premium cable and satellite service over IP and in March we launched Presto, a subscription video on demand service. Plans are also well developed for the launch of a new set top-box IQ3 and also a Triple Play offering in financial year 2015.

In terms of financial results that are the consolidated into Telstra’s books, the distribution received was up 6.5% to $165 million whilst cable access revenue was flat at $120 million. We have seen a strong turnaround in the performance of our other media assets. Overall revenue was up 3.3%, Pay TV revenue and customer growth was driven by paylite services which included Foxtel on T-Box.

Digital content services continued to decline driven by decline in legacy mobile products although this was partly offset by growth in subscription for sports and music services. In fact MOG, AFL and NRL apps all grew strongly up 76% to 155,000 subscribers. Foxtel on T-Box customers grew 111,000 driven by the strong continued demand for the entertainer bundle. And finally, we saw a 14.9% increase in the number of movie downloads from Big Pond.

Turning now to international. International revenue grew 15.1% including a $179 million of foreign exchange guidance. We divested our 76.4% interest in CSL in May to US$1.99 billion and CSL revenue and EBITDA has been recognized for the 10 months to the end of April. China Digital Media growth was driven by also Autohome which I will comment on separately in a moment. GES international revenues grew 19.8% or 14.5% on a local currency basis to $678 million.

This includes global connectivity and NAS revenue and was driven by customer growth from both enterprise and carrier customer business. We have broadened our product portfolio, including IP exchange and managed network services.

We listed our China based online car market service operator Autohome, on the New York Stock Exchange in December last year. And whilst we did not sell any of our shares into the offering, our post listing shareholding was reduced to 63.2% as a consequence of the dilution effect of the new shareholders we brought on. Autohome has continued to perform very strongly with revenues for the year in local currency up 65.1% whilst EBITDA grew 60.3%. In Australian dollar terms, revenue was $250 million and EBITDA $129 million.

Two of the key leading indicators of business activity for Autohome include dealer subscription services and the number of monthly unique users that use the site. These were both up strongly with dealer subs up 86.3% to approximately 14,000 and average daily unique users were up 14.4% to 6.75 million. We also saw an increase in the average amount of time that our customers spend on the site, which is also a key measure, up from 15.4 minutes to 16.3 minutes per visit. Looking at the results now from a channel perspective, Telstra retail was up 3.6% to $16.4 billion. Customer growth was driven by strong performance in Mobile, up 13.6% and fixed data up 7.2% offsetting the decline in fixed voice.

Business was up 0.8%, driven by strong growth in NAS, up 44%, also offsetting declines in fixed voice. Revenues in the newly formed Global Enterprise and Services Group were up 4.1%. Enterprise and Government was up 1.9% and we saw growth in NAS, up 23.4% offsetting weaker mobile service revenue from the lower international roaming rates. Telstra Global was up 17.9%. Finally, Telstra Wholesale performed very strongly, up 10.1% as a result of NBN service revenues and growing prepaid mobile wholesale services.

During the year we recognized NBN related income of $640 million. This revenue has increased as we have completed the transit network build and in line with the NBN roll out. Income from Commonwealth Government agreements reduced as the payments from information campaign and migration deed were fully amortized during the year. The retraining deed revenues of approximately $14 million will continue to be amortized over the next four to five years.

Income from the Infrastructure Services Agreement increased to $316 million. This was driven by the completion of the transit network, and included exchange rack and dark fibre services revenues from duct rental as well as income from the sale of lead-in conduits which all increased in line with the NBN roll out. Similarly, the PSAA payments also increased in line with the NBN roll out.

Let me turn to expenses. Total expenses grew 4% to $15.2 billion. In the period, our additional investments in DVCs and business growth were $250 million and $350 million respectively. We also invested a $110 million in new business initiatives and another $100 million in new businesses that were acquired through M&A activity. Against these increases, productivity and simplification program delivered a further $550 million in expense benefits for the full year.

Turning now to capital and portfolio management, where as I mentioned before we've had a busy year. First I'd like to take you back to the strategic framework for capital management which we presented to the market more than two years ago. This remains the key benchmark against which we will make all capital decisions. The framework has the joint objectives of maximizing returns to the shareholders, maintaining financial strength and retaining financial flexibility, particularly for investment in the future and these have all guided the decisions that we've made in the late up to these results.

In this regard, we continue to manage our balance sheet consistent with a Single A credit rating as we have just announced, the Board has declared a further increase to our dividend to bring the total dividend for the year to 29.5 cents per share fully franked up 5.4%.

As I previously mentioned our CapEx to sales ratio was 14.6% as we applied additional investments to rolling out of our LTE network. With very strong operating performance and proceeds from the sales from CSL and Sensis, we ended the year with cumulative excess free cash flow of $4.7 billion.

Consistent with the last principle of our framework, this clearly provides us with flexibility for continued portfolio management and strategic investments. In addition, we are strongly positioned to support the off-market buyback of $1 billion announced today about which I will speak more in a moment.

Before I do that, let me just first like to comment on a number of important strategic investments we have made this year to support longer term growth.

This is in addition to the significant activity on portfolio management, including the sale of the 70% of Sensis and our interest in CSL and the listing of Autohome.

In terms of new investments I have already mentioned NSC Group and O2 Networks in our NAS business. We also acquired 51% of S&P security in May which will be particularly important in the business sector and in January we announced to entering into MoU to establish our NAS business with Telkom Indonesia. On Tuesday we announced the acquisition of Ooyala as David has mentioned which will be the foundation of our intelligent video platform. We’ve also made number of investments in our eHealth, business including FredIT and DCA eHealth Solutions. And finally we’ve made a number of small minority investments joint venture activities which where our initial investment in Ooyala originated from.

Let me now make some specific comments in relation to the buyback. We continue to take a very disciplined and conceded approach to capital management, consistent with the framework I’ve just referred to. The governments’ decision to move to a monthly payment system for company tax resulted in an additional one-off increase in 2014 to our franking balance of $258 million.

We’re very conscious of this franking credits and the value of them and the off market buyback provides a mechanism to distribute them quickly particularly ahead of the proposed reduction next year in the company tax rate and associated franking rate to 28.5%. We have received a ruling from the tax office for Australian tax purposes the buyback price will be treated as having a $2.33 per share capital component with the balance being fully franked dividend. We’ll be issuing of book on the buyback in the fortnight to eligible shareholders. The buyback is not being made directly or indirectly to any person located or resident in the United States in accordance with the requirements of the law. Eligible shareholders will be invited to offer their shares to Telstra at a discount between 6% and 14%. The offer will be opened until October 3 with the buyback price being set on the October 6, and we believe this is an appropriate and value adding management initiative to further enhance returns to shareholders.

Finally on capital management and portfolio management just a couple of comments on some of our more detailed balance sheet and capital movements. I’ve mentioned before our accrued CapEx for the year was 3.7 billion broadly flat on 2013. Free cash flow was up 48.9% to 7.5 billion and this flow through to the increased liquidity position at the end of the year with cash on hand of 5.5 billion.

Net debt reduced 20% to 10.5 billion and we’ve reduced our average borrowing cost to 6.2%. The impact of a high liquidity is reflected in the reduction of our net debt and gearing ratio which reduced from 50.5% to 43%.

Liquidity will be reduce in the first quarter of 2015 to fund planned cash outflows these include the spectrum license investments of 1.3 billion, the buyback of 1 billion and of course the increased dividend of 1.8 billion. We also had debt repayments in FY15 of 2.2 billion of this amount we have already repaid two bonds totaling approximately 1.5 billion with a balance of 700 million due over the balance of the year.

Finally our average debt maturity reduced to 4.7 years at the year-end although that has increased again with the repayments that I just mentioned.

Before handing back to David let me make just a couple of comments on guidance for 2015.

We expect to continue to deliver low single-digit growth in EBITDA and income although of course in 2015 this will be offset by the loss of revenue and EBITDA from CSL. In FY14 the EBITDA and revenue from CSL was just under 300 million and just over 1 billion respectively. As a consequence there for guidance purposes, income and EBITDA growth in FY15 on a reported basis will be broadly flat when one excludes the impact of the profit on the sale of CSL last year of 561 million.

We expect the CapEx to sales ratio to be approximately 14% and free cash flow to be in the range of 4.6 billion to 5.1 billion.

That concludes my presentation so thank you. And I'll now hand back to David and join have some questions once David is presented. Thank you.

David Thodey

Thanks Andy. And I think you can seen from Andy's presentation the amount of activity, we've had on the last 12 months system incentive capital management and driving the business. So what I'd like to do now is just spend a few moments. Just give me a sense of the activity with achieved over the last 12 moths around strategic priorities. As you know, they are very simple firstly about improving customer efficacy driving value from our core business and of course growing and building new businesses or building new growth businesses.

So what I thought I just give you a brief update on each of this, just give you a bit of color around some of the things we're going. So let's go to customer efficacy, it was five years ago that we said customer service, customer efficacy is going to be our number one priority to put the customer the center of everything we do and that does remain number one strategic imperative.

When you think about customer efficacy, you've got to think about what does that mean and to ask us about three things improving customer service, it's about delivering data products to our customers and of course make it easier to do business with us. So let me just briefly go through each of these three customer service.

Well, last year we have really been trying to focus on how we can improve the customer experience, there has been a few things we've done. The big question is how do you provide personalized service of scale. So when customers coming talk to us on our context same as come to our shops that they really feel like they're getting a personalized experience so we made a big change. We say look maybe, whenever you talk to someone at Telstra, we're going to give you name and contact details. That's been a big change. Also whenever you buy new postpaid service when you come into the shop, we ring you back within 48 hours and say, hey, so how it's going? And of course this is all about providing a more personalized service and it's been really well received. All our people shops now have a business card and I can say this is who I am and please give me a call.

Pleasingly, we have seen significant improvement in PA score across all those interactions we have with our customers also what we call an emphasis that's when you increment the service volume at a problem and we're going to focus on that area. Because if we don't we can't really move forward so we've seen in terms of our contact centers an improvement of nearly four points in terms of the score our customers give us which mean PA in our field engineer the increase of 13 points so really great results.

But also we've been doing some other things. We've introduced the Telstra Platinum service which now consumer accounts for an access of end to end technology support from a Telstra technician in your home or over the phone or online. That's been a really successful service. Also on the small medium business we've enhanced that digital office technology product which really is worldclass we have enabled it with telephony, mobile, fixed data services and this really is an innovative product. And into the enterprise customer area, we have extended our consulting capabilities so now we can provide early consulting in terms of our enterprise customers in terms of understanding what they want to do but it's across cloud security, collaboration, customer contacts and of course the managed network and integrated services. So, really important areas.

And then our THANKS program continue to go really well. This is the first loyalty program Telstra really ever won in a consistent wide, it's now a year old. This year we had 1.6 million customers purchased a ticket with 2 million discounted move tickets which has been sold and music and sporting event tickets and we're very grateful to the loyalty of our customers. So really great results there. But that's all now. You got to deliver better products and we've got to keep focused on how to deliver betters products for our customers.

And I just want to touch on this area, because this is what we do everyday. Our IP network truly is world class, in fact I saw just last night we were awarded an Asian first for Unified Communications and that is an Asian award which is just tremendous. So, we really delivering what we think is a world class service. And in this area not to get into too many of the typical details, but we are really pushing the limits in terms of providing functionality that IP core network that allows enterprise customers to manage their applications into the better services to their consistence in their enterprise organizations.

In mobiles, we have introduced a large range of new plan tops. The New Phone Feeling which allows our customers a new phone after 12 months on the basis they return their old phone and this is so good working condition and of course the Stay Connected program that provides backup and device exchanging replacement service. We got to keep innovating around innovative product solutions to keep our differentiation.

In the fixed network area. We refreshed our Entertainer bundled services and the take up has been very encouraging. As I said 1.9 million customers on a bundled which represents 63% of our fixed data customer base. Also Our fixed broadband customers can access a new mobile app that helps them resolve common connection issues without having to call our contact centers or have field technician. And this degree of automation is really important as you digitally enable the service you provide your customers and we’ve already got 20,000 customers using this app.

And we have also launched the free Telstra Wi-Fi Maximiser App, this is not the Wi-Fi network build but this enables customers to better understand the performance of their wireless network in their home and measure the signal strength of devices connected to the gateway. This is really important as it becomes more and more -- as people become more and more dependent on this Wi-Fi connectivity.

So product innovation and leadership is really fundamental to our strategy.

Then I think easier to do business with, the never ending task. And we must continue to strive to be easier to do business with. And so we’re taking lots of actions. We now have a dedicated Moves Team for consumer and small business customers which is improving the experience of that critical point when you move business or you move home, it’s sort of like a moment of truth and it’s really critical we get it right. We aim for 100% of our consumer moves to be handled by this team by the end of full year ‘15.

We are also continuing to improve the experience of that critical moment when you get a bill and we now got a great new video bill capability which explains the elements of a customer’s bill by providing this personalized experience when you are wanting to understand how your bill has been laid out. And this has proved to be very, very successful.

Also we continue to invest in our digital platform so that our customers can interact with us online. Our industry leading app, the 24x7 app is now used by 1.7 million customers and it really is too many people the way that they can manage the use of their mobile phone. Also other digital channels including CrowdSupport, Twitter and our Facebook 24x7 also out may be about source of using Facebook continue to be roll out. But we must continue to become a truly digital and a social company. And therefore we need to be where our customers want us to be 24 hours a day, seven days a week 12 months of the year.

So now 3 million of our customers receive an email bill and over 70% of the payments are made online, 46% of our services are now digital that is a tremendous result. When you think where we were three years ago, we were probably about 10%. So great result there, but one of these results are delivering, well let me take you through them.

We’re seeing improved customer efficacy across all segments, as I said with overall plus 3 point improvement. Most of our core products recorded improved NPA scores, churn is at world leading levels, postpaid handheld mobile churn improved by 0.5pp to 10.3% and pleasingly, multi product holdings increased. As I said 259,000 new bundled customers, so this is all about customers buying more products from Telstra.

We will continue to put the customer at the center of everything we do. We want to provide the best customer service and products over the best networks. Improving customer efficacy will drive better shareholder returns through reduced churn, more customers, higher multi-product holdings resulting in increased revenue and profits. So really important, so customer efficacy number one.

Secondly, it’s how do we drive more value from our core business, this priority focuses on three things, customer and revenue growth; network leadership and productivity. So let’s talk about customer and revenue growth

We’ve already mentioned some of these numbers, but let me just go through. During the year, we saw revenue growth across all key segments with consumer growing by 4.6%, business up nearly 1% and enterprise services growing by 4.1%. Within the enterprise service group, our enterprise business grew here in Australia at 1.9% and the global connectivity NAS business was up by 19.8%, mobile revenue increased by 5.1% and fixed data revenue by 6.3%. These are great results as Andy has already taken this through. And we've also had very strong growth in customers, so more people are choosing to do business with Telstra which is very gratifying.

But that’s not enough. We've got to continue to invest in network leadership. This is very, very important. Because the expectations of our customers are going up, they expect our networks to perform, perform well and we must be committed to maintaining our network leadership position.

As I mentioned earlier, we invested about $1.1 billion of capital in 4G roll out, which now reaches 87% of the population. And also now our customers can access 4G from Bunbury to Bondi and over 3,000 towns and suburbs in between.

What’s so important here is that we maintain our leadership. 4G network must maintain its geographical premise. So it’s four times larger as I said before than any other 4G network in Australia and the 3G network has over 1 million square kilometers greater coverage than what is claimed by the next largest Australian mobile network. But this is also about ensuing a quality experience for our customer so there are fewer call drop outs and more reliable data speeds.

So we're going to invest around about another $1 dollars of CapEx in the mobile network this year 2015 as we extend our mobile leadership.

We also believe in Wi-Fi. So as you know we announced a $100 million Wi-Fi investment that will allow all Australians or irrespective whether they are Telstra customer or not to access to potentially 2 million hotspots here in Australia across the country and 13 million international hotspots within the five year period.

We are really accelerating our roll out. We expect by Christmas to have switched on around a 1,000 hotspots in metro and holiday areas. So, that's great.

Our IP core network continues to be the largest IP network in Australia. It carries over 1 terabyte of data every second and it really is world class. We’ve now invested nearly $1.5 billion to-date in building that network. And our investment in the fixed network which is enabling us to grow fixed broadband experience and the number of customers continues to progress. We have 600,000 new ADSL2+ ports, roughly there is about 700,000 new ports we build out over the year which allows customers to connect. And we're using Top Hats and that great innovation about how we roll out and continue to use the copper where we think it's commercially viable to do so.

We also upgraded the cable broadband network in Sydney, Brisbane and Gold Coast and Adelaide and a few parts of Melbourne. So, we continue to do more work on [HFC] network as well.

What the big message here is, we believe networks make a difference and we're going to continue to invest in network leadership, both here in Australia and internationally.

The third area in terms of driving value from the core is around productivity. And I’ve got to stress productivity improvement is critically important to us and will continue to be a focus for us every year for the long-term.

As Andy said, simplification is critically important, we saw expense benefits around $550 million last year about the gross value from a productivity program was about 1 billion but that's when you include revenue, CapEx reduction and the board to costs, so we are still on track in terms of $1 billion.

Some of the productivity process improvements we've implemented over past year are really important and right down in the heart of the business, a new approach to create and rebate. In the past when things have going wrong, we have sometimes simply offered customer a short-term when with the credited or rebate and that's just not acceptable we got to get right down and fixed whatever the recourse was in terms of the customer problem.

So resolving the customer issue continues to be our first priority, but we've got to get better at getting to the root cause of why there was a problem in the first place and that's been a big focus for us. We've also launched new Call Matching initiative which aims to ensure service calls are directed for best agents, so we can serve customers in a more timely matter. So first call resolution is really important and we've seen significant improvements in how our contacts are operating with reduced number of calls coming in and really great efficiency benefits. But we still have a lot of opportunity improve in that area.

In the Network app space the team have launched new tool that allows customers to see the status of their order, automating that process they don't have to ring us, and also reducing the from time they order a product till the time they actually get it. These are the sort of things that really drive real value into the business.

So we've improved the capital efficiency process as well. Our CapEx to sales as Andy said was 14.6% in line with our guidance, but it's all about how you’re effectively spending your capital so you’re getting the returns.

Productivity must be a focus for our entire business. Last year we had 1,600 redundancies over the businesses, we rebalanced different parts of the business. However, when you look at our total headcount here in Australia it was actually increased here in Australia and overall it was roughly flat. It’s worth noting that there were 400 people who joined us, increase over the year and if you exclude the impact of the CSL that’s where you see the headcount was really about that there were some few hundred who joined us so that’s really important as we go forward as we rebalance the business.

Productivity affords us the right to re-invest in new business opportunities and we believe there is further scope to drive costs out of the business through process improvement and simplification. So driving value from the core is really important. The results to-date are encouraging with strong customer growth and world-class networks both mobile and data. And pleasingly our return on invested capital is almost improved by 100 basis points to 17.2% with the core business contributing strongly to this improvement. So a great result from our core business.

Now let me turn to the last strategic priority of building new growth businesses. And this includes the focus on opportunities in Network Applications and Services, Asia and other emerging opportunities. So let me briefly go through some of the results we saw in full year ‘14.

First in Network Application and Services, we saw a strong organic revenue growth and also we saw growth from acquisitions such as O2 Networks and NSC Group. We’re very pleased with the rate of growth here and when you get underneath it, our cloud business areas like our cloud business grew by 32. We also continued to focus on improving NAS profitability. As Andy said we saw an improvement in our profitability in the second half of the NAS business. We are also expanding NAS into Asia and we invested in data centers and increased our focus on building out our executive and senior management capability in the Asian region, Andy now has the expanded role to lead and coordinate the activity outside Australia. Now I am delighted to reconfirm that Tim Chen is International President and Tim has a real focus on China and is doing a great job.

We are realizing value from our international assets as we mentioned with a successful listing of Autohome on the New York Stock Exchange and as Andy said the 63.2% share is valued just under $3 billion. In the domestic market we continue to be leaders in IPTV, the number of customers using Foxtel through T-Box grew by 111,000 to 185,000 subscribers in total and we have now sold 761,000 T-Boxes to-date.

Domestic sporting codes are driving increased downloads and subscription revenues with AFL app downloads growing by 51% to 2.3 million and in NRL app downloads increasing 75% to 1.3 million in 2014.

Now finally to emerging opportunities, and this includes the areas such as digital media, eHealth and Global Apps and platforms group our software division.

The app strategy is to build new growth businesses and take advantage of the considerable growth in the software driven business and that includes applications and integrated services and I am very pleased with the dedicated team that we have got there. In October 2013, we launched our start up incubator muru-D to foster Australian technology innovation and this week we announced the purchase of leading global video streaming company, Ooyala which is very exciting we think this business has good growth prospects ahead of us. I should stress software is by definition a global business.

Finally in eHealth, growth to-date has been through strategic acquisitions and investments, partnerships and commercial relationships. Key events were the acquisition of DCA Health Solutions, Medinexus and 50% investment in Fred IT Group and further minority investment in HealthEngine.

So we're very pleased with how that business starting to shape up. These investments make Telstra a significant provider of eHealth Solution through connectivity of health services, electronic health records and electronic prescriptions and will continue to be focus for us as we go forward.

These long-term growth opportunities very important as lay the foundations for future growth. We're already seeing early results with strong revenue growth in NAS and international. As we said NAS revenue was up 28%, international revenues were up 15%. As I mentioned, there has also been strong results in our Digital Media business with IPTV and of course in movie downloads, so overall encouraging report card.

So in summary, we're making good progress, we're executing on these three strategic priorities improving customer efficacy, driving value from the core and building new growth businesses and these will continue to be focus areas as we move forward.

So before I conclude, let me just give you an update on the National Broadband Network and I just want to make a few comments in this area. Firstly, we share the governance objective to finalize the agreements as soon as possible but no date has been set for completion. As you know the current agreements are complex. Therefore the shift to multi-technology model requires careful consideration as to how these agreements need to be modified. The teams are working to get the material commercial issues resolved. To that end, we've to create the non-bionic commercial framework around which revised agreements will be build and we're now working out.

The renegotiations are progressing well and the parties are working constructively towards a common goal. This is important as we will be NBN Co’s largest customer and also one of their biggest suppliers. It is in our mutual interest to achieve clarity on exactly how the transition to a multi-technology mode will occur.

We are committed as always to act in the best interests of our shareholders, and we are focused on maintaining the value of our current agreements, achieving certainty of outcome as soon as reasonably possible, and also minimizing any additional regulatory risk.

We're going to continue to keep our shareholders informed as the renegotiation process proceeds. So, before I finish, I just want to take a moment to thank all of our staff for their dedication and hard work. They are committed to delivering great customer service everyday and I really do appreciate the dedication and the contribution to the business. My thanks also to the senior management team who have been tireless in their work to improve business, always willing to try new things to change and innovate so that we don't stand still and also in credit culture where people enjoy working. It really is a pleasure to work such a capable group of executives I personally thank them.

So, just to summarize 2014, we delivered consistent earnings growth and increased returns to our shareholders with $4.7 billion return this year from our full year '14 operations. We expect operating momentum to continue into 2015. Our focus on innovation, networks and improving the customer experience is positioning us well for long term growth.

Thank you for your time this morning. And now we look forward to taking your questions. Thank you.

Question-and-Answer Session

Andrew Keys

Okay. We'll take questions here in Sidney first from the floor and then we go to the phones in a little go. Are you ready to go the name?

David Thodey

Yes, ready to go. Let's go.

Andrew Keys

Good morning Sumit.

Unidentified Analyst

Good morning. We've seen something with Telstra in the last couple of half years with some pretty solid operating leverage, our sales gets converted into profitability. And I was wondering as you look forward into sort of ‘15 and ‘16. Can you talk about the productivity initiatives a little bit more, I'm trying to understand what are the puts and takes that will keep labor cost perhaps under control and maybe put some downward pressure on the COGS ratio? That's my first question?

David Thodey

Right. Okay. So, labor and the COGS. Well, Sumit the business is changing as you know, you got the COG capital since of net break side and that's where we really trying to drive the real productivity improvements since we get more efficient and get rid of what we consider fairly related work and that we get really the labor savings and that's our continued focus. We still think there is really good opportunity to take more cost out there.

How we’re going to balance that and I’ll get Andy to mention a little bit about the expense growth under how that breaks out in a moment. But you’ve got to balance it as we’re buying these new businesses and building, now services like business which are very labor focused but less capital. So, we think that roughly what you’re seeing this year is where we will be in the future. But we’ve got to really be focused in on that area. So that’s (inaudible) labor and I’ll get Andy just give you a little bit of the numbers underneath that [4 bps] growth in OpEx and really what the effect of on line growth is.

In terms of COGS, in general COGS used to be driven primarily from the mobile business but as you drive into the network services business you’re just trying to get into managing the complexity of equipment in the large enterprise area and even in some of this business area here in Australia and then also in the international network. So COGS is really important we manage tightly and we only use it when we’re driving out network coverage business. But in general while we see some increase in that we think it’s manageable going forward. We’ve got a lot of focus on that in terms of driving good supply contracts when we buy and provide to customers, but it is a very, very important part of our business. But it’s a good liver to use if you get the network traffic coming through. Andy, do you want to talk a little bit about that expense side?

Andy Penn

Sure. I mean just simply costs increase around 4% to $15.2 billion or increased around $578 million, there are number of (inaudible) impact, foreign exchange impact, impacts of the bond write movement and the impairment of the foreign currency translation reserve which I mentioned before that all adds up to about $250 million also taking account of the removal of the expenses from Telstra clear in the year. So sort of take hold of that, that’s basically a cap of $250 million at the moment, but just over 2% is the underlying cost growth in the business which really is a consequence partly shifting business mix, as you know we saw 28% in the NAS business in this year and of course at the corporate level, at the aggregate level the EBITDA margin improved a few basis points to 42.1%. So overall, we are still getting that operating leverage but there is a slight change in the mix of the business and about $250 million worth of various difference for the cost which sort of as I say FX and other related.

Unidentified Analyst

So that should continue into next year as well, you would expect that that sort of momentum in terms of productivity savings and what it does to your cost base and your margin should continue sort of say on a like for like basis?

David Thodey

Well, the mix will continue to change. I mean our focus is obviously to grow EBITDA in the absolute level. And so I am not making a prediction on the sort of a group EBITDA that will a function how quickly things like NAS grow relative to mobiles, relative to fixed broadband but we think there is continued productivity available in the business.

Andrew Keys

And [Sameer] aspiration is still as I said before is about 1 billion a year. The mix is the issue where how much is OpEx, how much is sort of avoided cost but that’s our objective and there is no question in my mind that this still enormous amount of failure related work and bad process in the company. I mean we’ve made a lot of progress but there is still a lot we can tidy up and fix. And so it’s there for the taking, it’s up to us to execute against them.

Unidentified Analyst

Thank you.

David Thodey

Good morning Paul.

Paul Brunker - J. P. Morgan

Good morning, all. Paul Brunker, J. P. Morgan. Just to ask on mobile if I may. And the market growth this half has been quite disappointing again for the second half running, obviously you guys have done well by taking some share. But just any thoughts about whether we’re seeing a pause in mobile market growth or was this the peak but also have we seen any change in the half so far, just think about JB Hi-Fi’s sales in July being sharply down when you're seeing any inflection points happening. Any comments of [overall mobile] on take up of the data sharing product and the new phone fitting, dummy numbers or just indications on how they're going? And finally, how you feel you’re positioned on running and overage charges relative to the market since there have been some moves by competitors in that respect?

David Thodey

Right, okay. It was a few questions for me. Okay, well, let me give you my view on the mobiles market because I think I’m becoming an old campaign and not maybe as old as some of the people in the room here. But look, there is no question that post by mobile subs were a bit slower in the last half. By the way, usually the second half is slower than the first, it's always been the way it is. However, I’d look through these transitions; I can remember as I keep saying, 2G to 3G, the world is full in, mobile has gone x growth, it's not going to happen. I just don't believe it. I’ll tell you why. So we keep on talking about mobile penetration being based on the population of Australia, it's totally fallacious because when you think about the connectivity to mobiles, you’ve now got to increase, think about every PC in the country which will become a tablet, you have to think about every car, you have to think about every bit of machinery and suddenly the addressable banks goes out to probably 80 million, 90 million devices. Also the assumption is that we only have one mobile device. Now, I know that not everybody has two or three or five like me but the truth is that you will have more than one device. So, when I look at the incredible capability of these 4G LTE networks and the right of use of these devices, I see incredible opportunity.

Now, is there pricing pressure, competitive dynamics to the market? Yes there's been; what’s new. We've been here before and we will continue to be focus on network innovation, network leadership. And I remain very positive about the long term prospects of the business.

Now, any quarter or any half, we’re going to get ups and downs but I don’t manage the business for a quarter and half. I manage it out over the next three, four five years we’re planning, what we need to do by 2020. And I just can't see why mobile isn’t going to continue to be a great business going forward.

Now, I maybe wrong but I don’t think so because every time we think that we have sort of got to some point we then realize that there is another growth boot. So that’s where I am at. So that was some of the big picture stuff. Then I think you then went to data sharing -- I don’t have that data. Do you have that data?

Andy Penn

I mean I’ve got anecdotal on site connected, I mean detachment rate, so a pretty good. I think it's early days on data sharing plans but…

David Thodey

Yes. Look we’re pretty early in putting data sharing plans into Australia following the U.S. experience. It didn't take off as fast as we expected, mainly because you’ve got to get that inflection moment when you buy a mobile phone and maybe a tablet or when the mobile plans terminating and how you do that. And so we’ve got to probably make it easier for customers. But I think the long term prospect is that will be good.

In terms of roaming, I just want to say, no change to our strategy. We will continue to be competitive. We believe that we have a justifiable value differentiation because of the size of network and the speed, and the quality of the network, but we will continue to be competitive. And as the market moves, we'll move with it. And that's just why it's paying for three or four years. We are not going to let the market get away from us and that's just the way it is.

So, there will be movements in various elements of pricing in mobile phones as there has been for the last 16 years, 20 years and will be there. So, I don't really have much else to say on the rhyming, it's -- I don’t have anything to give the data. Does that give you give a bit of sense for…

Paul Brunker - J. P. Morgan

It does, thank you. Are there any trends this half to date in terms of customer activity?

David Thodey

Look, it's early days, I mean July was fine. I think there is some -- I hear a rumor that there is some things happening in the future, I don't know the dates or anything. But that sometimes has an impact about people buying behaviors took. I think, is that right. I don't, it's only rumor.

Andy Penn

You might well say that, I could possibly go back.

Andrew Keys

Hi, James, we'll take your question and then we'll go to the phone.

James Freeman - Deutsche Bank

James Freeman from Deutsche Bank. You have been quite acquisitive over the last couple of periods and particularly with the partnerships as well. Just trying to get an idea of return on investment that you are achieving or aiming for these acquisitions and how we should think about that going forward whether it's strategic or whether it is actually financial, the return is looking for?

David Thodey

Yes, look, I think the first thing to be very clear about, we are very focused about where we are doing acquisitions, it's -- maybe it’s a bit of a long presentation, but I wanted to be clear in terms of our strategic projects, we're investing where we want to.

We have strict investment criteria that we follow in material businesses and so that will continue. However, there are some early stage businesses like Ooyala for example that do not meet our traditional investment criteria. But we think that within the total scheme of things if that’s okay and we will do select investments in that area.

So I’ll let Andy comment a little bit more on the numbers but we still have strong aspiration, we are doing things to not get a return our investment and we will not be doing if it’s not good for shareholders, so that’s for the better, it may take a few years to flow-through but that’s the nature of our business just like we’ve got investment of $1 billion in the mobile network this year that’s about future profits, same with this acquisition.

Andy, do you want to comment any more on that?

Andy Penn

Yes. No, I think all I would add is that we’re looking across multiple horizons to grow. So I think in the short, near-term we continue to see strong growth opportunity in the core business into the future, mobile is up 5%, fixed broadband was up 6%, NAS was up 28% so a strong growth there but we’re also investing obviously for some longer-term areas as well, as we mentioned Ooyala is growing very, very fast. It’s reinvesting in that growth so therefore it’s profitable at the moment, so therefore currently the acquisition criteria because our acquisition criteria has been on the basis of earnings accretive. But we believe the whole digital platform is both intelligent video and distribution and advertising is going to be an enormously attractive market and very fragmented at the moment. But other than Ooyala and ventures type of investments all of the acquisitions did meet our acquisition investment criteria.

David Thodey

And I am just thinking Andy, I mean if we’d go back when we (inaudible) homes to fund back up four or five years ago they didn’t meet our investment criteria then but look they’ve done pretty well. Let’s hope that our instincts are good on this one too, wait and see.

James Freeman - Deutsche Bank

Is the time right in about that four to five years to meet the return?

David Thodey

Yes we think three to five, look a lot of our thinking now is out to 2020 and as you know over that period the NBN roll out and so we’ve got to be thinking about how the business structure changes and the board and we spend a lot of time thinking about that, while still running the business for today as well.

Andrew Keys

Thank you. We will now take a question over the phone. Please operator.

Operator

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

Fraser McLeish - Credit Suisse

Great thank you. Just two from me please one for David one for Andy. David just first on the comment on NBN that we have agreed the non-binding commercial framework, can you just give a bit of a better idea what our - I mean that of you agreed the broad value of the deal, would be my first question. And then just for Andy on the buyback, how should we think about buybacks going forward, is this sort of the one-off because of the franking credits really and bit of excess free cash flow going forward if you got excess free cash flow should we think that you are going to distribute a bi-combination of buyback and dividend like you have done this year or this really a bit of a one-off?

David Thodey

Well, I will let Andy take the last one and then I will do the NBN.

Andy Penn

Yes sure, I think what I would say is that we are taking a very considered and very thoughtful approach to capital management and I think what the results have shown is that we have the capacity to both invest in the longer term and also enhance returns to shareholders in the short-term and that balance is really important, as you know over the longer term we do believe the best way to enhance shareholder returns is for increasing the dividend and to do that we need to invest and look for growth opportunities.

As you said, the changing government policy enabled us to basically brought the benefit of an additional $260 million of franking credits in 2014 and we felt that the best and most effective way to optimize shareholder returns was to basically return that to shareholders quickly through the off-market buyback. So we haven’t made any further decisions regarding future capital management initiatives or obviously [breach] the market as when we do. But I think what I would say, is that we will continue to look for ways to optimize between those straight priorities and that capital management framework which is returns to shareholders, financial strength and financial flexibility.

David Thodey

Great. Fraser look there is not a lot I can say, but within the buyback manifesto or document is a little bit of quantity that I can just take there refer to you. But let me just re-stress in these renegotiation, objective is that we must be kept hold and that means that it should not be maturity with -- we should not be maturity with on any renegotiated arrangements then under the current definitive agreement.

So the commercial framework within which the parties are negotiating and knowledge of this objective. But final agreement is yet to be reached so there is no guarantee that this objective will be realized. The commercial framework anticipates a change in the [product] taken and respective the copper and HFC if we get it from stage the commissions (inaudible) some or all of such assets. So that's really all we can say, that's really under the document that we put out and we remain committed to looking after our shareholders.

Fraser McLeish - Credit Suisse

Thanks. That's helpful.

Andrew Keys

Thanks Fraser. Operator next question of the phone please?

Operator

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

Richard Eary - UBS

Good morning guys. Just one line question. Just if you look at, you’ve obviously identify margin profile for some of the core businesses but given the what we’ve got, a significant amount of growth coming from other businesses coming through which is probably now up to about $5 billion. My calculations that the EBITDA we are still getting from those are still very low in sort of mid single-digits. I know Andy you talked about obviously improving mass profitability but when can we start to see that profitability list and obviously that is key to the growth of the business as we go over the next two to three years? I am just cautious, trying to getting a bit of understanding or better understanding of that sort of EBITDA profile in that business and when we can start to see a step change?

Andy Penn

Richard, Andy. Look, I do expected that profitability on our NAS business will continue to improve from here as we take advantage of what brand leverage as I mentioned we did improve profitability in the second half of the year.

On the other hand, I wouldn't I mean we're growing very fast, I mean performance in NAS last year was very very strong. In Cloud we're up 32% overall up 28% and what was encouraging in all of that as well was the annuity revenue in the NAS business grew 30% actually a little bit more than the total NAS business. So, we're not going to hold back on the growth of that business and of course as we grow and as I mentioned in our presentation when you bring on new contracts, there is a element of transitional startup cost bringing on new customers which are investing for the longer term for those.

And as we mentioned, we will need to consolidate the so that's going to making start up losses at the moment so that's going to be sort of those impacts as well. So I don't want to sort of a, I don't want to give a specific forecast as such but I think specifically on the NAS business we would expect to continue to improve profitability from here as we were nearly $2 billion worth of revenues.

David Thodey

I mean Richard, I'll maybe just add on what Andy said. When we model the business, you got these new revenue streams and as early stage they are in the first growth of period but also they have a very different profile. They are not as capital intensive, therefore EBITDA, EBIT mix is quite different so you're not going to get the same EBITDA margins you get of network that's been around for 100 years but also (inaudible) much capital so therefore your profitability looks pretty good and the metric. So, I think that's the other dynamic. But if you start to model out the software business and this is one of the things I think we're thinking through how best to communicate, because when you aggregate the business you just see it at the top level but a software business has very different characteristics to a capital intensive more utility like infrastructure business.

So, we're going to continue to talk about how we can best sort of pull this apart for you and so you can do some, because that's what we do as we look at the changing lines for the business going forward. But overall the return on investment we think looks really attractive on the basis you execute well and you pick the right areas and therein lays the challenge for us which I think we're up for. So, I think gives you a little bit more of sense.

Richard Eary - UBS

Can I just ask two follow up questions?

David Thodey

Yes.

Richard Eary - UBS

The first one is just on capital intensity. I mean, is it correct as we move to more software related parts of the business and capital intensity should drop, if you look into obviously guidance for ‘15 is there any reason why that hasn’t dropped particularly when the metro rings out the NBN heightened should probably now come out of the mix? So that’s the first question. The second question just go back to MAN I mean on a medium term basis once we get through the first step change in initial growth is there a sort of margin target that you could share that you think is achievable within that business on a medium to long-term basis?

Andy Penn

Just on the capital intensity Richard, I mean yes it is absolutely correct to say that the capital intensity on a software business and some of the NAS business is different orders of magnitude to the, at core new infrastructure and mobiles businesses and network businesses. I think the one thing now that I would say I think the extent to which network assets reduced through the process of [NBN] is something which is sort of all the rest (inaudible) overall exaggerated in the sense, we still have very, very significant and strategically differentiated networks, the core transit network for the NBN our core mobiles networks all of the backhaul fixed networks, our IP access networks. So, whilst it is true to say that to some extent the roll out of the [NBN] does say it moves some of the infrastructure, we will continue to be and have very significant network and network investment.

So at the organization level at the total level when you added all that it doesn’t move the capital expense the CapEx to sales ratio at a material level perhaps at the sort of level that you might otherwise anticipate if you had not sort of look through that in quite a bit of detail.

David Thodey

Okay. Just to add on Andy’s comment there. When you -- I mean I can only work from my experience and Brendon’s experience working in the services business, look if and by the way these are indicative non-committed, pleased don’t take this as a forecast that’s not what it is, but you would expect to get margins in the 25% to 30% level, but CapEx to sales is sort of sub-5. I mean CapEx become sort of like to gold and you would never spend a lot of capital. So it’s a very different mix going forward in terms of service business, but that’s sort of the rough sort of figures we would sort model out, but please don’t take that as a forecast that sort of just indicative of what that these sort of businesses drive out. But still very, very nice business to have and you are going to manage your risk profile on the contracts very carefully too.

Richard Eary - UBS

Thank you.

David Thodey

Thank you. Next caller please?

Operator

Thank you. Your next question comes from Raymond Tong, Goldman Sachs. Go ahead please.

Raymond Tong - Goldman Sachs

Good morning, David, good morning, Andy. Just had a couple of questions, just firstly on CapEx again. Can maybe talk about the key drivers of CapEx spend next year, I think the mobile CapEx of 1 billion sort of implies that CapEx itself for the rest of the business is running pretty high and maybe just talk about what investments are going on there? Secondly just in terms of the mobiles business you saw a bit of a slow down in ARPU growth in post that in the second half following pretty good growth in the past half can you maybe talk what the trends you are seeing there?

David Thodey

Yes I will get Andy to take you through those Raymond.

Andrew Keys

So look just on the CapEx side, I mean as obviously the mobile network is a key feature of where we are investing CapEx but right the way across our portfolios in our IP access networks and submarine cable networks out, Asia in the fixed network. There will be some ongoing CapEx associated with in NBN. I mean obviously in our IT systems as well. So, there is not a material change in any of that but as I said in answer to Richard's question, we still have very, very significant infrastructure assets which we will continue to invest in.

On the point about mobile ARPU, we did make a provision in the last quarter essentially for early termination charges which we needed to catch up some provisions on and which actually sort of had one-off impact on that underlying ARPU. So actually, if you took that aside, the ARPU, postpaid handheld ARPU excluding MRO is in fact continuing the trend that [Warren] shared with the market when we had our investor briefing a while ago which is around the 2%. So it was just a one-off impact as a consequence of that provision.

Raymond Tong - Goldman Sachs

Okay, thanks. And just another question just in terms of the Sensis contribution or the voice contribution. So, you talked about in January that you expect about 70 million during FY14 and you may get another 100 million or so of EBITDA ongoing since it’s operated as a sort of separate business? Can we expect that 100 million to fall largely into FY15?

David Thodey

Sorry. What was the last, was it associated with -- well, I missed the last point.

Raymond Tong - Goldman Sachs

I think you mentioned in January that as Sensis sort of operates separate business, you're going to charge additional revenues and there will be some cost that you won’t have to bid going forward. Are you expecting to get most of those benefits from fiscal ‘15 onwards?

Andy Penn

Yes, that is correct. There is no change in our estimates there. The Sensis voice business we effectively retained as you rightly pointed out with $70 million of EBITDA. That business was declining and we would expect it to continue to decline but nonetheless that's been retained. And then the other benefits which arose which was some of the services that we used to provide to Sensis, we didn't charge for commercial terms on which we're charging them therefore, so for their normal telephony services et cetera and the cost savings that we expected to achieve which are associated with some of the central services and shared services that we provided from Telstra but didn't charge, we're in the process of working those through, so they would all through into FY15.

Raymond Tong - Goldman Sachs

Okay. Thanks Andy, thanks David.

Andy Penn

Thank you.

Andrew Keys

Okay. We have other question from the phone?

Operator

Thank you. Next question comes from [Catherine Overy, Westland Capital]. Go ahead please.

Andrew Keys

[Catherine], are you on mute?

Operator

Hello Catherine?

Andrew Keys

It seems [Catherine] is not there. Okay. Do we have any other questions from the floor here in Sydney? [Sameer]?

Unidentified Analyst

Hi. Thanks for taking, a couple of follow-ups. First one David, could you give us a sense around how ARPUs are tracking on some of the new 4G customers? Just trying to see if -- we’re now at about 5 million customers, you'll get a pretty good handle given that these are not early adopters anymore? What's going on with ARPUs there? And second one was just in terms of your international business, the NAS business. I was wondering if you could give us a sense of geographies you're operating in and what sort of the services, you're offering? Because I think in the last half year is you mentioned that you're making headway into Korea. I was wondering if you can give us an update on how you are going in the different markets. Thanks.

David Thodey

Right. Why don’t I take the first one and then Andy's got the breakdown to give you an idea on the 4G on the mobiles.

Look, on the international side, as I said, we’ve actually been building out quite a bit of capability. I mean right across from -- you go first Southeast Asia, I mean strong Singapore, Malaysia starting to build little bit out in Thailand and Vietnam but they’re sort of more nascent marks. I mean we've been in these markets for many, many years and this is what people forget.

In terms of -- we’re not so much in Myanmar; India sort of a bit nice and we’re just hired a new Country General Manager there, but we think India does present good opportunity, but we've got to see how the political situations sort of rolls out. We’ve been there for a long-term, and had good and bad experiences.

We are starting to make good progress in China in the Telco side. We've always been strong in that online business but in China, it's a more regulated industry in terms of pops. So, we're just setting up our new pops there. We build out cloud capabilities in Singapore, Hong Kong, that's going well, Hong Kong markets as well, we’ve opened the office in South Korea that's going well. Japan is a pretty tightly held market. But the offices seem to be sort of signed to along. Again these are sort of $1 million, $2 million deals initially. And then of course we come down to the Philippines and where we've sort of got really strong presence. So, that's sort of the landscape. And remember that a lot of the business we also sign is from multinationals from Europe and U.S. coming into Asia and also working with the other big operators we carry the traffic through the region.

So, that's been how we are going. And we think there is good opportunity as we build out enhanced unified com services. I said we just got this quadrant one, top quadrant writing which is really great. We’ll be able to offer more services to those international customers as well. So, we had 1,200 of our -- these enterprise people own [Singapore] for their kick up meeting and getting going and because it’s just getting that sort of business. So that’s where we’re going. Let me now guide you on the 4G ARPUs.

Obviously we haven’t sort of separately published there 4G ARPUs, but it is -- and of course as you know, we don’t price differently on 4G, but it is true to say obviously 4G customers tend to take higher data packs, higher service packs in their mobile offerings and tend to be those that are more smartphone penetrated, albeit smartphone penetration across the market is now north of 70%. So, we expect and as you know as I just mentioned postpaid handheld ARPU is up about 2% across the year. So, we expect that 4G dynamic if you like to continue to be supporter of ARPU growth going forward.

Unidentified Analyst

Thanks. Thank you.

Andrew Keys

Yes. So, I’m told that it’s strong from the front but we get to more (inaudible).

Unidentified Analyst

Thank you.

Andrew Keys

Okay. [Catherine] is back on the phone, so we’ll try her again.

David Thodey

Okay. Hi [Catherine]

Operator

Thank you. [Overy Catherine]. Go ahead please.

Unidentified Analyst

Thanks. Sorry about that before. My question relates to what’s happening with the average borrowing costs. I am just interested that you’re at 6.2%, most corporate seems to be refing at 4%. You’ve done some more refis -- sort of repayments and obviously you’ve got with the buyback et cetera some new finance coming on in this quarter. Can you give us a feel for what you’re doing that new data please? And what we should expect in terms of FY15 level? And there is one other question, sorry, on the interest rates, something like a $100 million of other in that interest income line in FY14. Could you explain what that is, please?

David Thodey

Sure Catherine look I think sort of overall we our borrowing strategy tends to be around 5 years in terms of term which we sort of manifest itself as a consequence of we tend to get 10 year money roughly, we try and diversify the portfolio as well in terms of sources being a large Australian corporate and a large borrower we have to go offshore for a very significant proportion of our borrowing and therefore we have to swap back a lot of that borrowing cost into Aussie dollars to make sure it’s appropriately hedged in that is what sort of drives the cost to some extent. In terms of margin the last few deals that we have been issuing, we have been issuing around 80 basis points over reference rate. So pretty strong we just signed a revolver for -- syndicated revolver for 1.5 billion at pretty attractive rates as well. So subject to what interest rates obviously do we would expect that borrowing cost to continue to reduce as basically we rollover as I mentioned we’ve already just repaid $1.5 billion of longer corporate and we got another 700 million this year, but our strategy will remain broadly the same, the revolver gives us a little bit more flexibility compared to corporate bonds but we will need to still source quite a bit of money from offshore just because of the debt of the market we did a $500 million Aussie issue late last year, but difficult to get much more than 5 to 7 year money given the debts of the Australian bond market.

So in terms of the interest cost is quite a bit of movements in the interest cost mainly as a function of the sort of fair value of hedging which we should be able to eliminate moving forward with adopting new accounting standards but that’s being one of the key drivers of the volatility, if you look at the actual underlying cash costs you'll see that's reducing inline with the 6.2% which is just, which we announced this morning.

Andrew Keys

Okay. I will take one more question and then we will close the briefing. Thank you, operator.

Operator

Thank you. Sachin Gupta from Nomura. Go ahead please.

Sachin Gupta - Nomura

Yes, thank very much. Just had one more question on NAS and Asia divertive if that's okay. Just trying to understand what's your approach for your expansion, are you looking more for partnerships or outright investments. I guess just trying to understand why would Telstra be successful given we have a lot of the domestic Telstras up here and they'll all trying to do the same thing as well?

David Thodey

Yes. Well, it's a good question and one what we’ve really looked into. Well, firstly you've got to remember that the member OTC really has one of the best core undersea cable and satellite networks and now IP networks in Asia. And point to presents equal to any other operator in the world across the region. So that gives you this incredible base, so we still good organic growth across the business.

Now the question is how do you grow, I mean yes there is, the AT&Ts, the Oranges and the NTTs, who are around the region. How do you find the way to grow your international coverage and your network services and I think if you look at our capability while from where we sit, sit back and look at our capability.

Our leadership of creating value across the network, in IP telephony virtual context and as cloud computing that you really provide a real leadership sort of capabilities besides just the core coverage that really differentiates you and there is not many people who are doing it. Now NTT is (inaudible) data and they have some capability and that probably would be the only what I would consider full service operator because the others really don't have that other capability.

The other thing is that when you look at a market like Indonesia where Brendon is really leading this partnership strategy with Indonesia, an enormous market not as mature as maybe some of Australia or Hong Kong, just enormous growth. There is a lot of room for a lot of players. And so, you don't necessarily have to really to be in arm to arm combat. There is just going to be bigger opportunity. So, we're really trying to go with a true market growth. I mean Philippines is the same, Indonesia, India is the same, even parts of Thailand, Vietnam, obviously China as well, and I get to be little bit careful in China finding the right way to participate in that market.

So, when 50% of the world's GDP is going to be out of in Asia by mid 2020s. It's some - well, you may not be successful but you do have to do pretty badly not be successful. So, that sort of my rationale for that and we just going to be really good in what we do so good market growth prospects, good capability. I think Australians do, do well in Asia. And now that’s not to say that you do, do well but I am saying that you play it well. We're not here, we're not just coming at overnight. We're being here for long term. Every market is different and we're going to take a long term strategy so that's why I think that the NAS portfolio can do well in the region. And the reason I for one remain optimistic but we'll be disciplined about it.

So, the answer to your question there will be some partnerships that we a lot of organic growth and we will do some acquisitions all through. Okay.

Sachin Gupta - Nomura

Thank you.

Andrew Keys

Thank you for the questions. We have a Media Briefing commencing here at 11, which we will need to reset. So, David would you like to make some closing remarks.

David Thodey

Yes, well look I mean firstly thanks for coming and we appreciate your support, look there is really I think the five big messages I'd want to leave with you. Look it's gratifying to see the strong financial results, that's being result of some really good work from the team. Great to return $4.7 billion to our shareholders, so that's great. While still investing $0.5 billion in new growth business opportunity just last week. And we're going to continue invest in our networks, which is really, really important to us as we go forward. And we're going to continue to focus on customers, customer service and productivity and that are the five big messages that's what we are going to do and we remain, we like this industry. So, thank you very much.

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