Telstra reaches pivot point: Delivers earnings ahead of guidance and wins where it matters in broadband and mobiles and slows PSTN decline

Telstra today announced earnings before interest and tax (EBIT) ahead of guidance for the half year ended 31 December 2006 - a decline of 15.7% or $546 million to $2.9 billion, better than the expected 17 to 20% fall detailed in the T3 prospectus andprevious guidance.

Profit after tax was $1.7 billion, down $430 million or 20.1% on the prior corresponding half year. As expected, these results were affected by transformation costs and other one-off factors that will be more than made up in the second half.

Telstra Chief Executive Officer, Mr Sol Trujillo, said: "We are only 13 months into our five year transformation. However, with 47 months to go, we have reached the pivot point, with positive earnings growth to recommence in the second half. We are on or ahead of our transformation plan on all fronts.

Our financial performance is ahead of guidance. We are winning where it matters - in 3G, broadband and digital online offerings. We have slowed the PSTN decline. We are improving service and operational performance. We are creating new opportunities by investing for competitive advantage.

"The first half has seen us break new ground and deliver a string of firsts, including:

• in mobiles, we have topped one million 3G subscribers in a record 16 months - and total Next G" subscribers reached 415,000 this week - while keeping average revenue per user (ARPU) $20 per month higher than for 2G customers;
• in broadband, we have held ARPU from the second half of fiscal 2006 while continuing to win broadband market share;
• in service, we have reduced ADSL broadband held orders by more than 80% from 19,300 in September 2005, despite increasing order volumes; and
• in fixed lines, we have been gaining residential market share since October 2006, the first time since the advent of competition we have had positive residential churn from competitors."

As expected, transformation expenses this half year affected comparisons with the fiscal 2006 first half, which had no transformation spend.

In addition, the booking of Melbourne Yellow" directories revenue has been delayed to the second half of fiscal 2007, unlike previous years.

"In line with guidance, the one-off factors influencing the first half result will be more than outweighed in the second half. We expect that second half EBIT will grow by between 37 and 40%," Mr Trujillo said.

Mr Trujillo said that following the company's strong first half revenue growth, Telstra had lifted full year reported revenue guidance to growth of 2.5 to 3% (up from previous guidance of a 1.5 to 2% rise) and reported EBIT guidance to growth of 3 to 5% (up from a previously expected rise of 2 to 4%).

Total income grew by 2.2% or $253 million to $11.8 billion mainly due to increases in mobiles and retail broadband, with Sensis new media revenues also growing strongly. This was partly offset by lower PSTN revenues. Sales revenue grew 3.6%, normalised for Melbourne Yellow™ directories revenue.

Total expenses increased by 9.9% or $799 million to $8.9 billion, driven by transformation related costs and higher cost of goods sold and handset subsidies due to increased market campaign activity, as Telstra focuses on winning in the key 3G and broadband markets.

Depreciation and amortisation also increased due to a reduction in the service lives of certain networks, platforms and applications as a result of the transformation. Network termination payments and labour expenses declined. Mr Trujillo said: "Top line growth was strong.

While costs increased, this expenditure is an investment in the future revenue and margin growth of the company, reflecting our focus on key growth markets, including mobiles and broadband."

Total mobile revenue grew 11.8% or $296 million to $2.8 billion, reflecting our strong competitive advantage with Next G" driving continued subscriber growth. Telstra added 12 and 13 times as many postpaid SIOs in the second quarter as Vodafone and Singtel Optus respectively, helping mobile services revenues to grow at 6.5%.

Telstra added 707,000 3G SIOs in the half, including 280,000 Next G™ customers despite the network only being launched in October 2006. Total mobile SIOs stand at 8.89 million, up 363,000 in the half. Driven by significant use of applications and content since the Next G™ launch, mobile data revenues strengthened with non-SMS data ARPU rising 74%.

Mr Trujillo said that Telstra was using the Next G™ network to drive for 3G leadership. "With the launch of our Next G™ network we have the best offer in the market.

Customers are flocking to Telstra's new Next G™ network and we are on track to lead the market in 3G SIOs by May 2007. Attracting 3G customers who are high-value, special-feature consumers is vital given the ARPU premiums we are achieving compared to 2G customers," he said.

Retail broadband revenue grew $166 million to $497 million, for market-leading growth of 50.2%.

The number of retail broadband customers grew to 1.84 million, with 331,000 added in the half. "Our broadband market share has increased again, up one percentage point to 45%, and we have continued to add retail customers at three times the rate of our nearest competitor. We are growing market share while holding ARPUs," Mr Trujillo said.

Sensis grew sales revenue by 6.9% or $57 million to $885 million on a normalised basis, driven by a 68% increase in new media revenue, with a 21% increase in online usage helping to expand margins. Sensis is on track for double digit revenue and double digit EBIT growth in the full year. "Yellow" online revenue grew 32%. But Sensis is now much more than Yellow", and its emerging business revenue grew 37%. Its Chinese online business SouFun maintained triple digit revenue and EBIT growth. Together with BigPond and Foxtel, Sensis' stable of new media assets is core to our evolution into a media communications company," Mr Trujillo said.

PSTN products revenue fell $216 million to $3.6 billion, a decline of 5.6% for the half compared with a 7.6% drop in the first half of fiscal 2006. Telstra has held residential fixed line SIOs steady since June 2006, and total fixed line SIOs fell just 80,000 or 0.8% in the half to 9.86 million, a best-in-class performance. "There has been a change in momentum in the fixed line business. We have contained line losses and continued to slow the decline of PSTN revenues using market based management initiatives such as subscription pricing and integrated offerings tailored for customer segments.

Telstra's PSTN decline is lower than for many of our global peers," Mr Trujillo said. Total offshore controlled entities revenue increased by 17.4% or $145 million to $978 million for the half. In local currency terms, CSL New World income increased 40.9% assisted by the merger between Hong Kong CSL and New World PCS in March 2006, while in New Zealand TelstraClear income fell 4% due to declining call revenues.

Revenue from other offshore controlled entities grew by 24.5%.

Other key financial outcomes included:

• Compared with the half year ended 31 December 2005, EBITDA margin decreased 4.0 percentage points to 42.3%. However, on an underlying basis (normalised for Melbourne Yellow" directories revenue and transformation costs), EBITDA margins improved 1.7 percentage points sequentially from the second half of fiscal 2006 (from 42.5% at 30 June 2006 to 44.2% at 31 December) as the transformation gains momentum.
• Operating cash capital expenditure tracked to full year guidance, increasing 22.8% to $2.5 billion driven primarily by the IP enablement of our network, IT transformation and the rollout of the Next G" network. Total transformation capex was $1.75 billion in the half, while "business as usual" capex is steadily declining. Fiscal 2007 is the peak transformation spend year.
• Free cash flow declined 55.9% to $862 million, from $1.96 billion in the prior half. This position and our borrowings program will support our ongoing activities within our capital management parameters.

Mr Trujillo said key transformation achievements in the half included:

• Next G™ network built and launched in a record 10 months, offering 100 times the coverage of competitor 3G networks and world's best peak network speed of 14.4 Mbps.
• Launch of ADSL 2+, with 25% of new broadband sales in December and January for plans faster than 1.5Mbps.
• Telstra's IT transformation is on track, with important capabilities already delivered and the first major release expected late in calendar 2007.
• Total workforce is down 2,066 versus first half fiscal 2006 and by 4,596 since 1 July 2005 (pre acquisitions and investments), placing Telstra on track to meet target workforce reductions by fiscal 2008 and fiscal 2010.
• Improved service, with 97% of PSTN service calls completed right the first time.>
• Market based management driving a 13% rise in customers using three or more Telstra products.
• Investment in improved service in the field, on the phone and online, with more than 6,400 staff participating in the Telstra Learning Academy.

Mr Trujillo said regulation remained a significant risk, but that Telstra would continue to defend the interests of its shareholders and the nation by seeking appropriate regulation reform and through the constitutional challenge initiated in the High Court. Mr Trujillo said that, apart from lifting full year revenue and EBIT guidance, previous guidance on the company's fiscal 2007 outlook and long-term management objectives remained unchanged. The Telstra Board of Directors declared a fully franked interim ordinary dividend of 14 cents per share, representing a total payment of $1.74 billion.

The record date for the dividend will be 2 March 2007 with payment to be made on 30 March 2007. Telstra shares will commence trading excluding entitlement to the dividend on 26 February 2007.

This event will be webcast live from 9.15am AEST