Guidance achieved; transformation drives shareholder value & top global performances

Telstra today announced a profit after tax and minority interests of $3.7 billion for the year ended 30 June 2008, an increase of 13.5%. With Telstra's end-to-end transformation driving improved results across the company, free cash flow increased 33%, or $956 million, to $3.9 billion.

Other financial highlights:

• Final ordinary dividend of 14 cents per share, fully franked.
• Total revenue growth of 4.7%, exceeded guidance of 3% to 4%.
• Reported EBITDA of $10.4 billion, up 5.6%, exceeded guidance of 4% to 5%; EBITDA margin of 42.2%, up 0.5 percentage points.
• Earnings before interest and tax (EBIT) increased 7.7% to $6.2 billion on a reported basis. EBIT excluding accelerated depreciation at CSL New World increased 9.1%, exceeding guidance of 6% to 8%.
• Accrued capital expenditure was $4.9 billion, down 16.7%, in line with guidance of $4.6 billion to $4.9 billion.
• Strong sales growth at all retail business units, Sensis and key product segments, including broadband and mobiles, with sales revenue up 4.2% to $24.7 billion, a $1 billion increase for the second consecutive year.
• Mobile services revenue grew 12.3% to $5.5 billion as the Next G™ network’s superior coverage, speed, capacity, reliability and services brought blended ARPU growth of 7.8% to $49 per month.
• Retail broadband revenue grew 49% to $1.8 billion, driven by both market share and ARPU increases.
• PSTN revenue was $6.7 billion, a 3.2% decline for the year compared with 4.4% in fiscal 2007. The number of retail PSTN lines has grown for 14 consecutive months.

Graphs - Full Year Results 2007-2008:

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Telstra Chief Executive Officer Mr Sol Trujillo said: “Telstra's turnaround continues to gain momentum on all fronts, with our fiscal year guidance met or exceeded for the third consecutive year.

“With such strong results, Telstra is leading the Australian market while continuing to rank at or near the top among global peers on key financial and operational metrics such as mobile services revenue growth, broadband market share gains, PSTN line loss mitigation, and advertising and directories revenue growth.”

Mr Trujillo said that most of Telstra's earnings growth had been achieved in the highly competitive and unregulated areas of the business where Telstra had invested to create competitive advantage, including mobile voice and data, IP access, the advertising and directories business, and broadband.

“We have redefined our business by investing to create competitive advantages and this value differentiation strategy, underpinned by our customer-centric transformation, sets us apart,” Mr Trujillo said.

“The Telstra customer experience is truly different, no matter which platform customers are using, and this is reflected in our sustained financial improvement. Telstra differentiates in everything it does: from the Next G™ and Next IP™ networks, to integrated services such as remote FOXTEL iQ* programming, products such as the Telstra Turbo 7 series® wireless broadband modem, content, and through the hands-on customer experience in our new T [life]™ stores.

“Telstra's networks, products and services offer clear advantages over our competitors, a fact reflected in increased broadband and mobile revenue market shares, a halving of retail PSTN churn since December 2005, and a more than doubling of revenue growth rates in IP and data access since the Next IP™ network was launched.”

Retail sales revenue grew 5.9% for the year with strong performances across each of the key segments. Sales revenue grew 6.1% in Telstra Consumer & Channels and 8.6% in Telstra Business. Growth of 3.6% in Telstra Enterprise & Government is the strongest since competition commenced.

Total expenses including depreciation and amortisation increased 3.3% to $18.8 billion in line with previous advice as the expenses related to the IT component of the transformation peak. Redundancies were higher with the total workforce reduced by 8,784 since 1 July 2005, ahead of guidance of 6,000 to 8,000 (excluding acquisition and divestment activity). Salary expenses also rose reflecting overall wage rises and the higher cost of skilled staff as Telstra continues to invest in growth areas and new technologies.

3G penetration more than doubled since June 2007 to 47% of our mobile base or 4.4 million subscribers, a feat unmatched by our global peer group. 3G post-paid ARPU is up 5.3% to $77.51 per month. 3G services drove mobile data growth of 44%. Telstra continues to gain around 20,000 wireless broadband subscribers per month with 588,000 in total generating ARPU in excess of $90 per month. SMS revenue grew 20% to $740 million over the year.

Blended average mobile subscriber acquisition and re-contracting costs (SARCs) fell 19% from targeting incentives better through market-based management and cost advantages through economies of scale in 3G 850MHz handsets.

“Our Next G™ network investment has accelerated mobiles growth, delivering double-digit growth for the third consecutive half and continuing our stand-out performance as customers see the value of our superior mobile offerings,” Mr Trujillo said.

Telstra's subscription-based pricing plans and market-based management initiatives underpinned a strong performance in PSTN. PSTN revenue was $6.7 billion, a 3.2% decline for the year compared with 4.4% in fiscal 2007. Retail PSTN revenue decreased just 0.1% for the fiscal year and retail lines actually grew by 87,000 resulting in 14 months of consecutive increases. However, wholesale line losses to low-cost Unconditioned Local Loop (ULL) services continued with total PSTN services in operation (SIOs) declining 390,000 to 9.4 million.

In the business market, IP revenues exceeded the revenues from legacy data products in the second half for the first time. This was driven by IP access growth of 28% for the full year, highlighting our success in migrating and winning customers for Telstra’s Next IP™ network.

The continued strength of the BigPond brand, with its unique content, award-winning customer service and value-based plans, is driving growth in Telstra’s media-comms portfolio. Retail broadband revenue grew 49% to $1.8 billion and ARPU increased 2.9%. Retail broadband customer numbers grew strongly to 3.3 million for the year resulting in a market share gain of 2 percentage points to 49%. Market share gains have been achieved for six consecutive halves driven by the strength and value of Telstra’s service.

"We've sustained both broadband market share gains and ARPU growth, a feat virtually unheard of among incumbents around the globe. The additional revenue from fixed broadband now dwarfs the PSTN revenue declines," Mr Trujillo said.

Announcing BigPond's improved financial results, Mr Trujillo also announced BigPond Music would transform Australian online music by offering tracks from all major record labels in a format that could be transferred between most music players, including the iPod, Sony Walkman, Xbox, PlayStation 3 and home media centres.

"From today Australian consumers have a real choice; between our competitors' restricted world where music cannot easily be transferred between devices, and Telstra BigPond's truly open world that offers convenience, simplicity and quality. Telstra BigPond is changing the game in music just as we have in other categories of online content. We will increase our share of the online music market because we already have a large online audience and billing relationships with millions of customers. And from today we also have a superior technology.”

Meanwhile, Sensis grew its sales revenue 8.1% to $2.1 billion for fiscal 2008 as Yellow™ directories increased revenue 5.8% to $1.3 billion with Yellow™ print revenues up 3.7%. White Pages® directories delivered double-digit growth, up 11.5% to $369 million. Digital media revenues including SouFun, Whereis® and MediaSmart® grew 32% with SouFun posting unaudited revenue growth of 67% and EBITDA growth of 99% for the year (US$ proforma).

Mr Trujillo said Sensis’ performance continued to defy global directories trends by delivering a world-leading performance of high single-digit top line growth and by achieving solid growth in its legacy print businesses.

“Following our recent acquisitions in China, Telstra will start to benefit from combining Australian expertise with the fast-growing Chinese market while importing expertise from China to our domestic business,” he said.

In subscription TV, FOXTEL delivered another impressive result with revenue up 17% to $1.7 billion while EBITDA grew 48% to $351 million. Sales of the FOXTEL HD+* service have been strong with nearly 40,000 subscribers taking it up since it was launched in June.

“With the continued success at BigPond, Sensis and FOXTEL, plus the integration of their services, Telstra is demonstrating the value behind its media-comms strategy, combining a range of premium content assets with a world-leading telecommunications business,” Mr Trujillo said.

Total offshore controlled entities revenue decreased 5% to $1.8 billion as a result of foreign currency movements. In local currency terms revenue at CSL New World increased 4.7%. At TelstraClear the revenue decline was just 0.2% with EBIT up 73% and EBITDA up 52%.

Mr Trujillo said Telstra was undertaking an IT transformation that was unmatched in terms of complexity, breadth and speed.

"Ours is a quad play across PSTN, broadband, wireless and FOXTEL providing us with a single view of the customer. Simultaneously, we have built and refurbished our data centre infrastructure with 100% new applications," he said. "Already we have successfully migrated 3.3 million consumer customers and 4.3 million services. For our migrated consumer customers, we have moved from managing their data across 74 billing, product and ordering systems to just three.

"The complexity of this project is breathtaking. Because our legacy systems had 2200 products, 236,000 product codes, 421,000 pricing charge codes and 10,000 discount plans, we have run more than 90,000 test cases to cover millions of permutations of customers, products and prices in order to ensure a smooth migration of customers. We have more than 15 million lines of code in the new environment. The new code is deployed and running at scale and we have processed hundreds of thousands of orders and millions of bills on the new platform. We process more than 4 million call records per day on the new platform.

"This has all been achieved without breaking our central commitment that there should be minimal interruptions to either our customers or the wider business. We have seen no increase in complaint volumes and all billing accuracy and revenue assurance metrics are equal between the new and legacy systems. We are on track to complete the consumer migration by the end of 2008 and we start migrating business customers this month."

Mr Trujillo outlined guidance for 2008/09+:

• Total revenue growth of 3% to 4%;
• EBITDA growth of 6% to 7%;
• Depreciation and amortisation around $4.5 billion;
• EBIT growth of 6% to 8%; and
• Accrued capex of $4.3 billion to $4.6 billion.

In addition, the long-term management objectives for fiscal 2010 have been updated+:

• Revenue Compound Annual Growth Rate (CAGR) from FY05 to FY10 was 2.5% to 3%, now 3% to 4%;
• Opex CAGR from FY05 to FY10 was 2% to 3%, now 4% to 5%;
• EBITDA CAGR from FY05 to FY10 was 2.5% to 3%, now 3% to 3.5%;
• EBITDA margin in FY10 of 46% to 48% maintained;
• Capex/Sales in FY10 was 10% to 12%, now around 14%;
• Workforce reduction to FY10 was 12,000, now 10,000 to 12,000; and
• Free cash flow in FY10 of $6 billion to $7 billion maintained.

Telstra's directors resolved to pay a fully franked final ordinary dividend of 14 cents per share, representing a total payment of $1.7 billion. The total dividend for the fiscal year is 28 cents per share. Shares will start trading excluding entitlement to the dividend on 25 August 2008. Payment will be made on 26 September 2008.

Telstra's Dividend Reinvestment Plan (DRP) has been suspended for the 2008 final dividend. Telstra planned to source the shares to be allocated under the DRP from the Future Fund. However, the Future Fund has confirmed it will not participate in the DRP for this dividend payment#.