Growth Continues as Telstra Transitions - Company Financial Information

Cambridge Telcom Report, March 13, 2000

Telstra Wednesday announced its results for the six months ended 31 December 1999, declaring a profit after tax and minorities of A$2.1 billion.

This is a 15.6 percent increase on the previous corresponding period -- and a half-yearly profit record for Telstra. The profit benefited from some one-off items. Earnings before Interest and Tax increased to A$3,307 million, at 9.3 percent -- the solid single digit growth previously foreshadowed.

The results show strong revenue growth, driven largely by Telstra's new age businesses -- chiefly mobiles, data, text and Internet. For the first time, revenue from non-traditional businesses reached 50 percent of total revenue.

For Telstra's 2.1 million shareholders and instalment receipt holders, earnings per share are up, from 14.1 to 16.3 cents per share and the Board has declared a dividend of eight cents, partially franked to approximately 49 percent.

Telstra also announced - -- A major program to capture further cost reductions. The overall impact of this program will be a reduction in expenses of about A$650 million per annum, most of which will occur in the next fiscal year. It is anticipated that this program, together with other initiatives, will lead to an overall reduction in staff numbers of around 10,000 over the next two years as well as up to 220 senior management positions which is about 22% of total executives.

-- Plans to deliver broadband services to 90 percent of the Australian population over two years. Telstra will deploy ADSL (Asymmetric Digital Subscriber Line) technology, which transforms ordinary copper phone lines into high-speed digital lines, to complement our existing delivery of broadband by cable and satellite.

-- The appointment of independent advisers to assess the options for sale of Telstra's major construction unit, Network Design and Construction Limited.

-- A review of the structure of our businesses and integrated organisation to ensure the best business architectures for Telstra in this modern era.

Telstra's Chief Executive Officer, Dr. Ziggy Switkowski, said the results were essentially demonstrating two things.

"First, despite intense domestic competitive pressures, Telstra continues to grow its revenue and secondly, the transition of Telstra from a phone company to a 21st century electronic information services company, with a growing focus on the businesses of the new economy, is succeeding. In fact, it is accelerating," he said.

"Six years ago, less than a quarter of Telstra's revenues came from non-traditional products and services. Now that figure is about half. That part of our business will likely continue to grow at double-digit rates although the underlying volume growth more closely follows the doubling of Internet traffic every five months with the escalating activity around e-commerce by Australian companies."

Data, text and Internet services, representing 14 percent of total revenues, grew by A$171 million, or 14.2 percent, reflecting the strong demand for high capacity data transmission and the escalating use of the Internet.

Telstra will grow these revenues with a number of initiatives. These include the plans for the ADSL rollout and also the recent changes to the price structures of our cable modem broadband access service, which now make it extremely attractive.

Mobile revenues are now more than 15 percent of our total revenues and grew yet again at more than 17 percent, due to both call time and handset sales for the digital GSM network, however, margins continue to be under pressure. Telstra remains the market leader in mobile services in operation, with around 50 percent, and has the lowest churn rate in the market, running at just over one percent per month.

Telstra expects take-up of the CDMA network to be strong, and has brought forward some of the capital expenditure on CDMA to increase coverage and rollout more quickly than originally planned.

Intercarrier or interconnect revenue grew by A$67 million or 21.3 percent, due to both originating and terminating calls on our fixed and mobile networks. More retail customers migrated to other carriers' networks resulting in increases in local call resale revenue.

International and national long distance call revenues are down, and local call revenue is flat.

International call revenue represents an important 5 percent of our total revenue even though it declined during the period by 19.2 percent or A$115 million.

Despite the introduction of fixed to mobile call preselection during the period, fixed-to-mobile revenues decreased only slightly, ie., by 1.1%. While market share and prices for fixed-to-mobile calling declined there is still strong growth in this market due to the continuing growth in the mobiles market.

"Our keenly priced response to the highly competitive fixed-to-fixed national long distance calls stimulated growth in use. Consequently, the effect of lower prices combined with higher minutes of use restricted our fall in fixed-to-fixed revenue to A$27 million or 3.6 percent. Value-added services such as call return and calling number display continued to exhibit strong growth."