Australian Mobile Market

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1 AUSTRALIA Telstra data inclusions on key post-paid plans $130 $130 $95 $70 $55 Optus data inclusions on key post-paid plans "Everyday Connect" "Mobile Accelerate" $50 $40 Vodafone data inclusions on key postpaid plans 1 MyPlan "Doubledata" promotions MyPlan+ $65 $70 1 July 2015 Macquarie Securities (Australia) Limited Plan-tracker: Promotions extended Event We continue to monitor activity in the Mobile sector via our Plan Tracker database. Activity in June was fairly limited, with some fine-tuning of plans by Vodafone and Optus, and the extension of a number of promotional data offers the key changes. June also saw the entry of Woolworths into the MVNO space with Woolworths Connect, supported by an extensive marketing campaign. Impact Changes of note during June: Early in June, Vodafone cut the monthly cost of its and Red plans with an iphone 6 bundle by between $1-5 per month. Vodafone also extended its double data promotion (applicable to the and Red plans) from June to mid-august. Early in June, Optus added a free six-month Netflix subscription (ex data usage) to its $40 My Plan Plus plans (for iphone 6, Samsung Galaxy 5 and Galaxy 6 plans). Virgin Mobile, wholly owned by Optus, extended its bonus data inclusions for the plan ( bonus) and plan ( bonus) from June to the end of July. Woolworths launched its MVNO, Woolworths Connect, on Telstra s 3G network. Its core offering is a $30/month plan with $650 national call credit and 2. of data (including bonus until 31 July). Implications for operators: Overall, the changes in June are fairly benign, and reflect fine-tuning of offers as opposed to bold strategic pricing decisions. While the market remains competitive, the discipline around data inclusions at lower-end plans and also handset subsidy are positives for overall industry structure. Having said that, the increases in data inclusions more broadly in recent months will place some downward pressure on ARPUs over time. Given the current strength in ARPU trends and the insatiable appetite for mobile data, we expect that this will take 6-12 months to play out. We remain of the view that mobile service revenues can continue to grow over the medium term given the increasing demand for data, albeit at a slower rate than recent periods. We also continue to hold the view that the current shifting landscape warrants close attention to trends in this space with regard to both ARPUs and handset subsidy. Outlook Telstra Corporation (TLS AU, A$6.15, Neutral, TP: A$6.30): Our view on the outlook for Telstra is unchanged following this update. While Telstra faces an increasingly competitive landscape in Mobiles and Fixed, it remains on track to deliver to guidance and should continue to hold its attraction for yield seeking investors in the current environment. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Key changes during June to handset bundles Vodafone was the only MNO to change pricing, while Optus modified lower-tier plan inclusions. Telstra Telstra left its data inclusions unchanged, which are, 2.,, and per month for its S ($55/month), M ($70/month), L ($95/month) and XL ($130/month) postpaid plans, respectively. Telstra left its pricing unchanged, as illustrated below: Fig 1 Telstra handset plan data inclusions "Everyday Connect" "Mobile Accelerate" $130 $130 $95 $70 $55 Optus Optus left its pricing and data inclusions unchanged, which are 0.,, and per month on its $40,, and My Plan Plus postpaid plans, respectively. Optus added a free six-month Netflix subscription (ex data usage) to its $40 My Plan Plus plans (for iphone 6, Samsung Galaxy 5 and Galaxy 6 plans). Vodafone Early in June, Vodafone cut the monthly cost of its and Red plans for the iphone 6 by $1-5 through a reduction in the monthly handset cost. The new and Red plans for iphone 6 are as follows: iphone 1: $87/month plan (down $2) and plan (down $5) iphone 6 6: $93/month plan (down $1) and $107/month plan (down $2) iphone 6 12: $99/month plan (down $2) and $113/month plan (down $2) Vodafone also extended its double data promotion (applicable to the and Red plans) from June to mid-august. 1 July

3 Fig 2 Optus data inclusions on key post-paid plans Fig 3 Voda data inclusions on key post-paid plans MyPlan MyPlan+ 1 "Doubledata" promotions $65 $50 $40 $70 While Vodafone reduced pricing for its higher-tiered plans, there was no price movement for the mid-tier plan that we track, as illustrated below: Fig 4 Bundled plan costs (for mid-range iphone) stabilised 105 $/mnth 95 Bundled plan costs rising over the last 2 years A short burst of competition following the Optus MyPlan+ releases iphone 6 launch 65 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Source: Company websites, Macquarie Research, July 2015 Telstra Optus Vodafone Virgin Virgin Mobile, wholly owned by Optus, extended its bonus data inclusions for the plan ( bonus) and plan ( bonus) from June to the end of July. The offer applies to plans for the iphone 6, Samsung Galaxy 5 and Galaxy 6. The promotion is for new customers signing up online for 24 month plans. 1 July

4 Woolworths launches MVNO product: Woolworths Connect Woolworths launched Woolworths Connect mid-june, which is a range of pre-paid mobile and mobile broadband products on Telstra s 3G network. Woolworths initial foray into the MVNO market (on Optus network) was short-lived, lasting from August 2011 to October Woolworths current offering comprises two pre-paid mobile products: A $30 plan with 2. of data (including bonus until 31 July on first recharge), $650 of national calls and unlimited SMS A $45 plan with 3. of data, $1,500 of national calls and unlimited SMS Woolworths is also offering 10% off the price of each plan for Woolworths Everyday Rewards card-holders who purchase or recharge at participating stores. Initial upfront costs are $2 for the sim card, which, along with recharge cards, are available from participating Woolworths, Big W and Caltex sites. Recharge vouchers are also available at BWS and on Woolworths website. Woolworths data add-ons are fairly expensive compared to other operators, ranging from $5 (for an extra 250MB, 14 day expiry) to $15 (for an extra, 30 day expiry). 1 July

5 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2015 AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients) Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients) Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients) TLS AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July month target price methodology TLS AU: A$6.30 based on a DCF methodology Company-specific disclosures: TLS AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Telstra Corporation Ltd with investment advisory services in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Telstra Corporation Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: TLS AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. 1 July

6 This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 1 July