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TELUS, Corp. (NYSE:TU)

Q3 2008 Earnings Call

November 7, 2008 11:00 am ET

Executives

John Wheeler - Investors Relations

Darren Entwistle - President and Chief Executive Officer

Robert McFarlane - Executive Vice President and Chief Financial Officer

Analysts

Peter MacDonald - GMP Securities

Vince Valentini - TD Newcrest

Greg MacDonald - National Bank Financial

John Henderson - Scotia Capital Markets

Glen Campbell - Merrill Lynch

Jeffrey Fan - UBS Securities

Peter Rhamey - BMO Nesbitt Burns

Simon Flannery - Morgan Stanley

Dvai Ghose - Genuity Capital Markets

Jonathan Allen - RBC Capital Markets

Operator

Good morning ladies and gentlemen, welcome to the TELUS third quarter 2008 earnings conference call. I would like introduce your speaker Mr. John Wheeler. Please go ahead.

John Wheeler

Welcome and thank you very much for joining us today. We’ll start with introductory comments Bob McFarlane, Executive Vice President and CFO. This is will be followed by a question-and-answer session. Darren Entwistle, President and CEO will be joining us for this Q and A session, given the unprecedented stock market turbulent being experienced by our investors and the importance of last month’s announcement of TELUS’ implementation of a next generation wireless network.

This is call is scheduled for one hour or less. The news release on the third quarter financial and operating results and detailed supplemental information are posted on our web site. In addition for those with the internet access, the presentation slides are posted for viewing at TELUS.com/investors. You’ll be in listen only mode during the opening comments.

Let me now direct your attention to slide two. The forward looking nature of the presentation answers the questions and statements about future events are subject to risk and uncertainties and assumptions. Accordingly, actual results could differ materially from statements made today, so do not place undo reliance on them.

We also disclaim any obligation to update forward-looking statements except as required by law. I ask that you read our legal disclaimers and refer to the risk and assumptions outlined in our public disclosure and filings with securities commissions in Canada and the United States.

Let me direct your attention to slide three that highlights the topics that Bob will be covering in his presentation. This includes both segment and consolidated reviews, plus updates on key developments listed there.

Now over to Bob on slide four.

Robert McFarlane

Thanks, John and good morning everyone. Let’s begin with a quick summary of the wireless highlights referring to slide five. TELUS reported strong wireless results positively affected by continued success of the Koodo brand and strong execution and SMART phone space.

Gross and wireless editions were a TELUS third quarter record, excluding the impact of the analog network turn-down, which I’ll explain in a moment. This success bodes well for TELUS’ ongoing revenue growth and the attractive future economics that this growth should generate.

Wireless data revenue’s increased by 56% due to the accelerated adoption of SMART phones, which is driving increased use of data services and to a less extent, increased data roaming revenues.

The continued decline and voice ARPU was partially offset by the strong growth in data ARPU. Wireless EBITDA period was impacted by the strong subscriber loading, increased retention spending, focused on SMART phone sales, including the migration plan, as well as increased data cost of sales.

Of course a major development was the October announcement to build a next generation wireless network and add into HSPA network sharing agreement with Bell Canada.

I’ll now describe our wireless results in detail starting on slide six. Wireless revenues were up 9%, based on the 11% growth in wireless customer space, while overall revenue prescriber declined slightly.

EBITDA as adjusted was relatively flat and impacted by records subscriber loading as well retention efforts focused on SMART phones. In addition, we also saw increases in certain network operating expenses due to very strong growth in data usage and roaming, as well as higher content and licensing costs from the excellent 56% increase in data revenues.

CAPX was flat year-over-year, due to deferred spending, in advance of our HSPA network build-out, which is now well underway.

Turning to slide seven. Net ads this quarter were a record 177,000 when excluding 27,600 units disconnected pursuant to the analog network turn-down. The loading was positively affected by the continued success of our recently launched Koodo post-paid, basic service brand, resiliency of the Mike service and continued good post-paid PCS loading.

In aggregate, post-paid digital net additions were 159,000, an increase of 61% compared to last year. And represented 90% of TELUS’ total net ads in the quarter. Overall, out accumulative subscriber base has recently surpassed the 6 million mark with post-paid representing just over 80% of the total.

Looking at the Canadian wireless industry as a whole on slide number eight, you can see the gross additions continue to be strong growing 7% year-over-year. While net ads have increased 6% with 1.2 million new subscribers year-to-date.

These results clearly show that even with increased economic uncertainty, growth in the Canadian wireless industry has remained robust. That’s a very healthy trend. We believe there remains ample room for future growth in Canada and that TELUS is well-positioned to compete for a share of this growth.

The graph on the left-hand side of slide number nine, shows that TELUS’ ARPU in third quarter of ’08, decline by 1% to $64.14. The declining trend of voice ARPU that we experienced this quarter and in recent years, is due to pricing competition, increased use of including minute rate plans, increased penetration of our basic service brand and a slight decrease in voice roaming.

Almost offsetting the voice decline, was data ARPU, which increase by nearly $3.00 to $10.19 and now represents 16% of total ARPU. We remain very bullish at TELUS for continued strong wireless data growth, given the increasing penetration of 3G capable devices in our subscriber base.

The ongoing introduction of higher bandwidth applications and devices, as well a successful continued orderly migration of non-dispatched Mike users and higher value-add prepaid subscribers to PCS, post-paid service.

Slide 10 reflects the continued focus on our wireless marketing efficiency and retention efforts in the third quarter. Gross ads of third quarter record increase 23% with 67% of them derived from post-pay. Digital turn increased by 9 basis points to 1.52%, due to an increase and the impact of higher prepaid churn.

COA decreased 10% year-over-year to $341 per gross ad. Reflecting the strong increasing gross additions along with a higher proportion of new subscriber loading from lower cost channels. Cost of retention increased significantly as investments in this area were focused in higher cost SMART phones and for ongoing Mike migration program.

Slide 11 highlights just a handful of SMART phones available from TELUS including the much anticipated Blackberry Storm Touch Screen World Phone on the far right. It is expected to become available for the holiday season. We continue to enjoy considerable success in this important category, as we’ve been the Canadian leader in SMART phone adoption. TELUS remains an industry leader, offering the largest selection of SMART phones and Canada’s largest high-speed network.

As shown on slide 12, we’re fine-tuning a revised 2008 wireless guidance, which reflects year-to-date results including; the start-up launch of the Koodo branded service and record subscriber loading, as well as our outlook for the remainder of the year. The wireless revenue range is being tightened towards the low-end of the range. And EBITDA guidance is being lowered based on higher expenses driven by strong subscriber loading and significant retention investments made in the first nine months of 2008.

To conclude the wireless section, as you may recall in October, TELUS confirmed its commitment to long-term evolution or LTE for short. As the technology for its fourth generation wireless broadband network.

As an interim step TELUS has begun building a national Next Generation wireless network, based on HSPA technology and expects the service launch by early 2010. This will enable a smoother transition to LTE. At the same time, TELUS has entered into a network sharing agreement with DELL, which builds on and enhances arrangements we’ve had in place since 2001.

This new and enhanced agreement allows TELUS to share capital expenditures, effectively lowering costs and increasing the pace of the national build-out. TELUS will benefit from being able to offer our clients the widest national coverage at launch for HSPA technology using our existing 850 and 1900 megahertz wireless spectrum.

In addition to the upfront capital cost benefits, we expect an array of benefits for TELUS, our customers and investors including; ongoing network operating cost savings, lower handset costs due to a larger HSPA device ecosystem and increased global roaming revenues achieved over time. We expect a recurring return on the upfront investment and expect to create long-term value for our investors.

Now lets turn our attention to slide 14 for TELUS’ wire-line segment highlights. In 2/3/08, we converted more than a million BC residential customers over to a new converged wire-line billing and client care system with minor impacts on customers and operations.

Third quarter wire-line revenue was solid, driven primarily by data revenue growth, including revenue from the acquisition of emerges as well as organic growth, which more than offset the moderate declines in local and long-distance.

High-speed net additions were disappointing. Meanwhile, now losses remain largely consistent with previous quarters. Meanwhile, expenses in Q3 ’08, were impacted by implementation costs in advance of revenue generation for long complex deals, such as the government of Ontario, department of national defense contracts, along with strong TELUS TV loading.

Turning to the wire-line financials, starting with revenue on slide 15. Local and long-distance revenue declined moderately reflecting the continued competitive environment and substitution of facts from wireless in void. Reported data revenue increased by 16% due to revenues from the emerges acquisition, increased managed data revenues in business and continued growth in broadband revenues and high-speed internet and TELUS TV subscribers.

Underlying data revenue grew approximate 4%, adjusting for acquisitions and regulatory impacts. Total wire-line revenue rose nearly 4%.

Turning to slide 16, we can see that wire-line profitability fell slightly due to increased costs. Total operating expenses increased 8.4% mainly due to an increase in salaries and benefits for increase in team members. Notably including those from emerges. Excluding the impact of the emerges acquisition, the number of wire-line team members was flat year-over-year.

Contributing to the higher expenses were increase cost of sales for increased data equipment sales with lower margins, expenses from the acquired companies, higher costs for the provisioning of TELUS TV due to increased loading and higher restructuring costs. External labor costs also increased to improve service levels and to implement services for new enterprise customers related to a number of significant wins in recent periods.

As Darren discussed last quarter, cost control remains a key management focus for the remainder of 2008 and into 2009 and beyond to protect wire-line margins. Restructuring costs in wire-line were $8.7 million in the third quarter, representing an increase of 36% over Q3 ’07.

We expect further increases and restructuring expenses in future quarters. Capital expenditures increased 12%, mainly from increased upfront expenditures to provide support to large new enterprise customers and broadband services.

Moving on to slide 17, let’s briefly examine our high-speed internet results. High-speed net ads were disappointing in third quarter, with TELUS adding 13,000 net subscriber, which is a significant decrease over the same period a year-ago. Subscriber ads were impacted by increased competition from our cable competitors expanded offering.

Certain temporary order fulfillment bottlenecks, TELUS marketing efforts including the removal of the free computer offer that were less effective than planned. We are seeing increased importance being placed on consumer bundled offers in the marketplace.

This highlights the increasing importance of consumer bundles, including both high-speed internet and TV. And reinforces our strategy to continue to invest in expanding a broadband speed and coverage including the TELUS TV footprint.

Given the disappointing third quarter loading results, internet marketing is a key area of focus for future marketing and operational execution improvement. Overall, our high-speed internet subscriber base is up 8.4% year-over-year.

Slide 18 highlights our wire-line network access line performance compared to our peers across North America. In the third quarter, residential line losses were partially offset by continued stable, positive business line growth. On a year-over-year basis, overall consolidated line losses increased slightly to negative 3.6%, due to losses of residential lines to void competitors, particularly cable companies, as well as ongoing technological substitution to wireless services.

Now to conclude wire-line in slide 19, we’ve revised TELUS’ 2008 wire-line guidance to reflect the results to-date in our outlook for the remainder of the year. Revenue and EBITDA have been tightened toward the low-end of the respective ranges, the revised EBITDA outlook reflects higher expected restructuring charges. And the diluted upfront impact of large complex deals.

Slide 20, illustrates the robust growth strategy and changing mix of TELUS’ total customer connections, which is consistent with our value creating growth strategy. Growth in wireless and high-speed internet continued to significantly out-pace declines in residential network access lines and dial-up internet.

Wireless and internet now account for 63% of total connections and we’ve generated a million more connections in the last two years. So putting it all together, let’s quickly look at TELUS on a consolidated basis, starting on slide 21.

Consolidated revenue in the third quarter grew by nearly 6%, while EBITDA as adjusted. Decreased slightly by 60 basis points, in large part due to higher costs as already mentioned.

Reported EPS has adjusted decrease by 4% and I will elaborate on the various drivers behind EPS on the next slide. Meanwhile CAPX increase by nearly 9%, driven mainly from an increase in the wire-line segment to support new enterprise in broadband service customers.

This next slide shows the detailed breakdown of the components sub-reported EPS. Lower outstanding shares contributed three sets to EPS, while the expense impacts of the Alberta IT system implementation and the write-offs related to Amp Mobile, incurred last year together lead to $.03 improvement.

Lower 2008 tax rates added $.03 of growth this quarter, while 2007 tax related adjustments positively impacted reported EPS last year $.28. Higher depreciation and amortization in Q3 ’08, impacted EPS by $.06, this reflects the reduction and estimated useful lines for circuit switching network assets. Growth and capital assets, plus additional amortization from acquisitions.

EBITDA in reduced EPS growth by $.03, while higher restructuring and other costs contributed $.03 to the decline. In the quarter, an unfavorable charge of $.02 per share after tax was recorded for sales tax reassessments related to prior years. This charge was equally split between depreciation and financing charges. Meanwhile higher financing, excluding aforementioned sales tax related church, and the prior year recovery for the cast settlement of auctions. Each negatively impacted EPS by $.01.

Slide 23 summarizes our share repurchases in the quarter and since we started buying back shares in December 2004. We remained active in the market in third quarter, repurchasing a total of 2 million tele-shares for $75 million. And outstanding shares were lower by 3% on a year-over-year basis. Since inception of the NCIB program in 2004, we’ve achieved an 11% or 41 million share reduction in the total number of shares outstanding.

In combination with these share buy-backs and our dividend, TELUS has returned $707 million to shareholders year-to-date, clearly highlighting our strong and ongoing record of returning capital to shareholders. In December, we intend to renew our NCIB, subject to board approval, to allow for the possibility of share repurchases into 2009.

Today we’re pleased to report a dividend increase of nearly 6% to $0.47.5, paid quarterly. The combination of our strong financial situation with confidence in our future prospects is the basis for the board decision announced today to increase the TELUS dividend for the fifth consecutive year. This increase builds upon our strong track record of dividend growth.

As shown on slide 25, today we’re making changes to consolidate a guidance to reflect revisions through outlook for the wireless and wire-line segments. The changes are noted here and in section nine of our MD&A, with the updated assumptions.

Our consolidated revenue guidance range is being tightened and lowered towards the low-end of the range. We’re also narrowing and lowering our EBITDA guidance, which also reflects the $20 million increase in our 2008 annual restructuring cost estimate. More on this in a moment.

Our EPS guidance range has been tightened from $.20 to $.15, and the low-end reduced by $0.05. Consolidated CapEx remains unchanged at $1.9 billion, which excludes the $882 million of AWS spectrum auction payments. In summary, we continue to expect good year-over-year revenue and adjusted EPS growth driven by the strong customer loading that we’ve seen in the first nine months of 2008.

Now lets turn our attention to slide 26 to outline the latest phase of TELUS’ operating efficiency program, which augments are ongoing in sizable investment and restructuring going back to 2001. In September, we started consolidating three enabling business units. Tech strategy, network operations and business transformation into two integrated teams.

The expected future benefits include more effective deployment of technologies and supporting systems. Cost efficiencies and improved customer service. As Darren highlighted after the second quarter, TELUS faces the challenge of working through J-Curve Investments in launching a new wireless brand and implementing large complex deals and broadband service deployment such as TELUS TV.

Over time these economics will improve but we recognize we must focus now on efficiency initiatives to pay for these investments. As outlined on the slide, significant efficiency initiatives are now underway, including optimizing the layers of management in spans of control to reduce staff, especially in the supporting business units.

An area of focus will be to increase the use of business process outsourcing to reduce costs. We’re rationalizing products in low-value activities in the longer term, our investments in our consolidated billing systems in Alberta and B.C. and in HSPA provides opportunities for efficiencies going forward.

And we're moving the consolidate vendor management with integration of significantly reducing the number of vendors. As a result of this program and issues in place, we have increased our restructuring cost estimate by $20 million to approximately $50 million for the year 2008.

Given the current economic environment, I now review TELUS' credit position on slide 27 before I conclude. As a result of our prudent financial policies, TELUS has maintained a strong balance sheet with sustainable cash flows and ample liquidity. TELUS' net debt EBITDA is 1.9 times within our policy guideline of up to two times even after paying $882 million for the AWS spectrum.

TELUS is the in enviable position of having no debt maturities until 2011 while our commercial paper program provides a low cost source of funds. While some organizations have had difficulty accessing debt markets, traditional sources of capital have consistently been opened and available to TELUS growth in the recent period of the capital market volatility. If conditions are advantageous, TELUS would consider trimming out some of our short term financing.

To conclude in slide 28, TELUS saw at the third quarter revenue growth and wireless were encouraged by the excellent trends with record loading and data revenue growth. Now, losses on the wire line side remain well below those of our North American peers with strong growth in business lines. We made minor revisions to the 2008 guidance to reflect strong subscriber loading and a near-term diluted investments for our large complex deals in Central Canada, the launch of Koodo Mobile as well as TELUS TV’s roll out.

As Darren and I highlighted in the past quarter, TELUS recognizes that the competitive nature of our industry makes it incumbent on the TELUS team to focus on cost discipline. As such, ongoing operating efficiency programs are being augmented to reduce cost and will be a key focus in remainder of 2008 and beyond.

Finally, with the combination of our strong balance sheet and our confidence in the future growth prospects of the company TELUS is pleased to announced our fifth consecutive annual dividend increase. So that said, Darren and I will be pleased to answer your questions. So, I will turn the call back over to John to start the Q&A session.

John Wheeler

Yes, just before I turn the call over to Ron to conduct the Q&A session, can I please ask your cooperation? Once again, one question at a time please. Ron, please proceed.

Question-and-Answer Session

Operator

Great. Thank you. (Operator instructions) The first question is from Dvai Ghose from Genuity Capital Markets. Go ahead please.

Dvai Ghose - Genuity Capital Markets

Yes. Thanks very much, good morning. Bob and if Darren's on the call, I just wanted to ask you about some of the wireless things that are happening in the market, just this week, we have seen Fido and Solo remove their SAF, Bell announced roll-over minutes. You've announced on some new jumbo bucket plans.

I am seeing a fairly significant change in pricing here. Questions I am getting from investors include, can we sustain the SAF in the premium brands if they are not in the flanker brands? Does TELUS have to show some leadership here in your opinion in terms of perhaps doing something like reintroducing a SAF on the flanker side?

And even on the cost side, where you see tremendous subsidization of PDA's which should lead to longer term cash flow, do you think there is a fear that the industries are being too aggressive in terms of these subsidies and perhaps too forward-looking and not looking enough in near-term margins?

Darren Entwistle

Thanks for the question, Dvai. First, I would say as a caveat, we are not going to discuss in an open form what our specific pricing strategies are whether it is Koodo or right through to smart phones. I do think the price changes that you have seen this past week in the marketplace reflect a couple of things.

Number one is the relative strength that TELUS has enjoyed in the RIMS smart phone market and the strong performance that we have delivered in that particular vein, as well as the significant attraction that we have realized with our Koodo brand.

I think it is also reflective of the fact that the market is going to evolve in the future with potential new entrance on the AWS front. I think in terms of describing TELUS' response as taking a leadership position, I think rather, TELUS will adapt and will respond to market price conditions as we deem appropriate and certainly, we will be competitive in the marketplace.

So, I think it is fair to say that we are not going to ignore the price changes that have taken place. We are going to price to remain competitive and we are gong to price according to market conditions.

The other thing I think, Dvai, that is noteworthy is that hopefully, people within the regulatory government area are taking note of the degree of the intensity of competition in the marketplace. Certainly, when you are providing very low prices for significant SWAS of bandwidth up to 500 MHz sort of unlimited and at the time subsidizing devices right down to a $0 price.

If that is not competitive to the extreme, then I do not know what is. So, hopefully, people in the regulatory front as well as new potential entrants will be taking note.

I think the other thing, Dvai, that is important in addition to TELUS responding to the evolving market conditions and pricing according, I think this does evidence the need for incumbent companies like TELUS to focus on efficiency not just as a wire line activity but as a wireless activity as well. And to make sure that we take cost out of our business to try to optimize the level of EBITDA flow through that we are achieving from the wireless side of our operations.

In terms of your smart phone comment, given that you did ask a two-part question, once again, as is the tradition. I guess, a few comments here are worth noting. Number one, we like the higher ARPU and churn the better stickiness. And the higher return that we get from a revenue perspective as it relates to smart phones and we think that makes it worth the investment from the COA perspective.

Second, I am hopeful that as smart phones become more pervasive in the market place and really for most wireless users become the device and functionality of choice that we start to leverage some economies as scale as the devices become more prevalent. That is reflected within our smart phone economics.

Three, certainly, we are seeing evolving competition in this area whether it is the iPhone or RIM with the Storm or the development of android or Symbian within the Nokia stream. There are more and more middle ware type applications coming online and I think with more competition, again, we should hopefully begin to realize some better pricing.

Next one I would make on this smart phone front is if you look at the growth on the applications front, it is excellent. If you look at our wireless data performance in terms of year-over-year growth, we delivered 42% growth on the data front which is partly reflective of the fact that we have been very strong in the smart phone market.

But clearly, we have seen no advance in terms of strength on the data growth front. I think that type of applications that smart phones enable will provide significant longevity in that particular growth path. And then lastly, back to taking cost that of the business, again, Dvai. I am hopeful that as smart phones become more prevalent, we can improve the cost infrastructure that we have in placed at TELUS as required to support the smart phones whether that is better cost of care because as smart phones become more familiar, you can use web-based channels more effectively.

As our sales channels, in and of themselves become educated on how to sell smart phones again, we would expect to see an efficiency gain in that area to help ameliorate the smart phone economics. And then lastly, when you look at technology and some of the technology choices that we announced about a month ago, again, we are making technology choices as it relates to the carriage of data traffic that should lower cost space of the TELUS organization and again, help the economics of our wireless business.

John Wheeler

Next question please.

Operator

Thank you. And the next question is from Glen Campbell from Merrill Lynch. Go ahead please.

Glen Campbell - Merrill Lynch

Yes. Thanks very much. I wanted to pick up on the wireless sufficiency scene. When you announced the HSPA build, Bell had been quite opened about the fact that they expect to see pretty significant reductions in the long-term capital intensity.

I think it is reasonable to kind of project 7% to 10%. So, given that you are going at this together, is there any reason to think that your sub-10% CapEx to revenue may not be achievable in the medium term for you as well. Thanks.

Robert McFarlane

Glen, I think capital expenditures are a function of a number of things, one of them in part is the function of your growth and your capacity requirements thereon. We are not here giving long term capital intensity guidance.

We did at the time denouncing the HSPA technology path towards 4G give guidance as related to one. We are not shifting from this year's $1.9 billion capital expenditure program. So, really, what we have done is defer the expenditures earlier in the year and shifted that into HSPA without increasing the quantum, if you will, and then we gave guidance in respective of next year, which by the way, is not that far of line with the capital intensity that we have experienced in recent years.

So, at the end of the day, I think if we first start with what is in front of us, we are looking towards building a HSPA network here in partnership with Bell on a national basis to provide advantage per firms without any material increase in capital expenditures for the organization. I think that is pretty good going step number one.

Step number tow, beyond that, we do believe that there are efficiencies as it relates to the technology as compared to the cost structure of our current technology and that bodes well in terms of, as Darren already just referenced, in terms of the cost to support data growth and subscriber growth in the foreseeable future but I am here to give a specific guidance, long term in terms of capital intensity.

John Wheeler

Okay. Ron?

Operator

Thank you and the next question is from Jonathan Allen, RBC Capital Markets. Go ahead please.

Jonathan Allen - RBC Capital Markets

Thanks very much. Bob, I looked at your revised EBITDA guidance from mobility, it seems to imply that Q4 EBITDA should be anywhere from down 5% to up 5%. Is this a reflection that you expect Koodo loading to continue being very robust in the fourth quarter, enhanced COA just continuing to pressure some of the margins?

Or is this a reflection of some of the intensifying wireless competition that you had addressed earlier and that we should expect this sort of run rate for margins going forward as new competition comes into the market next year?

Robert McFarlane

Well, firstly, as you are familiar, Jonathan, the fourth quarter always sees no highest period of time for subscriber editions and consequently, it does attract the highest cost of acquisition just associated with higher loading that occurs in that time frame. So, the traditional pattern is depression of margins in the fourth quarter.

Having said that, we have had some good subscriber growth as these results show on the first nine months of the year, so, we got a flow through affect of those subscribers and there are too falling down from the top line and helps medicate that.

But at the end of the day, as we set just targeting November where the bulk of sales are in the last four weeks of the year, the RIMS really reflects that fact that there is a variety of outcomes depending how successful our loading is in this very important fourth quarter season.

John Wheeler

Okay. Ron?

Operator

Okay. Thank you and the next question is from Vince Valentini from TD Newcrest. Go ahead please.

Vince Valentini - TD Newcrest

Yes. Thanks very much. Good morning. Given the traditionally low flow through of revenue, the EBITDA for your wireless business had only 2%, way below than what you have done historically and then you already noted that the big increase in your retention spending.

Given the investment you seem to be making in the future in smart phones, could you help us understand how that is going to help you in the future by telling us what percentage is based on smart phones and what percentage of the net or gross adds in the third quarter were smart phones?

Robert McFarlane

Vince, I understand the question, I think there are elements that sensitivity to disclosing that data that I think would be more harmful to our shareholders and it would be benefit from understanding information.

John Wheeler

Okay. Ron, next question please.

Operator

Okay. Thank you and the next question is from Greg MacDonald from National Bank Financial. Go ahead please.

Greg MacDonald - National Bank Financial

Thanks. Good morning, guys. Wire line revenue growth in both the data and long distance segment decline year-over-year relative to the first half, you recognized that DSL subs were a little light. I am not sure this tells the whole story, though.

I am wondering relative to some of the other telco results that we have seen, it is evident to me that we are seeing some re-priced on data access services and potentially LD and I am wondering if TELUS is seeing similar trends and if so, would that be an economic slow down issue? Would that be a competitive issue? If you can give us some comment on that. That would be helpful, thanks.

Darren Entwistle

Yes, I think you hit one factor right off the talk, Greg, in terms, you are quite correct in reference in the internet. We were disappointed with the internet growth in the third quarter on the HSIA branch. So, obviously that had an affect in terms of as that goes into the data growth line so that did impact that category.

In terms of long distance, it was not a bad result. This is obviously a commoditized product area for many years.

We have seen in recent years high single digit, almost double digit declines in the industry. The results here in the third quarter is, I think, unacceptable. In that context, what we are seeing is the increased bundling of minutes in terms of packaging it with other offerings and a bundled concept particularly as it relates to some country packages and the like.

And we are seeing resonance in the market with those offerings but underlying that, it is still fundamentally a declining area. I think our view is it was good going in that space for the third quarter.

John Wheeler

Okay. Ron, next question please.

Operator

Great. Thank you. The next question is from Scott Malat from Goldman Sachs. Go ahead please.

Scott Malat - Goldman Sachs

Thanks. Good morning. In ARPU, you talked that roaming was down. Overall, I am trying to get a better picture of the more discretionary pieces of ARPU. I think that people are really starting to cut back what they can. So, I am just wondering about long distance, some of the other voice plan add-ins, what are the trends there and are people lowering their voice plan buckets? Thanks.

Robert McFarlane

Well, in terms of ARPU categories, I think we are not really seeing any evidence of economic or general macroeconomic influences or impacts on our ARPUs. We are experiencing robust demand. Perhaps, one exception to that would be on international roaming particularly in the voice roaming, it was down.

There is some repriced there but it also reflects traffic of visitors in the United States into Canada. But that is relatively a smaller component of overall ARPU and relations or question on value-added services, the nature of our offerings is that we are seeing significant take up for add-on features and services and APS.

So, that is just having robust growth and consequently, we really can discern no negative impact on our ARPU as a result of macroeconomic conditions.

Really, what we are seeing is an ongoing trend that we have experienced for a couple of years in the voice front. And of course, the one other element that is a little unique organization. The ongoing orderly migration of the mobile voice telephone center component of our my-guidance subscriber based over to our PCS service as our contracts expire leaving the mic service more and more catering to push-to-talk service.

But overall, I think the point here reflecting perhaps the Canadian economy which is much stronger than that of U.S. and in particular in our incumbent regions where there is the strongest growth in Canada, we really have not experienced adverse effects from the economy on our results of any notable extent.

John Wheeler

Thank you. Ron, next question please.

Operator

Thank you. The next question is from John Henderson from Scotia Capital. Go ahead please.

John Henderson - Scotia Capital

Yes. Thank you. It is a question on, I guess, wireless pricing relative to wire line pricing and I think, in the U.S., we are seeing greater access line erosion every quarter. It just keeps getting worse and then wireless seems to be having a greater impact there over time and I just wonder if you are concerned about impacts that way? Do you think we are going to move in the same direction as U.S. markets in terms of access line erosion in part aided by this lower wireless pricing environment?

Darren Entwistle

I think it’s a reality, Jonathon, whether you’re talking about the U.S. or Europe that we need to be cognizant of. I think the first thing that I would point out is that if you look historically at how TELUS performed in respect to network access on erosion we have done well on a relative basis to our peer group.

Again, I think the fact that the Western based economy from a GDP perspective has outperformed the Canadian average by two to three times, speaks to, A: the robustness of our incumbent footprint and the strength of our brand in Western Canada. But also the resiliency of the economy here as well. And so I think we have consistently, quarter-in and quarter-out, since the onset of more intense competition done very well in terms of our resiliency from a network access line loss perspective.

Second thing that I think is worth highlighting is that for us with a national footprint we have a situation where fixed wireless substitution on a net basis is actually a positive for the TELUS organization. Yes, it’s a challenge within our ILEK footprint that we necessarily need to be cognizant of and address. But it’s and opportunity outside of our traditional franchise area because we don’t have a consumer wire line business as it relates to two-thirds of the Canadian population.

We arerincipally talking about key markets like Ontario and Quebec. In that case fixed wireless substitution is positive for the TELUS organization particularly given how well both of our brands resonate with the youth market.

TELUS has always enjoyed strong elasticity as brand appealing to all constituencies from corporate through the young people. We’re seeing the same traction in respect of our Koodo brand. So, in terms of our of franchise area expansion it is a distinct positive for us to go after fixed wireless substitutions on a net basis. It’s a positive for the TELUS organization.

And then lastly we’re trenching back to our ILEK area to talk specifically about the challenge that you’ve articulated. I think it goes back to one of the principles that we need to execute on and that’s bundling to the extent to which we can put together, deliver and continue to service well a strong portfolio of services from voice services to data services to entertainment service and of course mobile services. We'll have, you know, a much more resilient offering in market relative to what singular products being offered from the competition can provide and that really is the focus for our organization.

The other thing that is it bit interesting is that one of collieries of having lost access lines now for several years, is that even within our incumbent area where you have competitors with a significant access at line base, they provide an opportunity for TELUS to perhaps re-approach those customers again with a fixed wireless substitution offering that could be appealing. And again that would be an opportunity that would be available to us on a go-for-it basis within our established footprint within our ILEK territory.

I guess to summarize it is a reality that we face. It is a net positive for TELUS if you look at the contrast between our franchise region and our outer franchise region from an opportunity perspective.

It does emphasize that within our ILEK territory we have to focus on effective bundling and bringing together all of our disparate products into a compelling bundle. And as well, you know, we’re not the only accessed line player anymore within our ILEK territory so maybe there’s some future upside for us to consider as it relates to fixed wireless substitution.

John Wheeler

Ron, next question.

Operator

Great, thank you. The next question is from Peter Ramey from BMO Capital Markets. Go ahead please.

Peter Ramey, BMO Nesbit Burns

Great. Bob or Darren, I’d like to focus on the restructuring charges. It sounds like you’re implementing quite aggressively some restructurings in the fourth quarter. Is this to get a running start on '09 so you get the full benefit early on or do you see this as more a slow burn or slow benefits?

And in the past you’ve indicated the savings based on restructuring charges and intended to, if I’m not mistaken, to be a one year pay-back. If you could discuss perhaps what type of pay-back you would expect on that. Thank you.

Darren Entwistle

Thanks, Peter. No, it doesn’t reflect a ramp up in Q4, it reflects rather our inadequate performance as an organization in Q1, Q2 and Q3. I think I articulated at the Q2 call that I was not satisfied with our performance in this particular area and that we were going to do something about. I think that with the augmentation of our workforce restructuring charge by $20 million from $30 million to $50 million that is putting into practice some of the concerns that I articulated at the call at the half year.

I think maybe if you take a step back which kind of relates to my dissatisfaction, efficiency measures are nothing new for TELUS. We’ve been running workforce restructuring charges year-in and year-out since 2001 and back at that time we said this is going to an annul program for our organization.

Effectively what we said is that we have to invest and improve deficiency the same way invest in products, the same way we invest in networks or IT or the same way we invest in people and it’s something that we have to do necessarily on recurring basis. And because of that I was dissatisfied that we didn’t have better traction in 2008 but this is nothing new to the TELUS organization. And what you’re seeing right now in Q4 is really addressing what should have done by the TELUS organization from the outset of this year.

In terms of your other comment, I think certainly when we began tackling the efficiency program back on an inaugural basis in 2001. The pay-back periods were relatively speaking more attractive because we were really going after the low-hanging fruit and back then they, you know, pay-back periods of a year.

And then we started in the '03, '04, '05 zone, the pay-back period started to get slightly more protracted 18 to 24 months because some of the efficiencies that we were going after were a little bit more difficult to achieve, would take more time to get the money out of the business and would take a little bit more up front investment. And I think now we’re in a more challenging area for us and so, you know, again, the pay-back period is slightly more protracted yet still.

But, nevertheless, I think when you look at our organization, there’s a really simple thesis that we need to think about. As an organization we have lots of laudable ambitions in terms of how we want prudently invest our shareholders money domestically on strategy in our core operations and you can see that transpiring whether it’s making an investment in a basic wireless service, which we call Koodo, that’s near term dilutive.

If you look at the amount of money that we’ve expended on both the AWS Spectrum option and the money that we’re currently spending evolving our network to 4GLTE, again that’s near term dilutive. If you look at what we’re doing with some our large complex deals which are economically positive over the medium to longer term, those large corporate data network deals are dilutive near term.

And the same thing can be said in respect to what we’re to achieve on the TV front. And so, you know, the philosophy here is you have to earn your right to grow and rather then just tolerate the near term dilution I think earning your right to grow mean you got to create white space financially speaking for those J Curve investment that Bob articulated within his comments. And so you’ve got to take cost out of the business to fund those investments that you think are key to your future and so it relates to Q4 and you’re going to see again materially in 2009 and beyond, that’s why were so purposeful in our comments, we are going to push hard.

There is a non-trivial opportunity to optimize the spans that control within the TELUS organization to reduce staffing levels, to take out costs so that we can recycle those monies to do two things. Return some of it to shareholders and expend some of it in support of the investments that we would like to undertake strategically. We still believe that business process outsourcing opportunities to a lower cost region so to speak which is something that we have to do when as a organization price commoditization and margin compression are a fact of life. I think we have too many products within our overall portfolio, products that cost money.

I think decommissioning products not only takes money out of the business but it makes systems implementations more effective and more efficient. And we’re looking to reduce low value activities. Now we’ve got some technology investments that I think in the fullness of time whether it’s what we’re doing on IT front trying to consolidate down to a single customer care platform on both the wire line and wireless side of the business and will drive significant efficiencies in the future as will our investment in LTE back to Glen Campbell’s original comment. You know, that investment should give us a lower cost base on the wireless side particularly as it relates to supporting data applications which are the future growth component for us on wireless.

And then lastly, you know, procurement within TELUS is a little bit too decentralized. I think we’ve got some tremendous pockets of excellence when it relates to vendor management. I think we’ve seen that in the moves that we’ve made as it relates to the wireless technology evolution but they’re not pervasive. They’re pockets of excellence rather then something that’s baked into the D&A of our company.

And I think through centralization and better permeating the best practice when we spend over $4 billion a year, $4 and a half billion to be exact, as it relates to procurement activities. There are some opportunities there that we need to necessarily execute against and that’s what we’re going to up to and it will be material for Q4 and it will be material for 2009 to fund our future growth.

John Wheeler

Okay, thanks. Ron.

Operator

Thank you. The next question Bob Beck from CIBC World Markets, go ahead please.

Bob Beck, CIBC World Markets

Thanks, good morning. I just wanted to touch back on the bundling or the importance of bundling going forward. I recognize that you don’t give information on TELUS TV . Can you talk antidotal at all about some of the performance of some of the other products in your areas where you are offering it? You know, the high speed data and local line?

And just whether that confirms some of your commitments on TELUS TV. Because it sounds like, again, fairly bullish on the performance and whether that’s to the bundle or not? And really is this still a side story to, I guess, to Darren’s point on wireless on being the core to the bundle and perhaps where more the greater win back and forward leverage might come from wireless as the core. Thanks.

Darren Entwistle

I think to get this one on the head without sort of divulging competitive intelligence acouple of things are worth noting. Ironically because we had soft quarter on HSIA that I am dissatisfied with and disappointed with and something that we are going to work ardently as a management team going forward. It would be wrong to conclude that we had a soft quarter as it relates to TELUS TV.

TELUS TV—IPTV has been performing very strongly within the areas where we have coverage. And I would say empirically if you look at the TELUS footprint, where we are able to offer a full suite of services from voice through to data internet, through to entertainment. And yes, as you correctly point out, through to wireless within the bundle then we have seen out best results.

In areas where as a result of coverage challenges that we are looking to address in the future where we can offer the full bundle, the results on average are not as good. And so I think for the TELUS organization one of those j-curve investments is of course, to improve our broadband footprint across Alberta, across B.C. and continuing to improve it across Eastern Quebec so we can fully leverage the commercial efficacy of offering a bundle that’s very attractive to our consumer clients.

And that really is the focus of the organization on go-forward basis. And I guess as it relates to HSIA, you know, my comments in terms of being disappointed , I think are borne out empirically because it’s frustrating for me because in Q1 and Q2, we had a reasonable performance. If you look at Q2 in particular on high-speed internet access, we had net ads of 24,000 which represented a 60% increase on a year-over-year basis.

Yet in Q3, if you look at our net ads they were down by about 50% and that’s unfortunate because Q3 is an important time of year from a loading perspective given the back to school phenomenon that transpires and I think Bob’s comments were bang on. Yes, there were some ramped up competitor activity but you know, we weren’t as strong on our promos, we weren’t as focused as what we should have been and will be working hard as a leadership team to correct that on a go-forward basis.

But for us the job right now is try and get our broadband footprint covering the main primary, secondary and tertiary communities within out ILEK markets so that we can offer the bundle. Because when we have that footprint type coverage we do very, very well as an organization.

And I think when you layer on top of that, when people are interested in high speed internet access they don’t just want it on sedentary basis in their home office. They also want it on a mobile basis and the fact that we can offer smart phones effectively to consumers and we have done very well in terms of our share allocation in respect to smart phones with consumers. That is a nice combination to be able to offer high speed internet access on the wire line front complemented by what we can do on the smart phone front on the consumer ranks to give people high speed mobility as well.

John Wheeler

Hi, Ron, we’re at the hour so we’ll take one last question, please.

Operator

Okay, thank you. And the next question will be from Peter McDonald from GMP Securities. Go ahead please.

Peter McDonald, GMP Securities

Thank you. Just, Darren, can you expand back on your reference to the regulators with respect to competition in the wireless market. Is there something we should read into it? Is it reference to the unset details on roaming and tower sharing or is there something else that you’re referring to ?

Darren Entwistle

I think I’m referring to a simple point that is not a Q3 point, Peter, but something that I think we believe quite unequivocally here at TELUS and certainly isn’t justified empirically which is the wireless market in Canada is intense. We’ve got over 20 brands out in the Canadian market offering all sorts of value propositions from no-frill offerings for people that are just interested in talking and texting right through to smart phone offerings with very sexy devices which are function rich. So the level of choice is significant.

When you think about affordability the comment is pretty clear. Two elements, when you’re giving people 500 megs of throughput, I’m not sure if people understand what 500 megs of throughput means, but it’s significant in terms of what would be a usage time equivalent within the data vernacular versus what they would be used to on a minutes basis with voice. It’s very significant.

And when you’re subsidizing devices down to $0, I mean, just have a look at the delta between what the cost is of the devices versus what they’re being sold for and you’re looking at, you know, subsidies from $300 to $500 to secure customers, I think. That is in my view, highly reflective of the fact that this is a market that is very competitively intense.

If you look at the type of growth that is being achieved, it’s quite interesting, we did as an industry 7% growth on wireless, 6% growth on wireless as an industry at the net level and the basis point game was 480 basis points of gain. Now which again reflects the competitive health of the industry overall.

And it’s interesting to me because if you carved out Canada empirically and looked at our voice rates. Bob has talked now repeatedly now what must be two years in terms of the voice ARPU going down, which is a primary empirical indication as to the level of competitive intensity. But if you look at voice rates in Canada from an affordability perspective, you know taking that consumer point of view and juxtapose us against our peers within the G7 or G8, you’ve go Canada as top quartile country when it comes to consumer affordability on the voice front.

And of course now you’re seeing the same thing starting to gain traction on the data front. And this is in a Canadian market where, I got to tell you, we don’t enjoy the best economies of scale as it relates to population densities relative to the better economy scale afforded to other countries within the G7 and G8.

This is a challenging country to deploy infrastructure and technology. If you look at what’s happening as I say on the data front, the prices being offered right now are very competitive, they’re very attractive, and they’re starting to resemble the type of affordability that we have seen on the voice front. I think that there is no structural impediment in this country but merely if you look at the fact that we just kicked off wireless a little bit later then the U.S. and Europe, that’s the reason why from a penetration perspective we’ve been trailing. But I would expect Canada to get to the same end game as our peers on a global basis but hopefully we can generate more shareholder value along the way.

John Wheeler

Thanks very much, Bob and Darren and I’d just like to thank everybody on the line with us today for taking the time to join us and we look forward to working with you in the coming weeks and months.

Operator

Thank you and this concludes the TELUS third quarter 2008 earnings conference call. Thank you from TELUS.

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Source: TELUS, Corp. Q3 2008 Earnings Call Transcript
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