TELUS Corp. (NYSE:TU)
Q4 2008 Earnings Call
February 13, 2009 11:00 am ET
John Wheeler – Investor Relations
Darren Entwistle – President and Chief Executive Officer
Robert McFarlane – Executive Vice President and Chief Financial Officer
Greg MacDonald – National Bank Financial
Scott Malat – Goldman Sachs
David Lambert – Canaccord Adams
Dvai Ghose – Genuity Capital Markets
Simon Flannery – Morgan Stanley
John Henderson – Scotia Capital Markets
Glen Campbell – Merrill Lynch
Jeffrey Fan – UBS Securities
Randal Rudniski – Credit Suisse
Welcome to the TELUS Q4 2008 earnings conference call. I would like to introduce your speaker, Mr. John Wheeler. Please go ahead.
Welcome and thank you for joining us today for our fourth quarter 2008 investor call. The call is scheduled for one hour or less. The news release on fourth quarter financial and operating results and detailed supplemental investor information are posted on our website. 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 you to the risks and assumptions outlined in our public disclosure and filings with Securities Commissions in Canada and the United States.
Turning to slide three for an outline of today’s agenda, we will start with introductory comments by Bob McFarlane, Executive Vice President and CFO. Bob will review both segmented and consolidated results, give updates on the issues outlined and end with TELUS’s 2009 corporate priorities. This will be followed by a question and answer session. Darren Entwistle, President and CEO will be participating in this part of the call.
Let me turn the presentation over to Bob starting on slide four.
Let’s begin with a summary of the wireless highlights on slide four. Wireless revenues were up 7% based on 10% growth in the wireless customer base, partially offset by lower revenue per subscriber. EBITDA is adjusted and, excluding $6 million in restructuring costs, increased by 1.4% squeezing wireless margins due to the impact of record fourth quarter gross loading, higher COA expense, as well as retention efforts focused on upgrades to smart phones.
We also saw increases in certain network operating expenses due to a very strong growth in data usage in roaming, as well as higher content in licensing cost from the excellent 55% increase in data revenues. CapEx investments increased by $101 million reflecting the new HSPA network build out.
Turning to slide five, net ads for the quarter were 148,000. Importantly, while loading was lower than expected, postpaid net ads remained strong and increased 11% year-over-year and represented 80% of total new subscribers. After strong loading gains for the first nine months, we were impacted by new competitor pricing in response to the continued success of our Koodo postpaid basic service brand.
Also impacting subscriber loading was the late delivery of the BlackBerry Storm, which missed much of the holiday shopping season. Overall, our accumulative subscriber base up 10% totals more than $6.1 million with the more valuable postpaid customers representing a strong 80% of the total.
The next slide shows that 2008 was a tremendous year for wireless subscriber growth on a gross and net ads basis, particularly when looking back over the last seven years. TELUS has consistently produced more than 500,000 net ads in each of the last five years. We achieved record subscriber loading this year as gross ads increased by 15% and digital net ads, shown in purple, reached 588,000 up 14% year-over-year. Our 2008 results reflect the successful launch of Koodo Mobile, our efforts to build our distribution strength, and strong Smartphone adoption.
The graph on the left hand of slide seven shows that TELUS’s total wireless ARPU for the fourth quarter declined by about 2% to $62.00. The decrease was a result of voice ARPU declining more than data ARPU increased. The largest contributor to the decrease in ARPU for TELUS in the fourth quarter and for 2008 has been our Mike product.
Mike does not exhibit the same kind of upside from datas or other wireless services and is, therefore, more exposed to voice re-price. This was compounded in the fourth quarter by the economic downturn in the manufacturing construction oil gas sectors, which Mike has significant subscriber base in.
Also impacting ARPU is continued pricing competition, increased use of included minute rate plans, increased penetration of our basic service brand, and a slight decrease in voice roaming. Partially offsetting the voice decline was the strong growth of data ARPU, which increased by more than $3 to more than $11 overall.
Slide eight shows two of our newest smart phones available from TELUS, including the BlackBerry Storm touchscreen as well as the new BlackBerry Curve Mike. MikeBerry, as we affectionately refer to it here at TELUS. While we expect to continue our active Mike migration program, this new Mike handset will give users who utilize Mike’s Push To Talk capabilities a full suite of data applications, including access to corporate email at speeds comparable to EVDO and Wi-Fi enabled areas.
While fulfilling a need for a segment of our Mike subscriber base, the addition of the BlackBerry Curve Mike may also help to stem the ARPU erosion on our Mike product. We continue to enjoy considerable success in the important Smartphone category and see it as continued growth area even as the economy is slowing down.
Slide nine shows our fast growing wireless data revenue, as well as percentage of network revenue. Data revenue growth for the fourth quarter increased by 55% year-over-year to reach more than $200 million, and now represent 18% of network revenue compared to only 12.5% a year ago. It is important to note that the 18% is an average of total subscribers and impressive when considering this includes our Mike service, which generates only a small amount of data revenue.
We remain very bullish at TELUS for continued strong wireless data growth given the increasing sales of 3G capable devices, the ongoing introduction of higher bandwidth applications, as well as the continued orderly migration of non-dispatched Mike users and higher value prepaid subscribers to smart phones.
Slide ten reflects the continued focus on our wireless marketing retention efforts in the fourth quarter. Gross additions, a fourth quarter record, increased by 5% with postpaid gross ads increasing 16% year-over-year. Digital churn increased slightly by three basis points to 1.62% due to an increase in competition and the impact of higher prepaid churn.
COA for gross ad increased 10% year-over-year to $388 reflecting a combination of higher advertising expenses, lower gross ads due to the late arrival of the Storm than expected, a handset inventory evaluation adjustment and higher subsidies in smart phones as a result of pricing competition.
In aggregate, COA expense increased 16% to $172 million due to higher subsidies to support the adoption of smart phones, and higher marketing cost for reasons I just mentioned. Cost of retention increased by 10% but was relatively flat on a percentage of network revenue basis.
I wanted to give you a quick update on the ongoing progress of our HSPA network overlay, as shown on slide 11. As announced in October, we’ve selected and are working with Nokia Siemens networks and Huawei Technologies for the core and radio access network equipment.
TELUS’s planning is complete and the network build commenced at the beginning of the fourth quarter. We reached notable milestones in completing our first HSPA mobile phone call, video telephony call and data call back in December. The beginning of the HSPA network deployment boosted CapEx in the fourth quarter and, as a reminder, is included in our 2009 consolidated CapEx target up slightly more than $2 billion. These costs, of course, are being shared with Bell.
We remain on track for service launch by early 2010 to bring the benefits of this investment to our customers and investors. HSPA network overlay provides TELUS with an optimal upgrade pack to long-term evolution or LTE for a fourth generation of wireless network.
Before reviewing our wireline results, I want to take a moment to update you on our operating efficiency program on slide 12, which predominantly impacted our wireline segment but it’s also an area of focus in wireless.
During the fourth, efficiency initiatives significantly accelerated. Restructuring costs in the quarter were $38 million compared to $6 million a year ago and totaled $59 million for all of 2008 compared to only $20 million in 2007. The vast majority of these restructuring costs were incurred in the wireline side due to the legacy nature of many wireline services that are in decline, and to ensure resources are to redeploy to the growth areas of our business.
TELUS has multiple efficiency initiatives underway, including a compensation freeze for management in 2009. Other initiatives have included business unit consolidation, reduced management layers and optimized bands of control, as well as tightened expense control on items like travel being substituted by increased videoconferencing. As previously announced, we’ve assumed a sizeable $50 to $75 million in restructuring costs as operational efficiency remains a key priority for 2009.
Turning to the wireline financials starting with revenue on slide 13, local and LD revenue declined moderately reflecting the continued competitive environment and substitution affects from wireless and VoIP. When adjusting for CRGC credits in the fourth quarter of 2007, local revenue was lower by about 4.6%.
Strong wholesale growth and long distance revenues partially offset the retail erosion with a 3.4% drop overall. Data revenue increased by 13% due to revenues from the Emergis acquisition, increased managed data revenues in business, and continued growth in broadband revenues from high speed internet and TELUS TV subscribes. Underlying data revenue grew approximately 3% adjusted for acquisitions and regulatory impacts. Total wireline revenue rose nearly 4%.
Turning to slide 14, we can see that wireline profitability, when excluding for a $32 million of restructuring costs, actually increased by nearly 2%. Notably salaries, benefits and other employee-related costs declined 1% this quarter. Also impacting profitability were higher expenses associated with the increased cost of sales for increased data equipment sales with lower margins, expenses from the acquired companies, and higher costs for the provision of TELUS TV due to increased loading.
External labor costs also increased to improve service levels and implement services for new Enterprise customers related to a number of significant contracts, such as the Department of National Defense and the Government of Ontario. Capital expenditures increased 17% namely from increased upfront expenditures to provide support to large new Enterprise customers, healthcare and financial service solutions and broadband services.
Let’s move to slide 15 and briefly examine our intranet results. High speed netted ads improved sequentially in the fourth quarter at 19,000 new subscribers. This result compares favorably to the loading experienced recently by other Canadian operators. A combination of factors led to the year-over-year decline, including a maturing market, Shaw’s emphasis on deep discounted bundling prices across their home phone and internet products, and lower household formation due to the economy.
The improvement on a sequential basis is due to better operational execution in the fourth quarter, while the third quarter is typically better due to the back phenomenon. As well, we are seeing better high speed results where we have TELUS TV bundled offerings in the marketplace.
This reinforces the increasing importance of consumer bundles and our strategy to continue to invest in expanding our broadband speed and coverage, including the TELUS TV and high definition footprints. Overall, our high speed internet subscriber base is up 7.5% year-over-year.
Let’s turn to slide 16 for a business solutions wireline update. Late in the December, TELUS was selected by the government of Quebec to deliver and manage the providence’s data network. This was a significant milestone for out of reach and expansion and focus on key industry verticals, notably the public sector.
Network planning is underway and, although this is a long-term up to ten-year agreement, it’s likely to be a typical Enterprise investment that’s dilutive earnings in the near-term before the revenues ramp up and cash flow turns positive.
In addition, our TELUS Health Solutions unit, which is integrated with the operations of Emergis now, is well poisoned to exploit the projected growth in healthcare IT spending over the next few years. This includes the federal government’s recently announced $500 million program to have 50% of Canadians with an electronic health record by 2010. TELUS has the expertise and solutions to compete for this business well.
Slide 17 highlights how our wireline access line performance compares favorable to our peers across North America. Business lines were up 36,000 or 2% reflecting the success for out of reach and expansion, as just discussed, partially offsetting continued residential line erosion. Residential line losses totaled 42,000 in the fourth quarter, a sequential improvement and TELUS’s best quarterly result since the third quarter of 2007.
On a year-over-year basis, overall consolidated line losses were stable at negative 3.6% due to losses of residential lines to VoIP competitors, particularly cable TV companies, as well as ongoing technological substitution to wireless services.
So putting it all together, let’s quickly look at TELUS on a consolidated basis starting on slide 18. Consolidated revenue in the fourth quarter grew by 5%, while EBITDA is adjusted, and excluding for restructuring costs, increased by nearly 2%. Reported EPS decreased by 27% but when favorable income tax related adjustments, which were reported in both periods are baked out, EPS was actually slightly higher by just over a percent.
I’ll elaborate in the various drivers behind EPS on the next slide, but in the meantime, CapEx increased by $159 million driven, as already mentioned, by the new HSPA wireless network build out and wireline investments in broadband infrastructure and new Enterprise customer deployments.
This next slide shows the detailed breakdown of the components of reported EPS when we exclude the positive income tax related adjustments in both quarters represented by the green bars. Underlying EBITDA growth generated $0.03 of growth while lower 2008 tax rates also added $0.03 of growth this quarter.
Lower outstanding shares and lower depreciation in amortization contributed $0.04 of growth. Higher restructuring costs contributed $0.06 to the decline, and meanwhile higher financing costs associated with higher debt levels, which exceeded a lower interest rate cost, following the Emergis and AWS spectrum outlays, were partially offset by reduced interest rates. This combined with other items negatively impacted EPS by about $0.03.
Slide 20 shows TELUS’s scorecard on a consolidated results compared to our original 2008 targets, which were set before the year began in December 2007. Consolidated revenue in capital expenditure guidance were achieved, but a miss in wire loss EBITDA caused a small miss in consolidated EBITDA and a 4% shortfall in EPS. Not shown on the slide are our segmented targets for 2008. TELUS achieved three of the four segmented targets, as well as two of the four original consolidated targets.
To conclude our financial review, TELUS’s consolidated and segmented targets for 2009, as announced in mid-December, remain unchanged. TELUS recently announced it will be opening a call center in Clark County, Nevada to provide bilingual Spanish/English service. In addition to internal offshore work, TELUS International currently provides call center and BPO support for some of the world’s largest IT communications, consumer electronics, financial services and energy and utility companies, which have contracted that work to TELUS.
For certain clients, especially our U.S. based clients who need Spanish language agents in the new center, will allow us to provide that capability. Adding a contact center in the U.S., along with recent the Central American investment, will give TELUS important geographic business disruption backup and multiple language capabilities when bidding on future call center outsourcing opportunities.
As the contact center industry evolves, companies are starting to consolidate their contracts with fewer providers, and the expansion of TELUS’s international capability should help ensure we’re well positioned to compete for that business.
In light of the continued capital market volatility, I’ll take a moment to review TELUS’s funding position, as shown on slide 23. TELUS has a committed $2 billion credit facility with a syndicate of 18 financial institutions that does not expire until May 2012.
As announced in December, TELUS extended its 364-day credit facility for $700 million to March 2010 with a syndicate of Canadian banks. This ability to extend our $700 million credit agreement in the current credit markets demonstrates TELUS’s capability to finance itself in a challenging environment.
As a result of our long track record of setting and living up to our clear transparent and prudent financial policies, TELUS maintained a strong balance sheet supporting our health investment grade credit ratings. Given the recent trend in our industry for others to set similar policies, it’s clear we set the standard for capital structure optimization in the Canadian Telecom industry.
As I noted in recent conference calls, an array of traditional sources of capital have consistently been open and available to TELUS during the past six months, a period of capital market volatility. As stated previously, if conditions become advantageous, TELUS would consider terming out some short-term financing.
Slide 24 outlines our 2008 actuals and an update to our pension assumptions for 2009. Yet again, TELUS pension investment management team, led by Bob Kemp, beat the benchmark in 2008, which is one way to look at a negative 15.8% return on assets. In any event, over the past 15 years, TELUS has achieved a rate of return greater than our 7.25% accounting assumption. The impact of reduced pension asset values in 2008 will be partially offset by an increase in the discount rate for ’09 to 7.25%.
We now estimate a pension accounting expense of $18 million in 2009, an increase of approximately $118 million over 2008. We also expect an increase in cash pension contributions in ’09 of approximately $109 million. TELUS pension contributions will be tax deductible partially offsetting the funding requirement impact on an after tax basis.
Before I conclude with review of our ’09 corporate priorities, let me quickly recap the quarter. TELUS’s consolidated revenue growth was driven by data revenue in both wireless and wireline. In wireless, postpaid net ads remained strong and represented 80% of new customers. We continued to build momentum in wining and implementing large public sector contracts, including a recently announced contract with the government of Quebec.
TELUS Health Solutions is also well positioned for the opportunities in the healthcare IT sector. We demonstrated operating cost control with restructuring investments significantly accelerating in the fourth quarter and continuing into 2009. TELUS continues to invest to fund strategic growth initiatives as shown by our CapEx increase.
TELUS has maintained its access to capital, extended its 364-day credit facility and has kept its access to liquidity at greater than $1 billion. Finally, our 2009 consolidated and segmented targets are unchanged.
Consistent with our 2008 corporate priorities, slide 26 outlines our ’09 corporate priorities guiding TELUS this year as we strive to achieve our strategic imperatives. First, we will continue to advance our broadband strategy by enhancing broadband access for wireline and wireless clients.
For example, we will continue to expand our broadband infrastructure in our incumbent territories to advance our future friendly home strategy. In addition, we’ll be focused on quality implementations and service delivery for our significant large complex solutions.
Second, we’ll build up from a momentum in our efficiency initiatives in the back half of 2008 into '09 to continue to improve our cost structure and productivity. Lastly, we’ll focus on outpacing the competition and fostering enhanced loyalty for our clients through an engaged TELUS team.
This will entail continued focus on training, for example, which will not sacrifice to the temptations of short-term thinking. In these three ways we aim to build on our considerable strengths to create future growth and value for our investors, despite the challenging times.
Let met turn the call back to John. Darren and I will be pleased to respond to your questions.
I’d draw attention to two slides in the appendix on certain financial definitions and a reconciliation of our free cash flow schedule. The free cash flow definition has been amended to now include employer contributions to employee defined benefit plans.
Before we start the Q&A, I would ask for your cooperation in asking one question at a time, please.
(Operator Instructions) Your first question is from Greg MacDonald – National Bank Financial.
Greg MacDonald – National Bank Financial
Questions on dividend policy, this has been, or the end of 2008 at least, a pretty tough year for pension solvency trends prospect of a rough economy is out there arguably companies looking at higher than normalized CapEx because of the HSPA spending.
I would argue, and some might also, that this is as bad as it gets for the free cash flow outlook of this company, yet you’re still putting up a pretty nice buffer between what the free cash is and what the dividend is.
So, I guess the question I would have on the dividend policy is what really is the company looking for before it’s comfortable increasing the payout on the dividend, particularly given the Delta of, I would say, roughly 20% difference between what you’re target payout ratio is and what most of the other Telco’s out there a paying out in terms of a percentage of earrings or a percentage of free cash flow.
Well, I think the first thing is usually dividend policies are also set reflecting, not only the profitability of the company at its current state, but what it’s growth prospects are. So we have higher growth prospects then almost all the Telco’s that I’m familiar with, and consequently our dividend policy reflects the future for free cash flow expectations, which in our case, involve some investment and future growth, as well.
So our policy, which we’ve been compliant with, is very transparent. It’s led to five consecutive dividend increases over the past five years, which certainly is not being replicated in the Telecom industry in Canada or by others. So we got a very strong record of building dividend growth. We’ve repurchased significant amount of shares over the last four years. We’ve led the industry in terms of returning capital in combination with growth.
That’s a pretty good track record and we’re going to continue that going forward. So from that standpoint, we are comfortable with our ratio. We’ve been very clear in terms of our leverage policies as well. And so here we’re at a position and right on the back of a significant outlay for spectrum and buying a strategic investment last year, which is being integrated very successfully, and positioning ourselves extremely well in what’s turning out to be one of the highest growth sectors in the Canadian economy.
And we have the room to invest in a significant wireless network build and is our path to 4G and, at the same time, raise our dividend in the midst of a recession. So from that standpoint, I think our financial policies are serving us well and has served our shareholders well so we’re going to continue to do that going forward.
Your next question comes from Scott Malat – Goldman Sachs.
Scott Malat – Goldman Sachs
My question is on wireless flanker brand strategy. I just wanted to understand a little bit more in the differentiation strategy for Koodo versus TELUS. And then as you think about the flanker brands from some of your competitors, some of them are offering some smart phones. I know the Moto Q and then the Pearl on Fido. I just want to understand if this dilutes a little bit of the differentiation on the flanker brands and what other differentiation you look at between the two.
I think the philosophy that [inaudible] in terms of bringing out micro brand to market this past year was one of making sure that it was structurally distinct from the core brand, and I think that particular strategy has been somewhat unique to TELUS and not always apparent across our industry.
And so if you look at the Koodo brand, we’ll call it basic brand, you can call it a no frills brand if you want, essentially the attribute we wanted to embody within our value proposition was one of simplicity and affordability as it relates to two parameters, which is effectively talking and texting.
And that’s the value prop that we instilled within the Koodo offering and that is significantly different than the full feature rich content and iconic form factors that typically we push out through our main TELUS brand. The other things that I think are worth noting, is that we chose not to intermingle our channel strategy as it relates to the direct TELUS brand.
We very purposely ensured that, as it relates to TELUS stores, that TELUS stores were focused on moving forward the TELUS brand from feature rich handsets right through to TeleSmart phones. Whereas we built a distinct distribution channel to support Koodo and invested in that accordingly, at the same time as leveraging other retail relationships that have been traditionally strong for the TELUS organization.
Scott Malat – Goldman Sachs
Are there geographical differences on where you're focusing your efforts for Koodo versus TELUS?
No. It’s national in its orientation. I think there is some geographic difference in the sense that the distribution for Koodo is not as pervasive as the TELUS distribution, but no it's national in its orientation. I know typical geographic constraint, although I would say for the market that Koodo really attracts it's more of an urban market, so to speak, but that's not a purposeful limitation as it relates to the service.
The other thing that we chose to do with Koodo is to try and focus on ARPU with the sale rate. We're bringing a brand in the marketplace that's core in its orientation from a no frills perspective. Let's make sure there's no frills in the cost perspective as well. And if we're going to think about a flanker brand of that out, let's think about the ARPU as something that takes predominance over the RPU so that we get a meaningful margin contribution from the service.
And I would say that mentality has extended into our selection of handsets to make sure that the economics on the COA are as attractive as possible, in addition to the Koodo support infrastructure where we've leveraged business process, outsourcing from a contact center perspective and various other mechanisms to ensure that we have the lowest cost base possible in respect of Koodo.
You've also not seen us, as of yet and I'm going to say never is this going to be the case, but effectively we focused on simple talk and text and have not extended that yet into the Smartphone market in respect of Koodo. That's currently still our strategy.
How the future evolves will be somewhat contingent upon how we respond to competition in the marketplace. It would be fair to say that the competition that we have experienced this far, I think, has been overtly responsive to the attractive attributes of the Koodo product itself as it went through its nascent stage this year.
(Operator instructions) Your next question comes from David Lambert – Canaccord Adams.
David Lambert - Canaccord
I'm trying to get at maintenance CapEx. I was wondering if you could break down your CapEx for the quarter. How much was dedicated to the DT initiative and the /PTT hand? How much was dedicated to HSPA and how much was dedicated to the numerous Enterprise contracts that you guys have won in the last two quarters?
We don't provide breakdown on a detailed basis of our CapEx. I think maintenance CapEx [inaudible] given the status of our firm and so I don't think that's a particularly relevant thing to go and answer. Obviously, we’re doing significant expenditures.
One can look at the historic CapEx pattern of the firm, can look at the depreciation, amortization rate where our CapEx is in excess of that rate at the current juncture, given the significant build ours we've got going on. So I think that's probably a most relevant thing I can guide you to.
(Operator instructions) Your next question comes from Dvai Ghose – Genuity Capital Markets.
Dvai Ghose – Genuity Capital Markets
Now that Bell is staying public, obviously our clients have to make a choice in a large part between Bell and TELUS. And clearly the two things, which seem to be favoring sentiment towards Bell today, are number one, cost cutting and number two, capital intensity.
I'm wondering, therefore, on the cost cutting side, you have given us a bunch of restructuring charges. You've never really told us what sort of benefits these are expected to bring in '09 and onward and what sort of headcount reductions and so on. I think that would give a lot of comfort to your investors.
And the other issue, of course, is capital intensity. Your capital intensity is 20% as to 16% the key difference is a C-like strategy. You've given us some big picture numbers about contracts and costs. But can you give us an idea as to the sort of profitability and outlook is, and whether it's generating cash at the moment, what sort of margins we're looking at, because really you've given us all of the bad news and not any of the good news, in my opinion.
Well, Dvai, I wouldn't characterize it that way. I'm pretty sure we gave you guidance for 2009 that reflected growth for TELUS in terms of our revenue and operating profitability that is reflective of everything from our growth initiatives through to the efficiency measures that we have talked about previously.
I don't think cost cutting is an area where TELUS historically has been deficient by any stretch of the imagination if I look back over the last nine years. We have given you, I think, some considerable detail in terms of what has effectively been a 195% increase in our restructuring costs in 2008 versus the previous year, which is, I think, indicative of the efficiency focus that we have going on within the organization and we've earmarked up to another $75 million in 2009.
I think we've been reasonably explicit in terms of what we are doing as it relates to the efficiency activities themselves in terms of spans and layers being maximized within the organization, which means we are looking to reduce our staffing levels. And we have been doing that within our organization, not on a broad based expensive fashion from a bio perspective, but something more strategic and prudent.
We continue to pursue off shoring BPO activities to further compliment the reduction in our cost base. We talked about the rationalization of products and, as well, procurement arrangements within the TELUS organization. And we of course, as Bob indicated in his comments, implemented a management compensation freeze proactively in Q4 2008 for the 2009 financial year.
I also think we've exhibited a reasonably positive payback on our activities in this area. And our activities in this area now I think importantly are not just relegated to the wireline side of the business, but we're also equally concerned with EBITDA flow-through on the wireless side of the business. And, of course, we have activities going on in that particular area.
To provide you additional disclosure beyond what we have framed out for you, as it relates to the major national parameters of this organization for 2009, is not something that we would intend to do. As it relates devised of the CapEx intensity, yes, we have a higher CapEx intensity because we think we have better growth prospects, as it relates to the asset mix of this organization.
And I think we, over the last nine years, have proved that time and again quite categorically that we can invest money in our core business, effectively in our domestic market on areas that are precisely on strategy, and get a very decent return from those investments and allow shareholders to participate in those returns by the amount of cash that we return to them.
And if you look, as it relates to both your question and Greg's earlier question, since December 2004 TELUS has returned approximately $4.4 billion worth of cash to shareholders, circa $2.7 being returned through our successive NCIB programs and the remainder up to the $4.4 billion through the successive five time increases that we've affected in respect of our dividend growth model, and the fact that we have been able to incrementally increase our dividend.
I think, Davi, as well as it relates to the CapEx intensity, because of the numbers that I've just referenced, it hasn’t come at the cost of returning money to shareholders. We've been able to both invest for the future and simultaneously, which frequently at many organizations is mutually exclusive, both invest for the future and continuously return money to shareholders through the two mechanisms that I've articulated.
And if you look at where we're spending our money right now, I think it makes darn good sense to spend the money on our broadband initiatives, holistically both in support of the wireless deployment and the incentive the rationale for that activity quite explicitly and I thought it would be well understood by the marketplace as well as our broadband wireline activities within our ILEC franchises to ensure as it relates to the wireline side of our business not only do we project the margin inherent in our legacy services but we pursue growth paths from HSIA to the TV service that we've inaugurated that is doing very well for this organization.
And then the last area for CapEx, again, to give you I guess some detail to color it in would be the large complex deals that we have been successful on. First thing to point out is the CapEx there is not fixed but is variable. It's contingent upon success. We only incur it if we are successful in the RFP. And of the 20 large complex deals that we have secured, 17 of the 20 are cumulative cash flow positive. So they are accretive to cash and they're cumulative cash flow positive indicating that we've recouped the investment that we made putting the infrastructure in place in the first place.
The three that are not yet cumulative cash flow positive are those that are just being implemented or have just been implemented and will be becoming cash flow accretive over the next 12 months. So that's been a very good area economically for us so I would say when you look at our growth prospects, a substantiated CapEx intensity difference from some of our peers is well justified by the growth that we are capable of delivering. The fact that that doesn't come at a cost of returning cash to shareholders and I think is something consistent with the track record that we've been able to establish over the previous years.
Your next question comes from Simon Flannery – Morgan Stanley.
Simon Flannery – Morgan Stanley
I wonder if you could talk a little bit about the macroenvironment. You talked a little bit about the impact on Mike, but are you seeing impact on things like bad debts, long distance minutes of use and any sort of difference between the consumer and the business patterns and any regional differences you're seeing? Thank you.
Well I guess since we talked in December the economy has worsened in Canada and so generally economists are expecting negative growth overall. We have a greater than normal concentration of activity in western Canada which has been more buoyant and I think of all regions B.C. is the most buoyant.
The Alberta economy which was on hyper growth six months ago is now just on a normal growth as a result of the oil [pact], so on the enterprise level it is somewhat specific to industries but if you look at the four verticals that we tend to focus on, energy and financial services, you're seeing some more deferrals of projects than formerly was the case. In the case of our healthcare focus and public service focus I would say those opportunities are expanding so sectors such as manufacturing have not been and are not a significant focus or exposure to our organization on the wireline side.
I did reference Mike in respect to wireless because Mike is a relative small component of our overall subscriber base, but nevertheless contributed and was the reason why our ARPU declined year-over-year. And there was a noticeable change in some demand in the fourth quarter in the Mike area and I think that reflects the fact that of all our products Mike is most exposed to the manufacturing sector in the central Canadian economy which we otherwise really do not focus on. So that's probably why it showed up more there.
Our days outstanding alike have really not changed whatsoever in terms of bad debt experience. One has to segregate what may be say economy-driven bad debt versus a certain credit policy strategies. In that regard certainly on the large corporate side we really have not seen any defaults that I can think of of any materiality whereas we are seeing some softening in the small business and medium sized business sector, although again, overall we have not had any noticeable increase in bad debts on the business side.
On the consumer side it is somewhat reflective of the product line. Certainly if you go to wireless prepaid is a different category than postpaid. We are, as you know, 80% or more postpaid focused in our subscriber base. We are seeing some increased bad debts, etc. but we're managing those with certain deposit requirement programs. But we're going to continue to monitor that area to make sure that the return on all segments we're focusing on after taking into account possible adverse developments and bad debt, still justify the returns that we're looking for.
Your next question is from John Henderson – Scotia Capital.
John Henderson – Scotia Capital
I'm trying to understand your branch into the call center outsourcing business in Central America and the U.S. Can you just spend a bit of time on that please?
Sure. Over to you, Darren.
A few things I think are worth highlighting on that, one is the vertical focus that's been the hallmark of our national expansion on business wireline services is once again evident here. One of the verticals that we've elected to focus on through our partner solutions wholesale business is the U.S. telecom and IT industry. And in particular IT companies in Tier II U.S. telecom companies that are interested in business process outsourcing opportunities, which is quite a vibrant market right now as the telecom industry has been under duress and telcos, particularly Tier II telcos that don't always have access to economies of scale go in pursuit of efficiency initiatives, particularly as it relates to contact center activity.
And so if you're going to address that market effectively really what you have to have is an onshore capability to complement your offshore contact centers that provide the bulk of the efficiency gains. It's that two site topology, the onshore component which can be politically expedient particularly for U.S. telco and IT companies which can act as a gateway for increased off shoring activities where they can avail themselves of lower cost markets. And that for us effectively is the primary strategy behind it.
Secondarily, clearly if you're going to address the U.S. market in an effective fashion, then you need Spanish language capabilities without a doubt. And that's what has driven our minority investment in a BPO operation in Latin America, three cities within Latin America for the purposes of geographic and political diversity so that when we go to serve those U.S. telcos as they serve their clients we have both English and Spanish language capabilities. And of course a selection of Las Vegas helps support that because of the Spanish language market that we can access there as well.
Third thing that I think is important to point out, one of the things that has concerned us in the past is the concentration of our BPO activities within the Philippines. From a risk management perspective we've not been satisfied that we've had the degree of diversification that would make good sense if you want to run a robust BPO topology and mitigate geopolitical considerations. And so having two additional sites now complement the TELUS portfolio, one in Latin America and one in Nevada, it's helpful in that regard.
Then lastly you have to remember that as it relates to BPO activity for TELUS it's both insofar as the off shoring component is concerned, and this is off shoring outside of North America, yes, it's a go-to-market opportunity to address key verticals such as the ones that I just identified. It's also something that TELUS can avail itself of internally to make a contribution to the cost efficiency initiatives on wireless and wireline. And it's important that when you think about improving productivity in areas like wireless you'll have to tap into off shoring given that the wireless business is so contact center intensive.
It's important when you think about products with a rather steep J-curve from a cost perspective like TELUS TV, to be able to avail yourself of lower cost labor markets and when you're launching new products like Koodo where the focus being very much on AMPU from a contribution perspective, again, to put in an optimal cost infrastructure to support those initiatives. So there's a duality of what we do in these places in terms of both go-to-market but also to support the continued efficiency improvements of the TELUS organization. So that's the strategy soup to nuts.
John Henderson – Scotia Capital
I wonder if I could have a quick follow-up with Bob on wireless COA and the FX impact on inventory there?
So the question is what is the FX impact on our wireless inventory?
John Henderson – Scotia Capital
Well, you mentioned your COA was up in part because of the FX swings on handset inventory.
I think I was referring to the COA was up because of a valuation adjustment so that would be ob-related, obsolescence as opposed to FX.
John Henderson – Scotia Capital
Okay. Got it.
Your next question comes from Glenn Campbell – Merrill Lynch.
Glenn Campbell – Merrill Lynch
Darren, you sounded enthusiastic about the progress at TELUS TV and I was just wondering if you could give us a bit of an update there as to the sort of product, geographic scope, any sort of metrics on how it's progressing? Thanks.
I guess, Glenn, it's a difficult area for us to discuss in the type of detail that I think you're desirous of having given that we don't provide disclosure as it relates to the direct metrics attributable to TELUS TV. We are positive about the progress that we're making on the TELUS TV front and if I think about the product itself I think it's a very competitive product that delivers a very positive client experience.
We worked hard to bring both HD and personal video recorders to the marketplace which is a very meaningful development for the service that transpired over the course of 2008 and we've enjoyed strong resonance with our addressable footprint in that regard. Clearly in our view we don't see ourselves as having demand issue, but we do have supply side challenges as it relates to the addressable footprint that I just articulated.
So for us as we've expanded our coverage from key urban markets like Edmonton and Calgary and we're now investing to expand our footprint into the lower mainland, that takes time to come to fruition and it's not a question of money per se but rather the resources to effectively deploy that money in a competitive fashion to give the clients the type of experience that we think makes good sense.
We're also judicious about how quickly we go. This is not a new market in the same way that HSIA was a new market where effectively speed counts because it's a foot race for virgin customers. It matters effectively who gets to the customer's door first. This is a well established marketplace and so I don't think we need to rush and there are decisions that we have to make that bridle our speed.
For example if you rush too quickly in the era of standard definition in terms of rolling out subsidized set top boxes knowing that HD is just around the corner, well of course you've got to be cognizant of the fact that when you do rollout HD you're going to have to swap out set top boxes. So again, you want to do things that economically are optimal for your shareholders while remaining competitive in the marketplace.
Next consideration, I mean if you think about the comments I made previously, I believe fundamentally from a technology perspective we're going to permanently live in a hybrid world as it relates to high speed technology.
Right now within the TELUS infrastructure we've got 80 SL2 plus deployed. We've got Ethernet to the Suite deployed as it relates to apartments and condos which is a fact of life very much reflective of the lower mainland territory, and of course we're deploying fiber directly to new premises in areas where new housing developments are coming to fruition.
And when you think about that 80 SL2 two plus build out you need to make decisions like how aggressively do we go with that build out? When do we think the VDA cell II cards will be ready to be dropped into the 80 SL2 chassis? Where should we be supplanting brown field copper with fiber to the home? It's a balancing act if you will to make sure that you're sweating each technology stage before you upgrade to the next, but also at the same time you're remaining competitive from a bandwidth and an applications perspective in the marketplace.
One of the areas of course that we've highlighted for 2009 is that the broadband investment strategy is not one just relegated to the HSPA deployment on wireless, but one that of course we're going to take forward on the wireline front as well with the investment in 80 SL2 and hopefully on the back of the AT&T deployment in the U.S. the elevation of 80 SL2 to VDA cell II by dropping cards into the 80 SL2 chassis, which economically would be akin for example in going from EVDO to EVDO, REV A, being a very cost efficient upgrade and not too resource intensive so that's something that we're looking to undertake over the course of 2009. That should elevate our competitiveness in the marketplace and support an extended footprint.
I guess the last comment is our mentality on TV is somewhat different than the mentality that we see in other areas which is very aggressive price competition and certainly we have seen that on bundled Internet and telephony pricing from our competitor. Our mentality on TV is to compete on value, the focus on differentiation and build value in the entertainment market rather than amortized value through unnecessarily aggressive pricing strategies.
And I think the significant unique attributes of IPTV and its digital and dedicated nature support a lot of positive differentiating factors that will have good resonance that will have good client take up without TELUS having to be aggressive on price.
Your next question is from Jeffrey Fan – USB Securities.
Jeffrey Fan – USB Securities
Just want to follow-up on the previous question regarding the expansion into the U.S. with the call centers. Darren, you eloquently described the strategy of your BPO, but I'm more curious about why you feel the need to address the U.S.-based clients with every telco trying to – reverting back to their core and focus on where they think they have a competitive advantage. And just wondering what is the opportunity here in terms of servicing U.S.-based clients with this type of service?
We're already servicing U.S.-based clients with this service so I'm not sure from a confidentiality perspective whether I have the right to disclose the client's identity, but in Manila IT companies that would be very well known to you we serve. Gaming companies that would be very well known to you we serve. Utility companies that would be very well known to you we serve, so we already serve significant brand name U.S.-based clients out of Manila.
What our U.S.-base clients have told us is that if you guys can't complement your low cost English speaking service with a low cost Spanish speaking service your growth prospects with us are going to become significantly truncated and not only will we not grow with you but we may not keep the business with you that's already in place.
So for us to keep the clients that we've got, grow our relationship with them and secure new clients we have to have a Spanish language capability, which was the primary thesis behind our investment, our minority investment in Latin America. The secondary consideration was as I've indicated, geopolitical diversity is quite key given the number of people that we have in a single geographic location in Manila.
The other area of our business that has been exceedingly successful for TELUS, so we were just ranked number one in North America as it relates to operator services, we call that our global contact solutions business, but we have done very well as it relates to wholesale operator services. And although that's a mature business as people exit the mature business we've developed quite a cottage industry taking their business onboard and leveraging our rather significant economies of scale and the superior performance and cost infrastructure that we have been able to secure from that business.
And our wholesale business does extend into the U.S. with relationships across a range of U.S. telcos with a particular focus on Tier 2 U.S. telcos that don't have the economies of scale of some of the Tier 1 players that are very desirous of having economies scale particularly during this period where efficiencies are necessary.
And to the extent that they want to look to us to provide contact center solutions for them, one of the things that they tell us is that yes, we would like to do the business with you. We like your model. We like your performance, but you need to have Spanish language capability if we're going to do something like hand you our operator services business because a number of the people who call in are Spanish-speaking.
The other thing that they tell us is it would be a lot easier to do some off shoring with you if you had an onshore footprint to act as a gateway if you will and smooth out some of the political challenges that they would typically have to confront. And so that's a growth market for us that we've been doing very well in and this rather minor investment if you look at it from a dollars perspective is just to help facilitate the continued growth of that strategy. It's nothing more expensive than what I've just articulated.
Your last question comes from Randal Rudniski – Credit Suisse.
Randal Rudniski – Credit Suisse
You've outlined in terms of capital strategy CapEx and dividends pretty well, but I was hoping you could update us on how you view share buybacks in the current environment?
We of course have an NCIB, I think it's our fourth edition of the NCIB renewed back in mid-December so we have that capability. We've published very clear leverage guidelines that remain unchanged and you've got the payout ratio. We've got forecasts for 2009 out there so essentially we're in a really good position from the standpoint of having a strong balance sheet, being able to fund the increase in the CapEx, the minor increase in the pension outlays.
And in terms of NCIBs I think we'll monitor the market. You can see we're in the market in a small way in the fourth quarter. As to what we might do going forward I think we'll be prudent but I can't say exactly what the level of activity will be. It will be a function of the lower the share price the more activity; the higher the share price the less the activity. Those are some of the frameworks but it's not something that I can pre-commit to.
Thank you very much everybody online with us today for joining Bob and Darren and our team and we'll look forward to working with you in the coming quarter. Thank you.
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