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Telus Corp. (NYSE:TU)

Q4 FY07 Earnings Call

February 15, 2008, 11:00AM ET.

Executives

John Wheeler - Investors Relations

Darren Entwistle - President and CEO

Robert McFarlane - EVP and CFO

Analysts

Peter MacDonald - GMP Securities

Vince Valentini - TD Newcrest

Greg MacDonald - National Bank Financial

Robert Goff - Haywood Securities

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

Operator

Good morning ladies and gentlemen. Welcome to the TELUS Fourth Quarter 2007 Earnings Conference Call. I will like to introduce your speaker, Mr. John Wheeler. Please go ahead.

John Wheeler - Investors Relations

Thank you. Let me introduce the TELUS executives online with us today. They are Darren Entwistle, President and CEO; and Bob McFarlane, Executive Vice President and CFO. We will start with introductory comments by Darren and Bob. This will be followed by a question-and-answer session with both executives. The call is scheduled for one hour.

The news release on fourth quarter financial and operating results and detailed supplemental investor information, are posted on our website at telus.com. For those with access to the Internet, the slides are posted for viewing at telus.com/investors. You will be in listen-only mode during the opening comments.

Let me now direct your attention to slide two. The forward-looking nature of the presentations, answers to question, and statements about future events are subject to risks and uncertainties and assumptions. Accordingly actual results could differ materially from statements made today. So do not place undue 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 in filings with Securities Commissions in Canada and the United States.

Now over to Darren on slide three.

Darren Entwistle - President and Chief Executive Officer

Good morning. Reflecting back some aspects of the changing telecom industry and regulatory environment in 2007 were positive for TELUS. But the balance can only be to characterize as both frustrating and disappointing. Notwithstanding this, TELUS generated solid operational results for the year, continuing to advance our national growth strategy with the focus on growth tenets of wireless and data.

Lets begin our review on slide four. At a consolidated level, TELUS delivered revenue growth of 4.5% breaking through the $9 billion level. EBITDA was up 4% to $3.8 billion on the year, underpinned by our wireless operations which were up 10%. TELUS' consolidated EBITDA margin of 41% for the full year, represents a consistent performance with 2006. This is noteworthy given the higher than expected mid-year cost we experienced in three particular areas: First, implementing wireless number portability. Second, implementing the new unified customer care platform in Alberta. And third, the turning down of the AMP'D service due to the bankruptcy of its parent in the U.S.

Excluding positive income tax recoveries, TELUS generated a healthy underlying increase in earnings per share of 19% on a year-over-year basis. This was driven by three factors, higher EBITDA, lower financing costs and reduced shares outstanding. Notably, TELUS has achieved a record 18% return on equity in 2007.

Overall, TELUS achieved or exceeded three out of the four 2007 consolidated financial targets that we setout over a year ago, including the two profitability targets of EBITDA and EPS. Revenue ended 1% below target, largely attributable to competitive pressures on wireless pricing and our own shortcomings in operational execution.

Importantly, TELUS once again generated strong free cash flow of almost $1.6 billion. This has allowed us to continue using the cash we generate to accomplish two goals that at companies are mutually exclusive. Specifically, invest prudently in growth opportunities and simultaneously return significant amounts of cash to shareholders on an ongoing basis. Each and everyone of TELUS' investment decisions have been consistent with our strategy over the last eight years of concentrating our spending on our core business in our domestic market. The yield from these investments we share with securities holders, but also setting aside funds to carry on the cycle of investing for the future.

Slide five, outlines the way we continue to meet our commitment to use cash flow to realize value for shareholders. TELUS has delivered four successive yearly dividend increases with a compound annual growth rate of 32%. Additionally, TELUS' repurchased nearly 53 million shares for $2.5 billion over the last three years. Indeed in 2007 alone, TELUS returned to shareholders $1.3 billion in dividends and share repurchases. Over the past four years, TELUS has returned $4 billion in totality or more than a $11 per average share outstanding.

Turning to slide six, let's examine our wireless highlights for 2007. TELUS experienced revenue growth of 10.5% compared to a year ago, and this is based on a 10% growth in the wireless customer base and as well a 59% growth in data revenues. These results illustrate the return on our investment over the last three years in expanding in our high-speed EVDO data network. Having the fastest coast-to-coast wireless service covering 80% of Canadians is a catalyst for continued growth in the important data service category.

Notwithstanding this, the advent of number portability, certain competitive pressures and TELUS' own execution shortfalls led the higher retention costs and churn of 1.45% for the year. Clearly this aspect of TELUS' performance is one that I am less than satisfied with, as evidenced, in particular by our fourth quarter results in this area.

Improving proving customer retention will be a key focus in 2008, as we seek to raise the bar on our own performance. I continue to believe that number portability represents a long-term growth opportunity for our organization as we strive to capture a balanced share of the business market in a disciplined fashion.

Turning to slide seven, you can see TELUS' wireless customer growth and net additions since 2001. TELUS has consistently produced more than 500,000 net additions in each of the last four years, including record growth additions in 2007. The task ahead is to complement this with an excellent churn result.

Slide eight, provides an overview of the growth in the Canadian wireless industry for the last five years. Regardless of the Canadian government's decision on the framework for the advanced wireless services spectrum auction in the month on May, TELUS remains confident in continued strong industry growth for a number of reasons.

First; the estimated 490-basis point gain in 2007 is higher than 2006, illustrating that the Canadian market continues its healthy growth. Second; Canada's wireless industry still has significant latent potential for growth. A comparison to the current U.S. penetration rate, on the next slide illustrates this exact point.

With our results released today, we estimate that wireless penetration in Canada currently stands at about 61%, compared to the circa [ph] 80% penetration rate in the U.S. As Canada inevitably moves to the U.S. penetration rate over the next four years, 6 million new clients should join our industry.

I now turn your attention to slide ten, for TELUS' 2007 Wireline segment highlights which helps to explain our operating resiliency in this challenging industry. Notably, our wireline data revenues increased 8% in 2007, to $1.8 billion, offsetting decline in local and long-distance services. This strong data result, was based on almost 104,000, new high-speed Internet customer additions. While TELUS surpassed the 1 million customer mark for the first time, we were disappointed with our performance in this area, given the systems upgrade challenges we encountered over the course of 2007. On the business front, TELUS experienced excellent traction in the business and public sector markets, with several landmark contracts secured over the past year.

Slide 11, highlights our wireline resilience and network access line performance when compared to our North America peers. TELUS again experienced only moderate network access line losses at 3.2%, as residential losses of 6.5% were partially offset by business line growth in Ontario and Quebec.

Lets turn now to slide 12. TELUS is addressing the challenging dynamics of the wireline industry in three ways. First; we are enhancing TELUS' broadband access network in our consumer markets of BC, Alberta and Eastern Quebec. This investment underpins our high-speed Internet competitiveness and facilitates the acceleration of our TELUS TV rollout with the addition of high-definition capability this year.

Second, deregulation provides TELUS with increased pricing and competitive flexibility for three quarters of our consumer urban markets and two-thirds of our total business lines in our ILEC territories.

Third, TELUS is making infrastructure investments to progress our technology leadership across key industry verticals namely, the public sector, healthcare, financial services and energy. The acquisition of Emergis in mid-January fundamentally supports our goal of being the leader in healthcare transformation in Canada. Investors will note a significant portion of our wireline capital expenditures is success-based, tied to the positive economics of long-term contract wins with enterprise and public sector accounts.

As we enter 2008, we remain responsive to the changing competitive landscape. Slide 13 outlines our key priorities that will guide TELUS through our operational execution in 2008. You will note, the priorities are simple and the priorities are clear. Indeed I have already touched on a number of the key initiatives in today's call.

Overall, we are again taking a disciplined approach to drive profitable growth from wireline and wireless data services on a national basis. Importantly, elevating the client experience and building enhanced loyalty will be key, as we will be exacting for productivity gains from the net space of our efficiency improvement initiatives.

Finally, TELUS will continue to progress our technology initiatives, including the net space of our client care system into DC and as well, we will be enhancing broadband access for wireline and wireless clients. With that to go, TELUS has the right strategy. One that has been tested and proven over the last eight years. TELUS is extremely strong financially and well positioned to advance the strategy to a rigorous execution of our priorities, thereby generating value for investors in the years ahead.

Now over to Bob, who can brief you on TELUS' fourth quarter results.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Thanks Darren and good morning everyone. Let me begin the financial results review with our Wireless segment on slide 15. Fourth quarter wireless financial results were solid year-over-year. Wireless revenues were up nearly 9% as subscriber growth was slightly offset by a small decrease in revenue per customer.

EBITDA increased by 14% as a result of higher network revenue growth and lower cost of acquisition or COA for short, as we achieved profitable subscriber growth. This was partially offset by higher customer-retention spending as clients move from voice-centric mobile phones to what we call, smart phones such as PDAs and BlackBerrys.

Overall we were pleased to see wireless EBVITDA margins expanded by 2 points. The increase in wireless CapEx this quarter was mostly due to the continued network enhancements in capacity and coverage. Our EVDO REV A high speed network now covers roughly 80% of the population. Despite the fourth quarter increase, wireless CapEx was consistent with the original level targeted for the year 2007.

Turning to slide 16, wireless net additions were lower year-over-year. TELUS added 161,000 net additions in the quarter, after including the one-time reduction of 5,100 to prepaid net adds following a billing system audit. Note that this adjustment was reflected in both net ads and churn. This adjustment related to subscribers which deactivated over the past two years but were still registered as subscribers in our billing system.

Gross additions increased by 11% to a record level in the fourth quarter despite our disciplined marketing efforts, which are covered in more depth in the next few slides. Prepaid net additions increased 5.6% to 55,000 from the year ago, while postpaid net ads were 106,400 representing 66% of TELUS' total net ads in the quarter. While our prepaid subscriber base continues to expand, our overall subscriber mix remains at an 80:20 postpaid-prepaid mix.

Slide 17 shows that the total quarterly ARPU decreased by $0.80 or 1.2% year-over-year to $63.70, reflecting a declining voice ARPU and the increased proportion of prepaid additions. Note that for the full year 2007 wireless ARPU actually increased slightly to $63.56.

Looking at fourth quarter results, voice ARPU was down $2.59, caused mainly by lower per minute rates, increased price competition in the business and discount segments to the market and a decrease in roaming. At the same time as an off setting factor, TELUS' Wireless data ARPU increased by $1.79 to $7.95 and now represents 12.5% of total ARPU. Data service revenue increased by $39 million or 43% year-over-year.

The potential for continued strong, one of our state of growth remains positive given the increasing penetration of EVDO capable devices in our subscriber base. We expected introduction of higher bandwidth applications and devices, given the deployment of EVDO Rev-A, as well as the ongoing migration of non-dispatch mic users to PCS.

Slide 18, reflects the focus in our wireless marketing efficiency for the fourth quarter. Churn increased in the fourth quarter to 1.59%. We attribute this to shifting product mix and the first fourth quarter under WNT that while contributing to higher subscriber loadings, also contributed to higher churn. As mentioned earlier, TELUS reduced prepaid net ads by just over 5100 for a clean up of deactivated accounts, contributing an increase of 3 basis points to the churn rate.

Despite record growth additions, marketing expenses for the quarter were down 11% year-over-year, due to lower advertising and promotion spending contrary to speculation. COA gross, a per gross addition was $352, 19% lower year-over-year, partially due to disciplined marketing expenditures and a higher prepaid gross additions mix. COA as a percentage of lifetime revenue, the nature of marketing efficiency improved by 2 basis points over fourth quarter 2006.

Now, let's turn to the wireline side of our business, starting on Slide 19, to review the components of revenue. The local and L&D revenue declines are reflective of the continued competitive environment and substitution from wireless and voice as well as reduced revenues from moves, ads and changes. These revenue declines were partially offset by increasing data revenue. Double-digit growth in the high-speed Internet base, plus increased managed data revenues on the business side like the solid 7% data revenue growth. Other revenue declined more than 5% mainly due to lower equipment sales. Overall, wireline revenue was down 1%.

Turning to slide 20, wireline EBITDA increased by more than 2% in the fourth quarter due to lower operating expenses. This decrease in expenses was due to the excellent cost control, reduced costs of sales inline with our lower equipment sales as well as increased capitalization of labor. As a result wireline EBITDA margins expanded by more than 1%. Meanwhile, CapEx was 9% higher in the quarter, reflecting upfront investments to support new enterprise customer wins in Central Canada. Investments were also made in enhanced broadband and network access growth. The increase was partially offset by lower spending for billing and client care system development. It should be noted that while CapEx was higher for the quarter, it was inline with original 2007 guidance.

Let's move to slide 21 and examine Internet results. During the fourth quarter high-speed Internet subscribers surpassed 1 million and we are up 11% year-over-year. Net ads for the quarter were disappointing and much lower than the year ago, reflecting various challenges, including competitive dynamics and decrease marketing effectiveness. We are focusing on rebuilding this momentum going into 2008.

The next slide highlights a stable network access line performance trend. Overall, access lines declined 3.2% year-over-year, a result which remains much better than most North American TELCOs. The residential line component have losses in the fourth quarter of 47,000 a decrease of 6.5% year-over-year. This reflects continued competitive activity including the rollout of cable telephony service in many of our markets over the past year, as well as ongoing wireless substitution. However the decline in residential lines was partially offset by a healthy 2% increase in business lines, largely gained in Ontario and Quebec.

Slide 23, illustrates the robust growth trajectory, and changing mix of TELUS' overall total customer connections. On a consolidated basis, growth in wireless and high-speed Internet is significantly outpacing declines in residential network access lines and dial-up Internet. Interestingly, TELUS' wireless and Internet now account for 60% of total connections and we have generated nearly one million more connections in the last two years. This clearly demonstrates the continued successful execution of our national strategy focused on investing in growth in wireless and data that continues to create value for our investors.

So putting it all together, let's look at TELUS' on a consolidated basis starting on slide 24. Consolidated revenue in the fourth quarter grew more than 3% and EBITDA rose almost 8%. EBITDA growth led to a margin expansion of 1.7 points to 41% for the fourth quarter. Reported EPS, increased 73% which includes a positive $0.44 adjustment for tax-related matters this quarter. When excluding the positive tax adjustments in this period, as well as the $0.06 positive tax impact in the fourth quarter of 2006, underlying EPS, still increased by 22%.

Now, let me elaborate on the various drivers behind EPS growth on the next slide. This slide shows a detailed break down of the components of the $0.52 year-over-year increase in reported EPS. Incremental tax impacts were the largest contributor to reported EPS growth and were a net $0.38, when accounting for the $0.44 positive contribution this quarter, as compared to the 6% amount in the same quarter last year.

Underlying EBITDA growth generated $0.13 in growth. Continuing down the income statement, lower financing expenses contributed $0.05 to the improvements. Higher depreciation and amortization, primarily related to the new Alberta consumer billing system that went in service in the second quarter, as well as reduced asset lives for certain other assets, impacted EPS by $0.09. Other items added $0.05, including a lower average number of outstanding shares due to our ongoing share repurchase program.

Slide 26 summarizes our total share repurchases in the quarter and historically, since we first began buying back shares in December 2004. We remained active in the market in the fourth quarter, repurchasing a total of 3.1 million TELUS shares for $148 million. This brings TELUS' aggregate share repurchases since inception of the NCIB program to nearly 53 million shares for $2.5 billion. To put this into perspective, these amounts are significantly more than the $1.95 billion or 49 million shares, a share component of the Clearnet Communications acquisition made a few years ago.

Importantly for investors, this has to led to a 9.5% or 34 million reduction in the total shares outstanding over this period, despite shares issued for option exercises, and other dilution in previous years. Notably TELUS' innovative move to the tax-efficient net cash settlement method for past options beginning in 2007 has accelerated the impact of share repurchases by reducing share dilution. Outstanding shares were down to 4% on a year-over-year basis.

Slide 27, summarizes the completion of our mergers and provides a quick financing update. On January 17,, TELUS financed and paid with ease, $743 million for all issued and outstanding Emergis shares by drawing down its credit facility and available cash resources, mainly from issuing commercial paper. With the Emergis transaction closing in mid-January 2008, it will include results for about 11.5 months. Taking into account the funding of the Emergis acquisition, the pro forma net debt-to-EBITDA ratio measured at December 31, 2007 would be 1.9 times and still within our guideline range of 1.5 to 2 times.

Earlier this week, on February 12, 2008, TELUS accepted commitments for a new $700 million, 364-day revolving credit facility with a select group of Canadian Banks, which ensures TELUS maintains ample liquidity. With no significant debt expiring into 2011, TELUS enters 2008 with strong liquidity, considerable financial strength and balance sheet flexibility.

Now to conclude on slide 28, we are confirming TELUS' consolidated and segmented targets for 2008 as announced in mid-December with no changes. So with that, Darren and I would be pleased to answer your questions, I will turn the call back over to John Wheeler to start the Q&A session.

John Wheeler - Investors Relations

Thanks very much, Bob. Just before I turn the call over to Sebastian to conduct the Q&A session, can I ask your cooperation for one question at a time please? Sebastian, please proceed.

Question And Answer

Operator

Thank you [Operator Instructions]. And the first question is from Peter MacDonald, GMP Securities. Please go ahead with your question.

Peter MacDonald - GMP Securities

: Thank you. Can you discuss your intentions on GSM, are you contemplating or investigating an overbuilt strategy and would that be a partial or full overbuilt strategy and then you are going to really given the past, giving us the pros and cons of these type of strategic decisions and that would be very helpful in this case as well thanks.

Darren Entwistle - President and Chief Executive Officer

I think Peter's speculating on technology, evolution in an open form is not necessary the best thing to do for our shareholders. Clearly its always in comment upon us, whether it's a wireless business or wireline, to stay abreast, we are developing ecosystems from a technology perspective in the telecom's world. I think it's important to note that and so far as TELUS is concerned whether you are taking about the wireless business or wireline, technology upgrades have been a way of life for us.

If you think about what's going on right now within our broadband access network and the iterations that we are experiencing in terms of upgrading our access technology, I think that's reflective of the type of continuous change that you can expect from a technology perspective. And wireless has been no different, when I arrived here eight years ago, the network in the West was effectively analog. We have gone from analog to digital, digital to WiMAX, WiMAX to EVDO, EVDO to EVDO Rev A. So it's been a continuous stream of technology upgrades for us and I think its something that as an organization, we do very well from a execution perspective.

I think its also important to point that at the end of the day we have our eye on the economics. And in so far as making a technology upgrade is concerned, it's based on a business case. And effectively if I distill the business case down to two book ends in terms of let's say doing the right thing for shareholders, you don't want to be in a situation where you prematurely move towards a new technology not having sweated the existing assets efficiently and not having generated the ROI on the previous technology stage that you use shareholder money do invest it in the place.

Likewise on the other hand, if you wait too long you can become uncompetitive and of course that has an economic result on the organization as well. So really, it's at the end of the day all about timing and getting the timing right and making the right business case decision. For us, right now I think people forget we have made an investment in both EVDO and recently a very cost-efficient upgrade to Rev A which we're truly operationalizing this year in 2008 with handset availability really coming online and of course, we have enjoyed that capability previously with the Sierra wireless air card on the mobile computing front.

But I think its incumbent upon us right now to say we have technology leadership from a bandwidth perspective within the wireless world. That's good for consumer data applications and good for consumers data applications and good for business data approximately. And we need to sweat the heck out of this technology stage to get the ROI that we want on the EVDO and EVDO Rev-A investment in the first place. And it's interesting to note that right now, if you compare us to alternative technologies in Canada, we do have a leadership position.

From a speed perspective we have the fastest network, both on the downlink and on the uplink pass and we should be exploring that. I guess the final thing to say is beyond that, when we think about a technology evolution within the business case format, we want to think about where are the eco systems developing within this new technology that we are considering, what's it going to give us in terms of things like access to handsets, economies of scale, so on and so forth. Those are the key drivers, and it's interesting to know that frequently when you are considering technology upgrade, the cost of that upgrade are non-recurring. You experienced them once to drive the new technology through implementation. But the benefit associated with that new technology coming to fruition are recurring and of course, that always delivers a strong economic result when your cost are upfront, but the benefits are improving.

John Wheeler - Investors Relations

Next question please, Sebastian.

Operator

Vince Valentini from TD Newcrest. Please go ahead.

Vince Valentini - TD Newcrest

Yes, thanks very much. I am glad that you are talking about the Rev A there, because my question is on wireless data. I see that you had a quite a deceleration in the growth in data ARPU, it was up 69% in the first quarter and the fourth quarter, here we see it up only 29%. But it seems like you're taking steps to try to reverse that trend in outgrowth reaccelerates, spending a lot of money on retention to get new smart phones into customers hands. So I am wondering, if you can flush out a little bit more. Do you expect the data ARPU growth actually to reaccelerate? And as part of that answer, would you mind sharing with us some detail on the mix of your customers, although you gross add you had in the fourth quarter, could you give us, as what percentage of those might have been on smart phones?

Robert McFarlane - Executive Vice President and Chief Financial Officer

Okay, Vince, first thing, I think first point to make is, that our wireless data service growth year-over-year fourth quarter was 43%. That would compare to the number that you previously mentioned. So in that light, I think it's good growth. It's not as high perhaps as it could be. But you've touched on something that hangs quite positive for the future and that is the significant conversion of... as referenced in my comments, voice-centric type of traditional phones for more smart phone devices and in the likes the PDA's et cetera. And that certainly has been an emerging trend in 2007, particularly back half of 2007. And so essentially you're getting part of your existing base, as well as new subscribers increasingly adopting devices out of their desire to use the data where they may not have used previously. So I think that's a positive trend for the future.

In terms of the that the base one metric that might be helpful is that a little under 20% of our existing base, would be comprised of handsets that our EVDO capable. So that gives you an idea, as we have upgraded the network on EVDO going back two and a half to three years ago, and done it over the past three years and in fact now into Rev-A less than 27 of base has EVDO handsets. So consequently as that's building up, I think those are build in positive dynamic for future data growth which is clearly the emerging trend in the marketplace. So, that bodes well as well.

John Wheeler - Investors Relations

Okay. Sebastian.

Operator

Greg MacDonald from National Bank Financial. Please go ahead.

Greg MacDonald - National Bank Financial

Thanks good morning guys. Question goes to Darren. Darren it's really another strategic type question. We know from TELUS' interest in Bell last year that you thought that there were certainly scale benefits... scale and scope benefits for doing a deal in Canada. I wonder if you just might comment on looking at the landscape besides Bell, are there scale or scope benefits for further consolidation in the telecom market. I am not just thinking of TELUS, but overall. I mean is it your view that the maturity pressures in the business have changed in the last two years or not, that we are in a situation in Canada now that consolidation should occur and probably will occur in the next two or three years.

Darren Entwistle - President and Chief Executive Officer

Thanks for the question Greg. Clearly the machinations that we went through in the summer with BCE, we are predicated on a strategy where we felt that economies of scale are important and when you make the type of investments that we make from a CapEx and an OpEx perspective, the extent to which you can better leverage economies of scale, that's always a positive thing within our industry, effectively. Size does matter when you have the type of initiatives that we have from a magnitude perspective, the investments that are required, the execution and the complexity scale, both from a return on investment perspective and from the diversification perspective, as it relates to the way that you manage your portfolio and all the complexities therein is something that will be a strategy that I would subscribe to.

The second comment would be scale opportunities have to be quality scale opportunities. And I think it would be fair to say in the absence of BCE, the number of quality scale realization opportunities within the Canadian landscape, is significantly scarce, if not non altogether. So pursuing scale only makes good sense if A) its quality combination that your pursuing and you are confident that you can deliver the operational execution and just outside of the BCE envelope don't see opportunities of that ilk within that Canadian landscape. What we do think makes good sense is looking at opportunistic acquisition pursuits that would allow us to fill capability gaps in so far, as key components of our strategy are concerned. Clearly, you will see with the number of the landmark wins that we have been securing within the enterprise and public sector market that, that scenario of our business that is doing exceedingly well for TELUS. And one of the reasons that its doing well is that we haven't taken a broad based focus. We have been very segmented in our approach to the market, rather than broad based and so far, as the business market is concerned, we have looked to focus on key verticals, the verticals that I referenced during my opening remarks today.

Again, those verticals are key whether they are financial services, whether they are oil and energy, public sector in general or healthcare in particular, we are doing very well and we are winning business in that regard. And I was a opportunistic move for us to make on the acquisition front, whereby we think the economics are good, whereby it fills an important strategic capability gap that we think that we can execute against and that we can deliver the operational integration of that acquisition opportunity, we will give it due consideration. But again, I will make the same comment that I made previously in referring to economies of scale. Its got to be quality opportunity and even in so far, as vertical markets are concerned, the number of quality opportunities from an acquisition perspective, they really are few and far between within the Canadian landscape, which is an interesting thing because then that takes you all the way back to organic execution. And I will make the comment that I have made at several of these calls over the last three years.

TELUS does not need to do an acquisition to see its strategy through the provision in form. As a result of this strategy that we have had in place over the last eight years, we are in a very strong position, we have got an excellent platform to continue to deliver good organic operational execution and that is all that is required at this years strategy through to fruition, which means that any acquisition opportunity, I guess judged purely as something that's opportunistic. It's a nice to have opportunity rather than a need to have opportunity. I think that always makes us a little bit more sanguine when it comes back to the economics of any deal. And of course in terms of any appetite that we have, we are in a fortune situation right now and a differentiated situation, while we have got a extremely strong balance sheet. So we can give opportunities due consideration and we can process those opportunities with out straining the financial and economic resources of the organization

Greg MacDonald - National Bank Financial

Thanks,

John Wheeler - Investors Relations

Sebastian?

Operator

Robert Goff from Haywood, please go ahead.

Robert Goff - Haywood Securities

Thank you very much, when you look at the lower COA from yourself and Darren, could you say what the key drivers? Are they the efficiencies or discipline by their providers or would it also effect on our lower net present value per newer marginal subscriber?

Robert McFarlane - Executive Vice President and Chief Financial Officer

Rob in terms of the COA, really there is a couple of dynamics here. Sometimes you can have a lower COA expenses, because your gross adds went down. Our gross adds actually went to a record level in Q4 and our COA expenses were down so obviously it's not just a volume driver, measured as COA per gross add which sort of normalizes for that consideration again as you referenced went down significantly. Our absolute dollar advertising and promotion expenses were down year-over-year fourth quarter to fourth quarter and so it would be primary reason and so when you get good gross adds on a lower AMP spend then you are getting in a efficiency gain if you will on that side of it.

In terms of the subsidy and commission side, I think that contrary to erroneous speculation, we were prudent in the fourth quarter and such reflected in that COA number. And then lastly because of the mix and this should be a minor factor, because the mix of prepaid to postpaid you tend to have lower subsidy and commissions as it relates to prepaid as in postpaid because we get a cost structure to the respective ARPU profile of our additions.

So that's really the dynamic that occurred in the fourth quarter at the end of the day the only way to really summarize it is that we had improved efficiency on the COA. And so when you think back to item recall I think it was around the first quarter of the year-end people were saying, Gee why is your COA's way up and so on so forth, funny enough for the full year our COA is actually down, and yet our gross adds are significantly up year-over-year and our net adds are down a bit. But they are very consistent with what they were the prior year and so, all in all I think it's a good going in terms of the efficiency side. On the contrary you would be... maybe we should spent more and then dent our demand civilization [ph], I won't get in that debate publicly, but clearly in terms of the effectiveness what we did spent it was quite efficient.

Robert Goff - Haywood Securities

Okay

John Wheeler - Investors Relations

Sebastian please.

Operator

John Henderson from Scotia Capital. Please go ahead

John Henderson - Scotia Capital Markets

Yes thank you. I have a question minor around your wireless data pricing I know you've touched it already. But I did want to ask if the that the slowdown in wireless data growth in Q4 may have been attributed to your price plan for unlimited email at $15 a month and whether or not that may have caused some cannibalization. And then also just in terms of what your impact may be from the new unlimited usage, weather access usage price plan at $3 a month, it's a lowest I have seen. I mean what sort of impact that may have on CapEx and how you are kind of sort of following that, if your seeing what's your signs from earlier adoption you are seeing of that plan and how you could control the CapEx side of the equation if that goes out of control?

Robert McFarlane - Executive Vice President and Chief Financial Officer

Okay John, in terms of the wireless data pricing, firstly I would say that the type of consumer-centric plans that were introduced by the industry and a lot prior to fourth quarter I think did some demands then in terms of consumer was data but would not have had a material impact in terms of cannibalization. I think you refer to as and turn of the base. So I don't think that that would have been a material dynamic there. Really what you add is a classic demand stream going on the consumer segment which wasn't a big focus of wireless data growth in the prior three years, which was largely business oriented if you think of PDAs and the like. So that on a go-forward basis I think, there is quite an opportunity for growth in the consumer segment, from both the advent of more segmented pricing plans, but in addition to that, devices such as the BlackBerry Pearl, which are geared more to a consumer sell hold type of market and are doing very well in the marketplace.

John Wheeler - Investors Relations

Next question Sebastian?

Operator

Thank you. Glen Campbell from Merrill Lynch. Please go ahead.

Glen Campbell - Merrill Lynch

Yes, thanks very much. My question is for Darren, it's on long-term capital intensity in wireline. You talked a lot about the reasons, why wireline CapEx is going to be high this year and next year. But I wonder if you could just give us a general sense of where you think CapEx to sales in the wireline segment tend to or should stabilize for the long run after a couple of years? Thanks.

Darren Entwistle - President and Chief Executive Officer

Glen, you're really, seriously asking me to project three to five-year CapEx intensity ratios for the wireline business. That's not something, obviously that I am prepared to do. One of the things that we have said previously is that, we believe, given the margins that we have invested within our wireline business, that it's the right thing to make the necessary upgrades in our access network from a bandwidth perspective, so that we can do two pretty important things. Number one, work hard to preserve the margins that are associated with the heritage services, predominantly on the volume side of our business and clearly there are good margins that we generate from that segment of our business. And then, number two, establish a new wireline access network platform for advanced data services whether they are Internet related, security related or TV related, and it's, without a doubt, a heavy risk for our organization [ph] which is why you see CapEx intensity at circa 25% as we undertake these investments and they are multiyear investments.

There is no escaping that reality. So we can either abandon that business or we can invest in that business both from a protection point of view and also from a forward-looking new services point of view and build the platform for the longer term. But I think, we will deliver in the permissive time, an economic return for our shareholders and essentially for us that is the road that we are going down and as I say the magnitude of the investment is significant. We previously announced the $600 million that we are spending over the course of 07, 08 and 09 in upgrading our broadband type network and we think that, that is a prudent thing to do. So, these sums are material and the program is multiyear in its orientation because elevating in your bandwidth, in your access network significantly, making the move from ADSL2+ to VDSL2, to fiber into new neighborhoods, fiber to condos in terms of multiple dwelling units, fiber eventually in the permissive sometime, to legacy neighborhoods in terms of the technology retrofit. These things all take time and they will cost money but we think it's a right thing to do, to protect the margins that we enjoy today and establish a platform for future growth.

The other thing that I think, people do forget about sometimes is that, the business at TELUS from a mathematics perspective if nothing else is fundamentally changing. So, as we move from being a company that was predominantly wireline with wireless as the growing segment, to a company that's effectively half wireline and half wireless to a company that in the future will be predominantly wireless, in terms of the asset mix where our revenues and profits are derived from, and as well where cash flow is derived from, and of course the intensity from a CapEx perspective that we have traditionally experienced on the wireless side, it does reflect the more attractive near-term economics of that element of our industry. So when you look at our CapEx intensity on a consolidated basis, they weight of wireless will have a greater impact in the years ahead as it becomes a greater proportion of our financial mix and of our asset mix.

John Wheeler - Investors Relations

Excuse me Sebastian go ahead.

Operator

Jeffrey Fan from UBS Securities. Please go ahead.

Jeffrey Fan - UBS Securities

Thanks very much. Just a quick question again on some of your data plans that were offered in the marketplace. I am wondering if you can give any color because on the take up on some of these entry price plans and whether, consumers were really drawn in at the lower price plans or did you see a lot of consumers actually take a higher price plans meaning, we can't just look at the $10 or $15 ARPU or price per month as kind of the ARPU uplift and there may be greater ARPU uplift and then, what is I guess apparent. Just wondering if you can just share any thoughts on that?

Robert McFarlane - Executive Vice President and Chief Financial Officer

Well Jeffrey, when TELUS introduced $15 pricing geared to a consumer market for the data that was for unlimited messaging. It had... it was the access beyond that, such as Internet to web browsing and the like were subject to a data cap. That was not the approach taken by our competitors. So the TELUS approach was one which was based on using unlimited messaging effectively which is not capacity intensive and that's a very thoughtful and a prudent approach for offering benefit to the consumer in the marketplace, in a category not directly addressed previously, but in a way which is shareholder-friendly shall I say. That was not the approach which was by reciprocated by our competition. So consequently, our approach was one which fueled adoption through the devices in conjunction with a rate plan that gave people what they really wanted to get going and data processing time provided a tool to access other services such as downloading and browsing and the like, which would simulate additional revenues for our organization. So I think that's a next-line approach that we tried to take to the marketplace and want to see how the industry evolves in that area going forward.

John Wheeler - Investors Relations

Sebastian?

Operator

Peter Rhamey from BMO Capital Market please go ahead.

Peter Rhamey - BMO Nesbitt Burns

Yes, I was hoping that this is a question on wireless and when we look at your net adds impacted by a little bit higher churn and it seems it's going on generally across the industry both in Canada and U.S. Yes your gross ads are up, of course I am trying to look out in the next year to two and should we look at this as being positive in that gross ads are actually you can get your churn down that translates for net adds or should be looking at the net add trend and saying, look industry has penetrated and sustainable growth rate in the next two or three years is a net 450, 500 basis points undergo for our base. I am not too sure how on the demand function here for the industry as a whole?

Darren Entwistle - President and Chief Executive Officer

Okay, well I think if your are going to be reading the press release I would ask you to go back and have a look at the slide that I presented in my opening comments that looks at the penetration rate for wireless in Canada and a penetration gain that's been realized a year in and year out and you can see that typically the penetration gain has been between 450 and 500 basis points on approved year basis one.

So that's a pretty consistent trend in terms of how the industry has been performing and if you want predictability as to what 2008, 2009, 2010 will hold, I think that's a pretty good leading indicator for you to drive inference from. Next as it relates to tell us specific, you have got a pretty clear trend as well in terms of the net adds that we have been able to generate between lets say 515 and 585 over the last four years. So that's a ballpark figure from a growth perspective again and I think it's important to drive inference from. I think people forget that historically we as an organization didn't put the emphasis on other gross or net adds but rather put the emphasis on revenue growth and profit expansion from a disciplined perspective. But if you look again in the last four years in terms of our market share on a net basis, we have been in the ballpark of circa 30% sometimes a little bit more than that.

But it's been a fairly consistent performance all the way along. In so far as the growth add comment is concerned about 2007, yes we would have delivered a better net add result, if we had a stronger performance on customer loyalty and retention which is why I commented in my remarks that got to be an area of focus for us from an improvement perspective going forward. I caveat that with the recognition, the churn that we are going to achieve going forward in terms of what is or what constitutes an excellent result, is a little bit different prospectively than what it has been historically because we now have the advent wireless number portability. But again I make the comments that I had made previously, in that number portability did not create any major economic deterioration factor for the wireless industry in the U.S, and I think prospectively given the fact that TELUS has a relatively low share of the business market for historical reasons in Canada, we should be able to better capture a balance share of wireless that adds on the business front in the years ahead, given that impairment of a lock in number of portability has been removed.

The only other comment I would make as it relates to penetration gain gross adds and the like is in respect to the AWS Spectrum option. Typically if you have new players coming into the market that can have an overall effect on the penetration gain, pushing the penetration gain up, so that's another new exogenous factor to be considered in terms of penetration gain and gross adds along with normalizing now for the fact that well as local number portability is institutionalized within our industry.

John Wheeler - Investors Relations

Sebastian?

Operator

Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. You have had a few weeks now with Emergis. I was wondering if you could just comment a little bit on what your initials for the findings are, versus expectations and what sort of integration steps you've been able to take at this point? Thanks.

Darren Entwistle - President and Chief Executive Officer

Surely on Emergis, I would say that we are very pleased with that being thus far. It would be fair to say that we closed the transaction about a month earlier than what we had originally anticipated, and that's good going from the execution team on that front. The level of a mode of synergy is nothing else between, the welcoming TELUS organization and the enthusiasm of Emergis has been exceedingly strong.

Again, I mean, some pretty important comments, healthcare has already been strengthen up for TELUS. I don't like doing acquisitions where you've got no track record in a particular area. I prefer to do both-on acquisitions where you building upon a strength or a platform that's already existing within the organization and TELUS with our Western focus where typically within Western Canada, that's where you seeing the innovation and leadership within healthcare. We have enjoyed a very strong performance within the healthcare area traditionally as TELUS.

Bring Emergis on-board with differentiated capabilities and new applications, transactional and processing capability, intellectual property, so on and so forth, significant talent that within our organization that understand the healthcare industry very well. Bringing that into the fold within Western Canada, where we have already great connectivity activity, whether it's technology connectivity with healthcare authorities or connectivity at the suite level with the CEOs and the CIOs of these health authorities of bringing Emergis into that full, is really opening up a pipeline of new opportunities that I think will deliver an excellent return for the TELUS organization. And the reverse is also true. As Canada is coming to grips with the healthcare challenge and as TELUS has looked to expand its presence in Ontario and Quebec, that's effectively where you have the traditional footprint of Emergis and that's the market where they've got the connectivity, they got the client base, they got the experience so on and forth, so we are looking as a TELUS organization to leverage the relationships and track record that Emergis has been able to establish in provinces like Quebec and Ontario and bring our capabilities to bear in that regards.

So there is a nice complement between the two businesses that I think is very encouraging and clearly if any one is going to crack the code in the terms of healthcare challenge as it relates to affordability, the massive improvements required in patient care, in creating the shift from remediation and treatment to the prevention of the disease in the first place, a lot of the answers are going to be found in technology, technology investment and business transformation and that's the sweet spot for both the TELUS and the Emergis organization and we are excited about that.

From a synergies perspective that will be fairly modest over the next couple of years, because we are going to keep a certain level of independence with Emergis and really have a complement our capabilities in the healthcare front rather than fully integrate it. And I think we have already commented that, we've set aside about $10 million in terms of restructuring costs to realize some near-term synergies that are fairly obvious over '08 and 09 as we bring structurally the two companies a little bit closer together.

John Wheeler - Investors Relations

Thanks Darren. We are now at one hour. So we will take one more question and thank you.

Operator

Thank you and the last question is from Dvai Ghose from Genuity Capital Markets. Please go ahead.

Dvai Ghose - Genuity Capital Markets

Yes, thanks very much. I just want to go back to Bob, the comment that you made about potentially under spending on COA. On the one hand it's great to see a 19% decline in COA in an aggressive market. It shows discipline and it drove great margin increases. But you entered this quarter with a pretty low PDA and data market share. You have a wonderful EVDO network and you finally got the BlackBerry Pearl to exploit. And there is not that much evidence that you exploited it. I mean your mix deteriorated in terms of prepaid, postpaid. We don't expect it to show up in ARPU immediately, but we do expect to show up negatively in COA immediately and it didn't. So, there was a perception in the quarter that the majority of your sales were PDA related, it doesn't seem to be a at all evident in the numbers. Isn't the near gain just going to lead to longer term pain when it comes to ARPU and churn recovery?

Robert McFarlane - Executive Vice President and Chief Financial Officer

I see you are good on the rhymes and not so sure on the logic. Firstly, if you are talking about data growth, the majority of the data growth over the next period of time is going to come from your base not from the new additions. New additions of course will bring data growth rate but from a materiality perspective it's your base. So in that respect you may refer back to my comments in the presentation about significantly higher cost retention expenses linked to the upgrade... significant upgrade, in our base towards smart phones. That is clearly aligned with building a growth in wireless data on a go-forward basis.

Next in terms of the fourth quarter, while the mix in prepaid increased, prepaid as a percent of additions in the industry and for TELUS have always had a record level in the fourth quarter because of the Christmas gift giving dynamic that does occur. The issue in that respect isn't so much to that prepaid doesn't provide data but how are you going to stimulate,, promote, make it easy and attractive for users of prepaid or postpaid to use data. Everything I had mentioned, what we have talked about previously of course is given the nature of the technology on the mike side which is advantaged and differentiate in marketplace, particularly in respective first-to-talk or dispatch usage is less so in respect of wireless data.

It is not as high speed of service, it doesn't have the portfolio of devices that are available on our high-speed PCS network. And so we have had a conversion program going on for since early part of 2007, which essentially has taken the more voice-centric or data users prone to use high-speed or seek high-speed data service or solution which is more often stages in PCS and converting them over. So, the mic element has a very ARPU in general but significantly lower data component of ARPU and PCS. So, that conversion or migration program which is going in a quite an orderly manner and successful manner is also another aspect of building wireless data growth in the future.

Darren Entwistle - President and Chief Executive Officer

Thank you very much everyone for participating in the call. Just a comment to close, we are fronting back on the questions, that were asked a number of questions dealt with us being asked to give a prediction as to what the future is going to hold over the medium to longer term. And I guess in responding to that one of the things I would back to is that TELUS is an organization that when we do invest for the future, we do it in a way that's clearly on strategy with the focus on our domestic market. And one thing that is going to be predictable in the future is our continue desire to enter the shareholders share and the fruits of the returns that we generate from our investments. And going forward I think its interesting to know that it's never been a situation in TELUS in terms of the last four years where investments have been mutually exclusive in terms of returning cash to shareholders. Investments have been affordable along with the investments, we have progressed successive increases in the dividend and have lived up to a constant NCRD program. In terms forward-looking expectations, our desire to continue returning cash to our shareholders that participate in the strategy of this organization is something that is an important facet of the longer-term orientation of this organization.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Thank you very much

Operator

This now concludes the TELUS fourth quarter 2007 earnings conference call. On behalf of myself and rest of the conference team, thank you from TELUS.

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Source: TELUS Corp. Q4 2007 Earnings Call Transcript

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