TELUS Corporation Q3 2009 Earnings Call Transcript

| About: TELUS Corporation (TU)
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TELUS Corporation (NYSE:TU) Q3 2009 Earnings Call Transcript November 6, 2009 11:00 AM ET


John Wheeler – IR

Bob McFarlane – EVP and CFO

Darren Entwistle – President and CEO

Joe Natale – EVP and President, Consumer Solutions


Jonathan Allen – RBC Capital

Greg MacDonald – National Bank

Vince Valentini – TD Newcrest

Glen Campbell – Bank of America

Dvai Ghose – Genuity Capital Market

Peter Rhamey – BMO Capital Markets

Jeffrey Fan – Scotia Capital

Simon Flannery – Morgan Stanley


Good afternoon, ladies and gentlemen. Welcome to the Q3 2009 earnings conference call. I would like to introduce your speaker today, Mr. John Wheeler. Please go ahead.

John Wheeler

Thank you very much and thank you for joining us for our third quarter 2009 investor call. The call is scheduled for up to one hour. The news release on the third quarter financial and operating results and detailed supplemental investor information are posted on our Web site,

In addition for those with the internet access, the quarterly presentation slides are also available at this site. You’ll be in listen-only mode during the opening comments and let me now direct your attention to slide #2.

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 U.S.

Turning to slide #3 for an outline of today’s agenda, we will start with introductory comments and a review of the quarter by Bob McFarlane, our Executive VP and CFO; covering recent corporate developments will be Darren Entwistle, our President and CEO, and Joe Natale, President, Consumer Solutions. This will be followed by a question-and-answer session.

Let me turn the presentation over to Bob starting on slide #4.

Bob McFarlane

Thanks, John, and good morning, everyone. Let’s begin with a summary of the wireless highlights. Overall wireless revenues were relatively flat as equipment in other revenue growth of 16% were offset by lower network revenue growth as voice ARPU remained under pressure. Revenues from Black’s Photography are being recorded in wireless equipment revenue. So this is the quarter includes about one-month of Black’s revenue of $6 million.

Operational expenses increased by 1.6% driven higher by equipment expenses to support retention efforts in customer migrations to smartphones. And higher network operating expenses to support data revenue growth.

Marketing expenses decreased due to lower advertising and promotion expenses or lower commissions helped lower marketing expenses. Restructuring costs increased by $2 million. All-in, wireless EBITDA declined by $9 million or 1.7%. As planned CapEx increased by $60 million due to the investment in our HSPA network that was launched yesterday.

Turning to slide #5, net wireless subscriber adds this quarter were 125,000 with post-paid net adds of 131,000, representing 105% of the mix. We are encouraged to see that the net additions continue to improve sequentially in the face of a highly competitive market where competitors had access to unique popular devices.

Year-over-year net subscriber additions decreased 16% when including the deactivation of subscribers from the turn down of the analog network a year ago. Net additions were impacted by a combination of reduced pre-paid loading and the current churn of Koodo subscribers being at normal levels. Whereas a year ago there was a minimal churn given its then recent service launch.

We also observed the continuing industry trend whereby net adds were relatively more impacted by the economic recession in BC, Alberta, and Ontario where unemployment levels remain relatively higher in some other provinces. Our total subscriber base is up 7% year-over-year and now total 6.4 million.

Slide #6 shows the breakdown of TELUS’ total ARPU between voice and data for the third quarter. Total ARPU improved slightly over the second quarter, but continued with its year-over-year negative trend as voice ARPU erosion continued partially offset by data growth. Contributors to the decline in ARPU were the same as in recent quarters.

Factors such as reduced voice usage and economizing of rate plans in our PCS service continue declines in (inaudible) ARPU, reduced inbound roaming, increased penetration of Koodo and lower ARPU associated with internet-only devices all contributed to the decline.

On a positive side, data ARPU growth remains strong, increasing a $1.86 to $12.05. This now represents 20% of ARPU, up four points from last year.

Slide #7 shows the trend over the past seven quarters for total blended ARPU. Blended ARPU has been steady to improving slightly since the significant drop first observed in the fourth quarter of last year. We expect trends to continue into the fourth quarter, but the extent of the percentage decline in ARPU should improve in future quarters, given the relatively stable platform experienced year-to-date in 2009, along with the prospects for attracting higher value subscribers driven in part by a new HSPA plus network and devices.

As shown on slide #8, data revenue growth for the third quarter increased by 27% year-over-year reaching $229 million. We are quite bullish of TELUS in regards to prospects for future wireless data growth, given the increasing sales of 3G capable devices which should be enhanced with the introduction of new HSPA devices such as the Apple iPhone, BlackBerry Bold 9700, Android HTC Hero as well as many other new HSPA devices and internet sticks.

Slide #9 shows the metrics related to our wireless marketing and retention efforts in the third quarter. Gross additions declined by 6% and were impacted by the weaker pre-paid loading and the lack of certain popular iconic devices in our line up.

Churn decreased by 13 basis points from last year. Churn rate last year included the impact in the churn down in the analog network. Excluding this impact churn increased only slightly. Post-paid churn which is not shown on the slide remained at a low 1.16%.

COA for gross add decreased 11% to $320 due to lower marketing expenses, lower commissions, and lower per unit subsidy costs reflecting changes in promotional pricing and a higher Koodo mobile mix. In aggregate, COA expense decreased 16%.

Cost of retention increased by 18% as we continue to focus on prudently migrating clients to smartphones and other multimedia devices. It’s fair to assume that with the recent launch of the iPhone, COA and COR will increase along with loading in Q4 and in 2010.

Turning to slide #10, let’s review our wireline segment results. Revenue decreased by 3.4% as ongoing local and long distance revenue declines were only partially offset by modest data growth. Operational expenses declined by 2.3%, driven primarily by a 12% decrease in salaries and benefits, resulting from reduction in performance bonus expenses, staff count and targeting discretionary employee-related expenses, partially offset by increased OpEx associated with TELUS TV due to the higher programming and customer acquisition costs related to increased subscriber loading.

Interestingly, when excluding defined benefit pension expenses from both periods operational expenses declined by 5.4%. The decline more fully reflects our efforts in controlling costs.

Restructuring costs increased 20 million in the quarter, driven by a number of initiatives as we continue to emphasize our operational efficiency program. Operating profitability is measured by EBITDA was down but was primarily impacted by higher restructuring and pension costs, which I will review in a moment.

Capital expenditures increased by 7% mainly due to investments in our broadband expansion which is enhancing our service footprint for higher speed internet and hi-definition TELUS TV.

Turning to slide #11, we can clearly see the impact of the higher restructuring costs and pension expense on wireline profitability. When adjusting for both the $27 million increase in defined benefit pension expenses as well as the $20 million increase in restructuring costs, normalized EBITDA actually increased slightly by 1%.

Let’s move to slide #12 and examine our internet results. Hi-speed net adds declined over the same period last year to 9,000, but improved sequentially following a disappointing second quarter.

Slide #13 shows the success of TELUS TV in the third quarter, which includes both TELUS TV over broadband and for the first time TELUS Satellite TV.

Total net adds increased 83% year-over-year to 22,000 and represents a best quarter to-date, while the total subscriber base is more than doubled to 137,000 over the same period. This success is attributable to enhanced broadband coverage, expanded marketing efforts and improved installation capability and supports TELUS’ continued broadband expansion in urban markets including Calgary and the Greater Vancouver area. This continued build-out is a significant initiative and is a major driver for the higher than average capital intensity in a wireline business.

Slide #14 shows the past seven quarters of residential line losses, but more importantly, it shows the stabilizing trend for the last four quarters. Residential now losses a 6.8% actually improved year-over-year for the fourth consecutive quarter. This improvement reflects more effective win back capabilities and efforts fewer residential moves and the results of our continued broadband expansion which facilitates wireline bundling opportunities including TELUS TV.

So putting it all together let’s briefly look at TELUS on a consolidated basis, staring on slide #15. Consolidated revenue in the third quarter fell by 1.6%, while increased restructuring and pension costs caused reported EBITDA to decline by 5.3%. Reported EPS decreased by $0.01, which were aided by a positive tax related adjustment was also lower due to the significant increase in restructuring and pension costs. More detail on this in a moment. Meanwhile, consolidated CapEx increased by $85 million as already explained.

Slide #16 shows that consolidated profitability was largely impacted by higher defined benefit pension and restructuring costs when adjusting for these two costs items underlying EBITDA was essentially flat. The normalized EBITDA primarily reflects lower bonus expenses, fewer staff count and increasing traction from a comprehensive set of efficiency initiatives. Many of the initiatives across the clammy to improve efficiency and reduce costs result in a structuring cost.

Slide #17 shows restructuring costs over the past six quarters alongside the annual year-over-year comparison on the right hand side of the chart. The significant acceleration of operational efficiency initiatives over the past year is clearly evident and reflects our response to the challenging economic and competitive environment. TELUS has increased its restructuring assessment by $10 million to approximately $116 million for the year.

As part of our operating efficiency programs, slide #18 shows the changes in full-time equivalent staff count so far this year. The domestic staff count excluding the new staff acquired from the Black's Photography acquisition is down about 1600, while TELUS International is down about 150 positions.

It is important to note as I have in previous calls that the TELUS International staff count declined is not necessarily indicative of our expected full year trend. As you can see we have already exceeded our annual target of reducing the domestic staff count by more than 1500.

This next slide shows the detailed breakdown of the components I have reported EPS when we exclude $0.04 positive income tax related adjustments this quarter. As expected prior pension and restructuring costs contributed $0.06 and $0.05 respectively to the decline, slightly lower depreciation and amortization added $0.02 to the upside.

Similarly, lower shares outstanding, lower tax rates and other items each contributed $0.02 a growth respectively. Notably, underlying EPS is up 7% when excluding restructuring and pension costs and $0.04 of the positive tax related adjustments.

Slide #20 outlines TELUS’ revised consolidated guidance which reflects revisions to our outlook for both the wireless and wireline segments. Notable factors contributing to the change included continued economic softness and the early launch of our HSPA network with higher subsidy smartphones such as the iPhone as well as the $10 million increase in our restructuring estimates.

CapEx for 2009 is now expected to be approximately 2.1 billion. The changes we noted here in detail by reporting segment Section 9 of our ND&A.

To conclude the financial review slide #21 provides you with a first glance at TELUS’ preliminary expected CapEx for 2010, driven by the launch of TELUS’ new HSPA class wireless network in 2009 and progress in wireline broadband expansion. A preliminary view on 2010 CapEx levels is likely to reflect return back to more average historical levels experienced between 2006 and 2008 at a level as low as $1.7 billion. We expect to provide a 2010 detailed annual guidance in normal course per our past practice in December.

Turning to slide #22 to conclude with a quick review of other notable developments, consistent with our dividend payout policy, the TELUS board has maintained $0.475 quarterly dividend or a $1.90 annualized.

In response to preferences expressed in various shareholders we are again reinstituting a discounted DRIP program that will reward participating shareholders with the boost to the payouts and should encourage for their participation. Therefore, we are amending the dividend reinvestment program to issue non-voting shares in treasury at a 3% discount from the average market prices.

Finally, the CRTC made a very important decision on Globalive last week. We believe the CRTC made the only decision it could by upholding federal law that Globalive does not meet the Canadian ownership requirements set out in the Telecommunications Act. The public hearings clearly outline the nature of Globalive’s considerable non-compliance with foreign ownership loss and thereby provided Globalive the roadmap required for it to restructure its affairs and remedy their own situation.

Political intervention in this matter is both inappropriate and unnecessary as the power exists for Globalive to restructure its own affairs to become compliant. Globalive should be given a reasonable, but not unlimited time to do so as it has already been 15 months since the conclusion of the AWS auction.

In any event should there be a cabinet review we believe it should be a public process. It’s important to reiterate TELUS‘s position that it has never been opposed to foreign ownership restrictions being lifted, but has asked that all carriers in Canada operate under the same set of rules.

In order to avoid similar situations in the future where auction outcomes can be materially effective by unqualified bidders, all bidders in future spectrum auction should be prequalified as legitimately Canadian-owned and controlled entities beforehand this is the approach that TELUS is consistently recommended in the past.

So with that I will hand the call back over to Darren and Joe to review recent corporate developments.

Darren Entwistle

Thanks, Bob. In my remarks I will cover four major developments of TELUS that certainly mark a significant transformation in the Canadian wireless industry and that I believe bode well for improving our competitive position and future performance. Indeed my estimation these are game changing developments in our industry.

Let me begin on slide #24. In September TELUS acquired Black’s, Canada’s premium national imaging and digital retailer. This $26 million acquisition is in excellent fit with our company. First, it expands the distribution of TELUS’ wireless products across Canada through a set of premium mall locations. It is particularly complementary because 72% of the 113 stores are located in Ontario, where we are targeting increased distribution.

Secondly, Black’s is a nearly 80-year-old national brand with the strong reputation for customer excellence, excellent service and as well importantly a highly qualified staff of professional employees that complement the robust TELUS team that we have here.

Finally, Black’s business is characterized by recurring and more of retail customer-based that will naturally gravitate towards camera phones. We moved swiftly to train Black’s employees, create attractive in-store displays and commence an advertising campaign. Just yesterday we launched the sale of more than eight dozen TELUS camera phones in our 113 Black’s locations just 62 days after we closed the acquisition, further demonstrating our strong execution in this regard.

Let’s move to a second major development on the next slide. Slide #25. Yesterday TELUS achieved an important milestone with the early launch of Canada’s largest and fastest 3G+ network. This launch represents a landmark development for TELUS and Canadian consumers. Now more than 30 million Canadians can access advanced speed and services through TELUS’ 3G+ network, the most innovative wireless technology available today is being deployed.

This put Canada as the forefront wireless technology on the global basis. By way of example, this network offers customers the technology for increased wireless data download speeds of up to 21 Megs per second.

They have also been accessed to international roaming in more than 200 countries. The completion of this network has been a massive undertaking for our organization, led by Eros Spadotto and his technology strategy team, working closely with business transformation in technology operations and of course consumer solutions.

While it has impacted our CapEx spending this year the strategic benefits to complete and deliver an HSPA network to 93% of Canadians, several months early, are clear. With this next generation 3+ network we have achieved significant competitive advantage as the next two coverage maps illustrate.

Slide #26 shows our shared next generation wireless network in eastern Canada compared to the Rogers network. As evidenced on this map, in Ontario, and Atlantic Canada, we have a significant HSPA and most importantly an HSPA Plus advantage. In Quebec, we have HSPA standard coverage, which will move to HSPA Plus within the coming weeks with the operational launch in the first quarter of 2010.

Slide #27 shows TELUS’ HSPA wireless network coverage in western Canada. Notably, you can see the far reaching coverage that has been deployed in the last 12 months in British Columbia and Alberta, with all of it being HSPA Plus technology. The immense advantages TELUS has over a competition is exceedingly clear.

In addition, we are rolling out HSPA Plus coverage in Saskatchewan to partnership with SaskTel and Manitoba in 2010 and 2011. Now, let me turn this particular set of slides over to Joe Natale, who will discuss the remaining two important and complementary developments. Specifically, the simultaneous launch of some pretty important new devices a well as our innovative new rate plans. Over to you, Joe.

Joe Natale

Thanks, Darren. I am excited to note that the launch of our 3G+ network coupled with the immediate availability of a wide variety of new HSPA smartphones form TELUS such as the iconic apple iPhone 3GS is consumers more choice and effectively ends the one supplier monopoly in Canada. The iPhone 3GS is the fastest, most powerful iPhone yet, packed with a credible new features including improved speed and performance. We began selling both iPhone models this week.

Slide #29 & 30 show an array of other HSPA devices also being introduced alongside our new network. This week we launched the Blackberry Bold 9700 which has begun its global debut. Our sales channels are excited to be in the forefront of this Blackberry launch, particularly since it is the start of the holiday selling season. This is not always been the case as you know.

As shown on next slide we are also introducing the HTC Hero running on the Androig platform, LG New chocolate, the Nokia E71, and the Sierra Internet Key. Some great devices for this season. Importantly, these new devices are coming to TELUS clients earlier than ever before and the applications of these smartphones was exceedingly well on our Fab high speed network.

Additionally, we have new CDMA devices coming to the market as well including some which are exclusive to TELUS. While we recognize investors concerns on the short-term impact on costs of our acquisition of retention from smartphones sales increasingly observers are acknowledging the benefits of loading higher ARPU clients with higher data and life time revenues.

We also realize that this is incumbent on us to manage wireless costs effectively with discipline to benefit from the tremendous opportunity for a profitable growth that these devices provide for TELUS.

Coupled with the launch of our 3G+ network and new and innovative devices the next game changing initiative for us is the launch of our new pricing model, branded as clear choice and offering clearance of our rate plans for our clients.

Please turn to slide #31. Canadians shared with us what they wanted. Through our research and our discussions in a nutshell it included less complexity removing the complex elements of mechanisms in our rate plans. Providing much more clarity what you see is what you pay. Fewer rate plans and plans without add-on fees like the system access fee or carrier 911 charges. In so doing we are reinforcing the alignment of our TELUS brand promise; the feature is friendly with being clear and simple.

As a result, TELUS’ introduced three major changes to our new rate plan offerings. First, we have significantly reduced our plans from about 30 to 10 for consumers. We have significantly decreased the number of plans for our business clients, making them simpler, far simpler.

Second, there are no system access fees, no carrier 911 charges. And third, we have proceeded with the general rate adjustment of $5 to offset the majority of these fees. Existing TELUS clients have the options to continue to renew on their current rate plan or switch to a new rate plan over time.

We expect these rate plans will improve subscriber loading and reduce churn going forward. Moreover, by eliminating both the complexity and a number of plans we can improve certain costs through enhanced self-service and reduce call volumes to our client care centers. Through this and other initiatives that we are very focused on we expect to achieve a neutral AMPU impact.

With that let me turn it back to Darren to wrap up the call. Darren?

Darren Entwistle

Thanks, Joe. Let’s conclude on slide #32. And I'll summarize the quarter and recent developments. Our wireless and wireline results continue to be affected by the recession and ongoing competitive intensity, which combined with our earlier than expected introduction of the iPhone and other HSPA devices that are important to our line up are impacting our guidance for the year.

Though our intent to continue focus on delivering operating costs efficiencies we are largely offsetting revenue weakness on underlying normalized operating earnings. Next we continue to make significant strategic investments in our wireless and adds well our wireline broadband networks. This is paying off with the early launch of our 3G+ network and associated device offerings for consumers and businesses and the acceleration of our TELUS TV service.

To sum up I believe TELUS is clearly leading the changing Canada’s wireless market by delivering exceptional client experiences to the series of major initiatives we've completed just this past week. We very much look forward to capitalizing on these developments in the marketplace.

Let me also note that I am very pleased by the operational execution and project implementation expertise demonstrated by the TELUS team which has significantly improved our competitive position.

In the past, I have been occasionally publicly critical of our organization’s performance when warranted. Within this context I can say conclusively that I have never been as confident nor positive as to the future prospects of our company.

I will now hand the call back to John.

John Wheeler

Thanks, Darren. Before we start with the Q&A with Darren, Joe and Bob, I'd ask your cooperation in asking one question at a time please. (inaudible) request before. And Daniel, could you please proceed? Thanks.

Question-and-Answer Session


(Operator instructions) Thank you, John. Our question will be from Jonathan Allen at RBC Capital. Please go ahead.

Jonathan Allen – RBC Capital

Thanks very much. Darren, like to ask you a question about the dividend policy. Last few years I think, four years or five years now you have done a regular dividend increase. While profitability has been depressed even with some of your peers I think they have reinforced the desire to have at least a modestly growing annual dividend policy going forward. So I'm just curious why the company is sticking with the 45% to 55% EPS payout ratio and either pushing that higher, particularly with the CapEx spending coming down next year, looks like you do have a better buffer on the free cash flow payout. Thanks.

Darren Entwistle

Number one, that's a long-term policy that we set out and taken a long-term view of our earnings potential from a growth perspective we continue to believe that it’s the prudent policy for this organization. I think it’s also important to report that as a director on the board of TELUS the TELUS board remains committed to our long-term dividend growth model and more broadly to returning cash to investors through the appropriate mechanism, so they participate in the fruits of our labor, in terms of delivering economic returns from the J-curve investments that we make and I think our track record in this particular area is nothing short of exemplary.

John Wheeler

Fair to say, John, at this juncture we're experiencing some significant on strategy investments that in my estimation warranted a holiday on the successive dividend increases. I think it's important to illustrate empirically that if you go back to December of 2004 and look at the December 2004 to 2009 period we've returned $5.5 billion of cash to our investors over that particular period and a significant component of that was through five successive dividend increases that were rather material in nature and that is the long-term path for this organization.

Also if you look at the existing dividend given our stock price the yield has been toggling between 5% and 6% which we believe is attractive. As you’ve heard from Bob this morning, we've instituted the dividend or discount dividend reinvestment plan with a 3% discount, again, I think that’s attractive in terms of investors wanting to reinvest in our stock.

Jonathan Allen – RBC Capital

Quick clarification question for you. In the past you just done on the dividend increase at the early November time period, would the board consider doing reviewing it on a quarterly basis or should we not get investors helps up in the next few quarters and just look to next year instead?

Darren Entwistle

Number one, that’s the provident of the board, the board does look at the dividend on a quarterly basis, but if you were to inference from that I think that would be inappropriate at this stage I would be looking to next year in terms of the medium term.

Jonathan Allen – RBC Capital

Okay, thanks.


Thank you. Our next question will be from Greg MacDonald at National Bank. Please go ahead

Greg MacDonald – National Bank

Thanks. Good morning, guys. Question is on the wireless EBITDA guidance changes. I can appreciate the new mix issue i.e. expectation of higher smartphone loads in the 4Q. But the $75 million delta, change is a pretty large delta. I wonder if there is something underlying the change there besides subsidies i.e. your comment a little bit on network costs is that also an issue that you are considering could have an impact alternatively actively migrating subscribers from the CDMA side to the HSPA side is an option that would pressure margin you do have an incentive to do that in particular freeing up that CDMA network for alternative strategy. Can you say whether internal migration is also part of what you expect on the fourth quarter? Thank you

Bob McFarlane

Greg, in terms of the revised guidance that I don’t think there is any in the Qs we used the phrase or hidden underlying pressures other than such as COA and COR Obviously, we've just introduced a great line up of new handsets in conjunction with our new network launch. One would expect volumes are going to pick up and the associated COA and some COR as we have some of the base migrate up to the new phones has reflected in the guidance. We do not see any mark increase in migration cost in this quarter with respect to say Mike [ph] migration etc., as Darren has referenced we're going to continue selling the CDMA network and we've some great new devices, some of which are unique exclusive to our organization which will tell some demand in the marketplace as well. So essentially no surprises.

I think the most fundamental aspect of this is you've got an ARPU, that’s been decreasing and we're expecting loading to increase and the combination I’ve already outlined the trend ARPU were expected to improve, it’s going to be down year-over-year. Meanwhile we are expecting loading increase in the combination of the two should impact EBITDA in the short-term?

Greg MacDonald – National Bank

Thanks, Bob.


Our next question would be from Vince Valentini at TD Newcrest. Please go ahead

Vince Valentini – TD Newcrest

Yes, thanks very much. Questions on your wireless CapEx. Now that over 30 million population is covered by HSPA, does that imply that from November 5th on there will be a dramatic drop in your wireless CapEx or is there still another year or so of – though we know the footprint increasing the tower density or anything else I'm just trying to get a gauge of how quickly we should expect that component of the CapEx to fall up?

Darren Entwistle

Well I think couple of things, if you go back to the comment that we made previously in respect of wireless broadband we said that proponents of the waiting within 2009 but that there would be continued build activity through the 2010 period effectively towards the middle part of 2010, but that the way the wireless broadband build was going to be shouldered in 2009. So there will be continuing CapEx to support the requirements that we think are prudent for our HSPA investment and to drive through the HSPA plus coverage on a ubiquitous basis. We have other markets as well where we want to pursue opportunities, Manitoba are being the case in point, but the way really is in 2009 I think the best illustration of that was in respect of the slide when Bob made the comment that we are looking to trend our CapEx to circle 1.7 billion in 2010, a lot of that is illustrated the fact that the way on our wireless broadband build project was in 2009 allowing us to take our CapEx down by circa $400 million in 2010.

There is also some other factors that are important for people to think about that are somewhat unique to 2009 and we started up by satellite TV operation that required capital, we have had a unusually high level of large enterprise and public sector deals that will proceed through the operational implementation phase over ‘09 and early 2010, but hopefully the weight of the capital thereafter would be behind us and we think looking back empirically to where we were from a CapEx perspective between 2006 and 2008 it's useful, not exact, but a useful leading indicator as to where we would be in the future. And so when you think about things like even E911 again that was a regulatory edict that we had to shoulder in 2009 that was CapEx intensive that will not be reoccurring in 2010. So those things together from a portfolio perspective of what’s supporting our ability to take our CapEx down to more normalized levels.

Vince Valentini – TD Newcrest

Thank you.


Our next question would be from Glen Campbell at Bank of America. Please go ahead

Glen Campbell – Bank of America

Yes, thanks very much. My question is on wireless ARPU, particularly the voice set part, in the MD&A you talked about the factors that have contributed to the drop overage, roaming, Mike and so on, you didn’t mentioned long distance. I'm wondering if you can just talk over the longest and the contributor and more generally I mean we don’t necessarily giving it some numbers can you talk about what is the percentage decline for this quarter versus Q2 or sort of higher, lower in each case for those drivers. Thanks.

Bob McFarlane

Well in respect of long distance, Glen, we are experiencing a decline for certain with respect to wireless and wire line I think you've seen the wire line reported separately. So that is a similar trend that we're seeing on a wireless side. That’s a component of the voice erosion that’s being experienced. But overall there is a variety of factors that are affecting our ARPU, they are outlined in the MD&A and one of them often talked about is the mix of Koodo going in, while Koodo ARPU is on plan in fact the impact to overall ARPU from (inaudible) is actually less than the impact from declining PCS roaming on revenues. So we are experiencing and that’s in part because the recession I think and a cross board of traffic and the like in the absence of participating in the international traffic beyond United States with the CDMA that should change as we go forward and ramp up on the HSPA side. Again, in summary, the impact has been felt on long distances as on local and the voice side.

Glen Campbell – Bank of America

What we are trying to do I guess just trying to isolate recession impacts. If you look at just roaming with a year-over-year percentage decline now worst in Q3 than in Q2?

Bob McFarlane

I don’t have it in hand in terms of sequential, but certainly it was a material negative trend on year-over-year basis.

Glen Campbell – Bank of America

Okay, thanks Bob.


(Operator instructions) Our next question would be from Dvai Ghose at Genuity Capital Market, please go ahead.

Dvai Ghose – Genuity Capital Market

Hi, thanks. Question for Darren or Joe, regarding wireless going forward. It’s obviously encouraging that CapEx will come down, now that HSPA released on and congratulations on that. But the concern is you get a squeeze because of lower ARPUs, which I think will continue for the foreseeable future and higher device subsidies on the HSPA side. I think more than your peers you focus on the term AMPU which I think is powerful term, but we are not quite clear as to how you are going to defend AMPU in the face of falling ARPUs and rising subsidies

Could you share some of your strategies? Would you for example look at things like value course plans as they have in Japan with the devices that have subsidized and return for a lower air time pricing, would you look at increased outsourcing paperless, bills, etc.,?

Darren Entwistle

Alright, Dvai. What I would do is I’d start it off and I'll give Natale an opportunity to buttress my comments with anything that I leave out here along the way. A few things I think probably important to know in terms of the ARPU pressure, TELUS subscribes to the view that we are in a declining ARPU environment and if we don’t drive cost efficiencies we're going to experience a perpetual margin compression

Having said that I would say to you that the magnitude of the ARPU degradation that we experienced over the November 2008 to January 2009 period was particularly greater than what we think we would see on a recurring basis we saw a significant concentrated ARPU degradation over that 90-day period between November 2008 and January 2009 that would soon be normalized on a year-over-year basis. I think that will be a decidedly part of thing for this organization where the impact I believe is underestimated by analysts and investors.

In addition to that, Dvai, having the opportunity to participate in data revenues that we have been previously denied access to from a smartphone perspective as a result of our HSPA investment I think is extremely attractive for TELUS over the longer-term, so yes smartphones de present new term J-curve dilution. I think if you look at the year empirical evidence they do represent significant opportunities for economic growth attractive mediums a longer term margins again supported by the data application that these devices allow to come to provision and I am excited by that particular opportunity.

Also we will get opportunities to participate in markets that we have previously not had access to whether they are geographical markets because the breadth of our coverage or whether they relate to roaming on a in roaming or out roaming basis that again we think these represent reasonable growth prospects for our company. From a go forward basis as it relates to cost efficiency a few things, one, although smartphones specific and then a wide net.

I think we have illustrated that we can be responsible from a COA, COR perspective but you have to go beyond that if you're going to ameliorate the J-curve dynamics of smartphones and enjoy a better economic return. And so we will be looking to experience better channel efficiencies as we go through the tuition period on smartphones and become more productive, we expect to experience better sales efficiencies within this particular arena, we expect client care to become more effective and as well one of the areas where we are investing our dollars to significantly drive efficiencies is on the web portal front and things like online tools are going to be particularly critical in an era of Android devices which are driving increased customization and from my perspective increase customization always brings with increased cost and if you are going to deal with that effectively you have to have a terrific online capability.

Next, I think one of the important longer term trends is going to be better competition amongst the vendors within the smartphones space, to the extent to which we see a stronger competition I think we, as a carrier, will enjoy better economics. That’s not going to happen in the near-term but something that we're hopeful of in the medium to longer-term and you can see that starting with the diversity of devices that we have across the iPhone what we've done with the Blackberry 9700 and bringing the HTC Hero Android device to market.

Next, to address your question specifically I believe the Canadian wireless industry have to begin to wean itself off of the addition which represents the heavy subsidization that have become inherent in our sales and marketing strategy. I do believe that there are exciting trade off that we can pursue where we become less reliant on the heavy subsidization and we have as a result of that more attractive usage price plans in the marketplace and that is indeed a trade-off this organization would countenance.

Next I believe in the symbiotic relationship between wireline and wireless and what you can get on a bundling basis, one of the things that’s exciting about smartphones is that when you think about content delivery whether it’s the internet, whether its applications, whether its social media, whether its entertainment and music we have to deliver those applications across both wired and wireless platforms, I think is a terrific differentiator that’s meaningful to the client and if in bundling you can begin to enjoy concept that I have not heard discussed but one that we have introduced along with the ARPU mentality, which is economy’s scope on COA and COR and to the extent to which you can get a discount through economies of scope on the aggregate COA that will come with a bundle of high speed internet television and a wireless device, I think that represents attractive economics.

Again in terms of offshoring you can see that we believe in through the investments that we've made to support our domestic operations in TELUS international I think that’s going to become increasingly important for this organization in terms of cost efficiency.

I think if you want to have a tangible illustration of what you can achieve had a low ARPU, but a high margin I would say have a look at where the internet key device would be. There is a device that typically would carry a low ARPU associated with it, but will have a low subsidy associated with it in terms of the carrier cost that would need to be absorbed and I would say a very attractive long term margin for this organization leveraging our HSPA capability

Next I would say we very much do believe that in the paperless world and one of the major mitigation activities that we’re driving is of course what we’re trying to do on ebill both in respect of our heritage network on CDMA and prospectively on HSPA.

And then, lastly, one of the things we haven’t talked about as much but we think is attractive is that if you look at the clear choice rate plans that we've introduced we have indicated that we got a number of cost efficiency measures that we have put in place to ensure that in the near-term ARPU neutral. I believe that with clear and simple pricing and actually being margin accretive because the clear and more simple the pricing is the clients the more satisfied clients would be in the less likely they are to go to the competition from a churn perspective.

Moreover, the clear and simpler the pricing the less likely that we're going to have a bill query and the less likely that we have a bill query the less likely that they are going to call our call center and every time we pick up the phone in a call center it costs us eight to ten bucks and if we can avoid that by having simpler rate plans which we have introduced along with our new network I think that represents something that’s attractive in terms of long-term cost avoidance.

Bob McFarlane

Joe, any post-script?

Joe Natale

Just one quick comment, Darren talked about extensively the things we're doing around of AMPU as an organization, clear and simple have become not just the branding around rate plans, clear and simple, we are pushing hard as call from mindset within the organization and we believe with that as a mindset we can drive productivity improvements throughout different parts of the organization. I believe with that kind of focus as Darren described that you get very much a three way gain not only to drive improved customer satisfaction, which, of course, makes directly to retention and certainly attract customers who achieve a level of trust and support based on clarity and simplicity, really fundamentally believe it drives productivity inside the organization.

Take an example right now on the sales channel where some of the new and exciting handsets that are out there as part of this launch we have been through intensive training around the notion of smart fit the last number of weeks with our front-line sales people, now our customers more than ever are confused about which smartphone is best for them and if you look carefully at return rates in some parts of our business it’s often driven by the fact that we haven’t provided the right level of clarity and simplicity at the very front end of the process so it’s ideas like that, every piece of the value chain whether it’s in sales, in service, looking at the call volumes within the call center and why customers are calling, directing them towards web self serve it’s very much a cultural mindset that we have pressed upon the organization with some of the changes and focus on AMPU.


Thank you. Our next question will come from Peter Rhamey, BMO Capital Markets. Please go ahead.

Peter Rhamey – BMO Capital Markets

Great, thanks very much and good morning. Looking at guidance once again I think someone else one of the first questions dealt with the implied margins on a go-forward basis and I do note that it looks like the wireline margins implied are going to be flat particularly if you take up restructuring charges in the fourth quarter. So I assume you are looking at stable margins there. But on the wireless side you're going to have a $70 million to $80 million EBITDA decline and when we looked at other companies that have launched the iPhone namely AT&T and Rogers, you see it takes a couple of quarters for margins to normalize again. TELUS has always been very good at balancing growth and profitability.

I was wondering if you could talk a little bit about your strategy, you're a little bit different in that you're doing a completely different network platform for the iPhone than the others, but I was wondering do you push growth here to get scale earlier on or can you tend to meter the progress there in terms of getting not only the iPhone customers, but HSPA customers, in general? Thank you.

Bob McFarlane

Well, Peter, I think you have summarized it fairly well in terms of wireline margins excluding restructuring being relatively stable on a go-forward basis and obviously somewhat affected as we come out of the economic decline generally that the overall economy has experienced over the past year or so, should be helpful. On the wireless front clearly we have seen through the iPhone in North America both AT&T and Rogers, of course, here in Canada, near-term margin compression resulting from significant loading of the devices and subsidies associated with them and we have also seen in recent periods how that’s transitioned as they go through that J-curve to significant margin expansion.

And I think that is part of the empirical experience that Darren was referencing in his comment. So clearly in our case not only the iPhone, but with the whole set exciting devices that are introducing to the market, that bodes well for the prospects of our loading and we're not going to give specific subscriber guidance or expectations either for this quarter or for next year, but suffice to say we do expect a significant acceleration in loading and consequently plan does reflect the COA, that would be associated with that.

The other thing that is worth perhaps mentioning and I am sure you have noted this development with say AT&T or Rogers is their ratio of loading on the iPhone to the base relative to the new subscribers had trended on an approved fashion over time and so in contrast to the experience where say just over a year ago when the product was being introduced in Canada at least and there hadn’t been any previous iPhone and there is a significant head up demand. And in our case obviously the iPhone has been offered in Canada for some time so it’s not quite the same dynamic with respect to the pent up demand and the implication from COR.

But having said that clearly our go-forward guidance for the rest of this year and going forward next year there will be some margin compression has resulted the growth associated with these devices and that’s why it’s so important to have that AMPU focus that Darren referenced is in complete acknowledgement of that and then if you go forward into the medium term as we're seeing elsewhere you start to get the flow through benefits of those new devices and the recurring revenues and the passive economics affecting the margin, so we are quite prepared to invest in our future and are excited about the growth prospects in front of us on wireless.

Darren Entwistle

I think as well you know couple of additional things worth pointing out to the comments that Bob has made which were bang on. To think that the growth is just related to the iPhone I think is wrong, if you look at the impact of TELUS not having the Blackberry Bold, particularly in Q4 of last year that was very punitive for our organization arguably just as punitive as not having the iPhone was. And now that both of those devices in our device line up concurrently is exciting for us from a growth perspective in the near-term.

Additionally, we have seen a lot of interest in our Android device. Certainly, for me, it was encouraging yesterday to see the traffic in our stores that the traffic was not uniquely directed to the iPhone but what we're doing with the Blackberry 9700 and a lot of interest in the HTC Hero, particularly amongst the young people. And so it’s not a one tenet to our near-term growth that we're talking about. But a multiplicity of opportunities because of the breadth of our device based.

The other thing I think people sometimes underestimate is that our footprint in terms of smartphone availability at high speed is 93% in Canada, so we can reach a lot of people very, very quickly, so this is no longer a situation where the board of the iPhone or the Hero is in urban offering our footprint I think will create much greater attraction and again I think that bodes well for near-term growth. One of the big frustrations that we've had here in Vancouver is our inability to address effectively the ethnic community. We have a very vibrant ethnic community that represents a very lucrative economic opportunity for TELUS, but we were missing a couple of components that were very necessary to address that community effectively.

Number one was the SIM card orientation and the second was the iconic devices and what you could do from a roaming perspective. Those challenges are now behind us and the opportunity is in front of us. And that’s very important for us as it relates to the constituency that we're seeking to serve. And then lastly we just in the last 62 days added 113 points of distribution with the Black’s organization and we do believe that there is a synergistic fit between smartphone devices that are application rich on the data front when you think about someone that proficient in imaging and digital retailing.

And when you look at the Black’s customer base, one of the things that attracted us most is that particular acquisition was just how loyal that client base was, how technically proficient and then how recurring they were in terms of foot traffic within the stores they came back on a repeated basis and again I think that bodes well for our ability to augment successfully our distribution model in the months ahead and so those things are different and I think they speak of the type of growth that we're expecting on a prudent basis.


Thank you. Our next question will come from Jeffrey Fan at Scotia Capital. Please go-ahead.

Jeffrey Fan – Scotia Capital

Good morning. My question is on the CapEx guidance for next year. It sounds like the bulk of the decline is coming from the wireless front, with the build-out now nearly complete, just wondering what’s going on, on the wireline side within your guidance maybe talk a little bit about the qualitatively? And just maybe review for us the state of the network and the kind of bandwidth that you are able to deliver today and why are you expecting to get in the future in light of what Shoals [ph] is currently doing, going to DOCSIS 3 with 5000 megabit service now being introduced? Thanks.

Darren Entwistle

Okay. I will be consistent with my comment that I made previously. If you look the two broadband investments the weighting of the wireless broadband investment was significantly y towards 2009. The broadband wireline investment is kind of split equally over 2009 and 2010. If you look at where we are right now our coverage roughly is around and this is at the ADSL 2 plus level is around 90% within Edmonton. ADSL 2 plus allows us to get to circle a 15 meg zone where 90% in the Edmonton, 80% in Calgary, and about 50% covered in the lower Mainland.

So really the work add for us is to take our coverage up over the course of 2010, so ADSL to plus footprint covers 90% of the top 48 communities across Alberta, and BC. The ADSL 2 plus infrastructure is necessary the best way to think about it, is that infrastructure acts as a chassis over which you would deploy VDSL 2 line card in your network infrastructure which is effectively very inexpensive thing to do, it is just a card overlay on the ADSL 2 plus infrastructure, which would take your speeds from 15 megs up to 30 megs.

The other thing that we would be doing along with that would be pursuing BDSL cell 2 bonding which is an increasing development amongst ILECs on a global basis and through multiplexing or bonding, if you will, were capable of doubling the bandwidth from 30 megs to 60 megs. And we believe that from a bandwidth perspective is a very, very competitive level of both bandwidth and coverage to polity when you think that we will have that coverage over the top 48 communities across Alberta and BC.

It’s also important to note that one of the things that our satellite deployment has given us instantaneous ubiquitous coverage on TV, which allows us not only to address the rural markets effectively outside those 48 communities, but also allows us to toggle our CapEx within the 48 communities as the situation would dictate and that situation ranges from capital affordability right through to competitive intensity in terms of what's going on with our major competitor.

And then lastly, I think it's important t point out that there are some things that were unique, the 2009, including the satellite start-up or the E911 build or some of the IT undertaking that we had as well as some of the disproportionate weighting that we had on large complex deals within the enterprise and public sector space that will begin to (inaudible) over 2010. So that’s the thumbnail sketch of both our bandwidth perspective and our access infrastructure and a view of 2009 versus 2010 as it relates to CapEx.

And just a quick follow-on. The upgrade going from ADSL 2+ to the VDSL bonding do you expect to do that in 2010, is that 2011 will be on?

Darren Entwistle

No, we will be doing that in 2010 in terms of the VDSL2 deployment. Whether we get it al done in 2010 across the top 48 communities again remains to be determined according to both competitive intensity and capital affordability. But what we don’t get done in 2010 would get done early in 2011. That’s for the BDSL2 deployment; bonding will be done on a selective basis, as the opportunities and the competitive situation dictates.

Jeffrey Fan – Scotia Capital

Great. Thanks very much.

John Wheeler

Daniel, we are now through a little over an hour we will take one more question. Thank you


Thank you. Our last question will be from Simon Flannery at Morgan Stanley. Please go ahead.

Simon Flannery – Morgan Stanley

Thanks a lot. Thanks for putting me in. Wanted to come back to wireline as well. I could (inaudible) the wireless but just talk about what the enterprise is the sort of mindset in terms of spending and willingness to start looking at budgets again and what could we start to see a pickup in that, is that something that you are seeing in any of your weakness, any peak up in enterprise activity I don’t know wireless or the wireline side? Thanks

Darren Entwistle

Okay, in terms of enterprise activity I would say generically is still very sluggish both wireless and in respective wireline as well. I could be more specific the pickup is happening very slowly within the oil sector in Alberta, in particular, that’s true both the wireline and wireless. One of the big impacts that TELUS felt that that was I think disproportionate to TELUS was the downturn in the oil based economy.

One projects started to get cut, contractors started to get let go and when you have the type of market share that we have in wireless in Alberta with the type of ARPU that we generated when those contractors get let go, there is a definitive impact on both wireless from a client perspective but also wireless from an economic ARPU perspective. So we are starting to see some improvements, but it’s extremely slow across the enterprise market in totality.

If you look at our expansion in the east, we have been very successful with a number of investments in terms of the Ontario governments or the Department of National Defense or the City of Montréal or the Government of Quebec, number of those deals have either been implemented or they are going through the implementation phase. We would expect over the course of 2010 and 2011 those particular deals to start generating a profit return and then economic cash return to the TELUS organization as we go through the J-curve investment associated with the implementation and start getting to a decent run rate in terms of both profitability and cash generation. But holistically in terms of the enterprise market per se on a national basis improvement right now is slow.

Simon Flannery – Morgan Stanley

Okay, thanks.

John Wheeler

Okay, that concludes the Q&A session. Thank you very much everybody that's joined us on the phone and the Internet today

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