TELUS Corp. Q2 2008 Earnings Call Transcript

| About: TELUS Corporation (TU)
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TELUS Corporation (NYSE:USA) (NYSE:TU) Q2 FY08 Earnings Call August 8, 2008 11:00 AM ET


John Wheeler - IR

Darren Entwistle - President and CEO

Robert McFarlane - EVP and CFO

Glen Campbell - Merrill Lynch


Greg MacDonald - National Bank Financial

Peter MacDonald - GMP Securities

Jonathan Allen - RBC Capital Markets

Scott Malat - Goldman Sachs

Jeffrey Fan - UBS Securities

Dvai Ghose - Genuity Capital

Peter Rhamey - BMO Nesbitt Burns


Good morning, ladies and gentlemen welcome to the TELUS Second Quarter 2008 Earnings Conference Call. I would like to introduce your speaker, Mr. John Wheeler. Please go ahead sir.

John Wheeler - Investor Relations

Thank you very much and let me introduce the TELUS executives on line with us today. They are Darren Entwistle, President and CEO; and Bob McFarlane, Executive Vice President and CFO.

We'll start with introductory comments by Darren and Bob. This will be followed by a question-and-answer session with both executives. This call is scheduled for one hour or less.

The news release on second quarter's financial and operating results and detailed supplemental investor information are posted on our website at For those with access to the internet, the second quarter slides are posted for viewing at Investors. You will be on listen-only mode during the opening comments.

Let me now direct your attention to slide two. The forward-looking nature of the presentation, the answers to questions and statements of our 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 risk and assumptions outlined in our public disclosure and filings with Securities Commission in Canada and U.S.

Now, over to Darren on slide three.

Darren Entwistle - President and Chief Executive Officer

Thanks, John. Good morning and thank you for joining us today. I will first speak to what was satisfactory about TELUS' second quarter results. Second, I will discuss what was less than satisfactory; and third, I will highlight hat to watch for from our company in the second half of the year.

Let's start with slide four. TELUS' strength in execution in a competitive market delivered positive results in the second quarter, as evidenced by strong wireless net additions of 176,000 customers, a 7% decrease in the total cost of acquisition reflecting efficient and effective marketing, a year-over-year improvement in churn to 1.43%, the first decline since the introduction of wireless number portability in early 2007.

Moreover, satisfactory results in the wireline business were reflected by solid wireline revenue growth, driven primarily by data revenue from both the acquisition of Emergis in January and 7% organic growth. Also on the wireline front, we saw resilient long distance revenue and a small sequential improvement in network access line losses due to the success we are affecting in the business market in Central Canada.

Also positive, we saw a 70% increase in high-speed Internet client additions plus solid progress on TELUS TV. We are gaining momentum from temporary order processing constraints a year ago, caused by the major IT conversion to a new billing and client care system in Alberta.

And finally, we saw the successful extension of the same major IT initiatives to British Colombia as we cut over more than 1 million wireline residential customers to the integrated billing and client care platform, clearly benefiting from lessons learnt in Alberta last year.

As a result of our solid operational execution thus far this year, TELUS has revised upward our full year 2008 revenue guidance range, was now in the ranges for EBITDA and EPS to reflect higher than expected costs of increased customer additions and the implementation of new enterprise contracts.

As shown on slide five, the second quarter also presented certain challenges for TELUS that were less than satisfactory. These include a 92% decline in wireless ARPU that can be attributed to the competitive voice pricing we are facing in the Canadian market, which is offsetting our strong 54% growth in wireless data. Also, despite the fact that since 2001 TELUS' ongoing investment in restructuring and work force reduction totals $1 billion, I am less than satisfied with the revision of our restructuring expense target from $50 million to $30 million. Clearly, we need to realize improved traction on our efficiency initiatives.

Before I turn the call over to Bob to brief you in detail on TELUS' second quarter results, it is important for investors to take note of what to watch for in the second half of the year, as set out on slide six.

First, TELUS will stay the course on our 2008 corporate priorities. These include driving profit from our strategic services with a focus on data and wireless to enhance our competitiveness, which will be more important than ever, given new entrants are poised to enter the market next year as a result of the recent AWS auction.

Our priorities also include, continuing to build scale in our chosen vertical markets, including leveraging Emergis acquisition in the healthcare sector, and importantly, extracting elevated productivity gains from existing and new efficiency improvement initiatives. This is key if we are to absorb the endemic challenges of the telecom industry, including price commoditization, new competition and dilution from new technologies. This also includes absorbing the near term challenge of progressing through the J curve economics from significant enterprise contract implementations and broadband service deployments such as ADSL and TELUS TV.

Second, TELUS will continue to exercise our fiduciary responsibility to make technology evolution decisions that underpin the future growth of our wireless business. Our current deliberations include evaluating the various technology evolution pass to 4G, gathering real data on technologies, costing and the timing of their implementation, and as well, importantly, ensuring that complex decisions such as this is made in the best interest of our customers, our investors and our company.

In conclusion, TELUS' focus for the remainder of the year is to take action to advance our national growth strategy and enhance our competitive position in Canada's telecom industry.

Now, over to Bob to brief you in detail on TELUS' second quarter results.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Great. Thanks, Darren and good morning everyone. Let's begin with the wireless highlights on slide number eight. TELUS reported strong wireless results that are positively affected by introduction of a postpaid value oriented brand and execution in the smartphone space.

Gross and net ads were a TELUS second quarter record with high proportion of postpaid subscribers combined with low COA per addition. The success bodes well for TELUS' ongoing revenue growth and the very attractive future economics that this growth should generate. Clearly, we are still in the early days of our postpaid value brand, but we are pleased with the results today.

This new initiative strengthens our marketing effort against competitors who already have multiple brands. We are also encouraged with the recent trend of declining wireless churn, which is down 10 basis points sequentially and 2 basis points year-over-year. Our wireless churn rate remains the best amongst the major Canadian carriers and clearly demonstrates that our retention efforts are paying off.

Wireless data revenues increased by 54%, due to an accelerated adoption of smartphones, which is driving increased use of data services. Increase messaging, data roaming and continued migration of existing clients including Mike, the full functioning smartphones helped derive data revenue. Wireless guidance for the year is revised modestly to reflect improved revenue growth and the cost of acquisition associated with the record level of loading

Now let's turn to slide nine and review our wireless financial results. Wireless revenues were up 9%, based on 11% growth in the wireless customer base as well as the 54% increase in data revenue, while overall revenue per customer declined slightly. EBITDA, as adjusted increased by more than 7%. In addition to the cost associated with record loading levels, we also saw increases in certain network operating expenses due to very strong growth in data usage and roaming as well as higher content and licensing cost from the strong increase in data.

CapEx was down year-over-year. Capital expenditures in the first half of last year were higher due to cell site capacity and coverage spending, including network upgrades for EVDO RevA which has since then completed, as well as expenditures to implement wireless number portability.

Turning to slide 10, for a second quarter in a row TELUS led in net adds in the Canadian wireless industry. Net adds this quarter of 176,000 were also notable for having a high proportion of postpaid sub. This bodes well for future revenue and profit growth. The loading was positively affected by the late March introduction of our postpaid value brand, resiliency of the Mike service and continued good PCS results.

In aggregate, postpaid net adds were 157,000, an increase of 59% compared to last year and represented 90% of TELUS' total net adds in the quarter.

Gross additions increased 19%, also a TELUS second quarter record, despite our disciplined marking efforts which I'll cover in more depth on a later slide. Overall, our cumulative subscriber base remains at an 80-20 postpaid prepaid mix

Slide 11 shows that total quarterly ARPU declined by 1.4% to $62.73, as the declining voice ARPU was not fully offset by the growth in data. Voice ARPU continued its declining trend experienced in recent years due to an increase in the prepaid subscriber base in prior periods, increased use of included-minute rate plans, lower pricing and a slight decrease in voice roaming.

Partially offsetting the voice decline was data ARPU, which increased by $2.59 to $9.17 and now represents 15% of total ARPU. We remain very bullish at TELUS for continued strong wireless data growth, given the increasing penetration of EVDO capable devices in our subscriber base, the ongoing introduction of higher bandwidth applications and devices given the deployment of EVDO RevA as well as the successful continued migration of non-dispatch Mike users, and higher value prepaid subscribers to PCS smartphones.

Slide 12 reflects the continued focus on our wireless marketing efficiency in the second quarter. Gross adds increased 19% with 66% derived from postpaid. Churn improved by 2 basis points to 1.43%, a favorable trend. Notably, this is the first year-over-year comparison post the introduction of WNP.

COA decreased 22% year-over-year to $332 per gross addition, reflecting lower advertising and promotions cost on a per unit basis, due to the strong increase in gross adds, a higher proportion of new subscriber loading from lower cost channels and lower equipment subsidies reflecting the efficient and effective marketing for both our core and new value brands.

Overall marketing expenses only increased 5.8%, due to higher advertising and promotion cost and support of strong gross adds in the first full quarter of costs related to the launch of our new value brand.

Slide 13 highlights just a handful of smartphones available from TELUS including the newly announced HTC Touch Diamond on the far right. We continue to enjoy considerable success in this important category. We also continue to focus on investing in subscriber retention with cost increasing by $20 million or 25%, in part to support handset upgrades to full function smartphones and for ongoing Mike migration programs mentioned earlier. This is contributing to our good churn results, while resulting in higher overall ARPU for these customers post their migration.

TELUS remains bullish on the future of smartphone adoption to drive data revenue growth and with the launch of the HTC Touch Diamond next week; TELUS remains an industry leader offering a larger selection of smartphones on Canada's largest high-speed network.

To conclude the wireless section, as shown on slide 14, we are tweaking our original 2008 wireless annual guidance to reflect year-to-date results and our outlook for the back half of the year. The wireless revenue range is being tightened by $25 million towards the upper end of the range, reflecting stronger subscriber and data revenue growth.

EBITDA guidance is being tightened with both the low and high end being lowered by $25 million and $50 million based on the strong subscriber loading and data growth in the first half of 2008.

Now, let's turn our attention to slide 15 for TELUS' wireline segment highlights. Second quarter revenue was solid, driven primarily by data revenue growth that included the revenue from the Emergis and Fastvibe acquisitions that closed in the first quarter. High-speed net adds were strong, as we continue to regain momentum in B.C. and Alberta.

Now losses improved slightly and remain largely consistent with previous quarters. In July, we converted more than 1 million B.C. residential customers over to our new converged wireline billing and client care system and we are very encouraged by the successful experience to date.

Expenses this quarter were impacted by the implementation in advance of revenue generation of certain large complex fields such as the Government of Ontario contract and the strong internet and TELUS TV loading.

Turning to the wireline financials, starting with revenue. Total wireline revenue rose nearly 7%. The local revenue decline reflected the continued competitive environment and substitution effects in wireless and voice. LD revenue increased by 4%, mainly due to a negative one-time adjustment made in the second quarter last year.

Data revenue increased by 20%, major factors in the data growth were revenues from the Emergis acquisition plus growth in high-speed Internet, increased managed data revenues from the business side and increased revenue from TELUS TV.

The next slide provides a better indication of the normalized year-over-year growth rates for long distance and data revenue. In the second quarter of 2007, TELUS recognized a $13 million negative one-time adjustment on the revenues associated with last year's implementation of the new billing and client care system for residential customers in Alberta. Excluding this item, recorded last year, long distance revenue decreased by $6 million or 3.5%, which is still one of the better results in many years.

Data revenue growth was positively impacted by the acquisitions of Emergis and to a much smaller extent Fastvibe in January of this year. Excluding these factors, data growth was still a healthy 7%.

Turning to slide 18, we can see that wireline profitability fell slightly due to increased cost. Total OpEx increased 10.5%, mainly due to cost of sales, or increased data equipment sales with lower margins, expenses from the acquired companies and higher cost for the provisioning of TELUS TV due to increased loading.

External labor cost also increased to improve service levels and to implement services for new enterprise customers related to a number of significant contract wins in recent periods including the Government of Ontario and the Department of National Defense.

As Darren discussed, cost control remains a key ongoing management focus to preserve wireline, margins.

CapEx increased 4%, mainly from increased upfront expenditures to provide services to large new enterprise customers.

Slide 19 provides an update on the Emergis integration, strategically focused on the important healthcare vertical. TELUS continues to implement its post-merger integration plan to ensure a seamless transition for team members and customers while maintaining a continued focus on delivering its business goals.

Emergis' complementary expertise, applications and customer base are strengthening TELUS' industry leading healthcare solutions. The sales teams are now focused on working together on cross-selling opportunities and successfully completing implementations on contracts already won.

During the quarter, TELUS and Emergis successfully aligned a number of functions internally including finance, human resources, marketing and information technology and systems.

Let's move to slide 20 now, and examine briefly our Internet results. High-speed net adds continue to regain momentum in B.C. and Alberta, with TELUS adding 24,000 net subscribers, an increase of 70% over the same period a year ago. High-speed Internet subs was temporarily constrained a year ago due to reduced order processing following the implementation of the new billing and client care system for residential customers in Alberta. The overall cumulative high-speed Internet subscriber base was up more than 10% year-over-year.

Similar to our positive Internet momentum, slide 21 highlights our wireline resilience in network access lines performance compared to our peers across North America. In the second quarter, residential line losses improved and business NAL growth remains stable. So on a sequential basis, NAL losses improved by 20 basis points.

On a year-over-year basis, overall line losses increased slightly to 3.4%, due to competition of residential lines from VoIP competitors, particularly cable TV company as well as ongoing technological substitution to wireless services. Residential line losses are been partially offset by continued healthy business line growth in Central Canada.

Turning to slide 22, TELUS has successfully migrated residential customers from B.C. to the new converged billing and client care system. This is the first time most customers in Alberta and B.C. have been on the saying converged system. During the B.C. conversion, we applied the key learnings from the Alberta conversion in 2007, such as conducting a significantly larger trial in advance to the full launch to help ensure successful migration of our customers.

We are very encouraged by successful experience to date in terms of data accuracy, billing integrity, as well as customer service and fulfillment. Unlike last year, no financial charges are expected to be incurred as a result of the B.C. system conversion.

The converged system will allow TELUS to provide customers with higher quality of service with streamlined and standardized processes and allow for the elimination of multiple legacy systems over time, leading to improved expense efficiency and customer service capabilities.

Now, to conclude wireline in slide 23, we've revised TELUS' 2008 wireline guidance to reflect our results to date and our outlook for the rest of the year. Revenue has been raised, and tightened with the low end of the range increasing by $50 million and the high end increasing by $25 million.

EBITDA has also been tightened by $25 million towards the high end of the range. Both revenue and EBITDA are being revised upwards as the upfront dilutive effect of large complex contracts are expected to begin to subside in the back half of 2008.

Slide 24 illustrates the robust growth trajectory and changing mix of TELUS' total customer connections, which is consistent with our value-creating growth strategy. Growth in wireless and high-speed Internet continue to significantly outpace declines in residential network access lines and dial-up Internet. Wireless and Internet now account for 65% of total connection and we've generated 1 million more connections in the last two years.

So putting it all together, let's look at TELUS on a consolidated basis starting in slide 25. Consolidated revenue in the first quarter grew by nearly 8%, or EBITDA as adjusted increased at a lower 3.5% rate, due in large part to increased customer acquisition expenses in both wireless and wire line as I've already outlined.

Reported EPS increased 9% and I will elaborate on the various drivers behind EPS on the next slide. Meanwhile, CapEx was down and is expected to increase in future quarters, consistent with our full year guidance.

This next slide shows the detailed breakdown of the components of reported EPS. Normalized EBITDA growth generated EPS growth of $0.02; lower shares outstanding due to our NCIB program contributed $0.03 more than last year, while lower financing expenses contributed $0.03 to the improvement.

Meanwhile higher deprecation and amortization impacted EPS by $0.07. This reflects the reduction in estimated useful lives for circuit switching network assets, growth in capital assets, plus additional amortization from acquisitions. Increased cost of acquisition and cost of retention in our wireless and wireline segment contributed $0.04 to the decline.

The combined revenue and expense impacts of the Alberta IT system implementation with operating and capital write-offs related to Amp'd Mobile last year together totaled $0.10 to the year-over-year EPS gain.

Not presented on the slide is a $0.03 positive impact for 2007 tax related adjustments, which was a loss with lower 2008 tax rate, which contributed $0.03 of growth this quarter.

Slide 27 summarizes our share repurchases in the quarter and historically since we first started buying back shares in December of 2004. We remained active in the market in the second quarter, repurchasing a total of 1.7 million shares for $77 million. This brings TELUS' aggregate share repurchases since inception in the NCIB program to nearly 58 million shares for $2.7 billion.

For investors, this has led to a 11% or 39 million reduction in total shares outstanding since the start of these forward programs, with some partial offset or dilution per shares issued on option exercises.

Notably, TELUS has moved last year to the tax efficient net cash settlement in assets for past options, has accelerated the impact of share repurchases by reducing share dilution.

Outstanding shares were lower by 3.6% on a year-over-year basis, due to the NCIB. In combination with these share buybacks and our dividend, TELUS returned $221 million to shareholders this quarter, clearly highlights our strong and ongoing record of returning capital to shareholders.

As shown in slide 28, today we are making changes to consolidated guidance to reflect revisions to our outlook for the wireless and wireline segments. Our consolidated revenue guidance range is being raised and tightened, and the low and high end of the range increased by $75 million and $25 million respectively.

We are also narrowing our EBITDA guidance, with the high end of the range being lowered by $50 million. Our EPS range has been tightened from $30 million to $0.20 with the lower high end of $3.70 to reflect strong customer loading.

Consolidated CapEx remains unchanged at $1.9 billion which excludes the $880 million of AWS spectrum auction payments.

In summary, we continue to expect good year-over-year revenue and earnings growth, driven by the strong customer loading that we have seen in the first half of 2008.

As highlighted on slide 29, AWS spectrum auction concluded on July 21, after a marathon 331 rounds stretching almost two months, raising $4.25 billion for the Canadian government. A total of 282 licenses have been conditionally assigned to 15 companies.

TELUS bid 880 million for spectrum and the amount will be recorded as a capital expenditure in the third quarter of 2008. Consistent with our national growth strategy focused on data and wireless, TELUS successfully acquired 59 additional valuable spectrum line [ph] or an average of 16.2 Megahertz nationally. This increases TELUS' strong spectrum position and is expected to provide capacity for the eventual introduction of the future fourth generation services.

Before concluding, I'd like to highlight that TELUS' announced an increase to its commercial paper program by 400 million to $1.2 billion. DBRS confirmed the rating on our CP program on August 7. This program provides increased cash management flexibility and more attractive short-term rates for TELUS treasury operations, including funding AWS spectrum... wireless spectrum in recently concluded auction.

TELUS' currently... current $2 billion bank facility provides sufficient backup for the full commercial paper program. At the end of the second quarter, there was $800 million outstanding on our CP program, demonstrating strong demand for TELUS security in the Canadian market.

To conclude on slide 31, TELUS experienced solid second quarter consolidated revenue growth. In wireless, we're encouraged by the excellent loading, improved trends in churn and strong data growth as smartphone adoption accelerates. In line with TELUS' national growth strategy focused on data and wireless, the company acquired valuable spectrum across Canada, AWS spectrum increases the depth of our strong position and is expected to provide capacity as mentioned for future 4G offering. But still on the earlier stages, we are pleased with initial success of migrating more than 1 million residential customers in B.C. to our new converged IT system that Alberta customers converted to last year.

We're also experiencing positive momentum in the wireline consumer space with good Internet and TV loading, while our NAL losses remain well below that of the industry peers and are stabilizing. We made minor revisions to our 08 guidance to reflect stronger than expected subscriber loading in the current period diluted effect of upfront investments for large complex deals in Central Canada.

TELUS recognizes that the competitive nature of our industry makes it incumbent on TELUS' team to focus on cost discipline for the back half of 2008 and ongoing. Overall, TELUS had a successful quarter of operational execution with great loading, thus begun its successful IT system implementation and made minor revisions to our guidance to reflect positive year-to-date operating results.

So, with that said, Darren and I would be pleased to answer your questions. I'll turn the call back over to John to start the Q&A session.

John Wheeler - Investor Relations

Thanks, Bob. Just before I turn the conference call to the operator to start the question period, I ask your corporation in asking one question at a time please. So over to Alex.

Question And Answer


Thank you. [Operator Instructions]. And from National Bank Financial, Greg MacDonald. Please go ahead with your question.

Greg MacDonald - National Bank Financial

Thanks. Good morning, guys. The question I have is on the buyback itself, 12% executed on what would be your maximum. Didn't see a dividend increase this quarter, 12% executed on the buyback. I can appreciate that you wanted to hold cash in the second quarter in particular, as there were still some uncertainty at that time on the spectrum auction. But with that complete, looking at a little more clarity on your capital requirements in the second half, are we to expect that the company is now revisiting a focus on returning shareholders' cash to shareholders in particular given how weak the stock is... has been. I wonder if you can give us some insights on what you are thinking of there.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Okay. Well, the first thing I would say is, I think the real story news today is operational execution, and that is certainly what management concentrates on. And I have responsibilities certainly for leading our strategies with regard to capital structure. But wealth creation is first and foremost, created through operational execution. So, we are looking forward to questions on what really matters here.

In terms of dividends, we've had four consecutive annual increases, that's annual; we never do them in the third quarter. So we've never communicated that we would contemplate doing an off-cycle increase. So I think that's extraneous to the quarter.

In terms of the NCIB; obviously, we had significant repurchases. We also had some blockade periods which related to spectrum auction et cetera. So in any event, we continue with the NCIB program. I think the important thing is that we've got a lot more firepower here given the share price. Maybe the only people around that cheer when the share price goes down, but the people on the treasury group are very excited about the low share price right now.

Greg MacDonald - National Bank Financial

Okay. Thanks. That's helpful.

John Wheeler - Investor Relations

Okay, Alex.


Thank you. And your next question from GMP Securities, Peter MacDonald. Go ahead please.

Peter MacDonald - GMP Securities

Thanks. There was a pretty strong rumor in the market that you would make an announcement on your GSM strategy today. That would have made sense given you've had plenty of time to review it and the spectrum option behind you and I guess the benefits declined with the passage of time. But from your comments, Darren it sounded like you are still considering the option. So unless I misunderstood your comments, may be you can highlight what the remaining factors are that you are reviewing and given that timing and competition of... the timing of competition and 4G is getting closer, is there a drop dead date, when it doesn't makes sense to pursue it any further?

Darren Entwistle - President and Chief Executive Officer

Thanks for the question, Peter. I would say, our perspective is that it's more important to make the right decision than to synchronize it with our quarterly release. As I said previously, technology evolutions are a way of life for our organization at both the wireline and wireless front and we consider them carefully and deliberately, always with a view to augmenting the economics of the organization.

I think what is clear is that as it relates to 4G, we will be going LTE. And of course that was enabled by our securing of spectrum in the recent AWS auction. We are currently evaluating prospective paths to get to LTE and 4G and we are of course looking to select the path that maximizes our economics.

I think it's pretty clear that when evaluating the prospective paths that these paths come with new revenue and competitors positioning opportunities that enhance the economics of the organization. So continuing to review it, and review it very carefully. I think what's perhaps interesting for investors is that any decision in this regard will be made from a position of strength as evidenced by the operational execution in the second quarter of this year, predicated upon our CDMA network. And I think if you look at our strength whether it's our ability to deliver new client additions, whether it's the strength of our CDMA value proposition as it relates to data services delivering data growth, whether it relates to our leadership on the smartphone front, or the way that we successfully leverage the economics of our Bell network sharing agreement, clearly we are doing very well in that regard.

As soon as we have made this decision in that particular arena, we will communicate it the way that we have done in the past.

John Wheeler - Investor Relations

Okay, thank you. Alex, next question please.


Thank you. And from RBC Capital Markets, Jonathan Allen. Please go ahead.

Jonathan Allen - RBC Capital Markets

Thanks very much. First, congratulations on the wireless adds, very impressive for the quarter. I am curious though about the staying power of the Koodo brand. I'd imagine, it must have had a fairly material impact on the net adds for the quarter, but I am curious what your experience has been since the launch? Was it a big launch and a big subscriber grab at the beginning and things have tapered off since then or has subscriber additions been quite steady month-to-month going into the summer?

And on a similar note, I am curious about the COA on the Koodoo customers? Is the subsidy substantially sequentially lower for Koodoo versus the traditional TELUS and hence the lowest COA that we've have seen in the last couple of quarters? Is that actually something that is sustainable for the company?

Darren Entwistle - President and Chief Executive Officer

Jonathan, I'll open it up and I'll hand over to Bob. Actually, the staying power on the Koodoo brand is actually quite short, because that's not the name of the brand, the brand is called Koodo. So it's important that we provide, I think that clarification.

Number two, our approach as it relates to value based brand is not short-term in nature, but rather investing for longer term success. We think having the multiplicity of brands in the marketplace is the right thing to do in terms of creating economic value and I would say that that particular decision has improved in respect of its efficacy with the likelihood of new entrants coming to fruition post the AWS option that transpired recently.

As it relates to your question, in respect of the cost and the structure clearly, I think if you are managing a value-based brand effectively looking for a market that is complementary for the TELUS market, where people really are value seekers, then you need to make sure that the cost infrastructure that you built to support that brand is very effective to support what you want to achieve in the marketplace from a pricing perspective. I'll hand it over to Bob if he wants to make any additional comments.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Yeah. And the one thing that I would add is consistent with our tradition, we are not providing brand specific results or analysis.

Jonathan Allen - RBC Capital Markets

Yeah. If I could you just clarify then that from what Darren was saying, was there a big push at the beginning of the quarter then with subscriber additions for Koodo? And then it tapered off or have you seen things had been pretty consistent?

Darren Entwistle - President and Chief Executive Officer

I'm not going to comment because we are not breaking out how the brand is doing and fairly you watch a brand and that entails a certain activities. But when I tried to emphasize Jonathan is that this is an approach that's to deliver a result in 2008, it's a longer term strategy. I also think trying to draw inference from four months worth of results is a highly sarcastic [ph] event. All I can tell you is that our approach and our mentality as it relates to the value-based brand is long-term in orientation.

Clearly, it takes effort to introduce it into the marketplace. And as well as, for your question, we want to build the cost infrastructure for that brand that supports the fact that we want to have a value-based price proposition in the marketplace and I think that's the smart thing to do.

Jonathan Allen - RBC Capital Markets

Okay, thanks Darren. Congratulations again.

Darren Entwistle - President and Chief Executive Officer

Thank you.

John Wheeler - Investor Relations

Alex, thank you.


Thank you. And our next question; Goldman Sachs, Scott Malat. Go ahead please.

Scott Malat - Goldman Sachs

Thanks for taking the question. Yeah, just on the retention spend, was it little bit higher than we would have thought, just seems like you are subsidizing the smartphones more aggressively. Can you just give us an idea of your mix in smartphones, maybe that the usage patterns on these devices versus company averages?

Robert McFarlane - Executive Vice President and Chief Financial Officer

We don't disclose the specific composition on smartphones and its subscriber base. But I think it would be... while we believe that we are leading the market by a wide margin in respect of adoption of smartphones. And clearly, our retention efforts has been quite successful on that regard. So not only in terms of product offering, attracting new users to that category, but also internal migration to smartphones. Most particularly, and perhaps the contrast with U.S. experience with our Mike iDEN brand, we've been quite successful on an ongoing program of migration of more mobile phone centric users over to our PCS offering where the adoption of smartphone with associated data, revenue subscription which they didn't enjoy, the Mike subscribers.

So that program entails not only a retention side but a revenue enhancement in terms of getting the data growth on conversion of subscribers which really leaves the Mike brand over time more and more to a push-to-talk centric service and you can see in our overall churn rate for our organization as it relates to the industry. But certainly that's been a successful program to date in contrast market given the experience in the United States.

Scott Malat - Goldman Sachs


John Wheeler - Investor Relations

Certainly. Alex, next question.


Thank you. And our next question; from Merrill Lynch, we have Glen Campbell. Go ahead please.

Glen Campbell - Merrill Lynch

Yeah, thanks very much. Darren, I wanted to ask a little bit more about your cost reduction efforts. You expressed I guess, just tried to say some frustration in not being able to move faster there. You've trimmed your restructuring budget from $50 million to $30 million and yet, it stayed at target for the second half. Can you talk a little bit about perhaps what's holding you back? Is it internal factors, just execution, competitors et cetera, and what you are hoping to do there? Thanks.

Darren Entwistle - President and Chief Executive Officer

Thanks for the question, Glen. I think one of the things I tried to point out in my remarks is that if you go back to 2001, this organization has invested upwards of $1 billion in efficiency initiatives that have been very significant in nature. I guess what I am a bit frustrated with is that, despite the continuity on that front and the significant gains that we've realized, we've tapered off in about the last 12 to 18 months as it relates to those activities, and I think we need to back on track as an organization.

And I'm indeed disappointed to be revising downwards from $50 million to $30 million of course restructuring charges. And what I tried to highlight in my comments is that we are going to get back on track with our existing efficiency initiatives and we have a portfolio of those at TELUS and I think it behooves us to find additional efficiency initiatives. And it's particularly true when you think that on both the wireless and on the wireline front, we've got all challenges that are common to our industry as it relates to margin compression from competitive intrusion or technology substitution. But we also have to absorb the near tern dilutive impacts of some of these our key strategies for success over the longer term, which is of course the J curves that are related to investing in a new value brand, investing in new data applications, trying to augment our performance on high-speed Internet access supporting TELUS TV.

Also, the very significant dilution that's associated with implementing some of the large contract wins that we've secured in the enterprise market. I think one of the things that has hindered us is that we had a lot on our plate as an organization. Trying to materially improve your productivity from a performance perspective, at the same time, you are going through a major IT initiative on the billing and the client care front. Those two things are not always easily done being mutually inclusive.

And I think to the extent to which we can have a little bit more stability rather than have distractions as it relates to major M&A events, as it relates to spectrum auctions, regulatory events and of course get some stability with the new IT initiative, I think having a little bit more of a regularized platform at TELUS will allow us to get back on track as it relates to what we need to achieve on the efficiency front and also source sell additional efficiency initiatives that I hope I can communicate to the market in the quarters ahead and I think it's imperative that we do so, given the dynamics of our industry, which are now impacting wireline and wireless.

Glen Campbell - Merrill Lynch

Just a follow-up on that. Is one of the possibilities on the table, the possibility of a deeper network sharing arrangement with PCM and there has been a lot of talk about a joint network build and the technology aspect of it. But is it one of the opportunities that's possibly there to move to a more of a network sharing sort of arrangement?

Darren Entwistle - President and Chief Executive Officer

I think discussing specific programs, Glen, in a format such as this is not always in the best interest of our shareholders. What I can say is the network sharing agreement that we had with Bell, effectively since 2001 has allowed us to improve the economics of our wireless business. It's also allowed us to introduce new technologies more expeditiously as we went through 1x and EVDO and EVDO RevA and I think those two characteristics of our network sharing agreement, the improved economics that it gives us through capital avoidance and the ability to bring new technologies to market more expeditiously.

I think those things have served us well in the past. And I would hope that agreement will continue to serve us well in the future as we make the strategic choices that we have to make in respective technology.

Glen Campbell - Merrill Lynch

Thanks very much.

John Wheeler - Investor Relations

Alex, please


Thank you. Our next question from UBS Securities, Jeffrey Fan. Go ahead please.

Jeffrey Fan - UBS Securities

Thanks very much. I want to ask you a question on ARPU on the non-data ARPU. It looks the decline was about 6% this quarter. I know you gave us some reasons on what that was driven by, but I wondering if there are any sort of measures that you intend to take, just on the voice alone to help stem that decline?

And as a quick follow-up, just to help us forecast your ARPU more accurately, I am wondering if you can at least provide us with some color on how the Koodo sales would impact your ARPU with everything else I guess being equal? Thanks.

Robert McFarlane - Executive Vice President and Chief Financial Officer

Alright Jeff. Well, I think on the first part, again sort of reflecting Darren's comments on the prior questions, I don't think this is really the forum to talk about future pricing in any respect. But suffice to say fundamentally, it reflects the significant competitive rivalry that exists in the wireless industry to the benefit of consumers and to TELUS for price accordingly.

Having said that, well, the question is phrasing [ph] the standpoint of what you are going to do about voice ARPU going down? TELUS has had a leading ARPU for many, many years now and we are glad to see someone else has gotten up to our level, so that is a healthy thing I think with respect to future pricing dynamics in the Canadian Industry.

In terms of the Koodo impact, again, we're not giving specific disclosure as it relates to Koodo. But I think if you just do some rough mathematics, given the size of our subscriber base, the fact that we only launched the product in the last week of March, and therefore the results related to that would be ramping... we only have a partial impact in terms of ARPU in the quarter. I think you would find it would be incidental.

Jeffrey Fan - UBS Securities


John Wheeler - Investor Relations

Alex, next question please.


Thank you. And our next question from Genuity Capital, Dvai Ghose. Go ahead please.

Dvai Ghose - Genuity Capital

Yeah, hi. Thanks very much. If I can follow up on two points. Number one on the Koodo, it seems that it added a lot of subscribers in the quarter, in part because there is no systems activation fee or contract. Are you concerned that it will cannibalize your core TELUS Mobility brand? And on the HSPA, is there a legal issue here and as much is a 30-day business day cool-off period post auction from Industry of Canada. Does that preclude you from making an announcement vis-à-vis HSPA until I think the September, the 3rd?

Robert McFarlane - Executive Vice President and Chief Financial Officer

Well, the first question I think related to in terms of the stock et cetera lack of it on Koodo and whether there is cannibalization or concerned about... on our core brand. Although I would say is we reported statistics today with very low churn rate for the organization, good adds, so you can intuit from those the answer.

In terms of the legal question, I don't know what exactly you're referring to. I think Darren talked about this not being the forum to speculate about agreements and negotiation. And in terms of legal restrictions that relate to collusion for AWS. And so why don't we have that relates to if you are referring to a network sharing arrangement that we have with Bell or is that something that would be in a moment to that. But I'm not really familiar with the concern that you have.

Dvai Ghose - Genuity Capital

So that was the question, thank you.

John Wheeler - Investor Relations

Okay. Next question Alex, please.


Thank you. [Operator Instructions]. And our next question is from BMO Capital Markets, Peter Rhamey. Go ahead please.

Peter Rhamey - BMO Nesbitt Burns

Yes, thanks for taking my question. I'd like to talk a little bit about wireless; wireless has been earmarked by the balance between growth and profitability. And I note in this quarter a fantastic net adds as other color complement that you want. Should we see this as investors as a change in the balance that you are taking ahead of competition, enter... new competition coming into the market. Or is it more... or would you take a look at your ARPU trends and say, perhaps you got this a bit too aggressive in the quarter. And I do note also that your COA costs, your total COA costs were not up that much. So maybe it is a bit of a surprise for you. Any color you could add there Darren or Bob; that would be fantastic. Thank you.

Darren Entwistle - President and Chief Executive Officer

I think as you reflect on our COA whether it's nominally or on a per gross add basis, it underscores very strongly the fact that our marketing was both efficient and effective in the quarter.

Number two, as per Bob's comments to correlate the $0.92 reduction in ARPU with our value brand launch, is a mathematically incorrect thing to do, as it relates to our second quarter results. I think it's important to note as an organization, the focus of TELUS has not been on client sales, but rather generating profitability. The heritage of this organization has been a company that's putting more emphasis on revenue and EBITDA growth than subscriber additions.

We brought a value based brand into the market place for competitive positioning reasons. We want to make sure that that value-based brand is complementary to the focus that we have with the core TELUS brand and it's nice to see that we experienced some traction in the second quarter, but we've got a long way to go yet and to draw influence from only effectively four months worth of results. I just don't think is an accurate thing to do.

If you look at the ARPU dilution, there is really three driving factors that are independent of what we've done on the value-based brand front. And as Bob has indicated, the wireless market in Canada despite conjecture to this effect, is a very competitive market place and we are experiencing price commoditization on the voice side, which is indicative that the market is healthy, robust and the competitive dynamic is very strong.

In addition to that, we have been working hard as Bob indicated in his comments, as it relates to our iDEN base to transition some of our iDEN consumers, who are not heavy users of push-to-talk over to our PCS technology, where they can avail themselves both voice and data applications, and I think that is an economically positive thing to do. And we are working hard to try and purify our iDEN base down to a true push-to-talk base that values the dispatch capabilities of iDEN.

Another factor that hasn't been discussed as well as you're well aware we won the government of Canada contract and that government of Canada contract has come with a lower ARPU. So as we have ramped up our position with the government of Canada and brought more of those clients on board, they have come on board with a lower ARPU. And we are working hard as an organization to try and put additional features into that relationship that is good for the government to improve the ARPU. But that too has had a dilutive impact in contributing as well to what we've seen as it relates to the $0.92 reduction.

And I guess the last thing is, and I think we always talked about efficiency as a wireline initiative, and I think what the future entails for us is to think about efficiency from both a wireless and wireline initiative, and make sure that we build a cost structure on the wireless front that allows us to be very resilient to the inevitable pressures that we'll face on ARPU over the longer term. And that's exactly what your company is up to.

Peter Rhamey - BMO Nesbitt Burns

Thanks very much, Bob... I mean Darren.


Thank you. And from Morgan Stanley, we have Simon Flannery. Please go ahead with your question.

Unidentified Analyst

Hi, thanks. This is Jay [ph] on behalf of Simon. Quick question on the Mike to PCS conversion. I was curious if you are evaluating any strategies to transfer heavy push-to-talk users over to PCS? And if so, what are your thoughts on QChat like technology? Thanks.

Darren Entwistle - President and Chief Executive Officer

No is the answer to the question. I think people that are heavy push-to-talk users are exceedingly well served by iDEN. I would say the iDEN position has strengthened in the market as we haven't really seen competition from the likes of CDMA push-to-talk with the imploding [Indiscernible] platform or Kodiak on the GSM front really turn to solution, so I would say the iDEN position as it relates to heavy push-to-talk users is stronger than ever.

We've got the best handsets that are appropriate to the type of market that we are seeking to address. They are regularized than when you are addressing the transport industry, the construction industry, the oil and gas industry, and the like, they value the regularized handsets that are unique to the iDEN proportion. We still lead by a significant margin when it comes to mitigating call latency and it comes to being first-in-class as it relates to speed at call setup, and I have to tell you when you're a heavy PPT user, mitigating call latency and having quick call setup are the characteristics that you value greatly. So that's the base that we are going to continue to nurture.

The economics are very attractive, when you look at the type of ARPU that we can generate, relatively low churn rate and a CapEx intensity, that's in a single-digit figures that makes all very tidy economic profit from our iDEN business and we should continue to be responsible and nurture that business and the economics associated with it.

What we are doing is within the iDEN base, customers that are not heavy users to push-to-talk and typically these are more consumer oriented clients, taking the opportunity to migrate them over to PCS, which his NPV positive. Because they go from being essentially voice customers to people that can now be voice and data customers, given how rich the application portfolio is within our CDMA offering. And that is something that we are actively pursuing and that's why I've made the comment that we are seeking to purify our iDEN base down to the heavy push-to-talk users.

On the QChat front, that's a technology area that we are continuing to evaluate and have discussions with our U.S. counterparts in that regard, no comment beyond that to make at this particular juncture.

Unidentified Analyst

Okay, thanks.

John Wheeler - Investor Relations

Okay, Alex, we are through our questions in the queue, so I would like to thank everybody that's joined us today and we look forward to working with you in the coming months and quarters as we go forward. So thank you every much for joining us today.


And this concludes the TELUS second quarter 2008 earnings conference call. Thank you from TELUS.

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