management's discussion & analysis
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management's discussion & analysis
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2. core business,
vision and strategy
2.1 Core business
TELUS Corporation, as the largest telecommunications company in Western Canada and the second largest in Canada, provides a full range of telecommunications products and services including data, IP, voice, video and wireless services. TELUS earns the majority of its revenue from access to, and the use of, the Company's national telecommunications infrastructure, or from providing products and services that facilitate access to and usage of this national infrastructure.
The Company's reportable segments, which reflect TELUS' organizational structure and are used to manage the business, are TELUS Communications and TELUS Mobility. The two segments are differentiated based on management, products and services, distribution channels, technology, and regulatory treatment. Intersegment sales are recorded at the exchange value.
At December 31, 2004, the Company's principal subsidiary is wholly owned TELUS Communications Inc. (TCI), including TELE-MOBILE COMPANY partnership.
2.2 Vision and strategy
TELUS' strategic intent, or vision, is to unleash the power of the Internet to deliver the best solutions to Canadians at home, in the workplace and on the move. TELUS' strategy for growth is to focus on its core telecommunications business in Canada. As a result it has evolved from a regional telecommunications company in 1999, serving 28% of Canada's population, to a strong national facilities-based player in the growth areas of wireless, data and IP. The Company embarked on this strategy to take advantage of the significant growth opportunities that the national market offers.
TELUS continues to be guided by its six long-standing strategic imperatives that serve as a guideline for the Company's actions. Some recent examples of TELUS' activities in support of these imperatives follow.
2.2.1 Building national capabilities across data, IP, voice and wireless
Expansion in Central Canada is key to TELUS' business growth strategy. In 2004, TELUS successfully implemented several major deals, including the $160 million managed data contract with IBM for the TD Bank Financial Group for more than 1,000 branches across Canada.
Wireless coverage was extended to 500,000 more Canadians in 2004, ending the year at 30 million. Distribution was extended with 15 new TELUS Mobility stores, resulting in more than 100 corporate stores and a total of 2,500 retail locations.
TELUS achieved another milestone in the migration of long distance voice traffic from competitors to its IP-based network, a migration that began in July 2003. In 2004, TELUS successfully migrated 84% of its long distance traffic from the old Stentor Alliance platform. The migration of calls is another step in the transformation of the TELUS network to a single ubiquitous IP network designed to carry high-quality voice, data and video applications. This should eventually eliminate the need for separate networks to carry these applications and reduce network costs.
2.2.2 Providing integrated solutions that differentiate TELUS from its competitors
TELUS as a full service telecom operator should increasingly benefit from wireless and wireline synergistic bundling opportunities. This is a differentiating competitive advantage compared to competitors with narrow or stand-alone service offerings.
As a result of research and development activities TELUS has undertaken, the next phase of the IP-One product family was launched in June 2004, and is currently offered to businesses in 24 cities in Ontario and Quebec. IP-One Innovation service uses TELUS' next generation IP-based network to route calls and data, while providing business customers with a full suite of advanced applications and services. It gives customers the opportunity to reduce operational expenses by eliminating costs associated with installing, managing and supporting three separate connections. IP-One Innovation service also provides the efficiency and accessibility of integrated messaging that allows standards-based e-mail programs to retrieve voice-mail.
TELUS began rolling out its digital home strategy to consumers, branded the Future Friendly Home, and introduced TELUS Home Networking and TELUS HomeSitter. The wireless home networking solution was introduced for residential customers in B.C. and Alberta for an additional $8 per month plus the cost of a home networking kit. The service includes enhanced Internet access with speeds up to 2.5 megabits per second and capability to connect multiple computers through a wireless network. TELUS HomeSitter is a unique home monitoring system based on wireless broadband technology that offers customers peace of mind by allowing them to remotely monitor their home or business through a private account via any high-speed Internet connection. TELUS HomeSitter service is being offered to TELUS high speed Internet customers for $9.95 a month, or $14.95 for others.
2.2.3 Focusing relentlessly on the growth markets of data, IP and wireless
Executing against this imperative is central to the Company's success. TELUS achieved strong consolidated growth in 2004 based on record wireless subscriber net additions of 512,400, a 19% increase in wireless revenue and a 4% increase in data revenue.
In May 2004, TELUS announced its intention to acquire all of the publicly traded shares and warrants of Microcell, the smallest of the national wireless operators. In September 2004, Microcell's Board recommended its shareholders accept a higher-priced offer from competitor Rogers Wireless Communications Inc. Rogers completed the acquisition of Microcell in the fourth quarter of 2004. TELUS' offer was consistent with two other strategic imperatives of building national capabilities across data, IP, voice and wireless and partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy.
While TELUS ranks third in the Canadian wireless industry in terms of total subscribers, the success of its leadership position is reflected by TELUS Mobility, generating the highest growth in EBITDA and cash flow (EBITDA less capital expenditures) of the three Canadian operators. TELUS Mobility continues to focus on profitable wireless growth in the national market, which is now made up of three major facilities-based players and potential niche-market competitors operating on a resale basis.
2.2.4 Investing in internal capabilities to build a high-performance culture and efficient operations
TELUS team members are at the heart of the Company's competitive advantage in efforts to meet customer needs in the most effective way possible.
In early 2004, TELUS completed a major multi-phase three-year Operational Efficiency Program, which began in 2001 and attained cumulative annual savings of $538 million by the end of 2004. Building upon this base, in 2004 new restructuring activities in the Communications segment included a departmental reorganization of the information technology resources area, consolidating from 15 locations to two primary locations, which is expected to enable greater efficiencies of scale and effectiveness of program delivery. Two customer-facing business units were also integrated to improve the Company's competitiveness as well as its operating and capital productivity.
The Company is presently undertaking a billing initiative to re-engineer processes in the Communications segment for order entry, pre-qualification, service fulfillment and assurance, customer care, billing, collections/credit, customer contract and information management.
The Company also invested significantly in upgrading of skill sets, leadership training and team development. For example, in 2004 approximately $35 million was spent on training and learning, up from $33 million in 2003.
2.2.5 Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business
In March 2004, TELUS, O.N. Telcom, and the Province of Ontario announced a strategic alliance in which TELUS will provide O.N. Telcom with management support services and access to its products and services. The agreement provides O.N. Telcom with access to the TELUS national IP backbone, technology and services while positioning O.N. Telcom for improved customer service from TELUS' extensive product and market development initiatives.
In November, TELUS acquired the shares of ADCOM, Inc., the largest video conferencing company in Canada, for $12.2 million. Through this acquisition, TELUS gained approximately 80 employees, a new customer base, multi-site operations and state-of-the-art equipment. ADCOM has offices in Calgary, Edmonton, Ottawa, Montreal and Halifax. ADCOM's annual revenues in 2003 were $24.7 million. Also in November, TELUS Sourcing Solutions signed an agreement with the B.C. Government to provide payroll systems and services. As a result, about 140 employees joined TELUS from the provincial government.
In December, Verizon sold its 20.5% equity interest in TELUS, or 73.5 million shares, through a secondary equity offering. The long-term relationship agreement between the companies required Verizon to have approval of a majority of TELUS' independent directors, and resulted in TELUS agreeing to favourable terms to permit the transaction to proceed. TELUS received $148.1 million (US $125 million) and, under amendments to a business agreement, annual future fees of $97 million (US $84 million) payable to Verizon were reduced to a nominal amount.
The secondary offering increased the public float of TELUS shares by approximately 26%, providing more trading liquidity, and increasing the breadth of the shareholder base. Verizon and TELUS continue to have a mutually beneficial relationship to serve both wireline and wireless customers. For example, TELUS Mobility and Verizon Wireless expanded their current roaming arrangements under a consolidated long-term roaming agreement.
TELUS also sold non-strategic properties and other assets for $27.6 million in 2004.
2.2.6 Going to market as one team, under a common brand, executing a single strategy
TELUS' nature-based non-technical approach and the future is friendly brand promise are renowned in Canada. The approach is consistently applied to advertising in the Communications and Mobility segments and across all corporate communications programs.
TELUS also continues to execute on its commitment to becoming Canada's premier corporate citizen by supporting the communities in which employees live, work and serve. The Company's efforts are focused on health and wellness, education and sport, and arts and culture. In 2004, TELUS made a five-year commitment to the Royal Conservatory of Music to help strengthen the creative capital of young Canadians. The Company also announced multi-year sports sponsorships including Hockey Canada, Alpine Canada Alpin and the Canadian Soccer Association. Also announced was a multi-faceted partnership with Science World in Vancouver. For additional information, see TELUS’ 2004 Corporate Social Responsibility Report, which can be found at telus.com/socialresponsibility.
