management's discussion & analysis
management's discussion & analysis
5. results from operations
5.4 communications segment results
Operating revenues – Communications segment
Key operating indicators – Communications segment
Relative to a general industry trend of declining traditional revenues, the Communications segment performed relatively well due to improving data service revenues and a slowing of the rate of long distance revenue erosion.
- Voice local revenue is generated from access to the Company’s
network on a monthly subscription basis, from optional and
pay-per-use services, and from voice contribution revenues. Voice
contribution revenues represent TELUS’ share of contribution pool
funds for providing services in high cost areas. Local revenue
for 2004 includes a positive adjustment of $10.2 million recorded
in the second quarter of 2004 for CRTC Decision 2004-42. In the
decision, TELUS was allowed to recover ongoing operating costs
to support previously incurred local number portability and local
competition capital investments. Excluding this adjustment, the local
service decrease was primarily a result of a reduction in access lines,
partly offset by implementation of approved rate increases for business
single and multi-line services effective June 1, 2004.Interconnection
revenue, contribution revenues and enhanced services revenues were relatively
unchanged in 2004, when compared with 2003.
Residential network access lines continued to decrease as a result of competitive activity and technological substitution, including substitution to wireless services. Business lines decreased primarily as a result of incumbent local exchange carrier (ILEC) Centrex line losses to competition and migration to more efficient ISDN data services. It is expected that the trend of declining network access lines will worsen due to cable-TV competitors beginning to offer voice telephony services, and increased competition from new and existing VoIP competitors.
- Voice long distance revenue continued to decrease in 2004, but at a lower rate than the 5.4% revenue decrease observed in 2003, due primarily to non-incumbent minute growth. The decrease in revenue in 2004, when compared with 2003, was primarily a result of fewer consumer minutes, price competition, and technological substitution, partly offset by a $1 increase in certain monthly long distance plan administrative charges, effective June 2004, as well as increased non-incumbent long distance minute volumes. Price competition and substitution to alternative technologies are expected to continue.
- Communications segment data revenues include Internet access,
hosting and applications, local area network/wide area network
(LAN/WAN), gateway service, internetworking and remote access,
managed information technology (IT) services, and legacy data
services such as private line, switched data services, data local
access and data equipment sales. TELUS’ November 2004
acquisition of ADCOM, Inc. added $4.6 million of revenue in 2004,
while in 2003 TELUS divested certain application development
assets, which had 2003 revenues of $17.8 million.
Internet and enhanced data service revenues increased by $63.1 million in 2004, when compared with 2003, primarily as a result of the 22.8% increase in the high-speed Internet subscriber base over the last 12 months and traction gained from contracts with new customers, partly offset by an 11.9% reduction in dial-up subscribers over the last 12 months. Managed workplace revenues increased by $28.9 million, due to providing higher functional outsourcing services and technology upgrades for TELUS’ customers. Other data services and equipment sales decreased by $30.5 million in 2004.
- Other revenue decreased in 2004, when compared with 2003, primarily as a result of lower late payment fees, lower voice equipment sales and the conclusion in the first quarter of 2004 of amortization of deferred individual line service grant revenues (annual impact $6.7 million). Individual line service grants were provided in respect of the conversion of multi-party lines to single lines in high cost rural areas in Alberta in the early 1990s.
- Intersegment revenue represents services provided by the Communications segment to the Mobility segment. These revenues are eliminated upon consolidation together with the associated expense in TELUS Mobility.
Total external operating revenue discussed above included non-ILEC revenues of $560.7 million in 2004, as compared with $555.4 million in 2003. This reflects an increase of $5.3 million or 1.0% for the full year. The increase was primarily due to billings associated with a number of new multi-year contracts, including the TD Bank Financial Group and The Co-operators, a focus on recurring longer-term revenues and higher long distance traffic volume and prices, partly offset by lower equipment sales in 2004 and reduced revenues due to divestiture of certain application development assets in 2003. Non-ILEC revenues increased year-over-year in the third and fourth quarters following declines in the first two quarters of the year. This reflects execution on the Company’s objective to migrate away from non-recurring equipment sales toward recurring revenues.
Operations expense – Communications segment
Salaries, benefits and employee-related cost increases were incurred primarily to maintain high service levels, but also increased for the provision of in-sourcing of payroll services to government and health care industry clients, the purchase of ADCOM and the establishment of a call centre in Montreal to handle calls previously outsourced to a third party. Full-time equivalent employees increased by 221 employees for the provision of payroll services to the Government of B.C. and from the purchase of ADCOM. The decrease in Other operations expense was due mainly to lower facility costs and call centre outsourcing costs, partly offset by increased network support and maintenance costs with third parties. These increases were partly offset by Operational Efficiency Program savings.
- Salaries, benefits and employee-related cost increases included:
(i) Costs associated with temporary staff, overtime, training and travel increased by $34.2 million for the full year 2004, when compared with 2003. This increase was related to activities to maintain high customer service levels, improve internal processes, emergency operations training, and an increased expenditure on leadership training and team development;
(ii) Additional costs of $24.6 million in 2004 for operating structure changes. These costs were for the new partnership with the Calgary Health Region, the establishment of the new Montreal call centre, the purchase of ADCOM, and a new agreement in which TELUS Sourcing Solutions will provide payroll services to the Government of B.C. These increased costs were partly offset by savings on outsourcing of $10.4 million, which are included in Other operations expense. Non-cash share-based compensation expense recognized commencing January 1, 2004, as discussed in Accounting policy developments, was $23.8 million in 2004;
(iii) Base compensation and benefits increases; and
(iv) Partly offsetting the increases noted above were savings from the Operational Efficiency Program of approximately $60.0 million in 2004. Communications segment pension expense for defined benefit and defined contribution plans decreased by $27.2 million, primarily as a result of increased investment returns.
- Other operations expenses were inclusive of additional Operational
Efficiency Program savings of approximately $24.0 million in 2004,
and decreased when compared with 2003, principally due to:
(i) Reduced facilities, transit and termination costs, which decreased by $40.2 million due to lower rates for domestic, U.S. and international traffic termination, as well as migration to the IP network, partially offset by higher outbound traffic volumes;
(ii) A lower bad debt expense that decreased by $16.4 million as a result of stringent enforcement of credit policy, more effective collection practices and reduced loss exposure;
(iii) Increased capitalized labour of $15.4 million related to higher capital expenditure activity and more effective utilization of the workforce; and
(iv) The above-noted expense reductions were partially offset by expense increases associated with network support and maintenance costs with third parties, product and service cost of sales due to higher associated revenue, advertising and promotion costs associated with the premier corporate citizen campaign and additional sponsorship costs, higher contract and consulting costs primarily due to increased use of Accenture information technology resources, partly offset by in-sourcing of certain call centre operations. All other costs collectively increased in line with inflation.
Included in the total segment expenses discussed above are non-ILEC operations expenses of $582.9 million in 2004, as compared with $584.1 million in 2003. Non-ILEC operations expense decreased primarily due to lower costs of sales associated with lower equipment sales, migration of domestic traffic to TELUS’ IP-based network and a lower bad debt expense, partly offset by increased expenses from the acquisition of ADCOM, increased salaries and benefits, and increased wholesale transit and termination costs for higher outbound international and U.S. traffic volumes.
Restructuring and workforce reduction costs - Communications segment
Restructuring costs in 2004 include the following activities in the Communications segment:
- In the first quarter of 2004, a departmental reorganization was initiated, primarily in the Communications segment information technology resources area, consolidating from 15 locations to two primary locations. This reorganization, which had an implementation cost in 2004 of approximately $12 million, is expected to enable greater efficiencies of scale and effectiveness of program delivery.
- In the third quarter of 2004, a departmental reorganization was initiated in the Communications segment with the merging of two customer-facing business units. The resulting integration and consolidation aimed to improve the Company’s competitiveness as well as its operating and capital productivity. This reorganization had an implementation cost in 2004 of approximately $24 million.
- In addition to the foregoing initiatives, the Company undertook additional activities in 2004 aimed at improving its operating and capital productivity and competitiveness. These additional activities had a cost in 2004 of approximately $16 million.
At December 31, 2004, no future costs remain to be recorded under the Operational Efficiency Program (2001 to 2003). Cumulative annual cost structure reductions in the Communications segment under the Operational Efficiency Program were approximately $538 million by December 31, 2004, or over 97% of the $550 million target set in mid-2002.
EBITDA and EBITDA margin – Communications segment
While Communications segment data revenue increased in 2004, when compared with 2003, EBITDA and EBITDA margin decreased due to higher restructuring charges, decreasing voice revenues and operations expense growth rates exceeding overall revenue growth rates. Non-ILEC EBITDA turned positive in the fourth quarter of 2004, while for the full year of 2004, non-ILEC EBITDA losses decreased by 22.6%.
Communications segment capital expenditures are discussed in Cash used by investing activities.