annual report 2004

management's discussion & analysis

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management's discussion & analysis
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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.

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.

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:

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.