management's discussion & analysis
management's discussion & analysis
5. results from operations
5.5 mobility segment results
Operating revenues – Mobility segment
Key operating indicators – Mobility segment
TELUS Mobility Network revenue is generated from monthly billings for access fees, incremental airtime charges, prepaid time consumed or expired, wireless Internet services and fees for value-added services. Network revenue increased by 19.1% in 2004, when compared with 2003. This growth was a result of the continued expansion of the subscriber base by 15.0% in 2004 to approximately 3.9 million subscribers, combined with increased ARPU. As a result of an increase in average minutes of use per subscriber per month, an increase in roaming revenue, continued pricing discipline, and increased usage of data and Internet based products, including picture and text messaging, ARPU increased to $60 per month, $3 higher than in 2003.
Average minutes of use per subscriber per month increased by 9.7% in 2004. At December 31, 2004, postpaid subscribers represented 82.3% of the total cumulative subscriber base remaining stable from one year earlier, contributing to the ARPU premium TELUS Mobility enjoys over its competitors. Postpaid subscriber net additions of 428,500 in 2004 represented 83.6% of total net additions, as compared with 74.5% for the same period in 2003, driven by six consecutive quarters of year-over-year positive net postpaid subscriber growth. Subscriber net additions of 512,400 in 2004 set a new record for TELUS Mobility.
Blended postpaid and prepaid churn improved in 2004. Deactivations were 608,300 in 2004, as compared with 556,100 in 2003. These churn and deactivation results reflect a continued focus on client care including loyalty and retention efforts, value-added solutions and superior network quality providing the growing subscriber base with an exceptional service experience. Combined with the higher ARPU and improved churn, the lifetime revenue per subscriber increased in 2004 when compared with 2003.
- Equipment sales, rental and service revenue increased in 2004, when compared to 2003. Handset revenue increased mainly due to subscriber growth from a stronger wireless market, increased promotional, retention and contracting activity, and to a lesser extent, a shift in product mix to higher priced handsets. Gross subscriber additions grew to 1,120,700 for the full year of 2004, as compared to 987,200 in 2003. Handset revenues associated with gross subscriber activations are netted against costs in the calculation of COA per gross subscriber addition.
- Intersegment revenues represent services provided by the Mobility segment to the Communications segment and are eliminated upon consolidation along with the associated expense in TELUS Communications.
Operations expense – Mobility segment
TELUS Mobility has been able to achieve significant economies of scale as evidenced by the 8.4% increase in total operations expense compared to Network revenue growth of 19.1% and subscriber growth of 15.0%.
- Expenses related to equipment sales increased in 2004 when compared with 2003, principally due to an increase in gross subscriber activations, more expensive handset costs and higher retention activity, partly offset by favourable foreign exchange rates. TELUS Mobility did hedge its foreign exchange rates for a certain proportion of its handset purchases. The increase in handset volume related in part to fourth quarter marketing promotions including a new high-resolution camera phone and other video phones. Handset costs associated with gross subscriber activations are included in the calculation of COA per gross subscriber addition.
- Network operating expenses consist of site-related expenses, transmission costs, spectrum licence fees, contribution revenue taxes, and other direct costs related to network operations. Transmission and site-related expenses increased to support the greater number of cell sites, a larger subscriber base, and improved network quality and coverage. Industry Canada spectrum licence fees were higher in 2004 principally due to a $6.4 million credit received during 2003, as part of a retroactive filing with Industry Canada for years prior to 2003. Network costs, once normalized for these events, increased by 6.3% over 2003. Further, network roaming costs increased by $15.2 million in 2004, as compared to 2003, largely due to higher volumes as well as successful marketing efforts in non-urban roaming/resale areas. TELUS Mobility believes this variable cost increase is reflective of the overall positive industry trend of subscriber growth and increased subscriber usage evidenced in the ongoing strength of Network revenue growth. Finally, in an effort to contain Network costs, TELUS Mobility negotiated improved roaming rates and continued to build out microwave facilities aimed at reducing future leased line transmission costs. The digital population coverage grew to 30 million at December 31, 2004, as a result of continued activation of digital roaming regions and network expansion.
- Marketing expenses increased primarily due to higher dealer compensation costs and advertising expenses associated with the expanded subscriber base and increased re-contracting activity. Despite the higher marketing expenses and significant subscriber growth, COA per gross subscriber addition improved by 9.5% to $389 in 2004, as compared with 2003.
- General and administration expenses consist of employee compensation and benefits, facilities, client services, bad debt and various other expenses. General and administration expenses increased by only 4.6% in 2004. TELUS Mobility increased full-time equivalent employees to support the significant growth in the subscriber base and continued expansion of the client care team and Company-owned retail stores, partly offset by a lower bad debt expense due to reduced loss experience.
EBITDA and EBITDA margin – Mobility segment
Significant growth in TELUS Mobility EBITDA and EBITDA margin was attributed to its strategic focus on profitable subscriber growth. This was accomplished by achieving increased ARPU, a lower COA per gross subscriber addition, maintenance of a world-class churn rate, and successful cost containment efforts during the year, which offset the near-term dilutive impact of generating record subscriber net additions. The EBITDA margin, when calculated as a percentage of Network revenue, improved to 43.9% in 2004 as compared with 37.3% in 2003, representing a significant increase of 6.6 percentage points. Incremental Network revenue flowed through to EBITDA at a rate of 78.5% in 2004, as compared to 84.8% in 2003.
Mobility segment capital expenditures are discussed in Cash used by investing activities