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Q4 2007 investor conference call - Q & A transcript
John Wheeler, vice-president, investor relationsDarren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
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John Wheeler: Thanks, very much, Bob. Just before I turn the call over to Sebastien to conduct the Q&A session, can I ask your cooperation for one question at a time please? Sebastien, please proceed.
Q5.Yes. Thank you. I have a line of questioning around your wireless data pricing. I know you've touched on it already. But I did want to ask if the sort of slow-down in wireless data growth in Q4 may have been attributed to your price plan for unlimited e-mail at $15 a month, and whether or not that may have caused some cannibalization? And231 then, also, just in terms of what your impact may be from the new unlimited usage, web access usage price plan at $30 a month, it's the lowest I've seen. I'm wondering what sort of impact that may have on CapEx and how you're kind of sort of following that, if you're seeing -- what sort of signs from early adoption you're seeing of that plan, and how you could control the CapEx side of the equation if that got out of control? (John Henderson - Scotia Capital Markets - Analyst)
Q1. Thank you. Can you discuss your intentions on GSM? Are you contemplating or investigating an overbuild strategy, and would that be a partial or full overbuild strategy? You have been really good in the past with giving us the pros and cons of these types of strategic decisions, and that would be very helpful in this case as well. Thanks(Peter MacDonald - GMP Securities - Analyst)
Darren Entwistle: I think, Peter, speculating on technology evolution in an open forum is not necessarily the best thing to do for our shareholders. Clearly, it is always incumbent upon us, whether it's our wireless business or wireline, to stay abreast of the developing ecosystems from a technology perspective in the telecoms world
I think it's important to note that insofar as TELUS is concerned, whether you're talking about our wireless business or wireline, technology upgrades have been a way of life for us. If you think about what's going on now with our broadband access network and the iterations we're experiencing in terms of upgrading our access technology, I think that's reflective of the type of continuous change that you can expect from a technology perspective, and wireless has been no different.
When I arrived here eight years ago, the network in the West was effectively analog. We've gone from analog to digital, digital to 1x, 1x to EVDO, EVDO to EVDO Rev A. So it's been a continuous stream of technology upgrades for us, and I think it's something that as an organization we do very well from an execution perspective.
I think it's also important to point out that at the end of the day, we have on our eye on the economics, and insofar as making an technology upgrade is concerned, it's based on a business case. And effectively, if I distilled the business case down to two bookends in terms of, let's say, doing the right thing for shareholders, you don't want to be in a situation where you prematurely move towards a new technology not having sweated the existing assets sufficiently and not having generated the ROI on the previous technology stage that you use shareholder money to invest it in, in the first place.
Likewise, on the other hand, if you wait too long, you can become uncompetitive, and, of course, that has an economic result on the organization as well. So really, at the end of the day, it is all about timing and getting the timing right and making the right business case decision.
For us right now, I think people forget, we've made an investment in both EVDO and recently a very cost-efficient upgrade to Rev. A which we are truly operationalizing this year in 2008 with handset availability really coming online. And, of course, we've enjoyed that capability previously with the Sierra Wireless AirCard on the mobile computing front.
But I think it's incumbent upon us right now to say we have technology leadership from a bandwidth perspective within the wireless world that's good for consumer data applications and good for business data applications. And we need to sweat the heck out of this technology stage to get the ROI that we want on the EVDO and EVDO Rev A investment in the first place.
And it's interesting to note that right now, if you compare us to alternative technologies in Canada, we do have a leadership position. From a speed perspective, we have the fastest network both on the downlink and on the uplink paths, and we should be exploiting that.
I guess the final thing to say is beyond that, when we think about a technology evolution within the business case format, we want to think about where are the ecosystems developing within this new technology that we're considering. What's it going to give us in terms of things like access to handsets, economies of scale, so on and so forth.
Those are the key drivers. And it's interesting to note that frequently when you're considering a technology upgrade, the costs of that upgrade are non-recurring. You experience them once to drive the new technology through implementation. But the benefits associated with that new technology coming to fruition are recurring; and of course, that always delivers a strong economic result when your costs are up front but the benefits are in perpetuity.
Q2. Yes. Thank you very much. I was glad you were talking about the Rev A there, because my question is on wireless data. I see you've had quite a deceleration in the growth in data ARPU, it was up 69% in the first quarter. In the fourth quarter here, we see it up only 29%, but it seems like you're taking steps to try to reverse that trend and how growth reaccelerates, spending a lot of money on retention to get new smart phones into customers' hands. So I'm wondering if you could flush that out a little bit more? Do you expect the data ARPU growth to actually reaccelerate, and as part of that answer, do you mind sharing with us some detail on the mix of your customers, all these gross adds you had in the fourth quarter? Can you give us what percentage of those might have been on smart phones? (Vince Valentini - TD Newcrest - Analyst )
Bob McFarlane: Okay, Vince. First thing, I think first point to make is that our wireless data service growth year-over-year fourth quarter was 43%. That would compare to the number that you previously mentioned. So in that light, I think it's good growth. It's not as high, perhaps, as it could be.
But you've touched on something that I think is quite positive for the future, and that is the significant conversion of -- as I referenced in my comments, voice-centric type of traditional phones for more smart phone devices, the likes of PDAs, et cetera, and that certainly has been an emerging trend in 2007, particularly the back half of 2007.
And so essentially, you're getting part of your existing base as well as new subscribers increasingly adopting devices out of their desire to use data where they may not have used data previously. So I think that's a positive trend for the future.
In terms of the base, one metric that might be helpful is that a little under 20% of our existing base would be comprised of handsets that are EVDO capable.
So that gives you an idea, as we have upgraded the network on EVDO going back two and a half to three years ago, and doing it over the past three years and, in fact, now into Rev. A less than 20% of the base has EVDO handsets, so consequently, as that's building up, I think there's a build in positive dynamic for future data growth, which is clearly the emerging trend in the marketplace. So that bodes well, as well.
Q3. Thanks, good morning, guys. The question goes to Darren. It's really another strategic-type question. We know from TELUS' interest in Bell last year that you thought there were certainly scale benefits, scale and scope benefits for doing a deal in Canada. I wonder if you might just comment on, looking at the landscape besides Bell, are there scale or scope benefits for further consolidation in the telco market? I'm not just thinking of TELUS, but overall. I mean, is it your view that the maturity pressures in the business have changed in the last two years enough that -- we are in a situation in Canada now that consolidation should occur and probably will occur in the next two or three years? (Peter MacDonald - GMP Securities - Analyst)
Darren Entwistle: Thanks for the question, Greg. Clearly the machinations that we went through in the summer with BCE were predicated on a strategy where we felt that economies of scale are important, and when you make the type of investments that we make from a CapEx and an OpEx perspective, the extent to which you can better leverage economies of scale, that's always a positive thing within our industry.
Effectively, size does matter when you have the type of initiatives that we have from a magnitude perspective, the investments that are required, the execution and the complexity, scale both from a return on investment perspective and from a diversification perspective as it relates to the way that you manage your portfolio and all the complexities therein is something that would be a strategy that I would subscribe to.
The second comment would be scale opportunities have to be quality scale opportunities. And I think it would be fair to say that in the absence of BCE the number of quality scale realization opportunities within the Canadian landscape is significantly scarce, if not none altogether. And so pursuing scale only makes good sense, if it's a quality combination you're pursuing and you're confident you can deliver the operational execution.
And I just, outside of the BCE envelope, don't see opportunities of that ilk within the Canadian landscape. What we do think makes good sense is looking at opportunistic acquisition pursuits that would allow us to fill capability gaps insofar as key components of our strategy are concerned. Clearly, you have seen with the number of landmark wins that we have been securing within the enterprise and public sector market that that's an area of our business that is doing exceedingly well for TELUS.
And one of the reasons that it's doing well is that we haven't taken a broad-based focus. We have been very segmented in our approach to the market rather than broad-based, and insofar as the business market is concerned, we have looked to focus on key verticals, the verticals that I referenced in my opening remarks today.
Again, those verticals are key, whether they're financial services, whether they're oil and energy, public sector in general or health care in particular. We are doing very well, and we're winning business in that regard. And if there's an opportunistic move for us to make on the acquisition front whereby we think the economics are good, whereby it fills an important strategic capability gap that we think we can execute against and that we can deliver the operational integration of that acquisition opportunity, we'll give it due consideration.
But again, I'll make the same comment that I made previously in referring to economies of scale, it's got to be a quality opportunity. And even insofar as vertical markets are concerned, the number of quality opportunities from an acquisition perspective, they really are few and far between within the Canadian landscape, which is an interesting thing, because then that takes you all the way back to organic execution.
And I'll make the comment that I've made at several of these calls over the last three years. TELUS does not need to do an acquisition to see its strategy through to fruition in full. As a result of the strategy that we've had in place over the last eight years, we are in a very strong position. We've got an excellent platform to continue to deliver good organic operational execution, and that is all that is required to see our strategy through to fruition, which means that any acquisition opportunity gets judged purely as something that's opportunistic. It's a nice-to-have opportunity rather than a need-to-have opportunity. I think that always makes us a little bit more sanguine when it comes back to the economics of any deal.
Q4. Thank you very much. When you look at the lower COA from yourself and Bell, can you say what are the key drivers? Are they the efficiencies or discipline by the providers, or would it also reflect on a lower net present value per new or marginal subscriber? (Rob Goff - Haywood Securities Inc. - Analyst)
Bob McFarlane: Rob, in terms of the COA, really there's a couple of dynamics there. Sometimes you can have lower COA expenses because your gross adds went down. Our gross adds actually went to a record level in Q4, and our COA expenses were down. So, obviously, it's not just a volume driver. Measured as COA per gross add, which sort of normalizes for that consideration, again, as you reference, it went down significantly.
Our absolute dollar advertising promotion expenses were down year-over-year, fourth quarter-to-fourth quarter, and so that would be a primary reason. And so when you get good gross adds on a lower A and P spend, then you're getting an efficiency gain, if you will, on that side of it.
In terms of the subsidy and commission side, I think that contrary to erroneous speculation, we were prudent in the fourth quarter, and so that's reflected in that COA number. And then, lastly, because of the mix -- and this would be a minor factor. Because of the mix of prepaid to post-paid, you tend to have lower subsidy and commissions as it relates to prepaid adds than post-paid, because we gear our cost structure to the respective ARPU profile of our additions.
So that's really the dynamic that occurred in the fourth quarter. At the end of the day, the only way to really summarize it is we had improved efficiency on the COA. And so when you think back to -- I can recall -- I think it was around the first quarter of the year, and people were saying, "Gee whiz, your COA is way up, and so on and so forth." Funny enough for the full year, our COA [per gross add] is actually down, and yet our gross adds are significantly up year-over-year.
And our net adds are down a bit, but they're very consistent with what they were the prior year. So all in all, I think a good going in terms of the efficiency side. On the contrary view would be maybe we should have spent more and done a little more demand stimulization. I won't get into that debate publicly, but clearly in terms of the effectiveness of what we did spend, it was efficient.
Q5. Yes. Thank you. I have a line of questioning around your wireless data pricing. I know you've touched on it already. But I did want to ask if the sort of slow-down in wireless data growth in Q4 may have been attributed to your price plan for unlimited e-mail at $15 a month, and whether or not that may have caused some cannibalization? And231 then, also, just in terms of what your impact may be from the new unlimited usage, web access usage price plan at $30 a month, it's the lowest I've seen. I'm wondering what sort of impact that may have on CapEx and how you're kind of sort of following that, if you're seeing -- what sort of signs from early adoption you're seeing of that plan, and how you could control the CapEx side of the equation if that got out of control? (John Henderson - Scotia Capital Markets - Analyst)
Bob McFarlane: Okay, John. In terms of the wireless data pricing, firstly, I would say that the type of consumer centric plans that were introduced by the industry in the latter part of the fourth quarter, I think, did some demand stimulus in terms of consumer wireless data, but would not have had a material impact in terms of cannibalization, I think you referred to it as, as the base.
So I don't think that would have been a material dynamic there. Really what you've got is a classic demand stimulus going on in the consumer segment, which wasn't a big focus of wireless data growth in the prior two years, which was largely business or oriented, if you think of PDAs and the like.
So that -- on a go forward basis, I think there is quite an opportunity for growth in the consumer segment from both the advent of more segmented pricing plans, but in addition to that, devices, such as the BlackBerry Pearl, which are geared more to a consumer Soho type of market and are doing very well in the marketplace.
Q6. Thanks very much. My question is for Darren. It's on long-term capital intensity in wireline. You've talked a lot about the reasons why wireline CapEx is going to be high this year and next year. But I wonder if you could just give us a general sense of where you think CapEx to sales in the wireline segment should stabilize in the long run after a couple years out? Thanks. (Glen Campbell - Merrill Lynch - Analyst)
Darren Entwistle: Glen, you're really seriously asking me to project three to five year CapEx intensity ratios for the wireline business? That's not something, obviously, that I'm prepared to do.
One of the things that we have said previously is that we believe, given the margins that we have invested within our wireline business, that it's the right thing to make the necessary upgrades in our access network from a bandwidth perspective so that we can do two pretty important things. Number one, work hard to preserve the margins that are associated with the heritage services, predominantly on the voice side of our business, and clearly, there are good margins that we generate from that segment of our business.
Then number two, establish a new wireline access network platform for advanced data services, whether there Internet-related, security-related or TV-related. And it's without a doubt a heavy lift for our organization, which is why you see CapEx intensity at circa 25% as we undertake these investments, and they are multi-year investments. There is no escaping that reality.
So we can either abandon that business, or we can invest in that business both from a protection point of view, and also from a forward-looking new services point of view, and build a platform for the longer term that I think will deliver in the fullness of time, an economic return for shareholders. And essentially for us that is the road that we're going down, and as I say, the magnitude of the investment is significant.
We've previously announced the $600 million that we're spending over the course of '07, '08 and '09 in upgrading our broadband network, and we think that that is a prudent thing to do. So the sums are material, and the program is multi-year in its orientation because elevating your bandwidth and your access network significantly, making the move from ADSL 2+ to VDSL2 to fiber into new neighborhoods, fiber to condos in terms of multiple dwelling units, fiber eventually in the fullness of time to legacy neighborhoods in terms of the technology retrofit.
These things all take time, and they all cost money, but we think it's the right thing to do to protect the margins that we enjoy today, and establish a platform for future growth. The other thing that I think people do forget about sometimes is that the business of TELUS from a mathematics perspective, if nothing else, is fundamentally changing.
So as we move from being a Company that was predominantly wireline with wireless as the growing segment, to a Company that's effectively half wireline and half wireless, to a Company that in the future will be predominantly wireless in terms of the asset mix, where our revenues and profits are derived from, and as well as where cash flow is derived from. And of course, the intensity from a CapEx perspective that we have traditionally experienced on the wireless side does reflect the more attractive near-term economics of that element of our industry.
And so when you look at our CapEx intensity on a consolidated basis, the weight of wireless will have a greater impact in the years ahead as it becomes a greater proportion of our financial mix and of our asset mix.
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
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