events archive
events archive
Q1 2004 investor conference call - Q & A transcript
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Q1.(a)I have one question for George. And I was wondering, George, if you could confirm whether in B.C. where you've seen more competition than in other markets, whether top-line service revenue growth is still in double digits? (Glen Campbell, Merrill Lynch)
George Cope: Yes. Hi, Glen. We don't segment out our results and therefore won't directly, I guess, answer your question. I will say that, you know, all of our competitive strategies appear to have been working. Our churn is down across the country. Bob indicated our overall churn in the quarter roughly flat with last year, but it is worth noting that our post-paid churn was down from 1.33 to 1.17 and frankly, that's even continued into April where for the first time ever our post-paid churn was under 1%, so we think our strategies in the competitive arena are working well.
Q1.(b) All right. Maybe just one follow-up on wireless. With the change in foreign exchange rates, could you remind us of whether your handset purchases are priced in Canadian or U.S. and whether you expect any impact there? (Glen Campbell, Merrill Lynch)
George Cope: Yes. Actually, Glen, we buy literally all of our handsets in U.S. dollars and so, you know, we were helped last year by the dollar strengthening. It's obviously been somewhat flatter, a little weaker this year. It's been small enough that it really isn't materially flowing through to us in our results but clearly if the dollar moves, you know, somewhat weaker than it is even now, that does have some impact on us. But it doesn't cause us to change guidance.
Robert McFarlane: George, I would add that in addition -- and also note that in our notes to our financial statement, we disclose that we did enter into hedging contracts with respect to $50 million of purchases related in the Mobility segment and, of course, those would be handsets.
Q2.(a) Thanks very much. Bob, can you talk about the impact of some of the new contract wins in the non-ILEC business? Have you seen any revenue recognized yet from the TD contract or any of the others you've announced? And also, have you seen any material increase in costs as you build up for those contracts? (Vince Valentini, TD Newcrest)
Darren Entwistle: Vince, hi, it's Darren. I'll answer that question. I think it's fair to say that when we embark upon pursuing a large deal of the nature of TD or The Co-Operators, there's quite a significant sales cycle. Perhaps to just put this into perspective for you, when we - if you go back to the time when we embarked upon discussions with the TD for the solution that we eventually provided them, to the point in the future where we'll be at a full run rate in terms of billing, it will be a period of four years. That will be the delta between initiating discussions and actually being up to a full billing run rate.
If you look at the TD deal, it's $160-million deal over seven years. The full run rate for billing cycle in year would be $24 million. We are actually only going to bill this year $8 million, and in the 1st Quarter results there was only $250,000 appertaining to TD in the non-ILEC revenue number. It would also be fair to say that the first year of many of these deals, they are EBITDA dilutive because of the up-front investment in both opex and capex required to implement the solution.
Similarly, in respect of Co-Operators, that's a six-year $66-million deal. We'll be able to recognize that revenue a little bit earlier potentially because we will be acting as an agent for the customer and inserting ourselves to manage the network which is formerly provided by the incumbent and then, of course, we'll seek to displace them over the time as they migrate the sites away from the incumbent over to the TELUS organization. But I think TD is an excellent example, when you look at a full run rate of $24 million and think that we'll only actually bill $8 million this year and there's only $250,000 in Q1. I think it's a good example of the time it takes to get up to the full run rate on billing and fully recognize the revenue. Meanwhile, you're fully recognizing the costs.
Q2.(b) And just to follow up, you can't share with us what the Q1 impact would have been on your EBITDA from that start-up? (Vince Valentini, TD Newcrest)
Darren Entwistle: I think getting down to a level where we're giving you EBITDA information on a per-contract basis is a level of granularity that would not be appropriate, and it's also the type of information that our competitors would like to know, so I think I'll just draw the line there, Vince.
Q3.(a) Hi, guys. Thanks for taking the question. I was wondering if you could give us a little bit more colour into what is driving the weak operating environment on the Communications side. It looks like long distance was especially weak, so if you can give us a little more colour, (1) in what's driving it, and (2) what is your outlook for that business? It seems like it has been continuing to deteriorate and, of course, with VOIP on the horizon, the outlook doesn't look that great, so I was just wondering if you could give a little bit more colour there. Thanks. (Robert Barry, Goldman Sachs)
Darren Entwistle: Okay, Robert, I'd say there are several factors that, of course, are impacting the performance within the Communications business. I'll focus essentially on the ILEC, but also make a couple of comments appertaining to the non-ILEC business. Obviously, you've hit the nail on the head on the long distance front. Clearly that's a major factor for us. What we are seeing, of course, is substitution, substitution in the form of people using e-mail rather than long distance voice services, or substitution from a fixed wireless substitution perspective, or even second line substitution for high-speed internet access. All of those things are having an impact on long distance.
I think it would be fair to say that the silver lining for us, if we focus or drill in on fixed wireless substitution, is that it's actually a net positive for us on a national basis. It's a net negative for us in Alberta and in B.C. We mitigate that to a certain extent as a result of our strong Mobility position in those two provinces, but when you expand it nationally to net positive because, of course, we have no consumer wireline business to cannibalize in Ontario and Quebec so to the extent to which that migration transpires, it's a positive for the organization.
And I think that, you know, relates to another point that I think is worth making. It speaks to the efficacy of having a national wireless business in the first place. The fact that we've made such an investment in wireless over the last four years and it now accounts for one-third of our revenue composite, I think it puts us in a position to expose the organization to significant wireless growth in terms of revenue EBITDA and cash flow, which helps mitigate some of the softness that's transpiring on the wireline side of the business. Of course, other impacts that we're seeing are from competitive intrusion from the likes of Bell West; we have a highly competitive environment with Shaw; and of course, the advent of voice over IP disruptive technology providers like Primus and Vonage is also putting pressure on the wireline side of our business.
On the non-ILEC side, which was a disappointment for us in the 1st Quarter, we have been very purposeful in trying to de-emphasize non-recurring revenues coming from outright sales. It has been a big part of our business as a result of the Williams acquisition that we effected back in May of 2001 which was essentially an outright sales CPE business. We've been seeking to drive a migration from non-recurring to recurring revenue streams, emphasizing managed data solutions and the like.
The other thing, of course, has been the focus on the larger deals which have a longer lead time to realization, so we're not reflecting a lot of the revenue that will eventually accrue to us if we continue to be successful in securing deals of the nature of the TD and The Co-Operators. In terms of what we're doing about it, Robert, there are a number of initiatives that we have underway, and we have a slate of products that will be launched over the next 12 months within the consumer area of our business that I think are very compelling and hopefully they'll have a lot of resonance in the marketplace. Essentially what we're going to try and do is put together a very strong bundle that will contain voice services for consumers, data services for consumers and application services for consumers, and use that bundle to try and protect our long distance business and mitigate, to a certain extent, the erosion.
What else are we doing? Well, I think our pursuit of large national deals is the right way to go forward and the extent to which we remain disciplined in our focus on data, when we implement those national data WAN solutions, that infrastructure is ready to carry voice in the future. So that will be the next step that we take in relationships like TD to say okay, we've now deployed the next-generation network in support of that solution, now let's go after the voice business, which is another significant growth opportunity for us.
Other things that we're looking to do to mitigate the impact on the wireline side of the business is obviously to continue to take costs out of that operation. That's the focus for our IP roadmap and, of course, as I have said repeatedly, we want to use IP and next-generation network technology to enjoy economies of scale within our network operations to collapse disparate voice, data and video networks down to a single infrastructure and enjoy the cost savings as a result.
And finally, I think what we're really trying to do is to say okay, here's the equation - and this really does reflect the concept for how we manage the business. What we want to say to ourselves is that we have negative impacts on the wireline side that are related to a harsh regulatory environment, negative impacts related to competitive intrusion, negative impacts as a result of new technology that is being deployed, negative impacts from sociological considerations like fixed wireless substitutions. We want to mitigate all of those things with the positives that I've just articulated and if we can make a zero sum gain at worst, then we fully expose the organization at a consolidated level with a significant upside performance that we're enjoying in our wireless business. And that's really what we're trying to achieve.
Q3.(b) Great. Thank you. Just a quick follow-up. I noticed in the mention of the bundle there was no mention of video. Care to comment on that? Is that a possibility at some point going forward? I know you've talked about TELUS TV, et cetera. (Robert Barry, Goldman Sachs)
Darren Entwistle: Actually, I did mention it, but it was generic. That was within the applications component. I talked about voice, data and applications solutions for consumers and by applications, that could very well mean in the future video. I think I've talked quite frequently as to the conditions upon which we would launch that particular service, so I won't bore you with that information again, but I mentioned applications that could indeed include video.
Q4.(a) Yes. Thanks very much. My question is to do with the enterprise market. I wondered if you could comment on what you're seeing in terms of the funnel of new business coming in. Obviously, some recent announcements, but just looking out further, given that there is a long cycle time, if you could add any comments on the business that you're seeing out there. And to a certain extent, you've had to incur a capex and opex up-front to extend the reach of the non-ILEC network. Would you have any metrics, either in terms of rollout facilities or buildings that are being connected that would indicate, I guess, the increased reach of your opportunity and would point some guidance, I guess, in terms of the marketing that we should start to see coming in in future quarters? (Richard Talbot, RBC Capital Markets)
Darren Entwistle: I think, Richard, one thing that you could do is take my AGM presentation from last year, which talks about building national capabilities and take it from this year and you'll see a delta on a number of areas in terms of the fibre transport capacity going from 10,000 kilometres to 13,600 kilometres this year. You'll be able to see deltas in terms of the customer POPs which are now at 223. You'll see some deltas, as well, on the Co-lo front, so if you just juxtapose the two AGM presentations and look at the delta, you'll see the investment that we've been making, which of course would increase the addressable market for us.
The other thing that I think is probably worth pointing out for you, Richard, is that the Co-lo as a measure of coverage is not as relevant now as what it was before as a result of the CDNA ruling. The most profound impact over the last 12 months in terms of increasing our addressable market has been the CDNA ruling by the CRTC. Perhaps to give you another little bit of flavour, if you look at our capex in Q1-03 versus capex Q1-04 for the non-ILEC business, it's more than doubled, and that capex, I think, reflects the implementation of some of the large national deals that we've secured. To talk explicitly in terms of how the pipeline is going, I would say the pipeline is healthy. I think you'll see us announce going forward other deals of the ilk of The Co-Operators. It's really important for me to convey this point. We will be extremely patient with our non-ILEC business. This is a business that I have never had more confidence in, because I believe the quality of the business that we are securing is improving appreciably. The network is performing very well for us in Ontario and Quebec and we really have raised the bar in terms of the quality of the leadership team within the Province of Ontario in particular, and I think that will drive a lot of high performance going forward.
And the thing that is important for people to take away in respect of our patience is that we are not going to come off strategy. If we wanted to, we could pump the revenue by selling LD voice into a lot of customers in Ontario. That is not the type of reputation that we want to build in Ontario, and I think that is not a viable long-term strategy. What we are going to do is remain focused on data. We want to build a reputation for excellence in providing managed data network solutions and applications, and we want to sell voice as a data application. The extent to which we can take our NGN and add ADSL as an access mechanism to it or IP-One as an access mechanism to it and provide that managed data network solution, then that's the platform, once established, that we can use to go after the voice business in that account, and we would have huge economies of scope advantages over other players because we've already deployed the infrastructure in support of the data solution. But that next-generation infrastructure is capable of supporting voice, as well. And that's a strategy for this organization and there's a significant legacy voice and data network services base out there for us to displace with our technology leadership on NGN.
Q4.(b) If I could just follow up, Darren. On the capex, as you pointed out, it has doubled versus last year. I wondered if you could comment on how the percentage of success-based capex has changed over those two time frames. (Richard Talbot, RBC Capital Markets)
Darren Entwistle: Well, I think I kind of intimated the point to you that the deals that we are securing require obviously not just opex, but capex to implement. Of course, that is variable in nature, continuant upon securing those deals, so I think I'll draw the line there for you, Richard, okay, and we've given guidance in that regard.
Q5.(a) Thanks very much. Maybe look on the brighter side for a moment. If I take the midpoint of your revised guidance, your dividend payout ratio is down to 50% and I would think based on '05 consensus, well below that level. So my question is at what point do you become sufficiently comfortable in your free cash flow profile that you consider raising that dividend? (John Grandy, Orion Securities)
Robert McFarlane: Right. Thanks, John. It's Bob McFarlane here. In regards to the dividend, I think whether you look at it on a pay-out basis or on a free cash flow basis where, given we're going to be generating over a billion dollars of free cash flow, clearly we've got a healthy and improving financial picture. We, consistent with our strategy, have been applying that surplus cash flow to de-lever the balance sheet in accordance with our financial targets, and to that end, we have established the public long-term debt to EBITDA ratio of 2.2 and a long-term debt to total capitalization of 45-50% and, of course, we've had, as you know, the interim de-leveraging targets which we've been hitting or exceeding along the way. So clearly, we're coming closer to a point wherein we can both satisfy the de-leveraging targets and have flexibility to consider other opportunities such as a dividend increase. But I think suffice to say that we want to continue on and meet the targets this year and then it will be the board's decision as they review on a quarterly basis as to when or if, if and when it's appropriate to increase the dividend. But obviously, I would concur with you, we have increased flexibility in that regard.
Q5.(b) So a decision could come at any quarter. It's not an annual decision. (John Grandy, Orion Securities)
Darren Entwistle: No. The decision is made by the board. It's the purview of the board and it's made on a quarterly basis, John.
I think from a policy perspective, as well, for the people on the phone it's important to point out the extent to which we have met our credit objectives and we have exhausted core business development opportunities and we have surplus cash, we will not go off strategy. We will return that cash to shareholders in the most tax-efficient mechanisms possible.
John Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
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