events archive
events archive
Q1 2005 investor conference call - Q & A transcript
Q1. A question is on the wireline side, margins relative to guidance. And I'll ask a clarification first. Bob, you talked about the $9 million in restructuring costs you saw go through the PNL; I'm assuming the PNL in the first quarter and then the $91 million for the rest of the year. First, is that full expense? Or does that include cash costs? (Greg MacDonald, National Bank Financial)
Bob McFarlane: You're correct. In terms of first quarter, $9 million flowed through the PNL as an expense. And therefore, let's ballpark the 91 because we have a $100 million budget for the year. So we expect the additional $91 million to be spread out for the balance year going through the income statement as a GAAP expense. And given the ramp-up phase from a -- while I don't have precise modeling guidance, clearly you should be modeling that as a ramp-up rather than dividing by 3 for the remaining 3 quarters.
In terms of the cash portion, I forget the note number, but there is a note to our financial statements. Maybe my colleagues can just remind me of that number. And in there, we outlined what we reconciled the restructuring expense and pointed out it is note number 4 to the consolidated statements. And in that note, it reconciles the accounting expense to the cash outflow. And you will note in there, there is some interesting disclosure because some of the columns break out -- well, what were the outlays that related to programs initiated prior to 2005, as compared to outlays that are in year. And so you can kind of see what is the break out therefore of the cash related to charges taken in prior periods, as opposed to the charges taken at current period, as well as what is the liability for restructuring -- i.e., the accrued payments that are yet to be made. So there's a real comprehensive disclosure of that, and I would point or encourage you to read through that note number 4.
Greg MacDonald: I will. Thanks very much Bob for that. Now, this is obviously the major difference between what you put up in the first quarter with respect to EBITDA growth on the communication side and where the guidance lies. So, obviously, I'm going toward '06 here. I'm wondering if you might give us just an idea of -- number one, a description, a general description, of what the 90 -- or let's say the $100 million for full year is focused on? Is it labor? Is it sort of moving away from labor toward other? And if you can give us a sense of whether any movement on the employee base that is baked into that number is contingent on a new labor agreement, that would be helpful. Thanks.
Bob McFarlane: Well, Darren has mandated to me with responsibility for competitive efficiency program, which is the project name for this. I didn't see in my score card objective any contingency for a labor settlement to achieve this. So the short answer is no; it is not contingent on that. Examples would be for example a program that we commenced in the latter part of last year but is flowing through to this year, which is the combination of our business and client solutions business units. So obviously, there is duplication and overlap. And through the combination, we are streamlining those operations. So that would be an example.
Other examples relate to consolidation of physical locations and other IT consolidation, where we essentially had over a dozen physical locations with IT employees, which did not lend itself very well to effective and efficient project management. And so, we are in the process of consolidating those two primary campus locations. And so therefore, you have a combination of costs -- those from lease terminations to moving costs to deploying some new systems to -- some personnel are traveling or relocating; other personnel are choosing not to relocate. So there is a broad combination of these costs.
I do want to point out though that there is no major change in our guidance as it relates to the restructuring. We have consistently said 2005 would have $100 million. I was asked last quarter whether we had already moved and embarked on improved projects totaling $100 million. I answered by saying no. In fact, we had very few projects approved at that point. And we were really through the -- in the assessment phase and anticipated these initiatives to ramp up over the course of the year. And therefore, the $100 million would be back-ended through the course of the year.
Q2. My question is for Darren on the non-ILEC business. Darren, I wondered if you could characterize for us what you are seeing in terms of the pipeline of new non-ILEC inquiries, RFPs and the like. And if you could help us characterize what you are seeing in terms of the success rate and whether you think that the recent regulatory decisions are likely to impact the strategy one way or the other. Thank you.(Richard Talbot, Royal Bank of Canada)
Darren Entwistle: Thanks, Richard. I think the performance in Q1 for the non-ILEC is commendable. Clearly, when you post a result, where you achieve 24% revenue growth underpinned by 26% data growth on a normalized basis, and post your second positive earnings quarter in a row, you can be very pleased with that. And certainly, the data growth is underpinned with the implementation of some of the deals that we have articulated previously on the large corporate national deal front. And of course, those deals are very much in the orientation of data solutions. The pipeline for us on the non-ILEC front continues to be healthy.
As Bob indicated in his remarks, one of the dilutive factors of course that we have to anticipate over the remainder of the year that impact the EBITDA is that -- as we secure those large deals, in the near-term, as we implement those solutions, they are dilutive to EBITDA. On the regulatory front, certainly the CDNA or now CDNS decision is both favorable to TELUS Mobility and our non-ILEC operation. In Ontario and Qu¨¦bec lost its neutral because of the conservative and prudent accounting that we've undertaken in respect to the deferral of capital over the last several years. And of course, that is helping underpin the results. And you will recollect that one of the strategies of expanding nationally from the outset was that national expansion actually act as a regulatory hedge so that decisions that impacted us negatively in the ILEC would be fortuitous for us in Ontario and Qu¨¦bec. And of course, as well, the reverse is true.
So we are pleased with what we are achieving in terms of the pipeline or indeed the funnel for new deals, as they are coming to fruition. It doesn't matter much as to the AGM I talked about a couple of the new deals that we have brought forth. And now, we are now in the process of implementing, and then that is going to take place on a fairly regularized fashion going forward. But you can expect this particular management team to be conservative in the way that we drive the business forward.
We are not pursuing a non-ILEC operation to have great quarterly results over the next couple of quarters. We are building a business for the longer-term. So we are going to stick to the discipline of our strategy. We are not going to be price-focused in terms of what we drive forward into the marketplace but rather focus on certain select segments of the private sector and the public sector. We are going to continue to adhere to our focus on data in a very disciplined front. And in so far as data is concerned, not data CPE solutions but data-managed network solutions. And again, the focus is not just doing well on a quarterly basis but building a business for the longer-term based on a healthy pipeline that reflects the discipline of our strategic focus and our adherence towards strategy and its well pricing discipline.
Richard Talbot: Thanks. If I could just follow-up. In February, I asked Bob if there was any interest in CallNet in terms of increasing the depth of your national footprint. And he was fairly clear in his answer on that. But since that time, we've had a number of regulatory decisions. And I wonder if any of those would have changed your view?
Darren Entwistle: I think the only thing that the regulatory decision is changing is in respect of our capital expenditures that the footprint that we are driving forward with that was previously predicated upon a regulatory environment of infrastructure-based competition, now needs to be moderated to reflect the advantageous access terms within the CDNS agreement so that we can leverage the facilities of the incumbent operator in Ontario and Qu¨¦bec rather than deploy our own capital to build our infrastructure. And that has a positive economic impact on our business in Ontario and Qu¨¦bec. The previous view that Bob expressed in respective comment currently stands.
Richard Talbot: Thanks very much, and congratulations on the results.
Q3. I'm just looking at your consumer business in region on the wireline side. And we are seeing sort of contrasting trends on the long distance side, where revenue performance has been very strong and on DSL. So I wondered if you could talk a little bit about what the market trends are there. And if you could clarify whether the rate of revenue growth for long distance overall is fairly representative of what you're seeing in region. I am not asking you to break out exactly growth rate but just get a general sense of what the end regionality of revenue growth rate was. Thanks. (Glen Campbell, Merrill Lynch)
Darren Entwistle: Okay, Glen, let me try and tackle that question. Insofar as long distance is concerned, there are three particular parameters that are underpinning our results, both in an absolute sense and our results relative to our peers within the industry.
Firstly, in terms of our marketing and pricing philosophy on LD, we are exceedingly disciplined. This is an organization that does not believe in big bucket flat rate LD plans. We do not think that that is prudent. And it is particularly inappropriate if you're an incumbent because of the re-pricing effect on your base. So from our prospective, you can expect us to be very disciplined on LD pricing and to avoid big bucket, high-volume, flat rate LD plans that have a re-pricing impact on the base.
Number two, our bundling strategy is also differentiated from some of our peers within the North American telecommunications industry. When we construct a bundle and put forward a value proposition around that bundle, it is structured in a fashion to protect our high-margin services, such as long distance rather than expose them to competitive intrusion or margin erosion. So insofar as our integrated solutions or bundles are concerned, we put forth value proposition such that they protect the high-margin services and the base that we enjoy in that particular products area from a margin prospective rather than expose it.
Lastly from an LD perspective, given the reality that we face in terms of revenue and margin pressures, we have a philosophy at TELUS that if you can't fix it, let's feature it. So we have a very, very vibrant wholesale business that allows certain retail carriers to leverage our national and international carriage facilities from a long distance front, as they deliver long distance solutions into the marketplace. So that, we have a view that if you want to ameliorate some of the retail pressure on LD that you face in both the revenue and the margin front, one particular response is to have a very effective wholesale business and a cost structure that supports that wholesale business.
So those are three of the reasons, if you will, that underpin our results on the LD front. And again, I believe those to be reasons that are differentiated than from some of the marketing philosophies pursued by our peers.
Lastly on the ADSL front, that is an area of disappointment for us. As Bob has correctly indicated, that is one of the areas of the very strong results in Q1 that we are not particularly pleased with. And it is an interesting story in this area because we are posting some of our best customer retention results that we have ever experienced in terms of ADSL, but we are not satisfied with the net adds. And if you do the simple mathematics, you'll know that if we are experiencing good churn and we're not experiencing good net adds, then we've got a problem on the gross adds front. And that comes down to simply getting the right distribution strength in place, putting in place effective channels to market, to take DSL into Western Canadian customers' homes. And to do it in a fashion that is not predicated upon price. But in fact, as Bob has indicated today, what is leveraging our Future Friendly Home strategy on some of the advanced applications that are bringing to bear that leverage our ADSL infrastructure, our high-speed Internet infrastructure that we have put in place. So one of the areas that we've got to work on is improving our distribution strength to improve our gross adds, given that we're making good progress on the churn front.
And of course, as you are well aware from a market perspective, the market is maturing in Western Canada without a doubt. We have one of the highest penetration rates in the world of this region compared to other countries on an international level. So you know that is one of the factors as well that is impacting our distribution strength. But I think we can do a little bit better in that particular area, as we get more effective channels to market to deliver our ADSL solutions into households.
Q4. I know you went through this in pretty good detail on the call, but just the one time or normalized impacts on revenue and EBITDA in communications and in the national business -- will you just go through those? And probably the easiest way is to just to go back to slide 18. When I look at CDNS, I thought in the release that you sent out yesterday there is also a $6.4 million non-recurring benefit. Is that also in the local revenue?(Peter MacDonald, GMP Securities)
Bob McFarlane: Okay, so on slide 18, you see the disclosure there of the $18 million. I guess the first point of this slide was to let people understand that one of the impacts of the CDNS decision was -- I don't know if you would call it a distortion -- but certainly a transfer of revenue between two of our categories. So you see the deferral account benefit in the local revenue line, and the data line had the corresponding $18 million taken out of it. And then the irony or coincidence was that the acquisition impact was a similar number, so it didn't change our overall data growth rate.
Now, I think the second part of your question related to $6.5 million. Let's round that to $7 million related to the TELUS Qu¨¦bec Portable Subsidy. So that is not data revenue; that is a local revenue. And the $6.5 million relates to the non-recurring portion.
Peter MacDonald: Okay, and then so the $18 million would be the recurring portion that gets transferred between the local and the data going forward on a quarterly --?
Bob McFarlane: Well, I think there are two different things here. Yes, the $18 million is related to CDNS. The rounded $7 million is related to the TELUS Qu¨¦bec Portable Subsidy decision. So the point here is to the extent that we have discounts that we are obligated to provide on our facilities, we are recovering a similar amount through the deferral account. And therefore, there is not a negative impact on our incumbent operations.
The other side, I think we've already referenced is that from a -- Darren referenced -- from a non-incumbent prospective in Ontario, Qu¨¦bec, where we are the one leasing the lines, we are clearly a net beneficiary both on wireline as well as on our TELUS Mobility cost because we lease facilities from carriers to carry traffic and sell sites back to switches.
Peter MacDonald: Yes, I think I understand that portion. What I am trying to get at is there is a retroactive portion, which you talked about in your press release from CDNS that was $6.4 million. Then you have the offsetting 18 and 18 between the 2. I'm wondering, that 6.4 is not shown on this. Should I also add that to normalize -- back to my number if that's what I want to do?
Bob McFarlane: Yes, I think perhaps the confusion is that roughly 6.5 million is not CDNS; it is portable subsidy. Right? So, in the first quarter, the true-up of the rates over the past 3 years or so was around $11 million. So that's the total retroactive amount. And then, there was $7 million related to CDNS in February and March. Notice how it is the 7 million -- is where the confusion. Because there's $7 million related to portable subsidy. And then, there is a $7 million in-period CDNS, just happens to be the same amount. In addition to the in-period CDNS, there was a retroactive $11 million portion. That's what -- 11 plus 7 gets you the 18.
Peter MacDonald: Okay, I see now.
Bob McFarlane: I think it is the coincidence of 7 million being both the portable subsidy as well as the in-period CDNS. It is confusing people.
Peter MacDonald: Okay, that is helpful. And then when we look forward, you talked about $5 million. And so I look at that 5 million and the 11 plus 7 -- or however you want to look at it -- when I look at this quarter for the national business, what is the total regulatory impact on the revenue and EBITDA line in this quarter? And then how does that flow forward just for comparison purposes?
Bob McFarlane: Could you repeat the question for me?
Peter MacDonald: Yes, you talked about the -- there's a couple of things you said. But if I just go back and make it simple. If I just go back to your 11 plus 7 in the CDNS deferral account less out on the data side, is that fully reflected in the revenue and EBITDA of the national business? So is national actually 18 million lower on revenue and EBITDA than what is reported from regulatory? Or is that split between, somehow split between something else?
Bob McFarlane: The answer is, there would be a combination of incumbent, non-incumbent, but we don't give that split.
Peter MacDonald: Okay. And then the acquisitions as well. Did you give a split on the acquisitions on the impact that it would have on the non-ILEC business?
Bob McFarlane: Did we disclose the impact acquisitions on the non-ILEC business? Not specifically. There are two - only one was primarily incumbent; the other was primarily non-incumbent. The one that was primarily non-incumbent was relatively minor in it.
Q5. Good morning, and congratulations for the great performance. My question is in terms of prepaid. The mixture of your subscriber base is superior to your peers' with more postpaid. But what do you think about the opportunity for the prepaid market in Canada? In the U.S., some carriers are increasing the focus on the prepaid. But obviously, here, the penetration is higher. And in Canada, you probably have much more postpaid growth left. So you think it's a bit early to think more increased focus on prepaid? How do you think about the opportunity for the market in Canada? And how do you want to be positioned for that market opportunity in the future? Thank you. (Daniel Henriques, Goldman Sachs)
Darren Entwistle: George, over to you, please.
George Cope: Thanks for the question. First of all, just to remind everyone on the call that the Canadian market was really in the prepaid market well ahead of the U.S. market. And actually for a number of years, about 2 or 3 years back, it was a bigger share of the net adds than we have seen over the last few years.
In addition, one of the other impacts we've seen on the prepaid market at TELUS Mobility is the growth in family plans. And what we find is the youth wants to choose the phone- clearly, and sort of choose a phone that they think is appropriate for them. But it can actually be more economical for the parents to add the phone to the family plan and necessarily prepay. So it is one of the things we've seen. Of course, our preference is that because then we get a postpaid relationship and have a relationship directly with the client and frankly the family. So that's one of the pieces we've seen that has had some impact on prepaid.
Having said that, with the introduction of Virgin and then the subsequent lowering of price in the prepaid market by Bell Mobility on the airtime side and by their lowering their handset prices in the fourth quarter, we certainly -- ourselves and Rogers -- did some responding to that and have seen some increase in growth year-over-year in prepaid. And as the market penetrates further out, you could see that category reignite again. That remains to be seen, and we'll follow it carefully. The one nice part now about prepaid in Canada is because of where handset prices are, we generally do it in a non-subsidized basis, and we have been able to achieve in the low 20s ARPU on prepaid -- about double that of our competitors with a real focus on data services within the youth market. So that's really been how we focus and continue to obviously make sure we are competitive in that space.
Daniel Henriques: If I just could follow-up, you mentioned some price discounts. When you look at EVDO -- and you mentioned you are going to launch in the first quarter of '06 -- you already have an ARPU that is superior to your peers. Do you see EVDO as an opportunity to increase this lead? Or it is just something that will allow you to maintain this ARPU lead versus your peers?
George Cope: Well, I think we see data as an opportunity for continual maintaining and hopefully some increases in ARPU. We certainly have been very impressed with the execution of one of our competitors in that space on the DSM side and want to as quickly as we can get to those sort of rates of growth we've seen. And we are beginning to see huge acceleration growth ourselves in that area. And so we are really bullish on that sector, both business and consumer side.
One of the things I just want to caution investors -- we have had 9 consecutive quarters of increasing ARPU at a time where one of our largest competitors having a decreasing ARPU. That gap can only get so large before it starts to truly impact our market shares. We have to be careful of that. And so although I am very optimistic that we will continue with our price of leadership strategy, the idea of constantly seeing dollar increases quarter-over-quarter going forward on ARPU, I think is hard to forecast or bet on if you will as investors in light of the fact that one of our competitors is seeing a declining ARPU.
So I think that data could be stabilized and hopefully accretive to ARPU. But we are building our cost structures, as we have told people in the past, on the basis that ARPU doesn't increase. And when it does, it flows through to our investors as a benefit.
John Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
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