events archive
events
Q1 2007 investor conference call - Robert McFarlane presentation
Thanks, John, and thanks to everyone for joining us today online. Let's begin by turning to slide number four. The results represent a good start to the year. In summary, they're characterized by overall operating strength, with continued profitable wireless growth and sound resilience in the wireline business. Given the strong consolidated operating results posted, we're reiterating all of our 2007 annual targets, which we initially set back in December.
The quarter was marked by some notable positive developments, including large and very successful debt financings for TELUS and newly enacted rules for the deregulation of local phone markets, which I'll discuss in a few moments.
Now moving on to slide five, before we review the quarter, let me remind you that the impact of the introduction of a net cash settlement feature for substantially all share option awards that were granted to prior to 2005. As we had previously announced and estimated, first quarter results were impacted by a large, upfront, non-cash pre-tax operating expense of CAN $173.5 million associated with this beneficial change. We recorded CAN $153 million in wireline and CAN $20 million in wireless. This impacted first quarter EPS by CAN $0.32.
There are important advantages associated with this innovative new approach. Settling the in-the-money value of options for cash when exercised in the future avoids shareholder dilution. In the first quarter, 1.5 million options were cash settled without dilution. In addition, it's also more tax-efficient. The cash payment will be tax deductible for TELUS, yielding potential cash tax savings of up to CAN $70 million over three years. For the full year, we now expect the negative impact on reported accounting figures to be approximately CAN $180 million on EBITDA and CAN $0.33 on EPS, broken down by approximately CAN $155 million on wireline and CAN $25 (million) on wireless. I would also remind you that last December we set all of our 2007 targets for consolidated and business segments to exclude this largely one-time, non-cash charge.
Now let's turn to slide six and a review of our wireless results. Wireless revenues and EBITDA continued to deliver strong, double-digit growth. Revenue growth of 13%, to CAN $1 billion, was generated by continued subscriber growth along with higher ARPU. While reported EBITDA increased 12%, when adjusted to exclude the options expense, underlying growth was up a significant 17%, to CAN $464 million, reflecting an underlying margin expansion. The increase in capex this quarter is mostly due to network enhancements, investment in our EVDO network, and the successful provisioning of wireless number portability. Notably, wireless capex intensity remained moderate, at 11%.
Slide seven shows that TELUS added 91,000 wireless subscribers in the first quarter. Pre-paid net additions increased 34%, to 30,000, while post-paid net additions of 61,000 were down roughly 10,000 from a year ago and represented 67% of TELUS's total quarterly net adds. Although net adds declined slightly, it was one our highest first quarter loading results in the Company's history. Our total subscriber base is up 12% year over year, to over 5.1 million, and the overall subscriber mix is now 80% post-paid.
Slide eight shows that wireless revenue and EBITDA gains were driven by more than just subscriber growth. ARPU continues to increase, up nearly $2 year over year, driven by significant growth from adoption of new wireless data services, which has exceeded the continued erosion in traditional voice service ARPU. TELUS's wireless data ARPU increased by an outstanding 69% to CAN $6.27, which accounted for over 10% of total ARPU for the first time. We're clearly catching up to our peers after a slower start than some. This is evidence that in the very competitive reserves voice market, we've introduced new value-added high-speed data applications that have met with success. The tremendous adoption of these services is driving our overall ARPU increase despite reduced voice ARPUs. Our potential for continued strong wireless data growth in the future is very positive, given the increasing penetration of EVDO-capable handsets and devices in our subscriber base, as well as the introduction of even higher bandwidth applications when EVDO Rev A, or ``DOrA,'' as it's become to be known, for short, devices start to become available later this year.
Slide nine shows TELUS's ARPU performance on voice and data relative to our North American peers. While we had a later start than some, we've been experiencing tremendous growth and have been catching up to our peers. The line across this bar chart shows that TELUS's Q1 year over year wireless data ARPU growth rate was the highest recent result of the major operators on this chart. This momentum illustrates the opportunity for continued wireless growth expansion at TELUS. To further illustrate some successes in this area, we believe that TELUS is Canada's top mobile music provider, both in terms of devices and volume of songs.
Slide ten shows that the economics of our profitable subscriber growth philosophy and execution remains on track, with very healthy operating metrics. The complex operational processes to introduce wireless number portability on March 14th went very smoothly for TELUS and generally for the industry. With only two weeks left in the quarter, there was very little impact on our first quarter results. Our blended pre-paid and post-paid churn rate remained low, at 1.35%, with post-paid churn just under 1%. With higher ARPU and stable churn, the average lifetime revenue per TELUS subscriber has again increased year over year to an industry-leading CAN $4,595. Although COA per gross addition increased slightly, up 2%, our best-in-class marketing efficiency metric, that being COA over lifetime revenue, remained unchanged, at 9.5%, as shown on the last line. So we continue to generate attractive economic returns from our COA investment.
Now let's turn to a review of the wireline side of our business, starting on slide 11. Notably revenues increased slightly, which I'll expand upon, on the next slide. Reported EBITDA was significantly impacted by the non-cash charge for the net cash settlement method for past options, which I've already covered at the outset. The underlying EBITDA, adjusted for this charge, increased 1.5%, reflecting revenue growth and relatively stable operating expenses. Capital expenditures were higher in the first quarter of 2007, reflecting increased investment to support new enterprise customers in central Canada, as well as increased investment in broadband and network access growth. As a percentage of revenue, capex for the wireline segment remained relatively stable, at 22%.
Slide 12 looks more closely at the components of wireline revenue growth. Local and long distance revenue declines are reflective of the increased competitive environment from wireless and VoIP, but were offset by the increase in data revenues. Strong growth in high-speed internet and a pricing increase in the spring last year, plus increased managed data revenues on the business side, led to recorded data revenue growth of 7.9%. In fact, the underlying growth rate for data was even higher.
Two recent CRTC decisions resulting in recoveries from the price cap deferral account and the impact of retroactive competitor rate adjustments distorted reported local and data revenues in the first quarter of 2007, as shown on the next slide.
The table on slide 13 provides a truer indication of the underlying quarter over quarter growth rates for local and data revenue. TELUS recognized $15 million as a drawdown from the price cap deferral account in local revenues, from where the revenue was previously reduced in setting up the price cap deferral account in prior periods. This drawdown offset on favorable retroactive data rate adjustments, and covered recoveries for previously incurred expenses for local number portability and startup costs. Adjusted for the deferral account drawdown, local revenue would have declined 3.5%.
In contrast, data revenue growth was understated, due to the unfavorable impact of the retroactive rate adjustments for competitor digital network services, or CDNS discounts. With those as adjustment, underlying data revenue growth was nearly 11%, a very strong result indeed.
Moving to slide 14, we can see one of the big drivers of data growth--continued solid high-speed Internet addition. Net adds were lower at 32,000, but still at a very healthy level. This reflects a less intensive promotional effort by TELUS this quarter, while our cable competitor ramped up marketing for its lower-priced, so-called light telephone and Internet offerings.
Our high-speed Internet subscriber base now totals 949,000, up 18% from a year ago. It represents 84% of our total 1.13 million Internet connections.
The next slide highlights our network access line performance trend. Residential line losses in the first quarter were 34,000, a decrease of 5.5% year over year, reflecting continued competitive activity such as the geographical rollout of residential cable telephony services in our markets over the past year, as well as wireless substitutions
However, this decline in residential lines was partially offset by a 1.3% increase in business lines, resulting in a relatively stable overall line loss of 2.9% versus a year ago. These results continue to highlight TELUS' relative resiliency to competitive intrusion as compared to our peers across the world.
Slide 16 shows robust growth trajectory and changing mix of TELUS' overall total subscriber connections. This shows that on a consolidated basis, continued growth in wireless and high-speed Internet subscribers is significantly outpacing declines in residential network access lines and dial-up Internet. Interestingly, TELUS has again this quarter posted a total of 1 million more total connections than it did two years ago, and this is in spite of the many competitive pressures in wireline and wireless. This slide clearly shows the continued successful execution of our strategy, focus on growth in wireless, and data that continues to create value for our investors.
So putting it all together, now let's look at TELUS on a consolidated basis, starting on slide 17. As you can see, TELUS had strong revenue and earnings growth. Consolidated revenue in the first quarter grew 6% and adjusted EBITDA increased 9%. Most significant is the adjusted EPS increase of 50% to $0.90.
Let me elaborate on the drivers behind this EPS growth on the next slide.
This slide provides a detailed breakdown of the contributors to the large, $0.30 increase in EPS. Please note that consistent with our 2007 target definition, this excludes the $0.32 negative impact from upfront charge taken for the change to the net cash settled method for pre-2005 options.
Underlying EBITDA growth generated the biggest impact, of $0.15, which included $0.02 of lower restructuring costs. A decrease in depreciation and amortization contributed $0.07 in the quarter, aided by the recognition of $5 million of investment tax credits, as well as several software assets becoming fully amortized.
Analysts should note that, for modeling purposes going forward, as we operationalized our new billing system starting in Alberta this past quarter, a meaningful asset will begin to be amortized in future quarters, so this current depreciation expense trend should reverse in future quarters.
Other items, including a lower average number of outstanding shares due to share repurchases and lower tax expense, added another $0.06. Lower financing costs added a further $0.02. This trend is expected to accelerate in subsequent periods, when the $1.5 billion of notes due in June are repaid.
All in all, we remain on track to achieve our targeted EPS for 2007, which contemplated these items.
Slide 19 summarizes our total share repurchases since we first began buying back shares in December of '04. We remained active in the market this quarter, repurchasing a total of 3.5 million TELUS shares, for $201 million. This brings TELUS' aggregate share repurchases since December of '04 to 42.9 million shares, for nearly $2 billion.
Importantly for investors, this has led to a 7%, or 24 million, reduction in the total shares outstanding in the past two years, despite shares issued for option exercises and other related dilution. Notably, TELUS' decision to move to the net cash settlement method for past options beginning this year had an immediate positive impact in the first quarter by reducing dilution. The 3.5 million shares repurchased this quarter flowed directly to a 3.5 million like reduction in the number of shares.
Now, if you follow TELUS closely, you've likely seen slide 20 before. It clearly highlights our strong track record of returning capital to shareholders, expressed on a per-share basis. In 2007, the combination of a 38% higher dividend of $1.50 and estimated significant share repurchases for the year, based on annualizing our buyback level this quarter, would result in a total return of capital to shareholders of approximately $3.88 per average share outstanding.
Ironically, you may remember that this is very close to the level of cash distributions per share previously announced when TELUS was considering converting to an income trust last fall. While I put up the 2007 figures for illustrative purposes only, what is clear is that TELUS's strong free cash flow profile is allowing TELUS to deliver on our continuing commitment of returning a significant and growing amount of capital to our investors.
Before concluding, I wanted to take you through a couple of significant developments as shown in slide 21.
In Q1, TELUS closed a very successful $1 billion debt offering, consisting of $300 million of 4.5% coupon 5-year notes, and $700 million of 4.95% coupon 10-year notes. Now, proceeds of the offering, in combination with a potential commercial paper program, and accounts receivable securitization proceeds, are expected to be used for the redemption of TELUS' 7.5% coupon US dollar notes due on June 1, 2007.
This $1.5 billion refinancing at lower rates is expected to result in annualized interest savings of approximately $33 million, on an annualized basis. And as previously disclosed, in the first quarter, TELUS closed a new $2 billion credit facility with a syndicate of 18 financial institutions, that can be used, amongst other purposes, to backstop a commercial paper program.
In the last month, several positive developments have transpired for Canadian telcos on the regulatory front, as summarized in slide 22.
First, Phase I of wireless number portability was successfully introduced and implemented on March 14. This included not only wireless to wireless, but also wireless to wireline, and wireline to wireless porting.
Second and most significantly, on April 4, the federal government confirmed the criteria for deregulation of local exchange telephone services. The changes include needing to have sufficient facilities based competition in the market, meeting nine competitor quality of service standards averaged over six months, eliminating the 90-day restriction on win-back activities, and a definitional change of local market area to be forborne. Applications to the CRTC for forbearance are to be handled within a 120-day period.
TELUS has applied for deregulation in six cities--Victoria, Vancouver, Calgary, Edmonton, Fort. McMurray, and Rimouski, and more applications can be expected over time.
Most recently, on Monday, April 30, yesterday the CRTC announced its decision for the next price cap, which comes into effect on June 1. This confirms TELUS' assumption of no further mandated consumer local price reductions, while also allowing for greater consumer price flexibility.
Now, to conclude on slide 23. We have summarized TELUS' 2007 consolidated targets. We're pleased today to reiterate all of our existing annual guidance, which remains unchanged from that initially set in mid December. And again, as a reminder, for an apple to apple comparability, EBITDA and EPS targets are adjusted to exclude the impact of the accounting expense for the net cash settlement of pre-2005 options. So regardless of the amount recorded for the cash settled option expense this year, there will be no impact on our normalized EBITDA and EPS guidance.
When looking at these growth rates on an organic basis, it is evident that we continue to expect solid performance in the upcoming year, as we build on our track record of operational excellence.
And with that, Darren and I would be pleased to answer your questions, so I'll turn the call back over to John Wheeler to open it up.
Q1 2007 investor conference call - presentationsJohn Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
Back to Q1 overview