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Q2 2005 investor conference call - Q & A transcript
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Q1. Okay, thanks, guys. Good quarter. I wanted to focus a little on the EVDO deployment which it sounds like was largely responsible for the increase in Capex. Would you say you've become more aggressive on it considering that the U.S. carriers are clearly pushing forward with their own 3 G plans and -- or would you say the Capex increase is pretty much in line and could you remind us what you think the total Capex outlay would be over a two or three-year period to go out with EVDO? Thanks. (Vance Edelson, Morgan Stanley)
George Cope: Yeah, I'll answer it. Our EVDO plans obviously have been encouraged by the success in the U.S.. We've not accelerated that plan, the quarter numbers are part of the annual business plan numbers so we weren't really outside of where we thought we would be. We'll still run the overall business in that 11 to 13 percent Capex to revenue range. Our EVDO deployment, we've chatted before that it is our expectation to have the network ready such that we're in the marketplace to be competitive with our competitors, a launch which from our end, our expectations is we would see it in the market possibly first quarter next year, maybe -- or late this year and so we're working towards that. The labor disruption could have some impact on our EVDO deployment in Western Canada, although we're working to mitigate that as best we can. In terms of an overall number for that build out, I don't have that at my fingertips for the next two to three years, other than to assure investors and I've mentioned before in our model that our Capex to revenue range from 11 to 13 percent going forward we believe can be maintained as we deploy EVDO further than our first deployment this year.
Vance Edelson: And you're pleased with the handset pricing sounds like they're generally coming down, such that it's not going to hurt your equipment margin much when the time comes?
George Cope: Yeah, what we're pleased with is clearly the development in the U.S. is giving us the confidence to go forward with that. We'll have to as we do with any new technology, early adopters, some of those devices will be more cost than normal but we should be able to absorb that in our normal COA costs.
Q2. Thanks very much and good morning. My question is on the wireless side. George, if we look at the second quarter additions for the three largest operators, this would be the largest quarter in the industry's history, even is surpassing second quarter of 2000. Do you believe that we're borrowing from other quarters, perhaps during the year, or do you think that this is perhaps the beginning of a re-acceleration in the overall market? And relating to that, as the volume of subscriber growth accelerates, I'm wondering if you could talk about the incremental EBITDA to revenue margin. It slowed down a little bit this quarter. I'm just wondering if that's more a timing issue or do you see moving into sort of a slightly thinner margin on a go forward basis? Thanks.(Richard Talbot, RBC Capital Markets)
George Cope: Okay, Richard, in terms of the market subscriber growth, we were pleased with the quarter. There's certainly been no discussion -- there's been no discussion here at TELUS Mobility that we feel that we pre-bought any of the quarters or that it was a rollover from a previous quarter so I think you were just seeing an acceleration of growth, you're right and that's obviously given us the confidence on our revised guidance on the net adds. The one thing I will mention I'm sure investors will have noted, we had an increase in our mix of pre paid vs post paid even though we had a very strong quarter on post paid. We have seen some incremental growth in the prepaid area. That is primarily, we believe, driven by the fact that we lowered price, not as far as the new entrants had, but had to lower prices to stay competitive with both Bell and Virgin and therefore some clients were taking pre paid that we think previously would have taken post paid on family plans so we've seen some acceleration there. In terms of margin flow-through, I'm quite positive obviously and when we're getting a 49 percent margin in the business and in the second quarter, you know, our flow through was 68 percent on network revenue and I mentioned before that any time we can achieve, you know, the 70 percent number, obviously that's a tremendous achievement so we're at 68.1. We're obviously adding to our marginal growth such that we were able to come in at 49 so I'm not concerned with it. Obviously, I don't think you can run the business permanently at 70 percent incremental margin flow through, otherwise your overall margin is going to go to 70 and I doubt that's going to happen at a fully competitive marketplace. But clearly I think with the cost of acquisition that we were able to achieve in the quarter, there is still room for additional expansion and we'll try to run the business that way.
Q3. Thank you very much and may I echo that in terms of it being a very strong quarter. I'm interested in your take on the initial round of competition with Shaw on the digital telephony. Any lessons you've learned from that or implications? Also related to that, my question would be to what extent are your out of region calling patterns different on LD and how may that impact the impact of Shaw competing in telephony? (Rob Goff, Haywood Inc.)
Darren Entwistle: Hi Rob, it's Darren. I'll take this particular question. I think from the perspective of TELUS' response to Shaw's entry into telephone it is early days still, I think as Bob indicated the most dramatic impact on our network access line erosions in the second quarter was the loss of business lines related to a single customer loss to a competitor. Those business lines were not high margin business lines that were lost to a competitor which contributed to the erosion. Secondarily, the second most contributing factor to our network access line erosion was indeed not Shaw but other competitors on the VoIP front. I think in terms of lessons learned, I would say that when you see TELUS eventually enter the TV market, you can expect us to enter in a very disciplined fashion. I think disciplined behavior as it relates to pricing drives better innovation which I think at the end of the day is something that's going to give you a better result with customers. So if we see a situation where Shaw is disciplined in terms of their entry into telephony and TELUS acts similarly in terms of our entry into the entertainment distribution market, then I think that begets a more stable competitive environment. It drives better investment in innovation and I think at the end of the day, a better platform for sustainable business competition out there between ourselves and Shaw.
In terms of out of region, if I put the wireless LD to one side, which is a strong result for our organization, our philosophy in Ontario and Quebec as it relates to our wire line operations is not to emphasize the selling of long distance. We just don't think that that's the right strategic model in entering Ontario and Quebec. Our focus is very much on data and data applications and providing managed network solutions. The extent to which we secure those managed network solutions and can offer something like VoIP and long distance as a data application within that managed solution, then that's something that we will do, but in terms of our LD patterns out of region, we don't actually promote the LD, we promote the data solution and then try and piggyback LD on it and we think that provides a more sustainable, more competitive -- a more long-term model in terms of the efficacy of our strategy in entering Ontario and Quebec and trying to building the platform for long-term success.
Rob Goff: My question to you on the out of region was more on the residential side, i.e. do the Alberta/BC residential subscribers have more out of Canada calling than perhaps in Ontario and Quebec?
Darren Entwistle: I couldn't comment on that right now, Rob, without specific numbers on the calling patterns in front of me so I'd have get back to you on that.
Q4. Yes, thanks very much. My first question was on wireless. There's some cautionary language in the MD & A suggesting that ARPU trends in the back half of the year may flatten which is interesting given how strong ARPU was in the second quarter. I'm wondering, George, if you could talk a little about what's behind that.(Glen Campbell, Merrill Lynch)
George Cope: Sure, Glen, thank you. I made the same comment on the call last quarter and clearly we put the language in. It was really just trying to caution investors. We have had 10 quarters of improving ARPU, we want to continue to see that improve and I've talked about things that we're doing to try to make that happen. Our concern is the gap between us and one of our competitors continues to grow and clearly as they see an increase in ARPU that will give us the ability I think continue to see that, but there is a point where the gap, once you get over 20 percent, we're just concerned that we can't keep growing that gap. When we see text messaging included in new rate plans by our competitors, that we don't think are required, we think that can have some impact in the future on a creed of ARPU. So we just want to let investors know when you get into the $60 plus ARPU level, we just all want to be cautious but no overall or no concerns that we've seen going forward some decline in our ARPU.
Glen Campbell: Is there anything you're seeing in your loadings or sort of in your revenue churn that would suggest that this is about to happen now or is this just
George Cope: No, it's quite frankly, Glen, it's just a hundred thousand foot common, if you will, that says in a competitive marketplace with three players, the gap between you and one of your competitors can probably only be so large and we have to therefore make sure we maintain competitive responses. That's really the point. Having said that, if we can continue to see data growth accelerating as we're seeing and see the market absorbs some of the price changes, we'd obviously like to see it continue to increase, but we want to just try to be as cautious there as we can given the marketplace.
Q5. Thanks. I know you probably have some opposition to strike questions but I'm going to try and ask a related one and basically it has to do with the financial impact and I think most of us were surprised at the higher expenses and increased promotional activities and the lost revenue at Aliant's strike so I was just hoping to get an update on the expected financial impacts on your business now that the strike is underway. Thanks. (Peter MacDonald, GMP Securities)
Bob McFarlane: Okay. It's Bob McFarlane. I'll field that question, Peter. As Darren mentioned, we've been in a training mode, preparation mode for emergency operations procedures for quite some time, so to that extent, whether it's the second quarter, where obviously there was a ramp up and we did have some work-to-rule going on or in preceding quarters, we've been incurring some EOP, if you will for short, costs. On a go-forward basis, given the strike, obviously, they have increased, but we've also got some positive factors that I outlined in my comments earlier, given the significant portion of employees who are continuing to work. So at the end of the day, it's certainly not in our interests to give specific disclosure on that cost item. I think that in contrast to the Aliant situation which you referenced, which my recollection is they withdrew guidance. If I'm wrong with that, I apologize, but I do believe they withdrew guidance upon the implementation of their labor disruption. In contrast to that situation, we're reinforcing our guidance here and clearly we have positive results year to date and great momentum, but we also have the reality of a degree of uncertainty here, given the labor disruption and, in particular, the duration which is an indeterminate time frame to measure given current events. So that being the case, I think it would be fool hardy for us to convey a degree of precision with our forecasting, either to raise our guidance or lower or whatever, given that we think that even with a strike occurring and continuing, we expect it to fall within the range of guidance provided. Of course, if the labor disruption takes a turn and provides more certainty in our forecasting ability, we may be able to raise our guidance, but it would be certainly premature to do that at this juncture, so I think you should take some comfort in the reinforcement of guidance and the lack of specific changes, more a reflection of the reality of being in a labor disruption.
Peter MacDonald: I appreciate that. That's helpful. If I could just ask a follow-up. I think before you talked about the first level of impact being a one-year timeline and after that you would start to get a larger negative impact. Does the timeline still sit somewhat the same as what you previously discussed?
Bob McFarlane: That's not quite correct, if I understood the question. I'll put it in my own words here and that will maybe clear it up. In terms of the impact to labor disruption, it actually reduces over time. It reduces over time because your management team becomes more productive. You identify -- we've already identified a number of process improvements. Actually, some of which occurred during the rotating strike that preceded the general strike, so there's productivity improvements that arise just by the very nature of being able to understand better the front line business processes that are going on. So at the end of the day, yes, we have managers who are incurring overtime and so on and so forth but the same time as we've mentioned, with the significant number of unionized employees working, that means that a good chunk of our management that otherwise would have been deployed in emergency procedures are doing their normal day-to-day jobs and so consequently we're very encouraged by the developments to date and hopefully there will be resolution, but it would be mistaken to think that over time it gets worse. Over time it actually gets better.
Q6. Questions for George, it's related to the industry growth and subscribers. I want to bring up the issue of wireline substitution because if we're not seeing an acceleration yet, I'm wondering whether that's to come. I've gotten a hint from looking at other telephone companies maybe a little bit more than yours in terms of the gap between what the cable companies are clearly taking and what they're losing, and it seems to me that that's growing a bit. That showed up a little less for your numbers, but I'm wondering, George, if you could comment on whether you see that trend accelerating and whether you think that's going to have an impact on ARPU going forward. I would suggest maybe a positive impact and a related question to that, if the industry moves toward a hybrid wireless wireline type of a model, what is the ability of TELUS to offer this kind of product or are you looking at that right now? (Greg MacDonald, National Bank Financial)
George Cope: Okay, Greg, I'll try to answer both questions as best I can here. The first one in terms of acceleration of growth, I commented and I think Richard mentioned as well, it was the best second quarter so we clearly seen acceleration in our growth. We tend very much so here at TELUS Mobility to look to the U.S. market where historically we have trailed 24 to 36 months in penetration, so the significant confidence here that since we've done it for the last 20 years that we will trend towards the penetration levels of the U.S., is that today within the next 36 months, so that allows for significant growth going forward. We are continuing to see an increase in subscriptions of evening and weekend rate plans which obviously does drive some substitution from wireline to wireless, and what is of course strategically important for TELUS, is although we obviously have our land line business in the west, the fact that we have such a national wireless carrier could actually in the end be a creed for our organization so we're well positioned for that. In terms of hybrid wireless and wireline coming together with products such as Wifi and wireless, those are things we are looking at following the developments and clearly as that market evolves and if it evolved importantly from a strategic standpoint, TELUS Mobility and TELUS TCI would be in a position to be in that marketplace, but we're watching that as it unfolds, is the way I would describe it at this point.
Greg MacDonald: Okay. Is it your opinion, George, that that will be a major move toward -- the market will move in a major way toward that trend? The hybrid.
George Cope: Major? I think it's very early days on that. As I mentioned we're looking around the world as people have begun to implement it, we will see. I think it's too early for me to form an opinion on that at the moment.
Q2 2005 investor conference call - presentations
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
George Cope, president and chief executive officer, TELUS Mobility
Robert McFarlane, executive vice-president and chief financial officer
Question period
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