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Q2 2006 investor conference call - Darren Entwistle presentation
Good morning. During my remarks today I will provide TELUS' perspective on recent developments in the Canadian telecom industry, following the highlights of TELUS' strong second quarter results. Additionally, I will be introducing an exciting and innovative wireless service that TELUS is bringing to Canada.
Given that TELUS is the last Canadian telco to report its second quarter results, it is insightful to observe the metrics of the wireless industry relative to some investor concerns that I heard over the last few quarters.
The solid wireless results in aggregate we see today reflect the robust Canadian wireless industry. Notably, industry revenue is up 17%. In addition, the total number of wireless subscribers is up 11% on a year-over-year basis to 17 million subscribers.
It is also interesting to note the industry's focus on the more profitable post-paid subscriber segment. Encouragingly, ARPU increased year-over-year for each of the three major players, with an average increase in ARPU of 5%.
More over, churn in Canada was again down for all three players. Clearly, the average churn rate for the industry of 1.6% sets the standard for most wireless operators worldwide to aspire to. The combination of industry ARPU accretion and improved customer retention has led to an increase in the average lifetime revenue for the industry of 8%, which is the most telling economic driver for wireless.
A concern for investors -- investors recently has been the trend in the cost of acquisition. In the second quarter, this trend is reversed and, indeed, decidedly so for two of the three major operators.
As a result of these factors, industry EBITDA was up 22% over last year, with the operating margin for the industry improving by 180-basis points to 43.5% and cash flow up a strong 24%. All in all an encouraging and, hopefully, indicative quarter for wireless in Canada.
Let me also touch on the unprecedented regulatory developments in Canada transpiring this year, as outlined on slide 5.
Unguardedly optimistic that we are now moving in the direction where the future may hold less regulation rather than more, the telecom policy review recommendations issued in March generated a rare consensus within our industry and indeed established a blue print for effective reform that should be pursued. I applaud industry Minister Bernier for proactively embracing these recommendations.
In June, Minister Bernier tabled an unprecedented policy directive advising the CRTC to rely on, in his words, on market forces to the maximum extent feasible. This is without a doubt a welcome reflection of his vision of a sustainable business model for our industry, governed by free market forces rather than regulation. TELUS supports this thought leadership, which can, without a doubt, better enable our entire industry to take advantage of the IP world.
Recent developments at the CRTC are also encouraging and point to beneficial change for our industry.
Firstly, the CRTC was directed to reconsider its original decision on voice-over IP and to take into account the telecom policy review recommendations.On a related note, the CRTC's local forbearance decision was also appealed to cabinet by TELUS and other ILEC's, reflecting our mutual desire for a clearer and more expedient path to deregulation in Canada.Indeed, we are pleased that the CRTC is now considering the inclusion of wireless substitution in its market share test for deregulating local phone service.
Secondly, the CRTC decided appropriately against regulating mobile broadcast services. This is consistent with their past policy of taking a light regulatory approach to wireless that has been so fundamental to the enormous growth of the mobility industry.
Thirdly, the CRTC has set an appropriately narrow range and a focused scope of issues to be explored and reviewed in the ongoing proceeding on local price gaps, which will reach determination in 2007.
I am hopeful that we are seeing a transition from a series of punitive regulatory decisions for the ILEC's historically towards a more balanced and sustainable industry model that allows market forces to determine competitive outcomes.
I will now turn our focus to TELUS' results as outlined beginning on slide 6. The strong and sustained subscriber growth on this chart of total customer connections demonstrates conclusively the efficacy of TELUS' national growth strategy focused on wireless and data. Over the last two years alone TELUS has seen more than one million new subscriber connections.
Importantly for investors to note, the average revenue per connection has also increased, in this case by 3% to $64.40. In the second quarter, TELUS' fast growing wireless subscriber base, which is up 14% to 4.7 million subscribers has, for the first time in the Company's history, crossed over to exceed TELUS' network access lines. If this keeps up, who knows, we may eventually get some facsimile of a wireless EBITDA multiple in our stock valuation.
On the wireline data front, high speed ADSL growth was strong, with 14% growth in a subscriber base reflecting TELUS' successful marketing campaigns and our commitment to customer loyalty and retention.
As shown on slide 7, we are making positive revisions to our consolidated guidance for the full year. Owing to our strong growth in wireless, TELUS is raising our wireless revenue and net additions outlook. By extension we're increasing our consolidated revenue guidance this quarter by $25 million to a range of $8.625 to $8.725 billion of revenue on a consolidated basis.
TELUS' guidance in respect to capital expenditures is being increased modestly by 3%, due to continued growth investments for strong home starts in western Canada, an accelerated broadband roll out program in our access infrastructure and TELUS' ongoing billing system conversions. It is important to note, however, for investors that TELUS' consolidated free cash flow forecast remains unchanged at $1.6 billion.
I am also pleased to report that earnings per share today is being increased significantly by $0.50 to a range of $2.90 to $3.10, primarily as a result of federal and Alberta tax changes and, as well, TELUS' positive operational performance.
Let's now turn to slide 8. There were several note worthy points in the wireline side of our business in the second quarter of this financial year.
On a positive note, TELUS has seen only moderate network access line losses at 2.6%, given that residential line losses of 4.6% were offset partially by business line growth. More over, our strong marketing programs have driven a 71% increase in high-speed internet net additions on a year-over-year basis.
Notably, TELUS also implemented a $1 increase in pricing for high-speed internet this quarter, reflecting our philosophy of driving profitable growth. At the same time TELUS is not immune to the industry pressures that are affecting our long distance business, with revenue being down 10% on a year-over-year basis.
Additionally, enterprise repricing and, as well intense, competition are affecting our non-ILEC growth in central Canada. For these reasons we have narrowed the top end of our 2006 guidance for our wireline operations in the provinces of Ontario and Quebec. Notwithstanding these factors, TELUS' wireline results demonstrate our resiliency in a tough industry and place TELUS ahead of many of our North American peers.
Investors should know that there are three themes for our wireline business that reflect TELUS' operating cadence.
Firstly, we are intent on sweating TELUS' portfolio of heritage products and services to stabilize revenue and margin performance in the face of competitive intrusion and technology substitution. This goal of reinvigorating our traditional product lines should be supported by increasing deregulation that gives TELUS the freedom to act more competitively in respect to pricing, bundling and win-back activities.
Secondly, TELUS will continue to drive revenue growth through our future friendly home strategy, providing integrated home networking, security and entertainment applications over TELUS' wireline and wireless infrastructure.
Thirdly, TELUS will continue to be vigilant in respect of our productivity programs as outlined on slide 9. To maintain our competitive advantage, the operational efficiency program that is TELUS began five years ago continue today into a fourth phase. TELUS is progressing a wide array of cost-reduction programs across the organization, which incorporates productivity opportunities from the progressive collective agreement that was secured in 2005.
TELUS' operating efficiency initiatives fall into three broad categories. First, the outsourcing of non-core or peak-load work. The second category is consolidation of offices and call centers. And the third category is driving process improvement and automation.
In respect to outsourcing, TELUS has fully or partially contracted out a a number of non-core functions including property management, custodial services, building maintenance, mail services, fleet maintenance, and pay phone counting.
As a result of these outsourcing initiatives, approximately 250 employees have either accepted an offer of redeployment or a voluntary departure package. Regarding office consolidation, to achieve greater efficiency and improved customer service simultaneously, we have rationalized a number of offices into larger centers.
For example, in operator services we've consolidated our retail office and call center in Victoria into Calgary and Edmonton. And as well, we consolidated our conference operation into the BC lower mainland.
Additionally, we have completed the consolidation of two field dispatch centers in greater Vancouver into Calgary. Through these initiatives approximately 500 employees have either accepted an offer of redeployment or a voluntary departure package.
We are also transforming our organization to a more variable cost structure through the increased use of temporary employees that allows TELUS to synchronize our resources with the variability of customer demand.
Finally, with respect to process improvement and automation, TELUS continues to focus on streamlining functional area processes, which includes building on the learnings that we garnered as a management team deployed for emergency operations during the last labor dispute.
For example, we are automating our directory listing functions and making process improvements in our business support functions, such as human resources. TELUS' traction in driving operating efficiencies is evidenced by the $81 million that has been invested in restructuring and work force reduction charges over the last three quarters following the labor disruption, including the $30 million recorded in the second quarter of this year alone.
In areas like office and call center consolidations, TELUS sees relatively short conventional payback periods, whereas in respect to outsourcing activities by example, implementation takes longer and paybacks can extend over several years. It should be noted, however, that all of these initiatives have positive NPV and IRR business cases.
Turning now to our wireless highlights on slide 10, TELUS contributed to the strong industry results being enjoyed by investors this week. Noteworthy for TELUS is the 18% growth in wireless revenue facilitated by a 14th consecutive quarter of increasing ARPU and, as well, a solid quarter of net additions.
TELUS' $2 accretion in ARPU was supported by a 121% increase in our wireless data revenues and, as well, best-in-class customer retention. Of particular interest to TELUS investors are two key operating parameters.
First, TELUS' cost of acquisition of $394 is down sequentially quarter-to-quarter by 8% compared to the first quarter of 2006. Second, as 46.4% our wireless margin is up 200-basis points sequentially and 100-basis points on a year-over-year basis.
From an investment perspective, TELUS' higher wireless capital expenditures this quarter reflect the continued aggressive roll out of our high speed EVDO network to 19 communities across Canada over just the last eight months alone.
TELUS' industry-leading EVDO network has speeds that are indeed best-in-class, and it is serving as a catalyst for continued wireless data growth in business services and increasingly in consumer applications, as we can see in turn to go slide 11.
Today I'm please to announce an exciting new initiative between TELUS and Amp'd Mobile, made possible by TELUS' leading EVDO network that will yield opportunities for Canadians who want more from their mobile devices.
TELUS is partnering with Amp'd mobile in two ways. Firstly, through a U.S. $7.5 million capital investment through our venture capital arm, TELUS Ventures. Secondly, we have secured a unique licensing and service agreement on the commercial front with TELUS bringing Amp'd highly-interactive and customized mobile entertainment information and messaging services to Canada. Amp'd differentiated services and technology make it possible for clients to easily access personalized wireless content on TELUS' high-speed wireless network.
Turning now to slide 12, Amp'd Mobile, in our relationship, will be responsible for marketing and bringing exciting and exclusive entertainment to Canadian wireless subscribers. TELUS in this partnership will manage sales and distribution, billing, client care, network operations and pricing, thereby ensuring that Canadians continue to receive TELUS' best-in-class client experience.
Initially, the Amp'd Mobile, powered by TELUS service, will be focused on the post-paid subscriber segment. This innovative partnership, coupled and augmented by the TELUS brand, will enable us to engage new clients and earn additional revenue from the tech-savvy, entertainment-focused youth demographic.
It should be noted that this deal is not a traditional MVNO, but rather this partnership is an exclusive licensing and service agreement. We see a great fit with TELUS, as the Amp'd Mobile approach mirrors TELUS' marketing philosophy in Canada, with a premium and youth-oriented brand, a high ARPU and a focus on post-paid customers.
I'm delighted to have Peter Adderton, the founder and CEO of Amp'd Mobile, on our call this morning. For those of you who do not know Peter, he's renowned for his success in founding and creating the highly successful Boost Mobile youth brand in the U. S. and Australia. Since 2000, that brand has attracted over four million users. I will turn over to Peter, who will take you through slide 13 and ,beyond. Peter, over to you.
Peter Adderton - Amp'd Mobile - Founder & CEO
Thanks very much, Darren. Just quickly, we're very pleased to be here to tell your investors and Canadian media a little about Amp'd Mobile. Of course we appreciate the vote of confidence by TELUS, as evidenced by your investment in our company, Amp'd Mobile Inc. here in the U.S. , alongside our other select group of investors.
And just a short note on the investors that TELUS is joining: MTV Networks out of New York; Intel; Capital; Universal Music, one of the largest music providers in the world; Qualcomm, the founders of the EVDO-CDMA technology; and Premium Equity Funds, here in the U.S. So we're pleased to have TELUS as one of the high-caliber investors that we have in our company.
We look forward to providing you and the organization there at TELUS an excellent return on the investment. We think we're off to a great start here in the U.S., and we believe we'll get the same traction that we're getting in the U.S. in Canada.
I'll just take a little moment to talk about slide 13 and 14 to explain our successful Amp'd Mobile concept in the U.S. and for the Canadian audience, and for the international investors who may not be that familiar with the Amp'd Mobile brand.
Amp'd Mobile's broadband wireless services combines outstanding coverage with the fastest download speed in North America. Amp'd offers the traditional services, such as voice and text, but we have to have a completely different fresh user interface that is really designed to optimized the third-generation technology that TELUS has recently rolled out.
We have fully customized handsets and content. Amp'd Mobile's live Amp'd environment brings more relevant, personal experience to the wireless lifestyle, with unique music, video, community, entertainment, sports and games.
We really believe our company is a mobile entertainment company, more than just a wireless company. We launched Amp'd earlier this year. We now have got nationwide U.S. coverage. While our approach is to offer both post-paid and prepaid plans, the focus has been here in the U.S. and will be in Canada on the post-paid service.
Our strategy and tactics are to deliver fast, profitable growth as indicated by our high ARPU, which is significantly higher than U.S. average. To give you an example, they're two times the U.S. average that Amp'd is experiencing in its early days.
I know I get this question a lot. I'll let you know that we are a private company and we do not publicly disclose our operating metrics; however in their due diligence, TELUS wireless clearly liked what they saw, along with the other investors that Amp'd has. I'm just excited about the fit that we see with TELUS and the approach to Canada on many levels.
With our success here in U.S. market as a premium mobile brand, we believe in partnering with TELUS represents the best possible combination for setting a new standard for mobile entertainment in Canada. Amp'd Mobile in Canada will be responsible for marketing and bringing the freshest, hottest and most exclusive content to Canadian users, as well as providing optimized handsets capable of faster download speeds.
Amp'd Mobile's differentiation through our proprietary Amp'd Mobile live environment, clients will have access to music, 3D gaming, live sports, concert video streaming, mobile communities, unique personalized features, as well as their traditional mobile phone and message functionality.
Darren, I believe that our specialized Amp'd Mobile brand will compliment TELUS brand, and allows us to successfully target the lucrative 18 to 35 year old age group. With a hip and tech-savvy and a young adult market segment, Amp'd latest focused approach will be well received, I believe, in Canada.
What makes Amp'd -- what makes this approach work is leveraging a 3G EVDO high-speed network of TELUS. We use a high-speed 3G network here in the U.S. and it has worked great for us.
So, I guess get ready for the Amp'd brand. It's put out by TELUS and it's hitting the market in 2007. I, along the with the entire Amp'd Mobile team here in the U.S. and Canada see a win-win for partnering with TELUS and really a tremendous opportunity.
We hand it back to you, Darren, and thanks again for the opportunity.
Darren Entwistle - TELUS - President & CEO
Thank you very much, Peter, and it would fair to say that TELUS and our leadership team here at TELUS look forward to working with you and your team successfully in the coming years, and we're very excited by the partnership. I'll now turn the call over to Bob to brief you in detail on TELUS' second quarter financially results. Bob, over to you.
Q2 2006 investor conference call - presentationsJohn Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
Question period
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