events archive
events
Q2 2006 investor conference call - Q & A transcript
page: 1 2
John Wheeler: Thank you very much, Bob. And just before I turn the call over to Tammy to conduct the Q&A session, can I ask your cooperation for one question at a time, please? However, if you need a follow-up question related to the answer to your first question, that is appropriate, of course. Tammy, please proceed.
Operator: [OPERATOR INSTRUCTIONS] Our first question from Simon Flannery from Morgan Stanley. Please go ahead with your question.
Q1. Thank you very much. Good morning. Sprint yesterday was talking about the duel mode handsets they're expecting to get over the next couple of quarters, puts talk on iDEN combined with CDMA voice and also the progress they're making on QChat over RevA. Could you just talk about the potential plans that you might have to use some of these devices and potentially follow along with what Sprint plans to go in terms of network migration? Thanks. (Simon Flannery - Morgan Stanley - Analyst )
Robert McFarlane: Thanks for the question, Simon. I think in TELUS'case it's fair to say we're somewhat of a cheerleader, if you will, for Sprint Nextel in this regard because, as you know and many investors should realize, we both have the CDMA and the iDEN technology. So essentially in our case, we're a follower given that the economies of scale are really driven by the Sprint Nextel decision on these technologies, so I think what's fair to say is we're well positioned to reap the benefits of these decisions, and we're eagerly supporting the direction that Sprint Nextel is taking.
Simon Flannery: Okay. Thank you.
Operator: Thank you. Our next question is from Peter MacDonald from GMP securities. Please go ahead with your question.
Peter MacDonald: Thanks. Just before I ask my question, I think Simon also asked about the network migration that Sprint talked about, if you can address that part of it?
Robert McFarlane: I don't recall but what you are specifically referring to by network migration?
Peter MacDonald: I think what he was referring to was network migration to GSM.
Robert McFarlane: I don't think that's what I heard. I think he was referring to the convergence of iDEN, CDMA and what is the nature of the technology that'll be deployed to bring high-speed capability to iDEN.
Peter MacDonald: Okay, and then maybe you can discuss, then, the network migration that Sprint talked about that they're contemplating it and what your thoughts are on that?
Robert McFarlane: Well, in terms of network migration to -- are you referring to GSM technology?
Peter MacDonald: Yes.
Robert McFarlane: I think it is pretty early days to be speculating about CDMA versus GSM technology. Certainly with an investment in CDMA, it is somewhat akin to the old beta VHS argument of years ago. And in our respect we're -- if you look at our results, if you look at our capex intensity, if you look at our network sharing arrangement with the Bell organization, which is to our mutual advantage, I think a unilateral swap to a different technology would not be a prudent move to take. And in terms of the evolution to 4G technologies, I think similar to the answer I gave Simon, in the case of TELUS we will be observing the developments of the larger carriers. And so in our respect, we certainly have no intentions or contemplations of changing our technology at this juncture.
Peter MacDonald: Can I ask a couple of questions on the Amp'd deal?
Darren Entwistle: Absolutely.
Q2. First on brand, will the phone be branded as Amp'd and then what happens on the billing? You take care of the billing, but does the bill come -- does it come as a TELUS bill or Amp'd bill. (Peter MacDonald - GMP Securities - Analyst)
Darren Entwistle: The bill comes as a TELUS bill. In terms of the branding on the hardware or form factor, handsets if you will, the extent to which it's an optimized handset, customized to the Amp'd application, it is Amp'd powered by TELUS, what we're doing from a brand-affinity perspective. I guess maybe to expand upon my answer, Peter, to your question, I think it is important to highlight some non-trivial differentiating factors related to this arrangement versus what would be a more traditional MVNO model that we've seen in the Canadian market. First of all, this is not a traditional MVNO. This is a licensing and service agreement. If you really want to look at hardened differentiating factors, this particular application needs an EVDO network to be delivered, and I would say that Amp'd is not true of the type of MVNO that we've seen thus far within the Canadian market place. But to demonstrate the unique aspect of this application requires an EVDO network as the delivery mechanism. Other things that are different is the post-pay focus of the Amp'd model versus what we have seen in terms of other more traditional MVNO's being focused on prepaid. The other differentiating factors also include the significantly-higher ARPU driven off the back of the unique content, the application and the focus on post-paid. And I think Peter made comments during the call about Amp'd achieving an ARPU which was twice the industry standard within the U.S.
Other aspect that are differentiating are the fact that we get exclusive access to innovative and unique content, and that's very exciting. And when you look at a lot of the other MVNO's that we see traditionally in the Canadian market, they don't bring unique or exclusive content with them to the partnership arrangement on a wholesale basis. The other things that are different, again, from the traditional MVNO are the fact from a form factor perspective, Amp'd will be providing optimized handsets that are customized to the Amp'd application, leveraging the EVDO bandwidth that TELUS provides, and applications that are suitable to the entertainment, downloading and distribution that is being provided. Another element that is different is that a lot of other MVNO's have distinct branding that is separate from the wholesaler providing the network access in the first place. In respect to this deal because of the synergies between the Amp'd and TELUS brand, given that we have a commonality in terms of a premium brand as it relates to value add and high ARPU and a brand, as well mutually, that resonates well with the youth market, we see a strong brand association and affinity, which is why we're going forward with the Amp'd powered by TELUS nomenclature. And finally, again, differentiating ourselves from traditional MVNO's, TELUS will control the pricing and the sales at distribution model, in addition to what we will provide in the client care front.
So when you add up all of those factors, the EVDO network, the post-paid
focus, the high ARPU, the exclusive and exciting content that Amp'd brings
to the table, the customized handsets for the application, the brand affinity
and association, and the control that we have over sales and marketing,
particularly as it relates to pricing, client care and billing, I think
this is a unique model and a sustainable model and one that we're very excited
about in terms of the economic contribution that it can make to our organization.
Peter MacDonald: Just on that, Darren, with all of what you said, does that mean on the pricing model between the two of you that they get a revenue per customer for a month only and there is no other financial impacts on the way that you look at each customer?
Darren Entwistle: We have an economic share model, Peter, that I am not going to delve into at this particular juncture, but it would be fair to say in terms of subscriber growth, we have an economic share model, and in terms of securing clients, we also have a cost share model, so to speak. So overall we share in the economic gain as we bring subscribers on board in the fashion that I previously described.
Peter MacDonald: Thank you.
Operator: Thank you. Our next question comes from Jonathan Allen from RBC Capital Markets. Please go ahead with your question.
Q3. Thanks very much. Just a quick follow-up question on the Amp'd Mobile. First of all, from a customer perspective or from a reporting number, will you be consolidating those into your post-paid base or will this be showing up as some sort of separate wholesale line? And the second question, Darren, you mentioned that Amp'd Mobile is bringing exclusive content to the business, I was wondering if, as part of the agreement, TELUS would also have access to use some of that content for your existing SPARK plans for the core post-paid base? (Jonathan Allen - RBC Capital Markets - Analyst)
Darren Entwistle: Jonathan, the answer to your latter question is yes. We have access to that content not just, by the way, for the SPARK brand in terms of our wider mobile offering, but we would also have access to that content to support TELUS TV. In respect to reporting, I 'll hand over to Bob McFarlane.
Robert McFarlane: Right, Jonathan. We would, of course, be reporting these as post-paid subscribers, as they're sold in post-paid format, so these are our subscribers. It is not a wholesale arrangement like an MVNO, so there's really not a close call on this one. They're subscribers of TELUS.
Jonathan Allen: If I could follow up on one other question. In the U.S. though we haven't seen specific results, it had been rumored that Amp'd had gotten off to a fairly slow start. I believe the rumor was about 50,000 adds in the first six months. Was just wondering if you see any differences between the Canadian and U.S. market where Amp'd would be more successful in your view than they were in the U.S.?
Robert McFarlane: Actually, having conducted a due diligence pursuant to our venture capital investment, we're very pleased with the results. They haven't disclosed them but let's just say that the economic profile and the rate of growth of this organization in the United States has been truly a positive one, and I'm not sure why you would have rumors to the contrary. Obviously we've done the due diligence. We know the numbers. They're outstanding, and we're excited to bring this concept to Canada.
Darren Entwistle: That's both in respect to subscriber growth and ARPU performance, Jonathan.
Jonathan Allen: Great. Thank you very much.
Operator: Thank you. Our next question is from Marje Soova from Goldman Sachs. Please go ahead with your question.
Q4. Hi. Thank you. Wanted to get your thoughts on the overall prepaid market this quarter. You guys obviously performed better than others, but it still seems like there's a year-over-year slowdown, so just wanted to understand the dynamics there? And also just thinking about the prepaid ARPU and the data contribution there, just wanted to see if you can give any color on that? Thanks. (Marje Soova - Goldman Sachs - Analyst)
Robert McFarlane: Thank you, Marje. It is Bob here. ,In regards to prepaid comments in the market, I think as a general orientation, if you look at the heritage of the respective firms tell us historically a lower prepaid in our base Rogers, by way of an example through the acquisition of Microcel, really augmented the significant base and, of course, acquired an organization with a certain churn profile as well. So they've done quite well focusing on post-paid, and I think that's really where most marketing dollars and distribution channel emphasis has been in the Canadian market, so if you look at a relative change, I would say the other two competitors more so on the post-paid side. Of course, the Bell organization effectively out-sources part of its prepaid focus through the Virgin Mobile MVNO. In our case it is all internal, and we've really continued. We had no specific promotions in the area in this quarter.
We're very comfortable with the mix that we had. And I think the reason
we're seeing why we have net adds, whereas that's not the case for certain
of the other organizations, is one had significant write-downs as they cleared
the ship for the new team, and the other one, of course, has a materially
higher churn rate. So really the issue on prepaid is driving economics.
In our case at a $26 ARPU, which is approximately double that of our competitors,
having a churn rate of about 3%, and then not directing many advertising
dollars at all towards promoting that product, and containing the subsidy
related to the handsets we sell, all of which combines to drive positive
economics for us. So post-paid are worth more, but the prepaid are still
have value, and that's why we continue with sort of our traditional emphasis
in that regard. So we're quite pleased with the results that we saw in the
quarter. And the one other thing I would mention is for the first time I
don't know in how many years, in fact, it may be quite a long time since
I have seen a TV ad advertising prepaid on TV, and one of our competitors
is doing that right now with $0.01 evening/ weekends. And that's something
we try to stay away from because then you're directing fixed costs promotion
dollars to a lower economic product offering. That's something we're quite
careful about, and I think when you look at our COA, that's why we really
emphasize look at the COA in relation to the lifetime revenues and is what's
that return. And approximately 8% COA to lifetime revenue on an overall
basis, you can see whether it is post-paid or prepaid, we have a very, very
efficient marketing cost for our wireless offerings.
Darren Entwistle: It would be a good piece of analysis, actually, for the analyst community to do to the break down COA as a percentage of prepaid lifetime revenue to judge the efficacy of those investments.
Marje Soova: The use of ARPU -- data contribution to ARPU on prepaid versus post-paid?
Robert McFarlane: Yes, I know you answered it. You notice that John did have a one-question limit, so I was hoping the referee would enforce it, but we don't disclose our data by prepaid and post-paid specifically. What I would say -- and you're onto something -- is the way in which we have taken prepaid to the market and this is consistent over -- really from the beginning of the prepaid offering is we don't position it as a discounted offering. We don't position it as an inferior offering. It is similar handsets we're selling to a market that tends to be youth-oriented. They tend to be using data services and value-added services, and that drives much higher ARPU than relative to our competitors. Really it is a different payment mechanism. That's a different marketing approach than some other organizations have traditionally done in North America, and I think that is one of the contributors to why we have superior economics.
Operator: Thank you. Our next question is from Vince Valentini from TD Newcrest. Please go ahead with your question.
Q5. Thanks very much. I will limit myself to one question on capex, but I hope you go longer than normal today, because your remarks were a bit longer than normal and I think there's a lot of questions left in the queue. On capex, Darren, you talked about sweating the assets on the wireline side, and I think that is a great strategy. But if I look at your capex, you're spending way more than any of your peers on the wireline side. The new guidance would suggest 24% capex intensity for this year versus your peers in the 15% to 19% range. Is 2006 an unusual year with a bunch of projects that all hit and a bit of catch-up from the strike last year, or do you view this 24% as the new trend line going forward? Thanks. (Vince Valentini - TD Newcrest - Analyst)
Darren Entwistle: I would say that 2006 is a year where we're experiencing some strains without a doubt, given that we came off a year where in 2005 we could not effectively deploy capital because our ability to implement was impinged upon by the work stoppage. Clearly we've got a lot of catch in that regard. It is also exacerbated by some other considerations. In both Alberta and BC, there's a considerable amount of access network expansion related to new home starts and clearly, this is not a situation where we can mop up all that connectivity ourselves, given that we now have a competitive model within that markets, given that we are experiencing for the first time, effectively, competition within the access infrastructure itself with our cable competitor. So the home starts for us are driving capital and previously we would secure 100% of the connections but, of course, within a competitive scenario that's no longer the case. But without a doubt, it is augmenting the type of capital that we have to deploy to address those home starts. It's also fair to say that the broadband build we've embarked upon is proceeding exceedingly well. We are, of course, making an investment in a prudent and progressive fashion in our access infrastructure to upgrade the bandwidth to facilitate the future friendly home services that we would like to provide into people's homes over the foreseeable future. And also I guess one of the major drivers that we haven't discussed a lot but clearly certainly 2006 is a year where we are inaugurating and doing some heavy lifting, if you will, as it relates to systems conversions and more pointedly systems consolidations within the wireline area of our business.
As I indicated previously, the legacy of bringing BCTel, Alberta and TELUS
Quebec together has encumbered us with a myriad of order entry systems,
order processing systems and billing engines, which we are seeking to consolidate
down to one single customer care platform. And that's a major systems initiative
for us. And again that 2006 represents a lot of heavy lifting in that regard,
as we seek to establish momentum in respect to that system conversion program.
I guess maybe the best way to describe it when you look at the capex intensity,
I talked about 2006 being somewhat unique in terms of the strain related
to the factors that I just talked about. And by strain I would say that
this is not a new trend line, but perhaps pushing the outside of the envelope.
And management is very sensitive to working within a reasonable capex intensity
range. So it is not entirely atypical, but we are pushing the upward bound
without a doubt, and we're doing that as a result of the factors that I
just talked about. It is also important to say from an affordability perspective,
although we have modestly increased our guidance in terms of capex by $50
million or 3% on the $1.5, the $1.55 billion base, we are still sticking
to our free cash flow target where the mid-point is $1.6 billion, so it
would be fair to say the organic performance of the business, if you will,
is funding the strain that we're facing on home starts. It is funding the
very positive momentum that we've been able to establish, perhaps more expediently
than we thought, in terms of the broadband build and the bandwidth upgrade
and access infrastructure and also supporting the systems rationalization,
which is so key to our future strategic goals as a national organization.
John Wheeler: Okay, next question.
Operator: Thank you. Our next question is from Glen Campbell from Merrill Lynch, Canada. Please go ahead with your question.
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
Question period
Back to Q2 overview