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Q2 2007 investor conference call - Q & A transcript
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John Wheeler: Thanks Bob and Darren. Just before I turn the call over to Erica to conduct the Q&A session, can I ask your cooperation for one question at a time please? That sounds familiar. Erica, please proceed.
Q5.Yes, thanks very much. Darren, I have a question on wireless. This sub growth was good but when we look at the ARPU growth it lags what your competitors are doing as does your-- and you're losing revenue market share. So it makes me, I guess, I ask the question -- are you comfortable that you're churning and winning the right customers relative to your competitors? Clearly, you're looking for a good second half performance, which suggests that we're not asking for the specifics of your plans, but you've got some specific actions in mind. So I'm wondering sort of-- are you satisfied with what you're doing there and if not, are there sort of changes sort of in the works? (Glen Campbell - Merrill Lynch - Analyst)
Q1. Thanks very much. I'm trying to get a bit more comfort on how you can hit your wireless guidance for the year. You talked about number portability hitting your marketing costs in your COA and your retention, and I understand that, but I'm not quite sure why that goes away in the second half, when wireless number portability is still here and arguably still in its infancy. There's got to be more to it than that. So I'm wondering if you can comment -- have there been some specific adjustments made to your marketing and retention spending, have you sort of recognized you were spending too much perhaps to keep customers or get new ones and you've adjusted that so -- is that what gives you the confidence to think your spending comes down and therefore your EBITDA growth improves in the second half?(Vince Valentini - TD Newcrest - Analyst)
Bob McFarlane:Well Vince, I guess first of all it's not preordained. So it's aspirational. We need to execute in the second half of the year. I think that's clearly obvious. Certainly there is a minor impact related to the Amp'd that did flow through the wireless side of the organization. We did have the start up of that Canadian operation which we sponsored as well as the write-down's that I referenced. So there was an element in the cost of acquisition related to that.
As well, I think in terms as well as number portability, while it is a new development, this being the first full quarter that it has been in place in the Canadian industry and therefore what the long-term stabilized outcome is yet to be seen. I think it's fair to say that given the wide knowledge of the launch in late March that there was as we commented upon in the past, the deferral repurchase or purchase decision effect in the industry, which resulted in a bit of a spike in the gross adds and as well as people were thinking of moving. I think it would be fair to say a number of them deferred the decision until after wireless number portability so they can enjoy the benefit of the number going along with them.
So I think it's fair to say therefore that in terms of churn rate and deactivation levels, etc., while they can always be influenced by evolving competitive trends, there is logic to suggest that there an element of an exaggerated impact if you will, on the first quarter. But nonetheless, I think wireless number portability does have some permanent implications in terms of the importance on retention and associated impacts, and we've observed that in other markets like the United States.
So the point is that we can and expect to do better in the second half, particularly related to our retention and COA spending, and therefore, we are confident in our ability to achieve our full-year guidance.
Q2. Yes, thanks very much and good afternoon. I wanted to ask in a similar line of questioning but on the wireline side, the billing system implementation is always problematic for many companies, and you talked about this system being specific to Alberta. I was wondering if you could just update us on first of all, what gives you the confidence that this system is fully up and running. Maybe you could share with us some of your run rate numbers that you've got in the third quarter here. But as well, could you talk a little bit about-- is B.C. next? Or what other major system implementations do you have coming down the pipe over the next year or two? Thanks, very much. (Peter Rhamey - BMO Capital Markets - Analyst)
Darren Entwistle: Thanks for the question, Peter. I guess what gives us the confidence is the fact that they system is now stabilized. And as a result of that, we've begun to resurrect our normal fulfillment process as it relates to DSL and basic voice services in terms of network access lines. We're also getting the excessive opex that we actually had to put in place to deal with the system implementation deficiencies out of our business and things are returning to normal within our call centers.
So I think extrapolation from that particular point, we expect to experience robust system performance over the remainder of the year in Alberta and certainly we are encouraged now by the level of system stability that we are enjoying as it relates to the fulfillment aspect of the IT implementation.
As I said in my remarks, it's important to point out that one of the areas where we didn't experience deficiencies was our ability to get bills out the door in both a timely and accurate fashion. Effectively, the issue with the system has been on the provisioning front. We've put a lot of resources to be well deployed to address that particular deficiency and it was a very un-enjoyable period for about three months as we worked hard to achieve system stability. But that has now been realized and the additional cost that we implemented within the business to deal with the fact essentially we had manually provision a number of customers due to the system not being operable; that cost is now coming out of our P&L.
Effectively, over the remainder of this year we're just going to focus on continuing on with the upward implementation and starting to progress towards realizing the benefits of the system, which is effectively rationalizing a myriad of customer-care platforms on the wireline side of our business down to one. That will be a positive cost event. The new system will also help us to bundle much more effectively than we have in the past and be more responsive to changing market conditions with a myriad of systems, it's been problematic trying to be expedient in responding in an opportunistic sense to market conditions.
The next step for us in terms of the systems progression is to go to British Columbia on the wireline front, and we're forecasting to do that in the first half of 2008, and I'm hopeful that the tuition value related to all the problems that we experienced with the Alberta implementation will mean that the B.C. implementation will go a heck of a lot smoother.
Clearly, the Alberta implementation was a very painful learning process, but if we can recycle that tuition value into a much stronger implementation in B.C., I think that bodes well for us. To that, for us it will be rolling it out from the consumer side of our business to business solutions to TELUS Quebec, and eventually of course looking to combine the wireline and wireless sides of our business so we can bring the full power of our portfolio to bear for the benefits of both consumers and investors.
Peter Rhamey: Thanks very much for that. Just for greater clarity, that cut over would occur second half or first half of '08 in B.C.?
Darren Entwistle: First half of '08.
Peter Rhamey First half; thank you.
John Wheeler: Erica? Thank you.
Operator: The next question comes from Jonathan Allen of RBC Capital Markets. Please go ahead.
Q3. Thanks very much. First, I'll congratulate you. I see the CRTC has now deregulated Calgary, Edmonton and Vancouver, so at least one positive result from that. A question for you on wireless -- the voice ARPU declined down about 2.8% year over year and seemed to pick up a little bit in the quarter. We've seen the trend I guess accelerating over the last little while. I'm curious as a first question whether or not there was an impact from number portability; whether there were perhaps more attractive promotions that were outstanding in the quarter that brought down some of the ARPU. (Jonathan Allen - RBC Capital Markets - Analyst)
Darren Entwistle: Thanks, Jonathan. The question succinctly can be answered as yes. I think it's obvious that when you have the implementation of number portability which was previously an impediment for a customer moving from one operator to the next; it's obviously going to translate into some pricing pressure as it relates to the voice component of our ARPU. I guess what I would direct you to is that on a net basis, the ARPU is up and if we can continue to make the investments that we're making, from a capital perspective, in technologies like EVDO Rev A, where we are closing in on covering two-thirds of the Canadian population and expect to have handsets available in 2008 to leverage that network power, then the growth in data revenues can more than offset the commoditization that we're seeing on the voice side.
And the economics are quite solid because unlike the type of pressure that we face on the wireline business, where typically new services come at a significantly lower margin than the legacy services that they're supplanting, on the wireless side we enjoy a very healthy operating margin associated with new data applications coming to fruition.
And I guess if you look at the amount of growth still available to us, we're at a situation right now where data only accounts for about 10% of our ARPU. There's still significant opportunity for data growth to be realized, and we're also in a situation where effectively the market has not yet matured. We currently stand as sort of 59% to 60% of penetration. So that should ameliorate to a certain extent, some of the pricing pressure as it relates to the commoditization of legacy services on the wireless front as we still pursue as an industry emerging growth for the sector.
Jonathan Allen: Well Darren, that brings up a second question or a follow up I guess for John's purposes so he doesn't cut me off. With the shutdown of Amp'd Mobile, I guess it brings back the question of if there is some re-pricing or some lower promotions that are impacting the flagship TELUS brand. Perhaps you can discuss the merits of coming back with perhaps a discount brand similar to your peers with Fido and Solo rather than re-pricing your flagship brand.
Darren Entwistle: Yes, I don't think it's the smartest thing to do, to discuss any broad form of what are marketing plans are as it relates to our wireless business. It is a competitive market. You will have heard in my comments that there are in effect, 15 brands from people to choose from within the Canadian wireless industry. I guess what I would say is the hallmark of our success within a 15-brand industry is that fact that we've enjoyed 18 consecutive quarters of ARPU accretion which means we're doing something right with the TELUS flagship brand. We've consistently posted a best-in-class performance in terms of customer retention, and as it relates to the efficiency and the economics of our business, we continue to lead the way, in terms of COA as a percentage of lifetime revenue.
So right now I think we're pretty satisfied that with the operating characteristics of our business, but I think we have to always be mindful of developments within the industry, and including the implication of discount brands and how we deal with that, and as you know, we're an organization that doesn't close doors, but keeps our options open and explores all opportunities to present the right marketing profile for our Company in the marketplace so long as we can generate the type of economics that investors have come to expect from us.
Jonathan Allen: Great, thanks Darren.
John Wheeler: Thanks, Jonathan. Erica?
Operator: Greg MacDonald, National Bank Financial; please go ahead.
Q4. Thanks. Good afternoon guys. My question is on -- in the press release there is a reference made to -- and Darren, I think you made comment on this as well -- suggesting that your investment-grade rating is an advantage for the company. I would agree with it. I'm wondering if you're only referring to an advantage from an operating perspective, or are there other options that you could take advantage of with respect to your balance sheet? I guess in other words I'm asking -- does the decision not to pursue BCE suggest that the Company could consider a strategic review of its capital structure at some point in the near term or is that just not on the horizon in the current time? (Greg MacDonald - National Bank Financial - Analyst)
Darren Entwistle: Again, I don't think that the Company is well served by ruling out potential developments down the road from a corporate development or financial engineering perspective. I don't think again, we're well-served by discussing elements of this nature within a public forum. I do believe strongly that having an investment-grade balance sheet is of paramount importance and you need to look no further than the current credit market conditions to understand why that is so important. Not only does it help lower our weighted average cost to capital which improves the economics of our business because we enjoy lower pricing on the debt front; but as well it gives us ready access to the debt markets to pursue opportunistically the opportunities that we think make good economic sense for the security holders of our organization.
And to have financial flexibility is a huge plus for the telecom industry because it's been such a tumultuous industry. Any time when you have to incur significant capital expenditures but you're also subject to change within the competitive landscape, subject to change within the regulatory landscape, subject to change as it relates to how capital markets move to and fro, it's nice to have financial flexibility to give the organization resiliency to exogenous pressures and also give the organization opportunities that would be outside of our reach if our balance sheet was less than robust.
Bob, I don't know as the CFO if you want to add any color to that?
Bob McFarlane: No, I think you've covered it Darren, but I think keep in mind that when you're looking at capital structure, we always look at it from a long-term perspective. And one need look no further than the past few weeks or look no further than 2002 to see down cycles in the market and so you've got to be sure that when you set a capital structure, it's one which is optimized from a long-term multi-cycle perspective and that is certainly the approach that we've taken in the past few years. And yes, we always look at it annually in terms of what should we be doing on an incremental basis. In fact, the whole BCE initiative, one of the prime advantages of our whole approach was it would have resulted in an investment grade organization which would have made that entire organization in a completely different competitive situation and resiliency attribute than perhaps it will find itself in. But that's water under the bridge.
In any event, the point is that whether TELUS stand-alone, our existing operations, or looking at whatever opportunity presents itself in the future, we believe we are advantaged by the capital structure that we have.
John Wheeler: Good, thank you. Erica?
Operator: The next question comes from Glen Campbell of Merrill Lynch. Please go ahead.
Q5. Yes, thanks very much. Darren, I have a question on wireless. This sub growth was good but when we look at the ARPU growth it lags what your competitors are doing as does your-- and you're losing revenue market share. So it makes me, I guess, I ask the question -- are you comfortable that you're churning and winning the right customers relative to your competitors? Clearly, you're looking for a good second half performance, which suggests that we're not asking for the specifics of your plans, but you've got some specific actions in mind. So I'm wondering sort of-- are you satisfied with what you're doing there and if not, are there sort of changes sort of in the works? (Glen Campbell - Merrill Lynch - Analyst)
Darren Entwistle: I don't Glen that I would ever answer a question saying that I'm satisfied with the operations of the organization because that means I've got nothing else to add. So I think I would be better characterized as permanently dissatisfied. I would say the sub growth this was satisfactory for TELUS. Effectively, if you look at it, it was three-quarters postpaid and one quarter prepaid. If I had my druthers, I would like to have seen a little bit more exposure on the postpaid front from the organization, but all in all, not dissatisfied.
And I think whilst that mix is not as rich in the postpaid front let's say as what the Rogers organization posted, I think it still compares favorably from an industry perspective. We also have certain inherent challenges on the CD main front where we cannot necessarily take full advantage of roaming opportunities in what is increasingly a GSM world and that's a dichotomy that's institutionalized, but we have to live with.
I think it's also important to point out is that whilst we hit 128,000 in net adds, we only modestly benefited from wireless local number portability. I think the real winner in that regard was the Rogers organization. Despite comments that have been made to the contrary, certainly, we can track the movement of wireless number portability very accurately as an industry and we were net positive, but modestly so. So I think in terms of areas for improvement, I think that would be one.
But as I said previously heading into number portability, number portability is not a race. It's here to stay and we'll be judicious in the way that pursue it. We don't want to be disruptive and create downward pricing pressure by being overly aggressive in the near term. Let's take the longer term view and make sure that we're capturing our fair share of the market and we're generating a good economic return for investors.
I guess also we have a certain cross to bear. When you're a leader, sometimes people catch up, and we have posted a rather good ARPU yet again in the C$64 range, and we are again the industry leader in that regard and our ARPU is an improvement on a year-over-year basis from what we've posted previously. So at the end of the day, you need to look at things on a nominal basis as well, and I think if you compare us in terms of some of our key operating characteristics, whether it's ARPU or whether it's churn where there has been some catching up by one competitor and some deterioration by another in that particular area, we remain the industry leader in that regard. Even as it relates to COA as a percentage of lifetime revenue, despite the fact that given that the challenges of the smaller CDMA ecosystem where we would typically pay circa C$40 to C$50 more per handset, we still lead the way in terms of COA efficiency as a percentage of lifetime revenue, and that is, of course, taking into account that this particular quarter our COA was inflated by the costs of implementing our protectionist mechanisms related to number portability, may be somewhat exaggerated as Bob has accurately described and of course some inflation as it relates to the implementation of Amp'd which has been less than a positive experience from our organization.
So I think there is more work to do for us on the wireless front. I think orders of priority for us -- number one, I still think that there is a big opportunity with number portability for TELUS to capture a more balanced share of the business market in Canada, which I think has attractive ARPU characteristics, but that's a strategy that's not a near-term strategy. It's a long-term strategy and we'll be patient and disciplined in terms of pursuing our reasonable amount of market share in that particular sector where we are currently underweight as an organization, given our heritage.
The second order of priority for us is going to be driving through with the EVDO Rev A development so that we can continue to ensure our capex investments underpinned the major of area of growth for us, which is on the data front, and it's interesting, you talk with people catching up to us. Well, one area where we have not been a leader Glen is on data, and that's an area where we have been closing in, catching up if you will, with people that have been the leaders in that area.
So I think data is a big part of the DNA of our organization on both the wireline and the wireless front and I think you can expect us to continue to do well in that regard.
And finally, for us I think we need a tune up on the marketing front. I think we can do better on the marketing front in terms of COA, COR efficiency; but I think we can do better on the marketing front by opening up new points of distribution, new channels to market to ensure that our products have a more profound reach into the marketplace to help drive profitable.
And again, I think we can think our way through to how we can ensure that maybe there's a little bit of a better tweak on the postpaid front where the economics, on a relative basis, are superior. So that's what we're going to be up to.
Glen Campbell: That's very helpful, thanks. Just a quick follow up -- are you still in the market with double-your-minutes promotions. I know they were a big factor in Q2. Are you still offering them in the current quarter?
Darren Entwistle: No, we're not.
Glen Campbell: Okay, thanks.
John Wheeler: Erica, next please?
Operator: The next question comes from Dvai Ghose of Genuity Capital Markets. Please go ahead.
Q6. Yes, thanks very much. Darren, if I can ask you about efficiency, particularly in the wireline side of course. I think you went through a strike in 2005 and the anticipation was more efficient labor structure. Since that time, your wireline employee base is up some 14%. It's up 10% year over year, which could be a disappointment. I'm wondering if more can be done on the efficiency side. (Dvai Ghose - CIBC World Markets - Analyst)
Darren Entwistle: Okay, Bob will take you through the waterfall on the employee base front, which I think is a good question that you're asking, Dvai, and I think people would benefit from an education as to how that particular year-over-year growth breaks down, and then I'll come back and I'll just make some comments as it relates to your question.
Bob McFarlane: Dvai, I think what's important to understand from I guess from a productivity perspective or an efficiency perspective as it relates to our wireline organization is that we do have significant outsourcing operations that provide outsourcing services to third-party multi-national corporations, and that's in our TELUS international business segment. If you exclude the roughly 1800 increase in employees year over year in that operation, then our wireline employee count as of June '07 was 22,987 that compares to 22,552 a year ago. So you're talking about less than a 2% increase year over year. So I think that's an important consideration.
Darren Entwistle: I guess to come back, Dvai I think you've raised a fair point. I think we can do more on the efficiency front than what we've been posting thus far. As I've said previously, implementing the new collective agreement, investing in the implementation and the new collective agreement is something that we've been doing, and I think some of those up-front costs and some of the protracted implementations that we've been pursuing as it relates to some of the new operating latitudes that we enjoy within that collective agreement, are deferring or delaying our ability or masking our ability to demonstrate some of the efficiency gains that we were able to realize through that new collective agreement. Hopefully, we can make in the future, more evident, more transparent and more impactful for investors to observe.
I think it's also important to point out that the IT implementation that we've been pursuing, let's put the troubles to one side, just the implementation of the IT system in and of itself has generated significant costs into our organization. It's been a very, very capex, as well, opex intensive exercise to get that system implemented, and again, that's impacting negatively our efficiencies in the near term, but hopefully will impact them positively as it gets implemented over the medium to longer term.
And of course, the problems have been exacerbated in areas like Q2 because of the significant problems that we experienced in trying to get the Phase A implementation of the system up and running in a very robust fashion. I think just to illustrate, we had to bring in over 300 people to our call center in Alberta to undertake manual fulfillment processes and that particular experience was not enjoyable either from a process-performance perspective or from a cost perspective when you have to bring in that magnitude of people to undertake what essentially becomes a manual fulfillment process.
And of course the other things that continue to challenge us are formally very lucrative products like long distance where we've experienced a lot of pricing pressure. It's interesting to note that even within the normalized LD erosion that we experienced in the second quarter, it's actually not a minutes erosion. It's really reflective of two things: One is the re-price on the retail side of the business, because minutes have actually grown, and then TELUS not generating the type of wholesale traffic that we have previously, so it's those two things in combination, but that type of re-price pressure does get reflected in the margins of the organization in quite an impactful fashion. Overall, as I said earlier, a lot of the new products that we're selling don't carry the same margins as the legacy products that are either getting supplanted or commoditized.
I'm just telling you what is effectively inherent as a challenge of the wireline side of the business, but I think Dvai you're right to point out that we can do more and need to do more as it relates to the efficiency of our business. Sort of traditionally, on the wireline front as rightly point out, and I think now laterally on the wireless front as well. I think that's something that you can look for us to be concentrating on as a management team in the weeks and months ahead.
Dvai Ghose: Can I ask you a real quick follow up on the systems? Given the systems issues and the fact that you are implementing in new areas, will this slow down the rollout of new products such as a more extensive rollout of TV?
Darren Entwistle: Well it did in Alberta because we issued a stop sell on both ADSL and TELUS TV. Hopefully, that problem is non-recurring. So if my view is correct that the pain that we experienced in Alberta will at least produce significant tuition value in terms of the way that we garner the learning’s to make sure that the implementation in B.C. goes smoothly. Then it will not negatively impact our ability to install network access lines on the voice front in B.C., or continue on with ADSL in B.C., or carry on with TELUS TV. Hopefully, all of those problems are now behind us given that the system is implemented in Alberta and it is robust and we're now returning to normal operations within our call centers and our fulfillment processes.
Dvai Ghose: Thank you very much, Darren.
John Wheeler: Erica, please?
Operator: Jeffrey Fan, UBS Securities; please go ahead.
John 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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