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Q2 2007 investor conference call - Robert McFarlane presentation
Robert McFarlane: Thanks Darren, and good morning everyone. Let's begin the financial results review with our wireless results on slide number 11.
Wireless revenues continued to deliver strong double-digit growth, while operating expenses and consequently EBITDA were negatively impacted by the first full-quarter Wireless Number Portability or WNP for short.
The revenue growth was generated by a continued 11% subscriber growth and higher ARPU driven by a 48% increase in the data component.
Reported EBITDA increased by 2.2%, negatively impacted by the first full quarter of WNP, which resulted in higher cost of acquisition and retention costs, which I'll explain more in a moment.
The increase in capex this quarter was mostly due to network enhancements and strategic investments in our EVDO Rev A network, which we recently launched in British Columbia, Alberta and Quebec. With the EVDO Rev A rollout largely complete, we're on track to meet our annual wireless capex guidance of approximately C$550 million.
Slide 12 reflects the directional impact of wireless number portability on the industry overall, as well as for TELUS specifically. WNP was successfully implemented by the Canadian Industry in mid March, enabling full portability from wireless to wireless carriers and in addition wireline to wireless and vice versa -- a world first. Carefully planning, strong IT execution and implementation made this a consumer and commercial success, industry wide.
Q2 was the first full quarter of WNP experienced by Canadian wireless carriers. As expected, the advent of WNP had some impacts on the industry this quarter. Gross additions were up 8%, churn ticked higher, COA was up on aggregate basis, while cost of retention, at least for those who report it, was also up.
The results at TELUS were no exception. TELUS saw an increase in gross and net additions ahead of the industry growth rate, as we were a net beneficiary of WNP porting from our competitors. TELUS' blended monthly churn rate increased in the quarter to 1.45% from 1.3% last year, as total deactivations increased. Finally, cost of acquisition and retention costs were also impacted by WNP, which can be seen on the next slide.
EBITDA, on an adjusted basis, excluding a non-cash charge of C$1.8 million related to the net cash settlement feature for employee share options granted prior to 2005, increased slightly by about 3%. However, increased loading and other impacts related to the introduction of WNP significantly impacted wireless profitability in the quarter.
C$20 million of the C$30 million increase in costs of acquisition expense can be directly related to the higher gross loading, for which WNP was a major contributing factor. TELUS increased its retention programs in the quarter to mitigate the increased exposure to competitive churn and as a result, the cost of retention or COR increased by C$27 million. Adjusted to exclude these incremental impacts largely related to WNP, EBITDA would have increased by 13%.
Turning to slide 14, let me update you on Amp'd Mobile and the related impacts on TELUS. In March of this year, Amp'd Mobile Canada launched its interactive and mobile entertainment services. Unfortunately, on June 1st, its parent company, Amp'd Mobile Inc., entered bankruptcy proceeding in the United States. Following attempts to restructure its business under Chapter 11, Amp'd indicated an intention to suspend operations in the US. As a result, TELUS expects disruption of Amp'd live service and Amp'd sales have therefore been discontinued in Canada.
As the network carrier for Amp'd in Canada, TELUS is reaffirming our commitment to Amp'd clients by ensuring that all voice and basic messaging services continue to function until we're able to contact subscribers to offer them a comparable or better package of voice and our multimedia services. We do not expect an impact on revenue or subscribers as the majority of few thousand Canadian Amp'd clients are expected to migrate to TELUS.
TELUS' second-quarter results include Amp'd-related write-offs of approximately C$2 million to EBITDA, a pretax write-off of our C$11.8 million venture investment in the parent US company, as well as pretax adjustment of C$5 million for asset write-downs. As a result, there was an aggregate C$0.04 impact to second-quarter earnings per share. There is also the possibility of about another C$0.01 EPS impact in the third quarter related to Amp'd, and no further impacts expected thereafter.
Please turn to slide 15 and look at a more positive quarterly development. TELUS added 128,000 wireless subscribers in the quarter reflecting the success of our WNP-related retention efforts and marketing. Prepaid net adds increased 41% to 29,000 from a year ago, while postpaid net adds of 99,000 were strong, although down slightly year over year by 4,000. Postpaid additions represented 77% of TELUS' total quarterly net adds and the overall postpaid subscriber mix remains stable at about 80%.
Q2 and year-to-date net adds are consistent with annual guidance, and therefore we are reconfirming our net subscriber addition guidance today for the full year.
Slide 16 shows that wireless revenue gains were driven by more than just subscriber growth. Our ARPU continues to increase due to the adoption of new wireless data services, which has exceeded the continued competitive erosion in traditional voice service ARPU. Of note, this is the 18th successive quarter of year-over-year ARPU growth.
TELUS' wireless data ARPU increased by 48% to C$6.58, which accounted for 10.3% of total ARPU. The potential for continued strong wireless data growth is very positive, given the increasing penetration of EVDO-capable device in our subscriber base, as well as the future introduction of even higher bandwidth applications and devices given the recent deployment of EVDO Rev A.
Slide 17 provides a review of churn level against our industry peers. Second quarter blended monthly churn increased by 15 basis points to 1.45%, as the level of deactivations was impacted by the first full quarter of WNP. Notably, postpaid churn remained low at 1.07%. Despite the slight increase experienced with the introduction of industry-wide WNP, TELUS continues to achieve best-in-class wireless churn levels when compared to our Canadian and North American peers.
Now, let's turn to a review of the wireline side of our business starting on slide 18. Revenues decreased slightly, which I will analyze on the next slide, and as Darren mentioned, reported EBITDA was significantly impacted by the full commercial implementation of the new billing and client care system for more than 1 million residential customers in Alberta.
Meanwhile, capital expenditures were slightly lower in the second quarter of 2007, reflecting a decrease in capitalized billing and client-care system development expenditures, while we continue to invest upfront to support new enterprise customers in Central Canada as well as investments in broadband and network access growth. As a percentage of revenue, capex for the wireline segment remains stable at 26%, as the organization continues to invest for the long term, consistent with our corporate strategy.
Slide 19 looks more closely at the components of wireline revenue growth. Local and long-distance revenue declines are reflective of the competitive environment and substitution from wireless in voice. However, long distance was also negatively impacted by a one-time accounting adjustment related to the implementation of the new IT system in Alberta, and I'll look at this more closely on the next slide.
Reported declines in local and long-distance revenues were in turn offset by the increase in data and other revenues. Strong year-over-year 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 an 8% data revenue growth. Lower provisions for quality of service rebates partly offset by lower equipment sales, contributed to the “other” revenue growth.
The table on slide 20 provides a better indication of the underlying revenue for wireline and long distance. TELUS recognized a one-time negative C$13 million adjustment to reflect a better estimate for earned but unbilled long-distance revenues. As a result of billing cycles that don't match exactly with month end, as well as increased bundling, long-distance revenue recognition involved some amount of estimation.
With the new system in Alberta, we now have significantly improved billing data, including information on LD rate plans, discounts and pricing allocation within a bundle. This resulted in a one-time C$13 million adjustment, which is not expected to recur.
So normalized long-distance revenue was down 12%, reflecting industry-wide trends of increased price competition and ongoing substitution. Excluding this one-time adjustment, underlying wireline revenue growth was slightly positive.
Now, let's turn to slide 21 and take a deeper look at wireline EBITDA. As Darren mentioned, the new IT billing and client care system implementation in Alberta went well with respect to our billing cycles. We have accurate and timely bills and no long-term issues that companies can sometimes experience with such major system conversions.
Having said that, expenses in the second quarter included increased costs related to this system implementation, including the previously discussed C$16 million one-time accounting adjustment, as well as costs related to addressing certain order backlogs, which resulted from this system implementation. These costs included C$11 million, primarily for external labor costs and another C$5 million related to additional resources in call centers in order to maintain service levels. Adjusting for these increased expenses, underlying wireline EBITDA would have been up 1.5%.
Let's move to slide 22 on high-speed Internet. Here again, the new IT system implementation in Alberta temporarily slowed one of the drivers of data growth which is high-speed Internet additions. Net adds were lower in 14,000 as marketing activities were curtailed in Alberta, which temporarily reduced new order processing capabilities caused by the IT conversion. As a result, we're lowering our full-year 2007 high-speed net add guidance by 10,000 to now a target of more than 125,000.
We remain optimistic that we can achieve the new guidance, even while our cable TV competitor continues to expand marketing for its lower-priced telephony bundled Internet offerings. Our high-speed Internet subscriber base now totals 963,000, which is up 16% from a year ago.
The next slide highlights our network access line performance trend. Residential line losses in the second quarter were 56,000, a decrease of 5.7% year over year, reflecting continued competitive activity such as the rollout of cable telephony service in many new markets over the past year as well as wireless substitution. However, this decline in residential lines was partially offset by a 1.2% increase in business lines, resulting in an overall line loss of 3.1% versus a year ago.
These results continue to highlight TELUS' relative resiliency to competitive intrusion as compared to our peers around the world.
Slide 24 shows the 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 generated a million more total connections in the last two years, despite the many competitive pressures in the industry. This slide clearly shows the continued successful execution of our strategy, focusing on investing in the 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 25. As you can now appreciate, TELUS had a challenging quarter for earnings growth. Consolidated revenue in the second quarter grew 4%, but reported EBITDA declined by just over 1%. This reflects increased acquisition and retention expenses in wireless totaling C$47 million, which we largely attribute to WNP implementation and wireline system implementation impacts of about C$29 million. Interestingly, excluding these impacts, EBITDA growth would have been 7%.
Reported EPS declined 26%. Please note that the C$1.03 EPS last year included a positive C$0.34 adjustment for tax-related matters. When excluding the positive impact adjustments in both periods, EPS actually increased by 6% year over year.
Capex, as previously outlined, increased 5% as a result of increased wireless spending on EVDO Rev A technology rollout.
Now let me elaborate on the drivers behind the EPS decline on the next slide.
This slide provides a detailed breakdown of the components of the 33% year-over-year decrease in reported EPS. Incremental tax impact on EPS is a net C$0.31 when accounting for the C$0.34 in positive tax-related adjustments in the same quarter last year, as well as the C$0.03 positive adjustment this quarter. Underlying EBITDA growth, normalized for the many other items in the quarter, generated C$0.14, while C$0.05 relates to lower restructuring costs. Increased costs to retention and costs of acquisition largely in our wireless segment, contributed to a C$0.13 decline. The combined revenue and expense impacts of the Alberta IT system implementation reduced EPS by a further C$0.06. The operating and capital write-offs related to Amp'd Mobile reduced EPS by C$0.04. Other items added C$0.08, including a lower average number of outstanding shares due to share repurchases and lower depreciation.
Although a number of these items were not originally contemplated, we remain confident that we can achieve our EPS target for 2007, which is in the range between C$3.25 to C$3.45.
Slide 27 summarizes our total share repurchases in the quarter and historically, since we first began buying back shares in December of 2004. We remained active in the market last quarter, repurchasing a total of 2.7 million TELUS shares for C$170 million. This brings TELUS' aggregate share repurchases since December of '04 to 45.6 million shares for C$2.1 billion.
Importantly for investors, this has led to a 7.5% or a 26.8 million reduction in the total shares outstanding in the past two and a half years, despite shares issued for option exercises and other dilution. Notably, TELUS' innovative move to the net cash settlement method for past options, beginning at the start of this year, has accelerated the impact of share repurchases on reducing overall shares outstanding. Outstanding shares were already 2% lower than at the 2006 year end.
Now if you follow TELUS closely, you've seen slide 28 before. It clearly highlights on a per-share basis, our strong and ongoing record of returning capital to shareholders. For illustrative purposes in '07, the combination of over 36% higher dividend of C$1.50 and estimated significant share repurchases for the year, based on annualizing our quarterly dividend and buybacks year to date, with result on a total return of capital to shareholders of approximately C$3.73 per share.
What is clear in this slide is that TELUS' strong free cash profile is allowing TELUS to deliver on our continuing commitment of returning a significant and growing amount of capital to investors.
Before concluding, I want to quickly highlight the material financing developments at TELUS last quarter, which are shown on slide 29. TELUS launched an unsecured commercial paper program backstopped by our bank credit facility for up to C$800 million. As at June 30, we had C$664 million in total outstanding under this program. This low cost variable-rate financing combined with the well-timed March 2007 C$1 billion debt offering at a blended interest rate of approximately 4.8%, in combination with accounts receivable securitization proceeds, were used to redeem TELUS' 7.5% coupon US-dollar notes which matured on June 1st 2007.
This C$1.5 billion refinancing at lower rates is expected to result in annualized interest savings of approximately C$33 million and is extended in smooth maturities, while supporting TELUS' strong balance sheet.
As you can see in the next slide, TELUS has an enviable debt maturity profile with no significant debt refinancings until mid 2011. In recent weeks, there has been a material deterioration in the debt capital markets with a massive flight to quality. This has resulted in a rapid escalation of high-yield credit spreads and a market being closed to new issuance. We believe that TELUS' consistent approach to a prudent long-term financial policy, which balances the interests of shareholders and debt holders, remains in the best interests of our stakeholder. Given the recent capital market, as well as industry developments, we should enjoy enhanced competitive advantage in TELUS' considerable investment-grade financial strength.
Now to conclude on slide 31, we have summarized TELUS' 2007 consolidated targets. Despite a challenging quarter, we are to date reiterating our consolidated annual guidance, which remains unchanged from that originally set in mid December 2006.
Again, as a reminder, for an apples-to-apples comparability, EBITDA and EPS targets are adjusted to exclude the impact of the accounting expense for the net cash settlement of pre-2005 options. Given the growth rates, it's evident that we expect solid performance in the second half of the year, as we execute against our '07 priorities and focus on 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 commence the Q&A.
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
Q2 2007 investor conference call - presentations
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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