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Q3 2007 investor conference call - Q & A transcript

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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John Wheeler: Thanks Bob. Just before I turn the call over to Ron to conduct the Q&A session, can I ask your cooperation, once again, for one question at a time, please, so we can get through the people in the queue.

Operator:Peter MacDonald, GMP Securities. Go ahead please.

Q1. Thanks. I'm looking for some more clarity on the ARPU. You pointed to greater prepaid mix, lower iDEN and a greater mix of included minutes in pricing. So, I guess what I'm looking for is some sort of wading between those lines. And also, the prepaid/postpaid mix, is that a pricing mix? Because when you look at the year-over-year total number of prepaid versus postpaid, that number stays pretty consistent. And then, last, is there a way that we can quantify the iDEN contribution? What's happening on the sub loading? And is there a way that we look at the impact over the next couple of years from that? Thanks. (Peter MacDonald - GMP Securities - Analyst)

Q2. Okay, thanks. I think I'll try to add on to that one. I wonder, Bob, if I just drill into this issues on ARPU out of the Mike product a little bit more. Can you say where you're actually experiencing ARPU decreases in that segment, and give us a sense of what that is? I'm getting the sense that the Mike issue, relative to total ARPU, is the issue. And I can appreciate that you don't want to share too much with your competitors, but we're all trying to get a better sense of what the real ARPU risk is here, what the recurring nature of the negative 1.3% was on a year-over-year basis. Is there anything more that you can give us on what's actually happening with Mike ARPU? (Greg MacDonald - National Bank Financial - Analyst)

Q3. Yes, I just wanted to change tact here. You did a good job of reducing retention spend below my expectations off a higher spend in Q2, and COA is down. And I'm wondering whether this represents the new running rate for the company on a go-forward basis, or should we be expecting that it could be quite volatile here, depending on what's going on in the marketplace? Thank you. (Peter Rhamey - BMO Capital Markets - Analyst)

Q4. Yes, thanks very much. Sorry to come back to ARPU for you Bob, but one thing that really stands out for me, and I'm hoping you can shed some light on it, is the minutes of use. Even though you have bigger buckets, the overall minutes of use, as you said, were just flat. Rogers reported yesterday an 8% increase in minutes of use. It seems to be a bit night and day. Can you comment on what may be happening in terms of your subscriber base to drive the lower usage? And just a clarification on the data ARPU, if you do back out the Mike and back out the prepaid, you guys report your data ARPU a little differently than some of your peers. And if you look at just postpaid data ARPU, do you think your ARPU would be more comparable to peers in the sort of $10 range versus the $7 figure you reported? (Vince Valentini - TD Newcrest - Analyst)

Q5.Yes, thanks very much. A question for Darren, you've got a trial going on fiber to the home, over-billed in eight communities on a very small scale. Could you talk a little bit about what you're hoping to learn there, and whether you think there's a possibility that the economics might look better for that project than, say, what we're hearing from Verizon with their fiber to the home? Thanks. (Glen Campbell - Merrill Lynch - Analyst)

Q6. Yes, thanks very much. Clearly, you have some structural issues when competing against Rogers. Their wireless average lifetime revenue per sub was up 24% year-over-year in this quarter. Yours was down 6%. The good news is you have a very strong balance sheet, and perhaps some of your structural issues are fixable. So, that being said, what are your balance sheet priorities for '08 in terms of issues such as GSM overlay, flanker brand, migration of iDEN, fiber to the home, as mentioned by Glen, versus returning cash to shareholders and acquisitions? (Dvai Ghose - Ingenuity Capital Investments - Analyst )

Bob McFarlane:Thanks Peter.
In terms of a weighted type of comp set, clearly, I think, for competitive reasons, it wouldn't be prudent for us to provide that.
In respect to the prepaid/postpaid, I think the point there goes to prepaid subscribers, everyone knows, carry a lower ARPU and, in our case, roughly $25, which is quite good going in respect to prepaid subscribers. And so, there is value added in adding those subscribers. But, clearly, they generate a lower ARPU.
They also generate a lower data ARPU. It's part of why it's a lower total ARPU. And the data ARPU, in terms of increase, is increasing less than it is for postpaid. I think that probably makes intuitive sense.
So, in a quarter, such as in the third quarter, where the proportion of prepaids that we added, 27% total net adds, was greater than the 20% in accumulative base, I think there was an impact, as well, on terms of overall ARPU.
In terms of iDEN, we don't give the specific numbers on that. I would say that it continues to be a positive product and service for our company. Certainly, we are in a significantly different situation than the Sprint Nextel organization in the United States in that we never really marketed the Mike-branded iDEN service in Canada towards the consumer segment, quite in contrast to what has been done in some strategies down South.
So, we really don't have that same dynamic occurring here. We certainly don't have the spectrum capacity issues and other issues that are confronting the Sprint organization in that respect.
Having said that, it certainly isn't a growth segment for our organization. And because of the data upgrade path not being similar to that of EVDO, or EVDO Rev A, the more data-centric subscribers are more on our postpaid system.
So, given that data is the real growth element in the market for overall ARPU and data is a less relevant growth are for iDEN, therefore that maturing aspect is a factor in terms of influencing our overall ARPU, particularly as analysts like to express wireless data as a percent of overall consolidated ARPU, ours at 11%, certainly, it's been increasing. But, one of the reasons it would be lower than certain other competitors would be the fact that we do have a Mike subscriber base that doesn't generate a similar data ARPU as PCS postpaid would.
Having said that, of course, they do generate significant push-to-talk revenues, which postpaid don't provide either. So, before you look at the glass being half empty, it's also half full.

John Wheeler: Okay, the next question please.

Operator: Thank you. Greg MacDonald, National Bank Financial. Go ahead please.

Bob McFarlane: Greg, what I can say is -- and we show it on the slide. I've forgotten the exact number, but the ARPU with the split between the voice and the data component. So, you can see in the disclosure the voice ARPU going down.
So, I think if you look at it from a service perspective, component perspective, voice going down is the reason our overall ARPU went down because the voice exceed the data. The voice is down regardless of platform, whether it's Mike or whether it's PCS.
So, that I can tell you. The data is up much more on PCS than it is on Mike. So, from that perspective, the tradeoff is more generous in terms of PCS. But, that's about as far as I'll go on that.

John Wheeler: Okay, next question please.

Operator: Great, thank you. Peter Rhamey, BMO Capital Markets. Go ahead please.

Bob McFarlane: Well, Peter, I think -- let's go back just to this Q2. And at the time of Q2, you may recall, when we were having similar conversations on our results at that time, people noted that the retention and COA were up, and churn was up, as a matter of fact, as well. ARPU was up, so no one talked about ARPU, as I recollect. So, it's funny how things change in three months. The first two questions are ARPU, not on COA and retention, so thank you for turning it to that topic.
But, back in the second quarter, we said, look, WNP has just been implemented. It was a dramatic change in the industry, and people didn't want to be caught flat-footed. And so, we were aggressive in terms of retention and acquisition activities. And unfortunately, that did impinge on the margins in that quarter.
I recollect Darren saying that we felt we could do better in that regard, be more productive or more efficient, if you will, on a go-forward basis. Lo and behold, the third quarter's come in and not only did we improve on the second quarter, we improved on the prior year in that regard. And the subscriber adds were consistent overall with last year, despite the lower stem.
So, from that standpoint, you have to conclude that, gee, that's pretty good going. I mean, if we lowered our COA and our sub-adds fell through the floor, that would be a different situation. That's not the case here. So, I think that worked well, and we delivered upon an objective of improving our margins.
On a go-forward basis, in respect of the fourth quarter, clearly -- fourth quarter is generally 40% net adds of a year for the industry, so it's the big selling season. And to signal to our competitors what we're going to do in the last two months of the year when, in fact, about 35% of the annual adds are done in the final two months, I don't think would be prudent.
But, suffice to say, this organization has always prioritized profitable growth, but at a reasonable market share. And so, we'll be looking to see how the splits turn out. And I think there's certain implications for the industry, and we'll what our competitors' actions are as to how greedy or responsible they are in the fourth quarter.

John Wheeler: Okay. Thanks, Bob. Next question please, Ron.

Operator: Great, thank you. Vince Valentini, TD Newcrest. Go ahead please.

Bob McFarlane: Boy, I thought we disclosed a lot but, it only goes to show you, you can never satisfy everyone all the time when it comes to disclosure.
What I can say on the data ARPU is, directionally, you're correct. It is significantly higher than our average. That is, the data ARPU on the postpaid PCS is clearly significantly higher and would be comparable with some other firms.
Although, having said that, I do believe that there is still a great opportunity for improvement, whether it's PCS pre/post or Mike. I think we certainly have opportunities to raise the bar, and I think we have a good outlook in that regard.
In terms of MOUs, it's hard for me to comment about a competitor's. What I can say is that, in terms of MOUs driving ARPU, there's really a couple of considerations to keep in mind. It's not just your total MOU. It's your billable MOU.
And so, the extent to which they're included in a bucket, if you will, doesn't drive, incrementally, the variable. It usually depends upon the ratio relative to the fixed fee you're charging for that bucket. Secondly, we are experiencing industry-wide some substitution from data for ARPU, as messaging, obviously, is substituting, to an extent, for local and LD calls, actually.
So, it's hard for me to comment about the competitor's but, clearly, in our case, the real driver, in terms of the voice ARPU being down, is re-price due to competitive actions in the marketplace and the increased number of minutes are included in bundles.

John Wheeler: Thanks, Bob. Next question please.

Operator: Glen Campbell, Merrill Lynch. Go ahead please.

Q5. Yes, thanks very much. A question for Darren, you've got a trial going on fiber to the home, over-billed in eight communities on a very small scale. Could you talk a little bit about what you're hoping to learn there, and whether you think there's a possibility that the economics might look better for that project than, say, what we're hearing from Verizon with their fiber to the home? Thanks. (Glen Campbell - Merrill Lynch - Analyst)

Darren Entwistle: Yes, I think it's incumbent upon us to always trial new technologies and new access network topologies.
And so, in terms of our GPON trial, it is a learning exercise for us to determine can we deploy fiber efficiently and effectively to a new neighborhood, and can we do the same as it relates to apartment buildings? We also need to become proficient at the deployment of equipment as it relates to light-to-electrical conversation.
It's also important to deploy, from a trial perspective and from a learning perspective, new technologies where standards are not yet established. And you should be aware that, on the GPON front, standards are not yet established. So, for us to get ahead of the curve from a learning perspective, I think it's something worth doing for this organization, and it's no different than our approach on the wireless front.
Just it is incumbent upon this organization to remain on top of new technologies, the manner in which they're deployed, what they can deliver in terms of a functionality and product set to customers, and whether we can do that in a way that allows us to realize a decent payback and economic ramp in that particular overall solution.
So, nothing surprising here. It is a learning exercise for this organization. It is a technology which has not matured. And we are anxious to see standards developed in this area, so that manufacturers can get behind fiber to the home and, as a result of manufacturers getting behind these standards, hopefully, in the fullness of time, improve the economies of scale associated with this type of access network technology and topology.
But, we have been curiously watching what Verizon has been doing in the U.S. Some things, I think, are very relevant from a learning experience for TELUS, particularly as it relates to the technology. Some things are different here.
The fiber to the home program in Verizon's territory is principally an aerial program. And part of the thesis behind the deployment was, of course, to enjoy regulatory freedoms, or escape regulatory constraints. For us, of course, we now have a forborne regulatory environment that we should be able to avail ourselves out. And of course, our build is a hybrid-type build that includes both in-ground and aerial.
So, that's what we have been up to in that regard. I think the only thing to say is that, as it relates to access network technologies on the wireline front, there is not a one-size-fits-all solution.
It is very clear to me that we're going to need to take a hybrid approach in the years ahead, and this is for the medium, even the longer-term, where we'll have a heterogeneous aspect to our access network technology, where you'll see, sometimes, we'll be leveraging opportunities in new builds to deploy new technologies. In other areas, we will be doing overbuilds, where we've got Legacy technology, and we'll go through a progressive technology program, moving from ADSL2(+) to a VDSL2 and, maybe over the very, very long-term, fiber into the neighborhood and eventually to the home.
So, that's kind of our approach. And I think when it's not a one-size-fits-all approach, it behooves you to make sure that you've got learning, as it relates to all the types of technology that you're deploying, before you deploy them in earnest, to make sure that you can derive the type of returns that investors would expect. And we are very focused on the right economics, as it relates to the right technology, to support the right product portfolio.

John Wheeler: Okay, Ron. Thank you. The next question?

Operator: Great, thank you. Dvai Ghose, Ingenuity Capital Investments. Go ahead please

Darren Entwistle: Okay, Dvai. I really appreciate that particular fulsome question.
Our priorities for 2008, I think, will be very similar to the priorities that we demonstrated in 2007, 2006, 2005, going back, where we have effectively balanced our appropriate desire to invest in the future and invest in growth areas, like wireless and data services and, at the same time, simultaneously, returning cash to shareholders through two well established mechanisms.
And as I indicated in my remarks today, when we announced our dividend growth model four years ago, people were wondering whether it would it be a recurring or nonrecurring event. And here we are, four years later, with our fourth double-digit increase in the dividend.
Three of those increases, the percent increase on a year-over-year basis, was in the 30% zone, and the most recent one in the 20% zone. And of course, we bought back and cancelled some 50 million shares for $2.5 billion.
So, in terms of what you can expect from us, on a go-forward basis into the future, is the continued balance of returning cash to shareholders from successful investment programs that we've been able to leverage effectively and, at the same time, use our cash to appropriately invest in the continuation of the growth pieces around data and around wireless.
As it relates to your specific question on things like a flanker brand, for example, obviously, it's not appropriate for us to discuss any development of that sort on the marketing front within an open forum such as this. It's clearly, in doing so, to the benefit of our competitors rather than our shareholders.
We have not been an organization that has come out and said, unequivocally, no, we're not doing things that potentially could add value in the future. But, I think we need to examine this particular development in the marketplace and come up with the appropriate decision for TELUS.
There are differences here that I think are worth noting for our competitors, as it relates to a flanker brand or discount brand. For them, it was a situation they inherited, one, as a result of a new administration coming board, the other as a result of an acquisition. That's a different decision making paradigm than what we face at TELUS in terms of whether, organically, this would be something that we would want to pursue.
Also, unlike some of our competitors, it's pretty clear to me that the TELUS brand does, indeed, have the elasticity to address a range of markets within the Canadian context. It's got the elasticity on a national front. It's got the type of elasticity that extends across the languages that we, of course, embrace within our country, the ethnic constituencies that we embrace within our country, particularly given the language that we use for our branding vehicle. And it's got the elasticity to extend to the used segment.
So, I think that's a pretty strong endorsement of our existing brand. That having been said, we'll continue to watch what's happening in respect to the evolution of the existing discount brands that are out there -- and there's lots of them -- and make the right choice at the right point in time to maximize value for shareholders at the TELUS organization.
In terms of GSM upgrade, I'm not going to discuss that, as well. But, as I've said previously, there's two sides to every technology upgrade, and technology upgrades are not something that are new to the TELUS organization. We've done a myriad of technology upgrades over the last seven years. Indeed, just over the couple of years, not only have we deployed EVDO, but we've upgraded EVDO to Rev A. And the DORA footprint now covers almost two-thirds of the Canadian population.
So, for us, this is business as usual, and it's really a decision making paradigm that says we want to make the right technology move at the right time, so that we grow economic value rather than erode it, and that we don't lose our competitiveness, but we rather gain points of competitive advantage.
And any time we make a technology upgrade, we always say to ourselves what do we get for it? And whether it's DORA, where we get a network that's seven times faster than the EVDO network to support what we want to get done on mobile commuting, or music downloads, or Internet services and the like. It's got to have a business rationale.
And when you talk about things like a GSM upgrade, there's certain advantages that would be associated with that, that I think are well known to the people on this call. And whether that's time to market advantages, or mitigating disadvantages as it relates to form factors, or cost of device, and infrastructure as it relates to economies of scale, or in-roaming revenues with lucrative margins, there's always opportunities to go with the investment.
I think, from our perspective right now, we're satisfied with the technology that we have because we do think the technology that we've deployed provides us with the fastest, most powerful network in the country. We're very, very pleased with the fact that we've got the 8830 out there within the business market. We've got the World Phone. And we now, of course, today, are launching the Pearl device, in terms of delivering e-mail functionality to consumers.
The only thing I would say is that, if you look at our operational results, they're still best-in-class holistically. And in terms of where we're going over the very long-term, I think you'll see conversion, certainly, at the LTE level in the 2011 to 2012 timeframe.
What happens in between now and then is down to judicious, balanced decision making at organizations like TELUS, and all I can tell you is we have a belief that what we do, as it relates to branding, what we do as it relates to technology upgrades, whether it's wireless or GPON or ADSL2(+) on the wireline front, we balance those investment decisions with our continuing desire to still return significant amounts of cash to shareholders to established vehicles.

John Wheeler: Okay, Ron, next please.

Operator: Thank you. Rob Goff, Haywood Securities. Go ahead please.

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Q3 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
Back to Q3 overview