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events archive
Q4 2003 investor conference call - Q & A transcript
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Q1.a. My question has to do with demand, particularly on the wireline side of the business. I note that the revenue this year was off about 2%. You're forecasting flat to slightly up 2% in '04. I also note that the capex in the 4th Quarter increased a fair amount. I think, Bob, you talked a little bit about that. But I'm wondering if you could comment on overall demand levels. Are you seeing signs out there that point to an improvement beginning in '04 and is that what may be behind some of the increase in capex, and also if you could link that in with the non-ILEC business, where revenue growth seems to have plateaued, if you could comment on what the main drivers will be that you look for in '04 that will see some positive revenue growth there. (Richard Talbot, RBC Capital Markets)
Darren Entwistle: Richard, I need to compliment you on the way that you've couched your several questions into one particular paragraph. Very adept of you. Let me try and reverse my way through your questions, starting with the non-ILEC revenue growth. I think it's important to point out that if you do normalize for the dispositions that transpired over the course of 2003, we delivered roughly 10% revenue growth, going from 527 in the preceding year to circa 576 on a normalized basis. I think we were also very clear from the outset in respect to the non-ILEC business that the focus for this year was going to be on profit and the fact that we, you know, came in at less than $30 million negative EBITDA versus a negative $60 million original target, I think it's pretty good going for our business. I would also point out that if you look at the revenue base, the $555 million that we're generating from our non-ILEC wireline business, the quality of that revenue is very strong. Over half of that revenue is coming from data solutions and managed data solutions and that's the type of foundation that we want to have to build a very sound business on a go-forward basis.
I think one of the things that has hurt us in terms of year-over-year revenue growth in the non-ILEC business has been the weakness in corporate IT spend that we have seen reflected in less than appealing CPE sales. One of the big impacts year-over-year is that our CPE sales are down because corporates are not opening up their purse strings in pursuing certain IT strategies. We would expect to see that recover going forward as we see the economy improving.
The other thing that I think is pretty key for us, and you'll see this again reflected in 2004 is moving to EBITDA positive for our non-ILEC wireline business. Currently, I think if you look at the valuation of TELUS as an organization, there's very little value ascribed to our wireline operations in Ontario and Quebec and the extent to which we can go EBITDA positive in 2004 and cash flow positive in 2005, then I think we can start earning a value for our wireline business in Central Canada and hopefully start to see it reflected in our stock price.
Lastly, I think we've secured some very attractive deals over the course of 2003, the most notable of which, of course, is the TD Bank deal. None of the TD Bank deal revenues occurred in 2003 and they'll only start to come on-line as we implement that solution over the course of 2004 and that bodes well for our recurring revenues going forward, given that that's a seven-year $160 million deal. And I think, as well, the extent to which we have been investing in IP technology in the business market since 2000 and we've come forward with our IP-One NGN type solution, we can offer a very, very, very differentiated data offering in terms of the cost of the offering, the functionality of the offering and the robustness and the security of the offering. And that, I think, bodes well for our competitiveness and our future success in Ontario and Quebec and, indeed, Alberta and B.C. going forward. So I feel pretty positive about that business and I think it's a highlight for us on the wireline front over the past year.
On the ILEC side, you correctly point out that we did have revenue softness. And I'd say first and foremost, Richard, it's not easy to take out on a gross basis 7300 employees essentially over the last 18 months and simultaneously have revenue growth in the ILEC business. I think priority number one for us was to deliver on the Operational Efficiency Program, hit our net staffing reduction target of 6500 employees. We beat that delivering a net reduction of circa 6700, and delivering the step change improvement in our opex base and, by extension, the margin expansion that goes along with it. I think now that the OEP program has come to conclusion, we can begin again trying to revitalize the wireline growth in the ILEC region and we have a number of new product launches that we have scheduled within the ILEC business, particularly within our consumer market over the next 12 months that I think bode well for underpinning that revitalized revenue growth that I've just referred to.
Does that answer your question?
Q1.b. So overall, you have a positive bias toward the economy outlook in '04 and you would see that positive revenue growth also being fuelled with new revenue from new services and potentially some market share that you expect to take, as well? (Richard Talbot, RBC Capital Markets)
Darren Entwistle: Yes. I think you've got the tale of two provinces in Alberta and B.C., Richard, but overall, I think the economy is sufficient to support the revenue growth that we're postulating and, as I say, having been alleviated from the focus on the staffing level reductions and knowing what our new product development roadmap looks like for the course of 2004, I feel that in terms of the targets that we have set out for revenue growth for the ILEC business that they are reasonable.
Q2. Number of one-time, sort of one-time items in the quarter. I wonder if you could help go through them. Those related -- how much would be related to sort of conciliation or negotiation with union costs? You did highlight the $8 million of overtime costs. Are those recurring or are they pretty well completed? And then increased call centre costs, as you out-sourced -- or you in-source from a third party, are those costs in-source costs now -- or I guess the third party costs now going away, going forward? And then in the other direction, bad debt expense decreased by $12.5 million. I wonder if you could -- is that sort of a one-time thing in the quarter? (John Henderson, Scotia Capital)
Robert McFarlane: Okay, John. Well, again, I guess going in reverse, on the bad debt side which I'm fairly close to responsibility in that area, I think we're reducing to more normal levels, so I think that's a -- we're trending towards sustainable levels, so that we should be able to hold onto. In terms of impact from the labour situation on the results, I think that's difficult to quantify precisely. Certainly you're quite correct, we incurred extra overtime expenditures, and that wasn't solely due to the labour situation. That emanates back from the time frame that we experienced concurrent natural disasters, particularly out here in Western Canada, with the forest fires, with the largest cable accidental cut in the history of BC Tel cum TELUS, as well as you may recall, the power failures in Central Canada and the United States. So from that time on, we had overtime resources deployed. And we did have overtime resources deployed in terms of the customer service and to improve our service levels towards the end of the year. So I think that's an opportunity for some reduction. I guess I've learned after the past six months not to predict that there won't be any natural disasters, so hard to say that those aren't recurring one-time events, but suffice to say one would expect that to trend back to normalized levels. And as for the service level impact, maybe I can hand it over to Darren.
Darren Entwistle: I think just to underpin the contrast that Bob was alluding to, a stat that may be of interest to you in evaluating recurring versus non-recurring events, over the course of 2001 and 2002, we did not invoke in a singular instance our emergency operations procedures. We invoked them eight times over the course of 2003, as a result of the natural disasters and indeed, the third party cable cut that transpired in the downtown Vancouver corridor. And we also had some systems implementations that did not go as well as what was desired that had service impacts which again generated costs as we responded with manpower to deal with the deficiencies on the systems side. So in terms of this particular organization, I feel that there are non-recurring costs that are reflected in 2003 that we hope can be avoided as we go forward into 2004.
From a labour perspective, in respect of the negotiations, the cost in respect of that particular activity I would say is de minimus; there are non-recurring costs that are associated with our emergency operations planning to make sure that we are at a state of operational readiness to deal with any labour eventuality that may present itself. To the extent to which the labour situation is remedied, then of course those costs would not be repeated in 2004 and beyond.
Q3.a. Question for Darren, it's more of a broader issue. I guess when you look at what some of the ILECs, and I'll note particularly Bell, Verizon, SBC, have made some announcements recently, releasing details on the issue of voice-over IP and in particular, their plans to migrate in-market or their current circuit switch plans to migrate toward IP, I guess as a way of not only responding to competition, but looking at decreasing their current cost base of the way that they deliver voice. It's clear to me that you have an out of market product in your IP-One telephony service which I'm assuming is also used or focused in-market, but I wonder if you might comment. Have you made the investments that these other companies are talking about? Is this a case where they're playing catch-up or is this something in terms of investments in softswitch, gateway, maybe even further fibre deployment in-market, is this something that you anticipate you'll also have to be looking at and is that something that could be impacting capex going forward? (Greg MacDonald, National Bank Financial)
Darren Entwistle: Okay. Thank you, Greg. This is an area, obviously, that I feel pretty strongly about and I alluded to during the course of my remarks. TELUS has been making an investment in IP telephony since 2000, when we commenced our next-generation network. We are a world leader in IP telephony at the backbone layer, at the access layer and in respect of the customer premises and the applications associated with it. We are way out in front in this particular area and indeed, most of our peers are playing catch-up with us. And that's not because we have a stranglehold on any intellectual property. It's really a reflection of the efficacy of our strategy. You have to reflect that back in 2000, most of our peers were diversifying away from their core businesses and investing internationally. We were focused on our core business, focused on two tenets: data and wireless, and we were focused on Canada in respect of the national rollout or the national build-out of our infrastructure to support that focus on data and wireless. So it's the fact that we've been at this particular thing since the outset that I think has bestowed upon us a leadership position in this particular area.
Next thing I'd say for this organization is that what we do in terms of data and wireless, we do nationally. So I think it's obvious that in terms of launching our NGN IP-One type solutions to have a cost-disruptive model to enter a market, to offer a functionality set that's highly differentiated and indeed, a robustness of a service management offering and the security associated with that, obviously the focus for us initially is going to be in the out-of-market Ontario and Quebec region, where we have no voice base to cannibalize. But I think it's important to point out that we have repeated on many occasions that what we do on the NGN IP-One front will be done nationally. And I think for us what's positive in the ILEC region is the opportunity to reduce our operating costs. I think IP telephony can make that happen. And I think the challenge for this organization is going to be to make sure that what we can deliver from a functionality set as a result of computer telephony integration and the fact that customers are going to be willing to pay for that value proposition more than offsets the erosion that transpires in our core business. That will be the challenge for us in terms of solutions development and the way that we market that to our customer base.
Finally, in respect of our capex, we've been spending the capital all the way along. As I said, we operationalized our NGN IP-One solution, so that when you look at our 2001, 2002 and 2003 capex base, the IP investment is already in it. So for us right now, the investment is going to be on maintaining the capital that we've put in place, evolving the capital that we've put in place and nurturing that particular infrastructure so we can keep that lead time advantage that we have over our competitors, which I would say is roughly 18 to 24 months.
Does that answer your question, Greg?
Q3.b. I guess by way of sticking stakes in the sand though, it's always tough for us to understand where companies stand on these issues, and if Bell comes out and says we can have a full suite of IP products to 90% of our customers by '06, am I to assume that that's something that you can do equally? Is there a measurement that we can use to indicate that you're 18 months or a year ahead of everyone else? (Greg MacDonald, National Bank Financial)
Darren Entwistle: I think you should come have a tour of our operations. I think you should come and see those IP customers that we have operational today, so you can see first-hand the functionality, you can see first-hand the real-time deployment of that capability, and you can see that in terms of TELUS, it's not lip service in terms of what we will have come 2006. It's about what we have in terms of functionality today that's operational in the market, and that's why I say we've got an 18 to 24-month lead time advantage.
Q4.a. Question for George. I'm just trying to figure out how many City Fido subscribers moved over to Microcell. They mentioned that about 25,000 subscribers were switchers out of the City Fido subscribers that they got out of Vancouver. What percentage of that would you have taken? And you also said in the last quarter conference call that you were taking more subscribers from them in Eastern Canada, so I don't know if you can quantify that compared to how many would have switched over from TELUS in the 4th Quarter. And then I have a follow-up on that. (David Lambert, TD Newcrest)
George Cope: Sure. I'll answer some of what you've asked me. Let me start by saying as I said three months ago, City Fido does not add value to the wireless industry and clearly I believe Microcell's financials yesterday showed that to the marketplace. Having said that, we initiated a very tactical, strategic response the day they launched the program. We've had four phases rolled out. Phase 1 ran from October 9th to January 31st. We launched a program in Ontario and Quebec the day they launched City Fido, which offered Microcell clients the opportunity to switch to TELUS, receive a free phone for signing a contract and receive Fido's rate plans. I won't give you a number, but I can tell you that we converted well in excess of the new City Fido clients that Fido reported yesterday, their net new, not their conversions, well in excess of that number.
Phase 2 rolled out on February 2nd in the east, will run with full advertising again until March 31st offering 50% off Microcell's rates to clients in Ontario and Quebec until June 30th, free phone, full branding and matching rate plans after that. Phase 3 rolled out on February 9th and will run until March 31st in Vancouver and the Lower Mainland which offers new clients 700 minutes plus evening and weekends for $45 plus our $7 licence fee, no other services included, full long distance rates, et cetera, zero phone with contract and that's in the market until March 31st. Phase 4 in Vancouver launched by our retention team on February 10th where 100 people full-time will be re-attracting and re-marketing to clients who have left us, and in the first three days, roughly a third of those clients have indicated a willingness to return. And we will roll out other tactics as required to protect value for our shareholders. Meanwhile, we did this in an environment where we're able to increase ARPU and drive EBITDA 48%.
Q4.b. My follow-up is actually, when you look at the COA, most of the decline came from handset subsidies and actually marketing expenses went up by $25 million in the quarter, $24 million in the quarter. Reading from these promotions you're looking to offer, it seems like that $25 million is going to -- at least $25 million is going to be recurring every quarter. Am I reading this right? (David Lambert, TD Newcrest)
George Cope: Well, you clearly would be reading our financials right. Our COA is down year-over-year. We definitely spend more on branding than ever before. Our campaign actually was just recognized, TELUS was actually recognized as the number one brand recently by Marketing Magazine in the 4th Quarter. So you're correct on that. In terms of going forward, we just stand by our guidance that we've given the investment community for our wireless for the year, and that obviously will be a mix of promotions, et cetera. There's no doubt something like we ran in the 4th Quarter had more marketing dollars in it and will continue to be reflected in those sort of competitive responses; however, our financial disciplines and our guidance for the street hasn't changed.
Q5.a. Just a follow onto that, George, if I may. There were comments made yesterday by Microcell with regards to a national rollout and different pricing, higher pricing to be used, and I'm wondering what your take is on some threshold where you feel -- how much is Microcell under-pricing where you feel discomfort and where it would start to add value to the industry. I don't know if you can address that issue at all for us? (Peter Rhamey with BMO Nesbitt Burns)
George Cope: Yes. In the U.S. there are some unlimited plans, I think, north of $120, but we wouldn't be -- we won't be launching unlimited plans in the Canadian marketplace. Nobody that I know of has ever shown that an unlimited wireless plan, unfortunately with the cost structures of our industry infrastructure, is free cash flow positive and so it won't be something you'll be seeing from TELUS.
Q5.b. Were you encouraged by the remarks made yesterday? That if they, Microcell, were to roll out nationally, their price plans pricing would be higher, or are they just so far out of the money in terms of price points that it's... (Peter Rhamey with BMO Nesbitt Burns)
George Cope: Oh, I'll leave the analysts to determine whether or not that can be free cash flow positive. The most encouraging thing I saw was someone's thinking at least not even considering it again in another market until 2005. But I'll leave the analysts to do their own free cash flow calculations.
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
George Cope, president and chief executive officer, TELUS Mobility
Robert McFarlane, executive vice-president and chief financial officer
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