Telus Corp (TU) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS fourth quarter 2007 earnings conference call.

I would like to introduce your speaker, Mr.

John Wheeler.

Please go ahead.

Thank you.

Let me introduce the TELUS executives online with us today.

They're Darren Entwistle, President and CEO; and Bob McFarlane, Executive Vice President and Chief Financial Officer.

We'll start with introductory comments by Darren and Bob.

This will be followed by a question-and-answer session with both executives.

The call is scheduled for one hour.

The news release on the fourth quarter financial and operating results and detailed supplemental investor information are posted on our Web site at TELUS.com.

For those with access to the Internet, the slides are posted for viewing at TELUS.com/investors.

You'll be in listen-only mode during the opening comments.

Let me now direct your attention to slide 2.

The forward-looking nature of the presentations, answers to questions and statements about future events are subject to risks and uncertainties and assumptions.

Accordingly, actual results could differ materially from statements made today, so do not place undue reliance on them.

We also disclaim any obligation to update forward-looking statements except as required by law.

I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosure and filings with securities commissions in Canada and the United States.

Now over to Darren on slide 3.

Good morning.

Reflecting back, some aspects of a changing telecom industry and regulatory environment in 2007 were positive for TELUS, but the balance can only be characterized as both frustrating and disappointing.

Notwithstanding this, TELUS generated solid operational results for the year, continuing to advance our national growth strategy with a focus on the growth tenets of wireless and data.

Let's begin our review on slide 4.

At the consolidated level, TELUS delivered revenue growth of 4.5%, breaking through the $9 billion level.

EBITDA was up 4% to $3.8 billion on the year, underpinned by our wireless operations, which were up 10%.

TELUS's consolidated EBITDA margin of 41% for the full year represents a consistent performance with 2006.

This is noteworthy, given the higher than expected mid-year costs we experienced in three particular areas.

First, implementing wireless number portability; second, implementing the new unified customer-care platform in Alberta; and third, the turning down of the AMT service due to the bankruptcy of his parent in the U.S.

Excluding positive income tax recoveries, TELUS generated a healthy underlying increase in earnings per share of 19% on a year-over-year basis.

This was driven by three factors: Higher EBITDA, lower financing costs, and reduced shares outstanding.

Notably, TELUS has achieved a record 18% return on equity in 2007.

Overall, TELUS achieved or exceeded three out of the four 2007 consolidated financial targets that we set out over a year ago, including the two profitability targets of EBITDA and EPS.

Revenue ended 1% below target, largely attributable to competitive pressures on wireless pricing, and our own shortcomings in operational execution.

Importantly, TELUS once again generated strong free cash flow of almost $1.6 billion.

This has allowed us to continue using the cash we generate to accomplish two goals that at many companies are mutually exclusive, specifically invest prudently in growth opportunities and simultaneously return significant amounts of cash to shareholders on an ongoing basis.

Each and every one of TELUS's investment decisions have been consistent with our strategy over the last eight years of concentrating our spending on our core business in our domestic market.

The yield from these investments we share with securities holders while also setting aside funds to carry on the cycle of investing for the future.

Slide 5 outlines the way we continue to meet our commitment to use cash flow to realize value for shareholders.

TELUS has delivered four successive yearly dividend increases with a compound annual growth rate of 32%.

Additionally, TELUS has repurchased nearly 53 million shares for $2.5 billion over the last three years.

Indeed, in 2007 alone, TELUS returned to shareholders $1.3 billion in dividends and share repurchases.

Over the past four years, TELUS has returned $4 billion in totality, or more than $11 per average share outstanding.

Turning to slide 6, let's examine our wireless highlights for 2007.

TELUS experienced revenue growth of 10.5% compared to a year ago, and this is based upon a 10% growth in the wireless customer base and as well a 59% growth in data revenues.

These results illustrate the return on our investment over the last three years in expanding our high-speed EVDO data network.

Having the fastest coast-to-coast wireless service covering 80% of Canadians is a catalyst for continued growth in the important data service category.

Notwithstanding this, the advent of number portability, certain competitive pressures and TELUS's own execution shortfalls led to higher retention costs and churn of 1.45% for the year.

Clearly, this is aspect of TELUS's performance is one that I am less than satisfied with, as evidenced in particular by our fourth quarter result in this area.

Improving customer retention will be a key focus in 2008, as we seek to raise the bar on our own performance.

I continue to believe that number portability represents a long-term growth opportunity for our organization, as we strive to capture a balanced share of the business market in a disciplined fashion.

Turning to slide 7, you can see TELUS's wireless customer gross and net additions since 2001.

TELUS has consistently produced more than 500,000 net additions in each of the last four years, including record gross additions in 2007.

The task ahead is to complement this with an excellent churn result.

Slide 8 provides an overview of the growth in the Canadian wireless industry for the last five years.

Regardless of the Canadian government's decision on the framework for the advanced wireless services spectrum option in the month of May, TELUS remains confident in continued strong industry growth for a number of reasons.

First, the estimated 490-basis-point gain in 2007 is higher than 2006, illustrating that the Canadian market continues its healthy growth.

Second, Canada's wireless industry still has significant latent potential for growth.

A comparison to the current U.S.

penetration rate on the next slide illustrates this exact point.

With our results released today, we estimate that wireless penetration in Canada currently stands at about 61%, compared to the circa 80% penetration rate in the U.S.

As Canada inevitably moves to the U.S.

penetration rate over the next four years, 6 million new clients should join our industry.

I now turning your attention to slide 10, for TELUS's 2007 wireline segment highlights, which helps explain our operating resiliency in this challenging industry.

Notably, our wireline data revenues increased 8% in 2007 to $1.8 billion, offsetting declining local and long-distance services.

This strong data result was based on almost 104,000 new high-speed Internet customer additions.

While TELUS surpassed the 1 million customer mark for the first time, we were disappointed with our performance in this area given the systems upgrade challenges we encountered over the course of 2007.

On the business front, TELUS experienced excellent traction in the business and public sector markets, with several landmark contracts secured over the past year.

Slide 11 highlights our wireline resilience in network access line performance when compared to our North American peers.

TELUS, again, experienced only moderate network access line losses at 3.2% as residential losses of 6.5% were partially offset by business line growth in Ontario and Quebec.

Let's turn now to slide 12.

TELUS is addressing the challenging dynamics of the wireline industry in three ways.

First, we are enhancing TELUS's broadband access network in our consumer markets of B.C., Alberta and eastern Quebec.

This investment underpins our high-speed Internet competitiveness and facilitates the acceleration of our TELUS TV rollout with the addition of high definition capability this year.

Second, deregulation provides TELUS with increased pricing and competitive flexibility for three-quarters of our consumer urban markets and two-thirds of our total business lines in our ILEC territories.

Third, TELUS is making infrastructure investments to progress our technology leadership across key industry verticals, namely the public sector, health care, financial services, and energy.

The acquisition of Emergis in mid-January fundamentally supports our goal of being the leader in health care transformation in Canada.

Investors will note a significant portion of our wireline capital expenditures is success-based, tied to the positive economics of long-term contract wins with enterprise and public sector accounts.

As we enter 2008, we remain responsive to the changing competitive landscape.

Slide 13 outlines our key priorities that will guide TELUS through our operational execution in 2008.

You will note the priorities are simple, and the priorities are clear.

Indeed, I've already touched on a number of the key initiatives in today's call.

Overall, we are again taking a disciplined approach to drive profitable growth from wireline and wireless data services on a national basis.

Importantly, elevating the client experience and building enhanced loyalty will be key, as we will be exacting productivity gains from the next phase of our efficiency improvement initiatives.

Finally, TELUS will continue to progress our technology initiatives, including the next phase of our client care system into B.C., and as well we will be enhancing broadband access for wireline and wireless clients.

Without a doubt TELUS has the right strategy, one that has been tested and proven over the last eight years.

TELUS is extremely strong financially, and well-positioned to advance this strategy through rigorous execution of our priorities, thereby generating value for investors in the years ahead.

Now over to Bob, who can brief you on TELUS's fourth quarter results.

Thanks, Darren.

And good morning, everyone.

Let me begin the financial results review with our wireless segment on slide 15.

Fourth quarter wireless financial results were solid year-over-year.

Wireless revenues were up nearly 9% as subscriber growth was slightly offset by a small decrease in revenue per customer.

EBITDA increased by 14% as a result of higher network revenue growth and lower cost of acquisition, or COA for short, as we achieved profitable subscriber growth.

This was partially offset by higher customer retention spending, as clients moved from voice-centric mobile phones to what we call smart phones such as PDAs and BlackBerrys.

Overall, we were pleased to see wireless EBITDA margins expanded by 2 points.

The increase in wireless CapEx this quarter was mostly due to continued network enhancements in capacity and coverage.

Our EVDO Rev.

A high-speed network now covers roughly 80% of the population.

Despite the fourth quarter increase, wireless CapEx was consistent with the original level targeted for the year 2007.

Turning to slide 16, wireless net additions were lower year-over-year.

TELUS added 161,000 net additions in the quarter, after including a one-time reduction of 5,100 to prepaid net adds following a billing system audit.

Note that this adjustment was reflected in both net adds and churn.

This adjustment related to subscribers which deactivated over the past two years, but were still registered as subscribers in our billing system.

Gross additions increased by 11% to a record level in the fourth quarter despite our disciplined marketing efforts, which I'll cover in more depth in the next few slides.

Prepaid net additions increased 5.6% to 55 ,000 from a year ago, while post-paid net adds were 106,400, representing 66% of TELUS's total net adds in the quarter.

While our prepaid subscriber base continues to expand, our overall subscriber mix remains at an 80/20 post-paid, prepaid mix.

Slide 17 shows that the total quarterly ARPU decreased by $0.80, or 1.2% year-over-year, to $63.70, reflecting declining voice ARPU and the increased proportion of prepaid additions.

Note that for the full year 2007, wireless ARPU actually increased slightly to $63.56.

Looking at fourth quarter results, voice ARPU was down $2.59, caused mainly lower per-minute rates, increased price competition in the business, and discount segments of the market, and a decrease in roaming.

At the same time as an offsetting factor, TELUS's wireless data ARPU increased by $1.79 to $7.95, and now represents 12.5% of total ARPU.

Data service revenue increased by $39 million, or 43% year-over-year.

The potential for continued strong wireless data growth remains positive, given the increasing penetration at EVDO capable devices in our subscriber base, the expected introduction of higher bandwidth applications and devices, given the deployment of EVDO Rev.

A as well as the ongoing migration of non-dispatch mic users to PCS.

Slide 18 reflects the focus in our wireless marketing efficiency for the fourth quarter.

Churn increased in the fourth quarter to 1.59%.

We attribute this to shifting product mix and the first fourth quarter under WNP, that while contributing to higher subscriber loadings, also contributed to higher churn.

As mentioned earlier, TELUS reduced prepaid net adds by just over 5,100 for a clean-up of deactivated accounts, contributing an increase of 3 basis points to the churn rate.

Despite record gross additions, marketing expenses for the quarter were down 11% year-over-year due to lower advertising and promotion spending, contrary to speculation.

COA gross -- per gross addition was $352, 19% lower year-over-year, partially due to disciplined marketing expenditures and a higher prepaid gross additions mix.

COA as a percentage of lifetime revenue, a measure of marketing efficiency, improved by 2 basis points over fourth quarter 2006.

Now let's turn to the wireline side of our business, starting on slide 19, to review the components of revenue.

The Local and LD revenue declines are reflective of the continued competitive environment and substitution from wireless and VoIP, as well as reduced revenues from moves, adds and changes.

These revenue declines were partially offset by increasing data revenue, double-digit growth in the high-speed Internet base, plus increased managed data revenues on the business side led to solid 7% data revenue growth.

Other revenue declined more than 5% mainly due to lower equipment sales.

Overall, wireline revenue was down 1%.

Turning to slide 20, wireline EBITDA increased by more than 2% in the fourth quarter due to lower operating expenses.

This decrease in expenses was due to the excellent cost control, reduced cost of sales in line with our lower equipment sales, as well as increased capitalization of labor.

As a result, wireline EBITDA margins expanded by more than 1%.

Meanwhile, CapEx was 9% higher in the quarter, reflecting up-front investments to support new enterprise customer wins in central Canada.

Investments were also made in enhanced broadband and network access growth.

The increase was partially offset by lower spending for billing and client-care system development.

It should be noted that while CapEx was higher for the quarter, it was in line with original 2007 guidance.

Let's move to slide 21 and examine Internet results.

During the fourth quarter, high-speed Internet subscribers surpassed 1 million, and were up 11% year-over-year.

Net adds for the quarter were disappointing, and much lower than a year ago, reflecting various challenges, including competitive dynamics and decreased marketing effectiveness.

We're focusing on rebuilding this momentum going into 2008.

The next slide highlights our stable network access line performance trend.

Overall, access lines declined 3.2% year-over-year, a result which remains much better than most North American telcos.

The residential line component had losses in the fourth quarter of 47,000, a decrease of 6.5% year-over-year.

This reflects continued competitive activity, including the rollout of cable telephony service in many of our markets over the past year, as well as on going wireless substitution.

However, the decline in residential lines was partially offset by a healthy 2% increase in business lines largely gained in Ontario and Quebec.

Slide 23 illustrates the robust growth trajectory and changing mix of TELUS's overall total customer connections.

On a consolidated basis, growth in wireless and high-speed Internet is significantly outpacing declines in residential network access lines and dial-up Internet.

Interestingly, TELUS wireless and Internet now account for more than 60% of total connections, and we have generated nearly 1 million more connections in the last two years.

This clearly demonstrates the continued successful execution of our national strategy focused on investing in growth in wireless and data that continues to create value for our investors.

So putting it all together, let's look at TELUS on a consolidated basis, starting in slide 24.

Consolidated revenue in the fourth quarter grew more than 3%, and EBITDA rose almost 8%.

EBITDA growth led to a margin expansion of 1.7 points to 41% for the fourth quarter.

Reported EPS increased 73%, which includes a positive $0.44 adjustment for tax-related matters this quarter.

When excluding the positive tax adjustments in this period, as well as the $0.06 positive tax impact in the fourth quarter of 2006, underlying EPS still increased by 22%.

Now, let me elaborate on the various drivers behind EPS growth on the next slide.

This slide shows a detailed breakdown of the components of the $0.52 year-over-year increase in reported EPS.

Incremental tax impacts were the largest contributor to reported EPS growth, and were a net $0.38 when accounting for the $0.44 positive contribution this quarter, as compared to the $0.06 annual -- or sorry -- amount in the same quarter last year.

Underlying EBITDA growth generated $0.13 in growth.

Continuing down the income statement, lower financing expenses contributed $0.05 to the improvement.

Higher depreciation and amortization primarily related to the new Alberta consumer billing system that went into service in the second quarter as well as reduced asset lines for certain assets impacted EPS by $0.09.

Other items added $0.05, including a lower average number of outstanding shares due to our ongoing share repurchase program.

Slide 26 summarizes our total share repurchases in the quarter, and historically, since we first began buying back shares in December 2004.

We remained active in the market in the fourth quarter, repurchasing a total of 3.1 million TELUS shares for $148 million.

This brings TELUS's aggregate share repurchases since inception of the NCIB program to nearly 53 million shares for $2.5 billion.

To put this into perspective, these amounts are significantly more than the $1.95 billion or 45 million shares, the share component of the Clearnet Communications acquisition made a few years ago.

Importantly, for investors, this has led to a 9.5%, or 34 million reduction in the total shares outstanding over this period, despite shares issued for auction exercises and other dilution in previous years.

Notably TELUS's innovative move to the tax efficient net cash settlement method for past options beginning in 2007 has accelerated the impact of share repurchases by reducing share dilution.

Outstanding shares were down 4% on a year-over-year basis.

Slide 27 summarizes the completion of Emergis and provides a quick financing update.

On January 17, TELUS financed and paid with ease $743 million for all issued and outstanding Emergis shares by drawing down its credit facility and available cash resources, mainly from issuing commercial paper.

With the Emergis transaction closing in mid-January 2008, it will include results for about 11.5 months.

Taking into account the funding of the Emergis acquisition, the pro forma net debt to EBITDA ratio measured at December 31, 2007 would be 1.9 times, and still within our guideline range of 1.5 to 2 times.

Earlier this week, on February 12, 2008, TELUS accepted commitments for a new $700 million 364-day revolving credit facility with a select group of Canadian banks, which ensures TELUS maintains ample liquidity.

With no significant debt expiring until 2011, TELUS enters 2008 with strong liquidity, considerable financial strength and balance sheet flexibility.

Now, to conclude, in slide 28, we are confirming TELUS's consolidated and segmented targets for 2008 as announced in mid-December with no changes.

So with that, Darren and I would be pleased to answer your questions.

I'll turn the call back over to John Wheeler to start the Q&A session.

Thanks, very much, Bob.

Just before I turn the call over to Sebastien to conduct the Q&A session, can I ask your cooperation for one question at a time please.

Sebastien, please proceed.

Thank you.

(OPERATOR INSTRUCTIONS) And the first question is from Peter MacDonald, GMP Securities.

Please go ahead with your question.

Thank you.

Can you discuss your intentions on GSM?

Are you contemplating or investigating an overbuild strategy, and would that be a partial or full overbuild strategy?

And then you've been really good in the past with giving us the pros and cons of these types of strategic decisions, and that would be very helpful in this case as well?

Thanks.

I think, Peter, speculating on technology evolution in an open forum is not necessarily the best thing to do for our shareholders.

Clearly, it's always incumbent upon us, whether it's our wireless business or wireline, to stay abreast of the developing ecosystems from a technology perspective in the telecoms world.

I think it's important to note that insofar as TELUS is concerned, whether you're talking about our wireless business or wireline, technology upgrades have been a way of life for us.

If you think about what's going on now with our broadband access network and the iterations we're experiencing in terms of upgrading our access technology, I think that's reflective of the type of continuous change that you can expect from a technology perspective, and wireless has been no different.

When I arrived here eight years ago, the network in the West was effectively analog.

We've gone from analog to digital, digital to 1x, 1x to EVDO, EVDO to EVDO Rev.

A.

So it's been a continuous stream of technology upgrades for us, and I think it's something that as an organization we do very well from an execution perspective.

I think it's also important to point out that at the end of the day, we have on our eye on the economics, and insofar as making an technology upgrade is concerned, it's based on a business case.

And effectively, if I distilled the business case down to two bookends in terms of, let's say, doing the right thing for shareholders, you don't want to be in a situation where you prematurely move towards a new technology not having sweated the existing assets sufficiently and not having generated the ROI on the previous technology stage that you use shareholder money to invest it in in the first place.

Likewise, on the other hand, if you wait too long, you can become uncompetitive, and, of course, that has an economic result on the organization as well.

So really, at the end of the day, it is all about timing and getting the timing right and making the right business case decision.

For us right now, I think people forget, we've made an investment in both EVDO and recently a very cost-efficient upgrade to Rev.

A which we are truly operationalizing this year in 2008 with handset availability really coming online.

And, of course, we've enjoyed that capability previously with the Sierra Wireless AirCard on the mobile computing front.

But I think it's incumbent upon us right now to say we have technology leadership from a bandwidth perspective within the wireless world that's good for consumer data applications and good for business data applications.

And we need to sweat the heck out of this technology stage to get the ROI that we want on the EVDO and EVDO Rev.

A investment in the first place.

And it's interesting to note that right now, if you compare us to alternative technologies in Canada, we do have a leadership position.

From a speed perspective, we have the fastest network both on the downlink and on the uplink paths, and we should be exploiting that.

I guess the final thing to say is beyond that, when we think about a technology evolution within the business case format, we want to think about where are the ecosystems developing within this new technology that we're considering.

What's it going to give us in terms of things like access to handsets, economies of scale, so on and so forth.

Those are the key drivers.

And it's interesting to note that frequently when you're considering a technology upgrade, the costs of that upgrade are non-recurring.

You experience them once to drive the new technology through implementation.

But the benefits associated with that new technology coming to fruition are recurring; and of course, that always delivers a strong economic result when your costs are up front but the benefits are in perpetuity.

Next question, please, Sebastien.

Vince Valentini from TD Newcrest, please go ahead.

Yes.

Thank you very much.

I was glad you were talking about the Rev.

A there, because my question is on wireless data.

I see you've had quite a deceleration in the growth in data ARPU, it was up 69% in the first quarter.

In the fourth quarter here, we see it up only 29%, but it seems like you're taking steps to try to reverse that trend and how growth reaccelerates, spending a lot of money on retention to get new smart phones into customers' hands.

So I'm wondering if you could flush that out a little bit more?

Do you expect the data ARPU growth to actually reaccelerate, and as part of that answer, do you mind sharing with us some detail on the mix of your customers, all these gross adds you had in the fourth quarter?

Can you give us what percentage of those might have been on smart phones?

Okay, Vince.

First thing, I think first point to make is that our wireless data service growth year-over-year fourth quarter was 43%.

That would compare to the number that you previously mentioned.

So in that light, I think it's good growth.

It's not as high, perhaps, as it could be.

But you've touched on something that I think is quite positive for the future, and that is the significant conversion of -- as I referenced in my comments, voice-centric type of traditional phones for more smart phone devices, the likes of PDAs, et cetera, and that certainly has been an emerging trend in 2007, particularly the back half of 2007.

And so essentially, you're getting part of your existing base as well as new subscribers increasingly adopting devices out of their desire to use data where they may not have used data previously.

So I think that's a positive trend for the future.

In terms of the base, one metric that might be helpful is that a little under 20% of our existing base would be comprised of handsets that are EVDO capable.

So that gives you an idea, as we have upgraded the network on EVDO going back two and a half to three years ago, and doing it over the past three years and, in fact, now into Rev.

A less than 20% of the base has EVDO handsets, so consequently, as that's building up, I think there's a build in positive dynamic for future data growth, which is clearly the emerging trend in the marketplace.

So that bodes well, as well.

Okay.

Sebastien?

Greg MacDonald from National Bank Financial, please go ahead.

Thanks, good morning, guys.

The question goes to Darren.

Darren, it's really another strategic-type question.

We know from TELUS's interest in Bell last year that you thought there were certainly scale benefits, scale and scope benefits for doing a deal in Canada.

I wonder if you might just comment on, looking at the landscape besides Bell, are there scale or scope benefits for further consolidation in the telco market?

I'm not just thinking of TELUS, but overall.

I mean, is it your view that the maturity pressures in the business have changed in the last two years enough that -- we are in a situation in Canada now that consolidation should occur and probably will occur in the next two or three years?

Thanks for the question, Greg.

Clearly the machinations that we went through in the summer with BCE were predicated on a strategy where we felt that economies of scale are important, and when you make the type of investments that we make from a CapEx and an OpEx perspective, the extent to which you can better leverage economies of scale, that's always a positive thing within our industry, effectively.

Size does matter when you have the type of initiatives that we have from a magnitude perspective, the investments that are required, the execution and the complexity, scale both from a return on investment perspective and from a diversification perspective as it relates to the way that you manage your portfolio and all the complexities therein is something that would be a strategy that I would subscribe to.

The second comment would be scale opportunities have to be quality scale opportunities.

And I think it would be fair to say that in the absence of BCE the number of quality scale realization opportunities within the Canadian landscape is significantly scarce, if not none altogether.

And so pursuing scale only makes good sense if, A, it's a quality combination you're pursuing and you're confident you can deliver the operational execution .

And I just, outside of the BCE envelope, don't see opportunities of that ilk within the Canadian landscape.

What we do think makes good sense is looking at opportunistic acquisition pursuits that would allow us to fill capability gaps insofar as key components of our strategy are concerned.

Clearly, you have seen with the number of landmark wins that we have been securing within the enterprise and public sector market that that's an area of our business that is doing exceedingly well for TELUS.

And one of the reasons that it's doing well is that we haven't taken a broad-based focus.

We have been very segmented in our approach to the market rather than broad-based, and insofar as the business market is concerned, we have looked to focus on key verticals, the verticals that I referenced in my opening remarks today.

Again those verticals are key, whether they're financial services, whether they're oil and energy, public sector in general or health care in particular.

We are doing very well, and we're winning business in that regard.

And if there's an opportunistic move for us to make on the acquisition front whereby we think the economics are good, whereby it fills an important strategic capability gap that we think we can execute against and that we can deliver the operational integration of that acquisition opportunity, we'll give it due consideration.

But again, I'll make the same comment that I made previously in referring to economies of scale, it's got to be a quality opportunity.

And even insofar as vertical markets are concerned, the number of quality opportunities from an acquisition perspective, they really are few and far between within the Canadian landscape, which is an interesting thing, because then that takes you all the way back to organic execution.

And I'll make the comment that I've made at several of these calls over the last three years.

TELUS does not need to do an acquisition to see its strategy through to fruition in full.

As a result of the strategy that we've had in place over the last eight years, we are in a very strong position.

We've got an excellent platform to continue to deliver good organic operational execution, and that is all that is required to see our strategy through to fruition, which means that any acquisition opportunity gets judged purely as something that's opportunistic.

It's a nice-to-have opportunity rather than a need-to-have opportunity.

I think that always makes us a little bit more sanguine when it comes back to the economics of any deal.

And of course, with any appetite that we have, we are in a fortunate situation right now and a differentiated situation where we've got an extremely strong balance sheet, so we can give opportunities due consideration, and we can process those opportunities without straining the financial and economic resources of

Okay.

Sebastien?

Rob Goff from Haywood, please go ahead.

Thank you very much.

When you look at the lower COA from yourself and Bell, can you say what are the key drivers?

Are they the efficiencies or discipline by the providers, or would it also reflect on a lower net present value per new or marginal subscriber?

Rob, in terms of the COA, really there's a couple of dynamics there.

Sometimes you can have lower COA expenses because your gross adds went down.

Our gross adds actually went to a record level in Q4, and our COA expenses were down.

So, obviously, it's not just a volume driver.

Measured as COA per gross add, which sort of normalizes for that consideration, again, as you reference, it went down significantly.

Our absolute dollar advertising promotion expenses were down year-over-year, fourth quarter-to-fourth quarter, and so that would be a primary reason.

And so when you get good gross adds on a lower A & P spend, then you're getting an efficiency gain, if you will, on that side of it.

In terms of the subsidy and commission side, I think that contrary to erroneous speculation, we were prudent in the fourth quarter, and so that's reflected in that COA number.

And then, lastly, because of the mix -- and this would be a minor factor.

Because of the mix of prepaid to post-paid, you tend to have lower subsidy and commissions as it relates to prepaid adds than post-paid, because we gear our cost structure to the respective ARPU profile of our additions.

So that's really the dynamic that occurred in the fourth quarter.

At the end of the day, the only way to really summarize it is we had improved efficiency on the COA.

And so when you think back to -- I can recall -- I think it was around the first quarter of the year, and people were saying, "Gee whiz, your COA is way up, and so on and so forth." Funny enough for the full year, our COA is actually down, and yet our gross adds are significantly up year-over-year.

And our net adds are down a bit, but they're very consistent with what they were the prior year.

So all in all, I think a good going in terms of the efficiency side.

On the contrary view would be maybe we should have spent more and done a little more demand stimulization.

I won't get into that debate publicly, but clearly in terms of the effectiveness of what we did spend, it was efficient.

Okay.

Sebastien, please?

John Henderson from Scotia Capital, please go ahead.

Yes.

Thank you.

I have a line of questioning around your wireless data pricing.

I know you've touched on it already.

But I did want to ask if the sort of slow-down in wireless data growth in Q4 may have been attributed to your price plan for unlimited e-mail at $15 a month, and whether or not that may have caused some cannibalization?

And then, also, just in terms of what your impact may be from the new unlimited usage, web access usage price plan at $30 a month, it's the lowest I've seen.

I'm wondering what sort of impact that may have on CapEx and how you're kind of sort of following that, if you're seeing -- what sort of signs from early adoption you're seeing of that plan, and how you could control the CapEx side of the equation if that got out of control?

Okay, John.

In terms of the wireless data pricing, firstly, I would say that the type of consumer centric plans that were introduced by the industry in the latter part of the fourth quarter, I think, did some demand stim in terms of consumer wireless data, but would not have had a material impact in terms of cannibalization, I think you referred to it as, as the base.

So I don't think that would have been a material dynamic there.

Really what you've got is a classic demand stim going on in the consumer segment, which wasn't a big focus of wireless data growth in the prior two years, which was largely business or oriented, if you think of PDAs and the like.

So that -- on a go forward basis, I think there is quite an opportunity for growth in the consumer segment from both the advent of more segmented pricing plans, but in addition to that, devices, such as the BlackBerry Pearl, which are geared more to a consumer Soho type of market and are doing very well in the marketplace.

Next question, Sebastien.

Thank you.

Glen Campbell from Merill Lynch, please go ahead.

Yes.

Thanks very much.

My question is for Darren.

It's on long-term capital intensity in wireline.

You've talked a lot about the reasons why wireline CapEx is going to be high this year and next year.

But I wonder if you could just give us a general sense of where you think CapEx to sales in the wireline segment should stabilize in the long run after a couple years out?

Thanks.

Glen, you're really seriously asking me to project three to five year CapEx intensity ratios for the wireline business?

That's not something, obviously, that I'm prepared to do.

One of the things that we have said previously is that we believe, given the margins that we have invested within our wireline business, that it's the right thing to make the necessary upgrades in our access network from a bandwidth perspective so that we can do two pretty important things.

Number one, work hard to preserve the margins that are associated with the heritage services, predominantly on the voice side of our business, and clearly, there are good margins that we generate from that segment of our business.

And then, number two, establish a new wireline access network platform for advanced data services, whether they're Internet-related, security-related or TV-related.

And it's without a doubt a heavy lift for our organization, which is why you see CapEx intensity at circa 25% as we undertake these investments, and they are multi-year investments.

There is no escaping that reality.

So we can either abandon that business, or we can invest in that business both from a protection point of view, and also from a forward-looking new services point of view, and build a platform for the longer term that I think will deliver in the fullness of time, an economic return for shareholders.

And essentially for us that is the road that we're going down, and as I say, the magnitude of the investment is significant.

We've previously announced the $600 million that we're spending over the course of '07, '08 and '09 in upgrading our broadband network, and we think that that is a prudent thing to do.

So the sums are material, and the program is multi-year in its orientation because elevating your bandwidth and your access network significantly, making the move from [80 cell 2 plus to bedia cell 2] to fiber into new neighborhoods, fiber to condos in terms of multiple dwelling units, fiber eventually in the fullness of time to legacy neighborhoods in terms of the technology retrofit.

These things all take time, and they all cost money, but we think it's the right thing to do to protect the margins that we enjoy today, and establish a platform for future growth.

The other thing that I think people do forget about sometimes is that the business of TELUS from a mathematics perspective, if nothing else, is fundamentally changing.

So as we move from being a Company that was predominantly wireline with wireless as the growing segment to a Company that's effectively half wireline and half wireless, to a Company that in the future will be predominantly wireless in terms of the asset mix, where our revenues and profits are derived from, and as well as where cash flow is derived from.

And of course, the intensity from a CapEx perspective that we have traditionally experienced on the wireless side does reflect the more attractive near-term economics of that element of our industry.

And so when you look at our CapEx intensity on a consolidated basis, the weight of wireless will have a greater impact in the years ahead as it becomes a greater proportion of our financial mix and of our asset mix.

Excuse me.

Sebastien, go ahead.

Jeffrey Fan from UBS Securities.

Please go ahead.

Thanks very much.

Just a quick question, again, on some of your data plans that were offered in the marketplace.

I'm wondering if you can give any color, because on the take-up on some of these entry price plans and whether -- whether consumers were really brought in at the lower price plans, or did you see a lot of consumers actually take a higher price plan, meaning we can't just look at the $10 or $15 ARPU or price per month as kind of the ARPU uplift, and there may be kind of greater ARPU uplift than what is, I guess, apparent?

Just wondering if you can share any thoughts on that?

Well, Jeffrey, when TELUS introduced $15 pricing geared to the consumer market for data, that was for unlimited messaging.

It had -- it was -- the access beyond that, such as Internet to web browsing and the like, were subject to a data cap.

That was not the approach taken by our competitors.

So the TELUS approach, which was one, which was based on using unlimited messaging effectively, which is not capacity intensive, and that's a very thoughtful and prudent approach, both to bring benefit to the consumer in the marketplace in a category not directly addressed previously, but in a way which is shareholder friendly, shall I say.

That was not the approach which was reciprocated by our competition.

So consequently, our approach was one which fueled adoption through the devices in conjunction with a rate plan that gave people what they really wanted to get going in data, but at the same time provided a tool to access other services such as downloading and browsing and the like, which would stimulate additional revenues for the organization.

So I think that's an excellent approach that we try to take to the marketplace, and we'll have to see how the industry evolves in that area going forward.

Sebastien?

Peter Rhamey from BMO Capital Markets.

Please go ahead.

Yes.

I was hoping -- this is a question on wireless, and when we look at your net adds, and impacted by a little bit of a higher churn, and this is a theme that's going on generally across the industry both in Canada and the U.S.

Yet your gross adds are up, of course.

I'm trying to look out in the next year to two.

Should we look at this as being positive in that gross adds, actually, if you can get your churn down, that translates to net adds, or should we be looking at the net add trend and say, "Look, industry is penetrated, and the sustainable growth rate for the next two or three years is a net 450, 500 basis points on a go forward basis.

I'm not too sure how I'm supposed to read the tea leaves on the demand function here for the industry as a whole?

Okay.

Well, I think, if you're going to be reading the tea leaves, I would ask you to go back and have a look at the slide I presented in my opening comments that looks at the penetration rate for wireless in Canada and the penetration gain that's been realized year-in and year-out.

And you can see that typically the penetration gain has been between 450 and 500 basis point on a per year basis.

That's a pretty consistent trend in terms of how the industry has been performing.

And if you want predictability as to what 2008, 2009 and 2010 will hold, I think that's a pretty good leading indicator for you to draw an inference from.

Next, as it relates to TELUS specific, you've got a pretty clear trend as well in terms of the net adds that we have been able to generate between, let's say, 515 and 585, over the last four years.

So that's a ballpark figure from a growth perspective, again, that I think is important to draw inference from.

I think people forget that historically, we as an organization didn't put the emphasis on either gross or net adds, but rather put the emphasis on revenue growth and profit expansion from a disciplined perspective.

But if you look, again, at the last four years in terms of our market share on a net basis we've been in the ballpark of circa 30%, sometimes a little bit more than that, but it's been a fairly consistent performance all the way along.

Insofar as our gross adds comment is concerned about 2007, yes, we would have delivered a better net add result if we had a stronger performance on customer loyalty and retention, which is why I commented in my remarks that that's got to be an area of focus for us from an improvement perspective going forward.

I caveat that with the recognition that the churn that we're going to achieve going forward in terms of what is or what constitutes an excellent result is a little bit different prospectively than what it has been historically, because we now have the advent of wireless number portability.

But, again, I'll make the comments that I've made previously, in that number portability did not create a major economic deterioration factor for the wireless industry in the U.S.

And I think prospectively, given the fact that TELUS has a relatively low share of the business market for historical reasons in Canada, we should be able to better capture a balanced share of wireless net adds on the business front in the years ahead given that the impediment of a lack of number portability has been removed.

The only other comment I would make as it relates to penetration gain, gross adds and the like is in respect to the AWS spectrum option.

Typically, if you have new players coming into the market, that can have an overall effect on the penetration gain, pushing the penetration gain up.

So that's another new, exogenous factor to be considered in terms of penetration gain and gross adds along with normalizing now for the fact that wireless local number portability is institutionalized within our industry.

Sebastien?

Simon Flannery from Morgan Stanley, please go ahead.

Thank you very much.

Good morning.

You've had a few weeks now with Emergis.

I was wondering if you could just comment a little bit on what your initial sort of findings are versus expectations and what sort of integration steps you've been able to take at this point?

Thanks.

It's early days on Emergis, I would say that we are very pleased with how things have gone thus far.

It would be fair to say that we closed the transaction about a month earlier than what we had originally anticipated, and that's good going now from the execution team on that front.

The level of emotive synergy, if nothing else, between the welcoming TELUS organization and the enthusiasm of Emergis has been exceedingly strong.

Again, I'll make some pretty important comments.

Health care has already been a strength for TELUS.

I don't like doing acquisitions where you've got no track record in a particular area.

I prefer to do bolt-on acquisitions where you're building upon a strength or a platform that's already existing within the organization.

And TELUS, with our western focus, where typically within western Canada, that's where you're seeing the innovation and leadership within health care.

We have enjoyed a very strong performance within the health care area traditionally as TELUS.

Bringing Emergis on board with differentiated capabilities and new applications, transactional and processing capability, intellectual property, so on and so forth, significant talent within that organization that understands the health care industry very well, bringing that into the fold within western Canada, where we've already gotten great connectivity, whether it's technology connectivity with health care authorities or connectivity at the C-suite level with the CEOs and the CIOs of these health authorities bringing Emergis into that fold is really opening up a pipeline of new opportunities that, I think, will deliver an excellent return for the TELUS organization.

And the reverse is also true.

As Canada is coming to grips with the health care challenge and as TELUS has looked to expand its presence in Ontario and Quebec, that's effectively where you've had the traditional footprint of Emergis, and that's the market where they've got the connectivity.

They've got the client base.

They've got the experience and so on and so forth.

So we're looking as the TELUS organization to leverage the relationships and track record that Emergis has been able to establish in provinces like Quebec and Ontario and bring our capabilities to bear in that regard.

So there's a nice complement between the two businesses that I think is very encouraging.

And clearly, if anyone is going to crack the code in terms of the health care challenge as it relates to affordability, the massive improvements required in patient care and creating the shift from remediation and treatment to the prevention of disease in the first place, a lot of the answers are going to be found in technology, technology investment and business transformation.

And that's a sweet spot for both the TELUS and the Emergis organization and we're excited about that.

From a synergies perspective, there will be fairly modest over the next couple of years, because we are going to keep a certain level of independence with Emergis, and really have it complement our capabilities in the health care front, rather than fully integrated.

And I think we've already commented that we've set aside about $10 million in terms of restructuring costs to realize some near-term synergies that are fairly obvious over '08 and '09 as we bring structurally the two companies a little bit closer together.

Thanks, Darren.

We're now at one hour, so we'll take one more question, and thank you.

Thank you.

And the last question is from Dvai Ghose from Genuity Capital Markets.

Please go ahead.

Yes.

Thanks very much.

I just want to go back to Bob, the comment you made about potentially underspending on COA.

On the one hand it's great to see a 19% decline in COA in an aggressive market.

It shows discipline and drove great market increases, but you entered this quarter with a pretty low PDA in data market share.

You have a wonderful EVDO network and you finally got the BlackBerry Pearl to exploit and there's not much evidence that you exploited it.

I mean, your mix deteriorated in terms of pre-paid, post-paid.

We don't expect it to show up in ARPU immediately, but we do expect it to show up negatively in COA immediately, and it didn't.

So there was a perception in the quarter that the majority of your sales were PDA related doesn't seem to be at all evident in the numbers.

Isn't the near-term gain just going to lead to longer-term pain when it comes to ARPU and churn recovery?

I see you're good on the rhymes, I'm not so sure on the logic.

Firstly, if you're talking about data growth, the majority of the data growth over the next period of time is going to come from your base, not from the new additions.

New additions, of course, will bring data growth, but from a materiality perspective, it's your base.

So in that respect, you may refer back to my comments in the presentation about significantly cost of retention expenses linked to the upgrades, significant upgrades in our base towards smart phones.

That is clearly aligned with a building, a growth in a wireless data on a go forward basis.

Next, in terms of the fourth quarter, while the mix in prepaid increased, prepaid as a percent of additions in the industry and for TELUS are always at a record level in the fourth quarter because of the Christmas gift giving dynamic that does occur.

The issue in that respect isn't so much that prepaid doesn't provide data, but how are you going to stimulate, promote, make it easy and attractive for users, prepaid or post-paid to use data?

Everything I had mentioned, which weave talked about previously, of course, is given the nature of the technology on the mic side, which is advantaged and differentiated in the marketplace with respect to push to talk or dispatch usage is less so in respect to wireless data.

It is not as high-speed service, it doesn't have the plethora of devices that are available on our high-speed PCS network.

So we've had a conversion program going on for, since our early part of 2007, which essentially is taking more voice centric or data users prone to use high-speed or seek a high -speed data service or solution, which is more advantageous than PCS and converting them over.

So the mic element has a very strong ARPU in general, but significantly lower data component of ARPU than PCS.

So that conversion or migration program, which is going in a quite orderly manner and successful manner, is also another aspect of building wireless data growth in the future.

Thank you very much, everyone for participating in the call.

Just a comment to close, reflecting back on the questions that were asked, a number of questions dealt with us being asked to give a prediction as to what the future is going to hold over the medium to longer term.

And I guess, in responding to that, one of the things I would go back to is that TELUS is an organization that when we do invest for the future, we do it in a way that's clearly on strategy with the focus on our domestic market.

And one thing that is going to be predictable in the future is our continued desire to ensure that shareholders share in the fruits of the returns that we generate from our investments.

And going forward, I think it's interesting to note that it's never been a situation at TELUS in terms of the last four years, where investments have been mutually exclusive in terms of returning cash to shareholders.

Investments have been affordable, and along with the investments, we have progressed successive increases in the dividend, and have lived up to a constant NCIB program.

And in terms of forward-looking expectations, our desire to continue returning cash to allow shareholders to participate in the strategy of this organization is something that is an important facet of the longer term orientation of this organization.

Thank you very much.

This now concludes the TELUS fourth quarter 2007 earnings conference call.

On behalf of myself and the rest of the conference team, thank you from TELUS.