Telus Corp (TU) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS Third Quarter 2008 Earnings Conference Call.

I would like to introduce your speaker, Mr.

John Wheeler.

Please go ahead.

Welcome, and thank you very much for joining us today.

We'll start with introductory comments by Bob McFarlane, Executive Vice President and CFO.

This will be followed by a question and answer session.

Darren Entwistle, President and CEO, will be joining us for this Q&A session given the unprecedented stock market turbulence being experienced by our investors and the importance of last month's announcement of TELUS' implementation of a next generation wireless network.

This call is scheduled for one hour or less.

The news release on the third quarter financial and operating results and detailed supplemental information are posted on our website.

In addition, for those with the Internet access, the presentation slides are posted for viewing at telus.com/investors.

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

Let me now direct your attention to Slide 2.

The forward-looking nature of the presentation, 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.

Let me direct your attention to Slide 3 that highlights the topics that Bob will be covering in his presentation.

This includes both segment and consolidated reviews, plus updates on key developments listed there.

Now, over to Bob on Slide 4.

Thanks, John, and good morning, everyone.

Let's begin with a quick summary of the wireless highlights, referring to Slide 5.

TELUS reported strong wireless results positively affected by continued success of the Koodo plan and strong execution in the smart phone space.

Gross and net wireless additions were a TELUS third quarter record, excluding the impact of the analog network turndown, which I'll explain in a moment.

This success bodes well for TELUS' ongoing revenue growth and the attractive future economics that this growth should generate.

Wireless data revenues increased by 56% due to the accelerated adoption of smart phones which is driving increased use of data services, and to a lesser extent, increased data roaming revenues.

The continued decline in voice ARPU was partially offset by the strong growth in data ARPU.

Wireless EBITDA in the period was impacted by the strong subscriber loading, increased retention spending focused on smart phone sales, including the Mike migration plan, as well as increased data cost of sales.

Of course, a major development was the October announcement to build a next generation wireless network and enter into an HSPA network sharing agreement with Bell Canada.

I'll now describe our wireless results in detail starting on Slide 6.

Wireless revenues were up 9%, based on 11% growth in the wireless customer space, while overall revenue per subscriber declined slightly.

EBITDA as adjusted was relatively flat and impacted by record subscriber loading as well as retention efforts focused on smart phones.

In addition, we also saw increases in certain network operating expenses due to very strong growth in data usage and roaming as well as higher content and licensing costs from the excellent 56% increase in data revenue.

CapEx was flat year over year due to deferred spending in advance of our HSPA network build out, which is now well underway.

Turning to Slide 7, net adds this quarter were a record 177,000 when excluding 27,600 units disconnected pursuant to the analog network turndown.

The loading was positively affected by the continued success of our recently launched Koodo post paid basic service brand, resiliency of the Mike service, and continued good post paid PCS loading.

In aggregate, post paid digital net additions were 159,000, an increase of 61% compared to last year, and represented 90% of TELUS' total net adds in the quarter.

Overall, our cumulative subscriber base has recently surpassed the 6 million mark with post paid representing just over 80% of the total.

Looking at the Canadian wireless industry as a whole on Slide No.

8, you can see that gross additions continue to be strong, growing 7% year over year, while net adds have increased 6% with 1.2 million new subscribers year to date.

These results clearly show that even with increased economic uncertainty, growth in the Canadian wireless industry has remained robust.

That's a very healthy trend.

We believe there remains ample room for future growth in Canada and that TELUS is well positioned to compete for a share of this growth.

The graph on the left-hand side of Slide No.

9 shows that TELUS' total ARPU in the third quarter of '08 declined by 1% to $64.14.

The declining trend of voice ARPU that we experienced this quarter and in recent years is due to pricing competition, increased use of included minute rate plans, increased penetration of our basic service brand, and a slight decrease in voice roaming.

Almost offsetting the voice decline was data ARPU, which increased by nearly $3 to $10.19 and now represents 16% of total ARPU.

We remain very bullish at TELUS for continued strong wireless data growth given the increasing penetration of 3G capable devices in our subscriber base, the ongoing introduction of higher bandwidth applications and devices, as well as the successful continued orderly migration of non-dispatch Mike users and higher value add prepaid subscribers to PPS, post paid service.

Slide 10 reflects the continued focus on our wireless marketing efficiency and retention efforts in the third quarter.

Gross adds, a third quarter record, increased 23% with 67% of them derived from post paid.

Digital churn increased by nine basis points to 1.52% due to an increase and the impact of higher prepaid churn.

COA decreased 10% year over year to $341 per gross add, reflecting the strong increase in gross additions, along with a higher proportion of new subscriber loading and lower cost channels.

Cost of retention increased significantly as investments in this area were focused on higher cost smart phones and for the ongoing Mike migration program.

Slide 11 highlights just a handful of smart phones available from TELUS, including the much anticipated Blackberry Storm touch screen world phone on the far right.

It is expected to become available for the holiday season.

We continue to enjoy considerable success in this important category as we've been the Canadian leader in smart phone adoption.

TELUS remains an industry leader, offering the largest selection of smart phones in Canada's largest high speed network.

As shown on Slide 12, we're fine tuning our revised 2008 wireless guidance, which reflects year to date results, including the startup launch of the Koodo branded service and record subscriber loading, as well as our outlook for the remainder of the year.

The wireless revenue range is being tightened towards the low end of the range and EBITDA guidance is being lowered based on higher expenses driven by strong subscriber loading and significant retention investments made in the first nine months of 2008.

To conclude the wireless section, as you may recall in October, TELUS confirmed its commitment to long-term evolution, or LTE for short, as the technology for its fourth generation wireless broadband network.

As an interim step TELUS has begun building a national next generation wireless network based on HSPA technology and expects the service to launch by early 2010.

This will enable a smoother transition to LTE.

At the same time, TELUS has entered into a network sharing agreement with Bell, which builds on and enhances arrangements we've had in place since 2001.

This new and enhanced agreement allows TELUS to share capital expenditures effectively lowering costs and increasing the pace of the national build out.

TELUS will benefit from being able to offer our clients the widest national coverage at launch for HSPA technology using our existing 850 and 1,900 megahertz wireless spectrum.

In addition to the upfront capital cost benefits, we expect an array of benefits for TELUS, our customers, and investors, including ongoing network operating cost savings, lower handset costs due to a larger HSPA device eco system, and increased global roaming revenues achieved over time.

We expect a recurring return on the upfront investment and expect to create long-term value for our investors.

Now, let's turn our attention to Slide 14 for TELUS' wire line segment highlights.

In Q3 '08, we converted more than 1 million BC residential customers over to a new converged wire lines billing and client care system with minor impacts on customers and operations.

The third quarter wire line revenue was solid, driven primarily by data revenue growth, including revenue from the acquisition of Emergis as well as organic growth, which more than offset the moderate declines in local and long distance.

High speed net additions were disappointing, meanwhile now losses remain largely consistent with previous quarters.

Meanwhile, expenses in Q3 '08 were impacted by implementation costs in advance of revenue generation for large complex deals, such as the government of Ontario, Department of National Defense contracts, along with strong TELUS TV loading.

Turning to the wireline financials, starting with revenue on Slide 15, local and long distance revenue declined moderately reflecting the continued competitive environment and substitution effects from wireless and VoIP.

Reported data revenue increased by 16% due to revenues from the Emergis acquisition, increased managed data revenues in business, and continued growth in broadband revenues in high speed Internet and TELUS TV subscribers.

Underlying data revenue grew approximately 4%, adjusting for acquisitions and regulatory impact.

The total wireline revenue rose nearly 4%.

Turning to Slide 16, we can see that wireline profitability fell slightly due to increased costs.

Total operating expenses increased 8.4%, mainly due to an increase in salaries and benefits or an increase in team members, notably including those from Emergis.

Excluding the impact of the Emergis acquisition, the number of wireline team members was flat year over year.

Contributing to the higher expenses were increased cost of sales or increased data equipment sales with lower margin, expenses from the acquired company, higher costs for the provisioning of TELUS TV due to increased loading, and higher restructuring costs.

External labor costs also increased to improve service levels and to implement services for new enterprise customers related to a number of significant contract wins in recent periods.

As Darren discussed last quarter, cost control remains the key management focus for the remainder of 2008, and into 2009 and beyond to protect wireline margin.

Restructuring costs in wireline were 8.7 million in the third quarter, representing an increase of 36% over Q3 '07.

We expect further increases in restructuring expense in future quarters.

Capital expenditures increased 12%, mainly from increased upfront expenditures to provide support to large new enterprise customers and broadband services.

Moving on to Slide 17, let's briefly examine our high speed Internet results.

High speed net adds were disappointing in the third quarter with TELUS adding 13,000 net subscribers, which is a significant decrease over the same period a year ago.

Subscriber adds were impacted by increased competition from our cable competitors' expanded offering, certain temporary order fulfillment bottlenecks, TELUS marketing efforts, including the removal of the free computer offer, that were less effective than planned.

We also--we are seeing increased importance being placed on consumer bundled offer in the marketplace.

This highlights the increasing importance of consumer bundles, including both high speed Internet and TV, and reinforces our strategy to continue to invest in expanding our broadband speed and coverage, including the TELUS TV footprint.

Given the disappointing third quarter loading results, Internet marketing is a key area of focus for future marketing and operational execution improvement.

Overall, our high speed Internet subscriber page is up 8.4% year over year.

Slide 18 highlights our wireline network access line performance compared to our peers across North America.

In the third quarter, residential line losses were partially offset by continued stable, positive business line growth.

On a year over year basis, overall consolidated line losses increased slightly to negative 3.6% due to losses of residential lines to avoid competitors, particularly cable companies, as well as ongoing technological substitution to wireless services.

Now, to conclude wireline on Slide 19, we've revised TELUS' 2008 wireline guidance to reflect the results to date and our outlook for the remainder of the year.

Revenue and EBITDA have been tightened toward the low end of their respective ranges.

The revised EBITDA outlook reflects higher expected restructuring changes and the dilutive upfront impact of large complex deals.

Slide 20 illustrates the robust growth strategy and changing mix of TELUS' total customer connections, which is consistent with our value creating growth strategy.

Growth in wireless and high speed Internet continued to significantly outpace declines in residential network access lines and dial up Internet.

Wireless and Internet now account for 63% of total connections and we have generated a million more connections in the last two years.

So putting it all together, let's quickly look at TELUS on a consolidated basis starting on Slide 21.

Consolidated revenue in the third quarter grew by nearly 6%, while EBITDA as adjusted decreased slightly by 60 basis points in large part due to higher costs as already mentioned.

Reported EPS as adjusted decreased by 4%.

I will elaborate on the various drivers behind EPS on the next slide.

Meanwhile, CapEx increased by nearly 9% driven mainly from an increase in the wireline segment to support new enterprise and broadband service customers.

This next slide shows the detailed breakdown of the components of reported EPS.

Lower outstanding shares contributed $0.03 to EPS, while the expense impacts of the Alberta IP system implementation and the write-offs related to AMP'D mobile incurred last year together led to a $0.03 improvement.

Lower 2008 tax rates added $0.03 of growth this quarter while 2007 tax related adjustment positively impacted reported EPS last year by $0.28.

Higher depreciation and amortization in Q3 '08 impacted EPS by $0.06.

This reflects the reduction in estimate useful service lives for circuit switching network assets, growth in capital assets, plus additional amortization from acquisitions.

EBITDA reduced EPS growth by $0.03 while higher restructuring and other costs contributed $0.03 to the decline.

In the quarter, an unfavorable of $0.02 per share after tax was recorded for sales tax reassessments related to prior years.

This charge was equally split between depreciation and financing charges.

Meanwhile, higher financing, excluding the aforementioned sales tax related charge and the prior year recovery for the cash settlement of options.

Each negatively impacted EPS by $0.01.

Slide 23 summarizes the share repurchases in the quarter and since we first started buying back shares in December 2004.

We remained active in the market in the third quarter, repurchasing a total of 2 million TELUS shares for $74 million and outstanding shares were lower by 3% on a year over year basis.

Since conception of the NCIB program in 2004, we have achieved an 11% or 41 million share reduction in the total number of shares outstanding.

In combination with these share buybacks and our dividends, TELUS has returned $707 million to shareholders year to date, clearly highlighting our strong and ongoing record of returning capital to shareholders.

In December, we intend to renew our NCIB subject to Board approval, to allow for the possibility of share repurchases into 2009.

Today, we're pleased to report a dividend increase of nearly 6% to $0.475 paid quarterly.

The combination of our strong financial situation with confidence in our future prospects is the basis of the Board decision announced today to increase the TELUS dividend for the fifth consecutive year.

This increase builds upon our strong track record of dividend growth.

As shown on Slide 25, today we're making changes to consolidate a guidance to reflect revisions to our outlook for the wireless and wireline segments.

The changes are noted here and in Section 9 of our MB&A with the updated assumption.

Our consolidated revenue guidance range has been tightened and lowered towards the low end of the range.

We're also narrowing and lowering our EBITDA guidance, which also reflects the $20 million increase in our 2008 annual restructuring cost estimate.

More on this in a moment.

Our EPS guidance range has been tightened from $0.20 to $0.15 and the low end reduced by $0.05.

Consolidated CapEx remains unchanged at 1.9 billion, which excludes the $882 million of AWS spectrum auction payments.

In summary, we continue to expect good year over year revenue and adjusted EPS growth driven by the strong customer loading that we've seen in the first nine months of 2008.

Now, let's turn our attention to Slide 26 to outline the latest phase of TELUS' operating efficiency program, which augments an ongoing and sizeable investment in restructuring going back to 2001.

In September, we started consolidating three enabling business units - Tech Strategy, Network Operations, and Business Transformation - into two integrated teams.

We expect that future benefits will include more effective deployment of technologies and supporting systems, cost efficiencies, and improved customer service.

As Darren highlighted after the second quarter, TELUS faces the challenge of working through J curve investment to launching a new wireless brand and implementing large complex deals and broadband service deployment, such as TELUS TV.

Over time, these economics will improve, but we recognize we must focus now on efficiency initiatives to pay for these investments.

As outlined in the slide, significant efficiency initiatives are now underway, including optimizing the layers of management and spans of control to reduce staff, especially in the supporting business units.

An area of focus will be to increase the use of business process outsourcing to reduce costs.

We're rationalizing product to low value activity.

In the longer term, our investment in our consolidated billing systems in Alberta and BC and in HSPA provides opportunities for efficiencies going forward and we're moving to consolidate vendor management with integration of significantly reducing the number of vendors.

As a result with these program initiatives in place we're increased our restructuring cost estimate by $20 million to approximately $50 million for the year 2008.

Given the current economic environment I'll now review TELUS' credit position on Slide 27 before I conclude.

As a result of our prudent financial policies TELUS has maintained a strong balance sheet with sustainable cash flows and ample liquidity.

TELUS' net debt to EBITDA is 1.9 times, within our policy guideline of up to two times even after paying $882 million for the AWS spectrum.

TELUS is in the enviable position of having no debt maturities until 2011, while a commercial paper program provides a low cost source of funds.

While some organizations have had difficulty accepting debt markets, traditional sources of capital have consistently been open to TELUS throughout the recent period of capital market volatility.

If conditions were advantageous, TELUS would consider terming out some of our short term financing.

To conclude, on Slide 28, TELUS third quarter revenue growth.

In wireless, we're encouraged by the excellent trends with record loading and data revenue growth.

Now losses on the wireline side remain well below those of our North American peers with strong growth in business lines.

We made minor revisions to the '08 guidance to reflect strong subscriber loading and a near term dilutive investment for our large complex deals in Central Canada, the launch of Koodo Mobile, as well as TELUS TV's rollout.

As Darren and I highlighted in the past quarter, TELUS recognizes that the competitive nature of our industry makes it incumbent on the TELUS team to focus on cost discipline as such ongoing operating efficiency programs are being augmented to reduce costs, and will be a key focus the remainder of 2008 and beyond.

Finally, with the combination of our strong balance sheet and our confidence in the future growth prospects for the company, TELUS is pleased to announce our fifth consecutive annual dividend increase.

With that said, Darren and I would be pleased to answer your questions, so I'll turn the call back over to John to start the Q&A session.

Yes, just before I turn the call over to Ron to conduct the Q&A session, can I please ask your cooperation once again for one question at a time, please.

Ron, please proceed.

Great, thank you.

(OPERATOR INSTRUCTIONS.) The first question is from Dvai Ghose from Genuity Capital Markets.

Go ahead, please.

Yes, thanks very much.

Good morning.

Bob, and if Darren's on the call, I just wanted to ask you about some of the wireless things that are happening in the market.

Just this week, we've seen Fido and Solo remove their SAP, Bell announce rollover minutes even on some new jumbo bucket plans.

I'm seeing a fairly significant change in pricing here.

Questions I'm getting from investors include can we sustain a SAP in the premium brands if there are none in the [flanker] brands?

Does TELUS have to show some leadership here in your opinion in terms of perhaps doing something like reintroducing a SAP on the flanker side?

And even on the cost side where you see tremendous subsidization of PDAs which lead to long term cash flows, do you think there's a fear that the industry is being too aggressive in terms of these subsidies and perhaps too forward looking and not looking enough at near term margin?

To answer the question, Dvai, first I would say it's a caveat we are not going to discuss in an open forum what our specific pricing strategies are whether it's Koodo right through to smart phones.

I do think the price changes that you've seen this past week in the marketplace reflect a couple of things.

Number one is the relative strength that TELUS has enjoyed in the RIM smart phone market and the strong performance that we have delivered in that particular vein, as well as the significant traction that we've realized with our Koodo brand.

I think it's also reflective of the fact that the market is going to evolve in the future with potential new entrants on the AWS front.

I think in terms of describing TELUS' response as taking a leadership position, I think rather TELUS will adapt and will respond to market price conditions as we deem appropriate, and certainly we will be competitive in the marketplace.

So I think it's fair to say that we're not going to ignore the price changes that have taken place.

We are going to price to remain competitive and we are going to price according to market conditions.

The other thing I think, Dvai, that's noteworthy is that hopefully people within the regulatory and government area are taking note of the degree of the intensity of competition in the marketplace.

Certainly when you are providing very low prices for significant SWAS of bandwidth, up to 500 megs through to unlimited, and at the same time subsidizing devices right down to a zero dollar price, if that's not competitive to the extreme then I don't know what is.

So hopefully, people on the regulatory front, as well as new potential entrants will be taking note.

I think the other thing, Dvai, that's important in addition to TELUS responding to the evolving market conditions and pricing accordingly, I think this does evidence the need for incumbent companies like TELUS to focus on efficiency not just as a wireline activity, but as a wireless activity as well and to make sure that we take costs out of our business to try and optimize the level of EBITDA flow through that we are achieving from the wireless side of our operation.

In terms of your smart phone comment, given that you did ask a two-part question once again, as is the tradition, I guess a few comments here are worth nothing.

Number one, we like the higher ARPU and lower churn, the better stickiness and the higher return that we get from a revenue perspective as it relates to smart phones.

And we think that makes it worth the investment from a COA perspective.

Second, I'm hopeful about as smart phones become more pervasive in the marketplace and really for most wireless users become the device and functionality of choice, that we start to leverage some economies of scale as the devices become more prevalent, and that's reflected within our smart phone economics.

Three, certainly we are seeing evolving competition in this area whether it's the iPhone or RIM with the Storm, or the development of Android or Symbian within the Nokia stream, there are more and more middleware type applications coming online and I think with more competition again we should hopefully begin to realize some better pricing.

That's what I'd make on the smart phone front is if you look at the growth on the applications front, it's excellent.

If you look at our wireless data performance in terms of year over year growth, we've delivered 42% growth on the data front, which is partly reflective of the fact that we've been very strong in the smart phone market.

But clearly, we've seen no abeyance in terms of strength on the data growth front and I think the applications that smart phones enable will provide significant longevity in that particular growth path.

And then, lastly, back to taking costs out of the business again, Dvai, I'm hopeful that as smart phones become more prevalent we can improve the cost infrastructure that we have in place at TELUS that's required to support the smart phones whether that's better cost of care, because as smart phones become more familiar you can use web based channels more effectively, as our sales channels in and of themselves become better educated on how to sell smart phones again we would expect to see an efficiency gain in that area to help ameliorate the smart phone economics.

And then, lastly, when you look at technology and some of the technology choices that we announced about a month ago, again, we're making technology choices as it relates to the carriage of data traffic that should lower the cost base of the TELUS organization and again, help the economics of our wireless business.

Next question, please.

Thank you.

And the next question is from Glen Campbell from Merrill Lynch.

Go ahead, please.

Yes, thanks very much.

I wanted to pick up on the wireless efficiencies (inaudible).

When you announced the HSPA build, Bell had been quite open about the fact that they expect to see pretty significant reductions in the long term capital intensity.

I think it's reasonable to kind of project 10%.

So given that you're going at this together, is there any reason to think that some 10% CapEx to revenue may not be achievable in the medium term for you as well?

Thanks.

Glen, I think capital expenditures are a function of a number of things.

One of them in part a function of your growth and your capacity requirements thereon.

We're not here giving long term capital intensity guidance.

We did at the time of announcing the HSPA technology path towards 4G give guidance as related to one.

We're not shifting from this year's 1.9 billion capital expenditure program.

So really what we've done is defer expenditures early in the year and shifted that into HSPA without increasing that quantum, if you will.

And then, we gave guidance in respect of next year, which by the way, isn't that far out of line with the capital intensity that we've experienced in recent years.

So at the end of the day, I think if we first start with what's in front of us, we're looking towards building an HSPA network here in partnership with Bell on a national basis to provide advantage for our firms without any material increase in capital expenditures for the organization.

I think that's pretty good going, step number one.

Step number two, beyond that we do believe that there are efficiencies as it relates to the technology as compared to cost structure of our current technology, and that bodes well in terms of, as Darren already just referenced, in terms of the cost to support data growth and subscriber growth in the foreseeable future.

But I'm not here to give specific guidance long term in terms of capital intensity.

Okay, Ron?

Thank you.

And the next question is from Jonathan Allen, RBC Capital Markets.

Go ahead, please.

Thanks, very much.

Bob, if I look at your revised EBITDA guidance for mobility, it seems to imply that Q4 EBITDA should be anywhere from down 5% to up 5%.

Is this a reflection that you expect Koodo loading to be very robust in the fourth quarter and hence the COA just continuing to pressure some of the margins?

Or is this a reflection of some of the intensifying wireless competition that you had address earlier and that we should expect this sort of run rate for margins going forward as new competition comes into the market next year?

Well, firstly, as you're familiar, Jonathan, the fourth quarter is always the seasonal highest period of time for subscriber additions and consequently it does attract the high cost of acquisition just associated with higher loading that occurs in that timeframe.

So the traditional pattern is a depression of margins in the fourth quarter.

Having said that, we've had some good subscriber growth as these results show in the first nine months of the year.

So we got a flow through effect of those subscribers and their ARPU blowing down from the top line that helped mitigate that.

But at the end of the day as we said, just starting November where the bulk of the sales are in the last four weeks of the year, the range really reflects the process.

There is a variety of outcomes depending how successful our loading is and it's a very important fourth quarter season.

Ron?

Okay, thank you.

The next question is from Vince Valentini from TD Newcrest.

Go ahead, please.

Yes, thanks very much.

Good morning.

Given the traditionally low flow through of revenue to EBITDA for your wireless business at only 2%, well below what you've done historically, and you already noted the big increase in your retention spending.

Given these investments you seem to be making in the future and in smart phones, could you help us understand how that's going to help you in the future by telling us what percentage of your base is on smart phones and what percentage of the net or gross adds in the third quarter were smart phones?

Vince, I understand the question, but I think that has an element of competitive sensitivity to disclosing that data that I think would be more harmful to our shareholders than it would benefit them from understanding information.

Okay.

Ron, next question, please?

Thank you.

And the next question is from Greg MacDonald from National Bank Financial.

Go ahead, please.

Thanks.

Good morning, guys.

Wireline revenue growth in both the data and long distance segments declined year over year relative to the first half.

You recognize that DSL subs were a little light.

I'm not sure that tells the full story though.

I'm wondering relative to some of the other telco results that we've seen, it's evident to me that we are seeing some reprise on data access services and potentially LD.

And I'm wondering if TELUS is seeing similar trends, and if so, would that be an economic slowdown issues, would that be a competitive issue?

If you could give us some color on that, that would be helpful.

Thank you.

Well, your--yes, I think you hit [the factor] right off the top, Greg, in terms you're quite correct in referencing the Internet.

We were disappointed with the Internet growth in the third quarter on the [HSIA price].

So obviously, that had an effect in terms of that goes into the data growth line, so that did impact that category.

In terms of long distance, long distance was not a bad result.

This is obviously a commoditized product area for many years.

We have seen in recent years a single--high single digit to almost double digit declines in the industry and the result during the third quarter is--I think isn't acceptable.

And in that context, what we are seeing is increased bundling of minutes in terms of packaging it with other offerings in a bundled concept, particularly as it relates to some country packages and the like, and we're seeing resonance in the market with those offerings.

But underlying that, it's still fundamentally a declining area.

I think our view is it was good going and that's based on the third quarter.

Okay, Ron.

Next question, please?

Great, thank you.

The next question is from Scott Malat from Goldman Sachs.

Go ahead, please.

Thanks.

Good morning.

I know you talked--in ARPU you talked that roaming was down.

Overall, I'm trying to get a better picture of the more discretionary pieces of ARPU and seeing if people are really starting to cut back where they can.

So just wondering about long distance, some of the other voice plan add ins, what are the trends there and are people lowering their voice plan bucket?

Thanks.

Well, in terms of ARPU categories, we--I think we're not really seeing any evidence of economic or general macroeconomic influences or impacts on our ARPUs.

We still have--experiencing robust demand.

Perhaps one exception to that would be on international roaming particularly in the voice roaming.

It was down.

There is some reprise there, but also reflects traffic of visitors from the United States into Canada.

But that's a relatively smaller component of overall ARPU.

In relation to your question on value added services, the nature of our offering is that we are seeing a significant take up for add on features and services and apps.

So that is just having robust growth and consequently we really can discern no negative impact on our ARPU as a result of macroeconomic conditions.

Really what we are seeing is an ongoing trend that we've experienced for a couple of years on the voice front.

And of course, the one other element that's a little unique to our organization is the ongoing orderly migration of the mobile voice telephone centric component of our Mike i-DEN subscriber base over to our PCS service as our contracts expire leaving the Mike service more and more catering to the push to talk [side].

But overall, I think the point here--reflecting perhaps the Canadian economy, which is much stronger than the U.S., and in particular in our incumbent regions where it is the strongest growth in Canada, we really have not experienced adverse effects from the economy in our results of any notable extent.

Thank you.

Ron, next question, please?

Thank you.

The next question is from John Henderson from Scotia Capital.

Go ahead, please.

Yes, thank you.

A question on I guess wireless pricing relative to wireline pricing.

I think in the U.S.

we're seeing greater access line erosion every quarter.

It just keeps getting worse and I think wireline--wireless seems to be having a greater impact there over time.

And I just wonder if you are concerned about impact that way.

Do you think we are going to move in the same direction as U.S.

markets in terms of active line erosion in part aided by this lower wireless pricing environment?

I think it's a reality, Jonathan, whether you're talking about the U.S.

or Europe that we need to be cognizant of.

I think the first thing that I would point out is that if you looked historically how TELUS has performed in respect of network access line erosion we have done well on a relative basis to our peer group.

Again, I think the fact that the western based economy from a GDP perspective has outperformed the Canadian average by two to three times speaks to (a) the robustness of our incumbent footprint and the strength of our brand in Western Canada, but also the resiliency of the economy here as well.

And so, I think we have consistently quarter and quarter out sense the onset of more intense competition.

We've done very well in terms of our resiliency from a network access line loss perspective.

The second thing that I think is worth highlighting is that for us with a national footprint we have a situation where fixed wireless substation on a net basis is actually a positive for the TELUS organization.

Yes, it's a challenge within our [ILAC] footprint that we necessarily need to be cognizant of and address, but it's an opportunity outside of our traditional franchise area because we don't have a consumer wireline business as it relates to two-thirds of the Canadian population principally talking about key markets like Ontario and Quebec.

And in that case, fixed wireless substitution is a positive for the TELUS organization, particularly given how well both of our brands resonate with the youth market.

TELUS has always enjoyed strong elasticity as a brand appealing to all constituencies from corporate through the young and we're seeing the same traction in respect of our Koodo brand.

So in terms of our out of franchise area expansion it is a distinct positive for us to go out there, fixed wireless substitutions on a net basis.

It's a positive for the TELUS organization.

And then, lastly we're trenching back to our ILAC area to talk specifically about the challenge that you've articulated.

I think it goes back to one of the principles that we need to execute on and that's bundling to the extent to which we can put together, deliver, and continue to serve as well, a strong portfolio of services from voice services to data services to entertainment services, and of course, mobile services will have a much more resilient market--offering end market relative to what singular products being offered from the competition can provide.

And that really is the focus for our organization.

The other thing that's a bit interesting is that one of the corollaries of having lost access lines now for several years is that even within our incumbent area where you have competitors with a significant access line base, they provide an opportunity for TELUS to perhaps reapproach those customers again with a fixed wireless substitution offering that could be appealing.

And again, that would be an opportunity that would be available to us on a go forward basis within our established footprint within our ILAC territory.

So I guess to summarize, it is a reality that we face.

It is a net positive for TELUS, if you look at the contrast between our franchise region and our out of franchise region.

From an opportunity perspective, it does emphasize that within our ILAC territory we have to focus on effective bundling and bringing together all of our disparate products into a compelling bundle.

And as well, we're not the only access line player anymore within our ILAC territory, so maybe there's some future upside there for us to consider as it relates to fixed wireless substitution.

Ron, next question.

Great, thank you.

The next question is from Peter Rhamey from BMO Capital Markets.

Go ahead, please.

Great.

Bob or Darren, I think you have focused on the restructuring charges.

It sounds like you're implementing quite aggressively some restructurings in the fourth quarter.

Is this to get a running start on '09 so you get full--the full benefits early on, or do you see this as more slow burn or slow benefits?

And what type of--in the past you've indicated a savings based on restructuring charges and they tended to--if I'm not mistaken--to be a one-year payback.

Could you discuss perhaps what type of payback you would expect on that?

Thank you.

Thanks, Peter.

No, it doesn't reflect a ramp-up in Q4.

It reflects rather our inadequate performance as an organization in Q1, Q2, and Q3.

I think I articulated at the Q2 call that I was not satisfied with our performance in this particular area and that we were going to do something about it.

And I think with the augmentation of our workforce restructuring change from 20 million or by 20 million from 30 million to 50 million, that is putting into practice some of the concerns that I articulated at the call at the half year.

I think maybe if you take a step back, which kind of relates to my dissatisfaction, efficiency measures are nothing new for TELUS.

We've been running workforce restructuring charges year in and year out since 2001.

And back at that time, we said, this is going to be an annual program for our organization.

Effectively, what we've said is that we have to invest in improved efficiency the same way we invest in products, the same way we invest in networks or IT or the same way we invest in people and it's something that we have to do necessarily on a recurring basis.

And because of that, I was dissatisfied that we didn't have better traction in 2008 because this is nothing new to the TELUS organization.

And what you're seeing now in Q4 is really addressing what should've been done by the TELUS organization from the outset of this year.

In terms of your other comment, I think certainly when we began tackling the efficiency program back on an inaugural basis in 2001, the payback periods were relatively speaking more attractive, because we were really going after the low hanging fruit and back then they would have payback periods of a year.

And then, when we started in the '03, '04, '05 zone, the payback period started to get slightly more protracted at 18 to 24 months, because some of the efficiencies that we were going after were a little bit more difficult to achieve.

It would take more time to get the money out of the business and it would take a little bit more up front investment.

And I think now we're in a more challenging area for us, and so again, the payback period is slightly more protracted yet still.

But nevertheless, I think when you look at our organization, there's a really simple thesis that we need to think about.

As an organization we have lots of laudable ambitions in terms of how we want to prudently invest our shareholders' money domestically on strategy in our core operations.

And you can see that transpiring, whether it's making an investment in a basic wireless service, which we call Koodo, that's near term dilutive.

If you look at the amount of money that we've expended on both the AWS spectrum option and the money that we're currently spending evolving our network to 4G LTE, again, that's near term dilutive.

If you look at what we're doing with some of our large complex deals, which are economically positive over the medium to longer term, those large corporate data network deals are dilutive near term.

And the same thing can be said in respect of what we're trying to achieve on the TV front.

And so, the philosophy here is you have to earn your right to grow, and rather just--rather than just tolerate the near term dilution, I think earning your right to grow means you've got to create white space financially speaking for those J curve investments that Bob articulated within his comments.

And so, you've got to take costs out of the benefits to fund those investments that you think are key to your future.

And so, as it relates to Q4, and you're going to see it again materially in 2009 and beyond, that's why we were so purposeful in our comments.

We are going to push hard.

There is a non-trivial opportunity to optimize the spends and control within the TELUS organization to reduce staffing levels, to take out costs, so that we can recycle those monies to do two things - return some of it to shareholders and expend some of it in support of the investments that we would like to undertake strategically.

We still believe that our business process outsourcing opportunities to a lower cost region, so to speak, which is something that we have to do when as an organization price commoditization and margin compression are a fact of life.

I think we have too many products within our overall portfolio of products that cost money.

I think decommissioning products not only takes money out of the business, but it makes systems implementation more effective and more efficient.

And we're looking to reduce low value activities.

We've got some technology investments that I think in the [fullness] of time, whether it's what we're doing on the IT front trying to consolidate down to a single customer care platform on both the wireline and wireless side of the business, and will drive significant efficiencies in the future, as will our investment in LPE, back to Glen Campbell's original comment.

That investment should give us a lower cost base on the wireless side, particularly as it relates to supporting data applications, which are the future growth component for us on wireless.

And then, lastly, I think procurement within TELUS is a little bit too decentralized.

I think we've got some tremendous pockets of excellence when it relates to vendor management.

I think we've seen that in the moves that we've made as it relates to the wireless technology evolution, but they're not pervasive.

They're pockets of excellent rather than something that's baked into the DNA of our company.

And I think through centralization and better permeating the best practice, when we spend over $4 billion--4.5 billion to be exact as it relates to procurement activities, there are some opportunities there that we need to necessarily execute against and that's what we're going to be up to.

And it will be material for Q4 and it will be material for 2009 to fund our future growth.

Okay, thanks.

Ron?

Thank you.

The next question is from Bob Beck with CIBC World Markets.

Go ahead, please.

Thanks.

Good morning.

I just wanted to touch back on the bundling or the importance of bundling going forward.

I recognize you don't give information on the TELUS TV.

But can you talk anecdotally at all about some of the other products--the performance of some of the other products in your areas where you are offering it - high speed data, local line - and just whether that confirms some of your commitments on TELUS TV?

Because it sounds like you are, again, fairly bullish on the performance and whether that's to the bundle or not.

And really, is this still a side story to--I guess to Darren's point on wireless being the core to the bundle and perhaps where more of the greater win back and forward leverage might come from wireless as the core.

Thanks.

I think to hit this one on the head without sort of divulging competitive intelligence, a couple of things are worth noting.

Ironically, because we've had a soft quarter on HSIA that I am dissatisfied with and disappointed with and it's something that we're going to work on ardently as a management team going forward, it would be wrong to conclude that we had a soft quarter as it relates to TELUS TV.

TELUS TV--IPTV has been performing very strongly within the areas where we have coverage.

And I would say empirically, if you look at the TELUS footprint, where we are able to offer a full suite of services from voice through to data Internet, through to entertainment, and yes, as you correctly point out, through the wireless within the bundle, then we have seen our best results.

In areas where as a result of coverage challenges that we are looking to address in the future where we can offer the full bundle, the results on average are not as good.

And so, I think for the TELUS organization one of those imperative investments is of course to improve our broadband footprint across Alberta, across BC, and continuing to improve it across Eastern Quebec, so we can fully leverage the commercial efficacy of offering a bundle that's very attractive to our consumer clients.

And that really is the focus for the organization on a go forward basis.

And I guess as it relates to HSIA, my comments in terms of being disappointed I think are going out empirically, because it's frustrating for me, because in Q1 and Q2 we had a reasonable performance.

If you look at Q2 in particular on high speed Internet access, we had net adds of 24,000, which represented a 60% increase on a year-over-year basis.

Yet, in Q3, if you look at our net adds, they were down by about 50 percent and that's unfortunate because Q3 is an important time of year from a loading perspective given the back to school phenomenon that transpires.

And I think Bob's comments were [bang] on.

Yes, there was some ramped up competitor activity, but we weren't as strong on our promos.

We weren't as focused as what we should have been and we'll be working hard as a leadership team to correct that on a go forward basis.

But for us, the job right now is to try and get our broadband footprint covering the main primary, secondary, and tertiary community within our ILAC markets so that we can offer the bundle.

Because when we have that footprint type coverage, we do very, very well as an organization and I think when you lay on top of that when people are interested in high speed Internet access, they don't just want it on a sedentary basis in their home office.

They also want it on a mobile basis.

And the fact that we can offer smart phones effectively to consumers then we have done very well in terms of our share allocation in respect to smart phones with consumers.

That is a nice combination to be able to offer high speed Internet access on the wireline front, complemented by what we can do on the smart phones front within the consumer ranks to give people high speed mobility as well.

Hi, Ron.

We're at the hour, so we'll take one last question, please.

Okay, thank you.

The last question is from Bob Beck from CIBC World Markets.

Go ahead, please.

I just asked my question.

Thank you very much.

Okay, thank you.

And the next question will be from Peter MacDonald from GMP Securities.

Go ahead, please.

Thank you.

Just, Darren, can you expand back on your reference to the regulators with respect to competition in the wireless market?

Is there something we should read into it?

Is it reference to the unset details on roaming and power sharing orders, or is there something else that you were referring to?

I think I'm referring to a simple point that is not a Q3 point, Peter, but something that I think we believe quite unequivocally here at TELUS and it certainly isn't justified empirically, which is the wireless market in Canada is intense.

We've got over 20 brands out in the Canadian market offering all sorts of value propositions from no frill offering for people that are just interested in talking and texting right through to smart phone offerings with very sexy devices, which are function rich.

So the level of choice is significant.

When you think about affordability, the comment is pretty clear - two elements.

When you're giving people 500 megs of throughput--I'm not sure if people understand what 500 megs of throughput means, but it's significant in terms of what would be a usage time equivalent within the data vernacular versus what they would be used to on a minutes basis with voice.

It's very significant.

And when you're subsidizing devices down to zero dollars, I mean, just kind of look at the delta between what the cost is of the devices versus what they're being sold for and you're looking at subsidies from $300 to $500 to secure customers.

I think that is in my view highly reflective of the fact that this is a market that is very competitively intense.

If you look at the type of growth that's being achieved, it's quite interesting.

We did as an industry 7% growth on wireless, 6% growth on wireless as an industry at the net level, and the basis point gain was 480 basis points of gain, which again reflects the competitive health of the industry overall.

And it's interesting to me, because if you carved out Canada empirically and looked at our voice rates, and Bob has talked now repeatedly for what must be two years in terms of the voice ARPU going down, which is a primary empirical indication as to the level of competitive intensity.

But if you look at voice rates in Canada from an affordability perspective, taking that consumer point of view and juxtapose us against our peers within the G7 or G8, you've got Canada as a top quartile country when it comes to consumer affordability on the voice front.

And of course, now, you're seeing the same thing starting to gain traction on the data front.

And this is in a Canadian market where I've got to tell you we don't enjoy the best economies of scale as it relates to population density relative to the better economies of scale afforded to other countries within the G7 and G8.

This is challenging country to deploy infrastructure and technology.

And if you look at what's happening, as I say, on the data front, the prices being offered right now are very competitive, they're very attractive, and they're starting to resemble the type of affordability that we've seen on the voice front.

I think that there is no structural impediment in this country.

But merely if you look at the fact that we just kicked off wireless a little bit later than the U.S.

and Europe, that's the reason why from a penetration perspective we've been trailing.

But I would expect Canada to get to the same end game as our peers on a global basis, but hopefully we can generate more shareholder value along the way.

Thanks very much, Bob and Darren.

And I'd just like to thank everybody on the line with us today for taking the time to join us.

And we look forward to working with you in the coming weeks and months.