Telus Corp (TU) 2009 Q2 法說會逐字稿

Good afternoon.

Good morning, ladies and gentlemen.

Welcome to the Telus Q2 2009 earnings conference call.

I would like to introduce your speaker, Mr.

John Wheeler, please go ahead.

Welcome and thank you for joining us today for our second quarter 2009 investor call.

The call is scheduled for up to one hour.

The news release and the second quarter operating and financial results and the detailed supplemental investor information are posted on our website at Telus.com/Investors.

In addition, for those with internet access, the quarterly presentation slides are also available at this site.

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

Let me now direct your attention to slide two.

The forward-looking nature of this presentation answers the 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 the Securities Commissions in Canada and the US.

Turning to slide three for an outline of today's agenda, we will start with introductory comments by Bob McFarlane, Executive Vice President and CFO.

Bob will review both segmented and consolidated results and give updates on the issues outlined.

This will be followed by a question and answer session, with Bob and Darren Entwistle, President and CEO.

Let me turn the presentation over to Bob, starting on slide four.

Thanks John.

Good morning everyone.

Let's begin with a summary of the wireless highlights.

Network revenue was up just over 1%, and overall wireless revenues were relatively flat, as subscriber and data revenue growth were offset by continued voice ARPU erosion, and lower device revenue.

At the same time, cost control, along with fewer gross additions lead to operating expenses declining just over 1%, resulting in EBITDA growth of just under 2%.

Marketing expenses decreased due to lower advertising and promotion expenses, which were higher a year ago, due to the full scale launch of Koodo Mobile.

And a decrease in salaries and benefits expense from ongoing operating efficiency initiatives.

These were partially offset by higher equipment sales expenses.

Network operating expenses were relatively flat, restructuring costs increased CAD3 million, reflecting our focus on operating efficiencies, and as planned CapEx increased by CAD75 million, due to the ongoing investment in our next generation HSPA network being built out this year.

Turning to slide five, net wireless subscriber additions this quarter were 111,000.

We were encouraged to see that the net additions improved sequentially and showed some resilience in the face of certain high profile competitive product introductions in the second quarter.

On a year-over-year basis, net wireless additions were lower, due to the full scale launch of Koodo Mobile a year ago, and therefore the consequent absence of normal subscriber churn in the initial launch period of this service.

It is interesting to note that the 95,000 post-paid additions this quarter is quite close to our historical second quarter loading over the previous three years, 2005 to 2007 of around 100,000.

We also observed a continuing industry trend, whereby net adds were relatively more impacted by the economic recession in BC, Alberta, and Ontario, where unemployment levels have increased.

Our total subscriber base is up 8% year-over-year, and now totals 6.3 million.

Slide six shows the breakdown of TELUS's total ARPU between voice and data for the second quarter.

Total ARPU improved slightly over the first quarter, but continued a trend of being down year-over-year, as continued erosion in voice ARPU continued its declining trend, compounded by the recession and exceeded data growth.

Contributors to the decline in ARPU were reduced usage, and economizing of rate plans in our PCS service, continued declines in like ARPU, and continuing in the order of materiality reduced roaming rates and volumes, as well as to a lesser extent, though a greater number of Koodo subscribers, and internet only devices in our total subscriber base.

On the positive side, data ARPU growth remains strong, increasing CAD2.39 to CAD11.56, and now represents 20% of ARPU, up 5 points in the past year.

Data revenue growth for the second quarter was a strong 37% year-over-year, reaching CAD217 million.

We remain very bullish at TELUS for continued strong wireless data growth, given the increasing sales of 3G capable devices, especially into the consumer market.

Devices such as the Blackberry Tour, as shown above, the ongoing introduction of higher bandwidth applications, as well as the continued orderly migration of nondispatch mike users, and higher valued PCS subscribers, to both feature phones and smartphones.

In addition, we are optimistic, continuing the data growth potential from the upcoming launch of our HSPA service planned by 2010.

Slide eight shows the metrics related to our marketing retention efforts in the second quarter, gross additions declined by 4.7%, churn increased by 12 basis points, but improved sequentially by 7 basis points to 1.55%, and reflects higher involuntary churn due to rising unemployment levels and continued competition.

It is important to note that in the second quarter last year, Koodo Mobile subscribers had a minimal impact on churn, given it only recently launched commercial service in mid-March '08.

Post-paid churn, which is not shown on the slide, remained at a low 1.1%.

COA per gross add decreased 9% to CAD311, due to lower marketing expenses and lower commissions.

These were partially offset by higher subsidy costs, reflecting higher foreign exchange rates and promotion expenses.

In aggregate, COA expense decreased 14%.

Cost of retention increased by 18%, as we continue to focus on prudently migrating clients to smartphones and other multimedia devices.

To conclude the segment, we have adjusted our '09 wireless guidance to reflect our updated outlook.

Updating estimates for the first half 2009 results and economic conditions, we are now projecting close to flat wireless revenue and EBITDA growth for the full year '09.

In so doing, we have tightened wireless EBITDA guidance to the lower end of the previous range, consistent with ARPU pressures experienced to date.

Turning to slide 10, let's review our wireline segment results.

Revenue decreased by 2% as ongoing local and long-distance revenue declines were only partially offset by data and equipment growth.

Operating expenses declined by 2%, driven primarily by a 9% decrease in salaries and benefits, resulting from a reduction in staff count and variable pay, partially offset by the implementation costs of several large enterprise deals.

Restructuring costs increased CAD46 million year-over-year, driven by a number of management initiatives, as the Company continues to accelerate its operating efficiency program.

Operating profitability was down 12%, but was primarily impacted by higher restructuring and pension costs, which I will cover more in-depth in a moment.

Capital expenditures increased by 15%, mainly due to investments in broadband expansion, which is significantly expanding our service footprint for higher speed internet and high definition TELUS TV.

Turning to slide 11, we can clearly see the impact of the higher restructuring costs and pension expense on wireline profitability.

When adjusting for both the CAD46 million increase in restructuring costs, as well as the CAD28 million increase in defined benefit pension expenses, normalized EBITDA actually increased by nearly 5%, representing 230 basis points of normalized margin improvement year-over-year.

So the underlying operating profitability of the wireline segment has improved notably.

Let's move to slide 12 and examine our Internet results.

High-speed net additions were quite disappointing in the second quarter, with TELUS adding 3,000 new customers, a substantial slowdown over the same period a year ago.

The decrease is due in part to economic weakness, and reflects both reduced promotional activity by TELUS in the quarter, and market share loss to our cable TV competitor, who was focused on deep discounted bundled pricing across their home phone, TV, and Internet products.

We view our Internet results as unsatisfactory, and look to do better in future periods.

Slide 13 shows the success of TELUS TV in the second quarter, which includes both TELUS TV over broadband, and TELUS Satellite TV, although the latter was minimal in this quarter, due to its recent launch.

Total net adds increased 70% year-over-year to 17,000, while the total subscriber base more than doubled to 115,000 over the same period.

This success is attributable to enhanced broadband coverage and expanded marketing efforts, and supports TELUS' continued broadband expansion in key urban markets, including Calgary, Vancouver, and the lower mainland.

This continued buildout is a significant initiative, and is a major driver for the higher than average capital intensity in the wireline business, as noted previously.

Year-to-date, our Calgary and Vancouver ADSL2+ footprints have increased by approximately 10 percentage points.

As highlighted on slide 14, TELUS Satellite TV was launched in BC and Alberta at the end of June, following its successful two month internal trial.

The satellite TV service compliments and augments TELUS' existing TV over broadband, by enabling TELUS to more quickly expand the TV home bundle footprint, bringing TV coverage to more than 90% of Alberta and BC households.

In addition, it also enhances TELUS' competitive position, provides TELUS with CapEx flexibility in future years, with respect to broadband expansion, permits expansion into previous uneconomic areas, and leverages and improves the efficiency of our mass advertising.

Slide 15 highlights our wireline network access line performance.

We continue to compare favorably to our peers across North America, albeit TELUS' NALs were down 4.2% on a consolidated bases.

Business lines declined in the second quarter, as economic impacts led to business line disconnections, and fewer installations in the west, in addition to ongoing competitive activity.

I would note here that some of our larger central Canadian installations, our private data networks, and do not appear in business NAL accounts.

Residential line losses improved year-over-year, which I will discuss further on the next slide.

Slide 16 shows a favorable improvement in residential line losses, with the decrease being 7,000 less than that experienced a year ago.

This is the third consecutive quarter of year-over-year residential NAL loss improvement, with both the first and second quarter losses being the best in over two years.

The year-over-year improvement reflects more effective win-back capabilities and efforts, fewer residential moves, and the results of our continued broadband expansion, which facilitates bundling opportunities, including TELUS TV.

Let's conclude a review of the wireline segment in slide 17, with an update to our 2009 guidance.

Wireline revenue remains unchanged, while EBITDA was updated to reflect a higher annual estimate for restructuring costs, due to increased operating efficiency initiatives.

Note that while not a formal target, when excluding restructuring and pension costs, the guidance for '09 EBITDA over '08, implies 3 to 6% positive growth.

So putting it all together, let's briefly look at TELUS on a consolidated basis starting on slide 18.

Consolidated revenue in the second quarter fell by 1%, while increased restructuring and pension costs caused reported EBITDA to decline by 4.9%.

Reported EPS decreased by 7%, which while aided by a positive tax win, was also lower due to the significant increase in restructuring and pension costs.

I will elaborate on the various drivers behind EPS in a moment.

Meanwhile CapEx increased by CAD122 million, as already explained due to our significant wireless and wireline broadband expansion programs.

Turning to slide 19, as mentioned, consolidated profitability was largely impacted by higher restructuring costs and defined benefit pension expenses.

When adjusting for restructuring, and defined benefit pension costs from both periods, underlying EBITDA actually increased by about 4%.

The increase in normalized EBITDA primarily reflect lower variable pay accruals, and increasing traction from a comprehensive set of efficiency initiatives.

This next slide shows the detailed breakdown of the components of reported EPS when we exclude the CAD0.06 of positive tax related adjustments, including CAD0.03 from interest income on tax wins this quarter.

Higher restructuring costs contributed CAD0.10 to the decline, and as expected, higher pension costs negatively impacted EPS by CAD0.06.

Slightly higher depreciation and amortization as well as higher other expenses, driven by reduced year-over-year net gains on short-term investments, added CAD0.04 to the decline.

Meanwhile, financing costs negatively impact EPS by CAD0.01, as lower financing rates was offset by higher average debt balances, and year-over-year foreign exchange hedge losses.

Normalized EBITDA growth generated CAD0.07 of growth, while lower outstanding shares and lower 2009 tax rates contributed CAD0.02 of growth.

Underlying EPS is up 5% when excluding restructuring and pension costs and positive tax adjustments.

To conclude the financial review, Slide 21 outlines TELUS' revised consolidated guidance which reflect year-to-date results, accelerated restructuring costs, and our outlook for the rest of the year in light of general economic conditions in Canada.

Notably, while not a formal target, when adjusting EBITDA for restructuring and defined benefit pension costs, normalized EBITDA growth would be up to 3%.

Slide 22 shows restructuring costs over the last six quarters.

Alongside the annual year-over-year comparison on the right-hand side of the chart.

TELUS is undertaking a number of initiatives across the Company to continue to improve efficiency and reduce costs.

Certain of these activities result in restructuring costs.

The significant acceleration of operational efficiency initiatives that is driving the increased restructuring costs in recent quarters and for the year, is clearly evident on this slide, and reflects our response to the challenging economic and competitive environment.

Interestingly, restructuring costs for the last 12 months trailing have been CAD129 million, the largest since 2002 when we are in the midst of a major operating efficiency program.

Looking at EBITDA margins before restructuring costs, on slide 23, you can see that wireless margins improved 90 basis points to 43%, while wireline margins improved slightly year-over-year to 34%, despite the revenue pressures and increased pension costs.

As part of our operating efficiency program, slide 24 shows the changes in staff count since the end of 2008.

Domestic staff count is down about 1,000, while TELUS international is down approximately 450.

In our domestic operations, 900 permanent positions have been reduced by operating efficiency initiatives and attrition year-to-date, while the remaining balance is largely due to seasonality.

I should note that the TELUS international staff count decline is not necessarily indicative of our expected full-year trend.

As you can see, solid progress has been made, to date, towards a year end goal of reducing domestic full-time equivalent staff count by more than 1,500.

Before I conclude I will take a moment to review TELUS' strong funding position as shown on slide 25.

In May TELUS successfully closed a CAD700 million senior unsecured five-year debt offering at 4.95%.

Funds were used to pay down amounts drawn on our 2012 credit facility, and reduce the amount of commercial paper outstanding.

The offering was very well received, oversubscribed, and widely distributed, with more than 70 new and previous buyers.

In addition, in June we amended and extended our 364-day credit facility, with a syndicate of Canadian banks in the amount of 300 million, down from 700 million at TELUS' request, leaving us with a strong position and well over CAD1 billion in liquidity.

Today we are positively revising our '09 cash taxes outlook, and reducing the estimate for this outflow to a range of CAD270 million to CAD310 million, from a previous range of CAD320 million to CAD350 million, based primarily on the year-to-date resolution of prior years outstanding tax matters.

Our updated free cash flow annual '09 outlook is provided in the Appendix.

So, as a result of our long track record of setting and meeting our clear and prudent financial policies, TELUS continues to maintain a strong balance sheet, supporting our healthy investment grade credit ratings, and continued ready access to capital markets.

To conclude on slide 26, let me summarize the quarter.

Our wireless and wireline results continue to be impacted by the recession and ongoing competitive intensity.

However, given overall revenue softness, the Company is appropriately focused on delivering cost efficiencies, which led to increased operating margins, and underlying profitability in both our wireless and our wireline segments, excluding restructuring costs.

Encouragingly, we are experiencing significant TELUS TV growth with our core IPTV service, now augmented by the recent launch of TELUS Satellite TV.

Meanwhile, we continue to make significant strategic investments in wireless and wireline broadband networks.

Finally, our strong balance sheet and longstanding adherence to prudent financial policies are allowing us to invest to strengthen our future operational and competitive position.

So with that, I will hand the call back over to John.

Thanks, Bob.

Before we start the Q&A with Darren and Bob, I would ask that we have one question at a time please, from those asking questions, and I will ask our operator, Daniel to please proceed at this time.

Thank you.

(Operator Instructions).

Our first question will be from Greg MacDonald of National Bank.

Please go ahead.

Thanks, good morning, guys.

I am going to ask a question on wireless.

It looks to me like you have got some reasonably stable metrics there on the subscriber count, and the ARPU side in particular.

That is a pleasant surprise.

Could you focus or give us some color on the subscriber side, in terms of what the smartphone mix is, and on the ARPU side, if could you give us some guidance or some outlook on what is happening on usage trends sequentially, first quarter relative to second quarter?

I am just looking for some indication of whether you see some stability in that negative impact on roaming and LD that we have all seen?

Thanks.

Okay, Greg.

I think it is a correct observation, in terms of stable being a description of the overall metrics.

I would count churn in that category as well.

It is a little strange, as you know, with the year-over-year comparison this quarter, because of the Koodo launch last year, but whether that be on the loading or the churn, when you sort of normalize for that development, I think it was pretty good going.

In terms of the smartphone and data side, just under 50% of our second quarter gross adds were data devices.

So whether that be what you refer to as a smartphone or a multimedia type of device, so that is high-40s, that is a significant ratio for ourselves.

In terms of our cumulative base, it is the low-20s, somewhere around the 22% mark or thereabouts of our cumulative base with the smartphones, multimedia devices, so we are kind of rung at more than double, in terms of gross adds compare to the installed base, if you will.

So clearly that is a very positive trend.

When you go forward, our prospective HSPA launch, which brings us enhanced capabilities to augment the CDMA network that we have, and clearly we will have a broader lineup of multimedia and smartphone devices.

And so I think the future is very bright in terms of that ratio, and hopefully as you infer, the ARPU implications associated with that.

In terms of the roaming side, there are really a couple of trends going on.

As mentioned in prior quarters, we did have reprice last year on our roaming rates, both domestically, but in our case as well, with our primary roaming partner in the United States.

So as a consequence, there is a rate dilution that has flowed through over the past year.

There has been a volume impact as well of late, which is obviously recessionary related.

So I think that is linked to the extent of cross-border and travel, et cetera.

So from that perspective, I can't really say that we are seeing an improved trend in respect about roaming, and when I did read out the causes of ARPU decline, I was reading them in terms of order of materiality.

So roaming being third in that list is a significant contributor.

And so I think really it really is going to be related more to the economy and job growth, and the like.

So we are not really in control of that one, per se.

The difference, I think, as you go into 2010 and beyond, again with the HSPA network launch, is the fact that we now expose ourselves to a greater participation over time into international roaming.

We will not participate in the legacy GSM roaming, because we are not building out a legacy network.

But in terms of HSPA, as that installed base grows internationally, over time we are going to participate in a revenue stream that we could not enjoy with merely a CDMA network.

So I think again, on the medium to longer term, there is a distinct positive trend in that respect.

Next question, please, Daniel.

Yes, thank you.

Our next question will be from Jonathan Allen of RBC, please go ahead.

Please go ahead.

Thanks very much.

Thanks for providing the TV subscriber numbers.

With that disclosure, I am hoping, Bob, that you might be able to give us a few extra details on your TV business?

In particular, I was wondering if could you provide us any sort of detail on EBITDA drag or margin dilution that you are seeing from that, if you can quantify it?

And perhaps also any sort of installation costs, and whether those are being expensed?

Well, I could give you our margin by program that we offer.

I am just kidding.

It is the old adage, that give an inch, people want to take a mile.

So there is a significant disclosure change, which we appreciate the comment support on, with respect to disclosing the TV subscribers, but that is as far as we are going to go at this juncture on that nascent business.

Clearly though, when you are adding subscribers and growing significantly in the additions of subscribers, there is a cost of acquisition drag on earnings, but we are not going to go into the disclosure of that exact amount.

In that case, if I could just ask a different question on the TV business with the run rate, 20,000 last quarter, 17 this quarter, you mentioned that you are still expanding the footprint.

I was wondering if could you give us a ballpark of roughly what percentage you have actually covered with the TV business, whether you are sort of half or two-thirds, where you are fully mass marketing the product, and whether you anticipate that quarterly run rate will actually continue to improve?

Well, in respect of the, again, it is an urban market, it is a major of market build, so in respect of the Calgary and Edmonton markets, we have crossed the 80 and 90% coverage threshold respectively.

So we are nearing end game.

That's in sight in terms of those markets.

In terms of the lower mainland, we are still well less than half the market being covered.

So significant work to be done there, and we will continue to progress that over the next number of quarters.

And as we take it to, shall we say, secondary, in terms of size, cities, so there is still a lot of work to be done.

In the markets where we have crossed the 80% threshold, it lends itself much more to a more conventional integrated mass markets approach, and we are seeing success in that regard.

And therefore, we should have expanded TV coverage, and therefore success on the IPTV front, and then augmented to that, on go forward quarters, our satellite TV service, which we launched only with a day or two left in the second quarter, so it was a non-event statistically in the second quarter, but from an operational milestone, a significant one, and that one really provides us coverage.

Coverage in a distribution sense, Jonathan, geographic would be 100%, but in distribution, practically 90% of the population of Alberta and BC.

And consequently, for the first time, we can offer TV packages in bundles or whatever, as part of advertising and promotional activities province-wide in those areas.

Heretofore it has been a very complicated go to market.

Not only was it in only certain urban areas, but within those areas that weren't fully build out, we had to the market almost on a neighborhood perspective, on a direct approach, as opposed to a more efficient mass approach.

So we are very optimistic about the addition of this in our service set, and consequently, TV going forward, whether you want high-speed TV, or whether you are in a rural area or an urban area, we now after solution for virtually everyone.

Thanks, Bob.

Go ahead, Daniel.

Thank you.

Our next question will be from Peter Rhamey of BMO Capital markets.

A further question on the TV launch.

Now that you are out publicly with advertising the on TELUS Satellite TV, I was hoping that we could get some comments on how you are positioning the product in the market, vis-a-vis your FTTN?

I think Bell looks like they are targeting most of their satellite adds to their urban centers, where they are going to have FTTN.

Are you looking at focusing on the target markets of Calgary, Edmonton, and lower mainland exclusively with this, or is it a more full-blown strategy that you have in mind?

Thank you.

Peter, maybe there is a point of confusion.

There are so many acronyms even I throw out, I want to make sure I have said it straight.

In terms of the IPTV, which is based off of the Internet, that is an urban focused program, and the coverage metrics that I was referencing the prior call, relate to that service.

The 90% distribution coverage metric relates to the SAT TV coverage.

In terms of emphasis by geography, clearly the satellite TV would be first obviously as rural, because we don't have IPTV rural.

Satellite coverage is ubiquitous out there.

And then in urban markets, obviously our priority is IPTV, but as mentioned, there are still significant areas that don't have sufficient broadband speed for IPTV, or don't have sufficient speed for Hi-Def TV at this juncture, and if they want a TV solution, we will sell them satellite TV, but that is the second order of priority.

Thanks very much.

Thank you.

Our next question will be from Vince Valentini of TD Newcrest.

Thanks very much.

Coming back to wireless, nice reduction in your COA this quarter.

Obviously one of your competitors is going on the opposite direction with that metric with the smartphone subsidies.

Just wondering what your updated thoughts are on the economics of these big smartphone subsidies, and if we might see a big change in margins and reported metrics for you guys over the next year, as you roll out HSPA and get access to some of those other devices?

Will you start to play that game aggressively as well?

Well, we are starting to get into prospective actions, which I do want to be careful about, in relation to the HSPA launch.

I think if we look at it from a general perspective, one of the attractions of HSPA from our perspective, was when we looked at the global manufacturing volumes and economies of scale, it very much was going to evolve to HSPA, and obviously the first run of handsets on that technology standard are going to be higher cost, than second and third generation handsets on predecessor technologies.

But when one looked at the technology curve, it was our view that there would be a significant and timely ramp-down in those costs, and I think since we announced our decision to go with the HSPA build, we have been pleasantly surprised by the rapidity of the decline in device cost on that technology standard, faster than we had originally anticipated.

So the thesis with respect to the advantage that we think over the medium term that HSPA will have relative to CDMA, I think is so far bearing true.

In respect of smartphones and other devices, clearly they are associated with higher usage, higher data revenues, higher ARPU than your average subscriber.

To the extent to which you need to subsidize them, reflects or will influence the degree of dilution one has in the short term.

The economics associated with smartphones are distinctly positive.

I think we are at a relatively unique timeframe in the past 1.5 years, where there has been some iconic type of devices that have come into the market, that have been unique to a given supplier or two.

And as a result, there have been exclusivity arrange in the light that have have been reached in certain countries, and driving the introduction of those devices into the consumer market, with a product that has capability and functionality that previously would have been marketed to the business market, meant that the carriers dissimilate demand, and opening up that broader mass market, have had to sell at a retail price point to facilitate that objective, and so that has led to the higher subsidies.

I think that over time, a prudent approach in balancing that, there is a tremendous volume opportunity here in expanding the market, and ARPU a positive factor, and there is definitely a payback.

However, in terms of what the optimal subsidy is at the outset, I am not going to get into that, because that certainly gets into some competitive parameters.

What I would say is that our organization on a go forward basis is going to be on a fully competitive cost basis with any new handset that comes out, and that has not been the case in the past.

So in the past, whether it has been that we have had had some limited feature offerings, because of the absence of another technology standard, or whether it was on the cost of those handsets, where we were sometimes disadvantaged, and therefore had to subsidize more to get to a competitive retail price, or enjoy a lower margin, those dynamics, I think, are going to be permanently changed post the HSPA launch.

Thanks, Bob.

Daniel.

Thank you.

Next question will be from Jeff Fan of Scotia Capital.

Please go ahead.

Thanks very much and good morning.

Just maybe to follow-on with the previous question.

Bob, I wanted to get your sense of the profitability of smartphone and data revenue going forward?

Once you sort of set aside the impact of the upfront subsidy, I guess there is some talks that perhaps data revenue in the long term is not as profitable as voice.

Just wondering to see if you have a view on that, and again, taking aside the subsidy question that is incurred up-front?

I think a couple of points come to mind.

The first is, and we have talked, and Darren has talked extensively about this in the past, with respect to wireline, there is no doubt that legacy voice revenues are associated with higher margins, because you have built the fixed cost infrastructure related to it.

So the contribution margin, whether on the upside or the downside is significant.

And there is a similar trend with respect to data.

I mean, in the early days, when it was merely messaging, there wasn't as much capacity capital that was causal.

As we moved into the higher speeds with the Internet devices, and the applications and video, and picture taking, and the like, we are into much more capacity of intensive uses, and then in the case of the Blackberry device, we also have a fee going to Blackberry as they have a per subscriber charge.

So you have direct variable costs, if you will, per subscriber on these types of usages, and smartphones and multimedia devices, that wouldn't have necessarily been the case in the very early nascent days of data.

So consequently, yes, the data margins are less than what they would be, or they carry more variable costs.

Having said that, when you say strategically, what is an implication of that, an implication of that is you need to have a very capacity efficient network.

You need to have an efficient organization, and in that respect, that is why, or one of the reasons again, we add a second reason onto our decision to deploy HSPA, is we wanted to ensure that we had the optimal path to 4G with LTE, and that was through HSPA.

Why?

Because HSPA provides with us high data speeds at a very efficient cost, much more efficient costs than have been our historic or existing experience, so it lays a competitive platform, if you will, while you have higher direct costs, you are also reducing, or shall I say improving your capital efficiency of your network going forward, and that has really been, it is a traditional technology trend, or a curve in the wireless industry.

So, yes, there are more direct costs associated with it, that turn up more in the operating statement, but on the balance sheet, you have much more capital efficiency, and so overall, we are very optimistic about data, in terms of its potential to fuel growth in our wireless segment going forward.

Daniel.

Thank you.

Our next question will be from Dvai Ghose, Genuity Capital Markets.

Thanks very much.

Good morning Bob.

I just wanted to ask you a quick financial question regarding return on capital.

At the moment your net debt to EBITDA is 1.9 times, at the high end of your range.

Your dividend to free cash flow given your new guidance is about an 85% payout, which is why you haven't been buying back shares this year, and investors aren't expecting much by way of dividend increase.

Do you see this as a one-year hiatus because it is an unusually high investment year with HSPA and the completion of the fiber build in western Canada, and should return the capital resume from, say 2010 onwards, or is this sort of a change in strategy?

Well, it is not change in strategy, and I think your earlier part of your question would be appropriate, in terms of dividend growth remains a parameter for this organization, and so the reason we have something like a dividend payout guideline, which of course is a perspective measure of sustainable earnings, it sometimes gets distorted, looking retrospectively or with tax adjustments, or restructuring charges, as there has been this quarter for example, but its utility is that it does provide a framework for external investors, analysts, et cetera, to say, okay, roughly speaking, what is the capacity of the organization here to change its dividend.

So from that perspective, given that, as you mentioned, our balance sheet, which is healthy, but on the upper end of the leverage that we target, it means essentially simplistically, if you will, earnings growth in this organization is going to dictate dividend growth, and so there will be a correlation.

A high correlation between the two, and so this year being a heavy investment year, is one where we are doing the right thing strategically, and if that means that there is a reduction in return on capital in the form of share repurchases, then we think that is the right thing to do.

But on a go forward basis, we absolutely would be looking to improve the net earnings of the firm, which and given the correlation of reference earlier, will drive dividend growth on a go forward basis.

Thanks, Bob.

Thank you.

Our next question will be from Simon Flannery of Morgan Stanley.

Thank you very much, good morning.

Coming back to TELUS TV, Verizon has said that their line loss in their FiOS territory is about half of the line loss that they have seen in rest of the territory.

I was wondering if you are starting to see some meaningful improvement in some of the other metrics, as a result of bundling of the TV product?

Thanks.

Well, Simon, the short answer to your question is yes.

In our case what would be maybe different than some of the firms you referenced is at 7% residential erosion, while it is erosion, and we would love to have the figure lower, it compares quite favorably to other incumbent telcos.

It also has been stable.

So we have had the stability thou for a number of quarters, which is encouraging on the residential side, and in terms of the markets where we have upgraded to ADSL2+, where we have substantial coverage, for example Edmonton, Calgary more recently, and we are marketing the HD service over IPTV, yes, we have found improvements, and now losses, so there seems to be a correlation there.

All of this relates to perhaps the benefits of an integrated bundling approach, and one of the complications I was referencing earlier, and when you are in the midst of a buildout of given cities, it is a difficult go to market operational challenge, when you say you have got to offer a certain bundle or a certain package in one neighborhood, but not in another neighborhood, brings in a lot of complexities in the fulfillment and service side of the organization.

And so as we get the urban areas, and we are starting to get a couple now where they are substantively built out, then the go to market in those regions is simplified.

With the addition of the satellite service, what it allows us to do is simplify our go to market on a province-wide basis.

So we can now be advertising on TV in the major stations, which have broader area, watches well beyond the boundaries of say a central urban area of a city, and we can be offering TV as part of a bundle, or TV as a service, and then when people call in, through qualification, whether it is available or not in the area, or what is best for them or their preferences, what have you, then the selection between satellite and IPTV can be made.

And so what we are looking forward to on a prospective basis, is that the introduction of satellite TV should help us, in terms of improvement of the NOW ratio in the non-urban areas as well.

Great, thank you.

Our next question will be from Randal Rudniski of Credit Suisse.

Please go ahead.

Thanks.

Bob, I was hoping you could give us a rough idea as to how much of the 9% year-over-year decrease in wireline salaries expense, would be related to bonus accruals as opposed to efficiency initiatives?

Thanks.

Well, you are jabbing me in my ribs there with that question.

Unfortunately, I would say it would be significant, when I looked at my paycheck, but we are not going to get into the specific breakdown of our salary and variable.

What I would say in this day and age, you can hardly open the newspaper without reading an article in the United States particularly, but also in Canada, about compensation related issues, and the significant discussion about perhaps the lack of correlation between performance and pay.

Well in this organization, we try to set ourselves difficult targets.

I don't think anyone would say our guidance is set up guidance.

And so when we revise guidance, it is not like a firm that had a country mile to meet and missed it.

We have challenging targets, and we try to live up to that.

And when we don't make it, we own up to that as well, which we have with respect to our performance in recent quarters.

And I think when you look at the information circular with respect to last year, where we itemize compensation, or you look at the expenses in this organization, whether they be variable pay, whether they be operational efficiency, or cutting down discretionary costs, or whatever, we are doing the responsible things, and I think that it should be acknowledged that all of this activity that we have done, one is we have correlated our pay with the performance, and number two, is the significant investment that we have made in the pastime, and the accelerated nature of that investment and restructuring costs, as you know, was up-front with a payback in future periods.

And so we are looking forward to reaping the benefit of the run rate, of even a greater run rate improvement in the recurring, say non-variable pay or non-variable or performance pay related costs, as a consequence of the restructuring investments that we have been making this, in more recent quarters.

So we have a positive story with respect to the cost structure in this organization, and an even improving one on a go forward basis.

Terrific, thank you.

Thank you.

The last question that is currently queued will be from Bob Bek of CIBC.

Please go ahead.

Thanks.

Good morning, Bob.

Could I dig further into the ARPU, voice ARPU decline of 12%?

Do you care to comment at all about how the split is, relative to just the industry pressures as a whole, and how much might be economy driven, and also I guess the iDEN plays into that, and whether or not, I think you have talked about stabilization on whether we can expect to see that component of it stable heading from this point forward?

Thanks.

Well, thanks, Bob.

I will go from back end on your question.

In terms of the my guidance service, we continue to whittle away at the mobile phone base of Mike subscribers.

We have a pending HSPA launch next year, and from that standpoint, it doesn't make a tremendous amount of sense to try to accelerate a conversion.

What we have done rather is just let it run its natural course in recent quarters, in terms of subscribers coming up on contracts and the like, and providing incentives for them to convert to our PCS service, but not to induce an accelerated conversion beyond that normal pattern.

And we are disclosing Mike subscribers in terms viewer base, are now around a 10% rounded proportion of our total, so the materiality is reflective of that proportion.

But what is interesting is that if we backed out the Mike subscribers from our subscriber base, and if we backed out their associated ARPU from our service revenues, and then recalculated what the ARPU for the organization is, excluding Mike subscribers, the erosion year-over-year would be 5.0%.

So on one hand, it is still a negative number, but two, it is nowhere near what we report overall.

So I think that reflects the materiality shall we say of the erosion factor from the mic, so it is a notable factor, and very close to the erosion factor overall in our PCS service.

So from that standpoint, I think that we are not tremendously different than some of the other organizations in the marketplace.

Clearly there is industry softness in the economy that is affecting all of the carriers.

I think what is specifically to TELUS beyond merely the mic.

As I was alluding in to my earlier comment with respect to roaming, is we have had rate reduction, both domestically and cross-border, and while that shows up in ARPU, it shows up in network costs as well, and you notice that despite adding 450,000 subscribers in the past year, past 12 months, we have had flat network expenses.

And that is flat expenses despite a significant number of Rim Blackberry subscriber additions, where you have the monthly fee going there, that would be recorded in the network expenses.

So I think that shows you, or gives a clue that at least that element of ARPU there is a consequent expense reduction, that is sort of matched or hedging it.

The balance is a reflection of the economy and competitive activity.

I don't think we are tremendously different than other organizations in that respect.

That is helpful, thank you.

Daniel, we will take one last question.

Thank you.

Our last question will be from Glen Campbell of Merrill Lynch.

Please go ahead.

Yes, thanks very much.

I wanted to ask a question about spectrum license fees, which are due to be reset in March 2011.

We have Industry Canada proposing to reset them for the market.

I wonder if you could comment on that risk, and also give us a sense of whether if those fees were jumped substantially, you would be willing to look at a new system access fee across your subscriber base, or a significant increase to the existing one?

Thank you.

Well, Glen, I don't think we will be looking for you as a candidate for a new marketing position at TELUS with that kind of rationale.

I don't think that would be perhaps the most germane strategy, but going back to the essence of your question, we are into a conventional process at Industry Canada, with respect to what is the basis that they should calculate their spectrum license fees on a go forward basis.

And it is as early days as possible.

They haven't even selected the consultant that is going to advise them, so we are at the very front end of that regulatory process, and the fees could either go down from where they currently are, they could stay the same, or they could go up, and those are three plausible alternatives, so it is really too premature to comment about it, but I am not particularly concerned at this juncture.

I would view it as more of a normal process.

And then to editorialize, what I would say, in the aftermath of an AWS spectrum auction, where there is a distortion and the outcomes as a result of the rules, that essentially provided an indirect subsidy to certain organizations in Canada at the expense of other ones, such as ourselves, to then suggest that that is a proxy for value, when it was significantly higher per megahertz charge than the same spectrum in the United States.

And as spectrum proceeds, they were triple that, which was expected, and I encourage you to read the study which the NERA organization has completed with their econometric analysis of the Canadian spectrum auction results, with reference to other spectrums around the world.

And their conclusion was that there was a significant portion in the billions of dollars that is unexplained through aggression analysis, given what would have been predicted, and therefore can be attributed to the biased spectrum rules that were employed.

To therefore try to use that as a proxy that would dictate market price of spectrum to the detriment of all carriers in Canada, seems to be a very illogical course of action.

So at the end of the preliminary day, I probably talked more than I should about this, but I know I have seen your note, but far too premature, and I wouldn't get wound up about it at this juncture.

Can I conclude from your comments about my marketing savvy, that that higher or new system access fee, is something you wouldn't entertain even if this were to go against you?

Knowing that you are a loyal subscriber, and you are keen on it, we might just introduce it for one subscriber only.

Look forward to it.

Thanks Bob.

Thank you very much, everybody, for participating today, and taking the time to join us.

We appreciate the interest and continued support of TELUS, and we will continue to work with you over the coming months to get your questions answered.

So thank you very much for joining us.

We will see you down the road.