Telus Corp (TU) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Q3 2009 earnings conference call.

I would like to introduce your speaker today, Mr.

John Wheeler.

Please go ahead.

Thank you very much and thank you for joining us for our third quarter 2009 investor call.

The call is scheduled for up to one hour.

The news release on the third quarter operating and financial results, and detailed supplemental investor information are posted on our website, 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, and 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 Securities Commissions in Canada and the US.

Turning to slide three for an outline of today's agenda, we will start with introductory comments and a review of the quarter by Bob McFarlane, our Executive VP and CFO.

Covering recent corporate developments will be Darren Entwistle, President and CEO 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, and Joe Natale, President, Consumer Solutions.

This will be followed by a question and answer session.

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

Thanks John and good morning everyone.

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

Overall wireless revenues were relatively flat as equipment in other revenue, growth of 16%, were offset by lower network revenue growth as voice ARPU remained under pressure.

Revenues in Black's Photography are being recorded in wireless equipment revenue.

So this quarter includes about one month of Black's revenue of CAD6 million.

Operational expenses increased by 1.6% driven by higher -- driven higher by equipment expenses to support retention efforts and customer migrations to smartphones, and higher network operating expenses to support data revenue growth.

Marketing expenses decreased due to lower advertising and promotion expenses, while lower commissions helped lower marketing expenses.

Restructuring costs increased by CAD2 million.

All in, wireless EBITDA declined by CAD9 million or 1.7%.

As planned, CapEx increased by CAD 60 million due to the investment in our HSPA network that was launched yesterday.

Turning to slide five, net wireless subscriber adds this quarter were 125,000 with post-paid net adds of 131,000, representing 105% of the mix.

We were encouraged to see that the net additions continued to improve sequentially in the face of a highly competitive market where our competitors had access to unique, popular devices.

Year-over-year, net subscriber additions decreased 16% when including the deactivation of subscribers from the turn down of the analog network a year ago.

Net additions were impacted by a combination of reduced prepaid loading and the current churn of Koodo subscribers being at normal levels, whereas a year ago there was minimal churn given its then recent service launch.

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 remain relatively higher than some other provinces.

Our total subscriber base is up 7% year-over-year, and now totals 6.4 million.

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

Total ARPU improved slightly over the first quarter, but continued with its year-over-year negative trend, as voice ARPU erosion continued, partially offset by data growth.

Contributors to the decline in ARPU were the same as in recent quarters, factors such as reduced voice usage and economizing of rate plans in our PCS service, continued declines in [micro] ARPU, reduced inbound roaming, increased penetration of Koodo, and lower ARPU associated with internet only devices all contributed to the decline.

On the positive side, data ARPU growth remains strong, increasing CAD1.86 to CAD12.05.

This now represents 20% of ARPU, up four points from last year.

Slide seven shows the trend over the past seven quarters for a total blended APRU.

Blended ARPU has been steady to improving slightly since the significant drop first observed in the fourth quarter of last year.

We expect trends to continue into the fourth quarter, but the extent of the percentage decline in ARPU should improve in future quarters given the relatively stable platform experienced year-to-date in 2009, along with our prospects for attracting higher valued subscribers, driven in part by our new HSPA Plus network and devices.

As shown on slide eight, data revenue growth for the third quarter increased by 27% year-over-year, reaching CAD229 million.

We are quite bullish at TELUS in regards to prospects for future wireless data growth, given the increasing sales of 3G capable devices, which should be enhanced with the introduction of new HSPA devices such as the Apple iPhone, Blackberry Bold 9700, the Android HTC Hero, as well as many other new HSPA devices and internet sticks.

Slide nine shows the metrics related to our wireless marketing and retention efforts in the third quarter.

Gross additions declined by 6% and were impacted by the weaker prepaid loading and the lack of certain popular iconic devices in our lineup.

Churn decreased by 13 basis points from last year, but the churn rate last year included the impact in the turn down of the analog network.

Excluding this impact, churn increased only slightly.

Postpaid churn, which is not shown on the slide, remained at a low 1.16%.

COA per gross add decreased 11% to CAD320.

due to lower marketing expenses, lower commissions, and lower per unit subsidy costs, reflecting changes in promotional pricing and a higher Koodo mobile mix.

In aggregate, COA expense decreased 16%.

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

It's fair to assume that with the recent launch of the iPhone, COA and COR will increase along with loading in Q4 and into 2010.

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

Revenue decreased by 3.4% as ongoing local and long-distance revenue declines were only partially offset by modest data growth.

Operational expenses declined by 2.3%, driven primarily by a 12% decrease in salaries and benefits, resulting from a reduction in performance bonus expenses, staff count, and targeting discretionary employee related expenses, partially offset by increased OpEx associated with TELUS TV, due to the higher programming and customer acquisition costs related to increased subscriber loading.

Interestingly, when excluding defined benefit pension expenses from both periods, operational expenses declined by 5.4%.

The decline more fully reflects our efforts in controlling costs.

Restructuring costs increased CAD20 million in the quarter, driven by a number of initiatives, as we continue to emphasize our operational efficiency program.

Operating profitability as measured by EBITDA was down, but was primarily impacted by higher restructuring and pension costs, which I'll review in a moment.

Capital expenditures increased by 7%, mainly due to investments in our broadband expansion, which is enhancing 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 CAD27 million increase in defined benefit pension expenses, as well as the CAD20 million increase in restructuring costs, normalized EBITDA actually increased slightly by 1%.

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

High-speed net adds declined over the same period last year to 9,000, but improved sequentially following a disappointing second quarter.

Slide 13 shows the success of TELUS TV in the third quarter, which includes both TELUS TV over broadband, and for the first time, TELUS Satellite TV.

Total net adds increased 83% year-over-year to 22,000, and represents our best quarter to date, while the total subscriber base more than doubled to 137,000 over the same period.

This success is attributable to enhanced broadband coverage, expanded marketing efforts, improved installation capability, and supports TELUS' continued broadband expansion in key urban markets, including Calgary and the greater Vancouver area.

This continued build out is a significant initiative, and is a major driver for the higher than average capital intensity in our wireline business.

Slide 14 shows the past seven quarters of residential line losses, but more importantly it shows the stabilizing trend for the last four quarters.

Residential NAL losses of 6.8% actually improved year-over-year for the fourth consecutive quarter.

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

So putting it all together, let's briefly look at TELUS on a consolidated basis starting on slide 15.

Consolidated revenue in the third quarter fell by 1.6%, while increased restructuring and pension costs caused reported EBITDA to decline by 5.3%.

Reported EPS decreased by 1% -- by CAD0.01, excuse me, which while aided by a positive tax related adjustment, was also lower due to the significant increase in restructuring and pension costs.

More detail on this in a moment.

Meanwhile, consolidated CapEx increased by CAD85 million, as already explained.

Slide 16 shows that consolidated profitability was largely impacted by higher defined benefit pension and restructuring costs.

When adjusting for these two cost items, underlying EBITDA was essentially flat.

The normalized EBITDA primarily reflects lower bonus expenses, fewer staff account, and increasing traction from our comprehensive set of efficiency initiatives.

Many of the initiatives across the Company to improve efficiency and reduce costs result in restructuring costs.

Slide 17 shows restructuring costs over the past six quarters alongside the annual year-over-year comparison on the right hand side of the chart.

The significant acceleration of operational efficiency initiatives over the past year is clearly evident and reflects a response to the challenging economic and competitive environment.

TELUS has increased its restructuring estimate by CAD10 million to approximately CAD160 million for the year.

As part of our operating efficiency program, slide 18 shows the changes in full-time equivalent staff counts so far this year.

The domestic staff count, excluding the new staff acquired from the Black's Photography acquisition is down about 1,600, while TELUS International is down about 150 positions.

It is important to note, as I have on previous calls, that the TELUS International staff count decline is not necessarily indicative of our expected full year trend.

As you can see, we've already exceeded our annual target of reducing the domestic staff count by more than 1,500.

This next slide shows the detailed breakdown of the components of reported EPS when we exclude the CAD0.04 of positive income tax related adjustments this quarter.

As expected, higher pension and restructuring costs contributed CAD0.06 and CAD0.05 respectively to the decline.

Slightly lower depreciation and amortization added CAD0.02 to the upside.

Similarly, lower shares outstanding, lower tax rates, and other items each contributed CAD0.02 of growth respectively.

Notably, underlying EPS is up 7% when excluding restructuring and pension costs and CAD0.04 of the positive tax related adjustments.

Slide 20 outlines TELUS' revised consolidated guidance, which reflects revisions to our outlook for both the wireless and wireline segments.

Notable factors contributing to the change included continued economic softness and the early launch of our HSPA network with higher subsidy smartphones, such as the iPhone, as well as a CAD10 million increase in our restructuring estimate.

CapEx for 2009 is expected to be approximately CAD2.1 billion.

The changes are noted here and detailed by reporting segment in Section Nine of our MD&A.

To conclude the financial review, slide 21 provides you with a first glance at TELUS' preliminary expected CapEx for 2010, driven by the launch of TELUS' new HSPA Plus wireless network in 2009 and progress in wireline broadband expansion.

A preliminary view on 2010 CapEx levels is likely to reflect a return back to more average historical levels experienced between 2006 and 2008, at a level as low as CAD1.7 billion.

We expect to provide our 2010 detailed annual guidance in normal course, per our past practice, in mid-December.

Turning to slide 22, to conclude with a quick review of other notable developments, consistent with our dividend payout policy, the TELUS Board has maintained the CAD0.475 quarterly dividend, or CAD1.90 annualized.

In response to preferences expressed from various shareholders, we're again reinstituting a discounted DRIP program that will reward participating shareholders with a boost to their payouts and should encourage further participation.

Therefore, we're amending the dividend reinvestment program to issue non-voting shares from Treasury at a 3% discount from the average market price.

Finally, the CRTC made a very important decision on Globalive last week.

We believe the CRTC made the only decision it could by upholding federal law that Globalive does not meet the Canadian ownership requirements set out in the telecommunications act.

The public hearings clearly outlined the nature of Globalive's considerable noncompliance with foreign ownership laws and thereby provided Globalive the road map required for it to restructure its affairs and remedy their own situation.

Political intervention in this matter is both inappropriate and unnecessary, as the power exists for Globalive to restructure its own affairs to become compliant.

Globalive should be given a reasonable, but not unlimited time to do so, as it has already been 15 months since the conclusion of the AWS auction.

In any event, should there be a cabinet review, we believe it should be a public process.

It's important to reiterate TELUS' position that it has never been opposed to foreign ownership restrictions being lifted, but has asked that all carriers in Canada operate under the same set of rules.

In order to avoid similar situations in the fewer where auction outcomes can be materially effected by unqualified bidders, all bidders in future Spectrum auctions should be prequalified as legitimately Canadian owned and controlled entities beforehand.

This is the approach that TELUS has consistently recommended in the past.

So with that, I'll hand the call back over to Darren and Joe to review recent corporate developments.

Thanks, Bob.

In my remarks, I will cover four major developments at TELUS that certainly mark a significant transformation in the Canadian wireless industry and that I believe bode well for improving our competitive position and future performance.

Indeed, in my estimation, these are our game changing developments in our industry.

Let me begin on slide 24.

In September, TELUS acquired Black's, Canada's premier national imaging and digital retailer.

This CAD26 million acquisition is an excellent fit with our Company.

First, it expands the distribution of TELUS' wireless products across Canada through a set of premium mall locations.

It is particularly complimentary because 72% of the 113 stores are located in Ontario where we are targeting increased distribution.

Secondly, Black's is a nearly 80-year-old national brand with a strong reputation for customer excellence, excellent service, and as well, importantly, a highly qualified staff of professional employees that compliment the robust TELUS team that we have here.

Finally, Black's business is characterized by a recurring and loyal retail customer base that will naturally gravitate towards camera phones.

We have moved swiftly to train Black's employees, create attractive in-store displays, and commence an advertising campaign.

Just yesterday, we launched the sale of more than a dozen TELUS camera phones in our 113 Black's location just 62 days after we closed the acquisition, further demonstrating our strong execution in this regard.

Let's move to our second major development on the next slide, slide 25.

Yesterday, TELUS achieved an important milestone with the early launch of Canada's largest and fastest 3G plus network.

This launch represents a landmark development for TELUS and Canadian consumers.

Now, more than 30 million Canadians can access advanced speeds and services through TELUS' 3G plus network.

The most innovative wireless technology available today is being deployed.

This puts Canada at the forefront of wireless technology on a global basis.

By way of example, this network offers customers the technology for increased wireless data download speeds of up to 21 megs per second.

They also gain access to international roaming in more than 200 countries.

The completion of this network has been a massive undertaking for our organization.

Led by Eros Spadotto and his technology strategy team working closely with business transformation and technology operations, and of course, consumer solutions.

Whilst it has impacted our CapEx spending this year, the strategic benefits to complete and deliver an HSPA network to 93% of Canadians several months early are clear.

With this next generation 3G Plus network, we've achieved a significant competitive advantage as the next two coverage maps illustrate.

Slide 26 shows our shared next generation wireless network in Eastern Canada compared to the Rogers network.

As evidenced on this map, in Ontario and Atlantic Canada we have a significant HSPA and most importantly an HSPA Plus advantage.

In Quebec, we have HSPA standard coverage, which will move to HSPA Plus within the coming weeks with the operational launch in the first quarter of 2010.

Slide 27 shows TELUS' HSPA wireless network coverage in Western Canada.

Notably, you can see the far-reaching coverage that has been deployed in the last 12 months in British Columbia and Alberta with all of it being HSPA Plus technology.

The immense advantage TELUS has over our competition is exceedingly clear.

In addition, we are rolling out HSPA coverage in Saskatchewan to our partnership with SaskTel and Manitoba in 2010 and 2011.

Now, let me turn this particular set of slides over to Joe Natale who will discuss the remaining two important and complimentary developments, specifically the simultaneous launch of some pretty important new devices, as well as our innovative new rate plans.

Over to you, Joe.

Thanks, Darren.

I'm excited to note that the launch of our 3G Plus network coupled with the immediate availability of a wide variety of new HSPA smartphones from TELUS, such as the iconic Apple iPhone 3GS gives consumers more choice and effectively ends the one supplier monopoly in Canada.

The iPhone 3GS is the fastest, most powerful iPhone yet packed with incredible new features including improved speed and performance.

We began selling both iPhone models this week.

Slides 29 and 30 show an array of other HSPA devices also being introduced alongside our new network.

This week we launched the Blackberry Bold 9700, which has just begun its global debut.

Our sales channels are excited to be at the forefront of this Blackberry launch, particularly since it as at the start of the holiday selling season.

This has not always been the case, as you know.

As shown on the next slide, we're also introducing the HTC Hero running on the Android platform, the LG New Chocolate, the Nokia E71, and the Sierra Internet Key, some great devices for the season.

Importantly, these new devices are coming to TELUS clients earlier than ever before and the applications on these smartphones work exceedingly well on our advanced high-speed network.

Additionally, we have new CDMA devices coming to the market as well, including some, which are exclusive to TELUS.

While we recognize investors' concerns from the short-term impact on costs of acquisition and retention from smartphone sales, increasingly observers are acknowledging the benefits of loading higher ARPU clients with higher data and lifetime revenues.

We also realize that it is incumbent on us to manage wireless costs effectively, with discipline to benefit from the tremendous opportunity for profitable growth that these devices provide for TELUS.

Coupled with the launch of our 3G Plus network and new and innovative devices, the next game changing initiative for us is the launch of our new pricing model, branded as Clear Choice and offering Clear and Simple rate plans for our clients.

Please turn to slide 31.

Canadians have shared with us what they wanted.

Through our research and our discussions, in a nut shell it included less complexity, removing the complex elements of mechanisms in our rate plans, providing much more clarity, what you see is what you pay, fewer rate plans and plans without add-on fees like the system access fee or carrier 911 charges.

In so doing, we are reinforcing the alignment of our TELUS brand promise.

The future is friendly with being Clear and Simple.

As a result, TELUS has introduced three major changes to our new rate plan offerings.

First, we have significantly reduced our plans from about 30 to 10 for consumers and we have significantly decreased the number of plans for our business clients, making them simpler, far simpler.

Second, there are new system access fees nor carrier 911 charges.

And third, we have proceeded with a general rate adjustment of CAD5 to offset the majority of these fees.

Existing TELUS clients have the option to continue to renew on their current rate plan or switch to a new rate plan over time.

We expect that these rate plans will improve subscriber loading and reduce churn going forward.

Moreover, by eliminating both the complexity and the number of plans, we can improve certain costs through enhanced self-service and reduce call volumes to our client care centers.

Through this and other initiatives that we're very focused on, we expect to achieve a neutral AMPU impact.

And with that, let me turn it back to Darren to wrap up the call.

Darren?

Thanks, Joe.

Let's conclude on slide 32 and I'll summarize the quarter and recent developments.

Our wireless and wireline results continue to be effected by the recession and ongoing competitive intensity, which combined with our earlier than expected introduction of the iPhone and other HSPA devices that are important to our lineup are impacting our guidance for the year.

Through our intense and continued focus on delivering operating cost efficiencies, we are largely offsetting revenue weakness on underlying normalized operating earnings.

Next, we continue to make significant strategic investments in our wireless and as well our wireline broadband networks.

This is paying off with the early launch of our 3G Plus network and associated device offerings for consumers and businesses, and the acceleration of our TELUS TV service.

To sum up, I believe TELUS is clearly leading the change in Canada's wireless market by delivering exceptional client experiences through the series of major initiatives we have completed just this past week.

We very much look forward to capitalizing on these developments in the marketplace.

Let me also note that I'm very pleased by the operational execution and project implementation expertise demonstrated by the TELUS team, which has significantly improved our competitive position.

In the past, I have been occasionally publicly critical of our organization's performance when warranted.

Within this context, I can say conclusively that I have never been as confident nor positive as to the future prospects of our Company.

I will now hand the call back to John.

Thanks, Darren.

Before we start with the Q&A with Darren, Joe, and Bob, I'd ask for your cooperation in asking one.

You've heard that request before.

And Daniel, could you please proceed?

Thanks.

Thank you, John.

Our first question will be from Jonathan Allen at RBC Capital.

Please go ahead.

Thanks very much.

Darren, I'd like to ask you a question about the dividend policy.

Just in the last few years, I think four or five years now you have done a regular dividend increase and while profitability has been depressed even with some of your peers, I think they have reinforced the desire to have at least a modestly growing annual dividend policy going forward.

So I'm just curious why the Company is sticking with the 45% to 55% EPS payout ratio instead of either pushing that higher.

Particularly with the CapEx spending coming down next year, it looks like you do have a better buffer on the free cash flow payout.

Thanks.

Number one, Jonathan, that's a long-term policy that we set out and taking a long-term view of our earnings potential from a growth perspective.

We continue to believe that it's the prudent policy for this organization.

I think it's also important to report that as a director on the Board of TELUS, the TELUS Board remains committed to our long-term dividend growth model, and more broadly to returning cash to investors through the appropriate mechanisms so that they participate in the fruits of our labor in terms of delivering economic returns from the J-curve of investments that we make.

And I think our track record in this particular area is nothing short of exemplary.

It's fair to say, Jonathan, that at this juncture we're experiencing some significant on-strategy investments that in my estimation have warranted a holiday on the success of dividend increases.

I think it's important to illustrate empirically that if you go back to December of 2004 and look at the December 2004 to 2009 period, we've returned CAD5.5 billion of cash to our investors over that particular period.

And a significant component of that was through five successive dividend increases that were rather material in nature.

And that is the long-term path through this organization.

Also, if you look at the existing dividend given our stock price, the yield has been toggling between 5% and 6%, which we believe is attractive.

And as you've heard from Bob this morning, we've instituted the dividend, our discount dividend reinvestment plan with a 3% discount.

Again, I think that's attractive in terms of investors wanting to reinvest in our stock.

Thanks, Darren.

Quick clarification question for you.

In the past, you have just done the dividend increase at the early November time period.

Would the Board consider doing -- reviewing it on a quarterly basis, or should we not get investors' hopes up in the next few quarters and just look to next year instead?

Number one, that's the providence of the Board.

The Board does look at the dividend on a quarterly basis.

But if you inference from that, I think that would be inappropriate at this stage.

I would be looking to next year in terms of the medium term.

Okay, thanks.

Daniel, next question please.

Thank you.

Our next question will be from Greg MacDonald at National Bank.

Please go ahead.

Thanks.

Morning, guys.

Questions on the wireless EBITDA guidance changes.

I can appreciate the new mix issue, i.e.

expectation of higher smartphone loads in the 4Q, but the CAD75 million change is a pretty large delta.

I wonder is there something underlying the change there besides subsidies, i.e., you commented a little bit on network cost.

Is that also an issue you're considering could have an impact?

Alternatively, accurately migrating subscribers from the CDMA side to the HSPA side is an option would pressure margins.

You do have an incentive to do that, in particular freeing up that CDMA network for alternative strategies.

Can you say whether internal migration is also part of what you expect in the fourth quarter?

Thanks.

Greg, in terms of the revised guidance I don't think there's any -- I think I used the phrase or hidden, underlying pressures other than such as COA and COR.

Obviously, we've just introduced a great lineup of new handsets in conjunction with our new network launch.

One would expect volumes are going to pick up and the associated COA and some COR as we have some of the base migrate up to the new phones is reflected in the guidance.

We do not see any marked increase in migration costs in this quarter with respect to, say, Mike migration, et cetera.

As Darren has referenced, we're going to continue selling the CDMA network and we have some great new devices, some of which are unique, exclusive to our organization, which will fill some demand in the marketplace as well.

So essentially no surprises.

I think the most fundamental aspect of this is you've got an ARPU that's been decreasing and we're expecting loading to increase.

And the combination I've already outlined the trend.

The ARPU, while expected to improve, it's going to be down year-over-year.

Meanwhile, we're expecting loading increase and a combination of the two should impact EBITDA in the short-term.

Thanks, Bob.

Daniel, next question.

Thank you.

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

Please go ahead.

Yes, thanks very much.

Questions on your wireless CapEx.

Now that over 30 million population is covered by HSPA, does that imply that from November 5th on there will be a dramatic drop in your wireless CapEx or is there still another year or so of building out the footprint and increasing the tower density, or anything else?

I'm just trying to get a gauge of how quickly we should expect that component of the CapEx to fall off?

Well, I think a couple of things, Vince.

If you go back to the comments that we've made previous in respect of wireless broadband, we said that the preponderance of the waiting was in 2009, but that there would be continued build activity through the 2010 period effectively towards the middle part of 2010.

But that the weight of the wireless broadband build was going to be shouldered in 2009.

So there will be continuing CapEx to support the refinements that we think are prudent for our HSPA investment and to drive through the HSPA Plus coverage on a ubiquitous basis.

We have other markets as well where we want to pursue other opportunities, Manitoba being a case in point.

But the weight really is in 2009.

I think the best illustration of that was in respect of the slide that Bob put up.

When Bob made the comment that we're looking to trend our CapEx to circa CAD1.7 billion in 2010, a lot of that is illustrative of the fact that the weight on our wireless broadband build project was in 2009, allowing us to take our CapEx down by circa CAD400 million in 2010.

There's also some other factors that are important for people to think about that are somewhat unique to 2009.

We started up our satellite TV operations.

That required capital.

We've had an unusually high level of large enterprise and public sector deals that will proceed through the operational implementation phase over '09 and early 2010, but hopefully the weight of the capital thereafter will be behind us.

And we think looking back empirically from where we were from a CapEx perspective between 2006 and 2008 is a useful, not exact, but a useful leading indicator as to where we will be in the future.

And so when you think about things like even E911, again that was a regulatory edict that we had to shoulder in 2009 that was CapEx intensive that will not be reoccurring in 2010.

So those things together from a portfolio perspective are what is supporting our ability to take our CapEx down to more normalized levels.

Thank you.

Next question.

Thank you.

Our next question will be from Glenn Campbell at Bank of America.

Please go ahead.

Yes, thanks very much.

My question is on wireless ARPU, in particular the voice part.

In the MD&A, you talk about the factors that have contributed to the drop, overage, the roaming, the Mike and so on.

You didn't mention long distance.

I'm wondering if you can sort of talk about whether long distance is a contributor, and more generally I mean without necessarily giving us the numbers can you talk about whether the percentage declines this quarter versus Q2 are sort of higher or lower in each case for those drivers?

Thanks.

Well, in respect of long distance, Glenn, we are experiencing a decline that is for certain with respect to wireless and wireline.

I think you've seen the wireline reported separately.

So that is a similar trend that we're seeing on the wireless side.

So that's a component of the voice erosion that's been experienced.

But overall, there's a variety of factors that are affecting ARPU.

They're outlined in the MD&A and one of them often talked about is the mix of Koodo going in, and while Koodo ARPU is on plan, in fact the impact to our overall ARPU from Koodo is actually less than the impact from declining PCS roaming on revenues.

So we are experiencing and that's in part because of the recession, I think, and the cross-border traffic, and the like, and the absence of participating in the international traffic beyond United States with the CDMA.

That should change as we go forward and ramp up on the HSPA side.

So again in summary, the impact has been felt on long distance as on local on the voice side.

What we're trying to do I guess is just to try to isolate recession impacts.

If we looked at just roaming, was the year-over-year percentage decline worse in Q3 than in Q2?

I don't have it at hand in terms of sequential, but certainly it was a material negative trend on a year-over-year basis.

Okay.

Thanks, Bob.

Daniel?

(Operator Instructions) Our next question will be from Dvai Ghose at Genuity Capital Markets.

Please go ahead.

Hi, thanks.

Question for Darren or Joe regarding wireless going forward.

It's obviously encouraging that CapEx will come down now that HSPA overlay is done, and congratulations on that.

But the concern is you'll get a squeeze because of lower ARPUs, which I think will continue for the foreseeable future, and higher device subsidies on the HSPA side.

I think more than your peers you focus on the term AMPU, which I think is a powerful term, but we're not quite clear as to how you are going to defend AMPU in the face of falling ARPUs and rising subsidies.

Could you share some of your strategies?

Would you, for example, look at things like value cost plans as they have in Japan, whether a device has been subsidized in return for lower airtime pricing?

Would you look at increased outsourcing, paperless bills, et cetera?

All right, Dvai, what I'll do is I'll start it off and I'll give Mr.

Natale an opportunity to buttress my comments with anything that I leave out here along the way.

A few things I think are probably important to note in terms of the ARPU pressure, TELUS subscribes to the view that we are in a declining ARPU environment and if we don't drive cost efficiencies we're going to experience perpetual margin compression.

Having said that, I would say to you that the magnitude of the ARPU degradation that we experienced over the November 2008 to January 2009 period was particularly greater than what we think we would see on a recurring basis.

We saw a significant concentrated ARPU degradation over that 90-day period between November 2008 and January 2009.

That will soon be normalized on our base on a year-over-year basis and I think that will be a decidedly positive thing for this organization where the impact, I believe, is underestimated by analysts and investors.

In addition to that divide, having the opportunity to participate in data revenues that we have been previously denied access to from a smartphone perspective as a result of our HSPA investment I think is extremely attractive for TELUS over the longer term.

So yes, smart phones do present near term J-curve dilution, but I think if you look at the empirical evidence, they do represent significant opportunities for economic growth, attractive medium to longer-term margins, again supported by the data applications that these devices allow to come to fruition.

And I'm excited by that particular opportunity.

Also, we'll get opportunities to participate in markets that we have previously not had access to, whether they are geographical markets because of the breadth of our coverage, or whether they relate to roaming on an in-roaming or out-roaming basis.

Again, we think these represent reasonable growth prospects for our company.

From a go-forward basis as it relates to cost efficiency.

A few things, I'll go smartphone specific and then I'll widen it.

I think we have illustrated that we can be responsible from a COA/COR perspective.

But you have to go beyond that if you're going to ameliorate the J-curve dynamics of smartphones and enjoy a better economic return.

And so we will be looking to experience better channel efficiencies as we go through the tuition period on smartphones and become more productive.

We expect to experience better sales efficiencies within this particular arena.

We expect client care to become more effective, and as well, one of the areas where we're investing our dollars to significantly drive efficiencies is on the web portal front.

And things like online tools are going to be particularly critical in an era of Android devices, which are driving increased customization.

And from my perspective, increased customization always brings with it increased costs.

And if you're going to deal with that effectively, you have to have a terrific online capability.

Next, I think one of the important longer-term trends is going to be better competition amongst the vendors within the smartphone space.

To the extent of which we see stronger competition.

I think we as a carrier will enjoy better economics.

That's not going to happen in the near term, but it's something that we're hopeful of in the medium to longer term, and you can see that starting with the diversity of devices that we have across the iPhone, what we've done with the Blackberry 9700, and bringing the HTC Hero Android device to market.

Next, to address your question specifically, I believe the Canadian wireless industry has to begin to wean itself off of the addiction, which represents the heavy subsidizations that have become inherent in our sales and marketing strategies.

I do believe that there are exciting tradeoffs that we can pursue where we become less reliant on the heavy subsidizations and we have, as a result of that, more attractive usage price plans in the marketplace.

And that is, indeed, a trade off that this organization would countenance.

Next, I believe in the symbiotic relationship between wireline and wireless and what you can get on a bundling basis.

One of the things that's exciting about smartphones is that when you think about content delivery, whether it's the internet, whether it's applications, whether it's social media, whether it's entertainment and music, if you have to deliver those applications across both wires and wireless platforms I think is a terrific differentiator that's meaningful to clients.

And if in bundling you can begin to enjoy a concept that I've not heard discussed, but one that we've introduced along with the AMPU mentality, which is economies of scope on COA and COR, and to the extent to which you can get a discount through economies of scope on the aggregate COA that would come with a bundle of high-speed internet, television, and a wireless device, I think that represents attractive economics.

Again, in terms of off shoring, you can see that we believe in that through the investments that we've made to support our domestic operations in TELUS International.

I think that's going to become increasingly important for this organization in terms of cost efficiencies.

I think if you want to have a tangible illustration of what you can achieve at a low ARPU, but a high margin, I would say have a look at where the internet key device will be.

There is a device that typically will carry a low ARPU associated with it.

But it'll have a low subsidy associated with it in terms of the carrier costs that would need to be absorbed, and I would say a very attractive long-term margin for this organization leveraging our HSPA capability.

Next, I would say we very much do believe in a paperless world and one of the major mitigation activities that we're driving is of course what we're trying to do on ebill, both in respect of our Heritage Network on CDMA and prospectively on HSPA.

And then lastly, one of the things that we haven't talked about as much but we think is attractive is that if you look at the Clear Choice rate plans that we've introduced, we have indicated that we've got a number of cost efficiency measures that we have put in place to ensure that that that's in the near term AMPU neutral.

I believe that with Clear and Simple pricing it can actually be margin accretive because the clearer and more simple the pricing is to clients, the more satisfied clients will be and the less likely they are to go to the competition from a churn perspective.

Moreover, the clearer and simpler the pricing, the less likely that we're going to have a bill query, and the less likely that we have a bill query, the less likely that they are going to call our call center.

And every time we pick up the phone in our call center, it costs us CAD8 to CAD10.

And if we can avoid that by having simpler rate plans, which we have introduced along with our new network, I think that represents something that's attractive in terms of long-term cost avoidance.

Joe, any postscript?

Just one quick comment that Darren talked about extensively the things we're doing around AMPU as an organization.

Clear and Simple has become not just the branding around our rate plans.

Clear and Simple we're pushing hard as a cultural mindset within the organization.

And we believe with that as a mindset, we can drive productivity improvements throughout different parts of the organization.

I believe with that kind of focus, as Darren described it, you get very much a three-way gain.

Not only do you drive improved customer satisfaction, which of course directs -- links directly to retention and certainly you attract customers who achieve a level of trust and support based on clarity and simplicity, really fundamentally believe it drives productivity inside their organization.

You take an example right now in the sales channel with so many new and exciting handsets that are out there as far as this launch.

We've been through some intensive training around the notion of Smart Fit the last number of weeks with our front line salespeople.

Our customers more than ever are confused about which smartphone is best for them and if you look carefully at return rates, and in some parts of our business it's often driven by the fact that we have to provide the right level of clarity and simplicity at the very front end of the process.

So it's ideas like that at every piece of the value chain, whether it's in sales, in service, looking at the call volumes within the call center and why customers are calling, directing them to web self-serve.

It's very much a cultural mindset that we pressed upon the organization with some of the changes focused on AMPU.

Thanks, Joe.

Over to you, Dan.

Thank you.

Our next question will come from Peter Rhamey at BMO Capital Markets.

Please go ahead.

Great.

Thanks very much and good morning.

Looking at guidance once again, I think someone else, one of the first questions dealt with the implied margins on a go-forward basis, and I do note that it looks like the wireline margins implied are going to be flat, particularly if you take out restructuring charges in the fourth quarter.

So I assume you're looking at stable margins there.

But on the wireless side, you're going to have a CAD70 million to CAD80 million EBITDA decline.

And when we've looked at other companies that have launched the iPhone, mainly AT&T and Rogers, you see it takes a couple quarters for margins to normalize again.

TELUS has always been very good at balancing growth and profitability.

I was wondering if you could talk a little bit about your strategy here.

You're a little bit different in that you're doing a completely different network platform for the iPhone than the others, but I was wondering do you push growth here to get scale earlier on, or can you tend to meter the progress there in terms of getting not only the iPhone customers, but HSPA customers in general?

Thank you.

Well, Peter I think you summarized it fairly well in terms of wireline margins excluding restructuring being relatively stable on a go-forward basis and obviously somewhat affected as we come out of the economic decline generally that the overall economy has experienced over the past year.

So that should be helpful.

On the wireless front, clearly we've seen through the iPhone in North America, both AT&T and Rogers of course here in Canada, near term margin compression resulting from significantly loading of the devices and the subsidies associated with them.

And we've also seen in recent periods how that's transitioned as they go through that J-curve to significant margin expansion.

And I think that is part of the empirical experience that Darren was referencing in his comments.

So clearly in our case, not only with the iPhone, but with a whole set of exciting devices that we're introducing to the market that bodes well for the prospects of our loading.

And we're not going to give specific subscriber guidance or expectations either for this quarter or for next year, but sufficed to say we do expect a significant acceleration in loading, and consequently our plan does reflect the COA that would be associated with that.

The other thing that is worth perhaps mentioning and I'm sure I've noted this development with, say, AT&T or Rogers, is the ratio of loading on the iPhone to the base relative to new subscribers has trended on an improved fashion over time.

And so in contract to the experience where, say, just over a year ago when the product was being introduced in Canada at least and there hadn't been any previous iPhone, and there was significant pent up demand.

In our case, obviously the iPhone has been offered in Canada for some time.

So it's not quite the same dynamic with respect to the pent up demand on the implications on COR.

But having said that, clearly our go-forward guidance for the rest of this year and going forward next year, there will be some margin compression as a result of the growth associated with these devices.

And that's why it's so important to have that AMPU focus that Darren referenced is a complete acknowledgement of that.

And then if you go forward into the medium term as we're seeing elsewhere, you start to get the flow through benefits of those new devices and the recurring revenues, and the positive economics effecting the margins.

So we're quite prepared to invest in our future and are excited about the growth prospects in front of us in wireless.

I think, as well, a couple of additional things are worth pointing out to the comments that Bob has made, which were bang on.

To think that the growth is just related to the iPhone I think is wrong.

If you look at the impact of TELUS on having the Blackberry Bold, particularly in Q4 of last year, that was very punitive for our organization, arguably just as punitive as not having the iPhone was.

And now to have both of those devices in our device lineup concurrently is exciting for us from a growth perspective in the near term.

Additionally, we have seen a lot of interest in our Android device.

Certainly, for me it was encouraging yesterday to see the traffic in our stores, that the traffic was not uniquely directed at the iPhone, but what we were doing with the Blackberry 9700 and a lot of interest in the HTC Hero, particularly amongst young people.

And so it's not a one tenet to our near term growth that we're talking about, but a multiplicity of opportunities because of the breadth of our device space.

The other thing that I think people sometimes underestimate is that our footprint in terms of smartphone availability at high speeds is 93% of Canada.

So we can reach a lot of people very, very quickly.

So this is no longer a situation where the Bold, or the iPhone, or the Hero is an urban offering.

Our footprint, I think, will create a much greater attraction and, again, I think that bodes well for near term growth.

One of the big frustrations that we've had here in Vancouver is our inability to address effectively the ethnic community.

We have a very vibrant ethnic community that represents a very lucrative economic opportunity for TELUS.

But we were missing a couple of components that were very necessary to address that community effectively.

Number one was the SIM card orientation and the second was the iconic devices and what you could do from a roaming perspective.

Those challenges are now behind us and the opportunity is in front of us.

And that's very important for us as it relates to the constituencies that we're seeking to serve.

And then lastly, we just in the last 62 days added 113 points of distribution with the Black's organization, and we do believe that there's a synergistic fit between smartphone devices that are application rich on the data front when you think about someone that's proficient in imaging and digital retailing.

And when you look at the Black's customer base, one of the things that attracted us most to that particular acquisition was just how loyal that client base was, how technically proficient, and how recurring they were in terms of foot traffic within the stores.

They came back on a repeated basis, and again, I think that bodes well for our ability to augment successfully our distribution model in the months ahead.

And so those things are different and I think they speak to the type of growth that we're expecting on a prudent basis.

Daniel?

Thank you.

Our next question will come from Jeffrey Fan at Scotia Capital.

Please go ahead.

Good morning.

My question is on the CapEx guidance for next year.

It sounds like the bulk of the decline is coming from the wireless front with the build out now nearly complete.

Just wondering what's going on, on the wireline side within your guidance.

Maybe talk about that qualitatively and just maybe review for us the state of the network and the kind of bandwidth that you are able to deliver today, and where you expect to get to in the future in light of what Shaw's is currently doing, going to DOCSIS 3 with [1500 megabits] service now being introduced.

Thanks.

Okay.

Because this is one of the comments I made previously.

If you look at the two broadband investments, the weighting of the wireless broadband investment was significantly towards the 2009.

The broadband wireline investment is kind of split equally over 2009 and 2010.

If you look at where we are right now, our coverage roughly is around, and this is at the ADSL2+ level is around 90% within Edmonton.

And ADSL2+ allows us to get to circa the 15 meg zone.

We're at 90% in Edmonton, 80% in Calgary and about 50% covered in the lower mainland.

So really, the work ahead for us is to take our coverage up over the course of 2010 so that our ADSL2+ footprint covers 90% of the top 48 communities across Alberta and BC.

The ADSL2+ infrastructure is necessary.

The best way to think about is that infrastructure acts as a chassis over which you would deploy a VDSL2 line card in your network infrastructure, which is effectively a very inexpensive thing to do.

It is just a card overlay on the ADSL2+ infrastructure, which would take your speeds from 15 meg up to 30 megs.

The other thing that we would be doing along with that would be pursuing VDSL2 bonding, which is an increasing development amongst ILECs on a global basis, and through multiplexing or bonding, if you will, we're capable of doubling the bandwidth from 30 megs to 60 megs.

And we believe that, from a bandwidth perspective, is a very, very competitive level of both bandwidth and coverage to polity when you think that we will have that coverage over the top 48 communities across Alberta and BC.

It's also important to note that one of the things that our satellite deployment has given us is instantaneous, ubiquitous coverage on TV, which allows us not only to address the rural markets effectively outside those 48 communities, but also allows us to toggle our CapEx within the 48 communities as the situation would dictate.

And that situation ranges from capital affordability right through to competitive intensity in terms of what's going on with our major competitor.

And then lastly, I think it's important to point out that there are some things that were unique to 2009, including the Satellite startup or the E911 build, or some of the IT undertakings that we've had, as well as some of the weighting, disproportionate weighting that we've had on large, complex deals within the enterprise and public sector space that will begin to ameliorate over 2010.

So that's a thumbnail sketch of both our bandwidth perspective and our access infrastructure, and a view of 2009 versus 2010 as it relates to CapEx.

Just a quick follow on.

The upgrade going from ADSL2+ to the VDSL bonding, do you expect to do that in 2010 or is that a 2011 or beyond?

No, we'll be doing that in 2010 in terms of the VDSL2 deployment.

Whether we get it all done in 2010 across the top 48 communities, again, remains to be determined according to both competitive intensity and capital affordability.

But what we don't get done in 2010 will get done early in 2011.

That's for the VDSL2 deployment.

Bonding will be done on a selective basis as the opportunities and the competitive situation dictates.

Great.

Thanks very much.

Okay, Daniel, we're not through a little over an hour.

We've got -- we'll take one more question.

Thank you.

Thank you.

Our last question today will be from Simon Flannery at Morgan Stanley.

Please go ahead.

Great.

Thanks a lot.

Thanks for fitting me in.

Wanted to come back to the wireline as well.

If I could -- and perhaps the wireless, but to just talk about what the enterprise is, the sort of mindset in terms of spending and willingness to start looking at budgets again, and where could we start to see a pickup in that.

Is that something that you're seeing in any of your regions, any pickup in enterprise activity either on the wireless or the wireline side?

Thanks.

Okay, in terms of enterprise activity, I would say generically it's still very sluggish, both wireless and in respect of wireline as well.

I could be more specific.

The pickup is happening very slowly within the oil sector, in Alberta in particular.

That's true on both wireline and wireless.

One of the big impacts that TELUS felt that was, I think, disproportionate to TELUS was the downturn in the oil-based economy.

When projects started to get cut, contractors started to get let go.

And when you have the type of market share that we have in wireless in Alberta with the type of ARPU that we've generated, when those contractors get let go there is a definitive impact on both wireless from a client perspective, but also wireless from an economic ARPU perspective.

So we're starting to see some improvements, but it's extremely slow across the enterprise market in totality.

If you look at our expansion in the East, we've been very successful with a number of investments in terms of the Ontario government or the Department of National Defense, or the City of Montreal, or the Government of Quebec.

A number of those deals have either been implemented or they're going through the implementation phase.

We would expect over the course of 2010 and 2011 those particular deals to start generating a profit return, and then an economic cash return to the TELUS organization as we go through the J-curve investment associated with the implementation and start getting to a decent run rate in terms of both profitability and cash generation.

But holistically, in terms of the enterprise market per se on a national basis, improvement right now is slow.

Great.

Thanks.

Okay.

Well, that concludes the Q&A session.

Thank you very much for everybody that's joined us on the phone and on the internet today.