Telus Corp (TU) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS fourth-quarter 2009 earnings conference call.

I would like to introduce John Wheeler.

Please go ahead.

Welcome and thank you for joining us today for our fourth-quarter call.

The call is scheduled for up to one hour.

The news release on the fourth-quarter financial and operating 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 direct you to the ever-present slide 2.

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

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

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

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

Turning to slide 3 for an outline of today's agenda, we will start with introductory comments and a review of the quarter by Bob McFarlane, Executive Vice President and CFO.

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

We will then conclude with a question-and-answer session with Bob and Darren Entwistle, President and CEO.

Let me turn the presentation over to Bob, starting on slide 4.

Bob?

Great.

Thanks, John, and good morning, everyone.

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

Overall wireless revenues increased slightly, with equipment and other revenue growth of CAD56 million or 85%, which reflects the first full quarter of revenue from Black's Photography, which contributed CAD38 million of revenue, and increasing smartphone mix.

Operational expenses increased by 14%, driven higher by equipment expenses to support retention efforts and customer migrations to smartphones, notably including the Apple iPhone, as well as the inclusion of Black's.

Marketing expenses increased slightly to support the launch of our 3G+ network and devices, partially offset by lower commissions and lower gross additions.

Wireless segment restructuring costs decreased by CAD3 million, and all-in, wireless EBITDA declined by 12% and in line with our updated guidance provided in December.

The introduction of the iPhone negatively impacted EBITDA by approximately CAD20 million, given its significant volume, while Black's was a neutral contributor to EBITDA.

CapEx decreased by CAD44 million or 19% in the quarter, following the launch of our new 3G+ network in early November.

Turning to slide 5, net wireless subscriber additions this quarter were 122,000, with higher-quality postpaid net adds of 109,000 representing 89% of the mix compared to 80% a year ago.

Year-over-year net subscriber additions decreased by 18% and primarily reflected a reduction in prepaid net adds as the Company shifted focus away from the lower-value segment to focus more on adding higher-quality customers, particularly with smartphones.

Overall, our total subscriber base is up 6.4% year over year and now totals 6.5 million.

Slide 6 provides some additional detail on TELUS's continued success in smartphones, which speaks to the quality of our postpaid loading.

Smartphone subscribers now represent approximately 20% of TELUS's postpaid base, up substantially from 13% a year ago.

Although there may be some ambiguity in the definition of what exactly is considered a smartphone when comparing numbers between TELUS and other carriers, for TELUS this represents an apples-to-apples comparison.

It's important to highlight that HSPA loading commenced on November 5, when the new network was launched.

So we had less than 60 days selling our expanded smartphone lineup.

In November and December, subsequent to the new HSPA network launch, more than 40% of TELUS-brand postpaid gross loading was on smartphones.

7% of net adds were iPhones, while the retention to new ratio was 77/23 as compared to 85/15 that we understand has been experienced by other newly launched second-to-market iPhone carriers globally.

Meanwhile, there was a tremendous surge of more than 100% in the number of retention subs upgrading smartphones, such as the Android HTC Hero, and more materially, RIM devices, and of course, the Apple iPhone.

Overall, smartphone gross loading was up 61% year over year in Q4 and 72% in December, when our sales and marketing efforts started to hit their stride.

Slide 7 shows the breakdown of TELUS's total ARPU between voice and data for the fourth quarter.

Total ARPU continued 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 and included reduced voice usage, with total MOUs down 5.6%, economizing the rate plans by both consumers and business clients with chargeable MOUs decreasing significantly more than total MOUs, continued declines in Mike ARPU, increased penetration of Kudo within the base, and reduced roaming, which includes the impact of a domestic roaming rate reduction in the first quarter of 2009.

Encouraging for future prospects is that HSPA net adds were a positive contributor to ARPU year over year.

Also on the positive side, data ARPU growth remained strong, increasing CAD1.43 to CAD12.60.

This now represents 22% of total ARPU, up 4 points from last year.

As shown on slide 8, data revenue growth for the fourth quarter increased by 20% year over year, reaching CAD243 million.

We remain bullish with respect to the prospects for future wireless data growth, given the increasing penetration of smartphones within our subscriber base.

As mentioned earlier, smartphone penetration is increasing with the addition of new HSPA devices.

While still early days with respect to our 3G+ network, the ARPU associated with new HSPA devices is encouraging and significantly higher than non-HSPA ARPU.

Slide 9 shows the metrics related to our wireless marketing and retention efforts in the fourth quarter.

Gross adds declined by 2%, with the decline caused by prepaid, where we consciously decided not to match the more aggressive fourth-quarter offers in the marketplace.

Churn improved slightly by 2 basis points over last year, and postpaid churn, which is not shown on the slide, remained low at 1.18%.

COA per gross add increased only slightly, by 2.2%, to CAD380, despite higher marketing expenses to support the launch of the HSPA network and higher per-unit subsidy costs associated with smartphones, including the iPhone.

As expected, costs of retention increased by 27%, reflecting higher subsidy costs as part of our focus on migrating clients to smartphones, including customer upgrades to new, more expensive HSPA devices.

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

Revenue decreased by 3.8% due to ongoing local revenue declines, augmented by accelerated LD and equipment revenue declines that in aggregate were only partially offset by modest data growth.

Operational expenses were relatively flat, reflecting effective cost control, as I'll illustrate shortly.

When excluding defined benefit pension expenses from both periods, operational expenses declined by 3%, which is a more representative reflection of our operational efficiency efforts.

As disclosed in December, restructuring costs increased CAD42 million in the quarter, driven by a number of initiatives under our accelerated operating efficiency program.

Operating profitability as measured by EBITDA was down by 20% and impacted primarily by the higher restructuring and pension costs, which I'll review in a moment.

Wireline capital expenditures decreased by 18%, mainly due to lower investments in network access, large enterprise deals.

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

When adjusting for the CAD29 million increase in defined benefit pension expenses, as well as the CAD42 million increase in restructuring costs, normalized EBITDA decreased by 4.4%.

A significant investment in restructuring costs in the fourth quarter is expected to lower the wireline cost structure further in 2010, as I'll comment more on later.

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

High-speed net adds declined over the same period last year to 11,000 and reflects a maturing market, a decline in household formation due to the weaker economy, as well as extremely aggressive price competition from Shaw in the fourth quarter.

Slide 13 shows the continued success of TELUS TV in the fourth quarter.

Total net adds increased 120% year over year to 33,000 and represents our best quarter to date.

While the total subscriber base more than doubled to 170,000 over the same period, TELUS experienced significant year-over-year growth in IPTV net adds, as well as benefited from satellite TV additions which were not in 2008 results.

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

Slide 14 highlights two notable items.

First, for the fifth straight quarter, residential line losses continued to show a stabilizing trend and slightly improved in the fourth quarter over the same period a year ago.

Second, we are encouraged to see TELUS TV and high-speed Internet loading of 44,000 exceed the decline of residential line losses of 41,000.

These two items reflect more effective win-back capabilities and the results of our continued broadband expansion, which facilitates wireline bundling opportunities, including TELUS TV.

In an exciting development 10 days ago, TELUS announced the availability of a new TELUS TV service powered by Microsoft Mediaroom.

The new service offers a better television viewing experience for TELUS TV customers and includes many new, innovative features, including PVR Anywhere, which allows customers to record and watch a show on any connected television in any room in the house; TELUS TV connections for up to six TVs in a home with multiple HD streams; superior picture quality; enhanced channel browsing and guide with picture-in-picture channel surfing and instantaneous channel changing.

In addition, the new service enables faster dynamic Internet speeds.

Importantly, these new features help differentiate TELUS TV against our cable TV competitor and leverages the significant investments we've made in our wireline broadband network.

Speaking of our broadband build, slide 16 provides an update.

During the quarter, fiber-to-the-node coverage continued to expand, with TELUS now covering more than three-quarters or 1.8 million households in BC and Alberta, with a minimum 15 Mb per second broadband service.

Meanwhile, the continued buildout led to a significant jump in coverage in the greater Vancouver area to more than 70% of households in the quarter.

As we continue our broadband expansion in 2010, we expect to cover up to 90% or 2.2 million households in the top 48 communities across Western Canada by the end of 2010.

Starting during the second half of 2009, TELUS began a program to reach the top 48 communities with VDSL2 by the end of 2011.

This will double current data download speeds to up to 30 Mb per second and better enable our enhanced IPTV and Internet services.

In all, new greenfield developments in Western Canada have continued deploying fiber-to-the-home, while at the same time we've been deploying fiber-to-the-building with ethernet-to-the-suite technology for years.

Putting it all together, let's look at TELUS on a consolidated basis, starting on slide 17.

Consolidated revenue in the fourth quarter decreased slightly by 0.4%.

Increased operating expenses and higher restructuring and pension costs caused reported EBITDA to decline by 16%.

More detail on this in a moment.

In line with guidance, reported EPS decreased to CAD0.49 in the quarter, driven largely by decreased operating profitability, but with a few nonrecurring items we will talk about on slide 23.

Meanwhile, consolidated CapEx decreased by 19%, given trends toward lower CapEx in both wireless and wireline segments, as already mentioned.

All in all, consolidated results were in line with our most recent guidance provided in December.

Slide 18 shows that consolidated profitability was significantly impacted by higher defined benefit pension restructuring costs.

When adjusting for these two costs, underlying EBITDA was lower by 8.3%.

Normalized fourth-quarter EBITDA was impacted by lower legacy local and LD voice revenues, as well as increased wireless retention costs.

Slide 19 shows restructuring costs over the last three years, and our target for this year on the right-hand side of the chart.

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

Particularly given the ramp-up in restructuring efforts in 2009, for which the consequent OpEx savings were only partially reaped in year, along with continued emphasis on OpEx reduction in 2010, restructuring investments are expected to provide TELUS with a much better cost structure in 2010 and beyond.

As part of our operating efficiency program, slide 20 shows the changes in full-time equivalents staff count for 2009.

The domestic staff count for the year, excluding the new staff from the Black's Photography acquisition, is down 2150 approximately.

TELUS International is higher by about 750 positions, which substantially consists of internal positions offshore.

These significant employee reductions led to a sizable decrease year over year in employee-related expenses.

In addition, as mentioned earlier, the full-year flow-through effect of 2009 reductions is expected to lower the 2010 cost structure further.

Slide 21 shows TELUS's progress over the last four quarters in reducing domestic full-time equivalents for 2009 and our expectation for 2010.

Going forward, we expect a continued focus on operating efficiency, as highlighted earlier and as reflected by the associated target reduction in domestic FTEs of approximately 1000 in 2010.

Given the reduction in domestic FTE throughout 2009, combined with an additional 1000 FTE reductions targeted for 2010, TELUS is expecting an incremental savings of approximately CAD135 million, largely from reduced employee-related expenses.

On slide 22, we can see the significant year-over-year annual OpEx savings, largely resulting from wireline FTE reductions, combined with low variable payouts, leading to an 8% reduction in compensation and employee-related expenses.

Total wireline OpEx increased 3% despite the efficiency savings due to a significantly increased pension expense and restructuring costs.

Slide 23 shows the detailed breakdown of the components of reported EPS, including the positive income tax-related adjustments incurred this quarter and the same quarter last year.

As previously disclosed, earnings per share included an impact of CAD0.22 resulting from a loss on early partial redemption of our June 2011 US-dollar notes.

More on this on the next slide.

Normalized EBITDA contributed CAD0.18 to the decline, primarily from higher wireless retention costs, while higher pension and restructuring costs negatively impacted EPS by CAD0.09 and CAD0.06, respectively.

Slightly higher depreciation and amortization and other expense contributed CAD0.01 to the downside.

Turning to slide 24, I would like to take a moment to review TELUS's refinance in December.

As previously announced, TELUS successfully issued CAD1 billion of senior unsecured 10-year notes at 5.05% at the beginning of December.

The net proceeds of the refinancing were used to redeem 30% for $577 million of the outstanding 8% US-dollar notes due June 2011.

In addition, TELUS paid CAD315 million to terminate the associated cross-currency interest rate swaps.

TELUS recorded a pretax charge of CAD99 million, comprised of CAD63 million for the early partial redemption and CAD36 million upon terminating the associated interest rate swaps.

The total after-tax impact was CAD69 million or CAD0.22 per share, as previously highlighted.

This debt issue provides a significantly lower effective interest rate as compared to the rate for the redeemed notes and extended TELUS's average long-term debt maturity by an additional year overall to five years.

Before I conclude, we wanted to update our 2009 actual and 2010 pension assumptions now that we have the final year-end results.

We now estimate defined benefit pension expense to estimate an increase of approximately CAD10 million in 2010, following better asset returns in December, and a 5.85% discount rate.

We also expect a decrease in cash pension contributions of approximately CAD36 million.

We have prudently manage our obligations to our pensioners over an extended period of time, and, combined with good returns in 2009, the assets in our defined benefit pension plans cover 99% of estimated future obligations.

In summary, 2009 was a year where we utilized our strong financial position to strategically invest to enhance our competitive position and future growth.

We launched ahead of schedule a national 3G+ network and expanded greatly the ADSL2+ coverage for our wireline network.

We significantly improved organizational cost efficiency to address dilutive impacts of certain growth initiatives and the recession on our business, such that we reduced our salaries and benefits by CAD174 million or 7%.

Moving into 2010, we expect numerous benefits from our strategy, including accelerated wireless data growth.

Leveraging our broadband investments and the launch of our new IPTV platform, we look for ongoing TV growth.

We also expect CAD135 million of EBITDA savings in 2010 from last year's and this year's continued focus on operating efficiency initiatives.

In conclusion, we expect a significant growth in free cash flow in 2010, primarily due to the CAD400 million reduction in CapEx more than offsetting the increase in cash income taxes.

This is outlined in the appendix slides.

On that note, let me conclude, and let's move to the Q&A session with Darren and myself.

Back to you, John.

Thanks, Bob.

And just before we start the Q&A, I just want to make a small correction.

Back on slide 6, on the smartphone mix, we incorrectly gave you the percentage.

The percentage there since November and December for Apple iPhone net adds is actually 17%, and not 7% as stated.

So just a minor correction on slide 6.

So, on that note, we will turn it over to Daniel, and can you please proceed with the questions from the queue for Darren and Bob, please?

Greg MacDonald, National Bank Financial.

Wireless ARPU a little lighter than expected, from my estimates, both on data and voice.

We've seen historically Rogers when it adds the -- or when it has a reasonably big quarter with the iPhone, it takes one or two quarters before you see the real ARPU lift, particularly on data.

Is that the case that we're seeing here?

In particular, are we going to see a greater benefit on the year-over-year growth in data ARPU in the first quarter or the second quarter from what looks like reasonable smartphone loads in the 4Q?

I think your comment is appropriate in terms of we just launched the iPhone November 3, so we had a few days short of two months in the quarter of loading ramping up.

Early indications, I mean, we have an ARPU for HSPA adds well north of CAD100.

Now, how representative that is on a sustained basis remains to be seen, but certainly a very strong ARPU across the part board, not just the iPhone, but on all the HSPA devices.

So we're certainly encouraged by that development.

And we need to have a little more of an empirical trail, as you allude to, in terms of really getting good handle on that.

But it's certainly a positive factor in terms of a go-forward basis, but it had a negligible impact in quarter because of really the partial-quarter result.

Phil Huang, UBS Securities.

Based on my estimates, the voice ARPU decline is at a relatively stable pace with 12% for the last three quarters.

So the acceleration in overall ARPU for me looks like it mainly comes from slowing data growth.

I just want to be able to understand the different drivers behind that, like, how significant was the dilutive impact of data-only subs and lower rate -- roaming rates?

And to what extent did the presumably higher new sub activity in the latter part of the quarter contribute to the dilutive impact?

Thanks.

Well, in terms of ARPU, firstly, obviously, as reflected by the MOU on the voice side down 5.6% year over year, that reflects really two things -- a bit of the economy in terms of people rightsizing and moderating their usage, as well as presumably some messaging or data substitution for voice.

We have experienced that trend throughout 2009, really impacted by the economy.

In terms of the data side and roaming, in respect of roaming, we had a rate reduction on the domestic roaming with the Bell organization in the first quarter of 2009.

So the results for 2009 are impacted on the revenue side, and the expense side, but here we're just looking at revenue and the ARPU in terms of the domestic roaming rate.

That was not the case in the denominator, i.e.

the prior year, because the rate reduction transpired in Q1.

So, from that standpoint, the rate reduction flowed through in combination with reduced international travel, if you will, or volume as it turns up on our network from international inbound roamers from the United States.

We're really talking about CDMA here from a materiality perspective.

So consequently, the overall roaming bucket was a deflator for our ARPU.

In addition to that, on the data side, we have a significantly greater volume of Internet sticks being added in the base.

That is a positive development for the organization.

But one facet of that is the increasing transition of that product being adopted in the consumer as opposed to the business segment at lower price points.

Now, we all know that prices are coming down on those sticks.

The business model is certainly adjusting favorably.

But in terms of penetrating the consumer market at generally lower rates, we're finding in terms of year-over-year CAGR, that was a meaningful contributor.

Of course, in our case, we also have messaging, where we -- and it's quite specific to TELUS -- where we did a -- commenced charging for inbound messaging in the fourth quarter of 2008.

And so when you're looking at a year-over-year basis, the first quarter that you would have the inclusion of inbound messaging charges both in the current period and the prior year-over-year period is this fourth quarter.

And so messaging revenue, of course, expanded.

It increased in absolute dollars.

But because there was a jump in the fourth quarter of '08, the CAGR in terms of year-over-year comparison this quarter was impacted negatively.

So, all in all, we're not really concerned, if you will, on the stat of underlying data growth rates.

There's some -- a little bit of a measurement issue there on the year-over-year basis.

I think more importantly, as we track the categories and we look at the data usage on the smartphones, which is significantly greater than it is on our general phones, at the take-up rate for data packages when we upgrade on retention basis existing subscribers, as well as the new ones coming on board, the increased percentage of smartphones in our base is definitely a positive factor.

And so I guess that relates to my prior answer.

We are hopeful, we're encouraged by the early HSPA results.

We need a little more empirical experience to be able to track it better, but it's certainly a positive trend.

And we would hope to see significant improvement in our ARPU over the course of 2010.

Thanks.

That's helpful.

And maybe just a quick follow-up on the voice side.

Based on your view of the competitive activity right now, do you feel comfortable commanding a premium for the more mature networks that you have, or do you think that it is more prudent and important to more prominently react and match the more aggressive pricing out there?

We're very comfortable in terms of our pricing.

In fact, when we launched our new updated rate plans that started in November, concurrent with the network launch, was quite an organizational effort that we implemented doing both.

We think those are very resilient, very effective and very consumer-friendly, consistent with our future-friendly brand promise.

So if you asked the question in the front half of last year, I think we had an issue with respect to the system access fee.

That isn't the case.

That's been addressed, I think, in a customer-friendly manner.

And so from a go-forward perspective, we're quite comfortable with our positioning on PCS.

In respect of our flanker brand, keep in mind that we've been operating for almost two years on the Kudo side.

We have had stable loading with that brand on a year-over-year basis.

And remember that in your early periods, you have moderated churn.

So now that we're down the road in that brand launch, we really have normalized full-period churn flowing through.

And so therefore, to have your net adds being stable is very encouraging.

So we have that position in the market that is succeeding, and we see no reason to have to adjust pricing in response to competitive developments in the marketplace.

Jonathan Allen, RBC Capital Markets.

Bob, a question about the wireless margins.

This quarter, network margins were down just over 400 basis points, which was in line with the revised guidance and I think pretty much in line with where the Street was.

But COA was surprisingly not really the driver, with the COA expense actually being down year over year and COA per gross add up only 2%.

So I'm kind of confused and perhaps a little worried as we look to 2010 that if margins are already seeing pressure, down 400 basis points, what happens when the subsidies and COAs start to increase on the HSPA network over the next few quarters?

Do we see incremental margin pressure there, or am I missing something here?

Is maybe COA going to be a lot more manageable, like along the 2% increase that you had this quarter, or should we assume that the underlying wireless margins start to improve and offset some of that COA growth?

Hopefully I explained that properly.

Well, I think I understand the question.

But to answer your first question, I think you did miss something.

In terms of the COA, COR.

First of all, the COA reflects the full cost of loading.

In fact, in a quarter where we had a brand-new launch with new HSPA devices, if you look at the cost curve or technology pricing curve of handsets and HSPA technology, yes, there's going to be new models introduced.

But on average, it's going to trend down at a fairly fast pace until it's going to be significantly below that for CDMA, one of the rationales for our HSPA network launch.

So the trend in terms of going forward on COA is neutral, I would say, at worst and positive in terms of opportunity on the subsidy being lower at best.

In terms of what was affecting the margins, then, in the quarter was really two things.

Primarily, I think in terms of this discussion, was the COR side of things, cost retention.

And the cost retention was a very predictable thing.

In fact, we, in our launch announcing the iPhone, talked about a CAD100 million circa dilution in 2010 with respect to the iPhone.

And given that a significant element of loading for that new handset is from your existing basis as it pertains to contract renewals, this has always been something that is not unique to ourselves.

The key issue from a profitability perspective was what is the ratio, what would the ratio be in respect of new subscribers, where the revenues are fully incremental, versus retained existing subscribers, where the uplift in terms of greater usage is partially incremental?

And in that respect, with our 77/23 mix, we're very encouraged, because in talking with the Apple organization -- and I'm not talking about Canada, I'm talking about internationally and the experience of various launches -- we were advised to expect an 85/15 type of initial ratio.

Obviously, as you've seen in other carriers that are more mature in their offering of the iPhone, that turns down significantly over time.

But the big question was, what would it be in our initial period?

So we've started off on a much better ratio than expected, and that ratio should improve on a go-forward basis, obviously.

So, at the end of the day, COA is not our concern.

COR is not.

I think in terms of -- COR really relates to the investment in the iPhone and smartphones.

And I think the real issue then becomes the ARPU.

And if your ARPU is eroding at a greater rate than your sub base is increasing, that affects your overall margins.

So one of the missions of this organization is to arrest the ARPU decline, and we're set on doing that in 2010.

That's very helpful.

Thank you very much, Bob.

Peter Rhamey, BMO Nesbitt Burns.

A couple questions again on wireless.

There was some commentary that you had backed out of the prepaid market during the quarter.

Of course, your broader strategy is to focus on postpaid.

But I was wondering if this marked an intensification of competition in the prepaid market.

Second of all, I think one of your base assumptions for 2010 guidance was market launches by competitors in Q1 2010, and only one market has been launched so far.

I'm just wondering whether that is an optimistic sign that perhaps competition is going to come a quarter or two later for you, and whether you're feeling a little bit better about your business as a result?

I guess going in sequence, firstly, you inquired about prepaid.

Look, we like prepaid, properly priced, in terms of both service revenues and in terms of subsidies.

The lessons in respect to prepaid are well documented in the wireless industry, that if you overly subsidize and don't have an investment in the handset and the absence of contracts, and the churns spike up and make the product economical.

So we have a decent prepaid ARPU, and we have a decent approach historically and economically to prepaid.

But that reflects some discipline.

And what we saw in the fourth quarter was efforts by certain competitors to go to fully discounted or nearly fully discounted handsets on a prepaid basis.

We won't play in that.

And so if that meant sacrificing some loading, then so be it.

And that's what transpired.

And I think that's the right thing to do for our shareholders.

And so when we talk about a higher-quality mix in the fourth quarter, it wasn't because we said we don't want prepaid.

It was more, we're not going to participate in a prepaid loading characteristic that we don't believe has the proper economics.

So that's the Kudo side of things.

In terms of new entrants, well, there really was -- well, there wasn't a measurable impact, obviously, in the fourth quarter that we saw.

And various of the new entrants are struggling to operationalize their efforts, perhaps not too surprising.

So whatever the impacts are going to be, which are primarily central Canada focused, so a little less direct on TELUS, but in any event are not expected to be a meaningful factor over the first half of 2010.

With regards to prepaid, those offers are still in the market, I believe?

Is that fair to say?

I would have to just check on that.

Put it this way, they were very prevalent in terms of being promoted in the December Christmas timeframe, and there's a lot of gift purchasing on that basis going on.

Great.

Thanks very much, Bob.

Jeffrey Fan, Scotia Capital.

Just one quick one on the definition of smartphone.

I'm just wondering, Bob, if you can just clarify what your definition is, just to help us compare between companies.

And then switching gears on the bigger question on the fiber front related to wireline, with BC and Bell [aligned], I guess moving to fiber-to-the-home in some of their aerial footprint, just wondering if you can provide us with some facts on what your aerial coverage is in Alberta and BC and your thoughts on whether fiber-to-the-home over aerial deployment really makes sense.

Thanks.

In terms of the definition, in our case, we define smartphones as including devices such as the iPhone, RIM devices and PDAs.

It does not include data sticks, air cards, modems, embedded laptop devices, multimedia and messaging devices.

So essentially, you're talking about -- it is a handset that has a multimedia capability, so an Internet broadband connection.

And so that's the definition.

And obviously, from a materiality perspective, that largely consisted of RIM product and then laterally iPhones subsequent to the launch of the new network.

In terms of wireline broadband deployment in Western Canada, we've been deploying fiber to greenfield developments for quite some time, gee, over a year, by memory, now.

I think it started perhaps in late 2007 or thereabouts.

In any event, we've been at it for a considerable period of time.

And as well, we have experimented with some brownfield development to understand the cost structure of doing that in the business model certainly in respect of some MDU buildings and the like.

We are connecting Internet-to-the-suite, and this has been something that we've been doing for some time.

We've also begun the very early stages of the VDSL2 deployment in the past six months, and so we will be rolling that out and in a position to offer it on a commercial perspective in terms of speeds up to 30 megs really in the back half of this year and finishing that upgrade in the 2011 timeframe.

So this is something that we've been doing for some time.

Obviously, this is not a Verizon-like model, where we're taking fiber to every premise in our coverage footprint, but we're doing it selectively where the economics make sense, and that largely consists of greenfield developments or highly concentrated MDUs.

Maher Yaghi, Desjardins Securities.

I just want to go back maybe to the ARPU declines we're seeing in the wireless and just look at the minutes of use.

If I look at your quarter's decline here of 5.6%, it's higher than what we were seeing from your competitors.

Can you maybe tell us, is there a special area of focus that your customers are trying to reduce their usage of voice on?

And is this particular to TELUS?

And what is your view going forward as to when you think the decline could start to taper off and hold steady at a certain level instead of the decline increasing?

In respect of the ARPU, the 5.6% minutes of use decline is total minutes of use.

Unfortunately, if we measured it on a build basis or the chargeable minutes of use, the decline was greater than that.

So it reflects a challenge to the organization.

Essentially, what we're experiencing is -- and this is a trend really for the past year that we've witnessed -- is that our subscribers on average are not only using less minutes in total, but they are rightsizing their usage.

So, for example, if someone is subscribed to a package with 400 included minutes, whereas before they would go over the 400 and we would earn chargeable incremental revenue on a permanent basis, that is happening less frequently.

So they are managing, for example, usage of 399 minutes to make the point.

So that's an example of rightsizing.

So, to a certain extent, it reflects -- we have some bundles, of bundling minutes, and so you're getting the monthly recurring fee.

So there's a little bit of a shift there.

But regardless, we're seeing an overall decline.

I think in terms of go-forward, it's not something that is self-controlled easily in terms of predicting.

I think from a strategic perspective, we need to, knowing that part of that substitution effect is going to data, we want to make sure that we're getting our fair share of that data growth pie.

And this is where smartphones fit in so importantly, as they attract a heavier user with more applications, more revenue sources, and we've experienced higher ARPUs with them.

So hence the emphasis on the ARPUs -- or sorry, on the smartphones.

And we're hopeful that that is going to be a helpful factor in terms of arresting the decline in ARPU on a go-forward basis.

If you look at the underlying challenge on the ARPU front in the economy, is it going to get better?

Well, you probably have better sources than we do, given you have economists that work for you.

But certainly it is a consensus out there, the Canadian economy getting better.

And certainly we're seeing that in Western Canada.

So to the extent that plays a factor, that would be a nice headroom for us.

Do you think the offering that you have to your wireless subscribers has in any way been different than maybe your competitors are offering your customers a potential to lower their voice usage more than -- because if I look Bell or Rogers, we're not seeing those kind of declines in minutes of use.

Is there anything particular to the package that you're offering that is making this happen?

Well, I think the thing that is most unique in respect of ourselves, two things come to mind.

One is that we have a Mike subscriber base in our subscriber base, unlike other Canadian competitors.

And as you are probably familiar, we've been migrating the heavy users -- the heavy mobile voice users off of that service as it's become more push-to-talk-centric.

And the reason for that, amongst others, is that there is no 3G data path for Mike.

And so these heavy users, like everyone else, are wanting to use smartphones and multimedia devices and the like.

So we either migrated over to our PCS brand or we risked having them churn away.

And so, in doing that, Mike historically was priced on the voice side at a premium to the market because of its unique functionality and combination of our push-to-talk capability.

That is not the case anymore.

And as you're converting over, you're repricing at the market.

And so there's been an ARPU reduction on the Mike that's been flowing through our numbers that would not be something seen at other carriers.

In fact, that also pertains to net additions, because obviously Mike net additions are negative, and so they pull down our results.

So that's one reason.

Another reason would be related to roaming.

Yes, we do have some international roaming from the -- largely Verizon and less, really, from Sprint, on a cross-border basis.

As mentioned, US to Canadian traffic has actually declined in the past year with the recession, etc.

But from an international perspective beyond that, the CDMA roaming revenues have been negligible because of the lack of roaming partners.

The HSPA launch opens up the opportunity for ourselves to participate in that HSPA international roaming revenue that heretofore has been exclusively on a GSM basis to the benefit of one carrier in Canada.

So in the fourth quarter, that was nascent, because we were just ramping up.

But on a go-forward basis, we would expect that that should be a regular growth element in a positive way in our ARPU, and that was one of the business rationales behind the HSPA launch.

Dvai Ghose, Genuity Capital Markets.

A couple of things on the wireless side as well.

Given the fact that both Bell and TELUS launched HSPA with some fanfare in early November, I understand it was only about eight, nine weeks until the end of the quarter.

But both companies reported fairly modest postpaid additions, about 100,000 each, and less if you include the write-offs that both companies took, theirs obviously being much bigger than yours.

So I'm wondering, is this a function of weak demand overall because of economic factors, or do you think that there are competitive issues and Rogers actually did much better in terms of retention as well as acquisition?

We will see, obviously, with their numbers next week.

My second question, really, it's to Darren, regarding cash cost per users and AMPU.

I think you've been using this phrase, AMPU, which I think is quite interesting, because it acknowledges that while ARPU slips, it doesn't necessarily have to destroy value if you can reduce recurring costs.

Obviously, your margins in the quarter were negatively impacted by big costs of retention, but can you give us an idea of how things like Kudo and Clear Choice plans have helped you in terms of cash cost per user and therefore AMPU as a potential offset in future quarters to ARPU decline?

In respect of the first question on HSPA -- and you're right, it was a partial quarter, so it's early days -- remember, again, I guess cut to the chase, I don't think it was absent of demand.

I think it was sort of normal course.

Remember that in respect of the HSPA product, which is new to the market, it tends to be higher-priced, more fully featured product.

Look at the iPhone.

Look at the Bold, the HTC Hero, etc.

So in that respect, we're not down the maturity curve of production of HSPA handsets.

And so, for example, on our Kudo product line, it is exclusively CDMA.

We don't sell prepaid.

So from a standpoint on whether it be Kudo or HSPA, I don't think we're really -- HSPA is not an element of a volume driver.

It was more a focus on quality.

As that technology curve evolves and there's a greater portfolio of handsets at a variety of cost points, where in fact the subsidies should hopefully be lower than they have historically been on CDMA, then we should be able to pursue better volume at an efficient COA.

I guess we referenced that earlier.

So at the end of the day, I think it reflects really the quality effect that was going on.

It's difficult to say, with all the press that was going on in the fourth quarter, whether there were purchase deferrals or not.

I think at the end of the day, it was really a reflection of the marketing orientation of this organization towards quality product.

Your second question was in respect of AMPU, and for those not familiar with that acronym, average margin per unit.

So the point here is that in respect of whether it be increased competition, whether it be the fact that voice revenues are declining and data may or may not be sufficient to offset that, one needs to look at cost structure in order to maintain an improved margin.

And so that means managing on an AMPU basis.

So an example of that would be the introduction of the new rate plans in early November by our organization.

And essentially, the strategy related there was to deal off the future-friendly need to not be charging spectrum access -- system access fees, and at the same time, look at the cost structure, whether -- so that from an AMPU perspective over time there's no negative impact.

Now, the ARPU impact from that change was negligible in the fourth quarter.

As we indicated at the time of launch, it's available to new subscribers.

It's also available to existing to the extent that they want to fully adopt that new rate plan, which means giving up any benefit that may be embedded in an historical price plan that they have.

So we really didn't have a significant number, shall we say, of internal conversions.

And I think it positions us well in the marketplace.

But as mentioned, given that we did a CAD5 increase, which was less than the elimination of the system access fee and E911 charge, we do have a focus on the cost side of the organization, and we're driven to hold that in 2010.

Maybe just make one comment, Bob, on the Kudo cost structure in terms of how we engineered that product.

And I think Darren's suggestion there is in respect of Kudo, when we launched that product, it was understanding it was a flanker brand focusing on the affordable voice and messaging segment.

That one needed to, for a flanker brand of the future, one needed to have a low and efficient cost structure.

So we looked at every opportunity in setting that up, including a significantly outsourced service model and the like.

So from a variety of perspectives, without giving away our competitive secrets, that brand was constructed from a low cost perspective.

And so when we look at our business plan, how it's materialized, shall we say, as we're heading nearer to the second year of operation, we crossed the EBITDA many quarters ago.

It's ramping up quarter over quarter with significant EBITDA improvement.

So it is a distinctly positive factor in respect of margin improvement.

And so given that it is an important source of loading for our organization, that's an encouraging development.

So, at the end of the day, on the PCS brand, the HSPA launch differentiation, and I talked about the factors in the handsets, are the means by which we will improve that side.

And that then leaves the Mike, where, as you see the total subscribers now getting down to 9% or less of our subscriber base, as we finish the migration on that over the course of the next year or so, then we will be on a very solid footing in respect of overall AMPU in the organization.

No, that makes sense.

I guess my only request, and you gave a lot of really good disclosures, if you could help us to trace the AMPU and cash cost per users, because it gets a little bit dwarfed with things like retention expenses and acquisition expenses, I think that will be really useful and help you -- at least it will help us understand how you are achieving these targets.

Thanks for the input, Dvai.

David Lambert, Canaccord Adams.

On the wireline side, you seem to have a pretty significant jump in data revenues this quarter.

I was wondering if you can talk about -- I suspect it's coming from the enterprise side of the business.

I was wondering if you can talk about how these new contracts are starting to get layered into your revenues.

On the data side, on wireline, good new story is really a couple things there.

One, you've got TELUS TV additions on the consumer side that are contributing to good data growth.

That is a primary element.

And the other notable one is in terms of the implementations of some of the large, complex enterprise deals, where they are data-centric.

That as well is contributing to our growth on the wireline side on the data front.

So those would account for 80% to 90% of that growth.

How would the enterprise contracts would be coming on during 2010?

Of the new ones that you've had over the last, say, year, what percentage of those are actually generating revenues today versus throughout the year?

Okay.

Well, in terms of large enterprise deals, we have deemphasized them on a go-forward basis as we reorientate towards the middle market.

And that in part reflects the fact that with these large enterprise transactions in terms of the business model, you've got a dilutive timeframe.

It depends on the size, the scale and the timeframe.

But generally speaking, you're dilutive for the first year to year-and-three-quarters as you incur expenses in advance of the revenue ramp-up.

So, given the plethora of growth initiatives, HSPA, iPhone, TELUS TV, so on and so forth, and trying to balance that on the free cash flow side, and given the success in having some large implementations like government of Quebec and city of Montreal that are already underway, so from an organizational and implementation perspective we want to focus on the implementation as opposed to just acquisition, then we felt that was the appropriate transitional strategy into 2010.

So, therefore, don't expect any major new enterprise transactions.

That leaves the ones that are, shall we say, in the pipeline.

I mentioned Quebec and Montreal.

They're underway there.

We do have some others that are in implementation phase.

They are contributing negative EBITDA in 2010, and if you look at Department of National Defense, which was recently implemented as well.

So there is an improvement expected in terms of the contribution from LCDs in 2010, and that should be an element of margin enhancement.

And we think that the shift away from going after new ones, focusing on implementation is the right direction for the organization.

And another byproduct of that, obviously, is an absence of new deals that helps lessen the capital expenditure demand, the [success]-based demand that we've experienced in the past couple of years and is one of the reasons why we're able to have a lower CapEx profile in wireline this year.

We're now through an hour, so we will take one more question, and that will be it.

Bob Bek, CIBC World Markets.

Just a quick big-picture question to end it off, I guess.

Bob, you're through the CapEx hump with the HSPA out of the way and obviously some strong free cash flow growth expected for 2010.

Can you refresh us on the management and the Board's views on free cash flow usage and priorities?

Obviously, some competitors and many of your peers are looking at dividend increases and buybacks.

So can you just refresh us where you stand on the use of cash?

Thanks.

Sure, Bob.

We try to be helpful and be -- I don't know, predictable, if you will, by publishing our financial policy by line targets that, whether it be in respect of leverage or whether in respect of dividend payout, to help give some color.

The dividend payout ratio can get somewhat complex for our organization, just because we have some onetime tax adjustments that seem typically positive or, in this quarter as well, a debt retention charge.

So we show the calculation in the MD&A.

We back it out, by memory, I think we're at 67% or something like that in terms of the adjusted payout ratio, which is obviously higher than our 55% high end of our payout ratio guideline.

Really what we're trying to do is, given that the organization has gone from a period where we had tax refunds, making tax a source of cash for the organization, to a timeframe when we are in tax paying from a cash perspective, and, making it all that much more complex, given our structure and ability to defer some tax, we were able to move that peak tax period from last spring to this spring.

So the peak tax timeframe actually is going to be Q1 of 2010, because we will have catch-up installments on 2009.

We will also commence the regular normal installment for 2010.

And so we're going to have probably an all-time high cash tax remittance in Q1 2010, and then it will trend back to a more normalized base.

So what that would mean is 2011 is going to be significantly lower cash tax than 2010, as was 2009.

So, really, then, when we're looking at it to date is we say we have a leverage guideline.

We want to stay within it.

There is no science to going it over by a fraction or what have you, but it's more the spirit of what we're looking at.

And we have a spirit to stay with that.

And so, given we're at the high end, then we can increase dividends or we can do share repurchases to the extent that we have a positive free cash flow.

And given the cash taxes in this quarter, that was an element in our decisioning in the fall not to raise the dividend.

And so as we come through 2010, and you see the guidance is for a significant turnaround in the organization in terms of profitability, that should buy us some headroom.

And if we deliver upon that, we're going to have headroom within that payout ratio to consider a dividend increase, which certainly would be our desire, and to look at things like share repurchases.

But given where we are at present, we think we're taking the right, prudent approach.

Okay.

Well, thank you very much, everybody, for joining us today, and we appreciate your interest and continued support of TELUS.

Have a great day.