Telus Corp (TU) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the TELUS Q1 2010 earnings conference call.

I would now like to introduce your speaker, Mr.

John Wheeler.

Please go ahead, Mr.

Wheeler.

Welcome and thank you for joining us today for the first-quarter call.

We are here in Vancouver, and earlier today we had our 2010 annual general meeting.

This call is scheduled for up to one hour.

The news release on the first-quarter financial and operating results and detailed supplemental investor information are posted on our website, TELUS.com/investors.

For those with Internet access, the quarterly presentation slides are also available on our website.

In addition, Darren Entwistle's slides and speech from this morning's AGM are posted for viewing on our site.

You will be in listen-only mode during the opening comments, and let me direct your attention to slide two.

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 United States.

Turning to slide three, we have an outline of today's agenda there for you.

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 on the slide.

We will then conclude with a question and answer session with Bob and Joe Natale, our Chief Commercial Officer.

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

Thanks, John, and good afternoon, everyone.

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

Overall wireless revenues increased by 4%, reflecting wireless data revenue growth of 24% and equipment and other revenue growth of CAD30 million, which includes revenue from Black's Photography of about CAD19 million and to a lesser extent higher revenue from an increased smartphone mix and accessory sales.

OpEx increased by 6% as a result of higher equipment expenses to support retention efforts and customer migrations to smartphones, notably the iPhone, as well as the inclusion of Black's expenses.

Marketing expenses decreased by CAD7 million as the impact of loading through lower-cost channels and a shift in product mix resulted in lower overall commissions.

Network and G&A expenses are slightly higher to support increased subscriber base.

All-in wireless EBITDA increased by 2% and reflects improved revenue growth.

EBITDA margins on total revenue decreased slightly to 42%, reflecting increased retention costs associated with smartphone adoption.

I would note that EBITDA margins based on network service revenues was stable, up slightly by 1 basis point to 45.6%.

The 70% reduction in CapEx reflects the extensive coverage and quality of our 3G+ network, which was substantially complete and launched in November 2009.

The Company has transitioned to a sustainment mode in wireless following the launch.

Simple wireless cash flow increased by 50% to CAD438 million due to lower CapEx and EBITDA growth.

Turning to slide five, total wireless net adds this quarter were 51,000 with postpaid net adds increasing by 48% to 65,000.

The strong growth in postpaid net adds reflects the Company's continued focus on high-quality customers.

While not all industry data points are in yet, clearly we seem to be seeing a shift in the industry following the launch of HSPA+ services by TELUS.

Overall our total subscriber base is up 6.4% year over year and now totals 6.6 million.

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

Smartphone subscribers now represent approximately 22% or 1.2 million postpaid base, up substantially from 15% a year ago.

The iPhone and our wide selection of BlackBerry devices continue to drive retention loading.

The new and growing selection of Android powered devices round out our PDA lineup.

Notably iPhone loading mix improved with 26% of iPhone customers being new to TELUS, an uptick from the 23% experienced in the fourth quarter of 2009.

Slide seven shows the breakdown of TELUS' total ARPU between voice and data for the first quarter.

Encouragingly, the down trend in ARPU moderated from the 7.7% decline experienced in the fourth quarter of 2009 with overall ARPU declining by 4.4% year over year.

The improved trend is due to a lower rate of decline in voice ARPU of 9.5% this quarter compared to 12% in the fourth quarter of '09, offset by a higher rate of increase in data ARPU of 17% to CAD13 compared to the 13% increase in the fourth quarter of 2009.

The strong growth reflects increasing smartphone penetration in a subscriber base.

Data ARPU now represents 24% of ARPU, up 5 points from last year.

As shown on slide eight, data revenue growth for the first quarter increased by 24% year over year, reaching CAD258 million as compared to a 20% increase in the fourth quarter of '09.

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

As referenced earlier, smartphone penetration continues to increase with the addition of new HSPA devices.

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

Slide nine shows the improving metrics related to our wireless marketing efforts in the first quarter.

Gross adds increased by 2.9% with postpaid loading up 11%.

This reflects our improved competitive position, enhanced distribution for the iPhone starting in March of this year in both Best Buy and Future Shop and some general improvement in economic conditions.

Churn improved by 7 basis points over last year, and postpaid churn, which is not shown on the slide, remained low at 1.14%.

COA per gross add decreased by 4.2% to CAD322.

The lower COA per gross add reflects lower marketing spend and a shift in product loading through lower variable cost channels and the higher Canadian dollar, which more than offset prior subsidies due to iPhone sales.

As expected, cost of retention increased by 9%, reflecting higher subsidy costs from increased retention volume of 74% related to our focus on migrating clients to smartphones, including customer upgrades to new, more expensive HSPA devices.

We are pleased that our efforts to contain COA and COR expense was achieved despite higher gross adds and retention unit volume and marketing high subsidy iPhones in contrast to the first quarter of 2009.

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

Revenue decreased by 3.8% due to ongoing local and long-distance revenue declines, as well as lower equipment revenue that in aggregate were only partially offset by modest data growth.

Operational expenses were lower by an impressive 5.6% or CAD47 million, reflecting effective cost control, as I will elaborate on shortly.

Restructuring costs decreased by CAD22 million to CAD4 million, reflecting a a relatively high level of restructuring activities in the first quarter of 2009, as well as the impact of accelerating a number of initiatives into the fourth quarter of 2009.

Operating profitability as measured by EBITDA was higher by 6% due to lower operational expenses and restructuring costs.

EBITDA margins on total Wireline revenue increased by 320 basis points to 35.9%, the highest since the fourth quarter of 2008.

Wireline capital expenditures decreased by 9.4%, mainly due to lower investments in network access and large enterprise deals, as well as timing factors, partially offset by continued investments in TELUS TV and broadband initiatives.

Turning to slide 11, we see the breakdown of Wireline operating expenses.

Salaries, benefits and other employee-related expenses are down by 6% year-over-year due to the decrease in domestic telecom, full-time equivalent employees, and continued reduction of discretionary employee-related expenses such as travel and overtime.

Other operations expenses are lower by 5%, largely due to lower cost of equipment sales and other items.

As previously mentioned, restructuring costs were lower by CAD22 million.

In aggregate, total operating expenses were lower by 8%, leading to a strong EBITDA margin expansion despite lower revenue.

Slide 14 highlights our business and residential network access line losses.

Please note that historic NALs have been restated for prior periods starting in '07 as a result of a periodic subscriber measurement review and correction.

Total NALs for the first quarter of 2009 reflect a reduction of 7000 residential NALs from the previously reported number in respect of TELUS TV subscribers that did not subscribe to phone services but were inadvertently included in the NAL counts.

Business NALs were reduced by 65,000 from the previously reported number due to the cleanup and removal of inaccurate subscriber records as part of the integration of billing and subscriber reporting processes, as well as the consistent application of industry measurement practices across TELUS enterprisewide.

Business NAL losses of 8000 are stable year over year and continue to reflect a decline in voice lines in Western Canada from competitor activity, partially offset by growth in data lines nationally.

Residential line losses of 50,000 reflect aggressive price competition from the primary cable TV competitor.

Let's move to slide 13 and examine Internet results.

High-speed net additions were disappointing declining to 3000, which also reflects aggressive price competition from Shaw Cable in the first quarter.

Slide 14 shows the continued success of TELUS TV in the first quarter.

Total net adds increased 45% year over year to 29,000, while the total subscriber base doubled to 199,000 over the past 12 months.

In early April we surpassed the 200,000 TELUS TV subscriber milestone.

The overall success is attributable to improve installation capability, availability of high depth TV channels, and personal video recorders and enhanced broadband coverage.

Notably we launched an enhanced TELUS TV service powered by Microsoft Mediaroom during the quarter.

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

Consolidated revenue in the first quarter remained unchanged over the same period a year ago.

Operating expenses were lower by 1% and, in fact, the lowest since the first quarter of 2008 as a result of lower Wireline salaries and benefits from fewer domestic FTEs.

Restructuring costs were lower by CAD22 million, but our target of CAD75 million for the full year remains unchanged.

EBITDA growth of 4% reflects lower restructuring costs and an improved cost structure, especially in the Wireline segment.

Reported earnings-per-share decreased by 17%, but were up 2.5% when normalized for income tax related adjustments.

We will discuss the puts and takes on the next slide.

Meanwhile, consolidated CapEx decreased by 34% for reasons already mentioned.

We do expect capital spending to pick up in future quarters, in line with our annual guidance to accommodate growth.

Free cash flow increased by 97%, reflecting cost control and reduce capital expenditures.

Slide 16 shows the detailed down of components of reported earnings-per-share, including CAD0.01 positive income tax related adjustments incurred this quarter and CAD0.20 for the same quarter last year.

Lower restructuring costs positively impacted EPS by CAD0.05.

Normalized EBITDA contributed CAD0.03 to the upside.

Lower statutory tax rates added CAD0.02.

Higher depreciation and amortization, primarily from HSPA network, negatively impacted EPS by CAD0.06, while higher pension and financing costs contributed CAD0.02 to the decline.

Normalized for positive income tax-related adjustments, EPS increased by 2.5%.

Slide 17 shows the changes in full-time equivalent staff counts for the first quarter 2010 compared to the ending balances for 2009.

The domestic telecom staff down, excluding the staff from Black's, is down by 600 and primarily reflects 2009 restructuring initiatives.

Together Black's and TELUS International are lower by 600, which largely represents seasonality.

As you can see, we remain very focused on efficiency enhancement and are well on our way towards our annual target of reducing the domestic telecom staff down by about 1000.

On slide 18 we break down consolidated operating expenses.

Salaries, benefits and employee-related expenses are lower by 3.6% and primarily reflects fewer domestic FTEs and continued reduction of employee-related expenses.

Other operating expenses increased slightly due mainly to higher wireless subscriber retention costs and TELUS TV programming costs.

Total operating expenses are lower by 0.8% and as previously mentioned the lowest since the first quarter of 2008.

Slide 19 reviews our tax situation from both a cash and accounting perspective.

Cash income tax payments this quarter were CAD251 million, up from last year and a record quarterly level and consisted of the final tax payment for 2009, as well as the commencement of 2010 installments based mainly on 2010 estimated taxable income.

Cash tax payments for the first quarter of 2010 are expected to be up the peak, while 2010 is expected to be the peak full-year forecast taxes.

From an accounting perspective, the effective tax rate of 27% reflects revaluations of future income tax liabilities and reassessments of prior year's tax issues.

Our 2010 net cash tax payment guideline of approximately CAD385 million to CAD425 million remains unchanged.

Please note that a full breakdown of our free cash flow calculation including cash taxes can be found in the appendix of this presentation.

Slide 20 discusses TELUS strong balance sheet.

TELUS' net debt position was down slightly in the first quarter, and our net debt to EBITDA leverage ratio continues to be within our long-term policy target range of 1.5 to 2 times.

We continue to enjoy strong investment grade credit ratings.

TELUS completed CAD1.7 billion in refinancings last year in May and December, providing a significantly lower effective interest rate of approximately 5%.

That extended TELUS average long-term debt maturity by an additional year.

It now sits at just under five years.

Looking ahead, TELUS has approximately CAD2.1 billion in debt and foreign currency hedges to refinance in 2010 and 2011.

Effective in January of this year, all participating shareholders in our dividend reinvestment plan received TELUS nonvoting shares at a 3% discount to the average market price.

The participation rate for the DRIP has increased from 14% for the January 1 payment to 21% for the April dividend.

Based on our strong balance sheet and management's confidence in our midterm outlook for earnings and free cash flow growth, TELUS' Board of Directors has approved both an increase to the dividend payout ratio as shown on slide 21 to 55% to 65% of prospective sustainable net earnings.

This is up from the previous range of 45% to 55% and a 5.3% increase in the quarterly dividend to CAD0.50 per share for the July 2 dividend payment, which represents a sixth increase in six and a half years.

The new payout ratio guideline is appropriate to our prospects for earnings and cash flow growth and given moderating capital investments.

The increased dividend and payout guideline are also clear indications to TELUS' ongoing commitment to returning cash to shareholders through a dividend growth model.

The new dividend payout ratio is consistent with maintaining a strong balance sheet, debt policies and track record of balancing interests of debt and equity holders.

Referring to slide 22, 2009 was a year where we utilized our strong financial position to strategically invest to enhance our competitive position and future growth.

Looking forward we expect numerous benefits from our strategy, including accelerated wireless data growth, moderating capital intensity, an opportunity to cut our financing costs significantly, a reduction in cash taxes from peak year 2010 levels, the continued realization of operating efficiencies while restructuring costs decreased, and the moderation of dilution from several simultaneous growth initiatives.

Of course, a notable future use of cash would be possible wireless spectrum purchases.

To conclude the financial review, we are reconfirming our 2010 consolidated and segmented guidance.

As a reminder, we are targeting revenue growth of 2% to 5% driven by growth in wireless, EBITDA growth of flat to 6% reflecting wireless revenue growth and reduced Wireline operating expenses, EPS growth of 3% to 17% when adjusting 2009 for positive income tax-related adjustments, and a 19% decline in consolidated CapEx.

Slide 25 provides a quick update on TELUS' IFRS conversion status.

Beginning in the first quarter of 2010, TELUS began preparing Canadian GAAP to IFRS financial statements for internal use.

TELUS will continue to report 2010 and comparative '09 results according to Canadian GAAP for our public disclosure purposes.

Starting January 1, 2011, TELUS will prepare and report interim and annual 2011 financial statements, along with 2010 comparatives according to IFRS.

The Company has completed its initial identification, evaluation and selection of accounting policies necessary to change over to IFRS, and these are summarized in Section 8.2 of our MD&A.

Overall TELUS' IFRS conversion project is well underway and on track with our target conversion date of January 1, 2011.

In summary, results for the first-quarter 2010 showed positive trends in both Wireline and Wireless.

Wireless blended ARPU showed improving trends on moderated voice ARPU decline, as well as strong data ARPU growth.

Postpaid net subscriber growth improved year-over-year by 48% and reflects strong postpaid gross adds as we focus on adding higher quality subs.

Wireless and Wireline EBITDA improved year-over-year due to an improved cost structure, especially in the Wireline segment.

TELUS TV subscriber growth continues at a healthy pace and reflects the benefits of significant investments we have made in broadband.

Free cash flow increased by 97%, reflecting lower CapEx and increased cost savings.

Given management's confidence in our midterm outlook for earnings and free cash flow growth, we are increasing our dividend payout guideline and announced a 5.3% increase to the dividend payout.

Finally, 2010 consolidated and segmented guidance has been confirmed.

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

Back to you, John.

Thanks, Bob, and we are going to have the Q&A session with Bob and Joe as Bob just mentioned, and Darren Entwistle has now joined us as he has completed his media obligations.

So can you please proceed with questions?

(Operator Instructions).

Maher Yaghi, Desjardins Securities.

Good quarter, guys.

I just wanted to ask you a quick question on your guidance for 2010.

First, I mean when you look at your wireless EBITDA very strong in the quarter on cost-cutting, but to hit, if I look at your quarter and look at the potential results for the rest of the year, it is hard for me to see how you can hit the mid-end of the range even.

The high-end seems very feasible.

I mean do you review those guidance because the way you guys are controlling costs at this point?

I'm wondering if you have thought about increasing your guidance on the Wireline EBITDA or if you expect some kind of increased costs at the second half of this year that could explain this difference?

I just want to clarify each of the questions.

Is your question you are wondering how we are going to achieve the midpoint or how --?

No, it is hard to do the results so far this year have been very strong, and I'm wondering if you expect some weakness in the second half of this year.

Maybe that's what you kept your guidance and you did not increase it.

That is my question.

Great.

Thank you for that.

I now understand.

I think that is a fair question.

Clearly we had I think a very good quarter in terms of financial results that we released today, and I think it would be fair to say that one should not just necessarily extrapolate those growth rates times 4 for the year.

They are good going, and they represent good fundamental progress.

However, there are some elements that are one time in the quarter, not necessarily representative of items that have recurred in each and every quarter.

For example, we had a software sale.

That is part of our business, our health services business since software was developed and made major sales previously.

But this is a major one landing in this quarter.

And that is not to say we will not have such sales in future quarters but certainly not each and every quarter.

So that is an example.

We also had some capital tax wins.

Really settlements would be the appropriate way of putting it.

And to the extent to which those occur in subsequent quarters is indeterminate.

So there's two items where it is not that we flatter the quarter per se, but you don't necessarily have those each and every quarter, and therefore, timesing them by 4 would not be appropriate.

Can you quantify those items in terms of EBITDA?

I would say in aggregate those items would represent less than CAD20 million of EBITDA.

And then what is also indeterminate to be fair is on subscriber growth and the consequent COA that relates to that, we have traditionally needed three out of four quarters that was the dominant quarter in terms of COI and suppressing near-term EBITDA.

We have seen in recent years somewhat of a shift to the back to school.

So both Q3 at least in the August/September part of it, as well as Q4, have high wireless loading consequent COA expenses related to that.

So there is a seasonality aspect that needs to be factored in, and you can probably model that looking at past quarters.

So for all those reasons, we feel comfortable and confident, quite frankly, in reconfirming guidance.

I think what is interesting to me is, if I reflect back on my December guidance call, the questions I had on that call and afterwards were, boy, your guidance looks extremely aggressive.

How do you justify the basis on which you're going to achieve that?

So this seems to note and I respect and agree with the question, but it is a pleasant change from the first question.

(technical difficulty)-- to beat the guidance.

So one quarter done, three quarters to go, we are comfortable with reconfirming our existing guidance.

And just to follow up on the Wireline quickly, given the trends we're seeing in your NAS declines, how are you feeling about your investments on fiber to the node, and given the competitive profile in the industry right now, are we going to see some kind of -- do you expect to see these NAS declines stabilize or continue to increase during the rest of the year?

Thanks for that question.

Let me start off and then I will let Joe Natale come in and supplement my intro.

I think what you are observing is in the first quarter in terms of NAL losses, certainly in the residential side, there are significant losses there.

No different really than what is being experienced elsewhere in the industry, but certainly an ongoing challenge to the organization.

And, as well, we experienced softness in our Internet loads, and I have referenced the promotional pricing that we have faced, which has been lowest in Canada as put in the market by the Shaw organization.

So with that, those are challenges.

On the other hand, of course, we have had quite a positive result with our TELUS TV loading as we continue to add significant momentum there.

So maybe I could ask Joe just to comment a bit about our bundling strategy and what are some of the lessons from the results in regards to that.

Well, first of all, we are disappointed in the Internet net loading that we have seen in the quarter, and 3000 is not where we want it to be.

And with that came some access line losses.

In terms of what is going well on this front, we have seen some very strong gross loading for Internet customers.

And to Bob's point on bundling, we have done very well with bundling TV and home phone or bundling TV with Internet and now as well bundling the quad-play with wireless as well.

And that has gone very well.

In fact, when we have Internet at home phone bundled with TV, we are seeing a substantially lower churn rate than when the home phone or Internet service is naked or alone, if you will.

So that is going very well on our front.

As we build out the rest of our footprint in Western Canada, by the end of this year, we will have 90% of the homes in top 48 cities, roughly 2 million homes ready for HDTV, and we continue to push hard on the TV front.

Now the challenge we are having is one around churn.

Our cable competitors have been very aggressive in the marketplace.

They have been hammering away at CAD9.95 price points.

They have some of the most aggressive pricing in Canada both non-promotionally and also promotionally, and that is what we are up against, and we are fighting very hard on that point.

We are seeing bundling of TV, Internet and Shaw Digital Phone at CAD9.95 for service.

So we are stepping up our efforts in a very substantial way.

We have a very strong focus in terms of our save and win back campaigns and offers in the channel to kind of meet them on this competitor front.

As we build out our broadband footprint, we will keep driving the triple and quad-play, and the characteristics that go with it are very encouraging as I said earlier.

The third thing that we are doing is we are working very hard on the small to medium business front.

Shaw has been very active in the past 12 to 18 months on that front, and we are seeing some good activity with respect to our bundles for small business.

And they are having some of the same attributes around retention and ARPU containment in that area.

So that is the landscape on HSIA and the network access line situation that we have.

Something that is at the forefront as an organization, we are putting our strongest efforts behind it from outbound campaign management point of view, from the offers that we are putting forward, and the bundling plays, especially around TV, are going very well for us.

Phillip Huang, UBS Securities.

My question is on wireless cost.

You generated very good posting net adds during the quarter, up 48%.

I'm not sure if I'm looking at this correctly, but your equipment subsidies was actually not that higher than last year.

If I back out Black's EBITDA contribution, which I assume is not that significant, I estimate that your subsidy cost this quarter is around CAD135 million or roughly CAD10 million higher than last year.

I think you mentioned in the past you expect subsidy cost this year to be about CAD100 million higher.

And also, your marketing expense was actually lower than last year.

So my question is, could you maybe talk a bit about the factors behind these items?

Are the subsidy costs lower because you are seeing smartphone prices coming down, or was the mix of handset activation a factor?

I would have thought that marketing costs would have been higher for the current year relative to the prior year given you are pushing smartphones harder.

I'm just wondering if you expect some catchup spending going forward on those two areas.

Okay.

Well, I think the first point just to set straight is our subsidies are not down on handset costs per se.

Putting FX aside, certainly we have more smartphones than mix.

We have iPhones, etc., BlackBerry Bolts, what have you.

So the average subsidy cost is going up, and you can see the mix of loading, of course, as postpaid orientated.

So our smartphones, etc., higher cost handsets lead to an average higher subsidy there.

But we do benefit from the appreciation of the Canadian dollar with respect to handsets that are purchased from the majority of our suppliers.

So that is a helpful factor.

We have also had efficiencies and marketing spend.

Our gross adds are up, and our fixed outlay in AMT is down a bit.

So the effectiveness of our overall marketing activities have improved.

We have some distribution channel expansion occurred in the quarter relative to a year ago without any increased fixed costs associated with that.

So, at the end of the day, we did have legitimately an improvement in efficiency and effectiveness.

I would say from a marketing standpoint kudos, so to speak, to Joe and his team for doing some hard work.

This did not come by accident.

This was not just by fluke on some pricing that was lowered to us from a supplier.

This was from solid management, solid blocking and tackling on distribution costs, etc.

And at the end of the day, we had a very effective mix of loading relative to our marketing spend.

So that is why our COA is down.

I respect the question.

Because I'm not really familiar with too many organizations that recently launched and whatever they did in iPhone and etc.

and a year-over-year improvement overall in their COA for gross adds.

So I'm not sure we are the only one, but certainly we stand out in that regard.

So I think that is a very positive feature of our results this quarter.

Yes, thanks for that.

Maybe just a follow-on.

So now given that you have seen what you have been able to do with the amount of costs that you were able to spend, do you still think that 2010 in terms of subsidies costs or pushing smartphones will actually impact EBITDA by about CAD100 million versus last year, or do you think it will be a smaller impact, or is it too early to say?

Well, certainly I think -- it is early because it is Q1 and the big loading stock end of the year.

But if you go on the type of loading that you and we all expect to occur, yes, we still expect that in terms of the COA impact.

Really, though, you got to keep in mind and increasingly I have said this on occasion going back now over a year is that I encourage you to look at COA and COR because you take something like an iPhone as an example and we talk about the ratio here improving 26%, up from 23% being new.

So yes, 26% of those iPhone loads are flowing through to the COA expense.

But conversely 74% are flowing through your retention expense, and our retention expenses are up.

Now our volume is up there as well.

So it's not just a cost increase.

It is a volume-related thing.

But the point is that the cost of smartphones flow through both COA for new subscribers and flow through COR with respect to retaining the existing subscribers, and it is the aggregate amount that we are really trying to manage.

Peter MacDonald, GMP Securities.

The line of questioning, Joe, that we are all pretty pleasantly surprised by the nice margin improvements in the quarter, and like you said you do have fluctuations quarter to quarter.

So I want to make sure we are not getting too optimistic on the back of this.

So maybe I can just tackle it from a different direction.

Can you just talk about the one-time impacts that might have been affecting the quarter, and specifically what did the Olympics do for you both then Wireless and Wireline?

And then on Rogers' call, they talked about installing wireless promotion in light of Bell's Olympic efforts.

So just wondering if you did this as well.

Did you utilize some of the marketing savings maybe for retention?

And then the last thing on the Wireline numbers themselves, can you quantify the two items, the one-time cost efficiencies, maybe define what that is, and what the high-margin software sales, what those two combine to as a one-time number for the quarter?

Okay.

Peter, great question.

You managed to throw the three or four-parter into one with comments in there.

So that is fine.

So let me see if I got them.

The first one is Olympics.

I think it would be fair to say financially the impact would be negligible on our organization.

Clearly the absence of a GSM network base to receive inbound roaming from international travelers that are on GSM systems meant that that would presumably go to Rogers organization.

So while we had a little bit of roaming, it was not material whatsoever.

In fact, the impact was largely negligible.

We did have -- just route operations, if you're anywhere near the Vancouver offices of TELUS, operationally there are significant impacts in terms of having people work from home, people telecommute, people adjusting in terms of our fleet so that we walked around and did installs and did service calls without using vehicles, all that sort of thing.

But from a financial perspective, the impact was negligible.

In terms of stalling wireless promotion, while I have to remember that the next time we have a bad quarter on loading.

I would say I did not notice any reduction in advertisements living in Vancouver from I turned on the TV and watched the Olympics saw Bell, and turned on any other channel and saw Rogers.

But in any event it is fair to say that our marketing expenditures were as planned and were not reduced because of the Olympics.

In terms of Wireline one-time, I tried to adjust it -- I'm not going to give a blow-by-blow through sub-line items on the income statements, but I think it is fair to note we have been very transparent.

The funny thing is you have one-time effects in my experience every quarter.

Funny enough you have one-time things every quarter.

Sometimes they are the same ones, but often they are different.

And at this point, we are emphasizing, too, that we are beneficial in the quarter.

One was a settlement on capital taxes and the other was with respect to a nice software sale.

And I mentioned that in aggregate they would be less than CAD20 million.

And I would say the software was recorded on Wireline segment and the bulk, not all but the majority of that with the capital tax savings would be on the Wireline side of the organization as well.

Capital taxes are something hopefully you record and benefit from in every quarter.

But we have been through an experience where they had been denied, and so we were not able to record them and then on a catch-up basis had a positive settlement.

So in a way you could say because of the recalcitrance of the authorities in Ottawa, we understated our earnings in prior quarters.

So it is not an artificial item.

It is really a reflection of a settlement, and hopefully we will have approvals on our claims such that in future quarters it will be something that will not be one-time in nature but recurring as we apply and get approval, but we will see.

So those are the really notable items.

There's other minor items.

I think the main point here is you can normalize away one-time all you want.

We still had a really good quarter in both segments.

Glen Campbell, Merrill Lynch.

Could you give us a sense of how smartphone ARPU might be trending on the new network?

You said generally speaking you are seeing a lift, but I think you had indicated quite good ARPU out of the gate right after you launched the network.

But I just wanted to get a sense now that the network is a bit more seasoned roughly where that is falling in.

And I guess as a follow-up, it has been widely rumored that you will be launching smartphones under the Koodo network -- on the Koodo brand rather.

I just wanted to see if you would confirm that.

It would represent a departure from what you said in the past about that brand.

In respect of smartphones, on the HSPA network, really there is two principal categories of devices that we have been loading, mainly smartphones.

But the other notable one would be Internet Keys.

And they really carry totally different characteristics, as you know, in the ARPU, COA and well the business models.

So on the ARPU front, as it relates to smartphones, we are talking about over CAD98 has been what we have been seeing to date, and to the extent to which that remains that high would be great.

But whether it does or not, the point is that the strategy of having a new network, new value-added smartphone devices, and they are being used -- they are being sold and they are being used and they are generating desirable ARPUs.

That is really what we are seeing starting to flow through now in terms of our data growth rate, which is accelerating, and that is being driven by that very factor.

In respect of Internet Keys, it is a different dynamic there.

It is a growth item for our sales because of the volume year over year, etc.

But, as I think I talked on previous quarterly calls, the conversion of that product from being something that was because of the cost of those sticks formally being really for the business segment only, it is now increasingly for the consumer segment.

So volume picks up, but the price at which they are sold and the ARPU that generate is significantly lower.

So interestingly from an ARPU perspective, Internet sticks are a dilutive factor that exceeds the dilution that we would have from other factors, many other factors.

And so but that is not bad in itself because it is a different cost structure, etc.

as I mentioned.

So that is really the HSPA story.

In terms of Koodo, Koodo we have -- it is only CDMA devices.

Of course, they are lower-cost devices so as part of that consistent with the business model of Koodo Mobile.

In respect of whether or not we would offer a smartphone devices on Koodo, clearly I'm not going to go there.

That is competitive information whether we may or may not do that, and I don't think it appropriate for me to answer on this type of forum.

Jeff Fan, Scotia Capital.

My question is on the pace of your take-up of your smartphone subscribers.

You guys launched the network back in November.

I guess one would have suspected that the pace of your smartphone adds in terms of the percentage of your postpaid subscriber base on smartphones would start to pick up in the first full quarter that you had the network.

And especially given how on a relative basis in terms of percentage of your revenue mix and data and also with respect to your data revenue growth and smartphone mix is behind the biggest smartphone player out there that there would be some catch-up.

Is the pace of -- about 2% of your postpaid subscriber base being added to smartphone?

Is that the kind of pace that perhaps we should expect, or do you think there is another leg of catch-up here for smartphone adds going forward?

Okay.

Well, I think you have summarized the premise correctly.

We had a smaller portion of our base on smartphones, and a company such as Rogers, if you look at it, no secret why.

We did not have the iPhone; they did, right, at least up until November of '09, which was the big volume driver.

And, as you know, while everyone had BlackBerrys, they certainly were getting the new models on GSM first, and they are advantaged in that respect.

So those dual factors really lead their wireless growth to be in excess of that that we were recording and the percentage in the base.

Now in our case we do not sell smartphones in any notable fashion on our Mike network nor our Koodo service nor on prepaid clearly.

So you are down to postpaid PCS brand.

In terms of what we have experienced since launch, there has been a ramp-up, no doubt, in the adoption of the smartphone devices.

We are able to offer the HSPA iPhone, HSPA BlackBerry Bolt, for example, device, and new devices in terms of what we are just releasing this month in respect of the Curve and the Pearl.

Those are things that we would not have been able to do in the past when we were CDMA-centric.

So I think the trend of adding a couple of points to the base may be more.

It is certainly something that is possible.

But we are going to work hard.

I'm not going to give you any projection.

And so I think, therefore, the underperformance that we have had on the data front, there is no more excuse for it.

We have HSPA network, and guess what, you're seeing our data growth expand as a result.

So we are very optimistic about the future.

Dvai Ghose.

I just wanted to revisit Joe's comments about the competitive environment, and in Western Canada in particular, Shaw is very aggressive, telephony as well as Internet pricing.

In the past you really have not had much ability to fight back.

On a going forward basis, one of the most impressive things I think in your numbers was the 29,000 TV ads, the doubling year over year.

You have got some really strong momentum there and arguably a better TV product than Shaw.

And you also have a wireless product that they don't have, at least probably for the foreseeable future.

So I'm wondering if you are tempted in terms of realigning the strategic imbalance that there has been in the past by perhaps cranking up TV by lowering prices and, indeed, perhaps bundling Wireline and Wireless Internet in order to differentiate against Shaw who cannot do so.

Let me respond to that particular question.

Firstly, it is nice to be in a position to have a TV product that I construe to be the best TV product in North America.

And I'm exceedingly pleased with the success that we have realized, and to go over 200,000 customers at this juncture, I think bodes well for 2010 and beyond.

Number two, I would like to make it clear that we are not going to allow the organization to ignore the magnitude of price aggression that we have been experiencing in the marketplace indefinitely.

So the landscape is going to change.

We have seen extremely aggressive pricing on telephony and in respect of high-speed Internet access.

That is some of the most aggressive pricing that you are going to find, not just in Canada but in North America and around the world as it relates to those services.

And I think the time of turning the other cheek has dissipated, and I think there will be a greater connection in terms of Shaw's level of aggression on telephony and HSIA pricing and what we do on the TV front.

I am mindful of a situation where when I look at the valuation of TELUS and I do a sum of the parts breakdown, I would note that the Wireline side of our business seems to be valued at a multiple of EBITDA of around 3.3 times, whereas the Shaw organization has an EBITDA multiple from a valuation perspective of 7 times.

So if people want to continue to promote this organization from a pricing (technical difficulty)-- perspective, I will quite clearly be responsive in correlating RTV activity with the calibrated level of response in terms of what is going on from the Shaw organization in terms of price aggression on telephony and HSIA.

Having said that, I have to scratch my head because I look at the market structure in Western Canada and from my perspective is there is enough opportunity to be pursued prudently out there to deliver a good economic return, to have vibrant competition, to have affordable solutions for a client, and focus on a range of differentiating factors that are meaningful for clients in other areas other than price.

Also, one of the things I think has been deficient in the TELUS organization over the last 10 years that Joe Natale is correcting forthwith with a strategic and tactical mentality is the fact that we have failed to incorporate in our future-friendly homes solution on the Wireline side our wireless capabilities.

That is going to change on a go forward basis without a shadow of a doubt.

I think that there are considerable opportunities to be pursued here.

When I look at the road map in terms of applications development within the Microsoft Mediaroom vein, I like what I see.

When I see an operating system such as Windows 7 going Windows Mobile 7 but also being the same operating system for my TV product, I think about the interoperability that we can enjoy between wireless and TV and how we can deliver the content seamlessly across our various platforms.

When I look at wireless device and applications like remote DVR capability and factoring that in, if I look at taking the Mediaroom product from the TV to the PC, I'm excited by the roadmap ahead of us, and I think we can compete on a lot of areas that are non-price-based differentiation that will create sensible and sustainable competition in Western Canada that will serve clients well.

But I think the days of turning the other cheek are behind us.

We have got the capability set to be competitive, and we will leverage it.

A quick follow-up if I may.

Thank you for the wholesome answer.

Shaw, as you know, has made a bid for CanWest.

Do you think the ownership of content changes the game in their favor at all?

I don't think it is appropriate for me to speculate on the efficacy of that particular acquisition.

It is a question at that point for the Shaw organization.

I respect that particular organization, and I'm sure that they have got a strategic rationale that they can lay out in terms of the confluence of doing that with the additional expansion on the Wireless front.

I would say some acquisitions look like a broadcasting acquisition.

Some acquisitions are content rich.

Where this particular acquisition settles out remains to be determined in terms of how much differentiating proprietary content is available versus the broadcasting model of securing that particular asset.

I do believe from a content perspective the partnership model that we have pursued is the right model versus the acquisition activities.

I think we are best placed spending our money on our core business in areas where we have developed intellectual property.

I think a tangible demonstration of that has been what we have done on HSPA and what we're doing right now on broadband Wireline.

Diversifying away from that core business I don't think would particularly serve TELUS nor our investors well, and it does have the competency (inaudible) of this particular leadership team.

I like the partnership model on content because it allows me to have full exposure to the variety of content out in the marketplace.

When you start getting into an ownership position, it comes as a competitive model rather than a partner model.

The view from TELUS has always been on the content front.

We will add value by the way that we package content, the way that we bundle the content, and yes, I think there is a commonality with Shaw on the video drawn if we want to move that content across multiple platforms from the TV to the Internet to the wireless device.

And I think the technology choices that we have made and the operating system that we have chosen with Mediaroom will serve us exceedingly well in that particular space in the years ahead.

The other thing that people forget about, they talk about fiber deployment into the access layer of the network as if it was exclusively for the servicing of high bandwidth services such as TV.

I would ask people to take a look ahead, not very far ahead, and look at the amount of data traffic that is going to be carried on the macro wireless networks all over the world.

The topic that we will be talking about in the years ahead is, what can you do to reduce the burden of data traffic on your macro wireless network by offloading it on a micro wireless network either femto or pico cell related in terms of using WiFi to reduce the burden on the macro wireless network.

When you do that and start deploying WiFi microcells, femto or pico within urban neighborhoods, the first thing that you are going to come across is, what is your backhaul model for that wireless traffic?

And to the extent to which you have deployed fiber deep into your access territory, not just to support TELUS TV or higher speeds on Internet access, but also that gives you the mechanism that backhauls your micro cell wireless traffic, that is an exceedingly smart thing to do both strategically and very complementary to the type of data growth that we are going to see on the macro wireless networks in the future, and I think we are also well positioned on that front.

Greg MacDonald, National Bank Financial.

Bob, you'll be happy to know I'm not going to ask a question about dividend payout ratios.

By the way, I'm happy to say that move today.

A question really and if anyone wants to answer is a strategic one as well.

Shaw has indicated that it's considering launching directly with LTE.

If that is the case, does it change your outlook at all on the timeline of a TELUS upgrade to LTE?

And as a related question, I know that your HSPA to LTE migration path as a software upgrade, not hardware upgrade.

Could you just comment on the cost of doing so?

I am assuming it is going to be a fraction of the HSPA overbuild, but any information would help.

I will just take that one.

Number one, in the vendor deals that we cut with Huawei and NSN, we locked in the forward-looking economics on LTE.

We did it because we have got smart people within the TELUS organization, but we knew where we were going long term in terms of wireless technology.

And so we sat down and we did not cut one technology deal, we cut two, and we did pay twice the price in locking in those forward-looking economics.

So we get economies of scope from a technology perspective, and I think that will serve this organization well.

Number two, we have a significant differentiating factor versus the Shaw organization or the Rogers organization or the [Videotron] organization as a result of the network sharing agreement that we have got with Bell.

That allows us to use two balance sheets in support of a technology deployment rather than just one.

That gives us significant economies.

Number two, because of the division of labor in that we do a geographic segmentation of our respective network build activities, that division of labor, that geographic segmentation on the network build allows us to deploy technology twice as fast.

That is particularly important in terms of our competitive posture versus other organizations.

The third point to make is now that we've have had some degree of normalization of wireless technology in Canada, really is not our primary fiduciary responsibility -- maybe I have missed the point on this one -- but isn't our primary responsibility not to jump the gun on the next move to the next technology stage, but rather to derive an appropriate return on the investment that we have made in HSPA technology?

I think that is our primary responsibility to focus on vibrant market competition, focus on products and services, focus on customer service techniques so that we can get a decent return on the HSPA investment.

When we have done that, I think that currents us the right to start having a conversation as to what the next technology stage holds for our organization.

Next point, which people seem to miss out on, the last time I checked -- and I had a good look at the product portfolio this morning -- we don't have an HSPA+ smartphone.

We have got Internet Key, but I have not -- I keep calling the product guys, saying, guys, you know is it coming out of HPC?

What is LG doing?

What is going on at Samsung, you know, BlackBerry, iPhone, so on and so forth?

But today I get the HSPA smartphone not HSPA+ smartphone.

So I want to make sure that HSPA+ smartphones come online, so we can leverage the optimization of our HSPA+ network so that the 21 mgs on the download and the one-third return speeds that are something that our smartphone users can benefit from because we now have HSPA plus devices in the lineup.

The next point I would presume -- and again, this reflects my ignorance -- but if the Shaw organization is going to deploy LTE, I sure hope that TELUS, Rogers and Bell have also deployed a LTE; otherwise, they are not going to have anyone to roam on.

And that would be really unfortunate if that was the case, and we were still all harvesting the benefits of our HSPA+ investment.

And, by the way, just for everyone's edification, it is not a direct path from HSPA+ to LTE.

There is an interim step called HSPA+ dual cell or channel bonding, which actually doubles the speed from 21 to 42 mgs.

So let's chew through that bandwidth first, which is a very inexpensive upgrade path before we blow our brains out in respect of LTE.

Lastly, if I was going to go directly to LTE, one of the things I would ask the chief technology officer is, you know, in a wireless industry it always seems to me that network technology arrives 18 months ahead of handset technology.

So I would want to make sure that my CTO was promising me that if I was going to go out and use shareholder funds to build a wireless network, that we actually had handset devices, which is very important apparently to clients, for them to use on that network and leverage that capability.

Lastly, if at the end of the day someone does not have a dual HSPA/LTE network an era where handsets and multimode frequencies will be leveraging LTE/HSPA interoperability, then again I would say, what are you going to do in terms of your roaming footprint?

Because most of the incumbents when they eventually do make the move to LTEs are not going to be pure-play LTEs.

They are going to be a hybrid of LTE and HSPA.

And if you have not deployed HSPA, I'm wondering how you are going to leverage the wider footprint of HSPA roaming in an LTE world if you went directly to LTE.

Those are just some questions that preoccupy me, and I'm sure they do know are not always irrelevant, and maybe they are worth due consideration.

But that is certainly our perspective from a technology front, and I hope it is helpful.

As always, very comprehensive.

Thanks, Darren.

Okay.

We are well through our time on the hour.

So thank you very much for joining us, and the investor team will handle any extra questions you have.

And thanks, once again, for joining us today.