Telus Corp (TU) 2010 Q3 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the TELUS Q3 Earnings Conference Call.

I'd like to introduce your speaker, Mr.

Robert Mitchell.

Please go ahead.

Thank you, Matthew.

Good morning, everyone, and thank you for joining us for our Third Quarter 2010 Investor Call.

Today's call is scheduled for up to one hour.

The new release for our Third Quarter financial and operating results and detailed supplemental investor information are posted on our website at www.telus.com/investors.

Presentation slides for today's call are also available on our website.

You'll be in a listen-only mode during the opening comments.

And now 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, uncertainties, and assumptions.

Accordingly, actual performance could differ materially from statements made today, so please do not place undue reliance upon them.

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

We ask that you read our legal disclaimers, and refer to the risks and assumptions outlines in our public disclosure and filings with securities commissions in Canada and the United States.

Turning now to slide three, we have an outline of the agenda for today's call.

We will begin 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 outlines on this slide.

We will then conduct a question and answer session with Bob as well as Joe Natale, Chief Commercial Officer, and with Darren Entwistle, President and CEO.

And we will conclude with closing remarks by Darren.

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

Thanks, Robert, and good morning, everyone.

Let's begin with a summary of the wireless segment, which continued to show distinctly positive trends.

Overall, wireless revenues increased by 6%, reflecting wireless data revenue growth of 29% or CAD65 million, and equipment in other revenue growth of 19% or CAD15 million.

Equipment revenue increased due to Black's Photography, acquired last September, which offset a small decline in device and accessory revenues.

Wireless EBITDA increased by 3.5%, reflecting higher revenue, notably from an improving ARPU trend, and despite increased COA and COR expenses associated with record subscriber loading activity in the quarter.

EBITDA margins on total revenue declined slightly to 41.5%, due to the higher acquisition and retention costs associated with loading volumes.

The margin on network revenue was 45%.

Capital expenditures declined by 41% and reflect the extent of coverage to network quality of our HSPA+ network that was substantially completed last November.

Reflecting the extensiveness of our geographic coverage, by the end of the Fourth Quarter we anticipate covering 99% of B.C.

and Alberta's population, with 21 MBS HSPA+ technology Simple wireless cash flow increased by 30% to CAD422 million due to lower CapEx and EBITDA growth.

Turning to slide five, total wireless net adds increased by 22% to 153,000 and continued to reflect a strong postpaid/prepaid mix.

Postpaid net adds increased slightly to 132,000, representing 86% of our total net adds.

Strong TELUS subscriber loading was a result of demand for HSPA devices.

Particularly smartphones on our PCS brand, along with continued strength with Koodo in the back-to-school sales season.

iPad activations onto the TELUS network were all postpaid and another, although quite minor, source of year-over-year subscriber growth.

Compared to the Third Quarter of 2009, TELUS had significant loading growth from iPhones and Android smartphones, which were not available for sale until the Fourth Quarter of last year.

Nevertheless, RIM BlackBerry devices continue to represent the leading component of smartphone additions.

Prepaid net adds of 21,000 improved from a net loss a year ago and reflect an improvement in churn as well as slightly higher gross additions.

Despite continued expansion of new entrance and the launch and relaunch of two additional brands by incumbents, all at the lower end of the market.

Overall, our total subscriber base increased by 7% year-over-year and now totals 6.85 million.

Slide six provides additional detail on TELUS' improved success with smartphones, which reflect the competitive benefits of our investment in the HSPA+ network.

Smartphone subscribers now represent approximately 28% or 1.6 million of TELUS' postpaid subscriber base, up substantially from 18% a year ago and reflects an impressive 67% increase year-over-year.

In addition, in the Third Quarter, 38% of all gross adds were smartphones compared to 22% in the same period last year.

Our wide selection of BlackBerries continued to drive retention loading along with the iPhone 4.

We're excited with the strong adoption rate for smartphones and we expect this to continue with the growing selection of new Android-powered devices.

And starting next week, new Windows 7 smartphones in our smartphone lineup.

In fact, as shown on the slide, here are three new devices being offered by TELUS this upcoming holiday season.

Including two of the Windows 7 devices, the HTC 7 Surround, and the LG Optima 7, as well as the Samsung Galaxy Fascinate powered by Android.

As shown on slide seven, wireless data growth -- revenue growth for the Third Quarter increased by CAD65 million or 29% year-over-year reaching CAD291 million.

Data now represents 25% of network revenue compared to 20% a year ago.

Interestingly, wireless data revenue now accounts for over CAD1 billion in annual revenues for the Company.

The year-over-year growth reflects strong service revenue and text messaging, driven by increased penetration of smartphones and the consequent, increased adoption of data plans, increased mobile internet keys, and higher inbound data roaming volume.

We continue to be bullish on future wireless data growth given these trends, and the increasing functionality and appeal of the new devices we can offer customers as they become available.

Slide eight shows the metrics related to our wireless marketing and loyalty efforts in the Third Quarter.

Gross adds of 466,000 increased by 11% and represented an all time record, with postpaid and prepaid loading up 11% and 12%, respectively.

In fact, total subscriber loading representing the aggregate of new gross adds, as well as retention units this quarter, was also at an all time record and reflect an improvement in economic conditions, enhanced HSPA smartphone lineup, and continued marketing success in attracting and retaining subscribers.

Blended churn remains stable at 1.54% despite increased competition, and reflects lower involuntary churn, greater choice in HSPA handsets, including the iPhone, and successful retention efforts.

COA per gross add increased by only 6% to CAD339 despite higher per unit subsidies related to a higher smartphone mix, partly reduced by a favorable US dollar exchange rate and reduced A&P expenses for gross additions.

As such, TELUS's 22% growth in net subscriber adds was achieved despite containing our COA per gross add to the lowest of the incumbents.

Total COA expense increased by 17% due to record gross adds and higher COA per gross add.

Retention expenses increased by 9.5% due to higher retention volumes and increased volume of clients migrating to smartphones.

This was partially offset by a reductionist spend per retained subscriber, resulting from commission efficiencies and a favorable US dollar exchange rate.

Slide nine shows the break down of TELUS' total ARPU between voice and data for the Third Quarter.

Encouragingly, blended ARPU continues to show an improving trend sequentially and is now down 1.2% on a year-over-year basis in the Third Quarter compared to a decline of 1.9%, 4.4%, and 7.7% in the three previous quarters.

In fact, ARPU increased 2.2% sequentially and is the second straight quarter of sequential growth.

In addition, voice ARPU erosion of 6.7% year-over-year continues to improve and reflect the best quarter in about two years.

The lower rate of decline in voice ARPU was partially offset by an increase in data ARPU of 21% to CAD14.53 compared to 19% last quarter, continuing to help improve the trend in blended ARPU.

Data ARPU now represents a quarter of TELUS' ARPU, up 5 percentage points from last year, and represents a significant ongoing opportunity for continued growth as smartphone penetration increases and demand for data services increases.

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

Revenue decreased by 2.7%, an improvement over recent periods due to strong data revenue growth of over 7%, offset by ongoing local and long distance revenue declines, as well as lower equipment revenue.

Interestingly, for the first time, wire line data revenue exceeded the sum of local and long distance wire line revenue by about CAD15 million in the quarter.

More on this coming up shortly.

Operational expenses were lower by 1% and primarily reflect lower base salaries, driven by fewer domestic FTE employees, as well as continues reductions in discretionary employee expenses, augmented by a one time supplier credit.

This was partially offset by higher labor rate inflation for 2010 as well as an increase in the performance-based variable pay accrual this year as compared to the same period last year.

Restructuring costs decreased by 48% to CAD15 million while significant efficiency savings continue to be realized.

All together, EBITDA was modestly lower by 1%.

EBITDA margins and total wire line revenue increased slightly by 0.4 percentage points to 33.2%.

Wire line capital expenditures decreased by 8% to CAD336 million, mainly due to lower investments in network access, partially offset by continued investments in TELUS TV and broadband initiatives, including VDSL2.

Simple cash flow, as measured by EBITDA less CapEx, increased by 61% this quarter to CAD66 million due to lower CapEx.

Slide 11 highlights the success of our strategic imperatives implemented over a decade ago, including a focus on the growth markets of data and wireless.

As mentioned previously, wire line data revenue exceeded the sum of local and LD revenue for the first time ever, and now represents 51% of the total revenue pie as shown on the right side of the slide.

In fact, wire line data revenue has increased by 122% over the last decade.

While the combination of local, LD, and data revenue has declined over the last decade, the decline is only 4.8%.

As the strong organic growth in data services and a few acquisitions have been able to partially offset the significant ongoing declines in our legacy voice services.

Another interesting fact this quarter is that wire line data combined with wireless revenue together represents 75%, so 3/4 of total consolidated external revenue, compared to only 34% a full decade ago.

All in all, this demonstrates the effective execution of TELUS' decade old strategy of focusing relentlessly on the growth markets of data and wireless.

Slide 12 shows our continued success with TELUS TV in the Third Quarter.

Total TV net adds were a record 38,000, increasing by 73% year-over-year, nearly doubling the total subscriber base to 266,000 over the past year.

The success of Optik TV powered by Microsoft Mediaroom is helping fuel demand.

The Mediaroom platform is a differentiated world-leading platform, and customer reaction has been strong and distinctly positive.

Overall, our momentum in TV reflects the improved product capability and features of our Optik service, such as PVR Anywhere and our superior selection of HD channels, which is providing positive competitive differentiation.

Our successful Optik brand launch and marketing campaign, which began in June, as well as from continued enhanced broadband coverage as we continue to expand our ADSL2+ and VDSL footprint.

There are now 2 million homes with TELUS' service area eligible for Optik TV, and we continue to be very pleased with the momentum in our loading and retention results.

Slide 13 highlights our improved wire line operating indicators this quarter.

Total new customers from our broadband services totaled 53,000 this quarter, including 38,000 of the new TV customers as previously discussed, combined with new high speed internet customers of 15,000.

High speed net adds of 15,000 were an increase of 67% year-over-year and a definite improvement from recent quarters.

The improved result partially reflects the launch of Optik high speed internet service, which features dynamic and higher internet speeds that take full advantage of the increased bandwidth that we've deployed to neighborhoods in recent years through shortening the loop lengths and deploying fibers.

Total [NOW] losses this quarter were 51,000 represented by the purple bar on the slide, which includes Business NOW losses of 12,000 and Residential NOW losses of 39,000.

On an absolute basis, both business and residential line losses improved year-over-year, reflecting a slight improvement in economic conditions on the business side.

While our enhanced bundling capabilities, resulting from our expanded TV offerings, is starting to provide retention benefits for our residential customers.

All together, we're encouraged that growth in TV and high speed internet loading fully offset the declines in business and residential NOW losses.

Putting this all together.

Let's look at TELUS on a consolidated basis, starting on slide 14.

Consolidated revenue in the quarter increased by nearly 2% over the same period a year ago.

Operating expenses were higher, mainly due to higher wireless subscriber acquisitions, reflecting strong loading and retention costs, and inclusion of Black's Photo expenses starting in September of 2009.

As well as increased TELUS TV acquisition and programming costs resulting from the increased subscriber base, an increase in the performance-based pay accrual this year as compared to the same period last year, and higher wire line advertising and promotion costs, partly offset by lower wire line salaries and benefits from fewer domestic FTEs.

Restructuring costs down by CAD15 million.

Our estimate of CAD75 million for the full year, though, remains unchanged.

EBITDA grew 1.5%, reflecting revenue growth in wireless and lower restructuring costs.

Reporting earnings per share decreased by 13% to CAD0.77, but when adjusted for nonoperating items, EPS increased by 6%.

I'll show that analysis on the next two slides.

Meanwhile, free cash flow increased by 27%, reflecting improved profitability and the 20% reduction in CapEx.

Slide 15 shows the detailed breakdown of the components of reported EPS, including CAD0.03 of positive income tax related adjustments recognized in the Third Quarter, versus CAD0.04 in the same quarter last year.

As previously disclosed in the Second Quarter, Q3 earnings per share included an impact of CAD0.12, resulting from the loss on early partial redemption of June 2011 US dollar notes.

More details to come on that.

The CRTC's deferral count decision and resulting financing charge of CAD15 million contributed CAD0.03 to the decline.

Higher pension and depreciation and amortization costs totaled CAD0.02.

Lower restructuring costs positively impacted EPS by CAD0.03.

Lower statutory tax rates and other added CAD0.02 of growth.

Normalized EBITDA growth contributed CAD0.01, and finally, improved normalized financing costs reflecting lower interest rates added CAD0.01 of growth.

Slide 16 clearly shows the nonoperating items impacting reported earnings per share this quarter, and provides a better picture of the true underlying operational growth.

When adjusting for these nonoperating items, normalized earnings per share were up a healthy 6% to CAD0.89 per share.

So, with the review of our results out of the way, let's now turn our attention to several topical issues for a few additional comments before I wrap up and take your questions.

With Shaw obtaining approval for its' acquisition of Canwest, and with ECE advancing its deal with CTV, content has certainly been in the news this quarter.

Slide 17 discusses TELUS' approach to content.

As we stated before, TELUS' strategy in the marketplace is to aggregate, integrate, and make accessible the best content and applications, whether it's traditional content or user-defined content for our customers through various platforms.

TELUS is of the opinion that it's not necessary to own content to make it accessible to our customers on an economically attractive basis.

In fact, it's not clear to us whether the synergies of owning content outweigh the negative synergies of limiting the audience of that content through exclusives, as well as impacting other supplier relationships.

TELUS' core competencies include brand marketing, integration, billing, service management, and delivering a fully effective and innovative suite of services to our customers.

Our core competency is not necessarily producing content.

In addition, it's important to highlight that the content assets in play through recent high profile M&A transactions are primarily legacy broadcast media properties and do not necessarily respond to the shift of social media through user-driven interactive applications such as Facebook and Twitter, and enabling platforms such as Android and Apple that allow consumers to personalize and consume on demand.

Turning to slide 18, TELUS is pleased that the CRTC has recognized the importance of competition in the carrier market, and will seek to implement appropriate safeguards against self-dealing and anti-competitive behavior.

The Commission will be holding a public policy hearing starting on May 9, 2011, on the possible effects of consolidation and vertical integration in the Canadian broadcasting industry.

Noting that the aim of this public hearing is to put in place norms for commercial interaction that would provide all players with a fair opportunity to negotiate for such key elements as programming rates and details of carriage.

In particular, the hearing should provide more clarity regarding what types of conduct would constitute an undue preference or an undue disadvantage, thereby reducing complaints and assisting the CRTC in dealing with any remaining complaints on a more timely basis.

TELUS believes the CRTC needs the regulatory tools and measures to effectively deal with and prevent any prospective anti-competitive behavior.

Slide 19 provides and update on TELUS' IFRS conversion status.

Section 8.2 of the MDNA provides comprehensive IFRS disclosure, including full transparent status on key topics, and progress against key milestones of TELUS' changeover plan, as well as quantified estimated impacts on key financial statement line items.

The Company continues to evaluate the possible effects of new standards and exposure drafts.

Notably, in terms of the most current understanding and applications, pro-forma net income and earnings per share for the first nine months of the year under IFRS are estimated to be higher by CAD15 million or CAD0.05 per share as compared to Canadian or US GAAP.

Impacts on the statement of financial position of cumulative unamortized actuarial gains and losses for defined benefit plans, and asset impairment reversals, which are all all set out in section 8.2 of the MDNA.

The net impact from all of these impacts on the opening balance sheet for 2010 under IFRS is currently estimated to be CAD220 million, or a 3% reduction in owners equity, and a CAD15 million increase to net income year-to-date on a pro-forma basis.

The Company expects to continue its long-standing practice of releasing annual targets and key assumptions for upcoming year in December.

And I should highlight that we plan to provide 2011 guidance in our December call in accordance with IFRS.

Overall, TELUS's conversion project is well underway and on track for a target conversion date of January 1, 2011.

Turning to slide 20, we'd like to take a moment to provide a quick financing update.

As a result of our healthy liquidity position in August, TELUS canceled its unused CAD300 million, 364-day revolving credit facility, which was set to expire at the end of the year.

At the end of the quarter, TELUS had available liquidity of CAD1.7 billion from unutilized credit facilities, as well as the availability of CAD100 million under its accounts receivable securitization program.

All of which is consistent with TELUS' objective of maintaining at least CAD1 billion of available liquidity.

As previously announced, in the Third Quarter, TELUS again demonstrated its ability to efficiently access capital markets by successfully raising CAD1 billion of 10-year debt with a 5.05% coupon expiring in July 2020.

The net proceeds of this refinancing were used to partially redeem the outstanding 8% US dollar notes due June 2011, as well as terminate the associated cross currency interest rate swaps.

TELUS recorded a pretax charge of CAD52 million for an after-tax impact of CAD37 million, or CAD0.12 per share, as previously highlighted.

This debt issue, combined with a similar debt issue in December of '09, will generate significant interest expense savings, positively impacting future earnings and cash flow while extending our debt maturity profile by almost 2 years to 5.9 years.

As announced earlier today, based on management's confidence in the prospect of continued earnings growth and strong cash flow in 2011 and beyond, and aligned with our dividend growth model.

TELUS' Board of Directors has approved a 5% quarterly dividend payout increase to CAD0.525 per share, starting with the January 4, 2011, dividend payment.

This is the second 5% increase this year, and represents an 11% increase over the dividend paid in January 2011.

In addition, TELUS has announced that it's changing the dividend reinvestment program to open market purchases at full price rather than issuing shares from treasury at a 3% discount from the average market price.

These changes will come into effect on March 1, 2011, and apply to reinvestment dividends declared after January 4, 2011.

Shares from the reinvestment of the January 4 , 2011, dividend will continue to be issued from treasury at the 3% discount from the average market price.

To conclude the financial review, slide 22 outlines our updated 2010 consolidated guidance, reflecting strong wireless profitability growth despite the dilutive short term effects of record subscriber loading and smartphone upgrades.

TELUS is updating its 2010 annual guidance to reflect an increase in the wireless EBITDA range, which positively impacts consolidated EBITDA and EPS ranges as well.

Consolidated EBITDA guidance is now CAD3.6 billion to CAD3.7 billion, up CAD100 million on the low end while, reported EPS is now CAD3.10 to CAD3.30, compared to CAD2.90 to CAD3.30 previously.

All other guidance measures remain unchanged.

In summary, results for the Third Quarter 2010 show positive trends in both wireless and wire line, and demonstrate the realization of benefits from our major strategic investments in broadband networks and operating efficiency in recent years.

Wireless net adds increased by 22% year-over-year and reflect the strong net adds as well as stable churn, despite increased competition.

Blended wireless ARPU declined by 1.2% and is continuing to improve as the decline of voice ARPU continues to moderate strong data ARPU growth.

Wireless revenue is up a healthy 6%,d while EBITDA is higher by 3.5% despite record gross add and retention volume.

In wire line, TELUS achieved record TELUS TV net adds, with results reflecting the benefits of significant investments made in broadband.

Resident and business NOW losses improved on an absolute basis, while high speed internet loading improved after two disappointing quarters.

Given management's confidence in our midterm outlook for earnings and free cash flow growth, we're increasing our dividend by 5% to CAD2.10 on an annualized basis.

And finally, given our strong wireless profitability growth year-to-date, TELUS is updating its 2010 annual guidance, as just mentioned, to reflect an increase in wireless EBITDA guidance.

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

Let's move to the wrap up by Darren, and over to

Thanks, Bob.

Matthew, can you please proceed with questions from the queue for Bob, Joe, and Darren?

Hi there, ladies and gentlemen.

(Operator Instructions) And we have a few people that are already queued up.

The first question that we have is from Maher Yaghi.

Please go ahead.

Thank you for taking my question.

I have a quick strategic question regarding the use of cash.

Looking at your dividend increase, by my calculation, you still have about CAD460 million of extra cash to spend, potentially, in 2011 above the CapEx.

I was just wondering how management sees the use of cash, the extra cash as your cash flow are increasing.

Do you think that you might need to keep some of that cash aside to put potential spectrum auction later in 2012?

Or you see that potential cash outlay as being financed through that?

And if that's the case, do you think a potential buyback of shares is something you could contemplate in 2011?

Maybe taking the tail end of the question, to contemplate, absolutely.

We evaluate all appropriate uses for the cash flow in the organization.

And this is the Q3 call.

The December guidance call is coming in December.

So, this is still November so we're not going into detail about 2011 at this juncture.

But clearly, I think you've cited some of the considerations from a philosophy perspective.

You first need to start with what's the right amount to invest in the business.

And that's where we always start from.

In the past number of years, you've noticed high levels of capital expenditures reflecting our broadband investments in wire line and wireless.

And I think what we're seeing right in this quarter is the positive results momentum that's being realized on the back of that successful investment.

On a go-forward basis, whether it's this year or next year, we're at more moderated CapEx levels, to you point.

We're also at the higher end of the leverage ratio, but with the cash flow we expect to generate, we're in a positive trend, and so whether it's dividend increases, investing in CapEx, voluntary contributions, the pension plan, better tax deductible.

Whether it be share repurchases like you mentioned, these are all things we have to give consideration to.

And I would just note in that, while not referenced in your questions, today I just finished announcing that, in respect to the drip, we're no longer going to be issues shares in treasury.

Rather, we are going to be repurchasing shares on the market.

And no longer, in so doing, paying a 3% discount.

That's another in terms of a capital activity that is consistent with an organization that's generating a positive cash flow.

In terms of the drip, we have an over 30% participation rate.

That switch alone is not an insignificant switch.

And is a meaningful amount of money each quarter in the order of magnitude of CAD50 million.

As mentioned, that will take effect for the subsequent payments to January of next year.

So, that's a bit of a philosophy in terms of what we're going to do next year.

That's the next call, not this call.

Thank you.

Next question, please.

Our next question is from Greg MacDonald of National Bank.

Please go ahead, Greg.

Thanks, just a quick clarification question on the drip.

Have you done any analysis?

Or do you have a guesstimate on how much or what percentage of the shareholders that currently participate might change their activity as a result of this change?

Just trying to get a sense of -- seems like an indirect buyback program that you're putting in place, which I think is a neat way of doing it.

I'm trying to understand whether shareholders will actually opt out of the drip now as a result of not getting the shares at a discount any more.

Do you have any opinion on that, or is there anything you can comment on related to that?

Good question, Greg.

I don't have the exact number in front of me, but I'll give you a ballpark.

In the phases where we have not had a discount, there's been single digit participation in the drip.

So, there's clearly a core group of shareholders who are desirous of increasing their participation without paying a commission.

And you can do that through a drip.

They'll participate whether or not there is a discount.

In terms of phases where we have offered a discount on the drip, if you go back a few years ago when we were doing this, the percentage went into, as I recollect, the 24% realm.

So, in this phase, as I just mentioned, it's a little over 30%.

I think it's 32%, the participation rate.

So, maybe this is an era of a little more yield-seeking investors.

You can come to you own theory.

But obviously, that participation rate has increased higher than previous norms.

Which is fine.

Which is fine.

Having said that, given where we stand on leverage in the Company, and our expectations for cash flow generation, we don't need to contain leverage by issuing shares from treasury.

So in that sense, it doesn't make sense for us to -- from a corporate perspective, to be paying a 3% discount in order to do that.

So there are two changes we're making.

One is eliminating the 3% discount, which we've done before, and then reverting to open market purchases to satisfy drip participation, as opposed to issuing from treasury.

So, generally speaking, I don't think it happens overnight.

You have retail institutional, there's a bit of a lag.

But that 32% current participation would be expected to drop to 10% or possibly a little below that over the course of time.

Okay.

That makes sense.

That's helpful.

Thanks.

Quick question on the operating profile -- ARPU profile in particular.

I like what I'm seeing.

Most people would be -- I'm trying to get a sense of the mix of consumer versus business that you currently have in your smartphone customer base.

I'm getting the sense, based on what we saw both out of [Telesendal's] results that you're certainly not seeing that negative reprice that Roger saw in the quarter.

And I'm guessing that maybe there is a lower consumer smartphone mix with TELUS, maybe Bell, but certainly TELUS, than what I previously thought.

And that suggests that -- or maybe is a driver of your more bullish comments on the outlook for data ARPU.

Is that the case?

Is the consumer smartphone mix relatively low here, giving you confidence to talk about future ARPU?

Because it seems to me you've got a good strong probability of getting positive overall ARPU for next year and the year after.

Greg, first of all, I think it's fair to say that we had a lower percentage of smartphones in our base than, say, a firm like Rogers, for example.

Because prior to the HSPA launch, we clearly didn't have the Apple iPhone product which was really rolling the table on the consumer side.

On the business side, while we had decent penetration in the CDMA technology, as you know, we were getting many of the newer BlackBerry devices on a lag basis relative to Rogers.

So they were enjoying a benefit from that in the business segment.

So, from that perspective, fair to say that from the point of launching our HSPA network this time last year, we started from a lower base of penetration of smartphones.

Hence, with that dynamic and the higher ARPU and data participation of the smartphone subscribers, that has been a nice driver of data growth which we would expect to continue going forward.

Maybe what I'll do at this juncture is ask Joe Natale if he wants to augment the answer to this question.

Sure.

Thanks, Bob.

I would say that, unequivocally, before our HSPA launch, we were under-exposed, or under-indexed in terms of business smartphone penetration and overall business in our customer base from that segment.

You think about the world we were in just around a year ago or more, in the enterprise space, not having sufficient capability in terms of international roaming, and not having access to the most iconic handsets, the latest BlackBerry or the iPhone put us at a severe disadvantage with a lot of enterprise customers.

And we were not getting enough penetration in that segment of the market.

And then you must have been doing better in SMB given there's less of a focus on international roaming in that front.

But the challenge in SMB becomes that the owner, operator who tends to travel will make a decision for the entire organization based on their specific needs, which includes the same two parameters around roaming and handset availability.

So, what we've seen the last little while is, that given that capability's done very well in the business segment, both in terms of new growth opportunities, and also in the competitive landscape.

So, I think you're seeing a very strong smartphone penetration on both fronts, Greg.

Okay.

That is helpful.

Thanks, Joe.

Matthew, next question please.

Our next question the from Dvai Ghose with Canaccord Genuity.

Please go ahead, Dvai.

Thanks very much.

Good morning.

You clearly had a very strong acceleration in TV DSL adds and even reduced line loss because of uptick, perhaps.

I'm wondering to what extent your capacity constraint, in terms of the 38,000 net additions given installation challenges as well as the upgrade of Minerva and iMagic customers.

And what do you think the run rate could be going forward?

Dvai, I'll take that question.

It's Joe.

First of all, the team is very proud of the acceleration in both TV loading and the inherent internet connectivity to that.

90% of the our TV loading has come with internet in a bundle, whether it's existing internet customer or new internet customer for us.

In terms of the capacity question, the network customer delivery team and our field technicians have been working hard to add capacity.

We've been adding capacity every step of the way.

There's no question in the short term, given that we are actively migrating our Minerva base over to Optik TV, that a good chunk of that capacity is being consumed by that Minerva migration.

We hope to be substantially completed within the next few months.

And by the time we hit 2011, we should have most of the Minerva migration behind us in the first part of 2011.

Some of that involves a truck roll, some of it is done remotely through our ability to do remote migrations, so we're working actively on both those fronts.

All I can say is that between myself and Kevin Salvadori, my colleague, we're not going to let supply capacity constraints get in the way of the business and the window of opportunity that stands in front of us.

And we've been working very hard to add that capacity along the way.

In terms of a run rate for next year, I'm not willing to lay that out at this stage of the game.

As we lay out our guidance for 2011, you'll get a sense of what we're headed towards in the overall business.

That makes sense.

Joe, can I ask you a quick follow-up?

If you listen to the Shaw, they're recent results call, they talked about a pricing environment in western Canada and that pricing is going up and people are becoming much more stable in terms of pricing.

Which may be somewhat ironic, because it was they who launched the CAD9.95 per product bundles.

But I'm wondering whether you see that, or whether you believe there's a great opportunity as you have a superior product to theirs, which may not be sustainable over time, to crank up as much TV volume as you can while you have this opportunity?

First of all, let me start by saying that our advantage in the TV marketplace and the capabilities of Optik TV that many of the people on this call have had a firsthand opportunity to witness and see in action, are advantages not driven by the price, but advantages driven by the capability and feature set of the product offering.

And the inherent capability and feature set of the internet solution that goes with it.

The XBox attach capability.

The one thing we don't spend a lot of time talking about is also the dynamic bandwidth allocation that comes from the internet solutions attached to it..

At the end of the day, you've got a very capable internet speed capability that you wind up sharing with your family, not with the entire neighborhood.

So, as a result, the feature set capability of that's very strong as well.

Our intent is not to compete on price.

In terms of Shaw's aggressiveness that we saw through Q1 and Q2, we have seen that subside or back off from where it was in Q1 or Q2.

There has been active promotional activity through the back-to-school, back-to-university period, as you would expect.

But nowhere near the level of intensity or madness that we saw through the first part of the year.

I believe that we are truly competing on feature set and capability.

And if you look at the quality results as well, Dvai, from our installations, our customers are telling us that our infield technicians do a terrific job of installation, and a terrific job of the quality that goes with installation.

Because it is quite a bit of effort to walk into someone's home and, sometime rewire overall, set up TVs and the like, and that's a moment of truth for us that the team has managed very well.

Thanks very much.

Congratulations on the success.

Next questions please.

Our next question is from Peter McDonald with GMC Securities.

Please go ahead, Peter.

Thanks for taking the question.

If I look at the ARPU trends, your year-over-year decline peaked in Q4 of last year, so you're coming into your easiest comps.

You've shown nice sequential improvements over the last three quarters.

You're seeing limited impacts from new entrance, HSPA's working, the economy is improving, and the Q4 is the anniversary of the elimination of your [SAF] and 911 fees.

So, when I consider all that, should I be anticipating that Q4 will be your first quarter of positive ARPU growth since Q2 '07, or there any reasons why we should temper our expectations?

Thanks.

Well, thanks for the question.

And it's sort of interesting, if you look back over the past 11 months, I can recall being in the December guidance call for 2009 providing the guidance for 2010.

And there seemed to be a fair degree of cynicism as it related to our wireless revenue guidance, unfortunately.

And I remember distinctly the question related to ARPU as to what sort of ARPU trend was correlated with the guidance.

And the answer was, we were hoping to take that and make it a 7.7% [tager] that we were experiencing -- in the midst of experiencing at that point.

Down to a low single digit and approaching zero, if possible.

And that's really what's transpired over this year.

So, for the full year, I think we're down -- for the full nine months, we're down 2.5%.

Obviously, 1.2% if we take the third quarter.

I think the factors you cite are there.

What you didn't mention is -- that's also been at play is this time last year, we set out a comprehensive operational effort with respect to ARPU.

And certain dimensions, recognizing that the environment for ARPU is one that you shouldn't count on increases.

You should be prepared for decreases and so from a cost perspective, what are costs aligned with that that we can also address.

And under in the Joe Natale's leadership we've been tremendously effective and I think we're seeing those results.

So, I don't want to give a specific projection for next year.

But remember that while there are factors one can control yourself, there's the market reality of pricing that takes place, and the ability to -- for us to respond if appropriate.

And we've seen some of that for example in the Province of Quebec in the past couple of months, where we certainly didn't lead the action, but we responded to the action.

And so there continues to be significant competitive activity in the marketplace that creates some uncertainty.

But certainly, we have a positive trend that we're experiencing now.

And we're hopeful that the trend will continue, and if that's the case, I think we're going to end up with a positive result with respect to ARPU for the year, compared to almost any expectation that I'm aware of.

Thanks.

You mentioned Quebec.

Is there any other territories where you can talk about any change in competition since the last quarter?

Joe, did you want to comment on that question?

You know, some of you mentioned Quebec.

The only other thing I would say, what we saw through the back-to-school season is the new entrance really becoming much more aggressive on two fronts.

Both in terms of rate plans and credits and discounts around rate plans.

But also getting into handset subsidy, which is something that we were surprised by in terms of the (inaudible).

And the challenges of those economics, we all know are difficult when you've -- when you're hitting it both on the rate plan discount front and also the subsidy on handsets, increasing what is effectively prepaid market with a level of churn that is far different from the smartphone postpaid markets.

So that's the activity we saw.

That's probably most intensive in the GTA, where everybody is operating on that front.

So, it leads me to think that there's a level of aggression that will persist through the Christmas season.

But we're ready for it.

We fared very well through back-to-school.

Amongst the three major players, we increased overall adds by 7%, which says that we did okay.

We did okay overall as the industry.

And there's been a stimulation in the overall categories resulting in competitive activity.

Thank you.

Matthew, next question, please.

Our next question is from Vince Valentini of TD Newcrest.

Please go ahead, Vince.

Thanks very much.

Just to clarify on the video question before.

Is video big enough now -- or TV big enough that you'll start to segment some revenue and EBITDA next year?

And the bigger question is, I don't know if this is for Joe or Darren, but I'm sure you've seen the Atria and Blink and a few years ago the Toronto Hydro Telecom deals in Ontario.

Are there any assets like that in Alberta or B.C.

that you're maybe worried about that could fall into the hands of your competitors, and maybe bolster their capabilities in the small/medium business market?

Okay.

In terms of the question, Vince, on do we expect to segment TV or revenues and ARPU whatever.

At this juncture, there's not that intention.

Of course, I'll try to deal with stuff like that, to the extent there's going to be changes on our guidance call in a month.

In terms of the Blink, Atria, or are we looking for similar acquisitions in our incumbent territory.

Remember that, to the extent that those odds -- in our incumbent territory or odd are, they would represent redundant or duplicative assets.

So, I don't care there would be something that comes to mind in that respect.

And out of market, in respect of those acquisitions, we have significant fiber assets.

Those were a bit of a rural play and perhaps where we don't have coverage, we will look forward to obtaining it through resale from Rogers, the acquirer.

There really wasn't the type of synergies that relate to us, even out of market.

Certainly not in-market

The only thing I would add, Bob, is that if you look within the western market, the assets out there that someone could pick up to change the competitive landscape against our base in our market.

I really don't think there are any assets of consequence.

There hasn't been the same level of investment in telephony and networks by the Hydro companies and the like in western Canada.

If you look at the example of the smart metering projects out there with B.C.

Hydro taking much more of a partnering approach rather than wanting to build and run their own telephony and data networks.

It's a bit of an asymmetrical set of capabilities have been built in different parts of the country.

Nothing there that I think would change the nature of the landscape.

We'll take our next question, please.

Our next question is from Glen Campbell of Bank of America.

Please go ahead, Glen.

Thanks very much.

I wanted to start with a clarification.

In the MD&A, you mentioned that iPhones were a significant portion of the upgrades during the quarter.

It wasn't clear whether you had stock to make them a significant part of the net adds or gross adds in the quarter.

Can you help me on that one?

Sure, Glenn.

No question that the iPhone 4 played significantly in the quarter, both in terms of retention and acquisition.

On the retention front, given the relatively short level of incumbency we're had on the iPhone products overall since we launched it a year ago.

And then really only hit some of the big channels like Future Shop, Best Buy in March of this year, the average iPhone customer has maybe a four or five month tenure with us.

A very different set of upgrade economics.

On the acquisition front, I think we did very well.

We had inventory challenges like everyone else did during the quarter.

The team did a very good job of re-architecting our whole inventory distribution practice so that we could, as we put it, the inventory only has to hit the warehouse before about a few minutes before we have to ship out the distribution channel.

On the relative basis, my sense is that we did okay in terms of inventory availability.

Great, thanks.

My follow-up was on local revenue per line.

That was down about 5.5% year on year, and the decline was a little worse than the prior quarter.

Is that all competitively driven?

Are there other things going on?

Is this as bad as it gets?

Or would we expect this to get a little deeper in the coming quarters?

Thanks.

On the revenue per line on that front, there are factors that are contributing would have to be a few things.

Number one is -- competition overall is a critical factor on that front, and a level of competitive intensity will drive the price point and the need to bundle that offering is increasingly more important.

The second thing is just technology substitution, both in terms of people looking to alternative methods of communications and therefore taking away from the more discretionary variable portions of that ARPL, or average revenue per line.

Technology substitution and overall wireless substitution, yes, is an impact for us in western Canada, but overall it's a net positive for us on a national basis.

Given the size of the Ontario and Quebec marketplaces and how well we do with our wireless brands.

Is there anything (inaudible).

Say that again, Glen.

Is there anything going on with the mix there that might help to explain it?

Perhaps on the business side?

I know it's not a great metric, but it's just a surprising one.

On the mix side, not that I can think about off the top of my mind.

We can certainly take a look at it and Bob and others can get back to you.

Go ahead, Bob.

Just one other thing, just remember respect of the appropriate accounting treatment that we've had for the deferral account.

The revenue reduction for the deferral account has flowed through our revenue line, as opposed to being written off below the line, et cetera.

For example, on the conclusion or near-conclusion of this deferral account.

The CAD15 million we had with respect of retroactive interest flowing through financing lines.

An element of our local line, in terms of revenue, has born the full brunt of the offset over the years from the deferral account.

I think we're getting close to the end.

Robert, can we go to the next question?

I think Joe had a follow-up.

Quickly, I think the other explanation could be that you look through the competitive intensity around home phone that persisted through the first part of this year and last year, Glen.

That had a certain impact on the overall revenue per line.

That CAD9.95 competitive intensity has diminished substantially, and now we're at a different price point in the marketplace.

We were doing all the right things you'd expect us to do during that period, in terms of saving as many customers as possible.

With that came discounting.

And now with the growth and strength of our TV product, we have the capability that allows us to better discipline the marketplace with respect to pricing around, not just TV and internet, but also home phone.

That's sort of some of the shift that you're seeing midstream, if you will.

So Matthew, we have time for one more question, please.

This will be our final question.

Okay.

Our final question is from Jeff Fan of Scotia Capital.

Please go ahead, Jeff.

Thanks very much.

And my final question is on the vertical integration strategy.

One of the arguments that others have made regarding vertical integration is the protection against rising content costs.

I think there are negotiations going on with respect to sports content that's going on right now.

What is your feeling on that, with respect to that view?

We can debate regarding whether the exclusive really works, but the rising content cost seems to have some real monetary impact over time.

Just wondering what your thoughts are.

Well, Jeff, first of all, I guess my remarks on the slide or two we had on exclusivities would point out that we've had regulatory policy to prevent undue preferences.

An example of undue preferences would be above market charging to others versus what the fair value is.

Clearly that's an aspect that the hearing in May, in terms of putting some clarity on the meat on the bones of the principles, is going to be important to watch.

But I think to frame the decision properly, on an incremental basis you have to step back and say is there -- there's a content cost, this is a hedge, it's a hedge for a certain small portion of total content.

And what am I paying, and what's my impact to the balance sheet to obtain that?

We're talking about multibillion dollar acquisitions at multiples far in excess of those which the acquiring organization trades at.

And so, there is risk inherent with that as well as respect to the execution, given it's a different type f business, et cetera.

What we've done over the years is take our capital and invest it in our core network assets, which we certainly have the expertise to run and create value with.

And we're not saying that others can't be successful.

That's not point I'm making at all.

The point I'm making is, there's a significant risk associated with that.

When one looks at the possible synergies, such as a hedge on content costs, in a regulatory environment, that's to protect one against that.

And given all the other associated risks with the M&A approach to going out of traditional core competency, that's not something that has sufficient appeal for this organization and that's why we've been sticking to our knitting, so to speak.

Thank you.

That's helpful.

Great, thanks, Matthew.

To conclude, I'd like to turn the call over to Darren for his closing remarks.

TELUS' third quarter and our year-to-date results certainly reflect the efficacy of the strategic investments that we've made in the recent years in advanced wireless wire line broadband infrastructure.

These results are consistent with my personal goals that I set out at our annual general meeting in May in terms of three year (inaudible).

At that time, I expressed my confidence that over the next three years, TELUS has the potential to generate low double-digit annualized growth in earnings per share, and even greater free cash flow growth, obviously excluding any one time items like spectrum purchases.

I continue to be strongly confident in the opportunity that TELUS has in the coming quarters and the years ahead in terms of creating sustainable economic value for our investors.

Accordingly, I decided to take the entirety of my 2011 annual cash salary compensation net of taxes in TELUS shares.

The dividend increase announced today is consistent with our dividend growth model and it's the second 5% increase this year.

This reflects TELUS' confidence in the prospects for continued earnings growth and strong cash flow in 2011 and beyond.

Clearly, we've entered a period where, chronically, the sources of cash will exceed the uses.

Our past behavior at TELUS in returning cash to shareholders is indicative and prescient of what investors can expect going forward.

I'd like to conclude by thanking you for your continued interest and support of TELUS, and respect of our strategy to create sustainable value for our investors over time.

This concludes the call.

Ladies and gentlemen, this concludes the TELUS Q3 2010 conference call.

Thank you for your participation and have a great day.