Telus Corp (TU) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS Q4 earnings conference call.

I would like to introduce your speaker, Mr.

John Wheeler.

Please go ahead.

Welcome and thank you for joining us today for our fourth-quarter 2010 investor conference call.

The call is scheduled for up to one hour.

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

Our full year MD&A and financial statements and notes will be publicly filed by the end of February.

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

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

Let me now direct your attention to slide two.

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

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

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

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

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

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

Joe Natale, EVP and Chief Commercial Officer, will review recent operating initiatives that relate to several of our 2010 corporate priorities.

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

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

Thanks, John, and good morning, everyone.

Let's begin with a quick review of our 2010 consolidated scorecard.

As you may recall, when we released our original 2010 targets back in December of 2009 they were met with some skepticism about their aggressiveness.

As we close the year, I am pleased to highlight that we achieved all of our profitability targets.

While we achieved our ambitious wireless revenue target, a miss in wireline revenue also caused a miss in consolidated revenue.

The achievement on three quarters of the targets reflects strong wireless performance and the realization of benefits from our strategic investments in broadband networks and operating efficiency in recent years.

Let's start our review of the fourth quarter beginning with wireless on slide 11, excuse me, slide five.

Reflective of the best ARPU growth in 3.5 years and continued subscriber growth, wireless revenues increased by 9% to surpass CAD1.3 billion for the first time.

In addition, equipment and other revenue growth contributed to the upside due to record acquisition and retention loading volumes.

Wireless EBITDA increased by more than 9% reflecting higher revenue and despite increased COA and COR expenses associated with the record subscriber loading in the quarter along with significantly increased smartphone adoption.

EBITDA margins on total revenue of 35% were unchanged over the prior period.

Capital expenditures of CAD192 million were also unchanged as we continued to invest in coverage and capacity in our new HSPA+ network.

Simple wireless cash flow increased a healthy 17% to CAD284 million due to the strong EBITDA growth.

Turning to slide six, total wireless net adds of 119,000 were stable in a very competitive environment and continued to reflect a strong postpaid/pre-paid mix.

Higher value postpaid net adds of 109,000 were in line with last year and represented 92% of our total net adds for the quarter.

TELUS' subscriber loading reflects strong demand for HSPA devices, particularly smartphones, on our main TELUS brand.

Prepaid net adds of 10,000 declined slightly over last year and reflect an uptick in churn due to a very competitive market with many promotions by new entrants and the launch and relaunch of two additional brands by incumbents, all focused at the lower end of the market.

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

Slide seven provides additional detail on TELUS' great success with smartphones, which reflects the benefits of our HSPA+ network.

Smartphone subscriber loading hit an inflection point in the quarter as smartphone adoption surged.

During the quarter, smartphones represented over two-thirds of postpaid retention units compared to about one-third only a year ago.

In addition, 46% of all postpaid gross ads were smartphones compared to 38% in the third quarter and 25% a year ago.

Consistent with previous quarters, Blackberrys and iPhones continued to drive retention loading and represent over three-quarters of smartphone retention units.

Smartphone subscribers now make up approximately one-third or 1.9 million of TELUS' postpaid subscriber base, up substantially from 20% a year ago and was an impressive 74% increase year-over-year.

This is a very positive trend for TELUS as smartphone subscribers are heavy users of data as well as subscriber voice features and therefore generate higher ARPU profiles.

Accordingly, as shown on slide eight, wireless data revenue growth accelerated in the fourth quarter and increased by 36% or CAD87 million year-over-year reaching CAD326 million.

This growth reflects strong service revenue and text messaging driven by increased penetration of smartphones and the increased adoption of data plans, increased mobile Internet keys, and higher inbound data roaming volume.

Data now represents 27% of network revenue compared to 22% a year ago.

We continue to be bullish on the future of wireless data growth given all of these trends.

Slide nine shows the metrics related to our wireless marketing and loyalty efforts in the fourth quarter.

Gross adds of 475,000, which increased by 10%, was an all-time record with postpaid and prepaid loading up 14% and 3%, respectively.

Interestingly, the record total subscriber loading representing the aggregate of gross adds and retention units surpassed 1 million units and reflects improving economic conditions in Canada, stimulation of market demand from extensive competitive offerings, enhanced HSPA smartphone line up, and continued success in attracting and retaining high-quality postpaid HSPA+ subscribers.

Blended churn ticked higher to 1.72%, driven in part by an increase in prepaid churn due to increased competition from new entrants in the low-end of the market as well as churn related to Videotron's recent market rollout in Quebec.

COA per gross add increased by only 2% to CAD388 in this seasonally competitive quarter.

The increase reflects higher per-unit subsidies related to a higher smartphone mix partly reduced by a favorable US dollar exchange rate and reduced advertising and promotion expenses per gross add.

Total COA and retention expense increased by 13% and 28%, respectively, due to the record loading and higher subsidies to support clients migrating to smartphones, but was partially offset by the favorable US dollar exchange rate.

Slide 10 shows the breakdown of TELUS' total ARPU between voice and data for the fourth quarter.

Following three straight quarters of an improving ARPU trend, I am happy to report that blended ARPU year-over-year increased by 1.9%.

This is the first ARPU increase in 3.5 years.

This positive exit rate bodes well for wireless revenue growth in 2011.

This reflects a 27% increase in data ARPU, which more than offset the 5% decline in voice ARPU.

This was the lowest voice ARPU decline since the first quarter of 2008.

Data ARPU now represents 27% of ARPU, up 5 percentage points from last year.

Turning to slide 11, let's review our Wireline segment results.

Revenue remained relatively stable due to strong data revenue growth of nearly 7% offset by ongoing local and long-distance revenue declines, as well as lower equipment revenue.

Interestingly, for the second straight quarter wireline data revenue exceeded the sum of local and LD wireline revenue by CAD58 million.

EBITDA increased by 4.8% due primarily to lower restructuring costs.

Salaries, benefits, and other employee-related expenses declined by 6.8% and primarily reflects lower base salaries driven by fewer domestic FTE employees, as well as continued reduction in discretionary employee expenses.

As planned, restructuring costs decreased by 57% to CAD32 million while significant efficiency savings continued to be realized.

The result was that EBITDA margins on total Wireline revenue expanded by 1.4 percentage points to 29.6%.

Wireline capital expenditures increased by 16% to CAD372 million to support record TELUS TV subscriber loading and efficiency initiatives, including service delivery improvement, workforce management, as well as the purchase of a leased building to facilitate consolidation of contacts and our real estate space.

In addition, we continued to make considerable investments in our wireline broadband networks.

Slide 12 shows our continued success with TELUS TV in the fourth quarter.

Total TV net adds were a record 48,000, increasing by 45% year-over-year while total TV subscribers increased by 85% to 314,000.

Slide 13 shows our residential and business now losses.

On an absolute basis, residential line losses improved year-over-year by 18%, reflecting our enhanced bundling capabilities resulting from our expanded TV offering.

Business line losses of 18,000 reflects increased competition in the SMB market, as well as conversions to IP services which do not get counted as access lines.

Reductions related to the IP conversions represented about one-quarter of the business line losses.

Putting it all together, slide 14 highlights our improved Wireline operating indicators this quarter.

High-speed net adds of 18,000, which was the best result in two years, increased by 64% year-over-year.

This marks the second straight quarter of improved high-speed loading and indicative of the success we are having with the Optik brand offering.

When combined with the record TELUS TV net adds, total broadband loading fully offsets the declines in business and residential NAL losses.

This is the second straight quarter of improved wireline loading overall and we are encouraged with the continued momentum as we move into 2011.

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

Consolidated revenue in the quarter increased by 4.4% over the same period a year ago.

EBITDA grew 7.4% reflecting strong revenue growth in wireless and lower restructuring costs.

Operating expenses were higher mainly due to higher wireless subscriber acquisition costs reflecting strong loading and retention costs, as well as increased TELUS TV acquisition and programming costs, an increase in the performance-based variable pay this year as compared to last year, and higher Wireline advertising promotion costs partly offset by lower Wireline salaries and benefits from fewer domestic FTEs.

Restructuring costs for the quarter were CAD32 million, while for the year total restructuring costs were CAD74 million, in line with our original estimate of CAD75 million.

Reported earnings per share increased by 43% to CAD0.70 and when adjusted for non-operating items EPS increased by 40%.

Simple cash flow increased by 2.9%, reflecting improved profitability partially offset by a 9.7% increase in capital expenditures.

Slide 16 shows the detailed breakdown of the components of reported EPS including CAD0.03 of positive income tax-related adjustments recognized in the fourth quarter versus CAD0.23 in the same quarter last year.

In the fourth quarter of last year earnings per share also included an impact to CAD0.22 resulting from the loss on early partial redemption of our June 2011 US dollar notes.

Our fourth-quarter result this year benefited from lower restructuring costs, adding CAD0.10 to the upside, improved normalized financing costs reflecting lower interest rates, adding CAD0.06 of growth.

Normalized EBITDA growth contributed CAD0.03 to the upside, and finally, lower statutory tax rates added CAD0.01 of growth, offset by higher pension and other expenses also about CAD0.01.

Slide 17 shows that reported earnings per share were up 43%, but when adjusted for the non-operating items, normalized earnings per share still increased by a similar 40%.

So with the review of our fourth quarter out of the way, slide 18 shows here the in-year EBITDA savings beginning in 2008, as well as the total recurring annual savings achieved by the end of 2010.

Since 2008, TELUS has invested CAD323 million in one-time restructuring costs and realized approximately CAD400 million in recurring annualized savings in 2010.

Moving forward into 2011, TELUS will continue to focus on its operating efficiency program to ensure ongoing efficiency and productivity enhancements but at a reduced level at about CAD50 million, given the significant cost reduction achieved in recent years.

Slide 19 provides an update on TELUS's IFRS conversion status.

Section 1.6 of the review of operations provides 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 our most current understanding and applications, pro forma net income and earnings per share for the 12 months of the year under IFRS are estimated to be higher by CAD14 million or CAD0.04 per share as compared to Canadian or US GAAP.

Impacts on the statement of financial position include the recognition of cumulative unamortized actuarial gains and losses for defined benefit plans and asset impairment reversals.

The net impact from all impacts on the opening balance sheet for 2010 under IFRS is estimated to net at CAD220 million or a 3% reduction in owner's equity.

The full description and illustration of expected effects of transition to IFRS will be updated in TELUS' annual 2010 MD&A which will be filed by month end.

Our defined benefit pension assumptions for 2011 are shown on slide 20.

The discount rate for 2011 has been set at 5.25%, that is 10 basis points lower than our preliminary estimate of 5.35% back in December.

We have also set the expected long-term rate of return at 7%, and that is 25 basis points lower than our preliminary assumption.

Based on these assumptions and total fund returns in 2010, the defined benefit pension expense estimate, which is actually a recovery, is CAD34 million positive in 2011 consistent with our 2011 targets call assumptions.

Our total estimated pension funding in 2011 is nearly CAD300 million, including the CAD200 million voluntary special contribution we made to our defined benefit pension plans in January 2011.

The voluntary contribution has many benefits include reducing cash taxes in 2010 and 2011, and reducing pension expense in 2011.

Let me now move to several industry issues of interest to investors starting on slide 21.

TELUS commends the recent Videotron/TVA and Shaw/Canwest decisions, wherein the Commission has recognized the importance of equal access to content and will seek to implement appropriate safeguards against self-dealing and anti-competitive behavior related to content ownership.

The Commission will be holding a hearing in June about 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 fair opportunity to negotiate for such key elements as programming rights 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 to implement measures to effectively deal with and prevent anti-competitive behavior related to content ownership.

Turning to slide 22, to quickly review some other notable regulatory issues, following a series of decisions back to May 2010 involving consultation of public hearings and, most recently, pursuant to a Bell-initiated review, the CRTC issued its most recent decision in January.

It ruled that incumbent telco and cable TV companies could assess usage caps on wholesale Internet providers consistent with their retail practices and apply overage charges in excess of those caps on wholesale ISPs minus a 15% discount to the retail rates.

The CRTC has announced that it plans to review its decision on billing practices that would have applied to residential customers of wholesale Internet service providers.

It is important to highlight that the CRTC's usage-based billing proceeding is a review of the wholesale regulatory framework only, and CRTC does not regulate retail Internet rates.

In the short term, there is no major implications for TELUS.

TELUS does not assess usage-based billing rates on its wholesale Internet customers.

Only about 20,000 of TELUS' 1.2 million high-speed Internet users are residential customers served by ISPs reselling TELUS' wholesale Internet services.

The next slide provides an update on the ongoing process related to foreign ownership restrictions in the telecommunications sector.

In 2010 the government sought comments on three options for relaxing rules on foreign ownership, but has deferred its decision into 2011.

TELUS proposed a fourth option, specifically that foreign ownership rules should be liberalized for all telcos and cablecos on a symmetrical basis, while pure broadcasting activities would still be subject to foreign ownership controls.

Last week the federal court overturned the government's December 2009 order approving Globalive ownership structure.

The decision could be appealed by Globalive and/or the government or alternatively Globalive could adjust its corporate governance structure to cure the situation.

This has not, and has never been, an issue of whether Globalive will remain in operation.

It clearly will.

In addition, the Minister of Industry expects to issue his final report on a digital economy strategy in the spring of 2011 and we expect the government to use this opportunity to provide some direction on its legislative plan on foreign ownership and clarify its position ahead of a spectrum auction consultation kick-off later this year.

On slide 24, let me summarize, the fourth quarter continued some very positive trends in both Wireless and Wireline.

Wireless revenue and EBITDA growth of more than 9% driven by blended ARPU growth of 1.9% and healthy Wireless net adds despite increased competition.

Smartphone adoption accelerated driving data revenue growth to 36%.

Meanwhile, in Wireline EBITDA growth of 5% and margin expansion was supported by lower restructuring costs.

TELUS achieved record TELUS TV net adds reflecting the benefits of our significant investments.

Residential NAL losses improved on an absolute basis while high-speed Internet loading improved for a second consecutive quarter.

So, overall, our strong year-end results set the stage for 2011 earnings and free cash flow growth.

Each year we outline a number of corporate priorities for the year.

Slide 25 outlines those priorities for 2011 that have been identified as key to TELUS achieving our long-term strategic imperatives.

Let me now turn the call over to Joe Natale to make some comments on several developments around these before we take some questions.

Thanks, Bob, and good morning, everyone.

I am going to focus my comments on the first two corporate priorities, that is delivering on our future friendly brand promise and, secondly, optimizing the potential of TELUS' leading broadband networks.

These two priorities focused on the customer experience and creating competitive advantage are similar to last year.

We see them as continuing to be very relevant in 2011 and beyond.

Please turn to slide 26.

In late 2009 we announced a new clear and simple pricing model with fewer rate plan options to make it easier for customers to choose the right plan.

By enhancing billing transparency and reducing complexity, we wanted to make it easier for clients to deal with TELUS and at the same time improve our own effectiveness and our own internal efficiency in how we serve those customers.

Our desire to optimize TELUS' future friendly brand experience lead to further developments in 2010.

Two additions we introduced were, one, data notification, that is text messages warning customers when they are about to exceed their data buckets, and clear and simple device upgrades offering customers a fair and transparent way to upgrade to a new device without having to wait for their contract to end.

We believe the success of our approach is reflected in the record fourth-quarter and annual gross additions reported today.

Despite it being the most competitive quarter we have ever seen given the many new brands in the market, we achieved profitable subscriber growth and stable postpaid net additions while growing EBITDA by 9%.

We continue to evolve the clear and simple experience.

Earlier this week we announced that TELUS customers are now able to unlock their postpaid SIM-based devices for a fee of CAD50.

This will provide more freedom and flexibility and enhance the experience of customers traveling internationally who want access to a local number.

The trend in ARPU and our stable EBITDA margin are particularly gratifying when we think back to some of the skepticism on the launch of clear and simple pricing with no system access or carrier 911 fees.

There was concern at the time that this move would be dilutive to ARPU and to EBITDA.

But under Darren's careful direction and oversight my team worked hard to overcome (inaudible) of the AMPU/ARPU level.

While we [accomplished this that] our approach is working and the success also reflects our ability to attract and retain high-quality smartphone subscribers.

Please move to slide 27.

The success and results today are also based on TELUS offering 97% of Canadians coast-to-coast access to an advanced HSPA+ network.

The move to HSPA+ allowed us to not only level the competitive playing field, but tilt it in our favor with our speed and coverage advantages across Canada.

Earlier this week we announced even faster mobile Internet access speeds to be available in March with our launch of a new dual-cell upgrade to HSPA+ and the availability of the latest Sierra Wireless AirCard 4G Internet Key.

This upgrade doubles manufacturer's rated peak download speeds of up to 42 Mb per second.

Our initial launch will cover over a third of the Canadian population in Vancouver, Edmonton, Calgary, Fort McMurray, Whistler, Camrose, Winnipeg, and the Toronto area.

Notably TELUS' entire HSPA+ network is now considered a 4G network according to the recently announced ITU standards.

This latest move will ensure that TELUS is well positioned to offer innovative solutions to both attract and retain customers for years to come.

Let's turn to our Wireline business.

We are clearly pleased with the record fourth-quarter TV net additions, as well as the pull-through impact it's having on re-accelerating high-speed Internet loading as shown on slide 28.

The superior Optik TV service powered by Microsoft Mediaroom with its enhanced functionality, such as PVR Anywhere, has been very well accepted in the marketplace.

We were particularly successful over the holiday season with our marketing campaigns.

However, we do not necessarily expect the same quarterly run rate in the next few quarters as there is some Q4 seasonality.

We are also continuing in 2011 the orderly migration from the old iMagic and Minerva TV platforms, which does not result in new clients but does represent more satisfied customers with a better churn profile.

Optik TV and high-speed Internet are now offered to 2.1 million homes in Alberta, BC, and Quebec.

We are also completing the buildout of VDSL2 technology overlay this year which enhances the Optik TV experience by supporting three simultaneous HDTV channels in the home for viewing or recording and higher dynamic Internet speeds.

We are very excited by the Optik moment that we are seeing and the significant competitive opportunity it represents for the TELUS organization.

I would note that over 90% of our TV customers have a service bundle with TELUS.

Optik TV is clearly providing us beneficial pull-through effects on Internet and reducing residential access line erosion.

On that note I will now turn the call back over to John.

Thanks, Joe.

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

Thanks a lot.

(Operator Instructions) Phillip Huang, UBS.

Great, thanks for taking my question.

Good morning.

It's great to see your ARPU return to growth with such a strong momentum.

My question is on the increase in churn in the quarter.

Since you only disclose blended churn, I was wondering whether you might be able to elaborate where the pressure is coming from.

I think you alluded in your comments the most aggressive pricing promotions we saw was at the lower end and also from new entrants.

So should we assume that the higher churn is primarily driven by higher prepaid churn?

And what type of pressure are you seeing on the postpaid side?

Okay, Philip.

It's Joe and I will take that question.

If you look at churn through the fourth quarter, two factors really influence the churn through that period.

First of all, as you mentioned, the increased competitive intensity.

We did see a continuous intensity around unlimited plans and the new entrants trumping one another on a regular basis through one of the most intense marketing competitive periods I have seen in this business.

We did respond appropriately through the quarter with some promotional activity.

Second factor overall is just the seasonality that happens during the fourth quarter, and especially given some of the significant loading that happened a few years ago that led to contract renewals in the period.

If you look at the churn it is materially and disproportionately skewed to lower ARPU subscribers.

We don't disclose the banding, but you can imagine we look very carefully at which customers are leaving us.

And in a market with competitive intensity I think the quality of subscriber is a very, very important factor to focus on, and that has been our focus.

We have had some of our greatest and highest ARPU levels.

If you look at the higher bands of ARPU, churn has been flat to improving in the higher bands.

The churn is coming out of the lower bands and disproportionately through the prepaid category overall, which of course is a lower-value customer for us.

And I think that speaks to the quality of our loading efforts.

As Bob mentioned, 46% of our postpaid gross came on the smartphones and 33% of the base right now is on smartphones.

Our voice-to-data activity is something we are very pleased with and it's driving that ARPU growth and that higher-quality subscriber.

Two-thirds of the activity in voice-to-data conversion this past quarter was on a smartphone.

So I think it's our view that if we are going to have increased levels of competitive intensity, we are going to experience some churn impacts.

Our mandate as a management team is to make sure that they exist at the lower value segments.

That is very helpful.

Just maybe as a quick follow-on on the retention spending, at 14% I think it's the highest it has ever been.

My question is how much higher do you think retention spending is necessary to keep churn in check?

And directionally how significant was the help from lower commissions and FX on that?

Thanks.

Philip, really on the retention spending side, while it's percentage of revenue was high, on a per unit basis it wasn't much changed over prior periods.

It really reflects the fact that, as mentioned, almost three-quarters of our retention subs are taking smartphones.

Smartphones, of course, have higher subsidies and costs associated with them but the return on the lifetime revenue, etc., is an attractive proposition because these are all renewed contract subscribers.

So we are quite pleased with it.

The absolute dollar of the spending reflects an all-time record retention volume level, so we really look at it more on a per unit basis and we are comfortable with that.

It's obviously influenced to an extent of what prevailing prices are for these types of smartphones for new subscribers, because it's a derivative effect but we are comfortable with that.

I would say we are at a very high level so I really can't -- I would be surprised as a percent of revenue increased dramatically.

And so at the end of the day it seems to have been a very successful strategy as we see the flow-through coming into our ARPU.

We will continue to make the right voice-to-data investments as long as we continue to see the right economics that surround those investments.

As Bob mentioned, the voice-to-data migration that happens results in better ARPU and also substantially better churn, so it is an investment well worth making.

Right.

And any color maybe on the lower commissions and FX in terms of help on the retention spending this quarter?

No, I think that is a little too much detail for right now.

We had better get on to allow someone else to get a question in here.

All right, thank you.

Next question, please.

Maher Yaghi, Desjardins Securities.

Thank you for taking my question.

I just wanted to ask you a question on -- in your MD&A you mentioned that one of the reasons you had some increased cost on the retention is because of unlimited plans offered by your competitors.

When you look at your product offering how do you rate it at this point in time?

Do you think there are some areas where you think you need to be in terms of unlimited product offering in the market, or are you just going to wait out and see how things develop?

I can't honestly recall the exact reference there.

But I think the point that was being conveyed was when you have a lot of promotional activity which -- including with some incumbents who were pricing down handsets and new entrants, who as I recall at the time of launch I was being lectured upon that the attractiveness of a non-subsidized business model.

I am not sure where that model is anymore.

But in any event even some of these new entrants have evolved their business plans to significant subsidized offerings in the marketplace so we reacted to that.

And so that is reflected in COA in terms of subsidy.

I guess as it relates to COR, I think that is more of a second order effect but it kind of those to whatever prevailing market prices are for handsets.

Obviously we give commensurate types of deals for existing subscribers.

So that would be the effect.

Okay, that is helpful.

Maybe just I can maybe ask the question differently.

Without getting into what your plans are in the future, can you maybe tell me how you view your product positioning in the markets right now compared to your competitors who some of them or most of them now are offering unlimited plans?

You have stated in the past that that is not something that you really would like to have out there as a lower product offering.

Do you still feel that that area is not for you at this point in time?

You don't want to be competing in that market?

When we launched the Koodo brand it was with the full intent that the Koodo brand would be our flanker brand or our brand that would compete in the value segment of the marketplace.

Through the Christmas selling season we did launch an unlimited voice plan on Koodo at a CAD50 plan rate, which for the Koodo segment actually is accretive to ARPU and supportive to us as an organization overall.

Our focus on unlimited will continue to be guided by what is happening in the marketplace.

We will respond appropriately, and I won't get into specifics of what we are going to do given the sensitive nature of that, but our focus will be on unlimited voice.

We don't support the view towards offering unlimited data.

The economics just aren't there and the cost of bandwidth and the cost of spectrum don't support a world in our Wireless broadband marketplace where unlimited data is sustainable.

We certainly saw some of that activity through the Christmas season from the new entrants.

I just don't think it's a sustainable model and we are not going to be planning to go there.

Okay, thank you very much.

Next question, please.

[Peter McDonald].

Thanks.

If I compare your wireless results to Bell's there is some pretty different trends in churn and cost of acquisition.

Of course, your EBITDA went in opposite directions.

Can you give us some insight into what is going on there?

Are you managing the competition differently or are you facing different competition?

And if you are managing the competition differently is the increased churn temporary?

I am reluctant to do a relative comparison to Bell; I will let them speak to their results.

I think that likely the churn rate change in both organizations reflects a similar dynamic and that is just the competitive reality of the marketplace with the significant -- extensive promotional activity that was taking place.

Certainly, with the Videotron launch of -- the facilities-based launch in Quebec that contributed to some of our churn.

I am sure Bell has a much larger share of that market, so they may have seen it as well.

But I think those are really industry-wide trends.

We have given some color in terms of ourself, in terms of where we have seen the churn at the lower end, that sort of thing.

Of course we have had extensive cost of retention activities.

Our retention activities for many years has been part of our strategy and it has paid us good dividends.

So when we look at this quarter and we had easily a record loading on the retention volume, throw in a record loading on the gross adds and we held margins year-over-year on the Wireless side.

And accordingly, we had a 9% increase in EBITDA level.

All-in-all that is good going.

When I look back to December of 2009 and we had our revenue target for Wireless, I can remember the questions and the skepticism.

How are you going to get that type of revenue growth if you have got 7.5% decline in ARPU and only a 6% increase in the subscribers in the market?

We said, well, we are going to work on improving that ARPU.

Well, when we look back now I don't think anyone actually thought we would be in the positive 1.9% territory in the fourth quarter.

So that is a good trend for us, which means that even in a competitive market where there is tremendous promotional activity you can execute strategies that can be accretive.

And that is what we did in the fourth quarter.

Just a follow-up on that.

The competition side that you talked about on the incumbents was it an increase from Bell as well or was it primarily just the Videotron that you talked about?

I will do a quick comment; if Joe wants to supplement, fine.

It included the incumbents really on two sides.

We had the flanker brands -- the new flanker brand or more recent flanker brand, flanker brand number two for Rogers, being Chatr on top of Fido.

And of course Bell as well.

So there is activity there and Joe referenced some reaction activity to what was going on with the launch of Videotron in Quebec.

Throw on top of that that certainly there was some hints at lowering a price to stem demand in that environment, which we reacted to, and that is reflected in our numbers as well.

So it was really both the new entrant and the incumbent activity to summarize.

That is helpful.

Thanks a lot.

Next question, please.

Jeff Fan, Scotia Capital.

Thanks very much and good morning.

I wanted to touch on the Wireless CapEx intensity.

Bell yesterday talked about 11% to 12% CapEx intensity in 2011.

I know you guys only give total CapEx guidance, but just wondering if there is any reasons for investors to think that yours would be dramatically different given you guys share the same network.

Wondering if you can talk a little bit about that.

Thanks.

Well, I understand the question.

I guess we only really guide on consolidated CapEx.

In terms of intensity, the Wireless and the Wireline mix do -- can vary somewhat, but as an overall organization the CAD1.7 billion approximate mark is where we thought we would end up, which we did, and where we expect to end up this year.

In terms of the mix for Wireless, obviously Bell and ourselves presumably have similar trends in that regard.

We have similar technologies and we respectfully share the HSPA and CDMA networks.

So I can't speak for their intentions.

And I think maybe behind the question, whether it be the upgrade Joe referenced that we just announced the rollout on on the dual cell, that is not a material capital number.

That is a very modest and inexpensive upgrade given the way we already deployed our HSPA+ network.

In terms of LTE, we are all trialing that.

I think that is more of a future spend beyond 2011 for all material aspects.

So we are comfortable with the guidance that we only gave -- what was it -- about six weeks ago.

Thanks.

Next question, please.

Dvai Ghose, Canaccord.

Thanks very much.

Good morning.

Wanted to ask Joe a question about TV.

Your run rate hit a very nice 49,000 net additions in the quarter.

You have said in the past that the constraint is really on the supply side, not demand.

I understand there is some seasonalities you suggested, but have you reached your capacity limit here or do you think there is further install capacity that could accelerate the run rate in 2011?

On a related basis, obviously there is a lot of dilution in the near term caused by TV subscriber growth.

I am wondering to what extent you can offset that incrementally through cost cutting in 2011.

You gave us a good idea as to what you have done in 2010 and before.

All right.

Thanks, Dvai, for the question.

We spend a lot of time as an organization addressing the topic of supply.

Given the investment that we have made in Optik TV and its importance to our strategy, you would expect and imagine that we have gone out of our way to make sure that we have all the right mechanisms and levers to pull to add supply capacity on demand, whether that is supply capacity in the field for installers or supply capacity in the call centers or customer service.

We, I think, have done a very good job of reflecting that supply capacity in our operating environment.

Right now we don't have any significant challenges on the supply capacity front.

We continue to augment that capacity over time.

We are hiring people, we are training people, we are retraining individuals to support the TV product.

There is such enthusiasm in the organization to make that skill transition that we have been able to kind of toggle the capacity question both internally and externally.

So it's our deep desire not to make supply the constraining factor in the TELUS organization.

That is our focus.

We need to get through the next few quarters around the Minerva migrations.

When the Minerva migrations are put to bed then that will give us the next source of supply in the environment.

But as I have said in the past, it is our intention that we will not be supply constrained.

With respect to the cost side of the equation, we have a whole series of ARPU and AMPU-related initiatives on the Optik TV and the home front, not dissimilar to some of the things that we worked on this past year in 2010 on the wireless front which we have covered in the past.

So everything from taking a look at how we upsell into our growing base.

We have got some 300,000-plus TV customers at this point in time, that is roughly 10% market share in Western Canada.

That is a critical mass where we can now turn the jets on in terms of selling game packages, content, and other solutions into that base.

And we will continue doing that to drive those economics.

At the same time we have a lot of efforts in our order management processes to take a look at how we reduce call volumes, how we have customers serve themselves through the web, how we take some of the inherent support and administrative costs in this business down to a level where we can enjoy better G&A profile in the business.

So rest assured that we have got a whole list of those activities the team is pushing very hard on through 2011.

Great.

Just as a quick follow-up then.

So given all you said -- Shaw price increase, their increased footprint, and the end of the Minerva boxes sometime this year -- I think it would be safe to assume a fairly significant acceleration in TV adds this year versus 2010.

We remain enthusiastic.

We just wanted to put the enthusiasm with the seasonality that exists in the marketplace, and the notion that we want to make sure we keep driving in the marketplace based on selling the value proposition around TV and the features and functionality, not based on price.

That is our mindset.

Fair enough.

Dvai, I think it's erroneous to be asymmetrically focused on just the supply side parameter.

I think we are irrationally aggressive in terms of growing share that will propagate a response in the marketplace.

That is not consistent with the long-run economics that we want to achieve nor is it necessary given the market structure that we have in Western Canada.

Thanks very much.

Appreciate it.

Matt Niknam, Goldman Sachs.

Thanks for taking the question.

My question is on wireless substitution.

I just wanted to know where does wireless substitution currently stand in your footprint and did you see any real acceleration during the fourth quarter?

Then do you just expect to see more meaningful acceleration in this in 2011 or do you think this is more of a 2012 and 2013 type story as some of these new entrants get their footprints more built out?

Thanks.

Well, wireless substitution has been I guess a factor for some time.

First point that may not be intuitively obvious when you think of it is that wireless substitution is an accretive activity for this organization, because we are national on a wireless basis but we are regional on a local wireline phone basis.

And in the local wireline phone regions or incumbent markets we are also obviously a leading wireless provider, so a good portion of those just shift over to that side of the organization.

But to the essence of your question, what is the trend.

Really we haven't seen that much of a change in the trend in 2010.

Roughly a third or something to that order of magnitude of line losses are going to wireless and not to another wireline solution.

We haven't seen a notable change in the trend, so it's a meaningful trend but not particularly an accelerating one.

Whether the greater propensity for flat rate voice pricing changes that as we go forward remains to be seen.

Just as a follow-up, do you have any sort of ballpark in terms of homes in your footprint right now that are wireless only?

Sorry.

Could you just repeat the question?

Just the percent of homes in your footprint that have gone wireless only?

The percentage of homes.

You know, it's not an exact number but ballpark would be the low teens.

Okay, that is great.

Thank you.

Thanks.

Next question, please.

Vince Valentini, TD Newcrest.

Thanks very much.

Your TV and broadband ads are certainly impressive, but I wanted to ask about the CapEx related to that.

Your Wireless -- I know you don't give guidance on it, but just looking at last year's number your Wireline CapEx intensity is still 26% so no change from 2009.

That is way higher than most of your peers still.

Can you give us any sense of where you see that going the next couple of years?

Should you be able to get that down to 20% eventually once this big build and initial ramp up in subs is done?

And maybe as part of that can you remind us what you capitalized in terms of the customer premise equipment and installation, if anything?

Thanks.

Vince, in terms of CapEx generally, don't want to get into a multi-year type of guidance per se, but on the TV front really our standpoint there is like it is in most other places of business.

The first consideration of application of capital for this organization is where are we going to drive attractive returns consistent with our strategy.

And if those opportunities present themselves I think you have seen historically this organization's bent which is to execute towards those, and when we have done so quite successfully.

TV represents one of those key areas for us in the current and future environment.

So you are right, you reference that.

There is a variable component of our CapEx related to our TV subscriber growth.

There is an OpEx/CapEx mix in there but certainly a CapEx side of it as well.

And we are still building out, putting significant resources into our broadband network as we put VDSL2 into shortening loop lengths, increasing speeds.

That is making better service features available in our TELUS TV or Optik service, and if we look around the national market we have now become really a leader.

In fact, we have more IP TV subscribers than any organization in this country, so we are getting success with that strategy.

And so our view is that we are going to continue to invest in that and so I am not going to give specific CapEx intensity for Wireline or for TV specifically beyond this year.

But what we have said is that we believe that this and other similar types of investments can be handled somewhere in the zone of where we are and have been in the past year of CAD1.7 billion and the like.

Obviously, as we get a little larger and so on and so forth maybe little bit more.

But an intensity level we are in that zone and there should be some economy of scale that has potential to decrease.

So there aren't shocks that we anticipate that are going to take it into another step function territory, but we are comfortable that decisions that we have made to invest during the recession where we took capital up is certainly paying dividends now.

And I think our results show that.

Great, thanks.

I think it's particularly important when you look at the asset portfolio of this company that we have two strategic growth tenants, not just one, which has traditionally has been the case in the Wireless front.

TV gives us a second strategic growth tenant and that is particularly important from a diversification perspective.

I think that has long-term value implications for shareholders.

Secondly, despite where the CapEx intensity is on the Wireline front, I would remind investors that on a consolidated basis we are in a period where chronically the sources of cash are going to exceed the uses of cash.

And I think our cash flow growth will distinguish itself amongst our peers as well as our net income expansion, and that bodes well in terms of our ability to return cash to shareholders on a sustained basis.

Simon Flannery, Morgan Stanley.

Thanks very much.

You were talking earlier about the problems of an unlimited data model.

Perhaps you could you share a little bit of what you are seeing in terms of smartphone usage, particularly as you load more iPhones and Android devices, and what that is doing to people's choice of data tiers.

Are you seeing increasing overage revenues?

Are you seeing people saying, well, a gigabyte is not enough, I need to money to move up to a higher tier, and getting some ARPU accretion from people who are really using these things intensively?

Thanks.

Simon, I used the word in my remarks inflection point and that is truly what occurred in this organization.

I think I used it in the context of smartphones, but the associated concept would be data usage.

So as you can imagine, we have a lot of engineering estimates of data capacity but Joe's marketing guys shot through the lights on the smartphone adoption rates in the fourth quarter, etc.

And the associated usage really accelerated, certainly beyond our most aggressive scenario.

So that is all a good thing with showing it manifesting itself in terms of ARPU, but it also has capacity implications.

And so I think one of the lessons worldwide surely has to be that in the world of multimedia data, as opposed to just basic messaging and the like, the multimedia and other similar capacity intensive applications, there is a direct cost associated with data that needs to be paid for.

Depreciation matters in the world of data, and consequently unlimited data plans, as Joe reference, are not economic on a sustained basis.

So I know there is some different approaches in North America.

Again, I emphasize sustained basis.

I am not critical of others, but I am saying from our own experience it has reinforced that one needs to invest in capacity.

Spectrum matters and cell splitting activities are significant out there, so that is why voice is different than data.

Thank you.

Next question, please.

Ric Prentiss, Raymond James.

I want to follow on the lines of the smartphone conversations.

T-Mobile at their analyst day in the US a couple of weeks ago mentioned the cost curve coming down.

Where do you see the cost of your HSPA+ smartphones going in 2011?

And T-Mobile also talked heavily about the Android system as maybe having some of the lower cost points.

Is that what you are thinking also?

So Ric, we are seeing some of the same factors and dynamics in our business.

There is no question that the smartphone handset market is a global market.

It's competitively intensive in many of the categories.

We have seen an absolute abundance of Android-based smartphones enter the marketplace at price points never previously seen for those types of devices.

So we have been on the Android bandwagon from the very beginning.

Before it was even a term that was understood in Canada we led the way with respect to Android phone adoption.

Now it makes up a very significant port of part of our volume in our business.

On the RIM or Blackberry front we are also seeing a tempering of some of the costs on that front as the technology is able to enjoy better cost points in terms of their bill of materials and passing those savings along to various carriers.

So we definitely are seeing that curve head in that direction as things intensify on that front.

Our goal is to continue looking for devices that will meet the needs of the marketplace and afford us a better overall COA as a proportion of lifetime revenue, which is one of the metrics that we watch very, very closely as we look at the leverage economics of the investments we are making against the returns that we are getting.

So when we go out in the marketplace and we find phones like the INQ that we are offering on Koodo, it's because it's a very good device and we have achieved a price point that allows us to offer value to our customers and maintain the economics of our business.

So absolutely the case.

And then also on your top five (multiple speakers)

Just adding onto Joe's comment from a Canadian perspective with the dollar in parity to US dollar and maybe, except RIM, our handsets are generally priced in US dollars that is helpful for us from that standpoint.

So that is another positive factor to look forward into 2011.

You also mentioned smartphones as WiFi hotspots.

Is that not having your smartphone work on a WiFi network but in fact having the smartphone be a WiFi hotspot with others being able to jump on it?

Just wondering how that fits into the data plans.

It does; we do have that offering and we are seeing more and more smartphones come up with that hub-based or MiFi, there is a lot of different terminology points for it, basically allowing the smartphone to emit a local zone WiFi signal that can then allow various different devices to connect.

So those devices are here, we are seeing them proliferate in the marketplace, and more and more phones are coming with that embedded capability.

Okay, thanks.

We will take the last question, please.

Rob Goff, NCP.

Thank you very much for the question.

There has been a lot of talk about COA and retentions, but can you specifically address your policy towards early upgrades and the transparency of that policy and what you were seeing in the marketplace and the need for the marketplace to give greater transparency?

Sure, sure.

Absolutely.

We looked long and hard at this issue last year and we looked back historically at the dynamic of the whole upgrade world within our business and the dynamic used to go something like this.

The customer would walk into a store or call the call center and make their plea for getting a device upgrade.

There was very little understanding from the customer's point of view as too much how much subsidy there had been on that device and, therefore, in their minds, the phone had been priced at somewhere near our cost, even with the mark-up despite the fact they may have paid next to nothing for it and the negotiations began.

The negotiations would continue in the store, with the call center, the escalation process, and the like.

So we started a pilot through the latter part of last year and we tested the concept of an early device upgrade fee.

Our view is that we need to educate the consumer base around the subsidy model and how it works.

The only way to do that is to actually create a handset balance and to have customers understand just how much of an investment has been made with respect to the handset that they are enjoying the use of.

What we have found is that customers actually enjoy having structure and transparency around how that works.

When we said to people if you are willing to pay off your handset balance then you can get access to acquisition pricing.

So that is a model that we ran very carefully.

It's a model that we tested in the marketplace and we have seen the right reaction that you would anticipate.

On top of that it has created a lot of operating headroom for the organization.

You can only imagine how much time is being spent by salespeople in stores or escalation points in the call center trying to deal with a less [conservative] structure or clear policy overall.

And so if you think back to some of the comments I made last year around the importance of AMPU, not just ARPU -- AMPU being average margin per unit -- it has been fundamental in that thinking.

Let's take a look at all the costs that are driven or attracted through the process.

You get into a world of high penetration rates in the marketplace, you get into a world where more and more of the base has a data device or a smartphone, this dynamic becomes very, very important.

We looked at the proportion of time being spent by people on upgrades or on retention versus new activation.

We took a hard look at it and decided to make this change, and it has paid off for us.

Very good, thank you.

Thanks, everybody.

That was the last question so thank you for taking time today to join us.

We appreciate your continued interest and support of TELUS.

Thanks, have a great day.

Ladies and gentlemen, this concludes the TELUS Q4 earnings conference call.

Thank you for your participation and have a nice day.