Telus Corp (TU) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the TELUS Q1 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 first quarter 2011 investor conference call from Toronto where earlier today we held our annual general meeting.

The call is scheduled for up to one hour.

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

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

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

You will 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 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 disclosures and filings with the Securities Commissions in Canada and the United States.

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

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

Joe Natale, EVP and Chief Commercial Officer, will review key trends we are seeing in our wireless and wireline operations, and Darren Entwistle will close with comments on our dividend.

We will then finish with a question-and-answer session with all three.

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

Thanks, John.

Good afternoon, everyone.

Let's begin with a summary of wireless financial results.

Reflective of outstanding ARPU growth and continued subscriber gains, wireless increased by 11% to surpass CAD1.3 billion for the second straight quarter.

In addition, equipment and other revenues contributed to the upside due to higher acquisition and retention volumes, high proportion of Smartphone additions, and revenues from the Clear and Simple Device Upgrade program launched in November of last year.

Wireless EBITDA also increased by 11%.

This was accomplished despite increased COA and COR expenses associated with the subscriber loading in the quarter along with significantly increased Smartphone adoption.

EBITDA margins on total revenue remained unchanged over the prior period at nearly 42%.

Capital expenditures of CAD76 million increased by 29% as we continue to invest in network capacity and coverage including the rollout of higher speed, dual cell HSPA Plus technology.

Wireless simple cash flow increased a healthy 9% to CAD475million due to strong EBITDA growth.

Turning to slide five, total wireless net additions of 32,000 declined by 19,000 and reflects the loss of 16,000 low ARPU federal government subscribers in addition to increased competition from new entrants who were not in or fully in the market one year ago.

Higher value postpaid net ads of 52,000 declined by 13,000 over the prior period, but when adjusting for the loss of subscribers stemming from the federal government contract, postpaid net ads would have been slightly higher year-over-year.

Prepaid net losses of 20,000 reflect lower gross additions and a slight uptick in churn due to increased competition at the low end of the market including various flat rate voice offerings.

Overall, our total subscriber base increased by nearly 6.5% year-over-year and now total is more than 7 million subscribers.

I show on slide six wireless data revenue growth accelerated significantly in the first quarter and increased by an impressive 44%, or CAD112 million year-over-year reaching CAD366 million.

This is up from the 36% increase experienced in the fourth quarter of 2010.

This growth reflects strong service in text messaging revenue driven by increased penetration of Smartphone and increase adoption of data plans, increased mobile devices that provide an Internet connection, tablets, and higher inbound data roaming volume.

Data now represents 30% of network revenue compared to 23% a year ago.

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

Slide 7 shows the metrics related to our wireless marketing and loyalty efforts in the first quarter.

Gross adds of 388,000, which increased by 9%, were a first quarter record volume with postpaid loading up 14% offset by a slight decline of 2% in prepaid.

Churn ticked higher year-over-year to 1.7% but was consistent with the churn rate for the fourth quarter of 2010.

The increase reflects the loss of the federal contract and increased number of competitors as compared to a year ago and more price-based promotions in the market.

COA per gross add increased by 8% to CAD348 due to higher [prianet] subsidies from increased Smartphone sales, resulting from increased pricing competition and to a lesser extent higher commissions to support an increasing number of higher valued Smartphones partly offset by reduced advertising and promotion expenses per gross add and a favorable US dollar exchange rate.

Total COA and retention expense increased by 18% and 20% respectively due to increased loading and higher subsidies to support clients migrating to Smartphones.

Slide eight shows the break down of TELUS' total ARPU between voice and data for the first quarter.

Wireless ARPU increased by an impressive 3.7% year-over-year as data ARPU growth of 35% exceeded the voice ARPU decline of 5.8%.

This reflects the second consecutive quarter of year-over-year quarterly ARPU growth and the highest growth rate in nearly five years.

Data ARPU now represents 31% of ARPU, up 7 percentage points from last year.

Turning to slide 9, let's review our results for the wireline segment.

Reported revenue increased by nearly 2%.

This is, in part, due to the inclusion of a non-cash gain of $16 million from the acquisition of contact center provider, Transactel, which is included in revenue under other operating income.

More on the Transactel acquisition in a moment.

Excluding the Transactel gain, revenue growth of 0.6% was driven by CAD61 million, or 11% growth in data revenues, which offset continued declines in traditional voice, local, and long distance revenues.

Reported EBITDA declined by 3% due to continued declines in legacy voice services, increased costs associated with the expansion of our successful Optik services, as well as external labor costs to support a larger customer base -- as well as several one-time benefits recorded in the first quarter of 2010 which I will talk to shortly.

EBITDA margins declined by 1.8 percentage points to 34.4%.

Wireline capital expenditures increased by 32% to CAD333 million to support the continued expansion of our Broadband networks including the rollout of VDSL2 and fiber closer to the home and investments in Optik TV and high speed Internet service capabilities.

Simple cash flow is measured by EBITDA less Cap Ex declined by 48% to CAD102 million due primarily to the higher capital expenditures.

Let's take a quick look at the acquisition of Transactel on slide 10.

During the quarter as the second part of our eventual acquisition of 95% of Transactel, TELUS increased its economic interest from 30% to 51%.

Specifically in January, the Company completed an equity transaction pertaining to its first call option to increase its economic interests from 30% to 51% for CAD20 million in cash.

Subsequently, the business growth targets necessary for TELUS to exercise it's second call option to take control effective February 1, 2011 and thereby begin to consolidate, were reached in the first quarter.

TELUS was required to re-measure the Company's previously held 51% economic interest at the acquisition date fair value, resulting in recognizing a gain of CAD16 million recorded in other operating income in accordance with IFRS in the wireline segment.

With facilities in Guatemala and El Salvador, Transactel provides a full range of cost-effective call center outsourcing services and IT solutions for customer care, sales, technical, and back office support for TELUS third party multi-nationals and local Central American customers in various industries.

The investment was made with a view to enhancing TELUS' business process outsourcing capacity particularly regarding Spanish/English language capabilities and acquiring multi-site redundancy in support of other TELUS international contact center facilities.

In the second quarter, TELUS expects to complete the equity transaction of the second call option with the vendor for the incremental 44% economic interest for roughly USD50 million in cash, increasing the Company's economic interest in Transactel to a total of 95%.

Slide 11 shows the various impacts on EBITDA of several nonrecurring items.

TELUS' adjusted wireline EBITDA declined by 6.5% excluding the Transactel investment revaluation gain.

But as explained last year, there were several one-time benefits in the first quarter of 2010 including a high margin software sale as well as operating expense savings from a capital tax reversal which benefited wireline EBITDA by a total of approximately CAD10 million last year.

Normalized for these items, wireline EBITDA was closer to a 4% decline.

Slide 12 shows our continued success with TELUS TV.

In the first quarter, total TV net adds of 44,000 increased by 52% year-over-year while total TV subscribers increased by 80% to reach 358,000.

We continue to be pleased with the momentum in our loading and retention results and are encouraged with the improving customer churns since the launch of the Optik brand.

Slide 13 shows the recent trend in high speed Internet loading over the last five quarters and importantly the strong loading achieved over the last three quarters since the launch of the Optik brand.

The strong loading since the third quarter of 2010 is indicative of the success we are having with the Optik brand and the pull-through effect of bundled offers.

This momentum carried into the first quarter of 2011 as we added 16,000 net adds compared to only 3,000 a year ago.

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

On an absolute basis, residential line losses improved year-over-year by 34%, reflecting our enhanced bundling capabilities resulting from our expanded TV offering.

Similar to our high speed Internet loading, this is the third consecutive quarter of improved residential line losses.

Business lines increased by 2,000, a reversal of recent trend, reflecting the implementation of voice and data services for a wholesale customer partially offset by continued competition in the SMB market.

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

Consolidated revenue in the quarter increased by 6.5% over the same period a year ago.

Reported EBITDA grew by 4.6% reflecting strong growth in wireless.

Reported earnings per share increased by 19% to CAD1.01 and when adjusted for the Transactel investment revaluation gain, EPS increased by 14%.

Simple cash flow decreased by 9% reflecting the increased wireline capital expenditures.

Slide 16 provided -- provides a detailed breakdown of the components of reported EPS including the CAD0.04 positive impact resulting from the investment revaluation gain on Transactel.

Normalized EBITDA growth contributed CAD0.04 of growth.

Lower tax rates added CAD0.03 to the upside while lower financing costs reflecting lower interest rates and debt levels added an additional CAD0.03.

Lower pension and restructuring costs added CAD0.02 of growth, and lower depreciation and amortization also added CAD0.02 to the upside slightly offset by a higher number of outstanding shares.

Let's turn to slide 17 to discuss some positive news.

In April, TELUS and the Telecommunications Worker Union agreed to the terms of a tentative collective agreement covering approximately 11,200 active TELUS employees nationally in TELUS' wireline and wireless business segments.

This agreement was made possible through a professional and thoughtful negotiating process undertaken by the two parties over many months.

A process that has set the stage for a positive relationship and dialogue into the future.

The TWU is recommending ratification to their members, and we expect the vote will be complete with a positive outcome in early June.

The tentative agreement includes compensation increases of 1.5% in year one, 2% in years two through four, and 2.5% in year five.

The terms of the current collective agreement will continue to apply until a new agreement goes into effect.

We believe this collective agreement is a progressive contract that reflects our competitive marketplace and balances the needs of our team members, our customers, and our shareholders.

Turning to slide 18, let's recap TELUS' recent announcement to deploy long-term evolution, or LTE technology for short.

This initiative is consistent with our strategy on technology evolution as explained when we announce the build-out of our HSPA Plus wireless network back in 2008.

TELUS expects to begin construction of its next generation 4G plus LTE network in the latter half of 2011 in major urban markets for commercial launch planned for early 2012.

TELUS' LTE network will operate on the advanced wireless services or AWS spectrum that TELUS purchased for that purpose in Industry Canada spectrum auction in 2008.

The launch of 4G plus over AWS spectrum is the first stage in the upgrade to LTE.

While service is expected to be offered in 2012 will begin the evolution to LTE in major urban centers, the potential rollout into urban Canada will be dependent on TELUS having an equitable opportunity to bid on and acquire 700 megahertz spectrum in the Industry Canada auction planned for late 2012.

700 megahertz spectrum in contrast to AWS spectrum has superior propagation capabilities that make it effective and efficient in covering Canada's expansive rural geography.

The investment in the 4G plus LTE urban build is consistent with TELUS' consolidated capital expenditure targets in 2011.

Let me now move to several regulatory issues of interest to investors starting on slide 19 with the review of the ongoing process related to the 700 megahertz spectrum auction.

In April, TELUS and other parties filed reply comments which are available through Industry Canada.

Access to 700 megahertz for TELUS would support truly innovative Broadband applications throughout Canada.

It will allow TELUS to play a leading role in bridging the digital divide between urban and rural Canada such that Canadians can benefit from Broadband wireless LTE technology.

TELUS believes the magnitude of this rural build can only be realized with a wireless provider of TELUS' scale, operational capabilities, and geographic reach.

And excellent track record at delivering successive technology platforms to Canadians throughout the country.

TELUS is the most spectrally efficient major carrier in North America on a megahertz per pop basis and has need for more capacity to support the phenomenal data growth being experienced.

Cable companies and regional carriers have financial resources to bid and be successful in an open auction and should not be advantaged by access to any satisfied spectrum.

In addition, TELUS is proposing that in order to ensure that 700 megahertz spectrum is utilized outside of key urban areas, there must be a transparent and determinant use it or lose it build-out requirement and should be invoked three years after licenses are issued.

Slide 20 provides an update on the 2.5, 2.6 gigahertz spectrum auction process.

In April, TELUS and other parties filed first round comments which are also available through Industry Canada.

Industry Canada plans to auction 60 megahertz of clawed back spectrum plus additional spectrum in Alberta and Atlantic Canada where Rogers and Bell through their Inukshuk partnership did not obtain the 2.5, 2.6 gigahertz spectrum previously.

The 2.5 gigahertz spectrum aligns with third generation partnership project standards for LTE.

Currently, Rogers and Bell have a de facto Canadian monopoly and a head start in launching mobile services in this band.

In fact, it's our position that Rogers and Bell should be restricted from bidding on the clawed back spectrum to allow entry and should be capped individually and/or together due to co-owned Inukshuk spectrum holdings.

Access to 2.5 gig spectrum would also allow TELUS to meet the anticipated data demand in urban locations.

Finally let me now provide a quick review of one or more regulatory issues.

Vertical integration, starting on slide 21.

TELUS commends the CRTC's recent 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 has scheduled a public hearing in June 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.

A recent survey by Harris/Decima found that an overwhelming 89% of Canadians support federal government rules that require all content to be made equally available to all distributors.

Such rules are required to ensure consumers can watch any program they choose under -- no matter which company they buy their TV, Internet or wireless service from.

The unprecedented concentration of market power created by vertical integration requires regulatory safeguards to protect consumers.

The potential for abuse in market power is real, and the risk to consumers is significant.

Without proper regulatory safeguards, consumers could soon be [facing] increased costs and reduced choice in their TV viewing options.

The TELUS proposed safeguards include -- distributors should not be allowed to withhold content from competitors.

Preferential or exclusive programming rights should not be permitted in Canada.

Consumers should not have to switch suppliers to watch their favorite shows.

Fees charged for programming service should be in line with the fees charged for other services of equal value to ensure consumer costs do not skyrocket and enforcement measures which address any competitive behavior in a timely manner and provide a disincentive for blatant breaches of the undue preference provisions.

Let me conclude on slide 22 with a summary of our first quarter results.

In wireless, revenue and EBITDA both increased by 11% reflecting outstanding ARPU growth of 3.7%.

Smartphone adoption continues to accelerate, driving data revenue growth of 44%.

In wireline, revenue growth was driven by strong data growth as well as the inclusion of Transactel operations.

Strong momentum in TV and high speed Internet loading continues and the improvement in residential NAL losses reflect the success of the Optik services and marketing.

Finally reflecting the continued confidence that TELUS has in its outlook for earnings and cash flow growth, TELUS' Board of Directors announced an increase to the quarterly dividend by CAD0.025, or almost 5% to CAD0.55.

Now let me turn the call over to Joe Natale next to make some comments around our operations.

Thanks, Bob.

Good afternoon, everyone.

I am going to provide some brief color around a couple of key trends we are seeing in our wireless and wireline operations.

Starting on slide 23.

We are pleased to see that ARPU increased by 3.7% due to continued momentum in wireless data revenues up a very strong 44%.

This was driven by the continued robust Smartphone adoption that we're seeing in the marketplace.

At the end of the first quarter, Smartphones represented 38% of our postpaid base compared to 22% a year ago.

We continued to benefit from our move over a year ago to HSPA Plus as well as its 97% coast-to-coast population coverage, and we continue to maintain and evolve this competitive advantage with HSPA Plus dual-cell as well as our planned evolution toward LTE.

Our competitive advantage is particularly important as we face competition from new entrants while churn increased slightly as anticipated now that the vast majority of new entrants are in market which was not the case in Q1 of last year.

We held our own with record Q1 gross loading and healthy postpaid net additions.

And this result was in spite of net additions being impacted by the loss of roughly 16,000 low ARPU federal government subscribers.

We continue to focus on winning and retaining high quality subscribers.

Earlier today at our AGM, Darren addressed our continued focus on operational efficiency as an ongoing corporate priority and outlined a number of examples of efficiency initiatives we have undertaken.

I would like to point out that in addition to putting us in a better stead to win and retain wireless customers, our philosophy, our mindset around clear and simple capabilities and customer approach have also had the impact of streamlining our offers, processes, and systems which drives efficiency.

Our clear and simple initiatives have included reducing the number of rate plans from around 30 down to 10, unlocking of postpaid SIM-based devices, data usage notifications, in-store learning centers, clear and simple device upgrades, and more streamlined device line- up.

By enhancing billing transparency and reducing complexity, we have made it easier for clients to deal with TELUS, at the same time improved efficiency through reduced calls into our call centers and by way of in-store efficiencies.

This, combined with smart marketing and managing controllable costs, contributed to the 11% wireless EBITDA growth.

Clear and simple is part of our future friendly customer promise, and we'll continue to evolve and execute on this strategy in the time ahead.

Now turning to slide 24, we are very satisfied with the continued strong momentum we are seeing in demand for Optik TV.

With 44,000 TV net additions in the quarter, we are pleased to see the pull-through effects it is having on our future friendly home strategy, re-accelerating high speed Internet loading, and helping us win back clients, and reducing residential now losses.

More than 95% of our TV customers that added Optik TV in the quarter either added or have an existing service bundle with TELUS.

As shown on the slide again and even more so than the two most recent quarters where this has been a trend, combined Optik TV and Internet net additions of 60,000 more than mitigated NAL losses.

They were up 88% year-over-year and almost doubled to 33,000 residential NAL losses.

Notably Optik TV and high speed Internet is now offered to 2.1 million homes in western Canada and eastern Quebec, or roughly 87% of households in our targeted markets.

And more than 60% of these homes are now served with VDSL2 technology which enhances the Optik TV experience by allowing our customers to record and play back their shows on up to 6 TVs in the home.

With three simultaneous HDTV channels for viewing or recording, higher dynamic Internet speeds, the VDSL2 overlay is planned to be completed this year.

We are excited about what we see ahead for Optik TV and the road map for Optik TV.

In the first quarter, we added Facebook TV.

This is yet another exciting interactive IPTV application following on others including Caller ID, Music Room, Santa Tracker.

Facebook TV is just another example of our ability to leverage IP-based Optik TV and the Microsoft media road map with much more to come.

Our success in the market with Optik as well as strong wireless operating results supported by the move to HSPA and driven by accelerating Smartphone adoption and wireless data growth underscores that more than ever before, we have a great tool set to leverage our valuable brand and operational capabilities to execute in our marketplace.

With that, let me turn the call over to Darren for some final remarks.

Thanks, Joe.

As a result of generating strong cash flow in the last decade, TELUS has accomplished two goals that at many companies are mutually exclusive.

We have as an organization consistently invested capital prudently in future growth opportunities while simultaneously returning significant amounts of cash to shareholders.

Over the last eight years, TELUS has delivered eight increases in the dividend and paid out CAD4 billion consistent with our dividend growth model.

In this vein, we announced today a 4.8% dividend increase starting with the fourth of July, 2011, dividend payoff.

Today's dividend increase is the third in the last twelve months.

Moreover, after conferring with our Board, I'm also pleased to be able to provide shareholders with additional clarity on our intentions regarding TELUS' dividend growth model.

Specifically, TELUS intends to continue with two dividend increases per year from 2011 through 2013 which we expect to be declared each May and November.

Consistent with my personal three-year goals regarding earnings per share and free cash flow growth, TELUS is targeting annual dividend increases of [circuit] 10% from 2011 through 2013.

This is consistent with our dividend payout ratio guideline of 55% to 65% of our sustainable earning.

Of course, actual dividend declarations will be taken each quarter by the Board, and they will be subject to the Company's financial situation and the outlook at that particular time.

With that, let's turn the call back to John for the Q&A portion of today's session.

Thanks, Darren.

Peter, can you please proceed with the questions for the queue for Bob and Joe and Darren.

(Operator Instructions) Our first question comes from Jonathan Allen, RBC Capital Markets.

Please go ahead, Jonathan.

Thank you very much.

And great news on the dividend increase.

Thank you very much for that.

I'm curious, and I don't mean to sound greedy, but I'm just curious on share buybacks.

There was no mention of it.

Should I assume then that you are probably looking just to reduce debt this year given the maturity that you have and make room for spectrum for next year?

And if that's the case, is there a possibility perhaps next year as debt leverage comes down that we might actually see a reintroduction of buybacks?

And how does that fit into your overall capital markets plan?

Also question for Bob, just a quick clarification.

The CAD16 million gain on the acquisition that you recorded this quarter, is that included as part of your revenue and EBITDA guidance for the year?

Jonathan, first question related to NCIB or share buybacks, I think the way you phrased the question the answer would be yes.

That would be a fair assumption to take given that there is spectrum auction rules -- a spectrum auction or two actually auctions to transpire in that medium term not to mention LTE build, et cetera.

We are focused on return of capital with emphasis on the dividend which Darren just finished enunciating.

As well, I would emphasize this quarter as you know we just contributed CAD200 million.

This is much more, I would say, astute or efficient use of capital than a mere NCIB from the standpoint that we have a deficit with respect to some of the pension plans.

By contributing it, it's tax deductible.

So therefore, we not only get the deduction and contribution but hopefully the superior investment gains will be garnered compounding tax-free.

So mitigating or lowering our contributions over time.

So that's where the emphasis is for the near-term.

In respect of the Transactel investment gain, this is a byproduct of IFRS so a bit of a learning, I'm sure, for most of us here.

That investment gain triggered by the fact that we had an existing minority interest then you make a stage two investment at higher value taking a control position, and therefore under the standards, you have to revalue the existing position at fair value and accordingly valuing that at our more recent investment triggered the CAD16 million gain.

And per IFRS, interestingly enough that's recorded as other operating revenue and flows down from there.

So given it's non-cash, obviously, in the nature that's why we adjusted for it in our disclosure and highlighted it in that fashion.

And in respect of guidance, the CAD16 million one way or another is largely irrelevant to the magnitude of our guidance range.

Okay.

Peter, next question, please.

Thank you.

Our next question comes from Maher Yaghi from Desjardins Securities.

Please go ahead.

Yes, thank you for taking my question.

I wanted to ask you on the TV product, Optik TV, you are seeing very great success in the marketplace.

Can you talk little bit how we should look at in looking at the margin improvements as you gain the customer base increases and you have a bigger top line to allocate for your cost and that business.

When are we going to see that we hit that curve where margins will start to improve substantially from where they are right now?

I guess it's indeterminate because I don't want to be flippant about it, but if you are really fast with subscriber gains, of course, accelerated TOA is dilutive up front if we slow down the growth on the Optik significantly and then grow it, for example.

We would get -- it would be much quicker in happening in the short-term.

So I know your question is more medium-term orientated but so obviously we are trying to build the economic value through subscriber growth knowing there is that short-term dilution.

We're not going to give specific guidance as to when we cross the threshold, et cetera.

I don't think that would be an appropriate thing to do.

But suffice it to say that since we are up 80% year-over-year, order of magnitude in our subscriber net add for the TV subscribers -- it has been associated with the dilutive impact.

I can say that in respect of the variable costs associated with adding those subscribers we have had efficiency gains.

We have had a revenue per subscriber gains as well.

We are actually pleased with the direction of whether it be the ARPU, the cost, and quite frankly, the churn.

Not only is it reduced year-over-year on our TV service, but our churn rate is reduced as you probably have seen on our access lines, on our Internet all of which in terms of subscriber results are benefiting from the bundled approach.

So the all-in economic model, if you will, of the bundled approach with the lynchpin being the TV service is certainly bearing fruit for us.

And consequently, we are excited about the prospects that continue this ramp-up and hopefully continue to have those positive trends in the metrics I just referenced such that it will be a contributor obviously of EBITDA and cash flow with the organization in the medium- to the long-term.

But for the near-term it would remain dilutive.

Okay and just follow-up to your discussion.

You had a great segue into my follow-up which is can you give a bit of some operational data related to -- what percentage of your video customers have two or three products with you at currently?

And what's your experience so far in attracting customers that on the video side that you have no services with at all either -- neither Internet or telephony?

Are you attracting basically video customers -- new customers to TELUS that don't have services currently with?

I will take that, Maher.

A couple of thoughts.

First of all strategically, our goal with TV is to own the home and to own the home in terms of all the services within the home, and therefore drive a greater both ARPU and AMPU characteristic as well as better churn overall with respect to where we do have ownership of the home.

And we're seeing that.

If you were to look at our churn statistics, you would see that where we have TV and a bundle in the home, we're doing very, very well.

And our ability to Bob's point to sell other services into that home is greatly enhanced because of that position -- that stake that we have.

In the world of entertainment, there are many different ideas and opportunities around revenue.

Whether it's on-demand revenue, whether it's special event revenue, whether it's other sources of revenue that we were contemplating for the future around entertainment in the home.

I think we have been very open about the fact that in this particular quarter 95% of the people that bought Optik TV either pulled high speed with it or bundled high speed to have with TELUS already into the overall package.

And we are seeing a terrific amount of win-back opportunities that are coming.

A substantial material portion of our Optik TV customers are coming back and bringing with them services that had left TELUS a long time ago.

We track that figure very carefully and very closely, and it is something that is certainly material in the overall look at this.

In terms of breaking it down further, I think that would be -- those would be elements of competitively sensitive information that I don't think would be in the best interest of our shareholders to really disclose the specifics of our various bundling strategies or our various bundling outcomes.

But suffice it to say that it is at the heart and center of our strategy, and you can see from the results in the last few quarters the actual outcomes that we've generated, not just in terms of TV, but high speed and now loss erosion.

Next question, please, Peter.

Thank you.

Our next question comes from Phillip Huang from UBS.

Please go ahead, Phillip.

Good afternoon.

Thanks for taking my question.

Rogers recently announced that they will launch LTE in four of the top cities later this year.

Now I understand you plan to begin building LTE in the second half of the year.

Do you think this could disadvantage you by giving Rogers a quarter or two of head start on attracting tech savvy customers who tend to generate higher ARPU?

Do you see the potential need to accelerate your plan on LTE?

And then, just a clarification on the stronger inbound roaming revenue.

I was wondering if you might be able to give us color on the drivers behind that?

Just because Q1 obviously is a cooler period so I would have thought the strength would be more evident later in the year.

Thanks.

The second question, I think it's just simply the greater volume as other carriers are adding Smartphones and therefore increasing their data consumption.

As they roam, they're consuming greater data resources in our network which is leading to our data roaming revenues increasing.

And keep in mind that while that trend is continuing on a North American cross-border basis, with the HSPA network we are increasingly getting a share -- or a piece of, anyways, the international roaming traffic that we didn't previously enjoy prior to the HSPA launch.

So I think that's a natural inflator that we would expect to occur -- reoccur in the foreseeable future.

In respect of LTE, we don't view technology as a press release or our press release was clear to explain the plan that we have to build out LTE starting in the second half of this year.

Launch starting in 2012.

In respect of what handsets, et cetera, are going to be available, remember, that voice over LTE is still quite [inascent].

In fact, there are not many devices expected by the end of year that would be operative on spectrum -- AWS spectrum.

In any event, we are quite comfortable with our position, and we are going to focus on our plan.

And then so we are not concerned at all with respect to a press release indicating one carrier starting earlier than another.

At the end of the day, it is going to be the execution, and I think the key point here is just as we built out HSPA into rural Canada, we would like to do the same.

It's a natural thing for us to do to satisfy our customer base.

But to do so is dependent on being able to have access to 700 megahertz spectrum, and that remains to be a policy outcome.

So we await the rule-making with respect to that option hoping that there will be an equitable platform to enable us to build out into rural Canada as well as the urban commitment to be made.

In the interim, we've just completed operationalizing HSPA Plus dual-cell, bringing our theoretical download speeds up to 42 megabits per second.

So I think it's incumbent upon this management team to execute against that network technology to the best of our ability.

Secondly, going from HSPA Plus dual-cell to LTE is fundamentally different than going from CDMA2000 to HSPA Plus.

Clearly, we don't need to launch LTE to access iconic devices or international roaming, and we can take a much more modular approach in ensuring that we are synchronizing the capabilities of network technology with a rich device set out in the marketplace that would be meaningful to customers, that will drive data ARPU in the direction that it's currently headed.

Got it.

Thank you very much.

Next question, please.

Our next question comes from Greg MacDonald from Macquarie.

Please go ahead.

Thanks, good afternoon.

You had a good quarter, and you can say that for both wireless and wireline.

I want to ask a question on wireless though even though it could be probably be asked on wireline.

Excellent gross loads in the quarter, up 14%.

Smartphone mix was fantastic.

Net adds for Smartphones were almost as much as the 4Q which is saying something.

And I think that gives us a good line of site on data growth on the strength there, and that I think really highlights the contract between the 11% wireless revenue growth in the quarter and the 4% to 7% guidance for the year.

I know you aren't going to comment on guidance this early.

Let me ask two questions related on this.

This the first is, is there anything -- and I'm thinking on the voice side in particular -- is there anything on the voice side on the second half of this year from a comparable year-over-year perspective that would lead to a worsening of trends?

I noticed that the first quarter year-over-year growth on voice ARPU is a little bit worse than what we saw in the fourth.

Is there a worsening trend that you want to make us aware of there vis-a-vis the guidance?

And then second, if it turns out that guidance is light, how do you think about guidance and when you might revise that?

I know you probably want to see the 2Q, but given how important the 3Q is, would you want to wait to see the 3Q before thinking about changing guidance?

Thanks.

Congratulations by the way, Greg, on a new role with a great firm.

So good for you.

Thanks, Bob.

To answer your questions -- thanks for the comment.

Basically, our orientation traditionally is to be very reluctant to change or amend our guidance after only one quarter of results.

Right now if there is a dramatic deviation one way or another then obviously we would do so.

But very dangerous.

I remember one year we actually reduced subscriber add guidance in Q1 and ended up finishing the year exceeding our original top end guidance.

Once burned, twice shy so to speak.

A good outcome, but we wish to avoid being too reactive.

And we are in an industry as you know here on the wireless side with just a tremendous amount of promotions, competitive activity going on in the marketplace, and so you have got to be wary about extrapolating too much.

Having said that, we are clearly on a nice trend with respect to the data, and I think just as our strong Smartphone loading in the fourth quarter portended a nice ramp going into the first quarter this year for data growth, our continued strong Smartphone loading is a positive factor for some continued momentum.

Having said that, we are seeing, as you know, a trend in the marketplace toward voice going flat rate with the flanker brands.

Various new entrant offerings, et cetera.

And some significant discount offerings in the marketplace even under flat rate that are -- seem to be geared more to just add subscribers perhaps for some sort of non-organic transactional event than they are from an economic business plan perspective.

So that sort of froth in the marketplace makes it quite difficult to project, if you will, or rely upon strengthening, if you will, on the voice ARPU.

So I think there has to be some caution there.

And accordingly, we've reconfirmed our guidance.

We'll take a look at things at mid-year.

That is a variable we can't control entirely on our own.

Joe's team has done tremendously well in terms of turning around that ARPU.

But having said that, I wouldn't suggest that we are going to bank 3.7% growth for forever more, and so we will take a look at things in the mid-year.

That's helpful.

Thanks a lot, Bob.

Next question, please, Peter.

Your next question comes from Dvai Ghose from Canaccord Genuity.

Please go ahead.

Yes, thanks very much.

If I could ask Joe a quick factual question, and if you will allow me I'd like to ask Darren a follow-up.

No big deal.

Joe, you lost the government of Canada contract.

There were 16,000 migrations to Rogers in the quarter.

Could you give us some explanation as to why you lost the contract and the financial impact?

Sure, Dvai.

Just a brief bit of context, we won the contract almost three years ago to provide about 80% of the wireless capability to the government overall.

If you were to sit in some of those meetings three years ago, you would have heard a spirited debate about whether we should even bid on the opportunity three years ago.

It was a low ARPU opportunity back then at roughly about CAD28 of ARPU.

We did a lot of gyrations around AMPU and tried to figure out a lower subsidy model.

We looked at all the G&A to support the account.

We satisfied ourselves that there was reasonably good AMPU, and was well worth the pursuit -- we could effect the low cost subsidy, low cost administrative support model.

When the government came back last year with a winner-take-all.

Certainly, it was a very heavily contested bid by the major players.

The level of price aggression that we saw from Rogers on that bid was something that was completely unprecedented.

And frankly, it was our conclusion that it wasn't worth having that business if it was going to be that uneconomical.

And the uneconomical nature of it is extreme to say the least in terms of where it's kind of ended up.

We lost about 16,000 subscribers in the quarter.

Total to deactivate in the fullness of time would be close to about 80,000.

The government has been very clear in terms of the savings that they've realized, and this is information that is available publicly.

They are out saying that they've saved at least 50%.

So if you take the ARPU we had and 50% you do the math very quickly in terms of where this thing ended up.

The subsidy model is something we just couldn't stomach.

We are committed very much to high quality subscribers.

We're committed to making sure to make the right economic decisions around the business overall.

If you look at the churn in Q4 of last year, it was 1.7%.

Roughly the same in Q1 of this year.

So we held churn steady despite what would have been -- what has been a 7 basis point impact by the government of Canada deactivations overall.

So it's something that we'll continue to bleed out through the rest of the year.

And as I said, our focus is on driving the right economic growth for the business and making sure that we bolster our business on that front.

Thanks.

That sounds reasonable.

If I could just sneak in a quick follow-up to Darren.

On the strategic front, there is a lot of conversation about over the top in Canada at the moment, and when I look at you versus some of your legacy cable and satellite peers, it would seem that you have two advantages when it comes to perhaps embracing OTT as opposed to fighting it.

Which are, number one, you don't have a lot of legacy TV revenues.

And number two, you have a full, two-way IP compatible network which is compatible with a lot of these OTT providers.

I'm wondering whether you can see OTT as a threat or as a opportunity?

It's both, Dvai, I think it would be fair to say.

Kind of the same comments we used to make previously as it relates to fixed wireless substitution and what was a challenge for us in our [highlight] territory and an opportunity outside of it.

You know, it's both.

Clearly we were in an advantaged situation because we are not a broadcaster.

We're a video streamer, and we can leverage that technology advantage to our benefit because we could in fact have limitless content.

We are not constrained by having to broadcast that limitless content.

We can store it and only broadcast effectively from a streaming perspective what the viewer wants to watch.

And that puts us in a very strong position.

Secondly, I think we can offer a bundling portfolio from voice to data, wireline to wireless.

Entertainment and the like.

That's going to be very difficult to match.

And then lastly, it's empirical evidence to suggest that there is a good chunk of OTT that's not necessarily substitutional but rather additive.

In fact, people leveraging OTT services but not canceling their entertainment connection with their incumbent provider or still pursuing first-run, bought opportunities with the incumbent but also exploring opportunities on the OTT front.

I think it's something that we clearly need to be cognizant of.

As a new entrant for once, we don't have the exposure that the incumbents have.

Nice to see the shoe on the other foot for a change.

And there are opportunities that come on the OTT front that are quite attractive to us whether it be within the Xbox domain.

Whether it be outside of our franchise territory.

Whether it be to a wireless device in an LTE world, there is a lot of things in the future for us to give due consideration to.

Similarly, as we grow our base we need to be cognizant of emerging threats along the way.

But I like the technology platform that we have right now in so far as video streaming and how it gives us access network efficiencies in pursuing an -- in theory a limitless content base.

That's extremely attractive to us.

I like the bundling aspects of what we can do.

In my view, that's quite powerful and if you look at the leadership position that we've achieved today as it relates to HD content we are second to none.

If you juxtapose us versus the competition.

Those are things that I think at the end of the day stand us in good stead.

And as I say empirically, I've seen some evidence that suggests maybe this isn't a substitutional as what people originally surmised and posterity will give us better adjudication on that as we go forward.

Thanks very much, and congratulations on the results and the appropriate sell price reaction today.

Thanks, Dvai.

Peter?

Next question is from Peter MacDonald from GMP Securities.

Please go ahead.

Thank you.

Can you talk about what led you to the dividend increase this quarter?

I think in December you said there wouldn't be one until the end of 2011.

And then as well on the new dividend guidance, I think you are unique in providing long-term guidance in writing as you have.

And especially if I consider Bob's comments with respect to your financial guidance this year.

Can you talk about why you're confident enough in your business to provide long term dividend guidance at this time?

Okay.

I'm not aware of a comment that was made that we would be increasing the dividend until the end of 2011 because retrospectively we did not give forward-looking guidance as it relates to the dividend.

Perhaps John Wheeler was into the alcohol that weekend and made a slight slip.

That's not something that we have done previously.

Number two -- .

Sorry, Darren.

(laughter) Number two, I think if you look back historically, we launched the dividend growth model about seven years ago.

And at the time if you go back and look at the scripting that we had on our investor relations calls, we actually were quite explicit in saying that dividend growth model the words -- the nomenclature are chosen quite explicitly to telegraph the fact that this is not a one-off increase to the dividend but rather an intention by the organization with the dividend growth model to deliver on sustained increases to the dividend.

And I think we did a pretty good job in respect of that in terms of habitualizing that behavior.

And we did eight successful dividend increases over an eight-year period, and I think that's pretty good going in terms of returning the CAD4 billion of cash that I alluded to previously.

And I think that track record, so to speak, that evidence has buttressed our confidence into what we believe that we can do going forward into the future.

And it's a little bit of -- the past being prescient in this regard.

Secondly, I have gone public and made a comment that the personal goals that I have for this organization supported here by the leadership team over the 2011 to 2013 time period is to strive to deliver earnings per share growth in the low double-digit zone and to do even better than that on the free cash flow front.

Normalizing for the two spectrum options, obviously, that we have to process as an organization.

And I felt that it was reasonably consistent with those goals to have a chat with the Board and say to the market -- we feel that we are in a situation where one-off investments aside, the sources of cash are going to chronically exceed the uses of cash.

And so we have a responsibility to return capital to shareholders in a prudent fashion, and that is what led to effectively telegraphing our intentions in terms of our dividend growth model over the next three years.

Also if you go back to the 2009 period where as we embarked upon our HSPA Plus investment which was a heavy lift for this organization, and we took a holiday on the dividend in 2009.

And then in 2010 we came back and instead of the one increase per year in the Q3 time frame as we had done traditionally and investors were acclimated to that.

We did two in 2010, and I think investors were curious as to what the mode of operation for the TELUS organization would be going forward.

Are you going to do one?

Are you now going to standardize on two as per 2010.

I think there was an appetite for additional clarity to be provided.

And that effectively is what we have done.

We said okay, we think twice a year works well.

We think it's consistent with our sustainable earnings.

It's a frequency that reflected good cadence of returning cash to shareholders, if you will.

And doing it twice a year versus, let's say, four times a year allows us to make the magnitude of the increase more meaningful, more palatable to the investment community.

Also doing it twice a year allows the Board a little bit more adjudication in terms of calibrating what the exact size should be versus doing it on a singular basis once a year.

There is not a hell of a lot of science behind this.

It's a subjective judgment that I discussed with the Board and garnered their support in that regard.

The other factor as it relates to the magnitude -- in addition to the fact that it's consistent with what I want to do on EPS growth.

And it's consistent with what I just professed in terms of sources of cash being greater than uses, spectrum auctions aside.

I think the goal that's been set out -- and it's guidance effectively what we are giving.

I think it gives comfort to investors such that when we do go through a technology upgrade on LTE not to have huge sense of trepidation that that is going to knock us off our path in terms of what we want to do in returning cash to shareholders and executing again our dividend growth model.

One of the things that I think is a unique attribute of investing in TELUS is the fact that our strategy has been so successful that it allows us to do two things that at most companies is truly mutually exclusive.

We have sufficient funds to invest in the key strategic investments that we need to make as an organization.

Be it Broadband wireline to support Optik TV and take our addressable market out to 2.1 million homes across Alberta and BC.

Or on the wireless front to make the investment in HSPA Plus, HSPA Plus dual-cell, and now on a prospective basis LTE -- to do all of those things to insure our long-term competitiveness in the marketplace.

But simultaneous with that to also carry on returning cash to shareholders.

And that's very much been our thesis in the past, and that's what you can expect from this organization in the future.

And I do think it's one of the benefits of not just a successful strategy, but the pure play approach that we have taken to telecommunications.

Our investments are all about our core assets and furthering our strategy in our domestic market.

That's the business that we know well, and our track record in the past I hope would be indicative of what we can do in the future.

Thank you.

Our next question comes from Matt Niknam from Goldman Sachs.

Please go ahead.

Thank you for taking the question.

My question is on wireless and the Clearnet trial offers that we heard about out west.

Wondering if you can give us some color on the potential reasons for considering launch of a new brand with Koodo already out in the market.

And secondly, any thoughts or lessons learned from what you have seen so far that you could share?

Thanks.

Sure.

It's Joe.

I will take the question.

We've always been a Company that's been intent on doing market trials of ideas from time to time.

And to be absolutely clear, the Clearnet activity you are seeing in the marketplace is nothing more than that.

It is a market trial in two very specific markets.

One in Red Deer and another in [Cologna] And we were looking at different mechanisms or different ways of bundling wireless to understand market reaction.

So it's purely research at this stage and may or may not materialize in a rollout of some sort or magnitude.

We believe that there is an interest in a simple mobile land line offer out there and rather than confuse the market by using the TELUS or the Koodo brand in doing so, we decided to take a brand that we had on the shelf from a rights point of view and make a couple of market trials happen and assess very carefully what we think the outcome might be and where it might go.

It's not going to have a material impact on the business.

It's included in our 2011 targets so it's not something that is pointing to any sort of other brand being launched or any sort of other fighter brand of any nature being launched.

It really is a market trial.

That's very helpful.

Thank you.

Peter, we have gone through our time so we will take one more question, please.

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

Please go ahead.

Thank you very much.

Looking at your progress on Optik TV over the last couple of quarters and comparing it to AT&T.

And so on a run rate basis, you are getting about a fifth of the subscribers they are, but they have got a footprint that's about 13 times as big.

So we were thinking about the reasons why you might be having so much more success.

They are on the same technology platform.

They got great customer service according to JD Power.

They are bundling, you're bundling.

Have you done any work to understand why you're having the success that you are?

Glen, I think the only answer could be the management team.

We will go with that.

(laughter)

We certainly have shared a lot of insight with AT&T around the product and around different marketing strategies and what's working, what's not working.

Road map, technology issues and the like.

Their penetration rate, if I remember correctly, they have got about 3 million subscribers, and they are above 14% or so penetrated.

They have been at it for a few years.

I think for us, we are very focused on this.

Is it primary to our central strategy as an organization.

We put all of our guns behind it.

It's not a very specific answer, I know, but it's the one I would offer up.

We'd have to spend a little more time with AT&T really comparing and contrasting at a much more specific level where we see the differences.

Okay.

Thanks.

And quick follow-up.

Glen, if you look at IPTV, I want to be really clear about this.

This is the antithesis of an overnight success.

TELUS began TV in the late '90s.

I got involved at the turn of the millennium, and we went through a tuition period that was pretty deep, I think it would be fair to say.

And we went through a series of middleware platforms from iMagic to Minerva to standardizing a media room.

I would say that tuition period was exactly that.

The success that we are experiencing today really does reflect our cumulative learning over the last decade.

Then number two -- you'll recollect -- our goal in coming into this market was not to bluster in, pull the price lever, so to speak and not really have something significant to dialogue with the customer about.

Out of the gate, we focused on better customization of the programming packagings to the viewing preferences of the markets that we were seeking to address.

And that was fundamentally differentiated from the incumbent, and I think that strategy resonated very well with our client base.

And when we come to market with something like PVR anywhere which allows you to efficiently, effectively, and through operational networking with your set top box topology in your home -- to enjoy the full benefits of PVR without having to experience the capital outlay on a PVR piece of CPE.

That's just fantastic and to have that and to be able to network it across your set top boxes there has been a lot of attraction to that amongst our client basis.

When you launch a product and you can offer the functionality of that product to the embedded Xbox base in your [highlight] market, it's another nice piece of differentiation that you can light up an Xbox because it has got the media room keys inside as a set top box, and we have driven very hard on that.

We pushed hard on the differentiation via Facebook recognizing that younger viewers today like to multi-task.

It's no longer singularly watching one piece of entertainment.

They want to be able to connect with their friends while they are viewing that entertainment.

We've had this strategic comparative tell us now for 11 years the number one imperative being to integrate wireless wire line capabilities together into a compelling solution while our remote DVR application does just that and to be able to go to our iPhone and Blackberry Torch customers or to our tablet customers and say when you are on the move you can access your Optik TV programming guide and manage that guide and record your sports or your movie series or something else as you wish.

And it's bending technology to people's lifestyles rather than the other way around.

And we've marketed those attributes quite strongly.

Next, people forget about piggybacking consideration.

You can have the greatest product in the world, but if you don't have distribution, you are going to have a great deal of difficulty getting into people's homes.

We've got a well developed, well-heeled extremely professional distribution topology in western Canada that came to fruition to support our wireless business.

Realizing the economy of scope to use that topology to support not only our wireless business but what we want to deliver on the entertainment front is a fantastic channel to market for us to be able to tap into.

Augment that still further with blacks, add that to our traditional call center channels -- be it domestic or overseas.

That's a nice chunk of horsepower for us to bring to bear.

Then lastly, although Joe was being facetious about management.

It is fair to say that his team -- Joe and the team -- have done a fantastic job executing in the hearts and minds of our clients.

And we have seen good take-up.

Our brand elasticizes beautifully to this particular service, and we are executing against client expectations which is why we are getting good adds but also excellent client loyalty and retention.

When you boil it down, people love the viewing experience as well as all of the technology functionality, and the push that we've had on HD content to say we are going to lead on HD content and leverage the power of streaming technology that we have with IPTV, well that has put us in a premium position.

And the results speak for themselves.

That's great.

Thanks.

One quick follow-up.

Retention spend down sequentially, but we saw last year that it marched up through the year.

Should we think of that as being a seasonal item?

Or is it really tied just to product upgrades.

Can you give us help on that?

Glen, this is Bob.

I will close out the call with this answer.

Basically it's a byproduct of a couple of things, Glen.

One is, the fact that we had no record -- both gross adds and retention volumes.

There was a volume element.

We also had the record adoption of Smartphones which is carry a greater subsidy.

So that was the other element in the quantum increase.

All of which is byproduct of two things -- the emphasis that we're having in terms of high value-added subscribers and Smartphone adoption driving our data revenue growth.

That's the intentional, proactive aspect to it, and the other is the reality of the marketplace.

Significant promotional activity and discounting hardware that was going on, we needed to participate in that to get the type of loads that you see.

So part of it is intentional, and part of it is a function of the market dynamics.

And the combination of the two is what led to the results.

So when you extrapolate to future periods, of course, we are going to continue the emphasis that we had for a number of years on the Smartphone adoption.

And it's playing out well.

On the other aspect, the extent to which you will have and to what extent you are going to have subsidization levels in the marketplace as a result of competitive activity.

That's very difficult to project, and I think that's a variable.

Thank you very much.

Thanks, Glen, for the last question.

Thank you, Bob, and thank you everybody for joining our call today, and we the executives and the IR team look forward to working with you in the coming months.

Thank you.

This concludes the TELUS Q1 earnings conference call.

Thank you for your participation and have a nice day.