Telus Corp (TU) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS Q2 earnings conference call.

I would like to introduce your speaker Mr.

John Wheeler.

Please go ahead.

Welcome, and thank you for joining us for our second quarter investor conference call.

This call is scheduled for up to one hour.

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

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

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

And let me now direct your attention to slide 2.

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

Accordingly, actual 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 securities commissions in Canada and the US.

Turning to slide 3 for an outline of today's agenda.

We'll start with introductory comments by President and CEO Darren Entwistle, followed by a review of the quarter by Executive Vice President and CFO Bob McFarlane.

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

Joe Natale, our Chief Commercial Officer will review key trends we are seeing in our wireless and wireline operations.

We'll then conclude with a question-and-answer session with Bob, Joe and Darren.

And let me now turn the call over to Darren.

Thanks, John, good morning.

TELUS' quarterly and year-to-date results clearly demonstrate the efficacy of our long-term proven strategy of focusing on national growth in wireless and data.

The execution of this strategy and the results we are generating reflect the payoff from the strong asset base TELUS has built through core investments in our wireline and wireless businesses, positioning your Company for continued success in the competitive Canadian marketplace.

TELUS is operationalizing and monetizing these assets for the benefit of investors, driving bottom-line growth and strong cash flow, and has announced today a CAD200 million to CAD300 million increase in revenue guidance of this year.

It is continuity of performance and momentum such as this, including stringent cost management, that gives TELUS the confidence to support the targeting of our dividend growth model out to 2013 as I outlined to you in May.

Let me turn the meeting over to Bob and Joe to take you through the details of TELUS' strong quarter before we begin addressing your questions.

Thanks, Darren, and good morning, everyone.

Let's begin with a summary of our wireless financial results on slide 4.

Wireless revenue increased by nearly 10%, network service revenues increased by 9%, reflecting continued ARPU and subscriber growth.

In addition, equipment and other revenues contributed to the increase by growing by 20% due to higher acquisition and retention volumes, higher proportion of smartphone additions and revenues generated from the clear and simple device upgrade program launched in November of last year.

In line with network service revenues, wireless EBITDA increased by a healthy 9%.

EBITDA margins and total revenue remained largely unchanged over the prior period at 42%.

We were pleased with this result given our record Q2 gross loading volume, along with the increased expenditures on cost of acquisition and retention, given the competitive market dynamics and increased smartphone mix.

Capital expenditures of CAD107 million corresponded to capital intensity of only 8%, which should ramp up in the second half of 2011 as we employ LTE technology.

Turning to slide 5.

We had decent total wireless net adds of 94,000, particularly considering that we lost 32,000 low ARPU postpaid subscribers associated with the federal government in the quarter.

Despite the government of Canada deactivations, we are pleased to see the ongoing strength in postpaid wireless subscriber net adds of 92,000, which represented 98% of total net adds.

Adjusting for the federal government deactivations, postpaid net adds would have been up 14%.

Overall, our total subscriber base increased by 6% year-over-year, with higher value, postpaid subscribers representing 82% of our overall customer base.

As shown on slide 6, wireless data revenue growth is accelerating.

In the second quarter, data revenue increased by an impressive 49%, or CAD132 million year-over-year to reach just over CAD400 million.

This is TELUS' sixth consecutive quarter of accelerating year-over-year data revenue growth and the highest growth rate in over two years.

This growth reflects strong smartphone service revenue and text messaging growth, driven by higher penetration of smartphones and associated adoption of data plans, more mobile devices that provide an Internet connection, including tablets, and higher inbound data roaming volume.

Data now represents 33% of network revenue compared to 24% a year ago.

We remain bullish on wireless data growth, given all these trends.

Slide 7 shows the metrics related to our wireless marketing and loyalty effort in the second quarter.

Gross additions of 447,000 increased by 34,000, with postpaid up 12% while prepaid was essentially unchanged.

TELUS reported industry-leading blended churn of 1.67% this quarter, which includes the loss of the federal government contract.

Normalizing for this, excluding the 16 basis point impact from this government contract, churn was 1.51%, a slight year-over-year increase reflecting the utility of our cost of retention investment.

Cost of acquisition per gross add increased by 8% to CAD370 due to high per unit subsidies from prior smartphone sales, increased pricing competition and to a lesser extent, higher commissions on the increased number of more expensive smartphones.

These factors were partly offset by an unfavorable one-time settlement of channel subsidies in Q2 of 2010 and a favorable US dollar exchange rate.

Cost of retention increased by 31%, reflecting increased sales mix of more expensive smartphones, higher retention volumes and competitive market dynamics.

Slide 8 shows the breakdown of TELUS' total ARPU between voice and data for the second quarter.

Wireless ARPU increased by a healthy 2.5% year-over-year as data ARPU growth of 39% exceeded a total voice ARPU decline of 9%.

Data ARPU now represents one-third of ARPU, up nine percentage points from last year, due to the reasons I mentioned earlier.

Overall, this reflects the third consecutive quarter of year-over-year blended ARPU growth.

Based on a strong start to the first half of 2011, and our expectations for the balance of the year, TELUS is updating its 2011 wireless guidance as shown on slide 9.

Given healthy ARPU and subscriber trends, TELUS now expects revenue to be in the range of CAD5.4 billion CAD5.5 billion, an increase of CAD200 million to CAD150 million over our original target range.

For wireless EBITDA our guidance range remains unchanged, reflecting the possibility of continued high COA and COR expenditures in the upcoming back-to-school and holiday season quarters.

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

Revenue increased by over 3%, reflecting data revenue growth of 14%, which offset continued declines in traditional voice local and long-distance revenues.

Reported EBITDA declined by 5% due to the aforementioned declines in legacy voice services as well as increased cost related to the expansion of OPTIK services and higher cost to support a larger customer base.

EBITDA margins declined by 2.6 percentage points to 30.5%.

Wireline capital expenditures increased by 17% to CAD349 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.

Slide 11 shows our continued TV success in the second quarter total TV net adds of 46,000 were up 59% year-over-year, while the TV subscriber base increased 77%, surpassing the 400,000 milestone.

We continue to pleased with the momentum in this business including improved customer churn and ARPU growth and associated pull-through benefits for our bundled Internet and local access services since the launch of the OPTIK brand a year ago.

Slide 12 shows high speed Internet loading over the last six quarters, and importantly, the strong loading achieved since the launch of our OPTIK brand in June of last year.

Notably this quarter we added 13,000 new highspeed customers compared to only 3,000 a year ago.

The strong loading is indicative of the success we're having with the pull-through effect of the TV bundled offers.

Slide 13 shows our residential and business network access line performance.

Combined residential and business line losses represented a 4.2% reduction year-over-year.

On an absolute basis, residential line losses continued to slow year-over-year by 39%, reflecting our enhanced TV bundling capabilities.

This is the fourth consecutive quarter of improved residential line losses and our best result in over five years.

Business lines increased by 7,000, reflecting the implementation of voice and data services for wholesale customers, partially offset by continued competition in the asset and the market and technological substitution.

To conclude the wireline segment, let's review our updated 2011 wireline annual guidance in slide 14.

We have raised the revenue range by CAD100 million at the low end, and CAD50 million at the high end of our original target range.

The increase reflects the strong growth in OPTIK services.

EBITDA guidance remains unchanged.

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

Consolidated revenue in the quarter increased by 6.4% over the same period a year ago, while reported EBITDA grew by nearly 3%.

Reported earnings per share increased by over 5% to CAD0.99, as I will explain shortly.

Simple cash flow decreased by 6%, reflecting predominately increased wireline capital expenditures.

However, free cash flow increased by 20% to CAD286 million.

Factors driving this result were lower interest paid, lower contribution to employee defined benefit plan, higher wireless EBITDA and lower income tax payments only partially offset by the higher capital expenditures.

Slide 16 provides a detailed breakdown of the components of reported EPS, including CAD0.03 of positive income tax related adjustments recognized in both periods.

Lower financing costs reflecting lower interest rates were resulting from the recent debt refinancing added CAD0.05 to the upside.

Normalized EBITDA growth, lower pension and restructuring costs, and lower tax rates each contributed CAD0.03 of EPS growth.

This was offset by prior depreciation and amortization expenses totaling CAD0.07, associated with the asset base as a result of recent capital expenditures including on assets with shorter lives.

Family, a higher number of outstanding shares lowered EPS by CAD 0.02.

Turning to slide 17.

I would like to take a moment to review TELUS' recent refinancing in May.

TELUS successfully issued CAD600 million of senior unsecured five-year notes at 3.65%.

The net proceeds were used in combination with increased commercial paper issuance, to fund the repayment of the maturing US dollar note and to settle associated cross currency interest rates swaps, which all in, had an effective cost of 8.5%.

This debt issue was the final of three [choses] TELUS issued over 1.5 years to refinance the last of the higher cost debt used to fund the acquisition of Clearnet 10 years ago.

TELUS' bottom line will continue to benefit from lower financing costs in future quarters.

Furthermore, we have created a manageable and well staggered debt maturity profile for the next nine years.

In addition, effective August 1, TELUS extended its CAD500 million Accounts Receivable securitization program to August 2014.

The previous agreement was set to expire in May of 2012.

Let's turn to slide 18 to review our revised consolidated guidance.

Today, we are revising upwards our 2011 consolidated revenue guidance range by several hundred million dollars based on our strong results year-to-date, in both segments of our business and our outlook for the rest of the year.

In addition, we are revising our capital expenditure guidance to approximately CAD1.8 billion from CAD1.7 billion, related to the deployment of wireless LTE technology in the second half of 2011 as well as additional success-based CapEx for continued OPTIK TV and high speed Internet loading and broadband network expansion.

The other guidance ranges remain unchanged.

Let me review one regulatory issue, vertical integration, on slide 19.

In June TELUS presented its views regarding vertical integration to the CRTC.

The hearing proceeded as TELUS expected.

At the direction of the CRTC, the independent distributors, including TELUS, [pochaco], Eastlink, Fastel, Mantobatel, and the Canadian cable systems alliance presented a proposed code of conduct.

The basic principles in this code include one, a probation an exclusive distribution of television content on any platform.

Second, access to content on commercially reasonable terms, the proposed code prohibits unjust discrimination, and provides examples of such provisions.

For example, onerous minimum penetration and packaging requirements.

Third, where a dispute arises, the complainant must be held harmless pending resolution.

This means content cannot be withheld or withdrawn during a dispute.

And fourth, we propose restrictions on sharing confidential information between broadcasting and the carrier side of the vertically integrated entity.

In addition to the code, TELUS proposed implementation of monetary payment into a fund to benefit the public interest by companies found in breach of the undue preference provisions of the broadcast regulations.

TELUS' proposal helps the commission find a way to tax those who breach the regulations by requiring that they pay back into the system.

TELUS has submitted that setting up such a regime should go a long way towards dis-incenting bad behavior from occurring in the first place.

TELUS expects the commission to issue its decision in the fall of 2011.

In the meantime, the commission has addressed the concerns of many by issuing a temporary policy decision which prohibits the withholding of signals which are the subject of negotiation.

Specifically, this temporary prohibition will remain in force until 30 days after the CRTC issues its policy on vertical integration.

Let me conclude on slide 20.

Overall, TELUS reported strong consolidated revenue growth of over 6% driven by both wireless and wireline, both driven by strong data growth.

Total wireless and OPTIK subscriber growth remained robust and the continued improvement in residential now losses reflects the success of the OPTIK services and marketing.

Free cash flow increased to 20%.

The board declared a quarterly dividend of CAD0.55 per share, a 10% increase from a year ago, which is consistent to our dividend growth model as Darren highlighted at our annual meeting in May.

Finally, TELUS increased its 2011 revenue and CapEx guidance, reflecting the momentum in both our wireless and wireline operating segments.

Let me now turn the call over to Joe, to make some comments around noteworthy trends in our operations.

Thanks Bob.

Good morning of Ron.

Let me provide some color around a couple of key operating trends, starting on slide 21.

We saw a robust postpaid wireless loading in the second quarter with good overall industry growth, the low penetration rate in Canada relative to other developed countries clearly continues to represent an attractive and ongoing growth opportunity for TELUS.

The 2.5% ARPU expansion in the quarter was driven by ongoing strong momentum in wireless data ARPU, up 39%, driving total wireless data revenue growth of 49%.

We are continuing to see very robust smartphone adoption, smartphones represented 61% of postpaid gross loading and 75% of postpaid retention loading in the quarter.

We saw strong sales in all major smartphone categories, including iPhone, BlackBerry, and Android devices.

IPhone sales alone more than doubled over the same period last year.

TELUS' smartphone base increased by 80% year-over-year and now represents 42% of our postpaid base, a 17 point increase compared to last year as we continue to benefit from our move to HSPA technology.

These are higher ARPU and lower churn subscribers who are also consuming increasingly more data services.

These continue to be very positive trends for our organization.

Now, turning to slide 22, we are again very pleased with the continued momentum in the demand for OPTIK TV, with 46,000 TV net adds in the quarter, and compared to our peers, OPTIK TV has been driving, leading North American IPTV penetration gains.

We're also very satisfied with the pull through effects TV continues to have on our future friendly home strategy.

Reaccelerating high speed Internet loading, helping us win back clients, and reducing residential now losses.

Among TV customers added in the quarter 97% either added or have an existing service bundle with TELUS.

As shown, combined TV and high speed Internet net ads of 59,000 greatly exceeded residential now losses of 31,000.

This is the fourth consecutive quarter we have seen this trend.

Second quarter combined TV and Internet net adds up 84% from last year and almost three times that of the previous year.

OPTIK services are currently offered to 2.2 million homes in western Canada and eastern Quebec.

And of these, 67% now have access to VDSL2 technology which enhances the OPTIK TV experience by allowing our customers access to three simultaneous HDTV channels for viewing or recording on up to six TVs in the home, along with higher dynamic Internet speeds.

We remain excited about ongoing TV momentum as well as the service road map ahead for OPTIK TV and the Microsoft Mediaroom platform.

Turning to slide 23.

We continued to be active over the last few quarters in evolving our clear and simple customer approach in wireless.

Initiatives have included a significantly reduced number of rate plans unlocking postpaid SIM-based devices, sending data usage notifications offering in-store learning centers, and providing a more streamlined device lineup.

In the second quarter we transformed contracts via device ownership agreements with inclusion of a device balance on customer bills.

This enhanced transparency allows our wireless clients to clearly see what is remaining on a device subsidy.

Clients wishing to upgrade to a new device mid-contract or end-of-contract simply have to pay off the device balance which declines over time as the contract progresses.

This is simple, transparent, and fair, allows TELUS to offer our customers flexibility while recovering device subsidy costs.

We have also significantly simplified and lowered international roaming rates.

International roaming is now a new revenue opportunity for TELUS, which will increase with the global adoption of HSPA devices and increased data usage.

It is not material in our current results so we do not face the risk of repricing our base.

This is an excellent opportunity given the very large market and one characterized by a elasticity of demand as the [Routers] monopoly continues to be challenged.

Also in line with our clear and simple customer approach, we have made considerable efforts to offer the best customer experience for key over-the-top service providers including Skype, Facebook, and RDO.

For example, our partnership with Skype allows easy use of Skype on smartphones and the ability to repurchase Skype credits through the TELUS billing relationship.

We've also announced the launch of the Skype Edition LG Optimus black, the only Skype edition smartphone in the Canadian market.

In addition to driving customer loyalty and competitive differentiation our clear and simple customer approach has supported enhanced efficiency through streamlined offers, processes, and systems.

Enhanced billing transparency and reduced complexity are making it easier for customers to deal with TELUS, at the same time improving efficiency through, as an example, reduced call volumes in the client care.

We see the clearance of both philosophy and its benefits as extending across our entire business, including future friendly home, SMB, and enterprise solutions.

In wireline for instance, we have simplified our product offering and pricing, and are working towards increased billing transparency and simplicity.

As another example, we are enhancing the customer experience with initiatives to significantly increase the number of two hour appointment windows and we'll offer this option to a majority of IPTV customers.

With that, I will turn the call back to John to start the Q&A.

Thanks Joe.

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

Greg MacDonald from Macquarie Capital.

Let me ask the question on ARPU, some interesting trends.

You've got a very similar impact to Bell and Rogers on the voice side of the business.

I'm going to make an assumption that, that is repricing the existing customer base as a retention strategy.

Could you tell me whether I'm correct in that or not?

And give us some insight if you can on the future trends there.

Is this now a double-digit decline segment of the business?

And then probably more importantly on the saving grace of the data side, this was a very strong ARPU number for data this quarter.

And I'm wondering, Joe, you mentioned that it was an equally strong iPhone quarter year-over-year.

Is that something unique to the second quarter?

I'm trying to get a handle on sustainability of what was a surprise on the upside in data, for me at least.

Thanks.

I will start off and if Joe wants to supplement, he is free to do so.

Greg, certainly on the voice side, there's industry-wide trends towards some reprice, but at the same time, the significant trend of substitution by messaging and other data services.

So, that would be reflected in our case, minutes of use, which is a voice metric as you know, is down 9.7% on an annualized basis.

So basically, the lower usage that's going on is primarily what is driving this phenomenon.

But there is reprice as well as that's occurring.

Okay.

So to add to that Greg, I would say a few things.

First of all, the number one driver of our ARPU growth has been smartphone penetration, to your point, and the data growth associated with it.

As I said in my comments, we are seeing a larger proportion of new customers adopting smartphones, 61% of our gross loading and roughly three-quarters of our retention units went to smartphones overall.

So you look at that momentum, I think it's fair to say that most customers in the marketplace want a smartphone.

If you look at the Koodo numbers, Koodo has only begun offering smartphones in the last couple of quarters, and we continue to add new devices to the Koodo lineup, including the iPhone, just recently.

And with that, we will see continued growth in loading on that.

But we are seeing the same metrics on the Koodo front with respect to smartphone loading as well.

So, that will, in a very significant way, continue to overcome the voice erosion that is there.

And the other day, we had 58% of our customers who were still on voice only or voice-and-text-type devices, and the opportunity [will persist] for quite a while.

With respect to the iPhone, I think it's momentum that we've been building on the iPhone.

If you recall, we launched in November of 2009, didn't make it into a couple of very important channels until March of 2010, where we hit Best Buy and Future Shop.

Momentum started building from there and as we developed the channel capability, developed the sales proposition even further, now added to Koodo, it's become an even bigger share of our smartphone loading and will continue to do so.

The economics around it on the subsidy side are challenging, as you know, but both from an ARPU and churn perspective, it's been very good for us.

Just to clarify, it is normal ramp?

There is nothing unique in the quarter that would describe a bump that you might not get on 3Q, 4Q, going forward?

No, to the finer point, it is a normal ramp.

There was nothing unique, no big loading, no big customer, just normal ramp of the business.

Dvai Ghose, Canaccord Genuity.

Obviously, your ARPU and EBITDA growth trends were quite in contrast to your two peers in your quarter, so following on from Greg's question, looking into Q3, you have some visibility and beyond.

Do you think these trends are sustainable and if so, why do think you are performing so much better than your peers?

And on the wireline side, tremendous growth in TV and pick up in growth of DSL, but significant dilution, obviously, financially over the last few quarters.

I'm wondering when you think the dilution will peak and what the drivers of improved profitability will be?

Thanks Dvai.

Talking about sustainability in a dynamic market where we've got intense competitive conditions is not something where you can be perfectly predictive from a forecasting perspective.

I do think that there are favorable characteristics exhibited by the TELUS organizations that we need to take cognizance of.

Joe did a good job alluding to the smartphone penetration currently standing at 42% of our postpaid base, with non-trivial upside opportunities still available for us to exhaust.

Clearly what you can see is the organization making judicious investments from a cost of acquisition perspective that are leveraging the strength of our brand and distribution to drive our smartphone loadings.

Complementing that, I think the TELUS organization, when you're looking at 11.9% cost of retention as a percentage of network revenue, is making a prudent but nevertheless significant investment in cost of retention with our voice-to-data and low-end data to high-end data smartphone upgrade programs.

And again the opportunity in that particular area is a significant in nature.

So I don't think we have fully plumbed the depths yet in terms of what we can do to further smartphone penetration and the level of data growth that typically accompanies it.

I think that's empirically evidenced with the 49% data increase that we saw, that more than offset the voice ARPU erosion that's reflective of the competitive market conditions within which we operate.

It's also pretty clear from my perspective, that the data growth buttressing ARPU I think is a trend that I would hope would be recurring for us into the future.

Joe's comments about Koodo, I think, are particularly important.

From what was a core basic brand, focused on the simplicity of an affordable value proposition, we've begun to feather into the Koodo portfolio, a richer portfolio of data devices that are driving a greater smartphone uptake for Koodo and the data growth that accompanies it.

And that has been a nice result for us to see in terms of not just the nominal level of Koodo loading, but the amount of smartphone uploading within the Koodo portfolio and the data growth that it is driving.

I think another characteristic for us that's worth taking consideration of is our client service, our loyalty, and retention.

If you normalize for our GOC losses, our churn in the quarter would be 1.51% which I think would only be about 5 [bips] higher than the previous year despite the competitive intensity.

When you've got a significant smartphone component to your line-up and you can couple that with robust churn, again, I think that helps to buttress the ARPU of the organization.

Other things that I think are notable characteristics for TELUS is, again, the strength that we have in terms of network coverage and the associated bandwidth with that network coverage on the wireless front, and a data centric world in terms of what we have done in HSPA plus Dual-Cell, supported by the network sharing agreement that we have in place to underpin our coverage, our bandwidth and how important that is for us in terms of supporting our future data growth aspirations.

Roaming, again, I think is another characteristic we're taking cognizance of.

We've talked frequently on the inbound front but clearly, with some of the price moves that we've made outbound is an opportunity.

I think there is notable price elasticity in that regard and that's a nascent opportunity for this organization.

Finally, I think it's fortunate for our organization to have an exposure to western Canada.

There are troubled economic times that the globe is navigating through, but I think over the course of time on average, the western Canadian economies are doing disproportionately well.

And it's nice to have an exposure to key verticals like oil and gas, that are significant users of wireless and the data applications that accompany those devices.

So maybe I will pass it over to Joe for comments that he might want to have on roaming or Koodo or any other insights in that regard.

Thanks Darren.

Just a few things.

First of all, on Koodo.

Darren talked about the smartphone side of it, but I think there's a broader comment I would like to make about Koodo and that is I think it's a very well-designed fighter brand.

From the point of view, if you think about the other flanker brands that are out there, Koodo has got a very lean operation, a very simple set of rate plans, a very simple device lineup, a very cost-efficient distribution system.

So when it comes to really fighting in the marketplace, not just against new entrants but also against the other flanker brands that has a pretty strong inherent capability, also given that it's backed by a very capable network with respect to coverage and overall bandwidth.

So Koodo is uniquely placed from that perspective.

The second thing I'd say is on roaming, the roaming market, both inbound and outbound, is about CAD800 million overall.

Roughly one-half of that is into the US.

The other half is international, and when it comes to the international portion, as I mentioned earlier, we are really nascent in terms of market penetration and share gain on that front.

You saw a pretty bold move by the TELUS organization this past quarter around really simplifying international roaming rates, slashing costs, to really drive some demand elasticity, and drive a better adoption on that front overall.

Data roaming is something that's completely nascent.

Most people, on an airplane recently, I heard a father admonishing his kids, telling them to shut off the data roaming on their devices because they didn't want to spend a dollar or a nickel doing so.

And if you look at the overall situation around data roaming, it's an opportunity that exists there properly executed upon, properly captured.

One thing I would say to add is just around channel performance.

We've got a very strong channel capability, whether it's our own exclusive stores, our dealer relationships, Koodo kiosks, our retail relationships, we are very well covered across every single province from Atlantic Canada, through Ontario through the West.

As a result, I think we've got an advantage that we'll continue to leverage on that front.

And the last thing and you have heard us say this before, but it's worth repeating, both the TELUS and the Koodo brand have very strong brand resonance.

On a regular basis, are called upon as being both likable brands and brands that people want to adopt because of the brand messaging around them.

The Clear and Simple movement that we have wrapped further around the TELUS brand I think will continue to strengthen that brand likability and that brand attraction which is very important in any consumer market.

That's where I will leave it there.

Dvai, what was your -- sorry, I forget, what was the other question --

I apologize for hogging the puck.

The question was about wireline dilution.

Thank you very much for your answers, by the way.

The wireline dilution, when do you think it peaks and what are the drivers for improved profitability, in particular on the OPTIK side?

Well, as Bob and myself have said, repeatedly in respect to this subject, the key on the wireline front is harvesting economies of scale.

If you look at the performance of TELUS in Q2, if you aggregate the HSIA loadings with TELUS TV, it's roughly 59,000 versus I think it was about 31,000 between HSIA and TV in Q2 of 2010.

So a very nice uptick on a year-over-year basis.

The key for us in this area in terms of harvesting the economies of scale is to continue to grow the base, we've gone over 400,000 now.

But as the base augments and we begin to get better economies over a fixed cost base, I do think that will begin to help mitigate wireline dilution at both the profit level on the P&L but also in respect of cash flow as it relates to the balance sheet.

The other complementing factor to the economies of scale being realized as the size of the TV and the future-friendly home base grows, of course, is going to be ARPU increases.

And I think that in terms of our OPTIK TV product, there is significant headroom for ARPU increases on a go-forward basis.

Two parts to that.

Number one is the mathematical headroom.

Right now, a relatively small base, we have a disproportionate number of our customers that are on promotional schemes that we used to acquire those customers in the first place.

As the size of the base grows, the weighting of those new customers will be less, and mathematically, have less of a drag on ARPU and support the ARPU increases that I have just referenced.

In addition to that, because of the rich feature set of the Mediaroom portfolio, we would expect that usage in respect of TV to grow in terms of value-added services, Video On Demand, and applications, because at the end of the day, in a data centric world, we are offering IPTV and we would expect to see applications grow not at the same rate, but not dissimilar to what we're seeing on the wireless side of our business.

And so that's a nice upside opportunity for us to look forward to harvesting and it's a complementary nature of a growing base with harvesting economies of scale, supported by ARPU increases that I think will allow us to see not just a profit contribution but a cash flow contribution.

Two other or three other factors that would probably worth quickly considering.

One is, as I've indicated previously in terms of my foreshadowing, we expect to have in the future a moderating appetite in terms of fixed capital cost.

We're always going to have a success-based variable component in terms of things like capitalizing set-top boxes but a moderating appetite as it relates to fixed capital costs associated with our TV business.

Particularly given that we are looking over the course of 2011 to conclude the VDSL2 deployment over the 2.2 million addressable homes that we have today on the OPTIK front.

The other thing that I think is important in terms of the economics of our business on the future-friendly home portfolio front is the synergistic nature of OPTIK TV with OPTIK HSIA.

95% or more of new OPTIK TV customers have our OPTIK HSIA, and to the extent to which you can harvest not just economies of scale but economies of scope, because you are offering the multiplicity of services over a fixed cost base, that again is attractive to the economics.

And then two concluding factors, Bob referenced this once again, we have a nice trend line, in terms of moderating NAL losses, I think we must be one of the few places in the world that actually celebrates losing customers but on an improving basis.

That is the reality of the competitive market that we are in.

Nice to see on the resi front, the best NAL loss result in five years, as Bob referenced.

And lastly, in terms of the economics of our business, I continue to be excited by the Mediaroom road map.

We have a lot of exciting value-based differentiated services on the product front, on the feature front, and on the client interface and service front coming down the pipe.

And again, I think that will help the economics because all of those services are being layered over a fixed cost infrastructure.

Phillip Huang, UBS.

Just wanted to ask you a little bit about on the wireline CapEx side.

I understand the CAD100 million increase CapEx guide this morning goes to support your LTE build but with Shaw now positioning their 15 Megabits per second plan as their standard plan, how do you feel about your current level of investment in your wireline network?

Do you see wireline CapEx intensity inching back towards the mid to high 20%, in the next couple of years?

And then just quickly on the roaming revenue, just wondering through the summer and spring travel season, what have you seen in terms of trends for roaming revenues both inbound and outbound?

Have you seen any notable year-over-year improvement now that you have established a base of HSPA subscribers and more carriers around the world on the same standard?

Thanks

Well, in general, we don't want to give too specific guidance as we look forward.

We have talked before, as Darren just referenced, in terms of moderating a fixed capital investments with respect to OPTIK, but I don't think it would serve our purpose is to granular with respect to categories, and the intensity that they equate to, but obviously there is significant opportunity for us to have a lower wireline capital intensity.

But I think before we just stop there, it's important to understand why we have a higher CapEx intensity in the first place.

That's a strategic decision that invest in the requisite network capacity and speeds to enable our OPTIK TV service to be realistically competitive and differentiate itself in the marketplace, knowing that there is upfront dilution, and free cash flow investment in getting to that position.

We feel and we continue to believe is the appropriate strategy.

And it's manifesting itself in the bundled performance whether it be access lines, whether it be Internet subscriber adds, whether it be obviously TV adds themselves.

And so it is working, but it, like most things in business, requires an upfront investment to get the longer-term return numbers.

We're coming out, we're not at the front end anymore, but we are approaching stage three out of 10, if you will, in terms of J-Curve evolution.

So we are getting increased contribution, but we are still investing a fair amount of money and I think it's the right thing to do strategically.

And you could argue we are ahead of the curve on a relative basis on that.

So less investment ahead of us, more behind us then perhaps for some others.

The second question you had was I think with respect to roaming revenue.

That would be on the wireless side now?

What was that Phil --

Yes, sorry.

It's roaming on the wireless side, just wondering both inbound and outbound, maybe some color on what you've seen now that your a year-and-a-half or so following your launch on HSPA.

Well, the first thing is, as you know, and Darren referenced -- or Joe referenced that on the launching of our HSPA plus network in the fall of 2009, we essentially broke along with [Bell], the former non-US GSM world international roaming monopoly that Rogers had enjoyed.

However, there is much more to it than just having some technology that enables international roaming.

One is, that was a newer technology, and so over time, of course, the GSM base that exists in other countries who travel to Canada are going to themselves upgrade to HSPA plus technology.

And the same trend will happen with respect to LTE down the road in the future.

And so initially, a very small percentage of that traveling base had phones which would work on our network, and when they do come in, even if we did get proportionate share, say roughly one-third, it would only be one-third.

Of course, being the new guy on the street, we needed to negotiate bilateral agreements and so, over time, we have been ramping up our international coverage to the point where basically any notable country internationally that Canadians travel to, we have a bilateral agreement with.

That provided the requisite foundation for Joe's team to then say, well, we have now negotiated reduced cost base on international roaming, we can now pass that on to the consumer dealing up a major source of customer frustration, and obviously, drive increased volume and share for our organization.

So that's what occurred there.

There are some macro things going on with the economy on cross-border where we are seeing a little less traffic than has been characteristic, at different phases of the economic cycle.

But at the end of the day, roaming for our organization is an accretive source for ARPU and we expect it to be so on a sustained long-term basis.

It's nice to be able to go through the J-Curve investments that Bob very clearly and accurately referenced and still at the bottom line, generate 20% free cash flow growth and support a dividend growth model.

Peter MacDonald, GMP Securities.

Before I ask my real question, can you give me some guidance on the effective tax rate for the rest of the year?

Peter, sorry, can you just repeat the question?

What is the effective tax rate for the rest of the year?

You've got to test my memory there.

I think in the MD&A where we disclosed the annual tax rate, we are at somewhere around a 28% effective rate.

But I would have to -- maybe we can follow up with you later.

It's hard to project an effective rate precisely on a go-forward basis.

I certainly know that we provided annual guidance with a range and so maybe we can follow up with you on that post-call.

Okay.

And then Darren, you referenced the strength in the West, and on Bell's conference call yesterday, they talked about a greater focus on the West and their healthy wireless ARPU.

Have you seen evidence of them being there?

And then just on the territory of coverage in the oil and gas sector, do you have an advantage in your coverage that other carriers wouldn't have?

Or is it -- or do you have equal coverage within those territories?

Thanks.

Couple of things.

In terms of Western Canada, we're not talking about perfect economies.

I think these are challenging times all around.

My comment was, on average, over the course of time, I think the Western economies have been doing disproportionately well, and when I look at some of the in-line economic factors, I would expect that, on average, again into the future to carry on.

That's number one.

Number two, certainly we see competition in the West, whether it's the Bell organization and their market activity or their retail presence, or I just have to go to work to see the Rogers Arena in terms of their branding being omnipresent.

I'm very focused here in terms of competition.

It's a competitive market and that's just the reality and I don't think areas in the West are too differentiated from what we see in the East, but I think we have a bit more of an advantage being the home team in the West, and I think for certain clients, that's quite important.

We have, without a doubt, a strong coverage map in Western Canada.

It's a heritage part of the business, something for us to be proud about.

But we've built on that strong wireless footprint across Alberta and BC and I do think as a result of that, we have a distinct coverage advantage in areas that are pretty critical to strong ARPU performance.

When you think about areas like northern Alberta and the strength of the oil and gas industry, I would say the strength of our coverage in our network performance in that particular region is second to none.

Because we made selective investments in that regard, and they paid off for us.

And when you look at our performance overall in areas like oil and gas, it's not just a singular approach on wireless, our wireline business has traditionally done exceedingly well within the oil and gas sector.

And as a result of that, it's been an area where we have been able to feather in wireless services within the oil and gas sector, and we have done very well.

And they are very high users, not just of wireless in general, but as it relates to data applications, particularly when you think of field forces, technicians, people, oil and gas workers and the like, and it's been a lucrative market for us.

The other thing, of course, at the end of the day is good for us when you think about our strength from the West through to East, we've got a network sharing agreement and we have leveraged that to good effect.

And it's allowed us to concentrate our build activities in the areas where we have got a geographic build responsibility in terms of the expansiveness of our coverage, and the technology investment that we make that supports a higher bandwidth experience, which is, of course, critical within a data-centric market.

I would say that, that the characteristic is unique to us versus some of the other competitors in the marketplace, and again, it's served us well.

So, I am pleased with the coverage footprint that we have.

I do think it's advantageous for us in the West.

I am pleased with our ability to address key verticals like oil and gas, not just on a wireless basis, but a wireless/wireline combination basis.

Again, that served us well and it's a competitive market, but I think our results speak for themselves.

Just one clarification.

Would the northern Alberta Wireless Network be part of the network sharing arrangement that you would have with Bell?

Yes.

Peter Rhamey, BMO Capital Markets.

Two questions, if I may.

The first one is on the mix impact on ARPU and second one is on revisit the wireline margins.

On the mix impact on ARPU, last quarter, I think there was some conversation with respect to thinking about postpaid.

You don't disclose that.

You disclose many other [high] drivers for your business but not that one.

Would it be fair to say, Bob, that the trend in ARPU growth in the quarter for postpaid was similar to that of the blended number?

Should we think about it from a different perspective that mix might be having an impact?

No, I would say to be more accurate, the ARPU growth came completely out of the postpaid side.

So postpaid ARPU growth would be greater than blended.

Okay, very good.

Prepaid ARPU decrease.

And then on a blended basis, so the postpaid numbers would look better than the blended?

I think we've -- if I could just add, we've, over the last few years, have done a very good job of upgrading prepaid to postpaid customers, we're now it's a steady and regular flow, albeit largely been harvested as an opportunity for us.

So we don't have the massive mix shifts that may come in any particular quarter because of that movement.

That is good to hear.

Second question I have is, I heard from Darren's answer on the wireline margin issue.

Putting it all together, it sounds like your margin compression, you would attribute almost 100% to your growth initiatives that you have undertaken over the last year; IPTV, HSIA and not to repricing of legacy services in voice in the consumer or the enterprise segment.

Is that a fair way to look at that?

So the margin compression is that, as one likes to say, the J-Curve investment necessary to really ramp the growth parts of your business?

No, that's not accurate.

And the question I was asked was related to the TV business and the growth aspects, and when we would expect to see the J-Curve come to fruition as we go through an investment phase into a return phase.

If you look holistically at the wireline business, we have dilution not just coming from the new growth initiatives that we talked about, but we have the traditional factors that are driving margin compression, in terms of pricing re-rate, or looking at network access line losses.

At the end of the day, we have posted a very good result mitigating network access line losses, but when we lose a customer on an access line front, the margin associated with that customer is very significant in nature.

So we've got the traditional characteristics, of incumbent telcos, on a global basis in terms of probably three things.

One would be technology substitution, so to the extent to which people are sending e-mails rather than picking up the phone to make a long-distance call, we've got a technology substitution there.

To the extent to which we see fixed wireless substitution, which on a national basis would tell us as a net positive, but within the ILEC region in terms of impacting wireline, it's a negative in terms of wireless/wireline substitution in that space.

And then we have the final factor, which is both the re-rate, so re-rating our base to keep our customers because of technology substitution or competitive intrusion into our traditional market, or network access line losses.

And we worked our way through that, and we think we're doing reasonably well in that regard compared to others, but that's just a fact of life within our business.

Two things I think are probably worth mentioning.

In addition to how well we are doing in mitigating the network access line losses, when you look at the re-rate that we have absorbed, the repricing of our legacy or heritage voice base, I think we have made more progress than our peers in terms of working our way through that re-rate.

And I think that fills me with a bit more confidence in terms of the resiliency of the business on a go-forward basis.

And then lastly, I would draw your attention to comment that I made at the very outset, a fact of life within our business used to be uniquely true to wireline, it's now true for both wireline and wireless given what's going on in terms of voice ARPU, is diligent cost management and durability to habitually take costs out of the business year in and year out.

And this is an organization where we posted the stats, quite a few times, but we are an organization that, on a run rate basis, has taken CAD1 billion plus on a recurring basis out of the OpEx line of this organization, and it's driving continuous cost efficiency programs of that nature that are required to support both the J-Curve dilution associated with our growth initiatives on the wireline side, and the traditional factors that are impinging upon our margins and our profitability that I have just articulated.

Jeff Fan from Scotia Capital.

Thanks very much.

Just a quick clarification and then the real question.

The clarification is on the wireless EBITDA.

You guys show growth of 8.7%, but I'm wondering if we should be adjusting that CAD11 million credit, supplier credit to get to a 6.5%.

I'm wondering if that 11% was already included and we should adjust it?

And then the question around wireless going forward is when we look at the bigger picture here, the EBITDA growth has been very healthy, but we're also seeing CapEx growth really outpacing EBITDA growth it seems in the first half.

And with CapEx going up with LTE, I am just wondering if this is a new reality for the wireless business, and whether that impacts how you think about the wireless business' ability to subsidize what is going on the wireline side?

I'm not sure how to react to the second part of the question.

In fact, I find it somewhat bizarre.

We had 8% CapEx intensity, within a wireless basis, so when one benchmarks that on an international basis, it's pretty hard to find a healthy firm that is lower than that.

I am not aware of any.

So if the question is are we concerned about CapEx on wireless exceeding the EBITDA growth, the answer to that would be no.

Of course, if one wants to look at a narrow period of time when one is building a network like we built the HSPA plus network, yes, CapEx was higher at the point than EBITDA growth because you're building a long-term network.

I would expect the same thing to occur in a shorter duration with respect to the LTE upgrade.

But then to extrapolate that into a permanent situation, I think would be a mischaracterization of the dynamic for us or for others.

In terms of the supplier credit, treat it as you wish.

It's a supplier credit, it was earned, they are earned, there are numerous ones.

We do get credits virtually every quarter.

They were notable in this quarter so we disclosed them.

If you want to normalize that in EBITDA and then you will have to go and boost up our prior EBITDA though, I guess, for prior periods, but in any event, it really doesn't matter to me too much how you view that other than it was earned and we disclosed it.

And we will probably have more credits in the future.

Thank you.

Jeff, you can normalize for starting Q2, 32,000 nets in the whole as a result of the single largest wireless contract with the GOC move, and the investments that we needed to make in COA and COR below 32,00, to get to zero before we could actually incrementally start adding customers.

There are gives and takes on this front all the time as Bob just alluded to.

Fair enough.

Just back to Bob's comment.

I'm just looking at the CapEx increase for wireless in the first half from last year to this year.

That went up 15% and your EBITDA growth was roughly 10%.

This is just based on a period when you're actually not investing in LTE yet then you're enjoying prior year's investments, so I'm just looking at those trends based on the last couple of quarters.

I guess since my answer wasn't sufficient to drive the point home, and I'm not sure if you need -- given that there may be others in the audience that don't get this trend, we launched our HSPA plus network on November 2009.

So there was minimal expenditure going on throughout the early part of 2010 as you can imagine, having just launched a brand-new network as Eros took his team.

We had a little bit of a breather and we had all capacity just loaded into the fixed cost upfront network.

So then you go a year forward and you're at an 8% CapEx intensity.

I wouldn't be upset if it was at 10%, for example.

So to look at our growth rate from year-over-year period independent of where you are on a CapEx intensity, I would say would be an erroneous approach to looking at trends.

Okay, Peter.

We've gone through our time.

We'll take one more question, please.

Thank you.

Adam Shine, National Bank Financial.

Thanks a lot.

It's very early days, obviously, with respect to some of the moves announced by Shaw in the last few weeks if not months just with respect to ARRIS Gateway making its way into Calgary, Edmonton, back in June and coming to Vancouver as well as some of the changes that it's made to its Internet plan, announced in early June.

Any quick comments in terms of how the dynamic there may not be changing with respect to early Q3 trends perhaps?

Sure.

First of all, Adam, it is very early days for Shaw's ARRIS solution, yes, it's been launched in market, but I will hearken back to the comments that Darren made with respect to the TELUS OPTIK TV road map and future capability drops.

You will see in the fullness of time just what we are so excited about.

But there a series of capabilities and strengths that are evergreen from that perspective with respect to applications that are coming out, capabilities that are coming out, the ability to view programming on different types of devices and the list will go on.

So from that perspective, I see the ARRIS solution, I see it's static capability at this stage of the game, overall.

Shaw, at the end of the day, is the largest cable provider to adopt the ARRIS solution.

If you look at Mediaroom, Mediaroom has 8 million customers around a global basis and some of the largest service providers in the industry are creating an ecosystem around it that is quite formidable.

If you look across what's happening in Europe right now and the US with Mediaroom, we are all leveraging it and helping each other out from that perspective.

So I look at it and I feel still very bullish about all that OPTIK TV has to offer.

And the characteristics around OPTIK are very evident in our results this past quarter with respect to not just the loading but its impact on pulling through Internet loading and its impact on stemming access line losses overall.

With the conversion of VDSL2 capability, and offering a more ubiquitous 25 Meg profile, we think it offers a very capable and at this point in time, very sufficient speed profile for our customers because they can fully leverage the TV viewing, or they can dynamically access that bandwidth within the home fully when they are not utilizing it for TV viewing.

And don't forget, we are still building fibre to branded communities, and we are building ethernets to the suite and offering 100 Meg service in the vertical landscape of cities like Vancouver where more and more of the homes are showing up in condos rather than typical subdivision developments.

So we feel that we've got a capability on that front.

There's no question that Shaw has been aggressive in the marketplace.

We saw some discussions statements a few quarters ago from the analyst community from Shaw around not being promotional in nature or really being focused on the personalize-your-plans that were out there.

As of the last number of months, we have seen more aggressive activity from the Shaw organization on that front.

But we fully expected that to happen, given some of the success we have been seeing on the TV front, and as I started the conversation, I will go back to it.

We are very excited about the road map that's ahead of us on OPTIK.

And if you haven't had a chance, Adam, to get a full demonstration of OPTIK TV, we would love to have you come into one of our innovation centers.

We've got one in Toronto, we've got the capability in Montreal and certainly in the West, to show you what OPTIK is all about, and give you a flavor of what's coming down the road around OPTIK.

And you'll see what we are excited about.

That's right, Joe.

In the interest of time, I'll throw one very quick one at you on the wireless front.

Just with respect to Koodo, Darren obviously talked about adding smartphones to the equation, but going to the other side of the equation in the context of, it was a few weeks ago, including long-distance within the context of the Canada-wide plans.

Is that a change in the strategy with respect to how Koodo is going to be used to fight the new entrants?

Because it looks as though on this particular aspect, you seem to be leading, let's say, Fido and Solo, who otherwise seem to be facing greater competition in Quebec and Ontario.

Sure, I would be happy to address that very, very quickly.

I'm getting the sign, I'm getting the hook here, so, but --

We can do it offline if you would like.

Do we have time John to address it?

Sure, just quickly.

Just quickly.

We did it for the very point you draw, Adam.

One is, it is our fighter brand, and both against new entrants and some of the flanker brands, we want to leverage our most competitive strength, which is the quality and capability of our network.

We felt that for a lot of consumers, the complexity of zone-based pricing, [ended up] zones, was both cumbersome and worrisome.

In fact, our research showed that they would feel more comfortable with a broader based plan, but what we did do in the meanwhile, was we took text out of the bundle and made that an additive feature.

What we are seeing within our plans overall, seeing customers adding text back in or adding some of the other service bundles back in.

We are getting at the very worst, ARPU neutral effect from it.

But we are actually expecting to see some level of ARPU accretion coming from the change in plans overall.

But don't forget one very important thing, Koodo, unlike the other brands that are out there has a fixed subsidy of CAD150 given the Koodo tab.

So inherently within the rate plans is understanding that the subsidy will never exceed that amount.

And when you compare them against rate plans and offerings from some of the other flanker brands that are out there, you're up against offerings that are including a full subsidy on some very expensive devices.

So we think it's great from a customer perspective.

We think it's good from an overall economics of the business, very strong AMPU, and very reasonable ARPU output or impact of what we're seeing.

And it will help us with respect to the fighter brand profile that we have for Koodo in the marketplace.

Thank you very much, Joe, and everybody, and so at this point we will thank you for taking time today to join us and we appreciate your interest and continued support of TELUS.

And this will be the end of the call.

We look forward to working with you in the coming months.

Thanks.

Ladies and gentlemen, this concludes the TELUS Q2 earnings conference call.

Thank you for your participation and have a nice day.