Telus Corp (TU) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS Q3 earnings conference call.

I would like to introduce your speaker, Mr John Wheeler, please go ahead.

Welcome and thank you for joining our third-quarter investor call.

The call is scheduled for up to one hour.

The news release on the third quarter-financial and operating results and detailed supplemental investor information are posted on our Web site, telus.com/investors.

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

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

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 United States.

Turning to slide 3 for an outline of today's agenda, we will start with a brief opening comment by President and CEO, Darren Entwistle.

This will be followed by a review of the quarter by Executive Vice President and CFO, Bob McFarlane.

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

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

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

Let me now turn the call over to Darren.

Thanks John.

Good morning, everyone.

TELUS has clearly delivered strong third-quarter and year-to-date results.

As Bob and Joe will highlight, robust sales in SmartPhones, Optik TV, and high speed Internet are offsetting the legacy service challenges supported by wireless data growth of 53% and wireline data growth of 15%.

I attribute this superior performance to TELUS's steadfast focus on strategic investments in our wireless and wireline broadband infrastructure, which is clearly providing the foundation for superior customer services and solutions and results.

I'm confident that these operating and financial results will provide TELUS with momentum well into the future, which is contemplated by the dividend growth model announcement I made in May.

Supported by bottom-line double-digit net income growth, I am pleased that today we are delivering to shareholders the second of 6 targeted semi-annual dividend increases out to 2013.

The annual dividend increase for 2011 now stands at 10.5%.

Let me turn the meeting over to Bob and Joe before we take your questions.

Thanks Darren and good morning, everyone.

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

Total wireless revenue increased strongly by 9% and network revenue increased by 8.6%.

This was driven by both ARPU and subscriber growth.

In addition, equipment and other revenues grew by 14% from higher sales and upgrade volumes of more expensive SmartPhones.

Wireless EBITDA increased by nearly 7%, while EBITDA margins on total revenue declined slightly to 40.5%, or 44.2% of network revenue.

We were quite pleased with this result given first, our record Q3 gross loading volume and the consequent increased cost of acquisition.

Secondly, the loading was positively skewed to the more valuable post paid subscriber.

And thirdly, the higher retention investment is driving industry-leading churn and ARPU results, all achieved in a very competitive market.

Consistent with our planned investments for the back half of 2011, capital expenditures of CAD157 million increased by 39% year-over-year.

The increase reflects our urban LTE build out underway, which remains on track to launch by early 2012.

Notably, even with the LTE build out, this represents a low CapEx intensity of 11%.

Simple cash flow was almost unchanged as increased EBITDA offset the higher CapEx.

Turning to slide 5, TELUS generated very respectable total wireless net additions of 114,000, particularly considering that, during the quarter, we deactivated 19,000 low ARPU post paid subscribers associated with the federal government contract loss.

Despite these government of Canada deactivations, as well as the nature of competitive activity, we are very pleased to see the ongoing strength of our post paid wireless subscriber net add at 133,000.

Which is, essentially, unchanged year-over-year.

TELUS post paid net adds represented greater than 100% of total net adds given that pre paid subs decreased by 19,000.

Consequently, the post paid to pre paid mix of net adds for Q3 was very strong for TELUS, increasing the total subscriber base to 83,000 post paid.

Interestingly, adjusting for federal government contract losses, high revenue post paid net adds would have actually been up by 15%.

Slide 6 shows the metrics related to our wireless marketing and loyalty effort in the third quarter.

Gross adds of 472,000 increased by over 1% with post paid up nearly 9%, while pre paid was down 15% as we continue to focus on the high value and lower churn customers.

TELUS again reported industry-leading blended churn of 1.67% this quarter despite the loss of the federal government contract.

Excluding the 9 basis point impact from the government contract, churn would have been even lower at 1.58%.

In line with industry experience, cost of acquisition per gross add increased by 17%, to CAD397 due to higher per unit subsidies from higher SmartPhone sales, including price competition and, to a lesser extent, the higher commissions on increased volume of the more expensive SmartPhones.

COR increased by 21% reflecting increased sales mix of more expensive SmartPhones, higher retention volumes and competitive market dynamics.

Of course, the beneficial effects of TELUS's COR investment is being reflected in our leading churn rate just mentioned, as well as contributing to our excellent ARPU growth.

Slide 7 shows the breakdown of TELUS's total ARPU between voice and data for the third quarter.

Wireless ARPU increased by an industry-leading 3% and reflects the fourth consecutive quarter of ARPU growth for TELUS.

Notably, post paid ARPU increased by 3.1%.

These results reflect year-over-year data ARPU growth of 44% which exceeded the revenue impact of a total voice ARPU decline of 10%, reflecting some substitution of voice MOUs by data communication.

Data ARPU now represents 35% of ARPU, up9 points from last year due to the reasons mentioned earlier.

As shown on slide 8, wireless data revenue growth is showing an accelerating trend.

In the third quarter, data revenue increased by an impressive 53% which equates to CAD153 million year-over-year increase.

This is TELUS's seventh consecutive quarter of accelerating year-over-year data revenue growth.

This growth reflects strong SmartPhone service revenue and increasing text messaging, 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 34% of network revenue compared to 25% a year ago.

Given the trends and drivers just outlined, we continue to remain quite bullish on ongoing wireless data growth.

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

Revenue increased by nearly 4% caused by strong data revenue growth of 15%, which offset continued declines in traditional voice and long-distance revenues at 7% and 11%, respectively.

Reported wireline EBITDA declined by 2% due to the declines in legacy voice services, as well as continued pressure related to the expansion of Optik services.

EBITDA margins declined by 2 points to 31.4%.

Wireline capital expenditures decreased by CAD23 million, or nearly 7% to CAD313 million.

This outcome reflects higher prior-year investments for broadband network expansion, partly offset by investments for the success of Optik services and Internet data centers.

Simple cash flow was up 20% year-over-year to CAD85 million from lower CapEx.

Slide 10 shows our continued TV service success in the quarter.

The Company added a record 50,000 new TV customers, an increase of 32% year-over-year, while the TV base increased by 70% to surpass 450,000.

We continue to be pleased with the momentum in this business, including improved customer churn, good ARPU growth, and the pull through benefits for our bundled Internet and local access services.

This last point is demonstrated on the next 2 slides.

Slide 11 shows high speed Internet loading over the last 7 quarters and clearly this step increase in loading since the launch of the Optik brand in June 2010.

Reflecting the pull through effect of Optik loading this quarter, we added 22,000 new high-speed customers compared to 15,000 a year ago.

This is the best quarterly result in over 3 years.

Slide 12 shows our residential and business now performing.

Again, these results demonstrate the benefits of Optik and its bundling capabilities.

On an absolute basis, residential line losses continued to slow year-over-year and improved by 23% over last year.

This is the fifth consecutive quarter of improved residential line losses.

Business lines declined by 13,000, reflecting continued competition in the small-medium business market and some technological substitution.

On a combined basis, residential and business line losses represented a 4% reduction year-over-year and this was the best result since the first quarter of 2009, 2.5 years ago.

Notably, the residential line loss of 30,000 in the third quarter was the best result in 5.5 years.

Putting this all together, let's look at TELUS on a consolidated basis starting on Slide 13.

Revenue in the third quarter increased by 6.5% over the same period a year ago, while reported EBITDA was up by nearly 3%.

Reported earnings per share increased by 28% to CAD1 and I'll explain the drivers in a moment.

Free cash flow before dividends increased by 2% to CAD345 million.

The factors generating the increase were lower interest paid, lower contribution to employee defined benefit plans, higher wireless EBITDA, partially offset by higher CapEx and cash restructuring payments.

Slide 14 provides a detailed breakdown of the components of reported EPS, including CAD0.03 of positive income tax related adjustments recognized in the third quarter of last year.

Unfavorable non-recurring items recognized during the third quarter of 2010, including the loss on early partial redemption of our June 2011 US dollar notes and the CRTC deferral account decision, were responsible for CAD0.12 and CAD0.03 of the change respectively.

Notably, lower financing costs due to the lower interest rates from a recent debt refinancing added CAD0.06 to the upside.

Lower pension and restructuring cost contributed CAD0.05 to EPS growth and normalized EBITDA growth and lower tax rates each contributed CAD0.01 to the upside.

These positive contributors were partially offset by higher depreciation and amortization expenses totaling CAD0.02 associated with the larger asset base as a result of recent capital expenditures and acquisitions, as well as including investments and assets with shorter lives.

Finally, a slightly higher number of outstanding shares lowered EPS by CAD0.01.

As announced earlier today, based on our continued confidence and our prospects for earnings and cash flow growth in 2012 and beyond, the TELUS Board of Directors has approved a CAD0.03 quarterly increase to CAD0.58 per share for the January 3, 2012 dividend payment as outlined on slide 15.

The dividend increase represents a 10.5% increase over the dividend paid in January 2011.

This represents the second of 6 semi-annual dividend increases targeted to 2013, and is consistent with the May announcement of semi-annual dividend declarations to 2013, was clarified to TELUS dividend growth model for shareholders.

Turning to slide 16, in November, TELUS completed a new 5-year CAD2 billion bank credit facility expiring in 2016.

This new facility replaced our pre-existing committed CAD2 billion credit facility that would've expired in May 2012.

The new facility will be used for general corporate purposes including the backstop of TELUS's ongoing low interest cost commercial paper program.

Notably, we enjoyed wide participation with 15 North American financial institutions, led, not surprisingly, by the 5 Canadian major banks.

The success of the facility was facilitated by our strong credit rating and our track record of adhering to clear financial policies and targets, including our net debt EBITDA ratio of 1.8 times, as at quarter end.

Finally, let me review one important regulatory issue, vertical integration of content ownership as seen on slide 17.

In September, the CRTC released its much anticipated policy framework to address concerns regarding vertical integration in the broadcasting industry.

The new policy ensures that consumers will have greater access to television content on all platforms regardless of their service provider.

The commissions regulatory framework includes the following elements, a prohibition on offering television programs on an exclusive basis which applies to all platforms including wireless and Internet.

A code of conduct for better business practices which sets out what constitutes commercially unreasonable terms.

And availability of CRTC dispute resolution when necessary, and no head starts or withholding of signals when disputes arise.

TELUS was pleased with the decision and believes the commission's new policy protects consumer choice and ensures competition in the TV distribution market.

Let me conclude on slide 18.

Overall the third quarter reflected outstanding operating performance across the board.

Not only was revenue and profitability growth impressive, relative to North American telecom tiers, but the strong subscriber growth, ARPU and churn results bode quite well for the future.

Finally, we have confirmed TELUS's 2011 full-year guidance.

Let me now turn the call over to Joe Natale to make some final comments on noteworthy trends in our operations.

Thanks, Bob and good morning, everyone.

I'm going to provide some color around key operating trends starting on slide 19.

We saw very strong post paid wireless loading of 133,000 in the third quarter.

This was up over last year and accomplished in spite of intense competition in the key back-to-school selling season, the loss of 19,000 subscribers on the federal government contract, and continued expansion by the new entrants.

TELUS continues to focus on high-quality subscribers and this is evidenced in our ARPU momentum with the fourth consecutive quarter of year-over-year growth.

The 3% ARPU expansion was driven by strong ongoing momentum in wireless data revenue, up 53%.

We continue to generate very robust SmartPhone adoption.

SmartPhones represented 70% of post paid gross loading and compared to 38% a year ago and 79% of post paid retention loading.

Total SmartPhone sales of just over 597,000 were up 75% compared to 342,000 last year.

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

TELUS's SmartPhone base increased by 80% year-over-year, a very significant 20-point increase.

We continue to benefit from our move to HSPA, as well as acquisition and retention investments we are making.

As a result of these investments, TELUS reported industry-leading churn, flat with Q2, improved slightly from Q1.

Normalizing for the government contract, Q3 post paid churn was 1.2%, flat with the third quarter last year.

Overall, our investors are seeing the continuation of very positive trends in our wireless business.

Turning to slide 20, we are very pleased with strong momentum and demand for Optik TV.

With strong TV net additions of 50,000 in the quarter, Optik TV continues to drive the leading North American IP TV penetration gains.

We're also seeing positive momentum on Optik operating metrics.

Particularly noteworthy is increasing ARPU on the larger base driven by customers coming off introductory pricing, as well as the basic TV or centrals package CAD3 rate increase and CAD2 increase in high-speed Internet, both implemented in April.

We also remain very satisfied with the pull through effects of TV on our future friendly home strategy.

Accelerating high speed Internet loading, helping us win back clients and reduce residential now losses.

Among TV customers added in the quarter, 98% either added or have an existing service with TELUS.

As shown here, combined TV and high speed Internet net additions of 72,000 exceeded residential now losses of 30,000 by a factor of more than 2 times.

This was the fifth consecutive quarter we have seen as an extremely encouraging trend and the best loading for high-speed Internet in over 3 years.

We remain very excited about our TV momentum, as well as the service road map ahead for Optik TV on the Microsoft Mediaroom platform.

Look for TELUS to continue to differentiate from our TV competition in the coming quarters with new IP-based applications for TV, a refresh of our VOD service with significant enhancements feasibility, fresh new HD channels, and soon the capability to view some of your Optik TV content across multiple screens such as tablets, PCs and SmartPhones.

Turning to the next slide, in line with our cost-cutting initiatives over the last many years, we continue our efforts to take costs out of the business and improve operational efficiency in order to fund growth and SmartPhone adoption and Optik TV momentum.

In addition to driving customer loyalty and competitive differentiation, our clear and simple customer approach also supports greater efficiency.

We take somewhere in the range of 40 million customer calls each year at a cost of CAD8 to CAD12 each.

The reduced number and simplified rate plans, as well as clarifying and simplifying how customers can upgrade their devices, are starting to drive a decrease in calls into our call centers.

This is also supported by enhanced in-store capabilities, which is learning centers.

We are finding that a more intense focus on getting customers into the right device and plan from the very beginning avoids costly calls into customer care.

Handset, and TV set top box and gateway procurement is another area where we are achieving efficiencies as we negotiate based on greater scale and using competitive bidding processes earlier in the product lifecycle.

We're also leveraging Web channels for e-billing to help customers research buying decisions and enhance self-serve capabilities, resulting in call offloading.

This should allow us to offload an estimated 2 million calls this year alone.

We also have multiple process improvement initiatives underway ranging from empowering call center agents to handle more complex calls in order to reduce the number of call transfers to business process projects.

These are often small, self funding projects, but in aggregate, add up to considerable efficiency enhancements.

Notably, year-to-date, we have reduced our average call per SmartPhone customer by 40% and the average call rate for TV customer in excess of 50%.

On slide 22, let me turn let me turn to SMB and enterprise for a moment.

Building on our unique ability to offer integrated services, in October, we introduced the TELUS business freedom bundle, a wireless and wireline communications services for small and medium-size businesses in BC and Alberta.

2 flexible packages are offered with no long-term commitments, anytime device upgrades and changes of services, 24/7 technical support and one bill.

This is anywhere for mobile employees who need capabilities outside the office, and business selects for those that primarily work in a single location or have minimal mobility needs.

We feel well-positioned in the SMB space with our strong innovative capabilities and the ability to leverage wireless as a part of that overall package.

In enterprise, as announced in September, TELUS was chosen to provide telecommunication services to the government of British Columbia, with a 10 year CAD100 million a year contract.

Under the contract, TELUS will continue to provide services to the province and its public sector partners, and will extend advanced wired and wireless communications infrastructure into urban and rural BC communities.

We are very pleased with this renewal and expansion, which represents a strong testimonial to the leading capabilities and value of TELUS solutions to enterprise customers.

With that I will turn the call back to John for the Q&A session.

Thanks Joe.

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

Yes, thank you.

You're first question comes from Maher Yaghi from Desjardins Securities.

Please go ahead.

Yes, thank you for taking my questions.

And I wanted to come back to this very strong growth and better revenue in your wireless business.

If you can provide the growth and the better ARPU -- if you had to split between the increase in SmartPhone users as a percentage of your subscriber base, and between the higher data packages taken by existing customers, is there a way to split it between the 2?

Maher, I'd say, not really, because they are generally coincidence.

When people, in terms of voice to data upgrade -- so someone is on voice to voice upgrading to a SmartPhone, or subscribing for a package, an airtight package that includes data capability that they previously didn't have.

So, the adoption of SmartPhone is coincident very often with the increased subscription.

Next is the propensity to use the data is enhanced by now having a SmartPhone, all the functionality.

So, people become more familiar with it, start using and downloading apps, and that sort of thing.

The usage of those apps and, therefore, data, increases.

So, often people are generating to incremental revenues associated with that on the data side, sometimes offsetting a little bit of voice as well.

When you do that, the net effect is very positive.

So, it is really, I don't think, a practical thing.

Certainly we aren't able to say, here's the percentage from the SmartPhone separate from data consumption.

Okay, and that's exactly what -- I'm trying to see -- are you seeing a propensity more and more from your clients who have already a SmartPhone to increase their data packages as they use the product even more?

And, do you think that, that propensity will probably continue to lead to an improvement in the data percentage growth in ARPU?

Other than just existing customers upgrading to a new SmartPhone, are you seeing more and more that are being generated and helping ARPU for existing SmartPhone users?

I'd say the factors you cited are all contributors; so the answer would be, yes.

And yes, I guess.

And then I would say that if you looked at data consumption, so megabyte per user per month or whatever period you want to measure, it is on a steady increase; and that is for all subscribers or those that have SmartPhones.

So, that goes to point that the adoption of SmartPhone tends to get a data lift; having a SmartPhone for a while, using more apps, you tend to use more data.

And then, when you upgrade to, say, a new iPhone 4S or something which has greater capabilities, you tend to see data consumption increase.

And all those are associated with data ARPU.

So, they are all contributors.

Our next question comes from Phillip Huang from UBS.

Please go ahead.

Thanks for taking my question.

Good morning.

Continuing on the wireless topic, it is great to see the strong data growth, and it is hard to criticize the ARPU, but just on the voice side, the decline continued to accelerate.

I was wondering if you see the trend stabilizing in the next couple of quarters, given we saw Rogers starting to show some early signs of stabilization on the voice decline.

No, I don't see it stabilizing.

It actually increased this quarter, so I wouldn't say, therefore, it is stabilizing.

I think the increase is associated with the data increase that we have.

We are leading the industry in terms of the adoption of SmartPhones and data revenue growth; so clearly some of that usage is substitutional for voice.

So, I wouldn't say I see it subsiding.

At the end of the day, what is really relevant to everybody is that the net effect is accretive.

Accretive effect, that we are leading industry in ARPU growth, and I think that's what's relevant for investors.

Great.

Okay.

And I know you don't disclose post-paid ARPU, but is it fair to assume that it grew in the quarter as well?

Actually, in my remarks I did mention that our post-paid ARPU increased by 3.1%, so I gave it very precisely.

Sorry I missed that.

Thank you.

Thank you.

Our next question comes from Greg MacDonald, Macquarie Capital.

Please go ahead.

Good morning guys.

Another question on data ARPU if I could.

I forget whether it was Bob or Joe who made reference to the mix of subs; SmartPhone subs being skewed towards the high end.

A lot of investors out there worry that as penetration rates rise, and you are closing in on 50% now, that customers will start to skew more towards the lower end.

Could you give us a little more color on what you consider high end; and is there anything you could tell us, whether it is ARPU-related or whatnot, that would give us a sense of what the marginal SmartPhone customer is coming in at?

Just to help us understand what medium-term upside is for data -- number 1.

And number 2, no iPhone 4S impact in the Q.

What's your sense of the pent-up demand for that product, and just verify that there are no supply constraints that you have for that product?

Thanks.

Okay, I will take that, Greg.

To begin with, with respect to the SmartPhone customer, SmartPhone economics is still very, very strong for us.

We are seeing ARPU north of CAD90 for new SmartPhone customers coming on board.

In terms of what is high end -- high end really comes down to a combination of the quality and capability of the device, and the usage that, that customer puts forward that device.

Some of it is coming from the base of voice customers we have already, as they become more comfortable with the idea of a SmartPhone.

But some is also coming from people who are entering the category for the first time.

Look at the back-to-school selling season, we are seeing a whole demographic segment of people entering the category for the first time with quite an appetite for data usage and for SmartPhone capabilities.

So overall, my belief is that we will continue to see very strong SmartPhone economics for the foreseeable future.

We will see as it hits very high penetration rates, but at 48% we've got a long way to go before we get to a point where we feel that we have saturated the opportunity ahead of us, and the opportunity is quite large for us, in fact.

With respect to iPhone inventory, we've got very strong and solid inventory management practices in place that we have established over the last few years.

Worked very closely with Apple to make sure that we have inventory, not just as an overall quantum, but in the right locations across our thousand-plus points of distribution.

I think we've done a very good job of that.

The teams have done a good job of that.

We have not had any stock outs in the last little while, and we are going to manage it very carefully as we enter the Q4 selling season, which will have the typical volume and intensity that we see through the period.

And any sense of pent-up demand for that product?

Like people delaying purchase decisions, for example, in 3Q to wait for the 4S?

No question, we're seeing a lot of demand for the 4S, both with respect to customers that are new for the category and customers that are looking to make an upgrade.

But, no question the 4S is a device that's well sought after.

Great, thanks very much, Joe.

Go ahead, Peter.

Thank you.

Our next question comes from Dvai Ghose, Canaccord.

Please go ahead.

Thanks very much.

Good morning.

Given your success with Optik, Shaw has responded with media gateways which are now subsidizing.

They have reverted back to promotional pricing.

Is this having any impact?

Obviously, your numbers in the quarter were very strong on both TV and DSL, but is this having any impact subsequent to the quarter?

And on a related point, you talked about how ARPU in TV is growing; scale is, obviously, growing.

When do think that the losses being incurred by IP TV, both expense as well as capital, are going to peak?

Okay, why don't I start, and maybe Bob, you can pitch in on the second part of the question as well.

Dvai, we've not seen a significant impact from Shaw's Arris solution.

I think that's pretty clear in our results, having a record quarter for TV loading overall, and all the associated benefits that we talked about.

Shaw has been aggressive throughout Q3.

They launched their 15/15/15 6-month offer through a bunch of direct mail and targeted campaigns early in July, and that promotional offer has been on and off throughout the Q3 period.

I think at the end of the day, our success is driven largely by our premium products and the exciting road map that's ahead of us, both current capability around Optik and what's to come.

And customers recognize that.

We will watch very carefully for the competitive dynamic, as you would imagine we would.

But we have not seen any significant impact from the Arris solution to date.

We continue to enjoy the benefit of the product we have in market.

Thanks.

Just relation to the question, Dvai, on TV economics and profitability trend -- we are, obviously, going the upslope of the J-curve in terms of heading quarter-over-quarter to improved economics and contribution from the TV.

It is being stalled somewhat because of the magnitude of the loading and, therefore, the increase in the COA associated with that.

But if we look forward to 2012 in exact numbers, I think we will find that the accretion from the base is greatly exceeding even the loading levels, and we should be heading to stronger contributions period-over-period from the TV product.

Okay.

Thank you.

Peter?

Next question comes from Glen Campbell, Merrill Lynch.

These are great numbers.

Joe, I just wanted to clarify your answer to the question about SmartPhone ARPU.

Are you saying that the ARPU is CAD90-plus on average for the base, which would be a good number, or are you saying that is CAD90 for the incremental customers coming on which I think would be a great number?

It is CAD90 for the base, Glen, but we are seeing numbers reminiscent of that for new customers coming on.

Okay, thanks very much.

Depending on the segment and the type of handset they pick up along the way.

Okay.

Don't forget as well -- it is not just about new customers coming on, but it is also customers that are making that upgrade.

Bob talked about voice-to-data upgrades being an important part of what's driving our overall ARPU economics, and economics of the business as a whole.

There are also a whole bunch of customers that were on first-generation SmartPhones that didn't have the best data capabilities, whether it is Internet browsing or using applications; and even as we make a data-to-data conversion for some of those first-generation SmartPhone customers, we are seeing good uplift in ARPU as a result of that investment.

Okay, that's terrific.

If you look at -- okay, thanks, Glen.

My follow-up was on wireline capital products for 2012.

And I appreciate it is too early for numbers there, but could you talk generally about the sorts of investments you want to make in wireline next year?

Beyond the maintenance and the IP TV success-related capital, can you talk about what you want to do with the network and other big capital items for 2012?

Glen, it is a little early.

The answer to the first comment is, yes, it is early.

We're going to have our guidance call ready, as you know, in December, where we will be focusing on the year ahead as opposed to the period just finished.

So, don't have a lot to say.

But from a category perspective, we have Internet data center, IDC for short, investments going on related to the tremendous demand for hosting and related services.

We have, of course, the significant ongoing broadband build out, and I would say CapEx for enterprise deals wouldn't see that necessarily increasing.

But we do have, as Joe mentioned, the significant contract with the BC government that we have landed recently.

So, there's some CapEx associated with that project.

But those would be, top of the mind, some of the categories.

And of course we've got our JV development of a new head office facility, where we are on the real estate front, that's a nice project for us as well.

Okay, that's helpful.

And you mentioned, it was one of the items being the broadband build out -- it seems that the FTTN footprint is in quite good shape now.

Could you sort of just talk in qualitative terms about what you'd be looking to do next year?

Glen, I think in terms of getting to that we will focus on the next year in our guidance call, where that is the focus; as opposed to this call, where it is really on the results in hand.

And I do appreciate your opening comment very much.

Thank you.

Okay, thanks.

Our next question comes from Peter Rhamey, BMO Capital Markets.

Please go ahead.

Great.

A couple questions if I can.

1 on competition -- cable has been moving up market in the SMB space, and I'm wondering, you mentioned that you've got a new bundled offering out in the SMB space.

But what is the status of competition when it comes to your company?

I think it is faring better than many at south of the border.

Second, my sense is that new entrants are not all that active in your Western territory.

I was wondering if you saw a marked increase in their competitive activities, particularly towards the back half of the quarter?

Thanks.

Sure, Peter.

It is Joe.

I will take the question.

First of all, with respect to SMB, I think it is fair to say that SMB is an important segment to us as an industry and specifically to TELUS.

The competition for SMB really is largely between ourselves and our cable competitor.

Yes, there are some other resellers out there, but in the scheme of things, from a materiality point of view, they don't have the significant impact in the sector as the 2 primary competitors.

We've done very well in the last little while in SMB, both wireless and wireline.

We are seeing good growth in wireless of new customers.

We are seeing strong ARPU characteristics with SMB customers, and we're seeing an expansion of our distribution network to support that as well, across the country.

With respect to wireline, there's no question they has been line lost to our cable competitor in wireline.

But in this past year, we've seen that line loss stabilize and hit a very kind of stable level throughout the last few quarters.

And it is through a series of efforts that we've managed to achieve that.

1, of course, is certainly bolstering our loyalty and retention capabilities directly aimed at what's important for small business customers.

Secondly, is launching different bundling opportunities in the marketplace.

Really, it is culminated in this bundle I just talked about, the Business Freedom Bundle, which I think is unique and comprehensive in that it includes both wireless and wireline.

It allows customers to flexibly choose their needs with respect to number of lines, wireless or wireline; to add services on top of that, whether it is desktop, backup, or recovery for their PCs; their infrastructure; whether it is hosting their Web site.

It is a fairly comprehensive set of capabilities that we are offering to SMB customers on a utility basis, on a per seat utility basis.

It comes with simplicity and clarity in the offer and it comes with 1 bill.

So, we have great aspirations for that bundle and what it will mean to the segment overall, and we are very pleased with where it is going to take us.

And wireless side, any new marketing initiatives by the new entrants?

New entrants were very aggressive throughout the back-to-school period; I would say remarkably more aggressive than they were a year ago.

If you look at the rate plans they had in market, the handset plans and discounts they had market, they certainly were a step above in terms of aggressiveness than we saw in back-to-school in 2010.

There's no shortage of competitive activity in the wireless sector.

I think as an organization we've done very well.

Our results speech for themselves with respect to not just the loading, but also the churn characteristics.

There's no greater cure for wireless economics than strong and healthy churn.

It takes the pressure off of gross loading to generate a good net result.

Keeping a customer is the most profitable and economic alternative to having to woo a new customer and the associated upfront economics of getting that new customer.

So, we are very pleased with the outcome, but there's no question new entrants have been as aggressive and, in fact, more aggressive across the country this past season; and through a combination of the power of our brand, our promotional activities, the power of our distribution, the strength of our team, we've done very well.

Great, thanks, Joe.

Our next question comes from Jeff Fan, Scotia Capital.

Please go ahead.

Thanks very much.

My question is on the data revenue strength.

When we look at your numbers compared to some of your peers -- with similar SmartPhone subscriber growth, you guys are generating a lot higher data revenue growth.

So, everyone is going out to SmartPhone.

What are you guys doing, whether it is in the campaigning, geographical segments, or even customer segments that's driving the success?

Because 53% data revenue growth is quite impressive, especially compared to some of your peers.

Appreciate the question, Jeff.

I think some things are better left not discussed in terms of competitive intelligence.

We are, obviously, having superior results to our competition, and that isn't by accident.

But I don't think we need the details as to why, but clearly we are a marker in terms of what can be achieved in this area.

Maybe just a quick clarification, then, on the SmartPhone ARPU.

Joe, you mentioned CAD90 -- can you talk a little bit about the trend, either sequentially or year-over-year?

Is that stable, increasing, decreasing?

Can you just give us some color?

I don't think it would be wise to talk about those specific trend and where that's headed overall.

I think that's, to Bob's comment earlier, competitively sensitive information in terms of the trend and also where it is coming from.

The 2 are tied in terms of the answer.

Jeff, I think it would be not a good thing to talk about on this call.

Fair enough.

Thank you.

Our next question comes from Peter MacDonald, JMP Securities.

Please go ahead.

Thank you.

Your access line and Internet customer numbers were very good, especially when I compare that to the results of your peers.

And you talked about the Optik pull-through, which I assume makes up for most of it.

I guess if I was going to ask a couple questions on it, are there any other contributors that you want to highlight?

Maybe it's the economy or wireless substitution in the west, maybe there was some changes there?

And then when I look at the same sustainability of the improvement, should I be using this quarter's NAS improvements as a base, or did Optik make this quarter a bit of a positive anomaly that we shouldn't be putting too much attention on?

Thanks.

Sure.

First of all, with respect to our performance on Internet and home phone services, I think it is fair to say that the lion's share of the shift we've seen has come from Optik TV and Optik TV bundling.

As I mentioned in my comments earlier, 98% of our Optik TV orders are either coming with double, triple play with it -- win back if you will -- or customers are bundling their current teleservices within that overall offer.

And on top of that, we are seeing a material proportion of customers who had long ago left TELUS and had no services whatsoever with TELUS, coming back and bringing all services back.

Our focus on TV has not just been about entertainment -- certainly we have entertainment product that is best in class, and we are doing very well with it.

We are leading penetration of IP TV, not just in Canada, but North America as a whole.

If you look at what's happening at Verizon and AT&T U-Verse, our penetration gains are the highest in the industry.

But the point of TV was always to protect the home and bundle the home and secure the home as a totality.

And that's exactly the effect that we are after.

The offers we have out in the marketplace, the training of the channel, and the people that are selling this product are all aimed at driving that bundling.

The anchor to the home is TV and Internet, and our focus will remain in keeping that all intact.

Are there other factors?

There are some other factors, but they are small in comparison to the impact of Optik TV.

To supplement Joe's good comments -- I think as Joe was getting to, you need to slice it right between residential and the business on the now decline, and in spite of increased competition, as referenced in the comments in the SMB and business space, we are holding well there.

On the residential side, the phenomenal improvement that we've experienced, as Joe mentioned, is really directly attributable to the success of the bundling offer with TTV.

TTV in the business space is rather nascent; it is a material fact in our residential side.

So we have the same type of trends in terms of wireless substitution.

Hard to argue that, say, downtown Vancouver has a different propensity for wireless substitution, or less than Toronto.

I would think it would be higher given the density of condos and so forth.

Obviously, rural territory is a little different.

So, I think that the results are not reflective of different demographics or substitutional effects.

I think that the results were reflective of the more advanced strategy with regards to the integration of IP TV into a bundle of local and Internet.

And Bob, do you think that, that trend continues for a number of quarters, so I could look at the really strong improvements on the residential NAS part and say that, that can be continued in my forecast going forward?

Certainly trend analysis projection would suggest that.

Caution, that we can control what we do; we cannot control what our competitors do.

So, one can never give complete assurance in that regard.

But in terms of this is not a 1-off achievement, this is a sustained dynamic, this is the realization of the strategy we've talked about for a long time.

But it is empirically coming to pass, and it is quarter over quarter, over quarter, over quarter, over quarter.

You just go back in terms of the improvement on the erosion rates, so and so forth.

So, another factor that might be obvious, but we are stating, is that in respect to our principal cable competitor, if you go back a few years, they were building out home phone coverage themselves.

They are going from community to community, and so there is a natural 2-fold growth rates there or erosion for us.

1 in terms of a new market opening, and as you had new markets, there's this natural period to period growth going on.

And you had the adoption going on.

For the most part that build out is done, so you don't have period to period growth due to coverage.

It is now an adoption issue, and we are winning on the adoption front overall, if you do the superiority of our product offering in the marketplace.

Okay, thank you for the answer.

Thanks.

Our next question comes from Vince Valentini, TD Newcrest.

Please go ahead.

Wondering if you can talk about program cost increases on the video side?

The Q3 results, do they already reflect rate increases from the major content providers -- Bell, Shaw, and Rogers?

Or are you still renegotiating those rates and perhaps expect some cost increase in 2012?

They sure don't reflect the type of price increases that were attempted to be put through prior to the vertical integration decision.

The commercial negotiation continues.

I'm not sure that will be anywhere near the price that they were seeking.

Peter, next question please.

Thank you.

The next question comes from Ric Prentiss, Raymond James.

Please go ahead.

Thanks.

I would to further talk about the data revenue success.

On 1 side, the iPhone has also introduced the new iMessage product.

Can you talk about how that might affect your business if people were to adopt that?

And on the other side, people are talking about the large penetration you have with SmartPhones, how much more can it go.

Can you talk a little bit about what you're working on as far as revenues coming from someone other than the end-user?

Location-based services, or machine-to-machine, or some of what we might see as the next leg of data growth also?

Thanks.

Sure.

Let's start with the first question with respect to iMessage, and for that matter, other services of that nature that are available through a variety of SmartPhones.

At the end of the day, there's no question there will be substitutional effects of different messaging services that are out there.

No different than BlackBerry messenger was substitutive to SMS in different parts of our customer base, et cetera.

I think the key is that at, the end of the day, as SmartPhone adoption continues, people use their SmartPhones for more activities, they will drive data usage.

Data usage both domestically, and, for that matter, internationally, which is still a very nascent part of the opportunity for us as well.

And that data usage and consumption will continue to drive data ARPU growth for us as a business.

With respect to other services, we have a very vibrant machine-to-machine business and operation.

We haven't disclosed specific elements of that business, but suffice it to say, it is an important part of our strategy and SMB enterprise to go after the machine-to-machine market as a whole.

One place that we've done well with this solution is in the oil patch, and we have a number of services and solution offerings that are completely geared towards the oil and gas industry.

Everything from managing fleets of trucks and moving devices, to monitoring well heads through machine-to-machine modem that collects volume of flow data and helps with integration of that data into the billing processes, and helps drive economics for those businesses.

So, our team has done a good job of finding value-added services and solutions that can be embedded into a particular set of business processes for a sector; and oil and gas is a place where we've done that.

Transportation is another place where we have done some great work with fleet management and location-based services, and also vehicle monitoring that looks at wear and tear and maintenance of those fleet devices, whether they are trucks or other types of rolling gear.

And we have a very active plan to go after other segments in healthcare, in other elements of government, and anywhere where there's a combination of location and asset to be managed.

And the opportunity for us is very significant.

Great, thanks.

Peter, would you do the last question please?

Yes, from Adam Shine, National Bank Financial.

Please go ahead.

Thanks a lot, good morning.

Joe, back on the Q2 call -- I think it might of been in response to a question from Greg -- you talked about or highlighted how Koodo had just begun offering the SmartPhone earlier in the year and was seeing an expansion of its device lineup.

When I look at what appears to be much better SmartPhone loading in this quarter, and, obviously, acknowledge the prepaid loss in the period as well, partly impacted by competitive intensity.

When I look at the delta at each end, does some of that have to do with some of the changing strategy at Koodo, and perhaps, arguably, some of the momentum that it might be adding to the SmartPhone loading?

And maybe as a second element, does that momentum, if I'm correct, continue in at least into the Q1 period next year?

Thanks.

Adam, Koodo's done very well for us as a brand.

In well over 3 years it has allowed us to do a number of very important things.

1 is, it created a fighter brand for us in the marketplace that has been able to go out in the marketplace and create a value offering that is remarkably different and differentiated from the TELUS brand through the innovative use of a tab, which fixes the subsidy at CAD150 for each customer.

We've been able to kind of create plans and programs that are good for the business and are driving growth.

So, no question that Koodo has been a good contributor to our SmartPhone growth and momentum through the last few quarters, and will continue into the foreseeable future.

There is not a customer out there that doesn't want a SmartPhone.

And the Koodo model is 1 where we protect our economics based on a fixed subsidy at CAD150, and then with that, allow the customer to select sort of rate plans that are commensurate with their needs in terms of usage and overall economics.

And Koodo will continue to play that role for us.

But TELUS brand itself has done very well through the SmartPhone category, both in terms of new customers coming to TELUS and also customers upgrading from voice devices and first-generation data devices.

We suspect momentum at both TELUS and Koodo will continue for the foreseeable future.

I appreciate that.

1 last question -- on the Mediaroom and some of the new feature sets that were alluded to on the call.

Is that something that just naturally slows during the course of next year?

Or would some of those new features come out the first half versus back half next year?

We're not going to comment on the timing of those features.

As you'd imagine, that is a highly sensitive road map in terms of exactly what's coming out when.

It is fair to say that our road map for Optik TV extends over the next few years, and our discussions with Microsoft and the family of the ecosystem of other Mediaroom players across the globe, from AT&T, through Portugal Tel, through Swisscom, through Deutsche Telekom -- we're working together to, with Microsoft, to craft that road map and make it exciting and invigorating, and continue to kind of widen the gap between ourselves and our cable competitor.

Great, thanks a lot.

Thank you, Peter, and thanks to the investors for taking the time to join us today.

We appreciate your interest and continued support of TELUS.

Thanks very much and have a great day.

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