Telus Corp (TU) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the TELUS 2015 Q3 Earnings Conference Call. I would like to introduce Mr. Darrell Rae. Please go ahead.

Thanks, Peter. Good morning everyone and thank you for joining us today. The Q3 news release and detailed supplemental investor information are posted on our website, telus.com/investors. On the call today will be President and CEO, Darren Entwistle, who will provide opening comments, followed by a review of operational and financial highlights by John Gossling, our CFO. After our prepared remarks, we will conclude with a question-and-answer session. In consideration of your busy day, we're going to try to keep this call to under an hour.

Let me now direct your attention to slide 2. This presentation answers to questions and statements about future events such as 2015 annual targets, intentions for dividend growth and future share purchases, 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 you 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.

Let me now turn the call over to Darren, starting on Slide 3.

Thanks, Darrell Rae; and good morning, everybody. Despite a period of high customer activity and a tempered economy, TELUS posted solid results across numerous financial, operating, and growth metrics in the third quarter including net RGUs, net TV additions, lifetime revenue and customer loyalty. Consistent with this performance, TELUS also continued to demonstrate our robust track record of returning capital to shareholders through our notable shareholder-friendly initiatives. We once again demonstrated our leadership and differentiated approach in this regard by completing meaningful stock buybacks during the third quarter in conjunction with a double-digit percentage increase in our dividend, a growth rate that distinguishes us from our peers.

Let me take you through some of the highlights for Q3. While TELUS reported postpaid wireless net additions of 69,000 in Q3, impressively, our team delivered a wireless monthly postpaid churn rate of 0.97%. This represents our ninth straight quarter below 1% as our team continues to set benchmarks in our industry in respect of customer loyalty. Indeed, TELUS is the only North American carrier to achieve this exceptional level of performance despite the frequent and exogenous factors common to our industry associated with the regulatory environment, capital markets or the general economy. Notably, we have maintained our unmatched track record for customer loyalty during this period of heightened market activity in our industry.

Customer retention in the quarter represented 14.3% of network revenue compared to 11.5% one year ago. This reflects a significant CAD52 million year-over-year increase in the investment being made in our customers to support the heightened volumes associated with double cohort in the second half of 2015. The value opportunity in these investments is clear as reflected in lifetime revenue per subscriber increasing once again this quarter, up 4% to over CAD5,000. This represents a 14% to 31% value higher than our peers.

Given the significant value creation opportunity through lifetime revenue per customer, we are appropriately investing in retention spending during this period, particularly as we head into the high seasonal activity in the fourth quarter of this year. Year-over-year blended ARPU was CAD64.22 in the third quarter of 2015, compared to CAD63.52 last year, reflecting a year-over-year increase of CAD0.70, or 1.1%. Reflected in our ARPU growth this quarter is the recent implementation of our new data notification service that provides customers with greater control and greater transparency in their real-time data usage. The system investments we've made in this customer-friendly initiative allow us to provide customers with frequent real-time notifications of their data usage, onshore and offshore, particularly as they reach the upper echelons of their monthly data plan allowance.

While having some moderating dynamics on ARPU growth, this proactive service is in alignment with TELUS' Customers First priority of providing our customers with clear and helpful tools to assist in managing their data usage and spending more precisely. Additionally, the investment in this program is AMPU accretive in nature as it provides efficiency benefits to TELUS through the reduction in the number of inbound calls to our customer care team related to data usage and frequently ensuing credits being issued.

Turning to wireline, TELUS continues to be one of the only major telecommunications companies globally to report on ongoing growth in wireline revenue, EBITDA and customer connections. Indeed, despite the competitive dynamics of our market, we continued to prove that our long-term approach to investment in broadband wireless and broadband wireline infrastructure indeed positions TELUS well for the future. In this regard, revenue and EBITDA grew 3% and 3.4% respectively in the third quarter, reflecting continued growth in data from our increasing high speed Internet and TV subscriber base, as well as growth in TELUS Health Services and our business process outsourcing services at TELUS International.

Net wireline RGUs were 50,000 in the third quarter, driven by the addition of 24,000 net high-speed Internet subscribers and 26,000 net TELUS TV subscribers. Notably, and reflective of the quality of our asset mix, our combined TV and high-speed net additions exceeded our Residential Now losses by a factor of 2 times.

Consistent with our overall data-centric strategy, our commitment to the significant long-term opportunity in wireline remains a key component of our growth initiatives. We are a Company that has two growth tenants. This includes our recently announced generational investments in Vancouver and Edmonton over the next five to six years to connect homes, businesses and institutions with fiber. Moreover, these investments will provide a distinct advantage to the citizens of these communities by stimulating economic growth, driving efficiency and sparking innovation as they connect directly to our state-of-the-art fiber network.

TELUS Fiber will provide citizens with access to Internet speeds of up to 150 megabits per second and increasingly higher speeds as they are enabled over our gigabit-capable network. Importantly, these investments support our track record and long-term approach to balancing the allocation of capital to consistently deliver on both our broadband customer investment and shareholder return strategies. Clearly, as evidenced by our leadership and consistency in most key wireless and wireline metrics, TELUS is not a single growth tenant company. As a result of the quality and growth dynamics of our asset mix, we are able to provide a multi-tenant approach to returning cash to shareholders through our consistent long-term dividend growth and stock buyback programs.

As announced in September, we successfully completed our 2015 Normal Course Issuer Bid, purchasing approximately 12.1 million shares or 2% of our shares outstanding for CAD500 million. Additionally, we announced the acceleration of our 2016 buyback program to purchase and cancel up to 16 million shares or an additional 2.7% of our common shares, again for up to CAD500 million.

Moreover, we once again delivered on our dividend growth program with a 10.5% increase to our annual dividend, now at CAD1.76 per share. This represents the tenth dividend increase under our multi-year dividend growth program that we originally announced in 2011 with two more under the current program forecast for 2016. TELUS has notably now returned CAD1.4 billion to shareholders in 2015 through our buyback and dividend programs. And impressively, CAD12.2 billion or more than CAD20 per share over the past decade.

Importantly, since 2013, the synergistic relationship of our buyback and dividend growth programs will result in CAD172 million in future dividend outflows being avoided by the end of this year. Clearly, our consistent track record to deliver growth whilst returning significant capital to our shareholders is unmatched by our major peers and represents a true TELUS differentiator.

Since 2000, TELUS has successfully navigated the constantly changing dynamics of our industry and our economy by maintaining a consistent and disciplined commitment to long-term wireless and wireline growth. Indeed, TELUS increased our investment in CapEx and spectrum in 2015 to a notable CAD4.5 billion compared to an already impressive CAD3.5 billion in 2014. This represents a 29% year-over-year increase in our Company's commitment to building Canada's critical digital economy infrastructure for the long-term benefit of all customers and citizens, making TELUS one of the country's largest infrastructure investors.

While TELUS has established a track record for leveraging these capital decisions, the generational investments we are making also come with parallel investments in process and efficiency measures. In this vein, we are increasing our current efficiency initiatives by an additional CAD125 million in the fourth quarter, which will include a net reduction of approximately 1,500 full-time positions, a notable number of which are voluntary departures and early retirements. These are indeed difficult decisions to make, but a necessary element of aligning our organization with the growth, customer service and capital allocation activities that we are implementing now and into the future.

As we finish the year and look towards 2016, we will continue to focus on the Company's long-term and disciplined strategy of investing in our wireless and wireline data growth engines and earning the privilege of building customer confidence and trust through constantly improving client service excellence. Our track record for delivering on these investments, executed by our high performance and highly engaged employee culture at TELUS has truly been the foundation in establishing TELUS as the industry leader in customer service and as well the industry leader in returning capital to shareholders.

As always, I'd like to thank the TELUS team for their tireless focus on putting customers first, particularly during such a dynamic period in the marketplace. I'm exceptionally proud of how their commitment to executing our strategy translates into strong results for the benefit of our customers, the benefit of our shareholders, our team members and our communities.

Let me now turn the call over to John.

Thanks very much, Darren. Good morning, everyone. I'm on slide 11. Third quarter wireless results continue to reflect our solid operational execution in a very competitive double cohort environment. Network revenue growth of 4% was driven by data revenue growth of 12%. This includes subscriber growth, increased adoption of higher rate two-year plans, higher data usage from the continued growth in smartphones over the ever-expanding 4G LTE network and partly offset by the impact of the economic slowdown in the business market.

Reported EBITDA increased by 2% based on the network revenue increased from a larger customer base and ARPU growth. We also continue to benefit from ongoing operational efficiency initiatives, including the previous integration of Public Mobile and other efficiency programs. This increase was also achieved despite a 29% increase in retention spend, as well as increased customer service and other distribution channel expenses. Retention volumes were up 14% to 569,000 subscribers in the quarter, driving higher associated commissions, while per-unit subsidy costs increased due to continued preference for higher-value smartphones and lower device upgrade fees. Excluding restructuring and other like costs, EBITDA margins were 40.9% of total revenue. This reflects the greater retention volumes and expenses during the period of heightened market activity. Excluding COA and COR costs underlying EBITDA growth was 5.2%. As we head into in the seasonally important fourth quarter we expect retention volumes to remain elevated as we continue to invest in our customers.

Capital expenditures in wireless were down year-over-year by 17% and represented a modest 12% of total operating revenue, reflecting the ongoing investments in wireless broadband infrastructure to enhance our network coverage, speed and capacity, including the ongoing deployment of 700 megahertz spectrum.

Moving on to slide 12, revenue in our wireline business increased by a healthy 3.3%. This increase was driven by accelerating data revenue growth of 11%, reflecting high-speed Internet subscriber growth and higher revenue per customer, growth in business process outsourcing services, a higher TELUS TV subscriber base and increased TELUS Health revenues. This was partially offset by continued legacy voice and equipment revenue declines.

Reported wireline EBITDA decreased by 3.2%, primarily due to a CAD25 million increase in restructuring and other like costs, but when excluding those costs from both periods, wireline EBITDA increased by 3.6% with a margin of 27.3%, which is up 10 basis points year-over-year. This EBITDA growth reflected improving margins in data services, including Internet, TELUS Health, TELUS TV, business process outsourcing services, as well as ongoing operational efficiency initiatives and obviously, offset by higher margin legacy revenue declines. Capital expenditures increased slightly over the same period last year due to continued investment in broadband network infrastructure. This includes connecting more homes and businesses directly to our fiberoptic broadband network to support high-speed Internet and TV subscriber growth and extending the reach and functionality of our healthcare solution. We also continue to make investments in system resiliency and reliability.

As noted on slide 13, consolidated revenue was up 4.2% while EBITDA excluding restructuring and other like costs increased by 2.2%. Basic earnings per share of CAD0.61 increased by 5.2%, as underlying EBITDA growth and lower shares outstanding from our ongoing share purchase program was offset by higher restructuring and other like costs. The drivers of EPS are available in the appendix.

Free cash flow of CAD310 million increased by CAD91 million or 42% primarily due to CAD48 million of lower cash income taxes paid due to timing of installments and CAD34 million of lower capital expenditures.

As noted by Darren, with respect to our 2015 annual guidance, please note we have increased our restructuring and other like cost assumption by CAD125 million to approximately CAD250 million for 2015. This method is focused on supporting our ongoing operational efficiency initiatives and includes real estate rationalization and personnel-related costs. There is no change to our segment and wireless and wireline EBITDA guidance, which was given excluding restructuring costs; and our original consolidated EBITDA guidance before restructuring cost of CAD4.4 billion to CAD4.575 billion is being reiterated today.

With that, let me turn the call back to Darrell, who is standing in today for Paul, who is quite unwell.

Thanks, John. Peter, can you please proceed with questions from the queue for Darren and John?

Phillip Huang, Barclays Capital.

Yes, good morning. Thanks. Maybe a question for John first and then one for Darren. First, on the restructuring side, just want to better understand your thoughts behind accelerating the cost efficiency initiatives. I was wondering if you could read any of this as a reflection of the current economic environment or is this primarily based on having identified greater than expected savings opportunities as part of your original program? And then, a second question, perhaps with Darren on the spectrum side, you guys have certainly strengthened your spectrum portfolio significantly through the auctions this year. I was wondering if you see any opportunity to further increase your spectrum portfolio in the future as certainly there is still some under-utilized spectrum on the market, and perhaps held by other players. Thanks.

Thanks, Phil. I'll take that first part. So you're bang on in terms of what's driving the restructuring. Yes, the economic situation is front and center on our thinking on that. Obviously, things in our key market in Alberta are continuing to be under a fair bit of stress. We also, as you mentioned, have identified further initiatives that we were working on through the end of the second quarter into the third quarter and now with this larger headcount reduction that is going to drive the number higher. So you're right, it's the situation that we face and as well you see in wireless with the additional retention spending through double cohort, that's also driving our thoughts in terms of efficiency and what we need to do to maintain margins there. Darren, you want to take the second question?

Yes, just to complement what John is saying, clearly for us, we are seeing economic softness in the province of Alberta, I think that's pretty observable to all concerned, but there are also significant latent deficiency opportunities that we need to harvest within TELUS that are independent of the economic environment. And I think we've made a positive step forward in that regard with the increased restructuring investment that we're going to make.

It goes well beyond what we're doing in terms of staff-level reductions. We're also looking at decommissioning older wireless network technologies. We're looking at being aggressive in terms of supply chain efficiencies. We're tactically using TELUS International and I think that has been a very fruitful asset for us historically. And as well, I think we've discussed with you on a number of occasions we're leveraging the synergistic relationship between improved customer service and the costs of not serving customers well and the inefficiencies that that drives. You can see that in terms of our attempts to reduce inbound call volumes, which is a key feature of our data notification system that we just launched the past quarter, right through to the learning center environment within our stores, that not only reduces follow-up calls but stimulates data growth.

So, we've taken a pretty holistic approach to improving the efficiency profile of the organization and I think that's good as it relates to economic headwinds. But I think that's necessary as it relates to latent efficiency opportunities that have yet to be harvested within the TELUS fold directly and we're going to get right on that.

In terms of spectrum, yes, we have done a very good job in terms of augmenting our spectrum position over the course of 700, 2.5 and AWS-3. I'm very pleased with all of those outcomes, I think they're very smart investments in a data-centric wireless world. And yes, there are additional tactical opportunities that are out there in the market. I think it's our fiduciary responsibility to look at each of them, and if it makes good sense for us strategically and economically, then we'll proceed. If it doesn't meet those expectations, then we'll wait. There will be more spectrum coming on the market in the future, including 600, so we have the opportunity to be patient and we've earned that opportunity to be patient given the cumulative spectrum that we've secured over the last 30 months. So, I'll leave it at.

Thanks very much.

Next question, Peter.

Greg MacDonald.

Thanks. Good morning, guys. Want to talk about ARPU trends if we can. One of your competitors has put up a pretty good ARPU growth number. There is some difference between TELUS and other carriers when it comes to mix of prepaid versus postpaid. And I know that that can have an impact. There's also a difference between the carriers on the exposure to Alberta and Darren, you've mentioned that. I wonder if you might comment on a couple of things. Number one, how much of an impact did Alberta overall have on the ARPU growth trend this quarter? And then, secondly, it feels to me like the industry is kind of reaching a natural cap on postpaid ARPU, would you agree with that or not? Is there more upside I guess is what I'm asking as usage trends continue to grow in data? Thanks.

Okay. Greg, I think you'll remember for the past 15 years, I've not made a habit of giving forward-looking projections on ARPU. We've talked with some granular details as to the key drivers of ARPU and what we're working on as an organization at both the ARPU and at the AMPU level. But we've always declined from providing forward-looking ARPU projections.

Number two, yes, in looking at one of our major competitors, I think the ARPU growth that they posted was excellent. I think they should be applauded for it. I think it was a very good result. Yes, clearly under the hood, there are differentiating factors, but none that would normalize away the fact that that was a strong result from that particular organization.

Number 3. Alberta has had an impact on the overall performance in terms of both ARPU and loading, and that's quite distinct and it's top quartile in terms of being an explanatory factor in that regard. I think what's important and not to be lost in this is a good chunk of this is self-inflicted and sensibly so within the TELUS organization as a result of the investment that we made in our real-time rating and client notification system. The number one priority at this organization for now going on seven years has been putting customers first and leading the way on likelihood to recommend and we lead the way on likelihood to recommend against our peers by a significant margin.

And we have said repeatedly, we will take an ARPU hit to do the right thing for the customer over the longer term, which we think the right thing for the customer over the longer term is the right thing economically for our shareholders and that particular investment has done just that. So we've seen the moderation on the ARPU through lost overage, because we're providing clients with the information to manage well within their existing data plan.

The flow-through benefit at the AMPU line for TELUS prospectively is going to be very attractive, because we'll have fewer customers calling in upset that they are incurring expensive overage and every time they call in that generates CAD10 of cost plus within our organization. And of course, we inevitably ended up issuing a billing credit. So we don't actually get that particular benefit long term in any event and the client is unhappy. We're actually almost educating the client to call us to continually renegotiate their bill and to me that's bad business and inconsistent with the strategy of this organization.

In addition to the Alberta softness, we've seen other areas that have been impactful. The business market nationally as well as within Alberta has been impactful. We're going through the J-curve dilution phase in terms of our US Easy Roam launch from a roaming point of view. And of course, there are certain things happening on the attachment front, such as tablets that are accretive to AMPU, but they're dilutive to ARPU.

I think really where we want to get to is what the heck are you guys doing about it? So fine, you're not going to give a forward-looking view in terms of ARPU, but what are you doing about it? And so I think we have an obligation to speak to that particular point. Number one, I'll put a pin in it right now. I thought our wireless quarter for Q3 was soft. So rather than manufacture excuses, let's just deal it up, we had a soft quarter.

I'm not pleased with the data ARPU growth at 8.9%. I think we can do better than that. So when we talk about what can we do to improve ARPU, I would say, we need to improve in terms of data growth, whether that's upselling data packages, particularly on the back of our real-time data notification system with clients, whether it's doing a better job, monetizing growing data volumes or whether it's leveraging next-gen data growth opportunities as it relates to Internet of Things or machine-to-machine. I think we can do better.

There's still a lot of upside for us in the roaming front, both international outroaming, but also inroaming. We're only probably 60% of the way through the rollout of LTE and we know that when we provide that data bandwidth capability, customers use it and it's down to us to monetize that data. There are ARPU opportunities for growth as it relates to Koodo, I could go on and on. And then I think the flip side of the coin for us and this speaks to, Greg, let's say, hypothetically, ARPU is slowing or getting to the cap, looking at that particular hypothesis, what does it behoove us to do, it behooves us to focus on cost efficiency, and we've been the guys that have been on the AMPU front since 2009. So we're going to have the leverage the efficiency that our industry-leading churn gives us and what it generates in terms of lifetime revenue per client. That's a fantastic set of value driver parameters within our organization.

We need to continue to drive our Customers First initiative, because the economics there are extremely attractive. And we need to make hard choices, uncomfortable, sometimes unpleasant, sometimes difficult for the soul, cost efficiency decisions such as the one that we announced this morning, to get the AMPU to where it needs to be if we find ourselves in an environment where we're seeing some ARPU moderation. So that's kind of the holistic view.

Just a quick follow-on, Darren, was there a geography, i.e., Eastern Canada that you were less happy with relative to other geographies or was the disappointment across the board?

Across the board, concentrated, because of exogenous events in Alberta but across the board.

Okay. All right, thanks very much. Comprehensive answer.

Thank you, Greg.

Next question, Peter.

Simon Flannery.

Great. Thanks very much. Darren, any initial thoughts on the change of government and how do you think that might impact the telecom industry in the coming years? And any big sort of asks that you have? And then, we've seen the US carriers increasingly move to installment plans and now it seems like leasing of phones is taking over and even Apple is getting in the game, with their upgrade plan. How do you think -- we're seeing it in Japan, we're seeing it in other countries, how are you thinking about that if it seems like customers are interested in buying devices that way and separating it out, is that something that you're exploring? Thank you.

Thanks, Simon. I think it's early days with the new government. I would say for us we're cautiously optimistic, but I think it's important for us to be, given the experience that we've had over 15 years, to be sanguine about this. We're always going to have a degree of regulatory and government intervention. It's not a binary situation. I would hope that in the future that it would be moderating in that regard and I'd like to move to a more collaborative relationship with the government. I think there are fantastic things that we can do, given the technology and the infrastructure investments that we're making. And they are considerable in nature when you look at the totality of sort of CAD8 billion over the last few years by this organization in broadband, wireline and wireless technologies.

I think there's a lot that we can do collaboratively with the government for the greater good of our country, whether that's related to driving a digital economy strategy or even, perhaps more importantly, a digital society strategy supporting aspirations on both health and education. And I think we have a lot that we can bring to bear in that regard from intellectual property to experience within these markets to the technology investments that are going to matter to answering the future challenges of things like healthcare transformation where technology, if not a panacea, is going to be the core ingredient to not just driving better health outcomes for less money spent on a more affordable basis but driving the promotion of wellness and the avoidance of disease in the first place. And so I think that's a real open door for us to step through and do some very interesting things.

I also think that we can leverage technology for Canadians that are on the lower income front. We have a lot of people in Canada that are living at or below the poverty line and are not enjoying the benefits of the digital society and I think that that's quite heartbreaking actually. In Canada, we've always talked about the digital divide as a geographic concept, but in fact, it's a socioeconomic concept and I think we need to do something about it and I think technology leaders like TELUS could step forward in that regard and do something collaborative with the new government.

I would remind you that, right now, we have a couple of pretty important files underway in terms of wholesale wireless and wholesale wireline. In respect of the former, I would hope to see a decision that's consistent with infrastructure-based competition as it relates to the Phase II cost determination and mark-up on wholesale wireline, wholesale wireless access to our mobility networks, because that's the type of economic model that's going to continue to stimulate investment in this country, that's going to be so critical to the comments that I made previously in terms of the digital economy and the digital society.

And so that's a wait and see. But I think we've got tremendous empirical evidence that we can put forward to get an outcome from a Phase II cost determination point of view that's consistent with the infrastructure-based competition thesis from the regulator.

In terms of wholesale wireline, there is an area where I think we've got a terrific window of opportunity as it relates to our fiber build in Western Canada. We've got great technology. We've got a great TV product. We've got a favorable regulatory environment. We've got a strong competitive juxtaposition versus our competitive peer in this particular industry right now and we've got pretty sexy economies of scope to leverage. It's no longer just about fiber for TV and HSIA, but it's fiber to backhaul, the small cell topology that we're building within our neighborhoods. And it's fiber to backhaul things like home health monitoring, such as the initiative that we have right now with the Government of BC where we're putting pulse oximeters and BP cuffs and glucometers in homes and we want to backhaul that data traffic and put it in the hands of clinicians, docs, providers and caregivers to make sure that we deliver better health outcomes with better health information. So I'll stop there. I'll let John handle the comment for a second as it relates to headset financing.

Sure.

Thank you.

Simon, this is a fairly common subject when comparing the US to Canada. And obviously, the markets have developed over time differently. So if you look in the US where you have the two very large national carriers, two still quite large in terms of subscriber base and overall [five of those businesses], the two challengers, Canada has the three large national carriers that are relatively similar in size. So it's evolved differently in Canada where we went to device balanced kind of concept where that is device financing in our view, it's maybe not the full amount or the full value of the phone, but we went to that concept many years ago to give that transparency to our customers and that has worked quite well for us. So to go to that next step, I think is interesting. I think you've heard us talk a lot about customers and putting customers first and L2R as our main focus. So we have to balance that obviously with if there's customer demand for it and what do we need to do on the side of managing the risk of it, managing credit exposures. Obviously, there would be some changes we have to make in our systems and our distributions.

So we're looking at it, it is interesting, we're seeing the success in other markets. But as I say, we have a very high subsidy type of offering right now in Canada and that's effectively in our mind device financing. So it doesn't get you all the way there, but it's certainly something that we do offer and there's a cost to that obviously. We do have some of the elements as well that you see in the US, we have what we call our TF program that lets a customer upgrade to a new iPhone every year as the new models come out. So there are many things that are similar, they're perhaps packaged differently or they're called different things, but we feel that we've got a very high subsidy kind of environment here in Canada. But we're looking at it; of course, we're not completely blind of what happens in other markets and what seems to be working well in some of the markets you mentioned.

Great. Thank you.

Next question.

Vince Valentini.

Yes. Thanks very much. A question about the wireline business and I guess at the heart of the question is the EBITDA margins. But I'm just wondering how you're balancing your thoughts about volume versus pricing and profitability these days because your sub adds in Internet and TV were both up year-over-year, but if we back out that CAD15 million retroactive assessment on your programming costs, your EBITDA was actually even excluding restructuring cost was down 0.5% and the margins were down to 26.2%. So you've been talking about getting to 30% at some point. I would have thought you would have been swinging up the J-curve on some of the businesses like IPTV, but it doesn't seem to be evident. So your updated thoughts on volume versus profit would be much appreciated.

So, Vince, it's John. You're right. There was an adjustment last year. However, there was a positive adjustment last year on some real estate gains. So, that's effectively a wash in the prior period. So, there is no sort of sleight of hand going on with the margins or the increase there. That was neutral in Q3 last year. So, we can take that offline, we can walk you through the numbers and where those bits and pieces are.

But in terms of the margin, overall, yes, you're right, there is strong growth in Internet and TV and as we've talked before, there is a very different gross margin profile in a TV product versus the home phone products. So that mix continues to drive the overall margin profile in wireline. And Darren has talked quite a bit about our restructuring program. Clearly that's partly at the heart of why we're doing it as well because the margins in wireline continue to frankly be stressed by cost increases and that's where we have to attack.

So I think we've got softness in revenue and in subscribers on the wireline side in Alberta, that's been quite clear for a while. And that's also causing some downward pressure. So the consumer business in wireline is performing quite well, not only on subscribers, but also at the contribution level, but we're facing these headwinds and that's why we're continuing to attack the cost base.

So to be clear, Vince, there are not very many telcos where the wireline attributes on revenue and EBITDA are plus 3% on a global basis, particularly with the dilutive impact of TV and HSIA being up 7.8% on a year-over-year basis. In terms of the excellent question on focus on price and volume and the balance between the two, I think you've actually adequately captured it in that it is a balance. We're expecting to drive growth, particularly as we make increased investments in fiber, but not to the point where we're going to scorch the earth with price aggression just to hit a loading level.

For the us here, the focus has been on quality and this is a five to seven-year strategy as it relates to our wideband deployment on fiber. And we are exceedingly pleased with the results that we are realizing. The penetration gains that we are securing in the market are extremely attractive in terms of receptivity to our fiber-based value proposition. The ARPU is accretive versus the base, distinctly so. The churn is better than the base and that's highly attractive. Our ability to get multiple products with a customer is going up distinctly in that regard. Our reliability is better in terms of the service. Our ability to operate more efficiently is there, because we can leverage things like soft provisioning of services on a remote basis with that level of fiber connectivity and so when you look at the attributes of this holistically plus the point I made in answering Simon's question that it's really supporting multiple products across wireline, wireless and health. We think it's a very attractive program, but we don't feel the need to rush that program, it's very much a modular deployment and for once we have a regulatory window of opportunity that's favorable to supporting this generational investment that we're making.

Thank you.

Thanks. Peter, next question.

Maher Yaghi.

Yes, thank you for taking my question. I want to ask you a question about your spending on acquisition and retention in the quarter seems to be a balancing effort and by my calculation and correct me if I'm wrong, but your cost of retention per sub is about CAD402 compared to CAD400 for cost of acquisition. Now, if I compare that with some of your peers, it seems BCE was spending a lot more on cost of acquisition in the quarter and maybe the reason why their gross adds were higher, could you talk a little bit about how you see your spending efforts taking place going forward based on the results you saw this quarter? Is there a place to rebalance the spending that you're making to go a little bit more on the acquisition front, and if that is feasible? And a follow-up question on margins, now even with the higher cost that BCE is spending on acquisition and retention, their margins on wireless were better than what you guys have put up and I was wondering where can we see some improvement on the margin side? Is there some -- in the cost reduction you announced today, can you split maybe the cost savings in between wireline and wireless?

Okay. Let me take that. Firstly, let's do a scene setting here. So, we had a soft quarter on wireless by TELUS's definition. So, when you actually look at the overall results, you see things that are quite interesting, number one, clearly evident, we have two growth tenets, not one. I think that's a distinguishing factor. And TELUS's soft quarter on wireless across a number of parameters is not exactly out of the ballpark.

So we took about 31% share versus our peers that are 200, 300, 400 basis points higher than that, but I think we're in pretty close proximity. We're talking about a delta of 8,000 net adds on the post front. So, I'd say we are in the zip code, so to speak and disappointed. And I think investors should be pleased to see that, because that's the improvement mentality of this organization being evident.

Secondly, for us, when you think about the balancing of acquisition and retention, if you are going to make an investment within a double cohort environment, CAD52 million being increased on a year-over-year basis on COR' I think it kind of says, maybe you should be a little bit judicious in terms of your investment in COA during that particular period, particularly when you've got a great churn rate to give you a better gross to net flow through within your organization and the cost efficiency that goes with it and the great lifetime revenue outcome at CAD5,000.

So we can focus on the quality, not putting nominal loading first, but putting quality first. We can say in the quarter, we're going to prioritize COR ahead of COA buttressed by the great churn rate and the great lifetime revenue that we can generate. And then, the other thing that you think about it, in terms of the Alberta situation, in a market that's not going to be receptive given the economic downturn to acquisition strategies, why would you be wasting money on the COA front within that particular province at a time when it's going to get very low client receptivity. Wouldn't it be better instead to spend your money in terms of emphasis on COR, particularly given that every one of those customers that you retain is going to make a great contribution to the bottom line of the organization, given the retention characteristics and the ARPU characteristics of our organization. And that perhaps gives you a purview into the choices that we made in terms of COR, COA this past quarter. Not throwing good money away in an acquisition strategy in one part of Western Canada that is not really going to get a lot of resonance, and less overall focus on the quality front.

In respect to the margins point, we've got a 130 BP margin erosion and I've made some comments here in terms of what we're looking to do. The cost reduction program, I think is a great case in point. I said there is a part of it that is, yes, related to the general economy. But the preponderance of that program is harvesting latent deficiency improvements within TELUS and they are both within wireless and wireline. And maybe, Maher, to answer your question, when we come back in February, and we will have implemented the two key waves of this program that are taking place over November and January of next year, I will break out both the restructuring investment for you between wireline and wireless and the return that we're going to get from that investment so you can see the impact that it's going to have on both parts of the TELUS organization. What I can tell you is, we're looking to harvest about CAD125 million of annual EBITDA improvement flowing from these initiatives and that the average payback period is circa 12 months. So some things will be shorter, some things will be longer, but on average, the DPP on this is going to be about 12 months and it's going to help improve our margins.

And then, lastly, let's get back to focusing on the AMPU components. There are lots of things that we can do to still improve the margins on our wireless business, beyond just the staff-level reductions and I talked about those, whether it's leveraging a fantastic asset in TI that does wonderful things on the client service front, almost mirroring the fantastic service that our front-line team members provide domestically. We've got lots of opportunities to clean up legacy technology on the wireless front. That represents a cost drag for us on both the OpEx and on the CapEx front that I think would be a very smart thing for us to do. We've not been as efficient in managing our supply chain topology within TELUS and then once again, I think the best well for us to go back to is look for those four-point game opportunities where we can remove cost inefficiency and elevate client service simultaneously and we've got a list of about 40 activities in that regard that we're going to drive very hard.

Peter, next question.

Batya Levi.

Great. Thank you. Just a follow-up first on the prior question. As we look into 4Q, you mentioned that there will be more heightened activity and you are also going to start to benefit from some of those cost savings. Do you expect to implement some of that into the acquisition front just to drive that gross adds inwards a bit higher than the decline that we saw in the third quarter or is it still going to be a balancing act between the COR and COA?

For sure, it's going to be a balancing act between COR and COA. And TELUS has not historically assumed an aggressive profile on COA and I think you can presume that that's going to be the way that we will go forward. We will be competitive. We will be smart and we will leverage the fact that we've got a 34 BPs churn differentiation versus our peers to do smart acquisition adjudication strategies.

Okay. And on the wireline side, one of the highlights was that accelerating data revenue growth in the quarter. I was wondering if you could quantify maybe the impact of any price increases that you had and if we can expect that trend to continue into the fourth quarter. And the cable carriers are talking more about deployment of DOCSIS 3.1. Do you think that would impact the pace of your fiber deployments?

Okay. If I looked at the data growth, I would probably characterize it as three-quarters volume, one quarter rate or price related, I think would be a good rule of thumb for you to use to understand where the growth is coming from. And that volume is derived from market success.

As it relates to DOCSIS 3.X deployment, I don't see it materially impacting the pace of our fiber deployment. At the end of the day, fiber connectivity to the home is going to be a significant advantage for us. We've got a footprint now that's past 0.5 million homes and growing, and I think that that's a significant opportunity for you to contemplate in terms of reviewing the TELUS to grow tenant wireline, wireless positions. And again, I'll emphasize that the returns on that investment are extremely attractive from penetration to ARPU to churn to cost reduction to improved reliability.

Okay. Thank you.

Next question, Peter.

Drew McReynolds.

Yes, thanks very much. Not sure what happened there. Darren, just one last one from me, if -- the organization's talked in the past about just what the potential is in Canada and particularly your market in terms of bundling wireline data or Internet with wireless. Obviously, we're seeing some of the regional carriers do it. And I think the data point that you provided previously was about 25% of your basis is interested in bundling it too. I just wanted to get your big picture thoughts on, is this a trend that will continue to grow in Canada? And is there anything on the horizon that could possibly accelerate that trend? Thank you.

So, do you mean cross-product bundling or do you mean data pooling in terms of a data package that wireline and wireless would draw off of? I'm presuming it's the latter.

Yes, it would be.

Okay. I don't see us going there in the near term. We will always obviously respond to competitive market conditions. But right now, I think we would exact better economic returns across wireless and wireline by managing those two developments independently and putting our emphasis on product integration rather than data pooling.

And I make that comment for a number of reasons. Number one, we're spending a lot of money on fiber. So, making sure that we exact the strong return and avoid things that are dilutive perhaps to that return, I think would be a smart strategy. Number two, our main competitor doesn't have a macro wireless business. So, I don't think the necessity right now is there in terms of competitive pressures. Maybe when we get to the point of market maturation over the longer term, we could think about a concept of that ilk, whether that's within the consumer environment or the B2B environment, which is another economy of scope opportunity on the fiber front.

I think we could contemplate that at that juncture perhaps when our cross-product bundling strategy gets us to have three or four products on a per home basis leveraging everything from data and entertainment to small cell considerations right through to health. Maybe when we've hit certain penetration goals on that front and we've got product rep within the home, maybe we can think about a data bundle at that juncture. But in the near to medium term, that's not a path that we're currently contemplating going down.

Thanks, Darren, for those comments.

Okay. As we approach the hour, Peter, we have time for one more question.

Jeff Fan.

Thanks and good morning. Just a few final things here. First, just touch on the gross adds on wireless a little bit. I think we discussed the geographic potential impact there. Wondering if you can touch on whether you saw any competitive impact as a result of the gross adds results, is there something that your competitors might be doing that you're seeing, that's having an impact on those numbers? Second part is, data sharing, we just touched on data pooling between wireline and wireless, but just staying within wireless, I know you guys have data sharing plans, wondering if that's something that you see customers wanting and maybe pushing that a little bit more going forward? Thanks.

Okay. So let me break it down in terms of gross to net in a way that I think will be tremendously clear. Number one, we put the emphasis on COR. So in terms of the toggling between the two, CAD52 million year-over-year uplift, that's where we thought we should put the money and we were more circumspect in terms of an acquisition investment, I think that was smart.

Number two, the Alberta impact for us unloading was significant, that was the most material impact for us, which is why trying to put our foot on the gas on acquisition just would have wasted money within that particular territory for us, but that was the number one explanatory factor. Number two is, our competitors did well. So it's not like we're out of the ballpark with that [8K] delta and we're all in a pretty tight proximity in terms of share, but they did well.

So if you look at it, it doesn't take too much time on the data analytics to say, we took 31% share this quarter. The same quarter last year, we took 51% share. So that's a 2,000 basis point delta, so there's a lot of explanation within that and so that's great. I mean that's life and to be sanguine about it, we have led the industry on loading, which is not the central thesis -- ironically, it's not the central thesis at TELUS. We've led the industry on loading eight out of the last ten quarters. So we're not going to lead the industry 100% of the time on a tenet that's actually not central to our marketing thesis. We're focused on quality and we like to leverage the efficiency of the churn engine and the major differentiator that we have in the marketplace on L to R versus our peers to get quality ads at less cost that stay with us longer, that generate a great lifetime revenue overall.

The interesting thing is amongst the premium brands in Q3, TELUS was actually probably the most price aggressive in the market in certain instances when you actually peel the onion behind it, not so much holistically, and maybe that says something as to whether that was an effective investment or not. But I think it's good to be self-critical in that regard.

And then, last thing that (dampened it for us is, we've always done very well on the iPhone front. I think we'll do well on a go-forward basis. But when the average cost of an iPhone is CAD400 versus CAD260 the previous year, surprise, surprise, surprise, it dampens clients' enthusiasm along the way. And so those are the things that impacted our quarter.

The only other thing I would add is there is B2B pressure as well. So for us, in Alberta, it's consumer and business pressure. It's nice to see consumer wireline doing so well in Alberta, but we felt it on both the B2B and on the consumer front.

In terms of data sharing, back to ARPU dilutive events, as you think about that add a line within SharePlus and so on and so forth, that's good economics for us overall. That's greater, more accelerated consumption of the data package. Maybe if we're smart, we can begin to upsell that data package to a larger data package with that family within our home to avoid the ARPU dilution that can come with it. But we think that that's a good business and clients have been very receptive to it and we will continue to push that particular component of our marketing thesis, because we think it makes good sense. And to your question, Jeff, there is good residence in that regard on the client front.

Okay. Thanks, Darren.

Okay. Thanks, Jeff. That concludes our call. If you have any follow-up questions, feel free to contact the Investor Relations team. And on behalf of Darren and John, thank you for taking the time out of your schedules today.

Ladies and gentlemen, this concludes the TELUS 2015 Q3 earnings conference call. Thank you for your participation and have a nice day.