Telus Corp (TU) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the TELUS 2018 Q1 Earnings Conference Call.

I would like to introduce your speaker, Mr. Darrell Rae.

Please go ahead.

Hi.

Good morning or afternoon, everyone, and thank you for joining us today.

TELUS' first quarter 2018 results news release, quarterly report 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 our first quarter operational and financial highlights by Doug French, our CFO.

After our prepared remarks, we will conclude with a question-and-answer session.

In consideration of your day, we're going to try and keep this call to under an hour.

Let me direct your attention to Slide 2. This presentation, answers to questions and statements about future events, including our 2018 targets, outlooks and assumptions, as well as intentions for dividend growth and capital investments and the performance of TELUS, include forward-looking statements that are subject to risks and uncertainties and are made based on certain 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, in particular our first quarter Management's Discussion and Analysis and in our 2017 annual MD&A Sections 9 and 10 as well as filings with securities commissions in Canada and the United States.

The appendix of this presentation and Section 3 of our first quarter 2018 MD&A provide definitions and reconciliations of the non-GAAP measures that we use.

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

Thanks, Darrell, and hello, everyone.

As you've seen today, TELUS reported first quarter results that reflect strong operational and financial performance, including healthy revenue and EBITDA expansion in both our wireless and wireline product portfolios, in concert with robust customer growth across the business.

Our continued strong performance is owing in no small part to the TELUS team's unparalleled dedication to providing consistently exceptional customer experiences.

In the first quarter, consolidated operating revenue was higher by 6%, and EBITDA was up by 5.2%.

This performance is clearly indicative of our ability to deliver on the targets that we've set for 2018.

Notably, we delivered strong customer growth, with combined postpaid wireless and wireline RGU customer additions up 15% on a year-over-year basis.

Turning to wireless.

We saw strong growth in first quarter revenue and EBITDA, which were up 6.7% and 6%, respectively.

In addition, simple free cash flow expanded by 21%, again, on a year-over-year basis.

As well in the first quarter, postpaid wireless net additions were 48,000, up 9.1% from 1 year ago.

Postpaid churn came in at 0.95%, up slightly by 2 basis points from Q1 last year but 4 basis points lower than the fourth quarter of 2017.

Notably, postpaid churn averaged below 0.85% in both February and March after being 1.15% in January due to the flow-through of aggressive holiday promotions into the first month of this year.

Consistently strong performance is a hallmark of TELUS.

And it is telling that our team has now delivered a postpaid churn result below 1% for 18 of the last 19 quarters.

This puts us in our fifth year of churn below 1%, clearly demonstrating our sustained leadership in customer loyalty and the success of our decade-long and ongoing journey to put our customers first in every single thing that we do.

This commitment to our customers was further evidenced by the CCTS media report released in April.

Indeed, TELUS once again received the fewest complaints of any national carrier, accounting for only 7.5% of total complaints.

In addition, Koodo has maintained its leadership position amongst major flanker brands and has done so by a wide margin, receiving just 2.6% of all industry complaints.

Notably, TELUS has received the fewest complaints of any national wireless provider for 6 consecutive years, a position we continue to earn through our relentless focus on putting customers first and the passion and the commitment of our frontline team members given their high levels of engagement.

Notwithstanding this, the CCTS media report shows that we always have opportunities for improvement.

And we will take these customer complaints to heart, along with the invaluable feedback we receive from our clients each and every day.

Our commitment to delighting our customers remains our unwavering top priority.

This unrelenting commitment to our Customers First promise is buttressed by the ongoing significant investments that we are making in our leading broadband networks and technology.

Notably, TELUS once again ranked #1 in overall wireless download speed on a national basis and amongst the very fastest globally in the 2018 OpenSignal report released in February.

In addition, for the second year in a row, TELUS ranked #1 in overall network quality in Ontario, British Columbia, Alberta, Saskatchewan and Manitoba in the J.D. Power 2018 Canadian Wireless Network Quality Study (sic) [J.

D. Power 2018 Canada Wireless Network Quality Study] that was released earlier today.

Undoubtedly, these acknowledgments, each received for 2 consecutive years, underscore an important differentiator for the TELUS organization, and they demonstrate the value of our consistent and strategic CapEx investments in broadband technologies.

Looking at our wireless ARPU performance for the quarter, it is important to note that with the implementation of the new revenue recognition accounting standards, which Doug will speak to in a moment, the view of ARPU that we had typically discussed on our investor calls will now be referred to as average billing per user or ABPU.

Blended ABPU for the first quarter was $66.51, and that was up 1.5%.

As we anticipated, ABPU growth has moderated.

However, we continue to expect ABPU growth, albeit at a slower pace going forward.

This more modest growth is the result of a number of factors, including the lapping late last year of the success that we'd seen in respect of our Premium Plus offerings, which we were first to market on a broader basis.

They also include lower chargeable data usage as competitive activities drive larger inclusive data buckets and extra gigabyte promotions.

And finally, they also include the customer mix continuum where we're seeing the shift more towards nontraditional wireless connections.

Nonetheless, we continue to focus intensely on quality loading, coupled with cost efficiency, including margin-accretive ARPU and subscriber growth.

And that's through our consistent execution of high-value smartphone loading, inclusive of driving higher-value data and share plan adoption.

The combination of ABPU expansion and our best-in-class churn rate drove Q1 blended lifetime revenue to more than $5,800.

This illustrates that the economic value of our average customer is up 5% from this time last year and up to 49% higher than our national peers.

Moving now to our wireline business.

TELUS delivered strong performance once again in respect of revenue, EBITDA and subscriber growth, buttressed by our proven, diversified and evolving product portfolio.

Wireline revenues increased by industry-leading 5.4%, while EBITDA grew 3.7% in the first quarter.

Impressively, this marks our 22nd straight quarter of wireline EBITDA growth.

This performance is unrivaled amongst our global peers.

Data revenue on the wireline side, importantly, grew by 10%, driven by healthy high-speed Internet and TV net additions of 22,000 and 6,000, respectively.

Residential network access line losses continued to ameliorate to 16,000 in the first quarter, representing a 30% improvement on a year-over-year basis and our second straight quarter of moderating losses.

In total, we earned a healthy 12,000 wireline RGUs in the first quarter, up 50% over Q1 in 2017.

Our strong and consistent wireline operating and financial results clearly highlight the efficacy of our consistent focus on delivering customer service excellence combined with cost efficiency.

They also highlight the attractive bundled offers available to customers across our differentiated product portfolio, including the superior attributes of our Internet Optik TV and Pik TV offerings.

And finally, they reflect our focus on leveraging our PureFibre broadband network attributes and what they mean from a competitive differentiation point of view.

In this regard, during the first quarter, our team achieved an important milestone as we surpassed the 50% PureFibre coverage of our Optik footprint within our broadband network build program.

This ongoing expansion will enable more customers to access our leading fiber technology as well as the improved client experience that it offers.

The strong performance that we are seeing with our enhanced broadband network, representing PureFibre, will support the continued and sustainable growth of wireline and wireless services, including the advent of 5G.

Through the success of our broadband investments, we have demonstrated our ability to consistently drive long-term growth in revenue and EBITDA while simultaneously delivering on our dividend growth model and maintaining a robust balance sheet and now very interesting accretion in free cash flow, as Q1 demonstrated.

Importantly, we're off to a good start in terms of our previously stated objective to return to a positive free cash flow position after dividends this year.

Notably, free cash flow of $443 million in the first quarter was up 104% over Q1 of 2017.

This is being driven by moderating capital investments as we move past the peak of our elevated CapEx program in 2017, now in our rearview mirror, in concert with continued EBITDA expansion as well as lower cash taxes.

TELUS' return to a positive free cash flow position after dividends is a testament to the TELUS team's ability to execute on our extremely consistent, transparent and successful strategy.

As you know well, a key component of our strategy is, of course, our dividend growth program.

The dividend increase announced today reflects the 15th increase since we established our first 3-year program at our AGM back in 2011.

Moreover, today's increase represents the third dividend increase in our third and most recent 3-year dividend growth program, targeting annual growth between 7% and 10% for 2019.

Our track record of delivering on our industry-leading, shareholder-friendly initiatives continues to generate significant value for our shareholders.

Notably, TELUS has now returned $15.4 billion to shareholders, including $10.2 billion in dividends, representing $26 per share since 2004.

It's quite a track record.

Importantly, we continue to provide the consistency in our results that enables us to complete these shareholder-friendly programs while simultaneously making significant, growth-oriented capital investments to ensure sustainable future growth for years to come because we have diversified, high-performing assets, strong performance operationally, strong performance financially, strong performance in wireless, strong performance in wireline.

I'd like to close by congratulating the TELUS team for continually delivering on our commitments to our customers and our investors and for building a company that embraces the responsibility that we have for our clients, our shareholders and the communities we serve.

I'll now turn the call over to Doug to provide some additional color in respect of our first quarter results, including the move to the new IFRS accounting standards.

Doug, over to you.

Thank you, Darren.

Before we begin reviewing our first quarter results, let me provide a brief overview of our new accounting standards implemented, including IFRS 15, Revenue from Contracts with Customers; and IFRS 9, Financial Instruments.

Importantly, neither of these impact the economics of our organization.

Results for the comparative period in 2017 have also been restated to reflect the retrospective application of these standards.

Under IFRS 15, the timing of revenue recognition and the classification of our revenues as either service revenues or equipment revenues are affected and most pronounced in our wireless results.

Under IFRS 15, equipment revenues for handsets or other upfront deliverables are accelerated to the time of acceptance by the customer.

The amount recorded is a pro rata value of the item as part of the total contract value.

In the past, equipment revenue was the amount of cash received upfront.

The difference between the amount recorded and the amount of cash received upfront is set up on the balance sheet as a contract asset and is drawn down over the contract term through the customer's monthly payment.

Network revenue decreases in the future from the allocation of the monthly bill to the contract asset.

In addition, acquisition and fulfillment costs, including sales commissions, are deferred and amortized over the life of the contract.

As for IFRS 9, this does not currently have any material impact on our financial performance.

For a full breakdown and description of IFRS 15 and IFRS 9, please see our first quarter financial statements, in particular Note 2.

Let's now review our first quarter results, beginning on Slide 9. For the first quarter of 2018, we delivered strong financial and operational results, building off what we achieved in 2017.

External revenues were up 6.7%, reflecting network revenue growth of 4% and equipment revenue growth of 16%, respectively.

Network revenue growth resulted from continued quality postpaid subscriber growth and a larger portion of our customers selecting plans with higher or larger data buckets.

This growth was partially offset by declining chargeable data from -- with the larger buckets included in those rate plan offerings.

Equipment revenue growth was -- increase resulted from the higher retention volumes and postpaid gross additions and an increase in the higher-value smartphones in the sales mix.

Adjusted EBITDA grew 6%, reflecting our network revenue growth from a higher customer base and an improvement in equipment margins, partially offset by higher customer support costs.

Excluding the effects of IFRS 15, adjusted EBITDA growth was 5.2%.

The lower growth rate than reported under IFRS 15 reflects the COA and COR investments in which revenue was not accelerated under the old accounting rules.

As a result, the free cash flow metric is more important than ever, as EBITDA results in any particular period could vary based on the magnitude of the COA and COR spend.

For example, a higher cash outflow on COA and COR may drive a higher EBITDA growth rate under IFRS 15 even though the investment is cash dilutive.

We are confirming our guidance previously communicated and translated our 2018 targets to an equivalent IFRS 15 version.

I'll discuss that more in a moment.

Turning to wireline on Slide 10.

External revenue grew 5.4%, driven by data services growth of 9.8%, reflecting the growth in customer care and business service outsourcing revenues, primarily to the growth in business volumes and recent acquisitions; increased Internet and enhanced data service revenue from continued high-speed Internet growth and higher revenue per customer; and higher TELUS TV revenues from subscriber growth.

We generated adjusted wireline EBITDA growth of 3.7%, reflecting ongoing growth in data service margins, including Internet, TELUS Health and TELUS TV, partly offset by higher TV content costs and continued declines in our legacy voice service revenue.

Excluding the effects of IFRS 15, adjusted EBITDA growth was unchanged at 3.7%.

The impacts of adopting IFRS 15 in the wireline segment were and are expected to be less significant.

Despite an increase in wireline revenue coming from our lower-margin TELUS International business, our wireline margin remained at approximately 30%.

Turning to Slide 11.

On a consolidated basis, TELUS generated 6% revenue growth, reflecting continued growth in wireless network revenue and wireline data service revenues, as mentioned.

Excluding restructuring and other costs, adjusted EBITDA rose 5.2%.

Excluding the effects of IFRS 15, consolidated revenue and adjusted EBITDA were higher by 6.2% and 4.7%, respectively.

As shown on Slide 12, basic EPS was $0.69, while on an adjusted basis, EPS increased 2.8% to $0.73 as EBITDA growth was partially offset by higher depreciation and amortization, reflecting the higher investments we have made over the past few years, including our broadband networks as well as acquisitions.

Please see the appendix for the full breakdown of EPS and adjusted EPS.

On Slide 13, consolidated CapEx was $650 million in the first quarter, a decrease of 10%.

We continue to invest in our broadband networks, including supporting our small cell technology.

We now provide 1.5 million homes and businesses immediate access to our gigabyte-capable TELUS PureFibre network, resulting -- representing 51% of our current Optik TV footprint.

Our wireless network continues to be expanded and enhanced as we now offer LTE Advanced services to over 87% of all Canadians.

Even as we execute our generational investments in fiber, our free cash flow before dividends was up $443 million or 104% over last year.

This was driven by lower cash taxes, lower capital spending and strong organic EBITDA growth.

On Slide 14, as mentioned, we are confirming our 2018 guidance and show the translation to the equivalent IFRS amounts.

It's important to reinforce the -- that the IFRS view is due to accounting changes only, with no impact to the underlying economics of the business and will have no impact to free cash flow.

Revenue is targeted to be 4.6%, unchanged as compared to the pre-IFRS 15 targets.

However, the implied dollar rate of the range is now higher by just over $100 million on both the high end and the low end of the range, reflecting the noncash acceleration of total revenue, primarily from handsets, as discussed.

Adjusted EBITDA is targeted to be 3% to 6%.

EBITDA is now expected to be $50 million to $75 million higher under the new accounting standard, and the implicit cash flow remains the same.

Adjusted EPS is now expected to be higher by up to 6%, the change again, accounting related, as previously discussed.

Lastly, our capital expenditures target is unchanged at $2.85 billion.

With the implementation of IFRS 15, investors will continually need to be focused on free cash flow and the fundamental operational metrics for optimal comparability.

EBITDA results may not be aligned to free cash flow, especially in periods of high promotional investments on a year-over-year basis.

On that note, our free cash flow outlook for 2018 is unchanged at $1.3 billion to $1.4 billion, up a strong 37% higher over 2017.

Let me now turn the call back to Darrell to start the Q&A.

Thank you, Doug.

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

Our first question comes from Phillip Huang.

So first question is on postpaid churn.

The press release indicated sort of intensified competition as the driver for higher churn -- slightly higher churn.

Typically, seasonally quiet Q1.

Obviously, we have observed Shaw stepping up their wireless offering.

But Darren, I was wondering if you could perhaps comment on how you believe the competition for TELUS has evolved just compared to the prior year in your key markets?

And given the evolution in the competitive dynamics, does your thinking behind the optimal level of churn change at all?

So we've got a robust competitive dynamic that's pretty observable within the marketplace.

Specifically, as it relates to our churn result in Q1 at the 0.95%, I thought it was appropriate to give the additional color, as I did within my comments, that the churn rate in February and March on average was below 0.85%.

And so if you do the math on the weighted outcome, you can see clearly that our churn in January was 1.15%, and we consider that to be a particular anomaly, and it's related to the 10 GB $60 flow-through from the Christmas promotional period that polluted our January results that gave us an artificially high churn rate of 1.15% on the flow-through.

And then we saw the immediate amelioration in February and March, where we were below 0.85% on average in terms of churn in both of those months.

I think they are more indicative of the churn performance that TELUS will continue to deliver in the quarters ahead, normalizing for any market activity that is aggressive or irrational in terms of activities taking place, whether it's device subsidizations or, more particularly, rate plan affecting, as was the case with 10 GB $60.

But in the absence of that, back to the robust competitive dynamic and the usual performance of TELUS, I think the performance in February and March is more indicative or more predictive of what you can expect from this organization prospectively.

And January was unique because of the flow-through from the Christmas period and the implications associated, what I call pollution, with the 10 GB $60 plan.

That's helpful.

And then one on the fixed line side.

You're officially over the hump on your fiber build at 51% of your Optik footprint.

At what point can we start thinking about decommissioning copper plants as your next lever of optimization for the wireline business?

Now.

So given the fiber build is being done on a modular basis, we are decommissioning copper commensurate with that on a modular basis.

Obviously, it's going to be a multiyear program for us, but the opportunity is quite significant.

So it's something that we're going to be doing in concert with the wider fiber deployment.

And if you look at it in terms of where we're at right now, to give you a semblance of the characteristics, we're about 52% done on the build relative to our existing Optik footprint.

We're in about 110 communities across B.C., Alberta and Eastern Quebec.

We've now passed 1.55 million homes, businesses and health care organizations.

And we've got well over 0.5 million active customers with well over 1 million active services on our PureFibre solution.

And what we're seeing that's quite interesting, back to your copper comment, is that fiber relative to copper, we see the churn rate being about 25% lower on fiber versus copper, and more specifically, about 35% lower in terms of the churn rate of HSIA on fiber versus copper and 15% lower in terms of the TV churn rate on fiber versus copper.

The other thing that I've talked about repeatedly is the repair savings as it relates to OpEx and the avoidance of truck rolls or calls into our call center or people expressing their dissatisfaction on a digital basis.

We've seen about a 40% reduction in trouble tickets on fiber versus our legacy copper infrastructure.

And I would expect that to continue to grow.

And of course, what we want to do is get into a situation where clients can effectively self-provision their own services on an automated basis and do it within a digital context.

That gives us the highest level of customer sat, and of course, it gives us the lowest level of OpEx because we empower clients on a digital basis to tune their services according to their requirements, whether that's Internet speeds or whether that's their programming choices on TV or prospectively what they might want to do on home security or home health services, because one of the other big areas of economic advantage on fiber is that it's not just supporting one service; it's supporting a multiplicity of services, from voice to data Internet to entertainment on TV to security to home health to home automation and, of course, the key economy of scope synergy supporting the fronthaul delivery and backhaul redistribution of our 5G wireless topology as it comes to fruition in 2019, which would be kind of key on that synergy because our fiber build by the end of 2019 is going to be about 2/3 completed.

And then the other thing that I think is interesting, we always talk about ARPU, now ABPU.

But the average revenue per home is about 10% higher on fiber than what it's been on copper, and we're seeing that continue to grow.

And again, that's back to our bundling strategy and supporting multiple services on fiber versus what we typically experienced within the legacy copper environment.

And then finally, when you combine that higher ARPH, average revenue per home, with that lower churn rate, it's not surprising to see, similar to what we talked about on the wireless front, that our average lifetime value per client is 50% higher on fiber than it was -- than what it is on copper.

So we're going to continue that decommissioning because it does stuff for us that's very elegant.

It drives better growth.

It takes cost out of our business.

It increases client satisfaction and loyalty.

And it flows from revenue to EBITDA to simple cash flow, which back to our thesis that now that the majority of our fiber build is increasingly behind us, I would say the majority of our future cash flow generation is ahead of us.

And that's an exciting story at TELUS.

And I think we're an organization that has a terrific track record, that when we deliver upon a strategic investment, we ensure that investors share the fruits of our labor in that regard.

And then finally, beautiful flexibility because we've done all this while at the same time delivering on our dividend growth program.

And we've also managed our balance sheet exceedingly well and our risk profile because the fiber program is not just modular; it's success based.

Over 50% of the capital that we postulated at almost $2.9 billion for this year is entirely performance contingent.

If we don't secure the client, we don't spend the capital.

Set-top boxes are a classic example of that.

So I think we've got things in harmony, and we'll continue to progress this fruitfully.

And I like the robust competitive dynamic on this front over regulatory intervention any day of the week.

And clearly, Canada is a global leader when it comes to fiber deployment, not just in the West but on a national basis.

And if you compare our country in terms of fiber deployment versus other developed nations, we compare extremely favorably.

And I think this speaks volumes in terms of how that's going to support the competitiveness of our country in terms of our digital economy progression and as well as our digital society considerations on leveraging technology that have better health, education and environmental outcomes.

Next question comes from Jeff Fan.

Maybe just a clarification on the IFRS.

When we look at the 2018 change in your guidance, as you mentioned, Doug, you said $50 million to $75 million.

But when you look at 2017, looks like the impact on EBITDA was a little bit higher.

By my math, it was about $114 million.

Just wondering if you can clarify why the difference between one year to the next.

I think this is probably related to handset volume, but maybe you can help elaborate.

And then the second clarification is just on the $50 million to $75 million change in the guidance, just want to make sure there is nothing else impacting that change besides just the accounting.

And then maybe just a bigger-picture question for Darren.

On the wireless side, if competition does pick up as we get into higher-volume periods later this year, what's your priority?

Is it ARPU or ABPU?

Is it protecting churn?

Is it gross loading?

Just want to get your perspective on that.

Thanks, Jeff.

I'll do your second question first.

There was nothing else in the change in guidance.

It was a complete translation between pre- and post-IFRS 15.

So it is 100% alignment that you'd argue one equals the other, and it's just a slightly different definition.

Our cash flow and all our operating projections are untouched.

From the -- your first answer on the year-over-year, the complexity with IFRS 15 is your spending profile, which you're right, it's volume and rate, to be completely transparent, is on a 2-year rolling basis.

So the impact in any given year is your COA, COR spend, volume, rate in 2016, 2017 actually impacts you in 2018.

So you actually have to model that profile.

And why it's very significant, and it'll be even significant on a quarterly basis, when you think that we're accelerating revenue to handset revenue, for an example, and let's -- I'll just use an illustrative number.

If I increase my spending in 2017 in Q1 by $10 million over the previous year, if I don't increase my spending in 2018 by at least $10 million, my IFRS growth rate will be lower than it was in 2017, all other things being equal.

So as you're -- as we're modeling this, it's your year-over-year spend on a 2-year basis.

And so the translation across is really just taking into consideration the growth in 2016 COA, COR or the accelerated revenue, the growth in 2017 accelerated revenue and our estimate of where it's really headed in 2018.

And you have to take all 3 of those into consideration when you look at the impact on your 2018.

And so if you actually do a very, very high-spend quarter and you spend that material dollars more than you did a year before, you're going to get a very high growth rate of EBITDA even though you're very cash dilutive.

So having a higher IFRS growth rate on a year-over-year as compared to pre isn't necessarily a good thing on all accounts.

Okay, great.

So I think in terms of the competitive dynamic that I've already discussed as robust, I'm not going to give any forward-looking predictions in that regard.

It's contingent upon behavior from all the constituents within our industry.

I continue to believe that the organization that will do well within a competitive environment is the organization that's got the best loyalty and retention because it's got the best customer service and the best network performance.

I also think the organization that will do well from a risk management perspective in a scenario like the one that you just described is the one that's got better diversity in terms of the quality of the asset mix.

And as I said in my remarks, if you look at the consolidated results for TELUS, it's nice to see that we've got equal contributions coming from wireless and wireline.

It's not a one-trick-pony-type organization.

So when we've got growth contributions at the revenue, at the EBITDA level, coming from both our wireless and our wireline asset mix, I think that's a pretty strong story and, again, generating solid operational results, complemented by solid financial results.

And I think that diversity, again, puts us in good stead because if we get pressured on any one particular line of business, we've got the opportunity to harvest the contribution from the other assets within our portfolio.

In terms of what matters to us on this front, what matters to us is profit.

Revenue is vanity, margin is sanity.

And that's always going to dictate how we make decisions, allocate resources at TELUS so that we get the right economic outcome.

And within that particular axiom, we, of course, are always putting customers first, which supports the best loyalty and retention.

And the most valuable customer is the one that we've already got in that regard.

I do think, however, that talking about the robust competition within the industry, there's some attractive hallmarks that are worth talking about.

If you look at the industry in totality, there's volume driving profit growth more now than what's been the case historically where the profit growth was more driven by price increases.

I like the fact that volume growth is driving more of the profitability than price increases.

I think that's a good hallmark of health.

And I think that's a good hallmark for avoiding regulatory intervention, and I think that's smart for the industry.

If you look at the industry postpaid net now that TELUS has announced, they're up 60% for the industry in Q1.

I think that's a pretty good result for the Canadian wireless industry.

Again, it's a measure of health.

And on the ABPU front, without getting into a high degree of precision, we continue to postulate that we're going to experience positive ABPU growth prospectively, but it's going to be more modest over time.

And that takes into account certain considerations, and we've had fantastic continuity.

We're into 30 consecutive quarters of ARPU accretion at this juncture.

But when you think about things like BYOD and some of the dilution related to competitive intensity that they can create at the rate plan level, you've got to work your way through that.

And we're continuing to see price commoditization on voice wireless the way that we did on voice wireline.

That's nothing new for us.

Again, we're going to expect competitive intensity on a go-forward basis.

We've done some client-friendly moves.

We've led the way on data notifications, and that ameliorated some overage, which has been dilutive to ARPU but I would say accretive to AMPU because of the cost that we save by putting that empowerment in the hands of our clients.

And people are always going to be conscious about leveraging things like Wi-Fi offloading.

So we've got to work our way through those things, but we've got a lot of opportunities as well on the ABPU upside.

I think we can do better than what we've been doing on monetizing, growing data usage.

We shouldn't be giving that away.

We should be smart about it because it cost us billions of dollars of CapEx in terms of deploying spectrum and network technology that underpins that growing data usage from our customers.

And to us, monetizing it appropriately as we see clients upsize their data plans or getting them within the shared plan environment, I think, is the smart thing to do.

I think we'll continue to see ABPU accretion that comes from deployments in terms of where we take the next gen in our network technology as we move through LTE Advanced, as we deploy LAA and as we work our way through to the world of 5G.

And I think we're in a great position in that regard.

We've won the 4 key network awards from OpenSignal and Ookla to PCMag and J.D. Power, some on multiple occasions now.

So I think we're positioned well in that regard.

Premium Plus, even though we're lapping it, we can still focus on that particular component, and there's continuity to be had there.

I think we only tapped the opportunity as it relates to international out-roaming and the in-roaming opportunity.

We've now got our Easy Roam capability available now in about 127 countries globally.

So I'm looking for that to make a contribution to ABPU prospectively.

On the M2M front, huge opportunity for us on both wholesale and retail within that particular area.

And that would generate wireless revenue with an EBITDA profile that has a very nice margin to it.

And then lastly, we're looking to see a B2B recovery on wireless ARPU as it relates to things like an improved economic performance starting to strengthen out of the province of Alberta that's been dilutive over the last couple of years for TELUS, given our exposure there.

And then one of the other things on ABPU that's important is -- and we don't talk about it enough, is that when we're looking at loading, I mean, it's nice to see that our postpaid loading is up on a 10% basis year-over-year, and gross is up 8.5% on loading year-over-year.

But you've got to talk about the quality of loading.

Now we look at a loading definition that can include not just smartphones but wireless home phone connections or tablet connections.

What's the quality component of that?

What's that premium component?

Or what's the bias within that loading towards ABPU contributions that come from things like a disproportionate amount of the loading coming from smartphones rather than wireless home phones or tablets?

And if you look at TELUS' results in Q1, our tablet loading was down on a year-over-year basis, and pre to post, flat.

And we had a disproportionate amount of our loading coming from high-value smartphones.

But I think prospectively, it will make a nice contribution to the economics of our business.

And it was encouraging to see the combination of ABPU and churn giving us a 5% accretion year-over-year on lifetime revenue per wireless client.

So again, pretty solid overall in that regard.

And then the nice flow-through to the revenue, to the EBITDA and the excellent result as well on simple cash flow on wireless.

But again, it wasn't a singular story at TELUS.

We had a solid contribution operationally and financially coming from the wireline side of our business, and that diversity component is critical.

And then 2 final thoughts.

I guess the thing that matters most to me is AMPU.

We coined the acronym a long, long time ago, and that average margin-per-unit focus was critical under pre-IFRS.

It's critical under post-IFRS.

Our focus on the underlying economics isn't going to get confused by the accounting change along the way.

And we got to get better and better and better at taking cost out of the wireless side of our business, just like what we had to do on wireline, and look for us to increase our performance as it relates to wireless productivity and efficiency in the quarters and the years to come.

And then the last thing I'd ask you in terms of looking at our industry, can we look at it from a triangulation point of view and think about what really is the Pareto optimality of long-term economic value accretion?

And the 3 components of the triangle that I think about is, ABPU being at levels that gives us the right outcomes with client satisfaction, value for money, affordability and quality of service as it relates to speed, coverage, reliability and innovation.

The other parameter that I look at in the triangulation is: What's the ROI I'm getting out of that?

So how am I fitting in ABPU to give me enough return on the CapEx that I'm spending when the wireless technology half-life is sometimes less than 18 months?

And then the final component of the triangulation is government intervention and making long-term pricing decisions that avoid aggressive government intervention.

The things that have been most problematic for us as it relates to our share price historically has not been robust competitive tension in the marketplace.

We've done very, very well within that context, supported by our asset diversity and our excellent churn.

It's been onerous government intervention.

So that's the other component when I think about in terms of the triangulation as it relates to all the things that influence the right ABPU decisions for our organization and the right flow-through to AMPU and the economics along the way.

Our next question comes from Drew McReynolds.

A couple for you, Doug, and then one for Darren.

First, just looking at an improved free cash flow profile and obviously ticking all your boxes with respect to the payout ratio, the balance sheet, et cetera, can you just comment on where you are with the NCIB and thoughts on that going forward?

Second, just in terms of disclosures in and around TELUS Health, TELUS International, I think you alluded last quarter that you could be forthcoming at some point.

Just if you can provide us with an update on that.

And then I'll just have one for Darren afterwards.

So the NCIB is not a priority for us at the moment.

We have it as a tool if necessary, but as you've seen, we have not used that in a while now.

And that would remain our cash investments are going to fiber, to dividend increases and the investments we're making in strategy -- on strategy for the foreseeable future.

That being said, if it's ever needed during a downturn, we would consider it at that time on our share price.

On TI and Health, we did discuss on when and what timing is right.

Darren and I are looking at Q2 for that as a first update.

And there'll be one or the other and maybe both.

We'll look through that and give you more at that time.

But it will definitely -- there will be something in Q2 to enhance that disclosure.

Okay.

And bigger picture here for you, Darren.

When you talk about IoT and machine-to-machine, obviously, everyone knows, with 5G particularly, a very big growth opportunity ahead.

At a high level, can you just comment on kind of where you see TELUS or telecom operators in general competing?

Clearly, you'll have the pipe and will get compensated for that.

But you alluded to earlier in one of your answers about wholesale versus retail.

Where do you draw the line on that?

It is vertical by vertical?

Are there some obvious areas where you'd have a natural competitive advantage, et cetera?

So the focus for us on IoT is very much on key verticals.

Without giving you the exhaustive list, we think that we can do very well targeting verticals in areas like transportation, agriculture given our Western heritage, the health sector and the way that we can bundle that with other health solutions.

I could go on, but it gives you a flavor of what we're looking to do in that regard.

And our approach is both at a retail level and a wholesale level.

On the wholesale level side, one of the verticals that we're also excited about is what we can do in terms of home automation, and the consumer play there is extremely exciting.

And if we can put together a continuum of products, services and technology in the home that span voice, data, entertainment, security, health and home automation, empowering people to better control the assets within their homes, whether it's food inventory or optimality on heating and cooling or connected car considerations and the like, there's a lot for us to do in that particular sector that can be very exciting.

And all of these solutions leverage the investments that we're making in broadband technology, be it our play on PureFibre or what we're doing on the 5G front prospectively and what we're doing at an LTE level today.

And a long way to go.

The other thing that's key for us is certain verticals where we would be targeting IoT, we're already deeply entrenched, so it's selling new services to a very warm client relationship.

An excellent example of that would be our premium position in oil and gas and doing things that improve the performance of those organizations, whether it's within a fractionator environment or whether it's wellhead monitoring in terms of flows along the way, which are critical for both efficient and safe operations.

So that's kind of the mentality of what we're talking about here.

But again, let's not just be the telecom people that stop at the connectivity level, having penetrated those verticals on a bundled basis.

Let's think a little bit more strategically, and that would include monetizing the data.

So leveraging our ability to undertake dynamic insight on the data flows and process those accordingly and leveraging intelligence like AI along the way to monetize the data by finding things that are insightful to our clients to help them improve the productivity of their operations, to help them manage their assets or their workforce on a better productive basis, how to protect the safety of their assets when you think about various considerations and the complexity of some of the verticals that we would be seeking to serve.

So I would be looking to undertake deep analytics in that regard, find meaningful correlations within the data, exact that value for the benefit of our clients and monetize the data that we're generating through our M2M topology across all the verticals that I've just articulated.

So that's really what we're thinking about on the IoT front, from connectivity to what I would call more advanced services.

And we can also do things with that connectivity where we don't treat M2M as a walled garden.

We bring in third-party partners that can bring some of their applications to bear that would be of great interest to our clients.

So there's a lot of routes and a lot of channels for us to develop these services accordingly.

And as I said in my previous remarks, yes, the ARPU or the ABPU on M2M may be nominally lower than what we've been acclimated to with traditional smartphones, but we're making 50 to 60 points of margin on those lower services.

So back to the answer I gave to Jeff, which is let's stay focused on average margin per unit and average economic return per unit.

And I think IoT does that in a very elegant way.

Our next question comes from Vince Valentini.

Darren, thanks for the update on all the benefits of fiber to home.

It sounds like very exciting future.

Just want to ask about when that translates into the present.

I mean, your wireline margins this quarter still ticked down about 40 basis points year-over-year, and they're still slightly below 30%.

Do you expect to start to see some margin expansion this year and trending into -- in the low 30s?

And then second, just a tiny clarification.

Was Pik TV a large portion of your TV ads this quarter?

Okay.

So no on Pik TV, so that will be the simple categorical answer on that.

Yes, on quality loading on the wireline front, similar to the comment that I made on smartphones on the wireless front as it relates to quality loading.

And we had a pretty good result at 12,000 RGUs being up 50% on a year-over-year basis.

In fact, if you look at postpaid nets on wireless combined with wireline RGUs, we're up 15% on a year-over-year basis.

So pretty good going in that regard.

Vince, I think you're being a little bit hard on us in terms of the wireline margin front.

We were at 29.9%, so that's pretty close to 30%.

And it wasn't that long ago that you guys were torturing us as to when are you going to get to 30%, when are you going to get to 30%?

Because we set that as a public target, and we were in the 27% zone.

And I would say we're there at the 30% front in that regard.

But getting the essence of your question, which is, is there room for improvement?

And the answer is yes in that regard.

And that's what we are striving for.

And let me give you -- given that you asked for the here and now on that particular point, let me give you some empirical substantiation of that comment.

The EBITDA contribution holistically from TI in Q1 was basically 0. And that's because of the reasons that I said previously, that on an organic basis, the TI organization has been performing well, but we have lost some key clients because of exogenous factors that were impacting their businesses and the markets that they were seeking to serve.

So we've seen some dilution from that.

So it's not flattering our EBITDA results on wireline.

More particularly to the margin question, when you factor in the implications of the Xavient and Voxpro acquisitions, where the margins, okay, right now are considerably lower than 30% because those businesses are formative in their EBITDA accretion strategies, and we're looking for significant growth out of them in 2018, 2019, 2020.

But in the here and now, they are extremely dilutive to our wireline margin.

So we are absorbing that dilution to our wireline margin and still generating a result of 30%.

I think that's pretty telling.

And Doug can give you additional clarity, but let's just say that they are deeply below the 30% wireline mark that we have holistically on the wireline side of our business in terms of the margin.

So they are dilutive to our EBITDA margins on wireline, not neutral or accretive.

And that's the here-and-now truth.

As they start to go through their formative growth curve and see nontraditional EBITDA growth acceleration, they'll make a nice contribution to TELUS through the latter half of '18, '19 and '20.

And I'm hopeful that, that will be complemented by a resurrection in the organic performance at TI at that same time as we are organically winning new logos within our TI business that has performed very well historically.

The second point that I want to highlight in terms of the improvement opportunities for us, the B2B side of our business was EBITDA dilutive in Q1.

And if we can -- and we're working stridently to this effect, if we can get our B2B business from EBITDA dilutive to first milestone, EBITDA neutral, the opportunity to see both EBITDA and margin expansion through that improvement in the traditional telecom side of our B2B business is something that I'm looking forward to, and the team is working very hard towards.

So that's another empirical explicit upside opportunity for us to pursue.

And it's quite simple: take B2B from dilutive and get it to neutral, enjoy both EBITDA and margin expansion.

So those are 2 very specific here-and-now empirical examples that represent some upside for both EBITDA growth and EBITDA margin expansion on wireline.

Our next question comes from Simon Flannery.

This is Landon Park on for Simon.

I was hoping you could give us an update on your thoughts around the prospects for fixed wireless and how you might be able to leverage your fiber build to bring that to the forefront in helping serve rural communities and whether or not you think that's a viable solution, and in addition, what particular spectrum bands you might be focused on and what you'll be looking for from the regulatory side to bring that to reality.

A few things.

Let's make sure that on the regulatory side, we get access to the spectrum that Canada needs.

So that would be at the 3.5 GHz level.

That would be at the millimeter wave level, 28 GHz, 40 GHz and 65 to 70 GHz.

So bringing that to fruition, I think, would be a good thing on a regulatory basis to enable what we want to do here.

Secondly, I think we are in a great position in terms of horses for courses.

So if you look at what we've done historically on both wireline and wireless, we have deployed and managed a multiplicity of technologies simultaneously.

So if you look back historically on wireline, we had simultaneously deployed ADSL2, VDSL2, Ethernet to the suite, GPON, so on and so forth.

On the wireless side of our business, we've got historically HSPA+ deployed, HSPA+ Dual Carrier deployed, LTE deployed, LTE Advanced deployed, soon-to-be 5G deployed.

So I think we've done a good job managing a multiplicity of technologies contemporaneously along the way.

And so I would see the advent of point-to-multipoint fixed wireless buttressed by fiber and 5G wireless technology as another example and another opportunity for us to pursue prospectively.

And think about what a great position that we're in.

We only have to fast-forward until the end of 2019, we will be 2/3 built on the fiber front at the same time as we're launching 5G.

Now we have a very interesting economic decision to say, okay, as we think about taking 66% on the fiber build to the premise, why we -- which is why we call PureFibre to the premise, both the home and the business, well, if we're going to take that above 66% to 70% to 75% to 85% coverage, let's judge the efficacy of that fiber build against the point-to-multipoint fixed wireless alternative.

And if this fixed wireless alternative allows us to deliver exactly the customer solution that's necessary to win in the marketplace and the economics of fixed wireless are superior than a fiber built, in those instances, directly to the customer premise, then we'll do exactly that.

Secondly, we wouldn't be able to do a fixed wireless alternative, whether it's urban or rural, if we had not first deployed fiber deep into our access layer.

So the fact that we will have accomplished that particular objective earns us the optionality to say, okay, do we go beyond 66% coverage with fiber -- with PureFibre to the prem?

Or do we now look at alternative strategies that we can deploy, such as point-to-multiple point fixed wireless, leveraging 5G, what we get from the bandwidth, putting the spectrum to work simultaneously?

And then lastly, we'll continue, to the extent feasible, to leverage tactical technologies that allow us to milk our legacy copper network.

So in areas that are not economic for fiber, that are not economic for point-to-multipoint 5G fixed wireless, let's look at developing technologies that allow us to get more bandwidth out of our legacy copper infrastructure and improve the addressable market opportunity along the way.

And then lastly, when we think about, okay, what are the key criteria that make a decision as to whether we go PureFibre to the prem or whether we go fixed wireless, well, what's the size of the prize in terms of the opportunity?

What's the demographic look like, urban, rural?

What's the pop density in a particular area?

What are the economies of scope like, like how many services can we push over that fiber, such as what I've described previously?

Or what's the res/biz overlap within those communities?

If we have a high res/biz overlap, and we can look at the economy of scope of not just picking up consumers but businesses along the way, maybe that tilts the build in favor of doing a PureFibre build.

If we don't have a res/biz overlap, then maybe we think about fixed wireless along the way.

Thinking about PureFibre is something that's not just good for consumers but good for business as well.

It's a key consideration prospectively, and one of the best-performing areas that we have right now in our fiber build is the B2B component.

And when I talked about getting B2B back into that EBITDA-neutral, EBITDA-accretive zone, the PureFibre program has a big role to play in that regard.

So that's some of the decision-making criteria.

And then lastly, we will be looking to use both fixed wireless and PureFibre to replace aged plant that causes us a lot of OpEx generation on things like repair rolls.

So those are some of the parameters at play, but isn't it nice to have the choice?

I think that's what the 66% build will get you.

Not only does it set you up for 5G, but it puts you in the variable position or the optionality position to make selective choices as to whether you continue with PureFibre to the prem or leverage the advent of deep-bandwidth technologies like 5G to use wireless as the access mechanism versus PureFibre.

And that's a great position to be in.

Thank you for that, Darren.

Should we be thinking about -- on the back of that, should we be thinking about a potential for commercial trials on your side in 2019, 2020?

Yes.

Our next question comes from Maher Yaghi.

Doug, I wanted to ask you just to dig a little bit deeper on your EBITDA guidance for growth.

As you explained, subsidy cost changes could have a delayed impact on EBITDA growth.

So if I look at your EBITDA growth forecast pre- and post-IFRS, is it that you are expecting slightly lower subscriber loading in 2018 versus 2017 that is explaining this decreased percentage growth?

Or is it that you're expecting lower subsidy cost per loaded customer?

And I have just a follow-up question to Darren after.

Yes.

So it's actually COA and COR that come into the calculation, and it's also rate and volume.

So when you get to the assumptions -- I'm not going to give an estimate on what we expect for our loading for the year.

But that being said, if you remember, last year, there were multiple quarters where our COR spending was higher on a year-over-year basis, and our EBITDA growth rate under old accounting rules was lower because we expensed the subsidy.

As you lap some of that, that could have an impact on the year-over-year, as an example.

So don't just limit it to loading.

Look at COA, COR, rate and volume, and I think you'll come to the conclusion of where that differential might be.

Okay, that's fair.

And Darren, I wanted to ask you just a quick question on wireless ARPU growth.

I mean, you -- TELUS is not the only company that is seeing a reduction in ARPU growth.

We've seen it in BC as well.

What is your current view on future ARPU growth?

How much of it is explainable by the significant promotional activity in Q4 that we saw?

And how much of it is more structural?

I think, Maher, I'm not going to go beyond the comment that we would forecast positive ABPU growth prospectively but on a more modest basis.

I think the portfolio of dilution pressures on this front can be offset by the opportunities that we have to monetize increased data usage, particularly as we deploy new technologies that facilitate higher data usage.

And we're doing that right now on both LTE Advanced but also in the runup to 5G.

I think there are opportunities on roaming, machine-to-machine.

And I'm looking forward to a greater contribution coming from the province of Alberta as it continues.

I think we're doing the right things when it comes to the complexion of our loading, focusing on higher-quality areas, particularly as it relates to smartphone growth, which will support, prospectively, ABPU accretion at T plus X overall.

And so without putting a growth rate on that per se, I guess what I'm forecasting is that the accretion opportunities will more than offset the dilution reality that we're facing.

And then I go back to perhaps the most telling components, which is let's make sure that we're not singularly just focused on ABPU but having even better accretion at the AMPU line through cost efficiency programs.

And let's leverage the fact that we've got contributions from 2 assets, not just one wireless asset within our organization.

And also, the sober reality that the Pareto optimal combination of value for money and quality of service, all those things that make clients happy, generating the ROI from ABPU and AMPU to justify the CapEx investments that we make in wireless and generating a level of client satisfaction that drives a disinterest in our industry by government, those are the smart longer-term plays for our organization to pursue.

Last question comes from Tim Casey.

Thankfully, we've covered everything, but I noticed that since we started this call, the Competition Bureau has put out a notice that it's going to be reviewing access to Internet services.

I know it's just out, and you haven't reviewed the brief.

But any -- did you know this was coming?

Or any initial thoughts on how we should think about this going forward?

No, I didn't know that it's coming out.

I'll have to look at it.

I mean, I don't know what to say.

They've gone through the wholesale wireline review, and that was an extremely robust, data-intensive exercise by the regulator that involved all the constituents within our industry.

We've had various pronouncements in that regard.

So hard to fathom exactly what that is until I look at it.

I would say this part of our industry is extremely healthy and competitive.

And then lastly, I would encourage all the analysts on the call, would you please do me a favor and have a look at Canada's progression as it relates to fiber deployment, which is so critical for both wireline and wireless and so critical to our country in terms of the vibrancy of our digital economy and digital society?

Please compare us to other countries within the G20 as to how far progressed they are with their fiber programs.

This is a massive success story for Canada that I don't think has gotten the level of attention that it warrants.

And what we have done on the fiber front has not been done easily.

We've gone through free cash flow-negative years of 2014, '15, '16 and '17 and are now coming back into the free cash flow-positive zone because of the heavy lift that we've undertaken to drive that particular fiber build.

We've used our balance sheet to do the right thing for our investors, the right thing for our customers, but also the right thing for our country.

And this is also true on a national basis.

And I think there needs to be more fact-based investigations and more empirical evidence, both absolutely and relative to where other countries are as it relates to the deployment of critical fiber.

Okay.

On behalf of Investor Relations, thanks for joining us today.

If we didn't get to your question or you have any follow-up questions, feel free to contact any of us.

Thanks for your time.

Ladies and gentlemen, this concludes the TELUS 2018 Q1 Earnings Conference Call.

Thank you for your participation, and have a nice day.