TELUS Earnings Call Nuggets: Wireline Spending and Increasing Subsidies

TELUS Corp (NYSE:TU) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Wireline Spending

Greg MacDonald – Macquarie Capital: Questions on CapEx, wonder the overall question is $1.95 billion, is that kind of the level that we should be assuming on a go-forward basis. And secondly if you can give some context on with LTE spending coming down in ’13, can we assume that Wireline spending specifically FTTN spending is going up and maybe if that’s the case to give a little context on is it footprint expansion, is it bulking up on bandwidth within the existing footprint some context will be good?

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Joseph Natale – EVP and Chief Commercial Officer: Greg, I will take this question. Firstly, I would note that we’ve gone from circa 22% consolidated CapEx intensity back in ’09 to 18% intensity in the period from 2010 to 2012 and we are now dropping down to 17% CapEx intensity. It remains flat on a year-over-year basis we are obviously not going to give multiyear guidance and saying this a leading indicator in terms of what you can expect for 2014 and ’15 and beyond. I can give you some color to say that the distribution of the CapEx between Wireline and Wireless is not – in 2013 is not dissimilar to what we’ve experienced over the course of 2012. In terms of the Wireless broadband investment itself we still have more to do on the LTE front. Coverage considerations are important, but also the identification of our wireless network is also another consideration as we work to deal with the prevalence of smartphones and the insatiable data consumption patterns of both consumers and business customers. It is also important to highlight that from a wireless perspective, our CapEx is not just going through macro wireless investments, but also micro wireless investments in terms of the small cell deployment that we are undertaking as an underlay to our macro LTE network. And of course also if we can get the 700 auction consummated in 2013 we want to push our LTE capability into the real environment of Canada. We think that this is a strategic goal of the Canadian government in terms of bridging the broadband digital device and we are very keen as an organization to support that goal by affording all Canadians the benefits to be announced to access LTE speeds and what that can do in terms of consumer lifestyles and the competitiveness of businesses. Second things, of course, is our investment in broadband wireline TV and here we’re seeing, of course, significant growth an excellent retention characteristics in terms of our churn, an excellent growth from a client revenue per subscriber basis as well. So, well worth investing in, and so we’ll continue to support our broadband TV products of TV and HSIA but also I think it’s important to point out that our broadband wireline investment is also going to be supporting the backhaul of the wireless small cells that we will be deploying within urban conurbations. So, we’re getting economies of scope in terms of pushing fiber deeper into our access network where we’re not just supporting TV and Internet connectivity, but the backhauling of micro-wireless traffic as well as. Then finally, I think you’re well aware, but we’re in the progress of a very significant CapEx program to build two super Internet data centers in Canada; one in Quebec and one in British Columbia. In 2012, we brought the Rimouski data center online and the second data center which is in Kamloops, British Columbia intended to go online in the summer of 2013. So, we’ve got dollars dedicated towards that as well. So, that’s kind of the profile that we’re looking at. We think it makes good sense to continue to support our broadband services given the success that we have enjoyed. I think that type of growth that you see us postulating in terms of the expectations with the financial parameters that John Gossling laid out for 2013, it does reflect the fact that we are seeing growth across all line of business, markedly solemn, we’re going to support that in terms of the way that we make our CapEx investment. The only other comment, Greg that I think is important to make is we are in a luxurious position to be able to both invest to support our broadband growth across wireline and wireless and still pursue our program of returning cash to shareholders through our dividend growth model and more to come in terms of clarity, I’ll provide on share repurchases at the AGM. And it’s a strong balance sheet of this organization that allows us to simultaneously invest for the future in terms of operational growth and also support our ability to return cash to shareholders so that they participate in the success of our growth programs.

Greg MacDonald – Macquarie Capital: Quick follow-on, can you remind us what the cost, the CapEx cost was for Rimouski in ’12 and what the expectation is for Kamloops in ’13?

Darren Entwistle – President and CEO: Why don’t we get back to you, Greg, with the specificity on that one with one-to-one conversation.

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Increasing Subsidies

Maher Yaghi – Desjardins Securities: I just wanted to ask you how much if any consideration have been take in formulating your 2013 guidance with respect to current CRTC endeavor to regulate the wireless market, and is there anything particularly concerning that you believe is going on with that review that could jeopardize you industries profitability in terms of EBITDA. Just a question on TV, we are seeing and currently you are growing promotions in the market offering hardware in addition to PVR and set-top boxes you are offering TVs, Galaxy Notes etcetera, etcetera. Are we moving into a business model on the TV and Internet side where we are going to see also subsidies increasing down the road similar to what we are seeing in the wireless right now in order to keep and retain customers?

Darren Entwistle – President and CEO: Mark, I will hand the question over to Joe to respond to. I will just make opening comment in terms of regulatory intervention and its impact on our business. I would draw line under and say we expect it to be de minimis and the reason for that is back in 2009 TELUS is an organization didn’t just launch an HSPA network. We launched a new philosophy for organization which was centered around putting customers first and wanting to be number one on a global basis within our industry in terms of earning the customers likely to recommend our services to families and friends. And we put an immense amount of effort in that path over the last few years and it is one of the key reasons that we have been so successful in 2012, not just in terms of growth but also the efficiency of the organization taking out re-work and in-efficiencies that were associated with underperformance on the client service front through a lot of effort from our team members across the organization. We as an organization welcome the consumer code of conduct, it is something that we’ve been support of from the outset to have a national code of conduct and we as an organization because of what Joe and his team have been doing over the last few years are essentially complaint with the direction the CRTC, we’d like to see our industry move, because we have been a first mover in that regard and I think that puts us in an advantageous position. I just hand it over to Joe for some additional color.

Joseph Natale – EVP and Chief Commercial Officer: Yes, to Darren’s point, the vast majority of the elements in the draft code which we lobbied for we are already complaint and have been for quite a while, so we’re actually pleased that it’s moving forward and aligned with the view of the TELUS organization from a customer’s first perspective. There are a couple of issues that we are working through with the regulator and you would have heard them very specifically in the hearing that happened earlier this week, and there are issues where we think that the elements may not exactly be consumer friendly. One example, on the throw-out, Maher, is, the capping of overage charges therefore suspending the customer after they reach a certain overage limit and the case is being recommend as $50. We believe as an example that is not consumer friendly. It would be very difficult to apply. We have a lot of plans that are shared amongst the family and when they draw the example of, if a particular family member were to hit the overage cap, because they are watching a movie on their smartphone, do we suspend the entire family as a result of that? So, we’ve been busy talking to the CRTC about what are the best ways to really at the end of the day help avoid the issue of bill shock which isn’t the consumer friendly mindset that we have. We have led the industry with respect to notifications and driving data notifications. We believe the majority and preponderance of the issues around notification have to do with the data as opposed to voice and SMS, so the other issue that we’re pushing back on is with respect to voice and SMS notifications because they are quite complex and tricky to actually enact with our IT system. Again you have the notion of evenings at weekends and your favorite numbers and all kinds of interesting kind of takes on rate plans and it becomes increasingly complex to actually figure out when a particular phone call is outside the bucket or inside the bucket and requires notification or accumulation towards the notifications. So, we’re dealing with those types of issues. The other factor we’re pushing back on is just the fact that we’d like one national code to have a multiplicity of provincial codes and a national code, I think creates a degree of complexity and overlap and a necessary bureaucracy, so, that’s the other kind of issue that we’re rattling with. But in the main, the vast majority of the elements we’re already doing, all we think make tremendous sense. On your question around TV, understand very emphatically that our focus on TV has always been around quality and improved economics. The fact that we have promotion in the marketplace right now with respect to a free Samsung TV as part of signing up for least a couple of services, high speed internet TV with TELUS is nothing new. We have been offering promotional items in the past because of our long-standing relationship of Samsung, we’ve been able to get that TV on a very attractive cost frankly no different than some of the other promotional features we have in the past whether it was a tablet or whether it was laptop et cetera in the same sort of range of COA. The important thing to note is that we’re offering customers some choice. Some customers would rather have their monthly package on promotion for a few months, other would rather have the gifted piece of hardware. They are not – we’re not allowing them to have both. We’re not allowing the stacking of promotion, so from an economic point of view, this is no different and no different in terms of its aggression in the marketplace whatsoever. So, at the end of the day the TV economics will be largely governed by our ability to continue to drive the operating performance of the organization through some of things I mentioned earlier in my comments whether it is driving better churn, driving better ARPU overall both which are at all-time record level for us in the TV solution, and then the bundling aspects of the home. Our high-speed Internet loading has been terrific in the last number of quarters largely due to our ability to bundle entertainment in with the home as a result. So, that’s the view overall. We are not seeing any sort of increased focus on subsidiary in the future.

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