TELUS Earnings Call INSIGHTS: Intense Competition, Wireless ARPU Trends

On Friday, TELUS Corp (NYSE:TU) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Intense Competition

Phillip Huang – UBS Securities: It’s kind of encouraging to see all three incumbents appear to have moved more I guess disciplined on the wireless side of the business. I think we’ve seen stricter handset upgrade policies and we’ve also seen some symbolic price increases earlier this year. I’m just wondering how you guys – as you look to the more competitive, seasonally more competitive second half do you think the industry can maintain such discipline and especially when the iPhone 5 comes out and/or do you anticipate that every year around the second half you guys will need to be a little more generous, also on the price increase whether you expect to be able to increase on a more broad based leveled away you guys increase prices on the wireline side?

Joseph Natale – EVP and Chief Commercial Officer: If you look back over this past quarter we had some intensive competition and we managed to execute and deliver best in class results. That intensity we believe will continue in the marketplace. It has been that way since very long time, will continue to be that way. A look at our results overall 112,000 postpaid net, the churn rate 1.39 you factor out the Government of Canada losses and that’s 1.37. There is a wonderful thing about that sort of churn rate, it really gives us an opportunity to really step to one side and be more sanguine when it comes to the more aggressive promotions in the marketplace, knowing that the easiest customer to get is the one you already have. That has been fundamental to our thesis around our best in class results. You couple that with the continued support for ARPU growth, especially given the fact that we still have over 40% of our base that is yet to upgrade to a smartphone and there is still opportunity with respect to growing economics and the voice to data conversion thesis and economics still make incredible sense for our business. We are about to enter two very important seasons or cycles, one is back-to-school and the other is Christmas. We will see comic devices come through that period, but that is the case over the last little while as well. We launched the Samsung Galaxy S III in the last little while, it has been done very well for us. In fact from an acquisition point of view the android devices have been out loading the iPhone over the previous quarter. So at the end of the day without getting into the specifics of our plans for either those two very important seasons, which are incredibly sensitive, I would say that we’re prepared to continue to drive success in the marketplace, leverage the power of our brand, leverage the excellence of the management team that keep driving the source of results that you have been seeing.

Wireless ARPU Trends

Glen Campbell – Bank of America Merrill Lynch: My questions are on wireless ARPU trends. On the voice side a very nice improvement in trend and I was wondering, if you can give us a bit of color, is there less retention discounting, is this just a changing customer mix or are we seeing some say flattening out in demand levels? Then on the data side could you talk about what’s realistic to expect as penetration of smartphones goes from say 60% to 90%? You think most of those incremental customers can be brought on at the – let’s say on full data plans or more realistically are we looking at say $10 to $15 ARPU bumps from those customers?

Robert McFarlane – EVP and CFO: I will start off with replying and then Joe can comment as to where it is appropriate. Firstly I think when – let’s take our ARPU, really our organization looks at the combination of factors. Clearly smartphones has driven the ARPU increase in the industry and to a very significant extent at TELUS and what’s occurred is while ARPU has remained high, it came down a little bit but what’s been more notable is that churn rates have come down markedly in that category. So the loyalty of people who – their life begins to revolve around smartphone and the context and the conductivity that it provides and I think that’s just a different dynamic than the tradition of conventional voice centric devices in the past. The manifestation of that is as we always sort of look at lifetime revenues (ready with) the product of ARPU divided by churn. So that trend is distinctly positive for the organization and really driven by that smartphone penetration, which for the next few years we would expect to continue to be very significant as it has been. In respect to dynamics contributing to the increase in our reported ARPU on a year-over-year basis, I referred to some of those factors in my opening comments, but suffice to say its data growth that’s driving that where there is increased subscription to data plans that’s coming with smartphone adoption. I would add on that, it’s a less of a factor for sales but of course its building out there industry-wide and that’s the adoption of tablets, that’s a portion of which have the mobile subscription, and to the extent they do obviously that’s a much lower ARPU from a traditional management perspective. They don’t come with a voice subscription, but that does lower ARPU. So I think it’s kind of notable then in terms of 2.4% increase, while tablets are still small. They are an emerging component and in spite of that effect on the traditional metric we’re still getting the increase. The other thing that is probably more TELUS specific than generic to all carriers is roaming and we talked about this in the past that one of the rationales for the launch of the HSPA network and further through the adoption of LTE is our increased access to international roaming. So whereas on the CDMA platform it was really a cross-border U.S. Canada dynamic for all intensive purposes. Now we’ve got an international European Asian traffic component that is really driving growth as well as growth in terms of roaming and overall revenue. So, that’s really the primary sort of dynamics and maybe I’ll hand over to Joe just to augment it.

Joseph Natale – EVP and Chief Commercial Officer: The other thing I would say that if you are able to sit in one of our management team meetings, you would certainly see a very strong focus on ARPU, but an equally strong focus on AMPU, average margin per unit and we continue to drive efforts across the organization both in wireless and wireline to really drive efficiencies, simplify our rate structure, simplify our ability to serve customers, et cetera, and really take cost off the organization. It manifests itself in the type of EBITDA flow-through that we’re seeing on the wireless side right now. If you look at the last many quarters the flow-through has been significant. So, I think it’s fair to say that AMPU is as critical a driving force in the organization as ARPU is.