Cable / Telecom News

Unpopular investments (at the time) have led to strong run at Telus: Natale


MONTREAL – It's the darling of the Canadian telecom field these days among Bay Streeters, and Telus again had a strong quarter, posting a 13% increase in quarterly profit in its Q1 results released Thursday as it added tens of thousands of new wireless and IPTV customers.

It’s wireless ARPU has grown to over $60 a month and the price of its newly split shares is on the rise. Churn is down, customer satisfaction is up, wireline revenues are increasing, and dividend payouts are growing for investors. According to EVP and chief commercial officer Joe Natale, this spate of recent success dates back to some unpopular decisions made back during the financial meltdown in 2008.

Telus ramped up its network investments then (it and Bell had to go HSPA, which was the direction the whole wireless world shifted to but only Rogers had, giving it a head start with the iPhone and most international roaming), but Natale recalled investors’ tepid reaction to the spend in an interview in Montreal with Cartt.ca on Thursday. The investment community was not pleased. “When the world was melting down – we were going to meetings saying ‘now is a great time to invest,’” he said. “We can get lots of great technology at a discounted price… we could get two to three times the quantity and quality of stuff we got in the past for our dollar. We have the cash and we said lets get ready for the upswing of the economy.

“It was a very unpopular move for investors. We got pressured a lot as they said ‘please return the money to us’ instead.”

With CEO Darren Entwistle promising rising dividends and share buybacks from now through 2016, as he did during the company’s annual general meeting Thursday morning, the investors who stuck with Telus seem a satisfied bunch now.

THOSE BILLION-DOLLAR investments, Natale added, are part of the reason why the wireless newcomers launched just after that time have had such a hard time attracting enough customers to be successful and he, along with Telus CFO John Gossling, believes the Canadian market can only sustain three national players, despite what the federal government might desire.

“You see time and time again, when new entrants come into the market, they have very high churn rates because they just don’t have the service quality and they can’t really achieve it without huge investments that their business plan isn’t going to allow,” said Gossling.

So then, what is Telus telling the federal government and the Industry Minister, who is so intent on seeing a fourth national wireless player maintained? “First we say, ‘If your goal is a competitively intense wireless market, we have one’,” insisted Natale. “Just look at what’s happened in the last number of years: Voice has largely become an unlimited feature for the most part and so has texting. Data will become more affordable and of greater value as we find more economical ways of delivering it.

“I hold a meeting every Monday where we look at what happened the past weekend, the competitive intensity and what’s happened from a price change and promotion point of view. It’s never been more intense than now,” he added.

“I was floored when I started going to Joe’s meetings to see how competitive the market is – and that’s the three big guys beating each other up,” said Gossling, who joined Telus in 2012.

Natale explained that the wireless business in Canada is just over a quarter-century old but, “if you add up the collective results of all three of the major players, we’ve yet to become cumulative cash flow positive. This is an expensive industry and the geography of Canada and the density of the Canadian population makes it even more challenging,” he said. “If this was your family business, would you invest in it for 25 years and never be able to draw one dollar of cash from it?”

“This is a long haul business where you continue building out capability and you’ve got to have the appetite to build a network and do it well. So, when we get compared to some other countries that would fit neatly into southern Ontario from a geographic land mass point of view… comparatively speaking, this is one of the most challenging countries to cover,” Natale added.

“I just don’t believe that our country, our economics, can support a fourth carrier. That’s been fundamentally our view. It’s challenging.”

What’s needed now, however, is more spectrum to continue to build out LTE and to meet the growing wireless data demands of Canadians, said both executives (neither one of whom would comment on rumours it would like to purchase Mobilicity). That, of course, will come with the 700 MHz auction later this year. Neither Gossling nor Natale would venture a guess on what securing this prime spectrum might cost. “Last time we thought we were going to spend $350 or $500 (million),” said Gossling “and we ended up spending $882 (million),” added Natale.

“There’s no question it’s the most valuable spectrum. The question is who shows up to the party and how will these auction rules play out? There’s no set aside this time. We have caps, based on the tranches, but it’s a blind auction, so you don’t really know what’s happening within whatever tranche you’re bidding on,” he explained.

With 70% of the country covered by LTE (via Telus and Bell’s shared wireless net), “we want to build out the remaining 25-30% on LTE which is essentially more rural Canada overall and it just can’t be done economically without that spectrum. We just can’t. The cell site density we would need (with its existing spectrum) in those areas make it completely uneconomical,” said Natale.

DEPENDING ON WHO YOU talk to, Telus is either brilliant for staying away from buying content companies the way its competitors Bell and Rogers have, or others fret the company is facing difficult rights negotiations for years to come because it has no content horses of its own to trade. Natale has no doubt that the company’s strategy continues to be the correct path, despite the travails recounted by other Telus executives in another event going on in Montreal this week – the CRTC hearing into Bell’s second attempt to purchase Astral Media.

“There’s no question content is very important to our business and we have to have it available on our platforms,” said Gossling, the former CFO of CTVglobemedia. “Do we need to be a content owner? We’re a content aggregator… we stick to what we know and… it’s not really in our DNA to be content company so I think that’s been a smart move for us.

“Do we need safeguards? Absolutely. Do we need to make sure we have access to the content for all of our platforms? We do. We need to be sure it’s fair, that we don’t get left behind and somebody takes a head start on us.”

Adds Natale: “We’re not changing our strategy whatsoever. I just think we have to make sure we get the legislation in place and the rules in place that will help drive the right outcomes.”