The second largest Canadian telecommunications company, Telus Corporation (TU ) has reported third quarter adjusted earnings per ADS of 97 cents (99 Canadian cents per share), beating the Zacks Consensus Estimate by a penny. Adjusted earnings increased 4.3% from C$0.93 in the year-ago quarter.
Adjusted earnings exclude an income tax benefit of 3 Canadian cents.
Total revenue increased 6.5% year over year to C$2.622 billion ($2.682 billion), ahead of the Zacks Consensus Estimate of $2.632 billion. The year-over-year increase was attributable to higher revenues from wireless and wireline data services. Adjusted EBITDA upped 2.9% year over year to C$968 million ($990 million). The improved revenue was partially offset by higher costs associated with the growth in wireline Optik TV services and wireless subscribers.
Segment Results
Wireless revenues spiked 9% year over year to C$1.4 billion ($1.43 billion) in the reported quarter driven by an increases of 11.9% in network revenue and 13.7% in equipment and other revenue.
Within network revenue, data revenue jumped 53% year over year on strong adoption of smartphones and related data plans, increased mobile Internet devices and tablets, and higher roaming revenues. Voice revenue slid 5.7% year over year, due to the falling voice average revenue per user (ARPU).
The quarter’s ARPU grew 3.0% year over year to C$60.52 ($61.89), primarily attributable to higher data ARPU (up 44% year over year) partly offset by lower voice ARPU (down 10%). The monthly subscriber churn (customer switch) deteriorated by 13 basis points to 1.67% in the year-ago quarter, reflecting the loss of the federal contract plus increased price competition from new entrants and existing national competitors.
Net wireless subscriber addition was 114,000, reflecting a 25% year-over-year decrease following the loss of a federal service contract. Telus lost 19,000 net pre-paid customers in the third quarter, representing a 2.1% year-over-year decline. However, net post-paid subscriber addition was 92,000, up 1% year over year.
Telus had 7.2 million wireless subscribers, including 5.9 million post-paid customers and $1.2 million prepaid customers at the end of the third quarter.
Wireline revenues rose 4% year over year to C$1.267 billion ($1.295 billion) due to declines in voice local and long distance revenues, partially compensated by data and other services and equipment revenue growth. Data revenues increased 14.6% year over year to C$644 million ($659 million) owing to healthy TV subscriber growth, higher Internet services and enhanced data services, increased data equipment sales as well as newly consolidated managed workplace revenues.
Voice local revenues fell 6.9% year over year to C$379 million ($388 million) while voice long-distance revenue dropped 11.5% to C$116 million ($119 million) due to lower revenues from basic access, ongoing industry-wide price competition, substitution to wireless and Internet-based services, as well as declining residential access lines.
Telus added 50,000 TV subscribers to reach 453,000 customers (up 70% year over year). The massive growth can be credited to the ongoing success of the Optik TV brand, improved installation, enhanced service and expanded broadband coverage. Net high-speed Internet subscriber additions shot up more than four folds year over year to 22,000 (reaching 1.2 million in service) driven by the success of Optik TV and Optik high-speed Internet service as well as continued broadband footprint expansion and speed enhancement.
Total network access lines declined 4.0% year over year to 3.64 million in the reported quarter, resulting from intense cable competition and wireless substitution.
Cash Flow
Telus generated free cash flow of C$345 million in the reported quarter, up 2.1% year over year. Capital expenditure was C$470 million compared with C$449 million in the year-ago quarter.
Dividend
The company will pay a quarterly dividend of C$0.58 on January 12, 2012 to shareholders of record as of December 9, 2011. The dividend represents a 5.5% increment over the sequential quarter.
Outlook
Telus revised its outlook for 2011 taking strong third quarter results into account. The company maintained its consolidated revenue guidance of C$10.225–C$10.425 representing 4% to 6% growth on a year-over-year basis. Telus reiterated its EBITDA guidance of C$3.675–C$3.875 billion (up 1% to 6% year over year) and earnings per share guidance between C$3.50 and C$3.90 (up 7% to 19% year over year). The company also maintained its consolidated capital expenditure guidance of C$1.8 billion, up 5% year over year.
Moreover, Telus reiterated Wireless revenues estimates at C$5.4–C$5.5 billion (up 8–10% year over year) and EBITDA guidance at C$2.15–C$2.25 billion (up 6–11% year over year). For the Wireline segment, Telus maintained revenue estimates of C$4.825–C$4.925 billion (up 1–3% year over year) and EBITDA of C$1.525–C$1.625 billion, representing a decline of 6% to flat year over year.
Our Analysis
We remain encouraged by Telus’ prospects in Wireless data growth given new devices, technology upgrades, strong adoption of smartphones, deployment of HSPA+ Dual Cell technology and the expected launch of the 4G+ LTE network in 2012 which are expected to fuel Wireless revenue growth. On the Wireline side, the company’s continued investments to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services will boost profitability. In addition, we are encouraged by the company’s improved prospects of 2011 earnings and free cash flow with cost reduction plans and further investments in broadband infrastructure expansion and upgrades. However, accelerated access line erosion in the wireline segment, a weak Canadian economy, competitive threats from players such as Rogers Communication (RCI) and BCE Inc. (BCE) as well as reduced roaming charges keep us cautious on the stock.
Consequently, we maintain our long-term Neutral recommendation on Telus. However, for the short term (1–3 months), the stock retains a Zacks #4 (Sell) Rank.
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