The second largest Canadian telecommunications company, Telus Corporation (TU) reported first quarter 2011 adjusted earnings per ADS of 98 cents (97 Canadian cents per share), outpacing the Zacks Consensus Estimate by a penny. Adjusted earnings increased 14% year over year. The earnings uptick can be attributed to strong smartphone demand.
Adjusted earnings exclude a gain of 4 cents from the acquisition of a contact centre business.
Total revenue increased 6.5% year over year to C$2.531 billion ($2.567 billion), striding ahead of the Zacks Consensus Estimate of $2.490 billion. The year-over-year increase was attributable to higher revenues from wireless and wireline data services partially offset by declines in traditional voice revenues. Adjusted EBITDA upped 2.9% year over year to C$970 million ($983 million). The improved revenue was partially offset by high costs associated with the growth in wireline Optik TV services.
Segment Results
Wireless revenues spiked 11.2% year over year to C$1.317 billion ($1.335 billion) in the reported quarter driven by increases of 10.5% in network revenue and 19.3% in equipment and other revenue.
Within network revenue, data revenue climbed 44% year over year on strong adoption of smartphones and related data plans, higher-speed HSPA and EVDO-capable handsets, increased mobile Internet devices and tablets, and higher inbound data roaming volumes, partly mitigated by lower roaming rates. Voice revenue inched up 0.2% year over year, aided by subscriber growth but was partially offset by falling voice average revenue per user (ARPU).
In the reported quarter, ARPU grew 3.7% year over year to C$57.89 ($58.69), representing the highest increase since mid 2006. This improvement can be attributable to higher data ARPU (up 35% year over year) partly offset by lower voice ARPU (down 5.8%). The monthly subscriber churn (customer switch) deteriorated to 1.70% from 1.55% in the year-ago quarter, reflecting the loss of the federal contract and increased price competition from new entrants and existing national competitors.
Net wireless subscriber addition in the reported quarter was 32,000, reflecting a 37% year-over-year decrease due to tough pre-paid additions. Telus lost 20,000 net pre-paid customers in the first quarter, representing a 42.9% year-over-year decline. Net post-paid subscriber addition was 52,000, down 20% year over year.
Telus had 7 million wireless subscribers, including 5.8 million post-paid customers and $1.2 million prepaid customers at the end of the first quarter.
Wireline revenues rose only 2% year over year to C$1.263 billion ($1.28 billion) due to declines in voice local and long distance revenues, partially compensated by data revenue growth. Data revenues increased 10.9% year over year to C$619 million ($628 million) owing to healthy TV subscriber growth, higher Internet services and enhanced data services, increased data equipment sales as well as two months revenues from Transactel.
Voice local revenues fell 9.8% year over year to C$387 million ($392 million) while voice long-distance revenue dropped 6.8% to C$124 million ($126 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 44,000 TV subscribers to reach 358,000 customers (up 79.9% 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 five folds year over year to 16,000 (reaching 1.18 million in service) driven by the success of Optik TV and Optik high-speed Internet service launched in June 2010, as well as continued broadband footprint expansion and speed enhancement.
Total network access lines declined 5.1% year over year to 3.71 million in the reported quarter, resulting from intense cable competition and wireless substitution.
Cash Flow
Telus generated free cash flow of C$162 million in the reported quarter compared with C$247 million in the year-ago quarter. Capital expenditure was C$409 million, up 31.5% year over year.
Dividend
The company raised its quarterly dividend by 4.8% to 55 cents. The increased dividend is scheduled to be paid on July 14 to shareholders as of June 10. This reflects the third increment over the last 12 months.
Further, Telus plans to hike dividends twice every year until 2013. The dividend increase will be made 10% annually.
Outlook
Telus reaffirmed its outlook for 2011 reflecting strong wireless growth. The company continues to expect consolidated revenue of C$9.925–C$10.225 billion (up 1% to 4% year over year), EBITDA of C$3.675–C$3.875 billion (up 1% to 6% year over year) and earnings per share between C$3.50 and C$3.90 (up 7% to 19% year over year). The company reiterated its consolidated capital expenditure guidance at C$1.7 billion.
Telus expects Wireless revenues to grow 4–7% to C$5.2–C$5.35 billion and EBITDA to grow 6–11% to C$2.15–C$2.25 billion for 2011. For the Wireline segment, Telus reiterated its revenue and EBITDA guidance at C$4.725–C$4.875 billion and C$1.525–C$1.625 billion, respectively.
Our Analysis
We remain encouraged by Telus’ prospects in wireless data growth given new devices, technology upgrades, strong adoption of smartphones, recent deployment of HSPA+ Dual Cell technology and the expected launch of 4G+ LTE network in 2012, which are expected to fuel Wireless revenue growth. Popular smartphones like BlackBerry and iPhone (launched in late 2009) will provide Telus a competitive advantage over other dominant players such as Rogers Communication (RCI) and BCE Inc. (BCE).
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 its profitability. In addition, we are encouraged by the company’s improved confidence related to 2011 earnings and free cash flow with cost reduction plans and further investments in broadband infrastructure expansion and upgrade.
Consequently, we are currently maintaining our long-term Outperform recommendation on Telus supported by the Zacks # 2 (Buy) Rank.
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