Telus Corporation (TU) reported fourth-quarter 2013 adjusted earnings per ADS of 45 cents (49 Canadian cents per share), which were ahead of the Zacks Consensus Estimate of 43 cents. Adjusted earnings increased 17.5% from 40 Canadian cents (ADS of 43 cents) per share registered in the year-ago quarter.
Adjusted earnings for the reported quarter excluded the 2-cent per share impact of a special item related to favorable income tax-related adjustments.
Adjusted earnings for the year rose 15.6% year over year to C$2.16 (approximately $1.99).
Total revenue grew 3.4% year over year to C$2.94 billion ($2.68 billion) but was below the Zacks Consensus Estimate of $2.74 billion. The year-over-year increase was buoyed by higher revenues from wireless and wireline data services.
Total revenue for 2013 increased 4.4% year over year to C$11.4 billion ($10.49 billion).
Quarterly adjusted EBITDA grew 5.0% year over year to C$984 million ($905 billion), resulting in an EBITDA margin of 33.4%, up 50 basis points. For 2013, EBITDA grew 5.3% year over year to C$4.116 billion ($3.790 billion), resulting in an EBITDA margin of 36.1%, up 30 basis points.
Segment Results
Wireless revenues rose 3.4% year over year to C$1.60 billion ($1.47 billion) in the reported quarter driven by higher subscriber and ARPU growth.
Within network revenues, data revenues jumped 13.7% year over year on continued strong adoption of smartphones and related data applications and higher data roaming revenues. Voice revenue slid 2.7% year over year, due to falling voice average revenue per user (ARPU).
ARPU grew 1.5% year over year to C$61.86 ($56.91) primarily attributable to higher data ARPU (up 11.4%) negated by lower voice ARPU (down 5.5%) to some extent. The monthly subscriber churn (customer switch) improved to 1.41% from 1.51% in the year-ago quarter on the back of high-value client retention lower smartphone churn and the company’s customer first service approach.
Quarterly, net wireless subscriber addition was 91,000, reflecting a decline of 18.8% from the year-ago quarter. Telus lost 22,000 net prepaid customers in the fourth quarter compared with a net loss of 11,000 in the year-ago quarter. Additionally, net post-paid subscriber addition was 113,000, representing an annualized decline of 8.13%.
Telus had 7.8 million wireless subscribers (up 1.8% year over year), including 6.75 million post-paid customers (up 3.2% year over year) and $1.01 million prepaid customers (down 6.3% year over year) at the end of the reported quarter.
Wireline revenues increased 4.1% year over year to C$1.41 billion ($1.30 billion) on strong growth in data services and equipment revenues, partially compensated by lower voice local and voice long distance.
Data and equipment revenues climbed 10.5% year over year to C$851.0 million ($783.0 million) owing to healthy TV subscriber growth, Internet and data subscriber growth, higher rates, and increased revenues from data equipment sales.
Voice local revenues fell 8.2% year over year to C$323 million ($297.2 million) while voice long-distance revenues dropped 6.8% to C$96 million ($88.3 million), hurt by lower revenues from basic access, ongoing industry-wide price competition, shift to wireless and Internet-based services, and declining residential access lines.
During the quarter, Telus added 38,000 TV subscribers to reach a total of 815,000 customers (up 20.2% year over year).Net high-speed Internet subscriber additions were 21,000, bringing the total number of customers at the end of the fourth quarter to 1.4 million. The upside was driven by the success of Optik TV and Optik high-speed Internet service launched in Jun 2010.
Liquidity
Telus excited 2013 with Net debt of C$7.59 billion ($6.984 billion) as compared to C$6.58 billion ($6.51 billion) at the end of 2012. Net debt to EBITDA (excluding restructuring costs) increased to 1.8 times from 1.7 times in the prior year and was within the company’s long-term target range of 1.5−2 times.
Telus generated free cash flow of C$1.05 billion ($1.03 billion), exhibiting an annualized decline of 21.0%. Capital expenditure crept up 7.3% year over year to C$2.1 billion ($1.93 billion) in 2013.
Share Repurchase and Dividend
In 2013, the company returned $852.0 million in dividend and $1 billion in share repurchase under its normal course issuer bid (NICB) program. As part of NICB 2014 program the company had purchased 590,400 shares worth $22 million in Jan 2014.
Telus’ board of directors declared a quarterly dividend of 36 Canadian cents (ADS of 33 cents) payable on Apr 1, 2014 to shareholders at the close of business on Mar 11. It represents a 12.5% hike from previous year quarter dividend.
Acquisition of Public Mobile Holdings Inc.
On Nov 29, 2013 Telus completed the acquisition of Toronto and Montreal focused Canadian wireless operator Public Mobile Holdings Inc. for $229 million net of cash acquired. The transaction got approval from both Industry Canada and Competition Bureau.
Guidance
In 2014, Telus expects consolidated revenue to grow in the range of 4–6% to C$11.9–C$12.1 billion, EBITDA to increase 3–8% to C$4.15–C$4.35 billion and earnings per share to grow 11–21% to C$2.25–C$2.45.Capital expenditure is expected at approximately $2.2 billion, which is above the 2013 level.
Telus expects wireless revenues to grow 5–7% to C$5.9–C$6.0 billion and EBITDA to grow 4–8% to C$2.725–C$2.825 billion.
For the wireline segment, Telus expects revenues to grow 3–5% to C$5.45–C$5.55 billion and EBITDA to range between $1.425 billion and $1.525 billion, representing a decline of 1% to a growth of 8% year over year.
Our Take
We believe that the company’s ongoing investments in the expansion of LTE and increased rollout of smartphones and Internet data centers will fuel strong growth leading to more opportunities in the wireless and cloud computing businesses. Likewise, in the wireline front, Telus continues to focus on the efficiency of the Optik TV and Optik High-Speed Internet broadband services, which remain its strength in operations. Nevertheless, persistent erosion in access lines in the wireline segment and weak voice services in wireless might weigh on the company’s future earnings. Competitive threats and reduced roaming charges are other impediments which keep us sidelined.
Telus, currently carries a Zacks Rank #4 (Sell).
Other stocks worth considering are BT Group Plc. (BT), Level 3 Communications Inc. (LVLT) and Telecom Italia S.p.A. (TI). All the stock carry a Zacks Rank #2 (Buy).
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