Telus Corporation (TU) reported second-quarter 2014 adjusted earnings of 63 Canadian cents per share (58 cents per ADS), 16.7% up year over year and ahead of the Zacks Consensus Estimate of 54 cents.
Total revenue grew 4.4% year over year to C$2.95 billion ($2.69 billion), but missed the Zacks Consensus Estimate of $2.70 billion by a whisker. The year-over-year increase was buoyed by higher revenues from wireless and wireline data services.
Quarterly adjusted EBITDA grew 4.5% year over year to C$1,084 million ($989.7 million), resulting in an EBITDA margin of 36.7%.
Segment Results
Wireless revenues rose 6.2% year over year to C$1.62 billion ($1.35 billion) in the reported quarter. Wireless network revenues grew 6.1% year over year driven by higher subscriber and data growth. Meanwhile, Equipment and Other revenue leaped 7.7% to C$126 million ($115 million).
Within Network revenues, data revenues grew 20% year over year owing to continued strong adoption of smartphones and related data applications, expansion of LTE base and higher data roaming revenues, partially offset by increased used of data sharing plans, lower roaming rates and more competitive U.S. roaming packages. Voice revenues slid 7.7% year over year due to falling voice usage and substitution by data services and features.
ARPU grew 2.3% year over year to C$62.51 ($57.01). The monthly subscriber churn (customer switch) improved to 1.26% from 1.40% in the year-ago quarter on the back of the company’s customer-first service approach and greater portion of post-paid clients in its subscriber base.
Net wireless subscriber addition in the quarter was 58,000, reflecting a decline of 26.6% from the year-ago quarter. Telus lost 20,000 net prepaid customers in the second quarter compared with a net loss of 21,000 in the year-ago quarter. Additionally, net post-paid subscriber addition was 78,000, representing an annualized decline of 22%.
Telus had 7.88 million wireless subscribers (up 2.2% year over year), including 6.88 million post-paid customers (up 3.8% year over year) and 1 million prepaid customers (down 7.4% year over year) at the end of the reported quarter.
Wireline revenues increased 2.4% year over year to C$1.39 billion ($1.27 billion) on strong growth in data services, partially compensated by lower voice local and voice long distance.
During the quarter, Telus added 23,000 TV subscribers to reach a total of 865,000 customers (up 16.4% year over year). Net high-speed Internet subscriber additions were 15,000, bringing the total number of customers at the end of the second quarter to 1.43 million. The upside was driven by the success of Optik TV and Optik high-speed Internet service launched in Jun 2010, enhanced broadband speeds and improvement in customer churn rate.
Liquidity
Telus exited the quarter with net debt of C$9.27 billion ($8.69 billion) as compared to C$7.59 billion ($6.984 billion) at the end of 2013. Net debt to EBITDA (excluding restructuring costs) increased to 2.21 times from 1.71 times in the prior quarter and is outside the company’s long-term target range of 1.5−2 times.
Telus generated free cash flow of C$210 million ($192million), exhibiting a year-over-year rise of 9.4%. Capital expenditure crept up 24.5% year over year to C$636 million ($581 million) in the second quarter.
Dividend and Share Repurchase
Telus has returned $412 million to shareholders in the second quarter including $224 million in dividends and $188 million in share repurchase activity.
Our Take
We believe Telus’ 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, on the wireline front, Telus continues to focus on the efficiency of the Optik TV and Optik High-Speed Internet broadband services, which remain its core strengths. Nevertheless, persistent erosion in access lines in the wireline segment and loss of prepaid subscribers might weigh on the company’s future earnings. Competitive threats from other players like Rogers Communications Inc. (RCI) and BCE Inc. (BCE) and reduced roaming charges are other impediments, which keep us on the sidelines.
Telus currently carries a Zacks Rank #3 (Hold).
Other Stocks
A better-ranked stock in this sector is Chunghwa Telecom Co., Ltd. (CHT) which holds a Zacks Rank #2 (Buy).
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