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Telus Corporation (TU - Analyst Report) reported second-quarter 2013 adjusted earnings per ADS of 52 cents (54 Canadian cents per share), which were ahead of the Zacks Consensus Estimate of 51 cents. Adjusted earnings increased 12.5% from 48 Canadian cents (ADS of 47 cents) in the year-ago quarter.

Adjusted earnings for the reported quarter excluded the impact of losses related to the Telus Garden Residential real estate partnership, restructuring and other expenses, long-term debt prepayment premium and income tax-related adjustments.

The total revenue grew 6.1% year over year to $2.71 billion (C$2.82 billion) but missed the Zacks Consensus Estimate of $2.72 billion. The year-over-year increase was buoyed by higher revenues from wireless and wireline segments. The strong growth was also fuelled by continuous subscriber additions and higher ARPU across wireless, Optik TV and high-speed Internet services.

Quarterly adjusted EBITDA upped 6.5% year over year to C$1,037 million ($1,014 million), resulting in an EBITDA margin of 36.5%, up 20 basis points.

Segment Results

Wireless revenues rose 5.9% year over year to C$1.5 billion ($1.47 billion) in the reported quarter driven by growth in postpaid subscribers and data revenues.

Within network revenues, data revenues jumped 17.0% year over year to C$601.0 million ($587.4 million) on continued adoption of smartphones like Apple Inc.’s (AAPL - Analyst Report) iPhone and related data plans, increased mobile Internet devices and tablets, and higher data roaming revenues. Voice revenues slid 6.2% year over year due to declining voice average revenue per user (ARPU).

In the second quarter, ARPU grew 1.4% year over year to C$61.12 ($59.74), primarily attributable to higher data ARPU (up 13.0% year over year), which more than offset lower voice ARPU (down 4.5%). The monthly subscriber churn (customer switch) improved to 1.03% from 1.06% in the year-ago quarter on the back of investments in high-value client retention and lower smartphone churn.

Quarterly, net wireless subscriber addition was 79,000, reflecting a reduction of 8.1% from the year-ago quarter. Telus lost 21,000 net prepaid customers in the second quarter while net post-paid subscriber addition totalled 100,000.

Telus had 7.7 million wireless subscribers (up 3.5% year over year) including 6.62 million postpaid customers and $1.08 million prepaid customers at the end of the reported quarter.

Wireline revenues nudged up 6.3% year over year to C$1.30 billion ($1.27 billion) in the reported quarter due to strong growth in data services revenues, partially offset by deteriorating legacy voice revenues.

Data and equipment revenues climbed 15.0% year over year owing to healthy TV subscriber growth, higher rates and enhanced Internet and data services.

Voice local revenues fell 4.4% year over year to C$338 million ($330.4 million) while voice long-distance revenues dropped 1.6% to C$107 million ($104.6 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 partially offset by higher rates for basic access and calling service.

During the quarter, Telus added 31,000 TV subscribers to reach 743,000 customers (up 25.0% year over year). Net high-speed Internet subscriber additions were 13,000, bringing the total number of customers at the end of the second quarter to 1.36 million (up 6.1% year over year).

Liquidity

Telus ended the quarter with cash and investments of C$272 million ($270.6 million) compared with C$107 ($106 million) million at the end of 2012. Net debt reduced to C$6.698 billion ($6.665 billion) compared with C$6.487 billion ($6.456 billion) in the year-ago quarter. Net debt to EBITDA (excluding restructuring costs) decreased to 1.7 times from 1.8 times in the year-ago quarter and was within the company’s long-term target of 1.5−2 times.

During the second quarter, Telus generated free cash flow of C$192 million ($1.88 million), exhibiting an annualized decline of 32.4%. Capital expenditure was C$511 million ($499 million) in the second quarter compared to C$548 million ($535 million) in the year-ago period.

Dividend & Share Buybacks

The company’s board of directors declared a quarterly dividend of 34 Canadian cents payable on Oct 1, 2013 to shareholders of record as on Sep 10, 2013. In addition, the company increased its dividend growth program by another three years up till 2016 with projection of semi-annual dividend growth of approximately 10%.

Further, Telus expects to repurchase 31.9 million shares worth $1 billion in 2013, which is expected to move up to $2.5 billion by 2016.

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 future 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. Further, a weak Canadian economy, competitive threats from players such as Rogers Communications Inc. (RCI - Analyst Report) and BCE Inc. (BCE - Analyst Report) and reduced roaming charges keep us on the sidelines.

Currently, Telus carries a Zacks Rank #3 (Hold).

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