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Telus Corporation (TU - Analyst Report) reported third-quarter 2013 adjusted earnings per ADS of 56 cents (58 Canadian cents per share), which were ahead of the Zacks Consensus Estimate of 52 cents. Adjusted earnings increased 18.4% from 49 Canadian cents (ADS of 49 cents) in the year-ago quarter.

Adjusted earnings excluded the impact of losses related to restructuring and other expenses as well as income tax-related adjustments.

Total revenue grew 3.6% year over year to $2.76 billion (C$2.87 billion) but marginally missed the Zacks Consensus Estimate of $2.78 billion. The year-over-year increase was backed by higher revenues from wireless and wireline segments. The strength also came on the back of continuous subscriber addition and higher ARPU across wireless, Optik TV and high-speed Internet services.

Quarterly adjusted EBITDA grew 5.7% year over year to C$1,050 million ($1,010 million), resulting in an EBITDA margin of 36.5%, down 20 basis points.

Segment Results

Wireless revenues rose 5.2% year over year to C$1.44 billion ($1.39 billion) in the reported quarter driven by growth in subscribers and higher ARPU.

Within network revenues, data revenues jumped 17.0% year over year to C$637.0 million ($613.0 million) on continuous adoption of smartphones and related data services and higher data roaming revenues. Voice revenues slid 5.8% year over year due to declining voice average revenue per user (ARPU).

In the third quarter, ARPU grew 1.7% year over year to C$62.49 ($60.13), primarily attributable to higher data ARPU (up 13.0% year over year), which more than offset lower voice ARPU (down 5.8%). The monthly subscriber churn (customer switch) declined to 0.99% from 1.10% in the year-ago quarter on the back of successful Customer First service approach, investments in client retention and lower smartphone churn.

Quarterly net wireless subscriber addition was 106,000, reflecting a decline of 4.5% from the year-ago quarter. Telus lost 2,000 net prepaid customers in the third quarter while net post-paid subscriber addition totaled 104,000.

Telus had 7.8 million wireless subscribers (up 3.3% year over year) including 6.71 million post-paid customers and $1.09 million prepaid customers at the end of the reported quarter.

Wireline revenues increased 3.0% year over year to C$1.31 billion ($1.26 billion) in the reported quarter on strong growth in data services revenues, partially offset by deteriorating legacy voice revenues.

Data and equipment revenues climbed 8.7% year over year owing to healthy growth of Telus TV subscribers, high speed Internet and enhanced data services along with increased TV and Internet ARPU.

Network access lines declined 4.8% year over year to 3.3 million while residential lines reported an annualized drop of 7.4%hurt by on-going industry-wide price competition and shift to wireless and Internet-based services. Business lines were down 1.8% year over year due to the ongoing price based competition in the small and medium business market and customer adaptation of IP based services.

During the quarter, Telus added 34,000 TV subscribers to reach 776,000 customers (up 22.0% year over year). Net high-speed Internet subscriber addition was 19,000, bringing the total number of customers at the end of the third quarter to 1.37 million (up 5.4% year over year).

Liquidity

Telus ended the quarter with cash and investments of C$32 million ($30.8 million) compared with C$107 ($106 million) million at the end of 2012. Net debt increased to C$7.31 billion ($7.04 billion) from C$6.56 billion ($6.59 billion) in the year-ago quarter. Net debt to EBITDA (excluding restructuring costs) increased to 1.8 times from 1.7 times in the year-ago quarter and was within the company’s long-term target of 1.5−2 times.

During the third quarter, Telus generated free cash flow of C$365.0 million ($351.2 million), exhibiting an annualized decline of 14.3%. Capital expenditure was C$555 million ($534.1 million) in the third quarter compared with C$471 million ($473 million) in the year-ago quarter.

Dividend & Share Buyback

The company’s board of directors declared a quarterly dividend increase of 2 Canadian cents to 36 Canadian cents payable on Jan 2, 2014 to shareholders of record as on Dec 11, 2013.

During the quarter, the company returned $941 million to shareholders including $222 million in dividends and $719 million in share repurchases.

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 make us remain sidelined on the stock.

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

Other Stocks

Other stocks worth considering are Orange (ORAN - Analyst Report), Vodafone Group Plc. (VOD - Analyst Report) and Shenandoah Telecommunications Co. (SHEN - Snapshot Report). ORAN and SHEN carry a Zacks Rank #1 (Strong Buy) while VOD carries a Zacks Rank #2 (Buy).

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