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TELUS (TU) Downgraded to Sell on Intense Competition

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On Aug 24, 2016, leading Canadian telecom service provider TELUS Corporation (TU - Free Report) was downgraded to a Zacks Rank #4 (Sell) by Zacks Investment Research. Notably, TELUS’s predicament comes due to intense competition both in the wireless and the wireline segments.

In the wireless segment, the company competes against Rogers Communications Inc. (RCI - Free Report) and BCE Inc. (BCE - Free Report) along with menacing small regional carriers across Canada. Additionally, Shaw Communications Inc‘s entry into the Canadian wireless market after its takeover of WIND Mobile will further put pressure on TELUS.

Dropping Subscriber Numbers

Intense competitive pressure resulted in reduced subscriber addition for the company in the second quarter. Net addition of postpaid customers was 61,000, down 19.7% year over year whereas net loss of prepaid customers was 21,000, up 61.5% year over year. Moreover, Shaw Communications’ decision to venture into the Canadian wireless market with the WIND Mobile acquisition escalates competition for TELUS.

Wireline Business

On the wireline side of the business, competition has increased with cable TV operators (such as Shaw Communications) shifting from offering phone service based on ‘circuit-switched’ technology to the less costly Voice-over-Internet Protocol (VoIP). Capital expenditure in the wireline segment includes investments in broadband infrastructure, to attract more business and residential customers directly under fiber optic cable.

Notably, for full-year 2016, TELUS projects capital expenditure of approximately C$2.85 billion, in comparison with C$2.577 billion recorded in 2015. Continuous network investments can adversely affect TELUS’s cash flows, especially in a space where TELUS is already under massive strain. Moreover, during the second-quarter 2016, TELUS generated approximately $592.5 million of cash from operations, declining 5.4% year over year. Free cash flow, in the reported quarter, was around $97.8 million, down a significant 58% year over year.

The Positives

TELUS continues to benefit from increased penetration of smartphones, higher average revenue per unit, accelerating wireless data services and growing wireline fiber optic networks. The company anticipates balanced growth for its wireless and wireline businesses owing to its investments in high-speed broadband technology and services along with its Customer First strategy. Also, with the Internet of Things (IoT) marketplace paving its way into Canada, TELUS is aims to consolidate its foothold in the IoT market. It has also introduced the TELUS Global IoT Connectivity platform to deliver seamless connectivity and simplified billing across 200 networks globally, to assist the expansion of Canadian business enterprises.

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