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The second largest Canadian telecommunications company, Telus Corporation (TU - Analyst Report) reported fourth quarter 2011 adjusted earnings per ADS of 75 cents (C$0.73 per share), missing the Zacks Consensus Estimate by 4 cents. Adjusted earnings increased 11.9% from C$0.67 in the year-ago quarter.
Adjusted earnings per share excluded an income tax benefit of 3 Canadian cents and investment impairments of 2 Canadian cents. In fiscal 2011, adjusted earnings increased 9.9% year over year to C$3.66 ($3.7) per share.
Total revenue grew 5.3% year over year to C$2.69 billion ($2.63 billion), but fell shy of the Zacks Consensus Estimate of $2.704 billion. The year-over-year increase was attributable to higher revenues from wireless and wireline data services. Adjusted EBITDA upped 3.8% year over year to C$873 million ($853.2 million). The improved revenue was partially offset by higher costs associated with the growth in wireline Optik TV services and wireless subscribers.
In 2011, revenue and adjusted EBITDA rose 6.2% and 3% to C$10.4 billion ($10.5 billion) and C$3.76 billion ($3.80 billion), respectively. Telus’ revenue exceeded C$10 billion for the first time.
Wireless revenues spiked 6.5% year over year to C$1.42 billion ($1.39 billion) in the reported quarter driven by increases of 6.4% in network revenue and 4.3% in equipment and other revenue.
Within network revenue, data revenue jumped 43% year over year on strong adoption of smartphones and related data plans, increased mobile Internet devices and tablets, and higher roaming revenues. Voice revenue slid 7.2% year over year, due to falling voice average revenue per user (ARPU).
In the reported quarter, ARPU inched up 1% year over year to C$59.08 ($57.74), primarily attributable to higher data ARPU (up 35% year over year) partly offset by lower voice ARPU (down 12%). Despite the loss of the federal contract and increased price competition from new entrants and existing national competitors, the monthly subscriber churn (customer switch) improved to 1.67% from 1.72% in the year-ago quarter.
Net wireless subscriber addition was 129,000, reflecting an 8.4% year-over-year increase. Telus lost 19,000 net prepaid customers in the fourth quarter compared to 10,000 additions in the year-ago quarter. Net post-paid subscriber addition was 148,000, up 36% year over year.
Telus had 7.3 million wireless subscribers, including 6.1 million post-paid customers and $1.2 million prepaid customers at the end of the fourth quarter.
Wireline revenues rose 4.1% year over year to C$1.31 billion ($1.28 billion) due to strong growth in data services and equipment revenue, partially compensated by lower voice local, voice long distance and other services and equipment revenues.
Data revenues climbed 15% year over year to C$680 million ($664 million) owing to healthy TV subscriber growth, enhanced Internet and data services, and increased data equipment sales.
Voice local revenues fell 6.8% year over year to C$368 million ($359.6 million) while voice long-distance revenue dropped 12% to C$115 million ($112.4 million) due to lower revenues from basic access, ongoing industry-wide price competition, substitution to wireless and Internet-based services, as well as declining residential access lines.
Telus added 56,000 TV subscribers to reach 509,000 customers (up 62% year over year). The massive growth can be credited to the ongoing success of the Optik TV brand, improved installation, enhanced service and expanded broadband coverage. Net high-speed Internet subscriber additions were 24,000, bringing the total number of customers at the end of the fourth quarter to 1.24 million. The increase was driven by the success of Optik TV and Optik high-speed Internet service launched in June 2010, as well as continued broadband footprint expansion and speed enhancement.
Total network access lines declined 3.9% year over year to 3.59 million in the reported quarter, resulting from intense cable competition and wireless substitution. This marks the slowest rate of decline in the last three years.
Telus ended 2011 with cash and investments of C$46 million compared with C$17 million at the end of 2010. Net debt increased slightly to C$6.96 billion in the full year from C$6.87 billion in the prior year. Net debt to EBITDA (excluding restructuring costs) remained stable at 1.8 times at the end of 2011 and was within the company’s long-term target range of 1.5−2 times.
Telus generated free cash flow of C$204 million and C$997 million in the fourth quarter and fiscal 2011, respectively, up 77% and 6.2% year over year. Capital expenditure dropped 9.2% year over year to C$512 million in the fourth quarter while it picked up 7.3% year over year to C$1.85 billion in 2011.
Further, the company distributed 62% of the net income in the form of dividends in 2011 compared with 64% in 2010.
For 2012, Telus reiterated its financial guidance provided in mid-December 2011. The company expects consolidated revenue to grow in the range of 4–6% to $10.7–$11.0 billion, EBITDA to increase 1–6% to $3.8–$4.0 billion and earnings per share to rise 1–12% to $3.75–$4.15. Capital expenditure is expected to be approximately $1.85 billion, up 3% year over year.
Telus expects Wireless revenues to grow 5.5–8% to C$5.75–C$5.9 billion and EBITDA to grow 5–9% to C$2.3–C$2.4 billion for 2012. For the Wireline segment, Telus expects revenue to grow 1.5–5% to C$4.95–C$5.1 billion and EBITDA between -5% to 2% at C$1.5–C$1.6 billion.
Management expects the strong momentum in wireless data services to remain a key growth driver in terms of revenue and EBITDA.
We remain encouraged by Telus’ prospects in Wireless data growth given new devices, technology upgrades, strong adoption of smart phones, deployment of HSPA+ Dual Cell technology and the recent launch of the 4G LTE network that are expected to fuel Wireless revenue growth. On the Wireline side, the company’s continued investments to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services will boost profitability.
However, accelerated access line erosion in the Wireline segment, a weak Canadian economy, competitive threats from players such as Rogers Communication (RCI - Analyst Report) and BCE Inc. (BCE - Analyst Report) as well as reduced roaming charges will continue to weigh on future earnings.
We are currently maintaining our long-term Neutral recommendation on Telus. For the short term (1–3 months), the stock retains a Zacks # 3(Hold) Rank.