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Telus Beats by a Penny, Ups Outlook

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The second largest Canadian telecommunications company Telus Corporation (TU - Analyst Report) reported second quarter 2012 adjusted earnings per ADS of $1.01 (C$1.02 per share) that beat the Zacks Consensus Estimate by a penny. Adjusted earnings increased 6.3% from C$0.96 per share in the year-ago quarter.

Adjusted earnings per share excluded an after-tax gain related to the TELUS Garden residential real estate project of 2 Canadian cents and an income tax loss of 3 Canadian cents.

Total revenue grew 4.3% year over year to C$2.67 billion ($2.64 billion), but fell shy of the Zacks Consensus Estimate of $2.69 billion. The year-over-year increase was buoyed by higher revenues from wireless and wireline data services.

Adjusted EBITDA upped 5% year over year to C$990 million ($980.4 million).

Segment Results

Wireless revenues spiked 7.1% year over year to C$1.44 billion ($1.42 billion) in the reported quarter driven by an increase of 7.6% in network revenue and a 1% growth in equipment and other revenue.

Within network revenue, data revenue jumped 27.4% year over year on continued strong adoption of smartphones and related data plans, increased mobile Internet devices and tablets, and higher data roaming revenues. Voice revenue slid 1.9% year over year, due to falling voice average revenue per user (ARPU).

In the second quarter, ARPU grew 2.4% year over year to C$60.29 ($59.70), primarily attributable to higher data ARPU (up 21.1% year over year) partly offset by lower voice ARPU (down 6.7%). The monthly subscriber churn (customer switch) improved to 1.39% from 1.67% in the year-ago quarter on the back of high-value client retention and lower smartphone churn, thereby marking the lowest level in five years.

Net wireless subscriber addition was 86,000, reflecting a significant decline of 8.5% from the year-ago quarter. Telus lost 26,000 net prepaid customers in the second quarter compared to net additions of 2,000 in the year-ago quarter. Additionally, net post-paid subscriber addition was 112,000, representing an annualized growth of 21.7%.

Telus had 7.45 million wireless subscribers, including 6.30 million post-paid customers and $1.14 million prepaid customers at the end of the reported quarter.

Wireline revenues nudged up 1.5% year over year to C$1.28 billion ($1.27 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 and equipment revenue climbed 8.5% year over year to C$689 million ($682 million) owing to healthy TV subscriber growth, higher rates, enhanced Internet and data services, and increased data equipment sales.

Voice local revenues fell 6.8% year over year to C$354 million ($350.6 million) while voice long-distance revenue dropped 10.7% to C$109 million ($107.9 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.

Telus added 43,000 TV subscribers to reach 595,000 customers (up 47.6% 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 20,000, bringing the total number of customers at the end of the second quarter to 1.28 million. The increase was driven by the success of Optik TV and Optik high-speed Internet service launched in June 2010, as well as enhanced competitive offers.

Total network access lines declined 5.3% year over year to 3.5 million in the reported quarter, resulting from heavy discounted offers, intense cable competition and conversion from legacy voice services to IP services.

Liquidity

Telus ended the second quarter with cash and investments of C$72 million compared with C$21 million in the year-ago quarter. Net debt reduced to C$6.8 billion from the year-ago level of C$72 billion. Net debt to EBITDA (excluding restructuring costs) declined to 1.8 times from 1.9 times in the year-ago quarter and was within the company’s long-term target range of 1.5−2 times.

Telus generated free cash flow of C$284 million, down 0.7% year over year. Capital expenditure increased 20.2% year over year to C$548 million in the second quarter.

Guidance

Based on year-to-date results and the favorable outlook for the balance of the year, Telus raised its fiscal 2012 guidance. The company now expects consolidated revenue to grow in the range of 3–6% to $10.75–$11.05 billion, EBITDA to increase 3–7% to $3.9–$4.05 billion and earnings per share to grow 0–10% to $3.75–$4.15. Capital expenditure is expected to be approximately $1.95 billion.

Telus expects wireless revenues to grow 5–8% to C$5.75–C$5.9 billion and EBITDA to grow 10–14% to C$2.4–C$2.5 billion for 2012. For the wireline segment, Telus expects revenue to grow 1–4% to C$5.0–C$5.15 billion and EBITDA to decline 3–6% to C$1.5–C$1.55 billion.

Our Take

We believe the company’s ongoing investments in the expansion of LTE and internet data centers will fuel strong future growth leading to more opportunities in wireless and cloud computing businesses. Likewise, in the wireline front, Telus continues to focus on efficiency of the Optik TV and Optik High Speed Internet broadband services, which remains its strong part of operation.

Nevertheless, persistent erosion in access lines in the wireline segment and weak voice services in wireless might weigh on future earnings. Further, a weak Canadian economy, competitive threats from players such as Rogers Communication (RCI - Analyst Report) and BCE Inc. (BCE - Analyst Report), and reduced roaming charges keep us on the sidelines.

We are currently maintaining our long-term Neutral recommendation on Telus. For the short term (1–3 months), the stock retains the Zacks # 3 (Hold) Rank.

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