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The second largest Canadian telecommunications company Telus Corporation (TU - Analyst Report) reported third-quarter 2012 adjusted earnings per ADS of $1.07 (C$1.08 per share), which fell short of the Zacks Consensus Estimate of $1.09. Adjusted earnings increased 7% from C$1.00 per share registered in the year-ago quarter.

Total revenue grew 5.8% year over year to C$2.81 billion ($2.78 billion) and also surpassed the Zacks Consensus Estimate of $2.74 billion. The year-over-year increase was buoyed by higher revenues from wireless and wireline data services.

Adjusted EBITDA upped 5.2% year over year to C$1.02 billion ($1.03 billion).

Segment Results

Wireless revenues rose 7.4% year over year to C$1.5 billion ($1.51 billion) in the reported quarter driven by higher subscriber and ARPU growth.

Within network revenue, data revenue jumped 23% 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 2.2% year over year, due to falling voice average revenue per user (ARPU).

In the third quarter, ARPU grew 1.5% year over year to C$61.42 ($61.98), primarily attributable to higher data ARPU (up 17.3% year over year) negated by lower voice ARPU (down 6.8%) to some extent. The monthly subscriber churn (customer switch) improved to 1.44% from 1.67% in the year-ago quarter on the back of high-value client retention and lower smartphone churn.

Quarterly, net wireless subscriber addition was 111,000, reflecting a decline of 2.6% from the year-ago quarter. Telus lost 5,000 net prepaid customers in the third quarter compared with a net loss of 19,000 in the year-ago quarter. Additionally, net post-paid subscriber addition was 116,000 in the quarter, representing an annualized decline of 12.8%.

Telus had 7.56 million wireless subscribers, including 6.42 million post-paid customers and $1.14 million prepaid customers at the end of the reported quarter.

Wireline revenues nudged up 3.9% year over year to C$1.32 billion ($1.33 billion) in the reported quarter 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 14.4% year over year to C$737 million ($743.7 million) owing to healthy TV subscriber growth, higher rates, enhanced Internet and data services, and increased data equipment sales.

Voice local revenues fell 7.4% year over year to C$351 million ($354.2 million) while voice long-distance revenue dropped 11.2% to C$103 million ($103.9 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.

During the quarter, Telus added 42,000 TV subscribers to reach a total of 637,000 customers (up 40.6% 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 26,000, bringing the total number of customers at the end of the third quarter to 1.3 million. The upside was driven by the success of Optik TV and Optik high-speed Internet service launched in June 2010, as well as enhanced competitive offers.

Liquidity

Telus ended the third quarter with cash and investments of C$45 million compared with C$46 million at the end of fiscal 2011. Net debt reduced to C$5.2 billion compared with C$5.5 billion at the end of 2011. Net debt to EBITDA (excluding restructuring costs) declined to 1.7 times from 1.8 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$426 million, exhibiting an annualized growth of 23.5%. Capital expenditure edged up 0.2% year over year to C$471 million in the third 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 the 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 the company’s 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 a Zacks #3 (Hold) Rank.

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