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Telus Corporation ( TU - Analyst Report ) reported fourth-quarter 2012 adjusted earnings per ADS of 86 cents (86 Canadian cents per share), which fell short of the Zacks Consensus Estimate by a penny. Adjusted earnings increased 17.8% from 73 Canadian cents (74 cents) per share registered in the year-ago quarter.
Adjusted earnings for the reported quarter excluded the 3-cent per share impact of a special item related to favorable income tax-related adjustments.
Adjusted earnings for the year rose 7.7% year over year to C$4.05 (approximately $4.05)
Total revenue grew 6.0% year over year to C$2.85 billion ($2.86 billion) and surpassed the Zacks Consensus Estimate of $2.63 billion. The year-over-year increase was buoyed by higher revenues from wireless and wireline data services.
Total revenue for the year increased C$10.9 billion ($10.96 billion), up 5% year over year.
Quarterly adjusted EBITDA grew 8.4% year over year to C$974 million ($977 billion), resulting in an EBITDA margin of 33.2%, up 70 basis points. For 2012, EBITDA grew 5.1% year over year to $3.972 billion, resulting in an EBITDA margin of 36.4%, up 10 basis points.
Wireless revenues rose 7.7% year over year to C$1.54 billion ($1.55 billion) in the reported quarter driven by higher subscriber and ARPU growth.
Within network revenue, data revenue jumped 22% 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 0.4% year over year, due to falling voice average revenue per user (ARPU).
ARPU grew 3.2% year over year to C$60.95 ($61.15) primarily attributable to higher data ARPU (up 17.0% year over year) negated by lower voice ARPU (down 4.7%) to some extent. The monthly subscriber churn (customer switch) improved to 1.51% 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 112,000, reflecting a decline of 13.2% from the year-ago quarter. Telus lost 11,000 net prepaid customers in the fourth quarter compared with a net loss of 19,000 in the year-ago quarter. Additionally, net post-paid subscriber addition was 123,000, representing an annualized decline of 17.0%.
Telus had 7.67 million wireless subscribers (up 4.5% year over year), including 6.54 million post-paid customers ( up 6.7% year over year) and $1.12 million prepaid customers (down 6.9% year over year) at the end of the reported quarter.
Wireline revenues nudged up 4.1% year over year to C$1.36 billion ($1.37 billion) on 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 13.0% year over year to C$770 million ($773 million) owing to healthy TV subscriber growth, higher rates, enhanced Internet and data services, and increased data equipment sales.
Voice local revenues fell 4.3% year over year to C$352 million ($353.2 million) while voice long-distance revenue dropped 10.0% to C$103 million ($103.3 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 41,000 TV subscribers to reach a total of 678,000 customers (up 33% year over year). Net high-speed Internet subscriber additions were 23,000, bringing the total number of customers at the end of the fourth quarter to 1.4 million. The upside was driven by the success of Optik TV and Optik high-speed Internet service launched in Jun 2010.
Telus ended the year with cash and investments of C$107 million ($107.04 million) compared with C$46 million ($46.5 million) at the end of fiscal 2011. Net debt reduced to C$6.58 billion ($6.583 billion) compared with C$6.96 billion ($7.04 billion) at the end of 2011. Net debt to EBITDA (excluding restructuring costs) decreased to 1.6 times from 1.8 times in the prior year and was within the company’s long-term target range of 1.5−2 times.
Telus generated free cash flow of C$1.3 billion ($1.3 billion), exhibiting an annualized growth of 33.5%. Capital expenditure crept up 7.3% year over year to C$1.2 billion ($1.2 billion) in 2012.
Based on year-to-date results and the favorable outlook for the balance of the year, Telus raised its fiscal 2013 guidance. The company now expects consolidated revenue to grow in the range of 4–6% to C$11.4-C$11.6 billion, EBITDA to increase 2–8% to C$3.95–C$4.15 billion and earnings per share to grow 3–14% to C$3.80–C$4.20.
Capital expenditure is expected at approximately $1.95 billion, which is below the 2012 level. Further, it expects free cash flow of $1.2 billion to $1.4 billion. On the flipside, the company estimates cash taxes to increase, creating a headwind of C$390 million to C$440 million, substantially higher than C$150 million in 2012.
For 2013, Telus expects wireless revenues to grow 6–8% to C$6.2–C$6.3 billion and EBITDA to grow 5–9% to C$2.575–C$2.675 billion for 2012.
For the wireline segment, Telus expects revenue to grow 2–4% to C$5.2–C$5.3 billion and EBITDA to range between $1.375 billion and $1.475 billion, representing a decline of 2% to a growth of 5% year over year.
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 remain the 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.
Telus retains a Zacks Rank #2 (Buy) rating.
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