Telus Beats on Wireless Growth – Analyst Blog

Telus Corporation (TU), the second largest Canadian telecommunications company, reported second-quarter 2010 adjusted earnings per ADS of 86 U.S. cents (89 Canadian cents per share) outpacing the Zacks Consensus Estimate of 74 U.S. cents. Adjusted earnings climbed 25% year over year. Adjusted earnings exclude C$10 million or 3 Canadian cents in favorable tax-related adjustments.

Net income, excluding favorable tax-related adjustments, shot up 25% year over year to C$286 million ($276.7 million). Strong results were driven by increased synergies from the investments in broadband wireline and wireless networks.

Revenue inched up 0.9% year over year to C$2.4 billion ($2.3 billion) due to higher revenues from wireless and wireline data services, partially offset by declines in fixed-line voice revenues. Consolidated EBITDA increased 5.3% year over year to C$919 million ($889 million), aided by effective cost management and lower restructuring costs.

Wireless: Wireless revenues increased 6.3% year over year to C$1.2 billion ($1.16 billion), driven by a 4% increase in network revenues and 49% increase in equipment and other revenues (largely due to the acquisition of Black’s Photo in September 2009).

Within network revenues, data revenues grew 26% year over year on strong market adoption of smartphones and related data plans, higher-speed HSPA and EVDO-capable handsets, increased mobile Internet keys, and higher inbound data roaming volumes, partly offset by lower roaming rates. Voice revenue declined 1.5% year over year, primarily due to falling voice average revenue per user (ARPU).

Average revenue per user (ARPU) dipped 1.9% year over year to C$57.47 ($55.60) and continues to remain under pressure due to a sustained decline in voice ARPU (down 7.2%). This is partly due to lower minutes of use across enterprise and consumer markets. Blended monthly subscriber churn improved to 1.45% from the year-ago quarter of 1.55%, attributable to improving economic conditions, availability of new handsets including the iPhone and successful retention efforts.

Net wireless subscriber addition in the quarter was 124,000, reflecting 11.7% year over year increase due to higher additions registered in the post-paid segment. Telus added 109,000 net post-paid customers in the quarter, representing 14.7% year over year growth. Net prepaid subscriber addition was 15,000, down 6.3% year over year owing to handset price discounts offered by competitors.

Wireline: Revenues in the Wireline segment decreased 3.2% year over year to C$1.2 billion ($1.16 billion) due to declines in local and long distance revenues, partially offset by data revenue growth. Data revenues increased 5.1% year over year to C$557 million ($539 million) due to increased TV subscribers, higher internet services and enhanced data and hosting services.

Long-distance revenues plunged 16.6% year over year to C$136 million ($132 million) while local voice revenue dropped 9.4% to C$426 million ($412 million) due to lower revenues from basic access, increased competition, substitution by wireless and Internet-based services, as well as declining residential access lines.

Net high-speed Internet subscriber additions were flat year over year at 3,000 (reaching 1.13 million in service) due to competition and a mature Canadian broadband market. Telus added 29,000 TV subscribers to reach 0.2 million customers (up 98.3% year over year) attributable to improved installation, enhanced service, increased investment in broadband coverage and the addition of Telus satellite TV service in mid-2009.

Total network access lines declined 63,000 to 3.85 million, largely due to continued losses in residential lines resulting from intense cable competition and wireless substitution.

Telus generated free cash flow of C$241 million ($233.2 million), up 67.4% year over year, boosted by 28.7% lower capital expenditure from the comparable quarter last year. The reported quarter saw capital expenditure of C$397 million ($384 million).

On October 1, 2010, Telus will pay a quarterly dividend of 50 Canadian cents per share to shareholders of record as of September 10, 2010. This quarterly dividend represents 5.3% increase from 47.5 Canadian cents per share paid on October 1, 2009.

Telus updated its outlook for 2010. The company reduced its consolidated revenue guidance to C$9.70–C$9.950 billion from C$9.8–C$10.1 billion. The company reiterated its consolidated EBITDA, EPS and capital expenditure guidance of C$3.5-C$3.7 billion, C$2.90–C$3.30 and C$1.7 billion, respectively.

For the Wireline segment, Telus reduced its revenue guidance to C$4.75–C$4.85 billion from C$4.85–C$5 billion and reiterated its EBITDA guidance of C$1.575–C$1.675 billion for 2010. Wireless revenues are expected to be in the range of C$4.95–C$5.1 billion and EBITDA to range within  C$1.925–C$2.025 billion.

Telus remains challenged by the weak Canadian economy and domestic competition, which is expected to intensify with the potential entry of new wireless players in the near term. We remain cautious about accelerated access line erosion in the Wireline segment and declines in wireless ARPU. However, we are encouraged by the company’s prospects in wireless driven by network upgrades, expanded distribution capabilities and a rich portfolio of next-generation smartphones. Moreover, the company remains committed to deliver attractive returns to shareholders in the form of higher dividend payouts.

We are currently maintaining our Neutral recommendation with the Zacks # 3 (Hold) Rank.