Telus Corporation (TU), the second largest Canadian telecommunications company, reported third quarter adjusted earnings per ADS of 86 U.S. cents (89 Canadian cents per share) outpacing the Zacks Consensus Estimate of 78 U.S. cents. Adjusted earnings increased 6% year over year. Strong earnings were driven by robust wireless demand, which was partially offset by declines in traditional voice services.
Adjusted earnings exclude an after-tax charge of C$37 million (or 12 Canadian cents) from the early redemption of notes, an after-tax regulatory financing charge of C$11 million (or 3 Canadian cents) and favorable income tax-related adjustments of $9 million (or 3 Canadian cents).
Total revenue inched up 1.8% year over year to C$2.46 billion ($2.36 billion) attributable to higher revenues from wireless and wireline data services partially offset by declines in fixed-line voice revenues. Consolidated EBITDA rose 1.5% year over year to C$937 million ($902 million), aided by ongoing benefits from efficiency initiatives and lower restructuring costs.
Segment Results
Wireless: Wireless revenues grew 6.3% year over year to C$1.3 billion ($1.2 billion) driven by a 5.4% increase in network revenues and an 18.8% rise in equipment and other revenues.
Within network revenues, data revenues climbed 29% year over year on strong 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 fell 0.4% year over year, primarily due to falling voice average revenue per user (ARPU).
In the reported quarter, ARPU dipped 1.2% year over year to C$58.75 ($56.53) but improved from the declines reported in the prior two quarters. Thus, the trend of ARPU continues to improve due to lower decrease in voice ARPU (down 6.7%) and higher increase in data ARPU (up 21%). Blended monthly subscriber churn improved to 1.54% from 1.55% in the year-ago quarter, reflecting improving economic conditions, availability of new handsets including the iPhone and successful retention efforts.
Net wireless subscriber addition in the reported quarter was 153,000, reflecting 22.4% year over year increase driven by both strong post-paid and prepaid additions. Telus added 132,000 net post-paid customers in the third quarter, representing 0.8% year over year growth. Net prepaid subscriber addition was 21,000 compared with net dilution of 6,000 in the year-ago quarter. The increase in prepaid customers was driven by more competitive offers including data-capable handset selection as well as lower churn.
Wireline: Revenues in the wireline segment fell 2.7% year over year to C$1.2 billion ($1.13 billion) due to declines in voice local and long distance revenues, partially offset by data revenue growth. Data revenues rose 7.3% year over year to C$562 million ($541 million) attributable to increased TV subscribers, higher internet services and enhanced data and hosting services.
Voice long-distance revenues plunged 11.5% year over year to C$131 million ($126 million) while local voice revenue dropped 10.7% to C$416 million ($400 million) due to lower revenues from basic access, ongoing industry-wide price competition, substitution by wireless and Internet-based services, as well as declining residential access lines.
Net high-speed Internet subscriber additions shot up 66.7% year over year to 15,000 (reaching 1.15 million in service) driven by the launch of Optik TV and Optik high-speed Internet service in June 2010, as well as continued broadband footprint expansion and speed enhancement. Telus added 38,000 TV subscribers (record-breaking) to reach 0.27 million customers (up 94.2% year over year). The whopping growth can be attributable to the launch of the Optik TV brand, improved installation, enhanced service and expanded broadband coverage.
Total network access lines declined 51,000 to 3.79 million, largely due to continued losses in residential lines resulting from intense cable competition and wireless substitution.
Telus generated free cash flow of C$339 million ($326 million), up 27.4% year over year, boosted by 19.5% lower capital expenditure from the comparable quarter last year. The reported quarter saw capital expenditures of C$449 million ($432 million).
Dividend
On January 4, 2011, Telus will pay an increased quarterly dividend of 525 Canadian cents per share to shareholders of record as of December 10, 2010. This quarterly dividend represents a 5% increase from 50 Canadian cents per share paid in the previous quarter and a 10.5% increase from 475 Canadian cents per share paid in the year-ago quarter.
Outlook
Telus updated its outlook for 2010 reflecting strong wireless growth. The company continues to expect consolidated revenue guidance of C$9.70–C$9.95 billion, up 1% to 4% year over year. The company raised its consolidated EBITDA guidance to C$3.6–C$3.7 billion (up 3% to 6% year over year) from C$3.5–C$3.7 billion. Telus also raised its consolidated earnings per share guidance to C$3.10–C$3.30 from C$2.90–C$3.30. The company reiterated its consolidated capital expenditure guidance of C$1.7 billion.
For the wireline segment, Telus reiterated its full-year 2010 revenue and EBITDA guidance of C$4.75–C$4.85 billion and C$1.575–C$1.675 billion, respectively. Telus expects C$4.95–C$5.1 billion in Wireless revenues and C$2.00–C$2.05 billion in EBITDA, up from the previous outlook of C$1.925–C$2.025 billion.
Our Analysis
We are encouraged by the company’s prospects in wireless business driven by network upgrades, expanded distribution capabilities and a rich portfolio of next-generation smartphones. Telus remains focused on upgrading existing TV and Internet subscribers, as well as rolling out Optik availability to new customers. Further, the company remains committed to deliver attractive returns to shareholders in the form of higher dividend payouts.
However, 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.
We are currently maintaining our long-term Neutral recommendation. The company also carries a Zacks #3 Rank (Hold) for the short term.
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