Telus Corporation (TU), the second largest Canadian telecommunications company, reported fourth quarter adjusted earnings per ADS of 66 U.S. cents (67 Canadian cents per share), falling well below the Zacks Consensus Estimate of 72 U.S. cents. Adjusted earnings shot up 40% year over year attributable to strong data and wireless revenue combined with healthy Optik TV and Optik high-speed Internet services.
Adjusted earnings exclude favorable income tax-related adjustments of $10 million (or 3 Canadian cents per share). In fiscal 2010, earnings per share on GAAP basis upped 2.5% year over year to C$3.22 ($3.12).
Total revenue increased 4.4% year over year to C$2.551 billion ($2.517 billion) in the fourth quarter but was below the Zacks Consensus Estimate of $2.531 billion. The year-over-year increase was attributable to higher revenues from wireless and wireline data services partially offset by declines in traditional voice revenues.
Consolidated EBITDA climbed 7.4% year over year to C$847 million ($836 million), aided by ongoing benefits from efficiency initiatives and lower restructuring costs.
Total revenue and consolidated EBITDA rose 1.8% and 4.4% year over year to C$9.8 billion ($9.5 billion) and C$3.6 billion ($3.5 billion) in 2010, respectively.
Segment Results
Wireless: Wireless revenues grew 9.3% year over year to C$1.35 billion ($1.28 billion) in the reported quarter driven by an 8.8% increase in network revenue and 13.1% rise in equipment and other revenue.
Within network revenue, data revenues climbed 36% year over year on strong adoption of smartphones and related data plans, higher-speed HSPA and EVDO-capable handsets, increased mobile Internet keys and tablets, and higher inbound data roaming volumes, partly offset by lower roaming rates.
Voice revenue inched up 1.2% year over year, aided by subscriber growth but was partially offset by falling voice average revenue per user (ARPU).
In the reported quarter, ARPU nudged up 1.9% year over year to C$58.48 ($57.72), representing the first year-over-year increase since the second quarter of 2007. This improvement can be credited to higher data ARPU (up 27% year over year) partly offset by lower voice ARPU (down 5.2%).
Blended monthly subscriber churn (customer switch) deteriorated to 1.72% from 1.60% in the year-ago quarter, reflecting price competition from new entrants and existing national competitors.
Net wireless subscriber addition in the reported quarter was 119,000, reflecting a 2.5% year-over-year decrease stemming from tough pre-paid additions. Telus added 10,000 net pre-paid customers in the fourth quarter, representing a 23.1% year-over-year decline. Net post-paid subscriber addition was flat at 109,000 customers.
Wireline: Revenues in the wireline segment dipped 0.1% year over year to C$1.25 billion ($1.23 billion) due to declines in voice local and long distance revenues, partially offset by data revenue growth. Data revenues rose 6.7% year over year to C$591 million ($583 million) owing to healthy TV subscriber growth, increased Internet services and enhanced data and hosting services.
Voice local revenues fell 10.4% year over year to C$403 million ($398 million) while voice long-distance revenue dropped 8.5% to C$130 million ($128 million) due to lower revenues from basic access, ongoing industry-wide price competition, substitution to wireless and Internet-based services, as well as declining residential access lines.
Telus added a record-breaking 48,000 TV subscribers to reach 3.14 million customers (up 84.7% year over year). The massive growth can be attributed to the launch of the Optik TV brand, improved installation, enhanced service and expanded broadband coverage.
Net high-speed Internet subscriber additions shot up 64% year over year to 18,000 (reaching 1.17 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.
Total network access lines plunged 55,000 to 3.74 million in the reported quarter, resulting from intense cable competition and wireless substitution.
Telus generated free cash flows of C$121 million in the fourth quarter compared with negative cash flows of C$50 million in the year-ago quarter. Capital expenditure was C$564 million, up 9.7% year over year.
Outlook
Telus reaffirmed its outlook for 2011 reflecting strong wireless growth. The company continues to expect consolidated revenue of C$9.925–C$10.225 billion (up 1% to 4% year over year), EBITDA of C$3.675–C$3.875 billion (up 1% to 6% year over year) and earnings per share between C$3.50 and C$3.90 (up 7% to 19% year over year). The company reiterated its consolidated capital expenditure guidance of C$1.7 billion.
Telus expects Wireless revenues to grow 4– 7% to C$5.2–C$5.35 billion and EBITDA to grow 6–11% to C$2.15–C$2.25 billion for 2011. For the Wireline segment, Telus reiterated its revenue and EBITDA guidance of C$4.725–C$4.875 billion and C$1.525–C$1.625 billion, respectively.
Our Analysis
We remain encouraged by Telus’ prospects in wireless data growth given new devices, technology upgrades, strong adoption of smartphones and deployment of HSPA+ Dual Cell technology, which are expected to fuel Wireless revenue growth.
Popular smartphones like BlackBerry and iPhone (launched in late 2009) will provide Telus a competitive advantage over other dominant players such as Rogers Communication (RCI) and BCE Inc. (BCE).
On the Wireline side, the company’s continued investment to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services should boost its profitability.
In addition, we are encouraged by the company’s improved confidence related to 2011 earnings and free cash flow outlook with cost reduction plans and further investments in broadband infrastructure expansion and upgrade.
Consequently, we are currently maintaining our long-term Outperform recommendation on Telus supported by the Zacks # 2 (Buy) Rank.
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