Telus Corporation (TU) reported fourth-quarter 2009 results with adjusted (excluding debt redemption and favorable tax related adjustments) earnings per ADS of 43 US cents (46 Canadian cents per share), missing the Zacks Consensus Estimate of 56 US cents. Adjusted earnings also declined from 72 US cents per ADS (80 Canadian cents per share) reported in the year-ago quarter.

Reported net income for the quarter plunged 45% year-over-year to C$156 million (US$147 million) or 49 Canadian cents a share (46 US cents per ADS). Profit was hit by higher restructuring expenses, increased operating costs and the after-tax impact of C$69 million (US$65 million) associated with the costs of early debt redemption.

Adjusted net income for the quarter was C$146 million (US$138 million), down 42% year-over-year. For full year 2009, reported net income fell 11.4% year-over-year to C$1 billion (US$787 million) or C$3.14 per share (US$2.76 per ADS).

Revenue & EBITDA

Telus was challenged by the beleaguered Canadian economy in 2009, which mostly affected its wireline business. The second largest Canadian telecom carrier reported revenues of C$2.44 billion (US$2.3 billion) for the quarter, down 0.4% year-over-year, impacted by a persistent decline in fixed-line voice revenues and decreased wireless network sales. For 2009, revenue dipped 0.5% to C$9.61 billion (US$8.5 billion).

Consolidated EBITDA for the quarter declined 15.8% year-over-year to C$789 million (US$744 million) due to higher restructuring costs and pension plan expenses. Restructuring costs more than doubled year-over-year to C$77 million (US$73 million), partly due to severance costs associated with workforce reduction.

Results by Segment

Wireless

Wireless revenues increased 3.1% year-over-year to C$1.23 billion (US$1.16 billion). Network revenue decreased 1.7% year-over-year to C$1.1 billion (US$1 billion) as increases in data revenue (up 20%) due to strong market adoption of smartphones and data services was offset by lower voice revenue (down 6%). Data revenue accounted for 22% of the total network revenues, compared to 18% a year ago.

Average revenue per user (ARPU) declined 7.7% year-over-year to C$57.38 (US$54) with the fast-growing data component representing 22% of the total. ARPU remains under pressure due to sustained decline in voice ARPU. Blended monthly subscriber churn remained flat year-over-year at 1.60%.

Net wireless subscriber addition for the quarter was 122,000, reflecting an 18% year-over-year decrease due to lower additions (down 55%) registered in the prepaid segment. Telus added 109,000 postpaid customers and 13,000 prepaid customers in the quarter. The company exited 2009 with 6.52 million customers, up 6.4% year-over-year.

Wireline

Revenue in the wireline segment decreased 3.6% year-over-year to C$1.25 billion (US$1.18 billion) due to declines in local and long distance revenues, partially offset by data revenue growth. Data revenues increased 4.9% year-over-year to C$554 million (US$523 million) due to increased TV subscribers and enhanced data and hosting services.

Long-distance revenue declined 17.9% year-over-year to C$142 million (US$134 million) while local voice revenue declined 6.3% to C$450 million (US$425 million) due to lower revenue contribution from basic access, increased competition and declining residential and business access lines.

Net high-speed Internet subscriber additions in the quarter hit 11,000 (reaching 1.13 million in service), a decline from 19,000 registered a year-ago due to a matured domestic broadband market.

Total network access lines declined by 52,000 in the quarter to 4.05 million, largely due to continued losses in residential lines resulting from intense competition and wireless substitution. Telus TV subscriber base reached 170,000 at the end of 2009, with net additions of 33,000 customers registered in the fourth quarter. The company recently unveiled its new IPTV platform in British Columbia and Alberta.

Cash Flow & Dividend

Telus generated free cash flow of C$500 million (US$472 million) in 2009, up 39% year-over-year. The company reported a negative free cash flow of $35 million for the fourth quarter due to higher customer retention costs and expenses related to the early redemption of debt. Telus declared a quarterly dividend of 47.5 Canadian cents per share, payable on April 1, 2010, to shareholders of record on March 11, 2010.

Outlook

Telus has reiterated its guidance for 2010. The carrier expects consolidated revenue in the range of C$9.8 to C$10.1 billion (US$9.24 to US$9.53 billion), representing 2-5% year-over-year increase. EBITDA is forecasted to grow 1-6% year-over-year to between C$3.5 billion and C$3.7 billion (US$3.3 billion and US$3.5 billion).

The company expects rise in depreciation and amortization expenses and financing costs to constrict EPS for 2010 which is projected at C$2.90 to C$3.30 (US$2.73 to US$3.11). The current Zacks Consensus Estimate for 2010 revenue and EPS are US$9.35 billion and US$2.97, respectively.

Telus expects its wireless and wireline broadband businesses to deliver healthy results in 2010 boosted by the significant investment made on them during 2009. Revenue from wireless is projected to grow 5-8% year-over-year to C$4.95-C$5.1 billion (US$4.66-US$4.81 billion) boosted by the new 3G network. On the wireline side, growth in broadband will continue to be more than offset by sustained declines across local and long-distance voice businesses.

Capital expenditure (CapEx) for 2010 is forecasted to decline 19% year-over-year to C$1.7 billion (US$1.6 billion). A major portion of 2010 CapEx will be devoted to the ADSL 2+ broadband network deployments and advancement to VDSL 2 network. Given the lower CapEx level, Telus expects free cash flow to increase by 40% in 2010. Restructuring expenses for 2010 are projected at C$75 million (US$71 million).

Telus is banking heavily on the new HSPA+ technology based 3G wireless network launched in November 2009 in collaboration with its Canadian peer BCE Inc. (BCE). Leveraging this advanced network, the carrier launched Apple’s (AAPL) iPhones (3G and 3GS), ending Rogers Communication’s (RCI) exclusivity on the iconic handset. Moreover, Telus expanded its wireless retail network with the acquisition of Canadian imaging and digital retailer Black’s in September 2009.

However, Telus is exposed to an increasingly competitive environment which is set to intensify in 2010 with the entry of new wireless players (including Quebecor). Nevertheless, we are encouraged by the company’s prospects in wireless driven by the network upgrades, expanded distribution capabilities and a rich portfolio of next-generation smarphones that may improve wireless ARPU moving forward.

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