VANCOUVER, Aug. 8 Telus-earnings-Q2
Strong data and wireless results with record wireless additions
VANCOUVER, Aug. 8 /PRNewswire-FirstCall/ - TELUS Corporation today reported its financial results for the second quarter of 2008, including revenue of $2.4 billion, an eight per cent increase from a year ago. The performance was driven by nine per cent growth in wireless revenue and 20 per cent growth in wireline data revenue. Wireless net additions were a second quarter record at 175,600. Earnings before interest, taxes, depreciation and amortization (EBITDA) as adjusted increased by 3.5 per cent when compared to the same period a year ago.
Net income in the quarter was $267 million and earnings per share (EPS) were $0.83, up 5.5 per cent and nine percent, respectively, compared to the same period in 2007. The second quarter of 2007 included favourable tax-related adjustments of $10 million or three cents a share while there were no tax-related adjustments in 2008. Free cash flow of $302 million increased 87 per cent, driven primarily by lower capital expenditures, improved EBITDA and lower interest expense.
FINANCIAL HIGHLIGHTS
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C$ in millions,
except per share amounts 3 months ended
June 30
(unaudited) 20082007% Change
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Operating revenues 2,398.7 2,228.1 7.7
EBITDA(1) 917.6 884.6 3.7
EBITDA (as adjusted)(2) 917.3 886.4 3.5
Income before income taxes and
non-controlling interest 381.4 348.1 9.6
Net income(3) 267.0 253.1 5.5
Earnings per share (EPS), basic(3) 0.830.76 9.2
Cash provided by operating activities 461.0 1,061.9 (56.6)
Capital expenditures 435.6 481.8 (9.6)
Free cash flow(4) 302.3 161.7 87.0
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 11.1 of Management's discussion
and analysis.
(2) Excludes a charge (recovery) of $(0.3) million and $1.8 million to
Operations expense in 2008 and 2007, respectively, for introducing a
net-cash settlement feature for share option awards granted prior to
2005.
(3) Net income and EPS for the three month period in 2008 included no
favourable tax related adjustments compared to $10 million or 3 cents
for the same period in 2007.
(4) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, TELUS president and CEO said, "On strategy growth continued in data and wireless this quarter with solid operational execution on multiple fronts. This included strong second quarter wireless customer additions and increased momentum on high-speed Internet additions. We are updating annual guidance to reflect this positive performance, including increased guidance for revenue. We are also pleased with the initial success in converting more than one million residential customers in British Columbia from various legacy systems to our recently developed integrated billing and client care system."
"We continue to urge the federal government to pursue its stated goal of making Canada the most connected country in the world by investing a portion of the $4.25 billion raised in the recently concluded wireless spectrum auction," said Mr. Entwistle. "Canada has an unprecedented opportunity to enhance our global competitiveness by bringing broadband Internet services to hundreds of rural communities."
Robert McFarlane, executive vice president and CFO, noted, "as a result of good operational execution year to date, we have made upward revisions to full year 2008 revenue guidance, as well as narrowing the ranges for EBITDA and EPS guidance, while maintaining existing guidance for non-spectrum capital expenditures."
Mr. McFarlane also stated, "the 50 per cent expansion of our commercial paper program to $1.2 billion announced today enhances our flexibility and access to financing at attractive rates."
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This news release contains statements about expected future events and
financial and operating results of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that the forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-
looking statements as a number of factors could cause actual future
results and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2008 guidance and share purchases), qualifications and risk factors
referred to in the Management's discussion and analysis - August 6, 2008.
Except as required by law, TELUS disclaims any intention or obligation to
update or revise forward-looking statements, and reserves the right to
change, at any time at its sole discretion, its current practice of
updating annual guidance.
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OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $94 million or 9% to $1.14 billion in
the second quarter of 2008, compared with the same period in 2007
- Wireless data revenue increased $55 million or 54% due to the
continued adoption of full function smartphones and increased
adoption of data services such as text messaging, web browsing and
downloads
- ARPU (average revenue per subscriber unit per month) declined by 1.4%
to $62.73 compared to the same quarter a year ago. The fast-growing
data component of $9.17, represented 15% of ARPU, while the voice
component continued to decline as a result of the increased prepaid
subscriber base, lower pricing, including use of included-minute rate
plans and lower inbound roaming
- Net subscriber additions increased 37% to 175,600 from the same
quarter in 2007, a TELUS second quarter record. Postpaid net
additions were 157,200, an increase of 59%, while net prepaid loading
decreased 37% to 18,400. These results include those from TELUS'
postpaid value brand and service which was launched in late March
2008
- EBITDA as adjusted of $486 million is an increase of $34 million over
the second quarter of 2007 representing 7% growth, due to increased
network revenue and lower cost of acquisition (COA) expense,
partially offset by increased customer retention costs and network
and other expenses to support the 11% growth in the wireless
subscriber base, data revenue and the launch of a value brand
- Cost of acquisition per gross addition decreased 22% year-over-year
to $332 reflecting slightly higher advertising and promotions costs
spread over the 19% increase in gross additions, a higher proportion
of new subscribers from lower cost distribution channels and lower
equipment subsidies
- Blended monthly subscriber churn decreased slightly to 1.43% from
1.45% a year ago due to lower postpaid churn supported by successful
retention activities. The second quarter of 2008 and 2007 reflect the
first full comparable quarters with wireless number portability (WNP)
in place
- Cash flow (EBITDA as adjusted less capital expenditures) increased
$92 million or 33% to $371 million in the quarter due to an increase
in EBITDA and lower capital spending.
TELUS wireline
- External revenues increased by $76 million or 6.5% to $1.26 billion
in the second quarter of 2008, when compared with the same period in
2007, as data growth more than offset the declines in local revenues
- Data revenues increased by $87 million or 20% due to revenues from
the two January acquisitions (Emergis and Fastvibe), increased
enhanced data and hosting services, as well as high-speed Internet
subscriber growth. When adjusted for the two acquisitions and a
regulatory adjustment in the second quarter of 2007, underlying data
growth was approximately 7%
- Long distance revenues increased by $7 million due to a one-time
negative adjustment of $13 million recorded in the same period a year
ago with the implementation of a new converged billing and client
care system in Alberta
- TELUS added 23,600 net high-speed Internet subscribers, a 70%
increase from a year ago. The prior year's additions were temporarily
constrained by the implementation of a new billing and client care
system in Alberta that temporarily reduced order processing
capability
- EBITDA as adjusted of $431 million declined by $2.6 million or 0.6%
due primarily to increased cost of sales, including TELUS TV, and
initial costs for implementing enterprise customer contracts
- Network access lines (NALs) declined by 40,000 in the quarter, and
3.4% from a year ago, reflecting a slight sequential improvement.
Consistent with experience in recent years, residential NAL losses
were due to ongoing competitive activity and wireless substitution,
partially mitigated by an increase in business access lines
- Cash flow (EBITDA as adjusted less capital expenditures) decreased
$15 million or 12% to $110 million in the quarter due to slightly
lower EBITDA as adjusted and a small increase in capital
expenditures.
Corporate Developments
B.C. billing and client care system conversion
In mid-July, following a large trial, TELUS successfully converted more than one million wireline residential customers in British Columbia to a new billing and client care system. This converges to the system in Alberta, and for the first time most customers in Alberta and B.C. are now on the same billing and client care system. During the B.C. conversion, TELUS has applied learnings from the Alberta conversion in 2007 and the early experience has been positive. The expected customer service and cost benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems.
AWS spectrum auction concludes
Industry Canada's Advanced Wireless Services (AWS) spectrum auction concluded on July 21, 2008 raising more than $4.25 billion dollars for the government with 282 licences conditionally assigned to 15 companies. Successful bidders will be eligible to receive licences after making their final payments and showing compliance with Canadian ownership and control requirements.
In line with TELUS' national growth strategy focused on wireless, data and IP, the company bid to acquire additional spectrum across Canada for a cost of approximately $880 million. AWS spectrum increases the depth of TELUS' strong spectrum position, and is expected to provide capacity for the introduction of future 4G (fourth generation) service offerings.
TELUS expects to face new competition in the future as a result of the recent auction. However, the number and long-term viability of all new entrants in various markets remain uncertain because of build-out requirements, spectrum and start-up costs, capital market conditions, and restrictions on foreign investment.
TELUS is encouraging the Government of Canada to invest a portion of the $4.25 billion raised in the wireless spectrum auction to pursue its stated goal of making Canada the most connected country in the world. The auction raised almost three times the anticipated $1.5 billion, giving Canada an unprecedented opportunity to bring broadband Internet services to thousands of rural communities.
TELUS expands commercial paper program by $400 million
On August 7th, DBRS provided credit rating support for a 50 per cent increase in TELUS' commercial paper (CP) program to $1.2 billion. This provides increased flexibility and more attractive short term rates for TELUS, including future funding of commitments related to the AWS wireless spectrum from the recently concluded auction. At the end of the second quarter, there was $800 million outstanding on TELUS' commercial paper program, demonstrating strong demand for TELUS debt in the Canadian market.
TELUS appeals deferral account decision
TELUS filed appeals with the CRTC and the federal cabinet asking them to consider allowing TELUS to connect more remote Canadian communities to broadband Internet services using Deferral Account funds. TELUS believes this is an opportunity to work with governments, rural and First Nations communities to bring the benefits of broadband Internet to Canadians who live and work in remote areas.
TELUS believes all Canadians benefit when our nation's rural communities have access to broadband Internet service and all of the business, economic and educational opportunities it creates. TELUS continues to work with the CRTC to find a way to place new communities on its deferral account list so TELUS' entire $163 million fund is used for the purposes the CRTC determined in 2006. TELUS has also filed a petition to the federal cabinet to ensure we will retain the ability to ask the government to intervene should the CRTC not reopen the process for new applications.
Business Solutions
TELUS enhances suite of GPS services for business
TELUS launched three new Global Positioning System (GPS) services for businesses - TELUS Asset Tracker, TELUS Resource Tracker, and TELUS Track and Dispatch. TELUS Asset Tracker enables businesses to keep track of assets large and small. TELUS Resource Tracker allows businesses to increase safety and productivity through real-time location monitoring of workers. TELUS Track and Dispatch gives head-office the ability to determine the closest mobile worker to a new job assignment or to immediately dispatch help if a worker needs assistance. The new solutions are part of TELUS' comprehensive suite of wireless GPS services that also features TELUS Fleet Tracker, a fleet monitoring and tracking solution, and TELUS Navigator, a GPS turn-by-turn navigation solution.
CritiCall Ontario selects TELUS iScheduler and CallCentreAnywhere
CritiCall Ontario selected TELUS' iScheduler and CallCentreAnywhere to provide the foundation of their integrated patient electronic referral services. The five-year contract with Ontario's 24-hour emergency referral service for hospital-based physicians is valued at $2.3 million. It is the first implementation of TELUS iScheduler in Canada.
The contract combines TELUS' CallCentreAnywhere application with the TELUS iScheduler referral and waitlist capabilities. The joint service provides CritiCall agents with a simplified patient referral process that ensures the right information follows the patient wherever they travel to receive medical attention. The solution also provides CritiCall with advanced reporting capabilities to help organizations better understand their operational needs and performance to help with business planning.
TELUS Unified Communications make business easier
TELUS enhanced its suite of Unified Communications solutions by launching a new service enabling clients to use Outlook Voice Access to access email, contacts and calendars over the phone to stay connected to the office anywhere, anytime. The upgrade also provides business-class email and group document sharing tools that can be securely accessed from a PC, web browser, mobile device or a phone. Using Microsoft SharePoint, employees can share documents, find company resources, search for experts and corporate information, manage content and workflow, and make better-informed decisions in a single, integrated location.
Products and Services
Smartphones do it all
In May, TELUS launched its "the ultimate do-it-all" smartphone campaign. With the handiest wireless functions available, TELUS' new generation of smartphones are the ultimate communication devices to do-it-all. Whether it's for texting Saturday night's latest hip party location, browsing the web to know where this week's blockbuster movie is running, or using GPS location services, TELUS smartphones are perfect for consumers looking for a phone that gives them the ultimate freedom in the palm of their hand.
One of the new smartphones is the HTC Touch Diamond. TELUS will be the first carrier to bring this new handset to Canadians. The Diamond will allow users to browse the Web, check out videos on YouTube and make plans on Facebook with a simple one-touch interface. In addition, customers will be able to store and listen to thousands of songs with the media player and 4GB internal memory. TELUS also launched the Pink BlackBerry Curve 8330 smartphone and the Sierra Wireless Compass 597 USB modem.
TELUS sponsors Canadian Idol
TELUS is bringing a new approach to product placement to season six of Canadian Idol. As CTV's mobility sponsor, TELUS is introducing viewers to Ron Ronn, a 23-year-old aspiring singer/songwriter character who relies on a lucky dolphin, his best friend Mueller and a TELUS smartphone to manage his burgeoning career. TELUS and TAXI created Ron Ronn specifically for "Canadian Idol" as part of TELUS' sponsorship of the very popular show. Under terms of the sponsorship agreement, each of the 30-second Ron Ronn clips will run at the end of an "Idol" segment and before the regular commercial break. In addition to the Ron Ronn content, TELUS is again running its award-winning nature based campaign during Canadian Idol's scheduled commercial breaks.
Alberta and B.C. embrace 10-digit dialing
To meet growing demand for phone numbers, the telecommunications industry has added new area codes to B.C. and Alberta - 778 in B.C.'s current 250 area code region and 587 across Alberta. A second area code in these regions means that people must add the area code and dial 10 digits for local calls. Just a week into the first phase of the new area code introduction on June 23, a sample of several million calls found that nearly 90 per cent were already being placed using 10 digits.
Existing customers are not required to change their current telephone numbers, nor will the geographic boundaries that govern long-distance calling be affected. All three-digit numbers, including 211, 311, 411, 611, and 911 emergency service (where applicable) remain the same and do not require the inclusion of an area code.
Awards and Community
TELUS honoured for innovative learning and development
TELUS received a prestigious Industry Achievement Award for global leadership in supporting team member growth and professional development. SkillSoft, the international leader in eLearning, presented the award to TELUS at its 2008 Global Perspectives Awards gala. The award is presented to organizations that have maintained a long-standing leadership role in training and development. The judging panel reviewed the internal learning programs and resources submitted by more than 100 companies around the world, and selected only five companies as being true innovators. TELUS ranked first, with UPS, Verizon, FedEx and Hitachi also taking home awards as well.
Annual report recognized by international communicators
For the fourth consecutive year, the TELUS annual report was recognized by the International Association of Business Communications (IABC) with its prestigious Gold Quill Award. The Gold Quill Awards are the mark of global distinction and a hallmark of excellence in business communications. The awards are the communication professional's equivalent of the Oscars and recognize programs with clear strategies that demonstrate a full range of planning and management such as research, analysis and evaluation as well as the highest level of technical and creative skill.
TELUS receives IT Hero Award
The Information Technology Association of Canada (ITAC) handed TELUS the Corporate IT Hero Award for its involvement with Upopolis - a secure online social network designed exclusively for hospitalized children. Upopolis empowers kids to learn about their illness and have access to their homework while helping them stay connected with friends, teachers and family during a challenging time in their lives. The website was created by the Kids' Health Links Foundation (KHLF) using development and technology services donated by TELUS. Through Upopolis, not only can children stay connected to friends and family, they can connect with other children with the same condition. Upopolis also provides young patients with a personal profile, secure mail, instant chat, discussion boards, personal blogs and links to child-friendly games, as well as a homework site, and kid-friendly health and wellness information.
BC Children's Hospital Foundation hits the "green" with Skins caddie auction
Five Canadian golf fans had the chance of a lifetime to caddie for the PGA pros at the TELUS World Skins Game in support of BC Children's Hospital Foundation. This year's caddie auction brought in $45,000 for BC Children's Hospital Foundation, adding up to a total of more than $126,000 that has now been raised from TELUS World Skins Game caddie auctions in support of local charities since the fundraiser was created. The annual charity caddie auction allowed golf fans to bid at eBay.ca for the chance to caddie for one of their favourite professional golfers. The five highest bidders were given the opportunity to caddie at Predator Ridge June 16-17 for PGA golf stars Mike Weir who represented Canada, Fred Couples - United States, Greg Norman - Australia, Colin Montgomerie - Scotland, and rising young star Camilo Villegas who represented Colombia. The TELUS Skins Game raised $185,000 for the hospital foundation this year, which was increased to $250,000 by TELUS and its team members.
Thousands come out for TELUS Day of Service
On May 31, more than 8,600 TELUS team members, alumni, family and friends took a day out of their busy schedules to give where they live during the TELUS Day of Service - a nation-wide volunteer drive designed to make a difference in the communities where team members live and work. Team members participated in more than 200 volunteer activities through 137 charitable organizations in 23 regions across the country and the Phillipines. This included Victoria, Vancouver, Prince George, Kamloops, Kelowna, Calgary, Lethbridge, Red Deer, Edmonton, Grande Prairie, Toronto, Barrie, Ottawa, Montreal, Quebec City, Rimouski and Manila. Participants logged more than 27,000 volunteer hours on this one special day to support worthwhile causes. Volunteer efforts included ecological face lifts to city parks, sorting thousands of pounds of food bank donations and planting dozens of trees.
TELUS sponsors Walk to Cure Diabetes
The TELUS Walk to Cure Diabetes took place across Canada between May and June. TELUS' sponsorship of the Juvenile Diabetes Research Foundation's (JDRF) biggest fundraising event underscores the commitment TELUS has made to this partnership and to funding research to help the more than 200,000 Canadians affected by Type 1 diabetes. This was the first year of a three year partnership with JDRF. More than 2,100 TELUS team members took part, raising $460,000 for this worthwhile cause.
Dividend Declaration
The Board of Directors has declared a quarterly dividend of forty-five cents ($0.45) Canadian per share on the issued and outstanding Common shares and forty-five cents ($0.45) Canadian per share on the issued and outstanding Non-Voting shares of the Company payable on October 1, 2008 to holders of record at the close of business on September 10, 2008.
This quarterly dividend represents a 20 per cent increase from the $0.375 quarterly dividend paid in 2007.
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $9.4 billion of annual revenue and 11.4 million customer connections including 5.8 million wireless subscribers, 4.3 million wireline network access lines and 1.2 million Internet subscribers. TELUS provides a wide range of communications products and services including data, Internet protocol (IP), voice, entertainment and video. Committed to being Canada's premier corporate citizen, we give where we live. Since 2000, TELUS and our team members have contributed $113 million to charitable and not-for-profit organizations and volunteered more than 2.1 million hours of service to local communities. Eight TELUS Community Boards across Canada lead our local philanthropic initiatives. For more information about TELUS, please visit telus.com.
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TELUS CORPORATION
Management's discussion and analysis
2008 Q2
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Caution regarding forward-looking statements
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This document and Management's discussion and analysis contain forward- looking statements about expected future events and financial and operating results of TELUS Corporation (TELUS or the Company, and where the context of the narrative permits or requires, its subsidiaries). By their nature, forward- looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that assumptions (see below), predictions and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward- looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In the case of annual guidance, it is the current practice of the Company to evaluate and, where it deems appropriate, provide updates (see Section 9). Subject to legal requirements, this practice may be changed at any time at the Company's sole discretion.
Assumptions for 2008 guidance include:
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Economic growth consistent with recent provincial and national estimates by the Conference Board of Canada, including revised Canadian gross domestic product (GDP) growth of 1.7% and above average growth in the provinces of Alberta and British Columbia; forecast exchange rate between the Canadian dollar and U.S. dollar at or near parity; increased wireline competition in both business and consumer markets, particularly from cable-TV and VoIP (voice over Internet protocol) companies; impact from the acquisition of Emergis in mid-January; Canadian wireless industry market penetration gain of 4.5 to 5%; the target for consolidated capital expenditures explicitly excluded the purchase of wireless spectrum in the advanced wireless services (AWS) spectrum auction; in addition to capital expenditures, AWS auction expenditures of approximately $880 million are expected to be recognized in the third quarter of 2008; no new wireless competitive entrants are assumed for 2008; approximately $30 million restructuring expenses (up from $20.4 million in 2007); a blended statutory tax rate of approximately 30.5 to 31.5%; a discount rate of 5.5% (50 basis points higher than 2007) and expected long-term return of 7.25% for pension accounting (unchanged from 2007); and average shares outstanding of approximately 320 million (down from 331.7 million in 2007). Earnings per share (EPS), cash balances, net debt and common equity may be affected by purchases of up to 20 million TELUS shares over a 12-month period under the normal course issuer bid that commenced December 20, 2007.
Factors that could cause actual results to differ materially include, but
are not limited to:
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Competition (including more active price competition and the likelihood of new wireless competitors beginning to offer services in 2009 following the AWS spectrum auction); economic growth and fluctuations (including pension performance, funding and expenses); capital expenditure levels (increased in 2008 by purchases of wireless spectrum in the AWS auction); financing and debt requirements (including funding share repurchases and debt financings); tax matters (including acceleration or deferral of required payments of significant amounts of cash taxes); human resource developments; business integrations and internal reorganizations (including post-acquisition integration of Emergis); technology (including reliance on systems and information technology, evolving wireline broadband and wireless next generation technology options and the possible need for prospective wireless sharing arrangements to achieve cost efficiencies and reduce deployment risks); regulatory approvals and developments (including interpretation and application of tower sharing and roaming rules, the design and impact of future spectrum auctions, the new media proceeding and possible changes to foreign ownership restrictions); process risks (including conversion of legacy systems and billing system integrations); health, safety and environmental developments; litigation and legal matters; business continuity events (including manmade and natural threats); any prospective acquisitions or divestitures; and other risk factors discussed herein and listed from time to time in TELUS' reports and public disclosure documents, including its annual report, annual information form, and other filings with securities commissions in Canada (on www.sedar.com) and in its filings in the United States, including Form 40-F (on EDGAR at www.sec.gov).
For further information, see Section 10: Risks and risk management of TELUS' 2007 annual and first quarter 2008 Management's discussions and analyses, as well as updates in Section 10 of this document.
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Management's discussion and analysis
August 6, 2008
The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month and six-month periods ended June 30, 2008 and 2007, and should be read together with TELUS' interim Consolidated financial statements. This discussion contains forward- looking information that is qualified by reference to, and should be read together with, the Caution regarding forward-looking statements above.
TELUS' interim Consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), which differ in certain respects from U.S. GAAP. The principal differences between Canadian and U.S. GAAP, as they relate to TELUS, are summarized in Note 20 of the interim Consolidated financial statements. Management's discussion and analysis and the interim Consolidated financial statements were reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors. All amounts are in Canadian dollars unless otherwise specified.
TELUS has issued guidance on and reports on certain non-GAAP measures used by management to evaluate performance of business units, segments and the Company. Non-GAAP measures are also used to determine compliance with debt covenants and manage the capital structure. Because non-GAAP measures do not have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. For the reader's reference, the definition, calculation and reconciliation of consolidated non-GAAP measures are provided in Section 11: Reconciliation of non-GAAP measures and definitions.
Management's discussion and analysis contents
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SectionContents
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1. Introduction Introduction and summary of TELUS'
consolidated results for the second
quarter and first six months of 2008
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2. Core business, vision A discussion of activities in support of
and strategy TELUS' six strategic imperatives
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3. Key performance driversA listing of corporate priorities for 2008
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4. Capability to deliver A description of the factors that affect
resultsthe capability to execute strategies,
manage key performance drivers and
deliver results
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5. Results from operationsA detailed discussion of operating results
for the second quarter and first six
months of 2008
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6. Financial conditionA discussion of significant changes in
TELUS' balance sheets for the six-month
period ended June 30, 2008
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
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8. Critical accountingA description of accounting estimates that
estimates and accounting are critical to determining financial
policy developmentsresults, and changes to accounting
policies
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9. Annual guidance for 2008 TELUS' revised annual guidance
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10. Risks and risk management An update on certain risks and
uncertainties facing TELUS and how the
Company manages these risks
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11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used by
definitionsmanagement
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1. Introduction
1.1 Materiality for disclosures
Management determines whether or not information is material based on
whether it believes a reasonable investor's decision to buy, sell or hold
securities in the Company would likely be influenced or changed if the
information were omitted or misstated.
1.2 Canadian telecommunications industry
Key industry development
On June 30, 2007, Canada's largest telecommunications service provider BCE Inc. announced that it had entered into a definitive agreement to be acquired by a consortium led by Teachers Private Capital, the private investment arm of the Ontario Teachers' Pension Plan, and several co- investors, recently confirmed by BCE to be the U.S.-based Providence Equity Partners, Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity. The BCE Board recommended that their common shareholders accept the consortium's offer at an all-cash price of $42.75 per common share or approximately $34 billion. On September 21, 2007, BCE shareholders overwhelmingly approved the acquisition. In June 2008, the CRTC (Canadian Radio-television and Telecommunications Commission) approved the change in control of BCE's broadcasting licences. Industry Canada also approved the acquisition. A challenge before the Supreme Court of Canada by certain BCE bond holders was also dismissed in June. BCE has indicated that it expects the transaction to close on or before December 11, 2008.
Wireless developments - advanced wireless service (AWS) and other
spectrum auction in the 2 GHz range
Industry Canada conducted a wireless spectrum licence auction between May 27 and July 21, 2008 for 90 MHz of AWS spectrum (including 40 MHz set aside for new entrants), 10 MHz for personal communications network (PCS) service extension, and 5 MHz for another small band. The auction concluded after 331 rounds with Industry Canada reporting total proceeds of $4,255 million (average of $1.55/MHz/POP for AWS and PCS spectrum, where POP refers to person of population).
TELUS was advised that it was the provisionally successful bidder on 59 spectrum licences of 20 MHz or 10 MHz in the 1700/2100 MHz ranges, providing additional spectrum depth nationally in markets TELUS already covers. The cost of spectrum licences won was approximately $880 million. TELUS expects to receive the licences after final payment and after demonstrating compliance with Canadian ownership requirements, both expected to occur in the third quarter of 2008. Each of the other AWS spectrum auction provisional winners must also comply with both Canadian ownership and payment requirements. The average spectrum acquired by TELUS was 16.2 MHz at an average cost of $1.82/MHz/POP. See also Building national capabilities in Section 2, as well as Section 4.1 Principal markets addressed and competitors and Section 10.1 Regulatory.
In the third quarter of 2008, in accordance with the terms of the auction, the Company expects that the amount of successful bids will be paid through a combination of drawing on its credit facilities and utilization of cash on hand.
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Licences acquired by TELUS in the May 27 to July 21, 2008 Industry
Canada spectrum auction
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Number of
licences
Bandwidthacquired Geographic areas
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20 MHz comprised of 10 MHz 32 Quebec, SW Ontario, Ottawa
in the 1700 MHz range paired Region, Manitoba,
with 10 MHz in the 2100 MHz Saskatchewan, Alberta and
range B.C.
10 MHz comprised of 5 MHz in 27 Yukon, Northwest
the 1700 MHz range paired withTerritories & Nunavut,
5 MHz in the 2100 MHz range Newfoundland & Labrador,
Nova Scotia, New Brunswick,
P.E.I., N. Ontario, Central
Ontario, and Toronto
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1.3 Consolidated highlights
The chief executive officer, who is the chief operating decision-maker,
regularly receives TELUS' consolidated reports on two bases: including and
excluding (as shown in the "as adjusted" calculations) an incremental charge
for introducing a net-cash settlement feature for share option awards granted
prior to 2005. The highlights table below presents both views.
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Consolidated highlights
($ millions, except shares,
per-share amounts,Quarters ended June 30
subscribers and ratios) 2008 2007 Change
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Consolidated statements of income
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Operating revenues 2,398.72,228.1 7.7 %
Operating income 498.1 493.8 0.9 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8n.m.
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Operating income (as adjusted) 497.8 495.6 0.4 %
Income before income taxes 381.4 348.1 9.6 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8n.m.
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Income before income taxes (as adjusted) 381.1 349.9 8.9 %
Net income 267.0 253.1 5.5 %
Net-cash settlement feature, after tax(0.2) 1.3n.m.
--------- --------- ---------
Net income (as adjusted) 266.8 254.4 4.9 %
Earnings per share, basic ($) 0.83 0.76 9.2 %
Net-cash settlement feature per share- -- %
--------- --------- ---------
Earnings per share, basic (as adjusted) ($) 0.83 0.76 9.2 %
Earnings per share, diluted ($) 0.83 0.75 10.7 %
Cash dividends declared per share ($) 0.45 0.375 20.0 %
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Consolidated statements of cash flows
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Cash provided by operating activities461.01,061.9(56.6)%
Cash used by investing activities436.7 477.8 (8.6)%
Capital expenditures 435.6 481.8 (9.6)%
Cash (used) provided by financing
activities (27.7) (1,115.9)97.5 %
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Subscribers and other measures
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Subscriber connections(1) (thousands) 11,363 10,885 4.4 %
EBITDA(2)917.6 884.6 3.7 %
Net-cash settlement feature expense (0.3) 1.8n.m.
--------- --------- ---------
EBITDA (as adjusted) 917.3 886.4 3.5 %
Free cash flow(3)302.3 161.7 87.0 %
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Debt and payout ratios(4)
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Net debt to EBITDA - excluding
restructuring costs 1.71.8 (0.1)
Dividend payout ratio (%) 52 48 4 pts
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Consolidated highlights
($ millions, except shares,
per-share amounts, Six-month periods ended June 30
subscribers and ratios) 2008 2007 Change
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-------------------------------------------------------------------------
Consolidated statements of income
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Operating revenues 4,749.34,433.7 7.1 %
Operating income 1,025.5 890.8 15.1 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3n.m.
--------- --------- ---------
Operating income (as adjusted) 1,025.41,066.1 (3.8)%
Income before income taxes 782.6 623.7 25.5 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3n.m.
--------- --------- ---------
Income before income taxes (as adjusted) 782.5 799.0 (2.1)%
Net income 558.0 447.9 24.6 %
Net-cash settlement feature, after tax(0.1) 109.0n.m.
--------- --------- ---------
Net income (as adjusted) 557.9 556.9 0.2 %
Earnings per share, basic ($) 1.73 1.34 29.1 %
Net-cash settlement feature per share- 0.33 (100.0)%
--------- --------- ---------
Earnings per share, basic (as adjusted) ($) 1.73 1.67 3.6 %
Earnings per share, diluted ($) 1.72 1.32 30.3 %
Cash dividends declared per share ($) 0.90 0.75 20.0 %
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Consolidated statements of cash flows
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Cash provided by operating activities 1,086.21,522.5(28.7)%
Cash used by investing activities 1,437.1 870.1 65.2 %
Capital expenditures 755.3 863.7(12.6)%
Cash (used) provided by financing
activities 376.7 (638.7) n.m.
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Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(1) (thousands)
EBITDA(2) 1,867.11,648.9 13.2 %
Net-cash settlement feature expense (0.1) 175.3n.m.
--------- --------- ---------
EBITDA (as adjusted) 1,867.01,824.2 2.3 %
Free cash flow(3)882.1 642.5 37.3 %
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Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding
restructuring costs
Dividend payout ratio (%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
pt; pts - percentage point(s)
(1) The sum of wireless subscribers, network access lines and Internet
access subscribers measured at the end of the respective periods
based on information in billing and other systems.
(2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow.
(4) See Section 7.4 Liquidity and capital resource measures and Section
11.4 Definitions of liquidity and capital resource measures.
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Highlights for the second quarter and first six months of 2008, as
discussed in Section 5: Results from operations, include the following:
- Subscriber connections increased by 478,000 in the twelve-month
period ended June 30, 2008. The number of wireless subscribers grew
by 10.6% to 5.83 million, the number of Internet subscribers grew by
6.3% to 1.21 million and the number of network access lines decreased
by 3.4% to 4.33 million.
- Wireless gross subscriber additions increased to a TELUS second
quarter record of 422,200, or up 19%, when compared to the same
period in 2007, and were positively influenced by the introduction of
a new brand. Wireless average revenue per subscriber unit per month
(ARPU) was $62.73 in the second quarter of 2008, up $0.85 from the
first quarter of 2008, but $0.92 lower than the second quarter of
2007.
- Operating revenues increased by $170.6 million and $315.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were due
primarily to growth in wireless network revenues and wireline data
revenues (including revenues from Emergis), which more than offset
revenue declines in wireline voice local and long distance.
- Operating income adjusted to exclude the net-cash settlement feature
increased by $2.2 million in the second quarter of 2008, when
compared to the same period in 2007, as the increase in EBITDA (as
adjusted) exceeded higher depreciation and amortization expenses.
Operating income (as adjusted) decreased by $40.7 million for the
first six months of 2008, primarily due to an additional three months
amortization for a new billing system and increased depreciation,
which partly offset increased EBITDA (as adjusted).
- Excluding the effect of the net-cash settlement feature, Income
before income taxes (as adjusted) increased by $31.2 million in the
second quarter and decreased by $16.5 million in the first six months
of 2008, due to changes in operating income (as adjusted) noted above
and lower financing and other expenses.
- Net income increased by $13.9 million or seven cents per share in the
second quarter of 2008 when compared to the same period in 2007. For
the first six months of 2008, Net income increased by $110.1 million
or 39 cents per share when compared to the same period in 2007.
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Net income changes Quarters ended Six-month periods
($ millions) June 30 ended June 30
-------------------------------------------------------------------------
2007 Net income 253.1 447.9
Tax-effected changes:
Lower net-cash settlement feature1.5 109.1
Higher EBITDA as adjusted(1)21.4 29.6
Higher depreciation and
amortization(1), excluding
investment tax credits in 2007(19.8)(54.4)
Lower interest expenses(1) 10.8 17.1
Tax-related adjustments
(see Section 5.2) (10.0) 3.0
Other 10.0 5.7
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2008 Net income 267.0 558.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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(1) at 2008 blended statutory tax rates
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- Average shares outstanding during the first six months of 2008 were
4% lower than the same period in 2007, due to repurchases under
normal course issuer bid (NCIB) programs. The Company purchased
0.95 million Common Shares and 3.69 million Non-Voting Shares for a
total outlay of $199.2 million in the first half of 2008.
Highlights for the second quarter and first six months of 2008, as
discussed in Section 7: Liquidity and capital resources, include the
following:
- Cash provided by operating activities decreased by $600.9 million and
$436.3 million, respectively, in the second quarter and first six
months of 2008, when compared to the same periods in 2007. For the
second quarter period, a $350 million reduction in proceeds from
securitized receivables during 2008 compared to a $350 million
increase in proceeds in 2007, for a comparative reduction in cash
flow of $700 million. For the six-month period, a $350 million
reduction in proceeds from securitized receivables in 2008 compared
to no change in 2007.
- Cash used by investing activities decreased by $41.1 million in the
second quarter of 2008 and increased by $567.0 million during the
first six months of 2008, when compared to the same periods in 2007.
The decrease for the second quarter was mainly from higher wireless
capital expenditures in the prior year to extend higher speed EVDO
(evolution data optimized) coverage. The increase for the first six
months of 2008 was due mainly to the January 2008 acquisition of
Emergis, partly offset by lower wireless capital expenditures.
- Net cash used by financing activities decreased by $1,088.2 million
during the second quarter of 2008, when compared to the same period
in 2007, due to a number of factors, including repayment of
$1.5 billion maturing Notes in June 2007, net of the April 2008 issue
of $500 million Notes (see next paragraph). Net Cash provided by
financing activities for the first six months of 2008 increased by
$1,015.4 million when compared to the same period in 2007, due mainly
to the April 2008 debt issue, increases in net amounts drawn from the
2012 credit facility and commercial paper in 2008, as well as lower
share purchases under NCIB programs.
On April 9, 2008, TELUS successfully closed an offering of 5.95%,
Series CE, Notes due April 15, 2015, for aggregate gross proceeds of
approximately $500 million. The net proceeds of the offering were
used for general corporate purposes including repayment of amounts
under the 2012 credit facility, and to refinance short-term financing
sources, which had been utilized in January for purchase of the then
issued and outstanding Emergis common shares for $743 million.
- Free cash flow increased by $140.6 million and $239.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were mainly
due to lower capital expenditures, improved EBITDA (as adjusted), and
lower paid interest. Free cash flow was supplemented in the first
half of 2008 by financing activities to complete acquisitions
totalling $691.3 million, net of acquired cash.
- Net debt to EBITDA at June 30, 2008 was 1.7, unchanged from the
measure at December 31, 2007, continuing the achievement of the
Company's long-term target policy range of 1.5 to 2.0 times.
- The dividend payout ratio, based on the annualized second quarter
dividend and earnings for the 12-month trailing period ended June 30,
2008 (excluding favourable tax-related adjustments), was 52%, within
the Company's guideline.
2. Core business, vision and strategy
The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussion and analyses, as well as updates reported in Section 10 of this document.
TELUS' core business, vision and strategy were detailed in its 2007 Management's discussion and analysis. Activities that supported the Company's six strategic imperatives during the second quarter of 2008 include the following:
Building national capabilities across data, IP, voice and wireless
TELUS successfully bid on 20 MHz and 10 MHz blocks of advanced wireless services (AWS) spectrum in the 1700 MHz/2100 MHz ranges in the Industry Canada auction concluded July 21. The average spectrum won by TELUS was 16.2 MHz nationally, which increases TELUS' strong spectrum position, and is expected to provide capacity for the introduction of future 4G (fourth generation) service offerings.
Focusing relentlessly on the growth markets of data, IP and wireless
The second quarter of 2008 is the first full period including the operations of TELUS' wireless postpaid value brand. In March, TELUS launched this new brand and service to better address segments of the wireless market and complement the fully featured TELUS brand service. The expected benefits include more flexibility in serving various market segments, increasing postpaid customer additions, protecting revenue on the premium TELUS brand, and improving client retention programs.
Building integrated solutions that differentiate TELUS from its
competitors
In June, the Company launched three new global positioning system (GPS) solutions for businesses with mobile workers. TELUS Asset Tracker enables businesses to keep track of assets, whether large or small. TELUS Resource Tracker allows businesses to increase safety and productivity through real- time location monitoring of workers. TELUS Track and Dispatch gives businesses the ability to determine the closest mobile worker to a new job assignment or to immediately dispatch help if a worker needs assistance. These new solutions are part of the Company's suite of wireless GPS solutions on the PCS network that also features TELUS Fleet Tracker, a fleet monitoring and tracking solution, and TELUS Navigator, a GPS turn-by-turn navigation solution.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business
TELUS Ventures received a very positive return from its 2001 minority investment in Hostopia (TSX: H), a provider of private-branded web hosting, email and e-commerce solutions to telecommunications and cable TV companies, Internet service providers, domain registrars, and other Web service providers. This arose from Deluxe Corporation's (NYSE: DLX) all cash offer for Hostopia in June, which was recommended for approval by Hostopia's Board of Directors. Shareholder approval was obtained in late July and the deal closed in early August. TELUS Ventures invested in Hostopia to complement TELUS' existing services and to be its key supplier, as part of TELUS' strategy to benefit from emerging technologies that fill the Company's capability gaps.
Going to the market as one team under a common brand, executing a
single strategy
Acquired in January 2008 and re-branded "Emergis, a TELUS company," the post-merger integration process continued into the second quarter in order to ensure a seamless transition for team members and customers, while ensuring a focus on achieving strategic business goals. This included the identification of top joint-sales opportunities and working together to close multi-million dollars of new contracts. The teams also initiated an update to the three-year strategic business plans for healthcare and financial services. In addition, during the quarter certain business functions were aligned, including Finance, Human Resources and Marketing.
Investing in internal capabilities to build a high-performance
culture and efficient operations
In mid-July, following a large trial, TELUS successfully converted more than one million wireline residential customers in British Columbia to a new billing and client care system. This converges to the system in Alberta, and for the first time most customers in Alberta and B.C. are now on the same billing and client care system. During the B.C. conversion, TELUS has applied learnings from the Alberta conversion in 2007 and early experience has been positive. The expected customer service and cost benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems. See Section 4.2 for additional information on the July conversion.
3. Key performance drivers
The following is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussions and analyses, as well as updates reported in Section 10 of this document.
Management sets new corporate priorities each year to advance TELUS' strategy, focus on the near-term opportunities and challenges, and create value for shareholders.
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2008 corporate priorities
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Drive profit from strategic services with a focus on data
-------------------------------------------------------------------------
Build scale in vertical markets and leverage the Emergis acquisition
-------------------------------------------------------------------------
Exact productivity gains from efficiency improvement initiatives
-------------------------------------------------------------------------
Elevate the client experience and build enhanced loyalty
-------------------------------------------------------------------------
Execute technology initiatives, including broadband and IT platforms
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4. Capability to deliver results
The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussions and analyses, as well as updates reported in Section 10 of this document.
4.1 Principal markets addressed and competitors
At June 30, 2008, the principal markets addressed and competitors have not changed significantly from those described in TELUS' 2007 Management's discussion and analysis. Wireless competition is expected to increase in the future, as several potential entrants have provisionally acquired spectrum regionally in the AWS spectrum auction concluded in July 2008, as summarized below. Under the auction rules, successful bidders are subject to confirmation of eligibility and must complete payments within 30 business days of the auction close. Potential new entrants are expected to begin offering services in 2009 or later, as they establish operations, and build wireless networks in areas where they have won spectrum. Some new entrants may form alliances with one another. See Section 10.1 Regulatory,
-------------------------------------------------------------------------
Existing and potential competitors acquiring licences in the May 27 to
July 21, 2008 Industry Canada spectrum auction
-------------------------------------------------------------------------
CompetitorPrimary geographic focus
-------------------------------------------------------------------------
Incumbent national facilities-
based competitors
Rogers Communications Inc. Expansion of existing national capacity
Bell Mobility Inc. Expansion of existing national capacity
TELUS Expansion of existing national capacity
-------------------------------------------------------------------------
Incumbent provincial facilities-
based competitors
MTS Allstream Expansion of existing Manitoba capacity
SaskTel Expansion of existing Saskatchewan
capacity
-------------------------------------------------------------------------
Potential new entrants(1)
Globalive Wireless LP Spectrum in most regions, but excluding
most of Quebec
Data & Audio-Visual Enterprises Spectrum in most major centres, except
in Quebec and Atlantic Canada
6934579 Canada Inc. Spectrum in S. and E. Ontario and S.
and E. Quebec
Quebecor (9193-2962 Quebec Inc.) Regional spectrum in Quebec and parts
of Ontario
Shaw Communications Inc. Regional spectrum in Western Canada and
N. Ontario
Bragg Communications Inc. Regional spectrum in Atlantic Canada
and SW Ontario; Grande Prairie,
Alberta
Novus Wireless Inc. Provincial spectrum in B.C. and Alberta
Blue Canada Wireless Inc. Provincial spectrum in Nova Scotia and
P.E.I.
Others3 local areas in total
-------------------------------------------------------------------------
(1) Subject to building a wireless network in the geographic areas where
they elect to complete.
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4.2 Operational capabilities
Development of a new billing and client care system in the wireline
segment
A pilot implementation for approximately 150,000 residential customers in B.C. began in May 2008 and a subsequent system conversion for more than one million B.C. residential customers was completed in mid-July 2008. The Company applied key learnings from the Alberta conversion in 2007 and initial indications are that the cutover went we
