Growth in earnings and cash flow due to expense control and lower capital expenditures
Quarterly dividend increase of 5.3 per cent to 50 cents per share
VANCOUVER, May 5 /CNW/ - TELUS Corporation reported first quarter 2010 revenue of $2.375 billion, unchanged from the same period a year ago as four per cent growth in both wireless revenue and wireline data revenue offset continued declines in traditional voice services. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased by four per cent due to lower restructuring costs, efficiency initiatives and expense control.
When excluding income tax-related adjustments, net income and EPS increased this quarter by 2.5 per cent. First quarter results included favourable income tax-related adjustments of approximately $2 million or one cent per share this quarter and $62 million or 20 cents in the same period a year ago. Reported net income in the first quarter was $268 million and earnings per share (EPS) were 84 cents, down approximately 17 per cent.
Free cash flow of $246 million nearly doubled from a year ago, primarily due to capital expenditures being lower by $163 million, partially offset by a $37 million increase in cash tax payments.
Over the 12 month period, total customer connections increased 2.4 per cent or 276,000, driven by a 6.4 per cent increase in wireless subscribers and 103 per cent growth in TELUS TV customers, partially offset by declines in legacy landline connections.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ and in millions, except per share amounts 3 months ended
March 31
(unaudited) 2010 2009 % Change
-------------------------------------------------------------------------
Operating revenues 2,375 2,375 -
Operations expense 1,429 1,441 (0.8)
Restructuring costs 6 28 (78.6)
EBITDA(1) 940 906 3.8
Net income(2) 268 322 (16.8)
Earnings per share (EPS), basic(2) 0.84 1.01 (16.8)
EPS (excluding income-tax related adjustments) 0.83 0.81 2.5
Capital expenditures 311 474 (34.4)
Free cash flow(3) 246 125 96.8
Total customer connections (millions)(4) 11.89 11.62 2.4
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 11.1 in 2010 first quarter
Management's discussion and analysis.
(2) Net income and EPS for the three month period in 2010 included
favourable income tax-related adjustments of approximately $2 million
or 1 cent per share, compared to $62 million or 20 cents per share
respectively for the same period in 2009.
(3) See Section 11.2 in 2010 first quarter Management's discussion
and analysis.
(4) Historical NALs have been restated for prior periods commencing in
2007, as a result of a periodic subscriber measurement review and
correction. See section 5.4 in 2010 first quarter Management's
discussion and analysis.
"The growth in postpaid wireless and TELUS TV net additions coupled with the improvement in quarterly earnings and free cash flow in the first quarter of 2010 are a testament to our major strategic investments and the team's hard work," said Darren Entwistle, TELUS president and CEO. "We are starting to benefit from Canada's fastest 3G+ wireless network and enhanced wireline broadband network, leading to greater sales of smartphones and TELUS TV. Importantly, we are experiencing significant traction in our operational efficiency and cost control endeavours."
"Based on our positive financial outlook, we are increasing our dividend by 5.3%" noted Mr. Entwistle. "This reflects our confidence in the prospect for earnings and cash flow growth in 2010 and beyond."
Robert McFarlane, TELUS executive vice-president and CFO said, "The Board decision to increase the company's dividend this quarter as well as the dividend payout ratio target guideline to 55 to 65 per cent of prospective sustainable earnings, is aligned with our future expected earnings and free cash flow growth profile. TELUS is moving to a new phase of moderated capital expenditures and normal cash tax rates."
The company reaffirmed its annual 2010 guidance set in mid-December 2009.
-------------------------------------------------------------------------
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 2010 guidance), qualifications and risk factors referred to in the
Management's discussion and analysis in the 2009 annual report, and in
the 2010 first quarter report. 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 targets and guidance.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $47 million or 4.2% to $1.2 billion in
the first quarter of 2010, compared with the same period in 2009,
driven primarily by equipment and other revenue growth of
$30 million, which included revenue from Black's Photo, as well as a
1.6% increase in network revenue.
- Data revenue of $258 million increased $50 million or 24% due to the
continued adoption of smartphones and mobile Internet keys, and
increased use of data services such as text messaging and wireless
social networking.
- Blended ARPU (average revenue per subscriber unit per month) declined
by 4.4% to $55.80 compared to the same quarter a year ago. The
downward trend in ARPU moderated from the 7.7% decline experienced in
the fourth quarter of 2009. The improved trend is due to a lower rate
of decline in voice ARPU and a higher rate of increase in data ARPU.
Voice ARPU declined 9.5% this quarter compared to 12% in the
fourth quarter. Data ARPU increased by 17% to $13.14, which
represented 24% of total ARPU, and is higher than the 13% increase in
data ARPU in the fourth quarter of 2009.
- Total net subscriber additions of 51,000 increased by 6.3% over the
same period a year ago. Higher value postpaid net additions increased
48% to 65,000, while prepaid subscribers decreased 14,000. As a
result, postpaid subscribers represented 127% of aggregate net
subscriber additions. Smartphone subscribers now represent 22% of
total postpaid subscribers compared to 15% a year ago.
- Cost of acquisition per gross addition decreased by 4.2%
year-over-year to $322, reflecting the impact of loading through
lower variable cost channels and a shift in product mix, partly
offset by higher cost of subsidizing smartphone devices.
- Cost of retention of $123 million increased by $10 million,
reflecting higher retention volumes and equipment subsidy costs
associated with increased customer migrations to high cost
smartphones, notably including the Apple iPhone.
- Blended monthly subscriber churn improved to 1.55%, reflecting
improving economic conditions.
- EBITDA of $497 million increased by 1.8% due to improved wireless
revenue growth, partially offset by increased retention costs.
- Simple cash flow (EBITDA less capital expenditures) increased by
$146 million or 50% to $438 million in the quarter due to higher
EBITDA and $137 million reduction in capital spending due to late
2009 completion of the new HSPA wireless network.
TELUS wireline
- External revenues decreased by $47 million or 3.8% to $1.2 billion in
the first quarter of 2010, when compared with the same period in
2009, primarily due to continued declines in traditional local and
long-distance revenues.
- Data revenues increased by $20 million or 3.7% due to TELUS TV
growth, increased enhanced data and hosting services, and higher
managed workplace revenues.
- TELUS high-speed Internet net additions of 3,000 were down 11,000
from the same period a year ago, due to aggressive pricing and
promotional activity in the quarter by the Company's primary cable-TV
competitor.
- TELUS TV net additions were 29,000, an increase of 45% over the same
period last year, due to improved installation capabilities,
investment in expanded broadband coverage, and the addition of TELUS
Satellite TV service in mid-2009.
- Total network access lines (NALs) declined by 58,000 in the quarter
to 3.9 million, down 5.2% from a year ago. Residential NAL losses of
50,000 increased year-over-year due to aggressive pricing and
promotional activity by the cable-TV competitor and wireless
substitution. Business NALs declined by 8,000 primarily in Western
Canada, due to competitive and economic factors, which more than
offset increased business data lines in Ontario and Quebec.
- EBITDA of $443 million increased by $25 million or 6% in large part
due to lower restructuring costs and operational savings from
efficiency initiatives.
- Simple cash flow (EBITDA less capital expenditures) increased by
$51 million to $191 million due to higher EBITDA and $26 million
lower capital expenditures.
CORPORATE AND BUSINESS DEVELOPMENTS
TELUS TV surpasses 200,000 subscriber milestone and launches Mediaroom
TELUS' all-digital television service hit another notable milestone in April as the TELUS TV subscriber base surpassed 200,000 customers. Since launching TELUS TV, the company has advanced the service by introducing more than 400 channels, including over 40 in High Definition, and video on demand and pay per view.
In February, TELUS launched an enhanced version of TELUS TV powered by Microsoft Mediaroom. This new platform offers customers impressive new features including a single personal video recorder (PVR) solution for the whole home, allowing customers to record and play back shows on up to six TVs in a home and record three programs simultaneously from any room. TELUS' new PVR-anywhere service allows customers to record over 300 hours of Standard Definition programming or 120 hours of High Definition programming.
$1.7 billion capital investment extends reach and speed of advanced broadband
TELUS plans in 2010 to invest $1.7 billion across Canada, including $650 million in both British Columbia and Alberta and $400 million in Ontario and Quebec, as the Company continues extending the reach and speed of its advanced wireline and wireless broadband services. TELUS' investment in information, communications and technology is delivering advances in priority areas such as healthcare, the environment and the quality of life for Aboriginal people. TELUS is continuing to invest in broadband networks to deliver advanced Internet services and high definition digital TELUS TV to more than 1.8 million households. TELUS will also continue to enhance its wireless broadband network, building on the November 2009 launch of its 3G+ network, now covering more than 31 million Canadians.
Federal Government supports opening door to more foreign investment in telecom
At the beginning of March, the Federal Government signaled its intention to consider easing foreign ownership restrictions in the telecommunications sector. While the Industry Minister has signaled he will consider a number of options including removing all restrictions for carriers under the Telecommunications Act, he has also signaled that the government is not considering any changes under the Broadcasting Act at this time. This would make it difficult for all converged or integrated carriers like Shaw and TELUS to take advantage of any rule changes because all distribute broadcasting over the same networks used to carry telecom traffic.
There is also a possibility that government may consider a previously recommended phased-in approach to liberalization that would allow increased flexibility for carriers with less than 10% national market share or allow for more access to foreign capital in upcoming spectrum auctions expected in the 2011 to 2012 timeframe. It is currently not clear what, if any, changes to the foreign ownership regulatory structure may occur.
TELUS has not opposed foreign ownership restrictions being lifted in Canada, but has rather advocated that it be done in a fair and symmetrical basis for all communications carriers including satellite and cable-TV companies in Canada. At the same time, TELUS does not support changing Canadian control regulations for broadcasters.
TELUS Consumer and Business units combining into TELUS Customer Solutions
Beginning in March, as part of an organizational change, TELUS began the process of combining Consumer and Business Solutions into one team. The new Customer Solutions business unit is uniting under the leadership of Joe Natale, who assumed a new role as TELUS' chief commercial officer. The integration enhances our ability to collaborate more effectively on competitive strategies, market and customer care activities, and business support processes, which will also help achieve efficiency and cost synergies.
Latest Motorola devices available from TELUS
TELUS and Motorola launched the much-anticipated MOTOROLA MILESTONE in Canada. Powered by Google's new Android operating platform, the MILESTONE delivers a rich mobile web experience, superior messaging and top-of-the-line multi-media features in an innovative design. MILESTONE features the best of both worlds with a full QWERTY keyboard and touchscreen navigation, as well as the opportunity for users to customize their mobile with widgets and the freedom to run multiple applications at once.
Also in late April, TELUS launched the latest Android-powered device, the industry acclaimed MOTOROLA BACKFLIP with MOTOBLUR, available only on Canada's fastest 3G+ network. The unique reverse flip smartphone comes fully equipped with a 3.1" high resolution touchscreen, 3G+ speed, Wi-Fi access and access to more than 30,000 applications and widgets from the Android Market.
TELUS the first mobile carrier in Canada to offer over-the-air DRM-free music
TELUS is the first wireless carrier in Canada to offer over-the-air DRM-free (digital rights management) music tracks to Canadians. Canadians now have the freedom to play music purchased from the TELUS Music shop on any of their digital music-capable devices. DRM-free music expands the TELUS music experience by allowing clients to transfer the music they buy from TELUS to their own electronic devices including cell phones, smartphones or PCs.
TELUS CTO recognized for courage to innovate
TELUS Chief Technology Officer Ibrahim Gedeon was named to the distinguished list of honourary degree recipients for 2010 from the University of British Columbia (UBC). Honorary degrees recognize individuals who have made substantial contributions to society at the provincial, national and/or international levels.
TELUS again named a Global 100 Most Sustainable Corporations
Corporate Knights again recognized TELUS on its list of the Global 100 Most Sustainable Corporations in the World for 2010. TELUS is one of only nine Canadian companies and the only Canadian telecommunications company, to earn a spot on the list. The annual list of Global 100 Most Sustainable Corporations in the World is compiled by Corporate Knights magazine and Global Currents Investment Management. The Global 100 list is announced each year at the World Economic Forum in Davos, Switzerland.
TELUS recognized as one of Canada's Best Diversity Employers
For the second straight year, TELUS has been named one of Canada's Best Diversity Employers in an annual competition that recognizes the nation's leaders in creating diverse and inclusive workplaces. This year's list pays tribute to 45 companies and organizations in Canada that have developed exceptional diversity initiatives to promote inclusiveness among employee groups such as women, members of visible minorities and persons with disabilities.
2010 TELUS World Skins Game raising funds for Jeneece Place
The TELUS World Skins Game will bring some of the top names in golf to Canada this June when the event visits Victoria, British Columbia's Bear Mountain Resort. Canada's own Mike Weir, Camilo Villegas of Colombia, Fred Couples of the United States, Ian Poulter of England and Retief Goosen of South Africa make up the 2010 field. This summer's game will improve the quality of life for Vancouver Island's sick kids and their families for years to come. The money raised during the event will benefit the Queen Alexandra Foundation for Children in support of Jeneece Place, a home-away-from-home for families staying in Victoria to be near their children being treated at Victoria General Hospital. TELUS, the Jeneece Place Foundation, the Queen Alexandra Foundation for Children and their partners have already raised more than $400,000 for this important project, jump-starting the planning and architecture work.
TELUS' long-standing commitment to local charities such as Jeneece Place recently won international recognition when the Association for Fundraising Professionals named TELUS the world's top philanthropic corporation for 2010.
TELUS donates $679,000 to Atlantic Canada Boys and Girls Clubs
In February, TELUS donated $679,000 to 30 Boys and Girls Clubs in Atlantic Canada to further its commitment to helping at-risk youth. The Help Kids Go Further campaign was originally launched in April 2009 by TELUS President and CEO Darren Entwistle in celebration of the launch of the TELUS Atlantic Canada Community Board. The campaign saw $25 from the sale of every TELUS smartphone and mobile phone sold in Atlantic Canada earmarked for the local member agencies of Boys and Girls Clubs throughout the region.
TELUS supports local programs and charities through sales of TELUS TV
TELUS has expanded a local community investment program promoting TELUS TV while supporting communities in British Columbia and Alberta. Starting March 2 and lasting one year, TELUS will give $100 to community infrastructure projects for every new TELUS TV customer in Vernon, Powell River, Penticton and Lethbridge. This expands the program already in place in Airdrie and Medicine Hat Alberta and in B.C. in Kelowna, Sechelt, Prince George, and Vancouver Island.
TELUS and its customers partner locally to save lives with pink BlackBerry smartphones
With the launch of the pink BlackBerry Curve 8530 and pink BlackBerry Pearl 3G, TELUS will be giving customers the opportunity to get directly involved in a very local and important fundraising initiative. Starting this month and running until October 31, 2010, TELUS will donate $25 from the sale of each of these pink BlackBerry smartphones to a local breast cancer organization for the purchase of digital mammography equipment at hospitals in the province the device is purchased. Together, TELUS and its customers will advance the early detection and treatment of breast cancer, and thus save lives. The pink BlackBerry Curve and BlackBerry Pearl 3G will be available only from TELUS later in May.
TELUS turns out the lights and turns on the texts for Earth Hour 2010 Canada
TELUS gave its customers another way to get involved in Earth Hour 2010. In cooperation with the Mobile Giving Foundation, TELUS created an easy way for Canadians to text donations to the World Wildlife Fund Canada, the official organizer of Canada's Earth Hour. Through their TELUS mobile devices, customers simply had to text the word "earth" to 45678 to donate $5, to a maximum of $30 each month. Additionally, on March 27, TELUS and its team members joined tens of thousands of businesses and millions of people around the world in turning out the lights in support of Earth Hour 2010.
Go paperless for Earth Day to save 60,000 trees
This Earth Day, TELUS and the Nature Conservancy of Canada (NCC) are encouraging TELUS' wireless customers to go paperless, and save 60,000 trees in just one year. Each week, from April 26 to September 26, TELUS will give $1,000 to a selected client who makes the switch from paper to online billing and will also donate an additional $1,000 to NCC in honour of the winning client. For every client going paperless, TELUS will also donate $2 to the Nature Conservancy of Canada.
Dividend Declaration - 5.3% increase and new dividend payout ratio target guideline
The Board of Directors has declared a quarterly dividend of fifty cents ($0.50) Canadian per share on the issued and outstanding Common shares and fifty cents ($0.50) Canadian per share on the issued and outstanding Non-Voting shares of the Company payable on July 2, 2010 to holders of record at the close of business on June 10, 2010.
This quarterly dividend represents a two and one half cent or 5.3 per cent increase from the forty seven and a half cents paid on January 4 and April 1, 2010 and the four dividends paid in 2009. This is the sixth increase in the dividend over the last six years.
The Board of Directors has also approved a dividend payout ratio target guideline of 55 to 65 per cent of sustainable net earnings, up from the previous guideline of 45 to 55 per cent. This prospective target guideline signals management and Board confidence in the outlook of the company into 2011.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings release, quarterly results slides, supplementary financial information and our full 2009 annual report on our website at telus.com/investors.
Quarterly conference call and webcast presentation
TELUS quarterly conference call is scheduled for May 5, 2010 at 4:30 pm ET and will feature a presentation about our first quarter results. It will be followed by a question and answer period with analysts. Interested parties can access the webcast at: telus.com/investors. A transcript will be posted on the website within several business days. Also, a recording will be available on May 5 until May 15, 2010 at: telus.com/investors or by telephone (1-403-669-1055 or 1-877-353-9587, reservation no. 296209 followed by the number sign).
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $9.6 billion of annual revenue and 11.9 million customer connections including 6.6 million wireless subscribers, 3.9 million wireline network access lines and 1.2 million Internet subscribers and 200,000 TELUS TV customers. Led since 2000 by President and CEO, Darren Entwistle, TELUS provides a wide range of communications products and services including data, Internet protocol (IP), voice, entertainment and video.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed $158 million to charitable and not-for-profit organizations and volunteered 3.1 million hours of service to local communities since 2000. Nine TELUS Community Boards across Canada lead TELUS' local philanthropic initiatives. TELUS was honoured to be named the most outstanding philanthropic corporation globally for 2010 by the Association of Fundraising Professionals, becoming the first Canadian company to receive this prestigious international recognition.
For more information about TELUS, please visit telus.com.
TELUS Corporation
interim consolidated statements of income and
other comprehensive income (unaudited)
Three months
Periods ended March 31 (millions except per
share amounts) 2010 2009
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,375 $ 2,375
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,429 1,441
Restructuring costs 6 28
Depreciation 345 334
Amortization of intangible assets 108 93
-------------------------------------------------------------------------
1,888 1,896
-------------------------------------------------------------------------
OPERATING INCOME 487 479
Other expense, net 8 5
Financing costs 112 95
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 367 379
Income taxes 99 57
-------------------------------------------------------------------------
NET INCOME 268 322
OTHER COMPREHENSIVE INCOME
Change in unrealized fair value of
derivatives designated as cash flow hedges 17 29
Foreign currency translation adjustment
arising from translating financial statements
of self-sustaining foreign operations (1) 1
-------------------------------------------------------------------------
16 30
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 284 $ 352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME ATTRIBUTABLE TO:
Common Shares and Non-Voting Shares $ 267 $ 321
Non-controlling interests 1 1
-------------------------------------------------------------------------
$ 268 $ 322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:
Common Shares and Non-Voting Shares $ 283 $ 351
Non-controlling interests 1 1
-------------------------------------------------------------------------
$ 284 $ 352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE AND NON-VOTING SHARE
- Basic $ 0.84 $ 1.01
- Diluted $ 0.84 $ 1.01
DIVIDENDS DECLARED PER COMMON SHARE AND
NON-VOTING SHARE $ 0.475 $ 0.475
TOTAL WEIGHTED AVERAGE COMMON SHARES AND
NON-VOTING SHARES OUTSTANDING
- Basic 318 318
- Diluted 319 318
TELUS Corporation
interim consolidated statements of financial
position (unaudited)
March 31, December 31,
As at (millions) 2010 2009
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 46 $ 41
Accounts receivable 737 694
Income and other taxes receivable 31 16
Inventories 206 270
Prepaid expenses 173 105
Derivative assets 2 1
-------------------------------------------------------------------------
1,195 1,127
-------------------------------------------------------------------------
Non-Current Assets
Property, plant, equipment and other, net 7,637 7,729
Intangible assets, net 5,096 5,148
Goodwill, net 3,572 3,572
Other long-term assets 1,642 1,602
Investments 40 41
-------------------------------------------------------------------------
17,987 18,092
-------------------------------------------------------------------------
$ 19,182 $ 19,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,388 $ 1,385
Income and other taxes payable 6 182
Restructuring accounts payable and accrued
liabilities 86 135
Dividends payable 152 150
Advance billings and customer deposits 687 674
Current maturities of long-term debt 82 82
Current portion of derivative liabilities 48 62
Current portion of future income taxes 288 294
-------------------------------------------------------------------------
2,737 2,964
-------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt 6,072 6,090
Other long-term liabilities 1,281 1,271
Future income taxes 1,362 1,319
-------------------------------------------------------------------------
8,715 8,680
-------------------------------------------------------------------------
Total Liabilities 11,452 11,644
-------------------------------------------------------------------------
Owners' Equity
Common Share and Non-Voting Share equity 7,709 7,554
Non-controlling interests 21 21
-------------------------------------------------------------------------
7,730 7,575
-------------------------------------------------------------------------
$ 19,182 $ 19,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Three months
Periods ended March 31 (millions) 2010 2009
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 268 $ 322
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 453 427
Future income taxes 31 (11)
Share-based compensation 1 9
Net employee defined benefit plans expense 7 4
Employer contributions to employee defined
benefit plans (45) (53)
Restructuring costs, net of cash payments (49) (1)
Amortization of deferred gains on
sale-leaseback of buildings, amortization
of deferred items and other, net (1) 20
Net change in non-cash working capital (251) (103)
-------------------------------------------------------------------------
Cash provided by operating activities 414 614
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (311) (474)
Proceeds from the sale of property and other assets 3 -
Other 1 (4)
-------------------------------------------------------------------------
Cash used by investing activities (307) (478)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued - 1
Dividends to holders of Common Shares and Non-Voting
Shares (129) (151)
Long-term debt issued 875 3,574
Redemptions and repayment of long-term debt (847) (3,499)
Dividends paid by a subsidiary to non-controlling
interests (1) -
-------------------------------------------------------------------------
Cash provided (used) by financing activities (102) (75)
-------------------------------------------------------------------------
CASH POSITION
Increase in cash and temporary investments, net 5 61
Cash and temporary investments, net, beginning of
period 41 4
-------------------------------------------------------------------------
Cash and temporary investments, net, end of
period $ 46 $ 65
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest (paid) $ (36) $ (49)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive of Investment Tax
Credits (paid) received, net $ (251) $ (214)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information (unaudited)
Three-month periods ended
March 31 Wireline Wireless
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,198 $ 1,245 $ 1,177 $ 1,130
Intersegment revenue 36 33 7 7
-------------------------------------------------------------------------
1,234 1,278 1,184 1,137
-------------------------------------------------------------------------
Operating expenses
Operations expense 787 834 685 647
Restructuring costs 4 26 2 2
-------------------------------------------------------------------------
791 860 687 649
-------------------------------------------------------------------------
EBITDA(1) $ 443 $ 418 $ 497 $ 488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 252 $ 278 $ 59 $ 196
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 191 $ 140 $ 438 $ 292
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods ended
March 31 Eliminations Consolidated
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,375 $ 2,375
Intersegment revenue (43) (40) - -
-------------------------------------------------------------------------
(43) (40) 2,375 2,375
-------------------------------------------------------------------------
Operating expenses
Operations expense (43) (40) 1,429 1,441
Restructuring costs - - 6 28
-------------------------------------------------------------------------
(43) (40) 1,435 1,469
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 940 $ 906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 311 $ 474
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 629 $ 432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (from above) $ 940 $ 906
Depreciation 345 334
Amortization 108 93
--------------------------------------------
Operating income 487 479
Other expense, net 8 5
Financing costs 112 95
--------------------------------------------
Income before income
taxes 367 379
Income taxes 99 57
--------------------------------------------
Net income $ 268 $ 322
--------------------------------------------
--------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is a measure that does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers; EBITDA is defined by the
Company as operating revenues less operations expense and
restructuring costs. The Company has issued guidance on, and reports,
EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures (CAPEX).
-------------------------------------------------------------------------
TELUS CORPORATION
Management's discussion and analysis
2010 Q1
-------------------------------------------------------------------------
Caution regarding forward-looking statements
-------------------------------------------------------------------------
This document contains forward-looking statements about expected future
events and financial and operating performance 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 forward-looking statements
are subject to inherent risks and uncertainties. There is significant
risk that assumptions, 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
future performance, conditions, actions or events to differ materially
from the targets, expectations, estimates or intentions expressed. Except
as required by law, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, and reserves the right
to change, at any time at its sole discretion, its current practice of
updating annual targets and guidance. Annual targets, guidance and
related assumptions for 2010 are described in Section 9: Annual guidance
for 2010.
Factors that could cause actual performance to differ materially include,
but are not limited to:
-------------------------------------------------------------------------
Competition (including more active price competition; the expectation
that new wireless competitors will launch or expand services in 2010
using advanced wireless services (AWS) spectrum; industry growth rates
including wireless penetration gain; actual network access line losses;
TELUS TV(R) and wireless subscriber additions experience; variability in
wireless average revenue per subscriber unit per month (ARPU) as well as
variability in subscriber acquisition and retention costs that are
dependent on subscriber loading and retention volumes, smartphone sales
and subsidy levels, and TELUS TV installation costs); technological
substitution (contributing to reduced utilization and increased
commoditization of traditional voice local and long distance services);
economic growth and fluctuations (including strength and persistence of
the economic recovery in Canada, and pension performance, funding and
expenses); capital expenditure levels in 2010 and beyond (due to the
Company's wireline broadband initiatives, fourth generation (4G) wireless
deployment strategy, and any new Industry Canada wireless spectrum
auctions); financing and debt requirements (including ability to carry
out refinancing activities); tax matters (including acceleration or
deferral of required payments of significant amounts of cash taxes);
human resource developments (including collective bargaining in the TELUS
Québec region and a national collective agreement expiring in late 2010);
ability to successfully implement cost reduction initiatives and realize
expected savings, net of restructuring costs (such as from business
integrations, internal off-shoring and reorganizations, without losing
customer-focus and negatively impacting client care); technology
(including subscriber demand for data challenging wireless network and
spectrum capacity in future; reliance on systems and information
technology, broadband and wireless technology options and roll-out plans,
choice of suppliers and suppliers' ability to maintain and service their
product lines, expected technology and evolution path and transition to
4G technology, expected future benefits and performance of high-speed
packet access (HSPA) / long-term evolution (LTE) wireless technology,
successful deployment and operation of new wireless networks and
successful introduction of new products (such as new HSPA devices), new
services and supporting systems; and successful upgrades of TELUS TV
technology); regulatory approvals and developments (including the
incumbent local exchange carriers' (ILECs') obligation to serve;
utilization of funds in the ILECs' deferral accounts; interpretation and
application of tower sharing and roaming rules; the design and impact of
future spectrum auctions (including the cost of acquiring the spectrum);
the possibility of Industry Canada changing annual spectrum fees to a
market-based approach; and possible changes to foreign ownership
restrictions); process risks (including conversion of legacy systems and
billing system integrations, and implementation of large complex
enterprise deals that may be adversely impacted by available resources
and degree of co-operation from other service providers); health, safety
and environmental developments; litigation and legal matters; business
continuity events (including human-caused and natural threats); any
future 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 SEDAR
at sedar.com) and in its filings in the United States, including Form
40-F (on EDGAR at sec.gov).
For further information, see Section 10: Risks and risk management in
TELUS' 2009 Management's discussion and analysis, and updates in this
first quarter Management's discussion and analysis.
-------------------------------------------------------------------------
Management's discussion and analysis (MD&A)
May 4, 2010
The following sections are a discussion of the consolidated financial position and financial performance of TELUS Corporation for the three- month periods ended March 31, 2010 and 2009, and should be read together with TELUS' interim Consolidated financial statements for the same periods. This discussion contains forward-looking information 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. See Note 20 to the interim Consolidated financial statements for a summary of the principal differences between Canadian and U.S. GAAP as they relate to TELUS. All amounts are in Canadian dollars unless otherwise specified. TELUS' interim Consolidated financial statements include the accounts of the Company and all of the Company's subsidiaries, of which the principal one is TELUS Communications Inc. (TCI). Currently, through the TELUS Communications Company partnership and the TELE-MOBILE COMPANY partnership, TCI includes substantially all of the Company's wireline segment's operations and all of the wireless segment's operations.
Management's discussion and analysis contents
-------------------------------------------------------------------------
Section Contents
-------------------------------------------------------------------------
1. Introduction A summary of TELUS' consolidated results
for the first quarter of 2010
-------------------------------------------------------------------------
2. Core business and strategy A discussion of activities in support of
TELUS' six strategic imperatives
-------------------------------------------------------------------------
3. Key performance drivers A list of corporate priorities for 2010
-------------------------------------------------------------------------
4. Capabilities An update of the factors that affect the
capability to execute strategies, manage
key performance drivers and deliver
results
-------------------------------------------------------------------------
5. Discussion of operations A detailed discussion of operating
performance for the first quarter of 2010
-------------------------------------------------------------------------
6. Changes in financial A discussion of changes in the
position Consolidated statements of financial
position for the three-month period ended
March 31, 2010
-------------------------------------------------------------------------
7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
-------------------------------------------------------------------------
8. Critical accounting A description of accounting estimates
estimates and accounting that are critical to determining financial
policy developments results, and changes to accounting
policies, including status of transition
to International Financial Reporting
Standards (IFRS)
-------------------------------------------------------------------------
9. Annual guidance for 2010 TELUS' confirmed targets for the full
year, and related assumptions
-------------------------------------------------------------------------
10. Risks and risk management An update on certain risks and
uncertainties facing TELUS
-------------------------------------------------------------------------
11. Definitions and Definitions of operating, liquidity and
reconciliations capital resource measures, including
calculation and reconciliation of certain
non-GAAP measures used by management
-------------------------------------------------------------------------
1. Introduction
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
1.1 Preparation of the MD&A
The Company's disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. 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. The MD&A and the interim Consolidated financial statements were reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors.
Management has issued guidance on and reports on certain non-GAAP measures to evaluate performance of the Company and its segments. Non-GAAP measures are also used to determine compliance with debt covenants and manage the capital structure. Because non-GAAP measures do not generally have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. The Canadian Institute of Chartered Accountants (CICA) Corporate Performance Reporting Board has issued guidelines that define standardized EBITDA and standardized free cash flow. While EBITDA and free cash flow discussed in this document are management's definitions, reconciliations to the standardized definitions are provided in Section 11: Definitions and reconciliations.
1.2 Canadian economy
Canada's economy emerged from recession in the third quarter of 2009 and economic growth continued in the first quarter of 2010. The Bank of Canada reported in its April 2010 Monetary Report that it expects the Canadian economy to grow by 3.7% in 2010, before slowing to 3.1% in 2011 and 1.9% in 2012 - a more front-loaded economic recovery than the one in the Bank's January 2010 Monetary Report. The economy is expected to return to full capacity in the second quarter of 2011. The Bank also indicated that persistent strength in the Canadian dollar, Canada's poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as drags on economic activity in Canada. In addition, Statistics Canada's March 2010 Labour Force Survey reported the unemployment rate to be 8.2%, down from 8.5% in December 2009, and up from 8.0% reported in March 2009.
In the context of a continuing economic recovery in Canada and TELUS' operating performance in the first quarter of 2010, management confirms its annual targets for 2010, as described in Section 9.
1.3 Consolidated highlights
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Quarters ended March 31
($ millions, unless noted otherwise) 2010 2009 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,375 2,375 - %
Operating income 487 479 1.7 %
Income before income taxes 367 379 (3.2)%
Net income 268 322 (16.8)%
Earnings per share (EPS)(1) - basic ($) 0.84 1.01 (16.8)%
EPS(1) - diluted ($) 0.84 1.01 (16.8)%
Cash dividends declared per share(1) ($) 0.475 0.475 - %
Average shares(1) outstanding - basic
(millions) 318 318 - %
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Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by operating activities 414 614 (32.6)%
Cash used by investing activities 307 478 (35.8)%
Capital expenditures 311 474 (34.4)%
Cash used by financing activities 102 75 36.0 %
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Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(2) (thousands) 11,893 11,617 2.4 %
EBITDA(3) 940 906 3.8 %
Free cash flow(3) 246 125 96.8 %
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Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding restructuring
costs (times) 2.0 1.9 0.1
Dividend payout ratio of adjusted net
earnings(5) (%) 67 57 10 pts.
-------------------------------------------------------------------------
pts. - percentage points
(1) Includes Common Shares and Non-Voting Shares.
(2) The sum of wireless subscribers, network access lines (NALs),
Internet access subscribers and TELUS TV subscribers (IP TV and
satellite TV), measured at the end of the respective periods based
on information in billing and other systems. Subscriber connections
for March 31, 2009 include the reduction of 5,000 Internet
subscribers made in the second quarter of 2009. In addition, NALs at
March 31, 2009, have been reduced by 72,000 to reflect prior period
restatements of residential and business NALs.
(3) EBITDA and free cash flow are non-GAAP measures. See Section 11.1
Earnings before interest, taxes, depreciation and amortization
(EBITDA) and 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.
(5) Based on earnings per share excluding 36 cents per share favourable
income tax-related adjustments and 22 cents per share loss on
redemption of long-term debt for the four quarters ended March 31,
2010 (30 cents per share for the four quarters ended March 31,
2009), and minor impacts from a net-cash settlement feature.
-------------------------------------------------------------------------
Highlights from operations, including a comparison of results for the
first quarter of 2010, or measures as at March 31, 2010, to those in 2009:
- Consolidated Operating revenues were unchanged in the first quarter
of 2010 when compared to the same period in 2009. Growth in wireless
revenues and wireline data revenue was offset by lower wireline voice
revenues.
Wireless average revenue per subscriber unit per month (ARPU) was
$55.80 in the first quarter of 2010, a decrease of 4.4% from the same
period in 2009, which reflects moderation from the 7.7% year-over-
year decline experienced in the fourth quarter of 2009 and the 5.6%
year-over-year decline experienced in the first quarter of 2009.
- Subscriber connections increased by 276,000 in the twelve-month
period ending March 31, 2010. This includes 6.4% growth in wireless
subscribers and 103% growth in TELUS TV subscribers, partly offset by
a 0.7% decrease in total Internet subscribers and a 5.2% decrease in
total network access lines.
Wireless subscribers with smartphones now represent 22% of the
postpaid subscriber base as compared to 15% for the first quarter of
2009, as the Company continued to experience strong smartphone growth
driven by iPhone, Blackberry and, to a lesser extent, Android
devices.
- Operating income increased by $8 million in the first quarter of 2010
when compared to the same period in 2009, as higher EBITDA was partly
offset by an increase in depreciation and amortization expenses.
EBITDA increased by $34 million due to lower Restructuring costs and
traction from efficiency initiatives.
- Income before income taxes decreased by $12 million in the first
quarter of 2010 when compared to the same period in 2009. Higher
Operating income was more than offset by lower interest income,
mainly due to interest recorded last year from settlement of prior
years' tax matters.
- Net income decreased by $54 million in the first quarter of 2010,
when compared to the same period in 2009. The decrease was due
primarily to $62 million of favourable income tax-related adjustments
recorded in the prior year. Net income before income tax-related
adjustments increased by $6 million (see analysis table that
follows).
- Basic earnings per share was $0.84 in the first quarter of 2010, a
decrease of 17 cents per share from the first quarter of 2009. Basic
earnings per share, before favourable income tax-related adjustments
was 83 cents per share in the first quarter of 2010, compared to 81
cents per share in the first quarter of 2009 (see Section 5.2).
-------------------------------------------------------------------------
Analysis of Net income Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Net income 268 322 (54)
Deduct net favourable income tax-related
adjustments (see Section 5.2) (2) (62) 60
-------------------------------------------------------------------------
Net income before favourable income tax-related
adjustments 266 260 6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and capital resources highlights, including a comparison of
results for the first quarter of 2010, or measures as at March 31, 2010, to
those in 2009:
- TELUS had unutilized credit facilities of more than $1.7 billion at
March 31, 2010, as well as $100 million availability under the
Company's accounts receivable securitization program, consistent with
its objective of generally maintaining more than $1 billion of
unutilized liquidity.
- Net debt to EBITDA (excluding restructuring costs) at March 31, 2010,
was slightly under 2.0 times and within the Company's long-term
target policy range of 1.5 to 2.0 times.
- The dividend payout ratio of adjusted net earnings at March 31, 2010,
was 67% based on the annualized first quarter dividend and earnings
for the most recent four quarters, excluding favourable income tax-
related adjustments, the December 2009 loss on redemption of long-
term debt, and a minimal impact from a net-cash settlement feature.
On May 4, 2010, the Board of Directors declared a quarterly dividend
of 50 cents per share on the issued and outstanding Common Shares and
Non-Voting Shares of the Company, payable on July 2, 2010, to
shareholders of record at the close of business on June 10, 2010.
This represents a 5.3% increase from the previous level of the
dividend.
- Cash provided by operating activities decreased by $200 million in
the first quarter of 2010 when compared to the same period in 2009. A
first quarter 2010 reduction in proceeds from securitized accounts
receivable decreased cash flow by $100 million. The cash flow
decrease also included $37 million higher income tax payments and $26
million higher restructuring payments, with the balance primarily due
to working capital changes.
- Cash used by investing activities decreased by $171 million in the
first quarter of 2010 when compared to the same period in 2009. The
decrease was primarily due to higher capital investment levels in
2009 to build out the Company's 3G+ wireless high-speed packet access
(HSPA) network and service capability for the November 2009 launch.
The Company continues to invest in wireline and wireless broadband
initiatives with full-year capital expenditures expected to be
approximately $1.7 billion, down 19% from 2009. See Section 9.
- Cash used by financing activities increased by $27 million in the
first quarter of 2010 when compared to the same period in 2009. Cash
used by financing activities in the current quarter reflected
dividend payments net of amounts reinvested in TELUS Non-Voting
Shares issued from treasury under the Company's amended dividend
reinvestment plan (DRIP), partly offset by a $28 million increase in
commercial paper. In the comparative 2009 period, Cash used by
financing activities reflected payment of dividends with no
corresponding issue of TELUS Non-Voting Shares from treasury under
the DRIP, net of a $76 million aggregate increase in commercial paper
and amounts drawn on the 2012 credit facility.
- Free cash flow increased by $121 million in the first quarter of 2010
when compared to the same period in 2009, as lower capital
expenditures and improved EBITDA more than offset higher income tax
and restructuring payments.
2. Core business and strategy
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
TELUS' core business and strategy were described in its 2009 MD&A. Activities in the first quarter of 2010 that support the Company's six strategic imperatives include the following:
Building national capabilities across data, IP, voice and wireless
The Company plans to substantially complete its wireline ADSL2+ network in 2010, to offer download speeds of 15 megabits per second (Mbps) or higher, and covering up to 90% of the top 48 communities in Alberta and B.C. by the end of the year. As a next step, the Company has started to deploy VDSL2 technology to bring network download speeds of up to 30 Mbps when the upgrade is largely completed for the top 48 communities by the end of 2011. The Company is also continuing its fibre to the home deployment in new residential areas. These investments in core infrastructure serve to strengthen the Company's competitive position versus other wireless competitors and cable-TV companies.
Focusing relentlessly on the growth markets of data, IP and wireless
External wireless total revenues and wireline data revenues combined were $1,735 million (73% of consolidated revenue) in the first quarter of 2010. This reflects an increase of $67 million or 4.0% from the first quarter of 2009 where such revenues were $1,668 million (70% of consolidated revenue). Growth in aggregate wireless revenues and wireline data revenue offset a $67 million decline in wireline voice revenues.
Providing integrated solutions that differentiate TELUS from its competitors
The ongoing broadband build is expanding IP-based TELUS TV service coverage across B.C., Alberta and Eastern Quebec, providing more high-definition (HD) TV channels and personal video recorder (PVR) capabilities. The TELUS TV subscriber base more than doubled to 199,000 over the past 12 months. In February 2010, TELUS launched an enhanced version of TELUS TV powered by Microsoft Mediaroom. This new platform offers customers impressive new features including a single (PVR) solution for the whole home, which allows customers to record and play back shows on up to six TVs in a home.
Investing in internal capabilities to build a high-performance culture and efficient operations
TELUS realized approximately $37 million in operational efficiency savings during the first quarter of 2010 from initiatives implemented since the beginning of 2009. The Company expects to generate approximately $135 million of operating efficiency savings for the full year of 2010. This is expected to be partially offset by full-year restructuring expenses of approximately $75 million related to a reduction of approximately 1,000 domestic employees (see Key assumptions in Section 9).
The number of full-time equivalent (FTE) employees decreased by approximately 1,200 during the first quarter of 2010. This included a decrease of 600 domestic FTE employees resulting from past and current restructuring initiatives, attrition and hiring freezes. The remaining decrease included seasonal reductions in domestic part-time staff and TELUS International staff.
Beginning in March 2010 with a planned completion in May 2010, the Company began the process of uniting the operations of business and consumer solutions as part of an organizational change under the leadership of Joe Natale, who has been appointed Chief Commercial Officer and EVP & President of TELUS Customer Solutions. The expected benefits include: (i) increased capability to approach customers as one team with fully coordinated sales, marketing and customer care priorities; (ii) enhanced ability to share best practices, learning, programs, competitive strategies and go-to-market activities to deliver the experiences that customers demand; (iii) contributing to operational efficiencies and cost synergies contemplated in the Company's 2010 restructuring target; and (iv) streamlining interfaces between TELUS Customer Solutions and business enabling units, which will facilitate improved prioritization of financial and human resources.
Ongoing efficiency initiatives include:
- simplifying or automating processes
- simplifying organizational structures through consolidation of
functions and reducing organizational layers
- decommissioning uneconomic products and services
- leveraging business process outsourcing and off-shoring to TELUS' own
international call centres.
Going to the market as one team under a common brand, executing a single strategy
This strategic imperative is expected to be facilitated by the creation of TELUS Customer Solutions, described above.
3. Key performance drivers
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
Management confirms or sets new corporate priorities each year to both advance TELUS' long-term strategic priorities and address near-term opportunities and challenges.
-------------------------------------------------------------------------
Corporate priorities for 2010
-------------------------------------------------------------------------
Capitalize on the full potential of TELUS' leading wireless and wireline
broadband networks
Enhance TELUS' position in the small and medium business market
Ensure TELUS delivers its future friendly(R) brand promise to clients
Continue to improve TELUS' operational efficiency to effectively compete
in the market and fund future growth
Increase TELUS team engagement and live the culture of personal
responsibility and customer service.
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4. Capabilities
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
4.1 Principal markets addressed and competition
The principal markets addressed by the Company and its competition were described in Section 4.1 of TELUS' 2009 MD&A. See Key assumptions in Section 9 of this document for an update in respect of emerging competition from wireless new entrants.
Foreign ownership restrictions generally apply to all facilities-based telecommunications carriers, including wireless telecommunications companies, wireline telecommunications companies, and licensed broadcasting distribution undertakings. See Section 10.3 Regulatory for developments related to foreign ownership restrictions and other regulatory matters.
4.2 Operational resources
Operational resources were described in Section 4.2 of TELUS' 2009 MD&A.
4.3 Liquidity and capital resources
Capital structure financial policies
The Company's objectives when managing capital are: (i) to maintain a flexible capital structure that optimizes the cost of capital at acceptable risk; and (ii) to manage capital in a manner that balances the interests of equity and debt holders.
In the management and definition of capital, the Company includes Common Share and Non-Voting Share equity (excluding accumulated other comprehensive income), long-term debt (including any associated hedging assets or liabilities, net of amounts recognized in accumulated other comprehensive income), cash and temporary investments and securitized accounts receivable.
The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to holders of Common Shares and Non-Voting Shares, issue new shares from treasury, purchase shares for cancellation pursuant to permitted normal course issuer bids, issue new debt, issue new debt to replace existing debt with different characteristics and/or increase or decrease the amount of sales of trade accounts receivable to an arm's-length securitization trust.
The Company monitors capital utilizing a number of measures, including: net debt to EBITDA - excluding restructuring costs; and dividend payout ratios. On May 4, 2010, the Board of Directors approved a revised dividend payout ratio guideline of 55 to 65% of sustainable net earnings on a prospective basis. For further discussion, see Section 7.4 Liquidity and capital resource measures.
Financing and capital structure management plans
Reporting back on TELUS' 2010 financing and capital structure management
plan
-------------------------------------------------------------------------
Pay dividends to the holders of TELUS Common Shares and Non-Voting Shares
The dividends paid on January 4 and April 1, 2010 were 47.5 cents per
share, unchanged from 2009. The quarterly dividend declared for payment
on July 2, 2010, was 50 cents per share, an increase of 5.3%.
-------------------------------------------------------------------------
Use proceeds from securitized receivables, bank facilities, commercial
paper and dividend reinvestment, as needed, to supplement free cash flow
and meet other cash requirements
Stronger free cash flow, as well as reduced cash outflow for dividends
reinvested in TELUS Non-Voting shares issued from treasury, facilitated a
reduction of $77 million in net debt during the first quarter of 2010.
-------------------------------------------------------------------------
Maintain compliance with financial objectives, policies and guidelines
Maintain a minimum $1 billion in unutilized liquidity - The Company had
unutilized credit facilities of more than $1.7 billion at March 31, 2010,
as well as availability under the accounts receivable securitization
program.
Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0
times - Actual result slightly under 2.0 times at March 31, 2010.
Dividend payout ratio guideline of 55 to 65% of sustainable net earnings
on a prospective basis - The ratio is 61 to 69% calculated on a $2.00
annualized dividend, as compared to current EPS - basic guidance of
$2.90 to $3.30 (see Section 9).
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Maintain position of fully hedging foreign exchange exposure for
indebtedness
Maintained for the 8.00% U.S. dollar Notes due 2011, the only foreign
currency-denominated debt issue.
-------------------------------------------------------------------------
Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings in the range of BBB+ to A-,
or the equivalent, in the future
At May 4, 2010, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range.
-------------------------------------------------------------------------
4.4 Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
5. Discussion of operations
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
5.1 General
The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, customer characteristics, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information in Note 5 of the interim Consolidated financial statements is regularly reported to the Company's Chief Executive Officer (the chief operating decision-maker).
5.2 Summary of quarterly results
-------------------------------------------------------------------------
($ in millions,
except per 2010 2009 2009 2009 2009 2008 2008 2008
share amounts) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Operating
revenues 2,375 2,443 2,411 2,377 2,375 2,454 2,450 2,399
Operations
expense 1,429 1,577 1,456 1,451 1,441 1,479 1,465 1,477
Restructuring
costs 6 77 32 53 28 38 10 4
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EBITDA(1) 940 789 923 873 906 937 975 918
Depreciation 345 347 330 330 334 351 344 343
Amortization of
intangible
assets 108 94 100 94 93 84 92 77
-------------------------------------------------------------------------
Operating income 487 348 493 449 479 502 539 498
Other expense 8 10 6 11 5 11 6 2
Financing costs 112 230 101 106 95 118 122 114
-------------------------------------------------------------------------
Income before
income taxes 367 108 386 332 379 373 411 382
Income taxes
(recovery) 99 (48) 106 88 57 88 125 114
-------------------------------------------------------------------------
Net income 268 156 280 244 322 285 286 268
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income
attributable to
Common Shares and
Non-Voting Shares 267 155 279 243 321 285 285 267
Income per Common
Share and Non-
Voting Share
- basic 0.84 0.49 0.88 0.77 1.01 0.90 0.89 0.83
- diluted 0.84 0.49 0.87 0.77 1.01 0.89 0.89 0.83
Cash dividends
declared per
Common Share
and Non-Voting
Share 0.475 0.475 0.475 0.475 0.475 0.475 0.45 0.45
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
Trends
The consolidated revenue trend reflects year-over-year growth in wireless revenues generated from an increasing subscriber base and increased equipment and other revenues. Wireless network revenue increased by 1.6% year-over-year in the first quarter of 2010, as subscriber growth more than offset a lower blended ARPU. Blended ARPU for the first quarter of 2010 decreased by 4.4% year-over-year and was an improved result from the 7.7% decline in fourth quarter of 2009. The general trend is caused by declining voice ARPU (as discussed further in Section 5.5), partially offset by data ARPU growth. Data ARPU improved from 2009 due to increased adoption of data plans driven by increased smartphone adoption. The growing demand for wireless data may challenge network and spectrum capacity in future (see Section 10.2 Technology). Wireless equipment and other revenues increased by 51.7% year-over-year in the first quarter of 2010 from the acquisition of Black's Photo in September 2009 and increasing smartphone sales.
The expected entry of a number of new wireless competitors in 2010 and 2011 may disrupt usual seasonal patterns for wireless subscriber additions in the future. Historically, there has been significant fourth quarter seasonality with respect to higher wireless subscriber additions, related acquisition costs and equipment sales, and higher retention costs due to contract renewals, resulting in lower fourth quarter wireless EBITDA. The third quarter has become more significant in terms of subscriber additions in recent years as a result of back-to-school offers, while subscriber additions have typically been lowest in the first quarter. In addition, wireless ARPU has generally risen sequentially in the second and third quarters, and declined sequentially in the fourth and first quarters.
The consolidated revenue trend also reflects continued growth in wireline data revenue, but at a more moderate rate, more than offset by declining wireline legacy voice local and long distance revenues. The decline in wireline voice revenues is due to substitution to wireless and Internet services, as well as competition from VoIP service providers (including cable-TV competitors), resellers and facilities-based competitors, and winning a lower market share of new subscribers. See risk discussion in Section 10.1 Competition. Residential network access line (NAL) net losses have increased in the first quarter of 2010 as a result of aggressive promotional activity from the primary cable-TV competitor for local and Internet services. The Company has also experienced a larger number of disconnections and fewer installations of business NALs attributed to competition, technological substitution and cautious business spending.
The year-over-year decrease in operations expense in the first quarter of 2010 reflects fewer domestic full-time equivalent employees, partly offset by higher wireless retention costs, expenses from Black's Photo and increased TELUS TV programming costs from doubling the subscriber base. The sequential and year-over-year increase in fourth quarter 2009 consolidated operations expense primarily reflects higher wireless retention costs associated with migration to smartphones, and expenses from Black's Photo. The sequential decrease in consolidated operations expenses in the first quarter of 2009 resulted mainly from lower employee compensation.
Restructuring costs increased strongly from the fourth quarter of 2008 to the fourth quarter of 2009, as management accelerated efficiency initiatives, primarily in the wireline segment. While Restructuring costs in the first quarter of 2010 were the second lowest in the two-year period; it is expected that the full-year amount will be approximately $75 million as new initiatives are implemented (see Key assumptions in Section 9).
The sequential increase in depreciation expense beginning in the fourth quarter of 2009 resulted from growth in capital assets in service, including the wireless HSPA network launched in November 2009. The sequential decline in depreciation in the first quarter of 2009 was due to certain assets still in use becoming fully depreciated for accounting purposes in 2008.
The sequential increase and year-over-year increase in Amortization in the first quarter of 2010 resulted from implementation of HSPA services in November 2009. Amortization in the fourth quarter of 2009 was reduced by application of approximately $10 million in investment tax credits following determination of eligibility by taxation authorities, for assets capitalized in prior years that are fully amortized. Similarly, amortization in the fourth quarter of 2008 was reduced by approximately $6 million for investment tax credits. The sequential increase in amortization of intangible assets in the third quarter of 2008 was due to implementation of the converged billing platform for B.C. residential customers in July 2008.
Financing costs in the fourth quarter of 2009 include a $99 million loss on redemption of long-term debt to early redeem 30% of the principal amount of 8% U.S. dollar Notes (maturity June 2011) and unwind related cross currency interest rate swaps. The partial redemption was financed with a new ten-year $1 billion 5.05% Note issue. Financing costs for each period shown are also net of varying amounts of interest income, including interest from the settlement of prior years' income tax-related matters.
The trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments.
-------------------------------------------------------------------------
Income tax-related
adjustments
($ in millions, 2010 2009 2009 2009 2009 2008 2008 2008
except EPS amounts) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Approximate Net
income impact 2 79 14 19 62 32 - -
Approximate EPS
impact 0.01 0.25 0.04 0.06 0.20 0.10 - -
Approximate basic
EPS excluding
income tax-related
impacts 0.83 0.24 0.84 0.71 0.81 0.80 0.89 0.83
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5.3 Consolidated operations
-------------------------------------------------------------------------
Quarters ended March 31
($ millions, except EBITDA margin) 2010 2009 Change
-------------------------------------------------------------------------
Operating revenues 2,375 2,375 - %
Operations expense 1,429 1,441 (0.8)%
Restructuring costs 6 28 (78.6)%
-------------------------------------------------------------------------
EBITDA(1) 940 906 3.8 %
Depreciation 345 334 3.3 %
Amortization of intangible assets 108 93 16.1 %
-------------------------------------------------------------------------
Operating income 487 479 1.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 39.6 38.1 1.5 pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
Discussion of TELUS' consolidated operations follows. Segmented discussion is provided in Section 5.4 Wireline segment, Section 5.5 Wireless segment and Section 7.2 Cash used by investing activities - capital expenditures.
Operating revenues
Consolidated Operating revenues were unchanged in the first quarter of 2010 when compared to the same period in 2009, as wireless growth offset wireline revenue declines. Wireless segment network revenue increased by $17 million from growth in data revenue driven by increasing smartphone adoption, partly offset by declining voice revenue. Wireless equipment and other revenue increased by $30 million from the acquisition of Black's Photo in September 2009 and increased smartphone sales. Wireline segment data revenue increased by $20 million from growth in TELUS TV, enhanced data and managed services, but was more than offset by legacy voice revenues that declined by $67 million.
Operations expense
Operations expense decreased by $12 million in the first quarter of 2010 when compared to the same period in 2009.
-------------------------------------------------------------------------
Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Salaries, benefits(1) and employee-related
expenses 570 591 (3.6)%
Other operations expenses 859 850 1.1 %
-------------------------------------------------------------------------
1,429 1,441 (0.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes defined benefit pension plan expenses of $7 million in 2010
and $4 million in 2009, principally in the wireline segment.
-------------------------------------------------------------------------
In respect of changes in operations expense:
- Salaries, benefits and employee-related expenses decreased by $21
million, mainly due to lower wireline base salaries from fewer
domestic full-time equivalent (FTE) employees and continued reduction
of discretionary employee-related expenses (see Investing in internal
capabilities in Section 2). This was partially offset by an increase
in wireless G&A costs from inclusion of expenses from Black's Photo,
acquired in September 2009.
- Other operations expenses increased by $9 million, mainly due to
higher wireless subscriber retention costs and TELUS TV programming
costs, partly offset by lower wireline costs of sales and one-time
operating savings in both segments.
Restructuring costs
Restructuring costs in the first quarter of 2010 decreased by $22 million when compared to the same period in 2009. Restructuring costs were primarily severance costs in respect of efficiency initiatives described in Investing in internal capabilities in Section 2. An expense of approximately $75 million is expected for efficiency initiatives in 2010.
EBITDA
Consolidated EBITDA increased by $34 million in the first quarter of 2010 when compared to the same period in 2009, primarily due to lower restructuring costs and traction from efficiency initiatives, as well as a high margin application software sale and one-time operating savings in the first quarter of 2010. Wireline EBITDA increased by $25 million and wireless EBITDA increased by $9 million.
Depreciation; Amortization of intangible assets
Combined depreciation and amortization expenses increased by $26 million in the first quarter of 2010 when compared to the same period in 2009.
- Depreciation increased by $11 million primarily from growth in
capital assets, including the wireless HSPA network.
- Amortization increased by $15 million from increased software assets,
including application software supporting wireless HSPA services.
Operating income
Operating income increased by $8 million in the first quarter of 2010 when compared to the same period in 2009, as higher EBITDA was partially offset by increased depreciation and amortization expenses.
Other income statement items
-------------------------------------------------------------------------
Other expense, net Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
8 5 60.0 %
-------------------------------------------------------------------------
Other expense, net includes accounts receivable securitization expense, income (losses) or impairments in equity or portfolio investments, gains and losses on disposal of real estate, and charitable donations.
The increase in Other expense, net primarily reflects earlier timing in charitable donations in 2010, partly offset by gains on minor investments. Accounts receivable securitization expenses were approximately $2 million in the first quarter of 2010 and 2009, as higher average proceeds from securitized accounts receivable in 2010 were offset by lower average rates. See Section 7.6 Accounts receivable sale for additional information.
-------------------------------------------------------------------------
Financing costs Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Interest on long-term debt, short-term
obligations and other 113 115 (1.7)%
Foreign exchange losses (gains) - (7) n/m
Interest income (tax refunds) - (12) n/m
Interest income (other) (1) (1) - %
-------------------------------------------------------------------------
112 95 17.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/m - not meaningful.
-------------------------------------------------------------------------
Interest on long-term debt, short-term obligations and other decreased by $2 million in the first quarter of 2010 when compared to the same period in 2009, resulting from a lower average debt balance and lower effective interest rate. Interest income on tax refunds in 2009 was related to the settlement of prior years' tax matters.
-------------------------------------------------------------------------
Income taxes Quarters ended March 31
($ millions, except tax rates) 2010 2009 Change
-------------------------------------------------------------------------
Basic blended federal and provincial tax at
statutory income tax rates 106 115 (7.8)%
Revaluation of future income tax liability to
reflect future statutory income tax rates (7) (19) n/m
Tax rate differential on, and consequential
adjustments from, reassessments of prior
years' tax issues (1) (40) n/m
Share option award compensation 1 1 -
-------------------------------------------------------------------------
99 57 73.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and provincial statutory tax
rates (%) 28.9 30.3 (1.4) pts.
Effective tax rates (%) 27.0 15.0 12.0 pts.
-------------------------------------------------------------------------
Basic blended statutory income taxes decreased by $9 million in the first quarter of 2010 when compared to the same period in 2009 due to the 3.2% decrease in Income before income taxes, as well as lower blended statutory income tax rates. The effective tax rates were lower than the statutory tax rates due to revaluations of future income tax liabilities and the tax rate differential and consequential adjustments from reassessments of prior years' tax issues. Changes to B.C. income tax rates were enacted in the first quarter of 2009, reducing rates beginning January 1, 2010. Changes to Ontario income tax rates from 2010 to 2013 were enacted in the fourth quarter of 2009 for provincial income taxes effective July 1, 2010 and thereafter. In addition, enacted federal income tax rates decreased in 2010.
-------------------------------------------------------------------------
Other comprehensive income Quarters ended March 31
($ millions, except tax rates) 2010 2009 Change
-------------------------------------------------------------------------
16 30 (46.7)%
-------------------------------------------------------------------------
Other comprehensive income includes changes in unrealized fair value of derivatives designated as cash flow hedges, principally associated with U.S. dollar debt.
5.4 Wireline segment
-------------------------------------------------------------------------
Operating revenues - wireline segment Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Voice local 439 470 (6.6)%
Voice long distance 133 166 (19.9)%
Data 558 538 3.7 %
Other 68 71 (4.2)%
-------------------------------------------------------------------------
External operating revenue 1,198 1,245 (3.8)%
Intersegment revenue 36 33 9.1 %
-------------------------------------------------------------------------
Total operating revenues 1,234 1,278 (3.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total wireline segment revenues decreased by $47 million in the first
quarter of 2010 when compared to the same period in 2009, as follows.
- Voice local revenue decreased by $31 million. The decrease continues
to reflect lower basic access and enhanced voice service revenues
caused by competition for residential subscribers, the consequent
decline in local residential access lines and matching of competitive
offers, and technological substitution by wireless and Internet-based
services. The decrease also reflects a decline in business voice
lines from technological substitution to data services, competitor
activity including price competition, and cautious business spending
following the recent economic downturn.
Wireline operating indicators
-------------------------------------------------------------------------
As at March 31
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Network access lines (NALs)(1)
Residential 2,173 2,354 (7.7)%
Business 1,735 1,769 (1.9)%
-------------------------------------------------------------------------
Total 3,908 4,123 (5.2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended March 31
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Net (losses) additions in NALs
Residential (50) (44) (13.6)%
Business (8) (9) 11.1 %
-------------------------------------------------------------------------
Total (58) (53) (9.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As a result of a periodic subscriber measurement review and
correction, historical NALs have been restated for the prior periods
commencing in 2007. Total NALs at March 31, 2009, reflect a reduction
of 7,000 residential NALs from the previously reported number in
respect of TELUS TV subscribers that did not subscribe to voice lines
services, but were inadvertently included in NAL counts. Business
NALs were reduced by 65,000 from the previously reported number due
to the clean up and removal of inaccurate subscriber records as part
of the integration of billing and subscriber reporting processes, as
well as the consistent application of industry measurement practices
across TELUS.
-------------------------------------------------------------------------
Residential access line net losses increased in the first quarter of 2010, relative to the quarterly loss experience in 2009, as a result of aggressive promotional activity from the primary cable-TV competitor for local and Internet services. Business NAL losses continue to reflect declines in voice lines particularly in Western Canada from competitor promotional activity, partially offset by growth in data lines nationally. Growth in certain data services such as private networks is not measured by business NAL counts, and conversion of legacy voice services to IP services results in an overall decrease in business NALs.
- Voice long distance revenue decreased by $33 million. The decrease
reflects ongoing industry-wide price competition, losses of local
subscribers, and technological substitution to wireless and Internet-
based services. An increase in retail business minute volumes was
largely offset by lower consumer and wholesale minute volumes.
- Wireline data revenues increased by $20 million. The increases
resulted from: (i) subscriber growth in TELUS TV services; (ii)
increased Internet, enhanced data and hosting services, partly offset
by lower average retail prices from competitive pricing pressure; and
(iii) higher managed workplace revenues from a high margin software
application sale in the first quarter of 2010. These increases were
partly offset by declining legacy basic services and lower data
equipment sales.
Wireline operating indicators
-------------------------------------------------------------------------
As at March 31
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Internet subscribers
High-speed(1) 1,131 1,105 2.4 %
Dial-up 80 114 (29.8)%
-------------------------------------------------------------------------
Total(1) 1,211 1,219 (0.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscribers(2) 199 98 103.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended March 31
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Net additions (losses) of Internet subscribers
High-speed 3 14 (78.6)%
Dial-up (7) (10) 30.0 %
-------------------------------------------------------------------------
Total (4) 4 n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscriber net additions(2) 29 20 45.0 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) High-speed and total Internet subscribers at March 31, 2009 were
reduced by 5,000 for the opening balance adjustment reported in
second quarter of 2009. Net additions have not been restated for the
first quarter of 2009.
(2) Includes TELUS Satellite TV(TM) subscribers beginning in second
quarter of 2009.
-------------------------------------------------------------------------
High-speed Internet subscriber net additions were lower in the first quarter of 2010 than the same period in 2009. The decrease in net additions continues to reflect competitive intensity and a maturing market. TELUS TV subscriptions more than doubled in the 12-month period ended March 31, 2010, through improved installation capability, availability of high-definition TV channels and personal video recorders (PVRs), increasing geographic coverage of IP TV, the launch of TELUS Satellite TV service in mid-2009, and the marketing of bundled offers.
- Other revenue decreased by $3 million from lower voice equipment
sales.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment and is eliminated upon consolidation
together with the associated expense in the wireless segment.
-------------------------------------------------------------------------
Operating expenses - wireline segment Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Salaries, benefits(1) and employee-related
expenses 425 452 (6.0)%
Other operations expenses 362 382 (5.2)%
-------------------------------------------------------------------------
Operations expenses 787 834 (5.6)%
Restructuring costs 4 26 (84.6)%
-------------------------------------------------------------------------
Total operating expenses 791 860 (8.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes defined benefit pension plan expenses of $7 million in 2010
and $4 million in 2009.
-------------------------------------------------------------------------
Total wireline operating expenses decreased by $69 million in the first
quarter of 2010 when compared to the same period in 2009.
- Salaries, benefits and employee-related expenses decreased by $27
million, mainly due to a decrease in base salaries from fewer
domestic full-time equivalent (FTE) employees and continued reduction
of discretionary employee-related expenses such as travel and
overtime.
- Other operations expenses decreased by $20 million, principally due
to lower cost of sales from lower equipment sales volumes and
implementation of related services, as well as lower transit and
termination costs from lower outbound international long distance
minutes volumes and one-time operating savings. The decreases were
partially offset by higher programming costs for TELUS TV services
related to the doubled subscriber base, and to a lesser extent,
higher access facility costs from implementing large complex
enterprise deals.
- Restructuring costs decreased by $22 million, reflecting relatively
high level of restructuring activities in the prior year period, and
expectations of lower restructuring charges for the full year of
2010, when compared to 2009 (see Section 9). See current initiatives
under the Company's operating efficiency program in Investing in
internal capabilities in Section 2.
-------------------------------------------------------------------------
EBITDA - wireline segment Quarters ended March 31
2010 2009 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 443 418 6.0 %
EBITDA margin (%) 35.9 32.7 3.2 pts.
-------------------------------------------------------------------------
The wireline segment EBITDA increased by $25 million in the first quarter of 2010 when compared to the same period in 2009. Improvement in the EBITDA margin resulted from lower restructuring costs and operating savings realized from efficiency initiatives to alleviate declining voice revenues, as well as a high margin software application sale in the first quarter of 2010.
5.5 Wireless segment
-------------------------------------------------------------------------
Operating revenues - wireless segment Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Network revenue 1,089 1,072 1.6 %
Equipment and other revenue 88 58 51.7 %
-------------------------------------------------------------------------
External operating revenue 1,177 1,130 4.2 %
Intersegment revenue 7 7 - %
-------------------------------------------------------------------------
Total operating revenues 1,184 1,137 4.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment revenues increased by $47 million in the first quarter of
2010 when compared to the same period in 2009. In respect of year-over-year
revenue growth:
- Network revenue increased by $17 million due to continued wireless
data revenue growth and the 6.4% growth in the subscriber base. Data
revenue increased by $50 million or 24% and was partially offset by a
$33 million or 3.7% decrease in voice revenues. Wireless data
revenues now represent 24% of network revenue as compared to 19% from
the same period in 2009. The growth in data revenues reflects
strength in smartphone service revenues and text messaging driven by
increased penetration of smartphones, increased adoption of data
plans, higher-speed HSPA and EVDO-capable handsets, mobile Internet
keys, and higher inbound data roaming volumes, partly offset by lower
roaming rates.
Smartphones represented 33% of postpaid gross additions in the first
quarter of 2010, as compared to 18% in the same period in 2009.
Subscribers with smartphones now represent 22% of the postpaid
subscriber base as compared to 15% for the first quarter of 2009, and
generate ARPU significantly higher than messaging and voice-only
devices. A higher smartphone mix is expected to positively impact
future data revenue growth and ARPU, while increasing network usage
and future costs of retention compared to historical levels.
Blended ARPU of $55.80 decreased by $2.59 or 4.4% in the first
quarter of 2010 when compared to the same period in 2009, and
reflected the seasonal sequential decline when compared to $57.38 in
the fourth quarter of 2009. Data ARPU in the first quarter of 2010
was $13.14, an increase of $1.88 or 17% when compared to the same
period in 2009. Voice ARPU in the first quarter of 2010 was $42.66, a
decrease of $4.47 or 9.5% when compared to the prior year quarter.
While the voice ARPU decline moderated from the 12% decrease
experienced in the fourth quarter of 2009, it is a continuing trend
caused by: declining minutes of use by both consumers and businesses,
increased use of included-minute rate plans as subscribers shift
usage patterns and move to optimize price plans, increased
penetration and lower service revenue of the Koodo brand, an
increasing volume of mobile Internet key subscriptions from which
there is no voice revenue, lower Mike service ARPU, elimination of
system access fees and carrier e911 charges, and decreased inbound
roaming rates, partly offset by higher service feature revenues and
increased inbound roaming volumes.
Gross and net subscriber additions reflect improving economic
conditions, enhanced distribution for the iPhone commencing in March
2010 and a concerted effort to attract and retain high value postpaid
customers, when comparing to the first quarter of 2009. Overall gross
subscriber additions increased by 2.9% in the first quarter of 2010,
while strong postpaid subscriber gross additions of 238,000
represented a 10.7% increase compared to the same period in 2009. The
proportion of postpaid subscriber gross additions represented
approximately 67% of total gross additions for the first quarter of
2010, up five percentage points when compared to the first quarter of
2009.
Net additions for the first quarter of 2010 were 51,000, up 6.3% from
the same period in 2009, and reflect a continued improvement in the
postpaid / prepaid mix of gross and net subscriber additions.
Postpaid subscriber net additions of 65,000 increased by 48% in the
first quarter of 2010 when compared to the same period in 2009, and
represented 127% of total net additions for the first quarter of
2010, as compared to 92% in the same period of 2009. Prepaid
subscribers decreased by 14,000 in the first quarter of 2010 as the
Company did not respond to competitor handset discounting in the
prepaid segment and retained focus on higher value, postpaid
subscriber growth. The decrease in prepaid subscribers in 2010
compares to net additions of 4,000 in the first quarter of 2009.
The blended churn rate improved to 1.55% in the first quarter of 2010
from 1.62% in the same period in 2009. The decreased churn rate
reflects lower involuntary churn, as a result of the improving
economy, partly offset by increased competitive marketing intensity
within both the postpaid and prepaid market segments.
- Equipment sales, rental and service revenue in the first quarter of
2010 increased by $30 million largely due to the acquisition of
Black's Photo in September 2009, and to a lesser extent, higher per-
unit revenues from an increasing smartphone mix and higher
acquisition and retention volumes, as well as increased accessory
sales.
- Intersegment revenue represents services provided by the wireless
segment to the wireline segment and is eliminated upon consolidation
along with the associated expense in the wireline segment.
Wireless operating indicators
-------------------------------------------------------------------------
As at March 31
2010 2009 Change
-------------------------------------------------------------------------
Subscribers (000s)
Postpaid 5,355 4,966 7.8 %
Prepaid 1,220 1,211 0.7 %
-------------------------------------------------------------------------
Total 6,575 6,177 6.4 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proportion of subscriber base that is
postpaid (%) 81.4 80.4 1.0 pt.
Digital POPs(1) covered (millions)(2) 33.7 32.7 3.1 %
HSPA POPs covered (millions)(2) 31.3 - n/m
Quarters ended March 31
2010 2009 Change
-------------------------------------------------------------------------
Subscriber gross additions (000s)
Postpaid 238 215 10.7 %
Prepaid 118 131 (9.9)%
-------------------------------------------------------------------------
Total 356 346 2.9 %
-------------------------------------------------------------------------
Subscriber net additions (000s)
Postpaid 65 44 47.7 %
Prepaid (14) 4 n/m
-------------------------------------------------------------------------
Total 51 48 6.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ARPU(3) ($) 55.80 58.39 (4.4)%
Churn, per month(3) (%) 1.55 1.62 (0.07) pts.
Average monthly minutes of use per
subscriber (MOU) 359 382 (6.0)%
COA(4) per gross subscriber addition(3) ($) 322 336 (4.2)%
Retention spend to network revenue(3) (%) 11.3 10.5 0.8 pts.
EBITDA excluding COA ($ millions) 611 604 1.2 %
EBITDA to network revenue (%) 45.6 45.5 0.1 pts.
-------------------------------------------------------------------------
pt., pts. - percentage point(s)
(1) POPs is an abbreviation for population. A POP refers to one person
living in a population area that is wholly or substantially included
in the coverage area.
(2) Including roaming/resale agreements, principally with Bell Canada.
(3) See Section 11.3 Definitions of key wireless operating indicators.
These are industry measures useful in assessing operating performance
of a wireless company, but are not measures defined under Canadian or
U.S. GAAP.
(4) Cost of acquisition.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses - wireless segment Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Equipment sales expenses 218 183 19.1 %
Network operating expenses 157 154 1.9 %
Marketing expenses 86 93 (7.5)%
General and administration (G&A) expenses
Salaries, benefits and employee-related
expenses 145 139 4.3 %
Other G&A expenses 79 78 1.3 %
-------------------------------------------------------------------------
Operations expense 685 647 5.9 %
Restructuring costs 2 2 - %
-------------------------------------------------------------------------
Total operating expenses 687 649 5.9 %
-------------------------------------------------------------------------
Wireless segment total operating expenses in the first quarter of 2010
increased by $38 million when compared to the same period in 2009. In respect
of increased wireless total operating expenses:
- Equipment sales expenses increased by $35 million due in part to
higher acquisition and retention volumes and higher per-unit costs to
support migration of clients to smartphones, including the Apple
iPhone 3G and 3GS. This category includes results from Black's since
September 2009.
- Network operating expenses increased by $3 million. The increase
reflected the introduction of regulated e911 fees for wireless
subscribers in Quebec and slightly higher costs to support 24% growth
in data revenues. The continued penetration of smartphones drove
increases in revenue-share volumes to third parties and licensing
volumes to service providers, but was mostly offset by lower
negotiated revenue-share and licensing rates. Growth in roaming
volumes was offset by lower roaming costs from reduced rates.
- Marketing expenses decreased by $7 million, as a shift in non-
smartphone product mix and loading through lower variable cost
channels resulted in lower overall commissions. First quarter COA per
gross subscriber addition decreased by $14 or 4.2% compared to the
first quarter of 2009, as lower commissions per gross subscriber
addition were partly offset by higher per-unit subsidy costs driven
by a higher smartphone mix.
Retention costs as a percentage of network revenue increased to 11.3%
in the first quarter of 2010 as compared to 10.5% in the same period
in 2009. Retention costs increased from higher retention volumes
related to a larger subscriber base, as well as higher per-unit
subsidy costs from an increased volume of clients migrating to
smartphones, including upgrades to HSPA devices.
- Total G&A expenses increased by $7 million, mainly from $6 million in
higher salaries, benefits and employee-related costs due to the
inclusion in 2010 of expenses from Black's Photo. Other G&A expenses
increased slightly as inclusion of expenses from Black's Photo and
increased external labour costs supporting the growing subscriber
base were largely offset by a lower bad debt expense and one-time
operating savings. Bad debt expense decreased by $9 million,
reflecting decreased involuntary subscriber churn from an improving
economy.
- Restructuring costs were unchanged. For current restructuring
activities, see Investing in internal capabilities in Section 2.
-------------------------------------------------------------------------
EBITDA - wireless segment Quarters ended March 31
2010 2009 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 497 488 1.8 %
EBITDA margin (%) 42.0 42.9 (0.9) pts.
-------------------------------------------------------------------------
The wireless segment EBITDA increased by $9 million in the first quarter of 2010 when compared to the same period in 2009. This reflects improvement in terms of data growth, lower ARPU erosion and lower bad debt expense. As expected, wireless margins continue to be pressured primarily due to increase retention costs associated with smartphone adoption, following the launch of the new HSPA network and related devices in late 2009.
6. Changes in financial position
Changes in the Consolidated statements of financial position for the three-month period ended March 31, 2010, are as follows:
-------------------------------------------------------------------------
Financial position
as at: Mar. 31, Dec. 31, Explanation of
($ millions) 2010 2009 Changes the change
-------------------------------------------------------------------------
Current Assets
Cash and 46 41 5 12 % See Section 7:
temporary Liquidity and
investments, net capital resources
Accounts receivable 737 694 43 6 % The increase
reflected a $100
million reduction
in proceeds from
securitized
accounts receivable
(see Section 7.6),
partly offset by
lower wireless
accounts receivable
due to a decline in
postpaid ARPU and
seasonal decrease
in receivables from
dealers. Accounts
receivable turnover
was 43 days at
March 31, 2010
compared to 46 days
at December 31,
2009 and 43 days at
March 31, 2009.
Income and other 31 16 15 94 % Increase due to
taxes receivable reclassification of
balances from long-
term assets, as
well as final
income tax payments
in 2010 for the
2009 tax year
Inventories 206 270 (64) (24)% Primarily a decrease
in wireless handset
volumes, parts and
accessories, and
lower average cost
of new handsets
Prepaid expenses 173 105 68 65 % Mainly payment of
annual wireless
licence fees and
employee benefits,
net of amortization
Derivative assets 2 1 1 100 % Fair value
adjustments on
operational hedges
for TELUS
International
-------------------------------------------------------------------------
Current Liabilities
Accounts payable 1,388 1,385 3 - % Primarily reflects
and accrued an increase in
liabilities accrued interest
payable and
employee benefits
payable, offset by
lower trade
payables and
accrued liabilities
arising from lower
capital expenditure
levels
Income and other 6 182 (176) (97)% Reflects final
taxes payable income tax payments
in 2010 for the
2009 tax year,
partially offset by
the 2010 current
income tax expense
net of 2010
instalments
Restructuring 86 135 (49) (36)% Payments exceeded
accounts payable new obligations
and accrued under restructuring
liabilities initiatives
Dividends payable 152 150 2 1 % -
Advance billings 687 674 13 2 % Primarily reflects
and customer deferred revenues
deposits becoming current
Current maturities 82 82 - - % The balance in both
of long-term debt periods includes
the May 2010
maturity of $50
million TCI 12%
Series 1 debentures
and the July 2010
maturity of $30
million TCI 11.5%
Series U First
Mortgage Bonds
Derivative 48 62 (14) (23)% Fair value
liabilities adjustments for
share option and
restricted share
unit hedges, and
cash settled option
derivative unwind,
partly offset by
foreign exchange
hedges for wireless
handsets
Current portion 288 294 (6) (2)% Lower partnership
of future income not yet
income taxes allocated to
corporate partners
at March 31, 2010
compared to
December 31, 2009
-------------------------------------------------------------------------
Working (1,542) (1,837) 295 16 % The improvement in
capital(1) working capital was
enabled by
sequentially lower
operating and
capital
expenditures in the
first quarter, as
well as faster
turnover of
receivables,
facilitating
payment of income
taxes and
restructuring
obligations.
-------------------------------------------------------------------------
Non-Current Assets
Property, plant, 7,637 7,729 (92) (1)% See Capital
equipment and expenditures in
other, net Section 7.2 Cash
used by investing
activities and
Depreciation in
Section 5.3
Consolidated
operations
Intangible 5,096 5,148 (52) (1)% See Capital
assets, net expenditures in
Section 7.2 Cash
used by investing
activities and
Amortization in
Section 5.3
Consolidated
operations.
Included in the
balances for both
periods are
wireless spectrum
licenses of $3,849
million.
Goodwill, net 3,572 3,572 - - % -
Other long-term 1,642 1,602 40 2 % Primarily pension
assets plan funding
and continued
amortization of
transitional
pension assets
Investments 40 41 (1) (2)% Reflects the sale of
a small investment,
net of a new
investment
-------------------------------------------------------------------------
Non-Current
Liabilities
Long-Term Debt 6,072 6,090 (18) - % Includes a $46
million decrease in
the Canadian dollar
value of U.S.
dollar Notes and a
$28 million
increase in
commercial paper
Other Long-Term 1,281 1,271 10 1 % Includes a $26
Liabilities million increase
for changes in U.S.
dollar exchange
rates and a fair
value adjustment of
the derivative
liability
associated with the
2011 U.S. dollar
Notes (offset in
Long-Term Debt and
Other comprehensive
income), net of a
portion of deferred
revenue becoming
current
Future Income 1,362 1,319 43 3 % An increase in
Taxes future taxes on
long-term assets
and liabilities,
including
unrealized gains
and losses on
derivatives
-------------------------------------------------------------------------
Owners' Equity
Common Share 7,709 7,554 155 2 % Mainly Net income
and Non-Voting of $267 million and
Share equity Other comprehensive
income of $16
million
attributable to
holders of Common
Shares and Non-
Voting Shares, less
declared dividends
of $152 million
Non-controlling 21 21 - - % Net income of $1
interests million
attributable to
non-controlling
interests less
dividends of $1
million paid by a
subsidiary to a
non-controlling
interest.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of the MD&A.
The Company's capital structure financial policies are described in Section 4.3. In the normal course, the Company has generated annual cash flow from operations exceeding annual capital investment needed to support business growth and re-invest in technology.
-------------------------------------------------------------------------
Summary of Consolidated statements of
cash flows Quarters ended March 31
($ millions) 2010 2009 Change
-------------------------------------------------------------------------
Cash provided by operating activities 414 614 (32.6)%
Cash used by investing activities (307) (478) 35.8 %
Cash used by financing activities (102) (75) (36.0)%
-------------------------------------------------------------------------
Increase (decrease) in cash and temporary
investments, net 5 61 -
Cash and temporary investments, net, beginning
of period 41 4 -
-------------------------------------------------------------------------
Cash and temporary investments, net, end of
period 46 65 (29.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7.1 Cash provided by operating activities
Cash provided by operating activities decreased by $200 million in the first quarter of 2010 when compared to the same period in 2009, primarily due to the following.
- Changes in proceeds from securitized accounts receivable (included in
Net change in non-cash working capital on the Consolidated statements
of cash flow) are a use of cash when proceeds are reduced and a
source of cash when the proceeds are increased. In the first quarter
of 2010, the Company reduced proceeds from securitized accounts
receivable by $100 million, compared to no change in the first
quarter of 2009. See Section 7.6 Accounts receivable sale.
- EBITDA increased by $34 million, as described in Section 5:
Discussion of operations. Excluding restructuring costs, EBITDA
increased by $12 million.
- Payments under restructuring plans increased by $26 million.
- Interest paid decreased by $13 million, mainly due to financing
activities in 2009 that increased the proportion of fixed rate, semi-
annual interest debt, reduced variable rate commercial paper and
eliminated all amounts drawn on the 2012 credit facility.
- Income tax payments, net of refunds received, were $251 million in
the first quarter of 2010, or an increase of $37 million from the
same period in 2009. Payments included final instalments in respect
of the preceding tax year as well as current year instalments.
- Other changes in working capital, including a smaller reduction in
customer accounts receivable during the first quarter of 2010
compared to the first quarter of 2009.
7.2 Cash used by investing activities
Cash used by investing activities decreased by $171 million in the first quarter of 2010 when compared to the same period in 2009, primarily due to lower capital expenditures. Property, plant and equipment and intangible assets under construction were $546 million, a decrease of $43 million from December 31, 2009, reflecting a lower capital intensity level in 2010.
-------------------------------------------------------------------------
Capital expenditures Quarters ended March 31
($ millions, except capital intensity) 2010 2009 Change
-------------------------------------------------------------------------
Wireline segment 252 278 (9.4)%
Wireless segment 59 196 (69.9)%
-------------------------------------------------------------------------
Total capital expenditures 311 474 (34.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less capital expenditures(1) 629 432 45.6 %
Capital intensity(2)(%) 13 20 (7) pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 EBITDA for the calculation and description.
(2) Capital intensity is calculated as capital expenditures divided by
operating revenues. This measure provides a basis for comparing the
level of capital expenditures to other companies of varying size
within the same industry.
-------------------------------------------------------------------------
Total capital expenditures decreased by $163 million in the first quarter of 2010 when compared to the same period in 2009. Lower capital intensity in 2010 primarily reflects the considerable build activity throughout 2009 for the wireless HPSA 3G+ network that was launched in November 2009. The Company expects capital expenditures for the full year of 2010 to decrease by approximately $400 million or 19%, as compared to 2009 (see Section 9). EBITDA less capital expenditures increased by $197 million, or 46%, in the first quarter of 2010 when compared to the same period in 2009.
- Wireline segment
Wireline capital expenditures decreased by $26 million in the first
quarter of 2010 when compared to the same period in 2009. The
decrease reflected lower expenditures for network growth as demand
moderated and such expenditures were relatively high in 2009 for a
first quarter period. This was partly offset by increased spending
for TELUS TV and other wireline broadband initiatives (see Section 2:
Core business and strategy). Wireline capital intensity decreased to
20% in the first quarter of 2010 from 22% in the first quarter of
2009. Wireline cash flow (EBITDA less capital expenditures) was $191
million in the first quarter of 2010, up by $51 million or 36% from
the first quarter of 2009.
- Wireless segment
Wireless capital expenditures decreased by $137 million in the first
quarter of 2010 when compared to the same period in 2009. The
decrease in 2010 was due to activity in the prior year to construct
the new HSPA 3G+ network, which was substantially completed and
launched in November 2009, as well as lower expenditures for the
mature CDMA network. Consequently, wireless capital intensity
decreased to 5% in the first quarter of 2010 from 17% in the first
quarter of 2009, due to transitioning to a sustainment mode following
the November 2009 HSPA launch. Capital spending is expected to pick
up in future quarters. Wireless cash flow (EBITDA less capital
expenditures) was $438 million in the first quarter of 2010, up by
$146 million or 50% from the first quarter of 2009.
7.3 Cash used by financing activities
Net cash used by financing activities increased by $27 million in the first quarter of 2010 when compared to the same period in 2009.
- Cash dividends paid to holders of Common Shares and Non-Voting Shares
were $129 million in the first quarter of 2010, in respect of the
47.5 cent per share dividend declared in the fourth quarter of 2009.
The amount is the dividend payable at December 31, 2009, net of $22
million dividends reinvested in TELUS Non-Voting Shares under the
Company's amended dividend reinvestment plan (DRIP), where shares
were issued from treasury at a 3% discount rather than being
purchased in the open market. The DRIP participation rate at January
4, 2010, was approximately 14%. The dividend payment of $151 million
in the first quarter of 2009 was in respect of the 47.5 cent per
share dividend declared in the fourth quarter of 2008.
- Bank facilities and commercial paper
The Company often shifts among short-term financing sources to take
advantage of interest cost differentials. In the first quarter of
2010, issued commercial paper increased by $28 million to $495
million, while no amounts were drawn against the 2012 credit facility
(unchanged from December 31, 2009). In comparison, during the first
quarter of 2009, net amounts drawn on the 2012 credit facility
decreased by $680 million to $300 million, while issued commercial
paper increased by $756 million to $1,188 million.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or 12-month periods ended, March 31 2010 2009 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt 7,235 7,301 (66)
Total capitalization - book value 15,021 14,715 306
EBITDA - excluding restructuring costs 3,693 3,816 (123)
Net interest cost 549 449 100
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 88 76 12 pts.
Average term to maturity of debt (years) 4.8 3.8 1
Net debt to total capitalization (%)(1) 48.2 49.6 (1.4)pts.
Net debt to EBITDA - excluding restructuring
costs(1) 2.0 1.9 0.1
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt
(Earnings coverage) 3.1 4.3 (1.2)
EBITDA - excluding restructuring costs
interest coverage 6.7 8.5 (1.8)
-------------------------------------------------------------------------
Other measures
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 621 (42) 663
Dividend payout ratio of adjusted
net earnings (%)(1) 67 57 10 pts.
Dividend payout ratio (%)(1) 64 52 12 pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.4 Definitions of liquidity and capital resource
measures.
(2) See Section 11.2 Free cash flow for the definition.
-------------------------------------------------------------------------
The decrease in Net debt at March 31, 2010, as compared to one year earlier, reflects a number of financing activities in 2009, including a reduction in commercial paper, elimination of amounts drawn on the 2012 bank facility and partial early redemption of U.S. dollar Notes, largely offset by a $700 million five-year Note issue in May and a $1 billion 10-year Note issue in December. The increase in total capitalization primarily reflects increased retained earnings. Net debt to EBITDA (excluding restructuring costs) increased by 0.1, as the decrease in 12-month trailing EBITDA before restructuring costs was only partly offset by lower net debt.
The proportion of debt on a fixed-rate basis was 88% on March 31, 2010, up from 76% one year earlier primarily due to the May 2009 issue of Series CF Notes and repayment of amounts drawn on the 2012 credit facility, partly offset by increased securitization of accounts receivable. The average term to maturity of debt increased to 4.8 years at March 31, 2010, from 3.8 years at March 31, 2009, primarily due to the December 2009 issue of ten-year Series CG Notes and early partial redemption of U.S. dollar Notes due June 1, 2011.
The interest coverage on long-term debt ratio was 3.1 times for the 12-month period ended March 31, 2010, down from 4.3 times one year earlier. An increase in long-term interest expense (mostly due to the $99 million loss on redemption of long-term debt recorded in December 2009) decreased the ratio by 0.7, while lower 12-month trailing earnings before long-term interest and income taxes decreased the ratio by 0.5. The EBITDA (excluding restructuring costs) interest coverage ratio for the 12-month period ended March 31, 2010, was 6.7 times, down from 8.5 times one year earlier, due mainly to the loss on redemption of long-term debt recorded in December 2009. This ratio calculated to exclude the loss on redemption was 8.2 times at March 31, 2010.
Free cash flow (FCF) for the 12-month period ended March 31, 2010, increased by $663 million when compared to the 12-month period ended March 31, 2009. The increase in FCF resulted from lower total capital expenditures, partly offset by lower EBITDA and higher restructuring, interest and income tax payments.
The Company's strategy is to maintain the financial policies and guidelines set out below. The Company believes that these measures are currently at the optimal level and by maintaining credit ratings in the range of BBB+ to A-, or the equivalent, are expected to provide reasonable access to capital markets.
TELUS' long-term financial policies and guidelines are:
- Net debt to EBITDA - excluding restructuring costs of 1.5 to 2.0
times
The ratio at March 31, 2010 was slightly under 2.0 times.
- Dividend payout ratio target guideline of 55 to 65% of sustainable
net earnings
The target guideline is on a prospective basis, rather than on a
trailing basis. The current guideline was approved on May 4, 2010,
and signals management and Board confidence in the mid-term outlook
of the Company into 2011. The increased payout ratio is seen as
appropriate to the Company's prospects for earnings and cash flow
growth, and moderating capital expenditure investments. The ratio is
61 to 69% calculated on a $2.00 annualized dividend as compared to
current full-year 2010 guidance of $2.90 to $3.30 for EPS - basic.
7.5 Credit facilities
At March 31, 2010, TELUS had available liquidity exceeding $1.7 billion from unutilized credit facilities, consistent with the Company's objective of generally maintaining at least $1 billion of available liquidity. The Company also has availability under its accounts receivable securitization program at March 31, 2010 (see Section 7.6).
TELUS credit facilities at March 31, 2010
-------------------------------------------------------------------------
Out- Backstop
standing for
undrawn commercial
letters paper Available
($ in millions) Expiry Size Drawn of credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving
facility(1) May 1, 2012 2,000 - (123) (495) 1,382
364-day
revolving December 31,
facility(2) 2010 300 - - - 300
Other bank
facilities - 62 (1) (3) - 58
-------------------------------------------------------------------------
Total - 2,362 (1) (126) (495) 1,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars only.
-------------------------------------------------------------------------
TELUS' revolving credit facilities contain customary covenants, including a requirement that TELUS not permit its consolidated Leverage Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately 2.0 to 1 at March 31, 2010) and not permit its consolidated Coverage Ratio (EBITDA to interest expense on a trailing 12-month basis) to be less than 2 to 1 (approximately 6.7 to 1 at March 31, 2010) at the end of any financial quarter. There are certain minor differences in the calculation of the Leverage Ratio and Coverage Ratio under the credit agreements as compared with the calculation of Net debt to EBITDA and EBITDA interest coverage. Historically, the calculations have not been materially different. The covenants are not impacted by revaluation of property, plant and equipment, intangible assets and goodwill for accounting purposes. Continued access to TELUS' credit facilities is not contingent on the maintenance by TELUS of a specific credit rating.
7.6 Accounts receivable sale
TELUS Communications Inc. (TCI), a wholly owned subsidiary of TELUS, is a party to an agreement with an arm's-length securitization trust associated with a major Schedule I Canadian bank, under which TCI is able to sell an interest in certain of its trade receivables, for an amount up to a maximum of $500 million. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a servicing liability is recognized on the date of sale and is, in turn, amortized to earnings over the expected life of the trade receivables.
TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down. The necessary credit rating was exceeded by three levels at A (low) as of May 4, 2010.
-------------------------------------------------------------------------
Balance of
proceeds from
securitized
receivables 2010, 2009, 2009, 2009, 2009, 2008, 2008, 2008,
Mar. Dec. Sept. June Mar. Dec. Sept. June
($ millions) 31 31 30 30 31 31 30 30
-------------------------------------------------------------------------
400 500 400 400 300 300 250 150
-------------------------------------------------------------------------
7.7 Credit ratings
There were no changes to the Company's investment grade credit ratings as at May 4, 2010.
7.8 Financial instruments, commitments and contingent liabilities
Financial instruments
The Company's financial instruments and the nature of risks that they may be subject to were described in TELUS' 2009 MD&A. Certain updates follow:
Credit risk
Credit risk associated with accounts receivable is minimized by the Company's large and diverse customer base, which covers substantially all consumer and business sectors in Canada. The Company follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. The Company maintains allowances for potential credit losses, and any such losses to date have been within management's expectations. As at March 31, 2010, the weighted average life of customer accounts receivable was 31 days (December 31, 2009 - 36 days) and the weighted average life of past-due customer accounts receivable was 76 days (December 31, 2009 - 72 days).
Liquidity risk
As a component of capital structure financial policies, discussed under Section 4.3 Liquidity and capital resources, the Company manages liquidity risk by maintaining a daily cash pooling process, which enables the Company to manage its liquidity surplus and liquidity requirements according to the actual needs of the Company and its subsidiaries, by maintaining bilateral bank facilities and syndicated credit facilities, by maintaining a commercial paper program, by the sales of trade receivables to an arm's-length securitization trust, by continuously monitoring forecast and actual cash flows and by managing maturity profiles of financial assets and financial liabilities.
The Company has significant debt maturities in future years. As at March 31, 2010, the Company has access to a shelf prospectus, in effect until October 2011, pursuant to which it can offer $3 billion of debt or equity securities. The Company has credit facilities available, including a $2 billion facility until 2012 (see Section 7.5 Credit facilities). The Company believes that its investment grade credit ratings provide reasonable access to capital markets.
Market risk
Net income and other comprehensive income for the years ended March 31, 2010 and 2009, could have varied if the Canadian dollar to U.S. dollar foreign exchange rates, market interest rates and the Company's Common Share and Non-Voting Share prices varied by reasonably possible amounts from their actual statement of financial position date values.
The sensitivity analysis of the Company's exposure to currency risk, interest rate risk and other price risk arising from share-based compensation is shown in Note 4 of the interim Consolidated financial statements.
Commitments and contingent liabilities
Guarantees
Canadian GAAP requires the disclosure of certain types of guarantees and their maximum, undiscounted amounts. As at March 31, 2010, the Company's maximum undiscounted guarantee amounts, without regard for the likelihood of having to make such payment, were not material.
In the normal course of operations, the Company may provide indemnification in conjunction with certain transactions. Other than obligations recorded as liabilities at the time of the transaction, historically the Company has not made significant payments under these indemnifications.
In connection with its 2001 disposition of TELUS' directory business, the Company agreed to bear a proportionate share of the new owner's increased directory publication costs if the increased costs were to arise from a change in the applicable CRTC regulatory requirements. The Company's proportionate share would have been 80% through May 2006, declining to 40% in the next five-year period and then to 15% in the final five years. Should the CRTC take any action that would result in the owner being prevented from carrying on the directory business as specified in the agreement, TELUS would indemnify the owner in respect of any losses that the owner incurred. As at March 31, 2010, the Company has no liability recorded in respect of indemnification obligations.
Claims and lawsuits
A number of claims and lawsuits (including class actions) seeking damages and other relief are pending against the Company. As well, the Company has received or is aware of certain intellectual property infringement claims and potential claims against the Company and, in some cases, numerous other wireless carriers and telecommunications service providers. In some instances, the matters are at a preliminary stage and the potential for liability and magnitude of potential loss cannot be readily determined currently. It is impossible at this time for the Company to predict with any certainty the outcome of such claims, potential claims and lawsuits. However, subject to the foregoing limitations, management is of the opinion, based upon legal assessment and information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Company's consolidated financial position, other than as disclosed in Note 18(b) of the interim Consolidated financial statements and certain updates to litigation and legal matters in Section 10.5 of this document.
7.9 Outstanding share information
The total number of outstanding and issuable shares in the following table assumes full conversion of outstanding options and shares reserved for future option grants, at March 31, 2010.
-------------------------------------------------------------------------
Outstanding shares Common Non-Voting Total
(millions) Shares Shares shares
-------------------------------------------------------------------------
Common equity
Outstanding shares at March 31, 2010 174.8 143.6 318.4(1)
Options outstanding and issuable(2)
at March 31, 2010 0.1 15.1 15.2
-------------------------------------------------------------------------
Outstanding and issuable shares
at March 31, 2010 174.9 158.7 333.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares was 318.6 million for the quarter ended March 31,
2010.
(2) Assuming full conversion and ignoring exercise prices.
-------------------------------------------------------------------------
The number of outstanding and issuable shares at April 30, 2010, was not materially different than at March 31, 2010. Approximately 922,000 TELUS Non-Voting Shares were issued from treasury under the dividend reinvestment plan (DRIP) for the dividend paid on April 1, 2010. The DRIP participation rate was approximately 21% for April 1 dividend, up from 14% for the January 4, 2010 dividend.
The Board of Directors approved a recommended increase of 15 million Non-Voting Shares to the share option reserve, and the proposed increase is to be voted on by shareholders at the May 5, 2010 annual and special general meeting.
In March 2010, the federal government announced its intention to change the tax treatment of certain share-based compensation. Should the changes be enacted, the Company may find it necessary to revise its share-based compensation plans or waive deductions on the cash settlement of share options.
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
Critical accounting estimates are described in Section 8.1 of TELUS' 2009 MD&A. The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
8.2 Accounting policy developments
Transition to International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB)
The discussion in this section includes expectations at the reporting date about the transition from Canadian GAAP to IFRS as issued by the IASB, or IFRS-IASB (subsequently referred to as IFRS).
-------------------------------------------------------------------------
Key dates:
- January 1, 2010 (transition date): An opening statement of financial
position according to IFRS will be prepared, as at this date, to
facilitate the changeover to IFRS in 2011. TELUS will continue to
report its fiscal 2010 and comparative 2009 results according to
Canadian GAAP.
- January 1, 2011 (changeover date): The date after which TELUS will
prepare and report interim and annual 2011 financial statements with
2010 comparatives according to IFRS.
-------------------------------------------------------------------------
Transition date impacts and policy choices
The transition to IFRS requires the Company to apply IFRS 1, or the requirements for preparing IFRS-compliant financial statements in the first reporting period after the changeover date. IFRS 1 applies only at the time of changeover, and includes a requirement for retrospective application of each IFRS, as if they were always in effect. IFRS 1 also mandates certain exceptions to retrospective application and provides a series of optional exemptions from retrospective application to ease the transition to the full set of IFRSs. The Company disclosed its initial decisions regarding transition date impacts in Section 8.2.1 its 2009 MD&A. In addition, the Company determined a modest number of areas where changes in accounting policies were expected that may impact the Consolidated financial statements, disclosed in Section 8.2.2 of its 2009 MD&A.
-------------------------------------------------------------------------
Policy area Choices and impacts
-------------------------------------------------------------------------
Employee benefits
- Recognition of IFRS 1 optional exemption and transition date
cumulative actuarial impact: The Company currently expects to
gains or losses and record 100% of the actuarial gains or losses
transitional assets and transitional assets of its defined
at the IFRS benefits pension plans as an opening balance
transition date adjustment to Retained earnings.
- Recognition of Ongoing impact: The Company currently expects
ongoing actuarial to record 100% of the ongoing actuarial gains
gains and losses or losses in Other comprehensive income.
-------------------------------------------------------------------------
Fair value of property, IFRS 1 optional exemption and transition date
plant and equipment and impact: The Company currently expects to use
intangible assets as the carrying value at the transition date.
deemed cost
Ongoing impact: The Company currently expects
to continue to use the cost model for each
class of asset.
-------------------------------------------------------------------------
Impairment of assets IAS 36 states that assets should be tested
separately for impairment, and where the
recoverable amount cannot be estimated for
individual assets, it should be estimated as
part of a cash-generating unit. The Company
currently expects its cash-generating units to
be consistent with testing levels under
Canadian GAAP, namely, wireline and wireless.
Under IFRS, impairment testing for long-lived
assets (except for Goodwill) requires reversal
of impairments where adverse circumstances
have reversed.
Transition date impact: The Company is
currently evaluating the application of IAS 36
on the impairment of wireless spectrum
recorded in 2002, as well as impairments
recorded by predecessor companies for the
transition from regulatory accounting
principles (RAP) to GAAP for certain remaining
capital assets.
Ongoing impact: Whether the Company will be
affected depends on the facts at the time of
each impairment test. Increased volatility in
profit could result from periodic asset
impairments and reversal of impairments,
depending on the facts at the time of each
impairment test.
-------------------------------------------------------------------------
De-recognition of Transition date impact: Proceeds from the sale
financial assets and of accounts receivable under the Company's
liabilities accounts receivable securitization agreement
are expected to be recorded as short-term debt
under IFRS, rather than a reduction to
accounts receivable under Canadian GAAP.
Ongoing impact: Accounts receivable
securitization expenses are expected to be
included in Borrowing costs under IFRS, rather
than in Other expense, currently.
-------------------------------------------------------------------------
Leases The sale and lease-back of certain non-
strategic buildings, primarily in 2000 and
2001, resulted in deferred gains under
Canadian GAAP that are being amortized to
income over the varying terms of the leases.
IFRS requires that a portion of the deferred
gains be recognized at the time of the sale.
Transition date impact: A portion of the
balance of such gains deferred under Canadian
GAAP will be recognized at the transition date
as an increase in opening Retained earnings.
Ongoing impact: Amortization of the remaining
balance of such gains deferred under Canadian
GAAP will continue at a reduced amount.
-------------------------------------------------------------------------
Income taxes Transition date and ongoing impacts: The
impacts on the Company of the IAS 12 standard
for income taxes are expected to be related to
recognition and measurement of uncertain tax
positions, and disclosure and presentation
differences.
-------------------------------------------------------------------------
IFRSs that are mandatory at the changeover date have been finalized; however, the IASB's work plan currently has projects underway that are expected to result in new pronouncements that continue to evolve IFRS. As a result, IFRS as at the changeover date may differ from its current form. The IASB is reviewing the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, with the intention of replacing it with a new IFRS in 2010. The new IFRS is currently expected to be effective for fiscal years ending in 2011, with possible application to 2010 comparatives. The objectives of the review include improving the guidance on identifying liabilities, reducing the differences between IAS 37 and U.S. GAAP, making recognition of liabilities within the scope of IAS 37 consistent with those for other liabilities, and clarifying the requirements for identifying liabilities. The IASB is also expected to review the IAS 12 standard for income taxes on a piecemeal basis. The Company continues to evaluate the possible effects of IAS 37 and will monitor the near-term projects that the IASB initiates for income taxes. The ultimate impacts cannot be determined at this time.
IFRS changeover plan - updates
The following updates to the TELUS' changeover plan are based on the Company's current assumptions and expectations, which could change in future based on IFRS changes or other factors.
-------------------------------------------------------------------------
Key activity Milestones (expected Status and comments
timeframes)
-------------------------------------------------------------------------
Financial
statement
preparation
-------------------------------------------------------------------------
- Key elements Identification, evaluation Initial choices
phase and selection of accounting completed. Ongoing
policies necessary for the review of IFRS exposure
Company to change over to IFRS drafts and developments.
---------------------------------------------------------
This phase includes other See commentary below
operational elements, such as
information technology,
internal control over financial
reporting, and training
-------------------------------------------------------------------------
- Embedding Integrate the solutions The Company has adapted
phase necessary for the changeover its existing accounting
into the Company's underlying systems for parallel
financial systems and reporting under IFRS
processes. (See
Infrastructure below.)
---------------------------------------------------------
Maintain two parallel sets of In 2010, the Company is
books: one according to maintaining two
contemporary Canadian GAAP and parallel sets of books,
one according to contemporary as planned
IFRS
---------------------------------------------------------
Develop financial statements Drafted. Senior
formats and note disclosures management approval to
be sought in 2010
---------------------------------------------------------
Disclosure in the MD&A of the Activities are planned
impacts on the 2010 for the fourth quarter
comparative period, when of 2010
available
---------------------------------------------------------
2011 first quarter: Disclosure
in the MD&A of final
quantification of conversion
effects on the 2010
comparative period
-------------------------------------------------------------------------
Communication Provide ongoing training on In 2010, the Company
and training expected IFRS impacts, IFRS 1 plans to leverage
elections and accounting internal resources to
policy choices implement a general
Finance-wide training
seminar and a number of
targeted training
seminars for Finance
team members, who are
highly impacted by the
IFRS convergence
project.
General communication
and education is
provided to all Finance
team members
highlighting a number of
external IFRS resources
available through
TELUS' internal IFRS
website.
-------------------------------------------------------------------------
Infrastructure Determine necessary changes to Parallel reporting
- Information systems and processes and platforms were designed,
technology update accounting systems to implemented, and tested
enable the opening financial for operation in the
position under IFRS, and fourth quarter 2009.
facilitate dual reporting in
2010 Dual reporting
capability in the
Company's accounting
systems was activated in
the first quarter of
2010.
---------------------------------------------------------
Implement financial planning Processes are currently
and forecasting capability being adapted. Dual
under IFRS standards forecasting capability
is to be implemented
during 2010.
-------------------------------------------------------------------------
Business policy Assess impacts on contractual Contracts are currently
assessment arrangements and covenants. being reviewed.
Implement changes as necessary Calculations of the
Leverage Ratio and
Coverage Ratio,
specified in the
Company's 2012 credit
facility, are not
expected to be affected
by the changeover.
-------------------------------------------------------------------------
Control
environment
-------------------------------------------------------------------------
- Internal Approval of initial IFRS 1 Senior management
control over optional exemption and approval received for
financial accounting policy choices initial elections and
reporting policy choices obtained
in 2009.
Audit Committee review
of management's initial
elections and policy
choices, and Board of
Directors' approval
obtained in 2009.
Progress reviews by senior Review by senior
management and Audit Committee management of
implementation progress
and impacts of
outstanding IFRS
exposure drafts, in
April 2010.
Progress presented at
the May 4, 2010 Audit
Committee meeting,
including expected
impacts on the
Consolidated statement
of financial position at
the transition date and
expected impacts on the
2010 consolidated
statements of
comprehensive income.
---------------------------------------------------------
Testing of controls for 2010 Activities commenced in
comparatives the first quarter of
2010
-------------------------------------------------------------------------
- Disclosure Review and sign-off by senior Activities related to
controls and management of expected quantifying 2010 IFRS
procedures conversion effects on fiscal opening balance
2010 adjustments and 2010
reporting period
differences, continued
in the first quarter of
2010.
Approval of transition
date impacts and
quantified disclosure of
the differences in the
opening Consolidated
statement of financial
position is expected for
the third quarter of
2010.
Approval of the 2010
annual disclosures and
quantification of
expected impacts to the
2010 Consolidated
statements of
comprehensive income is
currently expected in
the fourth quarter of
2010.
---------------------------------------------------------
December 2010: Expect to issue It is a long-standing
final guidance for fiscal 2010 practice of TELUS to
according to Canadian GAAP. release annual targets
for the upcoming year in
Provide updated disclosure of December and provide a
expected conversion effects on final guidance for the
fiscal 2010. current year. An
investor call normally
December 2010 to first quarter follows the news
2011: Planned release of 2011 release.
annual targets according to
IFRS standards, together with Because of the
supplementary disclosure for transition, it may be
fiscal 2010 according to IFRS. necessary to delay the
announcement of 2011
targets until the first
quarter of 2011, or
revise targets at that
time.
---------------------------------------------------------
First quarter 2011 results with
2010 comparatives according to
IFRS. MD&A discussion of final
changeover impacts.
-------------------------------------------------------------------------
Transitional accounting policy changes adopted in 2009 and 2008
As activities consistent with Canadian GAAP being converged with IFRS, the Company previously adopted new recommendations for Goodwill and intangible assets (CICA Handbook Section 3064), Business combinations (CICA Handbook Section 1582), Consolidations (CICA Handbook Section 1601), Non-controlling interests (CICA Handbook Section 1602), financial instrument disclosure and presentation (CICA Handbook Sections 3862 and 3863), and Inventories (CICA Handbook Section 3031). See Section 8.2.4 of TELUS' 2009 MD&A.
9. Annual guidance for 2010
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
The Company confirms its original targets announced in December 2009.
Annual guidance
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2010 Confirmed targets and
expected change from 2009
actual results
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Consolidated
Revenues $9.8 to $10.1 billion
2 to 5%
----------------------------------------------------------------------
EBITDA(1) $3.5 to $3.7 billion
flat to 6%
----------------------------------------------------------------------
EPS - basic $2.90 to $3.30
(8) to 5%
EPS - basic (excluding income
tax-related adjustments
and loss on redemption
of long-term debt)(2) 3 to 17%
----------------------------------------------------------------------
Capital expenditures Approx. $1.7 billion
(19)%
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Wireline segment
Revenue (external) $4.85 to $5.0 billion
(1) to 2%
----------------------------------------------------------------------
EBITDA $1.575 to $1.675 billion
1 to 8%
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Wireless segment
Revenue (external) $4.95 to $5.1 billion
5 to 8%
----------------------------------------------------------------------
EBITDA $1.925 to $2.025 billion
flat to 5%
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(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition.
(2) A non-GAAP measure. For comparability purposes, the growth rates are
based on 2009 actual results adjusted to exclude 55 cents per share
of positive income tax-related adjustments and 22 cents per share for
a loss on early partial redemption of long-term debt.
-------------------------------------------------------------------------
The following key assumptions were made at the time the 2010 targets were announced in December 2009. Assumptions for the defined benefit pension plan expense and contributions were updated in the annual 2009 MD&A.
-------------------------------------------------------------------------
Assumptions for 2010 original Status
targets
-------------------------------------------------------------------------
Ongoing wireline and wireless Same expectation
competition in both business and
consumer markets
-------------------------------------------------------------------------
Canadian wireless industry market Same expectation, with an increasing
penetration gain of approximately proportion from postpaid subscribers
four percentage points for the year
(approximately 3.6 percentage
points in 2009)
-------------------------------------------------------------------------
Increased wireless subscriber Smartphones represented 33% of gross
loading in smartphones postpaid subscriber additions in the
first quarter of 2010, as compared
to 18% in the first quarter of 2009
-------------------------------------------------------------------------
Reduced downward pressure on Confirmed by the 4.4% year-over-year
wireless ARPU (down 6.8% in 2009) decrease in wireless ARPU in the
first quarter of 2010
-------------------------------------------------------------------------
New competitive wireless entry in After its initial launch in Calgary
early 2010 following one and Toronto in December 2009,
competitive launch in December 2009 Globalive expanded to Edmonton in
the first quarter of 2010, to Ottawa
in April, and is expected to launch
in Vancouver during the year. Public
Mobile is expected to turn up
services in Toronto and Montreal by
mid-2010.
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In wireline, stable residential Residential access line losses
network access line losses and increased in the first quarter of
continued competitive pressure in 2010, from aggressive promotional
small and medium business market activity by the primary cable-TV
from cable-TV and VoIP companies competitor for voice and Internet
services
-------------------------------------------------------------------------
Continued wireline broadband See Section 2: Core business and
expansion strategy
-------------------------------------------------------------------------
Significant increase in cost of Wireless costs of retention as a
acquisition and retention percentage of network revenues
expenses for smartphones and TELUS increased to 11.3% in the first
TV loading quarter of 2010.
TELUS TV loading was 29,000 in the
first quarter, compared to 20,000 in
same quarter in 2009. In addition,
programming costs have increased
with the doubling of the subscriber
base.
-------------------------------------------------------------------------
EBITDA savings of approximately Savings of approximately $37 million
$135 million from efficiency were realized in the first quarter
initiatives of 2010
-------------------------------------------------------------------------
Approximately $75 million of No change
restructuring expenses ($190
million in 2009)
-------------------------------------------------------------------------
A blended statutory tax rate of No change. The blended statutory
approximately 28.5 to 29.5% income tax rate was 28.9% in the
(30.3% in 2009). The expected first quarter of 2010.
decrease is based on enacted
changes in federal and
provincial income tax rates.
-------------------------------------------------------------------------
Cash income taxes peaking at Cash income tax payments net of
approximately $385 to $425 refunds received were $251 million
million (net $266 million in in the first quarter of 2010,
2009) due to the timing of comprised of final payments for the
instalment payments 2009 tax year and instalments for
2010. Payments in remaining quarters
are expected to be for in-year
instalments only, and accordingly,
no change is expected for the
estimate of full-year income tax
payments.
-------------------------------------------------------------------------
A pension accounting discount rate No change to defined benefit pension
was estimated at 5.75% and plan expenses, which are set at the
subsequently set at 5.85% (140 beginning of the year. The Company's
basis points lower than 2009). best estimate of contributions to
The expected long-term return of defined benefit pension plans in
7.25% is unchanged from 2009 and 2010 is currently unchanged.
consistent with the Company's
long-run returns and its future
expectations.
- Defined benefit pension plans
net expenses were estimated to
be $28 million in 2010
(compared to $18 million in
2009), based on projected
pension fund returns
- Defined benefit pension plans
contributions were estimated
to be approximately $143
million in 2010, down from
$179 million in 2009,
largely due to the stock
market recovery in 2009 and
proposed federal pension reforms.
-------------------------------------------------------------------------
10. Risks and risk management
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
10.1 Competition
The following are updated excerpts from Section 10.1 Competition of TELUS' 2009 MD&A.
Aggressive competitor pricing and technological substitution may
adversely affect market shares, volumes and pricing, leading to reduced
utilization and increased commoditization of traditional voice local and
long distance services
TELUS faces intense competition across all key business lines and market segments, including consumer, small and medium businesses (SMB), and the large enterprise market. Technological advances have blurred the traditional boundaries between broadcasting, Internet and telecommunications. Cable-TV companies continue to expand offerings of digital voice and enhanced phone services, resulting in intensified competition in the residential and certain SMB, local access, long distance and high-speed Internet access (HSIA) markets. Overall, industry pricing pressure and customer acquisition efforts have intensified across most product and service categories and market segments, and this is expected to continue.
In the consumer wireline market, cable-TV companies and other competitors encounter minimal regulation and continue to combine a mix of residential local VoIP, long distance, HSIA and, in some cases wireless services, into one bundled and/or discounted monthly rate, along with their traditional broadcast or satellite-based TV services. In addition, cable-TV companies continue to increase the speed of their HSIA offerings. To a lesser extent, other non-facilities-based competitors offer local and long distance VoIP services over the Internet and resell HSIA solutions. Erosion of TELUS' residential network access lines (NALs) is expected to continue from this competition, as well as ongoing technological and wireless substitution. Competitors are anticipated to capture a majority of the share in growth marketplace opportunities; thus, access line associated revenues, including long distance, can be expected to continue to decline. Although the HSIA market is maturing, subscriber growth is expected to continue over the next several years. With a more mature HSIA market, and the potential for higher-speed Internet offerings from competitors, TELUS may be constrained in its ability to maintain market share in its incumbent territories, because of the amount and timing of capital expenditures associated with maintaining competitive network access speeds.
Risk mitigation: Canadian Radio-television and Telecommunications Commission (CRTC) decisions in recent years approving wireline deregulation have provided TELUS with improved flexibility to respond to intensifying competition. Active monitoring of competitive developments in product and geographic markets enables TELUS to respond more rapidly to competitor offers and leverage the Company's full suite of integrated solutions and national reach. TELUS continues to expand its IP-based TELUS TV offering in its incumbent territories of B.C., Alberta, and Eastern Quebec in order to provide a premium television experience and enhance its bundles to better address customer needs and respond to cable-TV company bundled offerings. In addition, TELUS Satellite TV service in Alberta and B.C. complements IP TV service and enables the Company to more effectively serve those households that are not currently on the TELUS IP TV network footprint and leverage TELUS' strong distribution and marketing presence. In order to offset increasing competitive intensity and losses in its incumbent areas, TELUS continues to expand into and generate growth in non-incumbent markets in Central Canada with business services and mobility offerings. In addition to expanding services, TELUS also continues to actively pursue the most competitive cost structure possible.
Customer experience
There is a risk that TELUS will not maintain or earn improved levels of client loyalty if products and services and service experience offered by the Company do not meet or exceed customer expectations. If TELUS does not provide a better customer experience than its competitors, the TELUS brand image could suffer, and business clients and consumers may change service providers. The Company's revenues and profitability could be negatively impacted should the costs to acquire and retain customers increase.
Risk mitigation: Driving the best customer experience and earning the patronage of clients is a Company-wide commitment. Two of the Company's internal priorities for 2010 are to increase TELUS team member engagement and live the culture of personal responsibility and customer service, and ensure TELUS delivers its future friendly brand promise to clients. (See Section 3: Key performance drivers).
10.2 Technology
The following is an excerpt from Section 10.2 Technology of TELUS' 2009 MD&A.
Subscriber demand for data may challenge wireless networks
The demand for wireless data services has been growing at unprecedented rates and it is projected that this demand will further accelerate, driven by increasing levels of broadband penetration, increasing need for personal connectivity and networking, increasing affordability of smartphones and Internet-only devices (e.g. high-usage data devices such as the Apple iPhone, mobile Internet keys and emerging products such as electronic book readers), increasingly rich multimedia services and applications, increasing wireless competition, and possibly unlimited data plans. The industry expects dramatic year-over-year increases in subscriber data traffic over the next one to five years, as it is anticipated that wireless data demand will continue to track wired Internet data consumption, lagging by only three to five years. The anticipated levels of data traffic will represent a growing challenge to the current mobile network's ability to serve this traffic. The ability to acquire additional spectrum to address future requirements is dependent on the timing and the rules established by Industry Canada. (See Section 3: Regulatory in TELUS' 2009 MD&A.)
Risk mitigation: TELUS built an extensive 3G+ wireless network based on HSPA/HSPA+ technologies. This 3G+ network uses the most advanced mobile broadband technology commercially available in Canada at the reporting date, delivering manufacturer-rated download speeds of up to 21 megabits per second, as well as significant increases in network capacity. The new wireless network brings higher capacity and improved support and performance for real-time conversational and interactive services through the introduction of MIMO (multiple input multiple output) antennas, continuous packet connectivity and higher-order modulation schemes. As such, TELUS' 3G+ network, with coverage exceeding 1.1 million square kilometres and reaching 93% of the Canadian population (including network sharing agreements), positions TELUS to meet the capacity demands and challenges in the foreseeable future. The new network complements TELUS' existing wireless portfolio that includes the CDMA, 3G high-speed wireless (EVDO) network and the Mike Push to Talk network and business service. TELUS is continuing to evolve its technology leadership position to address traffic demand, while offering customers a wide selection of wireless devices and service experiences, no matter which network technology is running in the background.
In addition to the superior capabilities and higher capacity delivered by HSPA/HSPA+, the infrastructure supporting TELUS' 3G+ network facilitates the migration to 4G LTE wireless technologies, which in turn is expected to further increase network capacity and speed. TELUS investments to date in IP networks, IP/fibre cell-site backhaul and a software-upgradeable radio infrastructure, are expected to greatly facilitate rapid introduction of LTE when this ecosystem reaches maturity. LTE technologies are expected to deliver speeds up to 100 Mbps, while at the same time introducing significant improvements in performance including a reduction in delay/latency. These improvements are expected to increase network capacity, enhance performance, enable richer multimedia applications and services, and deliver a superior subscriber experience.
Fast growth of wireless data volumes requires optimal and efficient utilization of TELUS' spectrum holdings. Deployment of TELUS' HSPA/HSPA+ technology, eventual launch of 4G LTE technology, and development of a traffic management toolkit aim to achieve efficient utilization of TELUS' spectrum holdings and position TELUS to meet increasing levels of data traffic. Furthermore, TELUS has developed a spectrum strategy to further strengthen its ability to deliver the mobile Internet to Canadians in the future.
10.3 Regulatory
The following are updates to Section 10.3 Regulatory of TELUS' 2009 MD&A.
TELUS' broadcasting distribution undertakings
TELUS holds licences from the CRTC to operate terrestrial broadcasting distribution undertakings to serve various communities in B.C. and Alberta (both licensed in August 2003 and renewed in 2009 for a second full seven-year term) and Eastern Quebec (licensed in July 2005). TELUS also holds a licence to operate a national video-on-demand undertaking (licensed in September 2003 and in the process of being renewed).
The CRTC held proceedings relating to local television, and on March 22, 2010, introduced a new framework to allow English-language private broadcasters to enter into negotiations with broadcasting distribution undertakings to establish a fair value of the distribution of each TV station's programming. As there is uncertainty whether the CRTC has the authority to implement a negotiation regime, the CRTC also referred this regulatory policy to the Federal Court of Appeal seeking clarification of its jurisdiction under the Broadcasting Act. Some obligations may flow to all broadcast distributors as a result of this policy framework, subject to determinations by the Federal Court of Appeal.
Foreign ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership restrictions imposed by the Telecommunications Act, the Radiocommunication Act and the Broadcasting Act and associated regulations. Although TELUS believes that TELUS Corporation and its subsidiaries are in compliance with the relevant legislation, there can be no assurance that a future CRTC, Industry Canada or Heritage Canada determination, or events beyond TELUS' control, will not result in TELUS ceasing to comply with the relevant legislation. If such a development were to occur, the ability of TELUS' subsidiaries to operate as Canadian carriers under the Telecommunications Act or to maintain, renew or secure licences under the Radiocommunication Act and Broadcasting Act could be jeopardized and TELUS' business could be materially adversely affected.
In June 2008, the Competition Policy Review Panel provided its final report to the Minister of Industry. The Panel made a number of recommendations to liberalize foreign ownership rules for the telecommunications and broadcasting sectors. TELUS anticipates that the chances for full removal of foreign ownership restrictions under a minority government are low. However, the Federal Government Throne Speech on March 3, 2010 and the Federal Budget on March 4, 2010 signalled an intention to consider opening the telecommunications services sector to further foreign investment. At present, this contemplated relaxation of the ownership and control regime appears to be confined to satellite providers and would require the enactment of legislation. It is not clear what, if any, further changes to the ownership and control regime might occur. There is a risk that government may consider a phased-in approach to liberalization that would allow increased flexibility for carriers with less than 10% national market share or allow for more access to foreign capital in upcoming spectrum auctions expected in the 2011 to 2012 timeframe.
There has also been greater uncertainty around the interpretation of the existing rules due to a recent Cabinet decision. On December 10, 2009, the Governor in Council (on behalf of the Federal Cabinet) issued Order in Council P.C. 2009-2008, in which it overturned an October 29, 2009 decision by the CRTC (Telecom Decision CRTC 2009-678) that found that wireless new entrant Globalive did not meet Canada's foreign ownership laws due to the substantial capital backing of Egypt-based Orascom Telecom. Notwithstanding the Governor in Council's claim that the decision was particular to facts of the Globalive case, it appears that a new precedent may have been set with respect to loosening foreign ownership restrictions in telecommunications, broadcasting and other sectors where the "control in fact" test has traditionally been applied. The Governor in Council's decision creates the possibility of a double standard with respect to the application of the foreign ownership and control restrictions and may render these restrictions meaningless. It is possible the government may be considering changes to the Investment Canada and Telecommunications Acts to provide it more flexibility in determining when to allow ownership arrangements deemed to be in the public interest. Relaxation or elimination of foreign ownership restrictions increases the risk that foreign-owned or financed telecommunications carriers will be increasingly able to operate in Canada, particularly in the wireless sector. On January 8, 2010, Public Mobile Inc. filed an application for judicial review with the Federal Court seeking to overturn the Governor in Council's December 10, 2009 decision declaring Globalive to be eligible to operate as a Canadian carrier. Pubic Mobile Inc.'s application for judicial review is being opposed by the Federal Government and by Globalive.
There is no assurance that resolution of uncertainty over interpretation of existing laws and regulations concerning foreign ownership restrictions that TELUS is subject to, or the manner in which they may be changed, will be beneficial to TELUS.
Risk mitigation for regulatory matters: TELUS advocates a regulatory environment that relies, to the greatest extent possible, on market forces rather than regulatory intervention. TELUS believes this is in the best interest of customers. TELUS does not oppose the removal of the foreign ownership restrictions, provided that liberalization is implemented on a fair and symmetrical basis for all telecommunications carriers and broadcast distribution undertakings.
10.4 Human resources
The following is an update to Section 10.4 Human resources of TELUS' 2009 MD&A.
National collective bargaining in 2010
The collective agreement between TELUS and the Telecommunications Workers Union (TWU) will expire on November 19, 2010. The TWU contract applies to approximately 12,000 employees across Canada in TELUS' wireline and wireless business segments. TELUS and the TWU have agreed to begin negotiations in July 2010 to renew this collective agreement. In addition, collective bargaining continues in the TELUS Québec region to renew the collective agreement with the Syndicat québécois des employés de TELUS (SQET). The SQET agreement expired on December 31, 2009, and covers approximately 1,000 trades, clerical and operator services team members.
In any set of labour negotiations, there can be no assurance that the negotiated compensation expenses or changes to operating efficiency will be as planned or that reduced productivity and work disruptions will not occur during the course of collective bargaining prior to settlement.
Risk mitigation: A governance model is in place to ensure the financial and operating impact of any proposed terms of settlement are assessed and determined to be aligned with TELUS' strategic direction. As is prudent in any round of collective bargaining, any potential need to continue operations in response to work disruptions will be addressed through contingency planning and emergency operations plans.
10.5 Litigation and legal matters
The following is an update to Section 10.9 Litigation and legal matters of TELUS' 2009 MD&A.
Certified class action
A class action was brought in 2004 under class action legislation in Saskatchewan against a number of past and present wireless service providers including the Company. The claim alleges that each of the carrier defendants is in breach of contract and has violated competition, trade practices and consumer protection legislation across Canada in connection with the collection of system access fees, and seeks to recover direct and punitive damages in an unspecified amount. Similar proceedings were commenced in other provinces. A national class was certified on September 17, 2007 by the Saskatchewan Court of Queen's Bench. On February 20, 2008, the same court removed from the class all customers of the Company who are bound by an arbitration clause, applying two recent decisions of the Supreme Court of Canada. In March 2010, the Company obtained leave to appeal the 2007 certification decision. Certification is a procedural step. If the Company is unsuccessful on appeal of the certification decision, the plaintiff would still be required to prove the merits of the claim.
A new class action making substantially the same allegations was brought in 2009 in Saskatchewan. The Company believes this was done in an attempt to take advantage of the expanded scope in class action legislation since 2004. The new class action was stayed by the court in December 2009 upon an application by the defendants to dismiss it for abuse of process, conditional on possible future changes in circumstance. In March 2010, the plaintiffs applied for leave to appeal the stay decision.
Risk mitigation: The Company believes that it has good defences to these actions. Should the ultimate resolution of these actions differ from management's assessments and assumptions, a material adjustment to the Company's financial position and the results of its operations could result.
11. Definitions and reconciliations
11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure that management uses to evaluate performance of segments and the Company. EBITDA is also utilized in measuring compliance with debt covenants. (See Section 11.4 - EBITDA excluding restructuring costs.)
EBITDA is a measure commonly reported and widely used by investors as an indicator of a company's operating performance and ability to incur and service debt, and as a valuation metric. Management's definition is a top-down calculation.
-------------------------------------------------------------------------
EBITDA (management's definition) Quarters ended March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Operating revenues 2,375 2,375
Deduct:
Operations expense 1,429 1,441
Restructuring costs 6 28
-------------------------------------------------------------------------
940 906
-------------------------------------------------------------------------
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Management believes EBITDA assists investors in comparing a company's operating performance on a consistent basis, before taking into account financing decisions and before depreciation and amortization expenses, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to Net income in measuring the Company's performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the Consolidated statements of cash flows. Investors should carefully consider the specific items included in TELUS' computation of EBITDA. While EBITDA has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance and debt servicing ability relative to other companies, investors are cautioned that EBITDA as reported by TELUS may not be comparable in all instances to EBITDA as reported by other companies.
The CICA has defined standardized EBITDA to foster comparability of non-GAAP measures between entities. Similar to management's definition of EBITDA, standardized EBITDA is an indication of an entity's capacity to generate income from operations before taking into account management's financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management's estimate of their useful life. Accordingly, standardized EBITDA comprises revenue less operating costs before interest expense, capital asset amortization and impairment charges, and income taxes. The following reconciles management's definition of EBITDA with Net income and standardized EBITDA.
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EBITDA reconciliation Quarters ended March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Net income 268 322
Financing costs 112 95
Income taxes 99 57
Depreciation 345 334
Amortization of intangible assets 108 93
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Standardized EBITDA (CICA guideline) 932 901
Other expense (income) 8 5
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EBITDA (management's definition) 940 906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Management also calculates EBITDA less capital expenditures as a simple proxy for cash flow at a consolidated level and in its two reportable segments. EBITDA less capital expenditures may be used for comparison to the reported results for other telecommunications companies over time and is subject to the potential comparability issues of EBITDA described above.
-------------------------------------------------------------------------
Quarters ended March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
EBITDA 940 906
Capital expenditures (311) (474)
-------------------------------------------------------------------------
EBITDA less capital expenditures 629 432
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11.2 Free cash flow
TELUS reports free cash flow because it is a key measure used by management to evaluate the Company's performance. Free cash flow excludes certain working capital changes and other sources and uses of cash, as found in the Consolidated statements of cash flows. Free cash flow is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to the Consolidated statements of cash flows. Free cash flow can be used to gauge TELUS' performance over time. Investors are cautioned that free cash flow as reported by TELUS may not be comparable in all instances to free cash flow as reported by other companies, and differs from standardized free cash flow defined by the CICA. Management's definition of free cash flow provides an indication of how much cash generated by operations is available after capital expenditures, but before acquisitions, proceeds from divested assets and changes in certain working capital items (such as trade receivables, which can be significantly distorted by securitization changes that do not reflect operating results, and trade payables).
The following shows management's calculation of free cash flow.
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Free cash flow calculation Quarters ended March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
EBITDA (management's definition) 940 906
Share-based compensation 1 9
Net employee defined benefit plans expense 7 4
Employer contributions to employee defined
benefit plans (45) (53)
Restructuring costs net of cash payments (49) (1)
Donations and securitization fees included
in Other expense (10) (3)
Cash interest paid (36) (49)
Cash interest received - -
Income taxes received (paid), net (251) (214)
Capital expenditures (311) (474)
-------------------------------------------------------------------------
Free cash flow (management's definition) 246 125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The CICA defined standardized free cash flow to foster comparability of non-GAAP measures between entities. Standardized free cash flow is an indication of the entity's capacity to generate discretionary cash from operations, comprising cash flows from operating activities less net capital expenditures and those dividends that are more representative of interest costs. It does not necessarily represent the cash flow in the period available for management to use at its discretion, which may be affected by other sources and non-discretionary uses of cash. The following reconciles management's definition of free cash flow with standardized free cash flow and Cash provided by operating activities.
-------------------------------------------------------------------------
Free cash flow reconciliation Quarters ended March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Cash provided by operating activities 414 614
Deduct capital expenditures (311) (474)
Proceeds from disposition of capital assets - -
-------------------------------------------------------------------------
Standardized free cash flow (CICA guideline) 103 140
Amortization of deferred gains on
sale-leaseback of buildings, amortization
of deferred items and other, net 1 (20)
Reduction (increase) in securitized
accounts receivable 100 -
Non-cash working capital changes, except
changes from income tax payments (receipts),
interest payments (receipts) and securitized
accounts receivable 42 5
Proceeds from disposition of capital assets - -
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Free cash flow (management's definition) 246 125
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n/a - not applicable
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11.3 Definitions of wireless operating indicators
These measures are industry metrics and are useful in assessing the operating performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as Network revenue divided by the average number of subscriber units on the network during the period and expressed as a rate per month. Data ARPU is a component of ARPU, calculated on the same basis for revenue derived from services such as text messaging, mobile computing, personal digital assistance devices, Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units disconnected during a given period divided by the average number of subscriber units on the network during the period, and expressed as a rate per month. A prepaid subscriber is disconnected when the subscriber has no usage for 90 days following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies, commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as cost of acquisition divided by gross subscriber activations during the period.
EBITDA excluding COA is a measure of operational profitability normalized for the period costs of adding new customers.
Retention spend to Network revenue is calculated as direct costs, including handset subsidies any associated marketing and promotional costs aimed at the retention of the existing subscriber base, divided by Network revenue.
Smartphones are advanced mobile devices or personal digital assistants (PDAs) that provide text messaging, email, multimedia downloads and social networking (e.g. Facebook Mobile) functionalities in addition to voice. TELUS reports smartphones as a percentage of gross postpaid subscriber additions and as a percentage of the postpaid subscriber base.
11.4 Definitions of liquidity and capital resource measures
Dividend payout ratio and dividend payout ratio of adjusted net earnings: The basic measure is defined as the quarterly dividend declared per Common Share and Non-Voting Share, as recorded on the financial statements, multiplied by four and divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods (divided by annual basic earnings per share for fiscal years). The target guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 55 to 65% of sustainable net earnings. More representative of a sustainable calculation is the historical ratio based on reported earnings per share adjusted to exclude income tax-related adjustments, loss on redemption of long-term debt, and ongoing impacts of a net-cash settlement feature introduced in 2007.
EBITDA - excluding restructuring costs is used in the calculation of Net debt to EBITDA and EBITDA interest coverage, consistent with the calculation of the Leverage Ratio and the Coverage Ratio in credit facility covenants. Restructuring costs were $168 million and $80 million, respectively, for the 12-month periods ended March 31, 2010 and 2009.
EBITDA - excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs divided by Net interest cost. Historically, this measure is substantially the same as the Coverage Ratio covenant in TELUS' credit facilities.
Interest coverage on long-term debt (earnings coverage) is calculated on a 12-month trailing basis as Net income before interest expense on long-term debt and income tax expense, divided by interest expense on long-term debt. Interest expense on long-term debt includes losses on redemption of long-term debt. The calculation is based on total long-term debt, including long-term debt due within one year.
Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term debt, including Current maturities of long-term debt, as reconciled below. Net debt is one component of a ratio used to determine compliance with debt covenants (refer to the description of Net debt to EBITDA below).
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As at March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Long-term debt including current portion 6,154 6,512
Debt issuance costs netted against long-term debt 29 27
Derivative liability 747 651
Accumulated other comprehensive income amounts
arising from financial instruments used to
manage interest rate and currency risks
associated with U.S. dollar denominated debt
(excluding tax effects) (49) (124)
Cash and temporary investments (46) (65)
Proceeds from securitized accounts receivable 400 300
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Net debt 7,235 7,301
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The derivative liability in the table above relates to cross currency interest rate swaps that effectively convert principal repayments and interest obligations to Canadian dollar obligations, and is in respect of the U.S.$1,348 million debenture, as at March 31, 2010 (U.S.$1,925 million at March 31, 2009) that matures June 1, 2011. Management believes that Net debt is a useful measure because it incorporates the exchange rate impact of cross currency swaps put into place that fix the value of U.S. dollar debt and because it represents the amount of long-term debt obligations that are not covered by available cash and temporary investments.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing EBITDA - excluding restructuring costs. TELUS' long-term guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt used in the Company's capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. No gains on redemption and repayment of debt were recorded in the respective periods. Losses recorded on the redemption of long-term debt are included in net interest cost. Net interest costs for the 12-month periods ended March 31, 2010 and 2009 are equivalent to Financing costs reported for those periods.
Total capitalization - book value is calculated as Net debt plus Owners' equity, excluding accumulated other comprehensive income or loss:
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As at March 31
-------------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Net debt 7,235 7,301
Owners' equity
Common Share and Non-Voting Share equity 7,709 7,290
Add back Accumulated other comprehensive loss 56 100
Non-controlling interests 21 24
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Total capitalization - book value 15,021 14,715
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For further information: Media relations: Shawn Hall, (604) 619-7913, [email protected]; Investor relations: Robert Mitchell, (416) 279-3219, [email protected]
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