Strong growth in net income of 21% and free cash flow of 67%
Improving wireless trends in ARPU, subscriber additions and churn
TELUS TV additions of 29,000 lead to doubling of
subscriber base in last year
VANCOUVER, Aug. 6 /CNW/ - TELUS Corporation reported second quarter 2010 revenue of $2.4 billion, an increase of one per cent, as continued growth in wireless revenues and wireline data revenues more than offset declines in traditional voice services. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased by five per cent due to revenue growth, lower restructuring costs and ongoing benefits from efficiency initiatives.
Reported net income and EPS for the second quarter were $296 million and 92 cents, respectively, representing year-over-year increases of 21 and 19 per cent. When excluding for positive income tax-related adjustments, normalized net income and EPS were $286 million and 89 cents, respectively, increases of 27 and 25 per cent. Second quarter results included favourable income tax-related adjustments of approximately $10 million or three cents per share compared to $18 million or six cents in the same period a year ago.
Free cash flow of $241 million increased by 67 per cent from a year ago, primarily due to capital expenditures being $160 million lower, which was partially offset by cash income tax payments being $50 million higher.
Over the 12 month period, total customer connections increased by 288,000, driven by a 6.5 per cent increase in wireless subscribers and 98 per cent growth in TELUS TV customers, partially offset by continued declines in landline connections.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ and in millions, except per share amounts 3 months ended
June 30
(unaudited) 2010 2009 % Change
-------------------------------------------------------------------------
Operating revenues 2,398 2,377 0.9
Operations expense 1,460 1,451 0.6
Restructuring costs 19 53 (64.2)
EBITDA(1) 919 873 5.3
Net income(2) 296 244 21.3
Earnings per share (EPS), basic(2) 0.92 0.77 19.5
EPS (excluding income-tax related adjustments) 0.89 0.71 25.4
Capital expenditures 397 557 (28.7)
Free cash flow(3) 241 144 67.4
Total customer connections (millions)(4) 11.98 11.69 2.5
(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 second quarter
Management's discussion and analysis.
(2) Net income and EPS for the second quarter of 2010 included favourable
income tax-related adjustments of approximately $10 million or
3 cents per share, compared to $18 million or 6 cents per share
respectively for the same period in 2009.
(3) See Section 11.2 in 2010 second quarter Management's discussion and
analysis.
(4) The sum of wireless subscribers, network access lines (NALs),
Internet access subscribers, and TELUS TV subscribers (IP TV and
satellite TV). In addition, historical residential and business NALs
reflect previously announced restatements.
"Our second quarter results demonstrate that our major strategic investments in broadband networks and operating efficiency are driving improved growth in wireless and data revenues, 25 per cent growth in underlying earnings per share and 67 per cent growth in free cash flow," said Darren Entwistle, TELUS president and CEO.
Mr. Entwistle stated, "these results demonstrate strong progress during this transition year for our company as we increasingly realize the benefits from our broadband wireline and wireless investments."
Mr. Entwistle noted, "wireless operational performance was robust this quarter with excellent customer net additions up 12 per cent to 124,000, combined with a continued improving trend in monthly revenue per subscriber - down modestly at 1.9 per cent - and our lowest customer churn rate in two years."
"TELUS is offering Canadian customers competitive choice with the newest devices like the iPhone 4," added Mr. Entwistle. "Moreover, Canada's fastest mobile network is about to get even faster using cost efficient HSPA+ Dual Cell technology - in coming months manufacturer rated speeds will double to up to 42 megabits per second."
Mr. Entwistle also commented, "TELUS continues to demonstrate leadership and innovation for the benefit of consumers with the recent launch of Optik TV powered by Microsoft Mediaroom with the advanced functionality of PVR Anywhere. Optik TV clients are among the first globally to be able to use the Xbox 360 as a digital set top box. Furthermore, we are now providing customers the flexibility to manage their PVR by using Remote Recording over the Web or iPhone while they are on the move."
Robert McFarlane, TELUS executive vice-president and CFO said "TELUS in late July again demonstrated ready access to the capital markets with our notable $1 billion 10-year notes issue at an attractive 5.05% coupon. This successful outcome has been earned due to our transparent and prudent financial policies, our strong balance sheet, and management's long-term track record for execution against TELUS' public objectives and policies."
The company reaffirmed its consolidated annual 2010 EBITDA, EPS and capital expenditure guidance set in mid-December 2009. Wireless revenue and EBITDA guidance was maintained as was wireline EBITDA. Consolidated and wireline revenue guidance has been reduced by one to one and a half percent and two to three per cent, respectively. See section 9 in MD&A for updated detail on guidance, status and assumptions.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
This news release contains statements about expected future events and
financial and operating performance of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and predictions 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 performance 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 and second quarter reports.
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 $71 million or 6.2% to $1.2 billion in
the second quarter of 2010, compared to the same period a year ago,
driven by a 4% increase in network revenue, as well as a 49% increase
in equipment and other revenue, which included revenue from Black's
Photo acquired in September 2009.
- Data revenue of $273 million increased by $57 million or 26% due to
increased adoption of smartphones and related data plans and
applications, increased mobile Internet keys, and higher in-bound
volumes of data roaming.
- Blended ARPU (average revenue per subscriber unit) per month declined
by 1.9% to $57.47 from the same quarter a year ago reflecting a
sequential improvement from the 4.4% decline in the first quarter of
2010. The improving trend is due to a lower rate of decline in voice
ARPU and a higher rate of increase in data ARPU, which increased by
19% to $13.80.
- Total net subscriber additions of 124,000 increased by 12% over the
same period a year ago. Higher value postpaid net additions increased
15% to 109,000. Smartphone subscribers now represent 25% of total
postpaid subscribers compared to 16% a year ago.
- Cost of acquisition per gross addition increased by 10% year-over-year
to $342, reflecting higher per-unit subsidy (including a one-time
settlement for prior periods) and commission costs driven by a higher
smartphone mix, higher advertising and promotion expenditures for new
device launches, partly offset by a favourable U.S. dollar exchange
rate.
- Cost of retention of $112 million decreased slightly by $2 million,
reflecting a favourable U.S. dollar exchange rate, lower commissions
per subscriber, partly offset by higher retention volumes and
equipment subsidy costs from increased migrations to higher cost
smartphones.
- Blended monthly subscriber churn improved 10 basis points to 1.45%,
reflecting improving economic conditions, availability of new handsets
including the iPhone, and successful retention efforts.
- Wireless EBITDA of $523 million increased by 6.1% due to improved data
revenue growth and lower bad debt expense.
- Simple cash flow (EBITDA less capital expenditures) increased by
$120 million or 39% to $424 million in the quarter due to higher
EBITDA and a $90 million reduction in capital spending due to the
November 2009 completion of the new HSPA+ wireless network.
TELUS wireline
- External revenues decreased by $50 million or 4.1% to $1.2 billion in
the second 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 $27 million or 5.1%, reflecting TELUS TV
subscriber growth, higher managed workplace revenues and increased
Internet, enhanced data and hosting services.
- TELUS high-speed Internet net additions of 3,000 were unchanged from a
year ago, due to ongoing competitive intensity and a maturing market.
- TELUS TV net additions were 29,000, an increase of 71% over the same
period last year, due to improved installation capabilities, enhanced
service including PVR Anywhere, investment in expanded broadband
coverage, and addition of TELUS Satellite TV service in mid-2009.
TELUS TV subscriber base now totals 228,000 up 98% over last year.
- Total network access lines (NALs) declined by 63,000 to 3.85 million,
down 5.6% from a year ago. Residential NAL losses of 51,000 increased
due to intense cable-TV competition and wireless substitution.
Business NALs declined by 12,000 primarily in Western Canada from
competitive factors, which more than offset increased data lines in
Ontario and Quebec.
- Wireline EBITDA of $396 million increased by $16 million or 4.2% in
large part due to lower restructuring costs and operational savings
from efficiency initiatives.
- Simple cash flow (EBITDA less capital expenditures) increased by $86
million to $98 million due to higher EBITDA and a $70 million
reduction in capital spending.
CORPORATE AND BUSINESS DEVELOPMENTS
TELUS unleashes Optik
TELUS' ongoing investment in the expansion of its fibre optic network has given the company the capacity needed to introduce Western Canadians to the most compelling home entertainment services on the market.
TELUS is revolutionizing home entertainment and communications with a new suite of advanced TV and High Speed Internet services - newly branded as Optik in June. The TELUS team has tapped the latest fibre optic and IP technologies to bring customers the most advanced home services - Optik TV, powered by the award-winning Microsoft Mediaroom, and Optik High Speed, offering Internet access speeds of up to 15 megabits per second that can be accessed anywhere in the customers household with home Wi-Fi.
Optik TV offers PVR Anywhere, networking up to six TVs in the home with one multi-tuner PVR so customers can pause a recorded show or movie in one room and pick it up in another from where they left off. It also brings TELUS customers video on demand with DVD-style controls, picture-in-picture browsing, fast channel changing and on-screen call display.
TELUS Optik TV customers among first in world to use Xbox 360 as digital set top box
The Xbox 360 is a first-class home entertainment and gaming system that Optik TV customers can now use as a digital set top box. Beginning in August, the Microsoft Mediaroom software that powers Optik TV also supports delivery of Optik TV to the Xbox 360 to provide great functionality for watching television anywhere in the home.
TELUS is among the first TV providers in the world to offer this innovative capability with the Xbox 360. All the features of TELUS' popular Optik TV service now become available directly via the Xbox 360 console. This means that customers can use an Xbox 360 as a digital set top box to:
- Access any of Optik TV's over 400 TV channels including over 50 in HD
- Watch any shows that they have recorded on their Optik HD PVR digital
box
- Use PVR Anywhere to record up to three shows simultaneously from any
room
- Get PVR functionality from any TV when watching recorded programs -
pause, replay, rewind and fast-forward.
With the Xbox 360 console, Optik TV delivers the ultimate integration of gaming and entertainment on one platform. In addition to being able to watch recorded shows and schedule recordings, subscribers can also use the Xbox 360 console to access digital photos and digital music libraries on the TV via their home wireless network and connected Windows PC.
TELUS HEALTH SPACE launched
TELUS HEALTH SPACE, Canada's first consumer health platform to achieve Canada Health Infoway pre-implementation certification for providing a secure, interoperable application environment and personal health information platform, was launched on May 31. Twelve leading national health organizations are collaborating with TELUS to embed life-changing applications, medical devices and educational materials into TELUS HEALTH SPACE.
Powered by Microsoft HealthVault, TELUS HEALTH SPACE is a cutting-edge, high-security data storage and sharing service where individual Canadians will be able to keep all their personal healthcare information - such as lab results and prescription information - in an online database for access over any Internet connection. With the user-friendly TELUS HEALTH SPACE application, Canadians can create, store and manage all aspects of their health information and that of their family, such as immunizations, allergies, medications, height, weight, symptoms, key medical measurements, pre-existing conditions, as well as their medical history.
TELUS issues $1 billion of long-term debt to fund early redemption of 2011 Notes
In July, TELUS successfully completed a public offering of 10-year Canadian dollar notes, raising $1 billion. The net proceeds of the new 5.05% notes are to be used to fund the early partial redemption of the 8% US dollar notes due in June 2011 and terminate associated cross-currency interest rate swaps. The early redemption is expected to cause a pre-tax charge of approximately $58 million or after tax a 13 cent negative impact to third quarter 2010 EPS.
The first early redemption occurred in December 2009 with proceeds of a 10-year $1 billion notes issue. This second partial redemption reduces refinancing risk in 2011 as two thirds of the originally maturing C$3 billion of the swapped US 8% notes have now been refinanced. This US debt has an effective yield of approximately 8.5% and is being refinanced at lower interest rates of approximately five per cent. Another important benefit is that TELUS is successfully balancing the company's overall debt maturity profile out over many years so as to reduce the risk of having large amounts of debt coming due in any one year. Finally, the average total debt maturity has now been extended by 1.3 years to almost six years.
TELUS answers Canada's smartphone craving with award winning HTC Desire
TELUS announced an important addition to its leading 3G+ Android powered device line-up with the July launch of HTC Desire, with Android 2.1. This device was named Hottest Handset of 2010 at Mobile Magazine's 2010 Mobile Industry Awards. Featuring a large, crisp touchscreen, HTC Desire is being called the perfect Android powered smartphone to personalize and access social networks, including the most popular Google apps, such as free Google Navigation and Youtube and choosing from over 50,000 apps in the Android Market. Multiple social networks such as Twitter, Facebook and Flickr are easy to follow and update in a single view with HTC's Friend Stream app. Users can expect a more vivid view of rich web pages for embedded videos on the touchscreen and the ability to navigate with double-tap, multi-touch, and pinch and zoom. The 3.7 inch touchscreen and powerful 1 GHz Qualcomm Snapdragon processor, combined with HTC Sense and the fast speed of TELUS' 3G+ network, should make this smartphone incredibly responsive.
TELUS and the CFL team-up to bring Canadians mobile app
In July the CFL named TELUS as their official wireless provider bringing fans the first-ever CFL mobile app, called TELUS CFL Mobile. The premier app offers Canadians mobile access to live streaming of all games, real time scoring and exclusive content for TELUS customers with special in-game and on-demand features to complement live video streaming. TELUS CFL Mobile is now available on BlackBerries and will be available on other select Smartphones.
TELUS launches the Smart Hub 3G+ Wi-Fi Router with voice
TELUS launched its first TELUS Smart Hub 3G+ Wi-Fi router with voice that allows users to share their high speed Internet connection wirelessly across multiple devices and plug in an analog phone for voice services. Developed by NetComm Limited, the TELUS Smart Hub operates on TELUS' 3G+ network and is designed to support both voice and data traffic. Capable of connecting multiple Wi-Fi enabled devices simultaneously, the TELUS Smart Hub offers the benefits of a landline experience wirelessly.
TELUS Data Notifications helps customers manage data usage
In June, TELUS introduced a free SMS notification system called TELUS Data Notifications, informing wireless customers when they are nearing their data thresholds. The automatic service alerts customers when they are close to using all of the data included with their monthly rate plan or add-on feature so they can better manage their data usage. For customers with data packages, SMS notifications are sent informing customers when they have reached both 75 per cent and 95 per cent of their data thresholds. For customers using pay per-use data, SMS notifications will be sent when customers have used $10 and $50. These alerts will work in Canada and while roaming in the U.S. and Internationally.
TELUS to increase Canada's fastest wireless data network speeds
TELUS in August announced Canada's fastest* mobile network is to get even faster by deploying HSPA+ Dual Cell technology. TELUS will increase manufacturer-rated maximum download speeds to up to 42 Mbps when network deployment is complete in Canadian cities and towns. Dual Cell capable devices starting with Mobile Internet keys are expected to be commercially available starting in the first quarter of 2011. Canadians are amongst the most sophisticated users of wireless data in the world, and TELUS is committed to meeting their growing needs with the best technology available anywhere.
By leveraging the investment TELUS has already made in its 3G+ network, the company is able to support the deployment of Dual Cell technology with a small investment that is within TELUS' overall capital expenditure guidance for 2010. The implementation of HSPA+ and Dual Cell technology are expected to provide an optimal future transition to 4G long-term evolution (LTE) technology.
*Based on TELUS' tests of data throughput speeds in large Canadian urban centres available from national HSPA+ service providers. Internet access speed provided by the network operator may vary due to the device being used, network congestion, distance from the cell site, local conditions and other factors. Speed on the Internet is beyond the wireless network operator's control and may vary with your configuration, Internet traffic, website server and management policies, and other factors.
TELUS builds IP next-generation network cloud services
In partnership with Cisco, TELUS announced in June that it was enhancing its service delivery network using Cisco Unified Service Delivery. The solution combines the power of the data centre with the power of the network to transform service delivery and build a foundation for Internet-based "cloud" computing services to deliver the best-in-class managed services and offer a comprehensive range of innovative data and communication services. The investment helps to enable the interconnectivity of TELUS' diverse data centres to increase efficiencies and on-demand service delivery to customers.
François Gratton selected as "Top 40 Under 40"
François Gratton, senior vice-president, Business Markets for TELUS Québec, was selected in the 2009 Top 40 Under 40. François Gratton is one of the 40 Canadians and 8 Quebecers under 40 years old to be chosen from 1,200 leaders from private, public and non-profit organization across Canada. The winners of the Top 40 Under 40 are chosen by an independent advisory board of 25 Canadian business leaders. The judges base their choices on five key criteria: vision and leadership, innovation and achievement, impact, community involvement and growth strategy.
Environmentally friendly TELUS House Toronto opened
TELUS officially opened the doors of its new green office tower, TELUS House Toronto, home to 1,600 team members. TELUS House Toronto is environmentally future-friendly, targeting gold LEED (Leadership in Energy and Environmental Design) certification, an internationally accepted benchmark for design, construction, and operation of high-performance sustainable buildings. The 30-storey office tower offers street-level access as the newest leg of the PATH connecting team members and Toronto commuters to the busiest transit hub in the country. TELUS House Toronto brings together 15 offices across the Greater Toronto Area and houses some of the most advanced technology innovations like super high definition virtual meeting rooms called Telepresence, which is helping to reduce travel costs at TELUS.
Volunteers make a difference on fifth TELUS Day of Service
On May 29, the fifth annual TELUS Day of Service took place across Canada. On this one special day, TELUS team members and retirees mobilized in a massive nationwide volunteer effort to make positive, lasting connections within their communities. This year a record 10,000 TELUS volunteers, friends and family from coast-to-coast came together to give and support the communities where they live, work and serve. Over 175 volunteer activities were organized, which included preparing and serving meals for the homeless and those in need, planting trees and plants in parks and gardens and donating blood for Canadian Blood Services. TELUS Day of Service is part of TELUS' overall commitment to Corporate Social Responsibility in which we strive to engrain the triple bottom line of sound economic, social and environmental sustainability practices into all aspects of our business.
TELUS tops up Jeneece Place campaign to $1 million after TELUS World Skins Game
At this year's TELUS World Skins Game, TELUS partnered with the Queen Alexandra Foundation for Children, to have all funds raised going to Jeneece Place. TELUS started its fundraising efforts for Jeneece Place last July, when TELUS president and CEO Darren Entwistle announced that the 2010 TELUS World Skins Game would be held at Bear Mountain, in Victoria B.C. and kicked-off the fundraising with a $100,000 donation. At the closing of the 2010 TELUS World Skins Game on June 22, TELUS announced that it had raised $1 million for Jeneece Place through its donations and fundraisers, including donating $100 on behalf of every new Optik TV customer on Vancouver Island. Jeneece Place will provide accommodation for children and their families who need to travel to Victoria for care at Victoria General Hospital, the Queen Alexandra Centre or for specialist appointments and lab tests.
TELUS Walk to Cure Diabetes
In June, Juvenile Diabetes Research Foundation's (JDRF) biggest fundraiser, the TELUS Walk to Cure Diabetes, swept across Canada. TELUS team members and retirees, friends and family were excited to be shoulder-to-shoulder with JDRF on the third annual TELUS Walk to Cure Diabetes. More than 300,000 Canadians are currently affected by this devastating disease that can suddenly strike both children and adults, leaving them dependent on injected or pumped insulin for life. This annual, family-focused event raises awareness of type 1 diabetes as well as raises funds that are necessary to continue research towards finding a cure and improving treatments for this disease. More than 45,000 Canadians take part in the TELUS Walk annually and this year's fundraising goal is $7.5 million. Together, we can help find a cure for Juvenile Diabetes and make a real difference to current and future generations of Canadian children.
Go Pink with TELUS bringing digital mammography to Canadian communities
TELUS in cooperation with certain healthcare facilities across Canada launched a campaign to make a 'pink' difference and help bring digital mammography to various communities. Between May and October 31, 2010, TELUS is donating $25 for each purchase of a pink BlackBerry Curve 8530 or the pink BlackBerry Pearl 3G smartphone available only at TELUS. Digital mammography enhances early detection of breast cancer for women and men. The coast-to-coast campaign has already raised more than $300,000 and is funding innovative breast cancer technology in healthcare facilities across Canada, including: BC Women's Hospital & Health Centre Foundation, Alberta Cancer Foundation, Saskatchewan Cancer Agency, CancerCare Manitoba, Princess Margaret Hospital Foundation in Toronto, The Ottawa Hospital Foundation, Segal Cancer Center at the Montreal Jewish General Hospital and QEII Health Sciences Centre in Halifax.
Dividend Declaration
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 October 1, 2010 to holders of record at the close of business on September 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 October 1, 2009.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings release, management's discussion and analysis, 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 August 6, 2010 at 11:00 am ET and will feature a presentation about our second 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 August 6 until August 16, 2010 at: telus.com/investors or by telephone (1-403-669-1055 or 1-877-353-9587, reservation no. 371224 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 12 million customer connections including 6.7 million wireless subscribers, 3.8 million wireline network access lines and 1.2 million Internet subscribers and 228,000 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)
Periods ended June 30
(millions except per Three months Six months
share amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,398 $ 2,377 $ 4,773 $ 4,752
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,460 1,451 2,889 2,892
Restructuring costs 19 53 25 81
Depreciation 316 330 661 664
Amortization of intangible
assets 91 94 199 187
-------------------------------------------------------------------------
1,886 1,928 3,774 3,824
-------------------------------------------------------------------------
OPERATING INCOME 512 449 999 928
Other expense, net 6 11 14 16
Financing costs 114 106 226 201
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 392 332 759 711
Income taxes 96 88 195 145
-------------------------------------------------------------------------
NET INCOME 296 244 564 566
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Change in unrealized fair
value of derivatives
designated as cash flow
hedges 2 (2) 19 27
Foreign currency translation
adjustment arising from
translating financial
statements of self-sustaining
foreign operations - (9) (1) (8)
Change in unrealized fair
value of available-for-sale
financial assets - 1 - 1
-------------------------------------------------------------------------
2 (10) 18 20
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 298 $ 234 $ 582 $ 586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME ATTRIBUTABLE TO:
Common Shares and Non-Voting
Shares $ 295 $ 243 $ 562 $ 564
Non-controlling interests 1 1 2 2
-------------------------------------------------------------------------
$ 296 $ 244 $ 564 $ 566
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME
ATTRIBUTABLE TO:
Common Shares and Non-Voting
Shares $ 297 $ 233 $ 580 $ 584
Non-controlling interests 1 1 2 2
-------------------------------------------------------------------------
$ 298 $ 234 $ 582 $ 586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
AND NON-VOTING SHARE)
Basic $ 0.92 $ 0.77 $ 1.76 $ 1.78
Diluted $ 0.92 $ 0.77 $ 1.76 $ 1.78
DIVIDENDS DECLARED PER
COMMON SHARE AND NON-VOTING
SHARE $ 0.50 $ 0.475 $ 0.975 $ 0.95
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND NON-VOTING
SHARES OUTSTANDING
Basic 319 318 319 318
Diluted 320 318 319 318
TELUS Corporation
interim consolidated statements of financial position (unaudited)
June 30, December 31,
As at (millions) 2010 2009
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 41 $ 41
Accounts receivable 780 694
Income and other taxes receivable 152 16
Inventories 173 270
Prepaid expenses 217 105
Derivative assets 6 1
-------------------------------------------------------------------------
1,369 1,127
-------------------------------------------------------------------------
Non-Current Assets
Property, plant, equipment and other, net 7,618 7,729
Intangible assets, net 5,096 5,148
Goodwill, net 3,572 3,572
Other long-term assets 1,686 1,602
Investments 41 41
-------------------------------------------------------------------------
18,013 18,092
-------------------------------------------------------------------------
$ 19,382 $ 19,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,274 $ 1,385
Income and other taxes payable 6 182
Restructuring accounts payable and accrued
liabilities 83 135
Dividends payable 161 150
Advance billings and customer deposits 560 674
Current maturities of long-term debt 1,463 82
Current portion of derivative liabilities 721 62
Current portion of future income taxes 417 294
-------------------------------------------------------------------------
4,685 2,964
-------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt 4,740 6,090
Other long-term liabilities 673 1,271
Future income taxes 1,380 1,319
-------------------------------------------------------------------------
6,793 8,680
-------------------------------------------------------------------------
Total Liabilities 11,478 11,644
-------------------------------------------------------------------------
Owners' Equity
Common Share and Non-Voting Share equity 7,882 7,554
Non-controlling interests 22 21
-------------------------------------------------------------------------
7,904 7,575
-------------------------------------------------------------------------
$ 19,382 $ 19,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Periods ended June 30 Three months Six months
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 296 $ 244 $ 564 $ 566
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and
amortization 407 424 860 851
Future income taxes 146 132 177 121
Share-based compensation 6 11 7 20
Net employee defined
benefit plans expense 7 5 14 9
Employer contributions to
employee defined benefit
plans (44) (51) (89) (104)
Restructuring costs, net
of cash payments (3) 31 (52) 30
Other (5) 3 (6) 23
Net change in non-cash
working capital (287) 53 (538) (50)
-------------------------------------------------------------------------
Cash provided by operating
activities 523 852 937 1,466
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (397) (557) (708) (1,031)
Proceeds from the sale of
property and other assets - - 3 -
Other 8 5 9 1
-------------------------------------------------------------------------
Cash used by investing
activities (389) (552) (696) (1,030)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting
Shares issued 2 - 2 1
Dividends paid to holders of
Common Shares and
Non-Voting Shares (120) (151) (249) (302)
Long-term debt issued 878 2,599 1,753 6,173
Redemptions and repayment of
long-term debt (899) (2,783) (1,746) (6,282)
Dividends paid by a
subsidiary to
non-controlling interests - (4) (1) (4)
-------------------------------------------------------------------------
Cash provided (used) by
financing activities (139) (339) (241) (414)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash
and temporary investments,
net (5) (39) - 22
Cash and temporary
investments, net,
beginning of period 46 65 41 4
-------------------------------------------------------------------------
Cash and temporary
investments, net, end of
period $ 41 $ 26 $ 41 $ 26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS
Interest (paid) $ (185) $ (184) $ (221) $ (233)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ - $ 35 $ - $ 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive of
Investment Tax Credits)
(paid) received, net $ (58) $ (8) $ (309) $ (222)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information (unaudited)
Three-month periods ended
June 30 Wireline Wireless
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,181 $ 1,231 $ 1,217 $ 1,146
Intersegment revenue 40 31 9 7
-------------------------------------------------------------------------
1,221 1,262 1,226 1,153
-------------------------------------------------------------------------
Operating expenses
Operations expense 806 833 703 656
Restructuring costs 19 49 - 4
-------------------------------------------------------------------------
825 882 703 660
-------------------------------------------------------------------------
EBITDA(1) $ 396 $ 380 $ 523 $ 493
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 298 $ 368 $ 99 $ 189
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 98 $ 12 $ 424 $ 304
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods ended
June 30 Eliminations Consolidated
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,398 $ 2,377
Intersegment revenue (49) (38) - -
-------------------------------------------------------------------------
(49) (38) 2,398 2,377
-------------------------------------------------------------------------
Operating expenses
Operations expense (49) (38) 1,460 1,451
Restructuring costs - - 19 53
-------------------------------------------------------------------------
(49) (38) 1,479 1,504
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 919 $ 873
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 397 $ 557
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 522 $ 316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (from above) $ 919 $ 873
Depreciation 316 330
Amortization 91 94
---------------------------------------------
Operating income 512 449
Other expense, net 6 11
Financing costs 114 106
---------------------------------------------
Income before income
taxes 392 332
Income taxes 96 88
---------------------------------------------
Net income $ 296 $ 244
---------------------------------------------
---------------------------------------------
Six-month periods ended
June 30 Wireline Wireless
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ 2,379 $ 2,476 $ 2,394 $ 2,276
Intersegment revenue 76 64 16 14
-------------------------------------------------------------------------
2,455 2,540 2,410 2,290
-------------------------------------------------------------------------
Operating expenses
Operations expense 1,593 1,667 1,388 1,303
Restructuring costs 23 75 2 6
-------------------------------------------------------------------------
1,616 1,742 1,390 1,309
-------------------------------------------------------------------------
EBITDA(1) $ 839 $ 798 $ 1,020 $ 981
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 550 $ 646 $ 158 $ 385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 289 $ 152 $ 862 $ 596
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six-month periods ended
June 30 Eliminations Consolidated
(millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 4,773 $ 4,752
Intersegment revenue (92) (78) - -
-------------------------------------------------------------------------
(92) (78) 4,773 4,752
-------------------------------------------------------------------------
Operating expenses
Operations expense (92) (78) 2,889 2,892
Restructuring costs - - 25 81
-------------------------------------------------------------------------
(92) (78) 2,914 2,973
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 1,859 $ 1,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 708 $ 1,031
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,151 $ 748
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (from above) $ 1,859 $ 1,779
Depreciation 661 664
Amortization 199 187
---------------------------------------------
Operating income 999 928
Other expense, net 14 16
Financing costs 226 201
---------------------------------------------
Income before income
taxes 759 711
Income taxes 195 145
---------------------------------------------
Net income $ 564 $ 566
---------------------------------------------
---------------------------------------------
(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 Q2
-------------------------------------------------------------------------
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 and brand competition; the
expectation that new wireless competitors will launch or expand services
in 2010 and 2011 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
and repair 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 a tentative
collective agreement reached in the TELUS Québec region and the start of
collective bargaining for 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 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 (MD&A), as well as
updates in TELUS' 2010 first quarter MD&A and this second quarter MD&A.
-------------------------------------------------------------------------
Management's discussion and analysis (MD&A)
August 4, 2010
The following sections are a discussion of the consolidated financial position and financial performance of TELUS Corporation for the three-month and six-month periods ended June 30, 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 second quarter and first six
months of 2010
-------------------------------------------------------------------------
2. Core business and A discussion of activities in support of
strategy 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 second quarter and
first six months of 2010
-------------------------------------------------------------------------
6. Changes in financial A discussion of changes in the
position Consolidated statements of financial
position for the six-month period ended
June 30, 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 that
estimates and accounting 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' revised guidance 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) Canadian 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.
1.2 Canadian economy
Canada's economy emerged from recession in the third quarter of 2009, with economic growth continuing through the second quarter of 2010. Statistics Canada's June 2010 Labour Force Survey reported the unemployment rate was 7.9%, down from 8.5% in December 2009 and 8.6% in June 2009. The Bank of Canada reported in its July 2010 Monetary Report that it expects economic growth of 3.5% in 2010, 2.9% in 2011 and 2.2% in 2012, which is more gradual than predicted in its April Monetary Report. The Bank of Canada also expects Canada's economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.
In the context of a continuing economic recovery in Canada and TELUS' operating performance in the first half of 2010, management has revised its annual targets for 2010, as described in Section 9.
1.3 Consolidated highlights
-------------------------------------------------------------------------
Six-month periods
($ millions, unless Quarters ended June 30 ended June 30
noted otherwise) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Consolidated statements
of income
-------------------------------------------------------------------------
Operating revenues 2,398 2,377 0.9 % 4,773 4,752 0.4 %
Operating income 512 449 14.0 % 999 928 7.7 %
Income before income
taxes 392 332 18.1 % 759 711 6.8 %
Net income 296 244 21.3 % 564 566 (0.4)%
Earnings per share
(EPS)(1) basic and
diluted ($) 0.92 0.77 19.5 % 1.76 1.78 (1.1)%
Cash dividends
declared per
share(1) ($) 0.50 0.475 5.3 % 0.975 0.95 2.6 %
Average shares(1)
outstanding - basic
(millions) 319 318 0.3 % 319 318 0.3 %
-------------------------------------------------------------------------
Consolidated statements
of cash flows
-------------------------------------------------------------------------
Cash provided by
operating activities 523 852 (38.6)% 937 1,466 (36.1)%
Cash used by investing
activities 389 552 (29.5)% 696 1,030 (32.4)%
Capital expenditures 397 557 (28.7)% 708 1,031 (31.3)%
Cash used by financing
activities 139 339 (59.0)% 241 414 (41.8)%
-------------------------------------------------------------------------
Subscribers and other
measures
-------------------------------------------------------------------------
Subscriber connections(2)
(thousands) 11,979 11,691 2.5 %
EBITDA(3) 919 873 5.3 % 1,859 1,779 4.5 %
Free cash flow(3) 241 144 67.4 % 487 269 81.0 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA -
excluding restructuring
costs (times) 1.9 1.9 -
Dividend payout ratio
of adjusted net
earnings(5) (%) 66 58 8 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. In addition, NALs at
June 30, 2009, reflect previously announced 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 for the four quarters ended June 30,
2010, excluding favourable income tax-related adjustments of
30 cents, loss on redemption of long-term debt of 22 cents in
December 2009, and minor impacts from a net-cash settlement feature.
Earnings per share for the four quarters ended June 30, 2009,
excluding 33 cents per share favourable income tax-related
adjustments and minor impacts from a net-cash settlement feature.
-------------------------------------------------------------------------
Highlights from operations, including a comparison of results for the second quarter and first six months of 2010, or measures as at June 30, 2010, to those in the same periods in 2009:
- Consolidated Operating revenues increased by $21 million in the
second quarter and first six months of 2010 when compared to the same
periods in 2009. Continued growth in wireless revenues and wireline
data revenue exceeded the decline in wireline voice and other
revenues.
- Subscriber connections increased by 288,000 in the twelve-month
period ending June 30, 2010. This includes 6.5% growth in wireless
subscribers and 98% growth in TELUS TV subscribers, partly offset by
a 5.6% decrease in total network access lines and a 0.5% decrease in
total Internet subscribers.
Smartphones represented 30% of wireless postpaid gross additions in
the second quarter of 2010, compared to 15% in the second quarter of
2009, as the Company continued to experience strong smartphone growth
driven by iPhone, Blackberry and, to a lesser extent, Android
devices.
TELUS launched Optik(TM), a new suite of advanced TV and high-speed
Internet services. Optik brings together TELUS' most advanced home
services - Optik TV powered by Microsoft Mediaroom, and Optik High-
Speed with Internet access speeds of up to 15 megabits per second.
The Company is focused on upgrading existing subscribers to the
improved service and continued to have strong net additions of new
customers in the current quarter. See Section 2 - Providing
integrated solutions that differentiate TELUS from its competitors.
Erosion in residential and business network access lines continued at
an elevated level in 2010 due to technological substitution and
aggressive competitor activity in both consumer and business markets.
- Operating income increased by $63 million and $71 million,
respectively, in the second quarter and first six months of 2010 when
compared to the same periods in 2009. The increases were largely due
to higher EBITDA, which increased by $46 million and $80 million,
respectively, as a result of revenue growth and ongoing traction from
efficiency initiatives. In addition, depreciation and amortization
expenses decreased by $17 million in the second quarter (see Section
5.3 Consolidated operations).
- Income before income taxes increased by $60 million and $48 million,
respectively, in the second quarter and first six months of 2010 when
compared to the same periods in 2009. Higher Operating income was
partly offset by lower interest income of $14 million for the quarter
and $26 million for the first six months due to interest earned in
2009 for the settlement of prior years' tax matters.
- Net income increased by $52 million in the second quarter of 2010 and
decreased by $2 million in the first six months of 2010, when
compared to the same periods in 2009. Net income before income tax-
related adjustments (including related interest income) increased by
$60 million and $67 million, respectively.
-------------------------------------------------------------------------
Analysis of Net Six-month periods
income Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Net income 296 244 52 564 566 (2)
Net favourable
income tax-related
adjustments
(see Section 5.2) (10) (18) 8 (11) (80) 69
-------------------------------------------------------------------------
Net income before
favourable income
tax-related
adjustments 286 226 60 553 486 67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
- Basic earnings per share were $0.92 and $1.76, respectively, in the
second quarter and first six months of 2010, or an increase of
15 cents for the quarter and a decrease of two cents for the first
six months, when compared to the same periods in 2009. Excluding
favourable income tax-related adjustments, earnings per share were
$0.89 and $1.73, respectively, for the second quarter and first six
months of 2010, as compared to $0.71 and $1.53, respectively, in the
same periods in 2009 (see Section 5.2).
Liquidity and capital resources highlights, including a comparison of
results for the second quarter and first six months of 2010, or
measures as at June 30, 2010, to those in the same periods in 2009:
- TELUS had unutilized credit facilities of more than $1.7 billion at
June 30, 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 June 30, 2010,
was 1.9 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 June 30, 2010,
was 66% based on the annualized second quarter declared dividend and
sum of 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 August 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 October 1,
2010, to shareholders of record at the close of business on
September 10, 2010.
- Cash provided by operating activities decreased by $329 million and
$529 million, respectively, in the second quarter and first six
months of 2010 when compared to the same periods in 2009. The
decreases resulted primarily from changes in proceeds from
securitized accounts receivable, higher income tax payments net of
recoveries, lower interest received, and other working capital
changes.
- Cash used by investing activities decreased by $163 million and
$334 million, respectively, in the second quarter and first six
months of 2010 when compared to the same periods in 2009. The
decreases were 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 decreased by $200 million and
$173 million, respectively, in the second quarter and first six
months of 2010 when compared to the same periods in 2009, primarily
due to reduction of commercial paper and amounts drawn on the 2012
credit facility in the second quarter of 2009, following a public
Note issue in May 2009. In addition, dividend payments in 2010 were
net of amounts reinvested in TELUS Non-Voting Shares issued from
treasury under the Company's amended dividend reinvestment plan
(DRIP), while in the comparative 2009 periods, no TELUS Non-Voting
Shares were issued from treasury under the DRIP.
On July 23, 2010, the Company successfully completed a $1 billion
public offering of 5.05%, 10-year Notes. The proceeds are to be used
for an early partial redemption of the U.S. dollar, 8% Notes maturing
in June 2011, and for payments to terminate cross currency interest
rate swaps associated with the Notes to be redeemed. On July 27,
2010, TELUS delivered a redemption notice to the trustee that
specified a redemption date of September 2, 2010. The early
redemption is expected to cause a pre-tax charge of approximately
$58 million, or after tax, approximately 13 cents per share in the
third quarter.
- Free cash flow increased by $97 million and $218 million,
respectively, in the second quarter and first six months of 2010 when
compared to the same periods in 2009. Lower capital expenditures and
improved EBITDA more than offset higher income tax payments net of
recoveries, and lower interest received from the settlement of prior
years' income tax-related matters.
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 half of 2010 that support the Company's six strategic imperatives include the following:
Building national capabilities across data, IP, voice and wireless
On August 3, 2010, TELUS announced its mobile network is to get even faster through deployment of HSPA+ Dual Cell technology. TELUS will increase manufacturer-rated maximum download speeds to up to 42 megabits per second (Mbps) when network deployment is complete in Canadian cities and towns. Dual Cell capable devices are expected to be commercially available starting in the first quarter of 2011. Canadians are among the most sophisticated users of wireless data in the world, and TELUS is committed to meeting their growing needs with the best technology available anywhere. By leveraging the investment TELUS has already made in its 3G+ network, the Company is able to support the deployment of Dual Cell technology with a small investment that is within TELUS' overall capital expenditure guidance for 2010. The existing HSPA+ network and implementation of Dual Cell technology are expected to provide an optimal future transition to long-term evolution (LTE) technology, the emerging worldwide standard for fourth generation or 4G wireless networks.
The Company plans to substantially complete its wireline ADSL2+ network in 2010, to offer download speeds of 15 Mbps or higher, and covering up to 90% of the top 48 communities in Alberta and B.C. by the end of the year. Since 2009, the Company has been deploying VDSL2 technology to bring network download speeds of up to 30 Mbps to the top 48 communities, and the upgrade is expected to be largely complete by the end of 2011. The Company is also continuing its fibre to the home deployment in new residential areas, and fibre to the building deployment in new multi-dwelling units. These investments in core infrastructure serve to strengthen the Company's competitive position versus other wireless competitors and cable-TV companies. (See Providing integrated solutions below.)
Focusing relentlessly on the growth markets of data, IP and wireless
Combined external wireless revenues and wireline data revenues were $3,509 million (74% of consolidated revenue) in the first half of 2010, as compared to $3,344 million (70% of consolidated revenues) in the first half of 2009, or an increase of $165 million or 4.9%. Growth in aggregate wireless revenues and wireline data revenue more than offset a $144 million decline in wireline voice and other revenues for the six-month period.
Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business
In May 2010, TELUS announced that TELUS HEALTH SPACE(TM), powered by Microsoft HealthVault, is available for licensing by healthcare organizations. TELUS HEALTH SPACE is a high-security data storage and sharing service where individual Canadians will be able to keep all their personal healthcare information in an online database for access over any Internet connection. TELUS HEALTH SPACE is the first consumer health platform in Canada to gain Canada Health Infoway pre-implementation certification for providing a secure, interoperable application environment and personal health information platform. The Company also announced that twelve leading national health organizations are collaborating with TELUS to embed life-changing applications, medical devices and educational materials into TELUS HEALTH SPACE.
Providing integrated solutions that differentiate TELUS from its competitors
TELUS' ongoing investment in the expansion of its fibre optic network has provided the capacity to introduce compelling new home entertainment services in B.C. and Alberta. In June 2010, TELUS launched Optik, a new suite of advanced TV and high-speed Internet services. Optik brings together TELUS' most advanced home services - Optik TV based on Microsoft Mediaroom, and Optik High-Speed with Internet access speeds of up to 15 megabits per second that can be accessed anywhere in the home with home Wi-Fi. With Microsoft Mediaroom- based Optik TV, TELUS customers can record up to three programs simultaneously from any room on a single personal video recorder (PVR) and play them back on any of up to six TVs in the home with a digital box, even switching TVs mid- program. Optik TV also offers video on demand with DVD-style controls, an intuitive on-screen guide with picture-in-picture browsing, instant channel changing, and call display on the TV.
In June, the Company also introduced TELUS Data Notifications, which are automatic, free short-messaging service alerts that inform wireless service customers when they reach thresholds of data consumption. These alerts to customers on rate plans, or on pay-per-use basis, work in Canada and while roaming in the U.S. and internationally.
Investing in internal capabilities to build a high-performance culture and efficient operations
TELUS realized approximately $37 million in cumulative operational efficiency savings during the second quarter of 2010, or $74 million for the first six months of 2010. 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 ongoing initiatives in 2010 with associated 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 1,100 during the first six months of 2010. This included a decrease of 850 domestic FTE employees resulting from restructuring initiatives, attrition and hiring freezes. The remaining decrease included seasonal reductions in domestic part-time staff and TELUS International staff.
In May 2010, the Company completed the first stages in creating TELUS Customer Solutions by uniting the customer-facing business units, business and consumer solutions, under the leadership of Joe Natale, who has been appointed EVP & Chief Commercial Officer. 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
- consolidating administrative real estate to create a smaller
environmental footprint through mobile working, encouraging less
inter-city travel, reduced daily commutes, and lower use of real
estate space;
- decommissioning uneconomic products and services; and
- 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
The creation of TELUS Customer Solutions, described above, is expected to contribute to this imperative.
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.
-------------------------------------------------------------------------
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 quarterly dividend paid on July 2, 2010, was 50 cents per share, a
5.3% increase from the 47.5 cents per share dividend paid on April 1,
2010.
-------------------------------------------------------------------------
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 arising from
dividends reinvested in TELUS Non-Voting shares issued from treasury,
facilitated a reduction of $91 million in net debt during the first six
months 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 June 30, 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 of 1.9 times at June 30, 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).
-------------------------------------------------------------------------
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. During the third quarter of 2010, the
Company expects to unwind a portion of its cross currency interest rate
swaps associated with the planned early partial redemption of these
Notes. The redemption is to be funded with the proceeds of a July 23,
2010, Note issue (see Section 7.3 Cash used by financing activities).
-------------------------------------------------------------------------
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
At August 4, 2010, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range with a stable outlook
or trend.
-------------------------------------------------------------------------
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 2010 2009 2009 2009 2009 2008 2008
share amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Operating
revenues 2,398 2,375 2,443 2,411 2,377 2,375 2,454 2,450
Operations
expense 1,460 1,429 1,577 1,456 1,451 1,441 1,479 1,465
Restructuring
costs 19 6 77 32 53 28 38 10
-------------------------------------------------------------------------
EBITDA(1) 919 940 789 923 873 906 937 975
Depreciation 316 345 347 330 330 334 351 344
Amortization
of intangible
assets 91 108 94 100 94 93 84 92
-------------------------------------------------------------------------
Operating income 512 487 348 493 449 479 502 539
Other expense 6 8 10 6 11 5 11 6
Financing costs 114 112 230 101 106 95 118 122
-------------------------------------------------------------------------
Income before
income taxes 392 367 108 386 332 379 373 411
Income taxes
(recovery) 96 99 (48) 106 88 57 88 125
-------------------------------------------------------------------------
Net income 296 268 156 280 244 322 285 286
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income
attributable to
Common Shares
and Non-Voting
Shares 295 267 155 279 243 321 285 285
Income per Common
Share and
Non-Voting Share
- basic 0.92 0.84 0.49 0.88 0.77 1.01 0.90 0.89
- diluted 0.92 0.84 0.49 0.87 0.77 1.01 0.89 0.89
Cash dividends
declared per
Common Share
and Non-Voting
Share 0.50 0.475 0.475 0.475 0.475 0.475 0.475 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: (i) year-over-year growth in wireless revenues generated from an increasing subscriber base and increased equipment and other revenues; and (ii) growth in wireline data revenues, more than offset by declining legacy wireline voice and other revenues.
Wireless network revenue increased by 4.0% year-over-year in the second quarter of 2010, as subscriber growth more than offset a lower blended ARPU. Blended ARPU for the second quarter of 2010 decreased by 1.9% year-over-year, reflecting continued improvement from the 4.4% decline in the first quarter of 2010 and the 7.7% decline in the fourth quarter of 2009. A general trend of growing data ARPU continued in the second quarter of 2010, with a year-over- year growth of 19%, offset by declining voice ARPU of 7.2% (as discussed further in Section 5.5). Data ARPU growth is 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 the future (see Section 10.2 Technology). Wireless equipment and other revenues increased by 49% year- over-year in the second quarter of 2010, primarily from the acquisition of Black's Photo in September 2009 and, to a lesser extent, increasing smartphone sales.
The expected entry of a number of new wireless competitors, as well as the potential launch of new wireless incumbent flanker brands, 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.
Wireline revenue reflects a more moderate rate of data growth, more than offset by declining wireline legacy voice local, long distance and other revenues. Data revenue growth reflects the near-doubling of the TELUS TV subscriber base over 12-months and growth in managed workplace revenues, moderated by ongoing declines in legacy basic data services. 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 2010 as a result of aggressive promotional activity from the primary cable- TV competitor for local telephony and Internet services. The Company has also experienced steady disconnections and fewer installations of business NALs attributed to competition, technological substitution and cautious business spending, as well as lower growth in Ontario and Quebec due to the completion of some large enterprise deals, which also included large private IP networks that do not add access lines.
The trend in operations expense reflects fewer domestic full-time equivalent employees, partly offset by expenses from Black's Photo, higher combined wireless acquisition and retention costs, and increased TELUS TV programming costs from near-doubling of 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.
Restructuring costs in the first and second quarters of 2010 were lower than reported quarterly in 2009 and it is expected that the full-year amount will be approximately $75 million as new initiatives are implemented (see Key assumptions in Section 9). 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.
The sequential decline in depreciation expense in the second quarter of 2010 resulted mainly from an increase in the estimated useful life of TV set- top boxes and certain assets still in use becoming fully depreciated for accounting purposes (see Section 5.3 Consolidated operations - Depreciation). 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.
Amortization in the second quarter of 2010 was reduced by approximately $5 million of investment tax credits (ITCs) following determination of eligibility by taxation authorities, for assets capitalized in prior years that are now fully amortized. Similarly, ITCs reduced amortization by approximately $10 million in the fourth quarter of 2009 and approximately $6 million in the fourth quarter of 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.
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. 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 $1 billion 5.05% Note issue.
The trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments. The information presented below has been revised from that previously reported to exclude investment tax credits.
-------------------------------------------------------------------------
Income tax-related
adjustments
($ in millions,
except EPS 2010 2010 2009 2009 2009 2009 2008 2008
amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Approximate Net
income impact 10 1 71 14 18 62 26 -
Approximate EPS
impact 0.03 - 0.23 0.04 0.06 0.19 0.08 -
Approximate basic
EPS excluding
income
tax-related
impacts 0.89 0.84 0.26 0.84 0.71 0.82 0.82 0.89
-------------------------------------------------------------------------
5.3 Consolidated operations
-------------------------------------------------------------------------
Six-month periods
($ millions, except Quarters ended June 30 ended June 30
EBITDA margin) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Operating revenues 2,398 2,377 0.9 % 4,773 4,752 0.4 %
Operations expense 1,460 1,451 0.6 % 2,889 2,892 (0.1)%
Restructuring costs 19 53 (64.2)% 25 81 (69.1)%
-------------------------------------------------------------------------
EBITDA(1) 919 873 5.3 % 1,859 1,779 4.5 %
Depreciation 316 330 (4.2)% 661 664 (0.5)%
Amortization of
intangible assets 91 94 (3.2)% 199 187 6.4 %
-------------------------------------------------------------------------
Operating income 512 449 14.0 % 999 928 7.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 38.3 36.7 1.6 pts 38.9 37.4 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 increased by $21 million in the second quarter and first six months of 2010, when compared to the same periods in 2009. Wireless network revenue increased by $44 million and $61 million, respectively, from growth in data revenue driven by increasing smartphone adoption, partly offset by declining voice revenue. Wireless equipment and other revenue increased by $27 million and $57 million, respectively, from the acquisition of Black's Photo in September 2009 and increased smartphone sales. Wireline segment data revenue increased by $27 million and $47 million, respectively, from growth in TELUS TV and increased managed workplace revenues, but was more than offset by declines in legacy voice and other revenues of $77 million in the second quarter and $144 million for the first six months.
Operations expense
Operations expenses were relatively unchanged in the second quarter and first six months of 2010, when compared to the same periods in 2009.
-------------------------------------------------------------------------
Six-month periods
Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Salaries, benefits(1)
and employee-related
expenses 582 612 (4.9)% 1,152 1,203 (4.2)%
Other operations
expenses 878 839 4.6 % 1,737 1,689 2.8 %
-------------------------------------------------------------------------
Total operations
expense 1,460 1,451 0.6 % 2,889 2,892 (0.1)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes defined benefit pension plan expenses (principally in the
wireline segment): $7 million and $5 million, respectively, in the
second quarter of 2010 and 2009, and $14 million and $9 million,
respectively, in the first six months of 2010 and 2009.
-------------------------------------------------------------------------
In respect of changes in operations expense:
- Salaries, benefits and employee-related expenses decreased by
$30 million and $51 million, respectively, 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 expenses from
inclusion of Black's Photo, acquired in September 2009.
- Other operations expenses increased by $39 million and $48 million,
respectively, mainly due to higher wireless combined subscriber
acquisition and retention costs and inclusion of Black's Photo
expenses in 2010, as well as increased TELUS TV costs related to the
98% year-over-year increase in the subscriber base and higher
wireline advertising and promotions costs, partly offset by other
wireline cost decreases.
Restructuring costs
Restructuring costs decreased by $34 million and $56 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009, reflecting accelerated restructuring activities during 2009, principally in the wireline segment. A full-year expense of approximately $75 million is expected for efficiency initiatives in 2010 (see Section 9). Current restructuring costs were primarily severance costs in respect of efficiency initiatives described in Investing in internal capabilities in Section 2.
EBITDA
EBITDA increased by $46 million and $80 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009, primarily due to improving wireless network revenue growth and sustained traction from efficiency initiatives. In addition, the six-month period includes a one-time high margin application software sale and one-time operating savings in the first quarter of 2010. Wireline EBITDA increased by $16 million and $41 million, respectively, and wireless EBITDA increased by $30 million and $39 million, respectively.
Depreciation; Amortization of intangible assets
Combined depreciation and amortization expenses decreased by $17 million in the second quarter of 2010 and increased by $9 million in the first six months of 2010 when compared to the same periods in 2009.
- Depreciation decreased by $14 million and $3 million, respectively,
in the second quarter and first six months of 2010 when compared to
the same periods in 2009, primarily from asset life changes as a part
of a continuing program of asset life studies (including an increase
in the estimated useful life for TELUS TV set-top boxes in 2010), as
well as from certain computer hardware and digital cell sites
becoming fully depreciated (while the majority remain in service),
and lower retirements in 2010. These decreases were partly offset by
growth in TELUS TV and broadband capital assets, including ADSL2+,
VDSL2, gigabit passive optical network (GPON) technology and the
wireless HSPA network.
- Amortization decreased by $3 million in the second quarter of 2010
and increased by $12 million in the first six months of 2010, when
compared to the same periods in 2009. Higher amortization from
increased software assets, including application software supporting
wireless HSPA services, was partly offset by an investment tax credit
of approximately $5 million in the second quarter of 2010 for assets
capitalized in prior years that are now fully amortized.
Operating income
Operating income increased by $63 million and $71 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009, principally from 5% higher EBITDA and lower second quarter depreciation and amortization expenses.
Other income statement items
-------------------------------------------------------------------------
Six-month periods
Other expense, net Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
6 11 (45.5)% 14 16 (12.5)%
-------------------------------------------------------------------------
Other expense, net includes accounts receivable securitization expense, investment losses or income, gains or losses on disposal of real estate, and charitable donations.
Other expenses decreased by $5 million and $2 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009. Charitable donations decreased in the second quarter of 2010 compared with the same period in 2009, due to higher first quarter remittances in 2010. Accounts receivable securitization expenses were $2 million and $4 million, respectively, in the second quarter and first six months of 2010, unchanged from the same periods in 2009. See Section 7.6 Accounts receivable sale for additional information.
-------------------------------------------------------------------------
Six-month periods
Financing costs Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Interest expenses
(Interest on
long-term debt,
short-term
obligations
and other) 113 116 (2.6)% 226 231 (2.2)%
Foreign exchange
losses (gains) 1 4 n/m 1 (3) n/m
Interest income
- tax refunds - (14) n/m - (26) n/m
Interest income
- other - - - (1) (1) -
-------------------------------------------------------------------------
114 106 7.5 % 226 201 12.4 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/m - not meaningful.
-------------------------------------------------------------------------
Interest expenses decreased by $3 million and $5 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009. The decrease resulted from a lower average debt balance and lower effective interest rate. Interest income on tax refunds in 2009 was related to the settlement of prior years' tax matters.
-------------------------------------------------------------------------
Income taxes Six-month periods
($ millions, except Quarters ended June 30 ended June 30
tax rates) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax
at statutory income
tax rates 113 100 13.0 % 219 215 1.9 %
Revaluation of future
income tax liability
to reflect future
statutory income
tax rates (9) (7) - (16) (26) -
Tax rate differential
on, and consequential
adjustments from,
reassessments of prior
years' tax issues (10) (8) - (11) (48) -
Share option award
compensation 1 2 - 2 3 -
Other 1 1 - 1 1 -
-------------------------------------------------------------------------
96 88 9.1 % 195 145 34.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 28.8 30.1 (1.3)pts 28.9 30.2 (1.3)pts
Effective tax
rates (%) 24.5 26.5 (2.0)pts 25.7 20.4 5.3 pts
-------------------------------------------------------------------------
Basic blended statutory income taxes increased by $13 million and $4 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009, due to respective increases of 18% and 7% in Income before income taxes, partly offset by lower blended statutory income tax rates. The effective tax rates were lower than the statutory tax rates due to revaluations of future income tax liabilities and the tax rate differential and consequential adjustments from reassessments of prior years' tax issues. Changes to B.C. income tax rates were enacted in the first quarter of 2009, reducing rates beginning January 1, 2010. Changes to Ontario income tax rates from 2010 to 2013 were enacted in the fourth quarter of 2009 for provincial income taxes effective July 1, 2010 and thereafter. In addition, enacted federal income tax rates decreased in 2010.
-------------------------------------------------------------------------
Other comprehensive Six-month periods
income Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
2 (10) n/m 18 20 (10.0)%
-------------------------------------------------------------------------
Other comprehensive income includes changes in unrealized fair value of derivatives designated as cash flow hedges, principally associated with U.S. dollar debt, and foreign currency translation adjustments arising from translating financial statements of self-sustaining foreign operations.
5.4 Wireline segment
-------------------------------------------------------------------------
Operating revenues - Six-month periods
wireline segment Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Voice local 426 470 (9.4)% 865 940 (8.0)%
Voice long distance 136 163 (16.6)% 269 329 (18.2)%
Data 557 530 5.1 % 1,115 1,068 4.4 %
Other 62 68 (8.8)% 130 139 (6.5)%
-------------------------------------------------------------------------
External operating
revenue 1,181 1,231 (4.1)% 2,379 2,476 (3.9)%
Intersegment revenue 40 31 29.0 % 76 64 18.8 %
-------------------------------------------------------------------------
Total operating
revenues 1,221 1,262 (3.2)% 2,455 2,540 (3.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total wireline segment revenues decreased by $41 million and $85 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Voice local revenue decreased by $44 million and $75 million,
respectively. The decreases continue 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.
Wireline operating indicators
-------------------------------------------------------------------------
As at June 30
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Network access lines (NALs)(1)
Residential 2,122 2,311 (8.2)%
Business 1,723 1,764 (2.3)%
-------------------------------------------------------------------------
Total 3,845 4,075 (5.6)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six month periods
Quarters ended June 30 ended June 30
(000s) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Net (losses)
additions in NALs
Residential (51) (43) (18.6)% (101) (87) (16.1)%
Business (12) (5) (140.0)% (20) (14) (42.9)%
-------------------------------------------------------------------------
Total (63) (48) (31.3)% (121) (101) (19.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As a result of a periodic subscriber measurement review and
correction during the first quarter of 2010, historical NALs were
restated for the prior periods commencing in 2007. Total NALs at
June 30, 2009, reflect a reduction of 9,000 residential NALs from the
figure reported in the prior year, 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
60,000 from the figure reported in the prior year, 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 second quarter and first six months of 2010, relative to the loss experience in the same periods in 2009, as a result of aggressive promotional activity from the primary cable- TV competitor for local and Internet services. Business NAL net losses reflect steady churn rates, lower levels of additions, and slower growth in data lines from the completion of some large enterprise deals that also included large private IP networks. Growth in certain data services such as private IP 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 $27 million and $60 million,
respectively, reflecting ongoing industry-wide price competition,
losses of local subscribers, and technological substitution to
wireless and Internet-based services. Retail and wholesale minute
volumes declined.
- Wireline data revenues increased by $27 million and $47 million,
respectively. The increases resulted from: (i) subscriber growth in
TELUS TV services; (ii) higher managed workplace revenues including a
high margin software application sale in the first quarter of 2010;
and (iii) increased Internet, enhanced data and hosting services,
partly offset by lower average retail prices from competitive pricing
pressure. These increases were partly offset by declining legacy
basic data services.
Wireline operating indicators
-------------------------------------------------------------------------
As at June 30
(000s) 2010 2009 Change
-------------------------------------------------------------------------
Internet subscribers
High-speed(1) 1,134 1,108 2.3 %
Dial-up 73 105 (30.5)%
-------------------------------------------------------------------------
Total(1) 1,207 1,213 (0.5)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscribers(1) 228 115 98.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six month periods
Quarters ended June 30 ended June 30
(000s) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Net additions (losses)
of Internet
subscribers
High-speed 3 3 - 6 17 (64.7)%
Dial-up (7) (9) 22.2 % (14) (19) 26.3 %
-------------------------------------------------------------------------
Total (4) (6) 33.3 % (8) (2) n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscriber
net additions(1) 29 17 70.6 % 58 37 56.8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes TELUS Satellite TV(TM) subscribers beginning in second
quarter of 2009.
-------------------------------------------------------------------------
High-speed Internet subscriber net additions were unchanged in the second quarter and lower in the first six months of 2010, relative to the same periods in 2009. The low level of net additions in 2010 reflects ongoing competitive intensity and a maturing market. TELUS TV subscriptions nearly doubled in the 12-month period ended June 30, 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. As described in Section 2, the Company introduced its new Optik TV and high-speed Internet service in June 2010. The Company is focused on upgrading existing subscribers, as well as rolling out Optik to new customers.
- Other revenue decreased by $6 million and $9 million, respectively,
primarily from lower voice equipment sales.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment and is eliminated upon consolidation
together with the associated expense in the wireless segment.
-------------------------------------------------------------------------
Operating expenses - Six month periods
wireline segment Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 2010
-------------------------------------------------------------------------
Salaries, benefits
and employee-related
expenses 436 466 (6.4)% 861 918 (6.2)%
Other operations
expenses 370 367 0.8 % 732 749 (2.3)%
-------------------------------------------------------------------------
Operations expenses 806 833 (3.2)% 1,593 1,667 (4.4)%
Restructuring costs 19 49 (61.2)% 23 75 (69.3)%
-------------------------------------------------------------------------
Total operating
expenses 825 882 (6.5)% 1,616 1,742 (7.2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireline total operating expenses decreased by $57 million and $126 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Salaries, benefits and employee-related expenses decreased by
$30 million and $57 million, respectively, 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 increased by $3 million in the second
quarter and decreased by $17 million in the first six months.
Increased expenses included higher TELUS TV programming and material
costs related to the 98% year-over-year increase in the subscriber
base, higher advertising and promotions costs, and lower labour
capitalization from lower capital intensity in 2010. These increases
were offset by lower transit and termination costs from lower
outbound long distance minute volumes and per-minute costs and lower
cost of sales from lower equipment sales volumes. The six-month
period included one-time operating savings in the first quarter of
2010.
- Restructuring costs decreased by $30 million and $52 million,
respectively. See discussion in Section 5.3.
-------------------------------------------------------------------------
EBITDA - wireline Six month periods
segment Quarters ended June 30 ended June 30
2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 396 380 4.2 % 839 798 5.1 %
EBITDA margin (%) 32.4 30.1 2.3 pts 34.2 31.4 2.8 pts
-------------------------------------------------------------------------
The wireline segment EBITDA increased by $16 million and $41 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009. Improvement in EBITDA margins resulted from lower restructuring costs and operating savings realized from efficiency initiatives to mitigate declining voice revenues, as well as a high margin software application sale in the first quarter of 2010.
5.5 Wireless segment
-------------------------------------------------------------------------
Operating revenues - Six month periods
wireless segment Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Network revenue 1,135 1,091 4.0 % 2,224 2,163 2.8 %
Equipment and other
revenue 82 55 49.1 % 170 113 50.4 %
-------------------------------------------------------------------------
External operating
revenue 1,217 1,146 6.2 % 2,394 2,276 5.2 %
Intersegment revenue 9 7 28.6 % 16 14 14.3 %
-------------------------------------------------------------------------
Total operating
revenues 1,226 1,153 6.3 % 2,410 2,290 5.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment revenues increased by $73 million and $120 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Network revenue increased by $44 million and $61 million,
respectively, in the second quarter and first six months of 2010,
when compared to the same periods in 2009. The increases were due to
continued wireless data revenue growth and the 6.5% year-over-year
growth in the subscriber base, partly offset by decreased voice
revenues. Data revenue increased by $57 million or 26% in the second
quarter, and $107 million or 25% in the first six months, reflecting
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, as well as
increased mobile Internet keys, and higher inbound data roaming
volumes, partly offset by lower roaming rates. Data revenue
represented 24% of network revenue for the first half of 2010, as
compared to 20% in the same period in 2009. Voice revenue declined by
$13 million or 1.5% in the second quarter and $46 million or 2.6% in
the first six months, primarily due to falling voice ARPU, described
further below.
Smartphones represented 30% of postpaid gross additions in the second
quarter of 2010, as compared to 15% in the same period in 2009. At
June 30, 2010, smartphone subscribers represented 25% of the postpaid
subscriber base as compared to 16% one year earlier. Smartphone
subscribers generate significantly higher ARPU than those with
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 $57.47 in the second quarter of 2010 decreased by
$1.14 or 1.9% when compared to the same period in 2009, and reflected
the seasonal sequential increase when compared to $55.80 in the first
quarter of 2010. The 1.9% year-over-year decline in the second
quarter is a continued improvement from the 4.4% decline in the first
quarter of 2010 and the 7.7% decline in the fourth quarter of 2009.
Blended ARPU for the first six months of 2010 was $56.64, a decrease
of $1.86 or 3.2% from the same period in 2009. Data ARPU was $13.80
and $13.47, respectively, in the second quarter and first six months
of 2010, reflecting increases of $2.24 or 19% for the quarter and
increases of $2.06 or 18% for the six-month period, when compared to
the same periods in 2009. Voice ARPU was $43.67 and $43.17,
respectively, in the second quarter and first six months of 2010, or
decreases of $3.38 or 7.2% for the quarter and decreases of $3.92 or
8.3% for the six-month period, when compared to the same periods in
2009. While the year-over-year decline in voice ARPU has moderated
from the 9.5% decrease experienced in the first quarter of 2010 and
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, growing substitution of text messaging for
voice calls, elimination of system access fees and carrier e911
charges, lower Mike service ARPU, and decreased inbound roaming
rates, partly offset by higher service feature revenues and increased
inbound roaming volumes.
Gross and net subscriber additions reflect improvement in economic
conditions, enhanced distribution for the iPhone commencing in March
2010 and a concerted effort to attract and retain high value postpaid
customers. Total gross subscriber additions increased by just under
3% in the second quarter and first six months of 2010, when compared
to the same periods in 2009, with postpaid gross additions increasing
by approximately 12% in both periods. Postpaid gross additions were
approximately 67% of the total in the second quarter and first six
months of 2010, as compared to approximately 61% in the same periods
in 2009.
Net additions for the second quarter and first six months of 2010
increased when compared to the same periods in 2009, and reflect
continued improvement in the postpaid/prepaid mix. In 2010, second
quarter postpaid net additions represented 88% of the total (86% in
2009), while six-month postpaid net additions were 99% of the total
(87% in 2009). Prepaid subscriber net additions were relatively flat
for the second quarter of 2010 when compared to the same period in
2009 due to lower churn, while for the first six months of 2010,
prepaid net additions were down significantly from the same period in
2009, as the Company did not respond to competitor handset
discounting in this segment and focused on higher value, postpaid
subscriber growth.
The blended churn rates were 1.45% and 1.50%, respectively, in the
second quarter and first six months of 2010, as compared to 1.55% and
1.59%, respectively, in the same periods in 2009. The decrease in
churn rates reflect lower involuntary churn, the availability of the
new HSPA/HSPA+ network, greater choice in handsets including the
Apple iPhone, and successful retention efforts, partly offset by
increased competitive marketing intensity within both the postpaid
and prepaid market segments.
- Equipment and other revenues increased by $27 million and
$57 million, respectively, in the second quarter and first six months
of 2010, when compared to the same periods in 2009. The increases
were 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, partly offset by lower
activation revenues due to matching of competitive offers.
- 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 June 30
2010 2009 Change
-------------------------------------------------------------------------
Subscribers (000s)
Postpaid 5,464 5,061 8.0 %
Prepaid 1,235 1,227 0.7 %
-------------------------------------------------------------------------
Total 6,699 6,288 6.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proportion of subscriber
base that is postpaid (%) 81.6 80.5 1.1 pts.
Digital POPs(1) covered
(millions)(2) 33.7 32.7 3.1 %
HSPA POPs covered
(millions)(2) 31.7 - n/m
Six-month periods
Quarters ended June 30 ended June 30
2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Subscriber gross
additions (000s)
Postpaid 277 247 12.1 % 515 462 11.5 %
Prepaid 136 155 (12.3)% 254 286 (11.2)%
-------------------------------------------------------------------------
Total 413 402 2.7 % 769 748 2.8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subscriber net
additions (000s)
Postpaid 109 95 14.7 % 174 139 25.2 %
Prepaid 15 16 (6.3)% 1 20 (95.0)%
-------------------------------------------------------------------------
Total 124 111 11.7 % 175 159 10.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ARPU(3) ($) 57.47 58.61 (1.9)% 56.64 58.50 (3.2)%
Churn, per
month(3) (%) 1.45 1.55 (0.10)pts 1.50 1.59 (0.09)pts
Average monthly
minutes of use per
subscriber (MOU) 373 402 (7.2)% 366 392 (6.6)%
COA(4) per gross
subscriber
addition(3) ($) 342 311 10.0 % 333 322 3.4 %
Retention spend to
network
revenue(3) (%) 9.9 10.6 (0.7)pts 10.6 10.5 0.1 pts
EBITDA excluding
COA ($ millions) 665 618 7.6 % 1,276 1,222 4.4 %
EBITDA to network
revenue (%) 46.1 45.2 0.9 pts 45.9 45.4 0.5 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 - Six-month periods
wireless segment Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Equipment sales
expenses 217 190 14.2 % 435 373 16.6 %
Network operating
expenses 160 150 6.7 % 317 304 4.3 %
Marketing expenses 101 93 8.6 % 187 186 0.5 %
General and
administration (G&A)
expenses
Salaries, benefits
and employee-
related expenses 146 146 - % 291 285 2.1 %
Other G&A expenses 79 77 2.6 % 158 155 1.9 %
-------------------------------------------------------------------------
Operations expense 703 656 7.2 % 1,388 1,303 6.5 %
Restructuring costs - 4 (100.0)% 2 6 (66.7)%
-------------------------------------------------------------------------
Total operating
expenses 703 660 6.5 % 1,390 1,309 6.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $43 million and $81 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Equipment sales expenses increased by $27 million and $62 million,
respectively, 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. This category includes
results from Black's Photo since September 2009.
- Network operating expenses increased by $10 million and $13 million,
respectively. The increases reflected growth in roaming volumes, the
introduction of regulated e911 fees for wireless subscribers in
Quebec and slightly higher costs to support double-digit growth in
data revenues, partly offset by lower roaming costs from reduced
rates. 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.
- Marketing expenses increased by $8 million and $1 million,
respectively. COA per gross subscriber addition increased by $31 or
10% in the second quarter of 2010 and increased by $11 or 3.4% for
the first six months of 2010, when compared to the same periods in
2009. COA per gross subscriber addition for the second quarter
increased due to higher per-unit subsidy and commission costs driven
by a higher smartphone mix, and higher advertising and promotion
expenditures related to new device launches, partly offset by a
favourable U.S. dollar exchange rate (compared to 2009). For the
first six months, COA per gross subscriber addition increased due to
higher per-unit subsidy costs and higher advertising and promotion
expenditures, partly offset by a favourable U.S. dollar exchange
rate. In addition, COA per gross subscriber addition increased in the
second quarter of 2010 due to a one-time settlement of channel
subsidies for prior periods.
Retention costs as a percentage of network revenue decreased to 9.9%
in the second quarter, and increased to 10.6% in the first six months
of 2010, as compared to 10.6% and 10.5%, respectively, in the same
periods in 2009. Retention costs in the second quarter of 2010
decreased slightly when compared to the same period in 2009 in part
due to improving network revenue growth and a favourable U.S. dollar
exchange rate (compared to 2009). Retention costs for the quarter and
six-month period were also positively impacted by lower commissions
per retention subscriber, offset by higher retention volumes related
to a larger subscriber base and an increased volume of clients
migrating to smartphones, including upgrades to HSPA devices.
- Total G&A expenses increased by $2 million and $9 million,
respectively, mainly due to higher salaries, benefits and employee-
related costs from inclusion of Black's Photo expenses in 2010,
mostly offset by fewer domestic full-time equivalent employees. 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,
for the first six months of 2010, one-time operating savings in the
first quarter of 2010. Bad debt expense decreased by $7 million in
the second quarter and $16 million for the first six months,
reflecting decreased involuntary subscriber churn from an improving
economy.
- Restructuring costs decreased by $4 million for the quarter and six-
month periods. See discussion in Section 5.3.
-------------------------------------------------------------------------
EBITDA - wireless Six-month periods
segment Quarters ended June 30 ended June 30
2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 523 493 6.1 % 1,020 981 4.0 %
EBITDA margin (%) 42.7 42.8 (0.1)pts. 42.3 42.8 (0.5)pts.
-------------------------------------------------------------------------
The wireless segment EBITDA increased by $30 million and $39 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009. This reflects improvement in terms of data growth, lower ARPU erosion and lower bad debt expense. Wireless margins were pressured primarily due to higher combined acquisition and retention costs associated with smartphone adoption, following the launch of the new HSPA network and related devices in late 2009.
6. Changes in financial position
Changes in the Consolidated statements of financial position for the six- month period ended June 30, 2010, are as follows:
-------------------------------------------------------------------------
Financial
position
as at: June 30, Dec. 31, Changes Explanation
($ millions) 2010 2009 of the change
-------------------------------------------------------------------------
Current Assets
Cash and 41 41 - - % See Section 7:
temporary Liquidity and capital
investments, resources
net
Accounts 780 694 86 12 % The increase
receivable reflected a $100
million reduction in
proceeds from
securitized accounts
receivable (see
Section 7.6), partly
offset by a seasonal
decrease in
receivables from
wireless dealers.
Accounts receivable
turnover was 45 days
at June 30, 2010
compared to 46 days
at December 31, 2009
and 43 days at
June 30, 2009.
Income and other 152 16 136 n/m Reflects an increase
taxes in accrued income and
receivable other taxes
receivable, as well
as current year
instalments, net of
current income tax
expense
Inventories 173 270 (97) (36)% Primarily a decrease
in wireless handset
volumes, parts and
accessories, and
lower average cost of
new handsets
Prepaid expenses 217 105 112 107 % Mainly annual
payments of property
taxes, front-loaded
payments of employee
benefits, payment of
annual wireless
licence fees and
maintenance
contracts, all net of
amortization
Derivative assets 6 1 5 n/m Fair value
adjustments for
handset foreign
exchange hedges and
operational hedges
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,274 1,385 (111) (8)% Mainly lower accrued
payable and liabilities and trade
accrued payables arising from
liabilities lower operating and
capital expenditure
levels
Income and other 6 182 (176) (97)% Primarily reflects
taxes payable final income tax
payments in the first
quarter of 2010 for
the 2009 tax year
Restructuring 83 135 (52) (39)% Payments exceeded new
accounts obligations from
payable and restructuring
accrued initiatives
liabilities
Dividends 161 150 11 7 % Primarily reflects
payable the 5.3% increase in
the dividend rate for
the dividend paid
July 2, 2010
Advance billings 560 674 (114) (17)% Includes a
and customer reclassification of
deposits $128 million of the
regulatory price
deferral account to
Other long-term
liabilities
Current 1,463 82 1,381 n/m The June 30 balance
maturities of includes $1,432
long-term debt million for 8% U.S.
dollar Notes maturing
in June 2011. The
June 30 and
December 31 balances
include $30 million
for TCI 11.5% Series
U First Mortgage
Bonds maturing in
July 2010. TCI 12%
Series 1 debentures
of $50 million,
current at
December 31, matured
and were repaid in
May 2010.
Derivative 721 62 659 n/m Includes
liabilities reclassification of
derivative
liabilities
associated with the
June 2011 maturity of
U.S. dollar Notes
from Other long-term
liabilities, partly
offset by fair value
adjustments for share
option and restricted
share unit hedges,
and cash settled
option derivative
unwind
Current portion 417 294 123 42 % Primarily due to
of future changes in
income taxes partnership income
that will be
allocated over the
next 12 months, as
well as changes in
the accounting
classification of
liabilities between
current and long-term
-------------------------------------------------------------------------
Working (3,316) (1,837) (1,479) (81)% Primarily due to U.S.
capital(1) dollar Notes maturing
in June 2011 (see
Section 7.3)
-------------------------------------------------------------------------
Non-Current
Assets
Property, 7,618 7,729 (111) (1)% See Capital
plant, expenditures in
equipment and Section 7.2 Cash used
other, net 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
licences of $3,849
million.
Goodwill, net 3,572 3,572 - - % -
Other 1,686 1,602 84 5 % Primarily pension
long-term plan funding and
assets continued
amortization of
transitional pension
assets
Investments 41 41 - - % The sale of a small
investment was offset
by new investments
-------------------------------------------------------------------------
Non-Current
Liabilities
Long-Term Debt 4,740 6,090 (1,350) (22)% The decrease
primarily reflects
reclassification of
8% U.S. dollar Notes
maturing in June 2011
to Current maturities
of long-term debt),
net of a $57 million
increase in
commercial paper
Other Long-Term 673 1,271 (598) (47)% The decrease
Liabilities primarily reflects
reclassification the
$721 million
derivative liability
associated with the
8% U.S. dollar Notes
maturing in June 2011
to Current
Liabilities, partly
offset by the
reclassification of
$128 million of the
price cap deferral
account from Advance
billings and customer
deposits in Current
Liabilities
Future Income 1,380 1,319 61 5 % An increase in future
Taxes taxes on long-term
assets and
liabilities partly
offset by a
reclassification to
the Current portion
of future income
taxes
-------------------------------------------------------------------------
Owners' Equity
Common Share 7,882 7,554 328 4 % Mainly Net income of
and Non-Voting $562 million and
Share equity Other comprehensive
income of $18 million
attributable to
holders of Common
Shares and Non-Voting
Shares, less declared
dividends of $313
million, and adding
back $53 million for
treasury shares
issued for dividends
reinvested in
Non-Voting Shares
under the dividend
re-investment plan.
Non-controlling 22 21 1 5 % Net income of $2
interests million attributable
to non-controlling
interests less
dividends of $1
million paid by a
subsidiary to a
non-controlling
interest.
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
7. Liquidity and capital resources
The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of the MD&A.
The Company's capital structure financial policies are described in Section 4.3. In the normal course, the Company has generated annual cash flow from operations exceeding annual capital investment needed to support business growth and re-invest in technology.
-------------------------------------------------------------------------
Summary of Consolidated
statements of Six-month periods
cash flows Quarters ended June 30 ended June 30
($ millions) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Cash provided by
operating activities 523 852 (38.6)% 937 1,466 (36.1)%
Cash used by investing
activities (389) (552) 29.5 % (696) (1,030) 32.4 %
Cash used by financing
activities (139) (339) 59.0 % (241) (414) 41.8 %
-------------------------------------------------------------------------
Increase (decrease)
in cash and temporary
investments, net (5) (39) - - 22 -
Cash and temporary
investments, net,
beginning of period 46 65 - 41 4 -
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period 41 26 57.7 % 41 26 57.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7.1 Cash provided by operating activities
Cash provided by operating activities decreased by $329 million and $529 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009. Decreases in cash flow were primarily due to the following:
- Payments under restructuring plans increased by $26 million in the
six-month period.
- Interest received decreased by $35 million in both the second quarter
and six-month period. The $35 million interest received in the second
quarter of 2009 was primarily due to the settlement of prior years'
tax matters.
- Income tax payments, net of refunds received, were $58 million in the
second quarter and $309 million in the first six months of 2010, or
increases of $50 million and $87 million, respectively. Refunds
received were $nil in the second quarter of 2010 ($4 million in the
first six months of 2010), as compared to $54 million received in the
second quarter of 2009.
- Changes in proceeds from securitized accounts receivable (included in
Net change in non-cash working capital) are a use of cash when
proceeds are reduced and a source of cash when the proceeds are
increased. Proceeds from securitized accounts receivable were
unchanged during the second quarter of 2010, as compared to an
increase of $100 million during the second quarter of 2009, for a
comparative $100 million decrease in second quarter cash flow.
Proceeds decreased by $100 million during the first six months of
2010, as compared to an increase of $100 million in the same period
in 2009, for a $200 million comparative decrease in six-month cash
flow. See Section 7.6 Accounts receivable sale.
- Other changes in non-cash working capital, including: (i) a smaller
decrease in customer receivables in the first six months of 2010 when
compared to the same period in 2009; (ii) smaller inventory
reductions in the second quarter and first six months of 2010,
compared to the same periods in 2009, due to smaller inventory
balances in 2010; and (iii) a larger increase in prepaid expenses in
the second quarter and first six-months of 2010, when compared to the
same periods in 2009.
Decreases in cash flow were partly offset by:
- An increase in EBITDA before restructuring costs of $12 million and
$24 million, respectively, in the second quarter and first six months
of 2010 when compared to the same periods in 2009.
- A decrease in employer contributions to defined benefit plans, net of
defined benefit plan expenses, of $9 million in the quarter and
$20 million for the six-month period. See assumptions for defined
benefit pension plans in Section 9.
- A decrease in interest paid of $12 million in the six-month period.
7.2 Cash used by investing activities
Cash used by investing activities decreased by $163 million and $334 million, respectively in the second quarter and first six months of 2010 when compared to the same periods in 2009, principally due to lower capital expenditures.
-------------------------------------------------------------------------
Capital expenditures Six-month periods
($ millions, except Quarters ended June 30 ended June 30
capital intensity) 2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Wireline segment 298 368 (19.0)% 550 646 (14.9)%
Wireless segment 99 189 (47.6)% 158 385 (59.0)%
-------------------------------------------------------------------------
Total capital
expenditures 397 557 (28.7)% 708 1,031 (31.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less capital
expenditures(1) 522 316 65.2 % 1,151 748 53.9 %
Capital
intensity(2) (%) 17 23 (6.0)pts 15 22 (7.0)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 $160 million and $323 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods 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, as well as a deferral of expenditures ahead of the July 1, 2010, implementation of harmonized sales taxes (HST) in B.C. and Ontario. 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 $206 million and $403 million, respectively, in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Wireline segment
Wireline capital expenditures decreased by $70 million and
$96 million, respectively, in the second quarter and first six months
of 2010 when compared to the same periods in 2009. The decrease
reflected lower expenditures for network growth as demand moderated,
as well as lower expenditures for ADSL2+ due to significant activity
in 2009, partly offset by increased expenditures for TELUS TV, VDSL2
and gigabit passive optical network (GPON) technology (see Section 2 -
Building national capabilities and following). Wireline capital
intensity decreased to 22% in the first half of 2010 from 25% in the
first half of 2009. Consequently, wireline cash flow (EBITDA less
capital expenditures) was $289 million in the first half of 2010, up
by $137 million or 90% when compared to the first half of 2009.
- Wireless segment
Wireless capital expenditures decreased by $90 million and
$227 million, respectively, in the second quarter and first six
months of 2010 when compared to the same periods 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 7% in the first half of 2010 from 17% in the first half
of 2009. Capital spending is expected to pick up in future quarters.
Wireless cash flow (EBITDA less capital expenditures) was
$862 million in the first half of 2010, up by $266 million or 45%
when compared to the first half of 2009.
7.3 Cash used by financing activities
Net cash used by financing activities decreased by $200 million and $173 million, respectively in the second quarter and first six months of 2010 when compared to the same periods in 2009.
- Cash dividends paid to holders of Common Shares and Non-Voting Shares
were $120 million and $249 million, respectively, in the second
quarter and first six months of 2010. The amounts are the dividends
declared, net of amounts reinvested in TELUS Non-Voting Shares issued
from treasury at a 3% discount under the Company's amended dividend
reinvestment plan (DRIP). No shares were issued from treasury for the
cash dividend payments of $151 million and $302 million,
respectively, in the second quarter and first six months of 2009.
The quarterly dividends paid per share were 47.5 cents at January 4
and April 1, 2010, unchanged from comparable quarterly dividends in
2009. The quarterly dividend paid on July 2, 2010, was 50 cents per
share, a 5.3% increase from the dividend paid in April.
- 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. In the second quarter of 2010, commercial paper
increased by $29 million to $524 million. No amounts were drawn
against the 2012 credit facility at June 30, 2010 (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. During the second quarter of 2009, due primarily to
the successful issue of new Notes in May, the Company reduced
commercial paper to $604 million and reduced net amounts drawn on the
2012 credit facility to $nil.
- Long-term debt issue in July 2010; planned early partial redemption
of U.S. dollar Notes
On July 23, 2010, the Company successfully closed a public offering
of 5.05%, Series CH Notes maturing in July 2020, for gross proceeds
of $1 billion. The Series CH Notes are redeemable at the option of
the Company, in whole at any time, or in part from time to time, on
not fewer than 30 and not more than 60 days' prior notice, at a
redemption price equal to the greater of (i) the present value of the
Notes discounted at the Government of Canada yield plus 47 basis
points, or (ii) 100% of the principal amount thereof. In addition,
accrued and unpaid interest, if any, will be paid to the date fixed
for redemption.
The new Series CH Notes require that the Company make an offer to
repurchase the Notes at a price equal to 101% of their principal plus
accrued and unpaid interest to the date of repurchase upon the
occurrence of a change in control triggering event, as defined in the
supplemental trust indenture.
Net proceeds of approximately $993 million will be used to fund the
early partial redemption of U.S.$607 million of the Company's
publicly held U.S. dollar, 8% Notes maturing in June 2011, as well as
payments to terminate cross currency interest rate swaps associated
with the Notes to be redeemed and any excess for corporate purposes.
On July 27, 2010, TELUS delivered a redemption notice to the trustee
that specified a redemption date of September 2, 2010. The early
redemption is expected to cause a pre-tax charge of approximately
$58 million, or after tax, approximately 13 cents per share in the
third quarter.
- Long-term debt issue in May 2009
In the prior year, the Company successfully closed a $700 million
public offering of 4.95%, Series CF Notes maturing in May 2014.
7.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or 12-month periods ended, June 30 2010 2009 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt 7,221 7,255 (34)
Total capitalization - book value 15,179 14,764 415
EBITDA - excluding restructuring costs 3,705 3,820 (115)
Net interest cost 557 441 116
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 87 86 1 pt.
Average term to maturity of debt (years) 4.5 4.2 0.3
Net debt to total capitalization (%)(1) 47.6 49.1 (1.5)pts.
Net debt to EBITDA - excluding restructuring
costs(1) 1.9 1.9 -
-------------------------------------------------------------------------
Coverage ratios (times)(1)
-------------------------------------------------------------------------
Earnings coverage (Interest coverage on
long-term debt) 3.2 4.2 (1.0)
EBITDA - excluding restructuring costs
interest coverage 6.7 8.7 (2.0)
-------------------------------------------------------------------------
Other measures
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 718 (152) 870
Dividend payout ratio of adjusted net
earnings (%)(1) 66 58 8 pts.
Dividend payout ratio (%)(1) 64 53 11 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 June 30, 2010, as compared to one year earlier, includes maturity of $50 million long-term debt in the second quarter of 2010, a reduction in commercial paper and the December 2009 partial early redemption of U.S. dollar Notes, offset by the December 2009, $1 billion 10- year Note issue. A $382 million increase in retained earnings over the twelve- month period ended June 30, 2010, was the primary contributor to higher Total capitalization and the lower Net debt to total capitalization ratio. Net debt to EBITDA (excluding restructuring costs) at June 30, 2010 was unchanged from one year earlier as net debt decreased in proportion with 12-month trailing EBITDA (excluding restructuring costs).
The proportion of debt on a fixed-rate basis was 87% at June 30, 2010, up from 86% one year earlier primarily due to lower amounts of commercial paper outstanding. The average term to maturity of debt increased to 4.5 years at June 30, 2010, from 4.2 years at June 30, 2009, primarily due to the December 2009 issue of ten-year Series CG Notes and the December 2009 early partial redemption of U.S. dollar Notes due June 1, 2011.
The Earnings coverage ratio was 3.2 times for the 12-month period ended June 30, 2010, down from 4.2 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 0.3. The EBITDA (excluding restructuring costs) interest coverage ratio for the 12-month period ended June 30, 2010, was 6.7 times, down from 8.7 times one year earlier due mainly to the loss on redemption of long-term debt recorded in December 2009, as well as lower EBITDA before restructuring costs and lower interest income included in net interest costs. This ratio calculated to exclude the loss on redemption was 8.1 times at June 30, 2010.
Free cash flow (FCF) for the 12-month period ended June 30, 2010, increased by $870 million when compared to the 12-month period ended June 30, 2009. The increase in FCF resulted from lower total capital expenditures, partly offset by lower EBITDA, higher payments for restructuring, interest (net of interest received) and income tax (net of recoveries).
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 June 30, 2010 was 1.9 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 by the Board on
May 4, 2010, and signals management and Board confidence in the
mid-term outlook of the Company into 2011. The 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 June 30, 2010, TELUS had available liquidity exceeding $1.7 billion from unutilized credit facilities, consistent with the Company's objective of generally maintaining at least $1 billion of available liquidity. The Company also has availability under its accounts receivable securitization program at June 30, 2010 (see Section 7.6).
TELUS credit facilities at June 30, 2010
-------------------------------------------------------------------------
Out- Backstop
standing for
undrawn commer-
letters cial
of paper Available
($ in millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving
facility(1) May 1, 2012 2,000 - (118) (524) 1,358
364-day
revolving
facility(2) December 31, 2010 300 - - - 300
Other bank
facilities - 62 (2) (3) - 57
-------------------------------------------------------------------------
Total - 2,362 (2) (121) (524) 1,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 1.9 to 1 at June 30, 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 June 30, 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 $500 million. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a servicing liability is recognized on the date of sale and is, in turn, amortized to earnings over the expected life of the trade receivables.
TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down. The necessary credit rating was exceeded by three levels at A (low) as of August 4, 2010.
-------------------------------------------------------------------------
Balance of
proceeds from
securitized
receivables June Mar. Dec. Sep. June Mar. Dec. Sep.
30, 31, 31, 30, 30, 31, 31, 30,
($ millions) 2010 2010 2009 2009 2009 2009 2008 2008
-------------------------------------------------------------------------
400 400 500 400 400 300 300 250
-------------------------------------------------------------------------
7.7 Credit ratings
There were no changes to the Company's investment grade credit ratings as at August 4, 2010, detailed in TELUS' annual 2009 MD&A.
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 June 30, 2010, the weighted average life of customer accounts receivable was 32 days (December 31, 2009 - 35 days) and the weighted average life of past-due customer accounts receivable was 69 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 June 30, 2010, the Company has access to a shelf prospectus, in effect until October 2011, pursuant to which it was able to offer $3 billion of debt or equity securities. Subsequent to the July 23, 2010, $1 billion Note issue, the Company can offer $2 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 periods ended June 30, 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(g) 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 June 30, 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 June 30, 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 potential claims (including intellectual property infringement 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 any 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.
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 June 30, 2010.
-------------------------------------------------------------------------
Outstanding shares Common Non-Voting Total
(millions) Shares Shares shares
-------------------------------------------------------------------------
Common equity
Outstanding shares at June 30, 2010 174.8 144.5 319.3(1)
Options outstanding and issuable(2)(3)
at June 30, 2010 0.1 30.0 30.1
-------------------------------------------------------------------------
Outstanding and issuable shares
at June 30, 2010 174.9 174.5 349.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share, the
number of shares was 320.3 million for the quarter ended June 30,
2010.
(2) Assuming full conversion and ignoring exercise prices.
(3) Includes an increase to the share option reserve of 15 million
Non-Voting Shares, approved by shareholders at the May 5, 2010 annual
and special general meeting.
-------------------------------------------------------------------------
Other than for shares issued under the dividend reinvestment plan (DRIP), the number of outstanding and issuable shares at July 31, 2010, was not materially different than at June 30, 2010. Approximately 1.24 million TELUS Non-Voting Shares were issued from treasury under the DRIP for the dividend paid on July 2, 2010. The DRIP participation rate was approximately 27% for the July 2 dividend, up from a participation rate of 21% for the April 1, 2010, dividend.
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
Transitioning 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 has been 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.
-------------------------------------------------------------------------
IFRS 1 impacts and accounting policy choices
The transition to IFRS requires the Company to apply IFRS 1, or the requirement 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 IFRS. The Company disclosed its initial decisions regarding transition date impacts in Section 8.2.1 of 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. The following topics, though not an exhaustive list, are more relevant to the Company:
-------------------------------------------------------------------------
Topic Choices and impacts
-------------------------------------------------------------------------
Employee benefits
- defined benefit plans
- Recognition of IFRS 1 optional exemption taken: Yes.
cumulative unamortized
actuarial gains and Transition date impact: IFRS allows, and the
losses, past service Company has chosen, to recognize cumulative
costs, and transitional unamortized actuarial gains and losses, past
obligations and assets service costs, and transitional obligations
at the transition date and assets at the transition date as an
adjustment to Retained earnings on the same
- Recognition of ongoing date. Had the Company not taken the
actuarial gains and exemption, it would be required to
losses retroactively restate cumulative gains and
losses for all defined benefit plans since
their inception.
Ongoing impact: IFRS allows, and the Company
has chosen, to charge actuarial gains and
losses arising subsequent to the transition
date to Other comprehensive income. This
choice is consistent with changes proposed in
an exposure draft for employee benefits:
recognition and measurement of actuarial gain
or losses for defined benefit plans.
Difference from Canadian GAAP: Canadian GAAP
required that the excess of the net actuarial
gain (loss) over 10% of the greater of the
accrued benefit obligation and fair value of
the plan assets was to be amortized over the
expected average remaining service periods of
active employees of the plan, as were past
service costs and transitional assets and
liabilities.
-------------------------------------------------------------------------
Fair value or revaluation IFRS 1 optional exemption taken: No.
as deemed cost
Transition date impact: The Company has
chosen to measure its property, plant and
equipment and intangible assets at historic
cost. Had the Company taken the optional
exemption, it could record the fair value of
property, plant and equipment and intangible
assets at the transition date, for individual
assets or classes of assets.
Ongoing impact: For post-transition periods,
IFRS allows the Company to choose whether to
use the revaluation model or historical cost
model. The Company has chosen to continue use
of the historical cost model for each class
of asset.
-------------------------------------------------------------------------
Impairment of assets Difference from Canadian GAAP: IFRS requires
that increases in recoverable amounts of
impaired assets subsequent to the time of
impairment to be recognized as an impairment
reversal, but only to the extent that the
resulting carrying amount would not exceed
the carrying amount that would have existed
had an impairment amount not initially been
recognized. Canadian GAAP did not allow for
increases in recoverable amounts of impaired
assets subsequent to the time of impairment
to be recognized.
Transition date impact: The Company expects
to record impairment reversals at the
transition date for wireless spectrum, as
well as reversals for certain wireline
property, plant and equipment impairments
recorded by predecessor companies during a
past transition from regulatory accounting
principles (RAP) to Canadian GAAP.
Ongoing impact: The transition date RAP to
GAAP impairment reversal will result in a
minor increase in depreciation expense.
Volatility in Net income could result from
periodic impairment tests, should the facts
support a future impairment.
-------------------------------------------------------------------------
Sale of accounts Difference from Canadian GAAP: IFRS does not
receivable de-recognize the accounts receivable sold to
the arm's-length securitization trust that
the Company transacts with and considers the
sale proceeds to be short-term borrowings of
the Company. Canadian GAAP de-recognized
accounts receivable sold to the arm's-length
securitization trust that the Company
transacts with.
Transition date impact: Proceeds from the
sale of accounts receivable under the
Company's accounts receivable securitization
agreement are recorded as short-term debt,
rather than a reduction to accounts
receivable (or de-recognition).
Ongoing impact: Accounts receivable
securitization expenses are included in
financing costs under IFRS, rather than in
Other expense under Canadian GAAP.
-------------------------------------------------------------------------
Leasing (sales and Difference from Canadian GAAP: The Company
leaseback transactions) sold and leased-back certain non-strategic
buildings, primarily in 2000 and 2001. IFRS
requires that where the original sale was at
fair value that the gain be recognized in
income immediately. Canadian GAAP required
that gains arising on sales and leaseback
transactions be deferred and amortized over
the term of the resulting lease.
Transition date impact: A portion of gains
deferred under Canadian GAAP will be
recognized at the transition date as an
increase in opening Retained earnings.
Ongoing impact: Amortization of deferred
gains under IFRS will be reduced for the
portion of gains recognized at the transition
date under IFRS.
-------------------------------------------------------------------------
Income taxes Difference from Canadian GAAP; transition
date and ongoing impacts: The impacts on the
Company of the IAS 12 standard for income
taxes are primarily related to recognition
and measurement of uncertain tax positions,
and disclosure and presentation differences.
-------------------------------------------------------------------------
IFRS 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.
In April 2010, the IASB issued an exposure draft pertaining to employee benefits; specifically the recognition of actuarial gain or losses for defined benefit plans. The exposure draft proposes to eliminate the corridor method for recognition of actuarial gains or losses. The Company's elected accounting policy choice of recognizing ongoing actuarial gains or losses in Other comprehensive income is consistent with this exposure draft. The exposure draft also proposes certain presentation and disclosure changes. The final standard is expected to be published in 2011.
In June 2010, the IASB issued an exposure draft pertaining to revenue recognition as part of the joint revenue project with the U.S. Financial Accounting Standards Board. This exposure draft that the Company is currently reviewing is the next step in developing an entirely new revenue recognition standard. The final standard is expected to be published in June 2011.
The Company continues to evaluate the possible effects of IAS 37, as well as exposure drafts related to employee benefits and revenue recognition, 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.
-------------------------------------------------------------------------
Milestones
Key activity (expected timeframes) Status and comments
-------------------------------------------------------------------------
Financial
statement
preparation
-------------------------------------------------------------------------
- Key elements Identification, evaluation Initial choices
phase and selection of accounting completed and approved
policies necessary for the in 2009.
Company to change over to IFRS
Ongoing review of IFRS
exposure drafts and
developments, as noted
in the previous section,
has not resulted in any
changes to policy
choices.
-------------------------------------------------------------------------
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 parallel
contemporary Canadian GAAP and sets of books, as
one according to contemporary planned.
IFRS
Activities related to
quantifying and
recording 2010 IFRS
opening balance
adjustments and 2010
reporting period
differences, continued
in the second quarter of
2010.
----------------------------------------------------------
Develop financial statements Drafted. Senior
formats and note disclosures management approval
expected in the second
half of 2010
----------------------------------------------------------
Disclosure in the MD&A of the The Company currently
impacts on the 2010 comparative expects to quantify
period, when available impacts on key financial
statement line items and
other measures in the
third quarter MD&A.
The Company expects to
quantify the following
in the annual 2010 MD&A,
for release in the first
quarter of 2011:
- IFRS impacts on the
January 1 and December
31, 2010 Consolidated
statements of
financial position;
- IFRS impacts on the
2010 Consolidated
statements of
comprehensive income;
and
- IFRS impacts on 2010
policy metrics and
other calculated
measures.
-------------------------------------------------------------------------
Communication Provide ongoing training on In 2010, the Company is
and training expected IFRS impacts, IFRS 1 leveraging internal
elections and accounting resources to implement a
policy choices 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 Parallel reporting
- Information to 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 the second half
of 2010.
-------------------------------------------------------------------------
Business Assess impacts on contractual Contract reviews are
policy arrangements and covenants. conducted each quarter;
assessment Implement changes as necessary changes have not been
required, to date.
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 optional exemption and approval received for
over accounting policy choices initial elections and
financial policy choices obtained
reporting 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,
impacts of outstanding
IFRS exposure drafts,
and quantification
efforts in April and
July 2010.
Progress presented at
the May 4 and August 3,
2010, Audit Committee
meetings. Quantified
results were reviewed
with the Audit Committee
in July.
----------------------------------------------------------
Testing of controls for 2010 Activities commenced in
comparatives the first quarter of
2010 and continued in
the second quarter.
-------------------------------------------------------------------------
- Disclosure Review and sign-off conversion Fourth quarter of 2010 -
controls and effects on fiscal 2010 approval of IFRS
procedures disclosures in third
- Review and approval by senior quarter MD&A, including
management quantification of
impacts on key line
- Review by Audit Committee items.
and approval by the Board of
Directors First quarter of 2011 -
approval of fiscal 2010
IFRS disclosures.
----------------------------------------------------------
December 2010 The Company expects to
continue its long-
- Board of Directors' approval standing practice of
of the Company's 2011 releasing annual targets
IFRS-based budget for the upcoming year in
December and provide
- Senior management approval final guidance for the
of 2011 public targets under current year. An
IFRS investor call follows
the news release.
- Publicly issue final guidance
for fiscal 2010 according to
Canadian GAAP, and expected
IFRS changeover impacts on
fiscal 2010, together with
2011 annual targets according
to IFRS
-------------------------------------------------------------------------
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.
Management has considered the Company's performance for the first half of 2010, the July debt issue and planned early partial redemption of U.S. dollar Notes, and has provided the following guidance revisions:
Annual guidance
-------------------------------------------------------------------------
2010 revised
guidance and
expected change from Change from
2009 actual results original target
-------------------------------------------------------------------------
Consolidated
$9.70 to $(100) to
Revenues $9.950 billion $(150) million
1 to 4%
----------------------------------------------------------------------
EBITDA(1) $3.5 to $3.7 billion no change
flat to 6%
----------------------------------------------------------------------
EPS - basic(2) $2.90 to $3.30 no change
(8) to 5%
----------------------------------------------------------------------
Capital expenditures Approx. $1.7 billion no change
(19)%
-------------------------------------------------------------------------
Wireline segment
$4.75 to $(100) to
Revenue (external) $4.85 billion $(150) million
(3) to (1)%
----------------------------------------------------------------------
$1.575 to
EBITDA $1.675 billion no change
1 to 8%
-------------------------------------------------------------------------
Wireless segment
Revenue (external) $4.95 to $5.1 billion no change
5 to 8%
----------------------------------------------------------------------
$1.925 to
EBITDA $2.025 billion no change
flat to 5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 11.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition.
(2) Current basic EPS guidance remains unchanged from the original
target, but does include the impact of the 13 cent (per share)
penalty for early partial redemption of U.S. dollar Notes, and
3 cents favourable income tax recoveries realized in the first six
months of 2010.
-------------------------------------------------------------------------
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, confirmed ongoing
competition in both business and aggressive offers by the primary
consumer markets competitor in Western Canada, and a
new brand launch by an incumbent
wireless competitor
-------------------------------------------------------------------------
Canadian wireless industry market Same expectation, with an increasing
penetration gain of approximately proportion from postpaid subscribers
four percentage points for the year associated with growing data usage
(approximately 3.6 percentage and smartphone adoption
points in 2009)
-------------------------------------------------------------------------
Increased wireless subscriber Smartphone represented 30% of
loading in smartphones postpaid gross additions in the
second quarter of 2010, compared to
15% in the second quarter of 2009
-------------------------------------------------------------------------
Reduced downward pressure on Confirmed by the 1.9% year-over-year
wireless ARPU (down 6.8% in 2009) decrease in wireless ARPU in the
second quarter of 2010 (3.2% year-
over-year for the first six months)
-------------------------------------------------------------------------
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 launched in Edmonton in
the first quarter of 2010, and
Ottawa and Vancouver in the second
quarter.
Other new entrants began launching
services in the second quarter.
Public Mobile turned up services in
Toronto and Montreal. Mobilicity
launched services in Toronto and
stated expectations to launch in
Vancouver, Edmonton, Calgary and
Ottawa during rest of the year.
Quebecor, an existing mobile virtual
network operator (MVNO) competitor,
stated expectations to launch its
own services in Quebec and Ontario
later in 2010. Shaw Communications
stated it expects to begin launching
wireless services in late 2011.
In addition, an incumbent competitor
has announced a new brand.
-------------------------------------------------------------------------
In wireline, stable residential Residential access lines decreased
network access line losses and by 8.2% over the 12-month period
continued competitive pressure in ended June 30, 2010, resulting from
small and medium business market aggressive promotional activity by
from cable-TV and VoIP companies the primary cable-TV competitor for
voice and Internet services.
Business line losses were 2.3% over
the past 12 months from stable churn
and lower additions
-------------------------------------------------------------------------
Continued wireline broadband See Section 2: Core business and
expansion strategy
-------------------------------------------------------------------------
Significant increase in cost of Wireless COA per gross subscriber
acquisition and retention expenses addition was $333 in the first half
for smartphones and TELUS TV of 2010, or an increase of 3.2% from
loading the same period in 2009. Retention
spending as a percentage of growing
network revenue was 10.6% in the
first half of 2010, unchanged from
the first half of 2009.
TELUS TV loading was 57,000 in the
first half of 2010, compared to
37,000 in first half of 2009. TELUS
TV programming costs have increased
with the 98% increase in the
subscriber base over the past 12
months.
-------------------------------------------------------------------------
EBITDA savings of approximately Savings of approximately $74 million
$135 million from efficiency were realized in the first six
initiatives months of 2010
-------------------------------------------------------------------------
Approximately $75 million of No change
restructuring expenses ($190
-------------------------------------------------------------------------
A blended statutory tax rate of No change. The blended statutory
approximately 28.5 to 29.5% (30.3% income tax rate was 28.9% in the
in 2009). The expected decrease is first half of 2010.
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 million refunds received were $309 million
(net $266 million in 2009) due to in the first half of 2010, comprised
the timing of instalment payments of instalments for 2010 and final
payments for the 2009 tax year made
in the first quarter. Expectation
for the full year was revised to a
range of $330 to $370 million.
Payments for the remainder of 2010
are expected to be for in-year
instalments only, net of expected
refunds for the settlement of prior
years' matters.
-------------------------------------------------------------------------
A pension accounting discount rate No change to defined benefit
was estimated at 5.75% and pension plan expenses, which are
subsequently set at 5.85% (140 set at the beginning of the year.
basis points lower than 2009). The Company's best estimate of
The expected long-term return of contributions to defined benefit
7.25% is unchanged from 2009 and pension plans in 2010 is currently
consistent with the Company's unchanged.
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. The following are updates to the risk and risk management discussions in Section 10 of TELUS' MD&As for 2009 or the first quarter of 2010.
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 (BDUs)
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. In June 2010, Industry Canada unveiled three options for consultation on lifting foreign ownership restrictions for telecommunications companies:
- Increase the limit for direct foreign investment in broadcasting and
telecommunications common carriers to 49 per cent;
- Lift restrictions on telecommunications common carriers with a
10-percent market share or less, by revenue; or
- Remove foreign ownership restrictions completely.
These consultations ran through July 30, 2010. Aside from these proposed options, the government could also 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 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. Public 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
In June 2010, a tentative collective agreement was reached with the Syndicat québécois des employés de TELUS (SQET) in the TELUS Québec region. Both the SQET negotiating committee and their Executive Council have endorsed the deal and have recommended it to their membership for acceptance. Ratification votes were being held from mid-July to early August 2010. If ratified, the new collective agreement will expire on December 31, 2014. The previous SQET agreement expired on December 31, 2009, and covers approximately 1,000 trades, clerical and operator services team members.
In July 2010, TELUS and the Telecommunications Workers Union (TWU) began negotiations to renew a collective agreement that will expire on November 19, 2010. The TWU contract applies to approximately 12,000 employees across Canada in TELUS' wireline and wireless business segments.
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 Process risks
Systems and processes
TELUS undertook an extensive nine-month, enterprise-wide project involving hundreds of staff to implement changes in more than seventy systems and processes, in order to accommodate the July 1, 2010, implementation of harmonized sales tax (HST) by the provinces of B.C. and Ontario, and the HST rate increase in Nova Scotia. A relatively short implementation time, as well as delayed issuance of legislation and late rule changes, may result in interpretation issues and possible future reassessments that could lead to further system and process changes and increased costs. Despite the significant challenges, early indications are that the conversions were successful, with only minor post-implementation problems surfacing.
Risk mitigation: The quality assurance of the implemented solutions includes on-going government consultations, extensive functional, performance and revenue assurance testing, and an independent post-implementation review of the system changes.
11. Definitions and reconciliations
11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA)
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. 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 EBITDA - excluding restructuring costs in Section 11.4.) 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. 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's Canadian Performance Reporting Board defined standardized EBITDA to foster comparability of the measure between entities. 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. Management's definition of EBITDA differs from standardized EBITDA as follows:
-------------------------------------------------------------------------
EBITDA calculation Quarters ended Six-month periods
June 30 ended June 30
---------------------------------------------
($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net income 296 244 564 566
Financing costs 114 106 226 201
Income taxes 96 88 195 145
Depreciation 316 330 661 664
Amortization of
intangible assets 91 94 199 187
-------------------------------------------------------------------------
Standardized EBITDA
(CICA guideline) 913 862 1,845 1,763
Other expense (income) 6 11 14 16
-------------------------------------------------------------------------
EBITDA (management's
definition) 919 873 1,859 1,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
-------------------------------------------------------------------------
EBITDA less capital Quarters ended Six-month periods
expenditures June 30 ended June 30
---------------------------------------------
($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
EBITDA 919 873 1,859 1,779
Capital expenditures (397) (557) (708) (1,031)
-------------------------------------------------------------------------
522 316 1,151 748
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11.2 Free cash flow
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. 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. 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).
-------------------------------------------------------------------------
Free cash flow calculation Quarters ended Six-month periods
June 30 ended June 30
---------------------------------------------
($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
EBITDA (management's
definition) 919 873 1,859 1,779
Share-based compensation 6 11 7 20
Net employee defined
benefit plans expense 7 5 14 9
Employer contributions to
employee defined benefit
plans (44) (51) (89) (104)
Restructuring costs net of
cash payments (3) 31 (52) 30
Donations and securitization
fees included in Other
expense (4) (11) (14) (14)
Cash interest paid (185) (184) (221) (233)
Cash interest received - 35 - 35
Income taxes received (paid),
net (58) (8) (309) (222)
Capital expenditures (397) (557) (708) (1,031)
-------------------------------------------------------------------------
Free cash flow (management's
definition) 241 144 487 269
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CICA's Canadian Performance Reporting Board defined standardized free cash flow to foster comparability of the measure 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 Quarters ended Six-month periods
reconciliation June 30 ended June 30
---------------------------------------------
($ millions) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by operating
activities 523 852 937 1,466
Deduct stipulated dividends n/a n/a n/a n/a
Deduct capital expenditures (397) (557) (708) (1,031)
Proceeds from disposition of
capital assets - - - -
-------------------------------------------------------------------------
Standardized free cash flow
(CICA guideline) 126 295 229 435
Other (Amortization of
deferred gains on
sale-leaseback of buildings,
amortization of deferred
items and other, net) 5 (3) 6 (23)
Reduction (increase) in
securitized accounts
receivable - (100) 100 (100)
Non-cash working capital
changes, except changes from
income tax payments
(receipts), interest payments
(receipts) and securitized
accounts receivable 110 (48) 152 (43)
Proceeds from disposition of
capital assets - - - -
-------------------------------------------------------------------------
Free cash flow (management's
definition) 241 144 487 269
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/a - not applicable
-------------------------------------------------------------------------
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.
Earnings coverage (Interest coverage on long-term debt) 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.
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 $134 million and $129 million, respectively, for the 12-month periods ended June 30, 2010 and 2009.
EBITDA - excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs divided by Net interest cost. Historically, this measure is substantially the same as the Coverage Ratio covenant in TELUS' credit facilities.
Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term debt, including Current maturities of long-term debt, as reconciled below. Net debt is one component of a ratio used to determine compliance with debt covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at June 30
---------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Long-term debt including current portion 6,203 6,137
Debt issuance costs netted against long-term debt 25 29
Derivative liability 686 835
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) (52) (120)
Cash and temporary investments (41) (26)
Proceeds from securitized accounts receivable 400 400
-------------------------------------------------------------------------
Net debt 7,221 7,255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 June 30, 2010 (U.S.$1,925 million at June 30, 2009) that matures June 1, 2011. Management believes that Net debt is a useful measure because it incorporates the exchange rate impact of cross currency swaps put into place that fix the value of U.S. dollar debt and because it represents the amount of long-term debt obligations that are not covered by available cash and temporary investments.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing EBITDA - excluding restructuring costs. TELUS' long-term guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt used in the Company's capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. No gains on redemption and repayment of debt were recorded in the respective periods. Losses recorded on the redemption of long-term debt are included in net interest cost. Net interest costs for the 12-month periods ended June 30, 2010 and 2009 are equivalent to Financing costs reported for those periods.
Total capitalization - book value is calculated as Net debt plus Owners' equity, excluding accumulated other comprehensive income or loss:
-------------------------------------------------------------------------
As at June 30
---------------------
($ millions) 2010 2009
-------------------------------------------------------------------------
Net debt 7,221 7,255
Owners' equity
Common Share and Non-Voting Share equity 7,882 7,378
Add back Accumulated other comprehensive loss 54 110
Non-controlling interests 22 21
-------------------------------------------------------------------------
Total capitalization - book value 15,179 14,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For further information: Media relations: Shawn Hall, (604) 619-7913, [email protected]; Investor relations: Robert Mitchell, (647) 837-1606, [email protected]
Share this article