RCI Rogers Communications Inc

The second largest Canadian telecommunications company, Telus Corporation (TU) has reported second quarter adjusted earnings per ADS of $0.99 (C$0.96 per share), missing the Zacks Consensus Estimate by a penny. Adjusted earnings increased 5.5% from C$0.91 in the year-ago quarter.

Adjusted earnings exclude an income tax benefit of 3 Canadian cents.

Total revenue increased 6.4% year over year to C$2.554 billion ($2.639 billion), striding ahead of the Zacks Consensus Estimate of $2.616 billion. The year-over-year increase was attributable to higher revenues from wireless and wireline data services. Adjusted EBITDA upped 2.7% year over year to C$950 million ($983 million). The improved revenue was partially offset by high costs associated with the growth in wireline Optik TV services and retain wireless subscribers.

Segment Results

Wireless revenues spiked 9.6% year over year to C$1.34 billion ($1.38 billion) in the reported quarter driven by increases of 8.8% in network revenue and 21% in equipment and other revenue.

Within network revenue, data revenue jumped 48.9% year over year on strong adoption of smartphones and related data plans, increased mobile Internet devices and tablets, and higher roaming revenues. Voice revenue slid 3.7% year over year, due to falling voice average revenue per user (ARPU).

In the reported quarter, ARPU grew 2.5% year over year to C$58.88 ($60.83), primarily attributable to higher data ARPU (up 39% year over year) partly offset by lower voice ARPU (down 9.3%). The monthly subscriber churn (customer switch) deteriorated to 1.67% from 1.45% in the year-ago quarter, reflecting the loss of the federal contract and increased price competition from new entrants and existing national competitors.

Net wireless subscriber addition was 94,000, reflecting a 24.2% year-over-year decrease following the loss of a federal service contract. Telus added 2,000 net pre-paid customers in the second quarter, representing a 15.6% year-over-year decline. Net post-paid subscriber addition was 92,000, down 15.6% year over year.

Telus had 7.1 million wireless subscribers, including 5.9 million post-paid customers and $1.2 million prepaid customers at the end of the second quarter.

Wireline revenues rose 3% year over year to C$1.261 billion ($1.30 billion) due to declines in voice local and long distance revenues, partially compensated by data and other services and equipment revenue growth. Data revenues increased 14% year over year to C$635 million ($646 million) owing to healthy TV subscriber growth, higher Internet services and enhanced data services, increased data equipment sales as well as newly consolidated managed workplace revenues.

Voice local revenues fell 8.7% year over year to C$380 million ($393 million) while voice long-distance revenue dropped 10.3% to C$122 million ($126 million) due to lower revenues from basic access, ongoing industry-wide price competition, substitution to wireless and Internet-based services, as well as declining residential access lines.

Telus added 46,000 TV subscribers to reach 403,000 customers (up 76.8% year over year). The massive growth can be credited to the ongoing success of the Optik TV brand, improved installation, enhanced service and expanded broadband coverage. Net high-speed Internet subscriber additions shot up more than four folds year over year to 13,000  (reaching 1.2 million in service) driven by the success of Optik TV and Optik high-speed Internet service launched in June 2010, as well as continued broadband footprint expansion and speed enhancement.

Total network access lines declined 4.2% year over year to 3.68 million in the reported quarter, resulting from intense cable competition and wireless substitution.

Cash Flow

Telus generated free cash flow of C$286 million in the reported quarter, up 19.7% year over year. Capital expenditure was C$456 million compared with C$397 million in the year-ago quarter.

Dividend

The company will pay a quarterly dividend of C$0.55 on October 3 to shareholders of record as of September 9. The dividend represents a 10% increment over the year-ago period.

Outlook

Telus revised its outlook for 2011 taking strong second quarter results into account. The company raised its consolidated revenue guidance to C$10.225–C$10.425 billion from C$9.925–C$10.225 billion, representing a 4% to 6% growth on a year-over-year basis. Telus reiterated its EBITDA guidance of C$3.675–C$3.875 billion (up 1% to 6% year over year) and earnings per share guidance between C$3.50 and C$3.90 (up 7% to 19% year over year). The company also raised its consolidated capital expenditure guidance to C$1.8 billion from C$1.7 billion.

Telus expects Wireless revenues to grow 8–10% to C$5.4–C$5.5 billion and EBITDA to grow 6–11% to C$2.15–C$2.25 billion for 2011. For the Wireline segment, Telus expects revenue to grow 1–3% to C$4.825–C$4.925 billion and EBITDA to decline 6% to C$1.525–C$1.625 billion.

Our Analysis

We remain encouraged by Telus’ prospects in wireless data growth given new devices, technology upgrades, strong adoption of smartphones, deployment of HSPA+ Dual Cell technology and the expected launch of 4G+ LTE network in 2012, which are expected to fuel Wireless revenue growth. Popular smartphones like BlackBerry and iPhone (launched in late 2009) will provide Telus a competitive advantage over other dominant players such as Rogers Communication (RCI) and BCE Inc. (BCE).

On the Wireline side, the company’s continued investments to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services will boost its profitability. In addition, we are encouraged by the company’s improved confidence related to 2011 earnings and free cash flow with cost reduction plans and further investments in broadband infrastructure expansion and upgrade.

However, the weak Canadian economy, accelerated access line erosion in the Wireline segment, an increasingly competitive domestic wireless market and reduced wireless data plans will continue to weigh on future earnings.

We are currently maintaining our long-term Neutral recommendation on Telus. For the short term (1–3 months), the stock retains a Zacks # 2 (Buy) Rank.

 
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