VANCOUVER, BRITISH COLUMBIA — (Marketwired) — 11/06/14 — For the third quarter of 2014, TELUS Corporation (TSX: T)(NYSE: TU) reported consolidated operating revenue growth of 5.4 per cent from a year earlier, for the first time surpassing quarterly revenue of $3.0 billion. Earnings before interest, income taxes, depreciation and amortization (EBITDA) increased by 2.9 per cent to $1.07 billion. EBITDA excluding restructuring and other like costs increased by 4.3 per cent to $1.1 billion. Net income of $355 million was flat year-over-year, while adjusted net income increased by 6.0 per cent to $387 million. Basic earnings per share (EPS) rose by 3.6 per cent to $0.58, while adjusted EPS increased by 10 per cent to $0.64.
Darren Entwistle, TELUS Executive Chair said, “Our strong third quarter results reflect the significant and ongoing benefits of a global leader in employee engagement and a TELUS team that continues to embrace our company–s top priority to put customers first in everything we do. Indeed, as a result of this commitment, TELUS delivered an industry-best 136,000 net new customer connections, record lifetime revenue per customer and an industry-leading postpaid customer loyalty rate of 0.90 per cent. Moreover, our leading results reflect the continuity of our Customers First strategy launched in 2008, which has focused on listening to our customers and making real changes to meet their needs in order to provide a truly differentiated experience. Our team–s steadfast execution of this strategy is reflected in the just-released CCTS Annual Report in which complaints against TELUS have declined 53 per cent since 2011. Notably, this is the third consecutive year that TELUS has had the lowest number of complaints amongst Canada–s major carriers, reflecting the power of our customer first culture in action.”
Mr. Entwistle added, “In addition to the strategic long-term investments we are making to meet the needs of our customers and drive our future growth, we are simultaneously returning significant amounts of cash to our shareholders through our multi-year share purchase and dividend growth programs. In this regard, we further enhanced our track record by completing our 2014 share purchase program during the quarter, returning $500 million to our shareholders, and building upon the $1 billion NCIB program completed in 2013. Notably, the combined value of the two share purchase programs, plus nearly $1.8 billion in dividends paid, total $3.3 billion that we have returned to our shareholders since the beginning of 2013. To further demonstrate our commitment to this program, we announced in October that we would accelerate the start of our 2015 NCIB program to purchase and cancel up to $500 million in additional TELUS shares. Finally, I am also pleased to announce today that we are raising our quarterly dividend by 11.1 per cent year-over-year to 40 cents per share. This is our eighth increase since announcing our multi-year dividend growth program in May 2011.”
Joe Natale, TELUS President and CEO said, “TELUS– performance in the third quarter demonstrates that putting customers first delivers consistent results. Our recent CCTS scores, combined with our industry-leading postpaid churn rate, clearly distinguish TELUS as the telecom industry–s customer service leader.”
“We are committed to delivering upon what Canadians deserve from their telecom, Internet and TV provider, while simultaneously growing our businesses and producing meaningful returns for our shareholders,” Mr. Natale added.
John Gossling, TELUS Executive Vice-President and CFO said, “In the third quarter, TELUS continued to maintain the strongest balance sheet in our industry. Our strength was further enhanced by the successful issuance of $1.2 billion of new low-cost long term debt in September, which significantly increased our liquidity to more than $2 billion. As a result of the new debt issue, the average term to maturity of our long-term debt was extended to 11.2 years, compared to 5.5 years at the end of 2012, and our average cost of long-term debt has decreased to 4.72 per cent compared to 5.44 per cent at the end of 2012. As a result of our stable financial position, TELUS has the unique ability to make strategic investments in our advanced broadband networks and services for the benefit of all our customers, while returning significant capital to our shareholders.”
CONSOLIDATED FINANCIAL HIGHLIGHTS
Consolidated revenue growth was generated by strength in both wireless and wireline operations, with network wireless revenue up 6.6 per cent and wireline revenue up 2.5 per cent from a year ago. In wireless, revenue was primarily driven by continued subscriber growth and higher data usage as a result of continued smartphone adoption and the expansion of TELUS– LTE network coverage. Wireline strength was driven by data revenue growth of 7.1 per cent, generated primarily by high-speed Internet subscriber growth and higher revenue per customer, and TELUS TV subscriber growth. Data revenue from both wireless and wireline operations increased by 14 per cent over the same period a year ago to $1.65 billion.
TELUS attracted a total of 136,000 net new customer connections (excluding Public Mobile) in the quarter, driven by the gain of 113,000 wireless postpaid customers, 23,000 TELUS TV subscribers and 22,000 high-speed Internet customers, partially mitigated by the moderating loss of residential access lines. TELUS– total wireless subscriber base is up 2.3 per cent from a year ago to 8.0 million, high-speed Internet connections are up 5.7 per cent to 1.45 million, and TELUS TV subscribers are up 14 per cent to 888,000.
TELUS– ongoing customers first focus delivered a strong nine basis point year-over-year improvement in monthly postpaid wireless subscriber churn to a record low 0.90 per cent, the fifth consecutive quarter this important metric was below one per cent.
Free cash flow of $219 million was lower by 40 per cent from a year ago as higher EBITDA was more than offset primarily by higher capital expenditures (excluding spectrum licences), interest and income tax payments.
TELUS returned $385 million to shareholders in the third quarter, consisting of $234 million in dividends paid and $151 million in share purchases under its 2014 normal course issuer bid (NCIB) program, which was completed at the end of September. Year-to-date through the end of October, TELUS returned $1.4 billion to shareholders consisting of $913 million in dividends and the purchase of 13.6 million shares for approximately $524 million under its 2014 and advanced 2015 NCIB programs.
TELUS– 2014 consolidated capital expenditures target, as described in TELUS– fourth quarter 2013 results and 2014 financial target news release issued on February 13, 2014, has been revised and TELUS now anticipates full year consolidated capital expenditures of approximately $2.3 billion compared to its previously estimated 2014 target of $2.2 billion. The Company plans to continue its network-focused investments in advanced broadband wireless and wireline technologies, and in customers– first initiatives.
Reflecting the successful integration efforts of Public Mobile in 2014, TELUS– revised expectation for consolidated and wireless EBITDA for 2014 is to be negatively impacted by less than $20 million (previously $40 million).
The preceding disclosure respecting TELUS– 2014 financial targets and assumptions contains forward-looking information and is fully qualified by the –Caution regarding forward-looking statements– at the beginning of the accompanying Management–s discussion and analysis for the third quarter of 2014 and are based on management–s expectations and assumptions as set out in TELUS– fourth quarter 2013 results and 2014 financial target news release and in Section 9 entitled –General outlook and assumptions– in TELUS– 2013 annual report.
This news release contains statements about financial and operating performance of TELUS (the Company) and future events, including with respect to future dividend increases and normal course issuer bids through 2016 and the 2014 annual targets 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 those expressed in the forward-looking statements. Accordingly, this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for the 2014 annual guidance, semi-annual dividend increases through 2016 and our ability to sustain and complete our multi-year share purchase programs through 2016), qualifications and risk factors referred to in the first, second and accompanying third quarter Management–s discussion and analysis, in the 2013 annual report, and in other TELUS public disclosure documents and filings with securities commissions in Canada (on SEDAR at sedar.com) and in the United States (on EDGAR at sec.gov). 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
TELUS wireline
Dividend Declaration – increased to 40 cents per quarter, up 11.1 per cent from a year ago
The TELUS Board of Directors has declared a quarterly dividend of 40 cents ($0.40) Canadian per share on the issued and outstanding Common Shares of the Company payable on January 2, 2015 to holders of record at the close of business on December 11, 2014. This fourth quarter dividend represents a four cent or 11.1 per cent increase from the $0.36 quarterly dividend paid on January 2, 2014.
This new quarterly dividend is the eighth increase under TELUS– dividend growth program originally announced in May 2011 and extended through 2016, wherein the company plans to continue with two dividend increases per year, normally announced in May and November, of circa 10 per cent annually. Notwithstanding this, dividend decisions will continue to be dependent on earnings and free cash flow and subject to the Board–s assessment and determination of TELUS– financial situation and outlook on a quarterly basis. There can be no assurance that the company will maintain its dividend growth program through to 2016.
About TELUS
TELUS (TSX: T)(NYSE: TU) is Canada–s fastest-growing national telecommunications company, with $11.8 billion of annual revenue and 13.5 million customer connections, including 8.0 million wireless subscribers, 3.2 million wireline network access lines, 1.45 million Internet subscribers and 888,000 TELUS TV customers. TELUS provides a wide range of communications products and services, including wireless, data, Internet protocol (IP), voice, television, entertainment and video, and is Canada–s largest healthcare IT provider.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed more than $350 million to charitable and not-for-profit organizations and volunteered 5.4 million hours of service to local communities since 2000. Created in 2005 by Executive Chairman Darren Entwistle, TELUS– 11 community boards across Canada have led the company–s support of grassroots charities and will have contributed $47 million in support of 3,700 local charities organizations by the end of 2014, enriching the lives of more than two million Canadian children and youth. 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.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings news release, management–s discussion and analysis, quarterly results slides, audio and transcript of investor webcast call, supplementary financial information and our full 2013 annual report at telus.com/investors.
TELUS– third quarter 2014 conference call is scheduled for November 6, 2014 at 9:30 a.m. ET (6:30 a.m. PT) and will feature a presentation followed by a question and answer period with investment analysts. Interested parties can access the webcast at telus.com/investors. A telephone playback will be available on November 6 until December 15 at 1-855-201-2300. Please use reference number 1166789# and access code 92105#. An archive of the webcast will also be available at telus.com/investors and a transcript will be posted on the website within a few business days.
TELUS CORPORATION
Management–s discussion and analysis
2014 Q3
Caution regarding forward-looking statements
This document contains forward-looking statements about expected future events and financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us or our refer to TELUS Corporation and where the context of the narrative permits or requires, its subsidiaries. Forward-looking statements include, but are not limited to, statements relating to annual targets, outlook, guidance and updates, our multi-year dividend growth program, our multi-year share purchase programs, and trends. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions or future or conditional verbs such as aim, anticipate, believe, could, expect, intend, may, plan, seek, should, strive and will. By their nature, forward-looking statements do not refer to historical facts, are subject to inherent risks and uncertainties, and require us to make assumptions. 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 stated targets, expectations, estimates or intentions. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements. An update on our general outlook and assumptions for 2014 is in Section 9 General outlook and assumptions in the Management–s discussion and analysis (MD&A).
Factors that could cause actual performance to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to:
Management–s discussion and analysis (MD&A)
November 6, 2014
Contents
1. Introduction
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management–s discussion and analysis (MD&A).
1.1 Preparation of the MD&A
The following sections are a discussion of the consolidated financial position and financial performance of TELUS for the three-month and nine-month periods ended September 30, 2014, and should be read together with TELUS– September 30, 2014 condensed interim consolidated financial statements (subsequently referred to as the interim consolidated financial statements). The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our interim consolidated financial statements comply with IFRS-IASB and Canadian GAAP and have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Our use of the term IFRS in this MD&A is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures, such as earnings before interest, income taxes, depreciation and amortization (EBITDA), to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 11.1. All amounts are in Canadian dollars, unless otherwise specified.
Our 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. The MD&A and the interim consolidated financial statements were reviewed by TELUS– Audit Committee and approved by TELUS– Board of Directors for issuance on November 6, 2014.
1.2 The environment in which we operate
Economic growth
We estimate economic growth in Canada could be 2.3% in 2014 and 2.5% in 2015, based on a composite of estimates from Canadian banks and other sources. The Bank of Canada–s October 2014 Monetary Policy Report estimated economic growth for Canada at 2.25% in 2014 and 2.50% in 2015. In respect of the national unemployment rate, Statistics Canada–s Labour Force Survey reported a rate of 6.8% for September 2014 (7.2% reported in December 2013; 6.9% reported in September 2013).
Latest regulatory developments
On July 28, 2014, Industry Canada opened its Consultation on a Policy, Technical and Licensing Framework for Advanced Wireless Services in the Bands 1755 – 1780 MHz and 2155 – 2180 MHz (AWS-3). In this framework, the Minister of Industry proposes to auction 50 MHz of AWS-3 spectrum in March 2015 in advance of the April 2015 2500 MHz auction and set aside 30 MHz (or 60%) of the spectrum for wireless carriers with less than 10% national and 20% provincial wireless subscriber market share.
On September 8, 2014, the CRTC continued its Let–s Talk TV review, where it sought comments from industry stakeholders on a broad range of topics, including how basic packages should be structured, pick and pay, over-the-top (OTT) services and vertical integration, as well as penetration-based rate cards. We submitted public comments on June 27, 2014, during a consultation phase, where we proposed measures to tackle some of the challenges existing in the current industry structure. Outcomes of this review are expected in the first half 2015.
On September 29, 2014, the CRTC initiated the oral hearing phase of its proceeding to review wholesale mobile wireless services. During the hearing, the CRTC heard submissions from various parties, including the Competition Bureau, consumer groups, new entrants, and established wireless carriers. Matters in issue included roaming, tower sharing, rate setting for wholesale services, and other wholesale arrangements such as Mobile-Virtual-Network-Operators (MVNOs). The Commission–s decision is expected in the first half of 2015.
For additional information, see Section 10.1 Regulatory matters.
1.3 Consolidated highlights
Closing of $1.2 billion debt offeringandearly redemption of $500 million 5.95% Series CE Notes
On September 10, 2014, we closed a debt offering of $1.2 billion in senior unsecured notes in two series, an $800 million offering at 3.75%, due January 17, 2025, and a $400 million offering at 4.75%, due January 17, 2045. The net proceeds were used to repay indebtedness consisting of (a) advances on the 2014 credit facility and commercial paper issued to fund a substantial portion of the early redemption, on September 8, 2014, of our $500 million Series CE Notes, and (b) other outstanding commercial paper, which had been originally incurred for general corporate purposes. The long-term debt prepayment premium recorded in the three-month period ended September 30, 2014, was approximately $13 million before income taxes (or $0.02 per share after income taxes).
Share purchase programs
On September 23, 2014, we successfully completed our 2014 normal course issuer bid (NCIB) program, purchasing approximately 13 million of our Common Shares and returning $500 million to shareholders. The average share purchase price was $38.45. The purchased shares represent 2.1% of the shares outstanding prior to commencement of the NCIB. On September 29, 2014, we announced that we had received approval from the Toronto Stock Exchange (TSX) for a new NCIB program (2015 NCIB) to purchase and cancel up to 16 million Common Shares up to a maximum amount of $500 million over a 12-month period, commencing October 1, 2014. This represents up to an additional 2.6% of outstanding TELUS Common Shares at the date of the NCIB notice to the TSX. Our Board believes such share purchases are in the best interest of TELUS and that they constitute an attractive investment opportunity and desirable use of TELUS funds that should enhance the value of the remaining shares.
Additionally, we entered into an automatic share purchase plan with a broker to allow us to purchase our Common Shares under our NCIB during internal blackout periods, including during regularly scheduled quarterly blackout periods. Such purchases are determined by the broker in its sole discretion based on parameters established by us. As at October 31, 2014, pursuant to our 2015 NCIB, we had purchased approximately 0.6 million Common Shares for cancellation for $24 million, at an average price of $38.90 per share.
There can be no assurance that we will complete our 2015 NCIB or renew the NCIB program for 2016. For additional information on our multi-year share purchase programs, see Section 4.3. Also see Caution regarding forward-looking statements – Ability to sustain and complete multi-year share purchase programs through 2016.
Consolidated highlights
Operating highlights
2. Core business and strategy
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
Our core business was described in our annual 2013 MD&A.
Strategic imperatives
Since 2000, we have maintained a consistent strategic intent to unleash the power of the Internet to deliver the best solutions to Canadians at home, in the workplace and on the move. Our focus is on our core telecommunications business in Canada, supported by our international contact centres and outsourcing capabilities.
We developed six strategic imperatives in 2000 that remain relevant for future growth, despite changing regulatory, technological and competitive environments. These six strategic imperatives continue to guide our actions and contribute to the achievement of our financial goals. To advance these long-term strategic initiatives and address near-term opportunities and challenges, we set new corporate priorities each year, as further described in Section 3. Our strategic imperatives are discussed below.
Focusing relentlessly on the growth markets of data, IP and wireless
External wireless revenues and wireline data revenues were $7.4 billion in the first nine months of 2014, up by $502 million or 7.3% from the same period in 2013, while wireline voice and other revenues and other operating income were $1.5 billion, down $84 million or 5.4% year over year. Wireless revenues and wireline data revenues combined represented 83% of TELUS– consolidated revenues for the first nine months of 2014, up one percentage point over the same period a year ago.
Providing integrated solutions that differentiate TELUS from its competitors
We continue to focus on the healthcare industry as one of our key targeted verticals.
In early September, we acquired ZRx Prescriber from Quebec-based ZoomMed Inc., a web-based technology that allows physicians to use a mobile device to write and deliver prescriptions while accessing the patient–s insurance coverage information at the moment of prescription. With this technology, TELUS Health will become the first Canadian healthcare technology provider to offer insurance coverage validation nationally at the moment of prescription and accelerate the reimbursement of insurance claims.
Our commitment to corporate social responsibility and achievement of sustainable growth as we strive to be a globally leading corporate citizen has resulted in TELUS being named to the Dow Jones Sustainability North America Index (the Index) for the 14th consecutive year. The Index measures the performance of the world–s sustainability leaders based on a comprehensive assessment of long-term economic, environmental and social criteria that include corporate governance, risk and crisis management, customer relationship management and corporate citizenship. We improved our overall score this year to 83 out of 100, up four points from last year. We are the only Canadian telecom and one of two telecoms in North America to be named to the Index.
Building national capabilities across data, IP, voice and wireless
In 2014, we continue investing in broadband infrastructure and 4G LTE expansion and upgrades, as well as in network and systems resiliency and reliability, to increase available Internet speed and capacity, connect more homes and businesses to high-speed Internet services and extend the reach of Optik TV.
Partnering, acquiring and divesting to accelerate the implementation of our strategy and focus our resources on the core business
In August 2014, we launched a cloud-based mobile-device-management (MDM) solution to help Canadian businesses keep their mobile devices secure and embrace the growing bring-your-own-device (BYOD) trend. MDM is powered by the AirWatch–s VMware platform, with professional support provided by Vox Mobile. The platform allows businesses to manage their smartphones and tablets through a user-friendly, cloud-based portal, while preconfigured user profiles are designed to simplify enrolling, configuring and updating devices. It covers any carrier, as well as devices running BlackBerry, iOS, Android and Windows operating systems.
In September 2014, we partnered with Mojio to bring connected car technology to Canadians. The Mojio solution consists of a cellular device that plugs into a car–s onboard diagnostic port and connects cars to the Internet through our wireless network, offering drivers vehicle diagnostics and monitoring, and automated trip tracking from their smartphone.
During the third quarter, we also partnered with Syniverse to offer a technology that allows customers to make payments securely while travelling. Powered by the Syniverse Mobile Intelligence Portal and MasterCard, the new technology offers an enhanced security service for our customers. The Syniverse Mobile Intelligence Portal optimizes mobile context, which is the information about customers– mobile characteristics, such as their current geographic location, the mobile channels they use and their purchases profile, to confirm that the cardholder–s mobile device is in the location where the sale or purchase is taking place. Combining the speed and intelligence of our global network with mobile context data allows us to further improve the user experience for cardholders by ensuring legitimate transactions processed by our customers during their travels abroad are approved.
Going to the market as one team under a common brand, executing a single strategy
Our top corporate priority since 2010 has been to put our customers first as we strive to consistently deliver exceptional client experiences and win the hearts and minds of Canadians on our journey to become the most recommended company in the markets we serve. For the third consecutive year, Koodo Mobile placed highest in customer satisfaction for a stand-alone carrier, according to the 2014 Canadian Wireless Total Ownership Experience Study released by J.D. Power in May 2014.
Our four customer commitments that underpin our internal goals and corporate priorities and help us deliver an elevated experience to our customers are:
The Commissioner for Complaints for Telecommunications Services (CCTS) issued its annual report on November 4, 2014, reaffirming our position as the telecom industry–s customer service leader. For the third consecutive year, our approach to customer service resulted in a substantial decline in the number of complaints submitted to the CCTS – 26% fewer than a year before, even though we attracted a substantial number of new customers to both our wireless and wireline services.
According to the report, in 2013 – 2014, there were only 653 complaints from our customers and 172 complaints from Koodo customers, representing a very small proportion of our current 13.5 million customer connections.
Our continued improvement year after year is a testament to the dedication the entire TELUS team demonstrates in delivering exceptional customer service. We have drawn on past CCTS reports and direct customer feedback to implement numerous changes, and we will continue to learn from this year–s report to make even more improvements.
The CCTS is responsible for assisting customers and telecommunications carriers resolve a wide range of complaints about products and services, including home phone, long distance services, wireless services, wired and wireless Internet access, white page directories, directory assistance, and operator services.
3. Corporate priorities for 2014
We confirm or set new corporate priorities each year to both advance TELUS– long-term strategic priorities and address near-term opportunities and challenges.
Corporate priorities for 2014
4. Capabilities
Our 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
For a full discussion of our principal markets and an overview of competition, please refer to Section 4.1 of our annual 2013 MD&A. The following discussion reflects changes that occurred in the third quarter of 2014.
In 2014, we continue to deliver leading customer churn on a global basis. The third quarter of 2014 represents our fifth consecutive quarter of postpaid churn rates below 1%, matching our lowest churn rates recorded in the second quarter of 2006. Blended churn in the third quarter of 2014 of 1.25% represents our lowest churn since we became a national carrier 14 years ago. This further exemplifies the success of our differentiated customers first culture and our ongoing focus on delivering outstanding customer service, coupled with attractive new products and services.
Wireless segment
In 2014, we acquired and commenced the deployment of 700 MHz wireless spectrum, which we have begun to operationalize for the benefit of our customers. At September 30, 2014, our 4G LTE network covered more than 85% of Canada–s population, up from more than 79% of the population covered at September 30, 2013. Outside of LTE coverage areas, LTE devices we offer also operate on our HSPA+ network, which covered 99% of the population at September 30, 2014.
We continue to re-allocate our wireless spectrum to enhance our LTE services. As part of this re-allocation of spectrum, we have turned down our enhanced voice-data optimized (EVDO) data services which operate on the CDMA network. CDMA voice services will remain operational for several years but will now be re-allocated to a different area of the same 800 MHz spectrum. EVDO provided users with 2.4 to 3.1 megabits per second (Mbps) of download and upload speeds, while the redeployed spectrum will offer speeds from 14 to 84 Mbps for Internet access and other services.
In July 2014, the federal government proposed to set aside spectrum for wireless carriers with less than 10 per cent national and 20 per cent provincial wireless subscriber market share in the recently announced AWS-3 spectrum auction. It is unclear what the effect of the AWS-3 proposals will be in introducing any new competitors.
Wireline segment
We continue to invest in urban and rural communities with commitments to deliver broadband network capabilities to as many Canadians as possible. During the third quarter of 2014, we expanded our fibre footprint by connecting more homes and businesses directly to fibre, increased broadband Internet speeds, and expanded our IPTV video-on-demand library, high-definition content and enhanced marketing of data products and bundles. We will also continue to invest in our state-of-the art Internet data centres (IDCs), creating an advanced and regionally diverse computing infrastructure in Canada. At September 30, 2014, our high-speed broadband coverage reached approximately 2.8 million households in B.C., Alberta and Eastern Quebec, as compared to approximately 2.6 million households at September 30, 2013.
4.2 Operational resources
For a discussion of our Operational resources, please refer to Section 4.2 of our annual 2013 MD&A.
4.3 Liquidity and capital resources
Capital structure financial policies
Our objective when managing capital is to maintain a flexible capital structure that optimizes the cost and availability of capital at an acceptable risk.
In the management of capital and in its definition, we include Common 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 trade receivables.
We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of our telecommunications infrastructure. To maintain or adjust our capital structure, we may adjust the amount of dividends paid to holders of TELUS Common Shares, purchase shares for cancellation pursuant to NCIBs, issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics and/or increase or decrease the amount of trade receivables sold to an arm–s-length securitization trust.
We monitor capital utilizing a number of measures, including the net debt to EBITDA – excluding restructuring and other like costs ratio and the dividend payout ratio. See descriptions in Section 11.1.
Financing and capital structure management plans
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, our internal control over financial reporting.
5. Discussion of operations
Our 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
Our operating and reportable segments are wireless and wireline. Segmented information in Note 5 of our interim consolidated financial statements is regularly reported to our Chief Executive Officer (the chief operating decision-maker).
5.2 Summary of consolidated quarterly results and trends
Trends
The consolidated revenue trend continues to reflect: (i) year-over-year growth in wireless network revenues generated from a growing subscriber base and higher data usage; (ii) wireless equipment revenue that has generally increased year over year from increasing sales of higher value smartphones; (iii) year-over-year growth in wireline data revenues driven by Internet, enhanced data services and TELUS TV, increased TELUS Health revenues, and business process outsourcing services, which exceeded the decline in wireless and wireline voice and other revenues.
Increasing wireless network revenues reflect growth in data revenue from subscriber additions, growth in data usage, and higher wholesale data roaming revenues, partly offset by declines in voice revenue. Data revenue growth reflects increased data consumption driven by the proliferation of smartphones, tablets and other wireless devices, expansion of networks, greater use of applications and other wireless data, as well as increased customer adoption of higher rate two-year plans, including the offset by increased use of data sharing plans. Data revenue growth also reflects increased roaming volumes offset by lower roaming rates from more competitive roaming packages. Consequently, monthly blended ARPU has increased year over year for 16 consecutive quarters. The data revenue growth trend is impacted by competitive pressures driving bigger allotments of data provided in rate plans, including data sharing, and an increasing number of unlimited-messaging rate plans, as well as off-loading of data traffic to increasingly available Wi-Fi hotspots. In July 2013, we introduced new two-year wireless rate plans, which have impacted acquisition and retention trends, including subscribers optimizing unlimited talk and text and shared data plans, and which we expect to increase the frequency of subscribers updating their devices and services. ARPU is expected to continue to increase over time as our customer base renews under the two-year plans. However, the outcome is highly dependent on competitor and consumer behaviour, device selection and other factors. Additionally, the implementation of the new CRTC national Wireless Code may cause operational challenges, due to two and three-year customer contracts ending coterminously in 2015.
Historically, there has been significant third and fourth quarter seasonality with respect to higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals. These impacts can also typically be more pronounced around iconic device launches. Wireless EBITDA typically decreases sequentially from the third quarter to the fourth quarter due to continued competitive intensity and seasonal loading. Subscriber additions have typically been lowest in the first quarter. Historically, monthly wireless ARPU has experienced seasonal sequential increases in the second and third quarters due to increased vacation season usage and roaming, and seasonal sequential declines in the fourth and first quarters.
The trend of increasing wireline data revenue reflects growth in Internet and enhanced data services, including usage increases and adoption of higher speed services, the continuing but moderating expansion of the TELUS TV subscriber base (up 14% in the 12-month period ended September 30, 2014), business process outsourcing, TELUS Health services and rate increases. Higher Internet revenues are due to increased high-speed Internet subscriber base (up 5.7% in the 12-month period ended September 30, 2014), as well as to bundling of offers with Optik TV and certain rate increases. A general trend of declining wireline voice revenues and NALs is due to substitution to wireless and IP-based services and applications, as well as competition from voice over IP (VoIP) service providers (including cable-TV competitors), resellers and facilities-based competitors. Notwithstanding a positive trend in the past two quarters due to specific enterprise customer installations, the general trend for business NALs is a decline due to increased competition in the small and medium business markets, as well as conversion of voice lines to IP services.
The trend in the goods and services purchased expense reflects increasing content costs due to growing TELUS TV subscriber base and higher content rates, increased wireless equipment expenses associated with a higher proportion of smartphones in the sales mix, and higher network operating costs for the growing wireless subscriber base.
The trend in employee benefits expense reflects increases in compensation and in wireless full-time equivalent (FTE) employees to support a growing subscriber base, partly offset by higher capitalized labour associated with increased capital expenditures, as described in Section 7.3. Employee benefits expense includes restructuring and other like costs which tend to fluctuate quarter to quarter.
The general trend in depreciation and amortization has been relatively flat sequentially, as underlying increases due to growth in capital assets from acquisitions, the expansion of our broadband footprint and enhanced LTE network coverage are partly offset by adjustments related to our continuing program of asset life studies.
Financing costs include expenses for long-term debt prepayment premium of approximately $13 million in the third quarter of 2014 and $23 million in the first nine months of 2013. In addition, financing costs for the eight periods shown include varying amounts of foreign exchange gains or losses and varying amounts of interest income.
The trend in net income reflects the items noted above, as well as adjustments arising from legislated income tax changes, settlements and income tax reassessments for prior years, including any related after-tax interest on reassessments. The trend in basic EPS also reflects the impact of share purchases under our NCIB programs.
The trend in cash provided by operating activities reflects growth in consolidated EBITDA, net of higher interest from our re-financing activities and increased income tax payments. The trend in free cash flow also reflects the factors in cash provided by operating activities, as well as increasing capital expenditures (excluding spectrum licences), but excludes the effects of certain working capital changes, such as trade accounts receivable and trade accounts payable. As we expect to participate in future spectrum auctions, our expenditures on spectrum licences are correspondingly expected to continue.
5.3 Consolidated operations
The following is a discussion of our consolidated financial performance. Segmented information in Note 5 of the interim consolidated financial statements is regularly reported to our Chief Executive Officer (the chief operating decision-maker). We discuss the performance of our segments in Section 5.4 Wireless segment,Section 5.5 Wireline segment and capital expenditures in Section 7.3 Cash used by investing activities.
Consolidated operating expenses increased year over year by $138 million in the third quarter of 2014 and $294 million in the first nine months of 2014.
Operating income increased year over year by $16 million in the third quarter of 2014 and $124 million in the first nine months of 2014. In the third quarter, this was composed of increases in wireless EBITDA of $20 million and wireline EBITDA of $10 million, partly offset by a $14 million increase in total depreciation and amortization expenses. Higher operating income in the first nine months of 2014 was composed of increases in wireless EBITDA of $86 million and wireline EBITDA of $62 million, partly offset by a $24 million increase in total depreciation and amortization expenses.
Financing costs increased year over year by $15 million in the third quarter of 2014 and $4 million in the first nine months of 2014, mainly due to the following factors:
Re-financing activities reduced near-term long-term debt re-financing risk by extending our average term-to-maturity of long-term debt (excluding commercial paper) to approximately 11.2 years at September 30, 2014, from 8.6 years one year earlier. Our weighted-average interest rate on long-term debt (excluding commercial paper) was 4.72% at September 30, 2014, as compared to 5.07% one year earlier. TELUS– short-term commercial paper issuance is back-stopped by a committed term credit facility that expires May 31, 2019. For additional details, see Long-term debtissues and repayments in Section 7.4.
Basic blended income tax, at weighted-average statutory income tax rates, was flat year-over-year in the third quarter of 2014 and increased year over year by $33 million in the first nine months of 2014. The increase in the first nine months of 2014 was primarily due to growth in pre-tax income.
Comprehensive income decreased year over year by $167 million in the third quarter of 2014 and increased by $78 million in the first nine months of 2014. The decrease in the quarter was due to employee defined benefit plan re-measurements in the third quarter of 2014 being exceeded by the third quarter of 2013 positive returns on pension and post-retirement assets. The increase in the first nine months of 2014 was primarily due to an increase in net income of $109 million, partly offset by a decrease in employee defined benefit plan re-measurements (an increase in employee defined benefit plans returns being more than offset by restrictions arising from the defined benefit plan asset ceiling). Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.
5.4 Wireless segment
Wireless segment revenues increased year over year by $122 million or 7.7% in the third quarter of 2014 and $301 million or 6.6% in the first nine months of 2014, due to ARPU growth driven by 24% increase in data network revenue in the third quarter of 2014, partly offset by a decline in voice network revenue. Included in the total are Public Mobile–s network, equipment and other revenues of $19 million in the third quarter of 2014, and $68 million for the first nine months of 2014.
Network revenues from external customers increased year over year by $95 million in the third quarter of 2014 and $252 million in the first nine months of 2014. Network revenues, excluding Public Mobile, were $1.5 billion in the third quarter of 2014 and $4.4 billion for the first nine months of 2014, an increase of $78 million and $192 million when compared to the same periods in 2013. Data network revenue, excluding Public Mobile, increased year over year by 23% in the third quarter of 2014 and 20% in the first nine months of 2014. The increases reflect growth in the subscriber base, higher data usage from continued adoption of smartphones and other data-centric wireless devices, the expansion of our LTE network coverage, higher wholesale data roaming revenues and increased customer adoption of higher rate two-year plans. Voice network revenue, excluding Public Mobile, decreased year over year by 8.3% in the third quarter of 2014 and 7.5% in the first nine months of 2014. The decline in voice revenue is due to the increased adoption of unlimited nationwide voice plans, as well as continued but moderating substitution to data services and features.
Equipment and other revenues increased year over year by $26 million in the third quarter of 2014 and by $46 million in the first nine months of 2014. Equipment and other revenues, excluding Public Mobile, increased by $24 million in the third quarter, and by $38 million in the first nine months of 2014, mainly due to a higher proportion of smartphones in the sales mix and higher retention volumes, partly offset by lower cost of acquisitions.
Intersegment revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated expenses.
Wireless segment expenses increased year over year by $102 million in the third quarter of 2014 and by $215 million in the first nine months of 2014, when compared to the same periods in 2013. This includes Public Mobile operating expenses of $23 million in the third quarter and $84 million in the first nine months of 2014. Wireless expenses, excluding Public Mobile, increased by $79 million in the third quarter and by $131 million in the first nine months of 2014.
Equipment sales expenses increased year over year by $42 million in the third quarter of 2014 and by $70 million in the first nine months of 2014. Excluding Public Mobile, the increase was $40 million for the third quarter and $65 million for the first nine months of 2014, reflecting a high proportion of smartphones sold to new and existing customers, including greater availability of iconic devices launched in the third quarter of 2014, and increased retention volumes.
Network operating expenses increased year over year by $14 million in the third quarter and by $56 million in the first nine months of 2014. Excluding Public Mobile, the increase was $9 million in the third quarter and $30 million in the first nine months of 2014, as higher costs associated with operating the expanding LTE network and higher data and voice roaming volumes and expenses were partly offset by reduced roaming rates and, for the nine-month period, further impacted by lower supplier licensing costs.
Marketing expenses increased by $1 million year over year in the third quarter and decreased by $9 million in the first nine months of 2014. Excluding Public Mobile, the increase in the third quarter of 2014 was $1 million and the decrease was $12 million in the first nine months, as advertising expenses declined due to targeted reductions in marketing programs as a result of a reduction in our postpaid churn rates.
Other goods and services purchased increased year over year by $32 million in the third quarter and by $70 million in the first nine months of 2014. Excluding Public Mobile, the increase was $20 million in the third quarter and $36 million in the first nine months of 2014, resulting from higher non-labour restructuring and other like costs, as well as higher external labour costs to support the growing subscriber base.
Employee benefits expense increased year over year by $13 million in the third quarter and by $28 million in the first nine months of 2014 due to higher compensation and benefit costs, including share-based compensation, as well as an increase in the number of full-time equivalent employees to provide customer service and technical support for a growing subscriber base and greater smartphone adoption, partly offset by higher capitalized labour. Excluding Public Mobile, the increase was $9 million in the third quarter and $12 million in the first nine months of 2014.
Wireless EBITDA increased year over year by $20 million or 2.9% in the third quarter and by $86 million or 4.3% in the first nine months of 2014. Wireless EBITDA, excluding Public Mobile, was $704 million in the third quarter of 2014, a year-over-year increase of 3.4% in the third quarter, and $2.1 billion in the first nine months of 2014, a year-over-year increase of 5.1%. Wireless EBITDA before restructuring and other like costs increased year over year by $34 million or 5.0% in the third quarter and by $92 million or 4.5% in the first nine months of 2014. The increases in EBITDA reflect network revenue growth driven by higher ARPU and greater customer base, partly offset by higher retention, equipment sales and customer service and network operating expenses.
5.5 Wireline segment
Total wireline segment revenues increased year over year by $36 million or 2.7% in the third quarter of 2014 and by $125 million or 3.1% in the first nine months of 2014, driven by continued growth in data revenue, partly offset by ongoing declines in legacy voice revenues.
Service and equipment revenues increased year over year by $21 million or 1.6% in the third quarter of 2014 and by $106 million or 2.7% in the first nine months of 2014.
Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated expenses.
Total wireline operating expenses increased by $26 million year over year in the third quarter of 2014 and by $63 million year over year in the first nine months of 2014.
Goods and services purchased increased by $11 million year over year in the third quarter of 2014 and by $31 million in the first nine months of 2014. The increase was due to growth in our subscriber base, higher TV content rates, higher costs associated with increased TELUS Health services revenue, a retroactive assessment of additional TV revenue contribution expense of approximately $15 million towards our Canadian programming funding requirements, partly offset by lower advertising and promotions costs and lower external labour requirements.
Employee benefits expense increased year over year by $15 million in the third quarter and by $32 million in the first nine months of 2014. The increases were due to higher compensation and benefit costs, including higher costs to support increased business process outsourcing revenue. For the nine-month period, the increase was due to higher share-based compensation expenses, partly offset by lower restructuring and other like costs and a decrease in domestic and international full-time equivalent staff over the past year resulting from our ongoing operational efficiency initiatives.
Wireline EBITDA increased year over year by $10 million in the third quarter of 2014 and by $62 million in the first nine months of 2014, while EBITDA before restructuring and other like costs increased year over year by $11 million in the third quarter of 2014 and by $40 million in the first nine months of 2014. This resulted mainly from improvements in high-speed Internet, enhanced data and TELUS TV revenues due to subscriber growth, customer upgrades to higher speeds, subscribers coming off of introductory rates, savings from our operational efficiency initiatives and certain rate increases, net of higher TV programming (including a retroactive assessment of additional TV revenue contribution expense of approximately $15 million towards our Canadian programming funding requirements) and customer service costs. EBITDA margin increased during the third quarter and for the first nine months of 2014 compared to the same periods in prior year, due to continued revenue growth and ongoing operational efficiency initiatives, partly offset by declines in high-margin legacy voice services.
6. Changes in financial position
7. Liquidity and capital resources
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
7.1 Overview
In the first nine months of 2014, we paid $1.14 billion for the purchase of the wireless spectrum licences acquired in the 700 MHz spectrum auction that took place in the first quarter of 2014. We also paid dividends of $680 million to the holders of TELUS Common Shares, returned $500 million of cash to shareholders through share purchases under our 2014 NCIB, issued $1.2 billion of long-term debt and early redeemed our $500 million 5.95% Series CE Notes. Subsequent to September 30, 2014, we paid dividends of $233 million to the holders of TELUS Common Shares. Our capital structure financial policies, financing plan, and report on financing and capital structure management plans are described in Section 4.3.
7.2 Cash provided by operating activities
Cash provided by operating activities decreased by $47 million in the third quarter of 2014 and by $30 million in the first nine months of 2014, when compared to the same periods in 2013.
7.3 Cash used by investing activities
Cash used by investing activities increased year over year by $59 million in the third quarter of 2014 and by $1.35 billion in the first nine months of 2014, when compared to the same periods in 2013, and included the following:
Wireless segment capital expenditures increased year over year by $57 million in the third quarter of 2014 and by $145 million year over year in the first nine months of 2014, due to continued investment in wireless broadband infrastructure to enhance our network coverage, speed and capacity, including the deployment of recently acquired 700 MHz spectrum, as well as continued investment in system resiliency and reliability in support of our ongoing customers first initiatives, and to ready the network and systems for future retirement of legacy assets. Wireless segment capital intensity was 15% in the third quarter of 2014, up from 12% in the third quarter of 2013, and 13% in the first nine months of 2014, up from 11% in the same period in 2013.
The wireless EBITDA less capital expenditures was $449 million in the third quarter of 2014, as compared to $486 million in the third quarter of 2013, reflecting a decrease of $37 million or 7.6%, and $1.45 billion in the first nine months of 2014, as compared to $1.51 billion in the first nine months of 2013, reflecting a decrease of $59 million or 3.9% as the increases in EBITDA were more than offset by the increases in capital expenditures.
Wireline segment capital expenditures increased year over year by $45 million in the third quarter of 2014 and by $111 million in the first nine months of 2014. We continue to invest in our broadband infrastructure, including connecting more homes and businesses directly to fibre-optic cable. Investments in broadband infrastructure support TV and high-speed Internet subscriber growth and faster Internet speeds, and extend the reach and functionality of our health solutions. We also continued our investments to support business service growth, added functionality to administrative, client care and service delivery systems and system resiliency and reliability in support of our ongoing customers first initiatives. Wireline segment capital intensity was 29% in the third quarter and 28% in the first nine months of 2014, up from 27% in the third quarter and 26% in the first nine months of 2013.
The wireline EBITDA less capital expenditures was $(41) million in the third quarter of 2014, down from $(6) million in the third quarter of 2013, and $(28) million in the first nine months of 2014, as compared to $21 million in the first nine months of 2013, reflecting higher capital expenditures being only partly offset by higher EBITDA.
7.4 Cash provided (used) by financing activities
Net cash used by financing activities decreased year over year by $515 million in the third quarter of 2014. In the first nine months of 2014, cash provided by financing activities was $355 million, compared to cash used by financing activities of $993 million in the first nine months of 2013. Financing activities included the following:
Dividends paid to the holders of equity shares
Dividends paid to the holders of TELUS shares were $234 million in the third quarter of 2014 and $680 million in the first nine months of 2014, or year-over-year increases of $12 million in the third quarter and $41 million in the nine-month period. The increases reflect higher dividend rates under our dividend growth program offset by lower outstanding shares resulting from shares purchased and cancelled under our NCIB programs.
Purchase of Common Shares for cancellation
In the first nine months of 2014, we purchased approximately 13 million shares under our 2014 NCIB program, reaching the bid maximum cost of $500 million on September 23, 2014. The shares purchased represent approximately 2.1% of the outstanding Common Shares prior to commencement of the NCIB. In respect of our 2015 NCIB, during October 2014, we purchased approximately 0.6 million of our Common Shares by way of the automatic share purchase plan at a cost of $24 million. See Section 4.3 for details of our planned multi-year share purchase programs through 2016.
Short-term borrowings
Short-term borrowings are composed primarily of amounts advanced to us from an arm–s-length securitization trust pursuant to transfer of receivables securitization transactions (see Section 7.7 Sale of trade receivables). Proceeds were $400 million throughout 2013, were reduced by $300 million in the first quarter of 2014 and were $100 million at March 31, 2014, June 30, 2014 and September 30, 2014.
Long-term debt issues and repayments
Long-term debt issues, net of repayments, were $153 million in the third quarter of 2014 and $1.85 billion in the first nine months of 2014, and were composed of:
These debt issues contributed to the increase in our average term to maturity of long-term debt (excluding commercial paper) to approximately 11.2 years at September 30, 2014, compared to 5.5 years at the end of 2012. Additionally, our weighted average cost of long-term debt was 4.72% at September 30, 2014, as compared to 5.44% at the end of 2012, as a result of our 2013 and 2014 re-financing activities.
On August 7, 2014, we exercised our right to early redeem, on September 8, 2014, all of our $500 million 5.95% Series CE Notes. The long-term debt prepayment premium recorded in the three-month period ended September 30, 2014, was approximately $13 million before income taxes.
No amounts were drawn against our five-year credit facility (but approximately $155 million was utilized to backstop outstanding commercial paper at September 30, 2014). Our commercial paper program provides low cost funds and is fully backstopped by this five-year committed credit facility (see Section 7.6 Credit facilities).
7.5 Liquidity and capital resource measures
Net debt was $9.25 billion at September 30, 2014, an increase of $1.94 billion when compared to one year earlier, resulting from our re-financing activities in 2014, incremental debt issued (primarily for acquisition of Public Mobile and 700 MHz spectrum licences), and a decrease in cash and temporary investments, net of a reduction in short-term borrowings, as discussed above.
Fixed rate debt as a proportion of total indebtedness was 97% at September 30, 2014, up from 92% one year earlier, due to our 2014 and 2013 re-financing activities.
Total capitalization – book value was $17.37 billion at September 30, 2014, an increase of $2.82 billion from one year earlier due to the increase in net debt and retained earnings, partly offset by a reduction in share capital resulting from share purchases under our NCIB programs. Net debt to total capitalization increased to 53.3% at September 30, 2014, from 50.3% one year earlier.
Net debt to EBITDA – excluding restructuring and other like costs ratio was 2.18 times for the 12-month period ended September 30, 2014, up from 1.80 times from one year earlier, as the increase in net debt was partly offset by growth in EBITDA – excluding restructuring and other like costs. Our long-term policy guideline for this ratio is from 1.50 to 2.00 times. At the end of the third quarter of 2014, this ratio was outside of the long-term policy guideline range as a result of funding the purchase of the 700 MHz spectrum licences. We continue to aspire to return to the policy guideline but given the cash demands of upcoming spectrum auctions and other requirements, the timing of such return remains to be determined. While the ratio temporarily exceeds our long-term policy guideline, we are meeting our revolving credit facility covenants, which include a requirement that we not permit TELUS– consolidated Leverage Ratio to exceed 4.00 to 1.00.See Section 7.6 Credit facilities.
Earnings coverage ratio for the 12-month period ended September 30, 2014, was 5.4 times, down from 5.5 times one year earlier. Growth in income before borrowing costs and income taxes increased the ratio by 0.5, while higher borrowing costs decreased the ratio by 0.6.
EBITDA – excluding restructuring and other like costs interest coverage ratio for the 12-month period ended September 30, 2014, was 10.16 times, down from 11.30 times one year earlier. An increase in net interest costs (including the September 2014 long-term debt prepaym
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