Strong data and wireless results with record wireless additions
VANCOUVER, Aug. 8 /PRNewswire-FirstCall/ -- TELUS Corporation today reported its financial results for the second quarter of 2008, including revenue of $2.4 billion, an eight per cent increase from a year ago. The performance was driven by nine per cent growth in wireless revenue and 20 per cent growth in wireline data revenue. Wireless net additions were a second quarter record at 175,600. Earnings before interest, taxes, depreciation and amortization (EBITDA) as adjusted increased by 3.5 per cent when compared to the same period a year ago.
Net income in the quarter was $267 million and earnings per share (EPS) were $0.83, up 5.5 per cent and nine percent, respectively, compared to the same period in 2007. The second quarter of 2007 included favourable tax-related adjustments of $10 million or three cents a share while there were no tax-related adjustments in 2008. Free cash flow of $302 million increased 87Â per cent, driven primarily by lower capital expenditures, improved EBITDA and lower interest expense.
FINANCIAL HIGHLIGHTS
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C$ in millions,
except per share amounts 3 months ended
June 30
(unaudited) 2008 2007 % Change
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Operating revenues 2,398.7 2,228.1 7.7
EBITDA(1) 917.6 884.6 3.7
EBITDA (as adjusted)(2) 917.3 886.4 3.5 Income before income taxes and
non-controlling interest 381.4 348.1 9.6
Net income(3) 267.0 253.1 5.5
Earnings per share (EPS), basic(3) 0.83 0.76 9.2
Cash provided by operating activities 461.0 1,061.9 (56.6)
Capital expenditures 435.6 481.8 (9.6)
Free cash flow(4) 302.3 161.7 87.0 (1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 11.1 of Management's discussion
and analysis. (2) Excludes a charge (recovery) of $(0.3) million and $1.8 million to
Operations expense in 2008 and 2007, respectively, for introducing a
net-cash settlement feature for share option awards granted prior to
2005. (3) Net income and EPS for the three month period in 2008 included no
favourable tax related adjustments compared to $10 million or 3 cents
for the same period in 2007. (4) See Section 11.2 of Management's discussion and analysis.
Darren Entwistle, TELUS president and CEO said, "On strategy growth continued in data and wireless this quarter with solid operational execution on multiple fronts. This included strong second quarter wireless customer additions and increased momentum on high-speed Internet additions. We are updating annual guidance to reflect this positive performance, including increased guidance for revenue. We are also pleased with the initial success in converting more than one million residential customers in British Columbia from various legacy systems to our recently developed integrated billing and client care system." "We continue to urge the federal government to pursue its stated goal of making Canada the most connected country in the world by investing a portion of the $4.25 billion raised in the recently concluded wireless spectrum auction," said Mr. Entwistle. "Canada has an unprecedented opportunity to enhance our global competitiveness by bringing broadband Internet services to hundreds of rural communities." Robert McFarlane, executive vice president and CFO, noted, "as a result of good operational execution year to date, we have made upward revisions to full year 2008 revenue guidance, as well as narrowing the ranges for EBITDA and EPS guidance, while maintaining existing guidance for non-spectrum capital expenditures." Mr. McFarlane also stated, "the 50 per cent expansion of our commercial paper program to $1.2 billion announced today enhances our flexibility and access to financing at attractive rates." -------------------------------------------------------------------------
This news release contains statements about expected future events and
financial and operating results of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that the forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-
looking statements as a number of factors could cause actual future
results and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2008 guidance and share purchases), qualifications and risk factors
referred to in the Management's discussion and analysis - August 6, 2008. Except as required by law, TELUS disclaims any intention or obligation to
update or revise forward-looking statements, and reserves the right to
change, at any time at its sole discretion, its current practice of
updating annual guidance. ------------------------------------------------------------------------- OPERATING HIGHLIGHTS TELUS wireless - External revenues increased by $94 million or 9% to $1.14 billion in
the second quarter of 2008, compared with the same period in 2007
- Wireless data revenue increased $55 million or 54% due to the
continued adoption of full function smartphones and increased
adoption of data services such as text messaging, web browsing and
downloads
- ARPU (average revenue per subscriber unit per month) declined by 1.4%
to $62.73 compared to the same quarter a year ago. The fast-growing
data component of $9.17, represented 15% of ARPU, while the voice
component continued to decline as a result of the increased prepaid
subscriber base, lower pricing, including use of included-minute rate
plans and lower inbound roaming
- Net subscriber additions increased 37% to 175,600 from the same
quarter in 2007, a TELUS second quarter record. Postpaid net
additions were 157,200, an increase of 59%, while net prepaid loading
decreased 37% to 18,400. These results include those from TELUS'
postpaid value brand and service which was launched in late March
2008
- EBITDA as adjusted of $486 million is an increase of $34 million over
the second quarter of 2007 representing 7% growth, due to increased
network revenue and lower cost of acquisition (COA) expense,
partially offset by increased customer retention costs and network
and other expenses to support the 11% growth in the wireless
subscriber base, data revenue and the launch of a value brand
- Cost of acquisition per gross addition decreased 22% year-over-year
to $332 reflecting slightly higher advertising and promotions costs
spread over the 19% increase in gross additions, a higher proportion
of new subscribers from lower cost distribution channels and lower
equipment subsidies
- Blended monthly subscriber churn decreased slightly to 1.43% from
1.45% a year ago due to lower postpaid churn supported by successful
retention activities. The second quarter of 2008 and 2007 reflect the
first full comparable quarters with wireless number portability (WNP)
in place
- Cash flow (EBITDA as adjusted less capital expenditures) increased
$92 million or 33% to $371 million in the quarter due to an increase
in EBITDA and lower capital spending.
TELUS wireline - External revenues increased by $76 million or 6.5% to $1.26 billion
in the second quarter of 2008, when compared with the same period in
2007, as data growth more than offset the declines in local revenues
- Data revenues increased by $87 million or 20% due to revenues from
the two January acquisitions (Emergis and Fastvibe), increased
enhanced data and hosting services, as well as high-speed Internet
subscriber growth. When adjusted for the two acquisitions and a
regulatory adjustment in the second quarter of 2007, underlying data
growth was approximately 7%
- Long distance revenues increased by $7 million due to a one-time
negative adjustment of $13 million recorded in the same period a year
ago with the implementation of a new converged billing and client
care system in Alberta
- TELUS added 23,600 net high-speed Internet subscribers, a 70%
increase from a year ago. The prior year's additions were temporarily
constrained by the implementation of a new billing and client care
system in Alberta that temporarily reduced order processing
capability
- EBITDA as adjusted of $431 million declined by $2.6 million or 0.6%
due primarily to increased cost of sales, including TELUS TV, and
initial costs for implementing enterprise customer contracts
- Network access lines (NALs) declined by 40,000 in the quarter, and
3.4% from a year ago, reflecting a slight sequential improvement. Consistent with experience in recent years, residential NAL losses
were due to ongoing competitive activity and wireless substitution,
partially mitigated by an increase in business access lines
- Cash flow (EBITDA as adjusted less capital expenditures) decreased
$15 million or 12% to $110 million in the quarter due to slightly
lower EBITDA as adjusted and a small increase in capital
expenditures.
Corporate Developments B.C. billing and client care system conversion In mid-July, following a large trial, TELUS successfully converted more than one million wireline residential customers in British Columbia to a new billing and client care system. This converges to the system in Alberta, and for the first time most customers in Alberta and B.C. are now on the same billing and client care system. During the B.C. conversion, TELUS has applied learnings from the Alberta conversion in 2007 and the early experience has been positive. The expected customer service and cost benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems.
AWS spectrum auction concludes Industry Canada's Advanced Wireless Services (AWS) spectrum auction concluded on July 21, 2008 raising more than $4.25 billion dollars for the government with 282 licences conditionally assigned to 15 companies. Successful bidders will be eligible to receive licences after making their final payments and showing compliance with Canadian ownership and control requirements.
In line with TELUS' national growth strategy focused on wireless, data and IP, the company bid to acquire additional spectrum across Canada for a cost of approximately $880 million. AWS spectrum increases the depth of TELUS' strong spectrum position, and is expected to provide capacity for the introduction of future 4G (fourth generation) service offerings.
TELUS expects to face new competition in the future as a result of the recent auction. However, the number and long-term viability of all new entrants in various markets remain uncertain because of build-out requirements, spectrum and start-up costs, capital market conditions, and restrictions on foreign investment.
TELUS is encouraging the Government of Canada to invest a portion of the $4.25 billion raised in the wireless spectrum auction to pursue its stated goal of making Canada the most connected country in the world. The auction raised almost three times the anticipated $1.5 billion, giving Canada an unprecedented opportunity to bring broadband Internet services to thousands of rural communities.
TELUS expands commercial paper program by $400 million On August 7th, DBRS provided credit rating support for a 50 per cent increase in TELUS' commercial paper (CP) program to $1.2 billion. This provides increased flexibility and more attractive short term rates for TELUS, including future funding of commitments related to the AWS wireless spectrum from the recently concluded auction. At the end of the second quarter, there was $800 million outstanding on TELUS' commercial paper program, demonstrating strong demand for TELUS debt in the Canadian market.
TELUS appeals deferral account decision TELUS filed appeals with the CRTC and the federal cabinet asking them to consider allowing TELUS to connect more remote Canadian communities to broadband Internet services using Deferral Account funds. TELUS believes this is an opportunity to work with governments, rural and First Nations communities to bring the benefits of broadband Internet to Canadians who live and work in remote areas.
TELUS believes all Canadians benefit when our nation's rural communities have access to broadband Internet service and all of the business, economic and educational opportunities it creates. TELUS continues to work with the CRTC to find a way to place new communities on its deferral account list so TELUS' entire $163 million fund is used for the purposes the CRTC determined in 2006. TELUS has also filed a petition to the federal cabinet to ensure we will retain the ability to ask the government to intervene should the CRTC not reopen the process for new applications.
Business Solutions TELUS enhances suite of GPS services for business TELUS launched three new Global Positioning System (GPS) services for businesses - TELUS Asset Tracker, TELUS Resource Tracker, and TELUS Track and Dispatch. TELUS Asset Tracker enables businesses to keep track of assets large and small. TELUS Resource Tracker allows businesses to increase safety and productivity through real-time location monitoring of workers. TELUS Track and Dispatch gives head-office the ability to determine the closest mobile worker to a new job assignment or to immediately dispatch help if a worker needs assistance. The new solutions are part of TELUS' comprehensive suite of wireless GPS services that also features TELUS Fleet Tracker, a fleet monitoring and tracking solution, and TELUS Navigator, a GPS turn-by-turn navigation solution.
CritiCall Ontario selects TELUS iScheduler and CallCentreAnywhere CritiCall Ontario selected TELUS' iScheduler and CallCentreAnywhere to provide the foundation of their integrated patient electronic referral services. The five-year contract with Ontario's 24-hour emergency referral service for hospital-based physicians is valued at $2.3 million. It is the first implementation of TELUS iScheduler in Canada.
The contract combines TELUS' CallCentreAnywhere application with the TELUS iScheduler referral and waitlist capabilities. The joint service provides CritiCall agents with a simplified patient referral process that ensures the right information follows the patient wherever they travel to receive medical attention. The solution also provides CritiCall with advanced reporting capabilities to help organizations better understand their operational needs and performance to help with business planning.
TELUS Unified Communications make business easier TELUS enhanced its suite of Unified Communications solutions by launching a new service enabling clients to use Outlook Voice Access to access email, contacts and calendars over the phone to stay connected to the office anywhere, anytime. The upgrade also provides business-class email and group document sharing tools that can be securely accessed from a PC, web browser, mobile device or a phone. Using Microsoft SharePoint, employees can share documents, find company resources, search for experts and corporate information, manage content and workflow, and make better-informed decisions in a single, integrated location.
Products and Services Smartphones do it all In May, TELUS launched its "the ultimate do-it-all" smartphone campaign. With the handiest wireless functions available, TELUS' new generation of smartphones are the ultimate communication devices to do-it-all. Whether it's for texting Saturday night's latest hip party location, browsing the web to know where this week's blockbuster movie is running, or using GPS location services, TELUS smartphones are perfect for consumers looking for a phone that gives them the ultimate freedom in the palm of their hand.
One of the new smartphones is the HTC Touch Diamond. TELUS will be the first carrier to bring this new handset to Canadians. The Diamond will allow users to browse the Web, check out videos on YouTube and make plans on Facebook with a simple one-touch interface. In addition, customers will be able to store and listen to thousands of songs with the media player and 4GB internal memory. TELUS also launched the Pink BlackBerry Curve 8330 smartphone and the Sierra Wireless Compass 597 USB modem.
TELUS sponsors Canadian Idol TELUS is bringing a new approach to product placement to season six of Canadian Idol. As CTV's mobility sponsor, TELUS is introducing viewers to Ron Ronn, a 23-year-old aspiring singer/songwriter character who relies on a lucky dolphin, his best friend Mueller and a TELUS smartphone to manage his burgeoning career. TELUS and TAXI created Ron Ronn specifically for "Canadian Idol" as part of TELUS' sponsorship of the very popular show. Under terms of the sponsorship agreement, each of the 30-second Ron Ronn clips will run at the end of an "Idol" segment and before the regular commercial break. In addition to the Ron Ronn content, TELUS is again running its award-winning nature based campaign during Canadian Idol's scheduled commercial breaks.
Alberta and B.C. embrace 10-digit dialing To meet growing demand for phone numbers, the telecommunications industry has added new area codes to B.C. and Alberta - 778 in B.C.'s current 250 area code region and 587 across Alberta. A second area code in these regions means that people must add the area code and dial 10 digits for local calls. Just a week into the first phase of the new area code introduction on June 23, a sample of several million calls found that nearly 90 per cent were already being placed using 10 digits.
Existing customers are not required to change their current telephone numbers, nor will the geographic boundaries that govern long-distance calling be affected. All three-digit numbers, including 211, 311, 411, 611, and 911 emergency service (where applicable) remain the same and do not require the inclusion of an area code.
Awards and Community TELUS honoured for innovative learning and development TELUS received a prestigious Industry Achievement Award for global leadership in supporting team member growth and professional development. SkillSoft, the international leader in eLearning, presented the award to TELUS at its 2008 Global Perspectives Awards gala. The award is presented to organizations that have maintained a long-standing leadership role in training and development. The judging panel reviewed the internal learning programs and resources submitted by more than 100 companies around the world, and selected only five companies as being true innovators. TELUS ranked first, with UPS, Verizon, FedEx and Hitachi also taking home awards as well.
Annual report recognized by international communicators For the fourth consecutive year, the TELUS annual report was recognized by the International Association of Business Communications (IABC) with its prestigious Gold Quill Award. The Gold Quill Awards are the mark of global distinction and a hallmark of excellence in business communications. The awards are the communication professional's equivalent of the Oscars and recognize programs with clear strategies that demonstrate a full range of planning and management such as research, analysis and evaluation as well as the highest level of technical and creative skill.
TELUS receives IT Hero Award The Information Technology Association of Canada (ITAC) handed TELUS the Corporate IT Hero Award for its involvement with Upopolis - a secure online social network designed exclusively for hospitalized children. Upopolis empowers kids to learn about their illness and have access to their homework while helping them stay connected with friends, teachers and family during a challenging time in their lives. The website was created by the Kids' Health Links Foundation (KHLF) using development and technology services donated by TELUS. Through Upopolis, not only can children stay connected to friends and family, they can connect with other children with the same condition. Upopolis also provides young patients with a personal profile, secure mail, instant chat, discussion boards, personal blogs and links to child-friendly games, as well as a homework site, and kid-friendly health and wellness information.
BC Children's Hospital Foundation hits the "green" with Skins caddie auction Five Canadian golf fans had the chance of a lifetime to caddie for the PGA pros at the TELUS World Skins Game in support of BC Children's Hospital Foundation. This year's caddie auction brought in $45,000 for BC Children's Hospital Foundation, adding up to a total of more than $126,000 that has now been raised from TELUS World Skins Game caddie auctions in support of local charities since the fundraiser was created. The annual charity caddie auction allowed golf fans to bid at eBay.ca for the chance to caddie for one of their favourite professional golfers. The five highest bidders were given the opportunity to caddie at Predator Ridge June 16-17 for PGA golf stars Mike Weir who represented Canada, Fred Couples - United States, Greg Norman - Australia, Colin Montgomerie - Scotland, and rising young star Camilo Villegas who represented Colombia. The TELUS Skins Game raised $185,000 for the hospital foundation this year, which was increased to $250,000 by TELUS and its team members.
Thousands come out for TELUS Day of Service On May 31, more than 8,600 TELUS team members, alumni, family and friends took a day out of their busy schedules to give where they live during the TELUS Day of Service - a nation-wide volunteer drive designed to make a difference in the communities where team members live and work. Team members participated in more than 200 volunteer activities through 137 charitable organizations in 23 regions across the country and the Phillipines. This included Victoria, Vancouver, Prince George, Kamloops, Kelowna, Calgary, Lethbridge, Red Deer, Edmonton, Grande Prairie, Toronto, Barrie, Ottawa, Montreal, Quebec City, Rimouski and Manila. Participants logged more than 27,000 volunteer hours on this one special day to support worthwhile causes. Volunteer efforts included ecological face lifts to city parks, sorting thousands of pounds of food bank donations and planting dozens of trees.
TELUS sponsors Walk to Cure Diabetes The TELUS Walk to Cure Diabetes took place across Canada between May and June. TELUS' sponsorship of the Juvenile Diabetes Research Foundation's (JDRF) biggest fundraising event underscores the commitment TELUS has made to this partnership and to funding research to help the more than 200,000 Canadians affected by Type 1 diabetes. This was the first year of a three year partnership with JDRF. More than 2,100 TELUS team members took part, raising $460,000 for this worthwhile cause.
Dividend Declaration The Board of Directors has declared a quarterly dividend of forty-five cents ($0.45) Canadian per share on the issued and outstanding Common shares and forty-five cents ($0.45) Canadian per share on the issued and outstanding Non-Voting shares of the Company payable on October 1, 2008 to holders of record at the close of business on September 10, 2008.
This quarterly dividend represents a 20 per cent increase from the $0.375 quarterly dividend paid in 2007.
About TELUS TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $9.4 billion of annual revenue and 11.4 million customer connections including 5.8 million wireless subscribers, 4.3 million wireline network access lines and 1.2 million Internet subscribers. TELUS provides a wide range of communications products and services including data, Internet protocol (IP), voice, entertainment and video. Committed to being Canada's premier corporate citizen, we give where we live. Since 2000, TELUS and our team members have contributed $113 million to charitable and not-for-profit organizations and volunteered more than 2.1 million hours of service to local communities. Eight TELUS Community Boards across Canada lead our local philanthropic initiatives. For more information about TELUS, please visit telus.com.
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TELUS CORPORATION
Management's discussion and analysis
2008 Q2
------------------------------------------ Caution regarding forward-looking statements
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This document and Management's discussion and analysis contain forward- looking statements about expected future events and financial and operating results of TELUS Corporation (TELUS or the Company, and where the context of the narrative permits or requires, its subsidiaries). By their nature, forward- looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that assumptions (see below), predictions and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward- looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In the case of annual guidance, it is the current practice of the Company to evaluate and, where it deems appropriate, provide updates (see Section 9). Subject to legal requirements, this practice may be changed at any time at the Company's sole discretion.
Assumptions for 2008 guidance include:
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Economic growth consistent with recent provincial and national estimates by the Conference Board of Canada, including revised Canadian gross domestic product (GDP) growth of 1.7% and above average growth in the provinces of Alberta and British Columbia; forecast exchange rate between the Canadian dollar and U.S. dollar at or near parity; increased wireline competition in both business and consumer markets, particularly from cable-TV and VoIP (voice over Internet protocol) companies; impact from the acquisition of Emergis in mid-January; Canadian wireless industry market penetration gain of 4.5 to 5%; the target for consolidated capital expenditures explicitly excluded the purchase of wireless spectrum in the advanced wireless services (AWS) spectrum auction; in addition to capital expenditures, AWS auction expenditures of approximately $880 million are expected to be recognized in the third quarter of 2008; no new wireless competitive entrants are assumed for 2008; approximately $30 million restructuring expenses (up from $20.4 million in 2007); a blended statutory tax rate of approximately 30.5 to 31.5%; a discount rate of 5.5% (50 basis points higher than 2007) and expected long-term return of 7.25% for pension accounting (unchanged from 2007); and average shares outstanding of approximately 320 million (down from 331.7 million in 2007). Earnings per share (EPS), cash balances, net debt and common equity may be affected by purchases of up to 20 million TELUS shares over a 12-month period under the normal course issuer bid that commenced December 20, 2007.
Factors that could cause actual results to differ materially include, but
are not limited to:
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Competition (including more active price competition and the likelihood of new wireless competitors beginning to offer services in 2009 following the AWS spectrum auction); economic growth and fluctuations (including pension performance, funding and expenses); capital expenditure levels (increased in 2008 by purchases of wireless spectrum in the AWS auction); financing and debt requirements (including funding share repurchases and debt financings); tax matters (including acceleration or deferral of required payments of significant amounts of cash taxes); human resource developments; business integrations and internal reorganizations (including post-acquisition integration of Emergis); technology (including reliance on systems and information technology, evolving wireline broadband and wireless next generation technology options and the possible need for prospective wireless sharing arrangements to achieve cost efficiencies and reduce deployment risks); regulatory approvals and developments (including interpretation and application of tower sharing and roaming rules, the design and impact of future spectrum auctions, the new media proceeding and possible changes to foreign ownership restrictions); process risks (including conversion of legacy systems and billing system integrations); health, safety and environmental developments; litigation and legal matters; business continuity events (including manmade and natural threats); any prospective acquisitions or divestitures; and other risk factors discussed herein and listed from time to time in TELUS' reports and public disclosure documents, including its annual report, annual information form, and other filings with securities commissions in Canada (on http://www.sedar.com/) and in its filings in the United States, including Form 40-F (on EDGAR at http://www.sec.gov/).
For further information, see Section 10: Risks and risk management of TELUS' 2007 annual and first quarter 2008 Management's discussions and analyses, as well as updates in Section 10 of this document.
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Management's discussion and analysis
August 6, 2008 The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month and six-month periods ended June 30, 2008 and 2007, and should be read together with TELUS' interim Consolidated financial statements. This discussion contains forward- looking information that is qualified by reference to, and should be read together with, the Caution regarding forward-looking statements above.
TELUS' interim Consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), which differ in certain respects from U.S. GAAP. The principal differences between Canadian and U.S. GAAP, as they relate to TELUS, are summarized in Note 20 of the interim Consolidated financial statements. Management's discussion and analysis and the interim Consolidated financial statements were reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors. All amounts are in Canadian dollars unless otherwise specified.
TELUS has issued guidance on and reports on certain non-GAAP measures used by management to evaluate performance of business units, segments and the Company. Non-GAAP measures are also used to determine compliance with debt covenants and manage the capital structure. Because non-GAAP measures do not have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. For the reader's reference, the definition, calculation and reconciliation of consolidated non-GAAP measures are provided in Section 11: Reconciliation of non-GAAP measures and definitions.
Management's discussion and analysis contents -------------------------------------------------------------------------
Section Contents
------------------------------------------------------------------------- 1. Introduction Introduction and summary of TELUS'
consolidated results for the second
quarter and first six months of 2008
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2. Core business, vision A discussion of activities in support of
and strategy TELUS' six strategic imperatives
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3. Key performance drivers A listing of corporate priorities for 2008
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4. Capability to deliver A description of the factors that affect
results the capability to execute strategies,
manage key performance drivers and
deliver results
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5. Results from operations A detailed discussion of operating results
for the second quarter and first six
months of 2008
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6. Financial condition A discussion of significant changes in
TELUS' balance sheets for the six-month
period ended June 30, 2008
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7. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
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8. Critical accounting A description of accounting estimates that
estimates and accounting are critical to determining financial
policy developments results, and changes to accounting
policies
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9. Annual guidance for 2008 TELUS' revised annual guidance
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10. Risks and risk management An update on certain risks and
uncertainties facing TELUS and how the
Company manages these risks
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11. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used by
definitions management
------------------------------------------------------------------------- 1. Introduction 1.1 Materiality for disclosures Management determines whether or not information is material based on whether it believes a reasonable investor's decision to buy, sell or hold securities in the Company would likely be influenced or changed if the information were omitted or misstated.
1.2 Canadian telecommunications industry Key industry development On June 30, 2007, Canada's largest telecommunications service provider BCE Inc. announced that it had entered into a definitive agreement to be acquired by a consortium led by Teachers Private Capital, the private investment arm of the Ontario Teachers' Pension Plan, and several co- investors, recently confirmed by BCE to be the U.S.-based Providence Equity Partners, Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity. The BCE Board recommended that their common shareholders accept the consortium's offer at an all-cash price of $42.75 per common share or approximately $34 billion. On September 21, 2007, BCE shareholders overwhelmingly approved the acquisition. In June 2008, the CRTC (Canadian Radio-television and Telecommunications Commission) approved the change in control of BCE's broadcasting licences. Industry Canada also approved the acquisition. A challenge before the Supreme Court of Canada by certain BCE bond holders was also dismissed in June. BCE has indicated that it expects the transaction to close on or before December 11, 2008.
Wireless developments - advanced wireless service (AWS) and other
spectrum auction in the 2 GHz range Industry Canada conducted a wireless spectrum licence auction between May 27 and July 21, 2008 for 90 MHz of AWS spectrum (including 40 MHz set aside for new entrants), 10 MHz for personal communications network (PCS) service extension, and 5 MHz for another small band. The auction concluded after 331 rounds with Industry Canada reporting total proceeds of $4,255 million (average of $1.55/MHz/POP for AWS and PCS spectrum, where POP refers to person of population).
TELUS was advised that it was the provisionally successful bidder on 59 spectrum licences of 20 MHz or 10 MHz in the 1700/2100 MHz ranges, providing additional spectrum depth nationally in markets TELUS already covers. The cost of spectrum licences won was approximately $880 million. TELUS expects to receive the licences after final payment and after demonstrating compliance with Canadian ownership requirements, both expected to occur in the third quarter of 2008. Each of the other AWS spectrum auction provisional winners must also comply with both Canadian ownership and payment requirements. The average spectrum acquired by TELUS was 16.2 MHz at an average cost of $1.82/MHz/POP. See also Building national capabilities in Section 2, as well as Section 4.1 Principal markets addressed and competitors and Section 10.1 Regulatory.
In the third quarter of 2008, in accordance with the terms of the auction, the Company expects that the amount of successful bids will be paid through a combination of drawing on its credit facilities and utilization of cash on hand.
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Licences acquired by TELUS in the May 27 to July 21, 2008 Industry
Canada spectrum auction
------------------------------------------------------------------------- Number of
licences
Bandwidth acquired Geographic areas
------------------------------------------------------------------------- 20 MHz comprised of 10 MHz 32 Quebec, SW Ontario, Ottawa
in the 1700 MHz range paired Region, Manitoba,
with 10 MHz in the 2100 MHz Saskatchewan, Alberta and
range B.C.
10 MHz comprised of 5 MHz in 27 Yukon, Northwest
the 1700 MHz range paired with Territories & Nunavut,
5 MHz in the 2100 MHz range Newfoundland & Labrador,
Nova Scotia, New Brunswick,
P.E.I., N. Ontario, Central
Ontario, and Toronto
------------------------------------------------------------------------- 1.3 Consolidated highlights The chief executive officer, who is the chief operating decision-maker, regularly receives TELUS' consolidated reports on two bases: including and excluding (as shown in the "as adjusted" calculations) an incremental charge for introducing a net-cash settlement feature for share option awards granted prior to 2005. The highlights table below presents both views.
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Consolidated highlights
($ millions, except shares,
per-share amounts, Quarters ended June 30
subscribers and ratios) 2008 2007 Change
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Consolidated statements of income
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Operating revenues 2,398.7 2,228.1 7.7 % Operating income 498.1 493.8 0.9 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8 n.m. --------- --------- ---------
Operating income (as adjusted) 497.8 495.6 0.4 % Income before income taxes 381.4 348.1 9.6 %
Net-cash settlement feature (recovery)
expense (0.3) 1.8 n.m. --------- --------- ---------
Income before income taxes (as adjusted) 381.1 349.9 8.9 % Net income 267.0 253.1 5.5 %
Net-cash settlement feature, after tax (0.2) 1.3 n.m. --------- --------- ---------
Net income (as adjusted) 266.8 254.4 4.9 % Earnings per share, basic ($) 0.83 0.76 9.2 %
Net-cash settlement feature per share - - - %
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Earnings per share, basic (as adjusted) ($) 0.83 0.76 9.2 % Earnings per share, diluted ($) 0.83 0.75 10.7 % Cash dividends declared per share ($) 0.45 0.375 20.0 %
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Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by operating activities 461.0 1,061.9 (56.6)%
Cash used by investing activities 436.7 477.8 (8.6)%
Capital expenditures 435.6 481.8 (9.6)%
Cash (used) provided by financing
activities (27.7) (1,115.9) 97.5 %
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(1) (thousands) 11,363 10,885 4.4 % EBITDA(2) 917.6 884.6 3.7 %
Net-cash settlement feature expense (0.3) 1.8 n.m. --------- --------- ---------
EBITDA (as adjusted) 917.3 886.4 3.5 % Free cash flow(3) 302.3 161.7 87.0 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding
restructuring costs 1.7 1.8 (0.1)
Dividend payout ratio (%) 52 48 4 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated highlights
($ millions, except shares,
per-share amounts, Six-month periods ended June 30
subscribers and ratios) 2008 2007 Change
------------------------------------------------------------------------- -------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 4,749.3 4,433.7 7.1 % Operating income 1,025.5 890.8 15.1 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3 n.m. --------- --------- ---------
Operating income (as adjusted) 1,025.4 1,066.1 (3.8)% Income before income taxes 782.6 623.7 25.5 %
Net-cash settlement feature (recovery)
expense (0.1) 175.3 n.m. --------- --------- ---------
Income before income taxes (as adjusted) 782.5 799.0 (2.1)% Net income 558.0 447.9 24.6 %
Net-cash settlement feature, after tax (0.1) 109.0 n.m. --------- --------- ---------
Net income (as adjusted) 557.9 556.9 0.2 % Earnings per share, basic ($) 1.73 1.34 29.1 %
Net-cash settlement feature per share - 0.33 (100.0)%
--------- --------- ---------
Earnings per share, basic (as adjusted) ($) 1.73 1.67 3.6 % Earnings per share, diluted ($) 1.72 1.32 30.3 % Cash dividends declared per share ($) 0.90 0.75 20.0 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by operating activities 1,086.2 1,522.5 (28.7)%
Cash used by investing activities 1,437.1 870.1 65.2 %
Capital expenditures 755.3 863.7 (12.6)%
Cash (used) provided by financing
activities 376.7 (638.7) n.m. -------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber connections(1) (thousands) EBITDA(2) 1,867.1 1,648.9 13.2 %
Net-cash settlement feature expense (0.1) 175.3 n.m. --------- --------- ---------
EBITDA (as adjusted) 1,867.0 1,824.2 2.3 % Free cash flow(3) 882.1 642.5 37.3 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA - excluding
restructuring costs
Dividend payout ratio (%)
------------------------------------------------------------------------- -------------------------------------------------------------------------
pt; pts - percentage point(s) (1) The sum of wireless subscribers, network access lines and Internet
access subscribers measured at the end of the respective periods
based on information in billing and other systems. (2) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA). (3) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash
flow. (4) See Section 7.4 Liquidity and capital resource measures and Section
11.4 Definitions of liquidity and capital resource measures. -------------------------------------------------------------------------
Highlights for the second quarter and first six months of 2008, as discussed in Section 5: Results from operations, include the following: - Subscriber connections increased by 478,000 in the twelve-month
period ended June 30, 2008. The number of wireless subscribers grew
by 10.6% to 5.83 million, the number of Internet subscribers grew by
6.3% to 1.21 million and the number of network access lines decreased
by 3.4% to 4.33 million.
- Wireless gross subscriber additions increased to a TELUS second
quarter record of 422,200, or up 19%, when compared to the same
period in 2007, and were positively influenced by the introduction of
a new brand. Wireless average revenue per subscriber unit per month
(ARPU) was $62.73 in the second quarter of 2008, up $0.85 from the
first quarter of 2008, but $0.92 lower than the second quarter of
2007.
- Operating revenues increased by $170.6 million and $315.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were due
primarily to growth in wireless network revenues and wireline data
revenues (including revenues from Emergis), which more than offset
revenue declines in wireline voice local and long distance.
- Operating income adjusted to exclude the net-cash settlement feature
increased by $2.2 million in the second quarter of 2008, when
compared to the same period in 2007, as the increase in EBITDA (as
adjusted) exceeded higher depreciation and amortization expenses. Operating income (as adjusted) decreased by $40.7 million for the
first six months of 2008, primarily due to an additional three months
amortization for a new billing system and increased depreciation,
which partly offset increased EBITDA (as adjusted).
- Excluding the effect of the net-cash settlement feature, Income
before income taxes (as adjusted) increased by $31.2 million in the
second quarter and decreased by $16.5 million in the first six months
of 2008, due to changes in operating income (as adjusted) noted above
and lower financing and other expenses.
- Net income increased by $13.9 million or seven cents per share in the
second quarter of 2008 when compared to the same period in 2007. For
the first six months of 2008, Net income increased by $110.1 million
or 39 cents per share when compared to the same period in 2007.
-------------------------------------------------------------------------
Net income changes Quarters ended Six-month periods
($ millions) June 30 ended June 30
-------------------------------------------------------------------------
2007 Net income 253.1 447.9
Tax-effected changes:
Lower net-cash settlement feature 1.5 109.1
Higher EBITDA as adjusted(1) 21.4 29.6
Higher depreciation and
amortization(1), excluding
investment tax credits in 2007 (19.8) (54.4)
Lower interest expenses(1) 10.8 17.1
Tax-related adjustments
(see Section 5.2) (10.0) 3.0
Other 10.0 5.7
------------------------------------------------------------------------- 2008 Net income 267.0 558.0
-------------------------------------------------------------------------
------------------------------------------------------------------------- -------------------------------------------------------------------------
(1) at 2008 blended statutory tax rates
------------------------------------------------------------------------- - Average shares outstanding during the first six months of 2008 were
4% lower than the same period in 2007, due to repurchases under
normal course issuer bid (NCIB) programs. The Company purchased
0.95 million Common Shares and 3.69 million Non-Voting Shares for a
total outlay of $199.2 million in the first half of 2008.
Highlights for the second quarter and first six months of 2008, as
discussed in Section 7: Liquidity and capital resources, include the
following: - Cash provided by operating activities decreased by $600.9 million and
$436.3 million, respectively, in the second quarter and first six
months of 2008, when compared to the same periods in 2007. For the
second quarter period, a $350 million reduction in proceeds from
securitized receivables during 2008 compared to a $350 million
increase in proceeds in 2007, for a comparative reduction in cash
flow of $700 million. For the six-month period, a $350 million
reduction in proceeds from securitized receivables in 2008 compared
to no change in 2007.
- Cash used by investing activities decreased by $41.1 million in the
second quarter of 2008 and increased by $567.0 million during the
first six months of 2008, when compared to the same periods in 2007. The decrease for the second quarter was mainly from higher wireless
capital expenditures in the prior year to extend higher speed EVDO
(evolution data optimized) coverage. The increase for the first six
months of 2008 was due mainly to the January 2008 acquisition of
Emergis, partly offset by lower wireless capital expenditures.
- Net cash used by financing activities decreased by $1,088.2 million
during the second quarter of 2008, when compared to the same period
in 2007, due to a number of factors, including repayment of
$1.5 billion maturing Notes in June 2007, net of the April 2008 issue
of $500 million Notes (see next paragraph). Net Cash provided by
financing activities for the first six months of 2008 increased by
$1,015.4 million when compared to the same period in 2007, due mainly
to the April 2008 debt issue, increases in net amounts drawn from the
2012 credit facility and commercial paper in 2008, as well as lower
share purchases under NCIB programs.
On April 9, 2008, TELUS successfully closed an offering of 5.95%,
Series CE, Notes due April 15, 2015, for aggregate gross proceeds of
approximately $500 million. The net proceeds of the offering were
used for general corporate purposes including repayment of amounts
under the 2012 credit facility, and to refinance short-term financing
sources, which had been utilized in January for purchase of the then
issued and outstanding Emergis common shares for $743Â million.
- Free cash flow increased by $140.6 million and $239.6 million,
respectively, in the second quarter and first six months of 2008,
when compared to the same periods in 2007. The increases were mainly
due to lower capital expenditures, improved EBITDA (as adjusted), and
lower paid interest. Free cash flow was supplemented in the first
half of 2008 by financing activities to complete acquisitions
totalling $691.3 million, net of acquired cash.
- Net debt to EBITDA at June 30, 2008 was 1.7, unchanged from the
measure at December 31, 2007, continuing the achievement of the
Company's long-term target policy range of 1.5 to 2.0 times.
- The dividend payout ratio, based on the annualized second quarter
dividend and earnings for the 12-month trailing period ended June 30,
2008 (excluding favourable tax-related adjustments), was 52%, within
the Company's guideline.
2. Core business, vision and strategy The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussion and analyses, as well as updates reported in Section 10 of this document.
TELUS' core business, vision and strategy were detailed in its 2007 Management's discussion and analysis. Activities that supported the Company's six strategic imperatives during the second quarter of 2008 include the following: Building national capabilities across data, IP, voice and wireless TELUS successfully bid on 20 MHz and 10 MHz blocks of advanced wireless services (AWS) spectrum in the 1700 MHz/2100 MHz ranges in the Industry Canada auction concluded July 21. The average spectrum won by TELUS was 16.2 MHz nationally, which increases TELUS' strong spectrum position, and is expected to provide capacity for the introduction of future 4G (fourth generation) service offerings.
Focusing relentlessly on the growth markets of data, IP and wireless The second quarter of 2008 is the first full period including the operations of TELUS' wireless postpaid value brand. In March, TELUS launched this new brand and service to better address segments of the wireless market and complement the fully featured TELUS brand service. The expected benefits include more flexibility in serving various market segments, increasing postpaid customer additions, protecting revenue on the premium TELUS brand, and improving client retention programs.
Building integrated solutions that differentiate TELUS from its
competitors In June, the Company launched three new global positioning system (GPS) solutions for businesses with mobile workers. TELUS Asset Tracker enables businesses to keep track of assets, whether large or small. TELUS Resource Tracker allows businesses to increase safety and productivity through real- time location monitoring of workers. TELUS Track and Dispatch gives businesses the ability to determine the closest mobile worker to a new job assignment or to immediately dispatch help if a worker needs assistance. These new solutions are part of the Company's suite of wireless GPS solutions on the PCS network that also features TELUS Fleet Tracker, a fleet monitoring and tracking solution, and TELUS Navigator, a GPS turn-by-turn navigation solution.
Partnering, acquiring and divesting to accelerate the implementation
of TELUS' strategy and focus TELUS' resources on core business TELUS Ventures received a very positive return from its 2001 minority investment in Hostopia (TSX: H), a provider of private-branded web hosting, email and e-commerce solutions to telecommunications and cable TV companies, Internet service providers, domain registrars, and other Web service providers. This arose from Deluxe Corporation's (NYSE:DLX) all cash offer for Hostopia in June, which was recommended for approval by Hostopia's Board of Directors. Shareholder approval was obtained in late July and the deal closed in early August. TELUS Ventures invested in Hostopia to complement TELUS' existing services and to be its key supplier, as part of TELUS' strategy to benefit from emerging technologies that fill the Company's capability gaps.
Going to the market as one team under a common brand, executing a
single strategy Acquired in January 2008 and re-branded "Emergis, a TELUS company," the post-merger integration process continued into the second quarter in order to ensure a seamless transition for team members and customers, while ensuring a focus on achieving strategic business goals. This included the identification of top joint-sales opportunities and working together to close multi-million dollars of new contracts. The teams also initiated an update to the three-year strategic business plans for healthcare and financial services. In addition, during the quarter certain business functions were aligned, including Finance, Human Resources and Marketing.
Investing in internal capabilities to build a high-performance
culture and efficient operations In mid-July, following a large trial, TELUS successfully converted more than one million wireline residential customers in British Columbia to a new billing and client care system. This converges to the system in Alberta, and for the first time most customers in Alberta and B.C. are now on the same billing and client care system. During the B.C. conversion, TELUS has applied learnings from the Alberta conversion in 2007 and early experience has been positive. The expected customer service and cost benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems. See Section 4.2 for additional information on the July conversion.
3. Key performance drivers The following is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussions and analyses, as well as updates reported in Section 10 of this document.
Management sets new corporate priorities each year to advance TELUS' strategy, focus on the near-term opportunities and challenges, and create value for shareholders.
-------------------------------------------------------------------------
2008 corporate priorities
-------------------------------------------------------------------------
Drive profit from strategic services with a focus on data
-------------------------------------------------------------------------
Build scale in vertical markets and leverage the Emergis acquisition
-------------------------------------------------------------------------
Exact productivity gains from efficiency improvement initiatives
-------------------------------------------------------------------------
Elevate the client experience and build enhanced loyalty
-------------------------------------------------------------------------
Execute technology initiatives, including broadband and IT platforms
------------------------------------------------------------------------- 4. Capability to deliver results The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2007 annual and 2008 first quarter Management's discussions and analyses, as well as updates reported in Section 10 of this document.
4.1 Principal markets addressed and competitors At June 30, 2008, the principal markets addressed and competitors have not changed significantly from those described in TELUS' 2007 Management's discussion and analysis. Wireless competition is expected to increase in the future, as several potential entrants have provisionally acquired spectrum regionally in the AWS spectrum auction concluded in July 2008, as summarized below. Under the auction rules, successful bidders are subject to confirmation of eligibility and must complete payments within 30 business days of the auction close. Potential new entrants are expected to begin offering services in 2009 or later, as they establish operations, and build wireless networks in areas where they have won spectrum. Some new entrants may form alliances with one another. See Section 10.1 Regulatory, -------------------------------------------------------------------------
Existing and potential competitors acquiring licences in the May 27 to
July 21, 2008 Industry Canada spectrum auction
------------------------------------------------------------------------- Competitor Primary geographic focus
------------------------------------------------------------------------- Incumbent national facilities-
based competitors Rogers Communications Inc. Expansion of existing national capacity
Bell Mobility Inc. Expansion of existing national capacity
TELUS Expansion of existing national capacity
------------------------------------------------------------------------- Incumbent provincial facilities-
based competitors
MTS Allstream Expansion of existing Manitoba capacity
SaskTel Expansion of existing Saskatchewan
capacity
------------------------------------------------------------------------- Potential new entrants(1) Globalive Wireless LP Spectrum in most regions, but excluding
most of Quebec
Data & Audio-Visual Enterprises Spectrum in most major centres, except
in Quebec and Atlantic Canada
6934579 Canada Inc. Spectrum in S. and E. Ontario and S. and E. Quebec
Quebecor (9193-2962 Quebec Inc.) Regional spectrum in Quebec and parts
of Ontario
Shaw Communications Inc. Regional spectrum in Western Canada and
N. Ontario
Bragg Communications Inc. Regional spectrum in Atlantic Canada
and SW Ontario; Grande Prairie,
Alberta
Novus Wireless Inc. Provincial spectrum in B.C. and Alberta
Blue Canada Wireless Inc. Provincial spectrum in Nova Scotia and
P.E.I. Others 3 local areas in total
-------------------------------------------------------------------------
(1) Subject to building a wireless network in the geographic areas where
they elect to complete. ------------------------------------------------------------------------- 4.2 Operational capabilities Development of a new billing and client care system in the wireline
segment A pilot implementation for approximately 150,000 residential customers in B.C. began in May 2008 and a subsequent system conversion for more than one million B.C. residential customers was completed in mid-July 2008. The Company applied key learnings from the Alberta conversion in 2007 and initial indications are that the cutover went well. The critical billing function performed as expected, while billing cycles were maintained. The order entry system also performed well, without capacity and stability issues experienced initially with the Alberta conversion in 2007. Service levels have not been materially impacted following the 2008 conversion. See Section 10.2 Process risks.
4.3 Liquidity and capital resources
Capital structure financial policies (Note 3 of the Consolidated
financial statements) The Company's objectives when managing capital are: (i) to maintain a flexible capital structure that optimizes the cost of capital at an acceptable risk level; and (ii) to manage capital in a manner which balances the interests of equity and debt holders.
In the management of capital, the Company includes in the definition of capital: shareholders' 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 shareholders, purchase shares for cancellation pursuant to normal course issuer bids, issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics and/or increase or decrease the amount of sales of trade receivables 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 ratio of sustainable net earnings. For further discussion, see Section 7.4 Liquidity and capital resource measures.
Liquidity and financing -------------------------------------------------------------------------
TELUS' 2008 financing plan and results to-date
------------------------------------------------------------------------- Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the
normal course issuer bid (NCIB) In the first six months of 2008, the Company repurchased for
cancellation, 0.95 million Common Shares and 3.69 million Non-Voting
Shares for a total outlay of $199.2 million. See Section 7.3 Cash used by
financing activities.
Pay dividends Dividends declared for the second quarter of 2008 were 45 cents per
share, up by 20% from 37.5 cents per share in the same period in 2007.
Use proceeds from securitized receivables and bank facilities, as needed,
to supplement free cash flow and meet other cash requirements At June 30, 2008, the balance of proceeds from securitized accounts
receivable was $150 million, a reduction of $350 million from March 31,
2008 and December 31, 2007. The reduction in securitized accounts
receivable in the current quarter was completed following the closing of
the public debt issue described below. In January 2008, the Company
increased utilization of its existing $2 billion credit facility. The
proceeds were used for general corporate purposes, including the purchase
of Emergis. At June 30, 2008, $162.0 million was drawn on the 2012
revolving credit facility, down from $320.9 million at March 31, 2008,
and up from the nil amount drawn at the beginning of the year.
Maintain compliance with financial objectives, policies and guidelines Maintain a minimum $1 billion in unutilized liquidity - On March 3, 2008,
the Company closed a new $700 million, 364-day credit facility with a
select group of Canadian banks. This new facility provides incremental
liquidity to TELUS and allows the Company to continue to meet one of its
financial objectives, which is to generally maintain $1 billion in
available liquidity. The Company had unutilized credit facilities
exceeding $1.5 billion at June 30, 2008, including the 364-day facility. See Section 7.5 Credit facilities.
Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0
times - actual result of 1.7 times at June 30, 2008.
Dividend payout ratio of 45 to 55% of sustainable net earnings - the
ratio was 43%, based on the annualized second quarter dividend rate and
actual earnings for the 12-month trailing period ended June 30, 2008. The
ratio was 52% when calculated to exclude the impacts of favourable tax-
related adjustments from earnings for the 12-month trailing period ended
June 30, 2008.
Maintain position of fully hedging foreign exchange exposure for
indebtedness Maintained for the 8.00% U.S. dollar Notes due 2011, the one remaining
foreign currency-denominated debt issue.
Give consideration to accessing the public debt markets in 2008 to
refinance short-term financing sources with long-term financing On April 9, TELUS successfully closed its offering of 5.95%, Series CE,
Notes due April 15, 2015, for aggregate gross proceeds of approximately
$500 million. The net proceeds of the offering were used for general
corporate purposes including repayment of amounts under the 2012 credit
facility, and to refinance short-term financing sources.
Preserve access to the capital markets at a reasonable cost by
maintaining investment grade credit ratings and targeting improved credit
ratings in the range of BBB+ to A-, or the equivalent, in the future At August 6, 2008, investment grade credit ratings from the four rating
agencies that cover TELUS were in the desired range. TELUS' April 2008
debt issue was assigned credit ratings of: A (low) by DBRS Ltd., Baa1 by
Moody's Investors Service, BBB+ by Fitch Ratings, and BBB+ by Standard
and Poor's, all with a stable trend or outlook and all consistent with
the agencies' existing ratings for TELUS debt securities. See Section 7.7
Credit ratings. -------------------------------------------------------------------------
4.4 Disclosure controls and procedures and internal control over
financial reporting Changes in internal control over financial reporting There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
5. Results from operations 5.1 General The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, customer characteristics, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information is regularly reported to the Company's Chief Executive Officer, who is the chief operating decision- maker. See Note 5 of the interim Consolidated financial statements.
5.2 Quarterly results summary -------------------------------------------------------------------------
($ in millions, except per
share amounts) 2008 Q2 2008 Q1 2007 Q4 2007 Q3
-------------------------------------------------------------------------
Operating revenues 2,398.7 2,350.6 2,330.8 2,309.9
Operations expense,
excluding net-cash
settlement feature 1,476.9 1,394.2 1,370.7 1,323.7
Net-cash settlement feature (0.3) 0.2 0.6 (7.2)
Restructuring costs 4.5 6.7 6.1 6.4
-------------------------------------------------------------------------
EBITDA(1) 917.6 949.5 953.4 987.0
Depreciation 343.5 345.7 386.2 332.5
Amortization of intangible
assets 76.0 76.4 68.1 70.1
-------------------------------------------------------------------------
Operating income 498.1 527.4 499.1 584.4
Other expense (income) 2.4 16.8 5.8 8.0
Financing costs 114.3 109.4 109.1 86.2
-------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 381.4 401.2 384.2 490.2
Income taxes 113.5 109.4 (18.0) 78.6
Non-controlling interests 0.9 0.8 2.1 1.7
-------------------------------------------------------------------------
Net income 267.0 291.0 400.1 409.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share - basic 0.83 0.90 1.23 1.24
- diluted 0.83 0.90 1.22 1.23
Dividends declared per Common
Share and Non-Voting Share 0.45 0.45 0.45 0.375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except per
share amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Operating revenues 2,228.1 2,205.6 2,254.6 2,210.7
Operations expense,
excluding net-cash
settlement feature 1,338.5 1,263.1 1,362.4 1,239.7
Net-cash settlement feature 1.8 173.5 - -
Restructuring costs 3.2 4.7 7.9 12.5
-------------------------------------------------------------------------
EBITDA(1) 884.6 764.3 884.3 958.5
Depreciation 318.3 317.7 353.2 325.8
Amortization of intangible
assets 72.5 49.6 53.9 57.5
-------------------------------------------------------------------------
Operating income 493.8 397.0 477.2 575.2
Other expense (income) 18.5 3.8 10.1 4.0
Financing costs 127.2 117.6 133.6 116.6
-------------------------------------------------------------------------
Income before income taxes
and non-controlling interest 348.1 275.6 333.5 454.6
Income taxes 93.7 79.3 91.6 128.3
Non-controlling interests 1.3 1.5 1.4 2.4
-------------------------------------------------------------------------
Net income 253.1 194.8 240.5 323.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share - basic 0.76 0.58 0.71 0.95
- diluted 0.75 0.57 0.70 0.94
Dividends declared per Common
Share and Non-Voting Share 0.375 0.375 0.375 0.275
------------------------------------------------------------------------- -------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA). ------------------------------------------------------------------------- Trends The consolidated revenue trend continues to reflect growth in wireless network revenues generated from an increasing subscriber base. Wireless ARPU (average revenue per subscriber unit per month) for the second quarter of 2008 was up $0.85 from the first quarter of 2008, but declined $0.92 on a year-over- year basis. The decrease is a result of declining voice ARPU more than offsetting strong data growth. The voice ARPU decline reflects a shifting product mix, pricing competition and increased use of in-bucket, or included- minute service plans.
The trend in consolidated revenues also reflects strong growth in wireline data revenue, including new revenues from two January 2008 acquisitions. For the 2007 and 2006 periods shown above, growth in data revenue was fully offset by declining wireline voice local and long distance revenues due to substitution for wireless and Internet services, as well as competition from VoIP service providers, resellers and facilities-based competitors. Second quarter 2008 residential network access line losses improved when compared to the same period one-year earlier - the first quarterly improvement year-over-year since the fourth quarter of 2004. Partially offsetting the continuing line losses on the residential side were gains in business network access lines.
Historically, there is significant fourth quarter seasonality with higher wireless subscriber additions and related acquisition costs and equipment sales, resulting in lower wireless EBITDA. There is a less pronounced fourth quarter seasonal effect for wireline high-speed Internet subscriber additions and related costs.
The sequential increase in Operations expenses beginning with the first quarter 2008 (excluding the net-cash settlement feature) included expenses from January acquisitions. As described in Section 1.3, beginning with the first quarter of 2007, quarterly Operations expenses include expenses or recoveries for introducing a net-cash settlement feature for share option awards granted prior to 2005.
The downward trend in depreciation expense ended in the second half of 2007 with a reduction in estimated useful service lives for certain circuit switching and network management assets, resulting in write-downs of approximately $20 million and $47 million, respectively, in the third and fourth quarters of 2007. The previous downward trend was interrupted by a provision of approximately $17 million in the fourth quarter of 2006 to align estimated useful lives for TELUS Quebec assets, resulting from integration of financial systems. Depreciation is expected to increase slightly for the full year of 2008 as compared to 2007, due to a planned increase in capital assets and a reduction in the estimated useful lives for certain circuit-switching and other assets. See Caution regarding forward-looking statements.
The sequential increase in amortization of intangible assets in the first quarter of 2008 was due mainly to acquisitions. A major new wireline billing and client care system was put into service for Alberta residential customers in March 2007, resulting in $18 million of additional amortization each period beginning in the second quarter of 2007. In addition, amortization expenses in the fourth quarter of 2006 and the first quarter of 2007 were each reduced by approximately $5 million for investment tax credits relating to assets capitalized in prior years that are now fully amortized, following a determination of eligibility by a government tax authority. Amortization is expected to increase significantly for the full year of 2008 as compared to 2007, due to the Emergis acquisition and the July 2008 implementation of new phases of converged client care and billing system. See Caution regarding forward-looking statements.
Within Financing costs shown in the preceding table, interest expenses trended lower as financing activities have lowered the effective interest rate. The sequential decline in financing costs in the third quarter of 2007 was due to lower effective interest rates and debt balances plus increased interest income from tax refunds. Financing costs in the eight periods shown are net of varying amounts of interest income.
The generally upward trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments. EPS has been positively impacted by decreased shares outstanding from ongoing share re-purchases.
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2008 Q2 2008 Q1 2007 Q4 2007 Q3
-------------------------------------------------------------------------
Approximate Net income impact - 17 143 93
Approximate EPS impact - 0.05 0.44 0.28
Approximate basic EPS
excluding tax-related impacts 0.83 0.85 0.79 0.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Tax-related adjustments
($ in millions, except
EPS amounts) 2007 Q2 2007 Q1 2006 Q4 2006 Q3
-------------------------------------------------------------------------
Approximate Net income impact 10 4 20 30
Approximate EPS impact 0.03 0.01 0.06 0.09
Approximate basic EPS
excluding tax-related impacts 0.73 0.57 0.65 0.86
------------------------------------------------------------------------- 5.3 Consolidated results from operations -------------------------------------------------------------------------
($ in millions except EBITDA margin Quarters ended June 30
in % and employees) 2008 2007 Change
-------------------------------------------------------------------------
Operating revenues 2,398.7 2,228.1 7.7 %
Operations expense 1,476.6 1,340.3 10.2 %
Restructuring costs 4.5 3.2 40.6 %
-------------------------------------------------------------------------
EBITDA(1) 917.6 884.6 3.7 %
Depreciation 343.5 318.3 7.9 %
Amortization of intangible assets 76.0 72.5 4.8 %
-------------------------------------------------------------------------
Operating income 498.1 493.8 0.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense (as adjusted)(2) 1,476.9 1,338.5 10.3 %
EBITDA (as adjusted)(2) 917.3 886.4 3.5 %
Operating income (as adjusted)(2) 497.8 495.6 0.4 % EBITDA margin(3) 38.3 39.7 (1.4)pts
EBITDA margin (as adjusted)(3) 38.2 39.8 (1.6)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions except EBITDA margin Six-month periods ended June 30
in % and employees) 2008 2007 Change
-------------------------------------------------------------------------
Operating revenues 4,749.3 4,433.7 7.1 %
Operations expense 2,871.0 2,776.9 3.4 %
Restructuring costs 11.2 7.9 41.8 %
-------------------------------------------------------------------------
EBITDA(1) 1,867.1 1,648.9 13.2 %
Depreciation 689.2 636.0 8.4 %
Amortization of intangible assets 152.4 122.1 24.8 %
-------------------------------------------------------------------------
Operating income 1,025.5 890.8 15.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense (as adjusted)(2) 2,871.1 2,601.6 10.4 %
EBITDA (as adjusted)(2) 1,866.9 1,824.2 2.3 %
Operating income (as adjusted)(2) 1,025.4 1,066.1 (3.8)% EBITDA margin(3) 39.3 37.2 2.1 pts
EBITDA margin (as adjusted)(3) 39.3 41.1 (1.8)pts
------------------------------------------------------------------------- -------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA). (2) Excluding net-cash settlement feature (recoveries) expenses of
$(0.3) million and $(0.1) million, respectively, in the second
quarter and first six months of 2008 and $1.8 million and
$175.3 million, respectively, in the second quarter and first six
months of 2007. (3) EBITDA or EBITDA (as adjusted) divided by Operating revenues. ------------------------------------------------------------------------- The following discussion is for the consolidated results of TELUS. Segmented discussion is provided in Section 5.4 Wireline segment results, Section 5.5 Wireless segment results and Section 7.2 Cash used by investing activities - capital expenditures.
Operating revenues Operating revenues increased by $170.6 million and $315.6 million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. Revenue and subscriber growth continued to occur in wireless operations and wireline data services. Wireline data revenue was also positively impacted by two acquisitions completed in January 2008. Voice long distance revenues continued to erode, while voice local revenue showed a year-over-year decrease due to the effects of local competition and technological substitution.
Operations expense Consolidated Operations expense increased by $136.3 million and $94.1Â million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. Operations expense adjusted to exclude the net-cash settlement feature expense increased by $138.4 million and $269.5 million, respectively. Wireline expense increases were due to acquisitions, increased cost of sales, and initial implementation costs for new wireline enterprise customers, partly offset by absence of system conversion expenses recorded in the second quarter of 2007 for a new Alberta wireline billing and client care system. Wireless expenses increased to support the 10.6% year-over-year growth in the wireless subscriber base and 9% growth in wireless network revenue, and the continued start up costs associated with the launch of a new brand. TELUS' defined benefit pension plan net amortization did not change significantly.
Restructuring costs Restructuring costs increased by $1.3 million and $3.3 million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. An aggregate annual expense of approximately $30 million is expected for several small efficiency initiatives in 2008.
EBITDA Consolidated EBITDA increased by $33.0 million and 218.2 million, respectively, in the second quarter and first six months of 2008 when compared to the same periods in 2007. Excluding the net-cash settlement feature, consolidated EBITDA (as adjusted) increased by $30.9 million and $42.8Â million, respectively, due mainly to increased wireless EBITDA (as adjusted).
Depreciation Depreciation increased by $25.2 million and $53.2 million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. The increases were due primarily to the reduction in estimated useful service lives for certain digital circuit switching and other assets, as well as growth in capital assets, partly offset by an increase in other fully depreciated assets.
Amortization of intangible assets Amortization increased by $3.5 million and $30.3 million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. The increases included $13 million and $24 million, respectively, for new acquisitions, partly offset by a lower expense due to other software and subscriber base assets becoming fully amortized, as well as accelerated amortization for Amp'd Mobile in the second quarter of 2007 following discontinuation of Amp'd services.
The increase for the first six months also includes: (i) $18 million additional amortization for a new wireline billing and client care system for Alberta residential customers that was put into service in March 2007; and (ii) the effect of amortization in the first quarter of 2007 being reduced by approximately $5 million to recognize investment tax credits, then determined eligible by the tax authority, for assets capitalized in prior years that were fully amortized. Amortization is expected to increase significantly for the full year of 2008 as compared to 2007, due to the Emergis acquisition and the July 2008 implementation of the new converged client care and billing system for residential wireline customers in B.C. See Caution regarding forward- looking statements.
Operating income Operating income increased by $4.3 million and $134.7 million, respectively, in the second quarter and first six months of 2008, when compared to the same periods in 2007. Excluding net-cash settlement feature expenses in both years, operating income (as adjusted) increased by $2.2Â million in the second quarter of 2008, when compared to the same period in 2007, as the $30.9 million increase in EBITDA (as adjusted) exceeded higher depreciation and amortization expenses. Operating income (as adjusted) decreased by $40.7 million for the first six months of 2008, primarily due to an additional three months amortization for a new billing system and increased depreciation, partly offset by the $42.8 million increase in EBITDA (as adjusted).
Other income statement items -------------------------------------------------------------------------
Six-month periods
Other expense, net Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
2.4 18.5 (87.0)% 19.2 22.3 (13.9)%
------------------------------------------------------------------------- Other expense includes accounts receivable securitization expense, charitable donations, gains and losses on disposal of real estate, and income (loss) or impairments in equity or portfolio investments. Accounts receivable securitization expenses were $1.0 million and $6.9 million, respectively, in the second quarter and first six months of 2008, or decreases of $3.9 million and $1.2 million from the same periods in 2007, which were caused by the reduction in proceeds from securitized accounts receivable by June 30, 2008 (see Section 7.6 Accounts receivable sale). Net gains and losses on investments in 2008, including valuation adjustments on investments held for trading, were gains of $3.3 million in the second quarter and losses of $6.2Â million for the first six months. An $11.8 million write-off of an equity investment in AMP'D Mobile, Inc. was recorded in the second quarter of 2007.
-------------------------------------------------------------------------
Six-month periods
Financing costs Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Interest on long-term
debt, short-term
obligations and other 116.6 126.8 (8.0)% 228.4 246.1 (7.2)%
Foreign exchange losses
(gains) 0.2 5.7 (96.5)% 0.5 7.6 (93.4)%
Capitalized interest
during construction (1.3) - n.m. (2.6) - n.m. Interest income (1.2) (5.3) 77.4 % (2.6) (8.9) 70.8 %
-------------------------------------------------------------------------
114.3 127.2 (10.1)% 223.7 244.8 (8.6)%
-------------------------------------------------------------------------
------------------------------------------------------------------------- -------------------------------------------------------------------------
n.m. - not meaningful
------------------------------------------------------------------------- Interest expenses decreased $10.2 million and $17.7 million, respectively, in the second quarter and first six months of 2008 when compared to the same periods in 2007. Decreased interest expenses were due primarily to financing activities that lowered the effective interest rate. For the first six months, lower interest was partly offset by the initial application in 2007 of the effective rate method for issue costs.
Interest income decreased $4.1 million and $6.3 million, respectively, in second quarter and first six months of 2008, when compared to the same periods in 2007. Lower interest income was due primarily to lower average temporary investment and bank balances.
-------------------------------------------------------------------------
Six-month periods
Income taxes Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax at
statutory income tax
rates 117.8 116.9 0.8 % 241.8 209.2 15.6 %
Revaluation of future
income tax liability
to reflect future
statutory income tax
rates (7.9) (24.2) - (26.1) (27.9) -
Share option award
compensation 1.5 1.2 - 2.9 (6.5) -
Other 2.1 (0.2) - 4.3 (1.8) -
-------------------------------------------------------------------------
113.5 93.7 21.1 % 222.9 173.0 28.8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 30.9 33.6 (2.7)pts 30.9 33.5 (2.6)pts
Effective tax rates (%) 29.8 26.9 2.9 pts 28.5 27.7 0.8 pts
------------------------------------------------------------------------- The blended federal and provincial statutory income tax expense increased in the second quarter and first six months of 2008 when compared to the same periods in 2007, due to the respective 9.6% and 25.5% increases in income before taxes, partly offset by the lower blended statutory tax rates. A one per cent reduction in B.C. provincial income tax rates beginning July 1, 2008 was substantively enacted in the first quarter of 2008. Reductions to federal income tax rates for 2008 to 2012 were enacted in the second and fourth quarters of 2007. The effective tax rates were lower than the statutory tax rates due to revaluations of future income tax liabilities resulting from enacted reductions to future provincial and federal income tax rates, as well as future tax rates being applied to temporary differences.
Based on the assumption of the continuation of the rate of TELUS earnings, the existing legal entity structure, and no substantive changes to tax regulations, the Company currently expects cash income tax payments to be relatively low in 2008 with expected cash collections exceeding expected payments. In 2009, income tax payments are expected to increase substantially. The blended statutory income tax rate is expected to be 30.5 to 31.5% in 2008. See Caution regarding forward-looking statements at the beginning of Management's discussion and analysis.
-------------------------------------------------------------------------
Non-controlling Six-month periods
interests Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
0.9 1.3 (30.8)% 1.7 2.8 (39.3)%
------------------------------------------------------------------------- Non-controlling interests represents minority shareholders' interests in several small subsidiaries.
Comprehensive income Currently, the concept of comprehensive income for purposes of Canadian GAAP, in the Company's specific instance, is primarily to include changes in shareholders' equity arising from unrealized changes in the fair values of financial instruments. The calculation of earnings per share is based on Net income and Common Share and Non-Voting Share income, as required by GAAP.
5.4 Wireline segment results -------------------------------------------------------------------------
Operating revenues - Six-month periods
wireline segment Quarters ended June 30 ended June 30
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Voice local(1) 496.9 515.6 (3.6)% 998.6 1,047.7 (4.7)%
Voice long distance(2) 174.7 167.7 4.2 % 353.8 355.3 (0.4)%
Data(3) 521.5 434.6 20.0 % 1,027.7 859.4 19.6 %
Other 63.2 62.2 1.6 % 126.8 123.3 2.8 %
-------------------------------------------------------------------------
External operating
revenue(4) 1,256.3 1,180.1 6.5 % 2,506.9 2,385.7 5.1 %
Intersegment revenue 32.3 28.7 12.5 % 63.1 53.8 17.3 %
-------------------------------------------------------------------------
Total operating
revenues(4) 1,288.6 1,208.8 6.6 % 2,570.0 2,439.5 5.3 %
-------------------------------------------------------------------------
------------------------------------------------------------------------- (1) Voice local revenue decreased by approximately 3.5% in the first
six months of 2008 when the impact of first quarter regulatory
adjustments are excluded from both 2008 and 2007.
(2) Voice long distance revenue decreased by 3.5% and 4.0%, respectively,
in the second quarter and first six months of 2008 when the impact of
the second quarter 2007 adjustment is excluded.
(3) Data revenue increased by approximately 7% and 8%, respectively, in
the second quarter and first six months of 2008, when revenues from
acquisitions are excluded from 2008 and the impact of first quarter
mandated retroactive competitor price reductions are excluded from
both 2008 and 2007.
(4) External and total operating revenue increased by approximately 1% in
the second quarter and first six months of 2008, when excluding
revenues from acquisitions and regulatory adjustments. ------------------------------------------------------------------------- Wireline revenues increased $79.8 million and $130.5 million in the second quarter and first six months of 2008, when compared with the same period in 2007, due to the following: - Voice local revenue decreased by $18.7 million and $49.1 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. The decreases were
mainly due to two factors: (i) lower revenues from basic access and
optional enhanced service revenues caused by increased competition
for residential subscribers, offset in part by growth in business
local services; and (ii) for the six-month periods, approximately
$13 million lower recoveries from the price cap deferral account. The
2007 deferral account recovery of approximately $14.5 million
included previously incurred amounts associated with mandated local
number portability and start-up costs, and it offset unfavourable
mandated retroactive rate adjustments in the same period for basic
data revenue pursuant to two CRTC decisions (see the discussion for
wireline data revenue below).
-------------------------------------------------------------------------
Network access lines As at June 30
(000s) 2008 2007 Change
-------------------------------------------------------------------------
Residential network access lines 2,497 2,685 (7.0)%
Business network access lines 1,828 1,793 2.0 %
------- ------- --------
Total network access lines 4,325 4,478 (3.4)% Six-month periods
Quarters ended June 30 ended June 30
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Change in residential
network access lines (48) (56) 14.3 % (99) (90) (10.0)%
Change in business
network access lines 8 8 - % 20 20 - %
------- ------- -------- ------- ------- --------
Change in total network
access lines (40) (48) 16.7 % (79) (70) (12.9)%
------------------------------------------------------------------------- Residential line losses include the effect of increased competition from resellers and VoIP competitors (including cable-TV companies), as well as technological substitution to wireless services. The increase in business lines was experienced in incumbent areas as well as Ontario and Quebec urban non-incumbent areas.
- Voice long distance revenues increased by $7.0 million in the second
quarter of 2008, and decreased by $1.5 million for the first six
months of 2008, when compared with the same periods in 2007. Long
distance revenue in the second quarter of 2007 included a $13 million
negative one-time adjustment associated with implementation of a new
billing system for Alberta residential customers. Excluding the one-
time adjustment last year, revenue decreased by $6.0 million and
$14.5 million, respectively, due mainly to lower average per-minute
rates from industry-wide price competition and a lower base of
residential subscribers, partly offset by higher minute volumes.
- Wireline segment data revenues increased by $86.9 million and
$168.3 million, respectively, in the second quarter and first six
months of 2008, when compared with the same periods in 2007. Data
revenue increased primarily due to: (i) revenues from two
acquisitions in January 2008; (ii) increased Internet, enhanced data
and hosting service revenues from growth in business services and
high-speed Internet subscribers; (iii) increased broadcast,
videoconferencing and data equipment sales; (iv) mandatory
retroactive rate reductions recorded in 2007 (see next paragraph);
and (v) increased provision of digital entertainment services to
consumers in urban incumbent markets. The underlying growth absent
acquisitions and regulatory adjustments was approximately 8%.
Retroactive rate reductions of approximately $11 million were recorded in the first quarter of 2007, pursuant to CRTC Decision 2007-6 (digital network access link charges) and CRTC Decision 2007-10 (relating to basic service extension feature charges).
-------------------------------------------------------------------------
Internet subscribers As at June 30
(000s) 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet subscribers 1,064.1 962.7 10.5 %
Dial-up Internet subscribers 142.0 172.2 (17.5)%
------- ------- --------
Total Internet subscribers 1,206.1 1,134.9 6.3 % Six-month periods
Quarters ended June 30 ended June 30
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet net
additions 23.6 13.9 69.8 % 43.9 46.0 (4.6)%
Dial-up Internet net
reductions (4.4) (9.4) 53.2 % (13.3) (21.9) 39.3 %
------- ------- -------- ------- ------- --------
Total Internet
subscriber net
additions 19.2 4.5 n.m. 30.6 24.1 27.0 %
------------------------------------------------------------------------- High-speed Internet subscriber net additions increased during the second quarter of 2008, when compared to the same period in 2007, as the prior year's net additions were temporarily constrained by reduced order processing capability after the March 2007 implementation of a new billing and client care system for Alberta residential customers. High-speed Internet subscriber net additions decreased slightly for the first six months of 2008, when compared to the same period in 2007, due to competitive activity and a maturing market.
- Other revenue increased by $1.0 million and $3.5 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. The increase was due
mainly to increased voice equipment sales.
- Intersegment revenues increased for services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses -
wireline segment Six-month periods
($ millions, except Quarters ended June 30 ended June 30
employees) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Salaries, benefits and
other employee-related
costs, before net-cash
settlement feature 480.7 428.0 12.3 % 940.4 856.9 9.7 %
Net-cash settlement
feature (1.3) - n.m. (0.7) 153.1 n.m. Other operations
expenses 372.5 344.1 8.3 % 740.2 667.5 10.9 %
-------------------------------------------------------------------------
Operations expense 851.9 772.1 10.3 % 1,679.9 1,677.5 0.1 %
Restructuring costs 4.1 2.8 46.4 % 10.6 7.2 47.2 %
-------------------------------------------------------------------------
Total operating
expenses 856.0 774.9 10.5 % 1,690.5 1,684.7 0.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 853.2 772.1 10.5 % 1,680.6 1,524.4 10.2 %
Total operating
expenses
(as adjusted)(1) 857.3 774.9 10.6 % 1,691.2 1,531.6 10.4 %
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expenses. ------------------------------------------------------------------------- Total operating expenses adjusted to exclude the net-cash settlement feature expense increased by $82.4 million and $159.6 million, respectively, in the second quarter and first six months of 2008, when compared with the same periods in 2007. The increases were mainly due to acquisitions, compensation increases, increased cost of sales, and initial costs incurred to implement services for several new enterprise customers, partly offset by system conversion expenses recorded in 2007 for an Alberta wireline billing and client care system. The billing conversion expenses in the second quarter of 2007 were approximately $16 million for temporary labour to perform system fixes and maintain service levels.
- Salaries, benefits and employee-related costs increased by
$52.7 million and $83.5 million, respectively, in the second quarter
and first six months of 2008, when compared with the same periods in
2007. The increase resulted from more staff for the provision of
outsourcing services to customers, including Emergis operations
beginning in 2008, and compensation increases.
- Other operations expenses increased by $28.4 million and
$72.7 million, respectively, in the second quarter and first six
months of 2008, when compared with the same periods in 2007. The
increases were due to higher costs of sales for increased data
equipment sales with lower margins, expenses in acquired companies,
increased advertising and promotions expenses, and higher costs for
the provision of digital entertainment services, partly offset by
higher capitalized labour. In addition, regulated revenue-based
contribution expenses in 2008 do not include a recovery recorded in
the second quarter of 2007. External labour costs increased to
maintain higher service levels and to implement services for new
enterprise customers, but were offset by the absence in the second
quarter of 2008 of system conversion expenses recorded in 2007 for
the new Alberta wireline billing and client care system. Offnet
facility costs also increased to support new enterprise customers.
- Restructuring costs increased by $1.3 million and $3.4 million,
respectively, in the second quarter and first six months of 2008,
when compared with the same periods in 2007. Restructuring charges in
2008 were for a number of smaller initiatives under the Company's
competitive efficiency program.
-------------------------------------------------------------------------
EBITDA ($ millions) and Six-month periods
EBITDA margin (%) Quarters ended June 30 ended June 30
Wireline segment 2 |