TELUS Reports Fourth Quarter Results
2008 results consistent with latest guidance
Net income in the quarter was
For the full year, TELUS reported revenue growth of six per cent to
FINANCIAL HIGHLIGHTS
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C$ in millions, except per share amounts 3 months ended
December 31
(unaudited) 2008 2007 % Change
-------------------------------------------------------------------------
Operating revenues 2,454 2,330 5.3
EBITDA(1) 937 953 (1.7)
Income before income taxes and
non-controlling interest 373 384 (2.9)
Net income(2) 285 400 (29)
Net income (excluding income
tax-related adjustments)(2) 253 257 (1.6)
Earnings per share (EPS), basic(2) 0.90 1.23 (27)
Cash provided by operating activities 747 818 (8.7)
Capital expenditures 631 472 34
Free cash flow(3) 61 379 (84)
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 6.1 of Management's review of
operations.
(2) Net income and EPS for the three month period in 2008 included
favourable income tax-related adjustments of $32 million or 10 cents
per share, compared to $143 million or 44 cents for the same period
in 2007.
(3) See Section 6.2 of Management's review of operations.
“Fourth quarter results reflect our previously communicated intent to materially augment our ongoing operating efficiency program initiated in 2001, and accordingly restructuring costs tripled in 2008 to
“The very fact we are able to invest in value-creating projects such as a new wireless network across Canada during this time of economic uncertainty and change in our industry speaks both to the efficacy of our national growth strategy focused on data solutions and to our company’s financial strength,” said Mr. Entwistle.
“These results are consistent with our most recent annual guidance for 2008. TELUS is entering 2009 with enviable financial strength and balance sheet flexibility, supported by long-standing, prudent financial policies and strong investment grade ratings,” said
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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 2009 targets and share purchases), qualifications and risk factors
referred to in the Management's discussion and analysis in the 2007
annual report, the 2008 first, second and third quarter reports, and the
2008 fourth quarter Management's review of operations, and in other TELUS
public disclosure documents and filings with securities commissions in
Canada (on www.sedar.com) and in the United States (on EDGAR at
www.sec.gov). Except as required by law, TELUS disclaims any intention or
obligation to update or revise forward-looking statements, and reserves
the right to change, at any time at its sole discretion, its current
practice of updating annual targets and guidance.
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OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $77 million or 6.9% to $1.2 billion in
the fourth quarter of 2008, compared with the same period in 2007
- Wireless data revenue increased $72 million or 55% due to the
continued adoption of full function smartphones and increased
adoption of data services including messaging and social networking
- ARPU (average revenue per subscriber unit per month) declined by 2.4%
to $62.16 compared to the same quarter a year ago. The fast-growing
data component of $11.17, represented 18% of ARPU, while the voice
component continued to decline as a result of competitive pricing
pressure
- Net subscriber additions were 148,000 representing a decrease of 8.6%
from the same period a year ago. Postpaid net additions were 119,000,
an increase of 11%, while prepaid loading decreased by 47% to 29,000.
Postpaid additions represented 80% of total net additions
- EBITDA of $492 million was unchanged over the fourth quarter of 2007,
as increased network revenue was offset by higher cost of acquisition
and retention expenses, and network and other expenses to support the
10% growth in the wireless subscriber base, higher data revenue and
the launch of the Koodo basic service brand. Retention expenses
increased due to higher retention volumes and continued increases in
smartphone adoption
- Cost of acquisition per gross addition increased 10% year-over-year
to $388 reflecting slightly higher seasonal advertising, launch
advertising for the BlackBerry Storm for which only limited shipments
were received in 2008, and higher subsidies on smartphones in
response to competitor pricing
- Blended monthly subscriber churn increased slightly to 1.62% from
1.59% a year ago
- Simple cash flow (EBITDA less capital expenditures) decreased by 28%
to $256 million in the quarter due to planned higher capital spending
to support the start of the HSPA network build-out.
TELUS wireline
- External revenues increased by $47 million or 3.9% to $1.27 billion
in the fourth quarter of 2008, when compared with the same period in
2007, as data and other growth more than offset the moderate declines
in local and long distance revenues
- Data revenues increased by $62 million or 13% due to higher revenues
primarily from the January acquisition of Emergis, increased enhanced
data and hosting services, as well as high-speed Internet and TELUS
TV subscriber growth. When adjusted for Emergis and mandated
regulatory adjustments, underlying data growth was approximately 3%
- TELUS added 19,000 net high-speed Internet subscribers, a 27%
decrease from a year ago, due to increased competition and a maturing
market
- EBITDA of $445 million declined by $16 million or 3.5% due primarily
to higher restructuring costs, increased cost of sales for TELUS TV,
and upfront costs for implementing large complex enterprise customer
services
- Network access lines (NALs) declined by 36,000 in the quarter, and
3.6% from a year ago. Consistent with past experience, residential
NAL losses include the effect of ongoing competitive activity and
wireless substitution, partially mitigated by an increase in business
access lines
- Simple cash flow (EBITDA less capital expenditures) decreased
$74 million to $50 million in the quarter due to lower EBITDA and a
$58 million increase in capital expenditures. The increase in capital
primarily relates to supporting new enterprise customers and
enhancing the broadband network.
Corporate and Business Developments
TELUS awarded Government of Quebec contract
TELUS was selected by the Government of
This project will consolidate the Government of
TELUS named 2008 Health Company of the Year
The Information Technology Association of Canada named TELUS the 2008 Health Company of the Year. The award honours TELUS as a distinguished for-profit healthcare information technology company that has demonstrated excellence in the Canadian health informatics industry within the past 12 months. TELUS was nominated as a private sector company that has excelled in corporate initiatives and client satisfaction, delivering exceptional quality of service.
Sunnybrook Health Sciences Centre contracts with TELUS
In January, TELUS Health Solutions announced a multi-million dollar deal with Sunnybrook Health Sciences Centre to upgrade the hospital’s existing electronic medical record system to TELUS’ advanced web-based platform. The new system, Oacis, allows healthcare providers to capture and display every aspect of patient care from admission to discharge in one simple platform. At
TELUS has also acquired the intellectual property rights for MyChart, Sunnybrook Health Science’s innovative electronic continuity-of-care record system for patients. Personal electronic health records allow patients to manage their health by giving them immediate access to their personal health information as well as improving the information exchange between them and their healthcare providers. MyChart currently has over 1,000 users including doctors, clinicians, patients and family members.
TELUS acquires Remote Patient Monitoring solution
In January, TELUS announced the strategic acquisition of the rights to a Remote Patient Monitoring solution developed by
TELUS inaugurates new call centre in
After transforming four local offices into future friendly work spaces for its 1,300 team members in
TELUS expands international call centre capabilities providing
Spanish-language support
TELUS is opening a contact centre in
TELUS already provides a broad suite of call centre and BPO services to some of the world’s largest telecommunications companies, utilities, financial services corporations, and consumer electronic companies. As the contact centre and BPO industry evolves, more corporations are seeking one service provider to meet their business needs. Spanish-English language service is increasingly a prerequisite for meeting the needs of U.S.-based multinational clients of TELUS and the new investments improve TELUS’ competitive offering for this growing line of business.
Wireless Products & Services
TELUS brings Canadians the BlackBerry Storm smartphone
In December, TELUS launched the much anticipated touchscreen BlackBerry Storm 9530 smartphone with exclusive content from independent music label Arts & Craft. The BlackBerry Storm smartphone’s SurePress touchscreen depresses slightly when pressed, giving customers tactile feedback and making navigation and typing more precise. It also sports the features and reliability BlackBerry smartphone users have come to expect – easy-to-use email and instant messaging, full HTML Internet browsing, and integrated access to Facebook and MySpace, all on TELUS’ 3G network. Limited supplies of the handset received in mid-December, were boosted with further deliveries in late December and January.
Also in the quarter TELUS launched the BlackBerry Pearl 8130 in new colours, red and blue, and the HTC Touch Pro with Windows Mobile 6.1.
TELUS launches BlackBerry Curve 8350i smartphone with Push to Talk on
Mike Network
In January, TELUS launched the new BlackBerry Curve 8350i smartphone, the ultimate productivity tool for professionals in the field and on the go who need instant communication with their teams along with instant access to their e-mail. The new smartphone is packed with functionality, including built-in Wi-Fi and GPS, and combines the industry-leading BlackBerry communications and multimedia capabilities with Mike’s Direct Connect Push to Talk.
Awards and Community Investment
Aberdeen Group selects TELUS for case study
In January, global research company the Aberdeen Group selected TELUS for its annual case study on how technology improves learning. One company is highlighted each year for best-in-class practices as a benchmark for other companies. TELUS was selected from a pool of 535 companies due to its ability to align business priorities with learning and performance development to produce results. As a learning-focused technology company, TELUS is committed to investing in professional growth for team members.
Canadian Institute of Chartered Accountants presents TELUS with five
awards
In December, the Canadian Institute of Chartered Accountants (CICA) presented TELUS with the Overall Award of Excellence for Corporate Reporting, at its annual awards. The CICA judged TELUS’ 2007 financial reporting package, which includes its annual report to shareholders, information circular, corporate social responsibility report and online investor relations and corporate governance information, the best across all industries. TELUS also received the Award of Excellence for Financial Reporting, the Award of Excellence for Corporate Reporting in the Communications and Media category, Honourable Mention for Corporate Governance Disclosure, and Honourable Mention for Excellence in Sustainable Development Reporting.
TELUS directory assistance service tops U.S. and Canadian ranking
In November, TELUS was recognized by the Paisley Group, a directory assistance and operator services consulting company, for the best wholesale directory assistance service in both
TELUS and its team members donate
TELUS employees, retirees, board members and retailers pledged
TELUS employees contribute
In November, to celebrate National Diabetes Awareness Month, the Juvenile Diabetes Research Foundation (JDRF) announced nearly
National
Adding to the excitement around Team Canada winning the IIHF World Junior Championship, TELUS brought some of Canada’s hockey heroes to children involved in the HEROS (Hockey Education Reaching Out Society) program. In January, the
Dividend Declaration
The Board of Directors has declared a quarterly dividend of forty-seven and one half cents
This quarterly dividend represents a two and one half cent (
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with
TELUS Corporation
consolidated statements of income and
other comprehensive income (unaudited)
Periods ended December 31
(millions except per Three months Twelve months
share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING REVENUES $ 2,454 $ 2,330 $ 9,653 $ 9,074
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OPERATING EXPENSES
Operations 1,479 1,371 5,815 5,465
Restructuring costs 38 6 59 20
Depreciation 351 386 1,384 1,355
Amortization of
intangible assets 84 68 329 260
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1,952 1,831 7,587 7,100
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OPERATING INCOME 502 499 2,066 1,974
Other expense, net 11 6 36 36
Financing costs 118 109 463 440
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INCOME BEFORE INCOME
TAXES AND NON-CONTROLLING
INTEREST 373 384 1,567 1,498
Income taxes 88 (19) 436 233
Non-controlling interests - 3 3 7
-------------------------------------------------------------------------
NET INCOME AND COMMON SHARE
AND NON-VOTING SHARE
INCOME 285 400 1,128 1,258
OTHER COMPREHENSIVE INCOME
Change in unrealized fair
value of derivatives
designated as cash flow
hedges (21) 18 (26) 82
Foreign currency
translation adjustment
arising from translating
financial statements of
self-sustaining foreign
operations 4 (2) 2 (7)
Change in unrealized fair
value of
available-for-sale
financial assets - (1) (2) (1)
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(17) 15 (26) 74
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 268 $ 415 $ 1,102 $ 1,332
-------------------------------------------------------------------------
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NET INCOME PER COMMON
SHARE AND NON-VOTING SHARE
- Basic $ 0.90 $ 1.23 $ 3.52 $ 3.79
- Diluted $ 0.89 $ 1.22 $ 3.51 $ 3.76
DIVIDENDS DECLARED PER
COMMON SHARE AND
NON-VOTING SHARE $ 0.475 $ 0.45 $ 1.825 $ 1.575
TOTAL WEIGHTED AVERAGE
COMMON SHARES AND
NON-VOTING SHARES
OUTSTANDING
- Basic 318 326 320 332
- Diluted 319 328 322 334
TELUS Corporation
consolidated statements of financial position (unaudited)
As at December 31 (millions) 2008 2007
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments, net $ 4 $ 20
Short-term investments - 42
Accounts receivable 966 711
Income and other taxes receivable 25 121
Inventories 333 243
Prepaid expenses and other 220 200
Derivative assets 10 4
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1,558 1,341
-------------------------------------------------------------------------
Capital Assets, Net
Property, plant, equipment and other 7,317 7,196
Intangible assets subject to amortization 1,317 959
Intangible assets with indefinite lives 3,849 2,967
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12,483 11,122
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Other Assets
Deferred charges 1,513 1,318
Investments 42 39
Goodwill 3,564 3,168
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5,119 4,525
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$ 19,160 $ 16,988
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,465 $ 1,476
Income and other taxes payable 163 7
Restructuring accounts payable and accrued
liabilities 51 35
Dividends payable 151 -
Advance billings and customer deposits 689 632
Current maturities of long-term debt 4 5
Current portion of derivative liabilities 75 27
Current portion of future income taxes 459 504
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3,057 2,686
-------------------------------------------------------------------------
Long-Term Debt 6,348 4,584
-------------------------------------------------------------------------
Other Long-Term Liabilities 1,295 1,718
-------------------------------------------------------------------------
Future Income Taxes 1,255 1,048
-------------------------------------------------------------------------
Non-Controlling Interests 23 26
-------------------------------------------------------------------------
Shareholders' Equity 7,182 6,926
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$ 19,160 $ 16,988
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TELUS Corporation
consolidated statements of cash flows (unaudited)
Periods ended Three months Twelve months
December 31 (millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income 285 $ 400 $ 1,128 $ 1,258
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 435 454 1,713 1,615
Future income taxes (129) (16) 161 377
Share-based compensation (20) (30) 5 96
Net employee defined
benefit plans expense (27) (23) (102) (92)
Employer contributions
to employee defined
benefit plans (26) (26) (104) (93)
Restructuring costs,
net of cash payments 30 3 16 (18)
Amortization of deferred
gains on sale-leaseback
of buildings, amortization
of deferred charges and
other, net 8 3 3 4
Net change in non-cash
working capital 191 53 (1) 25
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Cash provided by operating
activities 747 818 2,819 3,172
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INVESTING ACTIVITIES
Capital expenditures
excluding advanced
wireless services
spectrum licences (631) (472) (1,859) (1,770)
Payment for advanced
wireless services
spectrum licences - - (882) -
Acquisitions - - (696) -
Proceeds from the sale of
property and other assets - 2 13 7
Change in non-current
materials and supplies,
purchase of investments
and other (12) (2) (9) (9)
-------------------------------------------------------------------------
Cash used by investing
activities (643) (472) (3,433) (1,772)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and
Non-Voting Shares issued - - - 1
Dividends to shareholders (144) (270) (433) (521)
Purchase of Common Shares
and Non-Voting Shares for
cancellation (6) (147) (280) (750)
Long-term debt issued 3,438 2,989 12,983 7,763
Redemptions and repayment
of long-term debt (3,424) (2,899) (11,667) (7,857)
Dividends paid by a
subsidiary to
non-controlling interests - - (5) (4)
Other - - - (1)
-------------------------------------------------------------------------
Cash provided (used) by
financing activities (136) (327) 598 (1,369)
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net (32) 19 (16) 31
Cash and temporary
investments, net,
beginning of period 36 1 20 (11)
-------------------------------------------------------------------------
Cash and temporary
investments, net, end of
period 4 20 $ 4 $ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
Interest (paid) (193) (171) $ (457) $ (454)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received 1 33 $ 3 $ 42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive of
Investment Tax Credits
(paid) received, net (2) 122 $ (10) $ 123
-------------------------------------------------------------------------
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TELUS Corporation
segmented information (unaudited)
Quarters ended December 31 Wireline Wireless
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,266 $ 1,219 $ 1,188 $ 1,111
Intersegment revenue 35 31 7 7
-------------------------------------------------------------------------
1,301 1,250 1,195 1,118
-------------------------------------------------------------------------
Operating expenses
Operations expense 824 783 697 626
Restructuring costs 32 6 6 -
-------------------------------------------------------------------------
856 789 703 626
-------------------------------------------------------------------------
EBITDA(1) $ 445 $ 461 $ 492 $ 492
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 395 $ 337 $ 236 $ 135
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 50 $ 124 $ 256 $ 357
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) 824 781 697 627
Restructuring costs 32 6 6 -
-------------------------------------------------------------------------
856 787 703 627
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ 445 $ 463 $ 492 $ 491
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ 395 $ 337 $ 236 $ 135
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ 50 $ 126 $ 256 $ 356
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited)
Quarters ended December 31 Eliminations Consolidated
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,454 $ 2,330
Intersegment revenue (42) (38) - -
-------------------------------------------------------------------------
(42) (38) 2,454 2,330
-------------------------------------------------------------------------
Operating expenses
Operations expense (42) (38) 1,479 1,371
Restructuring costs - - 38 6
-------------------------------------------------------------------------
(42) (38) 1,517 1,377
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 937 $ 953
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 631 $ 472
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 306 $ 481
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) (42) (38) 1,479 1,370
Restructuring costs - - 38 6
-------------------------------------------------------------------------
(42) (38) 1,517 1,376
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ - $ - $ 937 $ 954
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 631 $ 472
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ - $ - $ 306 $ 482
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
(from above) $ 937 $ 954
Incremental charge(3) - (1)
----------------------------------------------
EBITDA (from above) 937 953
Depreciation 351 386
Amortization 84 68
----------------------------------------------
Operating income 502 499
Other expense, net 11 6
Financing costs 118 109
----------------------------------------------
Income before income
taxes and
non-controlling
interests 373 384
Income taxes 88 (19)
Non-controlling
interests - 3
----------------------------------------------
Net income $ 285 $ 400
----------------------------------------------
----------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a measure that does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers; EBITDA is defined by the
Company as operating revenues less operations expense and
restructuring costs. The Company has issued guidance on, and reports,
EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Capital expenditures ("CAPEX").
(3) Substantially all of the Company's share option awards that were
granted prior to January 1, 2005, and which were outstanding on
January 1, 2007, were amended by adding a net-cash settlement
feature; such amendment resulted in an incremental charge to
operations of $NIL (2007 - $1) and did not result in an immediate
cash outflow. In respect of 2008 and 2007 results provided to the
Company's chief operating decision maker, operations expense and
EBITDA are being presented both with, and without, the impact of such
amendment.
TELUS Corporation
segmented information (unaudited)
Years ended December 31 Wireline Wireless
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ 5,021 $ 4,810 $ 4,632 $ 4,264
Intersegment revenue 131 114 28 27
-------------------------------------------------------------------------
5,152 4,924 4,660 4,291
-------------------------------------------------------------------------
Operating expenses
Operations expense 3,327 3,222 2,647 2,384
Restructuring costs 51 19 8 1
-------------------------------------------------------------------------
3,378 3,241 2,655 2,385
-------------------------------------------------------------------------
EBITDA(1) $ 1,774 $ 1,683 $ 2,005 $ 1,906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 1,311 $ 1,219 $ 548 $ 551
Advanced wireless services
spectrum licences - - 882 -
-------------------------------------------------------------------------
CAPEX(2) $ 1,311 $ 1,219 $ 1,430 $ 551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 463 $ 464 $ 575 $ 1,355
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) 3,327 3,077 2,647 2,360
Restructuring costs 51 19 8 1
-------------------------------------------------------------------------
3,378 3,096 2,655 2,361
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ 1,774 $ 1,828 $ 2,005 $ 1,930
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 1,311 $ 1,219 $ 548 $ 551
Advanced wireless services
spectrum licences - - 882 -
-------------------------------------------------------------------------
CAPEX(2) $ 1,311 $ 1,219 $ 1,430 $ 551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ 463 $ 609 $ 575 $ 1,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(unaudited)
Years ended December 31 Eliminations Consolidated
(millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 9,653 $ 9,074
Intersegment revenue (159) (141) - -
-------------------------------------------------------------------------
(159) (141) 9,653 9,074
-------------------------------------------------------------------------
Operating expenses
Operations expense (159) (141) 5,815 5,465
Restructuring costs - - 59 20
-------------------------------------------------------------------------
(159) (141) 5,874 5,485
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 3,779 $ 3,589
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ - $ - $ 1,859 $ 1,770
Advanced wireless services
spectrum licences - - 882 -
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 2,741 $ 1,770
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,038 $ 1,819
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses (as
adjusted)(3)
Operations expense (as
adjusted)(3) (159) (141) 5,815 5,296
Restructuring costs - - 59 20
-------------------------------------------------------------------------
(159) (141) 5,874 5,316
-------------------------------------------------------------------------
EBITDA (as adjusted)(3) $ - $ - $ 3,779 $ 3,758
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ - $ - $ 1,859 $ 1,770
Advanced wireless services
spectrum licences - - 882 -
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 2,741 $ 1,770
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted) less
CAPEX $ - $ - $ 1,038 $ 1,988
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
(from above) $ 3,779 $ 3,758
Incremental charge(3) - 169
----------------------------------------------
EBITDA (from above) 3,779 3,589
Depreciation 1,384 1,355
Amortization 329 260
----------------------------------------------
Operating income 2,066 1,974
Other expense, net 36 36
Financing costs 463 440
----------------------------------------------
Income before income
taxes and
non-controlling
interests 1,567 1,498
Income taxes 436 233
Non-controlling
interests 3 7
----------------------------------------------
Net income $ 1,128 $ 1,258
----------------------------------------------
----------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a measure that does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers; EBITDA is defined by the
Company as operating revenues less operations expense and
restructuring costs. The Company has issued guidance on, and reports,
EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX") are the sum of capital
expenditures and advances wireless services spectrum licences.
(3) Substantially all of the Company's share option awards that were
granted prior to January 1, 2005, and which were outstanding on
January 1, 2007, were amended by adding a net-cash settlement
feature; such amendment resulted in an incremental charge to
operations of $NIL (2007 - $169) and did not result in an immediate
cash outflow. In respect of 2008 and 2007 results provided to the
Company's chief operating decision maker, operations expense and
EBITDA are being presented both with, and without, the impact of such
amendment.
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TELUS CORPORATION
Management's review of operations
2008 Q4
-------------------------------------------------------------------------
Caution regarding forward-looking statements
-------------------------------------------------------------------------
This report contains 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 forward-looking statements are
subject to inherent risks and uncertainties. There is significant risk
that assumptions (see Section 1.5 Financial and operating targets for
2009), 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. Except as
required by law, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, and reserves the right
to change, at any time at its sole discretion, its current practice of
updating annual targets and guidance. Targets for 2009 and assumptions
are described in Section 1.5.
Factors that could cause actual results to differ materially include,
---------------------------------------------------------------------
but are not limited to:
-----------------------
Competition (including more active price competition and from the
likelihood of new wireless competitors beginning to offer services in
late 2009 and into 2010 resulting from the 2008 advanced wireless
services (AWS) spectrum auction); economic growth and fluctuations
(including the global credit crisis, and pension performance, funding and
expenses); capital expenditure levels (increased in 2009 and potentially
future years due to the Company's fourth generation (4G) wireless
deployment strategy and any new Industry Canada wireless spectrum
auctions); financing and debt requirements (including ability to carry
out refinancing activities and fund share repurchases); tax matters
(including acceleration or deferral of required payments of significant
amounts of cash taxes); human resource developments; business
integrations and internal reorganizations (including ability to
successfully implement cost reduction initiatives); technology (including
reliance on systems and information technology, broadband and wireless
technology options, choice of suppliers and suppliers' ability to
maintain and service their product lines, expected technology and
evolution path and transition to 4G technology, expected future benefits
and performance of HSPA (high speed packet access)/LTE (long-term
evolution) wireless technology, successful implementation of the network
build and sharing arrangement with Bell Canada to achieve cost
efficiencies and reduce deployment risks, successful deployment and
operation of new wireless networks and successful introduction of new
products, services and supporting systems); regulatory approvals and
developments (including interpretation and application of tower sharing
and roaming rules, the design and impact of future spectrum auctions, the
review of new media and Internet traffic management practices, and
possible changes to foreign ownership restrictions); process risks
(including conversion of legacy systems and billing system integrations,
and implementation of large complex deals); 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 www.sedar.com) and in its filings in the United States including Form
40-F (on EDGAR at www.sec.gov).
For further information, see Risks and risk management in Section 10 of
TELUS' 2007 annual and 2008 first, second and third quarter Management's
discussion and analyses, as well as updates reported in Section 5 of this
document.
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Management's review of operations
February 11, 2009
The following is a discussion of the consolidated financial position and results of operations of TELUS Corporation for the three-month periods and years ended
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 6: Reconciliation of non-GAAP measures and definition of key operating indicators.
Management's review of operations
-------------------------------------------------------------------------
Section Description
-------------------------------------------------------------------------
1. Introduction, performance A summary of TELUS' consolidated results
summary and targets for 2008, performance against 2008
targets, and presentation of targets for
2009
-------------------------------------------------------------------------
2. Results from operations A detailed discussion of operating results
for the fourth quarter and year ended
December 31, 2008
-------------------------------------------------------------------------
3. Changes in financial A discussion of changes in the
position consolidated statements of financial
position for the year ending December 31,
2008
-------------------------------------------------------------------------
4. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
-------------------------------------------------------------------------
5. Risks and risk management An update of certain risks and
uncertainties facing TELUS and how the
Company manages these risks
-------------------------------------------------------------------------
6. Reconciliation of A description, calculation and
non-GAAP measures and reconciliation of certain measures used by
definition of key management
operating indicators
-------------------------------------------------------------------------
1. Introduction, performance summary and targets
The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management’s review of operations and risk updates in Section 5. It is also qualified by Section 10: Risks and risk management of TELUS’ 2007 annual Management’s discussion and analysis, and updates in TELUS’ 2008 first, second and third quarter Management’s discussions and analyses.
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 economy and telecommunications industry
Economic and telecom industry growth
In early 2009, economic uncertainty related to tightening of credit markets worldwide remains. The credit situation remains fluid and it is difficult to predict future outcomes. TELUS’ capital structure financial policies were designed with credit cycles in mind (see Capabilities – Section 4.3 Liquidity and capital resources in TELUS’ annual 2007 Management’s discussion and analysis). The Company believes that these financial policies and guidelines, and maintaining credit ratings in the range of BBB+ to A , or the equivalent, provide reasonable access to capital markets.
The Government of Canada, in its
The Company estimates that revenues for the Canadian telecom industry grew by approximately 4%, due to continued wireless growth, which more than offset the declines of a mature wireline segment. TELUS’ 2008 revenues increased by 6% to
Key industry development
In
Wireless developments
TELUS estimates that Canadian wireless revenues grew by 10% in 2008 and that market penetration for the industry increased to approximately 65% of the population. The expectation for 2009 is a further 4.5 percentage point gain in the proportion of population using wireless services, which are increasingly seen as non-discretionary services, and less likely than many other consumer products to be cut in an economic downturn.
In 2008, TELUS’ wireless segment achieved 9% revenue growth (including 55% data revenue growth) and 10% subscriber growth. The Company’s Mike(R) service has exposure to the transport, construction, automotive and oil and gas sectors, which have been particularly affected by the economic downturn, resulting in a weakening in Mike service ARPU (average revenue per subscriber unit). Overall wireless ARPU decreased 2% in the fourth quarter and 1% for the full year of 2008 when compared to 2007. The economic downturn has also led to reduced voice roaming revenues.
As in recent years, a key driver of wireless growth continues to be the increased smartphone adoption and usage of data services such as text messaging and mobile computing. Canadian wireless providers continue the roll- out of faster next generation high-speed wireless networks to capture this growth opportunity. In 2008, TELUS announced its wireless technology evolution strategy toward fourth generation (4G) LTE, including the current joint HSPA network build and expected service launch by early 2010.
Competition remains intense due to a number of factors including introduction of TELUS’ basic brand and service (Koodo Mobile(R)) in
Advanced wireless services (AWS) and other spectrum auction in the
2 GHz range
Industry Canada conducted a wireless spectrum licence auction
TELUS was the successful bidder on 59 spectrum licences, providing additional spectrum depth nationally in markets TELUS already covers. Of the 59 licences acquired, 32 were 20 MHz licences covering geographic areas of
TELUS paid Industry Canada
Wireless competition is expected to increase in the future as a result of several entrants acquiring regional spectrum in the AWS spectrum auction, as summarized below. Subject to meeting Industry Canada’s eligibility requirements, some entrants are expected to begin offering services in late 2009 and in 2010, as they establish operations, and build wireless networks in areas where they have won spectrum.
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Existing and potential competitors acquiring licences in the 2008
Industry Canada spectrum auction
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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
(Bell Canada)
TELUS Expansion of existing national capacity
for future LTE technology deployment
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Incumbent provincial
facilities-based competitors
MTS Allstream Expansion of existing Manitoba capacity
SaskTel Expansion of existing Saskatchewan
capacity
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Entrants(1)
Globalive Wireless LP Spectrum in most regions, but excluding
most of Quebec
Data & Audio-Visual Spectrum in most major centres outside
Enterprises of Saskatchewan, Manitoba, Quebec and
Atlantic Canada
BMV Holdings Spectrum in Southern and Eastern
(6934579 Canada Inc.) Ontario and Southern and Eastern Quebec
Quebecor Inc. Regional spectrum in Quebec and parts
(9193-2962 Quebec Inc.) of Ontario, including Toronto
Shaw Communications Inc. Regional spectrum in Western Canada and
Northern Ontario
Bragg Communications Inc. Regional spectrum in Atlantic Canada
and Southwestern Ontario, as well as
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 Three local areas in total
-------------------------------------------------------------------------
(1) Subject to building a wireless network in the geographic areas where
they elect to complete.
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Wireline developments
As in 2007, the industry is continuing to focus its attention on broadband services to moderate the losses in network access lines. As penetration in this area approaches a saturation point, telecom and cable-TV companies have started to compete on speed, applications and price to differentiate their product offerings. Internet protocol (IP) telephony has facilitated a growing revenue stream for cable-TV companies. Telecom companies are strategically positioning themselves to encroach into the TV entertainment market with existing satellite TV service and/or new IP TV offerings. Consumers continue to substitute wireless and VoIP (voice over IP) services for traditional wired telephony services. Competitive losses and substitution have resulted in certain North American telecom companies having residential access line losses around 12%. At
The Company operates its incumbent wireline business in B.C.,
TELUS’ wireline segment external revenues increased 4% in 2008. Growth from wireline data services, including data revenues from two acquisitions, more than offset losses in voice services. While business network access lines increased by 2% in both 2008 and 2007 from the Company’s focus on non- incumbent growth, TELUS’ residential access lines decreased by 7.5% in 2008 and 6.5% in 2007, due to continued strong competition particularly from cable telephony and technological substitution.
Building capability in business markets
TELUS’ approach to the business market is through growth in
TELUS continues to expand its broad suite of call centre and business process outsourcing services for the benefit of a large roster of Canadian, U.S. and international clients. These services are reliant on TELUS’ growing call centre operations that are located in various locations around the world including
1.3 Consolidated highlights
The chief executive officer, who is the chief operating decision-maker, regularly received TELUS’ 2008 and 2007 consolidated reports on two bases: including and excluding (labelled “(as adjusted)”) an incremental charge for introducing a net-cash settlement feature for share option awards granted prior to 2005. The net-cash settlement feature was introduced in the first quarter of 2007. The highlights table below presents the unadjusted and adjusted views.
-------------------------------------------------------------------------
Consolidated highlights
($ millions, except
per share amounts, Quarters ended Years ended
subscribers and December 31 December 31
ratios) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Consolidated statements of income
-------------------------------------------------------------------------
Operating revenues 2,454 2,330 5.3 % 9,653 9,074 6.4 %
Operating income 502 499 0.6 % 2,066 1,974 4.7 %
Net-cash settlement
feature expense - 1 (100)% - 169 (100)%
-------- -------- ------- -------- -------- -------
Operating income
(as adjusted) 502 500 0.4 % 2,066 2,143 (3.6)%
Income before
income taxes 373 384 (2.9)% 1,567 1,498 4.6 %
Net-cash settlement
feature expense - 1 (100)% - 169 (100)%
-------- -------- ------- -------- -------- -------
Income before income
taxes (as adjusted) 373 385 (3.1)% 1,567 1,667 (6.0)%
Net income 285 400 (29)% 1,128 1,258 (10)%
Net-cash settlement
feature expense,
after tax - 1 (100)% - 105 (100)%
-------- -------- ------- -------- -------- -------
Net income
(as adjusted) 285 401 (29)% 1,128 1,363 (17)%
Earnings per share,
basic ($) 0.90 1.23 (27)% 3.52 3.79 (7.1)%
Net-cash settlement
feature per share - - - % - 0.32 (100)%
-------- -------- ------- -------- -------- -------
Earnings per share,
basic
(as adjusted) ($) 0.90 1.23 (27)% 3.52 4.11 (14)%
Earnings per share,
diluted ($) 0.89 1.22 (27)% 3.51 3.76 (6.6)%
Cash dividends
declared per
share ($) 0.475 0.45 5.6 % 1.825 1.575 16 %
-------------------------------------------------------------------------
Consolidated statements of cash flows
-------------------------------------------------------------------------
Cash provided by
operating
activities 747 818 (8.7)% 2,819 3,172 (11)%
Cash used by
investing
activities 643 472 36 % 3,433 1,772 94 %
Capital
expenditures 631 472 34 % 1,859 1,770 5.0 %
Payment for
advanced wireless
spectrum licences - - - 882 - n.m.
Acquisitions - - - 696 - n.m.
Cash provided (used)
by financing
activities (136) (327) 58 % 598 (1,369) n.m.
-------------------------------------------------------------------------
Subscribers and other measures
-------------------------------------------------------------------------
Subscriber
connections(1)
(thousands) 11,595 11,147 4.0 %
EBITDA(2) 937 953 (1.7)% 3,779 3,589 5.3 %
Net-cash settlement
feature expense - 1 (100)% - 169 (100)%
-------- -------- ------- -------- -------- -------
EBITDA (as adjusted) 937 954 (1.8)% 3,779 3,758 0.6 %
Free cash flow(3) 114 427 (73)% 567 1,573 (64)%
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA -
excluding
restructuring costs 1.9 1.7 0.2
Dividend payout
ratio(5) (%) 56 54 2 pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m. - not meaningful; pts - percentage points
(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. The measure
excludes TELUS TV(R) subscriber connections.
(2) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(3) Based on defined benefits plans net recovery and including payment
for AWS spectrum licences for the full year of 2008. See Section 6.2
Free cash flow.
(4) See Section 4.4 Liquidity and capital resource measures and Section
6.4 Definitions of liquidity and capital resource measures.
(5) Based on earnings per share excluding favourable tax-related
adjustments and net-cash settlement feature expense.
-------------------------------------------------------------------------
Highlights from operations:
- The Company met two of four original consolidated targets, and met
three of the four original segmented targets for 2008. See Section
1.4 Performance scorecard for 2008 results.
- Subscriber connections reported exclude TELUS TV subscribers.
Connections increased by 448,000 during 2008, net of approximately
28,000 subscriber deactivations from turning down the analogue
wireless network in September. The number of wireless subscribers
grew by 10% to 6.13 million, the number of Internet subscribers grew
by 3.8% to 1.22 million and the number of network access lines
decreased by 3.6% to 4.25 million. Excluding the analogue wireless
subscriber deactivations, subscriber connections increased by
approximately 476,000.
- The Company's wireless gross subscriber additions for 2008 set TELUS
fourth quarter and full year records, and were positively influenced
by the introduction of the new postpaid basic service and brand Koodo
Mobile earlier in 2008. Wireless average revenue per subscriber unit
per month (ARPU) was $62.16 in the fourth quarter of 2008 and $62.73
for the full year of 2008, down 2% and 1%, respectively, from 2007,
reflecting price competition in voice services, offset by strong data
ARPU growth.
- Operating revenues increased by $124 million and $579 million,
respectively, in the fourth quarter and full year of 2008 when
compared to the same periods in 2007, due primarily to growth in
wireless network revenues and wireline data revenues, which more than
offset revenue declines in wireline voice local and long distance.
Growth in wireline data revenues included revenues from two
acquisitions, Emergis Inc. and, to a much lesser extent, Fastvibe,
completed in January 2008.
- Operating income adjusted to exclude the net-cash settlement feature
increased by $2 million in the fourth quarter of 2008 and decreased
by $77 million in the full year of 2008, when compared to the same
periods in 2007. The increase for the fourth quarter was primarily
due to lower depreciation expenses, net of lower EBITDA (as adjusted)
and increased amortization of software assets. The decrease in
Operating income (as adjusted) for the full year was mainly due to
additional software amortization from the January acquisition of
Emergis and implementation of a new phase of the converged wireline
billing and client care platform in July 2008, as well as a 2.1%
increase in depreciation, net of higher EBITDA (as adjusted). EBITDA
(as adjusted) decreased by $17 million in the fourth quarter of 2008,
mainly due to increased restructuring charges. For the full year,
EBITDA (as adjusted) increased by $21 million, as increased data
revenues were partly offset by costs supporting the growth, including
costs of acquisition supporting strong wireless subscriber additions
and upfront implementation costs for new wireline enterprise
customers.
- Income before income taxes (as adjusted) decreased by $12 million and
$100 million, respectively, in the fourth quarter and full year of
2008 when compared to the same periods in 2007. Decreases were due to
lower operating income (as adjusted) and higher net financing costs.
Net financing costs include increased interest expenses mainly from
debt added in 2008 to help fund acquisitions in January and payment
for AWS spectrum licences in the third quarter. Net financing costs
also include interest income, which increased in the fourth quarter
but decreased significantly for the full year primarily due to
different amounts of interest on tax refunds in each year. The
decrease in interest income for the full year was also due to lower
cash and temporary investments in 2008.
- Net income decreased by $115 million or 33 cents per share (basic) in
the fourth quarter of 2008, and decreased by $130 million or 27 cents
per share (basic) for the full year of 2008, when compared to the
same periods in 2007. The decreases included lower net income tax
recoveries and related interest in the fourth quarter and full year
of $111 million (34 cents per share) and $208 million (63 cents per
share), respectively. Net income before income tax-related
adjustments decreased by $4 million in the fourth quarter and
increased by $78 million or 36 cents per share for the full year.
Average shares outstanding in 2008 were 3.4% lower than 2007, due to
market repurchases under normal course issuer bid (NCIB) programs.
-------------------------------------------------------------------------
Net income changes Quarters ended Years ended
($ millions) December 31 December 31
-------------------------------------------------------------------------
Net income in 2007 400 1,258
Deduct favourable income tax-related
adjustments in 2007 (see Section 2.2) (143) (257)
------------ ------------
257 1,001
Tax-effected changes:
Lower net-cash settlement feature expense 1 105
Change in EBITDA as adjusted(1) (12) 14
Lower (higher) depreciation and
amortization(1), excluding investment
tax credits 9 (69)
Interest expenses(1) (8) 2
Other 6 26
------------ ------------
253 1,079
Favourable income tax-related adjustments
in 2008 (see Section 2.2) 32 49
-------------------------------------------------------------------------
Net income in 2008 285 1,128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of this presentation, the 2008 blended statutory tax
rate was used.
-------------------------------------------------------------------------
Highlights - liquidity and capital resources:
- At December 31, 2008, TELUS had unutilized credit facilities of
$1.15 billion, as well as unutilized availability under its accounts
receivable securitization program, consistent with its objective of
generally maintaining more than $1 billion of unutilized liquidity.
In addition, the Company continues to meet the two other key
guidelines. Net debt to EBITDA at December 31, 2008 was 1.9 times,
within the Company's long-term target policy range of 1.5 to 2.0
times. The dividend payout ratio, based on the annualized fourth
quarter dividend and earnings for 2008 (excluding favourable income
tax-related adjustments), was 56%, slightly above the Company's
prospective guideline of 45% to 55% of sustainable net earnings. In
December, the Company renewed its $700 million, 364-day credit
facility with a syndicate of Canadian banks, extending the term to
March 1, 2010.
- The Company renewed its NCIB program for another year. Under Program
5, which will expire on December 23, 2009, the maximum number of
TELUS shares that may be purchased is eight million, or 2.5% of the
shares outstanding at December 31, 2008. See Section 4.3 Cash used by
financing activities.
- Cash provided by operating activities decreased by $71 million and
$353 million, respectively, in the fourth quarter and full year of
2008 when compared to the same periods in 2007, primarily due to
lower recoveries of income taxes and related interest. In addition,
during the fourth quarter of 2008, proceeds from securitized accounts
receivable increased by $50 million, as compared to a reduction of
$50 million in the same period of 2007. For the full year of 2008,
proceeds from securitized accounts receivable were reduced by
$200 million (as compared to no change for 2007).
- Cash used by investing activities increased by $171 million and
$1,661 million, respectively, in the fourth quarter and full year of
2008 when compared with the same periods in 2007. The increase for
the fourth quarter was due primarily to higher capital expenditures.
The full year increase was due to payment of $882 million for
advanced wireless services spectrum licences, the January 2008
acquisition of Emergis for $692 million (net of acquired cash) and
higher capital expenditures. The increase in capital expenditures in
2008 was directed to investments supporting high bandwidth services
for business and residential customers, the next generation wireless
HSPA network, healthcare and financial services solutions and upfront
expenditures to support new enterprise customers.
- Net cash used by financing activities was $136 million in the fourth
quarter of 2008, as compared to $327 million in the same period of
2007, as fewer shares were repurchased under NCIB programs and the
dividend for the fourth quarter of 2008 was remitted on the
January 2, 2009 payment date (while the dividend for the fourth
quarter of 2007 was remitted on December 31, 2007 for the January 1,
2008 payment date).
Net cash provided by financing activities was $598 million for the
full year of 2008 and included higher utilization of the 2012 bank
facility and the April 2008 issue of $500 million Notes maturing in
2015, partly offset by a reduction in issued commercial paper. These
activities helped support payment of $882 million for AWS spectrum
licences in the third quarter and $692 million for January
acquisitions, net of acquired cash. Net cash used by financing
activities in 2007 was $1,369 million, and included the June 2007
repayment of $1.5 billion of matured Notes.
- The dividend declared in the fourth quarter of 2008 increased 6% to
47.5 cents per Common Share and Non-Voting Share, up from 45 cents
per share declared in each of the four preceding quarters. This is
the fifth consecutive annual increase in the quarterly dividend rate.
- Free cash flow decreased by $313 million and $1,006 million,
respectively, in the fourth quarter and full year of 2008 when
compared to the same periods in 2007. The decrease for the fourth
quarter was due mainly to receipt of income tax recoveries and
related interest in the fourth quarter of 2007, as well as higher
capital expenditures in 2008. The decrease for the full year also
included payment of $882 million for AWS spectrum licences in 2008.
Financing activities in 2008 supplemented free cash flow to help fund
January acquisitions and the purchase AWS spectrum licences.
1.4 Performance scorecard
Five of the eight original consolidated and segmented targets for 2008 were met, while three were not achieved. Targets for consolidated revenue, wireline revenue and EBITDA, and wireless revenue were achieved. Consolidated and wireless EBITDA fell below their respective target ranges due to several factors, including lower wireless ARPU, higher subscriber acquisition and retention expenses and costs associated with data growth. Earnings per share (EPS) fell within the target range only as a result of favourable income tax recoveries; hence, the 2008 EPS target was not achieved. The consolidated capital expenditure target was achieved with actual expenditures 2% below the
During the year, management provided revised annual 2008 guidance and assumptions, when the results for the second and third quarters were announced. Annual guidance revisions for 2008 were also provided for revenues and capital expenditures in the 2009 targets news release and investor call on
In the following scorecard, TELUS’ results for 2008 are compared to its original targets. Targets for 2009 are also presented and are fully qualified by the Caution regarding forward-looking statements at the beginning of Management’s review of operations and Section 5: Risks and risk management.
-------------------------------------------------------------------------
Scorecards Performance for 2008 2009 targets
-------------------------------------------------------------------------
Legend
++ Exceeded target Change
range Original from 2008
+ Met target Actual Change 2008 Target actual
x Missed target results from 2007 targets result Targets results
-------------------------------------------------------------------------
Consolidated
Revenues $9.653 6.4 % $9.6 to + $10.025 4 to 6 %
billion $9.8 to
billion $10.275
billion
EBITDA(1)(2) $3.779 0.6 % $3.8 to x $3.75 (1) to
billion $3.95 to $3.9 3 %
billion billion
EPS - basic(3) $3.52 (14)% $3.50 - $3.40 (3) to
to $3.80 to $3.70 5 %
EPS - basic,(3)
(excluding
favourable
income
tax-related
impacts)(4) $3.37 1.2 % $3.50 x $3.40 1 to
to $3.80 to $3.70 10 %
Capital
expenditures
(excluding
expenditures
for AWS
spectrum
licences in
2008)(5) $1.859 5.0 % Approx. + Approx. 10 %
billion $1.9 $2.05
billion billion
-------------------------------------------------------------------------
Wireline segment
Revenue
(external) $5.021 4.4 % $4.975 + $5.05 0 to 3 %
billion to $5.075 to $5.175
billion billion
EBITDA(2) $1.774 (3.0)% $1.725 + $1.65 (3) to
billion to $1.8 to $1.725 (7)%
billion billion
-------------------------------------------------------------------------
Wireless segment
Revenue
(external) $4.632 8.6 % $4.625 + $4.975 7 to
billion to $4.725 to $5.1 10 %
billion billion
EBITDA(2) $2.005 3.9 % $2.075 x $2.1 to 5 to 8 %
billion to $2.15 $2.175
billion billion
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 6.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition.
(2) For comparative purposes, EBITDA for 2007 was adjusted to exclude an
incremental pre-tax charge that related to the introduction of a
net-cash settlement feature for share option awards granted prior to
2005. Of the consolidated total $169 million, approximately
$145 million was recorded in wireline and $24 million was recorded in
wireless.
(3) For comparative purposes, basic EPS for 2007 was adjusted to exclude
an incremental after-tax charge of $0.32 per share for the
introduction of a net-cash settlement feature.
(4) A non-GAAP measure.
(5) The target for 2008 capital expenditures was set excluding
expenditures in the AWS spectrum auction held from May to July 2008.
-------------------------------------------------------------------------
The following key assumptions were made at the time the 2008 targets were
announced in December 2007.
-------------------------------------------------------------------------
Assumptions for 2008 targets Actual or estimated result for 2008
-------------------------------------------------------------------------
Canadian real GDP growth Growing economic uncertainty in 2008
estimate of 2.8% and above resulted in the Conference Board of
average growth in the provinces Canada, Canadian banks and others to
of Alberta and B.C. reduce forecasts several times. Real
GDP growth rates for 2008 are estimated
to be less than one per cent for Canada
with above average growth for B.C. and
Alberta. These estimates were
aggregated from recent reports from the
Bank of Canada and several Canadian
banks.
-------------------------------------------------------------------------
Canadian dollar at or near The Canadian dollar closed at U.S.
parity with the U.S. dollar $0.821 on December 31, 2008, after
averaging U.S. $0.94 for the full year,
based on daily closing rates.
Influenced by declining commodity
prices and growing economic
uncertainty, the Canadian dollar
averaged U.S. $0.825 in the fourth
quarter of 2008, down from an average
U.S. $0.98 for the first nine months.
(Source: the Bank of Canada.)
TELUS maintained its position of fully
hedging foreign exchange exposure for
the 8.00% U.S. dollar Notes due 2011.
The Company's foreign exchange risk
management also includes the use of
foreign currency forward contracts and
currency options to fix the exchange
rates on short-term U.S. dollar
transactions and commitments
-------------------------------------------------------------------------
Increased wireline competition Confirmed by: (i) a western cable-TV
in both business and consumer competitor reporting strong high-speed
markets, particularly from Internet and telephone net additions
cable-TV and VoIP companies and expansion of its product offerings
to appeal to a wider consumer and
small/medium business base in more
locations; and (ii) TELUS' network
access line losses of 3.6% in 2008
-------------------------------------------------------------------------
The impact from the acquisition The transaction closed in mid-January
of Emergis was assumed to begin 2008 and had only a minor impact on
in March 2008 TELUS' 2008 targets
-------------------------------------------------------------------------
Canadian wireless industry Wireless market penetration gain is
market penetration gain estimated to be within this range
estimate is 4.5 to five
percentage points for the year
-------------------------------------------------------------------------
The capital expenditures target Actual results were as noted above.
explicitly excluded potential Payments of $882 million for AWS
purchases of wireless spectrum spectrum licences were recorded in the
in the AWS spectrum auction third quarter
-------------------------------------------------------------------------
No new wireless competitive Correct assumption. Eight regional
entrant assumed for 2008 competitive entrants have acquired
spectrum licences in the AWS auction
concluded July 2008, but it is expected
that entrants are not likely to offer
services until late 2009 or 2010
-------------------------------------------------------------------------
Restructuring expenses of Actual result of $59 million for the
approximately $50 million full year supported efforts aimed at
include the integration of improving cost structures and enhancing
Emergis efficiency that gained traction towards
the end of the year
-------------------------------------------------------------------------
A blended statutory income The blended statutory rate was 31% as a
tax rate of 31% to 32% result of enacted British Columbia tax
rate changes
-------------------------------------------------------------------------
A discount rate of 5.5% (50 Pension accounting assumptions are set
basis points higher than 2007) at the beginning of the year. See
and expected long-term return Section 1.5 for the 2009 assumptions
of 7.25% for pension accounting
(unchanged from 2007)
-------------------------------------------------------------------------
Average shares outstanding of Average shares for 2008 were
approximately 320 million 320 million, or 3.4% lower than in
2007.
-------------------------------------------------------------------------
1.5 Financial and operating targets for 2009
The following discussion is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management’s review of operations, as well as Section 5: Risks and risk management. The following assumptions apply to TELUS’ 2009 targets shown in the table in the previous section. The 2009 targets and assumptions were originally announced on
For 2009, TELUS is targeting 4 to 6% consolidated revenue growth, an increase of
Wireless revenues are forecast to increase 7 to 10% in 2009 due to continued growth in subscribers, increased smartphone adoption and increased wireless data service adoption and usage. Wireless EBITDA is expected to increase 5 to 8% in 2009.
Wireline revenue is expected to increase by up to 3% in 2009, driven by data growth. Wireline EBITDA is expected to decrease 3 to 7% as a result of increased pension expenses, upfront expenses associated with growth services (including early phase implementation costs for large business contracts), and expected increased restructuring charges, being somewhat offset by results from ongoing efficiency initiatives.
TELUS expects its 2009 EPS to be impacted by slightly increased depreciation and amortization expenses, and higher financing costs. The expected increase in financing costs is caused by a higher average debt level from the payment for AWS spectrum licences in the third quarter of 2008.
Capital expenditures in 2009 are forecast to be approximately
TELUS has reaffirmed its long-term financial policy guidelines, including Net debt to EBITDA of 1.5 to 2.0 times, and a dividend payout ratio guideline of 45 to 55% of sustainable net earnings. The 2009 targets align with these guidelines. EPS, cash balances, net debt and common equity may be affected by the purchase of up to eight million TELUS shares under the Company’s NCIB program.
-------------------------------------------------------------------------
Assumptions for 2009 targets
-------------------------------------------------------------------------
Ongoing wireline competition in both business and consumer markets,
particularly from cable-TV and VoIP companies
-------------------------------------------------------------------------
Canadian wireless industry market penetration gain estimate of
approximately 4.5 percentage points for the year, similar to estimated
growth in 2008
-------------------------------------------------------------------------
Downward pressure on wireless average revenue per subscriber unit (ARPU)
-------------------------------------------------------------------------
New competitive wireless entry beginning in the fourth quarter of 2009
with most entrants starting in 2010
-------------------------------------------------------------------------
Approximately $50 million to $75 million restructuring expenses
($59 million in 2008)
-------------------------------------------------------------------------
A blended statutory tax rate of approximately 30 to 31% (31% in 2008)
-------------------------------------------------------------------------
Net income tax payments of approximately $320 to $350 million
($10 million in 2008)
-------------------------------------------------------------------------
Forecast average exchange rate of U.S. $0.80 per Canadian dollar
(U.S. $0.94 in 2008)
-------------------------------------------------------------------------
A pension accounting discount rate estimated at 7.00% (subsequently set
at 7.25%) and expected long-term return of 7.25% (unchanged from 2008,
and consistent with the Company's long-run returns and its future
expectations). Defined benefits pension plans net expenses and funding
were both estimated to increase in 2009, mainly due to the decline in
value of defined benefits pension plans assets in 2008.
- Defined benefits pension plans net expenses were estimated to be $nil
in 2009, subsequently revised to approximately $18 million (compared
to a $100 million recovery in 2008)
- Defined benefits pension plans contributions were estimated to be
approximately $200 million in 2009, subsequently revised to
$211 million ($102 million in 2008).
-------------------------------------------------------------------------
2. Results from operations
2.1 General
The Company has two reportable segments: wireline and wireless.
Segmentation is based on similarities in technology, the technical expertise
required to deliver the products and services, the distribution channels used
and regulatory treatment. Intersegment sales are recorded at the exchange
value. Segmented information is regularly reported to the Company's Chief
Executive Officer (the chief operating decision maker).
2.2 Quarterly results summary
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2008 Q4 2008 Q3 2008 Q2 2008 Q1
-------------------------------------------------------------------------
Operating revenues 2,454 2,450 2,399 2,350
-------------------------------------------------------------------------
Operations expense(1) 1,479 1,465 1,477 1,394
Restructuring costs 38 10 4 7
-------------------------------------------------------------------------
EBITDA(2) 937 975 918 949
Depreciation 351 344 343 346
Amortization of intangible assets 84 92 77 76
-------------------------------------------------------------------------
Operating income 502 539 498 527
Other expense (income) 11 6 2 17
Financing costs 118 122 114 109
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 373 411 382 401
Income taxes (recovery) 88 125 114 109
Non-controlling interests - 1 1 1
-------------------------------------------------------------------------
Net income 285 285 267 291
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share
- basic 0.90 0.89 0.83 0.90
- diluted 0.89 0.89 0.83 0.90
Dividends declared per Common
Share and Non-Voting Share 0.475 0.45 0.45 0.45
-------------------------------------------------------------------------
(1) Includes net-cash settlement
feature expense (recovery) - - - -
(2) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except
per share amounts) 2007 Q4 2007 Q3 2007 Q2 2007 Q1
-------------------------------------------------------------------------
Operating revenues 2,330 2,310 2,228 2,206
-------------------------------------------------------------------------
Operations expense(1) 1,371 1,317 1,340 1,437
Restructuring costs 6 6 3 5
-------------------------------------------------------------------------
EBITDA(2) 953 987 885 764
Depreciation 386 333 318 318
Amortization of intangible assets 68 70 73 49
-------------------------------------------------------------------------
Operating income 499 584 494 397
Other expense (income) 6 8 18 4
Financing costs 109 86 127 118
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 384 490 349 275
Income taxes (recovery) (19) 79 94 79
Non-controlling interests 3 1 2 1
-------------------------------------------------------------------------
Net income 400 410 253 195
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income per Common Share and
Non-Voting Share
- basic 1.23 1.24 0.76 0.58
- diluted 1.22 1.23 0.75 0.57
Dividends declared per Common
Share and Non-Voting Share 0.45 0.375 0.375 0.375
-------------------------------------------------------------------------
(1) Includes net-cash settlement
feature expense (recovery) 1 (7) 1 174
(2) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
Trends
The consolidated revenue trend continues to reflect both growth in wireless network revenues generated from an increasing subscriber base, as well as strong growth in wireline data revenue, which includes new revenues from two
Prior to 2008, wireline data revenue growth 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. Residential network access line losses continue at recent run rate levels, as TELUS’ main cable-TV competitor expanded its product offerings, competitive pricing and coverage. Partially offsetting the residential line losses were continued gains in business network access lines.
Historically, there has been significant fourth quarter seasonality with respect to higher wireless subscriber additions, related acquisition costs and equipment sales, resulting in lower fourth quarter wireless EBITDA. The third quarter is becoming more significant as well, with back-to-school offers. Historically, there was a less pronounced fourth quarter seasonal effect for wireline high-speed Internet subscriber additions and related costs, which is no longer significant.
Starting in 2008, consolidated Operations expense includes expenses from two January acquisitions. Beginning with the first quarter of 2007, Operations expenses include expenses or recoveries for introducing a net-cash settlement feature for share option awards granted prior to 2005.
Depreciation expense increased beginning in the second half of 2007 with a reduction in estimated useful service lives for certain circuit switching, network management and other assets in the third and fourth quarters of 2007 and first quarter of 2008.
Amortization of intangible assets in the fourth quarter of 2008 and first quarter of 2007 are net of investment tax credits of
Financing costs shown in the preceding table are net of varying amounts of interest income, including interest from the settlement of prior years’ income tax-related matters, particularly in the third quarter of 2007. Interest expenses had been trending lower due primarily to a lower effective interest rate from financing activities in the first half of 2007 and
The trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments. EPS has been positively impacted by decreased shares outstanding from ongoing share re-purchases.
-------------------------------------------------------------------------
Income tax-related adjustments
($ in millions,
except EPS amounts) 2008 Q4 2008 Q3 2008 Q2 2008 Q1
-------------------------------------------------------------------------
Approximate Net income impact 32 - - 17
Approximate EPS impact ($) 0.10 - - 0.05
Approximate basic EPS excluding
tax-related impacts ($) 0.80 0.89 0.83 0.85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax-related adjustments
($ in millions,
except EPS amounts) 2007 Q4 2007 Q3 2007 Q2 2007 Q1
-------------------------------------------------------------------------
Approximate Net income impact 143 93 17 4
Approximate EPS impact ($) 0.44 0.28 0.05 0.01
Approximate basic EPS excluding
tax-related impacts ($) 0.79 0.96 0.71 0.57
-------------------------------------------------------------------------
In addition to income tax-related adjustments, unfavourable adjustments
for sales tax reassessments for prior years were recorded in the third quarter
of 2008 and second quarter of 2007. The after-tax adjustments were
approximately $8 million (two cents per share) in the third quarter of 2008,
and approximately $7 million (two cents per share) in the second quarter of
2007.
2.3 Consolidated results from operations
-------------------------------------------------------------------------
($ in millions, Quarters ended Years ended
except EBITDA December 31 December 31
margin in %) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Operating revenues 2,454 2,330 5.3 % 9,653 9,074 6.4 %
Operations expense 1,479 1,371 7.9 % 5,815 5,465 6.4 %
Restructuring costs 38 6 n.m. 59 20 195 %
-------------------------------------------------------------------------
EBITDA(1) 937 953 (1.7)% 3,779 3,589 5.3 %
Depreciation 351 386 (9.1)% 1,384 1,355 2.1 %
Amortization of
intangible assets 84 68 24 % 329 260 27 %
-------------------------------------------------------------------------
Operating income 502 499 0.6 % 2,066 1,974 4.7 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(2) 1,479 1,370 8.0 % 5,815 5,296 9.8 %
EBITDA (as
adjusted)(2) 937 954 (1.8)% 3,779 3,758 0.6 %
Operating income
(as adjusted)(2) 502 500 0.4 % 2,066 2,143 (3.6)%
EBITDA margin(3) 38.2 40.9 (2.7)pts 39.1 39.6 (0.5)pts
EBITDA margin
(as adjusted)(3) 38.2 40.9 (2.7)pts 39.1 41.4 (2.3)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) Excluding net-cash settlement feature expense of $1 million and
$169 million, respectively, in the fourth quarter and full year of
2007.
(3) EBITDA or EBITDA (as adjusted) divided by Operating revenues.
-------------------------------------------------------------------------
The following discussion is for the consolidated results of TELUS. Segmented discussion is provided in Section 2.4 Wireline segment results, Section 2.5 Wireless segment results and Section 4.2 Cash used by investing activities – capital expenditures.
Operating revenues
Operating revenues increased by
Operations expense
Operations expense for 2008 increased by
TELUS’ defined benefit pension plan net amortization did not change significantly in 2008. In 2009, management expects the net expense for, and contributions to, defined benefits plans to increase. See assumptions for 2009 in Section 1.5 Financial and operating targets for 2009. Bad debt expenses increased
Restructuring costs
Restructuring costs increased by
EBITDA
Consolidated EBITDA decreased by
Depreciation
Depreciation decreased by
Amortization of intangible assets
Amortization increased by
In addition, amortization was reduced through application of investment tax credits (ITCs) of
Amortization is expected to increase for the full year of 2009 as compared to 2008, mainly due to an additional seven months amortization for the B.C. phase of the converged wireline client care and billing platform. See Caution regarding forward-looking statements.
Operating income
Operating income increased by
Other income statement items
-------------------------------------------------------------------------
Quarters ended Years ended
Other expense, net December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
11 6 83 % 36 36 - %
-------------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income (losses) or impairments in equity or portfolio investments, gains and losses on disposal of real estate, and charitable donations. Accounts receivable securitization expenses were
-------------------------------------------------------------------------
Quarters ended Years ended
Financing costs December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Interest on long-
term debt, short-
term obligations
and other 128 109 17 % 481 464 3.7 %
Foreign exchange
(gains) losses - 2 n.m. (1) 13 n.m.
Capitalized interest
during construction - - - (3) - -
Interest income (10) (2) n.m. (14) (37) 62 %
-------------------------------------------------------------------------
118 109 8.3 % 463 440 5.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expenses on long-term and short-term debt and other increased
Interest income increased
-------------------------------------------------------------------------
Quarters ended Years ended
Income taxes December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax
at statutory income
tax rates 116 129 (10)% 486 503 (3.4)%
Revaluation of future
income tax liability
to reflect future
statutory income
tax rates (9) (141) - (41) (177) -
Tax rate differential
on, and consequential
adjustments from,
reassessments of
prior years' tax
issues (20) (3) - (21) (79) -
Share option award
compensation 2 1 - 6 (4) -
Other (1) (5) - 6 (10) -
-------------------------------------------------------------------------
88 (19) n.m. 436 233 87 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 31.2 33.6 (2.4)pts 31.0 33.6 (2.6)pts
Effective tax
rates (%) 23.5 (4.9) n.m. 27.8 15.6 12.2 pts
-------------------------------------------------------------------------
For the fourth quarter of 2008, blended federal and provincial statutory income tax decreased when compared to the same period in 2007, due to lower income before taxes and lower blended statutory tax rates. For the full year of 2008, blended statutory income taxes decreased due to lower blended statutory tax rates, partly offset by the 5% increase in income before taxes. A one per cent reduction in B.C. provincial income tax rates beginning
Income tax instalment payments were
-------------------------------------------------------------------------
Non-controlling Quarters ended Years ended
interests December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
- 3 (100)% 3 7 (57)%
-------------------------------------------------------------------------
Non-controlling interests represents minority shareholders’ interests in 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.
2.4 Wireline segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Voice local 480 505 (5.0)% 1,973 2,064 (4.4)%
Voice long
distance(1) 173 179 (3.4)% 700 715 (2.1)%
Data(2) 528 466 13 % 2,072 1,772 17 %
Other 85 69 23 % 276 259 6.6 %
-------------------------------------------------------------------------
External operating
revenue(3) 1,266 1,219 3.9 % 5,021 4,810 4.4 %
Intersegment revenue 35 31 13 % 131 114 15 %
-------------------------------------------------------------------------
Total operating
revenues(3) 1,301 1,250 4.1 % 5,152 4,924 4.6 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Voice long distance revenue decreased by 4% for the full year of 2008
when the impact of a second quarter 2007 adjustment, associated with
the Alberta billing system conversion, is excluded.
(2) Data revenue increased by approximately 3% and 6%, respectively, for
the fourth quarter and full year of 2008, when revenues from
acquisitions are excluded from 2008 and the impact of mandated
retroactive competitor price reductions are excluded from both years.
(3) External and total operating revenue growth was essentially flat in
2008, when excluding revenues from acquisitions and regulatory
adjustments.
-------------------------------------------------------------------------
Wireline revenues increased $51 million and $228 million, respectively, in
the fourth quarter and full year of 2008 when compared with the same periods
in 2007, due to the following:
- Voice local revenue decreased by $25 million and $91 million,
respectively. The decreases were mainly due to: (i) lower revenues
from basic access and optional enhanced service revenues caused by
increased competition for residential subscribers and consequent
decline in local residential access lines, offset in part by growth
in business local services and access lines; and (ii) for the full
year, 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 regulatory decisions (see the
discussion for wireline data revenue below).
-------------------------------------------------------------------------
Network access lines (NALs) As at December 31
(000s) 2008 2007 Change
-------------------------------------------------------------------------
Residential NALs 2,402 2,596 (7.5)%
Business NALs 1,844 1,808 2.0 %
-------- -------- -------
Total NALs 4,246 4,404 (3.6)%
Quarters ended Years ended
December 31 December 31
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Change in
residential NALs (42) (47) 11 % (194) (179) (8.4)%
Change in business
NALs 6 8 (25)% 36 35 2.9 %
-------- -------- ------- -------- -------- -------
Change in total NALs (36) (39) 7.7 % (158) (144) (9.7)%
-------------------------------------------------------------------------
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 for the full year was experienced in
Ontario and Quebec urban areas.
- Voice long distance revenues decreased by $6 million and $15 million,
respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. The decrease in long distance
revenue for the full year was partly offset by a $13 million negative
one-time adjustment in the second quarter of 2007, associated with
implementation of a new billing platform for Alberta residential
customers. Excluding the one-time adjustment in 2007, revenue
decreased by $6 million and $28 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 data revenues increased by $62 million and $300 million,
respectively, in the fourth quarter and full year 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
(as noted in the next paragraph); and (v) increased provision of
digital entertainment services to consumers in urban incumbent
markets. The underlying growth in 2008, absent acquisitions and
regulatory adjustments, was approximately 6%.
Pursuant to CRTC Decision 2007-6 (relating to digital network access
link charges) and CRTC Decision 2007-10 (relating to basic service
extension feature charges), retroactive rate reductions totalling
approximately $11 million in basic data services revenues were
recorded in the first quarter of 2007.
-------------------------------------------------------------------------
Internet subscribers As at December 31
(000s) 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet subscribers 1,096 1,020 7.5 %
Dial-up Internet subscribers 124 155 (20)%
-------- -------- -------
Total Internet subscribers 1,220 1,175 3.8 %
Quarters ended Years ended
December 31 December 31
(000s) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
High-speed Internet
net additions 19 26 (27)% 76 103 (26)%
Dial-up Internet
net reductions (10) (9) (11)% (31) (39) 21 %
-------- -------- ------- -------- -------- -------
Total Internet
subscriber net
additions 9 17 (47)% 45 64 (30)%
-------------------------------------------------------------------------
High-speed Internet subscriber net additions were lower in 2008 when
compared to the same period in 2007, due to a maturing market and a
cable-TV competitor's expanded product offerings.
- Other revenue increased by $16 million and $17 million, respectively,
in the fourth quarter and full year of 2008 when compared with the
same periods in 2007. The increases were due primarily to higher
voice equipment sales, net of 2007 recoveries for quality of service
rate rebates following CRTC decisions that clarified the application
of such rebate rules to TELUS.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment. These revenues are eliminated upon
consolidation together with the associated expense in the wireless
segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Salaries, benefits
and other employee-
related costs,
before net-cash
settlement feature 443 447 (0.9)% 1,853 1,729 7.2 %
Net-cash settlement
feature expense - 2 (100)% - 145 (100)%
Other operations
expenses 381 334 14 % 1,474 1,348 9.3 %
-------------------------------------------------------------------------
Operations expense 824 783 5.2 % 3,327 3,222 3.3 %
Restructuring costs 32 6 n.m. 51 19 168 %
-------------------------------------------------------------------------
Total operating
expenses 856 789 8.5 % 3,378 3,241 4.2 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 824 781 5.5 % 3,327 3,077 8.1 %
Total operating
expenses
(as adjusted)(1)(2) 856 787 8.8 % 3,378 3,096 9.1 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expense.
(2) Total operating expenses (as adjusted), excluding acquisitions in
2008, increased by approximately 4% in the fourth quarter and full
year.
-------------------------------------------------------------------------
Total operating expenses excluding the net-cash settlement feature expense increased by
- Salaries, benefits and employee-related costs decreased by $4 million
in the fourth quarter of 2008 and increased by $124 million for the
full year of 2008 when compared with the same periods in 2007. The
decrease for the fourth quarter was primarily a reduction in year-end
employee performance bonuses, as well as efficiency initiatives
targeting discretionary employee-related expenses such as travel in
the latter part of the year, partly offset by factors that increased
full year costs. The full year increase included Emergis operations
acquired in January 2008, implementation of new services for
enterprise customers, as well as base compensation increases earlier
in the year.
- Other operations expenses increased by $47 million and $126 million,
respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. The increases were due to:
(i) higher costs of sales for increased data equipment sales with
lower margins; (ii) expenses in acquired companies; (iii) higher
costs for the provision of digital entertainment services; (iv)
higher U.S. and international transit and termination costs in the
fourth quarter due to a lower Canadian dollar; and (v) higher off-net
facility costs to support new enterprise customers. These increases
were partly offset by lower advertising and promotional costs and,
for the full year, higher capitalized labour costs that increased in
parallel with higher wireline capital expenditures. Due to a
successful conversion of B.C. residential subscribers to the
converged wireline billing platform in 2008, conversion costs did not
have the extra system post-conversion expenses required in 2007 for
implementing the wireline billing and client care platform in
Alberta.
- Restructuring costs increased by $26 million and $32 million,
respectively, in the fourth quarter and full year of 2008, when
compared with the same periods in 2007. Restructuring charges in 2008
were for a number of initiatives under the Company's competitive
efficiency program.
-------------------------------------------------------------------------
EBITDA ($ millions) Quarters ended Years ended
and EBITDA margin (%) December 31 December 31
wireline segment 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
EBITDA 445 461 (3.5)% 1,774 1,683 5.4 %
EBITDA
(as adjusted)(1) 445 463 (3.9)% 1,774 1,828 (3.0)%
EBITDA margin 34.2 36.9 (2.7)pts 34.4 34.2 0.2 pts
EBITDA margin
(as adjusted) 34.2 37.0 (2.8)pts 34.4 37.1 (2.7)pts
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature expense of $2 million and
$145 million, respectively, in the fourth quarter and full year of
2007.
(2) EBITDA (as adjusted), excluding acquisitions in 2008, decreased by
approximately 6% and 5%, respectively, in the fourth quarter and full
year.
-------------------------------------------------------------------------
Wireline segment EBITDA decreased by
The EBITDA margin increase for the full year of 2008 resulted mainly from the significant net-cash settlement feature expense recorded in 2007. EBITDA margin (as adjusted) decreased due to early stage expenses for implementing large complex deals, as well as lower incremental margins on growing data services and higher restructuring charges.
2.5 Wireless segment results
-------------------------------------------------------------------------
Operating revenues - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Network revenue 1,122 1,040 7.9 % 4,369 4,008 9.0 %
Equipment revenue 66 71 (7.0)% 263 256 2.7 %
-------------------------------------------------------------------------
External operating
revenue 1,188 1,111 6.9 % 4,632 4,264 8.6 %
Intersegment revenue 7 7 - % 28 27 3.7 %
-------------------------------------------------------------------------
Total operating
revenues 1,195 1,118 6.9 % 4,660 4,291 8.6 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Key wireless operating indicators As at December 31
(000s) 2008 2007 Change
-------------------------------------------------------------------------
Subscribers - postpaid 4,922 4,441 11 %
Subscribers - prepaid 1,207 1,127 7.1 %
-------- -------- -------
Subscribers - total 6,129 5,568 10 %
Proportion of subscriber base
that is postpaid (%) 80.3 79.8 0.5 pts
Digital POPs(1) covered
(millions)(2) 32.6 31.6 3.2 %
Quarters ended Years ended
December 31 December 31
2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Subscriber gross
additions - postpaid 279 241 16 % 1,062 850 25 %
Subscriber gross
additions - prepaid 162 180 (10)% 593 584 1.5 %
-------- -------- ------- -------- -------- -------
Subscriber gross
additions - total 441 421 4.8 % 1,655 1,434 15 %
Subscriber net
additions - postpaid 119 107 11 % 481 365 32 %
Subscriber net
additions - prepaid 29 55 (47)% 80 150 (47)%
-------- -------- ------- -------- -------- -------
Subscriber net
additions - total(3) 148 162 (8.6)% 561 515 8.9 %
Subscriber net
additions - total
adjusted(3) - - - 588 515 14 %
ARPU ($)(4) 62.16 63.70 (2.4)% 62.73 63.56 (1.3)%
Churn, per month
(%)(3)(4) 1.62 1.59 0.03 pts 1.57 1.45 0.12 pts
Adjusted churn,
per month (%)(3) - - - 1.52 1.45 0.07 pts
COA(5) per gross
subscriber
addition ($)(4) 388 352 10 % 346 395 (12)%
Average minutes of
use per subscriber
per month (MOU) 412 411 0.2 % 411 404 1.7 %
EBITDA (as
adjusted)(6) to
network revenue (%) 43.9 47.2 (3.3)pts 45.9 48.2 (2.3)pts
Retention spend
to network
revenue(4) (%) 8.7 8.6 0.1 pts 9.1 7.6 1.5 pts
EBITDA (as adjusted)
excluding COA(4)
($ millions) 664 639 3.9 % 2,579 2,495 3.4 %
-------------------------------------------------------------------------
pts - percentage points
(1) POPs is an abbreviation for population. A POP refers to one person
living in a population area, which in whole or substantial part is
included in the coverage areas.
(2) Including roaming/resale agreements. At December 31, 2008, TELUS'
wireless PCS digital population coverage included expanded coverage
of approximately 7.5 million PCS POPs due to roaming/resale
agreements principally with Bell Mobility (Bell Canada).
(3) Net Additions and blended churn for 2008 include the impact of TELUS'
analogue network turndown on September 15, 2008. Adjusted subscriber
net additions and churn exclude the impact of 27,600 subscriber
deactivations resulting from turning down the analogue network.
(4) See Section 6.3 Definitions of key wireless operating indicators.
These are industry measures useful in assessing operating performance
of a wireless company, but are not defined under accounting
principles generally accepted in Canada and the U.S.
(5) Cost of acquisition.
(6) Excluding net-cash settlement feature (recovery) expense of
$(1) million and $24 million, respectively, in the fourth quarter and
full year of 2007.
-------------------------------------------------------------------------
Wireless segment revenues increased by $77 million and $369 million,
respectively, in the fourth quarter and full year of 2008 when compared with
the same periods in 2007, due to the following:
- Network revenue increased by $82 million and $361 million,
respectively, due primarily to strong wireless data revenues and the
10% growth in the subscriber base over the past year. Wireless data
revenues were $203 million in the fourth quarter of 2008, up 55% from
the same period in 2007, and now represent 18% of network revenue
(13% of network revenue in the same period in 2007). For the full
year of 2008, wireless data revenues were $690 million, up 55% from
2007. Growth in data revenues continues to reflect strength in text
messaging (including incoming text messages) and smartphone service
revenues driven by increased usage and features, data roaming,
migration of existing subscribers to full-function smartphones and
EVDO-capable handsets.
Blended ARPU of $62.16 and $62.73, respectively, in the fourth
quarter and full year of 2008 were down by $1.54 and $0.83,
respectively, when compared to the same periods in 2007, as
competitive pressures on voice revenues and strong growth in the
basic service were largely offset by growth in data services. Data
ARPU was $11.17 in the fourth quarter of 2008, up $3.22 or 41% as
compared to the fourth quarter of 2007. For the full year of 2008,
data ARPU was $9.84, up $2.82 or 40% as compared to 2007. Voice ARPU
was $50.99 in the fourth quarter of 2008, down $4.76 or 8.5% as
compared to the fourth quarter of 2007. For the full year of 2008,
voice ARPU was $52.89, down $3.65 or 6.5% as compared to 2007. The
decrease in voice ARPU was due to pricing competition, lower Mike
service ARPU, increased use of included-minute rate plans,
penetration of the basic brand, and lower voice roaming revenue. This
was partially offset by strong feature upsell, including long
distance and calling packages. Lower volume non-push-to-talk-centric
Mike subscribers continue to be actively migrated to PCS smartphones
for the enhanced data applications, contributing to future revenue
growth opportunities.
Gross and net subscriber additions in the fourth quarter of 2008
include the results of TELUS' postpaid basic brand first launched in
March 2008. Consistent with industry practice, the Company does not
breakout the results for this service for competitive reasons.
Despite softening economic conditions, gross subscriber additions of
441,000 in the fourth quarter of 2008 (including 279,000 gross
postpaid subscriber additions) were a TELUS fourth quarter record,
increasing 5% from the same period in 2007. The proportion of
postpaid gross subscriber additions was 63% in the fourth quarter of
2008, up six percentage points when compared to the fourth quarter of
2007. For the full year of 2008, gross subscriber additions were a
TELUS record 1.66 million, up 15% when compared to 2007. The
proportion of postpaid gross additions for the full year of 2008 was
64%, up five percentage points when compared to 2007.
Net additions in the fourth quarter of 2008 were 148,000, down 9%
from the same period in 2007. Postpaid subscriber net additions for
the same period represented 80% of total net additions as compared
with 66% of total net additions for the fourth quarter of 2007. Net
additions for the full year of 2008 (excluding deactivation of
analogue subscribers) were 588,000, up 14% from 2007 and were
comprised of 86% postpaid subscribers, up from 71% postpaid
subscribers in 2007.
The blended churn rate was 1.62% in the fourth quarter of 2008, or an
increase of 0.03 percentage points from the same period in 2007.
Blended churn (excluding deactivation of analogue subscribers) for
the full year of 2008 was 1.52%, increasing from 1.45% in 2007. The
increase reflected higher competitive intensity, including the impact
of higher prepaid churn, in part due to the growth of basic postpaid
brands in the market. The blended churn rate including deactivation
of analogue subscribers was 1.57% in the full year of 2008.
- Equipment sales, rental and service revenue decreased by $5 million
in the fourth quarter of 2008 and increased by $7 million for the
full year of 2008 when compared to the same periods in 2007.
Equipment sales decreased in the fourth quarter as higher gross
subscriber additions and retention volumes were more than offset by
lower per-unit revenues. Lower per-unit revenues were due to
increased promotional activity driving smartphone adoption, including
lower industry-wide smartphone pricing and penetration of the Koodo
brand. Equipment sales increased for the full year mainly due to
higher gross subscriber additions, partly offset by smartphone
adoption and per-unit pricing and penetration of the Koodo brand.
- Intersegment revenues represent services provided by the wireless
segment to the wireline segment and are eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Equipment sales
expenses 198 181 9.4 % 720 656 9.8 %
Network operating
expenses 158 141 12 % 603 514 17 %
Marketing expenses 124 119 4.2 % 470 439 7.1 %
General and
administration
expenses 217 185 17 % 854 775 10 %
-------------------------------------------------------------------------
Operations expense 697 626 11 % 2,647 2,384 11 %
Restructuring costs 6 - n.m. 8 1 n.m.
-------------------------------------------------------------------------
Total operating
expenses 703 626 12 % 2,655 2,385 11 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operations expense
(as adjusted)(1) 697 627 11 % 2,647 2,360 12 %
Total operating
expenses
(as adjusted)(1) 703 627 12 % 2,655 2,361 12 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature (recovery) expense of
$(1) million and $24 million, respectively, in the fourth quarter and
full year of 2007.
-------------------------------------------------------------------------
Wireless segment total operating expenses increased by $77 million and
$270 million, respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. Total operating expenses adjusted to
exclude the net-cash settlement feature increased by $76 million and $294
million, respectively, to promote, acquire, support and retain the 10% and 9%
year-over-year growth in the subscriber base and Network revenue,
respectively.
- Equipment sales expenses increased by $17 million and $64 million,
respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. Higher combined gross
subscriber additions and retention volumes, including smartphone
activity, were partially offset by lower smartphone per-unit costs
and sales of the Koodo service.
- Network operating expenses increased by $17 million and $89 million,
respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. In addition to supporting the
larger subscriber base, the increases were principally in support of
the 55% growth in data revenues and were primarily volume in nature,
as increased usage and smartphone adoption drove increases in roaming
costs, revenue share to third parties and licensing costs to service
providers.
- Marketing expenses increased by $5 million and $31 million,
respectively, in the fourth quarter and full year of 2008 when
compared to the same periods in 2007. The increase for the fourth
quarter was primarily due to higher advertising in support of the
BlackBerry Storm, which had delayed deliveries that negatively
impacted gross additions and COA. The increase for the full year was
primarily due to higher advertising in support of the 15% increase in
gross subscriber additions and introduction of a new brand.
COA per gross subscriber addition increased by $36 or 10% in the
fourth quarter of 2008 due to the marketing expense increase as well
as a handset inventory valuation adjustment. COA per gross subscriber
addition decreased by $49 or 12% for the full year of 2008, when
compared to 2007, due to the combination of mix in gross subscriber
loading towards lower variable cost channels and efficiency in
marketing spend, partly offset by higher subsidies on smartphones in
response to competitor pricing.
Retention costs as a percentage of network revenue were up marginally
to 8.7% in the fourth quarter of 2008, as compared to 8.6% in the
same period of 2007, and were 9.1% for the full year of 2008, as
compared to 7.6% for 2007. The increase in retention costs was due
primarily to continued handset upgrades to full function smartphones
to support data revenue growth and the continued migration of non-
push-to-talk-centric Mike service clients to PCS postpaid services.
- General and administration increased by $32 million and $79 million,
respectively, in the fourth quarter and full year of 2008 when
compared with the same periods in 2007. General and administration
expenses adjusted to exclude the net-cash settlement feature
increased by $31 million and $103 million, respectively, due to
higher costs associated with restructuring efforts, contracted labour
costs to support data products and service offerings, growth in the
subscriber base, expansion of company-owned retail stores and Koodo
outlets, and an increase in bad debt expense. These increases were
partly offset by a reduction of year-end employee performance bonuses
in the fourth quarter from below plan operational performance, as
well as efficiency initiatives targeting discretionary employee-
related expenses such as travel in the latter part of the year.
- Restructuring costs included several initiatives under the Company's
competitive efficiency program.
-------------------------------------------------------------------------
Wireless segment
EBITDA ($ millions) Quarters ended Years ended
and EBITDA December 31 December 31
margin (%) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
EBITDA 492 492 - % 2,005 1,906 5.2 %
EBITDA
(as adjusted)(1) 492 491 0.2 % 2,005 1,930 3.9 %
EBITDA margin 41.2 44.0 (2.8)pts 43.0 44.4 (1.4)pts
EBITDA margin
(as adjusted) 41.2 43.9 (2.7)pts 43.0 45.0 (2.0)pts
-------------------------------------------------------------------------
(1) Excluding net-cash settlement feature (recovery) expense of
$(1) million and $24 million, respectively, in the fourth quarter and
full year of 2007.
-------------------------------------------------------------------------
Wireless segment EBITDA remained the same in the fourth quarter of 2008 and increased by
EBITDA margins (as adjusted) decreased mainly due to lower incremental margins on growing data service adoption and higher retention expenses.
3. Changes in financial position
Changes in the Consolidated statements of financial position for the year
ended December 31, 2008, are as follows:
-------------------------------------------------------------------------
As at December 31
------------------- Changes Explanation of
($ millions) 2008 2007 the change
-------------------------------------------------------------------------
Current Assets
Cash and 4 20 (16) (80)% See Section 4:
temporary Liquidity and capital
investments, resources
net
Short-term - 42 (42) (100)% Liquidation of short-
investments term investments in
the second quarter
Accounts 966 711 255 36 % Mainly due to a
receivable $200 million
reduction in proceeds
from securitized
accounts receivable
and increases from
higher revenues
including
acquisitions, partly
offset by a faster
accounts receivable
turnover
(approximately
48 days versus
49 days) and
increased provisions
for bad debts
Income and 25 121 (96) (79)% Most jurisdictions
other taxes moved into a
receivable liability position
with the current
income tax expense
recorded in 2008
Inventories 333 243 90 37 % Primarily receipt of
new wireless handset
models for new
product launches and
dealers accepting
lower volumes in the
fourth quarter of
2008, as well as a
separate line of
handsets for the new
basic wireless brand
Prepaid 220 200 20 10 % Mainly an increase in
expenses deferred wireless
and other customer activation
and connection fees
associated with
subscriber growth
Derivative 10 4 6 150 % Fair value
assets adjustments to
foreign exchange
hedges, restricted
share units and other
operational hedges
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,465 1,476 (11) (1)% Includes lower
payable and accrued payroll costs
accrued from seven fewer
liabilities year-end payroll days
outstanding, and a
reduction in accrued
employee performance
bonuses, partly
offset by increases
from acquisitions
Income and 163 7 156 n.m. Mainly due to current
other taxes income tax expense
payable booked during 2008
and income taxes
payable from
acquisitions, less
instalments paid
Restructuring 51 35 16 46 % New obligations in
accounts 2008 exceeded
payable and payments under
accrued previous and current
liabilities programs
Dividends 151 - 151 n.m. Dividends payable as
payable at December 31, 2008
were remitted on the
January 2, 2009
payment date. In
2007, dividends were
remitted on
December 31 for the
January 1, 2008
payment date
Advance 689 632 57 9 % Includes an increase
billings and in billings for new
customer enterprise customers
deposits and wireless postpaid
subscribers from
subscriber growth,
and higher wireless
deferred customer
activation and
connection fees, net
of a reduction in
customer deposits
Current 4 5 (1) (20)% Primarily a net
maturities decrease in capital
of long- leases
term debt
Current 75 27 48 178 % Fair value
portion of adjustments for share
derivative option, restricted
liabilities share unit and
operational hedges,
net of options
exercised or
forfeited
Current 459 504 (45) (9)% A decrease in
portion of temporary differences
future for current assets
income taxes and liabilities, as
well as changes in
partnership taxable
income that will be
allocated in the next
12 months
-------------------------------------------------------------------------
Working (1,499) (1,345) (154) (11)% Includes dividends
capital(1) payable at
December 31, 2008,
that were paid on
January 2, 2009 and
income taxes payable
over the next
12 months, net of
reduced
securitization of
accounts receivable.
-------------------------------------------------------------------------
Capital 12,483 11,122 1,361 12 % Includes $882 million
Assets, Net for advanced wireless
services spectrum
licences acquired in
Industry Canada's
2008 auction,
$326 million for
acquired software,
customer contracts
and related customer
relationships and
other capital assets,
as well as capital
expenditures net of
depreciation and
amortization. See
Section 2.3
Consolidated results
from operations -
Depreciation,
Amortization of
intangible assets, as
well as Section 4.2
Cash used by
investing activities
-------------------------------------------------------------------------
Other Assets
Deferred 1,513 1,318 195 15 % Primarily related to
charges pension plan funding,
favourable cumulative
returns on plan
assets to the end of
2007 and continued
amortization of
transitional pension
assets
Investments 42 39 3 8 % Purchases,
revaluations and
sales of small
investments, net of
the value of Emergis
shares purchased in
the open market in
December 2007 that
were exchanged at the
close of acquisition
in January 2008, as
well as the sale of a
minority stake in
Hostopia
Goodwill 3,564 3,168 396 13 % Primarily the January
2008 acquisition of
Emergis
-------------------------------------------------------------------------
Long-Term Debt 6,348 4,584 1,764 38 % Includes the April
2008 publicly issued
$500 million, seven-
year Notes, and draws
of $980 million from
the 2012 credit
facility, partly
offset by a reduction
of $155 million in
issued commercial
paper. Also included
is a $436 million
increase in the
Canadian dollar value
of the 2011 U.S.
dollar Notes, which
is largely offset by
a lower derivative
liability (see Other
Long-Term
Liabilities)
-------------------------------------------------------------------------
Other Long- 1,295 1,718 (423) (25)% Primarily changes in
Term U.S. dollar exchange
Liabilities rates and a fair
value adjustment of
the derivative
liabilities
associated with 2011
U.S. dollar Notes
-------------------------------------------------------------------------
Future Income 1,255 1,048 207 20 % An increase in
Taxes temporary differences
for long-term assets
and liabilities,
partly offset by
lower tax rates being
applied
-------------------------------------------------------------------------
Non-Controlling 23 26 (3) (12)% Payment of dividends
Interests by a subsidiary to a
non-controlling
interest and an
increase in the
Company's total
effective economic
interest in TELUS
International
Philippines Inc. from
97.4% to 100.0%, net
of non-controlling
interests' share of
earnings
-------------------------------------------------------------------------
Shareholders'
Equity
Common 7,182 6,926 256 4 % Primarily Net income
equity of $1,128 million,
less dividends
declared of
$584 million and NCIB
purchases of
$280 million
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
4. Liquidity and capital resources
In 2008, cash provided by operating activities was supplemented by
financing activities as the Company made two strategic acquisitions in January
(Emergis and Fastvibe) and acquired 59 spectrum licences in the AWS auction,
which ended in July.
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Cash provided by
operating
activities 747 818 (8.7)% 2,819 3,172 (11)%
Cash (used) by
investing
activities (643) (472) (36)% (3,433) (1,772) (94)%
Cash (used)
provided by
financing
activities (136) (327) 58 % 598 (1,369) n.m.
-------------------------------------------------------------------------
(Decrease)
Increase
in cash and
temporary
investments, net (32) 19 - (16) 31 -
Cash and temporary
investments, net,
beginning
of period 36 1 - 20 (11) -
-------------------------------------------------------------------------
Cash and
temporary
investments,
net, end of
period 4 20 (75)% 4 20 (75)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4.1 Cash provided by operating activities
Cash provided by operating activities decreased by $71 million and $353
million, respectively, in the fourth quarter and full year of 2008 when
compared to the same periods in 2007. Changes in the fourth quarter and full
year include the following:
- Changes in proceeds from securitized accounts receivable (which are
included in non-cash working capital changes) contributed a
$100 million comparative increase in cash flow in the fourth quarter
and a $200 million reduction in cash flow for the full year.
Specifically, proceeds from securitized accounts receivable increased
by $50 million during the fourth quarter of 2008 as compared to a
decrease of $50 million during this period in 2007. For the full year
of 2008, proceeds were reduced by $200 million, as compared no change
in 2007. Utilized proceeds from securitized accounts receivable were
lower in 2008 as other sources of funding were used. See Section 4.6
Accounts receivable sale;
- EBITDA decreased by $16 million in the fourth quarter of 2008 and
increased by $190 million for the full year of 2008, as described in
Section 2 Results from operations;
- Share-based compensation expense in excess of payments decreased by
$91 million for the full year of 2008, due to recording of the net-
cash settlement feature expense in 2007 and lower cash outflows
resulting from fewer option exercises;
- Contributions to employee defined benefits plans in excess of the net
employee defined benefits plans recovery increased by $21 million for
the full year of 2008, when compared to 2007. Net contributions are
expected to increase in 2009. See assumptions in Section 1.5
Financial and operating targets for 2009;
- Interest paid increased by $22 million and $3 million, respectively,
in the fourth quarter and full year of 2008. The increases were due
to higher outstanding debt in 2008, partly offset by a lower
effective interest rate. The increase in interest paid for the full
year of 2008 was partly offset by repayment of forward starting
interest rate swaps in 2007.
- Interest received decreased by $32 million and $39 million,
respectively, for the fourth quarter and full year of 2008, due
mainly to receipt of interest on income tax refunds in 2007;
- Income tax recoveries received net of instalments paid decreased by
$124 million and $133 million, respectively, in the fourth quarter
and full year of 2008, as a result of larger settlements of income
tax-related matters in 2007; and
- Other changes in non-cash working capital, including (i) liquidation
of short-term investments of $42 million in 2008 as compared to
liquidations of $68 million in 2007; and (ii) increases in
inventories, net of increases in advanced billings and customer
deposits in 2008.
4.2 Cash used by investing activities
Cash used by investing activities increased by
Assets under construction were
-------------------------------------------------------------------------
Capital expenditures,
excluding AWS Quarters ended Years ended
spectrum licences December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Wireline segment 395 337 17 % 1,311 1,219 7.5 %
Wireless segment 236 135 75 % 548 551 (0.5)%
-------------------------------------------------------------------------
TELUS consolidated 631 472 34 % 1,859 1,770 5.0 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
less capital
expenditures(1) 306 482 (37)% 1,920 1,988 (3.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 6.1 EBITDA for the calculation and description.
-------------------------------------------------------------------------
Capital expenditures for the full year of 2008 increased by $89 million
when compared to 2007, and were in line with targeted annual expenditures of
approximately $1.9 billion. For the full year of 2008, EBITDA (as adjusted)
after deducting capital expenditures (excluding payment for the AWS spectrum
licences) decreased by $68 million.
- Wireline segment capital expenditures increased by $58 million and
$92 million, respectively, in the fourth quarter and full year of
2008 when compared to the same periods in 2007. The increases
included investment to support high bandwidth services for business
and residential customers, investment in healthcare and financial
services solutions, and upfront expenditures to support new
enterprise customers, partly offset by lower demand in 2008 for
network access builds resulting from more moderate residential
construction activity in B.C. and Alberta. Wireline cash flows
(EBITDA as adjusted less capital expenditures) were $50 million and
$463 million, respectively, in the fourth quarter and full year of
2008, or decreases of 60% and 24%, respectively, when compared to the
same periods in 2007. The decreases reflect higher capital
expenditure levels and lower EBITDA (as adjusted).
- Wireless segment capital expenditures increased by $101 million in
the fourth quarter and decreased by $3 million in the full year of
2008, when compared to the same periods in 2007. Expenditures
increased in the fourth quarter due to initiatives supporting the new
HSPA network build that commenced in 2008. For the full year,
expenditures were relatively unchanged as new spending on the HSPA
program was offset by lower expenditures for the CDMA wireless
network (including the EVDO RevA data network rollout). Wireless cash
flows (EBITDA as adjusted less capital expenditures) were
$256 million and $1,457 million, respectively, in the fourth quarter
and full year of 2008, or a decrease of 28% and an increase of 6%,
respectively, when compared to the same periods in 2007.
-------------------------------------------------------------------------
Payment for AWS Quarters ended Years ended
spectrum licences December 31 December 31
($ millions) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Capital expenditures
for AWS spectrum
licences - - - 882 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (as adjusted)
less capital
expenditures and
payment for AWS
spectrum licences(1) - - - 1,038 1,988 (48)%
-------------------------------------------------------------------------
(1) See Section 6.1 EBITDA for the calculation and description.
-------------------------------------------------------------------------
The Company acquired 59 licences in Industry Canada’s advanced wireless services spectrum auction that concluded in July for
-------------------------------------------------------------------------
Quarters ended Years ended
Capital intensity(1) December 31 December 31
(in %) 2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
Capital expenditure
intensity 26 20 6 pts 19 20 (1) pt
Capital expenditure
intensity, including
payment for AWS
spectrum licences
in 2008 - - - 28 20 8 pts
-------------------------------------------------------------------------
(1) Capital intensity is the measure of capital expenditures divided by
operating revenues. This measure provides a basis for comparing the
level of capital expenditures to other companies of varying size
within the same industry.
-------------------------------------------------------------------------
TELUS’ capital expenditure intensity ratio for the full year of 2008, excluding payment for spectrum licences, reflects intensity levels of 25% for wireline and 12% for wireless, consistent with intensity levels of 25% and 13%, respectively, in 2007. Payment for AWS spectrum licences in 2008 temporarily increased TELUS’ overall capital intensity ratio to 28% and the wireless capital intensity ratio to 31%.
4.3 Cash used by financing activities
Net cash used by financing activities in the fourth quarter of 2008 was
- Cash dividends paid to shareholders in 2008 were $144 million and
$433 million, respectively, in the fourth quarter and full year of
2008 as compared to $270 million and $521 million, respectively, in
2007. The decrease in dividend payments in 2008 resulted from
different remittance dates for dividends declared in the fourth
quarter of 2008 and 2007. The fourth quarter dividend for 2008 was
remitted on the January 2, 2009 payment date, while the fourth
quarter dividend for 2007 was remitted on December 31, 2007, for the
January 1, 2008 payment date. Otherwise, dividend payments in 2008
reflected higher quarterly declared dividend rates (see Section 2.2
Quarterly results summary), partly offset by lower shares outstanding
from NCIB share repurchase programs.
- The Company purchased 34% of the maximum 20 million shares allowed
under the fourth NCIB program ended December 19, 2008. Purchases of
shares under NCIB programs decreased by $141 million and
$470 million, respectively in the fourth quarter and full year of
2008 when compared to the same periods in 2007, as fewer shares were
repurchased at a lower average price. During the fourth quarter of
2008, the Company repurchased 155,000 TELUS Non-Voting Shares for a
total cost of $6 million.
In December 2008, the Company renewed its NCIB program, which has
been in place since December 2004. The renewed program (Program 5)
came into effect on December 23, 2008 and is set to expire on
December 22, 2009. The maximum number of shares that may be purchased
under Program 5 is four million Common Shares and four million Non-
Voting Shares. Daily purchases under Program 5 may not exceed 462,444
Common Shares and 254,762 Non-Voting Shares until March 31, 2009, and
thereafter may not exceed 231,222 Common Shares and 127,381 Non-
Voting Shares. The shares are to be purchased on the Toronto Stock
Exchange (TSX) and all repurchased shares will be cancelled.
Investors may obtain a copy of the notice filed with the TSX without
charge by contacting TELUS Investor Relations.
Shares repurchased for cancellation under normal course issuer bid
programs
-------------------------------------------------------------------------
Shares repurchased Purchase cost ($ millions)
------------------------------ --------------------------
Charged Charged
to to
Non- Share Retained
Common Voting capital earnings
Shares Shares Total (1) (2) Paid
---------------------------------------------- --------------------------
2007
Program 3
ended
Dec. 19 2,904,900 10,571,800 13,476,700 264 480 744
Program 4
beginning
Dec. 20 - 134,200 134,200 3 3 6
---------------------------------------------- --------------------------
2,904,900 10,706,000 13,610,900 267 483 750
---------------------------------------------- --------------------------
2008
Program 4
ended
Dec. 19 950,300 5,810,400 6,760,700 137 143 280
Program 5
beginning
Dec. 23 - - - - - -
---------------------------------------------- --------------------------
950,300 5,810,400 6,760,700 137 143 280
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents the book value of shares repurchased.
(2) Represents the cost in excess of the book value of shares
repurchased.
-------------------------------------------------------------------------
Long-term debt issues net of redemptions and repayments were $14 million
and $1,316 million, respectively, in the fourth quarter and full year 2008,
and resulted from the following:
- In April 2008, the Company publicly issued $500 million, 5.95%,
Series CE Notes at a price of $998.97 per $1,000 of principal. The
Notes mature in April 2015. The net proceeds of the offering were
used for general corporate purposes, including repayment of amounts
under the 2012 revolving 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
$743 million. The Series CE Notes require that the Company make an
offer to repurchase the Notes at a price equal to 101% of their
principal plus accrued and unpaid interest to the date of repurchase
upon the occurrence of a change in control triggering event, as
defined in the supplemental trust indenture.
- On August 6, 2008, the Board of Directors approved an increase in the
authorized commercial paper program from $800 million to
$1.2 billion.
- Amounts drawn on the 2012 bank facility increased to $980 million at
December 31, 2008 from $nil one year earlier, while commercial paper
issues decreased by $155 million during the year.
During the first quarter of 2008, the Company increased utilization
of the 2012 bank facility from $nil to $321 million and increased
commercial paper by $213 million for general corporate purposes,
including acquisitions in January. During the second quarter of 2008,
the Company reduced the amount drawn from the 2012 bank facility to
$162 million. Utilized bank facilities increased to $430 million
during the third quarter to help pay for the AWS spectrum licences.
In the fourth quarter, amounts drawn on the 2012 facility increased
by $550 million, offsetting a reduction in outstanding commercial
paper. Commercial paper outstanding was $432 million at December 31,
2008, as compared to $968 million at September 30, $800 million at
June 30 and March 31, and $587 million at December 31, 2007.
In comparison, debt financing activities for the full year of 2007
included the March issue of Series CC and CD Notes totalling $1 billion,
establishment of a commercial paper program in May, and repayment of
approximately $1.5 billion of maturing Notes in June. These activities
contributed to a lower effective interest rate in subsequent periods.
4.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or years ended, December 31 2008 2007 Change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Components of debt and coverage
ratios(1) ($ millions)
-------------------------------------------------------------------------
Net debt 7,286 6,141 1,145
Total capitalization - book value 14,621 13,197 1,424
EBITDA - excluding restructuring costs 3,838 3,609 229
Net interest cost 463 440 23
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of
total indebtedness (%) 77 82 (5)pts
Average term to maturity of debt (years) 4.0 5.3 (1.3)
Net debt to total capitalization (%)(1) 49.8 46.5 3.3 pts
Net debt to EBITDA - excluding
restructuring costs(1) 1.9 1.7 0.2
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt 4.3 4.2 0.1
EBITDA - excluding restructuring
costs interest coverage 8.3 8.2 0.1
-------------------------------------------------------------------------
Other measures
-------------------------------------------------------------------------
Free cash flow ($ millions)(2)
- based on defined benefits plans
net recovery 567 1,573 (1,006)
- based on defined benefits plans
contributions 361 1,388 (1,027)
Dividend payout ratio of sustainable
net earnings guideline - 45 to 55%(1)
Dividend payout ratio - actual earnings (%) 54 47 7 pts
Dividend payout ratio - actual earnings
excluding income tax-related adjustments
and net-cash settlement feature (%) 56 54 2 pts
------------------------------------------------------------------------
(1) See Section 6.4 Definitions of liquidity and capital resource
measures.
(2) See Section 6.2 Free cash flow for the definitions.
-------------------------------------------------------------------------
Net debt at
The average term to maturity of debt of four years at
The interest coverage on long-term debt ratio was 4.3 for 2008, reflecting an increase of 0.1 from 2007 (+0.2 from higher income before income taxes and long-term interest, net of -0.1 from increased long-term interest). The EBITDA interest coverage ratio of 8.3 for 2008 reflected an increase of 0.1 from 2007 (+0.5 from higher EBITDA before restructuring, net of -0.4 from higher net interest costs).
Free cash flow for 2008, calculated using the net defined benefits plans recovery as reported previously, decreased by
The Company’s strategy is to maintain the financial policies and guidelines set out below. The Company believes that these measures are currently at the optimal level and by maintaining credit ratings in the range of BBB+ to A-, or the equivalent, provide reasonable access to capital markets.
TELUS' long-term financial guidelines and policies are:
- Net debt to EBITDA - excluding restructuring costs of 1.5 to
2.0 times
The ratio for 2008 was 1.9 times, an increase of 0.2 from 2007, as
higher net debt was partly offset by improved EBITDA before
restructuring costs.
- Dividend payout ratio of 45 to 55% of sustainable net earnings
The target guideline for the annual dividend payout ratio is on a
prospective basis, rather than on a trailing basis, and is 45 to 55%
of sustainable net earnings. The ratios based on actual earnings for
2008 and 2007 were 54% and 47%, respectively. The ratio calculated to
exclude income tax-related adjustments from earnings in 2008 was 56%.
The comparable ratio for 2007, also excluding the net-cash settlement
feature expense was 54%.
4.5 Credit facilities
On
At
TELUS credit facilities at December 31, 2008
-------------------------------------------------------------------------
Backstop
Outstanding for
undrawn commercial
($ in letters paper Available
millions) Expiry Size Drawn of credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving May 1,
facility(1) 2012 2,000 (980) (201) (432) 387
364-day
revolving March 1,
facility(2) 2010 700 - - - 700
Other bank
facilities - 78 (11) (3) - 64
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Total - 2,778 (991) (204) (432) 1,151
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(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars only. Originally due March 2, 2009, the term of this
facility was extended in December 2008.
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TELUS’ revolving credit facilities contain customary covenants, including a requirement that TELUS not permit its consolidated Leverage Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately 1.9 to 1 at
4.6 Accounts receivable sale
TELUS Communications Inc. (TCI), a wholly owned subsidiary of TELUS, is a party to an agreement with an arm’s-length securitization trust associated with a major Schedule I bank, under which TCI is able to sell an interest in certain of its trade receivables up to a maximum of
TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down. The necessary credit rating was exceeded by three levels at A (low) as of
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Balance of proceeds from
securitized receivables
($ millions)
2008, 2008, 2008, 2008, 2007, 2007, 2007, 2007,
Dec. Sept. June Mar. Dec. Sept. June Mar.
31 30 30 31 31 30 30 31
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300 250 150 500 500 550 500 150
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4.7 Credit ratings
There were no changes to the Company’s investment grade credit ratings in 2008. DBRS Ltd. confirmed its credit ratings and trend for TELUS and TCI on
On
-------------------------------------------------------------------------
Credit rating summary DBRS Ltd. S&P Moody's FitchRatings
-------------------------------------------------------------------------
Trend or outlook Stable Stable Stable Stable
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TELUS Corporation
Senior bank debt - - - BBB+
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) - - -
TELUS Communications
Inc. (TCI)
Debentures A (low) BBB+ - BBB+
Medium-term notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
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5. Risks and risk management
The following are significant updates to the risks described in Section 10
of TELUS' 2007 annual and 2008 interim first, second and third quarter
Management's discussions and analyses.
5.1 Regulatory
Implementation of phase II wireless enhanced 911 (E9-1-1) services
On
Additional forbearance decisions
In 2008, the CRTC continued to take steps to forbear from regulating prices, particularly for services offered in competitive markets.
Residential and business local exchange services: Cumulatively, TELUS has received approval for deregulation of local phone services for residential markets covering approximately 80% of its residential lines in non-high cost serving areas (urban and suburban areas) and approximately 70% of its business lines. In aggregate, approximately 67% of total lines are deregulated.
Retail quality of service in non-forborne markets: In Telecom Decision 2008-15, the CRTC reduced the requirement for incumbent local exchange carriers (ILECs) to track and report retail quality of service measures in non- forborne markets from 17 measures to three: Installation appointments met, Out- of-service trouble reports cleared within 24 hours, and Repair appointments met. The requirement to track and monitor these indicators is expected to continue at least until the conclusion of a follow-up CRTC process examining whether any quality of service regime should remain in non-forborne areas. The CRTC also removed, in its entirety, the retail rate adjustment plan that previously required ILECs to make rate rebates to their customers if their annual performance for certain quality of service indicators failed to meet a designated standard.
High capacity/digital data services inter-exchange private lines: In
5.2 Technology risks
Restructuring of equipment vendors may impact the services and solutions
TELUS provides
TELUS has a number of relationships with equipment vendors, which are important to providing the services and solutions TELUS provides to its retail and business customers. TELUS faces the risk that some equipment vendors may experience business difficulties, may not remain viable or may have to restructure their operations, which could impact their ability to support all of their products in future. This may negatively impact the services and solutions TELUS provides.
In
Risk mitigation: TELUS planned for this possibility in terms of future growth, maintenance and support of existing Nortel equipment and services. TELUS has a comprehensive contingency plan for multiple scenarios that might be realized if the situation changes, including exposure to multiple suppliers, and ongoing strong vendor relations. TELUS has selected Nokia Siemens Networks and Huawei Technologies as its vendors for its next generation HSPA network build occurring in 2009 and 2010. There can be no guarantee that the outcome of the Nortel restructuring will not affect the services that TELUS provides to its customers, or that TELUS will not incur additional costs to continue providing services.
Implementation of HSPA and 4G network technologies and systems
TELUS and Bell have previously announced a joint HSPA network build with service expected by early 2010, demonstrating TELUS’ commitment to a technology path that provides an optimal transition to 4G LTE. Though this agreement builds the foundation for reducing capital and operating costs, there is no limitation on either party from building further network infrastructure to meet future and changing business requirements. Accordingly, there is the risk that TELUS’ future capital expenditures may be higher than those recorded historically and expected for 2009.
In addition, the expected timing and completion of the HSPA network are subject to various risks and uncertainties, including vendor performance and delivery related to completion of the network build and sharing agreement with
While TELUS plans to leverage the HSPA economies of scale found in the family of Third Generation Partnership Project (3GPP) technologies, there can be no assurance that these economies of scale will be better or worse than past experiences with CDMA2000-based technologies.
Risk mitigation: By reaching an agreement with Bell to jointly build out an HSPA network, TELUS is better able to manage its capital expenditures and more quickly deliver a commercial network than it could otherwise accomplish individually. TELUS’ continued roaming/resale agreements with Bell are possible because both companies have a similar mobile technology path, vendors, and an existing relationship in this arena. TELUS’ continued partnership with Bell is expected to provide cost savings beyond the initial network build, and flexibility to invest in service differentiation.
5.3 Process risks
Large complex deals
TELUS’ operating efficiency and earnings may be negatively impacted by challenges with (or ineffective) implementation of large, complex deals for enterprise customers, which may be characterized by significant, upfront expenses and capital expenditures, and a need to anticipate, understand and respond to complex and multi-faceted enterprise customer specific requirements and stakeholders. There can be no assurance that service implementation will proceed as planned and expected efficiencies achieved, which may impact return on investment or desired margins to be realized. The Company may also be constrained by available staff, system resources and cooperation of existing service providers, which can limit the number of large contracts that can be implemented concurrently in a given period.
Risk mitigation for large complex deals: TELUS has recently implemented internal reorganizations, such as one that consolidated three enabling units, Technology strategy, Network operations and Business transformation, into two integrated teams: Technology strategy and Business transformation & Technology operations. The expected future benefits include streamlined operations, more effective deployment of technologies and supporting systems, cost efficiencies and improved customer service, and better capability to implement large complex deals. TELUS follows industry standard practices for rigorous project management including executive (senior) level governance and project oversight; appropriate project resources, tools and supporting processes; and proactive project specific risk assessments and risk mitigation planning. TELUS also conducts independent project reviews to help monitor progress and identify areas which may require additional focus, and to identify systemic issues and learnings in project implementations which may be shared between projects.
5.4 Financing and debt requirements
TELUS' business plans and growth could be negatively affected if existing
financing is not sufficient to cover funding requirements
Risk factors such as disruptions in the capital markets, increased bank capitalization regulations, reduced lending in general, or a reduced number of active Canadian chartered banks as a result of reduced activity or consolidation, could reduce capital available, or increase the cost of such capital, for investment grade corporate credits such as TELUS.
Risk mitigation: TELUS may finance future capital requirements with internally generated funds as well as, from time to time, borrowings under the unutilized portion of its bank credit facility, use of securitized accounts receivable, use of commercial paper or the issuance of debt or equity securities. TELUS has access to a shelf prospectus pursuant to which it can offer
On
As described in Section 4.6 Accounts receivable securitization, TCI entered into an agreement with an arm’s-length securitization trust under which it is able to sell an interest in certain of its trade receivables up to a maximum of
Ability to refinance maturing debt
On
Risk mitigation: The Company’s commercial paper program is fully backstopped by the 2012 credit facility. TELUS may refinance amounts drawn on its credit facilities with longer-term maturities. At
A reduction in TELUS credit ratings could impact TELUS' cost of capital
and access to capital
TELUS’ cost of capital could increase and access to capital might be affected by a reduction in TELUS’ and/or TCI’s credit ratings. There can be no assurance that TELUS can maintain or improve current credit ratings.
Risk mitigation: TELUS seeks to achieve, over time, debt credit ratings in the range of BBB+ to A-, or equivalent. The four credit rating agencies that rate TELUS currently have ratings that are in line with this target with a stable outlook. TELUS has financial policies in place that were established to help maintain or improve existing credit ratings. TELUS’ credit ratings were confirmed in 2008 by the four credit rating agencies that cover the Company.
Lower than expected free cash flow could constrain ability to invest in
operations or make purchases under NCIB share repurchase programs
TELUS expects to generate free cash flow in 2009, which would be available to, among other things, pay dividends to shareholders and possibly repurchase shares. While anticipated cash flow is expected to be more than sufficient to meet current requirements and remain in compliance with TELUS’ financial policies, these intentions could constrain TELUS’ ability to invest in its operations for future growth or to complete share repurchases. TELUS has set its financial policies with the expectation that taxable income will be generated and that substantial net cash tax payments of approximately
Risk mitigation: From
The TELUS Board reviews the dividend each quarter, based on a number of factors including a target dividend payout ratio guideline of 45 to 55% of sustainable net earnings. This review resulted in a
5.5 Litigation and legal matters
Uncertified class actions
TELUS and certain subsidiaries are defendants in a number of uncertified class actions. The Company has observed an increased willingness on the part of claimants to launch class actions whereby a representative plaintiff seeks to pursue a legal claim on behalf of a large group of persons. A successful class action lawsuit, by its nature, could result in a sizable damage award that negatively affects a defendant’s results.
One such lawsuit is a class action was brought on
Risk mitigation: The Company is vigorously defending certification of these actions. Certification is a procedural step that determines whether a particular lawsuit may be prosecuted by a representative plaintiff on behalf of a class of individuals. Certification of a class action does not determine the merits of the claim, so that if the Company were unsuccessful in defeating certification, the plaintiffs would still be required to prove the merits of their claims. In addition, the Company believes that it has put in place reasonable policies, processes and awareness designed to enable compliance with legal obligations and reduce exposure to legal claims.
5.6 Economic growth and fluctuations
It is expected that the slower Canadian economic growth in the fourth quarter of 2008 will continue into much of 2009, reflecting a significant reduction in commodity prices, a U.S. economy in recession, weakened global economic growth, and continued tight global credit conditions. The principal risk to the current view of the Canadian economy is the impact of the continued negative developments occurring globally on Canadian business and consumer confidence, and thus is expected to impact both the business and consumer sectors.
Continuation of economic uncertainty or recessions may adversely impact
TELUS
An extended economic downturn may cause residential and business telecommunications customers to delay new service purchases, reduce volumes of use, discontinue use of services or seek lower-priced alternatives. Significant economic downturns or recessions could adversely impact TELUS’ profitability, free cash flow and bad debt expense, and potentially require the Company to record impairments to the carrying value of its assets including, but not limited to, its intangible assets with indefinite lives (spectrum licences) and its goodwill. Impairments to the carrying value of assets would result in a charge to earnings and a reduction in shareholders’ equity, but would not affect cash flow.
Risk mitigation: The Company cannot completely mitigate economic risks. TELUS has continued to benefit from healthy ongoing growth in the Canadian wireless sector. Through most of 2008, TELUS continued to benefit from growth in the cyclical resource economies in B.C. and
Pension funding
Economic fluctuations could also adversely impact the funding and expense associated with the defined benefit pension plans that TELUS sponsors. There can be no assurance that TELUS’ pension expense and funding of its defined benefit pension plans will not increase in the future and thereby negatively impact earnings and/or cash flow. Defined benefit funding risks may occur if total pension liabilities exceed the total value of the respective trust funds. Unfunded differences may arise from lower than expected investment returns, reductions in the discount rate used to value pension liabilities, and actuarial loss experiences.
Risk mitigation: TELUS seeks to mitigate this risk through the application of policies and procedures designed to control investment risk and ongoing monitoring of its funding position. Pension expense and funding for 2009 were largely determined by the rates of return on the plans’ assets for 2008 and interest rates at year-end 2008. As at
6. Reconciliation of non-GAAP measures and definition of key operating
indicators
6.1 Earnings before interest taxes depreciation and amortization (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure used by management to evaluate performance of business units, segments and the Company. EBITDA is also utilized in measuring compliance with debt covenants – see Section 6.4 – EBITDA excluding restructuring costs. EBITDA is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. The Company believes EBITDA assists investors in comparing a company’s performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to Operating income or Net income in measuring the Company’s performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the Consolidated statements of cash flows. Investors should carefully consider the specific items included in TELUS’ computation of EBITDA. While EBITDA has been disclosed herein to permit a more complete comparative analysis of the Company’s operating performance and debt servicing ability relative to other companies, investors should be cautioned that EBITDA as reported by TELUS may not be comparable in all instances to EBITDA as reported by other companies.
The following is a reconciliation of EBITDA with Net income and Operating income. EBITDA (as adjusted) excludes a charge for introducing a net-cash settlement feature for share option awards granted prior to 2005. EBITDA and EBITDA (as adjusted) are regularly reported to the chief operating decision- maker.
-------------------------------------------------------------------------
Quarters ended December 31 Years ended December 31
-------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income 285 400 1,128 1,258
Other expense (income) 11 6 36 36
Financing costs 118 109 463 440
Income taxes 88 (19) 436 233
Non-controlling interest - 3 3 7
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Operating income 502 499 2,066 1,974
Depreciation 351 386 1,384 1,355
Amortization of intangible
assets 84 68 329 260
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EBITDA 937 953 3,779 3,589
Net-cash settlement feature
expense - 1 - 169
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EBITDA (as adjusted) 937 954 3,779 3,758
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In addition to EBITDA, TELUS calculates EBITDA less capital expenditures as a simple proxy for cash flow at a consolidated level and in its two reportable segments. EBITDA less capital expenditures may be used for comparison to the reported results for other telecommunications companies over time and is subject to the potential comparability issues of EBITDA described above.
-------------------------------------------------------------------------
Quarters ended December 31 Years ended December 31
-------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA 937 953 3,779 3,589
Capital expenditures (631) (472) (1,859) (1,770)
-------------------------------------------------------------------------
EBITDA less capital
expenditures 306 481 1,920 1,819
Net-cash settlement feature
expense - 1 - 169
-------------------------------------------------------------------------
EBITDA (as adjusted) less
capital expenditures 306 482 1,920 1,988
Payment for AWS spectrum
licences - - (882) -
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EBITDA (as adjusted) less
capital expenditures and
payment for AWS spectrum
licences 306 482 1,038 1,988
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6.2 Free cash flow
TELUS reports free cash flow because it is a key measure used by management to evaluate its performance. Free cash flow excludes certain working capital changes and other sources and uses of cash, as found in the Consolidated statements of cash flows. Free cash flow is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to the Consolidated statements of cash flows. Free cash flow is a measure that can be used to gauge TELUS’ performance over time. Investors should be cautioned that free cash flow as reported by TELUS may not be comparable in all instances to free cash flow as reported by other companies. While the closest GAAP measure is Cash provided by operating activities less Cash used by investing activities, free cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures, but before acquisitions, proceeds from divested assets and changes in certain working capital items (such as trade receivables, which can be significantly distorted by securitization changes that do not reflect operating results, and trade payables).
Prospectively, the Company has chosen to present free cash flow adjusted for contributions to employee defined benefit plans, as the contributions have a significant non-discretionary component and are determined separately from the net defined benefit plans expense previously included in the calculation. The following tables present free cash flow on both bases.
The following reconciles free cash flow with Cash provided by operating activities less Cash used by investing activities:
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Quarters ended December 31 Years ended December 31
-----------------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by operating
activities 747 818 2,819 3,172
Cash (used) by investing
activities (643) (472) (3,433) (1,772)
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104 346 (614) 1,400
Amortization of deferred
gains on sale-leaseback
of buildings, amortization
of deferred charges and
other, net (8) (3) (3) (4)
Reduction (increase) in
securitized accounts
receivable (50) 50 200 -
Non-cash working capital
changes except changes
from income tax payments
(receipts), interest
payments (receipts) and
securitized accounts
receivable, and other 3 (14) 86 (10)
Acquisitions - - 696 -
Proceeds from the sale of
property and other assets - (2) (13) (7)
Other investing activities 12 2 9 9
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Free cash flow based on
defined benefit plans
employer contributions 61 379 361 1,388
Net employee defined benefit
plans recovery (expense) 27 23 102 92
Employer contributions to
employee defined benefit
plans 26 25 104 93
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Free cash flow based on
defined benefit plans net
expense 114 427 567 1,573
-------------------------------------------------------------------------
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The following shows management's calculation of free cash flow.
-------------------------------------------------------------------------
Quarters ended December 31 Years ended December 31
-----------------------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
EBITDA 937 953 3,779 3,589
Share-based compensation (20) (30) 5 96
Net employee defined benefit
plans expense (recovery) (27) (23) (102) (92)
Employer contributions to
employee defined benefit
plans (26) (25) (104) (93)
Restructuring costs net of
cash payments 30 3 16 (18)
Donations and securitization
fees included in Other
expense (8) (9) (30) (37)
Cash interest paid (193) (171) (457) (454)
Cash interest received 1 33 3 42
Income taxes received (paid)
and other (2) 120 (8) 125
Capital expenditures (631) (472) (1,859) (1,770)
Payment for advanced
wireless spectrum licences - - (882) -
-------------------------------------------------------------------------
Free cash flow based on
defined benefit plans
employer contributions 61 379 361 1,388
Employer contributions to
employee defined benefit
plans in excess of net
employee defined benefit
plans expense (recovery) 53 48 206 185
-------------------------------------------------------------------------
Free cash flow based on
defined benefit plans net
expense 114 427 567 1,573
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6.3 Definition of key wireless operating indicators
These measures are industry metrics and are useful in assessing the operating performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as Network revenue divided by the average number of subscriber units on the network during the period and expressed as a rate per month. Data ARPU is a component of ARPU, calculated on the same basis for revenues derived from services such as text messaging, mobile computing, personal digital assistance devices, Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units disconnected during a given period divided by the average number of subscriber units on the network during the period, and expressed as a rate per month. A prepaid subscriber is disconnected when the subscriber has no usage for 90 days following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies, commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as cost of acquisition divided by gross subscriber activations during the period.
EBITDA excluding COA is a measure of operational profitability normalized for the period costs of adding new customers.
Retention spend to Network revenue represents direct costs associated with marketing and promotional efforts aimed at the retention of the existing subscriber base divided by Network revenue.
6.4 Definition of liquidity and capital resource measures
Dividend payout ratio and dividend payout ratio of sustainable net earnings: For actual earnings, the measure is defined as the most recent quarterly dividend declared per share multiplied by four and divided by basic earnings per share for the 12-month trailing period. The target guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 45 to 55% of sustainable net earnings. The dividend payout ratio on an actual basis, excluding income tax-related adjustments and the net-cash settlement feature, is considered more representative of a sustainable calculation.
EBITDA – excluding restructuring costs is used in the calculation of Net debt to EBITDA and EBITDA interest coverage, consistent with the calculation of the Leverage Ratio and the Coverage Ratio in credit facility covenants. Restructuring costs were
EBITDA – excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs divided by Net interest cost. Historically, this measure is substantially the same as the Coverage Ratio covenant in TELUS’ credit facilities.
Interest coverage on long-term debt is calculated on a 12-month trailing basis as Net income before interest expense on long-term debt and income tax expense, divided by interest expense on long-term debt.
Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term debt, including Current maturities of long-term debt, as reconciled below. Net debt is one component of a ratio used to determine compliance with debt covenants (refer to the description of Net debt to EBITDA below).
-------------------------------------------------------------------------
As at December 31
-------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
Long-term debt including current portion 6,352 4,589
Debt issuance costs netted against long-term debt 28 30
Derivative liability 778 1,179
Accumulated other comprehensive income amounts
arising from financial instruments used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (168) (137)
Cash and temporary investments (4) (20)
Proceeds from securitized accounts receivable 300 500
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Net debt 7,286 6,141
-------------------------------------------------------------------------
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The derivative liability in the table above relates to cross currency interest rate swaps that effectively convert principal repayments and interest obligations to Canadian dollar obligations, and is in respect of the
Net debt to EBITDA – excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing EBITDA excluding restructuring costs. TELUS’ guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA excluding restructuring costs is substantially the same as the Leverage Ratio covenant in TELUS’ credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt used in the Company’s capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. No gains on redemption and repayment of debt were recorded in the respective periods. Should they occur, losses recorded on the redemption of long-term debt are included in net interest costs. Net interest costs for the years ended
Total capitalization – book value excludes accumulated other comprehensive income or loss and is calculated as follows:
-------------------------------------------------------------------------
As at December 31
-------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
Net debt 7,286 6,141
Non-controlling interests 23 26
Shareholders equity 7,182 6,926
Accumulated other comprehensive loss 130 104
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Total capitalization - book value 14,621 13,197
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SOURCE TELUS Corporation