TELUS Corporation reported third quarter 2009 net income of $280 million and earnings per share (EPS) of $0.88, a decrease of two and one per cent, respectively. Net income and EPS this quarter included favourable income tax-related adjustments related to prior years' tax matters of approximately $14 million net of tax or four cents per share, respectively. Excluding income tax-related adjustments, net income and EPS were down seven and six per cent respectively, and when further excluding restructuring costs were down two per cent and flat, respectively.
Operating revenue was $2.4 billion, a decrease of $39 million from last year. Total customer connections of 11.9 million were 326,000 higher than a year ago due to wireless, TELUS TV and high speed Internet growth. The revenue decrease reflects continued declines in voice revenues. Data and wireless revenues grew modestly affected by a weak economic environment and intense competition. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by five per cent primarily due to lower revenues, higher defined benefit pension plan expenses and higher restructuring costs from ongoing operating efficiency initiatives. When excluding defined benefit pension plan expenses and restructuring costs, underlying EBITDA decreased by $1 million. The underlying EBITDA benefited from strong cost containment as operations expenses excluding defined pension expenses decreased by three per cent.
Free cash flow of $266 million increased by $748 million over the same period a year ago, primarily due to the prior year payment for advanced wireless services (AWS) spectrum licences. Capital expenditures of $558 million for the quarter reflect TELUS' significant ongoing wireline and wireless broadband build-out initiatives. This has facilitated our increased TELUS TV subscriber loading and the early launch of a next generation High-Speed Packet Access (HSPA) wireless network and associated offering of new devices to customers.
"TELUS is leading the change in Canada's wireless competitive landscape by delivering exceptional client experiences through a series of major initiatives coming to fruition simultaneously," said Darren Entwistle, TELUS president and CEO. "This week, TELUS began offering Canadian consumers the largest coverage and the fastest technology through our newly launched HSPA+ wireless network."
"We have also introduced a fantastic array of brand new HSPA smartphones including the iconic Apple iPhone 3GS. Importantly, the new Blackberry Bold 9700 and the Android HTC Hero also join our compelling selection of innovative devices for Canadians. These devices are complemented by our new Clear Choice wireless rate plans, which simplify the rate plan options for our clients," Entwistle noted. "In addition, we have expanded our phone distribution to more than 100 premium Black's Photo locations across Canada. We very much look forward to capitalizing on these positive developments in the marketplace."
Robert McFarlane, TELUS executive vice-president and CFO said that "while we continue to appropriately focus on investing in cost reduction initiatives given the economic and competitive environment, we are at an exciting inflection point in respect of our major growth investments as we transition into the commercialization phase of our wireless and wireline broadband expansion initiatives. As a result, we expect capital expenditures to peak in the second half of 2009, while subscriber growth in wireless, Internet and TV should accelerate."
The Company has updated its 2009 full year guidance to reflect the impacts of ongoing weak economic growth in Canada particularly on its wireline business, the early launch of the new next generation wireless network, and the associated impact on acquisition and retention costs from the November launch of new smartphone devices including the Apple iPhone. The company now expects 2009 revenue to be between $9.6 billion and $9.7 billion. The wireless revenue guidance range has been increased by $25 million, while the wireline revenue guidance range has been lowered and tightened. The 2009 Consolidated EBITDA guidance range has been lowered by $125 million to $3.475 billion to $3.575 billion reflecting a $75 million decrease in the wireless guidance range and a $50 million decrease in the wireline guidance range. Total estimated annual restructuring has been increased $10 million to approximately $160 million. 2009 basic EPS is now expected to be in a range of $3.10 to $3.30. Consolidated capex has increased slightly to approximately $2.1 billion with a preliminary assessment of expected 2010 capital expenditures as low as $1.7 billion. Annual revised guidance and related assumptions for 2009, and the preliminary assessment of expected 2010 capital expenditure levels are described in Section 9 of the Management's discussion and analysis.
CRTC net neutrality decisions
The Canadian Radio-television and Telecommunications Commission (CRTC) decisions released on October 21 establish guidelines for what constitutes reasonable network management and uphold the principle of usage-based billing for wholesale ADSL access service. TELUS considers these to be fair decisions that recognize the significant investments made by Internet Service Providers (ISPs) like TELUS in Internet infrastructure while empowering consumers by way of new requirements for disclosing ISP network management practices.
In its decision on Internet traffic management practices (popularly known as throttling, traffic shaping, and/or net neutrality), the CRTC has permitted Bell, Rogers, Shaw and other ISPs to continue traffic shaping peer-to-peer file sharing traffic for now; however, the CRTC will evaluate each carrier's measures in future proceedings against the framework that it has established. The issue of whether throttling is permitted has therefore not been definitively resolved yet but the commission recognized that, in some circumstances, it may be the only viable response to traffic congestion.
The CRTC decisions do not have any immediate impact on TELUS because we have not traffic shaped, however we are pleased to see the CRTC preserve ISPs flexibility to adopt usage-based pricing at wholesale and retail. The CRTC's recognition that congestion is a real problem and needs to be managed is positive. The decision strikes a good balance between the realities ISPs are facing and fairness to customers. The chairman of the CRTC has correctly proclaimed that "Canada is the first country to develop and implement a comprehensive approach to Internet traffic management practices."
CRTC finds new wireless entrant not currently eligible to operate
In April, TELUS asked the CRTC to determine if new wireless entrant Globalive was compliant with federal laws in respect of foreign ownership that all communication companies in Canada operate under. After public hearings in September, on October 29, the CRTC ruled that Globalive was not compliant with the Telecommunications Act in respect of ownership and control and is not currently eligible to operate as a Canadian telecommunications carrier.
Globalive purchased wireless spectrum in a government auction 15 months ago. TELUS advocated to Industry Canada that they should pre-qualify bidders before the auction, but this was not done. After the auction, Globalive revealed an equity ownership and debt structure with more than 80 per cent of its capital owned by an Egyptian enterprise. The structure represented a far higher participation by foreign investors than had ever been approved by Canadian regulators in telecommunications or broadcasting. Also of concern to the CRTC was the single foreign enterprise's control of Globalive through trademark and technical services agreements.
TELUS has never opposed foreign ownership restrictions being lifted in Canada, but has simply asked that all communications companies in Canada operate under the same rules without an artificial and unfair advantage being handed to any one player by the government or the regulator.
This CRTC decision does not prevent Globalive or any other new wireless company from competing in Canada or accessing Canadian capital, as several have successfully done. It does require that Globalive must abide by Canada's laws and correct its governance and capital structure. TELUS is of the view that this correction should be made within a reasonable time.
TELUS will again recommend to government that bidders in future auctions should be pre-qualified.