TELUS Reports First Quarter 2012 Results
Revenue and earnings growth generated by continued leading wireless
performance
VANCOUVER, May 9, 2012 /CNW/ - TELUS Corporation's first quarter 2012
revenue was $2.6 billion, an increase of four per cent over last year.
The increase was generated by nearly six per cent growth in wireless
revenue and two per cent growth in wireline revenue, both driven by
strong data growth.
In the wireless segment, the company added 63,000 postpaid wireless
customers in the first quarter as strong smartphone adoption resulted
in wireless data revenue growth of 36 per cent. Notably, TELUS reported
industry leading wireless average revenue per unit (ARPU) and
subscriber churn metrics. ARPU increased by 1.7 per cent - the sixth
consecutive quarter of year-over-year growth. Blended monthly
subscriber churn decreased 15 basis points (bps) year-over-year to 1.55
per cent, reflecting lower churn on smartphones, the success of
retention investments and a customer friendly marketing and service
orientation. These industry leading metrics contributed to strong 13
per cent growth in wireless EBITDA (earnings before interest, tax, and
depreciation).
In the wireline segment, TELUS added 44,000 TV customers this quarter to
bring its total subscriber base to just over 550,000 - up 54 per cent
from year ago. When combined with attracting new high-speed Internet
subscribers, the company generated wireline data revenue growth of 13
per cent. However, due to aggressive competitive activity and wireless
substitution, access lines losses accelerated and underlying (adjusted)
wireline EBITDA was down seven per cent.
Consolidated first quarter EBITDA was up more than two per cent from a
year ago and for the first time, surpassed $1.0Â billion. Adjusted
EBITDA (excluding items detailed in footnote 2) was up more than 4 per
cent.
Net income and earnings per share (EPS) for the first quarter were
$348Â million and $1.07, respectively, representing year-over-year
growth of approximately six per cent each.
Free cash flow more than doubled to $358Â million this quarter - up by
$196 million over the same period a year ago. This was due primarily to
lower discretionary contributions made to defined benefit pension
plans, lower restructuring payments and higher adjusted EBITDA.
FINANCIAL HIGHLIGHTS
   Â
C$ and in millions, except per share amounts 3 months ended March 31Per cent
(unaudited) 2012 2011 change
Operating revenues 2,631 2,531 4.0Â
Operating expenses before depreciation & amortization 1,622 1,545 5.0Â
EBITDA(1) 1,009 986 2.3Â
Adjusted EBITDA(2) 1,010 970 4.1Â
Net income(3)(4) 348 328 6.1Â
Earnings per share (EPS), basic(3)(4) 1.07 1.01 5.9Â
Dividends per share declared for first quarter 0.58Â 0.525 10.5Â
Capital expenditures 441 409 7.8Â
Free cash flow(5) 358 162 121Â
Total customer connections(6) 12.75 12.31 3.6Â
  Â
(1)     Earnings before interest, taxes, depreciation and amortization (EBITDA). See Section 11.1 in the 2012 first quarter Management's discussion and analysis.
(2)Â Â Â Â Â Adjusted EBITDA for the first quarter of 2012 excludes a $1Â million equity loss for the residential component of the TELUS Garden real estate joint venture, and consistent with methodology last year, adjusted EBITDA for the first quarter of 2011 excludes a $16Â million non-cash gain on Transactel (Barbados) Inc.
(3)Â Â Â Â Â Net income and EPS for the first quarter of 2012 included favourable income tax-related adjustments of approximately $10Â million or 3 cents per share.
(4)Â Â Â Â Â Net income and EPS for the first quarter of 2011 includes the after-tax Transactel gain of $12 million or 4 cents per share.
(5)Â Â Â Â Â For definition, see Section 11.2 in 2012 first quarter Management's discussion and analysis.
(6)Â Â Â Â Â Sum of wireless subscribers, network access lines, total Internet subscribers, and TELUS TV subscribers (IPTV and satellite TV).
Darren Entwistle, TELUS President and CEO said, "TELUS continues to
build upon our company's operational momentum as we delivered the most
TV, high speed Internet and wireless client net additions, the highest
wireless ARPU and the lowest wireless churn amongst our Canadian telco
and cableco peer group. This led to strong results, with wireline data
revenue growth of 13 per cent and wireless data revenue growth of 36
per cent. Consolidated financial results were driven by outstanding
wireless revenue and margin enhancement. This performance is the direct
result of TELUS' investment in our network technology and the
commitment to the customer experience displayed by our dedicated team
members."
Mr. Entwistle added, "TELUS' operational execution and 121 per cent
increase in free cash flow is enabling the continued realization of my
personal three year goals for EPS and free cash flow growth to 2013,
and TELUS' dividend growth model to 2013. In this regard, we are
delivering to shareholders a 10.9 per cent higher dividend compared to
a year ago."
Robert McFarlane, TELUS Executive Vice-President and CFO, said "the
first quarter of 2012 represents a better than expected beginning to
the year with strong free cash flow generation supporting an even
stronger balance sheet. Despite industry leading wireline revenue
growth backed by strong operational results from Optik-TV and high
speed Internet, profitability for this segment declined but was
consistent with internal plans. We continue to be relentless in
identifying opportunities for appropriate cost reduction and based on
the increased initiatives in the pipeline, we now expect 2012
restructuring expenses to double to $50 million from the previous
estimate. Despite this change, the full year 2012 wireline
profitability target range remains achievable and accordingly, we
re-affirm our existing full year consolidated annual targets."
The 2012 consolidated and segmented annual targets have been reaffirmed.
See section 9 of the first quarter 2012 MD&A.
This news release contains statements about expected future events and financial and operating performance of TELUS that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and predictions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future performance and events to differ materially from that expressed in the forward-looking statements. Accordingly this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for 2012 annual targets), qualifications and risk factors (including TELUS' proposed share consolidation and foreign ownership levels, semi-annual dividend increases to 2013 and CEO three year goals for EPS and free cash flow growth to 2013 excluding spectrum costs) referred to in the 2012 Information Circular, Management's discussion and analysis (MD&A) in the 2011 annual report, and in the 2012 first quarter report. Except as required by law, TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance.
OPERATING HIGHLIGHTS
TELUS wireless
-
External wireless revenues increased by $75Â million or 5.7 per cent to
$1.38 billion in the first quarter of 2012, compared to the same period
a year ago. This growth was driven by a larger subscriber base and
higher ARPU due to increased use of wireless data services.
-
Data revenue increased by $132Â million or 36 per cent to $498 million
this quarter and now represents 39 per cent of network revenue, up from
30 per cent one year ago. Data ARPU increased by $5.12 or 29 per cent
to $22.83. These increases were due to continued strong adoption of
smartphones and related data plans, increased use of mobile Internet
devices and tablets, increased revenues from pay-per-use text
messaging, as well as higher roaming volume.
-
Blended ARPU increased by $0.98 or 1.7 per cent to $58.87 as 29 per cent
data ARPU growth more than offset a 10 per cent voice ARPU decline.
This is the sixth consecutive quarter of year-over-year blended ARPU
growth.
-
Wireless net additions of 22,000 were lower by 31 per cent
year-over-year and included the addition of 63,000 postpaid subscribers
and a loss of 41,000 lower-ARPU prepaid subscribers. Postpaid net
additions were up 21 per cent from a year ago. Excluding deactivations
from the loss of a low-ARPU federal service contract to a competitor
from the current and year-ago quarter, postpaid net additions were
unchanged year-over-year at 68,000.
-
Total wireless subscribers are up 5.1 per cent from a year ago to 7.36
million and the proportion of high value postpaid subscribers has
increased 1.9 points to 84.1 per cent. Smartphone subscribers now
represent 56 per cent of the total postpaid subscriber base of 6.19
million as compared to 38 per cent a year ago.
-
Cost of retention as a percentage of network revenue decreased by 1.5
points to 10.7 per cent, primarily due to lower retention volumes
resulting from retention investments in prior periods.
-
Cost of acquisition per gross addition increased year-over-year by 4 per
cent to $362, reflecting higher per-unit subsidies from increased sales
of more expensive, but higher ARPU and lower churn, smartphones and
competitive dynamics.
-
Blended monthly subscriber churn decreased 15 basis points (bps)
year-over-year to 1.55 per cent, reflecting lower churn on smartphones,
the success of retention investments and a customer friendly marketing
and service orientation. The loss of a federal government contract
contributed 3 bps to churn this quarter, compared to 8 bps a year ago.
-
Wireless EBITDA of $622Â million increased $71Â million or 13 per cent due
to strong revenue growth and effective cost control. EBITDA margin of
44.7 per cent expanded by 290 bps compared to last year.
-
Simple cash flow (EBITDA less capital expenditures) slightly decreased
by $4Â million to $471Â million in the quarter as EBITDA growth was
offset by increased capital spending related to the launch and
expansion of TELUS' new 4G LTE network.
TELUS wireline
-
External wireline revenues increased by $25Â million or two per cent to
$1.25 billion in the first quarter of 2012, when compared with same
period a year ago. This growth was generated by increasing data
revenues, partially offset by declines in local and long-distance
revenues and a one-time non-cash gain on Transactel.
-
Data service and equipment revenues increased by $81Â million or 13 per
cent, due primarily to strong growth in TELUS TV subscriber base
combined with rate increases in 2011, increased data equipment sales,
and higher Internet and enhanced data services revenue from several
sources including large enterprise deals.
-
TELUS TV quarterly additions of 44,000 were unchanged over same period
last year. The TELUS TV subscriber base of 553,000 increased by 54 per
cent from a year ago.
-
High Speed Internet net additions of 16,000 were unchanged from a year
ago and reflect the pull-through effect of Optik TV sales, as well as
continued broadband service expansion.
-
Total network access lines (NALs) declined 4.6 per cent from a year ago
to 3.5Â million. Residential lines losses accelerated to 47,000.
Residential lines are down 7.2 per cent year-over-year, largely
reflecting heavily discounted offers from TELUS' primary cable
competitor in Western Canada and wireless and Internet-based
technological substitution. Business NAL losses of 10,000 accelerated
from a year ago largely due to the implementation of voice and data
services for wholesale customers in the first half of 2011, ongoing
competition in the small and medium business market, and conversion
from legacy voice services to IP services.
-
Wireline EBITDA of $387Â million decreased by $48Â million or 11 per cent
due ongoing declines in higher margin legacy voice services that were
not fully offset by growth in lower margin data services. Adjusted
EBITDA (see note 2 in the table above) was lower by $31 million or 7.4
per cent, while adjusted EBITDA margin of 30.1 per cent, was down 350
bps from last year.
-
Simple cash flow (Adjusted EBITDA less capital expenditures) increased
by $12 million to $98 million in the quarter due to reduced capital
spending.
CORPORATE AND BUSINESS DEVELOPMENTS
TELUS proposal to convert Non-Voting Shares into Common Shares is
contested
TELUS announced on February 21, that it was proposing to convert its
Non-Voting Shares into Voting Shares to be decided at the May 9, 2012
annual and special meeting of shareholders pursuant to a plan of
arrangement. Under the proposal, each Non-Voting Share would be
converted into a Common Share on a one-for-one basis if approved by
two-thirds of the votes cast by the holders of Common Shares and
two-thirds of the votes cast by the holders of Non-Voting Shares, each
voting separately. In addition, court approval is required and
approvals from the Toronto and New York stock exchanges for the listing
of the new Common Shares.
After the announcement, Mason Capital, an event-driven U.S.-based hedge
fund rapidly bought approximately 33 million TELUS' Common Shares while
simultaneously selling short an almost equal number of TELUS Non-Voting
Shares and Common Shares. Despite Mason only having a net economic
interest in the company of 416,000 shares (less than 0.25 per cent), it
had control of the votes of almost 19 per cent of the Common Share
class. It announced it would vote against the proposal and subsequently
issued a dissident proxy circular, which TELUS responded to on April 25
with a second letter and proxy sent to TELUS shareholders.
Independent proxy advisory firms Institutional Shareholder Services Inc
(ISS) and Glass, Lewis taking into account Mason's filings and actions
both confirmed their recommendations to institutional clients that they
vote in favour of the proposed transaction, as recommended to TELUS
shareholders by our Board and its financial advisor Scotia Capital in
its fairness opinion.
Shareholders were set to decide the matter at TELUS' meeting of
shareholders today. However, on May 8, 2012, the Company announced it
was withdrawing the plan of arrangement set out in its 2012 Information
Circular, and plans to reintroduce a new proposal in due course.
TELUS poised to gain more 'followers' with Twitter on Optik TV
TELUS is giving customers in British Columbia, Alberta and Eastern
Quebec something to "Tweet" about with a free Twitter app on its Optik
TV service. The app is designed to provide Optik TV viewers with
convenient access to Twitter features and content without missing a
moment of their favourite TV show. This app introduces a new dimension
to TV watching and social media. Users are now able to Tweet what
they're watching and follow what others are saying about their
favourite show through 'TV Tweets', creating an innovative, new social
TV viewing experience. The Twitter app is offered free as part of the
Optik TV subscription, uses the standard Optik remote control, and
displays view trending topics and Tweets about the show they are
watching.
In February, TELUS also launched new innovations that continue to
transform the way customers enjoy Optik TV. TELUS Optik TV is the first
TV service in the world to offer customers the ability to control both
live and recorded TV using hand gestures and voice commands, over an
Xbox 360 Kinect. This means Optik TV customers can change channels up
or down, mute or unmute the volume, and pause, replay, and fast forward
without the remote control.
TELUS' also launched Optik on the go, which allows Optik TV customers to view a selection of commercial free
TV On Demand shows and movies on select smartphones, tablets and laptops anywhere in
Canada. Where available, TELUS customers will be able to experience the
service on TELUS' 4G LTE wireless network.
TELUS investing to bring B.C. cutting-edge communications technology
In March, TELUS announced it will invest in advanced technology and
state-of-the-art facilities that will expand TELUS' advanced wireless
and wireline broadband networks across the province, and in the
construction of TELUS Garden, the most advanced office and residential
development in the province's history. In addition, TELUS will invest
in creating one of the world's greenest intelligent data centres in
Kamloops, which will be built to LEED (leadership in energy and
environmental design) gold standards. The new data centre will further
expand TELUS' capacity to provide information technology management
services to business in Canada and internationally.
TELUS Garden development off to successful start
In early April, TELUS announced TELUS Garden's 415-unit condo tower had
sold out, ahead of the planned formal launch later that month. In
addition, 12 of the 21 floors available in the development's planned
office tower have already been pre-leased. The one million square foot
development will redevelop almost the entire Vancouver block as home to
TELUS' current national headquarters. The project incorporates a LEED
Platinum 24-storey signature office tower that will be home to TELUS'
new headquarters, a 46-storey residential tower built to the LEED Gold
standard and retail space along Robson and Georgia Streets.
When completed in 2014, TELUS Garden will use at least 30 per cent less
energy than a standard development of its size through the use of
innovative technologies and practices. It will transfer excess heat
from one building to another as needed, use solar panels to power some
infrastructure, and capture rainwater for toilets and garden
irrigation. Located near to the Skytrain, there will be facilities for
bicycles, and charging stations for electric cars.
TELUS introduces trade-in program for customers' used device
TELUS is making it easier for customers to get into the latest, wireless
devices with the introduction of a trade-in program. In March, TELUS
introduced a trade-in program that rewards wireless customers with
instant in-store credit for their used device while giving them a
chance to dispose of their electronic waste safely and smartly.
Customers can trade in a phone, mobile Internet key or mobile Wi-Fi
device at any participating TELUS trade-in location and will be offered
a credit for the device based on fair market value and device
condition. If a device is valued at $0, TELUS will donate $3 to Tree
Canada toward the planting of a tree for each recycled unit. TELUS
celebrated the launch of its new trade-in program with a limited time
offer - until May 21 customers get a $50 bonus credit. Credits may be
applied to any new device that is activated or renewed on TELUS service
at time of trade.
TELUS launches latest devices and focuses on exceptional in-store
experiences
During the first quarter, TELUS continued to offer customers a choice of
the latest devices. This included the LG Optimus LTE, Nokia Lumia 800,
Samsung Galaxy Nexus, Samsung Galaxy Note, and Samsung Galaxy Tab 8.9
LTE. The LG Optimus LTE and Samsung Galaxy Note allows customers to
experience the new incredible speed of the 4G LTE network, while the
Galaxy Nexus offers the latest version of the Android operating system,
Ice Cream Sandwich. The Nokia Lumia 800 represents the best in bold
design with its uni-body build and availability in three colours.
TELUS continued its focus on building an exceptional in-store experience
for customers by launching Galaxy Headquarters in approximately 350
stores across Canada. This initiative offers a quality in-store
experience focused around the Samsung Galaxy device line-up by
showcasing these products together in a central location within the
store and having knowledgeable sales reps and Learning Centre
specialists available to help customers choose the right device.
TELUS Next Generation store opens in Laval Quebec
In April, TELUS inaugurated its first of many Next Generation TELUS
stores in Laval, Québec. Located in the Carrefour Laval shopping mall
the first Next Generation TELUS store is designed with TELUS'
award-winning national brand that is instantly recognizable due to its
consistency. Set up with the latest wireless technologies, the new
store is completely interactive and designed to create a multi-sensory
experience throughout its dynamic layout. The store is designed to
encourage shoppers to fully experience the TELUS brand and our cutting
edge technologies in a variety of engaging ways including: live
devices, multiple screens and projected images, and a live Twitter feed
at the entrance.
TELUS and Vox Mobile launch Managed Mobility Services for enterprise
customers
In March, TELUS and Vox Mobile launched a unique suite of end-to-end
Managed Mobility Services, the only such offering from an established
Canadian wireless carrier, designed specifically for the complex needs
of Canadian enterprises. TELUS Managed Mobility Services powered by Vox
Mobile is a complete service offering that manages an enterprise's
mobile infrastructure and devices from procurement to payment. The
service leverages a growing trend in enterprises to adopt "Bring your
Own Device" policies that provide more mobile device choice.
TELUS launches Virtual Private Cloud service for Canadian businesses
In April, TELUS announced the launch of the TELUS AgilIT Virtual Private
Cloud, an innovative service that enables businesses to take full
control of their cloud computing environment. The first of TELUS'
AgilIT cloud offerings, and unlike other cloud infrastructure services,
TELUS' Virtual Private Cloud service provides organizations of all
sizes access to computing resources on-demand with a powerful,
full-featured portal that enables 24x7 remote access to view and manage
their cloud.
TELUS supports local programs and charities through Optik TV and
smartphone sales
From February through April, TELUS announced a number of marketing
programs supporting local organizations and charities in communities
across Canada through donations from the sale of TELUS Optik TV and
smartphones. This is consistent to TELUS' philosophy to "give where we
live" while sustaining our business success. Programs include:
-
TELUS is giving for every new and upgrading smartphone customer in
Edmonton, Alberta $100 to support the Campaign for Prostate Health
until May 31, 2012.
-
TELUS is giving in Grande Prairie, Alberta $25 to support the building
of the Philip J. Currie Dinosaur Museum for every new customer signing
up for TELUS Optik TV or activating a smartphone until August 8, 2012.
-
To mark the launch of Optik TV in Penticton, B.C. TELUS will give $25 to
the South Okanagan Similkameen Medical Foundation, in support of the
Penticton Regional Hospital, for every new customer signing up for
Optik TV or activating a smartphone until August 8, 2012.
-
TELUS will contribute $25 on behalf of every new smartphone customer in
Victoria, B.C. to the YMCA-YWCA Greater Victoria's Strong Kids Campaign
until August 8, 2012.
-
TELUS will give $25 in support of the Sturgeon Community Hospital
Foundation for every new Optik TV customer in St. Albert, Alberta until
August 8, 2012.
In January, TELUS announced it had raised more than $500,000 for
Opération Enfant Soleil and L'Association du cancer de l'Est du Québec
by donating $100 to the charities for every new customer signing up for
TELUS Optik TV in Eastern Quebec and Quebec City region during 2011.
Canadian entrepreneurs invited to share their challenges for a chance to
win $100,000
TELUS and The Globe and Mail announced the launch of The Challenge, the
second annual contest inviting Canadian small business owners to
present their biggest business challenge for the opportunity to win a
$100,000 grant from TELUS. Entrepreneurs across Canada are invited to
submit entries at Globeandmail.com/thechallenge and will be judged by a panel that includes entrepreneurs and small
business experts. The contest closes May 28, 2012.
TELUS and Canadian Youth Business Foundation team-up to support young
entrepreneurs
In April, TELUS and the Canadian Youth Business Foundation (CYBF)
announced a milestone campaign that will help young entrepreneurs
launch businesses across Canada. TELUS is donating up to $150,000 to
CYBF to help seven young entrepreneurs start and succeed in their
business venture.
TELUS named one of best employers for new Canadians
For the second straight year, TELUS was named one of the Best Employers
for New Canadians in an annual competition that recognizes the nation's
leaders in assisting recent immigrants make the transition to a new
workplace and a new life in Canada. TELUS was among 40 organizations
chosen this year. Launched in 2007, the competition is managed by the
editors of Canada's Top 100 Employers in partnership with ALLIES, a
joint initiative of The Maytree Foundation and the J.W. McConnell
Family Foundation
TELUS named one of Canada's Best Diversity Employers
For the fourth straight year, TELUS was named one of Canada's Best
Diversity Employers in an annual competition that recognizes the
nation's leaders in creating diverse and inclusive workplaces. This
year's list pays tribute to 50 organizations in Canada that have
developed exceptional diversity initiatives to promote inclusiveness
among employee groups such as women, members of visible minorities and
Aboriginal peoples. Among the reasons TELUS was selected include:
developing and implementing a diversity strategy with the support of
the TELUS Diversity and Inclusiveness Council;Â providing professional
development opportunities for thousands of women through Connections -
the TELUS women's network; and Creating Eagles, an Aboriginal team
member resource group at TELUS.
TELUS Investor Relations receive awards and Vice President a Lifetime
Achievement Award
At the prestigious 15th Annual IR Magazine Canada Awards in Toronto, the TELUS IR team was recognized for the best financial
reporting across all industries, best overall investor relations in the
telecommunications sector and was ranked fourth best overall in the
list of top 50 investor relations programs. In addition, John Wheeler,
Vice President, IR, received the 2012 Lifetime Achievement Award in
Investor Relations.
Charity and first three members of field announced for 2012 TELUS World
Skins Game
In April, TELUS announced PGA stars Paul Casey, Anthony Kim and
defending champion Jhonattan Vegas as the first three players in the
field for the 2012 TELUS World Skins Game as the event comes to Glen
Arbour Golf Course in Halifax, Nova Scotia July 29-31. The TELUS World
Skins Game is a highlight of the Canadian summer sporting schedule for
the country's golf fans, as well as the community that hosts it.
Fulfilling its promise to "give where we live," the TELUS World Skins
Game has raised more than $10 million since 2001 for a wide variety of
important causes across Canada. This year, the event will support the
funding of new technology enhancing care at the IWK Health Centre in
Nova Scotia.
TELUS announces new chair of the TELUS Montreal Community Board
In April, TELUS announced that Mrs. Claude Benoit accepted the position
of chair of the TELUS Montreal Community Board. She will replace Mr.
Bernard Lamarre, who has served on the Board since its inception in
2006. Mrs. Benoit will remain as president and CEO of the Old Port of
Montreal Corporation, a position she has held for more than a decade.
During her time there as vice-president, from 1997 to 2000, she oversaw
the development of the Montréal Science Centre. Mrs. Benoit is a member
of the Order of Canada and has been awarded the McNeil Medal from the
Royal Society of Canada for her significant contributions to the
promotion of scientific and technological literacy among students,
teachers and the general public.
The Honourable Myra A. Freeman joins the TELUS Atlantic Canada Community
Board
In March, TELUS announced the appointment of The Honourable Myra A.
Freeman to the TELUS Atlantic Canada Community Board. Mrs. Freeman, is
a member of the Order of Canada and served for six years as the
Lieutenant Governor of Nova Scotia. Currently, Mrs. Freeman is a
national director of the Historica-Dominion Institute of Canada, the
RCMP Foundation, the Duke of Edinburgh Awards, the International
Women's Forum of Canada, the Canadian Friends of the Israel Museum, the
Frank H. Sobey Awards for Excellence in Business Studies, and the
Advisory Board of the Coady International Institute. Recently, she
served as Honourary Chair of Mount Saint Vincent University's Capital
Campaign and as advisor on the Legacy Committee of the 2011 Halifax
Canada Games. She is also a recipient of several honourary degrees and
prestigious awards, including the Woman of Action Humanitarian Award
from the Canadian Israel Research Foundation and was recognized as a
one of Canada's 100 Outstanding Women by the Richard Ivey School of
Business and the Women's Executive Network.
Days In Wait launches and $2 million in funding to support David Foster
Foundation
In April, the David Foster Foundation and TELUS announced the launch of
Days In Wait, an online portal dedicated to raising awareness of the
importance of organ donation in Canada. Days In Wait refers to the
number of days a donor recipient has been waiting to receive a
life-saving organ. This innovative online community at daysinwait.com is a place where people can research information, ask questions and
register to be an organ donor. The site will also enable Canadians
touched by organ donation to share their stories of hope, support and
inspiration. In February 2011, the David Foster Foundation and TELUS
embarked on a mission to help bring awareness and education around the
critical shortage of organ donors in Canada. The creation of Days In
Wait is part of that drive. From 2010 through to the end of 2013,
TELUS, its team members and advertising agencies, TAXI and Cossette,
will have contributed more than $2 million in support of the David
Foster Foundation, including $500,000 from TELUS for the marquee
sponsorship of the David Foster Miracle Concert Weekend in Victoria,
May 25 to 27.
Dividend Declaration - Increase to 61 cents per quarter - up 10.9 per
cent year-over-year
In February, the Board of Directors declared early a quarterly dividend
of sixty-one cents ($0.61) Canadian per share on the issued and
outstanding Common shares and sixty-one cents ($0.61) Canadian per
share on the issued and outstanding Non-Voting shares of the Company
payable on July 3, 2012 to holders of record at the close of business
on June 8, 2012.
This second quarter dividend represents a 3 cent increase from the prior
quarter and a 6 cent or 10.9 per cent increase from the 55 cent second
quarter dividend paid in July 2011. This is consistent to the company's
semi-annual dividend growth model announced a year ago.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly
earnings news release, management's discussion and analysis, quarterly
results slides, audio and transcript of investor webcast call,
supplementary financial information and our full 2011 annual report on
our website at telus.com/investors.
TELUS' first quarter conference call is scheduled for May 9, 2012 at 4:30 pm ET and will feature a presentation followed by a question and answer
period with analysts. Interested parties can access the webcast at: telus.com/investors. A telephone playback will be available on May 9 until June 9
(1-877-353-9587, reservation no.770348#). An archive of the webcast
will also be available at: telus.com/investors and a transcript will be posted on the website within several business
days.
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications
company in Canada, with $10.5 billion of annual revenue and
12.7Â million customer connections including 7.4Â million wireless
subscribers, 3.5Â million wireline network access lines and 1.3Â million
Internet subscribers and more than 550,000 TELUS TV customers. Led
since 2000 by President and CEO, Darren Entwistle, TELUS provides a
wide range of communications products and services including wireless,
data, Internet protocol (IP), voice, television, entertainment and
video.
In support of our philosophy to give where we live, TELUS, our team
members and retirees have contributed more than $260Â million to
charitable and not-for-profit organizations and volunteered 4.2Â million
hours of service to local communities since 2000. Eleven TELUS
Community Boards across Canada lead TELUS' local philanthropic
initiatives. TELUS was honoured to be named the most outstanding
philanthropic corporation globally for 2010 by the Association of
Fundraising Professionals, becoming the first Canadian company to
receive this prestigious international recognition.
For more information about TELUS, please visit telus.com.
condensed interim consolidated statements of income and
other comprehensive income
     (unaudited)
   Three months
Periods ended March 31 (millions except per share amounts)      2012 2011
OPERATING REVENUES Â Â Â Â Â Â Â
Service     $ 2,443  $ 2,337Â
Equipment           176        169Â
           2,619        2,506Â
Other operating income           12        25Â
           2,631        2,531Â
OPERATING EXPENSES Â Â Â Â Â Â Â
Goods and services purchased           1,116        1,098Â
Employee benefits expense            506        447Â
Depreciation           343        332Â
Amortization of intangible assets           127        112Â
           2,092        1,989Â
OPERATING INCOME Â Â Â Â Â Â Â Â Â Â 539Â Â Â Â Â Â Â Â 542Â
Financing costs            75        104Â
INCOME BEFORE INCOME TAXES Â Â Â Â Â Â Â Â Â Â 464Â Â Â Â Â Â Â Â 438Â
Income taxes            116        110Â
NET INCOME Â Â Â Â Â Â Â Â Â Â 348Â Â Â Â Â Â Â Â 328Â
OTHER COMPREHENSIVE INCOME Â Â Â Â Â Â Â Â
Items that may subsequently be reclassified to income       Â
Change in unrealized fair value of derivatives designated as cash flow hedges          (1)       8Â
Foreign currency translation adjustment arising from translating financial statements of foreign operations         (2)       (4)
           (3)       4Â
Item never subsequently reclassified to income       Â
Employee defined benefit plans actuarial gains           156        44Â
           153        48Â
COMPREHENSIVE INCOME Â Â Â Â $Â 501Â Â $Â 376Â
NET INCOME ATTRIBUTABLE TO: Â Â Â Â Â Â Â
Common Shares and Non-Voting Shares     $ 348  $ 327Â
Non-controlling interests           -        1Â
     $ 348  $ 328Â
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Â Â Â Â Â Â Â
Common Shares and Non-Voting Shares     $ 501  $ 375Â
Non-controlling interests           -        1Â
     $ 501  $ 376Â
NET INCOME PER COMMONÂ SHARE AND NON-VOTINGÂ SHARE Â Â Â Â Â Â Â
Basic     $ 1.07  $ 1.01Â
Diluted     $ 1.06  $ 1.00Â
TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDINGÂ Â Â Â Â Â Â
Basic           325        324Â
Diluted           327        326Â
condensed interim consolidated statements of financial positionÂ
     (unaudited)Â
     Â
As at (millions)   March 31, 2012  December 31, 2011
ASSETS Â Â Â Â Â
Current assets     Â
Cash and temporary investments, net   $ 68  $ 46Â
Accounts receivable          1,406        1,428Â
Income and other taxes receivable         10        66Â
Inventories          270        353Â
Prepaid expenses         228        144Â
Derivative assets          12        14Â
         1,994        2,051Â
Non-current assets     Â
Property, plant and equipment, net          7,985        7,964Â
Intangible assets, net          6,135        6,153Â
Goodwill, net          3,661        3,661Â
Real estate joint venture         14        -Â
Other long-term assets          127        81Â
Investments         21        21Â
         17,943        17,880Â
   $ 19,937  $ 19,931Â
     Â
LIABILITIES AND OWNERS' EQUITY Â Â Â Â Â
Current liabilities     Â
Short-term borrowings    $ 407  $ 404Â
Accounts payable and accrued liabilities          1,403        1,419Â
Income and other taxes payable         329        25Â
Dividends payable         387        188Â
Advance billings and customer deposits          663        655Â
Provisions          72        88Â
Current maturities of long-term debt          1,024        1,066Â
         4,285        3,845Â
Non-current liabilities     Â
Provisions          122        122Â
Long-term debt          5,509        5,508Â
Other long-term liabilities          1,040        1,343Â
Deferred income taxes         1,352        1,600Â
         8,023        8,573Â
Liabilities         12,308        12,418Â
Owners' equity     Â
Common Share and Non-Voting Share equity          7,629        7,513Â
   $ 19,937  $ 19,931Â
condensed interim consolidated statements of cash flowsÂ
 (unaudited)Â
Periods ended March 31 (millions)     2012 2011
OPERATING ACTIVITIES Â Â Â Â Â Â Â
Net income     $ 348  $ 328Â
Adjustments to reconcile net income to cash provided by operating activities:      Â
      Depreciation and amortization           470        444Â
      Deferred income taxes           (302)       44Â
      Share-based compensation           7        (5)
      Net employee defined benefit plans expense           (1)       (9)
      Employer contributions to employee defined benefit plans           (116)       (235)
      Gain on 51% Transactel (Barbados) Inc. interest re-measured at acquisition-date fair value and subsequent adjustment to contingent consideration         -        (16)
      Other           (1)       (12)
   Net change in non-cash operating working capital           358        (85)
Cash provided by operating activities           763        454Â
INVESTING ACTIVITIES Â Â Â Â Â Â Â
Capital expenditures            (441)       (409)
Acquisitions and related investments           (32)       (60)
Real estate joint venture           (15)       -Â
Other           (21)       4Â
Net change in non-cash investing working capital           (5)       (51)
Cash used by investing activities           (514)       (516)
FINANCING ACTIVITIES Â Â Â Â Â Â Â
Non-Voting Shares issued           -        17Â
Dividends paid to holders of Common Shares and Non-Voting Shares            (188)       (115)
Issuance and repayment of short-term borrowing           3        22Â
Long-term debt issued           1,350        630Â
Redemptions and repayment of long-term debt           (1,392)       (482)
Dividends paid by a subsidiary to non-controlling interest           -        (4)
Cash provided (used) by financing activities           (227)       68Â
CASH POSITION Â Â Â Â Â Â Â
Increase in cash and temporary investments, net           22        6Â
Cash and temporary investments, net, beginning of period           46        17Â
Cash and temporary investments, net, end of period     $ 68  $ 23Â
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Â Â Â Â Â Â Â
Interest (paid)Â Â Â Â Â $Â (62)Â $Â (61)
Interest received     $ 7  $ -Â
Income taxes (inclusive of Investment Tax Credits) (paid), net     $ (48) $ (66)
segmented informationÂ
               (unaudited)
       Â
Three-month periods ended March 31 (millions) Wireless  Wireline  Eliminations  Consolidated
2012 Â 2011 Â 2012 Â 2011 Â 2012 Â 2011 Â 2012 Â 2011
Operating revenues               Â
External revenue $Â 1,383Â Â $Â 1,308Â Â $Â 1,248Â Â $Â 1,223Â Â $Â -Â Â $Â -Â Â $Â 2,631Â Â $Â 2,531Â
Intersegment revenue       10        9        41        40        (51)       (49)       -        -Â
 $ 1,393  $ 1,317  $ 1,289  $ 1,263  $ (51) $ (49) $ 2,631  $ 2,531Â
EBITDA(1) $Â 622Â Â $Â 551Â Â $Â 387Â Â $Â 435Â Â $Â -Â Â $Â -Â Â $Â 1,009Â Â $Â 986Â
CAPEX(2) $Â 151Â Â $Â 76Â Â $Â 290Â Â $Â 333Â Â $Â -Â Â $Â -Â Â $Â 441Â Â $Â 409Â
EBITDA less CAPEX $Â 471Â Â $Â 475Â Â $Â 97Â Â $Â 102Â Â $Â -Â Â $Â -Â Â $Â 568Â Â $Â 577Â
        Operating revenues (above) $ 2,631 $ 2,531Â
        Goods and services purchased       1,116       1,098Â
        Employee benefits expense       506        447Â
        EBITDA (above)       1,009       986Â
        Depreciation       343        332Â
        Amortization       127        112Â
        Operating income       539        542Â
        Financing costs       75        104Â
        Income before income taxes $ 464  $ 438Â
(1)Â Earnings before interest, taxes, depreciation and amortization (EBITDA) does not have any standardized meaning prescribed by IFRS-IASB and is therefore unlikely to be comparable to similar measures presented by other issuers; EBITDA is defined by the Company as operating revenues less goods and services purchased and employee benefits expense. TELUS has issued guidance on, and reports, EBITDA because it is a key measure that management uses to evaluate performance of its business and is also utilized in measuring compliance with certain debt covenants.
(2)Â Total capital expenditures (CAPEX).
Â
TELUS CORPORATION
Management's discussion and analysis
2012 Q1
Selected extracts from the TELUS Corporate Security Policy (Version 2.3)
7.1.3.2 Where feasible all classified information must be clearly marked
TELUS RESTRICTED or TELUS CONFIDENTIAL. Where there is any doubt as to
the appropriate handling or dissemination of information which does not
bear a security classification, the originator (information owner) of
the information must be consulted. The originating department or the
information owner is responsible to assign a classification to the
information produced. Lack of a security classification does not mean
that the information is not TELUS RESTRICTED or TELUS CONFIDENTIAL.
7.1.3.3 The distribution of information that carries a classification
should be restricted by the information owner, and adhered to by
personnel. An example is if a document is not to be distributed to
other employees by electronic means (such as e-mail) or photocopy, this
should be identified. Where uncertainty exists, consult with the
information owner.
7.1.3.4 Information that is marked TELUS RESTRICTED or TELUS
CONFIDENTIAL must be kept out of view when not being worked on, and,
all times when the desk is left unattended, such as coffee breaks and
lunch. This can be accomplished on workstations by using screen savers
with password protection. If the information is in hardcopy format, it
must be locked in a desk or cabinet.
7.1.3.5 At the end of working hours, all classified information must be
locked away in a desk, filing cabinet or safe. A clean desk policy
should be used for all information whether classified or not.
7.1.4.2 Information that is classified TELUS RESTRICTED or TELUS
CONFIDENTIAL must be shredded or disposed of in an equivalent method.
It is not to be put into the garbage or recycle bin.
Disclaimer arising from the Public Company Accounting Oversight Board:
"This document, unless expressly stated to the contrary, has not been
fully subjected to the Company's internal controls over financial
reporting and, as a result, material misstatement(s), if any, herein
contained are in no way indicative of the design, operation or
effectiveness of the Company's internal controls over financial
reporting."
Caution regarding forward-looking statements
This document contains forward-looking statements about expected future
events and financial and operating performance 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 are subject to inherent risks and uncertainties, and require
the Company to make assumptions. There is significant risk that
assumptions, predictions and other forward-looking statements will not
prove to be accurate. Readers are cautioned not to place undue reliance
on forward-looking statements as a number of factors could cause future
performance, conditions, actions or events to differ materially from
the 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. Annual targets, guidance and
related assumptions for 2012 are described in Section 9. Factors that could cause actual performance to differ materially
include, but are not limited to:
-
Competition including: continued intense competitive rivalry across all services
among established telecommunications companies, newer entrant wireless
operators, cable-TV providers, other communications companies and
emerging over-the-top (OTT) services; active price and brand
competition; TELUS' ability to offer an enhanced customer service
experience; industry growth rates including wireless penetration gain;
network access line losses; subscriber additions and subscriber
retention experience for wireless, TELUS TV® and Optik High Speedâ¢
Internet services; costs of subscriber acquisition and retention;
pressures on wireless average revenue per subscriber unit per month
(ARPU) such as through flat rate pricing trends for voice and data,
inclusive long distance plans for voice, and increasing availability of
Wi-Fi networks for data; levels of smartphone sales and associated
subsidy levels; and ability to obtain and offer data content across
multiple devices on wireless and TV platforms.
-
Technological substitution including: reduced utilization and increased commoditization of
traditional wireline voice local and long distance services; increasing
numbers of households that have only wireless telephone services;
continuation and acceleration of wireless voice ARPU declines such as
through substitution to messaging and OTT applications such as Skype;
and OTT IP services that may cannibalize TV and entertainment services.
-
Technology including: subscriber demand for data that could challenge wireless
network capacity, service levels and spectrum capacity; reliance on
systems and information technology; broadband and wireless technology
options and roll-out plans, including reliance on wireless reciprocal
network access agreements; choice of suppliers and suppliers' ability
to maintain and service their product lines; wireless handset supplier
concentration and market power; expected technology and evolution
paths; expected benefits and performance of high-speed packet access
plus (HSPA+) dual-cell technology and transition to long-term evolution
(LTE) wireless technology; dependence of rural LTE roll-out strategy on
ability to acquire spectrum in the 700Â MHz band; successful deployment
and operation of new wireless networks and successful introduction of
new products (such as new LTE and tablet devices), new services and
supporting systems; network reliability and change management; and
successful upgrades of TELUS TV technology.
-
Economic growth and fluctuations including: the strength and persistence of the economic recovery in
Canada that may be influenced by international economic developments in
the U.S., Europe, Asia and elsewhere; future interest rates; and
pension investment returns and funding.
-
Capital expenditure levels in 2012 and beyond due to the Company's wireless deployment strategy
for future technologies including LTE, wireline broadband initiatives,
new Internet data centre (IDC) initiatives, and future Industry Canada
wireless spectrum auctions, including auction of spectrum in the
700Â MHz band in first half of 2013 and the 2.5/2.6Â GHz bands in 2014.
-
Financing and debt requirements including ability to carry out refinancing activities.
-
Ability to sustain growth objectives to 2013 including, over this timeframe, dividend growth of circa 10% per annum
and CEO goals of generating low double-digit percentage annualized
growth in earnings per share and greater growth in free cash flow,
excluding spectrum costs. The growth objectives may be affected by
factors such as regulatory and government developments and decisions,
competitive environment, reasonable economic performance in Canada, and
capital expenditure and spectrum auction requirements. The growth
objectives are not necessarily indicative of earnings, dividends and
free cash flow beyond 2013.
-
Regulatory approvals and developments including: the result of future spectrum auctions for the 700Â MHz and
2.5/2.6Â GHz bands (including the amount and cost of spectrum acquired);
whether application and enforcement of new regulatory safeguards
regarding vertical integration by competitors into broadcast content
ownership prove to be effective; increased foreign control of certain
wireless entrants; interpretation and application of tower sharing and
roaming rules; and amendments to consumer protection legislation by
several provinces in respect of terms and conditions of wireless
services, whose non-harmonized rules create risk of significant
compliance costs.
-
Human resource developments including employee retention and engagement matters and the outcome of
collective bargaining for a Quebec region agreement that expired at the
end of 2011 (covering approximately 510 employees).
-
Ability to successfully implement cost reduction initiatives and realize
expected savings net of restructuring costs, such as from business integrations, business process outsourcing,
internal offshoring and reorganizations, centralized procurement, value
for money initiatives and real estate consolidation, without losing
customer service focus or negatively impacting client care.
-
Process risks including: reliance on legacy systems and ability to implement and
support new products and services; real estate joint-venture
development risks; and implementation of large enterprise deals that
may be adversely impacted by available resources and degree of
co-operation from other service providers.
-
Tax matters including possible increases in certain provincial and/or federal
corporate income tax rates, including the federal government's
announced policy change to eliminate the ability to defer income taxes
through the use of different tax year-ends between operating
partnerships and corporate partners, which is expected to increase
income tax payments in commencing in 2014.
-
Business continuity events including human-caused threats such as electronic attacks, and natural
disaster threats.
-
Acquisitions or divestitures including realizing expected strategic benefits.
-
Proposed share consolidation and foreign ownership levels.
-
Health, safety and environmental developments; Litigation and legal matters; 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 SEDAR at sedar.com) and in its filings in the United States, including Form 40-F (on EDGAR
at sec.gov). For further information, see Section 10: Risks and risk management in TELUS' 2011 MD&A and updates in this MD&A.
Management's discussion and analysis (MD&A)
May 9, 2012
The following sections are a discussion of the consolidated financial
position and financial performance of TELUS Corporation for the
three-month period ended March 31, 2012, and should be read together
with TELUS' Condensed interim consolidated financial statements dated
March 31, 2012. This discussion contains forward-looking information qualified by
reference to, and should be read together with, the Caution regarding forward-looking statements.
The generally accepted accounting principles (GAAP) used by TELUS are
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB) in compliance with
Canadian GAAP. The Condensed interim consolidated financial statements
have been prepared in accordance with International Accounting Standard
34, Interim Financial Reporting. The terms IFRS-IASB and IFRS used subsequently in this document refer
to these standards. All amounts are in Canadian dollars unless
otherwise specified.
Management's discussion and analysis contents
 Â
Section Description
1. Introduction A summary of TELUS' consolidated results for the first quarter of 2012
2. Core business and strategy A discussion of activities in support of TELUS' six strategic imperatives
3. Key performance drivers A list of corporate priorities for 2012
4. Capabilities An update of factors that affect the capability to execute strategies, manage key performance drivers and deliver results
5. Discussion of operations A discussion of operating performance for the first quarter of 2012
6. Changes in financial position A discussion of changes in the Consolidated statements of financial position for the three-month period ended March 31, 2012
7. Liquidity and capital resources A discussion of operating cash flows, investments and financing activities, as well as liquidity, credit facilities and other disclosures
8. Critical accounting estimates and accounting policy developmentsAccounting estimates that are critical to determining financial results, and changes to accounting policies
9. Annual guidance for 2012 TELUS' confirmed targets for the full year of 2012, and related assumptions
10. Risks and risk management An update of certain risks and uncertainties facing TELUS
11. Definitions and reconciliations Definitions of operating, liquidity and capital resource measures, including calculation and reconciliation of certain non-GAAP measures used by management
1. Introduction
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
1.1 Preparation of the MD&A
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that all relevant information is gathered and
reported to senior management on a timely basis, so that appropriate
decisions can be made regarding public disclosure. 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. The MD&A and the Condensed
interim consolidated financial statements were reviewed by TELUS' Audit
Committee and approved by TELUS' Board of Directors.
Management has issued guidance on and reports on certain non-GAAP
measures to evaluate performance of the Company and its segments.
Non-GAAP measures are also used to determine compliance with debt
covenants and to manage the capital structure. Because non-GAAP
measures do not generally have a standardized meaning, securities
regulations require such measures to be clearly defined, qualified and
reconciled with their nearest GAAP measure (see Section 11). The term EBITDA (earnings before interest, taxes, depreciation and
amortization) used in this document means standardized EBITDA as
defined by the Canadian Performance Reporting Board of the Canadian
Institute of Chartered Accountants (CICA). Adjusted EBITDA used in this
document deducts from standardized EBITDA, items of an unusual nature
that do not reflect ongoing telecommunications operations. See Section 11.1 for the definition, calculation and reconciliation of EBITDA.
1.2 Canadian economy
The Bank of Canada maintained its target for the overnight borrowing
rate at 1% in its April 2012 bank rate announcement. The Bank's April
2012 Monetary Policy Report projected Canada's economy will grow at
2.4% in both 2012 and 2013 before moderating to 2.2% in 2014, with the
economy returning to full capacity in the first half of 2013.
Statistics Canada's Labour Force Survey reported the March 2012
national unemployment rate at 7.2%, down from 7.5% in December 2011.
1.3 Consolidated highlights
 First quarters ended March 31
($ millions, unless noted otherwise) Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Consolidated statements of income   Â
Operating revenues       2,631       2,531       4.0 %
Operating income       539       542       (0.6)%
Income before income taxes       464       438       5.9 %
Net income       348       328       6.1 %
   Â
Basic earnings per share1 (EPS) ($) Â Â Â Â Â Â 1.07Â Â Â Â Â Â Â 1.01Â Â Â Â Â Â Â 5.9Â %
Diluted EPS1 ($) Â Â Â Â Â Â 1.06Â Â Â Â Â Â Â 1.00Â Â Â Â Â Â Â 6.0Â %
Cash dividends declared per share1 2 ($)       1.19       0.525      n/m   Â
   Â
Average shares1 outstanding - basic (millions) Â Â Â Â Â Â 325Â Â Â Â Â Â Â 324Â Â Â Â Â Â Â 0.3Â %
Consolidated statements of cash flows   Â
Cash provided by operating activities       763       454       68.1 %
   Â
Cash used by investing activities       (514)       (516)       0.4 %
â¢Â     Capital expenditures       (441)       (409)       (7.8)%
   Â
Cash (used) provided by financing activities       (227)       68       n/m   Â
Other highlights   Â
Subscriber connections3 (thousands) Â Â Â Â Â Â 12,749Â Â Â Â Â Â Â 12,308Â Â Â Â Â Â Â 3.6Â %
EBITDA4 Â Â Â Â Â Â 1,009Â Â Â Â Â Â Â 986Â Â Â Â Â Â Â 2.3Â %
Adjusted EBITDA4 5 Â Â Â Â Â Â 1,010Â Â Â Â Â Â Â 970Â Â Â Â Â Â Â 4.1Â %
Adjusted EBITDA margin6 (%) Â Â Â Â Â Â 38.4Â Â Â Â Â Â Â 38.6Â Â Â Â Â Â Â (0.2) pts.
Free cash flow4 Â Â Â Â Â Â 358Â Â Â Â Â Â Â 162Â Â Â Â Â Â Â 121.0Â %
Net debt to EBITDA - excluding restructuring costs4 (times) Â Â Â Â Â Â 1.8Â Â Â Â Â Â Â 1.9Â Â Â Â Â Â Â (0.1)Â Â Â
Abbreviations used in MD&A: n/a - Not applicable; n/m - Not meaningful;
pt(s). - Percentage point(s).
1Â Â Â Â Â Includes Common Shares and Non-Voting Shares.
2     Dividends declared in 2012 include the first quarter dividend of 58 cents per share, paid April 2, 2012, and the second quarter dividend of 61 cents per share payable on July 3, 2012, to shareholders of record at the close of business on June 8, 2012. Dividends declared in 2011 are in respect of the first quarter dividend of 52.5 cents per share, paid April 1, 2011. The declaration of the 2011 second quarter dividend (55 cents per share) was made subsequent to the end of the fiscal quarter, on May 4, 2011.
3     The sum of wireless subscribers, network access lines (NALs), Internet access subscribers and TELUS TV subscribers (Optik TV⢠subscribers and TELUS Satellite TV® subscribers), measured at the end of the respective periods based on information in billing and other systems.
4     Non-GAAP measures. See Section 11.1 EBITDA, Section 11.2 Free cash flow and Section 11.4 Definitions of liquidity and capital resource measures
5Â Â Â Â Â Adjusted EBITDA for the first quarter of 2012 excludes a $1Â million equity loss for the residential component of the TELUS Garden real estate joint venture. TELUS anticipates that it will not retain an ownership interest in the residential component after the sale of condominium units and completion of construction. Adjusted EBITDA for the first quarter of 2011 excludes a $16Â million non-cash gain on Transactel (Barbados) Inc. that resulted from re-measurement of the Company's 51% interest in Transactel at fair value when TELUS exercised its purchased call option and asserted control.
6Â Â Â Â Â EBITDA margin is EBITDA divided by Operating revenues. The calculation of the Adjusted EBITDA margin for the first quarter of 2012 excludes the equity loss for the residential component of the TELUS Garden real estate joint venture from both EBITDA and Operating revenues. The calculation of Adjusted EBITDA margin for the first quarter of 2011 excludes the non-cash gain on Transactel from both EBITDA and Operating revenues.
Operating highlights
-
Consolidated Operating revenues increased by $100Â million in the first quarter of 2012 when compared to
the same period in 2011.
Service and equipment revenues increased by $113Â million year over year
in the first quarter of 2012. Growth in wireless network revenue
provided approximately 75% of the increase, as wireless data revenue
growth continued to exceed declining wireless voice revenues. Wireless
equipment revenues decreased as a result of lower acquisition and
retention volumes, as well as lower handset prices. Wireline service
and equipment revenues increased from growth in data services,
including Optik TV and Optik High Speed Internet. Wireline data revenue
growth exceeded ongoing declines in legacy voice local and long
distance services.
Other operating income decreased by $13Â million in the first quarter of
2012 when compared to the same period in 2011, mainly due to the
$16Â million non-cash gain on Transactel (Barbados) Inc. recorded in the
first quarter of 2011. This non-cash gain reflected a re-measurement of
TELUS' 51% interest at fair value when the Company exercised its
purchased call option and asserted control. Transactel operates call
centres in Central America. In addition, in the first quarter of 2012,
the Company recorded a $1Â million equity loss related for the
residential condominium component of the TELUS Garden real estate joint
venture.
When adjusted to exclude the equity loss related to the residential
component of the real estate joint venture in the first quarter of 2012
and the non-cash Transactel gain in the first quarter of 2011,
Operating revenues increased year over year by $117Â million or 4.7% in
the first quarter of 2012.
-
Subscriber connections increased by 441,000 during the twelve-month period ended March 31,
2012, as a result of 7.6% growth in wireless postpaid subscribers, 54%
growth in TELUS TV subscribers and a 4.8% growth in total Internet
subscriptions, partly offset by a 6.2% decrease in wireless prepaid
subscribers, a 7.2% decline in residential network access lines (NALs)
and a 1.6% decline in business NALs. During the first quarter of 2012,
total wireless subscribers increased by 22,000, while total wireline
subscriber connections were unchanged.
The blended monthly wireless subscriber churn rate was 1.55% in the
first quarter of 2012, down 0.15 percentage points when compared to
1.70% in the first quarter of 2011 and also down 0.12 percentage points
when compared to 1.67% in the fourth quarter of 2011. The improvement
in the churn rate was due in part to first quarter 2012 completion of
migrations related to the loss of a federal government wireless service
contract to a low-priced bid from a competitor. Excluding federal
government subscriber losses of 5,000 in the current quarter and 16,000
in the comparative quarter in 2011, postpaid net subscriber additions
were unchanged year over year at 68,000.
Wireless blended ARPU was $58.87 in the first quarter of 2012, up $0.98
or 1.7% from the first quarter of 2011. Quarterly blended ARPU has
increased year over year for six consecutive quarters: 1.7% (2012 Q1),
1.0%Â (2011Â Q4), 3.0% (2011 Q3), 2.5% (2011 Q2), 2.7% (2011 Q1) and 1.9%
(2010 Q4). Prior to the fourth quarter of 2010, blended ARPU had been
declining since mid-2007.
-
Operating income decreased by $3Â million in the first quarter of 2012 when compared to
the same period in 2011, mainly due to $26Â million higher depreciation
and amortization expenses resulting from growth in broadband and
software assets, and acquisitions in 2011 and 2012. Largely offsetting
this was a $23Â million increase in EBITDA. Wireless EBITDA has increased by $71Â million driven by 7.1% growth in
network revenue, while expenses increased by less than one per cent.
Wireline EBITDA decreased by $48Â million as growth in data services was
more than offset by higher content and support costs for the growing
Optik TV service and ongoing declines in higher margin legacy voice
services, and absence of the $16Â million non-cash re-measurement gain
on Transactel recognized in the first quarter of 2011.
-
Adjusted EBITDA increased by $40Â million in the first quarter of 2012 when compared to
the same period in 2011. Adjusted EBITDA in the first quarter 2012
excludes the $1Â million loss for the residential component of the TELUS
Garden real estate joint venture, and adjusted EBITDA for the first
quarter of 2011 excludes the $16Â million non-cash gain on Transactel.
The adjusted EBITDA margin decreased year over year by 0.2Â percentage points to 38.4% resulting
from a 3.5 percentage point decrease in the wireline segment margin,
significantly offset by a 2.9 percentage point increase in the wireless
segment margin.
-
Income before income taxes increased by $26Â million in the first quarter of 2012 when compared to
the same period in 2011 mainly due to lower financing costs.
Income taxes increased by $6Â million in the first quarter of 2012 when
compared to the same period in 2011 mainly due to the prior year
revaluation of the deferred income tax liability. Basic blended income
taxes were unchanged year over year, as the increase in pre-tax income
was offset by a lower blended statutory income tax rate.
-
Net income increased by $20Â million or 6.1% in the first quarter of 2012 when
compared to the same period in 2011. Excluding items shown in the
following table, Net income increased year over year by approximately
$23Â million or 7.3%.
Analysis of Net income Â
 First quarters ended March 31
($ millions) Â Â Â Â Â Â 2012 Â Â Â Â Â Â 2011Â Â Â Â Â Â Change
Net income       348       328       20Â
Add back after-tax loss related to residential component of the TELUS Garden real estate joint venture       1       â"       1Â
Deduct after-tax Transactel gain       â"       (12)       12Â
Deduct net favourable income tax-related adjustments, including any related interest income (see Section 5.2)       (10)      â"       (10)
Net income before above items (approximate) Â Â Â Â Â Â 339Â Â Â Â Â Â Â 316Â Â Â Â Â Â Â 23Â
   Â
-
Basic earnings per share (EPS) increased by six cents or 5.9% in the first quarter of 2012 when
compared to the same period in 2011. Excluding items shown in the
following table, EPS increased by approximately seven cents or 7.2%
year over year.
 Â
Analysis of basic EPS Â
 First quarters ended March 31
Years ended December 31 ($) Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Basic EPS Â Â Â Â Â Â 1.07Â Â Â Â Â Â Â 1.01Â Â Â Â Â Â Â 0.06Â
Add back after-tax loss related to residential component of the TELUS Garden real estate joint venture, per share       â"       â"       â"Â
Deduct after-tax Transactel gain per share       â"       (0.04)       0.04Â
Deduct net favourable income tax-related adjustments per share (see Section 5.2) Â Â Â Â Â Â (0.03) Â Â Â Â Â Â â"Â Â Â Â Â Â Â (0.03)
EPS before above items (approximate) Â Â Â Â Â Â 1.04Â Â Â Â Â Â Â 0.97Â Â Â Â Â Â Â 0.07Â
   Â
-
Cash dividends declared: In the three-month period ended March 31, 2012, the Board of Directors
declared two quarterly dividends. On February 8, 2012, the Board
declared a first quarter dividend of 58Â cents per share on the issued
and outstanding Common Shares and Non-Voting Shares of the Company,
paid on April 2, 2012, to shareholders of record at the close of
business on March 9, 2012. On February 21, 2012, the Board of Directors
declared a second quarter dividend of 61Â cents per share on the issued
and outstanding Common Shares and Non-Voting Shares of the Company,
payable on July 3, 2012, to shareholders of record at the close of
business on June 8, 2012.
The 61 cents per share dividend declared for the second quarter of 2012
reflects an increase of six cents or 10.9% from the dividend one year
earlier. This is consistent with TELUS' dividend growth model (see Financing and capital structure management plans in Section 4.3).
-
Proposed share conversion: On February 21, 2012, the Company announced that holders of its Common
Shares and Non-Voting Shares
would have the opportunity to decide whether to eliminate the Company's
Non-Voting Share class at the Company's annual and special meeting to
be held May 9, 2012. Under the terms of the proposal, each Non-Voting
Share would be converted into a Common Share on a one-for-one basis,
effected by way of a court-approved plan of arrangement, subject to the
approval of two-thirds of the votes cast by the holders of Common
Shares and two-thirds of the votes cast by the holders of Non-Voting
Shares, each voting separately as a class.
On May 8, 2012, the Company announced it was withdrawing the plan of
arrangement set out in its 2012 Information Circular and intends to
reintroduce a new proposal in due course. See Share consolidation risk factor in Section 10.3 Regulatory matters.
Liquidity and capital resource highlights
-
TELUS had unutilized credit facilities of over $1.0 billion at March 31,
2012, as well as $100Â million availability under the Company's trade
receivables securitization program, consistent with its objective of
generally maintaining more than $1Â billion of unutilized liquidity.
-
Net debt to EBITDA - excluding restructuring costs was 1.8 times at March 31, 2012, unchanged from December 31, 2011, and
down from 1.9 times at March 31, 2011. The ratio remains within the
Company's long-term target policy range of 1.5 to 2.0 times.
-
Cash provided by operating activities increased by $309Â million or 68% in the first quarter of 2012 when
compared to the same period in 2011. The increase was due to a number
of factors, including lower employer contributions to defined benefit
plans, non-recurring rebates provided to residential subscribers in
2011, higher adjusted EBITDA, lower disbursements under restructuring
plans and lower income taxes paid net of refunds received.
-
Cash used by investing activities was slightly lower in the first quarter of 2012 when compared to the
same period in 2011. Increased wireless capital expenditures and other
investments in 2012 were largely offset by lower wireline capital
expenditures and changes in non-cash investing working capital.
-
Cash used by financing activities was $227Â million in the first quarter of 2012, as compared to cash
provided by financing activities of $68Â million in the same period in
2011. The net increase in cash used by financing activities was mainly
due to repayment of $300Â million matured Notes in March 2012 and an
increase in dividends paid in cash, partly offset by an increase in
cash provided through low-rate commercial paper issues. The increase in
dividends paid in cash resulted from the Company no longer issuing
shares from treasury for reinvested dividends, as well as from an
increase in the dividend rate.
-
Free cash flow increased by $196Â million or 121% in the first quarter of 2012 when
compared to the same period in 2011. The increase was mainly due to
lower contributions to defined benefit plans net of defined benefit
plan expenses, as well as higher adjusted EBITDA, lower restructuring
payments net of restructuring expenses and lower income tax payments
net of refunds received, partly offset by higher capital expenditures.
2. Core business and strategy
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
TELUS' core business and strategy were described in Section 2 of its
annual 2011 MD&A. Activities in the first quarter of 2012 that support
the Company's six strategic imperatives include the following.
Building national capabilities across data, IP, voice and wireless
The Company's efforts continue to be focused on wireless capacity
upgrades, ongoing deployment of a new LTE wireless network in urban
markets, continued investment in broadband infrastructure expansion and
upgrades to support expected growth in Optik TV and Internet services,
which includes completing the overlay of VDSL2 technology in the West
and VDSL2 bonding in Eastern Quebec. It also includes investing in new
state of the art Internet data centres to support market demand for
cloud computing services, as well as meet internal requirements.
-
The Company believes that the evolution of wireless networks to 4G LTE
is a natural progression required to sustain and to drive data growth,
and began construction of an urban LTE network in the second half of
2011. On February 10, 2012, TELUS launched LTE network service in 14
metropolitan areas.
-
TELUS' urban LTE network operates on advanced wireless services (AWS)
spectrum, acquired by the Company for $882Â million in Industry Canada's
2008 auction, and supports manufacturer-rated peak data download speeds
of up to 75 Mbps (typical speeds of 12 to 25 Mbps expected; actual
speed may vary by device used, topography and environmental conditions,
network congestion, signal strength and other factors). Outside of LTE
coverage areas, LTE devices offered by TELUS also work on the HSPA+
network, which covers 33.8 million Canadians at March 31, 2012.
-
After substantially completing its VDSL2 overlay in 2011, the Company
continues to invest in its wireline broadband network to expand
capacity and coverage, and launch Optik TV services in new areas such
as Penticton, B.C. At March 31, 2012, the Company's broadband
high-definition (HD) coverage, including VDSL2 and ADSL2+ coverage,
reached more than 2.3Â million households in Alberta, B.C. and Eastern
Quebec. TELUS also continues to deploy fibre to the home in new
residential areas, and fibre to the building in new multi-dwelling
units.
-
TELUS is enhancing its national network of data centres and related
facilities, drawing upon green hydroelectric power, natural cooling and
other technology to make them among the most environmentally
sustainable operations of their type in North America. This includes
new intelligent Internet data centres (IDCs) in Rimouski, Quebec and
Kamloops, B.C.
Focusing relentlessly on the growth markets of data, IP and wireless
The Company's strategy of focusing on growth markets is reflected in the
wireline data revenue and wireless revenue total of nearly $2.1Â billion
in the first quarter of 2012, or an increase of $156Â million or 8.1%
when compared to the first quarter of 2011. Increased revenue from
growth markets more than offset the decline in legacy wireline voice
and other revenues.
Providing integrated solutions that differentiate TELUS from its
competitors
In February 2012, the Company announced two innovations for Optik TV.
TELUS customers who use an Xbox 360 as their set-top box may now
control both live and recorded TV with hand gestures and voice commands
with that addition of an Xbox 360 Kinect sensor. TELUS also announced
Optik on the go, which provides Optik TV customers in B.C. and Alberta
with the capability to view a selection commercial-free TV on-demand
shows and movies on their mobile devices, tablets and laptops, whether
at home, or away from home using TELUS' 4G LTE wireless network or
Wi-Fi. There are is no additional charge for Optik TV customers to
watch select TV On Demand shows and movies from channels they already
subscribe to. Tablet and smartphone users can enjoy the service without
incurring data charges by using Wi-Fi to connect to the Internet. When
compatible devices connect via a mobile network, data usage charges
would apply.
In March 2012, the Company introduced TELUS Managed Mobility Services
powered by Vox Mobile - a service offering that manages an enterprise's
mobile infrastructure and devices from procurement to payment and
leverages a growing trend of enterprises adopting "bring your own
device" policies for their employees. TELUS Managed Mobility Services
offers enterprises a series of six individual, yet integrated, service
modules to provide an end-to-end service option for managing wireless
devices on multiple platforms, from multiple carriers.
3. Key performance drivers
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
Management confirms or sets new corporate priorities each year to both
advance TELUS' long-term strategic priorities and address near-term
opportunities and challenges. Corporate priorities are key performance
drivers that help achieve key performance measures quantified by the
Company's public financial targets disclosed in Section 9.
Corporate priorities for 2012
Deliver on TELUS' future friendly brand promise by putting customers first Increase TELUS' competitive advantage through technology leadership Drive TELUS' leadership position in its chosen business and public sector markets Accelerate TELUS' leadership position in healthcare information technology Strive to further improve operational efficiency and effectiveness at TELUS Build TELUS' culture for sustained competitive advantage.
4. Capabilities
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
4.1 Principal markets addressed and competition
The principal markets addressed by the Company and an overview of the
Company's competition were described in Section 4.1 of TELUS' annual
2011 MD&A.
4.2 Operational resources
Operational resources were described in Section 4.2 of TELUS' annual
2011 MD&A.
4.3 Liquidity and capital resources
Capital structure financial policies
The Company's objectives when managing capital are: (i) to maintain a
flexible capital structure that optimizes the cost and availability of
capital at acceptable risk; and (ii) to manage capital in a manner that
considers the interests of equity and debt holders.
In the management and definition of capital, the Company includes Common
Share and Non-Voting Share equity (excluding accumulated other
comprehensive income), long-term debt (including any associated hedging
assets or liabilities, net of amounts recognized in accumulated other
comprehensive income), cash and temporary investments and securitized
trade receivables.
The Company manages its capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics of
the underlying assets. In order to maintain or adjust its capital
structure, the Company may adjust the amount of dividends paid to
holders of Common Shares and Non-Voting Shares, purchase shares for
cancellation pursuant to permitted normal course issuer bids, issue new
shares, issue new debt, issue new debt to replace existing debt with
different characteristics and/or increase or decrease the amount of
trade receivables sold to an arm's-length securitization trust.
The Company monitors capital utilizing a number of measures, including
net debt to EBITDAÂ -Â excluding restructuring costs and dividend payout
ratios. See Section 7.4 Liquidity and capital resource measures.
Report on 2012 financing and capital structure management plans
Pay dividends to the holders of TELUS Common Shares and Non-Voting Shares The first quarter dividend of 58 cents per share was paid on April 2, 2012. On February 21, 2012, the Board of Directors declared a second quarter dividend of 61 cents per share on the issued and outstanding Common Shares and Non-Voting Shares of the Company, payable on July 3, 2012, to shareholders of record at the close of business on June 8, 2012. The 61 cents per share dividend declared for the second quarter of 2012 reflects an increase of six cents or 10.9% from the dividend one year earlier. This is consistent with TELUS' dividend growth model. TELUS plans to continue with two dividend increases per year to 2013, normally declared in May and November, and expects the annual increase to be in the range of circa 10% over this timeframe. The dividend growth model is not necessarily indicative of dividend increases beyond 2013. Notwithstanding this, dividend decisions will continue to be subject to the Board's assessment and determination of the Company's financial situation and outlook on a quarterly basis. TELUS is maintaining its long-term dividend payout ratio guideline of 55 to 65% of prospective sustainable net earnings.
Use proceeds from securitized trade receivables (presented as Short-term borrowings), bank facilities, commercial paper and dividend reinvestment, as needed, to supplement free cash flow and meet other cash requirements During the first quarter of 2012, a $258Â million increase in commercial paper was more than offset by repayment of $300Â million of matured Notes, while proceeds from securitized trade receivables were unchanged. On a year-over-year comparative basis, cash provided by operating activities increased $309Â million in the first quarter of 2012, exceeding a $295Â million year-over-year increase in cash used by financing activities and the relatively unchanged cash used by investing activities.
Maintain compliance with financial objectives, policies and guidelinesMaintain a minimum $1 billion in unutilized liquidity - The Company had unutilized credit facilities of over $1.0 billion at March 31, 2012, as well as $100 million of additional availability under the trade receivables securitization program.Net debt to EBITDA excluding restructuring costs ratio of 1.5 to 2.0 times - Actual result of 1.8 times at March 31, 2012. See Section 7.4.Dividend payout ratio guideline of 55 to 65% of sustainable net earnings on a prospective basis - See Section 7.4.
Preserve access to the capital markets at a reasonable cost by maintaining investment grade credit ratings in the range of BBB+ to A-, or the equivalent At May 9, 2012, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range.
4.4 Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
5. Discussion of operations
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
5.1 General
The Company's operating segments and reporting segments are wireless and
wireline. Segmented information in Note 5 of the Condensed interim
consolidated financial statements is regularly reported to the
Company's Chief Executive Officer (the chief operating decision-maker).
5.2 Summary of quarterly results
        Â
($ millions, except per share amounts and as noted) 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010Â Q4 2010 Q3 2010 Q2
Operating revenues       2,631       2,690       2,622       2,554       2,531       2,554       2,461       2,400Â
Operating expenses        Â
Goods and services purchased       1,116       1,316       1,178       1,134       1,098       1,235       1,036       997Â
Employee benefits expense       506       500       476       470       447       478       484       478Â
Depreciation and amortization       470       481       443       442       444       445       433       409Â
       2,092       2,297       2,097       2,046       1,989       2,158       1,953       1,884Â
Operating income       539       393       525       508       542       396       508       516Â
Financing costs       75       87       92       94       104       105       185       117Â
Income before income taxes       464       306       433       414       438       291       323       399Â
Income taxes       116       69       107       90       110       65       72       97Â
Net income       348       237       326       324       328       226       251       302Â
Net income attributable to Common Shares and Non-Voting Shares       348       246       325       321       327       225       250       301Â
Net Income per Common Share and Non-Voting Share        Â
- Basic       1.07       0.76       1.00       0.99       1.01       0.70       0.78       0.94Â
- Diluted       1.06       0.75       1.00       0.98       1.00       0.70       0.78       0.94Â
Cash dividends declared per Common Share and Non-Voting Share1 Â Â Â Â Â Â 1.19Â Â Â Â Â Â Â 0.58Â Â Â Â Â Â Â 0.55Â Â Â Â Â Â Â 0.55Â Â Â Â Â Â Â 0.525 Â Â Â Â Â Â 0.525 Â Â Â Â Â Â 0.50Â Â Â Â Â Â Â 0.50Â
Additional information        Â
EBITDA2 Â Â Â Â Â Â 1,009Â Â Â Â Â Â Â 874Â Â Â Â Â Â Â 968Â Â Â Â Â Â Â 950Â Â Â Â Â Â Â 986Â Â Â Â Â Â Â 841Â Â Â Â Â Â Â 941Â Â Â Â Â Â Â 925Â
Restructuring costs included in EBITDA and Operating income       13       16       3       12       4       38       17       19Â
1Dividends declared in the first quarter of 2012 include the first quarter dividend of 58 cents per share, paid April 2, 2012, and the second quarter dividend of 61 cents per share payable on July 3, 2012, to shareholders of record at the close of business on June 8, 2012.
2A non-GAAP measure (see Section 11.1 EBITDA). Equivalent to Operating income before depreciation and amortization expenses.
Trends
The consolidated revenue trend principally reflects: (i) year-over-year
growth in wireless network revenues generated from a growing subscriber
base and higher ARPU; (ii) wireless equipment revenue that has
generally increased year-over-year; and (iii) year-over-year growth in
wireline data revenues, which now more than offsets declining legacy
wireline voice and other service and equipment revenues.
Wireless network revenue reflects growing data revenue (36%
year-over-year growth in the first quarter of 2012), partly offset by
declining voice revenues (a 5.6% year-over-year decrease in the first
quarter of 2012). Data growth reflects increased use of data plans and
increased data consumption driven by increasing smartphone adoption, as
well as increased roaming revenues. The growing demand for wireless
data may challenge network and spectrum capacity in the future. Blended
ARPU has increased year over year for six consecutive quarters
following several years of declines. Recent moderation in the data ARPU
growth trend is a result of competitive pressures on data driving
bigger included-data buckets in rate plans, and an increasing number of
unlimited messaging rate plans, as well as a natural slowing of the
growth rate following the significant jump in smartphone adoption and
corresponding increase in usage in the latter part of 2010. Decreasing
wireless voice revenues reflect higher declines in voice ARPU since
2010.
Wireless equipment revenues decreased year over year in the first
quarter of 2012 due to lower subscriber acquisition and retention
volumes, but generally have increased year over year due to higher
subscriber acquisition and retention volumes and device upgrade
revenues, as well as an increasing proportion of more expensive
smartphones.
There is significant third and fourth quarter seasonality with respect
to higher wireless subscriber additions, related acquisition costs and
equipment sales, and higher retention costs due to contract renewals.
Wireless EBITDA typically decreases in the fourth quarter from
heightened competitive intensity. Subscriber additions have typically
been lowest in the first quarter. In addition, wireless ARPU has
generally risen sequentially in the second and third quarters, and
declined sequentially in the fourth and first quarters.
The positive wireline revenue trend reflects data revenue growth
resulting from continuing expansion of the TELUS TV subscriber base (up
54% in the 12-month period ended March 31, 2012), as well as growth in
enhanced data, Internet and managed workplace revenues, moderated by
ongoing declines in legacy basic data services. Growth in Internet
revenues includes expansion of the Optik High Speed Internet subscriber
base as a result of bundling offers with Optik TV, as well as rate
increases. A general trend of declining wireline voice revenues and
network access lines (NALs) is due to substitution to wireless and
IP-based services, as well as competition from VoIP service providers
(including cable-TV competitors), resellers and facilities-based
competitors. The primary cable-TV competitor in Western Canada
increased its promotional activity and incentives early in the first
quarter of 2012 to win back and protect its subscriber base, but backed
off on promotional activity in the latter part of the quarter. A
sequential increase in residential NAL losses in first quarter of 2012
was due to this increased promotional activity. The rate of residential
NAL losses had moderated from mid-2010 and through most of 2011 due to
the positive impact of Optik TV and Optik High Speed Internet services
and improved bundle offers. The general trend for business NALS is a
decline due to increased competition in the small and medium business
(SMB) market, as well as conversion of voice lines to more efficient IP
services. A higher rate of churn in wholesale NALs was observed in the
first quarter of 2012. In contrast, business NALs had increased in the
first two quarters of 2011 from implementing wholesale services for
enterprise customers.
The trend in the Goods and services purchased expense reflects
increasing content and support costs for the growing TELUS Optik TV
subscriber base, increasing costs of acquisition and retention for
wireless subscribers through 2011, as well as fourth quarter wireless
expense seasonality described above.
The trend in Employee benefits expenses reflects compensation increases,
as well as increased full-time equivalent (FTE) staff resulting from
acquisitions and targeted hiring to support TV, business and wireless
growth.
The sequential increase in depreciation and amortization expenses in the
fourth quarter of 2011 resulted from a $19Â million write-down of assets
in a foreign operation that were held for sale at December 31, 2011, as
well as from an increase in capital assets to facilitate subscriber
growth. Lower depreciation and amortization expenses in the second
quarter of 2010 included the effect of reduced capital expenditures in
the first half of 2010, and recognition of $5Â million of investment tax
credits following determination of eligibility by taxation authorities
for assets capitalized in prior years that were fully amortized.
Financing costs for each period shown are net of varying amounts of
interest income, including interest from the settlement of prior years'
income tax-related matters. Quarterly financing costs since the third
quarter of 2010 have decreased mainly due to lower effective interest
rates from refinancing activities in the third quarter of 2010 and
second quarter of 2011. Financing costs in the third quarter of 2010
include a $52Â million loss on early partial redemption of U.S. Notes,
as well as a $15Â million financing charge resulting from the Canadian
Radio-television and Telecommunications Commission's (CRTC's) final
determinations for the regulatory deferral account.
The trends in Net income and earnings per share (EPS) reflect the items
noted above, as well as adjustments arising from legislated income tax
changes, settlements and tax reassessments for prior years, including
any related interest on reassessments.
Income tax-related adjustments
($ in millions, except EPS amounts) 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 2010 Q2
Approximate Net income impact       10       10       â"       11       â"       10       9       10Â
Approximate EPS impact       0.03       0.03       â"       0.03       â"       0.03       0.03       0.03Â
Approximate basic EPS excluding income tax-related impacts      1.04       0.73       1.00       0.96       1.01       0.67       0.75       0.91Â
5.3 Consolidated operations
Discussion of TELUS' consolidated financial performance follows.
Segmented discussion is provided in Section 5.4 Wireless segment, Section 5.5 Wireline segment and Section 7.2 Cash used by investing activities - capital expenditures.
Operating revenues Â
 First quarters ended March 31
($ millions) Â Â Â Â Â Â 2012 Â Â Â Â Â Â 2011 Â Â Â Â Â Â Change
Service       2,443       2,337       4.5 %
Equipment       176       169       4.1 %
       2,619       2,506       4.5 %
Other operating income       12       25       (52.0)%
       2,631       2,531       4.0 %
Consolidated Operating revenues increased by $100Â million in the first
quarter of 2012 when compared to the same period in 2011.
-
Service revenues increased year over year by $106Â million in the first
quarter of 2012. Wireless service revenues increased by $86Â million or
7.1%, principally due to growth in wireless data network revenues from
subscriber growth and accelerated smartphone adoption, which exceeded
the decline in voice network revenue. Wireline service revenues
increased by $20Â million or 1.8%, as growth in data services, including
Optik TV and Optik High Speed Internet, exceeded the decline in legacy
voice local and long distance services.
-
Equipment revenues increased year over year by $7Â million in the first
quarter of 2012. Wireless equipment sales decreased by $11Â million as a
result of lower acquisition and retention volumes, as well as
competitive pressure to lower handset prices. Wireline equipment sales
increased by $18Â million mainly due to sales to business customers.
-
Other operating income decreased year over year by $13Â million in the
first quarter of 2012. The decrease was mainly due to recognition of a
$16Â million non-cash gain on Transactel (Barbados) Inc. in the first
quarter of 2011, which reflected a re-measurement of TELUS' 51%
interest at fair value when TELUS exercised its purchased call option
and asserted control. In the first quarter of 2012, the Company
recorded a $1Â million equity loss related to the residential
condominium redevelopment component of the TELUS Garden real estate
joint venture (see Transactions with real estate joint venture in Section 7.10). TELUS does not anticipate that it will retain an ownership interest
in the residential component after the sale of condominium units and
completion of construction. Partly offsetting these items was a
drawdown of the price cap deferral account in 2012 to recognize
provisioning of broadband Internet service to a number of qualifying
rural communities.
Operating expenses  Â
    First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Goods and services purchased          1,116       1,098       1.6 %
Employee benefits expense          506       447       13.2 %
Depreciation          343       332       3.3 %
Amortization of intangible assets         127       112       13.4 %
          2,092       1,989       5.2 %
Consolidated Operating expenses increased by $103Â million in the first
quarter of 2012 when compared to the same period in 2011.
-
Goods and services purchased increased year over year by $18Â million in
the first quarter of 2012, reflecting increased content and support
costs to grow and manage wireline Optik TV services. Partly offsetting
this was a decrease in wireless marketing expenses and lower
advertising and promotion expenses, as well as decrease in wireless
equipment expenses resulting from lower acquisition and retention
volumes.
-
Employee benefits expense increased year over year by $59Â million in the
first quarter of 2012. The increase mainly reflects a $40Â million
higher wage and salary expense, $10Â million higher employee-related
restructuring costs and an $8Â million lower recovery in respect of
employee defined benefit pension plans in 2012. The wage and salary expense increased due to hiring over the past year
to support the growing wireless and TV subscriber bases, full inclusion
in the first quarter of 2012 of operations of certain TELUS-branded
wireless dealership businesses acquired throughout 2011, one additional
month of expenses in 2012 from the consolidation of Transactel
operations, and management and bargaining unit compensation increases.
-
Depreciation increased year over year by $11Â million in the first
quarter of 2012 largely due to ongoing investments in broadband
networks including Optik TV and the urban wireless LTE network, partly
offset by an increase in fully depreciated assets.
-
Amortization of intangible assets increased year over year by
$15Â million in the first quarter of 2012, principally due to ongoing
capital investments in network and administrative software assets, as
well as acquisitions in 2011 and first quarter of 2012.
Operating income  Â
    First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
          539       542       (0.6)%
Operating income decreased by $3Â million in the first quarter of 2012
when compared to the same period in 2011, as the $71Â million increase
in wireless EBITDA (see Section 5.4) was slightly offset by the $26 million increase in depreciation and
amortization expenses and the $48Â million decrease in wireline EBITDA
(see Section 5.5).
Financing costs  Â
  First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Interest expense          89       106       (16.0)%
Interest income and foreign exchange         (14)       (2)      n/m   Â
          75       104       (27.9)%
Financing costs decreased by $29Â million in the first quarter of 2012
when compared to the same period in 2011, mainly due to a $17Â million
lower interest expense. The lower interest expense was due to a lower
effective interest rate resulting from refinancing activities in the
second quarter of 2011. In the second quarter of 2011, remaining U.S.
dollar Notes matured on June 1 and associated cross currency interest
rate swap agreements were settled (combined effective interest rate of
8.5%), funded by a May 2011, 3.65% debt issue and low-rate commercial
paper issues.
Interest income of $10Â million was recorded in the first quarter of
2012, resulting primarily from settlement of income tax-related
matters. No interest income was recorded in the first quarter of 2011.
Income taxes Â
 First quarters ended March 31
($ millions, except tax rates) Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Basic blended tax at weighted average statutory income tax rates       119       119       â" %
Revaluation of deferred income tax liability to reflect future statutory income tax rates       (1)       (8)      n/m   Â
Tax rate differential on, and consequential adjustments from, reassessments of prior years' tax issues       (3)       â"       n/m   Â
Share option award compensation       1       â"       n/m   Â
Other       â"       1       n/m   Â
       116       110       5.5 %
Blended federal and provincial statutory tax rates (%)       25.7       27.2       (1.5) pts.
Effective tax rates (%) Â Â Â Â Â Â 25.0Â Â Â Â Â Â Â 25.1Â Â Â Â Â Â Â (0.1) pts.
Basic blended statutory income taxes were unchanged in the first quarter
of 2012 when compared to the same period in 2011, as the 5.9% increase
in pre-tax income was offset by a lower blended statutory income tax
rate. The effective tax rates were lower than the statutory tax rates
due to revaluations of deferred income tax liabilities; the tax rate
differential on, and consequential adjustments from, reassessments of
prior years' tax issues; and other taxable income differences.
Net income  Â
  First quarters ended March 31
($ millions)Â Â Â 2012 2011 Change
          348       328       6.1 %
Net income increased by $20Â million in the first quarter of 2012 when
compared to the same period in 2011. See summary analysis in Section 1.3.
Other comprehensive income (OCI) Â
 First quarters ended March 31
($ millions) Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Items that may be subsequently reclassified to income       (3)       4       n/m  Â
Item never subsequently reclassified to income       156       44       n/m  Â
       153       48       n/m  Â
OCI items that may be subsequently reclassified to income are comprised
of changes in unrealized fair value of derivatives designated as cash
flow hedges, and foreign currency translation adjustments arising from
translating financial statements of foreign operations.
The OCI item never subsequently reclassified to income is in respect of
after-tax actuarial gains and losses on defined benefit plans, which
are likely to fluctuate from period to period. Actuarial gains were
recorded in the first quarter of 2012 as well as in the first quarter
of 2011.
5.4 Wireless segment
Wireless segment revenues increased by $76Â million in the first quarter
of 2012 when compared to the same period in 2011.
Operating revenues - wireless segment
  First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
 Voice         790       837       (5.6)%
 Data         498       366       36.1 %
Network revenue         1,288       1,203       7.1 %
Equipment and other         95       105       (9.5)%
External operating revenues         1,383       1,308       5.7 %
Intersegment revenue         10       9       11.1 %
Total operating revenues         1,393       1,317       5.8 %
Data revenue to network revenue (%)Â Â Â Â Â Â Â Â 39Â Â Â Â Â Â Â 30Â Â Â Â Â Â Â 9Â pts.
Network revenue increased year over year by $85Â million in the first quarter of 2012.
-
Voice revenue decreased year over year by $47Â million in the first
quarter of 2012, due to the ongoing trend of declining voice ARPU.
Voice ARPU was $36.04 in the first quarter of 2012, or a decrease of
$4.14 or 10% from the first quarter of 2011. Voice ARPU declined year
over year principally due to an increasing volume of mobile Internet
connection devices and tablet subscriptions where there are no voice
revenues, increased use of included-minute plans for both local and
long distance calling, an increased penetration of the lower ARPU Koodo
brand, and lower Mike⢠service ARPU, partly offset by increased roaming
volumes. The average minutes of use was unchanged from one year ago.
-
Data revenue increased year over year by $132Â million in the first
quarter of 2012, reflecting subscriber growth and strength in
smartphone service revenues and text messaging driven by increased
smartphone penetration, increased adoption of data plans, growth in
mobile Internet connection devices and tablets, increased rates for
pay-per-use text messaging, as well as higher data roaming volumes.
Data ARPU was $22.83 in the first quarter of 2012, reflecting an
increase of $5.12 or 29% from the first quarter of 2011.
-
Blended ARPU was $58.87 in the first quarter of 2012, reflecting an
increase of $0.98 or 1.7% from the first quarter of 2011, mainly due to
increased roaming and increasing data usage, partly offset by declining
voice ARPU. See table below for ARPU growth trends.
-
Gross subscriber additions decreased year over year by 25,000 or 6.4% in
the first quarter of 2012, reflecting cost discipline including lower
advertising and promotions expenses. Heightened competitive intensity
was reflected in price competition and an increased number of
promotional rate plan offers, port-in credits and in-store credits from
both established national competitors and newer entrants. Postpaid
gross additions decreased year over year by 15,000 or 5.5%, while
prepaid gross additions decreased year over year by 10,000 or 8.6%.
-
Net subscriber additions decreased year over year by 10,000 or 31% in
the first quarter of 2012. Postpaid net additions of 63,000 in the
first quarter of 2012 were net of 5,000 federal government subscribers
lost to a low bid contract offer by an established competitor effective
early in 2011. This compares to postpaid net additions of 52,000 in the
first quarter of 2011, which were net of the loss of 16,000 federal
government subscribers under the same contract loss. Excluding federal
government subscriber losses in both periods, postpaid net additions in
the first quarter of 2012 were flat year over year at 68,000, as lower
gross subscriber additions were offset by the lowest churn since the
third quarter of 2010, which had a positive impact on costs of
acquisition and retention. Prepaid net subscriber losses were 41,000 in
the first quarter of 2012, as compared to net losses of 20,000 in the
first quarter of 2011, reflecting increased competitive intensity in
the lower value market segments and the Company's choice to not match
certain competitive offers.
-
The blended monthly wireless subscriber churn rate was 1.55% in the
first quarter of 2012, as compared to 1.70% in the first quarter of
2011 and 1.67% in the fourth quarter of 2011. Excluding the effects
from the loss of the federal government wireless contract, blended
churn was 1.52% in the first quarter of 2012 and 1.62% in the first
quarter of 2011. The improved churn rate in the first quarter of 2012
was attributed to the Company's continued focus on retaining high-value
clients, including strong retention efforts since the introduction of
the Clear and Simple Device Upgrade program in November 2010, as
postpaid clients upgraded to new devices before the end of their
contracts.
-
The Company experienced an acceleration of smartphone adoption rates.
Smartphones represented 68% of postpaid gross additions in the first
quarter of 2012, as compared to 54% in the same period in 2011.
Cumulatively, smartphone subscribers represented 56% of the postpaid
subscriber base at March 31, 2012, as compared to 38% one year earlier.
Smartphone subscribers generate significantly higher ARPU and have
lower churn than those with messaging and voice-only devices, but have
higher costs of acquisition and retention resulting from the large
device subsidies for multiple-year contract sales or renewals. A higher
smartphone mix is expected to continue to positively impact future data
revenue growth, ARPU and churn rates, which increase expected lifetime
revenue. The higher smartphone mix is also expected to increase future
costs of retention and network usage, and require ongoing network
capacity investments.
        Â
Year-over-year ARPU growth (%) Â Â Â Â Â Â Â Â
 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 2010 Q2
Blended ARPU Â Â Â Â Â Â 1.7Â Â Â Â Â Â Â 1.0Â Â Â Â Â Â Â 3.0Â Â Â Â Â Â Â 2.5Â Â Â Â Â Â Â 2.7Â Â Â Â Â Â Â 1.9Â Â Â Â Â Â Â (1.2) Â Â Â Â Â Â (1.9)
Data ARPU Â Â Â Â Â Â 28.9Â Â Â Â Â Â Â 35.2Â Â Â Â Â Â Â 43.8Â Â Â Â Â Â Â 39.5Â Â Â Â Â Â Â 34.8Â Â Â Â Â Â Â 27.1Â Â Â Â Â Â Â 20.6Â Â Â Â Â Â Â 19.4Â
Voice ARPU Â Â Â Â Â Â (10.3)Â Â Â Â Â Â (11.9)Â Â Â Â Â Â (10.4) Â Â Â Â Â Â (9.3) Â Â Â Â Â Â (5.8) Â Â Â Â Â Â (5.2) Â Â Â Â Â Â (6.7) Â Â Â Â Â Â (7.2)
Equipment and other revenues decreased year over year by $10Â million in the first quarter of 2012,
largely due to lower acquisition and retention volumes, as well as
competitive pressure to lower handset prices, which drove higher
handset subsidies. Retention volumes decreased year over year due to
strong retention efforts over the past year as postpaid clients took
advantage of the Clear and Simple Device Upgrade program.
Intersegment revenue represents services provided by the wireless segment to the wireline
segment and is eliminated upon consolidation along with the associated
expense in the wireline segment.
Wireless operating indicators  Â
    At March 31
          2012       2011       ChangeÂ
Subscribers (000s) Â Â Â Â Â Â
 Postpaid          6,193       5,757       7.6 %
 Prepaid          1,169       1,246       (6.2)%
 Total          7,362       7,003       5.1 %
Proportion of subscribers that is postpaid (%) Â Â Â Â Â Â Â Â Â 84.1Â Â Â Â Â Â Â 82.2Â Â Â Â Â Â Â 1.9 pts.
Total digital population coverage1 (millions) Â Â Â Â Â Â Â Â Â 34.4Â Â Â Â Â Â Â 33.8Â Â Â Â Â Â Â 1.8Â %
HSPA+ population coverage2 (millions) Â Â Â Â Â Â Â Â Â 33.8Â Â Â Â Â Â Â 33.2Â Â Â Â Â Â Â 1.8Â %
      Â
  First quarters ended March 31
          2012       2011       ChangeÂ
Subscriber gross additions (000s) Â Â Â Â Â Â
 Postpaid          257       272       (5.5)%
 Prepaid          106       116       (8.6)%
 Total          363       388       (6.4)%
Subscriber net additions (000s) Â Â Â Â Â Â
 Postpaid          63       52       21.2 %
 Prepaid          (41)       (20)       (105.0)%
 Total          22       32       (31.3)%
ARPU3 ($) Â Â Â Â Â Â Â Â Â 58.87Â Â Â Â Â Â Â 57.89Â Â Â Â Â Â Â 1.7Â %
Churn, per month3 (%) Â Â Â Â Â Â Â Â Â 1.55Â Â Â Â Â Â Â 1.70Â Â Â Â Â Â Â (0.15) pts.
Average monthly minutes of use per subscriber (MOU)Â Â Â Â Â Â Â Â Â 324Â Â Â Â Â Â Â 324Â Â Â Â Â Â Â â"Â Â Â Â
COA4 per gross subscriber addition3 ($) Â Â Â Â Â Â Â Â Â 362Â Â Â Â Â Â Â 348Â Â Â Â Â Â Â 4.0Â %
Retention spend to network revenue3 (%) Â Â Â Â Â Â Â Â Â 10.7Â Â Â Â Â Â Â 12.2Â Â Â Â Â Â Â (1.5) pts.
EBITDA to network revenue (%) Â Â Â Â Â Â Â Â Â 48.3Â Â Â Â Â Â Â 45.8Â Â Â Â Â Â Â 2.5 pts.
1Â Â Â Â Â Including roaming/resale and network access agreements.
2Â Â Â Â Â Including network access agreements.
3     See Section 11.3 Definitions of key wireless operating indicators. These are industry measures useful in assessing operating performance of a wireless company, but are not measures defined under IFRS-IASB.
4 Cost of acquisition.
Operating expenses - wireless segment
  First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Equipment sales expenses          262       272       (3.7)%
Network operating expenses          172       164       4.9 %
Marketing expenses          87       100       (13.0)%
General and administration (G&A) expenses     Â
 Employee benefits expense          145       124       16.9 %
 Other G&A expenses          105       106       (0.9)%
Total operating expenses          771       766       0.7 %
Wireless segment expenses increased by $5Â million in the first quarter
of 2012 when compared to the same period in 2011.
Equipment sales expenses decreased year over year by $10Â million in the first quarter of 2012.
The decrease reflects lower acquisition and retention volumes, partly
offset by higher per-unit costs due to increased smartphone loading for
new subscribers and migration of existing clients.
Network operating expenses increased year over year by $8Â million in the first quarter of 2012.
The increase reflects growth in roaming volumes, partly offset by
reduced roaming rates and lower revenue-share and licensing costs.
Marketing expenses decreased year over year by $13Â million in the first quarter of 2012.
The decrease was due to lower commissions as a result of recent
TELUS-branded wireless dealership business acquisitions, as well as
lower advertising and promotions expenses.
-
COA per gross subscriber addition increased year over year by $14 in the
first quarter of 2012. The increase was primarily due to higher
per-unit subsidy costs driven by a higher smartphone mix, competitive
pressures on handset pricing driving deeper subsidies, and to a lesser
extent, higher commissions to support an increasing number of higher
value smartphone devices, partly offset by lower advertising and
promotions expenses.
-
Retention costs as a percentage of network revenue decreased year over
year by 1.5 percentage points in the first quarter of 2012. The
decrease was primarily due to lower retention volumes resulting from
strong retention efforts over the past year as postpaid clients took
advantage of the Clear and Simple Device Upgrade program, and to a
lesser extent, commission savings from the recent TELUS-branded
wireless dealership acquisitions. These savings were partly offset by
higher per-unit subsidy costs as a larger number of clients migrated to
more costly smartphones.
Total G&A expenses increased year over year by $20Â million in the first quarter of 2012,
reflecting full inclusion of costs from the acquisition of certain
TELUS-branded wireless dealership businesses throughout 2011.
-
Employee benefits expense increased year over year by $21Â million in the
first quarter of 2012, due to full inclusion of costs from the
acquisition of certain TELUS-branded wireless dealership businesses
throughout 2011, hiring over the past year to support the growing
wireless subscriber base, and compensation increases, as well as higher
employee-related restructuring costs.
-
Other G&A expenses decreased by $1Â million year over year in the first
quarter of 2012.
  Â
EBITDA - wireless segment  Â
  First quarters ended March 31
($ millions, except margins)Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
EBITDA Â Â Â Â Â Â Â Â Â 622Â Â Â Â Â Â Â 551Â Â Â Â Â Â Â 12.9Â %
EBITDA margin (%) Â Â Â Â Â Â Â Â Â 44.7Â Â Â Â Â Â Â 41.8Â Â Â Â Â Â Â 2.9Â pts.
The wireless segment EBITDA increased by $71Â million in the first
quarter of 2012 when compared to the same period in 2011. The increase
reflects strong data revenue growth, improved operating efficiency, as
well as lower acquisition and retention costs. The EBITDA margin
improved year over year, as revenue grew by 5.8% and total expenses
increased by less than one per cent.
5.5 Wireline segment
Total wireline segment revenues increased by $26Â million in the first
quarter of 2012 when compared to the same period in 2011.
Operating revenues - wireline segment   Â
  First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
 Data service and equipment          700       619       13.1 %
 Voice local service          359       387       (7.2)%
 Voice long distance service          110       124       (11.3)%
 Other services and equipment          67       68       (1.5)%
Service and equipment revenues          1,236       1,198       3.2 %
Other operating income          12       25       (52.0)%
External operating revenues          1,248       1,223       2.0 %
Intersegment revenue          41       40       2.5 %
Total operating revenues          1,289       1,263       2.1 %
Service and equipment revenues increased year over year by $38Â million in the first quarter of 2012.
-
Data service and equipment revenues increased year over year by
$81Â million in the first quarter of 2012. The increase resulted
principally from: (i)Â continued strong subscriber growth in Optik TV
services, a $3 per month rate increase effective April 2011 for the
basic TV service subscribers not on rate protection plans, as well as
varying rate increases for theme package selections in April 2011 and
October 2011; (ii)Â increased data equipment sales to business
customers; (iii)Â increased Internet and enhanced data services due to
growth from implementation of large enterprise deals, the pull-through
effect of bundle offers including Optik High Speed services that enable
TELUS to win and retain subscribers, and a $2 per month rate increase
effective April 2011 for Internet subscribers not on rate protection
plans; (iv) increased health services revenues; and (v) higher managed
workplace revenues due to inclusion of a full quarter of consolidated
Transactel revenues in 2012 versus two months in 2011.
Wireline operating indicators  Â
  At March 31
(000s) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Internet subscribers      Â
 High-speed          1,257       1,183       6.3 %
 Dial-up          41       56       (26.8)%
 Total          1,298       1,239       4.8 %
TELUS TV subscribers          553       358       54.5 %
      Â
  First quarters ended March 31
(000s) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â ChangeÂ
Internet subscriber net additions (losses)Â Â Â Â Â Â
 High-speed          16       16       â" %
 Dial-up          (3)       (6)       50.0 %
 Total          13       10       30.0 %
TELUS TV subscriber net additions          44       44       â" %
TELUS provides Optik TV and Optik High Speed Internet services in B.C.,
Alberta and Eastern Quebec, as well as TELUS Satellite TV in B.C. and
Alberta. Net additions of high-speed Internet subscribers and TELUS TV
subscribers in the first quarter of 2012 were equal to the strong
results achieved in the first quarter of 2011 due to the enhanced
bundling capabilities and retention offers with Optik TV, as well as
continued service enhancements. Subscriber growth was constrained by
Shaw Communications Inc. increased use of heavily discounted promotions
in B.C. and Alberta early in the first quarter of 2012, before backing
off later in the quarter.
-
Voice local service revenue decreased year over year by $28Â million in
the first quarter of 2012. The decrease continues to reflect lower
basic access and enhanced voice service revenues caused by competition
for residential subscribers, the consequent decline in local
residential access lines and matching of competitive offers, service
bundle offers in deregulated urban markets, and technological
substitution to wireless and Internet-based services. The decrease also
reflects the decline in business voice lines from technological
substitution to data services and competitor activity including price
reductions. These factors were partly offset by increases in monthly
local rates effective in the third quarter of 2011.
Wireline operating indicators  Â
  At March 31
(000s) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Network access lines (NALs) Â Â Â Â Â Â
 Residential          1,868       2,013       (7.2)%
 Business          1,668       1,695       (1.6)%
 Total          3,536       3,708       (4.6)%
      Â
  First quarters ended March 31
(000s) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Net (losses) additions in NALs     Â
 Residential          (47)       (33)       (42.4)%
 Business          (10)       2       n/m   Â
 Total          (57)       (31)       (83.9)%
Residential NALs continue to be affected by wireless and Internet-based
technological substitution for local services, as well as promotional
activity by primary cable-TV competitors in B.C., Alberta and Eastern
Quebec. Residential NAL losses in the first quarter of 2012 increased
by 14,000 from the same period in 2011 and increased by 10,000 from the
fourth quarter of 2011, largely the result of heavily discounted home
phone promotions from Shaw in B.C. and Alberta early in the first
quarter of 2012.
TELUS provides business services nationally. Business NAL losses reflect
the continuing trend of increased competition in the SMB market and
conversion of voice lines to more efficient IP services, as growth in
data services such as private IP networks is not measured by business
NAL counts and conversion of legacy voice services to IP services
causes a decrease in business NALs. A higher rate of churn in wholesale
NALs was observed in the first quarter of 2012. In contrast, during the
first quarter of 2011 business NALs increase due to the implementation
of voice and data services for wholesale customers.
-
Voice long distance service revenue decreased year over year by
$14Â million in the first quarter of 2012. The decreases reflect ongoing
industry-wide price and bundling competition, losses of local
subscribers, and technological substitution to wireless and
Internet-based services.
Other operating income decreased year over year by $13Â million in the first quarter of 2012.
The decrease was mainly due to recognition of a $16Â million non-cash
gain on Transactel (Barbados) Inc. in the first quarter of 2011. In the
first quarter of 2012, the Company recorded a $1 million equity loss
related to the residential condominium redevelopment component of the
TELUS Garden real estate joint venture. These items were partly offset
by a drawdown of the price cap deferral account in 2012 to recognize
provisioning of broadband Internet service to a number of qualifying
rural communities.
Intersegment revenue represents services provided by the wireline segment to the wireless
segment and is eliminated upon consolidation together with the
associated expense in the wireless segment.
Operating expenses - wireline segment     Â
  First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Goods and services purchased          541       505       7.1 %
Employee benefits expense          361       323       11.8 %
Total operating expenses          902       828       8.9 %
Total wireline operating expenses increased by $74Â million in the first
quarter of 2012 when compared to the same period in 2011.
Goods and services purchased increased year over year by $36Â million in the first quarter of 2012.
The increase primarily reflects increased content and support costs for
TELUS TV growth (54% year-over-year increase in the subscriber base),
higher cost of goods sold to support increased equipment sales, and to
a lesser extent, increased advertising and promotions primarily
supporting Optik High Speed Internet and Optik TV marketing campaigns.
Employee benefits expense increased year over year by $38Â million in the first quarter of 2012.
The increase resulted from hiring over the past year to support the
growing TV subscriber base, one additional month of expenses in 2012
from the consolidation of Transactel operations, a lower employee
defined benefit pension recovery in 2012, management and bargaining
unit compensation increases, and increased employee-related
restructuring costs.
EBITDA - wireline segment Â
 First quarters ended March 31
($ millions, except margins) Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
EBITDA Â Â Â Â Â Â 387Â Â Â Â Â Â Â 435Â Â Â Â Â Â Â (11.0)%
Add back equity loss related to the residential component of the TELUS Garden real estate joint venture       1       â"       n/m   Â
Deduct Transactel gain       â"       (16)      n/m   Â
Adjusted EBITDA Â Â Â Â Â Â 388Â Â Â Â Â Â Â 419Â Â Â Â Â Â Â (7.4)%
Adjusted EBITDA margin (%) Â Â Â Â Â Â 30.1Â Â Â Â Â Â Â 33.6Â Â Â Â Â Â Â (3.5)Â pts.
The wireline segment EBITDA decreased by $48Â million in the first
quarter of 2012 when compared to the same period in 2011. Adjusted
EBITDA decreased year over year by $31Â million in the first quarter of
2012. Decreases in adjusted EBITDA and adjusted EBITDA margins continue
to reflect declines in higher margin legacy voice local and long
distance services, partly offset by ongoing growth in lower margin data
service and equipment sales.
6. Changes in financial position
     Â
Financial position at: ($ millions) Mar. 31,2012 Dec. 31, 2011 Changes Explanation of changes
Current assets     Â
Cash and temporary investments, net       68       46       22       48 %See Section 7: Liquidity and capital resources
Accounts receivable       1,406       1,428       (22)       (2)%Mainly a decrease in receivables from wireless dealers.
Income and other taxes receivable       10       66       (56)       (85)%Reflects refunds received and a reclassification to Income and other taxes payable.
Inventories       270       353       (83)       (24)%Primarily a decrease in wireless handsets and accessories due to a decrease in units on hand and lower average cost.
Prepaid expenses       228       144       84       58 %Primarily prepayment of statutory employee benefits and annual wireless licence fees.
Derivative assets       12       14       (2)       (14)%Fair value adjustments to restricted share units and other operational hedges.
Current liabilities     Â
Short-term borrowings       407       404       3       1 %Both periods include $400 million received by TELUS from the arm's-length securitization trust in respect of securitized trade receivables (see Section 7.6), as well as small draws on bank facilities.
Accounts payable and accrued liabilities      1,403       1,419       (16)       (1)%Includes a decrease in payroll and employee-related liabilities due to payment of variable pay for 2011 net of 2012 accruals, as well as a decrease in wireless accrued dealer commissions resulting from seasonally lower loading in the first quarter 2012, partly offset by increases in interest payable and commodity and other taxes payable.
Income and other taxes payable       329       25       304       n/m   Reflects differences in income tax expense and instalment payments including taxes on earnings of partnerships for fiscal periods ending in the quarter, as well as a reclassification from Income and other taxes receivable.
Dividends payable       387       188       199       106 %The March 31, 2012, balance includes $189 million in respect of the 58 cents per share first quarter dividend paid on April 2, 2012, and $198 million in respect of the 61 cents per share second quarter dividend declared on February 21, 2012, payable on July 3, 2012.
Advance billings and customer deposits       663       655       8       1 %Primarily an increase in advance billings to wireline business customers.
Provisions       72       88       (16)       (18)%Includes payment of amounts in dispute.
Current maturities of long-term debt       1,024       1,066       (42)       (4)%Repayment of $300 million, 4.5% Series CC TELUS Corporation Note that matured in March 2012, net of a $258 million increase in commercial paper.
Working capital 1 Â Â Â Â Â Â (2,291)Â Â Â Â Â Â (1,794)Â Â Â Â Â Â (497) Â Â Â Â Â Â (28)%Includes the effect of an early declaration of the second quarter dividend to be paid on July 3, 2012, and an increase in Income and other taxes payable.
Non-current assets     Â
Property, plant and equipment, net       7,985       7,964       21       â" %See Capital expenditures in Section 7.2 Cash used by investing activities and Depreciation in Section 5.3
Intangible assets, net       6,135       6,153       (18)       â" %See Capital expenditures in Section 7.2 Cash used by investing activities and Amortization in Section 5.3. Included in the balances for both periods are wireless spectrum licences of $4,867 million
Goodwill, net       3,661       3,661       â"       â" %â"
Real estate joint venture       14       â"       14       n/m    See Section 7.10 Transactions between related parties.
Other long-term assets       127       81       46       57 %Includes deferred costs related to the TELUS Garden project and reclassification of $27 million from Other long-term pension liabilities.
Investments       21       21       â"       â" %â"
Non-current liabilities     Â
Provisions       122       122       â"       â" %â"
Long-term debt       5,509       5,508       1       â" %â"
Other long-term liabilities       1,040       1,343       (303)       (23)%Primarily a decrease in pension and post-retirement liabilities resulting from funding and actuarial gains.
Deferred income taxes       1,352       1,600       (248)       (16)%Includes deferred income tax recovery for the current period arising from reversal of temporary differences net of deferred income taxes related to unrealized gains and losses on derivatives and pension plan liabilities.
Owners' equity     Â
Common Share and Non-Voting Share equity      7,629       7,513       116       2 %Principally Net income of $348 million and Other comprehensive income of $153 million, less two quarterly dividend declarations totalling $387 million.
1Â Â Â Â Â Current assets subtracting Current liabilities.
7. Liquidity and capital resources
The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of the MD&A.
The Company's capital structure financial policies, financing plan and
results are described in Section 4.3. In the normal course, the Company has generated annual cash flow from
operations exceeding annual capital investment needed to support
business growth and re-invest in technology.
Summary information - Consolidated statements of cash flows Â
    First quarters ended March 31
($ millions) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Cash provided by operating activities          763       454       68.1 %
Cash used by investing activities          (514)       (516)       0.4 %
Cash (used) provided by financing activities          (227)       68       n/m   Â
Increase (decrease) in cash and temporary investments, net       22       6       â"Â
Cash and temporary investments, net, beginning of period       46       17       â"Â
Cash and temporary investments, net, end of period       68       23       195.7 %
7.1 Cash provided by operating activities
Cash provided by operating activities increased by $309Â million in the
first quarter of 2012 when compared to the same period in 2011,
primarily due to the following:
Analysis of changes in cash provided by operating activities
($ millions) Â
Cash provided by operating activities, Three-month period ended March 31, 2011 Â Â Â Â Â Â 454Â
Year-over-year changes: Â
 Lower employer contributions to defined benefit plans, net of employee defined benefits plans expense      127Â
 Non-recurring rebates to residential subscribers in 2011       53Â
 Higher adjusted EBITDA (see Section 5.4 Wireless segment and Section 5.5 Wireline segment)       40Â
 Lower restructuring disbursements net of restructuring costs       25Â
 Lower income taxes paid, net of recoveries received       18Â
 Other working capital changes       46Â
Cash provided by operating activities, Three-month period ended March 31, 2012 Â Â Â Â Â Â 763Â
-
Employer contributions to defined benefit plans, net of defined benefits
plans expense, decreased due mainly to lower discretionary
contributions ($100Â million in January 2012 versus $200Â million in
January 2011).
-
Non-recurring rebates were made in 2011, determined in accordance with CRTC Telecom Decision 2010-639, in respect of the price cap deferral account. Payment of the rebates
did not affect 2011 Net income because these amounts recorded in the
price cap deferral account did not previously receive income statement
recognition.
-
Restructuring disbursements net of restructuring costs decreased as the
size of restructuring initiatives decreased since 2010.
-
Income taxes paid, net, decreased due to higher first quarter refunds
received and lower final payments required on prior year's taxes.
7.2 Cash used by investing activities
Cash used by investing activities decreased by $2Â million in the first
quarter of 2012 when compared to the same period in 2011, as higher
capital expenditures in 2012 and other investments, including
$15Â million invested in the TELUS Garden real estate joint venture,
were largely offset by non-cash investing working capital changes. In
the first quarter of 2012, the Company made business acquisitions and
related investments including 100% ownership of a business
complementary to the Company's existing lines of business.
Total capital expenditures increased by $32Â million in the first quarter
of 2012 when compared to the same period in 2011. The capital intensity
level in the first quarter of 2012 was one percentage point higher than
the comparable period in 2011 mainly due to coverage expansion of the
wireless urban 4G LTE network. Adjusted EBITDA less capital
expenditures increased by $8Â million in the first quarter of 2012 when
compared to the same period in 2011.
Capital expenditures  Â
    First quarters ended March 31
($ millions, except capital intensity) Â Â Â Â Â Â Â Â Â 2012Â Â Â Â Â Â Â 2011Â Â Â Â Â Â Â ChangeÂ
Wireless segment          151       76       98.7 %
Wireline segment          290       333       (12.9)%
Total capital expenditures          441       409       7.8 %
Adjusted EBITDA less capital expenditures1Â Â Â Â Â Â Â Â Â 569Â Â Â Â Â Â Â 561Â Â Â Â Â Â Â 1.4Â %
Capital intensity2 (%) Â Â Â Â Â Â Â Â Â 17Â Â Â Â Â Â Â 16Â Â Â Â Â Â Â 1Â pt.
1See Section 11.1Â EBITDA for the calculation and description.
2Capital intensity is calculated as 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.
-
Wireless segment capital expenditures increased by $75Â million in the first quarter of 2012 when compared to
the same period in 2011, principally due to expansion of coverage of
TELUS' urban 4G LTE network, on which services were first launched in
14 metropolitan areas in February 2012. The increase also included
investments in common network components to support growth.
Wireless capital intensity was 11% in the first quarter of 2012, up from
6% in the first quarter of 2011, while wireless cash flow (EBITDA less
capital expenditures) was $471Â million in the first quarter of 2012,
down $4Â million or less than 1% from the same period in 2011.
-
Wireline segment capital expenditures decreased by $43Â million in the first quarter of 2012 when compared to
the same period in 2011. The decrease was mainly due to a lower level
of broadband expansion activity following substantial completion of the
VDSL2 broadband overlay in 2011, partly offset by investments in new
Internet data centres.
Wireline capital intensity was 22% in the first quarter of 2012, down
from 26% in the first quarter of 2011. Wireline cash flow (adjusted
EBITDA less capital expenditures) was $98Â million in the first quarter
of 2012, up $12Â million or 14% from the same period in 2011.
7.3 Cash (used) provided by financing activities
Cash used by financing activities was $227Â million in the first quarter
of 2012, as compared to cash provided by operating activities of
$68Â million in the same period in 2011.
-
Cash proceeds received from Non-Voting Shares issued for the purchase of
options were $nil million in the first quarter of 2012 as compared to
$17Â million in same period in 2011.
-
Cash dividends paid in the first quarter of 2012 were $188 million, an
increase of $73 million when compared to the first quarter of 2011. The
increase included:
-
$19 million resulting mainly from a 10.5% higher dividend rate for the
dividend paid in January 2012 when compared to dividend paid in January
2011; and
-
The dividend payment reported on the cash flow statement in the first
quarter of 2011 was net of $54Â million for TELUS Non-Voting Shares
issued from treasury under the dividend reinvestment and share purchase
plan. For dividends declared after March 1, 2011, the Company switched
to purchasing TELUS Non-Voting Shares on the open market with no
discount, rather than issuing shares from treasury at a 3% discount,
which resulted in increased cash outflows for dividends paid on
April 1, 2011, and thereafter.
-
In March 2012, the Company repaid $300Â million for the matured TELUS
Corporation Series CC 4.5% Notes.
-
Changes in commercial paper, short-term borrowings and bank facilities
The Company often shifts among short-term financing sources to take
advantage of interest cost differentials. The Company's commercial
paper program provides low cost funds and is fully backed up by the
five-year committed credit facility. Short-term borrowings are
comprised primarily of amounts advanced to the Company from an
arm's-length securitization trust pursuant to transfer of receivables
securitization transactions (see Section 7.6 Sale of trade receivables).
-
Commercial paper increased by $258Â million in the first quarter of 2012,
as compared to an increase of $150Â million in the same period in 2011,
or a comparative increase of $108Â million in cash provided by
commercial paper issues. The increase in commercial paper in the first
quarter of 2012 partly offset repayment of $300Â million of matured
Notes. In comparison, the increase in commercial paper in the first
quarter of 2011 helped fund discretionary defined benefit pension plan
contributions and acquisitions.
-
The balance of changes in Short-term borrowings reflected changes in
amounts drawn on bank facilities, or a comparative reduction of
$19Â million.
-
Proceeds from securitized trade receivables were $400 million at
March 31, 2012, unchanged in the year and throughout 2011.
-
No amounts were drawn against the Company's five-year credit facility in
the first quarter of 2012 or throughout 2011. See Section 7.5Â Credit facilities.
7.4 Liquidity and capital resource measures
Net debt as at March 31, 2012, decreased by $136 million since March 31, 2011,
mainly due to maturities of long-term debt in June 2011 and March 2012,
partly offset by increased use of low-rate commercial paper and a
$600Â million five-year Note issue in May 2011, as well as an increase
in cash and decrease in short-term borrowings.
Total capitalization - book value at March 31, 2012, decreased by $629 million when compared to one year
earlier mainly due to a decrease in retained earnings as well as lower
Net debt. The decrease in retained earnings included a $740Â million
12-month other comprehensive loss resulting from employee defined
benefit plan actuarial losses that are never subsequently reclassified
to income. Such actuarial losses or gains are likely to fluctuate from
period to period.
Fixed rate debt as a proportion of total indebtedness was 80% at March 31, 2012, down from 91% one year earlier due to
increased use of low-rate commercial paper.
The average term to maturity of debt was 5.7 years at March 31, 2012, up from 5.4 years at March 31, 2011,
mainly to refinancing activities in the second quarter of 2011.
Liquidity and capital resource measures
As at, or 12-month periods ended, March 31 2012 2011 Change
Components of debt and coverage ratios1 ($Â millions) Â Â Â
Net debt       6,898       7,034       (136)
Total capitalization - book value2 Â Â Â Â Â Â 14,519Â Â Â Â Â Â Â 15,148Â Â Â Â Â Â Â (629)
EBITDA - excluding restructuring costs       3,845       3,771       74Â
Net interest cost       348       511       (163)
Debt ratios   Â
Fixed-rate debt as a proportion of total indebtedness (%) Â Â Â Â Â Â 80Â Â Â Â Â Â Â 91Â Â Â Â Â Â Â (11) pts.
Average term to maturity of debt (years) Â Â Â Â Â Â 5.7Â Â Â Â Â Â Â 5.4Â Â Â Â Â Â Â 0.3Â
Net debt to total capitalization1 2 (%) Â Â Â Â Â Â 47.5Â Â Â Â Â Â Â 46.4Â Â Â Â Â Â Â 1.1 pts.
Net debt to EBITDA - excluding restructuring costs1 Â Â Â Â Â Â 1.8Â Â Â Â Â Â Â 1.9Â Â Â Â Â Â Â (0.1)
Coverage ratios1 (times) Â Â Â
Earnings coverage       5.4       3.8       1.6Â
EBITDA - excluding restructuring costs interest coverage       11.0       7.4       3.6Â
Other 12-month trailing measures   Â
Free cash flow3 ($ millions) Â Â Â Â Â Â 1,193Â Â Â Â Â Â Â 854Â Â Â Â Â Â Â 339Â
Dividend payout ratio of adjusted net earnings1 (%) Â Â Â Â Â Â 63Â Â Â Â Â Â Â 62Â Â Â Â Â Â Â 1 pt.
Dividend payout ratio1 (%) Â Â Â Â Â Â 61Â Â Â Â Â Â Â 61Â Â Â Â Â Â Â â"Â
1     See Section 11.4 Definitions of liquidity and capital resource measures.
2     Figures for the 12-month period ended March 31, 2011, have been revised from those originally reported, as a result of a retrospective reclassification between accumulated other comprehensive income and retained earnings, effected in the third quarter of 2011.
3     See Section 11.2 Free cash flow for the definition.
Earnings coverage for the twelve-month period ended March 31, 2012, was 5.6 times, up
from 3.8Â times one year earlier. Lower gross interest expenses
increased the ratio by 1.5, while increased income before gross
interest and income taxes increased the ratio by 0.1.
The EBITDA - excluding restructuring costs interest coverage ratio for the twelve-month period ended March 31, 2012, was 11.0 times,
up from 7.4Â times one year earlier. Lower net interest costs increased
the ratio by 3.5, while higher EBITDA before restructuring costs
increased the ratio by 0.1.
Free cash flow for the twelve-month period ended March 31, 2012, increased by
$339 million or 40% from the twelve-month period ended March 31, 2011.
The increase was mainly due to lower contributions to defined benefit
plans including lower discretionary contributions, higher adjusted
EBITDA, and lower paid interest due to a lower effective interest rate
resulting from refinancing activities in 2010 and 2011, partly offset
by increased capital expenditures.
TELUS long-term financial policies and guidelines
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, are expected to continue to
provide reasonable access to capital markets.
-
Net debt to EBITDA - excluding restructuring costs of 1.5 to 2.0 times
The ratio was remained within the guideline at 1.8 times at March 31,
2012.
-
Dividend payout ratio target guideline of 55 to 65% of sustainable net
earnings
The target guideline is on a prospective basis, rather than on a
trailing basis. The payout ratio is seen as appropriate to the
Company's current expectations for earnings, cash flow and capital
expenditure investments.
7.5 Credit facilities
TELUS Corporation has a $2Â billion (or U.S. dollar equivalent) revolving
credit facility with a syndicate of 15 financial institutions that
expires on November 3, 2016. The credit facility is used for general
corporate purposes including the backstop of commercial paper.
At March 31, 2012, TELUS had available liquidity of over $1.0 billion
from unutilized credit facilities, as well as availability of
$100 million under its trade receivables securitization program (see Section 7.6), consistent with the Company's objective of generally maintaining at
least $1Â billion of available liquidity.
TELUS credit facilities at March 31, 2012
      Â
($ in millions) Expiry Size Drawn Outstanding undrawn letters of creditBackstop for commercial paper programAvailable liquidity
Five-year revolving facility 1November 3, 2016Â Â Â Â Â Â 2,000Â Â Â Â Â Â Â â"Â Â Â Â Â Â Â â"Â Â Â Â Â Â Â (1,024) Â Â Â Â Â Â 976Â
Other bank facilities â" Â Â Â Â Â Â 165Â Â Â Â Â Â Â (7) Â Â Â Â Â Â (115) Â Â Â Â Â Â â"Â Â Â Â Â Â Â 43Â
Total â"Â Â Â Â Â Â 2,165Â Â Â Â Â Â Â (7) Â Â Â Â Â Â (115) Â Â Â Â Â Â (1,024)Â Â Â Â Â Â 1,019Â
1Â Â Â Â Â Canadian dollars or U.S. dollar equivalent.
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 1.8 to 1 at March 31, 2012) and not permit its
consolidated Coverage Ratio (EBITDA to interest expense on a trailing
12-month basis) to be less than 2 to 1 (approximately 11.0 to 1 at
March 31, 2012) at the end of any financial quarter. There are certain
minor differences in the calculation of the Leverage Ratio and Coverage
Ratio under the credit agreements as compared with the calculation of Net debt to EBITDA - excluding restructuring costs and EBITDA - excluding restructuring costs interest coverage. Historically, the calculations have not been materially different. The
covenants are not impacted by revaluation of property, plant and
equipment, intangible assets or goodwill for accounting purposes.
Continued access to TELUS' credit facilities is not contingent on the
maintenance by TELUS of a specific credit rating.
7.6 Sale of trade receivables
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 Canadian bank, under which TCI is
able to sell an interest in certain of its trade receivables, for an
amount up to a maximum of $500Â million. The term of the revolving
period securitization agreement expires on August 1, 2014.
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 as of May 9, 2012.
7.7 Credit ratings
There were no changes to the Company's investment grade credit ratings
as of May 9, 2012.
7.8 Financial instruments, commitments and contingent liabilities
Financial instruments
The Company's financial instruments and the nature of risks that they
may be subject to were described in TELUS' annual 2011 MD&A.
Commitments and contingent liabilities
TELUS Garden
See Transactions with real estate joint venture in Section 7.10.
Claims and lawsuits
A number of claims and lawsuits (including class actions) seeking
damages and other relief are pending against the Company. As well, the
Company has received or is aware of certain potential claims (including
intellectual property infringement claims) against the Company and, in
some cases, numerous other wireless carriers and telecommunications
service providers. In some instances, the matters are at a preliminary
stage and the potential for liability and magnitude of potential loss
currently cannot be readily determined. It is impossible at this time
for the Company to predict with any certainty the outcome of any such
claims, potential claims and lawsuits. However, subject to the
foregoing limitations, management is of the opinion, based upon legal
assessment and information presently available, that it is unlikely
that any liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's financial
position and the results of its operations, excepting the items
disclosed in Note 22 of the Condensed interim consolidated financial
statements.
7.9 Outstanding share information
The total number of outstanding and issuable shares at March 31, 2012,
as shown in the following table, assumes full conversion of outstanding
options and shares reserved for future option grants.
Outstanding shares   Â
At March 31, 2012 (millions) Common Shares Non-VotingShares Totalshares
Common equity   Â
 Outstanding shares outstanding       174.9      150.4      325.31
 Options outstanding and issuable2      â"        27.4       27.4
 Outstanding and issuable shares       174.9      177.8       353.7
1     For the purposes of calculating diluted earnings per share, the number of shares was 327.0 million for the three-month period ended March 31, 2012.
2Â Â Â Â Â Assuming full conversion and ignoring exercise prices.
7.10 Transactions between related parties
Investments in significant controlled entities
At March 31, 2012, TELUS Corporation ultimately controls 100% of the
equity of TELUS Communications Inc., which in turn ultimately controls
100% of the equity of TELUS Communications Company and TELE-MOBILE
COMPANY. This is unchanged from December 31, 2011.
Transactions with key management personnel
Key management personnel have authority and responsibility for planning,
directing and controlling the activities of the Company, and consist of
the Company's Board of Directors and the Company's Executive Leadership
Team. Total compensation expense amounts for key management personnel
for the three-month periods ended March 31, 2012 and 2011, were
$9 million and $7 million, respectively. See Note 23 of the Condensed
interim consolidated financial statements for additional detail.
Transactions with defined benefit pension plans
The Company provided management and administrative services to its
defined benefit pension plans. The charges for these services were on a
cost recovery basis and were immaterial to the Company. The Company
also made employer contributions to defined benefit plans as discussed
in Section 7.1.
Transactions with real estate joint venture (TELUS Garden)
In the first quarter of 2011, the Company announced that it partnered,
as equals, with an arm's-length party in a residential condominium,
retail and commercial real estate redevelopment project, TELUS Garden,
in Vancouver, British Columbia. The project will result in the Company
having a new national headquarter premises. The new-build office tower,
scheduled for completion in 2014, is to be built to the 2009 leadership
in energy and environmental design (LEED) platinum standard and the
new-build residential condominium tower, scheduled for completion in
2015, is to be built to the LEED gold standard. The residential tower
was successfully marketed and construction is expected to begin in the
second quarter of 2012.
During the three-month period ended March 31, 2012, the Company had
transactions with the real estate joint venture, which is a related
party, as set out in Note 17(b) of the Condensed interim consolidated
financial statements. Commitments and contingent liabilities for the
real estate joint venture are set out in Note 17(c) of the Condensed
interim consolidated financial statements, including the following:
Construction commitment
The real estate joint venture is expected to spend a combined total of
approximately $470Â million on the construction of an office tower and a
residential condominium tower. Construction activity has commenced on
the office tower and is to commence on the residential condominium
tower in the second quarter of 2012. As at March 31, 2012, the real
estate joint venture's contractual commitments for construction were
$152Â million through to 2014.
Operating leases
In the first quarter of 2012, the Company entered into an operating
lease for its new national headquarter premises with the real estate
joint venture, at market rates. Operating lease payments for the
20-year term total of $230Â million, including occupancy costs of
$91Â million.
Construction credit facilities
In the first quarter of 2012, the real estate joint venture received
financing commitments from two Canadian financial institutions in
connection with the TELUS Garden project. TELUS Corporation plans to
participate as a 50% lender in the construction credit facilities
which, once fully documented and all conditions of funding having been
satisfied, will provide a combined total of $413Â million of liquidity
to the real estate joint venture. The facilities contain customary
representations, warranties and covenants and will be secured by demand
debentures constituting first fixed and floating charge mortgages over
the two underlying real estate projects; the facilities will bear
interest at bankers' acceptance rate or prime rate, plus applicable
margins. As at May 9, 2012, no amounts had been advanced under the
facilities.
8. Critical accounting estimates and accounting policy developments
8.1 Critical accounting estimates
Critical accounting estimates are described Section 8.1 in TELUS' annual
2011 MD&A. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates, assumptions and judgements that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
8.2 Accounting policy developments
Real estate joint venture
The Company accounts for its interest in the real estate joint venture
using the equity basis of accounting whereby the investment is
initially recorded at cost and subsequently adjusted to recognize the
Company's share of earnings or losses of the real estate joint venture
and earnings distributed.
Standards, interpretations and amendments not yet effective and not
applied
IASÂ 19, Employee Benefits (amended 2011)
Relative to the Company's current accounting policies and presentation
and disclosure practices, the key difference in the amended standard is
that the expected long-term rate of return on plan assets will no
longer be used for defined benefit plan measurement purposes (and thus
will no longer be a significant estimate). In the determination of net
income in the Company's instance, the effect is that the defined
benefit plan expense concepts of "interest cost" and "return on plan
assets" will be replaced with the concept of "net interest." Net
interest for each plan is the product of the plan's surplus (deficit)
multiplied by the discount rate. Unchanged is that the amended standard
does not prescribe where in the results of operations the net interest
amount is to be presented, but the Company expects that it will present
such amount as a component of financing costs upon application of the
amended standard.
As the Company's current view, consistent with long-term historical
experience, is that the expected long-term rate of return on plan
assets would exceed the discount rate (a result of targeting a
significant percentage of the defined benefit plan assets to be
invested in equity securities), the relative effect of the amended
standard is expected to be a decrease in net income and associated per
share amounts. The variance, if any, between the actual rate of return
on defined benefit plan assets and the discount rate, as well as
related effects from the limit on defined benefit assets, if any, would
be included in other comprehensive income as a re-measurement. The
amended standard is not expected to affect the Company's statement of
financial position or the statement of cash flows.
The amended standard affects the Company's Consolidated statements of
income and other comprehensive income, including a decrease in Net
income of $29Â million for the first quarter of 2012 and $24Â million for
the first quarter of 2011. Such decreases are offset by increased Other
comprehensive income. For further detail, see Note 2(c) of the
Condensed interim consolidated financial statements. The Company
currently expects to initially apply the amended standard for periods
beginning on or after January 1, 2013.
9. Annual guidance for 2012
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
The Company's 2012 targets and assumptions were originally announced on
December 16, 2011, in the Company's annual financial targets news
release and accompanying investor conference call and webcast. Guidance
is unchanged from original targets disclosed in the 2011 MD&A.
Guidance for 2012 (key performance measures)
 2012 full-year guidanceExpected change from 2011
Consolidated  Â
 Revenues $10.7 to $11.0 billion 3 to 6%
 EBITDA1 $3.8 to $4.0 billion 1 to 6%
 EPS - basic $3.75 to $4.15 0 to 10%
 Capital expendituresApprox. $1.85 billion â"
Wireless segment  Â
 Revenue (external) $5.75 to $5.9 billion 5 to 8%
 EBITDA $2.3 to $2.4 billion 5 to 10%
Wireline segment  Â
 Revenue (external) $4.95 to $5.1 billion 0 to 3%
 EBITDA $1.5 to $1.6 billion (6) to 1%
1Â Â Â Â Â A non-GAAP measure. See Section 11.1 EBITDA for the definition.
The following key assumptions were made at the time the 2012 targets
were announced in December 2011. The preliminary assumption for the
expected long-term return on defined benefit pension plan assets was
6.5% for the purposes of the targets announcement, and subsequently set
at 6.75%, as disclosed in TELUS' 2011 MD&A.
Assumptions for 2012 original targets Result to date or expectation for full year
Ongoing intense wireless and wireline competition in both business and consumer markets TELUS' lower total gross and net wireless additions in the first quarter of 2012 reflect heightened competitive intensity extended from the fourth quarter of 2011 including price competition and an increased number of promotional rate plan offers, port-in credits and in-store credits from both established national competitors and newer entrants. The Company experienced elevated residential NAL losses in the first quarter of 2012, resulting from Shaw Communications introduction of heavily discounted home phone, high-speed Internet and cable-TV promotions in Alberta and B.C. that were introduced in November 2011 and increased into early 2012, and then backed off later in the quarter. Subsequently, Shaw announced a price increase for their home phone service, as well as for certain Internet and TV plans. Business NAL losses in the first quarter of 2012 continue to reflect increased competition in the SMB market, as well as technological substitution of voice lines for more efficient IP services.
Continued downward re-pricing of legacy services Wireless and wireline voice service revenues continue to decline due to price competition and technological substitution to data and IP services. Wireless voice revenue decreased year over by 5.6% in the first quarter of 2012, resulting from a 10% decline in voice ARPU. Wireline local and long distance revenues declined year over year by 7.2% and 11%, respectively, in the first quarter of 2012.
Wireless industry penetration of the Canadian population to increase between 4.0 and 4.5 percentage points, with wireless industry subscriber growth to remain robust due to a combination of increased competition and accelerated adoption of smartphones, tablets and data applications The expectation is unchanged. Wireless subscriber growth is typically highest in the second half of the calendar year.
TELUS wireless domestic voice ARPU erosion offset by increased data and international roaming ARPU growth Management's original expectation was for slightly positive growth in blended ARPU. Wireless blended ARPU increased year over year by 1.7% in the first quarter of 2012, as a 29% increase in data ARPU more than offset the 10% decline in voice ARPU. Roaming revenues have increased.
Wireless acquisition and retention expenses to increase due to increased loading of more expensive smartphones, including upgrades, and to support a larger subscriber base Acquisition and retention expenses were $270Â million in the first quarter of 2012, or a decrease of $13M when compared to the first quarter of 2011. The decrease reflects lower acquisition and retention volumes, resulting from intense competitive activity and successful retention efforts throughout 2011. The expectation for the full year is for increased acquisition and retention expenses. Smartphones represented 68% of postpaid gross subscriber additions in the first quarter of 2012, as compared to 54% in the first quarter of 2011.
Ongoing investments for deployment of LTE wireless technology in urban markets In February 2012, the Company launched LTE services in 14 metropolitan areas.
Wireline data revenue growth greater than legacy revenue declines due to continued wireline broadband expansion and upgrades supporting Optik TV and Optik High Speed Internet subscriber sales. Legacy revenue declines reflect continued erosion in network access lines and long distance revenueConfirmed by results in the first quarter of 2012. Wireline data revenue increased by 13% year over year, which exceeded the aggregate 8.2% year-over-year decline in voice local and long distance revenues. TELUS TV net additions of 44,000 and high-speed Internet net additions of 16,000 during the first quarter of 2012, offset the 57,000 decline in total NALs and 3,000 decline in dial-up Internet subscriptions.
Approximately $25Â million in restructuring costs to support operating and capital efficiency initiatives, supplemented by value-for-money initiatives to improve efficiency and effectiveness that do not involve restructuring charges Initiatives expected to impact restructuring costs are currently estimated at approximately $50Â million for the full year.
Financing costs of approximately $350Â million ($377Â million in 2011) Expectation unchanged. Financing costs of $75Â million for the first quarter of 2012 included $10Â million interest income from the settlement of prior years' tax matters and $4Â million foreign exchange gains.
Blended statutory income tax rate of approximately 25 to 26% (27.2% in 2011) The expected elimination of previously enacted Ontario corporate income tax rate reductions does not affect the assumption significantly. For the first quarter of 2012, the statutory income tax rate was 25.7% and the effective income tax rate was 25.0%.
Cash income taxes of approximately $150 to $200 million ($150 million in 2011). Expectation unchanged. Cash income taxes paid net of recoveries received were $48 million in the first quarter of 2012, comprised of final payments in respect of the 2011 tax year, instalments for 2012 net of refunds received.
A pension accounting discount rate was set at 4.5% (75 basis points lower than 2011) and the long-term return was set at 6.75% (25 basis points lower than 2011) Expectation unchanged.
A discretionary one-time pension contribution of $100Â million to be made in early 2012 (a discretionary one-time contribution of $200Â million was made in January 2011) The discretionary $100Â million contribution was made in January 2012.
10. Risks and risk management
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the MD&A.
10.1 Regulatory matters
The following are updates to the Section 10.3 Regulatory matters in TELUS' annual 2011 MD&A.
Future availability and cost of wireless spectrum
On March 14, 2012, the federal government announced the rules for two
spectrum auctions, as well as changes to foreign ownership restrictions
(see Foreign ownership restrictions below). Industry Canada plans to auction spectrum in the 700Â MHz band
in the first half of 2013, to be followed by an auction for spectrum in
the 2.5/2.6Â GHz bands in 2014.
The spectrum auction rules set a 10Â MHz cap on the amount of prime
700Â MHz spectrum any individual bidder can acquire. TELUS began urban
construction of a wireless 4G LTE network in the second half of 2011
and launched services on this network in February 2012 using the
Company's AWS spectrum acquired in 2008. Any potential roll-out of 4G
LTE wireless service to rural markets is dependent on an equitable
opportunity for TELUS to bid on and acquire 700Â MHz spectrum in the
planned auction. Spectrum in the 700Â MHz range has superior propagation capabilities that make it effective and
efficient in covering Canada's expansive rural geography. In addition,
these same capabilities improve the quality of in-building coverage in
urban areas.
In addition to establishing rules for the 700 MHz auction, the Industry
Canada also announced its intent to auction spectrum at 2500-2690 MHz
in 2014. This spectrum is prime spectrum for LTE in urban locations.
Currently most of this spectrum is held by Rogers and Bell through the
Inukshuk partnership for fixed broadband. Under the auction rules all
carriers will be limited by a 40 MHz cap on bidding on this spectrum.
Since Bell and Rogers already control substantial blocks of this
spectrum their ability to bid in the auction will be restricted absent
any divestment of existing blocks. For TELUS, the cap provides an
opportunity to significantly increase its spectrum holdings for LTE
should it succeed in acquiring spectrum. However there is no guarantee
TELUS will acquire all of the spectrum it might seek under the cap.
There are also risks that Rogers or Bell will gain competitive
advantage by launching LTE in these bands in 2012 using their existing
allocation to gain a head start in this band.
As outcome of these future auctions are unknown, the capital outlay
required to bid successfully and the amounts of spectrum that may
ultimately be secured in each region are uncertain.
Foreign ownership restrictions
TELUS and its subsidiaries are subject to the foreign ownership
restrictions imposed by the Telecommunications Act, the Radiocommunication Act and the Broadcasting Act and associated regulations. Although the Company believes that TELUS
Corporation and its subsidiaries are in compliance with the relevant
legislation, there can be no assurance that a future CRTC, Industry
Canada or Heritage Canada determination, or events beyond TELUS'
control, will not result in TELUS ceasing to comply with the relevant
legislation. If such a development were to occur, the ability of TELUS'
subsidiaries to operate as Canadian carriers under the Telecommunications Act or to maintain, renew or secure licences under the Radiocommunication Act and Broadcasting Act could be jeopardized and TELUS' business could be materially adversely
affected.
TELUS and certain of its subsidiaries must comply with the restrictions
on ownership of voting shares by non-Canadians prescribed by Canadian
laws, namely the Canadian Telecommunications Common Carrier Ownership and Control
Regulations, the Telecommunications Act (The Telecommunications Regulations), the Broadcasting Act and the Radiocommunication Act. Specifically, to maintain the eligibility of certain of its
subsidiaries that are Canadian common carriers under these laws, the
level of non-Canadian ownership of the Company's common shares cannot
exceed 33â
" per cent and TELUS must not otherwise be controlled by
non-Canadians. The Telecommunications Regulations give the Company,
which is a carrier-holding corporation of Canadian common carriers,
certain powers to monitor and control the level of non-Canadian
ownership of voting shares. The powers and constraints of the
Telecommunications Regulations have been incorporated into TELUS'
Articles and were extended to also ensure compliance under both the Radiocommunication Act and the Broadcasting Act. These powers include the right to: (i) refuse to register a transfer
of voting shares to a non-Canadian; (ii) require a non-Canadian to sell
any voting shares; (iii) convert voting shares to non-voting shares;
and (iv) suspend the voting rights attached to the voting shares in
inverse order of registration.
TELUS regularly monitors non-Canadian transfers and non-Canadian
ownership levels of its voting shares. The Company observed and
announced on March 22, 2012, that there was significant buying interest
by non-Canadians in TELUS Common Shares since the announcement of a
proposed share conversion (see Proposed share conversion in Section 1.3), as there was a 20 per cent increase in non-Canadian ownership of the
Common Shares. Accordingly TELUS had to restrict approval of
reservation applications for the transfer of Common Shares into
non-Canadian shareholders so as to remain compliant with the ownership
limits.
Share consolidation
On May 8, 2012, the Company announced it was withdrawing the plan of
arrangement to convert each Non-Voting Share into a Common Share on a
one-for-one basis, as set out in its 2012 Information Circular. The
Company intends to reintroduce a new proposal in due course. There is
no assurance that a new share consolidation proposal will be
introduced, when it may be introduced, what its terms may be or whether
such proposal would be successful in obtaining a favourable shareholder
vote. The market price of Non-Voting Shares and/or Common Shares may
decline, given that share prices in both classes increased following
announcement of the proposal.
Changes to foreign ownership restrictions for small common carriers
On March 14, 2012, the federal government announced that it will lift
foreign ownership restrictions on telecommunications common carriers
with a 10% or lower revenue market share. TELUS anticipates that that
proposed amendments to the Telecommunications Act will receive Royal Assent by late June 2012. This will give the small
wireless newer entrants the opportunity to raise foreign capital to
fund their network construction, operating losses and spectrum bids in
2013 and/or 2014. TELUS is hopeful these changes to foreign ownership
limits provided by the Government are a first step towards full
liberalization of restrictions across the industry.
Broadcasting distribution undertakings
TELUS holds licences from the CRTC to operate terrestrial broadcasting
distribution undertakings to serve various communities in B.C. and
Alberta (renewed in 2009 for a second full seven-year term), and in
Eastern Quebec (renewed in 2011 for a second full seven-year term).
TELUS also holds a licence to operate a national video-on-demand (VOD)
undertaking that is in the process of being renewed). The Company's
strategy is to aggregate, integrate and make accessible content and
applications for customers' enjoyment. The Company does not believe it
is necessary to own content.
The broadcasting landscape has undergone significant consolidation with
the acquisition by Shaw of the programming services of Canwest Global
(a transaction approved by the CRTC in October 2010), the acquisition
by BCE of control of the programming services of CTVglobemedia (a
transaction approved by the CRTC in March 2011) and the acquisition by
BCE of Astral Media announced in March 2012 (pending approval). As
well, Rogers Communications and Quebecor continue to own content
assets.
Given the potential for anti-competitive behaviour in a more vertically
integrated broadcasting market environment, the CRTC launched a policy
hearing in June 2011 to consider what safeguards might be necessary to
ensure healthy competition in the broadcasting sector. On September 21,
2011, the CRTC issued Broadcasting Regulatory Policy CRTC 2011-601 (Regulatory framework relating to vertical integration) that set clear safeguards to ensure competition. The decision applies
to companies that own both broadcasting content and broadcasting
distribution assets. TELUS is a member of the Canadian Independent
Distributors Group, which filed a request for dispute resolution of
specialty TV services controlled by Bell Media Inc. On April 5, 2012,
in Broadcasting Decision CRTC 2012-208, the CRTC set out its determinations and expectations relating to: the
packaging of programming services so that consumer choice is enhanced
while ensuring that the objectives set out in the Broadcasting Act are fulfilled; pricing incentives; making non-linear rights available
on commercially reasonable terms; and a final offer arbitration process
to set rates. The CRTC also indicated its preference for the parties to
arrive at a commercially negotiated agreement, prior to final offer
arbitration.
Absent the enforcement of safeguards determined in Broadcasting Regulatory Policy CRTC 2011-601, there is a potential risk that vertically integrated competitors,
owning both broadcast content and broadcasting distribution assets,
could unfairly raise programming costs of non-vertically integrated
companies such as TELUS, and/or attempt to withhold content on new
media platforms (Internet and mobile platforms), or otherwise
disadvantage TELUS in attracting and retaining wireless or Optik TV
customers. These regulatory safeguards improve the bargaining position
of non-vertically integrated companies, such as TELUS, for new content.
However, there can be no assurance that the new regulatory safeguards
will be fully effective.
Provincial consumer protection legislation / National wireless services
consumer code
A number of provinces have introduced, or plan to introduce, amendments
to consumer protection legislation that directly or indirectly affect
the terms and conditions of providing wireless services. As the rules
are not harmonized, they create risks of significant compliance costs
for TELUS and other wireless providers. In addition, Rogers
Communications requested that the CRTC establish an interconnection
steering committee process to develop and implement a national wireless
services consumer code, and certain consumer groups have asked the CRTC
to prevent wireless services providers from charging for services after
the consumer ports to another wireless provider. TELUS provided
comments in respect of these applications and supports the
establishment of a national wireless services code.
On April 4, 2012, the CRTC issued Telecom Notice of Consultation CRTC 2012-206, calling for comments and establishing a proceeding, so that it may
consider what form of intervention, if any, may be appropriate with
respect to retail wireless services, in light of the Commission's
forbearance from regulation of the wireless industry and the federal
government's policy direction to the CRTC to rely on market forces to
the maximum extent possible.
Risk mitigation for regulatory matters: TELUS generally advocates a regulatory environment in telecommunications
that relies on market forces to the greatest extent possible, rather
than regulatory intervention. TELUS supports the establishment of a
national wireless services consumer code to reduce compliance costs and
standardize the terms and conditions of service. In the case of the
distribution of broadcasting content, TELUS supports a symmetrical
regime under the Broadcasting Act that ensures all Canadian consumers continue to have equitable access
to broadcast content irrespective of the distributor or platform they
choose. TELUS believes that, as long as content is regulated to achieve
cultural objectives, this is in the best interest of all carriers and
their customers.
In respect of foreign ownership restrictions, TELUS does not oppose the
removal of foreign ownership restrictions in telecommunications, or on
the distribution of content, provided that liberalization is
implemented on a fair and symmetrical basis for all telecommunications
carriers and broadcast distribution undertakings.
10.2 Human resources
The following are updates to the Section 10.4 Human resources in TELUS' annual 2011 MD&A.
Collective bargaining
The collective agreement between TELUS and the Syndicat des agents de
maîtrise de TELUS (SAMT), which covers approximately 510 professional
and supervisory employees in the TELUS Quebec operating region, expired
on December 31, 2011. Negotiations to renew this contract continue. In
any set of labour negotiations, there can be no assurance that the
negotiated compensation expenses or changes to operating efficiency
will be as planned and may result in unanticipated increased costs
and/or reduced productivity. In addition, there can be no assurance
that reduced productivity and work disruptions will not occur during
the course of collective bargaining prior to settlement and
ratification.
Risk mitigation: A governance model is in place to ensure the financial and operating
impact of any proposed terms of settlement are assessed and determined
to be aligned with TELUS' strategic direction. Any potential need to
continue operations in response to work disruptions has been addressed
through extensive contingency planning and emergency operations plans.
Though the Company has built and validated emergency operations plans,
there can be no assurance that all potential issues have been planned
for or that the contingencies planned for will manifest in exactly the
same fashion as tested. As a result, there is risk that increased costs
or disruptions may still occur.
10.3 Process risks
The following are updates to the Section 10.5 Process risks in TELUS' annual 2011 MD&A.
Real estate joint venture
Risks associated with the real estate joint venture include possible
construction-related cost overruns, financing risks, reputational risks
and, for the commercial component of the joint venture, leasing
occupancy risks.
Risk mitigation: TELUS has established two joint ventures with subsidiaries of Westbank
Holdings Ltd., a leading developer of large commercial and real estate
projects, to develop the TELUS Garden project. Westbank brings
considerable expertise in the successful management of development
projects of the scope and scale of TELUS Garden. The residential
condominium project has been substantially pre-sold prior to the
commencement of construction. The commercial development obtained
significant lease commitments from TELUS and another major tenant prior
to its construction commencing. The success of the commercial project
will be dependent on the extent of additional lease commitments
obtained in the future, the future leasing market in terms of demand
for space and rates in Vancouver for high quality commercial office
space, as well as possible construction cost over-runs. Budget overrun
risks for both the residential and commercial projects are mitigated
through the use of fixed-price supply contracts, expert project
management oversight and insurance of certain risks. In its capacity as
lender to the project, TELUS has additional credit risks. There is no
assurance that the TELUS Garden project will be completed on budget or
on time or obtain lease commitments as planned. Accordingly, TELUS is
exposed to the risk of additional equity funding requirements or loss
on investment and loan amounts should the project's business plan not
be successfully realized, and reputational risks should the planned
high quality of the project not be realized.
11. Definitions and reconciliations
11.1 EBITDA (earnings before interest, taxes, depreciation and
amortization)
EBITDA does not have any standardized meaning prescribed by IFRS-IASB
and is therefore unlikely to be comparable to similar measures
presented by other issuers. EBITDA should not be considered an
alternative to Net income in measuring the Company's performance, nor
should it be used as an exclusive measure of cash flow. TELUS has
issued guidance on and reports EBITDA because it is a key measure that
management uses to evaluate performance of segments and the Company.
EBITDA - excluding restructuring costs is also utilized in measuring
compliance with debt covenants (see description in Section 11.4). EBITDA is a measure commonly reported and widely used by investors
and lending institutions as an indicator of a company's operating
performance and ability to incur and service debt, and as a valuation
metric.
The CICA's Canadian Performance Reporting Board defined standardized
EBITDA to foster comparability of the measure between entities.
Standardized EBITDA is an indication of an entity's capacity to
generate income from operations before taking into account management's
financing decisions and costs of consuming tangible and intangible
capital assets, which vary according to their vintage, technological
currency and management's estimate of their useful life. Accordingly,
standardized EBITDA comprises revenue less operating costs before
interest expense, capital asset amortization and impairment charges,
and income taxes.
As in 2012 and 2011, an adjusted EBITDA may also be calculated
periodically to exclude items of an unusual nature that do not reflect
normal or ongoing telecommunications operations, that should not be
considered in a valuation metric or should not be included in
assessment of ability to service or incur debt.
EBITDA reconciliation  Â
 First quartersended March 31
($ millions) 2012 2011
Net income       348       328Â
Financing costs       75       104Â
Income taxes       116       110Â
Depreciation       343       332Â
Amortization of intangible assets       127       112Â
Impairment losses (reversals) for capital assets       â"       â"Â
EBITDA (standardized EBITDA in CICA guideline) Â Â Â Â Â Â 1,009Â Â Â Â Â Â Â 986Â
Add back equity loss related to the residential component of the TELUS Garden real estate joint venture       1       â"Â
Deduct non-cash gain on 51% interest in Transactel (Barbados) Inc. re-measured at acquisition-date fair value       â"       (16)
Adjusted EBITDA Â Â Â Â Â Â 1,010Â Â Â Â Â Â Â 970Â
Management also 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.
Calculation of EBITDA less capital expenditures   Â
  First quartersended March 31
($ millions) Â 2012 2011
EBITDA Â Â Â Â Â Â Â 1,009Â Â Â Â Â Â Â 986Â
Capital expenditures        (441)      (409)
EBITDA less capital expenditures        568       577Â
Add back equity loss related to the residential component of the TELUS Garden real estate joint venture        1       â"Â
Deduct non-cash gain on 51% interest in Transactel (Barbados) Inc. re-measured at acquisition-date fair value       â"       (16)
Adjusted EBITDA less capital expenditures        569       561Â
11.2 Free cash flow
Free cash flow does not have any standardized meaning prescribed by
IFRS-IASB and should not be considered an alternative to the
Consolidated statements of cash flows. TELUS reports free cash flow
because it is a key measure used by management to evaluate the
Company's 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. Investors are cautioned that
free cash flow as reported by TELUS may not be comparable to free cash
flow reported by other companies, and differs from standardized free
cash flow defined by the CICA's Canadian Performance Reporting Board.
Management's definition of free cash flow provides an indication of how
much cash generated by operations is available after capital
expenditures, but before dividends, acquisitions, proceeds from
divested assets and changes in certain working capital items (such as
trade receivables and trade payables).
Free cash flow calculation    Â
   First quartersended March 31
($ millions) Â Â 2012 2011
EBITDA (see Section 11.1)         1,009       986Â
Add back equity loss related to the residential component of the TELUS Garden real estate joint venture         1       â"Â
Deduct non-cash gain on 51% interest in Transactel (Barbados) Inc. re-measured at acquisition-date fair value        â"       (16)
Restructuring (disbursements) net of restructuring costs         2       (23)
Items from the Consolidated statements of cash flows    Â
 Share-based compensation         7       (5)
 Net employee defined benefit plans expense (recovery)         (1)       (9)
 Employer contributions to employee defined benefit plans         (116)      (235)
 Interest paid         (62)       (61)
 Interest received         7       â"Â
 Income taxes refunded (paid), net         (48)       (66)
 Capital expenditures         (441)      (409)
Free cash flow (management's definition) Â Â Â Â Â Â Â Â 358Â Â Â Â Â Â Â 162Â
The Canadian Performance Reporting Board defined standardized free cash
flow to foster comparability of the measure between entities.
Standardized free cash flow is an indication of an entity's capacity to
generate discretionary cash from operations, comprising cash flows from
operating activities less net capital expenditures and those dividends
that are more representative of interest costs. It does not necessarily
represent the cash flow in the period available for management to use
at its discretion, which may be affected by other sources and
non-discretionary uses of cash. The following reconciles management's
definition of free cash flow with standardized free cash flow and Cash
provided by operating activities.
Free cash flow reconciliation    Â
   First quarters ended March 31
($ millions) Â Â 2012 2011
Cash provided by operating activities         763       454Â
Deduct stipulated dividends         n/a       n/a
Deduct capital expenditures         (441)      (409)
Proceeds from disposition of capital assets         â"       â"Â
Standardized free cash flow (CICA guideline) Â Â Â Â Â Â Â Â 322Â Â Â Â Â Â Â 45Â
Deduct proceeds from disposition of capital assets         â"       â"Â
Adjustments to reconcile to cash provided by operating activities        36       117Â
Free cash flow (management's definition) Â Â Â Â Â Â Â Â 358Â Â Â Â Â Â Â 162Â
11.3 Definitions of 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 revenue 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.
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.
11.4 Definitions of liquidity and capital resource measures
Earnings coverage is defined in the Canadian Securities Administrators' National
Instrument 41-101 and related instruments, calculated on a 12-month
trailing basis.
Calculation of Earnings coverage  Â
 Twelve-month periodsended March 31
($ millions, except ratio) 2012 2011
Net income attributable to Common Shares and Non-Voting Shares      1,240       1,103Â
Income taxes       382       344Â
Gross interest expense       372       517Â
Numerator       1,994       1,964Â
Denominator - Gross interest expense       372       517Â
Ratio (times) Â Â Â Â Â Â 5.4Â Â Â Â Â Â Â 3.8Â
The following measures do not have any standardized meaning prescribed
by IFRS-IASB and may not be comparable to similar measures presented by
other issuers.
Dividend payout ratio and dividend payout ratio of adjusted net earnings: The basic measure is defined as the quarterly dividend declared per
Common Share and Non-Voting Share for the most recently completed
quarter, as reported in the Consolidated financial statements,
multiplied by four and divided by the sum of basic earnings per share
for the most recent four quarters for interim reporting periods
(divided by annual basic earnings per share for fiscal years). The
target guideline for the annual dividend payout ratio is on a
prospective basis, rather than on a trailing basis, and is 55 to 65% of
sustainable net earnings. More representative of a sustainable
calculation is the historical ratio based on reported earnings per
share adjusted to exclude income tax-related adjustments, losses on
redemption of long-term debt, ongoing impacts of a net-cash settlement
feature introduced in 2007, and items adjusted for in EBITDA.
Calculation of Dividend payout ratios  Â
($, except ratios) 2012 2011
Dividend payout ratio  Â
Numerator - Annualized first quarter dividend declared per Common Share and Non-Voting Share       2.32       2.10Â
Denominator - Income per Common Share and Non-Voting Share, 12-month periods ended March 31 Â Â Â Â Â Â 3.82Â Â Â Â Â Â Â 3.43Â
Ratio1 (%) Â Â Â Â Â Â 61Â Â Â Â Â Â Â 61Â
Dividend payout ratio of adjusted net earnings  Â
Numerator (from above) Â Â Â Â Â Â 2.32Â Â Â Â Â Â Â 2.10Â
Adjusted net earnings, 12-month periods ended March 31 ($ millions) Â Â
 Net income attributable to Common Shares and Non-Voting Shares       1,240       1,103Â
 Deduct favourable income tax-related adjustments       (31)       (29)
 Add back loss on redemption of debt       â"       37Â
 Add back equity loss related to the residential component of the TELUS Garden real estate joint venture       1       â"Â
 Deduct after-tax Transactel gain       â"       (12)
 Net-cash settlement feature       (8)       (11)
       1,202       1,088Â
Denominator - Adjusted net earnings per Common Share and Non-Voting Share       3.71       3.39Â
Adjusted ratio2 (%) Â Â Â Â Â Â 63Â Â Â Â Â Â Â 62Â
1     The ratio for March 31, 2012, is 64% when based on the February 21, 2012, quarterly dividend declaration of 61 cents per Common Share and Non-Voting Share to be paid in July 2012, annualized to $2.44 per share.
2     The adjusted ratio for March 31, 2012, is 66% when based on the February 21, 2012, quarterly dividend declaration of 61 cents per Common Share and Non-Voting Share to be paid in July 2012, annualized to $2.44 per share.
EBITDA - excluding restructuring costs is defined as EBITDA (see Section 11.1), adding back restructuring costs of $44 million in for twelve-month
period ended March 31, 2012, and $78 million for the twelve-month
period ended March 31, 2011. This measure is used in the calculation of
Net debt to EBITDA (excluding restructuring costs) and EBITDA
(excluding restructuring costs) interest coverage, consistent with the
calculation of the Leverage Ratio and the Coverage Ratio in credit
facility covenants.
EBITDA - excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs, divided by Net
interest cost, calculated on a twelve-month trailing basis. This
measure is substantially the same as the Coverage Ratio covenant in
TELUS' credit facilities.
Net debt - the nearest IFRS measure is Long-term debt, including Current
maturities of long-term debt, as reconciled below. Net debt is a
component of a ratio used to determine compliance with debt covenants
(refer to the description of Net debt to EBITDA below). Management
believes that Net debt is a useful measure because it represents the
amount of long-term debt obligations that are not covered by available
cash and temporary investments, and because it incorporates any
exchange rate impact of cross currency swap agreements put into place
to fix the value of U.S. dollar debt.
Calculation of Net debt  Â
 At March 31
($ millions) 2012 2011
Long-term debt including current portion       6,533       6,187Â
Debt issuance costs netted against long-term debt       26       27Â
Derivative liability1 Â Â Â Â Â Â â"Â Â Â Â Â Â Â 413Â
Accumulated other comprehensive income amounts arising from financial instruments used to manage interest rate and currency risks associated with U.S. dollar denominated debt (excluding tax effects) Â Â Â Â Â Â â"Â Â Â Â Â Â Â 8Â
Cash and temporary investments       (68)       (23)
Short-term borrowings       407       422Â
Net debt       6,898       7,034Â
1     The derivative liability at March 31, 2011, was in respect of the U.S.$741 million debenture that matured on June 1, 2011, and related to cross currency interest rate swap agreements that effectively converted principal repayments and interest obligations to Canadian dollar obligations.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt at the end of the period divided by the 12-month
trailing EBITDA - excluding restructuring costs. TELUS' long-term
guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. This
measure is substantially the same as the Leverage Ratio covenant in
TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt used in the Company's
capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment
of debt, calculated on a 12-month trailing basis. No gains on
redemption and repayment of debt were recorded in the respective
periods. Losses recorded on the redemption of debt are included in net
interest cost. Net interest costs for the twelve-month periods ended
March 31, 2012 and 2011 are equal to reported Financing costs.
Total capitalization - book value is calculated as Net debt, defined above, plus Owners' equity excluding
accumulated other comprehensive income or loss.
Calculation of total capitalization  Â
 At March 31
($ millions) 2012 2011
Net debt       6,898       7,034Â
Owners' equity       7,629       8,119Â
Deduct: Accumulated other comprehensive income       (8)       (5)
Total capitalization - book value       14,519       15,148Â
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For further information: Media relations:
Shawn Hall
(604) 619-7913
shawn.hall@telus.com
Investor relations:
Robert Mitchell
(647) 837-1606
ir@telus.com